The Role of Green Technology Transfer in Climate Policy

Deflecting the trajectory of rapidly expanding greenhouse gas emissions in industrializing nations will require the transfer of clean energy technologies developed in high-income countries. How does international technology transfer come about and what is the appropriate role for governments in promoting such transfers?

Economic growth in developing countries brings the promise of a better life to much of the world’s population. With growth, however, comes pollution, particularly carbon dioxide (CO2) and other greenhouse gas (GHG) emissions. The need to reduce these emissions comes just as the share of global emissions from developing countries is rapidly growing. Much of this increase can be attributed to economic and population growth in China and India. In 1990, these two countries accounted for 13 percent of world CO2 emissions; by 2030, that figure is projected to rise to 31 percent.

Reducing GHG emissions will require new technologies, such as cleaner energy sources, like wind and solar, and energy-efficient technologies, such as hybrid vehicles and high-efficiency lighting. As concern mounts over developing country emissions, policymakers now face an important question as they negotiate climate stabilization protocols—namely how to encourage the development, diffusion, and deployment of alternative energy and energy-efficiency innovations in the developing world.

Incentives for Innovation

According to classic economic theory, market forces provide insufficient incentives for investment in the development of climate-friendly technologies. The cost of carbon emissions associated with the production of goods is not normally included in their price, so neither firms nor consumers have any incentive to reduce emissions. Technologies with benefits that are immediately apparent to the consumer are exceptions: for example, when people switch to more fuel-efficient cars, they can cut their gasoline costs, although they are not rewarded monetarily for the emissions-saving benefits of their actions.

With mounting concerns over climate change, both national climate policies and international efforts to combat climate change have begun to provide incentives for climate-friendly innovation in developed countries, addressing the lack of a market for emissions-saving innovation. As a result, patent activity for renewable energy technologies has increased dramatically in recent years. Similarly, the prospect of increased energy prices under carbon taxation or emissions-trading schemes spurs innovation in both energy efficiency and alternative-energy sources.

Technology Transfer

David Popp

Now that new emissions-reduction technologies, such as wind energy and hybrid vehicles are available for adoption, the challenge becomes one of technology transfer. Technology transfer may be “embodied,” as when high-tech equipment is physically transported to another country through international trade, or “disembodied,” involving the flow of know-how or experience via demonstration projects or training of local staff. This is more likely when a multinational firm licenses its technology to a locally owned firm than when a firm retains control of its technology through foreign direct investment.

When a new technology is introduced, some of the knowledge embodied in the invention becomes public, inspiring further innovations from which the inventor does not benefit. Such “spillovers” are even more likely in the case of disembodied technology transfer. Because firms cannot be fully compensated for these knowledge spillovers, firms will provide less than optimal levels of climate-friendly R&D, even if policies to correct the environmental externalities of emissions, like carbon taxes, are in place.

While spillovers are an issue for technology transfer in every sector, the incentives for developing countries to adopt climate-friendly technology also depend on the nature of the technology and the extent to which environmental externalities are corrected by environmental policy. While some technologies will spread even without climate policy, others need the incentives provided by policy to encourage adoption.

• Without climate change policy. Emissions-reducing innovations can spread if they also reduce energy usage and provide cost savings. If the technologies reduce emissions but provide no cost savings—as with expensive innovations like wind and solar energy generation and carbon sequestration from power plants—the incentive disappears.
• With climate change policy. Adoption of regulation creates incentives for taking up climate-friendly innovations. Regulation is therefore an important first step in the diffusion of technology.

(Dis) Incentives to Regulate

Typically, early adopters of environmental regulations are technologically sophisticated countries, because compliance is less expensive than for less-developed countries. As technologies for pollution control improve, the costs of abatement, and thus the costs of adopting environmental regulations, fall. Over time, countries adopt environmental regulation at lower levels of per-capita income

When considering environmental policy, countries must weigh the benefits of a cleaner environment against the costs of complying with the regulation. Technological advances can lower the cost of compliance, making regulation more likely. This suggests that advances in technology within developing countries can shorten the time by which they will agree to binding emissions reductions.

While often frowned upon by environmental advocates, globalization—defined as the opening up of economies to international competition—can help move green technologies to developing countries. These countries gain access to the technologies of the world’s leading economies through international trade and foreign investments. Once the technologies have lowered abatement costs, developing countries will be more willing to adopt environmental regulations.

Implications for Climate Policy

Technology and policy play a dual role. Stronger environmental policies stimulate new green technologies. At the same time, better technologies make it easier to regulate. While climate policy negotiators fret over nonparticipation by developing countries, the pattern is the same as for other environmental regulations. Developed countries have traditionally acted first, and the resulting technological innovations have made it easier for developing countries to adopt regulations at a later date.

Although we would expect a similar pattern for climate policy, GHG emissions reductions are first and foremost a public good. They benefit everyone, not just the local citizenry, making it less likely that developing countries will move as quickly to regulate CO2 emissions as they did in the cases of sulfur dioxide, nitrogen oxides, and lead. As evident from the Copenhagen climate negotiations, developing countries seeking continued economic growth appear unlikely to enact policies requiring binding emissions reductions at this time.

In such a case, policies that encourage technology transfer across borders, such as the Clean Development Mechanism (CDM), can encourage emissions reductions in developing countries. Clean technologies typically do not flow across borders unless environmental policies provide incentives for their adoption. By allowing developed countries to meet their own emissions reduction limits by sponsoring projects in developing countries, CDM creates an incentive to undertake emissions-reducing activities in developing countries that do not provide the user with private costs savings, such as lower energy costs.

Just as important, but often overlooked, is CDM’s potential to promote technology transfer. If CDM projects merely take advantage of low-cost emissions reduction opportunities in developing countries, it will be more expensive for these countries to later choose to reduce emissions on their own. However, technology transfer with knowledge spillovers from CDM projects enhances the ability of recipient countries to do so, lowering the future costs of adopting climate policy.

Encouraging CDM projects with knowledge spillovers will be challenging. Although policymakers could withhold approval for CDM projects without such spillovers, doing so without compensating the original firms for these spillovers will lower the interest of developed-country investors. Instead, subsidies to CDM investors could compensate them for the positive social benefits of knowledge spillovers. Funding for such subsidies would most likely come from developed countries. While developed countries may balk at such aid, providing assistance to increase the prevalence of knowledge spillovers from CDM projects not only improves the development prospects of recipient countries, but also the likelihood that these recipient countries will agree to binding emissions reductions at a later date.

CDM also increases the profitability of investing in projects with some private gain, such as improving energy efficiency. However, it is important to consider whether such transfers truly meet the standards of additionality intended by the Kyoto Protocol. (Additionality refers to emissions reductions achieved in addition to those that otherwise would occur without an intervention to reduce emissions.) Even if these technologies are not currently being used in the recipient country, technologies providing private cost savings will spread to developing countries without the aid of policy prescriptions such as the CDM. If the CDM merely hastens this diffusion, it serves to speed up the timing of emission reductions, but provides little long-term benefit.

Another frequently discussed option for increasing the spread of clean technologies is relaxing intellectual property protections. Intellectual property rights (IPR), such as patents, reward inventors for the fixed costs of innovation. Patents provide inventors with a temporary monopoly, lasting 20 years from the initial application date, in return for disclosing information on the innovation in the patent document, which becomes part of the public record. By granting this monopoly, which enables patent holders to charge higher prices, IPR help mitigate potential losses from knowledge spillovers and encourage innovation.

Although technology transfer may be slower when IPR are in place, it’s not safe to assume that the level of innovation would be the same if it was not available. While little work has been done on the effect of IPR on technology transfer of clean energy technologies, the few studies that exist suggest that the high costs of renewables are due more to their immaturity, rather than the existence of IPR.

In related studies within the health sector, current research finds that lack of income, national regulatory requirements, and insufficient international aid are the main barriers to the spread of AIDS treatments in Africa, rather than IPR. Similarly, with climate-friendly technologies, one would expect demand (or the lack thereof) for clean technologies to be a primary constraint on international technology transfer. Focusing efforts on policies that increase this demand is likely to be more effective than enacting restrictions on intellectual property protection for clean technologies.

David Popp is an associate professor of public administration at the Maxwell School of Syracuse University and a research associate at the National Bureau of Economic Research.

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