This insight examines the relationship between innovation policies, economic growth and the side effects of growth including environmental degradation, raw material depletion and increasing income and wealth inequality. It argues that policies to support growth-inducing innovation are counterproductive if not accompanied by measures to mitigate the collateral damage of growth.
Can innovation bring the planet closer to its limits?
In his seminal work, William Nordhaus (1992) finds four lethal conditions – limits – that can lead to the collapse of the economic system:
- The depletion of essential raw material supplies for which no substitute can be found.
- Land use reaches its limits and can no longer feed the population.
- Constant population growth leads to output being distributed among more and more people, thereby falling below subsistence levels.
- Environmental pollution and destruction of the biosphere exceed critical thresholds.
If one of these four limits is exceeded, a collapse occurs also if we analyse it through the lenses of neoclassical growth models. Nordhaus (1992) shows, however, that the statements change dramatically if technical progress is added to the modelling.
The global investments in science, technology and innovation have increased since the 1990s motivated not only by Nordhaus remarks but also by elements from endogenous growth theory which postulated that new discoveries will solve all major problems and thus enable indefinite growth. The positive impact of innovation on competitiveness was another driver for the heightened interest in the matter. The Lisbon Strategy as well as the Europe 2020 Strategy put innovation at the core of efforts to maintain and improve the union’s economic competitiveness.
Nonetheless, the planet seems to be a lot closer to hitting Nordhaus’ limits. Alarming news about GHGs emissions, biodiversity loss, huge land use by agriculture and deteriorating soils, exponentially increasing raw material consumption, increasing pollution of oceans, rapidly increasing wealth and income inequalities, etc. make the headlines on a daily basis.
Innovation policy and collateral damages
Are growth-inducing innovation policies that still dominate the policy landscape naive or are they still an essential tool for solving those global challenges? The surprising properties of renewable energies, which now produce electricity much cheaper than fossil fuels, and electromobility, which significantly reduces greenhouse gas emissions from the transport sector, have fuelled expectations that technologies will provide solutions to the problems at hand. While these technologies are helping to solve existential problems for humanity, not every innovation may do the same.
The main proposition of – naive – innovation policies is that their growth enhancing properties are only beneficial and without side effects. This assessment guarantees unlimited support for innovation policies across the political spectrum and triggers innovation support activities that promote innovations almost indiscriminately with a broad set of instruments.
Here the argument is that the side effects of these growth-oriented (innovation) policies have been backfiring and are consequently undermining the targets set out in the European Green Deal. Rather than ignoring side-effects, policymakers have to actively integrate these targets in the design and evaluation of measures. These claims should be substantiated by the following rough overview of the state of developments of three limits: decarbonisation, raw material use and inequality. If the case for naïve innovation policy is valid, then the planet should be further away from these limits than in the past.
The European Environment Agency (2022) explains the downward trend of GHG emission in Europe with large changes in the composition of fossil fuels used. Substituting coal and oil for gas has reduced emissions massively. This in combination with more energy efficient equipment, structural change and the rise of renewable energy technologies such as solar, wind and hydropower were the driving factors behind the reductions.
However, looking at the big transition ahead, there are three insights: first, that most of the decarbonisation is still ahead of us as in wide parts of the economy heavy polluting fossil fuels were substituted by less heavy polluting fuels (i.e. gas). This is not a system change/transformation but more of the same. Second, the rise of renewable energies is on the plus side of technological progress and innovation because they replace fossil fuels and render growth and rebound effects harmless with respect to climate change. Third, improving energy efficiency might be a “double edged sword”: if this prolongs the life cycle of technologies that use fossil fuels, it is most likely counterproductive because of rebound and growth effects. Improving energy efficiency is only a viable strategy in combination with the transition towards renewable energy technologies in all areas of the economy.
Raw material use
Absolute consumption of many raw materials – Ausubel (2015) argues – has been declining since the 1970s despite growth, while others have exceeded their peak or are about to reach their peak. This argument is easiest to understand in agriculture, where yields have increased significantly, although the area under cultivation has remained constant and the use of fertilisers has decreased significantly.
If one takes the share of domestically consumed resources as an indicator – as Eurostat does – then one gets a similar picture for Europe as Ausubel (2015) does for the USA. The addition of raw material in imported goods alters the picture significantly: there has been no relative decoupling in Europe as the growth in resource consumption is not less than economic growth. This also applies to the USA, Japan and Great Britain. In the EU-27 as well as in the OECD area, resource consumption has increased in proportion to GDP growth (see Wiedmann, 2013).
The interaction between innovation-induced growth and raw material use seems rather straightforward and almost linear. Raw materials consumption has not decoupled from growth in Europe at all but increased at about the same pace as GDP. This indicates that technological progress – at the present level of development of the European economy – is not resource saving.
The relationship between innovation and inequality is a much-neglected issue in research and policy discourse. As Innovation – and this hold across the political spectrum – is usually seen as a force for good benefitting all part of society (see e.g. Coad et al., 2021), the impact of innovation support on inequality is not sufficiently understood. For instance, successful entrepreneurial activities may under the present regulatory system create highly unequal outcomes and societies.
In summary, the planet has come closer to existing limits as identified by Nordhaus more than three decades ago despite continuous and increased investments in science and technology and an unprecedented freeing of market forces. There is obviously no automatic shift towards sustainable equilibriums rather the contrary.
Economic policy: what are we aiming at?
The short review of side effects of growth-inducing innovation support policies makes it evident that these interventions must be designed and assessed in terms of their impacts not only on economic growth, but also on climate change, environmental degradation, raw material depletion and income and wealth inequalities. In other words, innovation policies – as well as all other policy areas – must support the transition of companies and organisations, so that their contributions are in line with public targets and are positive for society and the planet in the long-term.
This figure is a “standard” depiction of policy interventions. The only significant changes are at the bottom where the share of companies and organisations operating in modeF (modeFurture) and modeBAU are depicted as target variables. Companies in modeF contribute towards achieving a decarbonisation of their activities (i.e. only use renewable energy) while introducing circular economy principles and reducing income and wealth inequalities thus contributing to the public interest. Companies that predominantly aim at increasing growth are still in modeBAU (business as usual). The stated targets in the green panel replace the now dominant growth target of these interventions. Interventions would attempt to increase the share of modeF companies and organisations. Companies and organisations that are not operating in modeF should simply not be supported. These criteria would be introduced for all public support programmes not just for innovation policy support. This can be used to harmonise access criteria to public support overall and would consequently significantly reduce red tape.
Given that these interventions can be implemented at the macro, meso, or micro level, it is no straightforward why this should be integrated into micro policies like innovation or investment support, when there are other policy fields that are obviously more suited – even responsible – to tackle the side effects of our economic system. The answer is that none of the big problems have been adequately addressed in the past. Inequality and growing imbalances have not been tackled effectively in the tax system, GHG emissions have not been sufficiently regulated by environmental and climate policies, carbon taxes, the emission trading system and so on. This holds for the implementation of a circular economy. In the absence of these policy interventions or their inadequacy, micro policies that promote modeBAU behaviour would enlarge our problems rather than solve them as these companies are not acting in the public interest.
While renewable energies and electromobility conform to a significant extent with modeF criteria (not including the inequality dimension), they cannot stand for all other innovations that are being supported. Rather, compliance with modeF criteria has to be evaluated for each and every innovation or technology if the side effect of innovations are to be kept in check. Indiscriminate and unscrutinised innovations support via the tax system – as has become popular in Europe over the past decade – might come with huge unaccounted side-effects. A closer look on the impact of innovation support programmes is therefore necessary if the planet is not to be moved further towards its limits by well-meaning but naïve innovation policies.
Acemoglu, D., Johnson, S., Power and Progress, Our Thousand-Year Struggle Over Technology and Prosperity, forthcoming.
Ausubel, J., The Return of Nature, How Technology Liberates the Environment, May 12, 2015, The Breakthrough Institute, https://thebreakthrough.org/journal/issue-5/the-return-of-nature
Coad, A., Nightingale, P., Stilgoe, J., Vezzani, A., Editorial: the dark side of innovation, Industry and Innovation, 28:1, 2021, 102-112, DOI: 10.1080/13662716.2020.1818555
European Environment Agency, Annual European Union greenhouse gas inventory 1990–2020 and inventory report 2022, Submission to the UNFCCC Secretariat, 27 May 2022, https://www.eea.europa.eu//publications/annual-european-union-greenhouse-gas-1
Jiborn, M., Kulionis, V., Kander, A., Consumption versus Technology: Drivers of Global Carbon Emissions 2000–2014, Energies, 2020, 13(2), 339; https://doi.org/10.3390/en13020339
Nordhaus, W. D., Lethal Model 2: The Limits to Growth Revisited, Brooking Papers on Economic Activity, 1992, https://www.brookings.edu/wp-content/uploads/1992/06/1992b_bpea_nordhaus_stavins_weitzman.pdf
Wiedmann, T. O., Schandl, H., Lenzen, M., Moranc, D., Suh, S., West, J., Kanemoto, K., The material footprint of nations, 2013, https://www.pnas.org/content/pnas/112/20/6271.full.pdf
Zuboff, S., The Age of Surveillance Capitalism, New York, 2019.
 This would amount to the automotive industry now investing in the development of more efficient diesel engines rather than electric motors.