Abstract
It is known that environmental innovation may crowd out process innovation. Less known are the exact conditions under which crowding‐out effect occurs. This article fills the gap by developing a dynamic control model of environmental and process innovation. The result shows that when the depreciation rate of process innovation is sufficiently high, environmental innovation investment crowds out process innovation investment. By comparing monopolist and social planner optimum, we find that the problem of insufficient investments can happen for environmental and process innovation for a smaller emission tax.
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