«Stimulating Different Types of Eco-Innovation in the UK:Government Policies and Firm Motivations»

Pelin Demirel and Effie Kesidou. Science and Technology Policies Research Center. TEKPOL Working Paper Series. STPS-WP-12/03. See bibliographic references in the original publication of this article.

«Results and Discussion

»As initially anticipated, the results provided in Table 2, 3 and 4 confirm that different types of eco-innovation indeed have different determinants. Moreover, these determinants have a different impact on the level of eco-innovations and the probability of eco-innovating. These findings have important implications for policy makers who may wish to stimulate a certain kind of eco-innovation by focusing on its specific determinants. Below we discuss the role of internal and external determinants for motivating EOP, INT and ECORD.

»Impact of External Factors

»With regards to the external policy instruments, our results indicate that environmental regulations are effective in driving certain types of eco-innovation, while environmental taxes fail to motivate any of the three eco-innovations considered.

»Environmental Regulations:

»Beyond the findings of the existing literature, incorporating all three types of eco-innovation in the same framework allows us to see the presence of a Utype relationship between regulations and eco-innovations: regulations are able to impact the least and most significant eco-innovations; namely end-of-pipeline technologies (EOP) and environmental R&D (ECORD). Their impact is less than clear for the integrated cleaner technologies (INT), which stand in between EOP and ECORD in terms of environmental and technological significance.

»Moreover, decomposing the marginal effects of regulations indicates that their impact is especially large in getting companies to invest into EOP and ECORD while they have a smaller, yet significant impact upon the levels of EOP and ECORD undertaken by eco-innovators. This suggests that regulations are being effective in converting firms to eco-innovators either at the lower or the higher end of the eco-innovation spectrum. These findings are in line with those of Frondel et al. (2007) who show that regulations are important for the end-of-pipeline technologies, but not for integrated cleaner technologies.

»According to Frondel et al. (2007, p.573), because regulations are very prescriptive, and usually ‘impose technology standards that can only be met through End-of-Pipeline abatement measures’, they stimulate investments in process innovations; specifically in end-of-pipeline technologies, while they have no impact upon integrated cleaner technologies. Hence, our findings confirm the existing literature in the context of the UK.

»Simultaneously, our results show that regulations stimulate investments in ECORD, which gives rise to both process and product environmental innovations. This finding is inline with the ‘Porter Hypothesis’, which states that regulations boost environmental R&D activities and thus, stimulate eco-innovation. According to the literature, companies which invest in environmental R&D gain ‘strategic advantage’ from innovation and become leaders in ‘green markets’ (Carraro, 200; Montero, 2002; Hart, 2004; Popp, 2005, Rothfels, 2002).

»Environmental Taxes:

»In contrast to regulations, environmental taxes do not appear to have a significant impact on any of the three types of eco-innovation. This finding is, again, similar to Frondel et al.’s (2007) results which confirm that market-based instruments do not affect either end-of-pipeline or integrated technologies in Germany. In the specific case of the UK, environmental taxes have not been frequently used as a means of regulating pollution levels since environmental laws have historically been the preferred policy tool in this field (Ashford, 1994; Jordan et al., 2003). Moreover, environmental taxes are commonly set at a low level and the innovation effects are, therefore, low or insignificant (Kemp, 2000).

»Impact of Internal Factors

»As far as internal factors are concerned, our results indicate that efficiency (equipment upgrade motives and cost savings) and EMS factors have a varied impact on the three types of eco-innovations while CSR is not a significant driver for any type of eco-innovation. Efficiency: Machinery and equipment upgrades are important means of increasing efficiency for companies and our results indicate that EOP and INT are driven by firms’ willingness to upgrade their equipment. This suggests that firms consider the most energy efficient and environmentally friendly technologies when they are renewing existing facilities. A

»nother indicator of efficiency, cost savings, appear to be an important driver for only the most advanced type of eco-innovations, ECORD, while it has no significant impact on either EOP or INT. This result is understandable for the case of end-of pipeline technologies which are considered to be costly rather than cost-saving investments (Ashford, 1994). The lack of impact in the case of integrated cleaner technologies, on the other hand, gives support to the findings of Palmer et al. (1995) who suggest that cost savings might not be large enough to drive eco-innovations.

»Finally, the results suggest that environmental R&D is not only stimulated by regulation but it is also market driven, mainly motivated by the cost saving potential of the outcomes that arise from environmental R&D. The decomposition of marginal effects on the cost savings variable confirms that many firms are motivated to do environmental R&D due to the cost saving possibilities while the impact of cost savings are smaller for those firms that are already investing into environmental R&D.

»Environmental Management Systems (EMS): The impact of EMS, on the other hand, is similar to that of environmental regulations where the most (ECORD) and least (EOP) significant eco-innovations respond to the presence of an EMS in the company. This effect is most clearly visible especially when the impact of ISO14001 certification is considered. EOP and ECORD respond positively to adopting ISO 14001 certification while INT is not stimulated by either maintaining an EMS or subscribing to ISO 14001. A plausible explanation of this finding is related to the innovative heterogeneity of firms where the least innovative firms benefit from having an organisational environmental structure to support them with the minimum compliance requirements through EOP while the most innovative firms use EMS as an innovation platform to build upon for ECORD. The decomposed marginal effects suggest that EMS is especially effective in motivating firms to start investing in EOP and has a significant but smaller effect on increasing the EOP investments of those firms that already invest in EOP. In the case of ECORD, EMS is only effective for persuading firms to invest in ECORD but cannot motivate increased ECORD investments for firms with existing ECORD activities.

»Corporate Social Responsibility (CSR): Finally, CSR fails to be a significant driver of any of the three eco-innovations. This indeed poses questions on how much we can rely on the corporate goodwill and voluntary compliance in environmental matters. While environmental awareness and protection is an important foundation for CSR, the costly nature of environmental protection and the externalities associated with these expenditures appear to get in the way of CSR as a powerful driver for environmental protection.


»This paper looks into the determinants of different types of eco-innovation, namely, end-of- pipeline pollution control technologies, integrated cleaner production technologies and environmental R&D. These three types of eco-innovation differ with respect to their technological significance, costs to companies and their benefits to the environment. By integrating these three different eco-innovation activities in a single framework, we are able to analyze whether and how certain factors stimulate each of these eco-innovations.

»Our findings indicate that environmental regulations affect end-of-pipeline pollution control technologies and environmental R&D while they do not influence integrated cleaner technologies. By setting strict technology standards, regulations stimulate investments in end-of-pipeline technologies, which have the lowest environmental and technological impact while, at the same time, encouraging investments in environmental R&D, which has the highest environmental and technological impact. Consequently, the results of this study suggest that regulations can play an important role in combating pollution not only in the short run, by stimulating investments in process innovations such as end-of-pipeline technologies, but also in the long run by driving investments in process and product innovations through environmental R&D. The latter provides support for Porter Hypothesis and has important implications for the environmental innovation policy. As markets for low-carbon products are estimated to be worth at least $500bn per year by 2050 (Stern Review, 2006), regulation may play a key role in motivating firms to invest in environmental R&D for the generation of eco-friendly products and services that have significant market potential.

»Our results further suggest that the impact of regulations is especially large in motivating companies to adopt eco-innovations while they have a smaller, yet significant impact, upon the intensity of investments on eco-innovations. These results are in-line with the literature on the diffusion of generic innovations. In particular, at early stages of diffusion the inter-firm adoption rate dominates the intra-firm intensity of use (Battisti and Stoneman, 2003). Policies tend to focus mainly on the adoption of innovations by firms rather than on their intensity of use. Yet, once beyond the early stages of adoption, the intensity of use becomes extremely important in the generation of benefits from adoption, in general, and of eco-innovations in particular (e.g. in increasing learning and the absorptive capacity of the company) (Battisti and Stoneman, 2003). Therefore, we highlight the necessity for designing environmental regulations that do not only motivate the adoption of eco-innovations but also their intensity of use.

»In contrast to environmental regulations, environmental taxes do not affect any type of eco-innovations. UK is currently adopting a growing number of market-based instruments in lieu of the EU. Policy makers should carefully consider the effectiveness of these instruments not only for reducing the immediate pollution but also for stimulating eco-innovations that will lead to a greener economy in the UK. Kemp and Pontoglio (2008) highlight the need for policy instruments that ensure the required policy stringency through appropriate design and effective enforcements. Additionally, our results suggest that market-based instruments cannot be solely relied on and they should be combined with the necessary regulations.

»Our findings also point to the presence of an important number of firm-based factors that determine the adoption and/or creation of eco-innovations. Firstly, cost savings resulting from environmental efficiency appear to be only significant in driving investments in environmental R&D which are the most advanced in the spectrum of eco-innovations. Cost savings come from eliminating or re-using waste. Less advanced eco-innovations, expectedly, have a lower potential for creating such savings for companies. Therefore, it is possible that cost savings are most closely associated with the most advanced eco-innovations. Improvements to the eco-infrastructure play a significant role in ensuring that even firms with less advanced eco-innovations can reap cost benefits. For example, ensuring that firms have accessible outlets for the sale of their by-products can be highly effective in encouraging cost savings and increasing eco-innovations.

»The least and medium significance eco-innovations (i.e. EOP and INT), on the other hand, are motivated by increased environmental efficiency due to equipment upgrades, which allow firms to shift to more energy efficient means of production. We note the benefits of policy incentives, such as ‘scrappage’ style programs, that will make it easier for firms to trade-in their machinery for more energy efficient alternatives.

»Second of firm-based factors, environmental organisational capabilities, also impact the least and most advanced eco-innovations, possibly providing the new starters with the required organisational structure on their first attempt to eco-innovate and also the most capable innovators with a sound framework to enable them to apply their innovation skills and knowledge to environmental matters. We find that ISO14001 certification is effective in strengthening the positive impact of environmental management systems on both end-of-pipeline technologies and environmental R&D.

»The third firm based factor, CSR, is interestingly not a significant driver of any type of eco-innovation. This casts doubt on the effectiveness of voluntary agreements by companies to reduce their environmental impact. CSR policies can most effectively be used as a supporting mechanism to environmental policies which underline the minimum basis for environmental compliance.»

Innovation Typologies
Thematic Readings

No comments:

Post a Comment