Can Environmental Policy Encourage Technical Change? Emissions Taxes and R&D Investment in Polluting Firms

65 Pages Posted: 3 Jul 2021 Last revised: 19 Aug 2021

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK); Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students; Institute for Financial Research (SIFR)

Christian J. Thomann

CESIS Centre of Excellence for Science and Innovation Studies; Leibniz Universität Hannover

Date Written: June 10, 2021

Abstract

Higher country taxes on noxious manufacturing emissions lead to substantial increases in firm R&D spending. The R&D response is driven entirely by the high-pollution firms most affected by emissions taxes. Pollution taxes increase the market value of R&D spending in polluting firms, even when this spending does not lead to new innovation. Pollution taxes have the strongest effect on R&D investment in sectors where new invention is harder to appropriate and outside knowledge is easier to acquire, suggesting an important reason dirty firms invest in R&D is to expand their capacity to absorb external knowledge and technical know-how.

Keywords: Technical change, Absorptive capacity, Two faces of R&D, Investment policy, Green growth, Air pollution, Climate finance

JEL Classification: G31, O13, O33, Q53

Suggested Citation

Brown, James R. and Martinsson, Gustav and Thomann, Christian J., Can Environmental Policy Encourage Technical Change? Emissions Taxes and R&D Investment in Polluting Firms (June 10, 2021). Swedish House of Finance Research Paper No. 21-14, Available at SSRN: https://ssrn.com/abstract=3871447 or http://dx.doi.org/10.2139/ssrn.3871447

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK) ( email )

Stockholm, 100 44
Sweden

HOME PAGE: http://https://www.kth.se/profile/gusma

Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students ( email )

111 60 Stockholm
Sweden

Institute for Financial Research (SIFR) ( email )

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Christian J. Thomann

CESIS Centre of Excellence for Science and Innovation Studies ( email )

Lindstedtsvägen 30-100 44
Stockholm, SE-100 44
Sweden

Leibniz Universität Hannover ( email )

Institute of Insurance Economics IVBL
Koenigsworther Platz 1
30167 Hannover, DE 30167
Germany

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