The impact of environmental taxation on innovation: Evidence from Canada

In recent years, many governments have implemented environmental regulations to combat climate change. In particular, carbon taxes have shown to be an important policy tool to reduce emissions. However, there is little clarity about what drives this relationship. Based on the Porter hypothesis, we find evidence of innovation as a mediator between carbon taxes and CO 2 emissions. Using Canadian province-level data from the period 1997 -2015, we exploit the implementation of the 2008 British Columbian carbon tax to conduct a difference-indifferences analysis. Our results suggest a statistically and economically significant switch from product innovation to process innovation for British Columbia compared to other Canadian provinces not subject to the carbon tax. So, the stimulating impact of carbon taxes on process innovation appears to be an important explanation for the reduction of emissions.