What is Unique About Green Innovation?

The phrase is bandied about more and more, but what do people really mean by green tech? What makes a green tech investment different from another? And why is green tech innovation so expensive? What’s the difference between green hydrogen and steel and grey hydrogen and steel? And does innovation have to be technological to count?

In a timely paper, What is Unique About Green Innovation? the OECD has tried to pin down some answers. Here’s the main ones in a nutshell.

Defining Green Innovation

The OECD defines a green innovation as containing new or improved products or processes lowering greenhouse gas emissions and preserving limited natural resources and biodiversity, such as better waste management which uses natural resources more efficiently.

Innovations can be technological or non-technological and tend to be expensive. The unpriced costs of environmental damage and the risks and uncertainty that come with technology, markets, and policies often deter private investment. This, the OECD says, make it very difficult to achieve a green transition without public support and intervention.

The need is clear: in 2019, global GHG emissions were primarily driven by heavy industry, energy, and transport, contributing 24%, 23%, and 15% of total emissions respectively.

Green innovation in heavy industry sectors such as energy, heavy industry and transport requires ‘major changes in the innovation ecosystem, including building hydrogen refuelling stations, pipelines for heavy-duty transport, and dedicated equipment in industries like cement to replace natural gas in high-temperature processes.’

Green Transition Technologies: A Status Check

But there is still a long way to go. The OECD classifies green hydrogen, green steel, batteries, and electric vehicles as green transition technologies. Yet green hydrogen and steel account for only 1% and 0.05% of global production respectively and are expensive than ‘dirty’ hydrogen and steel. Green hydrogen, for example, costs three times as much as grey hydrogen. In comparison, battery and EV technologies are much more mature, helping to bring down prices as production scales up.

Water electrolysis powered by renewable energy sources, such as wind or solar, produces green hydrogen. Green hydrogen can replace grey hydrogen to carry energy in chemicals and refining processes, while it is used as a reductant to remove oxygen from iron ore during steel production.

Green steel is made in a way that reduces or eliminates the carbon emissions traditionally generated in making steel.

Key Players and Supply Chain Dynamics

Despite the image above, the report identifies four key ecosystems, including Japan, the United States, Korea, and the European Union (EU), that are driving green innovation.

However, China leads in the battery and EV sectors. While it still produces more non-green hydrogen (33% of the global market) than green hydrogen, it makes more of the latter than anyone else (55%), followed by Europe (29%), according to OECD estimates. It’s also the world’s largest producer of non-green steel.

China’s dominance of the lithium-ion supply chain seems almost unassailable with only 10% of global capacity estimated to come from elsewhere, according to the OECD.

There are few supply chains for lithium-ion batteries outside China, which has nearly 90% of global capacity in the supply chain.

Defining Green Solutions

The OECD defines green solutions as helping to optimise production value chains in green hydrogen, steel, and battery production. Innovative services that encourage the adoption of cleaner techniques are also included. For instance, services which help move energy-intensive production closer to green-hydrogen production sites before transporting the intermediate product to be further processed are included.

Expanding micro-mobility options and car-sharing platforms also counts as it helps maximise EV utilisation. And innovations in recycling, reuse, and logistics for steel and batteries can reduce the demand for critical mineral resources and strengthen the resilience of the supply chain.

Key Questions for Investors and Policymakers

The OECD’s report raises key issues for investors and policymakers in green technologies, such as balancing incremental improvements and pursuing breakthrough investments. It also asks how to ensure green innovations achieve broader environmental benefits beyond reducing carbon emissions and addressing resource depletion. It also raises a critical question that isn’t asked enough: what are the limits to current green technologies?