In the long run, the development and widespread adoption of new technologies can greatly ameliorate what, in the short run, sometimes appear to be overwhelming conflicts between economic well being and environmental quality. Therefore, the effect of public policies on the development and spread of new technologies may be among the most important determinants of success or failure in environmental protection (Kneese and Schultze, 1975).

To achieve widespread benefits from a new technology, three steps are required (Schumpeter, 1942):

• invention, the development of a new technical idea;
  
• innovation, the incorporation of a new idea into a commercial product or process and the first marketplace implementation thereof; and
  
• diffusion, the typically gradual process by which improved products or processes become widely used.

Rates of invention, innovation, and technology diffusion are affected by opportunities that exist for firms and individuals to profit from investing in research, in commercial development, and in marketing and product development (Stoneman, 1983).

Governments often seek to influence each of these directly, by investment in public research, subsidies to research and technological development, dissemination of information, and other means (Mowery and Rosenberg, 1989). Policies with large economic impacts, such as those intended to address global climate change, can be designed to foster technological invention, innovation, and diffusion (Kemp and Soete, 1990). For the impact of R&D policies on technology development and transfer, see the IPCC Special Report on Technology Transfer (IPCC, 2000).

To examine the link between policy instruments and technological change, environmental policies can be characterized as market-based approaches, performance standards, technology standards, and voluntary agreements. All these forms of intervention have the potential to induce or force some amount of technological change, because by their very nature they induce or require firms to do things they would not otherwise do. Performance and technology standards can be explicitly designed to be “technology forcing”, mandating performance levels that are not currently viewed as technologically feasible or mandating technologies that are not fully developed. The problem with this approach can be that while regulators typically assume that some amount of improvement over existing technology will always be feasible, it is impossible to know how much. Standards must either be made not very ambitious, or else run the risk of being ultimately unachievable, which leads to great political and economic disruption (Freeman and Haveman, 1972). However, in the case of obstructed technology, regulators know quite well the technology improvements that are feasible. Thus, although the problem of standards being either too low or too ambitious remains a possibility, it does not make standards inherently incapable of implementing some portion of the available technology base, and to do so cost-effectively on the basis of cost–benefit tests.¹⁰⁶

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