Cap-and-trade policies and regional environmental innovation: evidence from the EU Emissions Trading System

We investigate whether more regionally stringent cap-and-trade (C&T) policies induce regional innovation in environmental technologies and whether this effect spills over to proximate regions. Compiling a novel regional dataset, we test this argument for the EU Emissions Trading System (EU ETS) over the period 2005-2020. We find evidence of an intra-regional spillover effect, which is weaker in regions specialized in environmental technologies. We also identify inter-regional spillovers through spatial proximity and trade relationships, but not via knowledge networks. Instrumenting C&T exposure with a Bartik IV supports a causal interpretation of our estimates.