3.3 Directed technological change and green growth

However, it is not only large companies that can do something for less by-products. The circular economy also

offers major business potentials for small and medium-sized enterprises. A small British company, Batoko, produces swimming dresses and bathing suits only from plastic from the ocean, while 4ocean in Florida also manufactures bracelets from plastic fished from the oceans. The textile industry innovation of the Dutch startup company, DyeCoo, dyes clothing without water and overly harmful chemicals, and thus it not only uses less harmful materials, but is also able to produce the end-product faster, using less energy. The Australian company, Close the Loop, manufactures road surface – by 60 percent more durable than traditional asphalt – by recycling used printer cartridges, plastic and glass. For one kilometre of road it uses 530,000 plastic bags, 168,000 bottles and 12,500 empty printer cartridges. The American Lehigh Technologies manufactures construction base materials from decomposed rubber waste. The Danish RGS90 produces construction insulator materials from porcelain and glass waste. While the Canadian startup company, Enerkem, produces biofuels from hydrocarbon extracted from waste. The Berlin-based startup, Kaffeeform, collects waste from coffee shops in the capital and produces recycled coffee cups from coffee-grounds, while the Danish ecoXpac manufactures biodegradable beer bottles.

However, the concept of circular economy can only be based on households’ collective environmental awareness

and on changing corporate business models. The thoughts of sustainability, green energy and no-waste have spread rapidly in the western part of Europe and in the highly developed countries of the world. As a result, in Germany, the Netherlands and the Scandinavian countries convincing and conviction have already reached such levels that a large part of the population is willing to use more expensive products and energy, if they are provably based on sustainability and global climate protection. Due to the income differences, this approach has not yet spread widely in the Eastern and Central European countries. However, numerous examples show that the circular economy approach is

a profitable business model and a significant take-off opportunity for the small and medium-sized enterprises of a country, the benefits of which the world will truly appreciate only in the future.

Since the financial crisis of 2008-2009, economic models relying more directly on the role of efficient government intervention than before have gained ground. Since purely market coordination-based growth models predict that sustainable economic growth cannot be achieved or can

growth theories implemented by the state’s environmental

policy have become increasingly more popular (Bowen, 2012, 2014; Jacobs, 2012). Based on green growth theories, the innovative state – looking beyond market trends – is also able to orient the direction of growth towards a future growth path it deems desirable, and thus the support of innovation also stimulates the innovation capacity of the entire economy.

It was Nordhaus (1973) who first introduced the “backstop technologies” as a production factor in his analysis, which

are able to replace the harmful production of non-renewable resources, or even the resource itself, with

renewable resources and clean production. An example of backstop technologies, already available for natural resources, is the solar and wind energy. Thus, the alternate technologies are already available today, but their exploitation is hindered because they are often not yet only be achieved under very strong assumptions, green

competitive enough to be widely implemented (Chakravorty et al., 1997; Pittel et al., 2014). The application of backstop

technologies will commence when the exploitation costs of those are lower than the revenues calculated based on market prices.

Acemoglu et al. (2012, 2016) build their green growth models based on directed technological change by overshadowing harmful technologies and treating alternate,

non-polluting technologies as growth drivers, which is the harmonisation of the relative prices of production factors (Hicks, 1932), the technological pressure and innovation limit (Kennedy, 1964) and the concept of directed technological changes (Acemoglu, 1992).

In the two-sector economy, economic production harmful for the environment (causing pollution) absorbs natural resources, while clean (green) production preserves them. It follows from market structure that labour force flows

where it receives higher wages, which, however depends on the marginal product of labour, i.e. on labour productivity. Since polluting production is cheaper, it can offer

higher wages than clean industries, and thus initially it is not worthwhile for the economic agent to invest or take a

job in a clean industry. Nature is present in the model only indirectly: the excessive use of resources reduces production, and ultimately environmentally unsustainable growth leads to an environmental disaster.

The economy is shifted from the harmful equilibrium that hinders future sustainable growth by environmental policy:

based on emitted volume, the government imposes a tax

on the product of the polluting industry, thereby changing the production costs of the companies producing the intermediate goods. The labour productivity of harmful production decreases, and thus it no longer pays to employ workers at the previous wages. As a result, the labour

force flows to the green industries, and thus the emissions

of polluting production decrease and end (Chart 3‑5).

In the long run, due to the tax imposed on dirty industries and the decline in production, the aggregated output of the economy will become lower, but the probability of a climate disaster decreases as well. At the same time, economic growth remains positive, since the government

intervention modified only the distribution of the labour force and innovation tendency among the industries.

Aggregated innovation activity does not change, but more innovations appear in the clean industries than in polluting ones. Following this, the innovation necessary for growth

is realised in the green industries. Chart 3-5: Sustainable growth in the models of directed technological change

0.3 introduction of tax and subvention policy

Innovation rate

0.2

0.1

0 10 20 30 Number of years

Traditional technologies Green technologies

Source: own compilation based on Acemoglu et al. (2012).

State intervention adjusts market failures, prevents polluting industrial innovations and fosters the development of green sectors, thus resulting in sustainable, long-term economic growth.

The timing of the imposition of taxes, and the validity

timeframe thereof is an important issue. Too early intervention by the government may lead to the devaluation of investments that are less polluting than expected, while postponement may entail major social welfare loss, if the production is more polluting than expected. The validity

timeframe of the tax is determined by the substitutability

of the green and polluting industries’ products. If the final products of the polluting and clean productions are substitutable, taxes should only be effective until the total production changes over to clean innovation and output. If the clean and polluting industries and final products are supplementary in final consumption, the tax must be effective forever, otherwise the original equilibrium, undesirable for the society, will be restored.

Mazzucato (2013) and Mazzucato and Semieniuk (2017) analyse the practice of the developer, innovative state, depicting through examples from the historically successful, developed western world, how the state contributed to development in the large technological revolutions. They present how the state in Finland and the government in the United States financed the building of Nokia and Apple, Google and Facebook, respectively, the development of Tesla, or the invention of GPS and the internet, which were originally military technology tools.

The state with a targeted mission appears on sub-markets of high market risk, high capital intensity and uncertain payments, also in the area of electronic, pharmaceutical or biotechnological developments, thus orienting the market toward the future development path it deems the less developed countries – which are worried about the

desirable. Accordingly, the state can play a major role in

shaping development in case of the western world too, if it considers the benefits of green growth and looks beyond the market trends when it wishes to orient the direction of growth.

Moreover, through the optimal combination of imposing taxes and strengthening propensity for innovation it can be achieved that in the long run sustainable growth is accom

panied by higher aggregated output. The surge in clean technology patents, and the headway of new technologies may have spillover effects that impact the entire national

dence and local knowledge spread is significant in green

economy.

The state has numerous instruments both in respect of taxation and subsidies depending on whether it wants to

influence consumption or production. The carbon tax, the carbon dioxide emissions quotas and the introduction of emission-related penalty taxes are aimed at curbing polluting technologies, while increasing the petrol prices or the CO 2 tax of airfares are directed at consumers. Green innovation ments from the outset. In order to manage climate change,

by Hungarian companies and the propagation of clean technologies can be supported by several tools, such as investment tax allowances or research and development subsidies, while consumers may benefit from personal income tax allowances, tax credit or cash transfers.

However, the local taxation of polluting industries has several international aspects, since as a result of taxes introduced on a stand-alone basis, the polluting production may easily move to another country with no

regulatory system. The model of Hemous (2012) presents the two regional extension of the directed technological change, where due to the carbon tax imposed in the Global North region on the emission of pollution the polluting industries move to the Global South region, where the degree of polluting innovations increases, while Van den Bijgaart (2017) expands the model with countries’ tendency to innovate, where in addition to the size it is also important how far the polluting and green innovations at industry level are from the innovation limit. At the same time, in the empirical assessment of the model Van den Bijgaart (2017) finds that it is not sufficient if only the developed economies (United States or the European Union) are committed to boosting green innovation. Based on this, in the interests

the majority of the countries that signed the Kyoto

Protocol should participate, since due to the size of the countries this is the only way to achieve economic coverage that ensures sustainable green growth.

However, the less developed states of the world at present are still in the intensive growth phase of emissions, which complicates acceptance of a global response to climate protection. Aghion and Jaravel (2015) examine the question from the aspect of emerging countries, and propose that for opportunity of economic convergence and thus reject the introduction of global carbon dioxide quotas – even copying and imitating the already developed technologies provides an opportunity for development, and at the same time it would also result in a major technological advance for them.

Based on Aghion et al. (2016), the impact of path depen

innovation by corporations: companies that have innovated in the past are later much more likely to register green patents again than those that have not. Moreover, companies which operate next to corporations that are successful in clean innovation are much more likely to make innovations in clean technologies themselves.

At the same time, open access to patents may also have a negative impact on corporate innovation, since if anybody can easily access technological knowledge, the innovator is unable to earn a profit on its investment, while for the copying company it is not worthwhile to make develop

of the global success of directed technological change,

it is also necessary to revise the traditional patent scheme developed to safeguard companies’ innovation activity.

Instead of safeguarding corporate innovations, knowledge sharing should become the focus within the framework of green growth. Hall and Helmers (2013) examine the positive impact of Eco-Patent Commons, a free-of-charge

patent portfolio

established in 2008, on several large companies, such as IBM, Nokia and Sony. The initiative,

which accelerated environmental protection and fostered

further innovation ceased in 2016, the reason for which – in the opinion of Contreras et al. (2018) – was the non-transparent monitoring of the use of the patents and thus the non-transparency of participation. Today, car manufacturer Tesla publicly shares its patent of the electro engine with the world, in order to facilitate the changeover of the automotive industry to the manufacture of environmentally friendly cars as soon as possible.