Generating Growth from Innovation for the Low-carbon Economy: Exploring Safeguards in Finance and Regulation

CIGI Paper No. 117

January 17, 2017

This paper is also available in French. To download the French version, please click here.

The Paris Agreement, agreed to at the twenty-first session of the Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change, heralded a new level of engagement on energy innovation with COP21’s “Mission Innovation” — a commitment, by 21 member countries, to doubling the investment in energy innovation by 2020. Public investment in innovations related to energy and to carbon and business environment enablers that reduce barriers to the emergence of new firms have resulted in the creation of many firms whose business models are founded on innovation and whose markets are global, but whose customers and competitors are much larger incumbents. In Canada, a low innovation equilibrium creates structural impediments to the growth of new firms. Structural barriers reduce the rate at which innovations are considered in regulatory formulation and, as such, will slow progress toward both growth goals and Paris Agreement goals. Innovation policy makers must consider how public investments in innovation are translated into markets with ensuing spillover benefits to the environment and the economy. Within the policy framework of stringency, predictability, flexibility and subsidiarity, policies to safeguard the spillover benefits of publicly funded innovation should address market failures and asymmetries in the status of innovative firms vis-à-vis regulators and standards agencies, as well as public and private sector markets. Policies to finance these safeguards should be financed through the prompt unwinding of fossil fuel subsidies embedded in both fiscal policies and public finance. Four interrelated policies are proposed in this paper as solutions to the challenges of stimulating low-carbon growth through the scale-up of new firms where decoupling economic growth from greenhouse gas emissions growth is the policy goal: the Innovative Carbon Emissions Mitigation Fund; the Sustainable Finance Performance Warranty Program; the Best Global Regulations for Low-carbon Economy Program and the Sustainable Infrastructure Program.

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