How Clean Innovation Happens

Clean innovation is a hot topic, especially with the recent federal budget betting big on cleantech.  Following 3 years of investigation, Smart Prosperity Institute has released a Policy Brief on Clean Innovation. This post explores our model for understanding clean innovation and the role of governments in accelerating it.

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How does Clean Innovation happen?

While our Clean Innovation Model is a simplification of the real world, it is important for identifying the main stages of the clean innovation process and highlighting the major forces and actors at play.

At the model’s core are the stages of clean innovation. These are represented sequentially: research, development, demonstration, deployment, and ultimately diffusion. However, it’s worth noting that innovation is a system, and in reality the information flows can be multi-directional and there are interactions and feedback loops among all these stages.

There are two major forces at play in clean innovation: a push force, whereby new ideas and inventions are generated, and a pull force, whereby societies and markets determine which of those inventions are worth buying. In the model, the push force is driven by researchers, including academic, business and government, and the pull force originates with consumers, including business, government and public.

The other two key actors featured in the model are private investors, who tend to be drawn into the system at the later stages as clean innovations move closer to market, and of course governments, which can influence and accelerate the clean innovation system through a variety of public policy tools.

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What makes clean innovation different from innovation in general?

Clean innovation faces a unique challenge because of the presence of a “double market failure”:

1) The knowledge spillover market failure exists for all kinds of innovation and leads to an under-provision of research and development. Because new discoveries can “spill over” to benefit competitors, researchers are not always able to capture the full value of their discoveries. Governments frequently intervene to address this market failure through various forms of support for R&D.

2) The environmental externality market failure is a distinct and fundamental challenge faced by most types of clean innovation. Once past the R&D stage, new ideas and inventions typically rely on market demand to pull them through to commercialization.  The difference for clean innovation is that the benefits produced – cleaner air and water, lower greenhouse gas emissions, or less waste – typically have little or no market value because markets fail to put a price on environmental harm. As a result, there is generally little incentive to invest in or develop such products.

This double market failure (combined with the presence of other market barriers) means that government involvement is particularly important to catalyze clean innovation. But it must be done wisely, through targeted measures that reduce market uncertainty and unleash private initiative and investment to carry new technologies through to market. 

So how and where should governments intervene?

The model identifies four general policy areas that governments must use in combination to accelerate clean innovation in Canada: (1) PUSH policies that drive new ideas, (2) PULL policies that stimulate markets, (3) GROW policies that help ideas develop into marketable products, and (4) STRENGTHEN policies that make the system more effective and resilient.

To learn more about what this means for public policy, check out our new Policy Brief on Accelerating Clean Innovation in Canada.