Climate Change Offers Many Incentives for Innovation

Climate change affects firms in Germany in several ways. This triggers not only eco-innovations in firms to mitigate the effects of global warming, but also other innovations, as a recent study by ZEW Mannheim together with the University of Applied Sciences Augsburg shows.

Climate change has different effects on the implementation of eco-innovations in terms of new products and new processes in firms. “The important driver for environmental product innovations is often – unsurprisingly – the rising demand for eco-friendly products. Firms mainly focus on innovations that reduce a product’s energy consumption,” says study co-author Dr. Christian Rammer, deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics”. Government regulations aimed at counteracting climate change also contribute to firms increasingly implementing eco-friendly product innovations. However, rising customer demand and climate policy are also prompting environmental process innovations in firms that, for example, reduce CO₂ emissions or replace fossil fuels with renewable energy sources.

However, the study authors also observe that climate change is having an impact on innovations that are not aimed at protecting the environment. “The demand for climate-neutral products is also a driver for other product innovations. This suggests that climate neutrality is also relevant for new products that are not aimed at reducing negative environmental impacts,” says Rammer. In addition, rising costs resulting from climate change trigger further process innovations, as firms often have to adapt their production processes due to higher energy and climate costs.

The empirical analysis examines how firms in Germany change their innovation activities when they are exposed to different effects of climate change. For this purpose, the authors of the study use data on 8,462 firms with at least five employees, which were collected as part of the Community Innovation Survey of the European Commission in 2021. For the 2021 wave of the survey, ZEW co-developed a measure to analyse how strongly firms are affected by climate change. It takes into account four dimensions of how climate change affects firms: first, the direct impact of extreme weather conditions (e.g. storm damage); second, the costs of adapting to the effects of climate change (e.g. switching production and delivery due to extremely high temperatures); third, policy measures to mitigate climate change (e.g. emissions taxes); and fourth, changing customer demand for eco-friendly products.

Considering all four measures together, for a total of 60.8 per cent of the firms at least one of the described climate change impacts is very or moderately relevant for their business. The largest shares of firms affected by climate change are found in the sectors of energy supply and mining (55.9 per cent) and transport and storage (50.8 per cent). The least affected sectors, according to the ZEW study, are telecommunications, programming and information technology (10.2 per cent) as well as law, accounting, consulting and advertising (5.5 per cent).