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EMISSIONS GAP REPORT 2018 – BRIDGING THE GAP: THE ROLE OF INNOVATION POLICY AND MARKET CREATION
Chapter 7.
Bridging the gap: The role of innovation policy and market creation
Lead authors: Mariana Mazzucato (University College London - Institute for Innovation and Public Purpose) and Gregor Semieniuk (SOAS University of London)
Contributing authors: Anna Geddes (ETH Zurich), Ping Huang (Tufts University), Friedemann Polzin (Universiteit Utrecht), Kelly Sims Gallagher (Tufts University), Clare Shakya (International Institute for Environment and Development), Bjarne Steffen (ETH Zurich) and Hermann Tribukait (Mexico Energy Innovation Funds)
7.1 Introduction
By pairing innovation in the use of existing technologies and in behaviour with new technologies, directed innovation has the potential to radically transform societies and reduce their greenhouse gas (GHG) emissions. Therefore, accelerating innovation is a key component of any attempt to close the emissions gap, but it will not happen by itself.
As innovation is inherently uncertain and often costly, it requires access to substantial amounts of finance as well as acceptance of inevitable failures and losses across the innovation landscape. This landscape covers everything from basic to applied research, and from demonstration to scale-up, deployment and diffusion, with feedback effects between the various stages, meaning that funding requirements can escalate quickly. Moreover, as there are often long lead times from the invention of a sophisticated GHG-saving process or material to its transformation into a commercial product and its diffusion through newly created markets, innovators require extraordinary patience.
Well-crafted innovation policy that kickstarts and steadies innovation across the landscape can make a significant contribution to closing the financing gap, and in this case the emissions gap. This means that the public sector must often lead in terms of taking risks through ambitious innovation policy. Such policy requires more considerations to co-create and shape markets than simply fixing market failures. In other words, the public sector plays a crucial role in directing the innovation process rather than just filling the gaps. In the past, direction has been shaped through a mission-oriented approach: framing and solving societal problems and using all available levers to crowd-in other sources (Mazzucato, 2017; 2018a). This includes sustaining and accelerating innovation, not just in research and development (R&D) but across the entire innovation landscape, such as by providing patient finance that risk-averse actors are not willing to provide. No other actor can replace the public sector.
This chapter explores the type of policies that can accelerate low-carbon innovation for closing the emissions gap, and barriers to implementing them. Section 7.2 discusses what we regard as the four policy principles to drive additional investment, while section 7.3 illustrates how these principles have been crucial to the success of solar photovoltaic (PV). Section 7.4 discusses barriers to implementing active policies, before section 7.5 concludes by highlighting challenges and opportunities for accelerating low-carbon innovation through policy.
7.2 Innovation policies
7.2.1 Risk-taking across the innovation landscape Innovation policy requires attention to be paid to the entire innovation chain: from the supply side (from basic and applied R&D to demonstration) to the demand side (regulations, subsidies and taxes, procurement, and significant changes in consumption patterns) (Polzin, 2017; Mazzucato, Semieniuk and Watson, 2015). In low-carbon sectors, in addition to grant funding, an important share of research, development and venture capital funding comes from public sources (Mazzucato and Semieniuk, 2017) and almost half of the investments into demonstration projects originate in public innovation institutions (Nemet et al., 2018). Similarly, governments are highly active on the demand side with subsidies — whether set administratively (such as feed-in tariffs) or through auctions — loan guarantees and significant direct investment (Mazzucato and Semieniuk, 2017). Public procurement can also help spur innovation by favouring low-carbon technologies (Edler and Georghiou, 2007, see also online appendix A.3) and regulation must be conducive to innovation, which includes avoiding over-regulation while new business models are still forming. Successful innovation is often accompanied by the public sector’s lead on taking risks at all stages of the innovation chain.
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