Yes. I'm sorry.
Generally, countries innovate best around what they already do best. That's where you tend to be your most innovative. For Canada, because we do a pretty good job in natural resources as it is, there's a huge opportunity for us to create market value and new opportunities by innovating in that space. We're not there yet, and we have to figure out why.
That's the question we've been asking over the past two and a half years: why are we not there yet? We've looked at what we call the “clean innovation ecosystem”—all the players at all the stages of tech development in clean innovation in Canada. That includes natural resources, but it includes some other sectors too. What we've found is that to improve Canada's environmental and economic performance here, it will require addressing a double market failure.
I will share a bit of economic theory here in terms of double market failure. There's a knowledge spillover that occurs whenever you're creating new ideas. If you create a new idea, the market can grab it up, but you're not able to capture all the benefit of that idea. That's true of all types of innovation. It's not unique to clean innovation at all. What's unique to clean innovation is that you're creating something that doesn't have a market value. If you're creating a commodity that has a lower environmental footprint, the market doesn't care. It cares about that commodity, not the fact that there's a version of that commodity that has a lower environmental footprint. That's an environmental externality, which we call a market failure.
This is what's unique about clean innovation. You have the regular market failure around a knowledge spillover, but you have this special and kind of unique market failure around there not being a market or around a market not recognizing the full value of the cleaner thing you're producing. That's unique. As a a result, there's a unique role for government in this space, and that is to make the market work well, not to direct the market, not to tell it what to do, and not to tell anyone what to do, but to create a field in which the market can work well on its own and private investors and private business can then work efficiently.
The problem is that these market failures translate to risk for business. This goes to your question about de-risking the sector. Perhaps the most important role for government is de-risking the policy risk. Because it's a unique situation in clean innovation, where you have a double market failure, there's a role for government to step in and help create that market demand for the cleaner technologies. It means that entrepreneurs, investors, and researchers are relying on government's actions to help create the demand for their products and services.
If there's uncertainty around a government's environmental policy agenda, including what policies it will put in place, how those policies will evolve, or how resilient they are in terms of political change, that translates into uncertainty in the market. This policy risk leads to underinvestment in clean innovation. It's a problem that only government can solve.
The key, though, is to intervene in smart ways, not to direct anything, but to create a situation where the market works well. Through our two and a half years of work, we've found that there are four areas where policy is needed.
The first has to do with creating policies that address those challenges around the creation of new ideas. That's the stuff focused on R and D, the policies that get the great ideas out of the government labs and the post-secondary institutions and harness them. There's a second set of policies that helps to create that market demand for clean innovation and cleaner commodities; pricing carbon is a great step in the right direction, but there are other things as well. There is a set of policies that we need to help grow companies to a bigger size, to help commercialize them and get them to scale so that they can compete and export. Finally, there are some kinds of crosscutting policies, if you will, that support the entire ecosystem, such as skills, data, and cluster development.
The challenge is that because the system works well only when the whole ecosystem works, you need to have some policy interventions in different places, and you really have to target them to where the market failure or the market barrier is so that you're doing it in a smart way.
I'm going to tell you a bit about some of the pull policies, because that's our area of expertise at the Smart Prosperity Institute. Pull policies are the ones that pull technologies to market. They're the ones that create the demand for those clean innovations.
Carbon pricing is one of them. By putting a price on the environmental attribute that you don't want, you create a nice reward for the products and services that don't have that negative environmental impact. It pulls those technologies and those commodities to market, but it's not the only one. As well, you can have well-designed regulations that can do that and that provide a sort of implicit price on pollution. You also can use government procurement, infrastructure spending, and those things to target this and to use the power of the government as a purchaser to create market demand for these new technologies.
Fortunately, these things have been studied at length. The OECD has done a lot of work on this. They've found that these policies do work really well. They induce innovation and achieve the market demand you want but, like any policy, they can be badly designed or well designed.
They found that for them to be well designed, there are a few criteria you want to meet. You want them to be stringent. If you create an environmental policy that doesn't do very much, it's not going to have much impact.
If you create a policy, it should be predictable. You want to de-risk that policy and show what's going to happen over time so that the private sector knows what's happening and will come in and will invest in that space.
Finally, you want them to be flexible. You don't want to direct anyone to what they should be doing, but you want to solve those problems in a way that allows the business community, municipalities, and governments to respond in the way that makes the most sense for them. Carbon pricing is flexible, but there are lots of other ones that are flexible as well.
I would just say that the natural resources sectors of the Canadian economy have an opportunity in this clean technology space in the next little while. It's an environmental opportunity and it's an economic opportunity, but it's not going to happen without a suite of coordinated policies. You really have to look at the entire ecosystem to see where there are issues and figure out the thing as a whole. We're going to need different policies in different places depending on whether we're targeting knowledge spillover or an environmental externality, or there's a barrier around the financial community not investing in clean tech in the natural resource sectors because they're not familiar with it, which is one of the barriers we've heard about a lot.
Different policy is needed in different places, and it gets a little complex, but the unique thing here is that there are some things that only government can do. When it comes to this vision of achieving market share and growing these companies and improving their environmental performance, these things are going to require some smart, far-sighted, and sustained government action. That's going to allow the private sector to do the work. The private sector is still the big player here. Over time, the private sector takes on more and more of this because the government has corrected the market and let it work.
Government has a natural role in setting a vision and a level of ambition that position natural resource sectors for long-term success. Governments can invest more patiently with longer horizons than the private sector can. They can approach risk differently, but most importantly, only governments can provide that policy certainty and create the market conditions that will unleash the clean innovation.
Thank you.