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Abstract
We analyse the role of financial barriers in affecting the adoption of environmental innovations (EI) with a focus on manufacturing small and medium-sized enterprises in Europe. In taking stock of the consolidated literature on EI, we find that the role of financial barriers is substantially neglected, although crucial, even more relevant in the current phase of the economic cycle. Our empirical analysis confirms the existence of direct negative effects of financial barriers on environmental innovation investment decisions. It furthermore sheds more light on the determinants of financial barriers that shape firms’ cleaner production choices. Our findings have the following policy implications: properly designed policies can play a critical role, not only by stimulating EI through their determinants, but also by acting on the financial obstacles to eco-innovation.
Policy relevance
Environmental innovations (EI) are essential to achieve economic growth and environmental protection goals. Technological development is one of the key factors that can counterbalance the growth and population emission-augmenting effects. EI are a priority in major EU policy strategies and a prerequisite for the development of a ‘Resource efficient Europe’, one of the flagship initiatives of Europe 2020. The existence of financial barriers can constitute a serious deterrent for the eco-innovative capacity of firms, even more than for ‘traditional’ innovations, as EI are characterized by high technical risk, long payback period and uncertainty on the appropriability of private rents. This article analyses in depth whether barriers related to external financing affect EI investments and whether the stringency of financial constraints to investments in EI is affected by factors related to EI specificities. We show that when both direct and indirect effects on EI investments are considered, the role of the policy framework appears to be as particularly crucial in order to reverse the risk/return trade-off of eco-innovative investments. Targeting policy interventions to facilitate access to credit and to mitigate capital markets’ imperfections is essential to mitigate the apparent contradiction between EU industrial policies and climate abatement scenarios.
Acknowledgements
The final revisions of both text and empirical strategy of the article have been conducted when Claudia Ghisetti took service at the European Commission, Joint Research Centre. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of this publication.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. As noted by Carrillo-Hermosilla, Del Río, and Könnölä (Citation2010), the literature provides several attempts to define EI. In general, all definitions agree that innovations can be defined as environmental when they reduce the environmental impact of consumption and production activities, even when such an environmental effect was not intentional.
2. The EcoAP (Action 4) recognizes that access to finance is especially difficult for SMEs engaging in ecoinnovation because their perceived commercial risk is greater (EC, Citation2011).
3. Own elaboration on World Input Output Database (available upon request) shows the heaviness but also the dynamic innovation potential of manufacturing firms, as the share of CO2 emissions over the value added in EU28 is higher for manufacturing firms, but it has improved over time through innovation.
4. As an example of the difficulties in overcoming lock-ins in traditional polluting technologies, Aghion et al. (Citation2014) report the challenge of stimulating research and development on electric cars.
5. According to IEA, fossil-fuel subsidies amounted to $544 billion in 2012, and over half of the total corresponded to subsidies on oil products. As a result, 15% of global CO2 emissions currently receive financial incentives corresponding to $110 per tonne, while only 8% are subject to a carbon price (IEA, Citation2013).
6. Chart 3 in Sawin (Citation2004, p. 39) shows the impact of policy inconsistencies on annual wind installations in Germany, the US, and Spain.
7. Under some mitigation scenarios, carbon price is expected to be €60–100/tonne of carbon dioxide (Kapoor & Oksnes, Citation2011, p. 54).
8. These features clearly do not characterize only eco-innovation markets, but they are more pronounced than for most other sectors (EC, Citation2011).
9. Mazzucato (Citation2015) suggests, as an example of innovative high-risk projects requiring financial support, investments made by the greentech company Tesla Motors.
10. To the best of our knowledge, this is the only source that presents both EI and financial barriers information (e.g. Community Innovation Survey CIS 4 presents only barriers, CIS5 EI but not barriers; CIS surveys are the main source of information on EI, but at the moment, they do not allow for analyses on EI and financial barriers).
11. The cross-sectional structure of the data constitutes a limitation in the scope of the current analysis and requires the need to make explicit that it allows us to assess only correlations rather than proper causations among the variables.
12. Even though the self-reported nature of variables in the survey can be considered as a limitation, it is worth to note that, given the aim of our analysis, it is extremely relevant to have the entrepreneurs’ opinion on the relevance of the barriers they experience in their EI investments. The choice of considering binary variables is motivated because we are not interested in assessing the degree of seriousness of the barriers, but if entrepreneurs consider the specific factor as a barrier to EI or not. The lack of multiple continuous variables can, however, constitute a limit to the current empirical analysis that needs to be made explicit.
13. We are currently facing a contingent situation where energy prices have sharply decreased due to excess of supply in oil markets, the discovery of new fossil fuel sources in North America and stagnating economic growth in the EU and emerging countries (except for India). A reduction in energy use resulting from energy efficiency improvements and investments in renewables might also contribute to reduce energy prices. Nevertheless, it is reasonable to assume that in the medium–long run, prices will tend to increase due to scarcity of cheap fossil fuels and especially for the increasing stringency of climate policy targets. In the EU, for instance, the decreasing cap of the EU ETS and the introduction of new energy/carbon taxes (EU Energy Directive) will sustain increasing prices for energy deriving from fossils. Markandya, Gonzalex-Eguino, Criqui, and Mima (Citation2014) estimate carbon values in the EU27 about 100–200 €/tonne for the period 2020–2030 and about 400–600 €/tonne in 2050. The dynamics of carbon prices, which is coherent with the achievement of climate change mitigation targets (25% in 2020 and 80% in 2050), is expected to be exponential: prices sharply increase after 2025–2030.
