Significant policy effort is devoted to stimulate the development, adoption and diffusion of environmentally-
friendly technology. Sceptics worry about the effects of regulation-induced environmental
technology on firms’ competitiveness. Since innovation is a crucial productivity driver, a potential
crowding out of inventive efforts could increase the cost of mitigating environmental damage.
Using matching techniques, we study the short-term effects of regulation-induced environmental
technology on non-green innovative activities for a sample of firms in Germany. We find indeed
some evidence for a crowding out of the firms’ in-house R&D. The estimated treatment effect is
larger for firms that are likely to face financing constraints. However, we do not find negative
effects on the number of ongoing R&D projects, investments in innovation-related fixed assets or
on the outcome of innovation projects. Likewise, for firms with subsidy-backed environmental innovations
no crowding out is found.
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