Environment-Friendly Innovation by Price Signals or Regulation? An Empirical Investigation for Germany.

This paper presents a scoping investigation of environment-friendly innovation, price and policy signals in Germany. The variables for sustainable innovation (special patent indicators) and for rational expectations (real crude oil import costs and expenditures for environmental protection) are cointegrated and need respective econometric treatment. The aim is to shed some light on the issue whether price signals spur innovation processes in the long run and how, in the short run, the interactions in innovation per environmental sector (waste treatment, water protection, noise reduction and clean air) function. The results show that the market mechanisms are distinct: In the long run, the pace of technical progress for energy and resource saving follows the lead price signal, whereby the couplings occur immediately. Yet, within the single environmental sectors, a variety of short-term interaction patterns is observed. Not always is it technical progress that spurs cost reactions, but there is an influence of government regulation and procurement, too. Most distinct observations offers the study of the interactions in the clean air policies of the past 15 years which did change a lot. Most of the rational expectations on measures and their impact came true.