Analysis of Linkages between Environmental Policy Instruments and Innovation: A Case Study of End-of-Life Vehicles Technologies in Japan

Environmental policies are designed to deal with externalities either by internalizing environmental costs or imposing specific standards for environmental pollution. This study aims to examine the impact of environmental regulations related to End-of-Life Vehicles (ELV) on innovation in Japan. We determined whether there is any statistical difference in patent activity comparing the periods before and after the regulations were enacted. In order to control for exogenous factors such as business cycles, we also analyzed the ratios of ELV and total environmental patents during the same periods. Results showed that environmental regulations drive innovations and the number of ELV-related patents were larger even after controlling for such exogenous factors. We concluded that environmental policy for ELV in Japan was effective in inducing innovation. However, we also found that the weakness in these types of command and control policy is the lack of incentives for further innovation.


Introduction
Economic analysis of environmental policy asserts that the negative impact of economic activities on the environment constitutes an externality.To internalize such externalities and persuade firms to innovate with social optimum, environmental regulations are implemented (Johnstone et al., 2010).In general, environmental regulations aim at reducing the environmental impacts by setting specific conditions.These regulations will eventually trigger innovations as stated by the Porter hypothesis (Ambec et al., 2011).The environmental regulations can either be based on market mechanisms or command-and-control (CAC) approaches.The market-based instruments are mechanisms that are influenced by market signals rather than directives.Market-based regulations are limited by cost allowing firms to choose the least-cost solutions to improve environmental performances (Popp, 2010).The CAC regulations are considered to force the adoption of technology compared to market-based regulation (Lee et al., 2007).Further, CAC regulation also allows the firms to meet regulation standards or objectives using any technology.However, once the firms have reached a particular standard or objective using different technologies, there is little incentive for them to develop new technologies and/or to innovate.Therefore, firms stop investing in the research and development (R&D) including technological development, which in turn decrease innovation (Jaffe et al., 2003).energy prices to show that energy prices and regulatory standards affect the energy-efficiency innovation.Likewise, Popp (2006) studied patents from the United States, Japan, and Germany related to sulfur dioxide and nitrogen oxides, and showed there was a significant increase in patents related to sulfur dioxide and nitrogen oxides emissions reduction due to different environmental regulations in these countries.In contrast, some studies found no significant impact of the environmental regulations on innovation (Fischer et al., 2003).Most of the studies are based on finding the relation between market-based instruments and innovation.There are only few studies that have focused on finding the impact of command and control policies.Furthermore, there is limited research on exploring the relationship between innovation and environmental regulation on recycling and waste management.Yabar et al. (2012), for example, found that environmental regulations induce technological innovation in dioxin emissions from incinerators and recycling of home electric appliances in Japan.They used technological patents related to dioxin emissions and home appliances as a proxy in their study and found that environmental regulation triggers innovation.In this research, the End-of-Life Vehicles (ELV) patents were used as a proxy to find the relation between the ELV policies and innovations in Japan.
We determined whether there is any statistical difference in patent activity comparing the periods before and after the regulations were enacted using the patent data.The relevant Japanese data on ELV was gathered for the period 1990-2013 and the period was divided into: 1990-2001, 2002-2005 and 2006-2013 sub-periods.In order to control for exogenous factors such as business cycles, we also analyzed the ratios of ELV and total environmental patents during the same period.

Sound Material-Cycle Society in Japan
In the 1950s and 1960s, due to rapid economic growth and rapid urbanization, there was a huge increase in waste volume and pollution of the environment due to inappropriate management of waste (Singh et al., 2015).To combat this problem, the Waste Management and Public Cleansing Law of 1970 focused on treatment of huge volumes of waste in a short period using facilities such as incinerators.This led to an increase in the number of batch-type incinerators in the 1970s.In the 1980s, lifestyle changes reflected a change in the nature of the waste such as an increase in plastic products and products with plastic packaging.The huge increase in plastic waste going for incineration was associated with dioxin emission ultimately giving rise to dioxin-related public health issues in the early 1990s.Studies revealed that there was extensive emission of dioxin in low-combustion and batch-type incinerators (Bagnati et al., 1990;Ohta et al., 1997).This pushed the government to introduce the Law Concerning Special Measures against Dioxins in 1999(Law No. 105 of 1999).This facilitated the replacement of batch incinerators with continuous-type incinerators with dioxin-trapping technologies.Due to limited landfill space in Japan, the government focused on effective uses of resources and minimizing the environmental and health impacts on the whole life cycle of the products from the early 1990s (Yabar et al., 2012).This helped to promote not only the recycling of plastics but also of other valuable material from the waste stream that can be used as a source of raw materials.Many laws were made based on the 3R approach, i.e.Containers and Packaging Recycling Law (1995), Home Appliance Law (1998), Food Recycling Law (2000), and End-of-life Vehicles Recycling Law (2002) (Yabar et al., 2012;METI, 2004;METI, 2006).There are many studies on home appliance and ELV in Japan, but only a few studies have put their focus on proving that regulations drive innovation.
ELV is considered as a municipal waste in Japan (Fig. 1) and comprises around 10% of total municipal waste generation.Since local governments had concerns on the treatment and disposal of ELV, the central government introduced the ELV Recycling Law in 2002. www.ccsen

Recycl
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Patent Data as a Proxy to Measure Environmental Innovation
The patent data related to ELV was used as a proxy to examine the link and effect of environmental policy on technological innovation for ELV.In the past, few empirical studies investigated the linkage between environmental policy and innovation due to a lack of patent data availability (Popp, 2005).Now due to more and free availability of patent data, we know that its use has many advantages (Popp, 2005;Yabar et al., 2012), which are as follows: • Patent classification provides valuable information to find the advancement in a specific technology.
• The international patent system can be used to track the diffusion of technologies across countries.
• The rate of a given patent can display its potential for technological development and commercial value.
• Patent citations can help us ascertain the knowledge flow.

Model Specification
In order to determine whether ELV regulations are the major drivers of ELV innovation, we identified the relevant patents related to ELV recycling, mostly related to ASR, as shown in Table 1.These were identified using the World Intellectual Property Organization (WIPO) website and the Organization and Economic Cooperation and Development (OECD) Report for Total Environmental Patents (2011).We focused on the ASR technologies as the Japanese ELV regulation is much more concentrated on ASR.Furthermore, a Japanese patent database was used to find ELV patent counts.Specific codes were used for each ELV patents' group for simplicity during the statistical analysis.The PG1, PG2, PG3, PG4, PG5, PG6, PG7, PG8, PG9, PG10 and PG11 designations are the specific codes in which PG stands for Patent Group for different ELV patent groups as shown in order of Table 1.The capital letter B, D and A used in Table 2, Table 3  Source: WIPO Figure 3 shows the registered patent count for the ELV-related technologies for the period 1990-2014.We used the key words specifically applied to ASR recycling technologies to find the most appropriate ELV-related technologies in our research.To avoid overlap in technologies, we used the ratios of ELV patents over the total environmental patents (see Appendix).The ELV recycling law was enacted in 2002, partially implemented in 2003, and fully implemented in 2005.In order to find out changes in the trend before, during, and after the ELV regulation period, we divided the period into: 1990-2001 (before regulation), 2002-2005 (during regulation) and 2006-2013 (after the first recycling target) periods.We then undertook t-test analysis using the SPSS software to analyze the statistical difference of ELV patents before and during the ELV regulation, and during and after the ELV regulation.Table 2 and Table 3 show the t-test results.To control the potential exogenous effects on factors and to prove that external factors were not involved in the ELV innovation, we determined the ratios of ELV patents over the total environmental patents and conducted t-test analysis for these ratios.In the t-test of the group before and during the ELV regulation, there was a significant difference for the majority of the patents at a 99% confidence interval.The patents in pair 2 and pair 8 are related to the recycling of polyurethane, which is also used in home appliances such as refrigerators.Thus, it can be inferred that the technology for polyurethane was introduced after the application of the Home Appliance Law in 1998 due to the advancement in technology before the introduction of the ELV Recycling Law in 2002.Moreover, the t-test between the ELV technological patents during the regulation and after the targets were met, shows that the patent count was higher during the regulation period with significance at the 99% confidence interval.Therefore, we found that the number of ELV-related technological patents in general is larger than in the period before the regulation and after the regulation targets were met.
We compared the ratio of the ELV technology-related patents to the total environment-related patents in order to find if there were any effects caused by exogenous and other factors such as business cycles and demand changes.
The ratio of ELV technological patents over the total environmental patents is shown in Figure 4.The average ratio value of ELV technological patents and the total environmental patents before, during and after ELV regulation are shown in Figure 5.
Figure 5. Average ratio value of ELV-related patents and total environmental patents before, during and after the ELV regulation The ratio of ELV recycling patents to the total environmental patents before, during and after the ELV regulation was 0.419, 0.489 and 0.440, respectively.This shows that ELV technological patents were higher during the regulation.Moreover, we again undertook a t-test of the ratio before, during, and after the regulation as shown in Table 4.The result shows that the ELV-related patents are higher during the regulation period compared to before and after the period, which demonstrates that the regulations were effective but once the regulation target is met, there is a decrease in ELV-related technological activities.The ratio before regulation, ratio during regulation and ratio after regulation in the table refer to the ratio of ELV recycling patents to the total environmental patents before, during, and after the ELV regulation, respectively.

Discussion and Conclusion
This study analyzed the potential impact of environmental regulations on ELV recycling innovations in Japan.The statistical results show that the number of related patents to ELV recycling is larger during the ELV regulation period as compared to before and after the regulation.The result indicates that the ELV regulations were effective but once the targets were met, innovation slows due to a lack of incentives for further innovation.The recycling target and policy set by the Japanese government as environmental policy for automobiles push the auto industries to facilitate innovation mostly in the ASR sector.Moreover, it illustrates that proper regulation can activate advancement in environmental technologies through innovation, but after the targets are met, there is less incentive for the manufacturers to work towards further innovation.In this study, we used registered ELV patent data as a proxy for actual innovation.In the next stage of our study, we will use the FP2 patents (patents which are registered in more than two patent offices), which might provide us a more reliable result of valuable innovations.Further, we will explore the impact of not only patents but Research and Development (R&D) data related to ELV innovation for stronger evidence.

Appendix
The environmental patents used in this paper were selected from OECD (2011).The ELV recycling-related patent was selected using the WIPO website via key words related to ELV recycling and our own criteria specified in Table 1.

Figure 3 .
Figure 3. ELV recycling technological patent trends and policies

Figure 4 .
Figure 4. Ratio of ELV-related patents and total environmental patents

Table 1 .
and Table 4 stands for before, during, and after the ELV regulation.Patents related to ELV recycling technologies

Table 2 .
Paired samples t-test results for group of patents before and during the ELV regulation

Table 3 .
Paired samples t-test results for group of patents during the ELV regulation and after the ELV recycling targets were met

Table 4 .
T-test of patents ratio before-during and during-after the regulation period

: Patents related to Environmental Innovation
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