Climate Innovation and Carbon Emissions: Evidence from Supply Chain Networks

We study the effect of climate-related innovation on carbon emissions by analyzing supply chain networks. We find that climate innovation reduces carbon emissions at customer firms, driven by product innovations. The effect is economically significant, dominated by the most emission-intensive customer firms, gradually increases over a five-year horizon, and is significant for Scope 1 and Scope 2 emissions. We then look at the diffusion of climate innovation to new customers. We find that customers ex-hibit a strong preference for suppliers with new climate patents, that climate patents allow suppliers to attract new customers, especially customers with high environmental ratings or a large carbon footprint, and that these new customers subsequently also reduce their emissions. We use the quasi-random assignment of patent examiners and the exogenous technological obsolescence of climate patents as instruments to suggest a causal interpretation of the main findings.