Does carbon pricing spur climate innovation? A panel study, 1986–2019

Abstract

Across the world, governments have enacted policies to discourage fossil fuel use. Scholars have explored whether carbon pricing policies, such as carbon taxes and cap-and-trade, reduce emissions. In the present study, we examine whether carbon pricing spurs climate innovation. In doing so, we test the Porter−Linde hypothesis, which suggests that flexible and non-technology-forcing regulations spur innovation. Our dynamic panel data analysis covering 38 countries in the Organisation for Economic Cooperation and Development (OECD) over 34 years finds that the adoption of carbon pricing policies is associated with an increase in patent applications for climate mitigation technologies of 3.1 per million population in the year of enactment, and 5.2 per million population in the long term. This finding holds controlling for other policies that can influence climate innovation such as feed-in tariffs and public investment in low-carbon research and development (R&D). Further, we find that the trade leakages do not undermine the association between carbon pricing and climate innovation.