Innovation rewards: Towards solving the twin market failures of environmental innovation

The challenge of achieving socially optimal incentives for environmentally beneficial innovation faces twin market failures: a market failure to adequately incentivize environmentally beneficial activities and a market failure to adequately promote innovation.  These market failures interact in a negative synergistic manner to produce inaccurate demand signals for environmental innovation in the private market.   While traditional intellectual property and environmental law fail to cure these public goods market failures, an innovation rewards system could produce more socially appropriate incentives.

            This paper introduces a new framework for an innovation rewards system for environmentally beneficial innovation.  The proposed rewards system would provide innovators with an optional alternative to the traditional patent system where innovators would be compensated based on the environmental and human health benefits of an invention, rather than based on expected market profit.  These innovation rewards would be assessed by an administrative body, similar to the existing U.S. Patent Compensation Board for atomic energy inventions, on a regular basis to provide an annualized revenue stream.

            The proposed innovation rewards system would have the effect of increasing production of environmentally beneficial technology towards its socially optimal output level, reducing consumer deadweight loss, and internalizing the positive externalities of environmentally beneficial innovation.  The rewards system would also reduce the inefficiency of inventing around competitors’ patents, decrease transactions costs of licensing, and reduce the cost of inefficient patent thickets.  Overall, this system would shift private incentives from market profits towards the social benefit provided by an innovation, thus internalizing the externalities of environmentally beneficial innovation and bringing private incentives more in line with their socially optimal level.

            An innovation rewards system has several advantages over alternative market and public mechanisms.  For example, government grants and subsidies, performance standards, taxes, and cap-and-trade programs all require ex ante centralized understanding of how to address concerns and the future course of technology development.  Innovation rewards, on the other hand, are the only solution that addresses both the innovation and the environmental market failure, and does so while maintaining reliance on the diverse ideas and insight of decentralized private market research, development, and innovation.

            Finally, this framework may have particular application beyond the domestic sphere to help tackle vexing international environmental challenges.  Due to the potential for pooling resources for innovation rewards, such a system could be a very cost-efficient mechanism for achieving more socially accurate incentives for environmentally beneficial innovation on a global scale.