Implications of Policy Uncertainty for Innovation in Environmental Technologies: The Case of Public R&D Budgets

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Abstract

The role that environmental policy uncertainty can play on innovation in environmental technologies has not been extensively assessed empirically. In this chapter, we seek to assess the impact of environmental policy uncertainty on innovation, using patent data as a proxy for innovation and volatility in public expenditures on ‘environmental’ R&D as a measure of policy uncertainty. Drawing upon a panel data set of 23 OECD countries over the period 1986–2007, support is found for the negative effect of public R&D volatility on innovation. In the base model, a 10% increase in policy uncertainty is seen to cause a 1.2–2.8% decrease in environmental patent activity, whereas a 10% increase in government support for R&D will increase innovation by 2.6–3.9%.