Demand-pull and technology-push environmental innovation: a policy mix analysis on EU ETS and EU Cohesion Policy

Existing literature on the sustainability transition towards a low-carbon economy provides conceptual frameworks for designing combinations of policy interventions but lacks empirical evidence regarding their application. This paper aims to test whether a mix of policy instruments represents a potential valid solution to manage carbon abatement effectively. We refer to the European Union Emissions Trading System (EU ETS) as an example of demand-pull environmental policy, while we include the Structural and Cohesion Funds (SCFs) and the Horizon 2020 funds as examples of technology-push policies. Through the application of a panel event study, we find that the EU ETS generates a positive impact on environmental patent applications in the light manufacturing sector during the period 2013–2020, while EU ETS participation and financial support contribute to environmental innovation and CO2 emission reduction in the energy sector. Hence, those sectors where market dynamics allow avoidance of complete internalization of the carbon price may benefit from financial support to re-direct the technological change towards the sustainability transition. We demonstrate that the analysed policy mix contributed to a reduction of about 2.2% of total emissions produced by energy firms in the EU ETS during Phase III, which is in line with EU climate targets. Overall, our work may support policymakers in understanding the relevant factors that affect the impact of the policy mix on the environmental transition.Key policy insights A Demand-pull policy instrument like EU ETS fosters patent applications of firms with limited cost pass-through options, particularly in the light manufacturing sector.A policy mix of EU ETS and regional development funds is required to effectively improve the environmental innovation of firms that can easily transfer the costs of CO2 emissions to the final users, such as in the energy sector.The interaction of regional development policies and innovation policies crowds in additional investments and catalyses R&D activities, contributing to environmental innovation for EU ETS firms.