Climate Innovation and Carbon Emissions: Evidence from Supply Chain Networks

Abstract

We study whether climate-related innovation leads to carbon emission reductions by analyzing supply chain networks. We find that climate innovation reduces carbon emissions at customer firms, but only for the supplier firm's product innovation patents, not its process innovations. The effect is economically significant, dominated by the most emission-intensive customer firms, gradually increases over a five-year horizon, and is significant for customer's Scope 1 and Scope 2 emissions. We analyze transmission mechanisms by exploring customer firms' choices of potential suppliers in reaction to supplier climate patent announcements. We show that customer firms generally have a strong preference for suppliers with climate innovations, and that climate innovation helps suppliers attract new customers, particularly those with high environmental ratings or a large carbon footprint. To sharpen the causality, we utilize the quasi-random assignment of examiners to climate patent applications and leverage the exogenous technological obsolescence of climate patents.

Keywords: climate change mitigation technologies (CCMTs); climate innovations, supply chain, new customer firms, carbon emissions, ESG scores, discrete choice model