Environmental Regulations and Economic Growth: The Role of Innovations

Abstract

This paper analyses the impact of environmental regulations on economic growth. We investigate the role of technological innovations measured in terms of total patent activity on the relationship between environmental regulations and economic growth. The total environmental tax revenue as a proportion of GDP is used to measure environmental regulations, which reflects the stringency of environmental policies in a given country. This study utilized a panel data set across 83 countries for the period 2002-2022 and applied a two-step System Generalized Method of Moments (GMM) estimator to examine endogeneity, growth persistence, and unobserved heterogeneity, and to assess the direct and interactive impacts of environmental regulations and patent activity on economic growth. The empirical findings indicate that the advancement of technological innovations enhances the efficacy of environmental regulations to stimulate economic growth however the positive effect of technological innovations on environmental regulations-growth relationship diminishes and even becomes negative after a certain threshold level of technological innovations is reached. In other words, it is found that environmental regulations can spur growth in low-innovation economies, but reduces economic growth in highly innovative ones by crowding out research and development, increasing costs, or introducing transitional inefficiencies. The findings emphasize the significance of matching the policies on the environment and innovations to make sure that the innovations that are brought by regulations are capable of supporting sustainable economic growth.