Socioeconomic impact of environmental product and process innovation in the context of global trade

Environmental innovation is presented in the public debate as a tool to mitigate climate change, while promoting growth and employment. However, the empirical evidence on its socioeconomic impact is limited to specific types of innovation, sectors, and countries. In this paper, we investigate the direct and indirect effects of environmental product and process innovation in the context of global trade. To conduct our investigation, we build and empirically calibrate a model of the world economy on environmental accounts, socioeconomic accounts, and world input-output tables. We use it to simulate the effects of environmental product and process innovation in different sectors over the period 2020–2040. Our findings point to positive and significant effects in most sectors. However, they confirm the importance of substitution effects between more and less polluting products, imported and domestic. Furthermore, significant trade-offs emerge between promoting growth and supporting employment. These effects vary substantially depending on the type of innovation and sector. The main implication is that industrial policies to promote innovation should be calibrated to the specific policy goal and patterns of innovation prevailing in each sector.