Red Tape or Rocket Fuel? The Surprising Ways Governments Can Drive Innovation
Through funding, standard-setting and data coordination, governments are building ecosystems where forward-thinking ideas are shaping the future.
“Government” and “innovation” are rarely viewed as going hand in hand. The former conjures up images of slow-moving bureaucracy and endless red tape; the latter, of caffeine-fueled startups looking for the next big breakthrough.
This cliché obscures an interesting truth: there are many instances where governments have been the invisible hand driving innovation, shaping industries and technologies in ways that markets alone might struggle to. The sheer scale of governments, coupled with their responsibility to serve the public good, make them an invaluable player in the innovation game.
This article explores three pivotal roles that governments play in fostering innovation: as funders, standard-setters, and data coordinators. Through examples drawn from sustainability, we’ll examine how these levers of innovation can be harnessed to unlock opportunities in applying AI for social and environmental good.
Government as Funder: Promoting Research & Development
One of the most powerful levers driving innovation is government R&D funding towards projects which might otherwise fail to get off the ground. Compared with other funding sources, governments often target areas underserved by the market, where there is potential for outsized social impact – which they can capture. This funding can take the form of grants, loans and procurement contracts allocated to both private and public sector projects. Through these, governments drive the innovation of new products, services and technologies vital to improving societal outcomes.
As an example, the US Advanced Research Projects Agency-Energy (ARPA-E) was set up in 2009 to supercharge American energy leadership, through funding R&D of advanced energy technologies. Since then, ARPA-E has provided $4.07 billion of funding to over 1,500 projects. 1,187 patents have been issued, 166 companies formed, and 7,818 peer reviewed journal articles published.
One of ARPA-E’s most recent funding programs allocated $36 million to accelerate advancements in battery technologies, specifically to:
Prolong battery cell life through coatings that regenerate degraded battery cells
Develop modular battery packs that can be easily repaired, reused, and remanufactured
Build autonomous robotic disassembly of battery packs
Whilst this R&D program may appear utopian, it is worth remembering that one of the largest recipients of government R&D is defence. The US government spends almost half of its R&D budget on defence, largely through the Defense Advanced Research Projects Agency (DARPA), which is behind innovations such as GPS, Siri, self-guided bullets and autonomous drones. ARPA-E is in fact modelled off of DARPA – albeit without the military focus.
In 2023 the UK government developed a similar funding agency to unlock scientific and technological breakthroughs that benefit society – the Advanced Research and Invention Agency (ARIA). Various programs within ARIA are researching applications of AI to benefit society:
A £57 million ‘Robot Dexterity’ program, aiming to advance robotic dexterity to create more capable and useful machines, filling gaps in labour shortages from ageing populations
A £59 million ‘Safeguarded AI’ program, aiming to construct a ‘gatekeeper’ AI system tasked with understanding and reducing the risks of other AI agents
An £81 million ‘Forecasting Tipping Points’ program, aiming to enhance climate change response by developing an early warning system for tipping points
These are just the beginning of a promising opportunity to fund R&D into applying AI to society’s biggest challenges.
Government as Standard Setter – Innovation through Adaptation
The question of whether government regulation of industry can drive innovation is a contentious one… Many rightly point to how regulation increases compliance costs for businesses, creates high barriers for new entrants, and where regulation is uncertain or changing, hinders business’ ability to plan for the future.
However, in some cases, government regulation can set new industry standards that force industries to innovate to adapt.
This has been pivotal to regulations targeting environmental pollution such as the EU Emissions Trading System (ETS). The ETS is a "cap-and-trade" system whereby the EU sets a limit on total greenhouse gas emissions from certain industries, and companies must buy or receive emission allowances to cover their emissions. Over time, the cap is reduced, making allowances scarcer and encouraging businesses to cut emissions or invest in cleaner technologies – with the ultimate goal of net zero by 2050.
The theory behind this regulation is that putting a price on carbon emissions creates a financial incentive for companies to reduce emissions and adopt low-carbon technologies. In practice, the ETS has had the greatest impact on the electricity sector, accelerating the phase out of the most polluting technologies like coal and opening up market space for renewable technologies. Some evidence suggests that the ETS has increased innovation activity in low-carbon technologies by as much as 30%1 and reduced carbon emissions by approximately 10% during its initial trading phases2.
However, the ETS has also led to “carbon leakage” – whereby companies, to avoid the cost of complying with the ETS, relocate operations to countries with less stringent environment regulations, and pollute there instead. The EU is addressing this issue with the Carbon Border Adjustment Mechanism (CBAM), which will subject certain imports to a carbon price. Whether this will tackle carbon leakage and effectively decarbonise the EU… it is a little too early to tell.
Government regulation is often called for as an approach to responding to risk and protecting the public interest. This applies strongly to the field of AI, whereby user adoption is predicated on user trust of model safety and ethics3.
This is core to the UK government’s plans to regulating AI. As of yet, the UK government has no overarching regulation on AI, but has outlined its pro-innovation approach to future regulation. The UK government believes a context-based, proportionate approach to regulation will help strengthen public trust and increase AI adoption, whilst providing businesses the clarity to invest in AI and innovate responsibly.
The UK AI Security Institute (AISI) plays an influential role in standard setting. The AISI conducts safety evaluations of frontier AI models, including the likes of OpenAI, Google DeepMind and Anthropic. These evaluations assess the capabilities of each model, and the robustness of technical safety interventions implemented. Through its research, the AISI is generating insights that are shaping international standards and governance frameworks for secure AI deployment.
As safety standards are adopted into legislation, AI developers looking to deploy their models in regulated jurisdictions may be forced to innovate security protocols to meet these standards.
Government as Data Coordinator – Collecting and Sharing Data for Public Good
Finally, governments can drive innovation through promoting data as a public good. Governments sit on vast troves of valuable data across multiple domains, from satellite imagery to census data, but much of it is either restricted, fragmented, or underutilised. Governments can play a crucial role in curating, funding, and opening up datasets that allow AI researchers and startups to develop solutions for social and environmental challenges.
This is already the case for certain environmental datasets. For example, NASA and the European Space Agency provide free, real-time satellite data on climate patterns, deforestation, and pollution. By having this data open-source and free, other players (governments, start ups, NGOs) can use this to inform policy, build awareness and develop solutions to target these issues. This data is already being used by various AI models, one of the most impressive being Google’s ‘Global Forest Watch’ which maps deforestation in real-time.
There are many other opportunities for AI to be used innovatively to solve global challenges, using open source data curated by governments. Two concrete ways for government to build open datasets include:
Targeted dataset creation programs, where governments produce high-priority datasets for a specific use case e.g. poverty mapping. These datasets could form part of a national data bank, a vital asset which governments could lease to companies to leverage for innovation.
An existing example is the UK Biobank, one of the world’s largest biomedical databases used by scientists for health-related research.
Mandated digitisation of valuable data. In the UK, the majority of scientific data and experimental information is not published – and therefore remains inaccessible for analysis. The UK government could mandate publicly funded research data to be recorded digitally4.
As with any conversation around data, it is imperative it is used ethically. Key challenges revolve around privacy (ensuring sensitive data is anonymised), bias (ensuring algorithmic fairness), monopolisation (ensuring datasets are not concentrated in the hands of tech giants) and consent (ensuring data is extracted and used with permission).
These challenges aside, there is great potential for governments to foster innovation through effective and responsible use of public datasets. This is taking on a whole new importance as portions of US government data are being altered or removed entirely under the Trump administration’s disbanding of advisory councils and launching of directives against DEI and climate change. This signals an opportunity for other governments to step up and coordinate data sharing initiatives in the interest of societal advancement.
Concluding thoughts…
Whilst there exist instances where governments have hindered progress through over-regulation that stifles private investment, risk-taking, and market competition, this article has sought to explore the ways in which governments do play a key role in innovation.
To protect citizens and catalyse breakthroughs, governments should establish clear ethical and legal standards that inspire forward-thinking ideas that shape the future.
As AI technologies evolve, this balanced approach of combining targeted funding, rigorous standard-setting, and coordinated data management with proportionate risk safeguards becomes more crucial than ever to accelerate AI’s potential for good.
What’s more, once innovation has been unlocked and the relevant technologies and industries commercialised – governments stand to be among the beneficiaries to adopt these advancements to improve their own operations and the delivery of public services.
By embracing their ability to be both catalysts and beneficiaries of innovation, governments can create a virtuous cycle that secures a brighter future for all.
I hope you enjoyed this article on Government’s Role in Innovation, part of my series called ‘Sustainability’s Playbook for AI Governance: What Works, What Doesn’t, and What’s Next’.
📣 If you are interested in this topic, have any feedback or want to collaborate, please reach out via Substack message or email ‘larissa.machiels@gmail.com’.
References
Raphael Calel and Antoine Dechezleprêtre, "Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market," Review of Economics and Statistics 98, no. 1 (2016): 173–191.
Antoine Dechezleprêtre, Daniel Nachtigall, and Frank Venmans, "The Joint Impact of the European Union Emissions Trading System on Carbon Emissions and Economic Performance," Journal of Environmental Economics and Management 118 (2023): 102758.
UK Government, A Pro-Innovation Approach to AI Regulation, accessed March 27, 2025, https://assets.publishing.service.gov.uk/media/64cb71a547915a00142a91c4/a-pro-innovation-approach-to-ai-regulation-amended-web-ready.pdf
Tony Blair Institute for Global Change, A New National Purpose: Accelerating UK Science in the Age of AI, accessed March 27, 2025, https://institute.global/insights/tech-and-digitalisation/a-new-national-purpose-accelerating-uk-science-in-the-age-of-ai