How different policy instruments affect green product innovation: A differentiated perspective

Based on representative firm-level data for the three countries Austria, Germany, and Switzerland, we investigate the effects of energy-related regulations, taxes, voluntary agreements, and subsidies on the creation of green energy products, and analyze through which channels policy affects green product innovation and which factors mediate the observed effects. Policy may affect green product innovation by directly stimulating the supply of green products/services, or more indirectly by stimulating the demand for green products/services. Our data set allows us to distinguish between the two channels, which improves our understanding of the frequently observed positive net effect of policies. Controlling for the demand-side effect, taxes and regulations are negatively related with green product innovation. Hence, if taxes and regulation do not trigger additional demand, they decrease the propensity to innovate. These effects are ameliorated for technologically very advanced firms and for firms with a high level of financial awareness. Subsidies and (partly) voluntary agreements are positively related with green product innovation.