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Environmental innovation and policy:
Lessons from an evolutionary model of
industrial dynamics
Maïder Saint Jean
IFREDE - E3i
Bordeaux IV University
Workshop on 'Environmental policy
and modelling in evolutionary
Outline of the presentation
• Purpose of the model and main building
blocks
• Experimental settings and results
• Methodological problems
• Lessons for policy
Introduction
• The purpose of the model is to represent
technological trajectories of firms that are
guided by several dynamic forces: pathdependency, market selection and supplydemand coevolution.
• The questions to be answered: is market
selection able to favour the development of
cleaner technologies? Under which
conditions cleaner technologies can be
developed and diffused? What are the
impacts of stricter emission standards?
• The model deals with a population of rival
suppliers in interaction with a population of
industrial clients.
– Suppliers modify the characteristics of their
product thanks to R&D investments so as to
adapt to demand pressures and to acquire
competitive advantage.
– Clients ’ requirements evolve so as to adapt to
technological changes and modifications of
industrial structures.
– Environmental pressures are synthesized with
supply chain pressures (price, product quality)
• The main building blocks cf. figure
Supply-Demand Interactions
Supply n firms
Competition
among suppliers
2’
Demand m firms
Allocation of
R&D investment
2
Preferences
Requirement levels
Process/Product Innovation
1
Performance achieved
Market Share
Average performance of industry
1’
3
Purchase
3’
4
Defection
Experimental setting
• The reference configuration: 12 suppliers,
200 clients, 2 groups of clients
• Scenarios of industrial dynamics:
– scenario ‘ homogeneous oligopoly ’
– scenatio ‘ market segmentation ’
• Such scenarios are used to explore the
impact of tighter standards upon the
trajectories of firms and upon the market
structures
The impact of tighter emission standards
The rise in the environmental requirements of clients, generated by tighter
environmental standards, has different impacts according to the nature and
timing of the standards:
- A tighter product standard enables a greater increase in the average
environmental quality of the product if it is enforced early rather
than late. The product standard has also a positive side-effect on the
process environmental quality. In particular, if an exclusive dominant
design emerges on the market because of strong competition
between PROD-type firms, the early application of the product
standard leads to a shift in paradigm for firms.
- A tighter process standard enables an increase not only in the average
process environmental quality but also in the average product one.
The early application of the standard tends to be more efficient in the
case of an homogeneous oligopoly dominated by PROD-type firms.
- On the contrary, in the case of a market segmentation characterised
by the emergence of a green market niche the late application of a
tighter process standard allows higher levels of environmental and
economic performance to be reached.
In summary:
• In the scenario of an exclusive dominant design, independent
of the type of standards, it is important to act relatively early
before the specialisation of leader PROD-type firms has
stabilised, which allows firms to take action before the lockin into a technological path with low environmental content.
• In the scenario of coexistence of a dominant design and a
green market niche, it is important for the product standard to
be implemented prior to the process standard in order to
enable the followers to survive and to encourage innovation
offsets for firms. In such cases, emission standards may
prevent both a situation of lock-in on the supplier side and a
situation of behavioural inertia on the user side. Standards
may thus enable a preservation of certain forms of
technological and behavioural diversity.
Limits
• Methodological problems related to simulations :
- the stochastic characteristic of the dynamics;
- the high number of parameters;
- the empirical calibration of the model.
• Limits of the model:
-
no sectoral differences are taken into account;
there’s no real price strategies of firms;
effective financial constraints do not apply;
the role of final consumers is not explicitly incorporated;
no new innovative entrants are considered.
• Regarding environmental innovations:
- the anticipation of environmental regulation by firms and its impact
on firm’s innovation strategy;
- the issue of “transition management” and system innovations.
Lessons for policy
• The efficiency of standards depends on the nature of performance standards
(process or product), on the market structure and on the timing of intervention.
Such results stress the different efficiency of regulatory instruments according
to the evolution of industrial structures across time.
• Rather than being designed in isolation one with each other a system of
instruments related to environmental regulation on the one hand and to
innovation and diffusion support on the other hand should be designed. The
stake is to implement policy that supports environmental innovation as a
dynamic process and that takes into account the different stages from
innovation to diffusion.
• In the model, the survival of a green market niche results from the adjustment
between an environmental leader firm and a group of green clients
characterised by high environmental requirement levels and high willingness
to pay. Moreover an early change in paradigm experienced by environmental
pioneering firms turns to open a window of opportunity for the development
of a green market niche. So qualitative coordination that prevails between
vertically related firms can be an appropriate channel through which
regulation can be transmitted.