Policy Making for Environmental Innovations

The instrument theory is reviewed with attention to the effects of policy instrument on technology development. The effects policy instruments on innovations are discussed vis-à-vis the empirical findings. The instrument theory linked with the innovation theory to assess the conditions that are favourable for environmental innovations. It is argued that innovators must spend a lot of money to demonstrate a new technology and then wait 6 to 8 years until authorities finish the policy preparation and start with the implementation of stricter demands. The innovators are uncertain during the waiting time about the demands and the speed of implementation. The uncertainties reduce the present value of the revenues from sales of technology, thus investments in innovations become unattractive. It is shown that strict environmental demands and type policy instruments, though relevant, have less impact than the duration of and uncertainty about policy preparation and enforcement. The market-based instruments are advantageous in comparison with the direct regulations because they create a larger market for the innovations, but the waiting time can be very long because of resistance to this type of instruments, whereas covenants create less market volume, but entail a shorter waiting time, so they be effective in combination with liabilities, penalties, bonds etc. The conditions for innovations are: short preparation period of environmental demands with clear aims for emission reduction and assurance about enforcement of the demands, based on the policy instruments that provide freedom to anticipate the demands