Can Environmental Policy Encourage Technical Change? Emissions Taxes and R&D Investment in Polluting Firms

Higher country taxes on noxious manufacturing emissions lead to substantial increases in firm R&D spending. The R&D response is driven entirely by the high-pollution firms most affected by emissions taxes. Pollution taxes increase the market value of R&D spending in polluting firms, even when this spending does not lead to new innovation. Pollution taxes have the strongest effect on R&D investment in sectors where new invention is harder to appropriate and outside knowledge is easier to acquire, suggesting an important reason dirty firms invest in R&D is to expand their capacity to absorb external knowledge and technical know-how