Strict environmental standards work better than subsidies to stimulate innovation

Being strict works best. A government that wants companies to develop cleaner, climate-friendly products should simply impose strict requirements on new products. Then greenhouse gas emissions are guaranteed to fall. And something else is happening, according to the Netherlands Environmental Assessment Agency (PBL) and Tilburg University in a new study about which an article will be published in the economic journal on Thursday. ESB: companies develop new techniques to meet the strict standard. Innovation is increasing.

“Strict standards work very well. You don’t really need innovation subsidies anymore,” says professor Herman Vollebergh, who is also a researcher at PBL. Together with PhD student Rik Rozendaal, he investigated the effect of the strict standards for CO₂emissions from new cars, announced in 2009 and 2010 in the European Union and the United States.

What turned out? Immediately after the announcement, many more patents were filed for ‘radically cleaner car propulsion technology’, such as techniques relevant to electric and hydrogen cars. Vollebergh: “Apparently the standards were so strict that car manufacturers were forced to finally work on green breakthrough technologies.”

Innovation subsidies led to much less green innovation, according to Vollebergh and Rozendaal. To reach that conclusion, they examined more than 34,000 patents that were awarded more than 3,600 car manufacturers between 2000 and 2016.

Investing in research

According to the economists, a standard works as soon as it is enforced with high fines and demands more than is currently possible. “This is the requirement and find out how you meet it,” Vollebergh summarizes. In the case of cars: a car that emits less than any existing model. Because if it is difficult to meet a standard, manufacturers will be more inclined to invest in research into new green technology.

Innovation subsidies for companies can sometimes temporarily lead to new patent applications, and therefore inventions, “but not for the actual introduction of the innovations,” says Vollebergh. “And that’s your goal.”

For example, in the 1990s there was a lot of subsidy money in the European Union for green innovation in cars. Vollebergh: “You did see the patent applications increasing, but in the end there was no need to actually apply those inventions.” At the time, Japan reinforced its subsidies with strict standards. “It was there that the first cars with hybrid engines were developed and marketed.”

Also read this essay by Marike Stellinga: Will it shrink for the climate, or grow green?

Companies will only innovate products on a large scale if they are sure there is a market for it – otherwise it will be too expensive. Strict standards greatly increase the chance that this market will emerge. For example, it became difficult for car manufacturers to meet emissions standards with conventional combustion engines in all their cars. Only then will innovation also lead to adoption of that clean technology. “A strict standard promotes both: innovation and adoption.”

Bake subsidy money

In short: subsidies may work, strict standards certainly work. Nevertheless, the subsidy pot is always opened up, says Vollebergh, also by the Rutte IV cabinet. “I do not understand why. Where are the results of all those subsidies? You give a bucket of subsidy money and you don’t know where it leads. Standards are much more targeted and much better.” Another great advantage of standards: they are free for the government.

Not that governments don’t know the tool; governments are already using standards on a large scale. For example, the European Union sets requirements for the energy efficiency of all kinds of appliances. And has she banned light bulbs and plastic straws. According to Vollebergh, the European emissions trading system is also a standard that ultimately works very strictly: emissions in industry must gradually fall to zero.

The Dutch government could investigate much more systematically where there is room for stricter standards, for example for drinking water and new construction, says Vollebergh. She doesn’t have to worry about getting out of step internationally. History does not show that companies leave when standards become too strict, says Vollebergh. “You see that innovative companies focus on the region with the strictest standards. First it was Japan, now it is Europe and the US.”

High excise duty

Scientists should be much more appreciative of standards when devising effective climate policy, Vollebergh believes. Economists generally advocate a high CO₂tax to push clean technology. But according to Vollebergh, the study also shows that a load works less well than a strict standard. “Such a tax gives companies more freedom to avoid the ultimate goal: much less emissions.” For example, to mitigate the high excise tax on fuel, car manufacturers for a long time mainly researched cars that consumed less fuel. “Not to electric or hybrid cars. There is no escaping a standard, but taxes can.”