iaere presentation v03B · IAERE Conference 2016 – Working Paper Presentation Enrico Botta, Univ. degli Studi di Milano . The impact of environmental regulation is widely discussed

ENVIRONMENTAL REGULATION AND DIRECTION OF TECHNOLOGICAL CHANGE

IAERE Conference 2016 – Working Paper Presentation

Enrico Botta, Univ. degli Studi di Milano

The impact of environmental regulation is widely discussed in the literature

The traditional view on environmental polices is opposed to the Hypothesis put forward by Porter and van der Linde

The Porter’s Hypothesis has been articulated into three more narrowly defined “forms”

•  The assumptions of perfect markets with fully rational agents are rejected, as such firms are not operating at the maximum possible efficiency.

Strong version

•  Firms will innovate in order to comply with the new regulation in the most cost effective manner.

Weak version

•  Flexible environmental policy regimes are more likely to increase innovation and improve company performance.

Narrow version

•  Main studies on green innovation and environmental regulation:

–  Jaffe and Palmer (1997) –  Johnstone et all (2010) –  Rubashkina et al. (2015)

•  Limited panel data

•  Few studies assessing jointly both market and non-market based regulation.

The narrow and weak version

Impact on green innovation

•  ..but what happens to “grey innovation” ? –  Aghion et al. (2016)

Impact on grey innovation

?

– A more stringent environmental regulation should steer innovation away from “polluting” technologies and towards green technologies

–  The direction of technological change is affected by the cumulated knowledge stock

– Market based regulation provide dynamic incentives and therefore stimulate higher rates of green innovation

Our main working hypothesis is that the direction of technological change is driven by two key factors

•  Intro •  The model

Index

The following empirical model is developed to test the hypotheses set out above:

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•  a common measure of innovation worldwide and used to mitigate issues with the quality of inventions

•  Aggregate into three main groups: green energy technologies, other green technologies and not-environmental related innovation.

Triadic patents

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•  It covers 26 OECD countries over the years 1990-2012. •  It combines information on 15 environmental policy (both

market based and not-market based) instruments. •  Instruments not related to the energy sector are excluded

OECD index

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Overall Environmental Regulation of the Energy Industry

Not market-based instr.

FiT Taxes R&D sup ELVs

Market-based instr.

Trading schemes

N.B. information on not energy related regulation instruments has been dropped


•  The law of motion of knowledge is calculated using the perpetual inventory method (Verdolini & Galeotti, 2011. Coe and Helpman,1995)

•  a separate variable for the knowledge stock of each type of technology. Both foreign and domestic knowledge stocks considered

Knowl. stock

know_stocktech,it=innotech,it+(1-δ) * knowstocktech,it-1

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•  GDP per capita

•  Liberalization of the energy sector Controls

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Econometric estimation

A.  Hausman, Hall and Griliches (HHG)

B.  Blundell, Griffith and Van Reenen (PSM)

C.  Blundell, Griffith and Van Reenen & IHS (IHS)

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•  Intro •  The model •  Results

Index

Green patents -‐ HGG

Green patents -‐ PSM

Green patents – PSM & IHS

Grey patents -‐ HGG

Grey patents -‐ PSM

Grey patents – PSM & IHS

EPS 0.138*** -0.00729 0.0367 -0.0808*** -0.0601*** -0.0605*** (0.0516) (0.0521) (0.0564) (0.0280) (0.0232) (0.0231)

log_ksgreen_energy 0.316*** 0.583*** 0.394*** 0.176*** 0.193*** 0.196***

(0.119) (0.152) (0.136) (0.0492) (0.0473) (0.0455)

log_ks_other_green 0.737*** 0.795*** 0.547*** -0.0504 -0.0905 -0.0953 (0.237) (0.225) (0.210) (0.1000) (0.0823) (0.0819)

log_ks__grey -0.764*** -0.579** -0.681*** 0.380*** 0.503*** 0.506*** (0.254) (0.266) (0.254) (0.107) (0.106) (0.105)

Lag3.lforei._KS_ge 3.653*** 0.558* 0.739* -0.454* -0.115 -0.119 (0.725) (0.303) (0.420) (0.247) (0.143) (0.143)

Lag3.lforei._KS_go 2.755*** 1.242** 0.870 -0.550 -0.361 -0.366 (0.729) (0.558) (0.603) (0.388) (0.260) (0.259)

Lag3.lforei._KS_grey -6.089*** -1.443** -1.390* 0.697 0.237 0.240 (1.173) (0.279) (0.279)

etcr2_ele -0.104*** -0.0838** -0.0998** -0.00443 0.0333** 0.0330** (0.0392) (0.0414) (0.0412) (0.0183) (0.0139) (0.0139)

lgdp_pc -1.446* 0.591 -0.147 -0.133 -0.395* -0.404* (0.841) (0.449) (0.484) (0.367) (0.226) (0.226)

lPSM 0.0518 0.522** 0.289*** 0.286*** (0.205) (0.223) (0.0742) (0.0726)







EPS_Market 0.0955** 0.0613 0.0873* 0.00866 0.00297 0.00325 (0.0404) (0.0465) (0.0448) (0.0252) (0.0210) (0.0210)


(0.114) (0.144) (0.124) (0.0472) (0.0459) (0.0442)

log_ks_other_green 0.816*** 0.842*** 0.580*** -0.0329 -0.0616 -0.0651 (0.237) (0.226) (0.206) (0.100) (0.0841) (0.0836)

log_ks__grey -0.844*** -0.654** -0.715*** 0.376*** 0.474*** 0.477*** (0.254) (0.280) (0.252) (0.108) (0.109) (0.108)

Lag3.lforei._KS_ge 3.231*** 0.547* 0.657* -0.346 -0.118 -0.119 (0.719) (0.330) (0.397) (0.245) (0.140) (0.140)

Lag3.lforei._KS_go 2.851*** 1.213** 0.857 -0.622 -0.460* -0.462* (0.741) (0.576) (0.603) (0.394) (0.261) (0.260)

Lag3.lforei._KS_grey -5.775*** -1.444** -1.329* 0.772 0.317 0.316 (1.139) (0.611) (0.706) (0.567) (0.280) (0.280)

etcr2_ele -0.106*** -0.0888** -0.0979** -0.000299 0.0334** 0.0332** (0.0396) (0.0411) (0.0410) (0.0183) (0.0140) (0.0140)

lgdp_pc -0.960 0.622 -0.0985 -0.530 -0.494** -0.502** (0.799) (0.455) (0.468) (0.349) (0.225) (0.224)

lPSM 0.113 0.532** 0.309*** 0.304*** (0.212) (0.219) (0.0743) (0.0727)







EPS_nonmarket 0.0690* -0.0413 -0.0305 -0.0772*** -0.0611*** -0.0616*** (0.0401) (0.0346) (0.0390) (0.0185) (0.0164) (0.0164)


(0.123) (0.140) (0.142) (0.0494) (0.0477) (0.0457)

log_ks_other_green 0.707*** 0.758*** 0.477** -0.0491 -0.0656 -0.0713 (0.239) (0.220) (0.201) (0.0991) (0.0820) (0.0818)

log_ks__grey -0.741*** -0.570** -0.609** 0.366*** 0.460*** 0.462*** (0.259) (0.252) (0.243) (0.105) (0.106) (0.105)

Lag3.lforei._KS_ge 3.676*** 0.547* 0.605* -0.544** -0.158 -0.168 (0.761) (0.279) (0.353) (0.247) (0.157) (0.160)

Lag3.lforei._KS_go 2.687*** 1.276** 0.878 -0.609 -0.332 -0.340 (0.744) (0.553) (0.575) (0.387) (0.262) (0.263)

Lag3.lforei._KS_grey -5.951*** -1.458*** -1.271** 0.735 0.213 0.220 (1.206) (0.555) (0.639) (0.538) (0.292) (0.295)

etcr2_ele -0.104*** -0.0826** -0.0949** -0.00166 0.0341** 0.0336** (0.0392) (0.0407) (0.0413) (0.0179) (0.0139) (0.0139)

lgdp_pc -1.337 0.573 -0.0762 0.0125 -0.322 -0.331 (0.858) (0.439) (0.446) (0.356) (0.241) (0.241)

lPSM 0.0422 0.467** 0.284*** 0.283*** (0.191) (0.220) (0.0749) (0.0736)

Green knowledge flows across national boundaries but slower







EPS -0.0493** -0.0506** EPS_market 0.0130 0.0143 EPS_nonmarket -0.0603*** -0.0639***

log_ksgreen_energy 0.105** 0.127*** 0.0817* 0.102** 0.117** 0.139***

log_ks_other_green -0.144* -0.136* -0.0979 -0.0912 -0.137* -0.133* log_ks__grey 0.568*** 0.573*** 0.535*** 0.539*** 0.543*** 0.544*** lforei._KS_ge -0.499* -0.445* -0.442* -0.404* -0.727** -0.729** lforei._KS_go -0.751** -0.694** -0.733*** -0.691*** -0.813*** -0.780*** lforei._KS_grey 0.707* 0.635* 0.666** 0.613** 0.818** 0.779**

etcr2_ele 0.0215 0.0212 0.0211 0.0207 0.0200 0.0182 lgdp_pc -0.186 -0.184 -0.291 -0.291 -0.0296 0.00196

lPSM 0.366*** 0.336*** 0.367*** 0.341*** 0.368*** 0.334***

•  Intro •  The model •  Conclusion

Index

•  The estimations suggest that environmental policy stringency does drive the direction of technological efforts

•  Market and non-market instruments behave differently in relation to type of innovation considered.

•  Path dependency.

•  Measures to favour inflow of green technology might be a tool to stimulate green innovation when designing more stringent regulations prove to be politically challenging

Three main conclusions

•  Thank you

Documents

iaere presentation v03B · IAERE Conference 2016 – Working Paper Presentation Enrico Botta, Univ. degli Studi di Milano . The impact of environmental regulation is widely discussed