Environmental regulation and direction of technological change

In resource-constrained world, environmental regulation is more likely to steer the direction of technological change than simply increasing green innovation. Nonetheless, studies on the Porter’s hypothesis have often omitted the impact of environmental policy on “not-green” technologies. To this end, the paper empirically assesses the consequences of increasingly stringent regulation on the technologies the environmental policy aims to promote and on competing innovation. The estimations suggest that different types of regulatory instruments have distinct influences on the direction of technological efforts but reveal also the presence of path dependency. Market-based instruments are shown to be the main driver of increased innovation in the technological field that environmental policy wish to promote while non-market based measures principally shifts private innovation efforts away from polluting technologies. At the same time, the increase driven by market instruments seems to be coupled with a decrease in innovation in other, not necessarily polluting, technologies. The empirical analysis in a panel setting of the dynamic efficiency of diverse types of regulations and the usage of composite indicator in the field of environmental economics and innovation are additional novelties of this paper.