Science, technology and innovation are critical to sustainability transitions

Without a major acceleration in low-carbon innovation, reaching net‐zero emissions by 2050 will be unachievable. Sustainability transitions in systems like energy, food and transport depend on the development and deployment of enabling technologies. Significant levels of investment are needed across the entire innovation chain to meet the scale and pace of the netzero transition. This includes research and development (R&D), since achieving net-zero depends on technologies that are still far from market. Public investments in energy and environment R&D have increased in recent years (Figure 1), but their growth will need to accelerate if technological developments are to keep pace with meeting net-zero targets

Source: OECD R&D statistics, September 2022. See OECD Main Science and Technology Indicators Database, http://oe.cd/msti, for most up-to-date OECD indicators

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R&D expenditures were resilient during the pandemic economic downturn

The two most salient disruptions of the last couple of years – the COVID-19 pandemic and Russia’s war of aggression against Ukraine – have had far-reaching, cascading effects, including on STI. While there was a slowdown in the growth of R&D spending during the pandemic, it nevertheless continued to increase in the OECD area, marking the first time a global recession has not translated into falls in R&D expenditures. This reflects how investments in R&D were an integral part of the response to the pandemic. Data for 2021 show that OECD R&D growth rates bounced back to pre-pandemic levels, reflecting a recovery in R&D expenditures in many countries that had experienced a decline in the previous year (Figure 2).

Figure

Growth in gross domestic expenditure on R&D, between 2019-20 and 2020-21

Percentage growth rate in constant price

Source: OECD R&D statistics, February 2023. See OECD Main Science and Technology Indicators, http://oe.cd/msti, for most up-to-date indicators

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Looking ahead, projected falls in economic growth and the highest rates of inflation seen since the 1980s could adversely impact STI expenditures. Unlike during the pandemic, where STI investments were central to finding solutions, R&D expenditures could follow a pro-cyclical trend and decrease with the current economic downturn. On the other hand, pressure on R&D expenditures from an economic downturn could be offset by recently announced, ambitious industrial policies, which often incorporate R&D investments. Russia’s war of aggression against Ukraine is also expected to lead to increased expenditures on defence R&D over the next few years in many OECD countries.

Transitions call for greater directionality in research and innovation activities

Besides making larger investments, governments need to promote greater direction in research and innovation activities to help compress the innovation cycle for low-carbon technologies. Large parts of such support will likely be channeled through sectors, such as energy and transport, and STI policy will need to co-ordinate with other parts of government to bridge various “valleys of death” across innovation chains. This orientation coincides with the growing use of cross-government industrial policies, including mission-oriented innovation policies

(MOIPs) (Figure 3), which require governments to make explicit innovation policy choices, in conjunction with other actors (notably firms), on where to focus their limited resources.

Figure 3. Map of MOIPs and their net-zero missions

An increasing number of countries have engaged in systemic policies to reduce GHG emissions

Note: For instance, Ireland currently operates two MOIP initiatives which include a total of 4 missions. The list of MOIP initiatives, as well as their net-zero missions, is available at: https://www.oecd.org/sti/inno/Online%20list%20of%20NZ%20missions.pdf

The OECD defines a MOIP as a co-ordinated package of policy and regulatory measures tailored specifically to mobilise STI to address well-defined objectives related to a societal challenge, in a defined timeframe. These measures may span different stages of the innovation chain, from research to demonstration and market deployment; feature a mix of supply-push and demandpull instruments; and cut across various policy fields, sectors and disciplines. Missions improve on disjointed STI policies, but currently fall short of enacting transformative change. Early indications suggest they lack sufficient scale and reach to non-STI policy domains to have their intended wide-ranging impacts. The challenge remains to move these initiatives from effective co-ordination platforms to integrated policy frameworks that mobilise and align a wide range of actors. This will require significant political support and adaptation of incentive structures and practices within public administrations.

While MOIPs have attracted considerable policy attention in recent years, they still account for a small proportion of government expenditures on research and innovation. Much government support remains non-directed, for example, through the extensive use of instruments such as tax incentives to firms to encourage them to perform R&D. Governments vary in the policy instrument portfolio they use, with some making greater use of R&D tax incentives than others (Figure 4).

Figure 4. Direct government funding and government tax support for business R&D As a percentage of GDP, 2006 and 2020

Note: Data on subnational tax support not available for China, Spain United States. For general and country-specific notes on the estimates of government tax relief for R&D expenditures, please see http://www.oecd.org/sti/rd-tax-stats-gtard-ts-notes.pdf

Source: OECD R&D Tax Incentives Database, http://oe.cd/rdtax, January 2023

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Broad consensus exists that R&D tax incentives are more suited to encouraging R&D activities with near-market potential. By contrast, policy instruments like direct grants are more suitable for supporting longer-term, high-risk R&D, as well as targeting specific areas that either generate public goods or have particularly high potential for spillovers. Both types of measures provide useful support to business R&D, but the growing urgency to deal with key societal challenges like climate change points to the need for a more directive approach. Yet the last two decades have seen a significant shift from direct support instruments to a greater reliance on R&D tax incentives. Across OECD countries, R&D tax incentives represented around 60% of total government support for business R&D in 2019, compared to 36% in 2006 (Figure 5). Governments should revisit their business R&D support policy mix to assess its fit with their net zero ambitions.

Note: For general and country-specific notes on the estimates of government tax relief for R&D expenditures (GTARD), see http://www.oecd.org/sti/rd-tax-stats-gtard-ts-notes.pdf.

Source: OECD R&D Tax Incentives Database, http://oe.cd/rdtax, January 2023 and OECD R&D statistics, September 2022. See OECD MSTI Database, http://oe.cd/msti, for most up-to-date OECD indicators.

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Beyond greater directionality, transitions call for wider STI policy reforms

While larger investments and greater directionality in research and innovation activities are needed, these should coincide with a reappraisal of STI systems and their supporting STI policies to ensure they are “fit-for-purpose” to contribute to sustainability transitions. Governments may require altogether different STI policy frameworks and practices from those they commonly use today to help direct and accelerate the innovation cycle for low-carbon technologies. They should design policy mixes that enable transformative innovation and new markets to emerge, challenge existing fossil-based systems while promoting just transitions, and create windows of opportunity for low-carbon technologies to break through. Reforms concern all aspects of STI policy and governance, including research and innovation funding, various co-ordination mechanisms, and the ways STI inputs and outputs are measured. They should cover supply and demand side interventions that target both production and consumption. The STI Outlook introduces a checklist of STI policy sub-domains where such reappraisal is needed (Figure 6).

The STI response to the COVID-19 crisis offers lessons for sustainability transitions

The global STI response to COVID-19 provides important lessons for sustainability transitions. For instance, new co-operations between various actors during the pandemic were critical to the successful STI response but reinforcing these over the longer term may require significant change to academic culture, structures, incentives and rewards. Many of the required changes – including in research performance assessment, public engagement, and transdisciplinary research – are already underway but have not yet been adopted at the necessary scale and speed because of embedded inertia in science systems. More radical change is necessary to spur science to engage with other societal stakeholders to produce the broader range of outputs and solutions that are urgently required to deal with complex global challenges and crises.

The global nature of the pandemic also called for vibrant multilateralism and international solidarity, but the response experience was mixed, demonstrating what could be done rapidly through international co-operation but also its limits, particularly in the uneven international rollout of vaccines and therapeutics. Vaccine nationalism and diplomacy were perhaps emblematic of international co-operation-competition dynamics that are likely to characterise the response to other crises, notably climate change. Such dynamics will continue to shape the ways in which research and innovation can contribute to global crisis responses.