This paper analyzes the justifications for governmental involvement in the development and commercialization of environmental technologies. To do so, a list of ‘generic’ rationales for government R&D involvement is extracted from various literature sources. Each rationale is discussed theoretically, and then analyzed in terms of its possible application to the environmental field. The intended contribution of the paper is to provide a theoretical background concerning the proper role of government in the development of environmental technologies. By determining the circumstances under which government involvement is justified, the groundwork is laid for the development of appropriate governmental policies.

The paper argues that there are several salient features of the environmental field which may justify governmental involvement. The increasingly high degree of environmental regulation has already caused indirect market failures that hinder private R&D efforts. Potential technologies to counter environmental externalities represent public goods which have social benefits for which there are no incentives in the private market. Uncertainty due both to our lack of understanding of the complexities of the natural environment and to shifting environmental regulations and policies may cause a risk aversion in the private sector against developing technologies. Imperfect public knowledge concerning environmental issues leads to less than optimal demand for new environmental technologies. All of these features generate market distortions which cause private R&D to deviate from what is socially optimal. As a result, governmental involvement in environmental technology development may well be warranted.