Global economic and policy leaders--along with a lot of politicians, of course--are in Copenhagen this week to try to hash out new international policy on fighting the effects of climate change. Whatever they come up with is likely to have a substantial price tag, and much of the current negotiations, John Broder reports in the New York Times , are over how to pay for any plan, and specifically how to help developing countries pay so that they go along: Many poor nations are insisting that wealthier nations make deeper cuts in their emissions and contribute more money to help the poorer countries, a split that widened in Copenhagen on Tuesday as competing documents of a potential agreement circulated. Over time, some of the hundreds of billions of dollars the poorer countries are demanding will begin to flow, as global carbon markets become established and governments in rich countries begin to open the spigot of public spending. But in the meantime, the industrialized countries have proposed a relatively modest fund of about $10 billion a year for each of the next three or four years to help poorer countries adapt. Even that effort remains the subject of conflict over which countries should contribute how much, what body should oversee the spending and how to determine which projects qualify for finance . Meanwhile, Philippe Aghion , David Hemous , and Reinhilde Veugelers write today at Voxeu.org about the unfulfilled promise, so far, of a "green innovation machine." From 2001-2006, according to their study, only 2% of patent applications worldwide were for environment related technologies. If the cost of government action is going to be offset by economic growth, this trend needs to change quickly: The private green innovation machine is not up to the challenge. It needs government intervention to address a combination of environmental and knowledge externalities. Economists have long emphasised the importance of carbon prices as policy instrument to use. Properly factoring in directed technological change, i.e. taking into account that research will be directed to the most profitable projects, delivers new insights for the green policy agenda. Building on an endogenous growth model on innovation and environment developed by Acemoglu , Aghion, Bursztyn, and Hemous (2009), we discuss how government intervention should be designed to effectively turn on the private green innovation machine and, more generally, to fight climate change at the lowest possible cost for growth. Researchers choosing to direct their innovation activities at improving either clean or dirty technologies will typically target innovation towards the most profitable sector, taking into account the current state of technology in both sectors and government taxes and subsidies. In this directed-innovation perspective, governments need to address not only the standard environmental externality but also imperfections in the research sector, particularly those whereby past advances in old, dirty technologies make future production and innovation in clean sectors relatively less profitable. This introduces a new cost-benefit analysis to policy intervention. The cost of supporting the cleaner technology is slower economic growth while innovation switches from the more technologically advanced dirty sector to the technologically immature clean sector. These costs will be born initially. It will take a certain period before these losses will be recovered through their benefits in the form of higher and cleaner growth, once the clean sector is innovating. Read Kick-starting the green innovation machine here .