Carrot first, stick second? Environmental policy-mix sequencing and green technologies

Abstract

Eco-innovations are considered key in the transition towards a more sustainable economy. However, since there are several barriers to the adoption of eco-innovations, different instruments have been proposed to encourage their uptake, leading to instrument mixes. Analysis of these mixes has been scarce in the eco-innovation literature and mostly focused on static rather than dynamic combinations of instruments. This paper tries to cover this gap by assessing the sequencing of instruments to promote eco-innovation. To that aim we use a panel database of investments in green technologies by Spanish firms between 2010–2020. Our results show that the order in which the instruments are introduced (sequencing) affects the adoption of eco-innovation, although the effective sequencing effect slightly differs for different environmental technological innovation types (cleaner production vs. end-of-pipe). In both cases, using subsidies (“carrots”) first and then using environmental taxes (“sticks”) positively and significantly influence the adoption of environmental technologies. Results from heterogeneous analysis confirms that this is especially true for small and medium firms. Within carrots, it seems tax credits and subsidies are substitutes, whatever the sequence of their introduction is. These results have clear policy implications which cannot be derived from analyses of static policy mixes. They suggest that, if the aim is to promote the adoption of eco-innovations, carrots should be used first, and then sticks should be adopted. In addition, it warns against using tax credits and subsidies together, given their redundancy in promoting eco-innovation. If subsidies are introduced after tax credits have already been applied (or the other way around), substantial inefficiencies can be expected, increasing the costs of eco-innovation promotion without any added value in terms of effectiveness.