Environmental Policy Uncertainty and Innovation in Environmental Technologies

22 Pages Posted: 19 Dec 2009

See all articles by Nick Johnstone

Nick Johnstone

International Energy Agency - Energy Statistics Division

Ivan Hascic

Organization for Economic Co-operation and Development (OECD)

Margarita M. Kalamova

Organisation for Economic Co-Operation and Development

Date Written: December 16, 2009

Abstract

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

Johnstone, Nick and Haščič, Ivan and Kalamova, Margarita M., Environmental Policy Uncertainty and Innovation in Environmental Technologies (December 16, 2009). Available at SSRN: https://ssrn.com/abstract=1524239 or http://dx.doi.org/10.2139/ssrn.1524239

Nick Johnstone (Contact Author)

International Energy Agency - Energy Statistics Division ( email )

United States

Ivan Haščič

Organization for Economic Co-operation and Development (OECD) ( email )

2 rue Andre Pascale
75775 Paris Cedex 16
France

Margarita M. Kalamova

Organisation for Economic Co-Operation and Development ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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