Can’t account for either upstream or downstream 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