Development crashes green innovation

As demonstrated in the Article, one of the main reasons why the effectiveness of patents as an incentive mechanism in the environmental domain is limited is the reliance of patent incentives on market demand in directing innovation.7 To start with, a market-based platform clearly cannot be relied upon to incentivize production of nonmarket goods.8 In the environmental context, this inherent limitation of the patent system comes into effect, for instance, with respect to basic scientific research regarding various fundamental questions related to climate change.9 Yet, even outside the realm of pure basic research, the more upstream a research and development (R&D) project is—i.e., the more removed it is from commercial applications—the higher the uncertainty regarding the market value of such project is likely to be, and the less probable it is that the patent system would provide ample incentives to pursue it.10 Thus, for instance, R&D endeavors designed to explore methods of employing various alternative energy sources in lieu of fossil fuels—which may later serve as the foundation for a wide array of downstream innovative efforts—are not likely to be adequately incentivized by patents.11

Unfortunately, in the context of environmental innovation, the concern that the patent system fails to provide adequate incentives to innovate applies to downstream innovation as well, since market demand tends to underrepresent the social value of green technologies. A cleaner environment constitutes a public good; hence, positive externalities play a significant role in undercutting demand for green products and processes. In deciding whether to purchase and install a pollution-reducing scrubber, for instance, a profit-maximizing firm is likely to focus on its direct costs and benefits, while not ascribing much weight to the substantial beneficial impact on numerous third parties that such a step may yield. If businesses are not willing to pay for climate change technologies a sufficient amount of money that reflects their social value, then the patent system—in its reliance on market demand—is not likely to incentivize development of such technologies at a socially optimal level.12

While the concern that businesses’ demand for green technologies underrepresents social value has been noted in innovation literature,13 this Article highlights that this is true with respect to individual consumers as well. Due to the existence of positive externalities and a variety of other factors explored in a growing body of interdisciplinary work, it appears that consumers cannot be trusted to sufficiently account for the ramifications of their choices on the environment. This may ultimately have a significant impact on the ability of the patent system to incentivize the development of both green consumer products and more upstream technologies, the demand for which derives from the demand for end-products.14

One other factor that may dilute the signal of social value produced by a market-based platform for incentivizing innovation is the inability of consumers to pay for various innovative products and services. Some low-income consumers—including developing countries in their capacity as consumers—may lack the means to pay for climate change technologies, even if they were otherwise willing to do so. This may be highly problematic regarding solutions that are required to address the particular needs of poor populations—for instance, an innovative product or process that would assist a country with a significant reliance on the agricultural sector to adapt to increasing temperatures. Such solutions would never be developed if we only relied on patent incentives.15

One other reason explored in the Article for the inability of the patent system to adequately promote green innovation derives from its reliance on a mechanism of exclusive rights. Some types of innovations are more difficult to exclude than others, and patent incentives have limited effectiveness in promoting highly nonexcludable innovations. This may be the case, for instance, with respect to certain industrial processes that are designed to “green” production of manufactured goods. To the extent that the use of such a production process by competitors of the patent owner can be kept in secrecy and is not embedded in the final product, it might not be possible to detect and prove infringement. As a result, patents may fail to serve as an effective incentive mechanism in this context as well.16