Pollution Taxes Push High-Emitting Firms to Invest in R&D

May. 19, 2026

With Europe tightening carbon-pricing rules while mobilizing hundreds of billions of Euro for sustainable infrastructure and industrial transition, SHoF research suggests emissions taxes can spur firms to invest in the technical know-how needed for cleaner production—even when they do not produce breakthrough green inventions.

 

Environmental Taxes Can Change How Firms Innovate

A long-running debate in climate policy is whether environmental taxes simply raise costs for firms or whether they also encourage cleaner technological change. This paper argues the answer is both.

Using data from 18 OECD countries between 1990 and 2012, Gustav Martinsson (SHoF/Stockholm University), Christian Thomann (SHoF/KTH), and James Brown (Texas A&M) show that taxes on sulfur oxide (SOx) emissions pushed manufacturing firms to spend more on research and development.

The increase was concentrated among firms in the dirtiest industries, including cement, chemicals, metals, and petroleum products, where production processes generate the most pollution.

“Pollution taxes make it more expensive for polluting firms to continuing using their existing production technologies,” the authors write.

Much of the debate around green industrial policy focuses on new inventions. This paper highlights a less visible effect of environmental policy: pushing firms to invest in the technical capabilities needed to adopt cleaner production methods, even when they are not developing breakthrough technologies themselves.

R&D Rose, But Patents Did Not

The study combines OECD pollution tax data with firm-level R&D spending from Compustat and global patent records from the European Patent Office’s PATSTAT database.

The effects were economically meaningful. A one-standard-deviation increase in pollution taxes was associated with roughly an 11% increase in average R&D spending.

Looking specifically at the introduction of a new or higher pollution tax, the estimated effect was even larger: firms increased R&D spending by roughly 13%–14% on average following the policy change.

Crucially, the increase appeared only after pollution taxes rose, not in the years beforehand, supporting the authors’ argument that the policy changes themselves drove the response.

However, while pollution taxes increased R&D spending, they did not generally produce more patents among the high-pollution firms most affected by the taxes.

Instead, the authors argue that many firms were investing in what economists call “absorptive capacity”—the ability to understand, adopt, and implement external technologies and know-how.

“The R&D response to pollution taxes is concentrated in sectors where external knowledge is easier to acquire,” the authors say.

Instead of inventing new breakthrough clean technologies themselves, firms were building the internal expertise needed to modernize operations and adopt cleaner methods developed elsewhere, the study finds.

Lessons for Policy

For investors, the paper shows that markets viewed these R&D investments positively. The marginal value of R&D spending rose significantly when firms operated under higher pollution taxes, suggesting that investors believed the spending would improve firms’ long-term competitiveness or ability to adapt to tighter environmental standards.

For policymakers, the findings strengthen the case that market-based environmental policies such as pollution taxes can influence corporate behavior beyond simple compliance or pollution reduction.

“Our work shows tax policy can also encourage the technology investments that allow firms to broadly overhaul the way they produce, in order to reduce pollution at the source,” the authors write.

Importantly, the effects extended beyond traditionally innovative firms. Even companies with weak patent histories increased R&D spending when taxes rose.

The authors caution that the study does not directly measure whether the additional R&D reduced emissions, because comparable firm-level emissions data were unavailable across countries during the sample period. Still, in a related study on Sweden, Martinsson, Thomann and co-authors estimate that carbon pricing accounted for at least a third of emissions reductions between 1991 and 2015—and that emissions would otherwise have been roughly 30% higher.