Environmental Innovations and Profitability: How Does it Pay To Be Green?

The achievement of the goals set by the broad 10-year growth strategy "Europe 2020" of the European Commission, aiming by 2020 at a smart, sustainable and more inclusive economy, is intertwined with improvements towards greener production processes. The generation and adoption of Environmental Innovations by firms are consequently keys to improve the sustainability of the production processes, either when innovations are integrated in the production process (Cleaner Production measures), or when innovations are add-on measures (End-of-Pipe technologies). Whereas a consensus on the determinants of Environmental Innovations seems to be growing, still widely debated are the economic implications of their adoption. Are firms missing economic opportunities when they commit resources to improve their environmental performances, or is it true the opposite? A deep research effort has been devoted to the analysis of the economic performance effects of improvements in the environmental performances, at various levels of analysis, but still no clear answer has been provided to the question whether it pays or not to be green.

We contribute to this debate by proposing a differentiation between different typologies of Environmental Innovations. Our main argument is that it depends on how to be green, i.e. the "box" of Environmental Innovations has to be opened to disentangle the competitiveness effect of their adoption. We find support to this argument by using data on German firms extracted from the merge of two waves of the Mannheim Innovation Panel for the years 2011 and 2009. Our results suggest that profitability gains depend on the typology of innovation considered. In other terms, it cannot be argued a priori whether it pays or not to adopt greener production processes, as it is needed to specify the typology of innovation considered. Efficiency improving innovations, such as those innovations that reduce the use of materials or energy per unit of output are found to positively impact firms' economic performances. Contrarily, some negative profitability effects might be associated with innovations that are targeted at reducing production negative externalities, such as reduction of air, soil, water and noise pollution as well as those to replace dangerous materials. Although they may be profitable in the long run due to improved environmental regulation, it does not pay off in the short run when environmental regulation has to be faced as an external restriction.

The existence of a threshold before innovations can engender profitability gains is also depicted, as only highly eco-innovative firms are facing profitability variations after the adoption of environmental innovations.

Ghisetti, Claudia and Klaus Rennings (2013), Environmental Innovations and Profitability: How Does it Pay To Be Green?, ZEW Discussion Paper No. 13-073, Mannheim.