Climate change affectedness and innovation in firms

Abstract

Climate change increasingly affects businesses in many ways. This paper analyses the link between the way and extent a firm faces economic consequences of climate change on the one hand, and the firm's innovation activities on the other. We investigate whether climate change affectedness leads to more innovations that reduce negative environmental impacts (‘eco-innovations’), and whether other innovation activities are crowded-out by more eco-innovation (with potential adverse effects on technical progress and productivity). We use a novel data source from the Community Innovation Survey 2020 which distinguishes four mechanisms how climate change may affect firms: new government regulation, changes in demand, higher production cost, and disruption from extreme weather events. Based on data from the German CIS 2020, probit and treatment effect models show that climate change affectedness is positively linked to eco-innovations. For other innovation activities we also find positive, albeit lower effects, suggesting that there is no crowding-out of non-eco-innovations due to the economic consequences of climate change.