Coevolution of supply and demand: the case of environmental innovations

1. DIMETIC, 19th october 2007, Maastricht, The Netherlands Coevolution of supply and demand: the case of environmental innovations Maïder Saint Jean GREThA, Bordeaux University saintjea@u-bordeaux4.fr

2. References • Belis-Bergouignan M-C., Oltra V., Saint Jean M., 2004, Trajectories towards clean technology: example of volatile organic compound emission reductions, Ecological Economics, 48, pp201-220. • Saint Jean M., 2005, Coevolution of suppliers and users through an evolutionary modelling – The case of environmental innovations, European Journal of Economic and Social Systems, 18 (2), pp255-284. • Saint Jean M., Polluting emissions standards and clean technology trajectories under competitive selection and supply chain pressure, Forthcoming in Journal of Cleaner Production.

3. Outline of the presentation • Some stylised facts on environmental innovations • The main building blocks of the model • Results • Further developments: analysis of policy instruments • Conclusions

4. 1. Some “stylised facts” on environmental innovations • Environmental innovations: innovations that consist of new or modified processes, practices, systems and products which benefit the environment and contribute to environmental sustainability regulatory push-pull effect • Clean technology vs end-of-pipe technology • Clean technology implies an integrated change in the production process and a reduction of pollution at source; • End-of-pipe technology controls and treats pollution after it has been generated  multi-dimensionality of clean technology; innovation offsets • Environmental R&D dedicated to the improvement of environmental quality of processes and products • “Green paradigms” for the generation of heat, electricity and motion  radical questioning of existing production processes; technological irreversibility and lock-in

6. The space of clean technology trajectories

7. Case 1: the paintings • Diversity of users and market segments • Public concern • Significant range of environmental innovations with no or low solvents • Change in the knowledge base of the producers and the users: paintings  organic chemicals

8. Case 2: the surface treatment activities • Clean technologies for the surface treatment, ex.: low temperature plasma • SMEs of the metal-work sector subcontractors of car manufacturers and aerospace firms • Technological irreversibilities in the solvent paradigm • Obstacles to the adoption of clean technology: • High adopion costs related to weak financial and absorptive capacities • Product performance constraints

9. 2. The main building blocks of the model Scheme of supply-demand interactions SUPPLY n firms DEMAND m firms Allocation of R&D Investment Process/Product innovation Profile of each client: Requirement Levels: maximum price, minimum quality standards, environmental regulatory standards Competition among suppliers Preferences Performance achieved for each characteristic Market share Purchase Defection Average performance of industry

10. Procedure of supplier’s selection by a client at time t Supplier t-1 of client j: S(t-1) Requirement thresholds of client j at time t At time t, performances of supplier S Requirement thresholds reached? Defection of client j YES NO Product replacement with the same supplier S Selection of a new supplier remaining on the market on the basis of its global performance Transfer of information from client j to S(t): priority characteristics Choice of a new supplier S’ Transfer of information from client j to S’(t)

11. Models of reference • Chiaromonte F., Dosi G., 1993, Heterogeneity, competition and macroeconomic dynamics, Structural Change and Economic Dynamics, 4, 39-46. • Malerba F., Nelson R., Orsenigo L., Winter S., 1999, ‘ History-friendly ’ models of industry evolution: the computer industry, Industrial and Corporate Change, 8, 3-40. • Laffond G., Lesourne J. and Moreau F., 1998, Stratégies de différenciation environnementale et dynamique des structures de marché, Colloque AFSE, Toulouse, May. • Valente M., 1999, Evolutionary economics and computer simulations - A model for the evolution of markets, PhD thesis, University of Aalborg, Denmark.

12. Table of correspondence • R&D investments and innovation activities of suppliers • The product price • Technology space • Decision rules of clients • Inter-firm interactions • Exit process

13. 1.R&D investments and innovation activities of suppliers

14. 2. The product price

15. Environmental quality of the process X3max2 PARADIGM 2 X3max1 PARADIGM 1 Productive efficiency of the process 3.Technology space

16. 4.Decision rules of clients

17. 5.Inter-firm interactions

18. 6. Exit process

19. 3. Results • Protocol of simulation: parameter initialisation, battery of simulations • The reference configuration: 12 suppliers, 200 clients, 2 groups of clients • Two scenarios or market configurations: • scenario ‘ homogeneous oligopoly  ’ • scenario ‘ market segmentation ’

20. Scenario HO

21. Scenario MS

22. 4. Further developments: policy implications • The impact of tighter standards: • Process standards • Product standards • Policy timing  The rise in the environmental requirements of clients, generated by tighter environmental standards, has different impacts according to the nature and timing of the standards • The role of procurement policy: • Critical mass of ‘green’ users • Strategic niche management (Kemp, Schot and Hoogma, 1998) • Taxes, subsidies, diffusion of information, etc.

23. Process standards Scenario HO Scenario MS

24. Product standards Scenario HO Scenario MS

25. Limitations • Methodological problems related to simulations : • the stochastic characteristic of the dynamics; • the high number of parameters; • the empirical calibration of the model. • Limits of the model: • no sectoral differences are taken into account; • there’s no real price strategies of firms; • effective financial constraints do not apply; • the role of final consumers is not explicitly incorporated; • no new innovative entrants are considered. • Regarding environmental innovations: • the anticipation of environmental regulation by firms and its impact on firm’s innovation strategy; • the issue of “transition management” and system innovations.

26. 5. Conclusions • An evolutionary model of supply and demand coevolution • Process/product innovations with characteristics of environmental quality • Related questions cf. M. Schwoon (fuel cell vehicles, role of infrastructures), E. Brouillat (recycling, product life extension), impact of REACH (Registration, Evaluation, Autorisation and Restriction of Chemicals) on innovation • Empirical validation?