European firms develop more technologies to reduce CO2 emissions when emitting becomes more expensive. At the same time, extreme heat and uncertainty about the availability of key raw materials can limit the room for innovation. Environmental economist Henri Gruhl looked into the factors that determine how companies develop new technology.
The transition to an economy with lower CO2 emissions does not only require the application of existing technologies. New and better solutions are also needed. The question is therefore what drives companies to invest in this – and what circumstances make innovation more difficult. Gruhl investigated the three developments that are becoming increasingly important in Europe: climate policy, extreme heat and disruptions in the international supply of raw materials.
A higher CO2 price stimulates clean technology
One of his key findings is that companies are developing more technologies that can reduce emissions when CO2 emissions become more expensive. A higher price on emissions therefore gives companies a financial incentive to look for cleaner technologies.
Moreover, the effect goes beyond the technologies that companies develop themselves. Gruhl also sees changes in the collaborations around innovation: the share of collaborative inventions rises, particularly with non-competing firms that have relevant low-carbon expertise. This suggests that climate policy not only affects the level of low-carbon innovation, but also how companies collaborate.
Extreme heat: less revenue, but not significantly fewer patents
Gruhl also investigated the consequences of climate change itself. Extreme heat reduces the operating revenue of companies. Yet, on average, there is little evidence that companies are also applying for fewer patents as a result.
Still, the absence of a clear average effect on patenting may mask important differences. Gruhl finds suggestive evidence that extreme heat reduces patenting in less heat-adapted regions and among smaller inventor teams.
Uncertain raw materials can slow down innovation
A clearer effect emerges in the availability of critical raw materials. Gruhl and his coauthors looked at the impact of Chinese restrictions on the export of rare earths. This makes it more uncertain for European companies whether they will have access to these important materials in the future.
For European companies and research institutions that are already strongly active in technologies in which rare earths play an important role, Gruhl sees a relatively stronger decrease in the number of new patents in those areas compared with less specialized innovators.
Importance for the European climate transition
Gruhl's research thus shows two sides of innovation policy. Clear financial incentives can drive technological change, while uncertainty about the conditions in which companies need to innovate can actually slow down that development.
For the European climate transition, this means that it is not only important to encourage companies to emit less CO2. Predictability and access to essential raw materials also play a role.