Eco Innovation

May 2008
ECO-INNOVATION
FINAL REPORT FOR SECTORAL INNOVATION WATCH
ALASDAIR REID MICHAL MIEDZINSKI
www.technopolis-group.com
TABLE OF CONTENTS
1. Defining and measuring eco-innovation 1.1 Defining eco-innovation 1.2 Types of eco-innovations 1.2.1 Towards a life-cycle perspective 1.2.2 Product and process innovations 1.2.3 Organisational innovations 1.2.4 Marketing innovations 1.3 Levels of eco-innovation 1.4 Measuring eco-innovation 1.4.1 Key challenges of measuring eco-innovation 1.4.1.1 Eco-innovation indicators on the micro level 1.4.1.2 Constructing aggregate measurement levels 1.4.1.3 Linking eco-innovation to the material flow indicators 1.4.2 Priority actions for evidence based eco-innovation policies 2. Evidence on eco-innovation in the EU 2.1 The micro-level: eco-innovation in companies 2.1.1 Evidence from the Community Innovation Survey 2.1.2 Modes of innovation 2.1.3 Case studies of eco-innovators 2.2 The meso-level: product systems and technological regimes 2.2.1.1 Static sectoral aggregates 2.2.1.2 Product life-cycle perspective 2.2.1.3 Technological regimes perspective 2.2.1.4 Industrial symbiosis perspective 2.3.1 International competitiveness in environmental goods and service 2.3.2 Patents 2.3.3 Publications 2.3.4 Innovation and environmental and resource performance 3. Determinants of eco-innovation 3.1 Introduction - mapping eco-innovation determinants 3.2 Costs and demand 3.3 Regulation and standardisation 3.4 Taxation 3.5 Competition 2 2 3 3 4 5 5 6 7 7 7 9 10 13 14 14 14 18 20 22 22 22 23 24 27 28 29 31 34 34 35 40 42 43
2.3 The macro-level: is innovation contributing to a more sustainable economy? 27
SYSTEMATIC Eco-Innovation Report 2008
3.6 Socio-cultural factors 3.6.1 Cultural capital and consumer behaviour 3.6.2 Human capital 3.6.3 Social capital 3.6.4 Organisational capital 4. Eco-innovation: towards a fourth generation innovation policy 4.1 Changing the nature of innovation policy 4.1.1 Innovation policy today 4.1.2 Revisiting innovation policy 4.1.3 Innovation policy for sustainability 4.2 Steps towards a more sustainable mode of innovation policy 4.2.1 Setting conceptual borders 4.2.2 Identifying key policy challenges 4.2.3 Setting long term policy objectives and targets 4.2.4 Getting the right policy mix for eco-innovation 4.2.5 Policy coherence: making a policy out of the policy mix 4.2.5.1 Horizontal coherence 4.2.5.2 Vertical coherence 4.2.5.3 Temporal coherence 4.2.6 Policy learning on-going evaluation and policy feedback 4.3 Selected examples of policy measures supporting eco-innovation 4.3.1 The Dutch Energy Transition programme 4.3.3 The British National Industrial Symbiosis Programme (NISP) 4.3.4 EKU: The Swedish Tool for Ecologically Sustainable Procurement 4.3.5 The Japanese Top Runner standard 5. Conclusions and recommendations
45 46 47 48 48 50 50 50 52 53 55 55 55 55 56 58 59 59 59 60 61 61 64 66 67 70
4.3.2 The Austrian Programme on Technologies for Sustainable Development 63
EXHIBITS AND TABLES

Exhibit 1: The product chain .............................................................................................. 3 Exhibit 2. Preventive environmental technologies (Hohmeyer and Koschel 1995 op. cit Rennings 2000) .................................................................................................................. 5 Exhibit 3. Possible aggregations levels for different innovative products (Schaltegger and Sturm 1992; op cit. CML et al. 2008) ....................................................................... 10 Exhibit 4. Material flow indicators (OECD 2008c) ......................................................... 11 Exhibit 5 Effects of innovation activity on reduced materials and energy per unit output (EMAT) CIS3..........................................................................................................15 Exhibit 6 Effects of innovation activity on reduced environmental impacts or improved health and safety (EENV) - CIS3 ......................................................................................16 Exhibit 7 : Highly important effect of innovation on EMAT, CIS4 - main sector ..........17 Exhibit 8 Highly important effects of innovation activity on reduced environmental impacts or improved health and safety (EENV) - CIS4...................................................17 Exhibit 9: Ecover: driving change in the consumer detergent market ..........................20 Exhibit 10 Tesco: influencing or adapting to consumer demand ? ................................21 Exhibit 11 : Skysails: a wind of change in shipping..........................................................21 Exhibit 12 Eco-innovations according to the position in the product chain ................. 23 Exhibit 13 the industrial ecosystem of Kalundborg, Denmark ...................................... 26 Exhibit 14 Industrial symbiosis in Kalundborg, Denmark............................................. 26 Exhibit 15 Publications in 'environment/ecology' in the EU-25, US, and Japan per 100.000 capita, 2001 ........................................................................................................30 Exhibit 16 EU25 performance on resource productivity .................................................31 Exhibit 17. Correlation between Summary Innovation Index (SII) and energy intensity in EU25.............................................................................................................................. 32 Exhibit 18. Correlation between Summary Innovation Index (SII) and resource productivity in EU14......................................................................................................... 32 Exhibit 20 Reasons for introducing eco-innovation (ZEW et al 2001) ......................... 36 Exhibit 21. Important competition factors (ZEW et al 2001) ........................................ 37 Exhibit 22: The importance of a high customer acceptance for innovative firms ........ 37 Exhibit 23. Importance of environmental regulations for processes and products and changes to comply with regulations (ZEW et al 2001) ....................................................41 Exhibit 24. Area of socio-cultural factors with the strongest influence on the innovation performance of each sector ........................................................................... 45 Exhibit 25 Importance of the factors influencing consumer responsiveness to innovation in each sector.................................................................................................. 46 Exhibit 26 Most important reasons explaining the lack of qualified personnel involved in innovation activity ........................................................................................................ 47 Exhibit 27 Main drivers of innovation collaboration...................................................... 48 Exhibit 28: Positioning innovation policy........................................................................51 Exhibit 29: A taxonomy of innovation policy the MONIT approach.......................... 52 Exhibit 30. From environmental protection to eco-innovation..................................... 53
Exhibit 31. Examples of typical eco-innovation measures ............................................. 57 Exhibit 32. Three types of policy coherence (OECD 2003)............................................ 59 Exhibit 33. Eco-innovation measures in a multi-level governance approach ...............60 Exhibit 34. Example of vision and transition paths of one of the priority areas in the Dutch Energy Transition programme (Blueprint 2003) ................................................ 63 Exhibit 35. Example of the energy saving label (METI 2008) ....................................... 69 Exhibit 36. Main eco-innovation drivers and strategic policy response........................ 72 Table 1. Knowledge needs and possible data sources for analysing eco-innovation .....12 Table 2. Determinants of eco-innovation (adapted from Horbach 2005, 2008) ......... 34 Table 3. Innovation barriers perceived as high by eco-innovators (ZEW 2008).......... 35 Table 4: Importance of regulation for innovation per sector .........................................40 Table 5: Meeting regulation requirements as effect of innovation activities .................41 Table 6: Types of fiscal incentives.................................................................................... 43 Table 7: Competitors as information source (1998-2000)............................................. 44 Table 8: Innovation cooperation with competitors by sector (1998-2000) .................. 44
Preface
THE IMPORTANCE OF ECO-INNOVATION Old and New Policies
Given current economic and environmental policies, natures life-sustaining services will continue to decline at a rapid pace. Business as usual may put human life on Earth eventually into question. Meanwhile, economic options will become limited and world peace more fragile. Traditional environmental policies and measures focus on dealing with specific problems. In certain respects, this approach has been quite successful. For instance, it has cleaned up water pollution, taken dangerous products off the market, recycled certain products, and slowed the acceleration of climatic change. However, since traditional problem solving begins after recognising a problems existence, such policies are neither helpful on a systems level, nor are they preventive in a general sense. Solving individual problems by specialised environmental technologies can even exacerbate other problems, in particular those as yet undiscovered. Today, more than 95% of the resources lifted from nature are wasted before the finished goods reach the market. And many industrial products - such as cars demand additional natural resources while being used. The key for sustainability is to radically increase the resource productivity of all economic activities, including energy generation. While it may seem obvious, it is nevertheless worth repeating that climate change, too, is the consequence of enormous flows of human-induced carbonaceous material, and of large quantities of N2O emissions, originating from the technical fixation of millions of tons of nitrogen from the air for producing fertiliser. Today, that the environmental safety threshold has already been surpassed is evident from such developments as climate change, widespread hunger and water shortages, desertification, the spread of diseases, massive erosions, and increasing natural catastrophes such as hurricanes and floods. And yet, only some 20% of humankind enjoys the full benefits of our economic model, while all human beings and in particular the poor - have begun to suffer the consequences of its flaws. But even if one were to ignore the ecological problems caused by the overuse of nature, globalising the western lifestyle is not possible, because it would require more than two planets as a resource basis. Rapidly rising raw material prices testify to this.
Technologies for Tomorrow

To translate the reality just outlined into a general guideline for policy development, the Europe INNOVA panel on eco-innovation has concluded that: Eco-Innovation means the creation of novel and competitively priced goods, processes, systems, services, and procedures that can satisfy human needs and bring quality of life to all people with a life-cycle-wide minimal use of natural resources (material including energy carriers, and surface area) per unit output, and a minimal release of toxic substances. This suggests that continued reliance on traditional environmental technologies is no longer enough. Many examples exist where incremental improvement of existing technologies has increased resource productivity two to four times. However,
sufficiently decoupling production and consumption from nature requires new systems, goods, services, processes, and procedures for meeting human needs. One such novel solution is to propel ships by sky sails, potentially saving up to 60% of fuel for 50,000 freighters at competitive costs. Another is to give surfaces the character of lotus leaves so that they will become self-cleaning. To such solutions, the markets of the future will belong. The use of fossil-energy carriers must be abandoned as rapidly as possible, through a switch to inexhaustible sources of energy with the help of dematerialised technology. The development of as yet non industrialized countries is impossible without dematerialised solutions. Entrepreneurial success on all economic levels, including exporting goods, blueprints, and serviceswill also depend on striving for maximum resource productivity, as will gaining independence from those countries possessing raw materialsincluding energy carriersand preventing armed conflicts over access to natural resources.
Goals for Sustainability and Suitable Indicators

Creating new values for civil society requires the casting of goals with a definite time frame. Wherever possible, these goals should be encapsulated into measurable physical terms, so that developments can be managed. To the extent that value creation requires natural resources, the goals have to respect the laws of nature. Specifics, including policy instruments, for protecting natures services may vary for differing geographic and geological conditions. However, since humankind has only one planet, the fruits of the commons and its protection must be shared fairly. The following global goals have been suggested in literature for the target year 2050: The ecological footprint per person should not exceed 1.2 hectares. The worldwide per capita consumption of non-renewable resources should be less than five to six tons per year. (This goal implies a tremendous increase in resource efficiency in industrialized countries. In Germany, for instance, it means a Factor 10 increase, requiring a yearly absolute improvement in resource productivity of almost 5%, starting now. In the United States, the resource use would have to decline by about a factor of 15, and in Finland higher than that).
These goals must be discussed further. If the dematerializations indicated above for industrialized countries were achieved, they would allow developing countries to increase their use of natural resources, for improving their quality of life without jeopardizing the overall goal of global sustainability. Because it is impossible to manage a system without metrics, we must agree on appropriate indicators. These must satisfy six criteria: 1. they must be based on measurable quantities; 2. they must be generally applicable on a cradle to grave basis; 3. they must be directionally true; 4. they must be cost efficient in their application; 5. they must be based on scientific evidence and on broadly accepted guidelines such as the above definition for eco-innovation; and
6. they must respect and relate to the laws of nature (for instance, economic indicators must go beyond conventional measures of gross domestic product (GDP)). As to the ecological dimensions of sustainability, calculations of total material requirements (TMR), material input per service-unit (MIPS), and ecological rucksack (total material input for manufacturing a product, from cradle to the point of sale in kg, minus the mass of the products itself in kg) measurements satisfy these
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requirements. In addition, the value/weight and labour input/weight of industrial goods have been suggested as initial indicators. Furthermore, a great need remains for indices that reflect the resource implications of progress in the institutional, social, and economic dimensions of sustainability.
Economic Policies
No incentives or policies currently exist for a sufficiently resource-efficient economy: the key flaw of the present mainstream economic model is its lack of incentives for increasing the productivity of natural resources. Put simply, prices do not reflect the real value of natural resources. Adjusting the economic and fiscal framework is therefore the most fundamental and urgent prerequisite for moving toward sustainability. For this shift, a strong preference seems to be emerging for economic instruments, such as environmental tax reform and market-creation policies, including tradable permits. Instead of value-added taxation, for instance, it may be more efficient to tax natural resources use before goods for final use have been produced, while lowering taxation of labour accordingly. But because of market failures, economic instruments may not work in all cases; therefore other instruments and measures should be considered, such as information and coordination instruments and command-andcontrol mechanisms, for instance adjusting norms and standards. The choice of policy options should depend on their efficiency in dematerializing goods and services at the least possible cost to civil society. Today, public procurement of goods and services amounts to some 15 to 20% of final consumption. Preference to dematerialised goods, infrastructures, and services, could give the manufacturing sector a powerful incentive to increase resource productivity. In Germany, this may be a particularly attractive option as it has been shown that some 20% of resource-input production costs could be saved on average without negatively affecting outputs. Agreement has also emerged in civil society that improving education and training on all levels, as well as enhancing the public availability of relevant information, will play a central role as part of a progressive strategy. As new technical and societal developments tend to require ten to twenty years for taking hold, dematerialisation must commence immediately A single country cannot bring about the needed changes, but Europe with its historic experience, economic power, and technical skills has a realistic chance to lead humankind to a more promising future. Friedrich Schmidt-Bleek Member of the Sectoral Innovation Panel on Eco-Innovation President, Factor 10 Institute May 2008
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Executive summary
This report is the result of two-years of analysis and debate within the wider framework of the Europe INNOVA Sectoral Innovation Watch project. It sets out a conceptual framework for further analysis and policy development on eco-innovation; it brings together the available evidence on eco-innovation in a coherent framework; and it proposes a set of policy options for a more structured integration of ecoinnovation into mainstream policy. The report's authors have benefited from the advice and steer of a panel of high-level experts on eco-innovation.
Understanding eco-innovation
Eco-innovation is the creation of novel and competitively priced goods, processes, systems, services, and procedures designed to satisfy human needs and provide a better quality of life for everyone with a whole-life-cycle minimal use of natural resources (materials including energy and surface area) per unit output, and a minimal release of toxic substances. Eco-innovation encompasses novel or significantly improved solutions introduced at any stage of the product life-cycle with the aim of improving resource productivity or reducing environmental impact. Indeed, evidence suggests that the biggest resource efficiency gains can be realised in the upstream part of the supply chain that is in the production of basic (most notably during extraction of the raw material) or intermediate goods. In the downstream phases of the product life cycle (use of the product, consumer practices) resource efficiency gains are significantly lower. Understanding the full implications of eco-innovations implies taking into account in a systemic manner the consequences of their application. Indeed, eco-innovation needs to be analysed at three levels: micro (product, service, process, company); meso (sector, supply chain, region, product/service system); and macro (economy-wide). Product innovations can lead to either positive or negative changes in eco-efficiency, however an analysis limited to the product-level does not allow for a complete understanding of the changes induced in resource use or environmental impact. At the other end of the scale, the introduction of an innovation in more complex systems (e.g. energy systems), requires implementation of a series of micro level innovations implemented by multiple actors. The paradox is that system innovations are the most challenging to achieve, but also promise the most significant resource efficiency gains. Accordingly, measuring the importance of eco-innovation in the economy is both a necessity and a substantial challenge. It requires creating a coherent measurement approach drawing on different traditions, most notably from innovation studies and environmental economics (resource efficiency and resource productivity). The current indicators, statistics and knowledge base in the European Union about eco-innovation is insufficient as a robust basis for making correct policy choices. Survey-based data are valuable to analyse company profiles and various aspects of innovation activities and as such are relevant for innovation policy makers. Nevertheless, a limitation is that they do not include technical information about specific processes or products. In this context, even future plans for new questions on eco-innovation in the Community Innovation Survey (CIS) are not a sufficient tool for an informed design of eco-innovation policy measures. Therefore, there is a need to adopt and use other methods to gather data on the level of products and processes. There are established tools to analyse the whole life-cycle ecoefficiency of products and services. However, there is not an integrated database at the EU level currently, which can serve as a reliable policy reference for information on eco-innovative products or services.
One of the key challenges is to relate innovation performance to eco-efficiency gains and to macro-level resource efficiency indicators, which could serve as a reference framework for setting long-term innovation policy targets. Policy makers thinking about eco-innovation should reflect on how to use material flow measurements in the context of innovation policy in order to embed eco-innovation in an overall resource productivity perspective.
Evidence on eco-innovation in the EU

At the micro-level, the share of companies reporting a high impact of innovation activity on either energy/resource consumption or environmental effects was not significant during the period 1998-2000. Indeed, what is more striking from the data is the share of companies reporting "no impact" of their innovation activities on either energy/resource consumption or the environment. The no impact" shares varied from roughly 30% (in Denmark) to 65% in Luxembourg. For the 2000-2002 period, only 14% of innovating companies in the EU27 reported that 'reduced environmental impacts or improved health and safety' were a highly important effect of their innovation activity (16% in industry and 11% for services). In short, the vast majority of innovative companies are still not placing environmental or resource consumption concerns at the heart of their innovation strategies. As part of the sectoral innovation watch analysis of CIS data, innovative firms were classified into four groups across two dimensions: the novelty of the firms innovations; and the creative effort that the firm expends on in-house innovative activities. The results suggest that intermittent (44%) and strategic innovators (37%) are the dominant innovation modes within the CIS defined 'eco-innovators' group. Strategic eco-innovators have an above average share of new-to-firm products and new-to-market products in turnover. Importantly, eco-innovators make more use of non-technological change than the average innovative company (across all sectors). This suggests that organisational and marketing innovations are an important element of eco-innovation. A key point for policy-makers is to what extent, policy intervention can a) increase the number of 'strategic eco-innovators' and b) speed up the rate of diffusion of technological or non-technological innovation amongst the 'adopters'. A number of case studies of innovative firms carried out under the sectoral innovation watch project offer pointers to the needs for policy support of eco-innovative firms. A stable regulatory framework reducing risks for longer-term investments, clearer labelling of eco-products, etc. are amongst the actions required. On the one hand, meso level eco-innovation analysis can be done by the aggregation of micro data for sectors or regions. This can involve, for example, the use of innovation performance indicators related to material flow analysis (MFA) findings. This approach can, however, face difficulties in collecting data for sectors as well as in solving the problem of significant differences in data time periods (i.e. between MFA and innovation indicators). While providing comparable general information, such an approach is static and does not explain the dynamic relations and mechanisms of change in supply chains or technological systems. Product chain analysis and innovation life-cycle assessments have been used to measure the nature and impacts of technological environmental innovations, which tend to be mainly upstream rather than downstream in the vertical product chain. Studies suggests that change in eco-quality of the industrial system, requires the development and implementation of new technologies rather than the modification of mature systems already in place. The key environmental features of any technology are determined in the design and research and development process. Later stages allow only for incremental changes and minor modifications. Being far away from the decisive phases for eco-efficiency (e.g. design, R&D), the consumer is not in the position to have effective control over the process. Therefore, policy approaches such as sustainable consumption are not
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particularly effective unless they are embedded in a perspective of supply chain transformation. A final meso-level approach is that of industrial symbiosis that engages traditionally separate industries in a collective approach to competitive advantage involving physical exchange of materials, energy, water, and by-products. Although the environmental contribution of industrial symbiosis is predominantly studied from the perspective of the resource savings or reductions in pollution emissions, the approach could be linked to the perspective of regional innovation activities, in particular in relation to eco-innovation clusters. At the macro-level, trade, technological specialisation and economic data, generally limited to the environmental goods and services 'sector', offer some evidence of general trends or country level specialisation. However, in all cases, to truly capture the notion that eco-innovation occurs across all sectors of the economy will require much more in-depth studies and the development of more robust indicators, useful for tracking performance. From an innovation policy perspective, there is a need to begin measuring the contribution of innovation activity, and eco-innovations in particular (aggregate values), on resource productivity. A preliminary statistical analysis of such data for the EU25 immediately throws up some stylised facts: very few countries are performing similarly in terms of the rankings for innovation, energy intensity and resource productivity. the EU's innovation leaders, Finland and Sweden, both do less well in terms of energy intensity and resource productivity of their economies. a group of new Member States (Hungary, Latvia, Lithuania, Poland and Slovakia) perform poorly on both innovation performance and energy intensity of their economies. Clearly, a structural shift to more resource/energy efficient economic activities is still required in all EU countries to a greater or lesser extent; and eco-innovation needs to be encouraged much more strongly in this context.
Barriers and drivers to eco-innovation

While high costs of innovation activity, the lack of an appropriate source of finance and perceived excessive economic risks were highlighted by CIS3 data as barriers for eco-innovation, a study on a large sample of eco-innovative companies identified costs, notably energy, reduction as one of the key reasons to introduce eco-innovation. Companies are often not aware of the longer-term opportunities to cut costs thanks to investment in eco-innovation process (most notably eco-efficiency). Price and regulatory factors are key competitive issues for companies introducing ecoinnovations. Indeed, higher price (and not lower quality or less reliability) of environmental products seems to a major barrier to market penetration. In this context, not surprisingly, customer proximity and acceptance are considered by over 40% of eco-innovators (CIS3) as important for innovation activity. Similarly, improving the firms image is one of the most important motivations to introduce ecoinnovation. A significant element of demand for 'eco-innovative' products and services should be that exercised by public agencies through their purchasing practices: so called green public procurement. However, only 36% of the tender documents in the EU25 contain appropriate and legal environmental criteria. Moreover, certain categories of purchase are more suitable for green procurement than others. A recent study has underlined the important that green procurement should integrate a life cycle cost assessment and not only purchase cost and that a focus on the purchase price during the tender process is not justified. It is crucial that public authorities start procuring green products, in order to help these products towards a wider placement on public and private market and to generally serve as a 'positive role model'. However, the effect of green public procurement on eco-innovation will depend on the tendering criteria set
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and the market. The influence of public procurement on the creation of lead markets should be experimented in this context. The importance of regulations for eco-innovation is generally positive. Various empirical studies have confirmed that complying with environmental regulation was one of the key motivations to innovate among eco-innovation companies. Similarly, CIS3 data indicates that eco-innovative firms rank meeting regulation requirements as a highly important effect of their innovation activities more often than any other sector. Standardisation is important in enabling the uptake of eco-innovation and environmental technologies and facilitating their dissemination. Advanced performance benchmarks and wider use of labelling are necessary to inform consumers about product performance. In this respect, the oft-quoted Japanese TopRunner programme can serve as an example but will need adapting as a recent evaluation points out that the programme does not necessarily stimulate innovation. Fiscal measures are certainly one factor that can be used to stimulate eco-innovation. However, rather than 'environmental R&D' tax breaks, eco-innovation will be most effectively fostered by a radical reorganisation of taxation systems, namely by shifting the taxation burden from labour to resources. Eco-innovation is characterised by one of the highest shares of enterprises relying on information from other companies in their product market. Hence, horizontal knowledge spill-overs in innovation are of high significance. Learning from competitors is stimulated by high market uncertainty and uncertainty about the technological solutions to achieve high environmental performance of products and processes. In the framework of the SYSTEMATIC project, four dimensions (or four capitals) were used to identify the socio-cultural characteristics relevant to innovation for each sector: cultural capital & consumer behaviour, human capital, social capital, and organisational capital & entrepreneurship. Although for eco-innovation, cultural capital factors are important for consumer responsiveness to innovation, a survey of a panel of experts suggests that income level remains the most important factor. This confirms that the price is a key factor determining demand of eco-innovative goods and services. Nonetheless, education level and availability of information are also significant factors influencing consumer demand for eco-innovation. Eco-innovation is also hindered by the lack of qualified personnel due to inadequate education programmes leading to a low number of students and graduates in relevant disciplines and a lack of people with interdisciplinary skills. Eco-innovation is perceived as less path dependent in terms of choice of partners and more open towards new opportunities. Studies underline the importance of trust, collaboration and stakeholders involvement in implementing projects related to new technologies which have direct impact on the life of local communities and require social acceptance, e.g. for renewable energy. Environmental management tools and general organisational changes and improvements are relevant triggers for eco-innovation, since they help to reduce the information deficits to detect cost saving potentials (specifically material and energy) that are also an important driving force of eco-innovation. In this context, an environmentally oriented innovation policy has not only to regard traditional instruments like the improvement of the technological capabilities of a firm but also the coordination with soft environmental policy instruments like the introduction of environmental management.
Eco-innovation and innovation policy

The underlying rationale of innovation policy is to improve the competitiveness of the economy and, consequently, to contribute to higher economic growth and employment. Defined in this way innovation policy does not give any specific preference to deploying measures, which aim at more environmentally and socially sustainable development. Even if environmental concerns are identified in policy
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papers or work programmes, in practice they do not override the underlying objective of the policy that is economic growth. Innovation policy supporting eco-innovation is de facto third generation innovation policy. An intrinsic element in formulating such a policy is not to focus only on the short-term needs of economic growth, but also a long-term sustainable development. Hence, eco-innovation is working towards enhancing competitiveness of enterprises, but in doing so it seeks to avoid negative side effects for the natural environmentcomplying with the limits to resources, recognises that technology alone cannot be a solution to the problem of sustainability and integrates the (often neglected) dimension of final consumption. Innovation policy needs to focus on system innovations to help in complying with the limits as it involves both the environmental and social dimension. Such an approach integrates the notion of limited resources and social sustainability, explicitly relating a set of social and environmental goals and the norms of economic (market) activity. Six steps are outlined towards a more sustainable mode of innovation policy Setting conceptual borders (definition and measurement); Identifying key policy challenges; Setting long term policy objectives and targets; Getting the right policy mix for eco-innovation; Policy coherence: multi-level co-ordination and synergies between policies; Policy learning: on-going evaluation and policy feedback
The public sector can use numerous instruments to work towards eco-innovation which can be . The measures can be divided into five broad types: market-oriented schemes; public procurement; regulatory and normative frameworks; incentives for eco-innovation business process; awareness raising and demonstration measures; strategic planning and foresight.
As a complex policy challenge, support for eco-innovation requires a coordinated approach, most notably between innovation, research and environmental policy. Implementation of eco-innovation measures has to be done in close collaboration and the levels of policy delivery following a common vision; a set of objectives and a strategy shared by all concerned stakeholders. Environmental policy agencies will have to cooperate more systematically with innovation policy-makers. Equally, dematerialising our economies requires a shift in emphasis towards innovation inducing regulations such as setting strict environmental performance standards The report analyses selected measures implemented in EU Member States and Japan: Energy Transition Programme (the Netherlands) Technologies for Sustainable Development Programme (Austria) National Industrial Symbiosis Programme (UK) Ecologically Sustainable Procurement (Sweden) Top Runner Programme (Japan). Learning from these examples can help other countries implement policy measures relevant for eco-innovation, while recognising that each of the measures has its limits and that the impact on eco-innovation is not always fully discernible yet.
Conclusions and recommendations

The major global challenges (mega-drivers) for eco-innovation are climate change, limited natural resources and increased global competition. The overall policy response to these challenges is to connect sustainability and economic growth. The SYSTEMATIC panel emphasised that eco-innovation is still subordinated to economic growth in policy practice. Therefore, there is a need to review overall strategic policy priorities and make eco-innovation a key policy driver. The panel agreed that radical change and system innovation should be taken into account in designing and implementing EU innovation policy. It was argued that in order to encourage systemic change there is a need to both set clear long-term strategic policy targets as well as revise existing policy mix.
Mega drivers Main challenges Making climate change into a driver for ecoinnovation to win future markets needs strong policy instruments Strategic policy response Setting long-term ambitious eco-innovation targets Policy measures
Climate change
Limits to resources
Global competition
Fiscal measures as an incentive for eco-innovative products (and Defining co-ordinated policy disincentive to non-eco-friendly products) response (policy mix) Designing and implementing Public procurement as a lever for Making eco-challenges into technology forcing policies eco-innovation and lead markets. drivers of competitiveness Need for a strategic EU level Ambitious standards and Recognising that growth is programme (e.g. top-runner regulations as a framework not the overriding policy setting tool within which programme in Japan) EU objective technology development and ecoIntegrating notion of limits System change - changing and rebound effects in policy innovation is fostered the rules of the whole Support for R&D and measures system to help firms to commercialisation in areas of EU Creating critical mass in eco- environmental technology internalise external costs innovative fields and specialisation, notably in Avoiding rebound effects overcoming country and upstream parts of the product and accepting limits of regional fragmentation - a cycle. resources (limiting Total European eco-innovation Material Requirement) Demand side measures to change valley? consumer preferences Making eco-efficient Eco-capacity building up including training and capacity products attractive (fair and down from policy to building pricing) technicians Competing environmental priorities e.g. some solutions for energy may be not resource efficient
The following four main 'political messages', sum up the findings of this report: Eco-innovation is neither sector nor technology specific, limiting eco-innovation to 'environmental goods and services' is not a road for policy to continue to follow. There is no conclusive evidence that innovation performance is contributing to less resource intensive or more environmentally friendly socio-economic activity. Simply merging traditional environmental and innovation policy tools will not lead to a radical ('factor-x') dematerialisation of our economies nor reduce environmental footprints. Therefore, there is a need for a radical shift in framework conditions, notably in regulatory and taxation systems leading businesses and consumers to price their resource use correctly Innovation policy, therefore, needs to a) adjust its targets towards longer term metrics related to the impact of innovation on resource productivity; b) re-focus attention from direct subsidies to fiscal, regulatory and standard setting practices, promoting eco-innovation c) support innovation leading to an eco-efficient production cycle (e.g. integrating industrial symbiosis with cluster policy).
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Introduction
Detailed insights into sectoral innovation performance are essential for the development of effective innovation policy at regional, national and European levels. The Sectoral Innovation Watch project, ran from November 2005 to May 2008, analysed the factors and institutions impacting on innovation performance, and the framework conditions influencing innovation potential in nine sectors (food/drink, machinery/equipment, textile, chemicals, ICT, space and aeronautics, automotive) and three horizontal topics: biotechnology, eco-innovation, gazelles (fast growing SMEs). Sectoral Innovation Watch was implemented by a consortium composed of LABEIN, Logotech, MERIT, NIFU-STEP, SPRU, Technopolis, ZEW and WIFO. Sectoral Innovation Watch provides policy-makers and stakeholders with a comprehensive, holistic understanding of sectoral innovation performance and challenges across the EU25. The final reports for each of the sectors as well as a number of cross-cutting analytical reports can be viewed at: www.europe-innova.org . This report provides a synthesis of the work carried out on eco-innovation and in doing so draws on: cross-sectoral analysis undertaken by the project partners in the framework of a number of work packages. Out of the nine analytical work-packages, input for the eco-innovation report was received from the policy-mapping (Work-package 3, Technopolis), a paper on modes of innovation (Work-package 4, UNU-MERIT), the profiling of innovation leaders (work-package 6, Technopolis), regulatory and fiscal factors (work-package 9, ZEW), and socio-cultural factors influencing innovation (work-package 10, Technopolis); discussion with and inputs received from a panel of experts ('sectoral innovation panel'). Reports of the five panel meetings held can be found on the Europe INNOVA website, including a list of the panel members. Particularly constructive inputs were received from: Sebastian Gallehr (chair), Friedrich Hinterberger, John Holmberg, Maj Munch Andersen and Friedrich Schmidt-Bleek; a literature review on eco-innovation carried out by Technopolis.
Alasdair Reid and Michal Miedzinski edited this report with contributions from Nelly Bruno and Viola Peter, all from Technopolis. Comments on a draft version of this report were received from Geert van der Veen of Technopolis Group and Klaus Friesenbichler of WIFO. The usual disclaimer applies and any remaining errors are attributable to the authors only. The key questions addressed by this report are as follows: the scope and definition of eco-innovation (chapter 1), notably in terms of the need to distinguish eco-innovation from the narrow understanding of 'Environmental Goods and Services' generally used when carrying out a 'sectoral ' analysis; the extent to which there is evidence of eco-innovation activity in European enterprises, any visible trends in this direction, and evidence of impact of innovation activity on sustainable resource consumption; the factors and determinants (regulatory, socio-cultural, etc.) influencing ecoinnovation activity; and the rationale for and the approach to eco-innovation policy measures; as well lessons to be drawn from examples of measures from EU or other countries.
1. Defining and measuring eco-innovation

1.1 Defining eco-innovation
Innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations" (OECD 2005). Such a definition is neutral in the sense that it does not determine the content or the direction of change (Rennings 2000). The term environmental innovation, or shortly eco-innovation, relates to innovations aiming at a decreased negative influence of innovations on the natural environment. There is no generally accepted definition of eco-innovation. Various definitions have been proposed in the literature since the mid-1990s (see for example Carley and Spapens 1988, Rennings 2000, ZEW 2001, Kemp and Foxon 2007, CML et al. 2008, Andersen 2008, UNU-MERIT et al. 2008). The SYSTEMATIC panel on eco-innovation proposed to define eco-innovation as the creation of novel and competitively priced goods, processes, systems, services, and procedures designed to satisfy human needs and provide a better quality of life for everyone with a life-cycle minimal use of natural resources (materials including energy and surface area) per unit output, and a minimal release of toxic substances. According to this approach, the improvements in resource and energy efficiency lies at the heart of the eco-innovation. This definition will be used as a reference in this study.1 As for any other innovation, eco-innovations have several types and can result in a new or significantly improved product (good or service), process, a new marketing or organisational methods. Eco-innovation should be seen as an integral part of innovation efforts across all production and service sectors. The SYSTEMATIC panel on eco-innovation proposed a broad and inclusive definition of eco-industries as comprising all industry or service sectors, which are pro-actively and demonstrably involved in eco-innovation, including novel solutions to satisfy legally set standards, norms and requirements.2 Interestingly, companies do not see activities towards resource and energy efficiency improvements as distinct from a normal innovation process. In a recent study (OECD 2008a), when asked about whether they saw any difference between innovation in general and environmental innovation, many companies interviewed considered there were none. Most companies considered that all their innovations take environmental considerations into account, even when environmental improvements are not the main objective of their research and innovation efforts. Indeed, many environmental innovations combine an environmental benefit with a benefit for the firm or user (OECD 2008a). In this context, the motivation to eco-innovate is to benefit from the return on investment in the innovative technology, which reduces material inputs in the production process (e.g. primary resources, energy).
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This definition builds that proposed for eco-efficiency by Frank Bosshardt in 1989 for the Business Council of Sustainable Development (BCSD) definition of eco-efficiency. In its contribution to the Earth Summit in Rio de Janeiro in 1992, the BCSD proposed to define eco-efficiency as the delivery of competitively priced goods and services that satisfy human needs and bring quality of life while progressively reducing ecological impacts and resource intensity, through the life cycle, to a level at least in line with the earths estimated carrier capacity. literature including companies involved in production of environmental processes and goods. For a discussion on this point, see the final report of the MEI project (UNU-MERIT et al. 2008).
2 As such this definition differs from the more narrow understanding of eco-industry present in the
Eco-innovation and environmental goods and services (EG&S) OECD and Eurostat experts have defined environmental goods and services (EG&S) as consisting of activities which produce goods and services to measure, prevent, limit, minimise or correct environmental damage to water, air and soil, as well as problems related to waste, noise and eco systems. This includes cleaner technologies, products and services that reduce environmental risk and minimise pollution and resource use (OECD 2005b). The OECD classified EG&S into four categories: pollution management, cleaner technologies and products, resource management, and environmentally preferable products. Whereas innovative products belonging to some EG&S categories can be considered eco-innovations (e.g. cleaner products, environmental services), some others do not represent eco-innovations on their own, but rather offer means to control and measure environment-related activities in enterprises (e.g. pollution measuring devices). In some cases, however, such tools could play a facilitating role and lead to ecoinnovations in companies (e.g. organisational or process eco-innovations introducing corrections to the production process). Some types of eco-innovations are not covered by EG&S, most notably the organisation and process changes, as these are highly integrated in the company context and as such are non-tradable.
For more information on EG&S and WTO see OECD (2005b)
1.2 Types of eco-innovations 1.2.1 Towards a life-cycle perspective

Eco-innovation encompasses novel or significantly improved solutions introduced at any stage of the product or service life (from cradle to grave). The so-called end-ofpipe or curative technologies are, however, the least efficient solutions from this point of view. Resource and energy efficiency become of key importance as preventive measures minimising material inputs and decreasing levels of waste throughout the production and use process (Hinterberger et al. 1997, Hawken et al. 1999, Huber 2008).
Exhibit 1: The product chain
Source: Huber 2008
Huber (2008) underlines that the biggest resource efficiency gains can be realised in the upstream part of the supply chain that is in the production of base products (most notably during extraction of the raw material). In the downstream phases of the product life cycle (use of the product, consumer practices) the resource efficiency gains are significantly lower. However, all types of innovations leading to a lower resource and energy intensity at the stages of material extraction, manufacturing (both in relations to the components and final product), distribution, use, reuse and recycling as well as disposal are considered eco-innovations if they lead to a decreased resource-intensity from the perspective of the whole-life-cycle of the product or a service. Indeed, the concept of cradle-to-cradle takes the minimisation of waste to a logical extreme. In cradle-tocradle production, all material inputs and outputs are seen either as technical or biological nutrients. Technical nutrients can be recycled or reused with no loss of quality and biological nutrients composted or consumed (McDonough and Braungart, 2002). Lovins (2008) has argued that a sixth wave of innovation can be based on Sustainability, radical resource productivity, whole system design, biomimicry, green chemistry, industrial ecology, renewable energy and green nanotechnology.
1.2.2 Product and process innovations

A product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics (OECD 2005a). Product eco-innovations include any novel and significantly improved product or service produced in a way that its overall impact on environment is minimised. Products can include various goods with a different number of components (e.g. from a household appliance to a house) and various types of services such as new public mobility schemes (e.g. car sharing) and environmental services (e.g. waste management, environmental consulting). Increasingly, the distinction between the goods and services is becoming blurred, indeed it can be argued that people need services (utility, value), rather than goods themselves. However, from an eco-innovation perspective, it is important to underline that a service society can be as, or even more resource demanding than our present 'commodity' based society since all services require resources 3. At the same time, by focusing upon services, it is possible to achieve a dematerialisation of the economy, in as much as society favours technologies which enable the fulfilment of needs (through services provided) without necessarily the current consumption of 'things', hence minimising resource use. A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software (OECD 2005a). In terms of eco-innovation, one of the most significant process innovations is development and application of so-called environmental technologies. Error! Reference source not found.The exhibit below presents an outline of areas where preventive (integrated) and additive (curative) environmental technologies can be applied. The preventive technologies are integrated in the production process and in the product itself.
3 A good example is the increasing concern in the Internet sector about the resource (energy, etc.) intensity
of servers maintaining the virtual services offered by countless websites. See for instance Maclean & Arnaud (2008) or "Massive Computer Centers Bad for the Environment", (28 March 2008) Spiegel Online International (http://www.spiegel.de/international/business/0,1518,544053,00.html.
Exhibit 2. Preventive environmental technologies (Hohmeyer and Koschel 1995 op. cit Rennings 2000)
It should be noted that in many cases using the whole-life-cycle perspective requires changing the focus of innovation process analysis from a single product, service or a company to the whole production value chain or a product system including the behaviour of the final user of the product. The SYSTEMATIC eco-innovation panel members, during their 4th meeting (SIP4 2007), underlined that realising the full 'ecopotential' of a product innovation is highly dependent on the way in which relations between the components are designed. Hence, the more components integrated into a product (e.g. an eco-house), the more there is a need for careful design of the overall 'system product' and active management of the full chain of suppliers of components (e.g. in the eco-housing case, planning laws as well as professional standards and norms in construction sector strongly influence the take-up of more novel solutions).
1.2.3 Organisational innovations

An organisational innovation is the implementation of a new organisational method in the firms business practices, workplace organisation or external relations (OECD 2005a). In terms of organisational eco-innovations, they include environmental management systems (EMS) or other specific environmental management tools such as process control tools, environmental audits or chain management. The most well known EMS solutions include ISO 14000 family standards or the voluntary EU instrument on the Eco-Management and Audit Scheme (EMAS).
1.2.4 Marketing innovations

A marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing (OECD 2005a). Marketing innovations can be of high importance from the point of view of eco-innovation. The activities can include taking into account environmental aspects in the product promotion (e.g. voluntary ecolabelling), franchising and licensing as well as pricing.
1.3 Levels of eco-innovation

Various studies emphasise that in order to better understand environmental implications of eco-innovation needs to be studied at the relevant level taking into account wider effects of their application. The ECO-DRIVE study (CML et al. 2008) suggests that eco-innovation should be analysed on three levels: micro (product or service, process, company); meso (sector, supply chain, region, product system/service system); and macro (economy-wide: nation, economic blocks, global).
It is argued that in analysing eco-innovation it is essential to distinguish between the micro level where the real things happen, and the also very real meso and ultimately macro level, where outcomes may be quite different from singled out micro developments, not only in terms of economic growth and decoupling (CML et al. 2008). The study gives an example of adding 230 volt plugs in a train, which from the micro level perspective is bad for environmental performance of the train (increased energy use) and increases costs. However, it may make professional travellers change from plane to train on short to medium distances (meso-level change). In such an approach, the essence of eco-innovation is about the relative reconfiguration of product qualities in order to achieve a higher-order change. The environmental benefit is due to a change of consumer behaviour rather then due to the objective technological improvements of a product. Equally, Schmidt-Bleek (2008) argues that the eco-innovations should be assessed taking into account systemic consequences of their applications. He gives an example of introducing self-cleaning surfaces (micro-level change), which can contribute to the elimination of cleaning needs thus saving water, detergents and energy (meso- and systemic change). In this context, the major efficiency gains (or innovation benefits) are realised during the product utilisation phase and not during the micro-level production process. These two examples, although diverse, show that in the case of micro-level innovative improvements can lead to a higher-level, positive or negative, change in eco-efficiency. The analysis limited to a micro-level (or a product) does not allow to understand the actual eco-innovative qualities of the changes. Therefore, a higher or a systems- level of assessment is needed to better understand the effects of eco-innovation (Horbach 2005, CML et al 2008, Schmidt-Bleek 2008). An intended introduction of a meso or macro level change (system innovation) in case of more complex systems (e.g. energy systems), requires a concerted implementation of a series of micro level innovations and coordinated activities of many actors. For example, introduction of a fuel cell on a large scale would require changes in vehicle production, changes in a fuel distribution system as well as a wide acceptance and participation. Observers agree, however, that while system innovations are the most challenging, they also promise the most significant efficiency gains. It should be noted here, that although the introduction of different level of analysis is necessary to understand impacts and nature of eco-innovation, the practical implementation of this distinction is challenging and requires in-depth knowledge about the product system and value chain relations. It is, nevertheless, necessary to take it into account when setting up measurement and monitoring systems that will feed policy-making decisions, at all levels (from local upwards).
1.4 Measuring eco-innovation

Developing and refining current approaches to measuring eco innovation is a necessity for evidence based policy development. Development of public policy, as well as public-private partnership based, initiatives in various fields starting with innovation but encompassing industrial, environmental, regional and urban development, transport, etc.. need a sounder and more comprehensive knowledge of the potential influence they can exert on the incentive for enterprises to orientate their innovation activities in line with the eco-innovation concept. This section provides an overview of the main tools and methods existing or requiring further investment by national and European authorities as well as business and other stakeholders.
1.4.1 Key challenges of measuring eco-innovation

Measuring eco-innovation, both from a process perspective and a result of innovation activity, is a substantial challenge as it requires creating a coherent measurement approach drawing from different research traditions; including innovation studies and environmental economics (most notably resource efficiency and resource productivity). Recent EU funded studies on eco-innovation measurement methods have not produced a fully-fledged methodological approach (see CML et al. 2008, UNU-MERIT et al 2008). It is argued that in general the knowledge base for eco-innovation is insufficient to develop policy. One of the reasons for this is that eco-innovation has not been recognised as an official sector or a policy field and as such has not benefited from the tailored approaches in indicator development process (UNU-MERIT et al 2008). In general, the authors underline the need to further develop indicators and statistical systems in order to allow a more in-depth analysis of eco-innovation.4 Similarly, in its most recent report on monitoring EU sustainable development strategy, EUROSTAT (2007) lists indicator on eco-innovations among a list of indicators to be developed. The major conceptual and operational challenges in measuring eco-innovation include: agreeing on selected key eco-innovation indicators on the micro level, taking into account the whole-life-cycle approach and wider impacts in depicting ecoefficiency aspects of eco-innovations; clarifying different analytical levels of eco-innovation analysis and developing insightful data aggregation methods; and establishing operational approaches to link different levels of analysing ecoinnovations to understand their systemic effects and their relation to other key indicators, most notably to these measuring economic growth and sustainable development.
1.4.1.1 Eco-innovation indicators on the micro level Micro level eco-innovation data refers to indicators related to, on the one hand, company performance, and on the other hand, to individual products and processes. From an eco-innovation perspective, the two aspects are closely inter-linked. Gathering representative samples for the company-level innovation activity related data is done with the use of surveys in innovation studies. To be able to analyse ecoinnovation activity of enterprises, the innovation surveys need to include more ecoinnovation relevant information. In this context, the MEI project (UNU-MERIT et al
4 For a discussion on eco-innovation measurement issues see the reports from ECO-DRIVE (CML et al.
2008) and MEI (UNU-MERIT et al 2008) projects.
2008) in close collaboration with EUROSTAT proposed to adopt specific questions in the EU Community Innovation Survey (CIS) in order to have a fuller account of the eco-innovation perspective5. So far, the CIS has not included an eco-innovation dimension allowing for a robust analysis (see also Chapter 2 and 3 in this report). The authors report that the next CIS (CIS-5) will have a special module on eco-innovation, which in 2010 will produce richer data about the nature of eco-innovation and its determinants (UNU-MERIT 2008). Survey-based data are valuable to analyse company profiles and various aspects of innovation activities and as such are relevant for innovation policy makers. Nevertheless, a limitation remains, that the CIS and other surveys only provide general (and self-declared) information on companies. They do not cover technical information about specific processes or products. Therefore, even the revised innovation surveys will not solve the problem of fully capturing eco-efficiency aspects of innovation at the micro-level. Therefore, there is a need to adopt and use other methods allowing for gathering data on the level of products and processes. There are established tools to analyse the whole-life-cycle eco-efficiency of products and services (see for example Hinterberger et al 1997, EEA 1998, Schmidt-Bleek 1999, 2005, 2008, CML et al. 2008, UNUMERIT et al. 2008). Examples of such tools include e.g. LCA-Life Cycle Assessment (EEA 1992) or MIPS - Material Intensity Per unit Service (see box). The advantage of MIPS is that it can be expressed as one synthetic indicator. Both these (and other) tools have been tested and used in practice. However, none have been universally applied. In consequence, there is no integrated database at the EU level, which can serve as a representative benchmark reference. For instance, the LCA related database is not updated regularly and remains incomplete with data available just for some groups of products and mostly in the EU15. In order to build a reliable policy decision base for EU level policies, the measurement tools need to be more universally applied so that up-to-date data are available to analysts and policy-makers. Needless to say, good policy needs to be based on consistent information; this requires reaching a consensus on the measurement approach ensuring a wider and more regular collection of data. Clearly, policy-makers from different policy areas should coordinate their efforts to improve micro-level ecoinnovation data availability. To sum up, innovation surveys are not a sufficient tool for planning eco-innovation policy measures. The policy design processes need to be based also on aggregated data making it possible to understand past impacts of eco-innovative products and processes. Learning from eco-efficiency measurement approaches is one way to strengthen the knowledge base of innovation policy targeting eco-innovation. Example of measuring resource and energy efficiency: MIPS
MIPS (Material Input Per Service unit) indicates the quantity of resources (known as material in the MIPS concept) used for a product or service. The total MI (material input) carried by a finished product is called its ecological rucksack. The value for S in MIPS is the total number of units of service (utility) delivered by the product during its lifetime, or the expected total number of service units that the product might supply during its life-time. MIPS calculates the use of resources from the point of their extraction from nature: all data correspond to the amount of moved tons in nature, thus to the categories of biotic or renewable raw material, abiotic or non renewable raw material, water, air and earth movement in agriculture and silviculture (including erosion). All material consumption during manufacture, use and recycling or disposal is calculated back to the resource consumption. This is done by simple a calculation of factors for energy consumption or also for transport, which are expressed
5 See MEI report for detailed proposal (UNU-MERIT et al 2008).
in t/MWh or t/tkm. Complex system analyses are concealed there, which, for example, indicate resource consumption per energy carrier and type of power plant. The resource productivity can be improved either by lowering MI for a given S or by increasing S with a fixed quantity of resources. Both changes can be achieved through technological as well as managerial/societal changes/innovations. For example, by increasing the longevity of goods, or by leasing rather than selling a product, and by sharing buildings, infrastructures, vehicles or machines can the total number of service units be improved dramatically, without a corresponding increase in the total input of natural raw materials. By means of MIPS, enterprises can undertake up-to-date life-cycle-wide environmental observations of their products and services. In addition, MIPS provides the distinct advantage that brings potential for implementing product and process innovations derived from the analyses and calculations. The crucial difference to those indicators that relate to outputs (emissions) is the active orientation towards sustainable products and services, and not only the reduction of emissions caused by existing products and product families. Most importantly, however, one can use MIPS to design and manufacture life-cycle-wide dematerialised technical solutions. MIPS could also be used as a universal label for indicating the material efficiency of goods and services. One of the disadvantages is the relatively high cost of data gathering, which is however justified, if the measurement is applied systematically. Source: Schmidt-Bleek (1999, 2005, 2008), Ritthoff et al. (2002)
1.4.1.2 Constructing aggregate measurement levels Since eco-innovation requires analysis on different levels, the measurement systems have to be organised accordingly. Logically, the knowledge on eco-innovation will always depend on the scope and quality of data and measurements undertaken at the micro level. Higher-level indicators are essentially aggregates of the micro-level data on companies and eco-innovations (products, processes etc.). Exhibit 3 illustrates possible steps in moving from a micro to a macro level perspective in analysing process and product eco-innovation. From a purely ecological perspective, one of the best-known indicators is the so-called ecological footprint (Wackernagel et al, 1996)6. Although widely recognised, this measurement fails to take account of toxic waste, highlighting that any aggregation has to carefully account for all potential spillover effects. Hence, the aggregation of micro-level eco-innovation indicators should be done with a systems perspective and the whole-life-cycle approach in order to take into account sectoral characteristics, country/region specificities, time-lag factors (e.g. of knowledge and technology diffusion), possibility of a rebound or substitution effects, to avoid the risk of double counting etc. There is a need for further research to develop operational approaches to capture complexities of a multi-level eco-innovation analysis.7
6 The ecological footprint is the total land and water area required to support a population with a specific
lifestyle and given technology with all necessary natural resources and to absorb all wastes and emissions for an indefinite length of time
7 For a discussion on eco-innovation data aggregation see for example CML et al (2008).
Exhibit 3. Possible aggregations levels for different innovative products (Schaltegger and Sturm 1992; op cit. CML et al. 2008)
1.4.1.3 Linking eco-innovation to the material flow indicators One of the key challenges of eco-innovation measurement on an aggregate level is to relate innovation effects in terms of eco-efficiency gains to the resource efficiency indicators, which, in this context, could serve as a reference point for setting long-term eco-innovation targets. There are a number of approaches dealing with analysing material flows, resource productivity and decoupling.8 It should be underlined that excessive human made material flows (extraction and displacement of natural resources) cause shifts in the eco-systems, which on one hand contribute to observed welfare levels, but on the other lead to longer term systemic disequilibria such as floods, shortages of water, desertification, erosion, etc. Hence, the primary objective of eco-innovation should be to reduce material flows. In this context, innovation policy should be linked to sustainability objectives. The recent OECD report (2008c) is the state-of-the-art presentation of Material Flow Analysis (MFA). MFA comprises two main elements. First, systematic material flow accounts in physical units provide a structure for information about material flows. Secondly, material flow indicators derived from these accounts convey policy relevant messages to a non-expert audience about the significance of material flows with respect to economic and environmental issues of concern. MFA allows for defining a number of indicators (see Exhibit 4). EUROSTAT (2007) uses the domestic material consumption (DMC) indicator. It is underlined that DMC is used as a proxy for the more relevant indicator, total material consumption (TMC), which includes upstream hidden flows related to imports and exports of raw materials, finished and semi-manufactured products. TMC indicator is still under development as few EU Member States are able to calculate it at this stage. In addition, DMC and TMC are only a rough proxy for measuring the overall environmental impact of resource use. An indicator on the environmental impact of material use needs to be developed (EUROSTAT 2007). Equally, OECD (2008c) underlines that actual use of material flow (MF) information in national policy debates and policy-making remains limited. This should change as an increasing number of countries are incorporating MF indicators into national indicator sets, while some are
8 Compare for example a study analysing national trends in decoupling using DMC-Domestic Material
Consumption and EMC-Environmentally weighted Material Consumption indicators (CML et al 2005). See also EUROSTAT (2007) for the recent data and OECD (2008c) for a comprehensive report on MFA.
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also formulating broad national goals, quantitative objectives, and even time-bound numerical targets in terms of MF indicators.
Exhibit 4. Material flow indicators (OECD 2008c)
According to OECD (2008c) further work in developing MFA as a practical analytical tool must be aimed at: better understanding the environmental impacts and costs of resource use throughout the entire life cycle of materials and the products that embody them (i.e. from natural resource extraction, manufacturing, use/consumption to end-oflife management); implementation of compatible databases for key material flows (e.g. flows of particular importance to the environment and the economy), and sharing of good practices within countries, among countries and enterprises.
Factor 10/MIPS One of the approaches integrating micro and macro perspective of decoupling is the Factor10/MIPS concept. It takes the input of natural materials into the technosphere as a starting point for estimating the impact potential of welfare creation on the environment. The total material requirement (TMR) is the sum total of the life-cycle-wide material input into the industrial metabolisms of a country (or of any other defined economic entity). On the macrolevel, GDP divided by TMR (total material productivity indicators) could be considered as a decoupling indicator for the environmental impact potential of an economic entity. In order to achieve a Factor 10 within 30 years, the material productivity would have to increase (the TMR lowered) by 7.7 % per annum, within 50 years by 4.6%, and within 100 years by yearly 2.3 %. This requires that all goods, infrastructures and services are designed, manufactured, transported, stored, used and discarded with the smallest possible amount of material (as well as land surface) consumption. One of the tools allowing to measure the micro-level of decoupling is MIPS. Source: Schmidt-Bleek 2008
Policy makers dealing with eco-innovation should reflect on how to use material flow measurements in the context of innovation policy in order to embed eco-innovation in an overall resource productivity as well as environmental sustainability perspective. Schmidt-Bleek (2005) underlines that from a global sustainability perspective statements about the relative eco-efficiency of an individual product or an enterprise are of limited value because they almost never allow the extrapolation to the total resource use on the regional, national or global level. The task is not evident and presents a methodological challenge, but establishment of a reference framework integrating the measurement of innovation with overall resource productivity is
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necessary if it is to contribute to setting targets for longer-term informed policies supporting eco-innovation. Table 1 summarises the discussion on measurement issues indicating knowledge needs as regards different levels of eco-innovation measurements and possible (potential) data sources and analytical tools. Table 1. Knowledge needs and possible data sources for analysing eco-innovation
Level Micro What do we want to know? Company profile eco-innovation activity in companies by: type of innovation (product/service, process, organisational, marketing) level of novelty size of company sector geographical region etc. eco-innovation collaboration information sources relevant for ecoinnovation activity Innovation profile (product or process level) eco-innovation benefits in: energy efficiency gains resource efficiency gains waste reduction eco-efficiency profile of eco-innovation before (a) it is introduced on the market, (b) received public aid Possible data sources and analytical tools improved innovation surveys (CIS5+) existing data on EMAS and other environmental management standards (e.g. LCA. ISO, MIPS, ecological footprints) case studies and dedicated studies
Meso eco-innovation activity of companies in different sectors innovation eco-efficiency gains on mesolevel (sectors, value-chains, technology regimes, product systems)
official statistics on waste, toxic substances and emissions (e.g. PACE) databases with data on energy and material flows linked to the production activity (collection enforced by regulatory framework and standards or in the framework of a voluntary scheme) data collected in the process of ecological labelling impact assessments of products and services (possibility to use also existing tools like MIPS, LCA - Life Cycle Assessment, ecological rucksack, ecological footprint) case studies and thematic research projects aggregated micro indicators (taking into account possible substitution and rebound effects) + data on trade in EG&S data on material flows related to sector or other area of activity systems dynamics modelling on systemic impacts of eco-innovations patent analysis thematic analyses and case studies on eco-innovative products or type of ecoinnovations using systemic approach (e.g. on value chains, product systems) aggregated micro indicators on ecoinnovation activity in enterprises + data on trade in EG&S contribution of innovation activity, and eco-innovations in particular (aggregate values) to resource productivity (DMC/GDP or EMC/GDP): simple indicators and modelling exercises patent analysis
Macro
eco-innovation and national innovation system eco-innovation activity and economy (GDP growth, employment, trade etc.), consumer behaviour and natural environment (limiting energy and material consumption, waste production, quality of water, soil and air etc.)
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1.4.2 Priority actions for evidence based eco-innovation policies

The SYSTEMATIC panel on eco-innovation called for the further analytical effort and empirical research to understand systemic implications of eco-innovation as regards 9: Measuring eco-innovation and its impacts: A limited set of key indicators needs to be developed to understand and communicate the performance of businesses, economic sectors and national economies with regard to eco-innovation and their relation to key indicators of sustainable development, most notably material flows. A practical reporting system could be developed to guide eco-innovative management from micro to macro scale decision-making. Ex-ante assessment of environmental and economic effects of eco-innovation: Existing tools for integrated sustainability assessment (in particular, economicenvironmental models) should be further developed to allow a proper representation of eco-innovations in key sectors such as energy, industry and transport. Simulations and ex-ante assessments of the potential environmental and macro-economic effects of a broad application of eco-innovations in Europe should be carried out. These scenarios should quantify potential reductions of energy and material use as well as emissions through a wider use of ecoinnovations. Furthermore, they should assess potentials of eco-innovations for stimulating growth and improving European competitiveness on international markets.
This section draws on the discussion of the SYSTEMATIC Panel on Eco-Innovation during its first meeting in Brussels in March 2006.
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2. Evidence on eco-innovation in the EU

The previous section of this report set out an analytical framework on three levels while underlining that data is scarce, dispersed and, often, non-comparable (across countries), etc. Previous attempts to look at eco-innovation at a multi-country level have drawn a similar conclusion then 'copped out' at the stage of presenting available evidence by describing or analysing the environmental goods sector (EGS) as a proxy for eco-innovation, because of lack of data on eco-innovation in the broader sense. We prefer not to adopt this approach since it undermines, or muddles, a central tenant of the work of the panellists and study team: that eco-innovation is, or should be, at the core of innovation in all types of enterprises, across all sectors. Certainly, understanding the importance and trends in the EGS is one element of understanding eco-innovation but it is only a partial story. Moreover, the available 'traditional' proxy data for eco-innovation were gathered in the initial scoping paper for the ecoinnovation work10. The limitations of the analysis presented here are: The resources to prepare the eco-innovation 'sector report' were limited (half the resources provided to the more traditional sectors). The original idea that, that the study team on eco-innovation could draw on analysis and results produced by the other 'work-packages' of the sectoral innovation watch project did not work out. Unfortunately, even where data was partially available, the eco-innovation aspects were generally ignored. Only one working paper on modes of innovation (UNU-MERIT 2008) and some elements of work on the regulatory environment (ZEW 2008) were finally of relevance. The analysis is carried out at a multi-country level, where comparability between data is essential. Smaller, more focused (e.g. regional) data-sets or academic studies of eco-innovation while of relevance for building up an understanding of emerging issues are not applicable for a multi-country analysis due to data comparability limits. Given the limited resources, the eco-innovation study did team did not attempt to carry out econometric analysis on the limited sector and macro data available (patent statistics, publications, energy efficiency and emission intensity indicators etc.). Rather the aim was to point out options and possibilities for future quantitative and qualitative analysis in this area.
Accordingly, in the following sections, the evidence gathered at all three levels of analysis: micro, meso and macro-level, is presented. Case studies of eco-innovative enterprises complement the limited data available.
2.1 The micro-level: eco-innovation in companies 2.1.1 Evidence from the Community Innovation Survey
An obvious source of multi-country evidence on eco-innovation activity in companies is the CIS. The CIS3 and CIS 4 exercises covering the periods 1998-2000 and 20022004 included questions related to effects of innovation activities concerning resource impact of innovation and reduced environmental impact. For both periods, the CIS yields data as reported by companies with declared innovation activities on: Reduced materials and energy per unit output (EMAT) Reduced environmental impacts or improved health and safety (EENV)
10 Scoping Paper for Eco-innovation report. Sectoral Innovation Watch Project, (Technopolis 2006).
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The first difficulty is that these questions do not yield exactly the same level of detail from period to period; the second is that the availability of data is patchy from one Member State to another. Nevertheless, looking simply at the descriptive data, the information suggests that neither reduced materials and energy nor reduced environmental impacts (unfortunately and inexplicably mixed up with health and safety) are major effects of innovation activity in any EU Member State. For CIS3, the questions regarding the EMAT and EENV indicators were ranked according to high, medium, low or no resource/energy or environmental impacts of innovation activities. The following two figures illustrate the available data for a subset of the EU27 countries providing answers to these questions, differentiated by this ranking (data for other countries is available for the 'high' ranking only, and the other countries do not deviate in terms of the importance of the high ranking).
Exhibit 5 Effects of innovation activity on reduced materials and energy per unit output (EMAT) CIS3
Source: Eurostat, calculations Technopolis Group
As can be seen, the share of companies reporting "high impacts" of innovation activity on either energy/resource consumption or environmental effects is not significant (around 8% of innovative companies for EMAT and 15% for EENV). Indeed, what is more significant from this data is the share of companies reporting "no impact" of their innovation activities on either energy/resource consumption or the environment. The "no impact of innovation" shares varies from 31% in Denmark to 65% in Luxembourg for the EMAT indicator and from 27% in Denmark to 65% in Luxembourg for the EENV indicator.
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Exhibit 6 Effects of innovation activity on reduced environmental impacts or improved health and safety (EENV) - CIS3
For CIS4, this ranking of the importance of the EMAT and EENV effects was not retained and instead innovating companies were asked to report only on "Highly important effects of innovation". For CIS4, only 14% of innovating companies report that 'reduced environmental impacts or improved health and safety' were a highly important effect of their innovation activity, on average across the EU27 (16% in industry and 11% for services). The following two diagrams provide a descriptive view of the available data for all business sectors, for industrial sectors and for the core service sectors per EU Member State (for which data is available).
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Exhibit 7 : Highly important effect of innovation on EMAT, CIS4 - main sector
Exhibit 8 Highly important effects of innovation activity on reduced environmental impacts or improved health and safety (EENV) - CIS4
Interpreting this data would require a more in-depth study of micro-data. However, at a policy level, the share of companies (leaving aside outliers such as Cyprus) that can be considered in a 'statistical way' as 'eco-innovators' barely rises above 10-15% in most countries (and sometimes is below 10%).
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The political message seems to be that even in a period in which environmental awareness was rising in the media and where resources prices were beginning to shift upwards (allied to growing concerns even amongst mainstream business people about the 'peak in oil'), that the vast majority of innovative companies are not placing environmental or resource consumption concerns at the heart of their innovation strategies.
2.1.2 Modes of innovation

A working paper produced by the SYSTEMATIC project11 focused on distinguishing between different types (or modes) of innovators using CIS data. Innovative firms were classified into four groups across two dimensions: the novelty of the firms innovations; and the creative effort that the firm expends on in-house innovative activities. Two of the four innovation modes capture strengths in R&D-based innovation, while the other two capture firms that innovate though diffusion processes: Strategic innovators: These firms are the main source of innovations that diffuse to other firms. They have introduced a new product or process (novel innovator) that they developed either internally or in co-operation with others. They perform own R&D on a continuous basis and have introduced a least one product that is new to their market. National or international markets are their most significant markets. Intermittent innovators: these firms develop innovations at least in part in-house and have introduced new-to-market innovations. But, they are unlikely to develop innovations that diffuse to other firms. Technology modifiers: these firms have developed an innovation and while none perform R&D, they have some in-house innovative activities. If they are active on national or international markets, they have not introduced a new to market innovation. If they are active in local and regional markets, they may have introduced a new to market innovation and have slightly modified it for this market. Technology adopters: these firms innovate through diffusion, depending on adopting innovations developed by other firms.
The authors attempted to use as a proxy for 'eco-innovators' those innovative companies reporting the above described EMAT or EENV effects. The results of this working paper suggest that intermittent (44%) and strategic innovators (37%) are the dominant innovation modes within the 'CIS defined eco-innovators' group. Labour productivity is highest for strategic innovators but overall labour productivity among eco-innovators is below that of the average firm. Strategic innovators in eco-industries have the highest turnover share of new-to-firm products (29%) and new-to-market products (13%), which is above the average across all industries. Intermittent innovators in eco-industries have an above average share of turnover due to new-tomarket products (9% vs. 7%) but a below average share due to new-to-firm products (17% vs. 23%). Eco-innovators make more use of non-technological change than the average innovator where implementing new organisational structures is most popular. Nonetheless the use of non-technological change is below average for strategic innovators in opposite to intermittent innovators, which use it in particular for implementing advanced management. The use of intellectual property to protect new inventions and innovations, in particular registration of design patterns, secrecy,
11 UNU-MERIT (2008), Strategic innovators drive innovation performance at the sector level: A sectoral
analysis of innovation modes.
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complexity of design and lead-time advantage on competitors is as well above average for intermittent innovators. The identified 'eco-innovators in the CIS data innovate mostly by buying advanced machinery and equipment (70%), performing intramural R&D (58%) and training their personnel (49%). They also receive above average funding from central government, especially strategic innovators. Building on this initial analysis the final report of the MEI project (UNU-MERIT et al 2008) notes that eco-innovation occurs in the whole economy: any company adopting a good, service, production process management or business method with environmental benefit is an eco-innovator. The MEI team propose to distinguish, in future analysis of CIS data, between different types of eco-innovators: Strategic eco-innovators: active in eco equipment & services sectors, develop ecoinnovations for sale to other firms; Strategic eco-adopters: intentionally implement eco-innovations, either developed in-house, acquired from other firms, or both; Passive eco-innovators: process, organisational, product innovations etc. that result in environmental benefits, but where there is no specific strategy to ecoinnovate; Non eco innovators: No activities for either intentional or unintended innovations with environmental benefits.
Again, what is important here is not so much the classification typology itself (although the above definition of strategic eco-innovators falls once again into the trap of limiting eco-innovation to EGS), but as underlined in chapter 1, the development of a robust data collection system allowing analysis of the different modes of ecoinnovators. Indeed, an equally valid typology was proposed already in the mid nineties by Fussler and James (1996, op. cit. Carley and Spapens 1998): they suggest that a top group of only 2-3% companies are 'eco-innovators' while 13-14% are early adopters, 68% majority adopters and 16% laggards. The important additional element here being a time one, with the leading 2-3% of companies acting well ahead of the "awareness curve" in the business sector of the importance of the factors driving a shift to ecoinnovation. A key point for policy is then to what extent, policy intervention can a) support 'strategic eco-innovators' and b) speed up the rate of diffusion amongst the 'adopters' taking into account the need of a system level change. Indeed, policy makers should support strategic eco-innovators given that their innovations have the potential to induce a higher-level change not causing adverse rebound effects. Policy makers should also understand what makes companies strategic eco-adopters and provide incentives for other companies to include eco-innovation in their strategies. Equally, innovation policy should encourage strategic adopters, especially those developing eco-innovations in-house, to become strategic eco-innovators should their solutions have potential for a wider application. In fact, if the objective is to introduce a systemic change then it also implies that the policies should address companies along the whole value chain that is to focus equally (or even primarily) on developing eco-innovation absorption capacity of passive ecoinnovators as well as motivating non eco-innovators to change their practices. Therefore, the typology is useful only if it is used in a way to help understand specific technology regimes or whole sectors to be addressed by the policy.
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2.1.3 Case studies of eco-innovators

As part of the sectoral innovation watch project, in-depth case studies were carried out with 70 innovative firms in the EU25, of which seven companies were directly identified as eco-innovation firms 12. The full seven case studies of the eco-innovation companies can be viewed via the Europa INNOVA website. The following boxes summarise three of the seven cases.
Exhibit 9: Ecover: driving change in the consumer detergent market

Founded in 1980 in Belgium, Ecover (B) is an international company that is active in the production of ecological detergents and cleansing agents. Ecover has developed into the world's leader in its market segment by achieving an average annual growth rate of 25% since the turn of the century to reach a turnover of 55m in 2006. The products, which innovate by replacing petrochemical-based washing product components with renewable organic substances, are currently distributed in 22 countries on four continents. The environmentally conscious innovations introduced in the running of the company have led to many articles in the mainstream press and several prizes and awards from international, national and regional authorities for Ecovers contributions and achievements in the field of environmentally sound development. Even among innovation leaders, Ecover stands out as an unusual enterprise. Like most of the other companies selected to showcase innovation in this study, Ecover delivers innovative products. Like many of them, it innovates in its approach to production and marketing. Like some of them, it also innovates in its approach relating to other key parts of its business, including its choices of transport modes, its production environment, its creative processes and its relationship with suppliers. In fact, its entire business model is geared towards changing the conceptual framework within which individual consumers make purchase decisions. Ecovers managers insist on one point: the company is not market-driven, yet it is profitable. The basic assumption made by Ecover is that all other factors being equal, the consumer will choose the product with the least negative impact on the environment. As such, this does not differ from the strategies identified as green marketing or ethical marketing adopted by a small number of players across a widening range of consumer goods. However, with a strong growth rate and a growing stream of free advertising through interviews and feature articles across a wide variety of news media, Ecovers approach may be touching on something more fundamental than a successful niche marketing strategy.
Ecover is an interesting case. Some panel members felt that this example was a too 'typical' green product and too 'consumer-orientated', arguing that eco-innovations in intermediate goods can be more important in reducing resource use, etc.. However, the Ecover case represents almost the full cycle of eco-innovation that one could expect: relatively radical changes to products (including a number of patents), innovation in production through factories and office buildings corresponding to high environmental standards, innovation in 'marketing' aimed at driving consumer demand for more ecological products, etc.. In this respect, Ecover stands out from the other companies examined, and despite some reservations related more to getting the right 'political messages' across, can be considered as a good practice example of ecoinnovation. The second case is rather paradoxical, Tesco a huge retail company in large part with a mission to drive and increase consume demand, and hence consumption; yet taking more than a passing interest in reducing the environmental impact of its activities. The issue arising here is clearly one of whether there is any 'decoupling' (i.e. Tesco can maintain or increase its market share while reducing its resource and energy use per
12 Technopolis Group (2008c). Final report of Work-package 6 of the SYSTEMATIC project: innovation
leaders showcase, May 2008.
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Euro of sales) or whether green retailing simply generates a rebound effect (e.g. consumers feel they are shopping 'responsibly' and hence increase consumption wiping out any positive environmental effect that Tesco's effort to reduce energy or packaging, etc. may generate).
Exhibit 10 Tesco: influencing or adapting to consumer demand ?

Tesco (UK) has achieved substantial levels of growth and is now the worlds third largest grocery retailer, employing over 400,000 people across 14 countries and achieving net sales in excess of 63b. In 2006 the company made a big change to its business model by introducing a community and environmental element to its strategy. As the number one supermarket in the UK (based on both global sales and domestic market share), Tesco also now wants to be number one for corporate responsibility and has over recent years become very active in developing new products, processes and services aimed at decreasing environmental impacts and encouraging sustainable development. Changing customer demands, combined with increased strategic prioritisation of environmental and sustainability issues, increased resources, partnerships and investment have driven a whole range of innovations at Tesco. The key elements of Tescos eco-innovation activities revolve around: Setting an example through reducing its own emissions and waste Helping customers by making green choices easier and more affordable Investing in energy-efficient technologies
Current trials of new equipment, buildings and transportation, alongside ongoing long-term investment in new technologies and academic research suggest that Tesco will continue to lead the way in finding eco-innovation solutions in the retail sector in the future.
The third case, Skysails, is a truly innovative product aimed at reducing fuel consumption of container ships, etc. Since, the impact of freight transport by ship is less resource intensive already than by air-freight, the Skysails solution could increase this advantage further and reduce costs (as energy prices rise), encouraging more freight to be transported by boats.
Exhibit 11 : Skysails: a wind of change in shipping

SkySails (D) has developed a highly impressive technology for the shipping industry that allows for both saving operating costs and reducing pollution: a wind-powered propulsion system that reduces fuel consumption by 15-30 per cent. But that's not all. The system pays for itself within only three to five years, it is small, it can be retro-fitted to most sea-going ships, it is fully automated and it can be installed within only six days, even while the ship is being (un)loaded. The simple difference to previous attempts at using wind power for shipping is that the SkySails-System employs a towing kite that is not rigidly fixed to the deck like conventional masts and therefore can be operated in higher altitudes where considerably stronger and more stable winds prevail than at sea level. The idea of using the enormous powers a kite is able to release came to the then 15 year-old Stephan Wrage, founder and CEO of SkySails, while he was stunt kiting on a beach. Two decades later, chances are that SkySails will shape shipping in the 21st century by bringing back wind power to seafaring.
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2.2 The meso-level: product systems and technological regimes

The meso level of eco-innovation focuses on analysis and assessments of the whole product or service systems (covering full supply chains and life-cycles of products and services), technology regimes, industrial sectors, infrastructures as well as regions (CML et al 2008). This level is crucial for understanding eco-innovation from the point of view of the definition used in this study, which emphasises importance of capturing the whole-life-cycle perspective of innovation (see Chapter 1). It has to be noted that meso level is the most challenging from the point of view of gathering evidence as it requires information from many agents. The meso level itself is diverse ranging from the product system to the whole sector and needs to be analysed with the use of various methods. 2.2.1.1 Static sectoral aggregates On the one hand, meso level eco-innovation analysis can be done with a simple aggregation of micro data for sectors or regions. This could be done for example with the use of innovation performance indicators related to the MFA (material flow analysis) findings. This approach can, however, suffer difficulties in collecting data for sectors as well as in solving the problem of significant differences in data age (i.e. between MFA and innovation indicators). While providing comparable general information, such approach is static and does not explain the dynamic relations and mechanisms of change in supply chains or technological systems. The latter often have trans-sectoral approach and global character. In literature there are different approaches to studying meso-level eco-innovation trying to capture this complexity. Most often researchers develop case studies devoted to product system or technology field or a particular sector. The most often used or referred to method in this context is life cycle analysis - LCA (see e.g. Huber 2008, Matos and Hall 2007, Berkhout 2005). 2.2.1.2 Product life-cycle perspective In a study based on empirical survey of more than 300 eco-innovations from 2000 to 2004, Huber (2008) used product chain analysis and innovation LCA to assess the nature and impacts of technological environmental innovations. The dataset is not representative, however its sheer size makes the findings worthwhile. The central finding of the study was the environmental innovations tend to be mainly upstream rather than downstream in the vertical product chain. Huber (2008) agues that the results suggest that change in eco-quality of the industrial metabolism, requires a change in path; i.e. it requires the development and implementation of new technologies rather than the modification of mature systems already in place. He underlines that the key environmental features of any technology are determined in the design and research and development process. Later stages allow only for incremental changes and minor modifications. Once in place, there is not much left which one can do about it, aside from some improvements in later new-generation variants of that product, some percentage points of materials and energy savings in the factory, and some additional percentage points by being an environmentally aware consumer (ibid.). The findings are in line with the point of view of material flow analysis, which indicates that the biggest impacts on nature (or the biggest ecological rucksacks) are caused in the initial material extraction phases of production.
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Exhibit 12 Eco-innovations according to the position in the product chain
Source: Huber 2008
Being far away from the decisive phases for eco-efficiency (e.g. design, R&D), the consumer is not in the position to have effective control over the process. Therefore, approaches such as sustainable consumption or sustainable household can, in the end indeed, not be particularly effective in changing societys metabolism unless such approaches are embedded in a perspective of supply chain transformation based on technological environmental innovations (ibid.). The author concludes: Consumer demand may be decisive with regard to the diffusion of consumer goods. But apart from the fact that consumers hardly affect selection of capital goods, final demand cannot buy into existence things which do not exist yet with one exception, which is the demand by basic providers, key manufacturers and large service and trade businesses, because they have, or can have if they wish so, a decisive influence on suppliers along the product chain, and a defining influence on the design and redesign of both capital and consumer goods. (ibid.). In order to get a more in-depth understanding of dynamics of different product or technology systems, studies have to recognise sectoral or technological systems specificities as well as regional contexts. Thus, the analytical approaches will vary depending on the characteristics of organisation of production in different sectors and regions as well as on the availability of data. 2.2.1.3 Technological regimes perspective Berkhout (2005) used the perspective of technological regime to study interactions and change in large, integrated technological systems and their influence on these systems environmental profile. In his study he focused on two products: coated printing and writing papers, and PVC. Innovation in technological regimes was considered as unfolding dynamically out of the interaction of four types of innovation: abatement innovation, process innovations, product innovation and infrastructural changes. It is argued that opportunities and pressures for each form of innovation (and their interaction) are specific to the technological regime or sector. The study used LCA with a view to explore the system-wide environmental effects of infrastructural, process, product and abatement innovations. In absence of the mature and parameterised LCA model for PVC, a new model was developed. The research commenced with an in-depth analysis of the sector profile disaggregating its manufacturing process in to steps. For example, in the case of pulp this included
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forestry, pulping, paper milling, paper recovery, de-inking and fibre recycling. As the study was concerned with exploring the possibility of planning the regime transition, it also used scenario analysis approach. The study did not observe the transition from abatement (e.g. pollution control) to process environmental innovation in the analysed sectors. Novel process technologies did not play a dominant role in defining the environmental profile of production systems. Integrated environmental performance improvements appeared to be achieved through more continuous, incremental technical change. Clearly, the more profound the change, the more costly and risky it is for producers. This suggests existence of a path dependency in technological regimes. The study showed that to a different degree, product innovation continues to be an important factor in mature price-competitive industries. While there are cases where environmental factors are clearly dominant (e.g. investments in abatement or novel chlorine-producing processes), there is a range of technological changes with major environmental performance impacts that are motivated by cost-saving or quality changes. In this context, policy-makers should recognise that even direct measures like technology-based emission standards are only part of what lies behind the reshaping of the environmental profiles of industries. Other policies relevant for industry and technological performance in firms also play a role. Resource productivity is already a major focus for innovative activity in resourceintensive industries. The scaling-up of production capacity and the adoption of yield and efficiency improving techniques are central to the normal technological activity of all producer firms. In case of the analysed sectors, growing competition, related technological developments and changes in market demand have forced producers to focus more on product quality and product innovation. Product innovation has thus become a growing focus for these industries, and may have countervailing effects on resource productivity. The problem of systems innovation appears to be less one of a reorientation of prevailing technological trajectories, but more a problem of substitution. Berkhout (2005) argues that the problem of technological transitions should not begin with describing the inter-linkages between micro-, meso- and macro-innovations within the context of an incumbent technological regime. Truly revolutionary innovations are likely to start small, and they will come to define through co-evolutionary processes a new regime or themselves. In doing this, they will need to overcome innovation barriers (technological, institutional, economic, political). Berkhout (2005) pointed to a number of policy implications in this context: the need to encourage new incipient regimes; the need to facilitate competition early on (by reducing barriers); and the need to intervene in processes of regime extrication and extinction (negative incentives to incumbent technologies - by imposing full environmental costs on them, for instance) so creating the conditions for their substitution.
2.2.1.4 Industrial symbiosis perspective Chertow (2007) defines industrial symbiosis (IS) as engaging traditionally separate industries in a collective approach to competitive advantage involving physical exchange of materials, energy, water, and by-products. The keys to industrial symbiosis are collaboration and the synergistic possibilities offered by geographic proximity. There are two approaches to creating industrial symbiosis (Chertow 2007). Planned eco-industrial park model includes a conscious effort to identify companies from different industries and locate them together so that they can share resources across and among them. Self-organising symbiosis model emerges from decisions by private actors motivated to exchange resources to meet goals such as cost reduction, revenue
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enhancement, or business expansion. Based on historical and contemporary examples, Mirata and Emtairah (2005) list the following benefits of successful cases of industrial synthesis: Environmental benefits - improved resource use efficiencies, reduced use of nonrenewable resources and reduced pollutant emissions; Economic benefits - reductions in the resource inputs costs in production, reductions in waste management costs and from the generation of additional income due to higher values of by-product and waste streams; Business benefits - improved relationships with external parties, development of a green image, new products and new markets; and Social benefits - new employment and raising the quality of existing jobs and by creating a cleaner, safer, natural and working environment.
In general, the empirical research indicates that planned eco-industrial parks, particularly from scratch, that involve significant material and energy exchanges have rarely become sustainable. Gibbs et al (2002, op.cit. Chertow 2007) list the following barriers to successful industrial symbiosis project: technical barriers - the possibility that local industries do not have the potential to fit together; informational barriers - difficulty to find new uses for waste products, relating to poor information regarding the potential market and potential supply; economic barriers lack of incentive to use waste streams as a resource if there is no reliable market for them; regulatory barriers regulations may prevent industries or industrial processes being linked together; motivational barriers - firms, public sector agencies and other relevant local actors must be willing to co-operate and commit themselves to the process.
More successful have been cases based on principles of self-organisation (Jacobsen and Anderberg, 2005, Chertow, 2006 op.cit. Chertow 2007). The most well known example of industrial symbiosis such case is Kalundborg in Denmark (see box). Other examples of functioning industrial symbiosis in Europe include e.g. the Regional Recycling Information System (REGRIS) in the Oldenburger Munsterland Region of northwest Germany which supports the management of inter company information flows, provides data to local firms about recycling opportunities, and coordinates recycling activities (Milchrahm and Hasler 2002, op. cit. Chertow 2007); and the city of Jyvaskyla in Finland (Korhonen et al. 1999, op. cit. Chertow 2007) where the energy supply is organised around co-production of heat and electricity and includes industrial wastes used as fuels in a highly efficient system.
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Exhibit 13 the industrial ecosystem of Kalundborg, Denmark
Source: Chertow 2008
Exhibit 14 Industrial symbiosis in Kalundborg, Denmark

The term industrial symbiosis was coined in the small municipality of Kalundborg, Denmark, where a well-developed network of dense firm interactions was organised. The primary partners in Kalundborg, including an oil refinery, power station, gypsum board facility, and a pharmaceutical company, share ground water, surface water, and wastewater, steam, and fuel, and also exchange a variety of by-products that become feedstocks in other processes. High levels of environmental and economic efficiency have been achieved which has led to many other less tangible benefits involving personnel, equipment, and information sharing. The first exchanges took place in the 1970s, and, by the late 1980s, at least ten additional exchanges had begun across multiple firms. Yet, until a group of local high school students prepared a science project in 1989 in which they made a scale model of all the pipelines and connections in their small community, the unique aspects of the project went largely unnoticed (Christensen 1998; op.cit Chertow 2007). Following this high school project, still on display in Kalundborg, came the European media and then academics (Engberg 1993; Gertler 1995 op.cit Chertow 2007) to describe the existing network from a broader environmental perspective. Two fundamental conclusions are commonly shared in the Kalundborg case. First, the Kalundborg symbiosis emerged from self-organization initiated in the private sector to achieve certain goals, such as cost reduction, revenue enhancement, business expansion, and securing long term access to water and energy. Second, once a revelation was made, a coordinative function was found to be helpful in organising more exchanges and moving them forward. In Kalundborg, for example, managers belonged to an Environment Club and a coordinative organization, the Symbiosis Institute, was launched in 1996 as part of Kalundborgs industrial development agency, specifically working to accelerate the number and complexity of new exchanges (Jacobsen 2005; op.cit. Chertow 2007).
Mirata and Emtairah (2005) underline that although the environmental contribution of industrial symbiosis is predominantly studied from the perspective of the resource savings or reductions in pollution emissions, the approach could be linked to the perspective of regional innovation activities, in particular in relation to ecoinnovation. The authors analyse the Landskrona IS programme from this perspective (ibid).
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On the other hand, industrial symbiosis is a natural partner of the industrial cluster perspective. Both perspectives can benefit from each others experience in terms of analytical approaches and policy development. Innovation policy with a focus on ecoinnovation could take into account industrial symbiosis perspective in its measures supporting industrial clusters development. It could be one of the policy options to support to meso-level eco-innovations (notably as regards efficiency improvements).
2.3 The macro-level: is innovation contributing to a more sustainable economy?

This section takes a look at evidence in terms of recent trends at a more macro-level and how eco-innovation is becoming a more integrated element in national innovation systems. Enterprise level eco-innovation activity should ideally assist in leading to decoupling, whereby economic development (and here we avoid entering into a debate on whether this implies (GDP growth, employment, trade etc.), consumer behaviour and natural environment (limiting energy and material consumption, waste production, quality of water, soil and air etc.) As noted in chapter 1, possible sources of data include aggregated micro indicators on eco-innovation activity in enterprises, including as a proxy for competitiveness in ecoinnovation trade in EGS, patent and publication activity in environmental technologies as a means of examining technological specialisations EU countries, etc. The chapter close with a tentative discussion on how, from an innovation policy perspective, we can begin measuring the contribution of innovation activity, and ecoinnovations in particular (aggregate values), on to resource productivity (DMC/GDP or EMC/GDP). Our approach here is based on a relatively descriptive analysis of key indicators, although it is clear that future studies and analysis need to involve more complex modelling and time series type exercises to draw out robust relations between innovation activity and a more sustainable competitiveness of the EU economy.
2.3.1 International competitiveness in environmental goods and service

Trade and the world market for environmental goods and services (EGS) serve as an indication for international competitiveness of European enterprises 13. In terms of world trade shares, the US accounted for 23.5% in 2000, followed by Germany with 16%. Japan (12.5%), Italy (7.5%), the UK (6%) and France (5.5%) followed at a certain distance. In 2004, EGS exports for the EU25 amounted to 13bn and imports to 11.1bn, 57% of trade (both imports and exports) being recorded with other EU countries (Ernst and Young, 2006). Germany, France and the UK are both the largest exporters and importers (55% of EU-trade), though all three are net exporters of EGS. Whereas the new Member States account for 10% of trade, all of them are net importers of environmental technologies 14 The United Kingdom, Belgium, Poland, Portugal and Lithuania are the only countries that export more environmental technologies to countries outside the EU than within the EU. The EU25 as a whole is a net exporter in
13 While trade statistics can be used for the more narrowly defined EGS, they do however not reveal trade in
eco-efficient goods. Still, the data gives an idea of the importance of the more traditional environmental technologies, which are the basis for a number of firms in terms of revenue and employment. In terms of innovation however, they are rather mature and if innovations are happening, they are typically incremental.
14 The trade data come from the Eurostat database COMEXT: Database for Environmental Technology
Trade. The codes used in this study do not cover all of environmental sectors (cover only air pollution control, water pollution control, waste disposal, monitoring equipment, solar thermal, photovoltaic, hydropower and other environmental equipment) and do not include imports and exports of services.
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all but photovoltaic equipment15. The largest export sectors are air pollution control (2.9bn), other environmental equipment (2.6bn) and water pollution control (1.2bn). Since 1999, total EU-25 exports have grown 25% and imports 44% (in constant Euros). Exports grew in every sector except hydropower (-21%) and waste disposal (0.5%). The fastest growing export sectors were other environmental equipment (44%) and monitoring equipment (41%). The fastest growing import sectors were photovoltaic equipment (106%), air pollution control (50%) and monitoring equipment (33%). These figures underline that, even the limited set of EGS products and services, now represent a significant market potential, and that several EU countries have a good competitive position in these fields. While trade statistics can be used for the more narrowly defined EGS, they do however not reveal trade in eco-efficient goods. Still, the data gives an idea of the importance of the more traditional environmental technologies, which are the basis for a number of firms in terms of revenue and employment. In terms of innovation however, they are rather mature and if innovations are happening, they are typically incremental (apart from in the field of renewable energies). The question whether Europe should focus on more advanced, intelligent, knowledge intensive, cleaner products and processes as prime markets where more radical innovation is more likely, is maybe misleading. In the medium to long term, there is a huge demand for cheap, but not necessarily low tech, environmental technologies in particular in less industrialised, developing, as well as rapidly industrialising countries in South America, Asia, and Africa. However, a growth potential of intelligent eco-innovation is present in the industrialised countries and world regions. If it was possible to capture a wider perspective of trade in products and services based on eco-innovation, then it would be possible to begin to understand the role of regulatory regimes. For instance, does the strict EU regulatory framework contribute to an emerging 'lead market' in specific eco-innovations, compared to the US or China. Although discussions took place within the SYSTEMATIC eco-innovation panel on the products or technologies in which Europe could consider focusing effort to generate a lead market (SIP3 2007).
2.3.2 Patents
Patents are useful indicators for what, how much, and where commercially useful technological innovation takes place. While they do not provide insight into their potential economic value, they do indicate the orientation and application of technical innovations. However, the service industries such as eco-tourism as well as product related services do not really patent their innovations. Instead, patent analysis needs to first identify and check the relevant patent classes, possibly with the help of a key word search and expert opinion. The results are then not any more referred to as environmental goods, but environmental technologies, as a number of components and products correspond to specific technologies. According to data presented by Legler et al (2003), patent applications at the European Patent Office (EPO) related to environmental technologies had their ups and downs throughout the 1990s. Compared to world trends of all patent applications, environmental patent applications first peaked in 1991, while at the world level all patent applications declined slightly. The application numbers for environmental technology decreased during the early 1990s while the number of all patent applications constantly increased.
15 Photovoltaic production is dominated by Japan and the US, though there are were by 2007 44 major
production plants in the EU, almost half of which are in Germany. Since 1999, production growth in Germany has averaged 50% per year.
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The world trend is very similar to the one for patent applications by Germany, Germany accounting for about 50% of all patent applications from European countries. The German decline can be linked to public remediation measures using end-of-pipe technologies and weak incentives to innovate in clean production processes. At world level, less high energy prices can be stated as another reason for lower application numbers (BMBF 1998). Next to the possibility of absolute patent counts, the relative patent share provides a clear picture of a countries' position in the worldwide market. In order to obtain this proxy, the number of patents in a particular technology field (such as environmental technology) are compared to all patents of a given country providing the relative patent application (RPA) indicator. If the share is relatively high, a country is specialised. For environmental technologies, a positive specialisation can be observed for Canada, Germany, Sweden, and France throughout the 1990s. The Netherlands lost momentum in the second half of the nineties, Germany could equally not maintain its strong position, while Japan became less and less specialised. Such 'macro-level' analysis only allows identification of trends in specialisation and since often patent data is not available at regional levels, it is hard to identify 'clusters' of eco-innovators on this basis. However, from a product life-cycle perspective, patent analysis could be extended and provide very useful insights into eco-innovation since it is rarely the final product that is patented, but rather particular components. For example, there is no valid patent on the product "automobile", but thousands of patents on particular components. Identification and analysis of the eco-efficient components for example on technologies integrated in hybrid cars can be done. Returning to the argument that in principle any industry can produce eco-efficient products, the identification of the innovators of these components would reveal which industries or sectors are the sources for eco-innovation (Technopolis 2006).
2.3.3 Publications
The number of publications by scientific or technological field is frequently used for analysing scientific profiles of individuals, institutions, or countries and often the information is used in benchmarking activities. They are used as an output measure of the activity of scientists and researchers in public or private. As one of the challenges for eco-innovation is the production of science intensive environmentally friendly technologies, the relevant knowledge base of a country is a highly significant input factor and provides background for varying economic success. The provider of bibliometric data, the Institute for Scientific Information (Thompson ISI) defines the field of 'environment/ecology' with a number of sub-fields such as 'environmental contamination and toxicology', 'environmental technology', 'water resources research and engineering' or 'environmental monitoring and management'. Each field is defined by a set of specialised scientific journals 16. Between 1988 and 2001 the overall number of publications at world level increased of an average annual growth of 2.8%. In the same period, the field of environment/ecology grew on average by 5.2% indicating a significant growth at world
16 The use of bibliometric indicators for the analysis of the eco-industries is useful for at least three reasons:
A lot of R&D in the environmental sector is conducted in public research institutions. Their performance is still very much measured by publications. Publications are also one of the prime means of knowledge transfer. Publications and in particular scientific specialisation patterns provide a good idea about the science base of a country. The relative importance of a scientific field can also be seen in the context of the number of researchers in this particular field. Ideally, a country's technological specialisation profile is matched by a similar pattern of the science base. Some sub-sectors in the environmental industries concern pure services, which will not be captured by patents or designs but could be reported in specialised journals.
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level, and compared to other science fields. Western Europe surpassed both average growth rates by achieving 4% for all publications and 5.7% in environment/ecology.
Exhibit 15 Publications in 'environment/ecology' in the EU-25, US, and Japan per 100.000 capita, 2001
Source: NSB, Thompson-ISI. Calculations: Technopolis
In 2001, in terms of absolute publication numbers, the US produced with 11,250 the largest number of publications in the environmental sector, followed by UK (2,800), Germany (2,180), and France (2,070). Taking per capita ratios, the picture changes significantly: the relative numbers show clearly that environmental research is very strong in the Nordic countries. If Norway was added, it would even lead this table with 7.2 publications per capita. According to further ISI data, the Nordic countries have a relatively strong specialisation in the field of environmental publications. Out of a range of 22 science fields, environmental publications are among the top eight or nine only in these countries 17. Similarly to patent analysis, publications data allows identification of 'European leaders' in specific environmental technologies at a broad level. While the usage of the environmental/ecology field is certainly not the most accurate one for eco-innovation, a refined bibliometric analysis using keywords across the different subfields would help identifying not only the researchers working on a given subject but also provide a basis for research trends and hot research issues across a wider range of sectors.
17 While the usage of the environmental/ecology field is certainly not the most accurate one for eco-
innovation, a refined bibliometric analysis using keywords across the different subfields can help identifying not only the research teams working on a given subject but also provide a basis for research trends and hot research issues across a wider range of sectors.
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2.3.4 Innovation and environmental and resource performance

As noted above, at the end of the day, what we would like to understand, and therefore act upon, is whether innovation activity in European enterprises is contributing to improved resource productivity and lessened environmental effects (pollutants released in the environment, etc.). Generally speaking, the latest Eurostat review of resource productivity trends in the EU27 is hardly a glowing report card (see exhibit).
Exhibit 16 EU25 performance on resource productivity
Source: Eurostat (2007)
In this context, the question of whether innovation activity leads to a more or less intense use of resources is clearly of interest. The resource productivity and the energy use18 of a country depends on a number of factors: industrial structure, stage of development, 'historical trajectory' dependent on the time since policies or private corporate governance priorities began a shift to less resource or energy intensive production, etc. The following exhibits present correlations between synthetic indicator of innovation performance (Summary Innovation Index of the European Innovation Scoreboard)19, on one hand, and energy intensity20 and resource productivity21 on the other.
18 Differences in energy efficiency levels observed can be explained notably by national circumstances:
climate and typography, purchasing power, industrial and economic specialisation (paper in Scandinavian countries, services in the United Kingdom, equipment in Germany or in the Czech Republic, petrochemical industry in the Netherlands), behaviours (in-house temperature in English accommodations lower than in French ones), the development of transport and housing infrastructures (buildings are older in France than in Germany or Denmark) and the importance given to policies of energy efficiency. Nonetheless, even after adjusting values for these factors, differences still exist between EU-countries, to an order of three between extremes, namely Bulgaria and the UK (ADEME, 2007c).
19 The Summary Innovation Index (SII) gives an at a glance overview of aggregate national innovation
performance based on 25 indicators including both input and output dimensions of innovation. For further information see Inno Metrics webpage at http://www.proinno-europe.eu
20 The energy intensity of the economy is a measure of the amount of energy needed to produce one unit of
economic output. A reduction in energy intensity means that less energy is needed to produce the same output and is thus related to energy efficiency. The indicator presented here is calculated as the ratio of gross inland energy consumption (in tonnes of oil equivalent) to GDP (in constant 1995 euro).
21 The indicator Domestic Material Consumption (DMC) is defined as the total amount of material directly
used in an economy. DMC equals Direct Material Input (DMI) minus exports. DMI measures the direct
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Exhibit 17. Correlation between Summary Innovation Index (SII) and energy intensity in EU25
Exhibit 18. Correlation between Summary Innovation Index (SII) and resource productivity in EU14
input of materials for the use in the economy. DMI equals Domestic Extraction (DE) plus imports. Currently DMI indicator is only available for 14 EU Member States.
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This analysis immediately throws up some stylised facts: there is no significant correlation between innovation performance (as it is defined by the European Innovation Scoreboard) and resource productivity and energy intensity. In case of energy intensity the picture is interesting as there is a large group of countries with similar energy intensity and diverse innovation performance. Understanding resource productivity results requires further research taking into account notably the industrial structure of countries. very few countries are performing similarly in terms of the rankings for innovation, energy intensity and resource productivity. Germany is an exception, ranking high (4th ) for both innovation and energy intensity and for resource productivity (2nd). At the other extreme, Slovakia ranks 23rd for both innovation and energy intensity; while Hungary ranks 20th for innovation performance and 19th for energy intensity The EU's innovation leaders, Finland (2nd) and Sweden (1st), both do less well in terms of energy intensity22 and resource productivity of their economies. Again at the other extreme, a country like Estonia does very poorly on energy intensity (due to its dependence on oil shale for electricity production) while performing relatively well on innovation (12th ). Greece, which ranks 14th for energy intensity and resource productivity, is placed 21st for innovation. A group of new Member States, Hungary, Latvia, Lithuania, Poland and Slovakia, perform poorly on both innovation performance and energy intensity. Clearly, the structural shift to more productive economic structures in both business development and energy use is still underway in these economies.
Clearly more research is needed to better understand the relation between innovation performance and both resource productivity and energy intensity. Such research should take into account past developments and look at possible future trends. This would provide a more substantial evidence base to inform the process of setting longterm policy goals.
22 However, relatively it is important to remember that the EU is the best performing region of the world in
terms of energy efficiency, with a performance that is 30% better the US one, 40% better than the Chinese one and up to three times better than in the former Soviet countries or in the Middle East (ADEME, 2007c).
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3. Determinants of eco-innovation
3.1 Introduction - mapping eco-innovation determinants
Eco-innovation activity of companies is determined, on one hand, by general factors typical for any innovation activity and, on the other hand, by environmentally specific factors. Horbach (2005, 2008) groups eco-innovation determinants in three groups: supply side, demand side, and institutional and political influences (Table 2). Table 2. Determinants of eco-innovation
Supply side Demand side Technological (and management*) capabilities Appropriation problem and market characteristics Path dependencies (inefficient production systems, knowledge accumulation) (Expected) market demand (demand pull hypothesis): state, consumers and firms Social awareness of the need for clean production; environmental consciousness and preference for environmentally friendly products Environmental policy (incentive based instruments or regulatory approaches) Fiscal systems (pricing of eco-innovative goods and services)* Institutional structure: e.g. political opportunities of environmentally oriented groups, organization of information flow, existence of innovation networks International agreements
Institutional and political influences
Source: adapted from Horbach 2005, 2008; *added by authors of this report
The following areas are considered in terms of analysing determinants (drivers and barriers) of eco-innovation activity: cost and demand, including public procurement, regulations and standards, taxation, competition, socio-cultural factors.
The following sections present a summary of main findings related to these areas. The sections draw mainly from the contributions prepared in the framework of Sectoral Innovation Watch (ZEW 2007, Technopolis 2008b) completed by an additional literature review.
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3.2 Costs and demand

According to an analysis of CIS3 indicators 23, the most significant barriers for companies considered eco-innovators were too high costs of innovation activity (almost 30% companies in the sector), the lack of an appropriate source of finance (23%) and perceived excessive economic risks (around 20%). Table 3. Innovation barriers perceived as high by eco-innovators (ZEW 2008)
Innovation barrier (high) CIS-3 data Innovation costs too high Lack of appropriate sources of finance Excessive perceived economic risks Lack of qualified personnel Insufficient flexibility of regulations or standards Lack of customer responsiveness to new goods or services Lack of information on markets Organisational rigidities within the enterprise Lack of information on technology Eco-innovation Innovative Non-innovative companies companies 29.6 22.7 20.4 14.1 12.0 8.8 7.4 6.8 6.1 25.6 19.3 16.8 12.7 8.1 6.9 5.4 5.9 4.2
Source: CIS-3 data, ZEW (2007)
Interestingly, according to the major study on a large sample of eco-innovative companies one of the key reasons to introduce eco-innovation, most notably process innovation, was to reduce costs (see Exhibit 19). An earlier study (ZEW 2001), entitled IMPRESS, showed that 34% of firms decreased their energy costs due to ecoinnovation. It can be argued that the companies may be not aware of the longer-term opportunities to cut the costs thanks to investment in eco-innovation process (most notably eco-efficiency) or they do not have good access to finance. The latter may be confirmed by a high number of companies indicating the lack of appropriate source of finance (23%), which is, however, a general problem related to innovation activity in all sectors. A recent report (Coogan 2007)24 identified two types of gaps in the private sector financing of environmental technologies. There is a gap in expectations between technology developers and private sector financiers; and a gap in the availability of funding for early-stage developers (notably at the proof of concept stage). Obstacles to access to finance include: financial structure and scale that involve higher upfront capital costs and a higher external financing requirement than otherwise; inaccurate perceptions of cost and long-term performance risk, compounded by a lack of timely and accurate information; problems in coordination and communication between the different actors involved (e.g. ministries, agencies, technology developers, banks, and fund managers); market distortion caused by high-carbon fuel pricing that does not reflect the environmental and social costs they impose. This puts most sustainable
23 One has to keep in mind that only limited information is available in CIS-3 on eco-innovation, which
limits the robustness of the analysis. The most closely related information is that on the importance of (a) the reduction of material and energy costs per produced unit, and (b) the improvement of the environmental impact or health and safety aspects as an effect of innovation activities in 1998-2000. All enterprises that cited at least one of these two effects as highly important were regarded as ecoinnovators. Eco-innovators cannot be identified as within the tabulated CIS-4 results.
24 Final report of the FUNDETEC project which undertook a comparison and assessment of funding
schemes for the development of new activities and investments in environmental technologies. The project researched and assessed 178 funding instruments that support the development of environmental and sustainable energy technologies in 20 different countries were
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energy technologies at a competitive disadvantage and makes them dependent on supportive policy and regulatory frameworks to be financially viable. This situation may change rapidly, as witnessed, by the sudden boom in available private sector venture financing25 for clean energy generation and other green energy technologies (a reported $1.1 billion in 2007, an increase of 94 per cent over 2006)26. Price and quality are the dominating competition factors for companies introducing eco-innovations (ZEW et al 2001). According to the study only 3% of the surveyed firms, which introduced eco-innovation, mentioned environmentally friendly features as the most important competition factor. In the innovation process of a firm, environmental aspects are clearly dominated by economic factors or by restrictions due to regulation.
Exhibit 19 Reasons for introducing eco-innovation (ZEW et al 2001)
N
500
Product Process Pollution control
Service Organisational Method
Distribution System Recycling System
400
300
419
200
402
390
390
374381
308
314
264
100
171 132 141
203 185 142 120 92 66 61 44 84 125 111 101 77 62 62 47 24 41 181 159 131 109 100 142 103 87 67 77 155
195
182 139
122
92
101 84 42
0 Comply with environmental regulations Secure existing markets Increase market share Reduce costs Improve firm's image Respond to a competitor's innovation Achieve an accreditation
One more recent study (Rehfeld et al 2006) concluded that many environmental product innovators regard themselves as being confronted with problems during the commercialisation of environmental products. According to statements from customers, particularly the higher price (and not lower quality or less reliability) of
25 For instance, the Clean Tech Venture network, information available at http://cleantech.com 26 As reporting in: The six trillion dollar men, NewScientist, 31 May 2008, www.newscientist.com
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environmental products seems to be one of the major reasons for their low market performance. Therefore, price seems to be one explanation for the lower demand and weaker market performance. Equally, the evidence suggests that companies undertake eco-innovations only if this does not risk increasing the final prices and sales of their products (ZEW et al 2001). Logically, the majority of eco-innovators surveyed by IMPRESS study (83% of the companies) declared that their innovations had no effect on sales and prices (ibid.). Exhibit 20. Important competition factors (ZEW et al 2001)
In this situation, companies have limited possibilities to influence patterns of customer expenditures, i.e., increase their willingness to pay for environmentally beneficial products. Logically, the customer proximity and acceptance is of great importance for eco-innovation companies. According to CIS3 results, 40% of ecoinnovation companies see customer acceptance as important for innovation activity (see Exhibit 21). Similarly, the improving the firms image is seen as one of the most important motivations to introduce eco-innovation (ZEW 2001). Exhibit 21: The importance of a high customer acceptance for innovative firms
Food and Drink Energy Production Gazelles Textiles Space & Aeronautics Chemical Industry Eco-Innovators ICT/Electrical/Optical Automotive Industry Machinery/Equipment Biotechnology 0 5 10 15 20 25 30 35 40 45 21 22 23 29 30 38 40 41 42 42 46 50
% of innovative firms
As mentioned earlier, a significant element of demand for 'eco-innovative' products and services should be that exercised by public agencies through purchasing practices:
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green public procurement. Given the sheer size of the EU procurement market, estimated 1.5 trillion or over 16% of EU GDP according to the EC (2004)27, it could be by far the most powerful measure at the disposal of the public sector for stimulating eco-innovation (Edler and Georghiou 2007)28. Indeed public procurement plays an analogous influence to the demand key manufacturers Huber (2008) exert on suppliers along the product chain, and hence a defining influence on the eco- (or not) design and redesign of both capital and consumer goods. A study for the Environment Directorate-General of the EC defined green public procurement as: the approach by which public authorities integrate environmental criteria into all stages of their procurement process, thus encouraging the spread of environmental technologies and the development of environmentally sound products, by seeking and choosing outcomes and solutions that have the least possible impact on the environment throughout their whole life-cycle (Bouwer et al 2006)29. Introducing ambitious environmental criteria to public procurement may be thus a measure to encourage eco-innovation. In the context of eco-innovation and public procurement, DG Environment underlines: the key rationale behind the promotion of Green Public Procurement is that through the introduction of environmentally-conscious practices into everyday public spending, the authorities can stimulate the development and use of more environmentally-friendly technologies. () The total share of public purchases in some industry sectors reaches 50% and this provides public authorities with the real power to help move eco-products into mainstream. Additionally, this gives producers real incentives to pursue innovative solutions. The success of this strategy will be in sharing the eco-innovation efforts between niche-manufacturers and mainstream industry. This can be achieved by changing the way industry perceives eco-innovation not as a hindrance but as a business opportunity30. Bouwer et al (2006) found that there were seven countries (Austria, Denmark, Finland, Germany, Netherlands, Sweden and UK: the so-called Green-7) that consistently have more tenders with green criteria than the other-18 and respondents from these countries rated their GPP activities more highly on the questionnaires. The Green-7 exhibit some or all of the following traits: Strong political drivers, national guidelines and programmes for GPP; Public information resources via websites and eco-labels; Use of innovative tools like life cycle thinking and green contract variants in procurement procedures; Frequent implementation of environmental management systems (EMS) by purchasing authorities Green products would be more expensive Lack of environmental knowledge Lack of managerial and political support Lack of tools and information
The study identified the following barriers to GPP:

27
European Commission (2005) A report on the functioning of public procurement markets in the EU: benefits from the application of EU directives and challenges for the future, 03/02/2004
28 Over longer time periods, public procurement has been shown to trigger greater innovation impulses in
more areas than do R&D subsidies; equally up to 50% of innovations in Finland have been shown to be triggered by public procurement (Edler and Georghiou 2007). 29 Bouwer M, Jonk M, Berman T, Bersani R, Lusser H, Nappa V, Nissinen A, Parikka K, Szuppinger P and Vigano C, (2006) Green Public Procurement in Europe 2006 Conclusions and recommendations. Virage Milieu & Management bv, Korte Spaarne 31, 2011 AJ Haarlem, the Netherlands 30 http://ec.europa.eu/environment/gpp/gpp_and_eco_innovation_en.htm
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Lack of training
The same study points out that only 36% of the tender documents of all 25 Member States actually contain appropriate and legal environmental criteria. Positive exceptions are Sweden and Germany with a rate of more than 60% of all tender documents analysed. Although many public tenders contain references to the environment, they often do not bring expected results. This is due to the fact that the criteria and references are not well defined. One of the main reasons for unclear references is the lack of training in this area one of the main barriers to green procurement. The study emphasised that certain categories of purchase are more suitable for green procurement than others. The following product groups were deemed suitable for green public procurement (Bouwer et al 2006): Cleaning products and services Horticultural services Medical devices pharmaceuticals (Electrical) machinery - communication equipment Energy Chemical products, rubber, plastic Food products and beverages, Restaurant services Architectural, construction, installation and related consultancy services Sewage- and refuse-disposal services Sanitation and environmental services Transport equipment Office machinery (computers/monitors/printers/copiers) Construction work Construction products (including heating/cooling/lighting appliances) Furniture and other manufactured goods Paper, printed matter, printing services Transport and communication services
However, a recent study has underlined the important that green procurement should integrate a life cycle cost assessment and not only purchase cost (ko-Institut 2007). This study concludes that 'green products' do not always have higher purchase prices than non green product versions. In fact, in most product groups, the make or brand of the product have a much higher influence on the purchase price of a certain product than green criteria. Furthermore, in most cases, the operating costs (for energy, paper, or other operating media) cause a significant share of the total life cycle costs, for example in case of gas boilers, office lighting, buses or bus services, passenger cars, printers, and to a smaller extent also computers and computer displays. In these cases the sole focus on the purchase price during the tender process is not justified. The mostly lower costs during the use phase of a green version compensates the sometimes higher purchase costs. ko-Institut (2007) points out that the data on 'green products' is difficult to access, most notably in smaller markets. This may mean that it is quite difficult for public authorities to purchase green product versions without high additional effort (e.g. marketing research, negotiations with purchasers); this is the case e.g. for food or textiles). It is argued that despite these and other barriers, it is crucial that public authorities start procuring green products, in order to help these products towards a wider placement on public and private market (compare also Huber 2008), and to generally serve as a 'positive role model'. As public authorities are able to procure high quantities, due to a scale effect, higher prices are levelled, as potential additional
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efforts during the production are allocated to a higher number of products reducing the price per unit. However, as for general public procurement and innovation, it is clear that the use of green public procurement will have a varying effect on eco-innovation depending on the purchasing criteria set and the market the tender is addressed to (compare Edler and Georghiou 2007). The potential influence of ambitious public procurement on the creation of niche or lead markets should be experimented in this context. Indeed, the European Commission is seeking to promote both GPP (DG Environment) and piloting a 'lead market' approach for a number of eco-innovation relevant fields 31.
3.3 Regulation and standardisation

The SYSTEMATIC eco-innovation panel (SIP1 2006) considered that the use of regulation and standardisation in fostering eco-innovation should be tackled with caution. It was underlined that regulation should not have the effect of fragmenting European markets; that standardisation can be a barrier for market entry of smaller firms; and that the use of fiscal incentives can be more effective than more regulation. Regulatory activities include laws that influence the decision behaviour of firms. In the context of innovation, they may provide incentives to innovate or hamper innovation activity. The perceived importance of regulations for eco-innovation is high (see Table 4)32 and overwhelmingly positive (ZEW 2007). This finding confirms results of other studies. Table 4: Importance of regulation for innovation per sector
Importance of regulation Sector Biotechnology Food/Drink Machinery/Equipment Textiles Chemicals Energy ICT Space & Aeronautics Automotive Eco-innovation Gazelles high 14 13 2 2 13 16 3 8 8 13 7 medium 4 5 8 7 6 3 11 1 5 5 0 low 4 3 8 10 1 1 6 4 4 3 5 not relevant 1 2 7 4 2 2 4 7 6 2 9
Source: Survey of National Experts, ZEW (2007)
Various empirical studies (ZEW 2001, Rehfeld 2006) confirmed that complying with environmental regulation was one of the key motivations to innovate among ecoinnovation companies. The IMPRESS study (ZEW 2001) indicated that environmental regulations were important for both product and process innovations. The later survey on German companies on product innovation confirmed this finding indicating that compliance with regulations is a more important innovation goal for eco-innovators than for other innovators (Rehfeld et al 2006).
31
http://ec.europa.eu/enterprise/leadmarket/leadmarket.htm The markets include: sustainable construction; bio-based products, recycling, renewable energies. The lead market initiatives for each market will include public procurement as a key priority action.
32 The difference of the sum of responses to 25 indicates a non-response by the national expert.
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Exhibit 22. Importance of environmental regulations for processes and products and changes to comply with regulations (ZEW et al 2001)
Similarly, CIS3 indicates that eco-innovative firms rank meeting regulation requirements as a highly important effect of their innovation activities more often than any other sector. Table 5: Meeting regulation requirements as effect of innovation activities
Sector Food Textile Chemicals Machinery Automotive Aerospace ICT Energy Biotech Eco-innovation Gazelles Innovative companies 23.7 19.0 25.5 20.5 33.2 17.2 11.2 26.8 16.0 51.6 26.7 Continuous R&D 27.3 23.8 28.4 21.2 39.7 21.0 11.1 27.1 17.0 51.8 31.4 Market innovations 24.7 20.5 25.4 24.3 33.6 18.8 14.3 22.1 17.5 53.3 35.2
Source: CIS-3 data (% of eco-innovation companies), ZEW (2007)
Apart from the positive effects that regulation may also hamper R&D and innovation activities. Nevertheless, analysis of CIS-3 data suggests that the general perception of regulation as a barrier for innovation is not very significant compared with the positive effects of regulation on innovation activities. Standards are a core part of the infrastructure that supports efficient innovation33. They provide a focus for critical mass effects in product and service markets. Standards can effect innovation through a variety of mechanisms. They form an important part of the framework conditions for business and influence the possible routes to market or legal validity of market offerings. As codified information, standards serve to spread knowledge of the requirements for market acceptability and contain quite explicit technical information, reducing uncertainty for both producers and customers. They promote and enable the diffusion of technology in a form that is readily assimilated by firms with the complementary capabilities to take up and use
33 See: http://www.nssf.info
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the new methods. However, meeting standards and regulations can also be perceived by business as a constraint on their ability to undertake certain forms of innovation. A 2008 Commission Communication34 underlines that the EU expects standardisation to make an important contribution to 'sustainable industrial policy' this aims at improving the energy and resource efficiency of products, processes and services and the competitiveness of European industry. Standardisation is important in enabling the uptake of eco-innovation and environmental technologies and facilitating their dissemination in the Single Market and access to global markets (but equally can lead to a technology lock-in such as in the building industry). In addition, the Commission considers that advanced performance benchmarks and wider use of labelling will be necessary to inform consumers about product performance and reward frontrunners. In this respect, the oft-quoted example of the Japanese Top-Runner programme is analysed in chapter 4, although a recent evaluation points out that this programme does not stimulate innovation. Indeed, more broadly, there is clearly need for further research and analysis to fully grasp the positive and negative effects of standardisation processes on eco-innovation. Currently, DG Enterprise is funding a number of pilot projects under Europe Innova looking at how standards can positively influence innovation, these include the DEPUIS project (Design of Environmentally-friendly Products Using Information Standards), which aims at improving the environmental friendly design of new products and services through the innovative use of new information standards 35.
3.4 Taxation
Taxation may affect innovation through various channels. On the one hand, a high tax burden may decrease the propensity to invest in general. On the other hand, specific tax incentives for R&D and innovation may influence decisions to carry out innovation activities. In general, there are mainly two ways in which the national taxation system may influence innovation activity of firms (OECD, 1998): R&D allowances: Firms may fully claim current R&D expenses in the year of their expenditure. R&D tax credits: Tax credits allow firms to deduct a certain percentage of their R&D expenses directly from their tax burden.
Apart from these indirect ways of promoting R&D there may also be direct ways for R&D promotion in terms of specific grants or subsidies. In fact, most countries employ indirect as well as direct instruments for promoting R&D investment. The table below provides an overview from the survey of national experts 36 on the most commonly used fiscal incentives in the member states for different sectors.
34 Commission Communication, (11.3.2008 COM(2008) 133 final) Towards an increased contribution from
standardisation to innovation in Europe

35 http://www.standards.eu-innova.org/Pages/Depuis/default.aspx 36 A semi-standardised questionnaire for national experts was used to complement the information
gathered from CIS and other formal data sources. Sector-specific information was collected for each EU-25 country.
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Table 6: Types of fiscal incentives

Sector Biotechnology Food/Drink Machinery/Equipment Textiles Chemicals Energy ICT Space & Aeronautics Automotive Eco-innovation Gazelles R&D allowance 8 6 8 7 7 6 8 6 6 7 8 Tax credit 9 8 9 10 8 10 11 7 9 8 8 Grants, subsidies 13 9 10 7 9 9 14 10 9 11 9
Source: Survey of National Experts, ZEW (2007)
According to the survey, eco-innovation field does not differ substantially from other sectors benefiting from the mix of measures. This is probably because most fiscal measures are applied horizontally across sectors. As outlined before, there may also be implicit innovation preferences of a national taxation system. In his context, the role of excise taxes was analysed.37 According to the survey of national experts, excise taxes play a significantly more positive role for the eco-innovation companies than for any other sector (ZEW 2007). However, the SYSTEMATIC panel (SIP1 2006) argued that eco-innovation could be most effectively driven by a radical reorganisation of taxation systems, namely by shifting the taxation burden from labour to resources. Indeed, as OECD (2008b) argues, 'the focus should be on taxing the bad, rather than subsidising the good. The reason is simple: the bad is known (e.g. CO2 emissions), while the good of today can become obsolete or be proven to be inefficient tomorrow".
3.5 Competition
While competitors can hinder innovation activities in case they exert market dominance, they can also serve as a source of information relevant for innovation activities. Eco-innovation is characterised by one of the highest shares of enterprises relying on information from other companies in their product market. It indicates that horizontal knowledge spill-overs in innovation are of high significance. Learning from competitors is stimulated by high market uncertainty and uncertainty about the technological solutions to achieve high environmental performance of products and processes.
37 Taxes that are imposed on the manufacture and distribution of certain consumer goods, e.g.
environmental taxes, communications taxes, and fuel taxes.
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Table 7: Competitors as information source (1998-2000)

Sector Food Textile Chemicals Machinery Automotive Aerospace ICT Energy Biotech Eco-innovators Gazelles All innovative companies 12.7 12.3 15.5 18.5 17.0 15.1 16.8 19.6 23.9 21.1 10.6 Companies with continuous R&D 14.9 17.3 18.6 23.6 20.3 23.5 18.8 21.1 23.9 23.4 16.0 Companies with new-to-the-market innovations 12.6 11.7 15.3 18.4 20.0 16.2 16.0 21.4 25.4 20.9 12.9
Share of enterprises citing competitors as highly important information source for innovation (%).
Co-operation with competitors in innovation projects is rather rare. About 10 percent of all innovative enterprises in the SYSTEMATIC sectors co-operated with competitors. It should be borne in mind, however, that only 35 percent of all innovative enterprises are engaged in any form of innovation co-operation38. Cooperation with competitors in the eco-innovation field (11%) is close to average scores for all sectors. Innovation capacity is a key competitive factor, and sharing innovation projects with competitors is likely to lead to outflow of knowledge from the more experienced partner. Table 8: Innovation cooperation with competitors by sector (1998-2000)
Sector Food Textile Chemicals Machinery Automotive Aerospace ICT Energy Biotech Eco-innovators Gazelles Share of companies 7.0 5.0 12.9 8.7 10.9 16.0 12.0 17.4 33.5 11.2 1.6
38 Of course there are many emerging "eco-clusters" notably in the construction and energy fields; as well as
environmental technology 'marketing' platforms such as the Netherlands Water Platform (http://www.nwp.nl/). For an example of an eco-energy cluster see: http://www.clusterobservatory.eu/upload/Europe_Innova_Cluster_Mapping-Case_EcoEnergy_Upper_Austria.pdf; a good example of an eco-construction cluster is the Walloon ecoconstruction cluster (Belgium: http://clusters.wallonie.be/ecoconstruction/en/)
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3.6 Socio-cultural factors

Socio-cultural barriers or drivers to innovation are socio-cultural factors that influence sectoral innovativeness. In the Sectoral Innovation Watch project (Technopolis 2008b) four dimensions (or four capitals)39 were used to identify the socio-cultural characteristics relevant to innovation: cultural capital & consumer behaviour, human capital, social capital, and organisational capital & entrepreneurship.
Cultural capital refers to the cultural background and basic value system that is shared by the individuals in a community and manifests in their attitudes and habits, including consumption (consumer behaviour). Human capital represents the knowledge, skills and attributes derived from education, training and work experience (OECDD 2005). Social capital is defined as networks together with shared norms, values and understanding that facilitate cooperation within or among groups. (OECD 2001). Finally, organisational capital refers to the companys culture, routines, structure, ethics and management styles. According to the results of the expert survey conducted among members of Europe INNOVA Sectoral Innovation Panels 40, socio-cultural factors are important determinants of sectoral innovativeness, and eco-innovation (87% of respondents across sectors, 90% for eco-innovation). Experts ranked the four capitals in their order of importance for sectoral innovation performance. Cultural capital is considered to have far the strongest influence on ecoinnovation. Human capital is ranked second, followed by organisational capital and social capital which appear as the least important areas. Results for eco-innovation differ compared to average results for all sectors. Most of the sectoral experts ranked human capital as the most important area, followed by cultural capital and organisational capital. Exhibit 23. Area of socio-cultural factors with the strongest influence on the innovation performance of each sector
Ranking: from 1 to 4 where 1 is the most important and 4 the least important n=69 out of which 10 for eco-innovation Source: Expert survey (n=69), calculations: Technopolis
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Three of these dimensions have been used previously at European level (Ricardis project, 2006) but in a different context to define the intellectual capital of a company. To emphasise the importance of individual habits and attitudes, cultural capital and consumer behaviour have been added to the analysis. participants of Sectoral Innovation Panels. 72 responses were returned.
40 The survey was conducted between October and December 2007. The survey was distributed among all
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3.6.1 Cultural capital and consumer behaviour

According to the expert survey, cultural capital is significant but not the most important determinant influencing customer responsiveness to eco-innovation. The survey indicated that across all sectors, and in the case of eco-innovation in particular, income level is the most important factor influencing customer responsiveness to innovation. This perception confirms findings of empirical studies presented in previous sections. However, the eco-innovation panel members ranked environmental considerations (3.9) and education level (3.7)41 as more significant factors than the average for all sectors (see Exhibit 24).
Exhibit 24 Importance of the factors influencing consumer responsiveness to

innovation in each sector
Source: Expert survey of Sectoral Innovation Panels (n=72; n=10 for eco-innovation) Ranking: 5-rank scale where 5 is the most important and 1 least important
As noted above, CIS3 data suggests that eco-innovation companies ranked the lack of consumer responsiveness as a more important factor hampering innovation activities during the period 1998-2000. Studies (ADAC 2005) suggest that instruments such as eco-labels have proven effective in raising awareness and building consumer trust in the quality of the goods and services delivered. However, information and education of consumers should complement labelling or standardisation since consumers rarely understand the use of resources linked to each of their acts. In particular, firms and households will not voluntarily adopt environmental technologies that are relatively expensive at purchase, without more on knowledge of the costs and benefits throughout the life-cycle. For environmentally efficient products to be successful in the market, Meffert and Kirchgeorg (1998) emphasise that public environmental benefits (e.g. meeting of the greenhouse gas reduction targets) need to be combined with private consumer benefits such as cost savings through energy efficient appliances, improved product quality and durability, beneficial health effects, and prestige enhancement. Products that have no customer benefits additional to their environmental benefits are not likely to be taken up by the mass-market (Villiger et al., 2000).
41 Eurobarometer study (n247) confirms that education seems to be an essential determinant of the
willingness to pay more for renewable energy: more than 25 points separate those willing to pay more for renewable energy with third-level education from those who ended it by the age of 15 (55% compared to 28%).
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In conclusion, despite being indicated as the most important area in general questions, cultural capital factors appear less important for consumer responsiveness to innovation then hard factors related to income level. This can be linked with previous findings indicating price as a key factor determining demand for eco-innovative goods and services. A main challenge is to overcome consumer's preference for low price at point of purchase rather than lower cost of actual use. Nonetheless, education and availability of information on life-cycle costs are factors on which policy can act.
3.6.2 Human capital

According to the results of the CIS3 the lack of qualified personnel was one of the most important factors hampering innovation activities. In the framework of the Sectoral Innovation Watch survey, respondents ranked the reasons explaining the lack of qualified personnel in innovation activities in their sector. Exhibit 25 Most important reasons explaining the lack of qualified personnel involved in innovation activity
Source: Expert survey of Sectoral Innovation Panels (n=72; n=10 for eco-innovation) Ranking: 5-rank scale where 5 is the most important and 1 least important
The results of the expert survey indicated that for eco-innovation the most important reason explaining the lack of qualified personnel is the lack of adequacy of education programmes to industry needs (3.8) followed by the limited supply of highly specialised experienced labour (3.6) and closely related low number of students and graduates in the relevant disciplines (3.5) and lack of people with interdisciplinary skills (3.5). Interestingly, the score for the factor related to inappropriate education programmes is much higher then in other sectors. Where a technology is new, it requires training for it to be installed and maintained properly. For example, in the construction sector the diffusion of the most advanced energy saving technologies is dependent on small local fitters and repair companies. CIS3 data highlights that 49.2% of 'eco-innovation' firms had implemented internal or external training for their personnel directly aimed at the development and/or introduction of innovations which is well above average of all sectors (42.7%). Training and education are also important issues for procurers and users of environmental technologies, including maintenance. Ernst and Young (2006) indicate in this respect that suppliers of environmental monitoring instrumentation are increasingly switching from supplying goods to supplying services. Measuring or maintenance services require notably the integration of various skills, such as management of data systems.
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3.6.3 Social capital

One of the most important issues related to social capital are factors driving innovation collaboration (see Exhibit 26). According to the SYSTEMATIC panel expert survey, the most important factor for eco-innovation in this respect is the existence of funding opportunities for collaborative projects (score of 3.8). Previous collaborations and/or shared experience was considered as the most important factor across sectors. Interestingly, eco-innovation experts ranked this factor considerably lower. This may suggest that eco-innovation is perceived as less path dependent in terms of choice of partners and more open towards new opportunities. In addition, having the same nationality/shared language and the geographic proximity are considered more important in eco-innovation than in other sectors. The least important collaboration factor is membership of formal associations. Despite low ranking of social capital factors, studies underline the importance of trust, collaboration and stakeholders involvement in implementing projects related to new technologies which have direct impact on the life of local communities and require social acceptance. One of the important areas in this respect is renewable energy.
Exhibit 26 Main drivers of innovation collaboration
Source: Expert survey of Sectoral Innovation Panels (n=71; n=9 for eco-innovation); Ranking: 5-rank scale where 5 is the most important and 1 least important
Brohmann et al. (2007) highlighted that early involvement of local relevant stakeholders for new energy technologies is key for building trust and shared understanding, which are critical in gaining acceptance from local community. Failure to involve stakeholders may result even in non-implementation of the project. Positive experiences gained at individual sites could expand to the regional level or even influence national policies. Likewise, in other cases, local controversies can expand, as occurred in the establishment of national-level lobbies in the United Kingdom and France (ibid.).
3.6.4 Organisational capital

Environmental management tools and general organizational changes and improvements are relevant triggers for eco-innovation (see Rennings et al. 2006, Rehfeld et al. 2007, Horbach 2008). Horbach (2008) emphasises that environmental management tools help to reduce the information deficits to detect cost saving potentials (specifically material and energy) that are also an important driving force of
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environmental innovation. In this context, an environmentally oriented research (and innovation) policy has not only to regard traditional instruments like the improvement of the technological capabilities of a firm but also the coordination with soft environmental policy instruments like the introduction of environmental management. An increase in EMS and ISO certified firms might signal that firms understand environmental issues as integrated aspects in their businesses, and that ecoinnovations can enhance their competitiveness. Interestingly, the results of the CIS3 indicate that 31.4% of the eco-innovative companies ranked organisational rigidities as an important factor having hampered innovation activities during the period 1998-2000, which is well above average of the other sectors (24.6%). Understanding why companies do or dont invest in energy efficiency projects remains an open issue. Cooremans (2007) underlines that investments in energy efficiency are rarely regarded as strategic by organisations, which explains why they are often not realised. Part of the surveyed energy managers believed that they often feel that energy efficiency is not regarded as priority in their organisation and that organisational barriers often stop the adoption of efficient technologies (ibid.). This suggests that organisational barriers may be sometimes equally significant as costs. Equally, the afore-mentioned difficulties in accessing finance for ventures that are technologically 'risky' or require coordination with public authorities and legislators may hinder certain environmental technologies as mentioned above.
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4. Eco-innovation: towards a fourth generation innovation policy

The previous chapters of this report have set out the current state of the art of knowledge on eco-innovation. To sum up succinctly, the evidence suggests that: the concept of eco-innovation has been wrongly restricted in policy debates to (technological) innovation in the environmental goods and services sector; eco-innovation can and does occur in all economic sectors but the current set of indicators and data prevents a full and proper analysis of the phenomenon. ; current innovation performance in EU Member States is not contributing to improving resource productivity, and hence the urgently required dematerialisation of the economy (including the service sector which is not contrary to popular perception 'resource light'). The most effective forms of eco-innovations in terms of their impact on resource productivity take place in the upstream part of the value chain and contrary to popular belief, policy intervention aimed at changing practices at the R&D and design phase are more effective than campaigns to change consumer behaviour. fostering more eco-innovation requires a better understanding of the specific drivers and barriers, which include notably, pricing of resources (including via taxation); an information/education gap with respect to the life-cycle cost of products and services; and the 'system innovation' character of eco-innovations (success being dependent on a range of stakeholders changing their behaviour or legislative and regulatory adjustments).
Within this context, this chapter seeks to set out a new agenda, not for 'eco-innovation' policy but for a 'fourth generation' innovation policy where resource productivity and eco-efficiency are placed as central goals of mainstream innovation policy.
4.1 Changing the nature of innovation policy 4.1.1 Innovation policy today
Innovation policy is typically defined as a set of policy actions to stimulate and enhance innovation activities whereby innovation activities refer to the introduction on the market of new activities and processes in enterprises at all stages in their development from a business idea to a mature firm seeking to renew its production process or product range, etc. The final beneficiary or main target of innovation policy is typically enterprises as well as nascent entrepreneurs seeking to establish an enterprise (start-ups and spin-offs)42. From a innovation systems perspective, innovation policy may, however, choose to achieve its aim by supporting a number of indirect beneficiaries, whether these be financial organisations (seed capital funds, etc), innovation and business support services, cluster management partnerships, knowledge transfer structures in universities, public research organisations, etc. The overall objective of the innovation policy is to raise the competitiveness of the enterprises and thus to contribute to the economic performance of the economy.
42
The word enterprises here is used to essentially refer to profit seeking private enterprises, however thirdsector, not for profit companies, and increasingly public sector organisations, e.g. health sector, are also seeking to improve their 'innovation performance'.
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Exhibit 27: Positioning innovation policy
The natural policy neighbours of innovation policy are typically science and technology policy and, on the other side, industrial and entrepreneurship policies. To simplify whereas innovation policy is mainly focused on knowledge exploitation and diffusion, science and technology policy is occupied with knowledge generation (see Exhibit 27)43. The distinction between generation and exploitation is introduced as a conceptual illustration and does not imply that such distinction exists in practice. It is clear that policies are not designed and delivered within such tightly drawn conceptual borders but rather tend to trespass into other policy territories. As an example, science ministries often engage in supporting industrial R&D leading to innovation. Moreover, these conceptual borders become fuzzy in practice, e.g. in some sectors the time from knowledge generation (or development) to market application is very short (e.g. textiles, services). The underlying rationale of innovation policy is thus to improve the competitiveness of the economy and, consequently, to contribute to higher economic growth and employment. Defined in this way innovation policy does not give any specific preference to deploying measures, which aim at more environmentally and socially sustainable development. Even if environmental concerns are identified in policy papers or work programmes, in practice they do not override the underlying objective of the policy that is economic growth.
43 Technopolis (2008a) Sectoral Innovation Systems: the Policy Landscape in the EU25: Final Report
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4.1.2 Revisiting innovation policy

Importantly, the more recent literature on innovation policy underlines the need for horizontal (or cross-cutting) approach to policy intervention, the so-called 'thirdgeneration' innovation policy44. Innovation policy is thus expected to transcend traditional vertical policies and inter-link with other policies such as scientific research, education and training, environmental policy, transport, health, etc.
Exhibit 28: A taxonomy of innovation policy the MONIT approach

Goals Sectoral innovation policy Multi-sectoral innovation policy Integrated science, technology and innovation (STI) policies
Innovation policy, i.e. Innovation policy in a limited aimed primarily at sense (basically technology innovating industries and and industrial policies) economic growth Innovation policy in a wider sense, i.e. aimed at economic growth and quality of life Innovation policies in other sectoral domains, e.g. in health, in the environment, etc.
Horizontal/comprehensive /integrated or coherent/ systemic innovation policies
Source: OECD (2005c) Keeping this classification in mind, the issue of how to define an eco-innovation policy measure can be addressed. For the sake of this study, eco-innovation was defined as novel and competitively priced goods, processes, systems, services, and procedures that can satisfy human needs and bring quality of life at life-cycle minimal use of natural resources per unit output (resource and energy efficient), and a minimal release of toxic substances.45 If placed in the aforementioned MONIT taxonomy, eco-innovation policy clearly falls in the set of policies adopting a wider perspective, that is it aims at better quality of life and respect for natural environment and not only at increased competitiveness and higher economic growth. It is also multi-sectoral in the sense that eco-innovation processes are pervasive and consider practically all production and service sectors. It could be argued that innovation policy supporting eco-innovation is de facto third generation innovation policy. An intrinsic element in formulating such a policy is not to focus only on the short-term needs of economic growth, but also a long-term sustainable development. Hence, eco-innovation policy is working towards enhancing competitiveness of enterprises, but in doing so it seeks to avoid negative side effects for the natural environment. Exhibit 29 compares rationales and objectives of policies involving protection of environment and support for innovation activities. Certain analysts argue that eco-innovation policy includes objectives, which are in fact opposing (compare OECD 2005c, p.96). In the political practice, the goal of economic growth often overrides, or at least reduces ambitions of, environmental protection objectives. Many production companies perceive environmental protection as a threat to their competitiveness and an additional cost, which could lead to lay-offs or even delocalisation of their production to counties with less stringent regulations. Such arguments come back to the oft-quoted problem of a supposed conflict between longterm sustainability goals with the (short-term) goals of sustained economic growth and increased employment. Indeed, in practice, ambitious environmental goals are
44 The so-called third generation innovation policy stresses the need for innovation to become an
integrated dimension of other traditional policies. See: Innovation tomorrow: Louis Lengrand & Associs; et al (2002); OECD (2005c)
45 This definition of eco-innovation was proposed by Friedrich Schmidt-Bleek, Friedrich Hinterberger and
Sebastian Gallehr in their position paper prepared for the Sectoral Innovation Panel on Eco-innovation, November 2007.
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always subjected to a certain degree of compromise depending on the lobbying powers of different interest groups.
Exhibit 29. From environmental protection to eco-innovation

Policy Environmental policy Innovation policy Rationale - account for negative production externalities for natural environment - provide incentives for enterprises to engage in innovation activity - provide incentives for enterprises to engage in innovation activity - account for negative production externalities for natural environment - reduce resource consumption in economic activity to minimum levels taking into account long-term sustainability (including dematerialisation, reducing energy consumption and pollution) Main objective - protect natural environment (in this context: against industrial pollution) - contribute to competitiveness of economy and growth
Policies in favour of ecoinnovation
- promote environmentally friendly solutions and economic competitiveness
4.1.3 Innovation policy for sustainability

Bartelmus (2002) elaborates three options for action in the light of environmental limits on economic activity: ignoring the limits muddling through; pushing the limits searching for eco-efficiency; complying with the limits attaining sufficiency.
The first option supported by orthodox economists implies that governments should react only to the worst environmental problems. The belief underlying this approach is that economic growth produces an automatic improvement in environmental quality thanks to improved production process and technologies. This option of non-action relying on market forces is increasingly questioned. Indeed, there is no evidence that total material consumption decreases as economies move up the development ladder to higher income levels (Bartelmus 2002). On the contrary, both poorer and richer economies contribute to material consumption and pollution but in different ways. While pollution of poverty is associated with poor water quality, deforestation, marginal housing etc., pollution of affluence comes with over-consumption and production of waste and emissions (ibid). The second option, pushing the limits, puts an emphasis on eco-efficiency or increased resource productivity mainly through the technological improvements of a production process (eco-innovation). Even the most eco-efficient production, however, will not guarantee sustainable development should the total consumption grow too fast. In this situation, known as the rebound effect, the total material or energy consumption will increase despite significant resource efficiency gains due to an even higher increase in total consumption (Bartelmus 2002, Herring and Roy 2007). The third option, complying with the limits, recognises that technology alone cannot be a solution to the problem of sustainability and integrates the (often neglected) dimension of final consumption (Sachs 2002, Kemp and Rotmans 2005). Sachs (2002) argues that eco-efficiency in production needs to be combined with sufficiency in final consumption.
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Policy-makers should view the last two options as distinctive dimensions. Pushing the limits, although insufficient, has a key role to play in complying with them. In this context, innovation policy can help in pushing the limits through supporting new ecoefficient technologies, production processes and organisational models in enterprises as well as promoting strategic collaborations across value chains and at the level of innovation systems. In order to induce a change of the whole production process there is a need of action going beyond a single product or technology level. One of the perspectives developed to address this notion is known as system innovations. System innovation involves a comprehensive change such as changes in production chains, energy systems, product-service systems, consumption patters and lifestyles. Kemp and Rotmans (2005) emphasise that in the socio-technical realm (system innovation) involves changes in socio-technical systems beyond a change in (technical) components. Examples of system innovations are the hydrogen economy or integrated mobility. Innovation policy targeting system innovations may help in complying with the limits as it involves both the environmental and social dimension. Such an approach integrates the notion of limited resources and social sustainability explicitly relating the set of social and environmental goals and norms of economic (market) activity (Bartelmus 2002). Similarly, Foxon et al (2005) argue the challenge of sustainable innovation policy is to develop enabling policy frameworks, strategies and processes that support technological and institutional innovation in ways that appropriately encompass the economic, environmental and social dimensions of sustainability. Innovation policy conceived in this way promotes economic growth only as long as it complies with a long-term sustainability goal avoiding over-consumption of resources or social divisions. System innovation is the most ambitious objective for policy intervention responding to the need of a radical system change. Policy process aiming at system innovation implies revisiting entire economic development strategies, norms and regulatory frameworks as well as the policy-making system itself. Importantly, the shift may be implemented in different sectors or technological regimes at a different time. Managing this shift is a challenging task (Kemp and Rotmans 2005, Foxon and Pearson 2008). Kemp and Rotmans (2005) make it clear that such a deliberate transition is a serious policy challenge, which has to take into account the costs of adaptation, resistance of vested interests and uncertainty about the best opinion (ibid. p.54). Reflecting on obstacles to the transition process, Foxon and Pearson (2008) point out that, first, long-term social and environmental problems tend to receive relatively low priority in the face of more immediate policy pressures; second, the interrelated nature of these problems and radical uncertainty in future costs and benefits of complexity which are not easy to address within current process, and third, the goals and trajectories to ensure sustainability are inevitably contested (ibid, p.150). Therefore, a shift towards a sustainable mode of innovation policy requires a longterm vision reconciled with and defining short-term goals, a learning process reducing the perceived uncertainty and complexity of policy choices and a participative policy process anticipating and settling potential contestations.
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4.2 Steps towards a more sustainable mode of innovation policy 4.2.1 Setting conceptual borders
The initial step to consider in policy design and planning regarding eco-innovation is agreeing on the conceptual approach, which involves reaching an agreement on definitions and measurement methods to be used in monitoring and evaluations. This step is necessary to be able to design and plan longer-term strategies and wellinformed policies and gradually build extensive knowledge base for the eventual corrective measures and better-informed policy choices in the future.
4.2.2 Identifying key policy challenges

In order to properly target the policies, governments and other stakeholders need to systematically scan for the most important policy challenges and related needs of society. The policy challenges will differ depending on the policy level and competencies of the organisation. The hierarchy of challenges of typical innovation policy and innovation policy supporting eco-innovation differs fundamentally. The latter will include a wider spectrum of potential opportunities and threats linked to economic and technological developments as well as environmental and societal changes. The biggest sustainability challenges are typically global, but their immediate and medium term consequences will affect different regions and societies in different ways, to a different degree and at a different time. The awareness of global mega-trends related to e.g. climate change, technological transformations, global competition, fossil fuels consumption etc. and their importance for EU, national or regional economies, is crucial. It is critical, however, that the mega-trends are interpreted and related to the specific context and the level of action. To illustrate this statement one can argue that the challenge of global warming is relevant for all city regions, however, the challenges brought by this change are different for cities facing the prospect of raising sea levels, desertification or uncontrolled migrations. They are also different for cities with different economic, social, political and cultural profiles. Therefore the definition of policy challenges will depend on the location, level and competencies of involved organisations.
4.2.3 Setting long term policy objectives and targets

Various authors underline the key role of ambitious long-term target setting (Foxon and Pearson 2008, Blueprint 2004). As the knowledge and powers to take appropriate actions are dispersed, it is fundamental that policy objectives and targets are set with the participation of relevant stakeholders, most notably business (Bartelmus 2002, Foxon et al 2005). In a recent OECD study (2008a) a range of interviewed companies highlighted that the role of governments is to set clear environmental targets (on dematerialisation of production), and to provide the necessary framework conditions for companies to invest and innovate, both in domestic and global markets. However, in doing so the governments should be technology-neutral, that is they should not impose the technology through which those targets should be reached (OECD 2008a). One of the policy approaches to creating long term vision and objectives is technology foresight combining various methods such as scenario-planning, expert groups, Delphi, technology roadmaps etc. Foresight, however, cannot be a one-off activity and should be incorporated into normal policy making. Long-term targets should serve as a framework for the short-term actions (temporal coherence).
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4.2.4 Getting the right policy mix for eco-innovation

Given the multi-level and multi-dimensional character of eco-innovation measures, there is a need to map existing laws and regulations, standards or measures, which influence directly and indirectly policy impact on eco-innovation. This mapping exercise has to include a cross-impact assessment of identified measures. This analysis should yield knowledge on the current policy coverage, gaps and overlaps, causal relationships or conflicts between different measures and, as such, is critical for policy design, coordination and achieving greater policy coherence. The public sector can use numerous instruments to work towards eco-innovation. The measures can be divided into five broad types: market-oriented schemes; public procurement; regulatory and normative frameworks; incentives for eco-innovation business process; awareness raising and demonstration measures; strategic planning and foresight.
It is argued that measures supporting eco-innovation are a mix of market-based and regulatory tools supported by voluntary agreements involving all relevant stakeholders (Bartelmus 2002). These instruments are applied within many government policies (e.g. fiscal policy, science policy, environmental policy, innovation policy). The eco-innovation measures are designed, implemented, monitored and controlled at different levels of policy making and with participation of various stakeholders. Examples of concrete policy measures are presented in Exhibit 4 (see also Technopolis 2004, Blueprint 2004, Foxon et al. 2004, Andersen 2004, Carley and Spapens 1998). Different measures and policy mixes may require different degrees of political efforts and broad consensus. For example, introducing radical fiscal changes requires a strong political will and a broad cooperation between many stakeholders. Some of the measures are developed and introduced by public and private sector acting in collaboration (e.g. voluntary agreements on standards and norms, eco-labels).
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Exhibit 30. Examples of typical eco-innovation measures

Type
Market-oriented instruments
Examples of measures
fiscal measures (e.g. energy tax, emissions tax, tax reductions, investment tax credits, VAT) emissions trading schemes green public procurement
Policy fields
fiscal policy trade policy
Public procurement
relevant for all policy fields with the public procurement capacity (notably transport policy, construction and housing policy, defence policy) environmental policy industrial policy energy policy trade policy local development policy
Regulatory and normative frameworks
energy (de)regulation standards and norms (including technology regulations, quota-based schemes, energy saving requirements) permits and bans land use regulations environmental management systems eco-labels and other soft standardisation instruments (including voluntary agreements) financial schemes (loans and credits) subsidies (e.g. renewable energy infrastructure subsisdies) venture capital funds business incubation programmes targeted R&D and technology programmes targeted business advisory services eco-cluster policies (cluster involved in ecoinnovation development and support for eco-innovative solutions in existing clusters e.g. advanced on-site industrial ecology solutions)
Support for innovation activity
economic policy energy policy innovation policy entrepreneurship policy research policy regional policy
Capacity building and demonstration measures
professional training (eco-efficiency capacity building for enterprises) changes in educational programmes green foresight strategic spatial planning
education and training policy foresight is relevant for all policy fields
Strategic planning and foresight
A number of eco-innovation measures can be designed and implemented in the framework of innovation policy. The most relevant type of measures for innovation policy relates to the support for eco-innovation activity, and includes: financial schemes (loans and credits); venture capital funds; business incubation programmes; targeted R&D and technology programmes; targeted business advisory services; eco-cluster policies (cluster involved in eco-innovation development and support for eco-innovative solutions in existing clusters e.g. advanced on-site industrial ecology solutions).
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As a complex policy challenge, support for eco-innovation requires a coordinated approach, most notably between innovation, research and environmental policy. Implementation of eco-innovation measures has to be done in close collaboration between different policies and the levels of policy delivery following a common vision; set of objectives and a strategy shared by all concerned stakeholders. Introducing any of above measures alone may lead to the highly unsatisfactory results. Huber (2008) underlines that shift towards preventive measures in environmental policy (or upstreaming environmental policy) that is with a focus on dematerialisation requires use of measures typical for technology policy. Thus, environmental policy agencies will have to cooperate systematically with technological R&D policy-makers or expand their policy portfolio. Equally, upstreaming environmental policy would induce a shift in emphasis towards innovation inducing regulations such as setting strict environmental performance standards (Huber 2008). Resource efficiency perspective (CML et al. 2005)
The most relevant EU policy fields from the point of view of resource efficiency include: integrated product policy (IPP), eco-labelling, eco-design, etc., life-cycle policies on use of chemical substances, waste management, packaging and packaging waste, fiscal instruments energy efficiency and renewable energy programmes. The policies can be classified into (1) acting directly on (raw) materials, and (2) acting on specific stages of the life cycle of products. The first type of policy aims to achieve a reduction of the use of a material through stimulation of efficiency and recycling or a reduction of environmental burden by improving significantly the environmental performance of a material. Instruments are taxes, recycling targets, renewable energy targets, efficiency policies, etc. The second type of policy aims to achieve a reduction of mostly environmental burden of parts or all of the life cycle of a product, including its material content. Integrated Product Policy (IPP) is one of the guiding principles in this context, with several instruments that can be listed as part of IPP, such as labelling, eco-design, VAT. For several product groups, policies exist that focus on the reduction and proper management of the products waste. The waste management stage of life cycles has historically been given most attention in a policy sense. The same goes for packaging, being a part of the life cycle of many products (compare CML et al 2005). Innovation policy measures supporting eco-innovation could be integrated with both types of resource efficiency measures.
4.2.5 Policy coherence: making a policy out of the policy mix

Numerous studies call for increased policy coordination and integration in the context of eco-innovation challenge (Kemp and Rotmans 2005, Andersen 2004, Rennings et al 2004, Foxon et al. 2004, OECD 2008b). OECD (2003) differentiates three different levels of policy integration: policy coherence, policy coordination and policy consistency. Policy co-ordination means getting the various institutional and managerial systems, which formulate policy, to work together whereas policy consistency means ensuring that individual policies are not internally contradictory. Policy coherence goes beyond coordination and consistency and is defined as a process of ensuring the systematic promotion of mutually reinforcing action, by the concerned government and non-government players, in order to create and maintain synergies towards achieving the defined objective (OECD 2003, p.11). The challenge of ensuring policy coherence appears as a key in the context of multi-dimensional and multi-actor policy supporting eco-innovation. Equally, questions of consistency and coordination are also relevant as policy coherence is not possible without internal consistence and efficient methods of coordination. The OECD differentiates between three types of policy coherence: horizontal, vertical and temporal (see Exhibit 31).
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4.2.5.1 Horizontal coherence The challenge of sustainable innovation policy requires that governments cooperate internally across different ministries responsible for different policy fields (so called the whole of government perspective). The fields most commonly concerned with eco-innovation are environmental policy, science and technology policy, economic policy, innovation policy, transport policy, energy policy and agriculture policy. This list is not exclusive as de facto all policy fields are directly or indirectly concerned. The collaboration should involve both executive and legislative bodies if more profound system changes are required.
Exhibit 31. Three types of policy coherence (OECD 2003)

Horizontal coherence - ensuring that individual objectives and policies developed by various entities are mutually reinforcing. Strengthening the inter-connectiveness of policies and promoting a whole-of-government perspective are ways of promoting the horizontal perspective on policy coherence. Vertical coherence - ensuring that the practices of agencies, authorities and autonomous bodies, as well as the behaviour of sub-national levels of government, are mutually reinforcing with overall policy commitments. For example, the delivery of goods and services to the citizens should not contradict national objectives. Programme efficiency is one way of stressing the need for vertical coherence, and the issue of ensuring compliance across levels of government is a typical expression of this dimension. Temporal coherence - ensuring that policies continue to be effective over time and that short term decisions do not contradict longer-term commitments. Ensuring dynamic efficiency is another way of expressing this perspective. It pertains to how policies work out as they interact with other policies or other forces in society, including whether future costs are taken into account in todays policy-making.
4.2.5.2 Vertical coherence One can recall the subsidiarity principle46, which find its application in searching for optimal eco-innovation policy mix in terms of vertical policy coherence. The exhibit below gives a simplified overview of the roles of stakeholders at different levels in designing and implementing eco-innovation selected measures. 4.2.5.3 Temporal coherence Temporal coherence implies that long-term goals are not contradicted by short-term actions. This is probably the most challenging task in the process of developing a sustainable innovation policy as it includes long term sustainability goals, which often are perceived as opposed to short-term economic ambitions. The transition management approach (Kemp and Rotmans 2005) is an example of an approach of policy development, which accommodates both long- and short-term action (see the example of the Dutch Energy Transition programme in this report).
46 Subsidiarity is the principle, which states that matters ought to be handled by the smallest (or, the lowest)
competent authority. The Oxford English Dictionary defines subsidiarity as the idea that a central authority should have a subsidiary function, performing only those tasks, which cannot be performed effectively at a more immediate or local level.
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Exhibit 32. Eco-innovation measures in a multi-level governance approach

local/regional fiscal measures trading schemes subsidies green public procurement permits and bans standards and technical norms horizontal coherence eco-labels financial schemes R&D and technology programmes advisory services eco-efficiency campaigns educational programmes green foresight land use planning vertical coherence leading role significant role supplementary role national EU global
4.2.6 Policy learning on-going evaluation and policy feedback

A shift towards eco-innovation and, preferably, sustainable innovation, require an ongoing policy learning process to assess results in order to adapt and improve policy measures (compare Kemp and Rotmans 2005, Foxon et al. 2004). Moreover, Foxon et al. (2004) underline that the policy-learning process should be used for attaining and maintaining policy coherence. Given the significant problems with measuring ecoinnovation identified earlier in this report this is clearly a key challenge for improved policy-making. The policy goals cannot be set in stone as they depend on (often unforeseen) developments in the wider context, be it technological, societal or environmental changes. Equally, the policy measures themselves may bring about unintended consequences due to an imperfect knowledge base at the initial stages of policy design and planning. Foxon et al (2004) argue that policy learning would improve the evaluation of policy effectiveness, enable correction of the unintended consequences of policy measures, and encourage appropriate responses to new information and knowledge. Policy learning should thus include: monitoring and evaluation, review of policy impacts on the process of sustainable innovation in the particular sector, and learning and policy enrichment. It is also underlined the international policy measure benchmarking could benefit policy learning process (ibid. p. 16).
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4.3 Selected examples of policy measures supporting eco-innovation

This section presents selected examples of different types of eco-innovation and sustainable innovation measures implemented in different EU Member States and Japan47. The cases described are: Energy Transition Programme (the Netherlands) Technologies for Sustainable Development Programme (Austria) National Industrial Symbiosis Programme (UK) Ecologically Sustainable Procurement (Sweden) Top Runner Programme (Japan).
4.3.1 The Dutch Energy Transition programme

The Dutch transition management approach is a very good example of an attempt to ensure policy coherence integrating many policy fields, most notably innovation, environmental and energy policy. The approach was adopted in the 4th Netherlands Environmental Policy Plan (Blueprint 2004). It was based on the argument that environmental problems required a different policy approach: a long-term, integrated approach addressing problems of uncertainty, complexity, and interdependence. The key elements of the transition approach include (Kemp and Rotmans 2005): Long-term thinking (min. 25 years) as a framework for shaping short-term policy; Thinking in terms of more than one domain (multi-domain) and different actors (multi-actors) at different scale levels (multi-level); A focus on learning and a special learning philosophy (learning by doing and doing by learning); An orientation towards system innovation; Learning about variety of options. to set a transition goal multidimensional and not narrowly defined democratically chosen based on integrated risk analysis setting minimum levels of stocks (e.g. capital, nature, resources) to develop transition visions long term visions that constitute a framework for transitional pathways and formulating short-term and long-term objectives to define interim objectives interim objectives derived from the long-term objectives (backcasting) contain qualitative and semi-quantitative measures content, process and learning objectives to evaluate and learn from the process content, process dynamics and knowledge evaluated after each development round to create public support creating and maintaining public support and acceptance.
The basic steps of transition management are (ibid. p.46):
The Dutch Ministry of Economic Affairs is now applying the approach to innovation in energy policy (Energy Transition)48. The Energy Transition programme aims to attain a sustainable energy supply within 50 years. In 2001, the Ministry started a
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The selection is largely based on the review of measures undertaken in the framework of SYSTEMATIC study (Work package 3). In addition, the Japanese Top Runner Programme was included following frequent references from the Panel.
48 See http://www.senternovem.nl/
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consultation process with various stakeholders (companies, researchers, NGOs). Based on these conversations and scenario studies, the first main priority areas in the transition to a sustainable energy system with a time-horizon of 2030 were selected. Foxon et al (2005) underlines that the Ministry sees the transition approach as a way of dealing with uncertainties and avoiding apparent certainties. Therefore, the government is not choosing specific options, but organising its policy around a cluster of options: the transition paths. These enable the government to give direction to the market, whilst giving market players the opportunity to develop their own products based on their own market analysis, ambitions and entrepreneurship. The Ministry argues this policy renewal requires a new form of concerted action between market and government (Foxon et al 2005): Relationships built on mutual trust: stakeholders want to be able to rely on a policy line not being changed unexpectedly once adopted, through commitment to the direction taken, the approach and the main roads formulated. The government places trust in market players by offering them experimentation space. Partnership: government, market and society are partners in the process of setting policy aims, creating opportunities and undertaking transition experiments, e.g. through ministries setting up one stop shops for advice and problem solving. Brokerage: the government facilitates the building of networks and coalitions between actors in transition paths. Leadership: stakeholders require the government to declare itself clearly in favour of a long-term agenda of sustainability and innovation that is set for a long time, and to tailor current policy to it. 1. Biobased Raw Materials 2. Sustainable Mobility 3. Chain Efficiency 4. New Gas 5. Sustainable Electricity 6. Energy in the Built Environment 7. The Greenhouse as Energy Source Transition paths and experiments (more than 80) are proposed for each theme. The stakeholders work together in a platform consisting of representatives from market participants, scientific and civic organisations and the government. The platforms are public-private partnerships cooperating to realising a sustainable energy supply. Six ministries are involved in the Energy Transition programme. This is to ensure effective interdepartmental policy compatibility. The ministries participating in the Energy Transitions Interdepartmental Programme Management (IPM) are the following: Economic Affairs; Housing, Spatial Planning and the Environment; Transport, Public Works and Water Management; Agriculture, Nature Management and Food Quality; Foreign Affairs; and Finance. The board of director-generals from the six ministries manages the Energy Transition in the name of the six ministers.
Currently, the Energy Transition programme focuses now on seven themes:
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Exhibit 33. Example of vision and transition paths of one of the priority areas in the Dutch Energy Transition programme (Blueprint 2003)
The Energy Transition Task force (ETTF) was established by the Minister of Economic Affairs and the Secretary of Housing, Spatial Planning and the Environment and is composed of representatives from the top of the business community, the government, research organizations, banking, and NGOs. A main task of the Task Force is to identify favourable opportunities for the Netherlands with respect to energy innovations and to specify what needs to be done to exploit the opportunities. Furthermore, the Task Force strengthens the social base for energy transition. More than 80 transition experiments have been proposed and a number of them are currently underway.
4.3.2 The Austrian Programme on Technologies for Sustainable Development

The Building of Tomorrow49 is part of the Austrian Programme on Technologies for Sustainable Development developed by the Federal Ministry of Transport, Innovation and Technology. The programme aims at enhancing the competitiveness of Austrian industry and research while at the same time improving the quality of life and the environment. The activities focus on three areas: Sub-programme "Building of Tomorrow" Sub-programme "Energy Systems of Tomorrow" Sub-programme "Factory of Tomorrow"
Each sub-programme has defined concrete goals and a strategy of several years. Exemplary pilot and demonstration cases (beacons of innovation) are being developed through chains of projects, each one building on the results of the previous. Basic research studies, cooperative research involving both companies and researchers and finally the development of components and technologies form the basis for these demonstration cases. Relevant topics are being put out to tender and the best projects are selected for funding by an international jury. Support is offered by a thematic programme management (umbrella management) both for proposals and the projects resulting from the tenders. In addition specific accompanying measures will be used such as project competitions, networking events and qualification and training programmes.
49 This section is based on Building of Tomorrow website: http://www.hausderzukunft.at/english.htm
(visited in March 2008); ETAP, Austria reaches TOP Position in Passive House Technology thanks to the Building of Tomorrow Programme, ETAP note, October 2006.
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The programme has general guiding principles of sustainability: orientation towards benefit and need; efficient use of resources; use of renewable resources; multiple use and recycling; flexibility and adaptability; fault tolerance and risk precaution; securing employment, income and quality of life. generation of innovative approaches and project definitions activities focusing on fundamental research applied research and development networking and cooperation between individual projects support for implementation (promotion, trainings, etc.) pilot and demonstration projects
The activities supported by the programme include:
The programme initiates and supports trendsetting research and development projects and the implementation of exemplary pilot projects. The programme pursues clearly defined targets, selects projects by means of tendering procedures and is characterised by networking between individual research projects and by accompanying project management. According to the Austrian Government, the main achievement of the programme is the improved cooperative research in the field of environmental technology leading to demonstration projects. The share of projects submitted by companies in financed projects increased substantially over the past years. Building of Tomorrow "Building of Tomorrow" refers to residential and office buildings that feature the following improvements as compared to the present practice in Austria: Improved energy efficiency over the whole life cycle; Pronounced use of renewable sources of energy, in particular solar energy; Increased use of renewable raw materials and efficient use thereof; Increased consideration of service and use aspects for the benefit of users of residential and office buildings; Costs comparable to those of conventional building designs.
The programme aims to reduce the energy consumption in buildings by using renewable raw materials and alternative sources of energy such as solar energy while not increasing construction costs compared to traditional building designs. "Building of Tomorrow" supports passive house and low energy solar building technologies, the two being the most important current concepts of solar and energy efficient building. Additional attention is given to ecological, economic and social concerns. Due to the introduction of this programme, the high level of project cooperation, a strong participation of enterprises as well as an improvement of the scientific initial situation in Austria could be achieved. With the help of the Building of Tomorrow programme, Austria has reached a top position in Europe in passive house technology as well as solar energy.
4.3.3 The British National Industrial Symbiosis Programme (NISP)

The National Industrial Symbiosis Programme (NISP) initiated in the United Kingdom is an innovative free business opportunity programme that aim to deliver bottom line benefits to its members whilst generating positive outcomes for the environment and society. It is the first industrial symbiosis initiative in the world to be launched on a national scale. Operating at the forefront of industrial symbiosis
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thinking and practice, the programme helps companies take a fresh look at their resources. NISP enables thousands of businesses to change how they practice and become more efficient with the disposal of waste resources. The programme was officially launched in July 2005 and is part funded by DEFRA's 50 Business Resource Efficiency and Waste Programme. Membership to the programme is free. NISP consists in a network of 12 regionally based offices across England, Wales and Scotland, each with a team of dedicated industrial symbiosis practitioners who work closely with their members. By having a regionally delivered but linked national programme, business problems identified in one region can often have solutions developed in a second and benefits delivered in a third. The programmes strength over other resource efficiency initiatives is that it is driven by the demands of businesses it works with, responding to and helping to overcome genuine industry issues. To do this effectively each region works alongside a programme advisory group. This group is made up of leading local industry and business representatives who help steer the regional scheme. NISP also works closely in partnership key UK organisations: The Environment Agency employs a dedicated NISP Liaison Manager to raise awareness of the programme amongst Agency staff, and to work alongside the NISP teams, local authorities and businesses identifying opportunities and synergies; NISPs partnership with the Resource Efficiency KTN (formerly Mini-Waste Faraday)51 ensures the programme taps into the UKs best technological expertise and innovation increasing the potential for industrial symbiosis through the implementation of new technologies and processes; NISP employs a Local Government Liaison to work alongside the Local Government Association and local authorities to help businesses improve the management of their resources and identify potential new business and market opportunities; Such relationships are important and help to resolve issues that may restrict resource efficiency and link them to local policy on planning, transport and sustainable purchasing.
By operating as an independent facilitator bringing together companies of all sizes from all business sectors, NISP helps to create commercial opportunities through the exchange of all resources, including materials, energy and water and sharing assets, logistics and expertise. Membership provides business with access to new opportunities, workshops and events and dedicated support from NISPs experienced industrial symbiosis practitioners. As of 2008, NISP has more than 8,000 industrial member companies including multinationals, SMEs and single operators. Each of the 12 regions has output targets. These are recorded by a unique case study methodology that reports actual achievements as verified by the companies themselves . All programme outputs are externally verified. Since NISP was launched in April 2005, NISP has made a significant impact on the UK economy (data as of February 2008): helped to divert over 2.95m tons of industrial waste from landfill; generated 119m in new sales for its members; reduced CO2 emissions by over 2.9m tonnes; saved its members over 97m; eliminated 338,000 tonnes of hazardous waste; created 618 new jobs and safeguarded an additional 807;
50 Department for Environment, Food and Rural Affairs is a UK Government Department. 51 http://ren.globalwatchonline.com/epicentric_portal/site/UKREN/
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saved 5.24m tonnes of virgin material being used in the UK; attracted over 75.1m in private investment in reprocessing and recycling; saved over 2.54m tonnes of potable water.
4.3.4 EKU: The Swedish Tool for Ecologically Sustainable Procurement

Sweden, which has worked for a long time on developing environmental requirements for public procurement, has developed a practical online instrument, called EKU52, to help private and public purchasers choose greener products and therefore promote the development of more sustainable production. The EKU tool (Internet-based resource for ecologically sustainable procurement) has been developed since 1998. This tool is currently managed by the Swedish Environmental Management Council (SEMCO), which is jointly owned by the Swedish state, the Swedish Association of Local Authorities and Regions and the Confederation of Swedish Enterprises. Operations have so far been financed by state grants, which in 2006 were increased to SEK 5m. While EKU office provides a comprehensive quality control and is responsible for the database, the product responsibility is shared by local authorities, county councils and government agencies. The EKU tool offers ready to use material, such as suggestions for mandatory requirements, award criteria, contract clauses. For each criterion, suggestions are made as to what kind of evidence the purchaser can ask for, either during the procurement process or later under the contract period. The EKU tool provides public and private purchasers with sets of environmental criteria for 20 product groups, from batteries to medical devices. The objective of the criteria is to make it easier for purchasers to make use of environmental requirements. Another objective is to inform suppliers and contractors about the kind of environmental requirements which might be brought up in procurement processes. The criteria are constantly tracked and reviewed whenever necessary, for example to adjust to a change in legislation. In April 2006, eight groups of criteria out of 20 went under review. The procurement criteria are developed through an extensive quality assurance process where important parties from both private and public sector have participated. All the criteria are indeed negotiated within a working group that enables a consensus dialogue between various stakeholders from industry, eco-label organisations, public purchasers, experts from Governmental agencies, scientists etc. Then a decision committee including representatives from SEMCO reviews the conclusions. The criteria are afterwards available on the EKU web site for any purchaser. The basis for the Swedish Environmental Management Council's development of criteria are the 16 national environmental quality targets, e.g. limited climatic effect, fresh air and pollution-free environment. Aspects that are not linked to environmental targets can be covered if they are clearly associated with the environmental performance of the goods/service/contract concerned. Other important aspects for which no link exists, such as quality, safety and ergonomics, are not covered by the work on criteria. In spite of its similarity with the Nordic Swan or the European Eco Label, the EKU tool does not compete with these eco-label organisations but rather adjusts them to the market situation, to the scope of the procurement and to the procurement legislation. For instance in the EKU tool there is a balance between compulsory requirements, award criteria and contracts clauses (where applicable) and to every criterion there is a
52 This section is based on: ETAP, EKU: The Swedish Took for Ecologically Sustainable Procurement, ETAP
note, June 2006; Bergman I.-M., Ecologically Sustainable Public Procurement in Sweden, PowerPoint presentation, December 2002; Ministry of the Environment of Sweden, Environmental public procurement, Official government letter, March 2007; Swedish Environmental Management Council, the website: http://www.msr.se/en/green_procurement/ (consulted in March 2008).
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suggested level of verification. The EKU criteria also develop criteria for products and services not covered by eco-label organisations (medical devices for instance). Moreover, actions to mobilise public purchasers are included in the EKU project, with educational courses to explain the conditions for environmental requirements in public procurements and to present the EKU instrument. Finally, public procurers are invited to join a specific network in order to share tips or news regarding environmental procurement in the country. 141 procurers have already joined this online community. The Swedish Environmental Protection Agency's review of the EKU tool 53 reveals that, in most of the cases investigated, it had an effect in the direction of reduced environmental impact, but that in many cases the requirements were set too low. The requirement level is uneven, both within individual product groups and between different product groups. The EKU tool should eventually be added to so as to include suggestions for particularly high environmental requirement, referred to as "spearhead criteria". This would favour the best products on the market in environmental terms, and it could also stimulate the development of environmental products. In this way, public purchasers can select which level of environmental requirements they wish to use. The report, which addressed procurement managers at all Swedish municipalities, counties and state authorities, and which had a total of 558 respondents (a response rate of 77%), shows amongst other things that: 60% of procurement managers always or frequently issue environmental requirements as part of their procurement processes (municipality 70%, county 80%, state 40%). 34% have given their personnel training in environmental public procurement (municipality 43%, county 86%, state 19%). 42% use the EKU tool (municipality 62%, county 86%, state 14%). 32% work with some form of review of their procurement processes from an environmental perspective (municipality 34%, county 50%, state 29%). 48% see the biggest obstacle to environmental public procurement as being a lack of knowledge about how to issue environmental requirements. 64% would like help with drafting environmental requirements.
The study shows that the counties have made the most progress with environmental public procurement, followed by municipalities and finally state authorities. The study also reveals that a lack of knowledge is a main problem and that those organisations where the personnel have undergone training have made more progress in their work on environmental public procurement.
4.3.5 The Japanese Top Runner standard

Japans Top Runner programme54 is a regulatory scheme designed to stimulate the continuous improvement of the use-phase energy efficiency of products within selected 21 segments of markets for household and office appliances, vehicles, vending machines etc. The programme is an example of a scheme based on a maximum standard value system. It searches for the most energy efficient model of electrical appliances on the market and then stipulates that the efficiency of this top runner
See Environmental public procurement a 2004 questionnaire study, Swedish Environmental Protection Agency report 5445 54 This section is based on Nordqvist J., Evaluation of Japans Top Runner programme, AID-EE project, 2006; METI and ECCJ, Top Runner Programme, Developing the worlds best energy-efficient appliances, January 2008; and Leonardo ENERGY website at http://www.leonardoenergy.org/drupal/node/991.
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model should become the standard within a certain number of years (three to ten years depending on the product group). The government underlines that the broad policy context of the programme was influenced by the fragility of Japans energy supply structure and obligations related with Kyoto Protocol (METI 2008). In 1998, the Parliament incorporated the programme as an element of the Japanese Law Concerning the Rational Use of Energy (the Energy Conservation Law). The Agency for Natural Resources and Energy acts as the regulator for the Top Runner programme on behalf of Japans Ministry for Economy, Trade and Industry (or, in the case of vehicle standards, the Ministry of Land Infrastructure and Transportation). The Agencys Energy Efficiency and Conservation Division is the organisational home of the Advisory Committee for Natural Resources and Energy, which sits at the top of the hierarchy of committees that define the programme. The Top Runner standards are set by working committees consisting of representatives from the manufacturing industry, universities, trade unions, and consumer organizations. Through its design, the Top Runner programme undergoes recurring revisions and feedback processes, allowing its scope to be continuously modified. In iterative cycles, it introduces product-specific energy performance requirements, where the basis for the adoption of standards is pre-defined as the usephase energy performance of the best technology available on the market at the time of revision (Nordqvist 2006). By the target year, each manufacturer must ensure that the weighted average of the efficiency of all its products in that particular category is at least equal to that of the top runner model. The product data is collected with questionnaires. The companies who fail to achieve targets are not immediately penalised, but the reasons of their underperformance is analysed. The programme allows for a succession of sanctions to be applied, should manufacturers or importers fail to comply with the requirements that come into force at the end of commitment periods (compare Nordqvist 2006). First, the Ministry issues so-called advice to the actor at fault. The information of such correspondence is confidential, so that corrective measures may be taken without embarrassment. Failure to respond to ministerial advice will lead to a public proclamation, in which the transgressor is officially named and publicly shamed. As a final step, the regulator may expressly order an erring company to comply, and levy a fine if it does not. Whether, so far, any sanctions have been effectuated in Japan as a consequence of noncompliance with Top Runner regulations is not known (ibid.). In order to address the consumer-side the government designed measures to inform about and popularise the energy efficient machinery and equipment (METI 2008). Manufacturers are obliged (display obligations) to include the information on energy consumption efficiency for each piece of machinery and equipment. Another element of this policy is energy saving labelling programme. As of December 2007, it covered 16 product items including air conditioners, fluorescent lights, TV sets, electric refrigerators, computers, etc. The labelling programme is voluntary. The label includes four main elements, namely the degree that energy saving standards had been achieved, energy saving standard achievement rate, energy consumption efficiency, and the target fiscal year (see Exhibit 34). The labels are displayed in product catalogues as well as on products themselves. Products that do not meet the target receive an orange label, in contrast to a green label for the models, which achieve the top runner standard (ibid.). Since April 2006, also retailers have been granted a responsibility under labelling programme. Retailers have to provide information of products displayed at their shops with the use of Uniform Energy-Saving Label which presents rating, expected annual electricity bill and other information. Since October 2006, the Uniform EnergySaving Label has been applied to air conditioners, electric refrigerators and TV sets.
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Also, shops can receive a special logo if they actively offer information and promote sales of energy-efficient products (METI 2008). Quantitative data on Top Runner effects has been unavailable until recently (Nordqvist 2006). In a recent publication by METI (2008), the results for efficiency improvements for several product categories (e.g. TV sets, VCRs, computers etc.) have been published. The results attained efficiency improvements exceeding initial targets (see METI 2008 for details).
Exhibit 34. Example of the energy saving label (METI 2008)
One of the side effects of the programme may be an increase in prices of the final products (Nordqvist 2006, METI 2008). For cars, the government, however, offers tax relief for purchase of cars exceeding standards (Nordqvist 2006). The government introduced energy efficiency labelling and plans demonstration projects explaining advantages of purchasing more energy efficient products (METI 2008). Nordqvist (2006) emphasises that the most common critique directed at Top Runner in Japan is that the approach only encourages incremental technical improvements, while more radical innovations receive no incentives under the scheme. Equally, if standard-setting procedures do not properly account for the actual technological potential, the programme runs the risk of being sub-optimal. On the other hand, the built-in flexibility of Japanese Top Runner cycles allows the programme to address and correct such failures (ibid.). It is argued that if the EU considered adopting the Top Runner approach many features would need to be altered. Nordqvist (2006) emphasises that standard-setting procedures in an EU Top Runner programme would have to make sure that companies under different national schemes are not unnecessarily subjected to conflicting requirements. Moreover, it is far from self-evident that European manufacturers would be as complaisant as their Japanese counterparts in participating in the iterative, extensive, lengthy and resource-intensive standard-setting exercises that have proved successful in Japan. It needs to be analysed whether this or some other alternative approach for standard-setting may be more conducive in a European environment. The development of parallel policies to Top Runner in Japan should also be noted (e.g. labelling, green procurement law, green vehicle tax relief scheme etc). It might be effective to launch from the beginning a whole package of co-ordinated Top Runner instruments (Nordqvist 2006).
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5. Conclusions and recommendations

The following four main 'political messages', sum up the findings of this report: Eco-innovation is neither a sector nor technology specific phenomenon, limiting eco-innovation to 'environmental goods and services' or environmental technologies is not the road for policy-makers to follow. At the current time, there is no conclusive evidence that innovation performance in the EU is contributing to less resource intensive or more environmentally friendly socio-economic activity. Simply merging traditional environmental and innovation policy tools will not lead to a radical ('factor-x') dematerialisation of our economies nor reduce environmental footprints. Therefore, there is a need for a radical shift in framework conditions, notably in regulatory and taxation systems leading businesses and consumers to price their resource use correctly Innovation policy, therefore, needs to a) adjust its targets towards longer term metrics related to the impact of innovation on resource productivity; b) re-focus attention from direct subsidies to fiscal, regulatory and standard setting practices, promoting eco-innovation c) support innovation leading to an eco-efficient production cycle (e.g. integrating industrial symbiosis with cluster policy).
The remainder of this section summarises the key conclusions and recommendations of the SYSTEMATIC panel on eco-innovation. Eco-innovation policy challenges According to the panel members the major global challenges (mega-drivers) for ecoinnovation are climate change, limited natural resources and increased global competition. The overall policy challenge is to connect sustainability and economic growth. The challenge is equally relevant for the public and private sectors. The panel members emphasised that eco-innovation, although recognised in policy documents, is still subordinated to economic growth. Therefore, there is a need to revisit the definition of economic growth, review overall strategic policy priorities and make eco-innovation a key policy driver. The eco-innovation field is to a large extent policy-driven. It was noted that policy has already driven many developments as e.g. CO2 emissions trade schemes. It was also argued that current climate change crisis situation could be used to raise policy awareness and promote more systematic changes (e.g. in energy system) through setting ambitious policy targets. EU innovation policy to promote systemic change The panel agreed that radical change and system innovation should be taken into account in designing and implementing EU innovation policy. It was argued that in order to encourage systemic change there is a need to both set clear long-term strategic policy targets as well as revise existing policy mix. The panel consider that eco-innovation includes both incremental and radical innovations. Incremental innovation concerns improvements to existing goods, processes, services, systems and management procedures in all areas of economic activity, e.g. improvements to existing water treatment facilities or waste disposal technologies. Radical (system) innovations are inventions and novel solutions that bring about completely new products, processes, technologies or organisational patterns allowing for systemic change, whether economic, social or technological systems (system innovation). According to the panel, radical innovations respond
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better to societal needs and provide improved quality of life to citizens. Examples of radical eco-innovation include inventing and implementing a new renewable energy source or creating self-cleaning materials. Radical innovations, especially those leading to a systemic change (system innovation), deserve the highest priority in innovation policy. System innovations can be shaped to a large extent by public policy. The initial focus should be on moving towards more integrated production processes and products leading to higher cost effectiveness (fewer resources, less energy) with the ultimate goal of promoting regenerative businesses that make a positive contribution to eco-systems. The panel suggested that developing a strategic policy vision and framework could funnel incremental changes to produce more radical systemic innovations. Setting ambitious long-term targets The panellists emphasised that long-term radical policy targets based on clear regulations are key in planning innovation investments by companies. The panel agreed on a message that long term ambitious policy targets and strong innovation friendly regulatory environment would substantially increase investment attractiveness (by reducing uncertainty) and the innovative potential of the ecoinnovation area. The panellists underlined a possible positive impact of standards encouraging new ecologically friendly technologies (technology forcing standards). Public procurement could play an important role in imposing such standards e.g. construction industry. Standards should take into account the situation of different stakeholders, especially SMEs. Panellists pointed to Japans Top Runner programme as an example of a policy approach to induce major technological changes. It was emphasised, however, that efforts should be made to avoid possible negative side effects of standardisation and offer some structural support for companies from regions lagging behind. EU Structural Funds could play this role. Policy coherence - systemic approach to policy design and coordination It was argued that setting radical targets have to be accompanied with clarifying existing policy mix. There is a need for horizontal policy coordination and overall ecoinnovation strategy. Panel underlined that existing policies still do not recognize explicitly rebound effects and implications of limited natural resources. Furthermore, sufficient time horizon must be taken into account when designing the eco-innovation policy. It was also pointed out that new eco-innovation regulations needed to be effectively enforced. Innovation policy addressing eco-innovation should take into account the characteristics of specific areas. Eco-innovations appear within, or at the crossroads of, different sectors. Some leading principles of eco-efficiency, which are directly linked to eco-innovation such as resource efficiency, should have horizontal applications across different sectors. Differentiation between high- and low-tech ecoinnovations does not capture the essence of the issue, that is, the quality impact of ecoinnovation.
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Exhibit 35. Main eco-innovation drivers and strategic policy response

Mega drivers Main challenges
Making climate change into a driver for eco-innovation to win future markets needs strong policy instruments Making eco-challenges into drivers of competitiveness Recognising that growth is not the overriding policy EU objective System change - changing the rules of the whole system to help firms to internalise external costs Avoiding rebound effects and accepting limits of resources (limit Total Material Requirement) Making eco-efficient products attractive (fair pricing) Competing environmental priorities e.g. some solutions for energy may be not resource efficient
Strategic policy response

Setting long-term ambitious eco-innovation targets Defining co-ordinated policy response (policy mix) Designing and implementing technology forcing policies Need for a strategic EU level programme (e.g. top-runner programme in Japan) Integrating notion of limits and rebound effects in policy measures Creating critical mass in ecoinnovative fields and overcoming country and regional fragmentation - a European eco-innovation valley?
Policy measures
Climate change
Fiscal measures as an incentive for eco-innovative products (and disincentive to non-eco-friendly products) Public procurement as a lever for eco-innovation and lead markets. Ambitious standards and regulations as a framework setting tool within which technology development and eco-innovation is fostered Support for R&D and commercialisation in areas of EU environmental technology specialisation, notably in upstream parts of the product cycle.
Limits to resources
Global competition
Demand side measures to Eco-capacity building up and change consumer preferences down from policy to including training design technicians and capacity building Due to high innovation potential of SME, re-allocating funding to more SME attractive innovation funding
It was emphasised that efforts should be made to better coordinate innovation policy and regulatory framework. Despite undeniable progress in existing policy measures, the public sector response is not sufficient. There is a need to create measures on different levels depending on the nature of challenge (subsidiarity). Europe has potential and should take the lead in bringing about a global change. The panellists added that there existed a considerable number of measures, but they were not sufficiently coordinated. The panel underlined the importance of systemic understanding of policy implications for eco-innovation field as it allows for better targeting of the policy response (policy acupuncture). The understanding of system needed to be dynamic. Thus, milestones leading to the overall target should be monitored and adapted according to the actual developments in order to reach the overall goal. This requires investment in policy intelligence, most notably foresight techniques, which constitute an early warning policy system needed to better anticipating change. The need for EU policy measures supporting inter-regional cooperation and networking between well established and potential eco-clusters was emphasised. This would contribute to building critical mass leading to a more effective cooperation on an EU level e.g. in the use of renewable resources as well as helping overcome path dependency and static regional and country oriented policies in eco-innovation. Fiscal policies - internalising external costs The panel underlined that the logic of public support for eco-innovation should be different and include different calculations of the cost of innovation. Hence, public policies should support eco-innovations taking into account its integrated cost, which implies that even if innovation is not cost effective under the current market price
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regime, it can become profitable under a price regime that internalises external costs. The panel argued for measures addressing capacity building in the field of ecoinnovation expertise, especially at the European level. Well-developed eco-innovation expertise would help to anticipate future needs and increase the chance to enter or create new markets. In this context, it was underlined that eco-innovation products are already attractive. The perceived main factor limiting their sales is high price. Panel members suggested two possible policy responses. Some panellists emphasised that the price factor would disappear if environmental and social external costs of production were internalised by producers (e.g. taxes on resources used). On the other hand, it was suggested that simple demonstration projects1 identifying and disseminating existing good practices in the field of eco-innovative products and services could lead to a change of business behaviour. As regards tax systems, it was argued that change could be imposed by a radical reorganisation of taxation system, namely by shifting taxation burden from labour to resources. Another solution suggested was to lower corporate taxes and provide incentives to reinvest profits in greener technologies and solutions. Regulation and standardisation Regulations should impose more ambitious technical norms and standards if one wishes to achieve innovative results. There are different levels of norms in the context of eco-innovation (i.e. output, input and throughput of the production process). It was argued that it is more feasible to set norms for input rather than output. When it comes to output more attention should be given to setting goals rather than deciding on strict norms. (Top-runner approach benefiting best performers was mentioned in this context.) It was underlined that public procurement could play a substantial role in promoting higher standards having impact on more ambitious norms. Bringing about EU level eco-standards would not only encourage innovation but also create a level playing field for the EU companies. There is a need to establish the extended producer responsibility that would ensure e.g. internalisation of environmental and social costs in the market price of the products. The panel felt that regulation and standardisation should be tackled with caution. It was underlined that regulation should not have the effect of fragmenting European markets. The panel warned that too ambitious standardisation may become a barrier to innovation activities in SMEs. It was argued that the use of fiscal incentive systems could be more effective than more regulation. Unlocking the potential of SMEs SMEs play a key role in developing eco-innovative solutions. Especially newly developed businesses have a greater freedom to adopt non-traditional approaches, e.g. social entrepreneurs. Start-ups have the potential to be created as a systematically sustainable or regenerative business. In this context, EU innovation policy should support eco-innovative start-ups and spin-offs as a source and inspiration of this type of sustainable and regenerative businesses models. It was underlined, however, that it is the large and highly consolidated industries with a large impact on the economy and natural resources, which have the potential to bring about a systemic shift towards greater resource efficiency (decoupling). The important policy question here is how to link SMEs eco-innovation approach and practical solutions with the behaviour of the large actors. Capacity building - demonstration and raising awareness programmes Providing relevant information, education and training on eco-innovation to both consumers and companies is of high relevance. The consumers could benefit from wide information campaigns and green labelling systems.
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Many SMEs lack information about their resource efficiency potentials. SMEs should have access to good practice related to eco-innovation, especially that related to resource efficiency. The development of learning capabilities on eco-innovation is also a key capacity for innovation and business growth, and can lead to breakthroughs in new products and processes as well as cost savings from energy efficiencies and radical increases in resource productivity. The panel welcomed the prospect of EU-wide demonstration activities emphasising that they should be a part of a larger, far-reaching educational and awareness raising initiative on sustainable business. In this context, panel members called for revisiting definition of business excellence by adding to it a sustainable development component. It was underlined that there was a need to link business performance and quality of life (including impact on environment).
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Schmidt-Bleek F. (2008) Future beyond climatic change, A Position Paper, Factor 10 Institute Schmidt-Bleek F., Hinterberger F. and Gallehr S. (2007) Position paper prepared for the Sectoral Innovation Panel on Eco-innovation, November 2007 Schmidt-Bleek F. (2005) Selected parts from a paper Sustainability made in Germany, presented by Schmidt-Bleek at a Conference in Tokyo in 2005, unpublished Schmidt-Bleek F. (1999) The Factor 10/MIPS-Concept: Bridging Ecological, Economic, and Social Dimensions with Sustainability Indicators, UNU/Zero Emmissions Forum SIP 1 SYSTEMATIC Innovation Panel on eco-innovation (2006) Report from the 1st panel meeting, available at: http://www.europe-innova.org SIP 2 - SYSTEMATIC Innovation Panel on eco-innovation (2007) Report from the 2nd panel meeting, available at: http://www.europe-innova.org SIP 3 - SYSTEMATIC Innovation Panel on eco-innovation (2007) Report from the 3rd panel meeting, available at: http://www.europe-innova.org SIP 4 - SYSTEMATIC Innovation Panel on eco-innovation (2007) Report from the 4th panel meeting, available at: http://www.europe-innova.org SIP 5 - SYSTEMATIC Innovation Panel on eco-innovation (2008) Report from the 5th panel meeting, available at: http://www.europe-innova.org Swedish Environmental Protection Agency (2004) Environmental public procurement a 2004 questionnaire study, report 5445 Technopolis (2008a) The policy landscape in the EU25, Final Report, Sectoral Innovation Watch, Work Package 3 Technopolis (2008b) Socio-cultural factors of eco-innovation, Final Report, Sectoral Innovation Watch, Work Package 10 Technopolis (2008c), Final report of Work-package 6 of the SYSTEMATIC project: innovation leaders showcase, May 2008 Technopolis (2006) Scoping Paper for Eco-innovation report, Sectoral Innovation Watch Project, Work Package 3 Technopolis (2004) Policy instruments for sustainable innovation, project supporting the Dutch EU-Presidency preparations for the Informal Environmental Council on July16-18, 2004 UNU-MERIT, ZEW, RISO, ICL, LEIA (2008) MEI Measuring Eco-Innovation, Draft Final Report (March 2008) UNU-MERIT (2008) Strategic innovators drive innovation performance at the sector level: A sectoral analysis of innovation modes, Sectoral Innovation Watch, Work package 4 Wackernagel, M. and Rees, W. E., (1996) Our Ecological Footprint: Reducing Human Impact on the Earth, New Society Publishers, British Columbia, Canada ZEW (2007) Analysis of regulatory and policy issues influencing sectoral innovation patterns, Sector report eco-innovation, Interim paper (draft), Sectoral Innovation Watch, Work Package 6 ZEW (coord) (2001) The Impact of Clean Production on Employment in Europe An Analysis using Surveys and Case Studies (IMPRESS), Draft Final Report of Contract No: SOE-1-CT-98-1106
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Appendix I
Energy intensity, resource productivity and innovation performance
Energy intensity (kgoe per 1 000 euro) Year EU25 (EU27) EU15 Austria Belgium Cyprus Czech Rep. Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom 2004 204.89 187.65 147.09 207.43 254.30 874.42 121.14 1096.22 268.93 186.96 159.61 240.64 533.64 158.84 188.82 692.30 1086.21 193.52 260.97 201.99 596.35 238.04 910.18 324.74 222.17 214.67 206.03
Resource Productivity (gdp/dmc) 2004 n.a. 1.43 1.46 1.51 n.a. n.a. 1.29 n.a. 0.70 1.75 1.67 0.57 n.a. 1.06 1.54 n.a. n.a. n.a. n.a. 1.54 n.a. 0.66 n.a. n.a. 0.91 1.17 1.64
Summary innovation index (SII) 2007 (0.45) n.a. 0.48 0.47 0.33 0.36 0.61 0.37 0.64 0.47 0.59 0.26 0.26 0.49 0.33 0.19 0.27 0.53 0.29 0.48 0.24 0.25 0.25 0.35 0.31 0.73 0.57
Source: Eurostat and European Innovation Scoreboard
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May 2008

ALASDAIR REID MICHAL MIEDZINSKI

2.3 The macro-level: is innovation contributing to a more sustainable economy? 27

SYSTEMATIC Eco-Innovation Report 2008

4.3.2 The Austrian Programme on Technologies for Sustainable Development 63

SYSTEMATIC Eco-Innovation Report 2008

EXHIBITS AND TABLES

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

Technologies for Tomorrow

SYSTEMATIC Eco-Innovation Report 2008

Goals for Sustainability and Suitable Indicators

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

Evidence on eco-innovation in the EU

SYSTEMATIC Eco-Innovation Report 2008

Barriers and drivers to eco-innovation

SYSTEMATIC Eco-Innovation Report 2008

Eco-innovation and innovation policy

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

Conclusions and recommendations

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

1. Defining and measuring eco-innovation

SYSTEMATIC Eco-Innovation Report 2008

1.2 Types of eco-innovations 1.2.1 Towards a life-cycle perspective

Exhibit 1: The product chain

Source: Huber 2008

SYSTEMATIC Eco-Innovation Report 2008

1.2.2 Product and process innovations

SYSTEMATIC Eco-Innovation Report 2008

1.2.3 Organisational innovations

1.2.4 Marketing innovations

SYSTEMATIC Eco-Innovation Report 2008

1.3 Levels of eco-innovation

SYSTEMATIC Eco-Innovation Report 2008

1.4 Measuring eco-innovation

1.4.1 Key challenges of measuring eco-innovation

2008) and MEI (UNU-MERIT et al 2008) projects.

SYSTEMATIC Eco-Innovation Report 2008

5 See MEI report for detailed proposal (UNU-MERIT et al 2008).

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

Exhibit 4. Material flow indicators (OECD 2008c)

SYSTEMATIC Eco-Innovation Report 2008

SYSTEMATIC Eco-Innovation Report 2008

1.4.2 Priority actions for evidence based eco-innovation policies

SYSTEMATIC Eco-Innovation Report 2008

2. Evidence on eco-innovation in the EU

SYSTEMATIC Eco-Innovation Report 2008

Source: Eurostat, calculations Technopolis Group

SYSTEMATIC Eco-Innovation Report 2008

Source: Eurostat, calculations Technopolis Group

SYSTEMATIC Eco-Innovation Report 2008

Exhibit 7 : Highly important effect of innovation on EMAT, CIS4 - main sector

Source: Eurostat, calculations Technopolis Group

Source: Eurostat, calculations Technopolis Group

SYSTEMATIC Eco-Innovation Report 2008

2.1.2 Modes of innovation

analysis of innovation modes.

SYSTEMATIC Eco-Innovation Report 2008