The impact of environmental regulation on clean innovation: Are there crowding out effects?

We examine how environmental regulation influences innovation, and which policy instruments most effectively stimulate technological development across 15 countries and 3 million firms. Employing panel local projections, we go beyond immediate impact and estimate effects of regulatory changes on patenting over a five-year horizon. To address gaps in emissions reporting, we estimate firm-level greenhouse gas emissions by a machine learning approach, which serve as a proxy for regulatory exposure. At the country level, stricter emission regulation shows little impact on overall environmental technology innovation. At the firm level, however, tighter policies spur innovation in climate change–mitigating technologies, without evidence of crowding out other forms of innovation. These effects are strongest for clean energy technologies, particularly among high polluters in energy-intensive sectors. Policy design plays a critical role: increases in the stringency of technology support and non-market-based instruments significantly boost clean technology patenting, whereas we find no robust effect of market-based instruments. This also holds specifically for clean energy technology patenting.