Environmental compliance costs and innovation activity in UK manufacturing industries

Abstract

We examine the relationship between environmental regulations and innovation, using data from UK manufacturing industry during 2000-2006. We estimate a dynamic model of innovation behaviour, and explicitly account for the likely endogeneity of our measure of the burden of environmental regulations (pollution abatement costs). Our results indicate that environmental R&D and investment in environmental capital are stimulated by greater pollution abatement pressures. However, we do not ?find a positive impact of environmental compliance costs on total R&D or total capital accumulation. New environmental innovations may therefore have a crowding out effect on other potentially more productive investments or avenues for innovation.Innovation, Pollution abatement expenditures, Panel data.