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Lost in Transition: Financial Barriers to Green Growth

Author

Listed:
  • Philippe Aghion

    (INSEAD - Institut Européen d'administration des Affaires)

  • Antonin Bergeaud

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Maarten de Ridder

    (CAM - University of Cambridge [UK])

  • John Michael van Reenen

    (LSE - London School of Economics and Political Science)

Abstract

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. We 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. We validate the theory with two empirical exercises. First, we use micro data to provide causal evidence that tight credit disproportionately affects green innovation, through its effect on young firms. Second, we 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, we 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.

Suggested Citation

  • Philippe Aghion & Antonin Bergeaud & Maarten de Ridder & John Michael van Reenen, 2024. "Lost in Transition: Financial Barriers to Green Growth," Working Papers hal-04754876, HAL.
  • Handle: RePEc:hal:wpaper:hal-04754876
    DOI: 10.2139/ssrn.4771433
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    Cited by:

    1. Silvia Appelt & Matej Bajgar & Chiara Criscuolo & Fernando Galindo-Rueda, 2025. "How effective are R&D tax incentives? Reconciling micro and macro evidence," CEP Discussion Papers dp2071, Centre for Economic Performance, LSE.

    More about this item

    Keywords

    Climate Change; Productivity; Endogenous Growth; Innovation; Creative Destruction;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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