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Faculty & Research


Lost in Transition: Financial Barriers to Green Growth

Working Paper
Green innovation offers a solution to climate change without compromising living standards. Yet the share of climate-enhancing innovations in total patents, after booming for two decades, has seized to grow since the Global Financial Crisis. The authors develop a quantitative framework in which firms direct innovation towards green or polluting technologies, and become better at innovating in technologies that they have previously succeeded in. This causes mature, incumbent firms to predominantly innovate in polluting technologies. When green technologies become more attractive, e.g. due to a carbon tax, young firms are responsible for a large share of the transition to green innovation. As young firms are financially constrained, a credit shock harms their innovation, bringing the green transition to a halt. The authors validate the theory with two empirical exercises. First, the authors use micro data to provide causal evidence that tight credit disproportionately affects green innovation, through its effect on young firms. Second, they show that contractionary monetary policy shocks have a significantly larger effect on green patenting than non-green patenting, in line with the model. Quantifying the model, the authors find that tight credit can explain around 60% of the recent slowdown in the rise of green patenting. This translates to a cumulative increase in emissions by half a year of the initial (high pollution) steady state.

Professor of Economics