Environmental Policy Uncertainty and Innovation in Environmental Technologies
22 Pages Posted: 19 Dec 2009
Date Written: December 16, 2009
The effect of uncertainty related to environmental damages or technological change has on the optimal level of environmental policy stringency has been extensively analysed in the literature. However, empirical evidence on the innovation efforts of firms in the face of actual policy uncertainty has not been examined formally. Drawing upon real options theory, it is hypothesised that for any given level of environmental policy stringency, environmental policy uncertainty can serve as a brake on investment in innovative activities which can reduce the cost of meeting environmental objectives. By increasing the benefits of ‘waiting’, policy uncertainty will reduce incentives to identify innovative environmental technologies. Using patent counts as a measure of environmental innovation, preliminary empirical evidence has been presented which supports this hypothesis.
Keywords: Environmental Policy, Innovation, Uncertainty, Risk, Investment
JEL Classification: Q55, Q56, Q58
Suggested Citation: Suggested Citation