Environmental Taxation and its Effect on Green Innovation

In 1991, Michael Porter put forth the hypothesis that properly designed environmental regulation can induce innovation that offset the costs of such regulation. Porter’s view has been as much welcomed by environmentalists as it has been contested by economists. The hypothesis raises the question if environmental regulation can be a determinant for innovation in general and green innovation in particular. Using the Porter hypothesis as a source of inspiration, we measure the effect of environmental taxation on green innovation. Taking patent counts as a measure of innovation, we analyze data from 21 OECD countries over a period of ten years to investigate if regulation indeed has an effect on the number of environmentally related patents. The research suggests that there is no overall statistically significant correlation between environmental taxation and green innovation. However, statistically significant and positive effects were found in a number of individual countries. (Less)