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Addressing environmental challenges
Innovation is increasingly perceived as crucial for tackling environmental challenges like dealing with climate change, limiting global greenhouse gas emissions, and maintaining biodiversity. Innovation can help address environmental challenges through the introduction of new technologies and also non-technological innovations. These non-technological innovations—in particular, organisation innovation—are needed to make environmental technological innovation effective. For example, evidence shows that innovation in climate change mitigation technologies is accelerating and that in recent years manufacturing companies have also been upgrading their efforts towards sustainable manufacturing, from introducing pollution prevention to designing integrated approaches that take into account product lifecycles and wider impacts. Public policy can foster this type of innovation by improving the access to finance for innovative businesses who address environmental challenges, combining supply- and demand-side policies (e.g. providing public funding of R&D addressing environmental challenges and introducing environmental criteria in public procurement procedures), improving the regulatory environment and adopting market-based instruments affecting price signals (e.g. through carbon pricing or cap and trade systems).
Evidence on the contribution of innovative entrepreneurship addressing environmental challenges
Figure 3. Business birth rates in a selection of green sectors versus total manufacturing (2006 or latest data)

Source: OECD Structural and Business Statistics (SDBS) Database. http://dx.doi.org/10.1787/888932384287
- Improving access to finance. Policy should be changed to improve the access to finance for innovative businesses that address environmental challenges; in particular, for actors pursuing green innovation, especially new entrants and start-ups, that usually have the most difficult time finding financing. It is indeed difficult to obtain funding at reasonable cost for an immature market with high capital intensity and relatively high risk. New policies can improve the supply of capital via equity, debt, venture capital or changes in capital markets. This could include the creation of fiscal incentives to attract investors, multiple forms of credit enhancement, seed funding programs, innovation funds dedicated to specific fields, risk-sharing arrangements between public and private organizations, and public-private co-investment partnerships. Prioritising the funding of projects addressing key environmental challenges has also become particularly important in today’s context of public spending reduction and economic crisis. However, although focused policies have the advantage of addressing precisely defined opportunities, there is a risk that too narrowly specified policies will not support potentially more radical and complementary innovations in related fields.
- Complementary supply-side and demand-side policies. While supply-side policies facilitate the creation of innovation (e.g. through public funding of R&D addressing environmental challenges), they do not provide incentives for their adoption and diffusion. Thus, supply-side policies need to be complementary to and linked to specific diffusion and demand-side policies. Policy makers, for instance, could introduce environmental criteria in public procurement procedures.
- Improving the regulatory environment. Adopting policies for the protection of the environment contributes to create favourable conditions for the growth of firms in environmental sectors and would stimulate, thereby, businesses in those sectors. This includes making procedures for business start-up, patent registration, etc. less burdensome. Instruments that directly affect price signals seem also necessary, though not always sufficient, condition for addressing environmental challenges. The main strength of market-based environmental policies (e.g. carbon pricing or cap and trade systems) is that they can make environmental inputs more expensive so that they internalise environmental externalities (e.g. pollution). Such price signals enhance firms’ and consumers’ incentives to adapt and develop green innovations.
- Baumol, W. (2002), The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism, Princeton University Press, Princeton, N.J.
- European Commission (2011), “Attitudes of European entrepreneurs towards eco-innovation. Analytical report”, Brussels.
- IEA (International Energy Agency) (2008), Energy Technology Perspectives 2008: Scenarios and Strategies to 2050, IEA, Paris.
- OECD (2012), "Transitioning to green innovation and technology", in OECD Science, Technology and Industry Outlook 2012, OECD Publishing. doi: 10.1787/sti_outlook-2012-5-en
- OECD (2010a), "Addressing global and social challenges through innovation", in The OECD Innovation Strategy: Getting a Head Start on Tomorrow, OECD Publishing. doi: 10.1787/9789264083479-8-en
- OECD (2010b), Measuring Innovation: A New Perspective, OECD Publishing. doi: 10.1787/9789264059474-en
- OECD (2008), Environmental Policy, Technological Innovation and Patents, OECD Publishing, Paris.
- OECD (2007), Business and the Environment: Policy Incentives and Corporate Responses, OECD Publishing, Paris.
- OECD (n.d.), “Industry and globalization, Green growth and eco-innovation”, Web page of OECD Directorate for Science, Technology and Industry. http://www.oecd.org/sti/ind/greengrowthandeco-innovation.htm
- Veugelers, R. (2009), “A lifeline for Europe’s young radical innovators”, Bruegel Policy Brief, Issue 2009/01.

Country Reports

- General incentives for investments in the Netherlands (Innovation, Agricultural Productivity and Sustainability in the Netherlands), 2015
- Overall assessment and recommendations (Innovation, Agricultural Productivity and Sustainability in Australia), 2015
- Entrepreneurship Works, Belgium (Flanders) (Inclusive Business Creation: Good Practice Compendium), 2016
- Executive summary (Innovation, Agricultural Productivity and Sustainability in Australia), 2015
- The city of the future Project (Germany), 2015
Thematic Reports

- Applying the framework for innovation (The Innovation Imperative: Contributing to Productivity, Growth and Well-Being), 2015
- Applying the framework for innovation (The Innovation Imperative: Contributing to Productivity, Growth and Well-Being), 2015
- Addressing Global and Social Challenges through Innovation (The OECD Innovation Strategy: Getting a Head Start on Tomorrow), 2010
- Executive summary (Fostering Innovation for Green Growth), 2011
- Applying Eco-innovation: Examples from Three Sectors (Eco-Innovation in Industry: Enabling Green Growth), 2010
What Countries are Doing
- What is innovation?
- How can policy support innovation?
- Who is engaged in innovation?
- How can innovation contribute to socio-economic development?
- What is the role of innovation at different stages of development?
- How has innovation changed over time?
- What conditions impact on innovation?
- What sorts of linkages can foster innovation?
- How does innovation differ across sectors and technologies?
- What is the role of regions in innovation policy?
- How can innovation be measured?