Environmental Regulations and Green Innovation: The Role of Trade and Technology Transfer

Our theoretical model predicts that green innovation is an inverted U-shaped function of emission tax under free trade, while it is upward sloping under autarky. Our empirical analysis supports this finding by using the Environmental Policy Stringency Index (EPS) as a proxy for environmental regulations. Our theory also determines the conditions under which international technology transfers increase green innovation. The empirical results indicate that technology transfers increase green innovation at any given level of EPS, although the inverted U-shape persists. We observe that OECD and non-OECD countries lie on either side of the turning point. Implementing stricter environmental regulations in non-OECD countries increases green innovation, while the reverse is likely to hold for most OECD countries. Our findings also show that market-based regulations are more effective in non-OECD countries for fostering green innovation, while non-market-based regulations are more effective in OECD countries.