Innovation Effects of Market-Based vs. Non-Market-Based Instruments: Sectoral Differences and the Porter Hypothesis Revisited

Abstract

This study examines the effect of environmental policy stringency on green innovation across five sectors in 23 European countries from 2002 to 2020. Focusing on differences between market-based and non-market-based instruments, it tests the weak and narrow versions of the Porter hypothesis. Allowing for heterogeneity across sectors and using Poisson Pseudo-Maximum Likelihood (PPML) estimation, the impact of policy stringency on green patent applications indicates that the effects of environmental policy on innovation are both instrument- and sector-specific. While the effects are generally positive, market-based instruments are sometimes associated with adverse effects, particularly in the buildings sector. These findings challenge the