Incentivizing green technology innovation to confront sustainable development

Abstract

Sustainable development relies to some extent on the ability of key industries to transition towards production based on green technologies. The shift to green technology can occur through incremental innovation or disruptive innovation. Moreover, market forces will not usually promote a shift to green products without government intervention. We assume a market where incumbents and new entrants, characterized as low and high-cost producers, respectively, manufacture a product. They receive subsidies from the government for choosing a type of green technology innovation, which, in turn, affects their production costs. Two types of incentives are considered: subsidizing technology innovation or the product itself. The theoretical model and numerical simulations developed herein indicate that both types of firms choose incremental innovation when subsidizing the product. However, when subsidizing green innovation, new entrants are the first to choose disruptive innovation. Interestingly, incumbents will follow only if the subsidy is high enough. Our results suggest that new entrants, disadvantaged by their higher costs, use the subsidy to catch up with incumbents. Therefore, they embrace disruptive innovation to potentially change the market's structure in their favor. We discuss the policy implications of these results for advancing sustainable development.