Linking emission trading to environmental innovation: Evidence from the Italian manufacturing industry

This paper examines the different forces underlying the adoption of environmental innovations (EI), with a focus on policy related EI. In particular, exploiting the 2006-2008 wave of the Italian Community Innovation Survey (CIS), we investigate whether the first phase of the European Emissions Trading Scheme (EU ETS) exerted some effects on EI in CO2 abatement and energy efficiency controlling for other variables, grouped as internal/external to the firm, and additional environmental regulation factors. Our empirical analyses show that a few factors emerge as particularly relevant such as relationships with other firms and institutions, sectoral energy expenditure intensity and current and future expected environmental regulation. For the specific role of the EU ETS, we find that, on the one hand ETS sectors are more likely to innovate than non-ETS sectors but on the other hand that sector's specific policy stringency is negatively associated with EI, possibly due to anticipatory behavior from early moving innovative firms and some sector idiosyncratic factors.