Environmental technological innovation and diffusion: Model analysis

This paper analyses the role of technological innovation and diffusion to control and reduce polluting emissions. First, the main effects of environmental innovation on growth and emissions are highlighted. Then, the incentives for firms to undertake R&D and carry out innovation are reviewed. Market imperfections and externalities imply that public innovation policies are necessary to supplement firms' investments in environmental innovation. Hence, the paper discusses how R&D and innovation are linked to environmental policies, analyses how optimal policy-mixes can be designed, and focuses on the impact of related externalities on technological diffusion, crowding-out and endogenous growth. Given the international dimension of many environmental problems, the paper also discusses the impact of environmental innovation on the geographic distribution of polluting industries and of environmental policies on the international dissemination of innovation. The first part of the paper is devoted to theoretical models, whereas the second part provides a survey of empirical attempts to model environmental technological innovation and diffusion.