4.7 Article

Effect of policy uncertainty on environmental innovation

Journal

JOURNAL OF CLEANER PRODUCTION
Volume 363, Issue -, Pages -

Publisher

ELSEVIER SCI LTD
DOI: 10.1016/j.jclepro.2022.132645

Keywords

Policy uncertainty; Environmental innovation; Environmental sustainability; Climate change; Sustainable development

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Uncertainty in economic policies and regulations has a negative impact on firms' environmental innovation, with significant effects appearing after 5-6 years but dissipating thereafter. These findings are relevant to other countries, highlighting the detrimental effects of policy and regulatory uncertainty on climate change mitigation and environmental sustainability.
Uncertainty in economic policies and regulations incentivizes firms to delay investments in environmental research and developments (R&D) or postpone environmental projects that are costly to undo. A consequence of those decisions is that firms innovate less for the environment. Using 1026 U.S. firm data (equivalent to 13,241 firm-year observations) this study shows that a negative effect of policy uncertainty - a drop in environmental innovation - does not surface in the short term but in the longer term, i.e., in 5-6 years' time. The negative effect, nevertheless, dissipates after six years. These findings are of relevance to other developed countries as well as emerging countries that have a relatively higher uncertainty in their economic policies and regulations. In sum, the results call for attention from governments and regulators around the world: uncertainty in policies and regulations are detrimental to combating climate change and promoting environmental sustainability.

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