Page 73 - Low Carbon Development in China and India
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sector investment at the early commercialization stages by supporting
demonstration activities (to reduce risks) and market formation (to
underwrite demand). Finally, through regulations and other policies,
including tax and fiscal policies, governments also have a strong
influence on the diffusion of energy technologies.
There is often an intermediate stage between demonstration and
diffusion that can be considered a market formation or early deployment
stage. Here too, the government can play a critical role as policies are
often needed to create an initial market to ease the penetration of new
energy technologies into the market place. First-of-a-kind technologies
are often more expensive, and governments can create niche markets
through procurement and other policies (e.g., feed-in-tariffs or
technology portfolio standards) to create demand for advanced
or cleaner energy technologies. With this support, entrepreneurs
can experiment and test the market. Technological learning occurs
through experience. Even after the niche market has been exploited,
policy intervention may be needed to broaden and deepen the market
through the elimination of market hurdles, provision of information,
tax incentives, or low interest loans. At some point, a given technology
becomes competitive in the market place, and the government can exit
the market formation stage. For new, cleaner energy technology to be
competitive in the broader market, government policies are also needed
to correct for market externalities and define the rules of the game
(e.g., through a carbon tax). Because there are so many market
distortions, technologies cannot be assumed to freely compete in the
global market place. The innovation process is situated within an
overarching system comprising actors, institutions, and networks
involved in developing and commercializing a technology.
Innovation policies must therefore also target the smooth
functioning of the innovation system (see bottom of Figure 1.4).
Although government policy affects all stages of innovation, rarely do
we see evidence of comprehensive government strategies to optimize
the efficiency of the ETIS. Instead, government policies persistently
aim at isolated components of the system, such as support for R&D
with regard to which policies are needed to maximize feedbacks in the
system, or which market formation policies will be needed whether
and when the technologies emerge in the demonstration phase.
Policies on issues, such as education, taxes and subsidies, and market
regulation, can exert an important but indirect influence on innovation
supply and demand. This reinforces the need for consistency, not
just between direct innovation policies but also between the broader
regulatory and institutional environments for innovation.
38 Low Carbon Development in China and India
demonstration activities (to reduce risks) and market formation (to
underwrite demand). Finally, through regulations and other policies,
including tax and fiscal policies, governments also have a strong
influence on the diffusion of energy technologies.
There is often an intermediate stage between demonstration and
diffusion that can be considered a market formation or early deployment
stage. Here too, the government can play a critical role as policies are
often needed to create an initial market to ease the penetration of new
energy technologies into the market place. First-of-a-kind technologies
are often more expensive, and governments can create niche markets
through procurement and other policies (e.g., feed-in-tariffs or
technology portfolio standards) to create demand for advanced
or cleaner energy technologies. With this support, entrepreneurs
can experiment and test the market. Technological learning occurs
through experience. Even after the niche market has been exploited,
policy intervention may be needed to broaden and deepen the market
through the elimination of market hurdles, provision of information,
tax incentives, or low interest loans. At some point, a given technology
becomes competitive in the market place, and the government can exit
the market formation stage. For new, cleaner energy technology to be
competitive in the broader market, government policies are also needed
to correct for market externalities and define the rules of the game
(e.g., through a carbon tax). Because there are so many market
distortions, technologies cannot be assumed to freely compete in the
global market place. The innovation process is situated within an
overarching system comprising actors, institutions, and networks
involved in developing and commercializing a technology.
Innovation policies must therefore also target the smooth
functioning of the innovation system (see bottom of Figure 1.4).
Although government policy affects all stages of innovation, rarely do
we see evidence of comprehensive government strategies to optimize
the efficiency of the ETIS. Instead, government policies persistently
aim at isolated components of the system, such as support for R&D
with regard to which policies are needed to maximize feedbacks in the
system, or which market formation policies will be needed whether
and when the technologies emerge in the demonstration phase.
Policies on issues, such as education, taxes and subsidies, and market
regulation, can exert an important but indirect influence on innovation
supply and demand. This reinforces the need for consistency, not
just between direct innovation policies but also between the broader
regulatory and institutional environments for innovation.
38 Low Carbon Development in China and India
