# **1 INTRODUCTION**

More rapid green growth is inconceivable without innovation. Frontier innovations shift out production possibilities, allowing the production of more output and newer, more environmentally-friendly outputs with fewer or different inputs. Innovations thereby help to decouple growth from natural capital depletion and environmental pollution, for example towards more resource-efficient and cleaner technologies. Some innovations can directly increase resilience to environmental shocks. Catch-up innovations, that make the use of existing technologies more widespread by adapting them to local contexts, are even more important for all countries. They typically reduce production costs and increase enterprise competitiveness, and are lower risk than frontier innovations. The introduction of new products, processes, business models and other organizational methods, and marketing techniques, whether through frontier or catch-up innovation, in principle contribute to the expansion of existing markets and the creation of new markets, in the process increasing the job content and poverty alleviation of growth.

This paper examines existing patterns of green innovation, to what extent innovation policies should be designed differently to address the green growth agenda, and what policy modifications can best help yield short-run or at least medium-term impact. The paper discusses the implications of the inherent ̳double externality‘ of knowledge-related market failures compounding the traditional environmental externalities. It motivates appropriate policy action in the absence of global agreements, answering the question of why developing countries should undertake green innovation policies, and what types of policies should be pursued depending on existing technological capabilities.

In contrast to most recent empirical analyses that use older patent data to 2005 or at most to 2008 to characterize international patterns of green frontier innovation (OECD 2011a, Dechezleprêtre et al. 2011, Aghion et al. 2011), this paper uses patent data to end-2010 and explores patterns across developing countries in greater detail. This matters since there have been significant increases in green patenting over the 2006-2010 period. The paper also examines different frontier innovation patterns by level of technological sophistication of countries, and by extent of cross-country collaboration. As a proxy for patterns of broader green catch-up innovation, we analyze data on trade in environmental products. And a deeper analysis of trade data allows us to explore the extent to which developing countries export products ̳similar‘ to environmental products in terms of required inputs or technologies, as an indicator of their capability to start producing greener products. Finally, the paper also reports findings from an exhaustive survey of green Base-of-Pyramid (BoP) innovations to meet the needs of poor consumers.

In examining appropriate mixes of policies to foster green innovation, the paper combines insights from the latest relevant policy literature, available data on policy actions and firm-level responses, and selected case studies. These are organized around three complementary policy areas, namely to promote frontier innovation, to promote catch-up innovation, and to develop absorptive capacity. The paper makes the case for a portfolio of green innovation policies that include policy instruments to address the two complementary knowledge and environment-related market failures: both supply-side ̳technology-push‘ elements that reduce costs of knowledge creation and adoption as well as demand-side ̳market-pull‘ elements that increase net revenues from sales of greener products. While it is not premature to put a green twist on generic innovation policies, for instance that prizes are a preferred policy instrument over patents from a number of dimensions to promote the creation and diffusion of green as opposed to nongreen technologies, there is clearly still considerable progress to be made in ranking green innovation 2