Environmental challenges and innovations are dramatically changing the global economy, according to a report released by the environmental research group Worldwatch Institute on Wednesday.

"Once regarded as irrelevant to economic activity, environmental problems are drastically rewriting the rules for business, investors and consumers, affecting over $100 billion in annual capital flows," co-directors Gary Gardner and Thomas Prugh said in a written statement.

And the trend is creating a widespread flurry of new business opportunities, according to the 278-page report, which estimated that $52 billion was invested in renewable energy in 2006, up 33 percent from 2005, and cited preliminary estimates of $66 billion in 2007. Clean technology is the third-largest sector for venture-capital investment in China and in the United States. And carbon trading nearly tripled to $30 billion in 2006, the report estimated.

The opportunities are enormous, Worldwatch Institute President Christopher Flavin said in the report.

"Building a low-carbon economy is now the central challenge of our age," he wrote. "Meeting that challenge will require restructuring the global energy industry through technological, economic and policy innovations that are as unprecedented as the climate change it must address."

Flavin cited studies concluding that the world must cut carbon emissions by 40 to 70 percent by 2050, and also noted projections that emissions are predicted to grow at quadruple that rate.

If the world is to meet calls to cut emissions in half by that time, he said, industrial countries will need to cut their by more than 80 percent.

To meet that goal, he called for a three-part climate strategy: capturing and storing the carbon contained in fossil fuels, reducing energy consumption through new technologies and lifestyles and shifting to carbon-free energy technologies.

Innovation is needed to resolve the many outstanding technical issues in carbon capture and storage, he said, and enormous potential also exists in improving energy efficiency in light bulbs, electric motors, air conditioners, aircraft and especially buildings.

He also wrote that sunlight, wind, waves and other resources are abundant enough that clean energy could potentially provide more power than "will ever be needed by humanity" and argued that intermittency -- the fact that many of these resources only are available part-time -- is not as big a problem as utility engineers once anticipated. That said, he added that advances in microturbines and fuel cells, digital smart grids and energy storage could play a large role.

Another big opportunity is water technologies, according to Ger Bergkamp, head of the water program at the World Conservation Union, and Claudia Sadoff, an economic adviser at the union and principal economist at the International Water Management Institute.

With populations growing, but the supply of water remaining constant, competition for clean water is becoming the norm, they wrote. They cited projections that more than three-quarters of the world's people will face water scarcity by 2050, estimates that 2.8 billion people -- 40 percent of the global population -- already live with water scarcity today and reports of at least 1.7 million deaths from unsafe water, sanitation and hygiene practices globally in 2000.

"There is simply no question that the way water resources are managed today is unsustainable," they wrote.

To help change that situation, Bergkamp and Sadoff called for investments in new technologies to enhance water-use efficiency and water productivity, a careful alignment of economic signals and incentives and more inclusive and transparent decision-making.

Agriculture is the primary user of water, consuming more than 70 percent of the world's water, while industrial uses account for 20 percent and less than 10 percent goes toward drinking and sanitation, according to the report. While the average person only requires 2 to 5 liters of drinking water daily, an average of 2,000 liters of water is required to provide food for each person, Bergkamp and Sadoff wrote.

They said they already have seen innovations in the way water is managed, stored, distributed, used and reused, to make better use of currently available water, and specifically cited technologies such as water-saving appliances, drip irrigation and other agricultural technologies to use water more efficiently, innovative wastewater-treatment and reuse technologies and desalination technologies that can create more drinkable water from salty sources.

Much of the report focuses on the need for further economic change to better reflect the costs of climate change and the benefits of technologies and business practices that combat it.

"Pricing goods and services so that environmental costs and benefits are counted is one key measure -- easy in principle but often difficult for people or politicians to accept," Flavin said.

Meanwhile, Daniel Esty, a professor of environmental law and policy at Yale University, urged governments to move from "command and control" regulations that dictate a particular technology to market-based incentives that put a price on the harm caused or natural resources consumed. The private sector is better positioned than governments to compel innovation, he said.

"A technology development process that depends on a few thousand government officials setting standards and defining 'best available technologies' cannot possibly explore or even imagine all the ideas that need to be funded and tested," he said. "It makes more sense to shift the burden of action to the business community so that companies have an incentive to think broadly about opportunities for progress."

In the report, Gardner and Prugh also called the current economic model "outdated," pointing to such shortcomings as atmospheric carbon dioxide reaching its highest level in 650,000 years, urban air pollution causing 2 million premature deaths each year and the decline of North American bees, bats and other pollinators, jeopardizing agricultural crops and ecosystems.

While the cost of combating climate change is likely to be significant, the writers said, pointing to a study that found the cost to be around 1 percent of gross world product, or $650 billion -- roughly equivalent to the cost of the Vietnam War – in 2007, they argued that the alternative is worse.

In 2006, a report by Nicholas Stern, head of the U.K. Government Economic Service, concluded that inaction on climate change could dampen global economic output by anywhere from 5 to 20 percent each year over the course of this century.

Gardner and Prugh pointed to taxes on pollution, "feebates," which subsidize cleaner products through taxes on dirtier ones, and fees on automobiles entering city centers as examples of ways governments are trying to pair costs with environmental damage.

John Talberth, director of the Sustainability Indicators Program at Redefining Progress, also argued that new economic indicators are needed to make environmental well-being part of the economic equation and that traditional indicators are becoming "obsolete."

Gross domestic product fails as a measure of societal welfare, as it doesn't account for the depletion of human or natural capital, he wrote, suggesting new indicators such as a well-being index, based on health, wealth, knowledge, community and equity, a energy return on investment index, which could give the ratio between the energy a resource provides and the amount of energy required to produce it, an index that measures the percentage of the population with access to improved water and sanitation services and an environmental sustainability index.

The report was one of several reports impacting greentech this week.

On Tuesday, a study by research firm Energy Insights found that climate-focused energy policies, consumer and business concern regarding climate change and investor interest are boosting energy-company investments. Technologies that will benefit include IT systems that measure and manage companies' carbon footprints and software for carbon trading markets and renewable energy technologies, especially wind and large-scale solar, according to the report.

And on Wednesday, the U.S. Energy Information Administration said U.S. commercial crude-oil inventories dropped to 282.2 million last week, down 6.8 million barrels from the previous week, due to lower crudeoil imports.

That puts inventories in the lower half of the average range for this time of year, according to the report. Platts, an energy and commodities research group, said ongoing port closures in Mexico, due to bad weather, will likely cause another drop in imports this week.

-- Reporter Rachel Barron contributed to this story