Environmental policy and innovation: A sectoral analysis

This paper provides preliminary and suggestive evidence regarding the relation between environmental policy and innovation using sectoral-level data on 39 major economies over the years 1995-2009. First, we ask whether environmental policy stringency is associated with higher or lower sectoral innovation levels. Unlike most of the literature, we focus on overall innovation rather than low-carbon innovation, thus accounting for any substitution dynamics between green and general technologies. Second, we ask whether (increased) innovativeness impacts the ability of countries to implement more stringent climate policy, namely if our data supports to hypothesis of an “environmental policy multiplier”. Our results suggest that increased environmental policy stringency does not hamper innovativeness in our sample, and also finds evidence that innovation acts as a springboard for further increases in policy stringency. We conclude by highlight fruitful research avenues to test the robustness of the preliminary results emerging from our base specification.