Abstract
While other contributions have analyzed environmental innovations with point of departure in the polluting firm, we introduce an upstream market for environmental innovations. A strong environmental policy may then benefit industry competitiveness through its effect on entry into the upstream market. In our analysis we hope to draw attention to an often overlooked issue. Innovation of new pollution abatement techniques requires a new market to develop. If policy is lax, few firms enter and are forced to charge a high mark-up in order to cover development costs. On the other hand, a stringent environmental policy induces higher demand and allows a lower mark-up. Consequently, even if the polluting industry in question is export oriented, an especially stringent policy may be welfare enhancing.
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