Effect of policy uncertainty on environmental innovation

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.

Automated summary

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.