The complementary effects of environmental policy and oil prices on innovation: evidence from OECD countries

Abstract

This paper examines the single and the joint influence of environmental policy stringency and oil prices on green innovation, admitting the possibility of different magnitudes of the response of innovation depending upon whether oil prices are increasing or decreasing, and accounting for endogeneity of policies. A panel data set of OECD countries is used over the period 1990–2016. Results suggest that increasing the stringency of environmental regulation can, beyond inducing green innovation, shield the effect of oil prices on innovation. In addition, a more stringent environmental policy reduces the asymmetric response of innovation when oil price increases or decreases. Thus, environmental policy and oil prices can be complements when inducing green innovation. Exploiting these complementarities requires an interdependent use of environmental and energy policies, through dynamic adjustments of subsidies and taxes on oil prices alongside reasonable levels of stringency in environmental policy.