Unintended Consequences of Punishment : Environmental Penalties and Green Patents

We find that high environmental penalties are associated with a subsequent decline in green patents by U.S. manufacturing firms. Utilizing the 1990 Clean Air Act Amendment (1990 CAAA) as a quasi-natural experiment, we show that an exogenous shock increasing expected environmental penalties systematically decreases green patenting activities. One explanation is that firms facing environmental penalties will redirect their available R&D resources towards immediate, necessary applications rather than longer-term research in pursuit of successful patents. The empirical patterns in our findings are consistent with this view, revealing that the adverse effect of environmental penalties on green innovation is particularly pronounced in firms with high product market competition, high institutional ownership, and weak financial conditions