The Effect of Environmental Policy Stringency on Environmental Innovations - A Cross Country Comparison

Abstract

This thesis is a cross-country comparison based on panel-data across 30 countries from 1990-2012. It uses a Negative Binomial Regression Model to test The Porter Hypothesis to see if environmental policy stringency affects the number of environmental innovations in a country. A composite index "EPS," developed by the OECD, with a scale that ranges from 0 to 6 measures policy stringency. Patent applications from the IP5 patent family measure environmental innovations. The findings indicate that a more stringent level of environmental policies in a country do lead to a higher number of environmental patent applications. The results of the thesis show that one step on the EPS scale increases the rate of the number of patent applications by a factor of 1.144 to 1.156. The thesis also divides policies into market-based and non-market-based instruments to see which kind of regulations have the greatest impact on innovations. The results show that non-market-based regulations have a greater impact in the short term, while market-based regulations have a greater impact in the long term. This thesis shows that it could be economically preferable to change our environmental habits and see economic growth and environmental protection as complements rather than contradictions.