Directing environmental innovation toward radical clean technologies for sustainable transitions: Market-based vs. command-and-control policies Sebastian Gebhardt, Yun Hou, Masaru Yarime Policy Focus Global net-zero transition hinges on radical clean technology breakthrough rather than incremental endof-pipe pollution abatement; existing environmental policy research mostly focuses on innovation quantity while ignoring innovation direction. Based on 17 EU manufacturing firms’ long-run patent evidence, this paper empirically verifies the directional innovation effects of two core policy types to optimize decarbonization policy portfolios. Governments should prioritize marketbased tools (carbon tax, cap-and-trade, ETS) as core decarbonization instruments to foster radical clean innovation,while positioning C&C rules as supplementary measures for mature clean-tech large-scale deployment; coordinated policy mixes are required to complete full sociotechnical sustainability transition. Study Methodology The research constructs a 1991–2000 firm-level panel dataset combining five data sources: OECD environmental policy stringency index, PATSTAT European patent database, ORB firm financial data, SDC M&A dataset and World Bank macro Key Points ► Market-based environmental policies significantly boost firms’ clean technology innovation and raise technological radicalness; command-and-control (C&C) regulation generates no meaningful impact on green patent output. ► Market instruments create sustained price signals and cross-economy market restructuring, shrinking dirty-tech market scale while expanding commercial space for radical clean breakthroughs. ► C&C policies only drive minimal end-ofpipe abatement upgrades instead of transformative innovation, constrained by fixed compliance thresholds and rigid technical mandates. ► Empirical DID evidence from France’s carbon tax (market policy) and Germany’s tightened TA Luft emission rules (C&C policy) confirms divergent innovation effects of the two regulatory modes. photo from Gui Yata 18th Issue September 2026 Public Policy BULLETIN
2 Findings and Analysis Market Policies Boost Clean Innovation & Radicalness; C&C Has Zero Significant Patent Effects Baseline regression shows one standard deviation rise in market-based policy index lifts firms’ weighted clean patent count by 32.9% (+0.05 extra clean patents per average firm); market policies positively improve clean tech originality (p<0.1) and exploration index (p<0.1), meaning firms explore statistics, covering 6,550 listed manufacturing firms across 17 EU economies (68,029 firm-year observations, 158,839 granted EPO patents). Patent classification: Split environmental patents into two categories per OECD’s environmental patent coding system: clean technologies (solar, EV, fuel cell, circular recycling) and abatement end-of-pipe tech (scrubber, engine efficiency retrofit); radicalness is measured via originality index (knowledge source diversity) and exploration index (new tech domain entry) weighted by seven-year forward patent citations. Baseline regression: Adopt PPML (Poisson PML with highdimensional fixed effects), control firm + year fixed effects, one-year lag for independent variables, two-way clustered bootstrap standard errors (country + parent firm, 1000 replications); separate regressions for total environmental, clean, abatement patents and two radicalness indicators. Causal identification via DID: Two quasi-natural experiments: 1.Market policy shock: France’s CCE carbon tax (announced 2012, implemented 2014, treatment=France, post≥2012); 2.C&C policy shock: Germany revised TA Luft stringent emission standard (approved 2001, enforced 2002, treatment=Germany, post≥2001). Robustness: Alternate 5-year citation weighting, additional country/industry new-firm controls and R&D intensity controls to validate core results. more cross-domain, breakthrough radical clean R&D. All C&C coefficients are small and statistically insignificant across clean/abatement/radicalness outcomes; stricter mandatory emission standards cannot stimulate patentable green innovation. DID Causal Test Confirms Divergent 1. France CCE Carbon Tax (Market Reform): Post-2012 policy announcement, treated French firms see significant rise in clean patent volume and two radicalness metrics (treat×post all p<0.01), abatement innovation remains flat; pre-event parallel trend verified via event-study graph, ruling out preexisting innovation gaps. 2. Germany TA Luft Strict C&C Upgrade: Post-2001 tighter regulatory reform, all interaction coefficients are negative yet statistically insignificant across all innovation indicators; event study confirms no post-policy surge in clean or abatement patenting. Core Mechanisms for Policy Heterogeneity 1. Market-based policy dual incentive: Continuous carbon/ pollutant price signals deliver permanent marginal reward for over-compliance; flexible compliance allows firms to delay low-value abatement spending and allocate capital into long-cycle radical clean R&D; economy-wide price shifts shrink incumbent polluting industries’ market size while opening large emerging market space for zero-carbon clean tech, pushing incumbents to pursue disruptive innovation to avoid market shrinkage. 2. C&C policy inherent limitation: Fixed uniform emission ceiling only incentivizes firms to meet legal minimum standard with cheapest existing end-of-pipe equipment; no extra economic gain for beyond-standard innovation; rigid mandated tech paths narrow firms’ R&D option set and discourage exploratory radical clean investment. Table 1 Descriptive Statistics Directing environmental innovation toward radical clean technologies for sustainable transitions: Market-based vs. command-and-control policies Public Policy BULLETIN
3 policy alone can spur radical clean invention but cannot complete full industrial transition; auxiliary policies help scale niche clean technologies to replace incumbent polluting socio-technical regimes. Dynamic Policy Adjustment across Regions & Industries For high-emission traditional manufacturing sectors, combine moderate carbon pricing with phased emission standards; for emerging clean sectors, lower regulatory threshold and leverage market demand to accelerate radical clean technology commercialization; tailor market policy tightening pace based on regional industrial foundation and cost-bearing capacity. Policy OutcomesSupplementary Heterogeneity & Boundary EU countries gradually converged to near-max C&C stringency by 2010, while market policy stringency stays universally low with large upgrade space; C&C may boost existing mature clean-tech deployment but fails to generate new patentable radical innovation; study sample only covers listed manufacturing firms, excluding small private enterprises and utility industries. Recommendations Prioritize Market Instruments as Core Decarbonization Policy Design stepwise, predictable carbon tax or cap-andtrade systems to generate stable long-run price signals; gradually raise market policy stringency to reshape industrial market structure and drive radical clean R&D; reference France’s progressive carbon pricing path to lock in future cost expectations for corporate long-term green investment planning. Deploy C&C Rules as Complementary Supplementary Tools Retain appropriate command-control emission standards to ensure mature clean technologies’ large-scale market penetration after radical tech is invented; avoid overreliance on rigid uniform regulatory mandates which lock firms into incremental end-of-pipe abatement rather than transformative clean innovation. Build Multi-layer Complementary Policy Mix for Full Sustainability Transition Pair market pricing mechanism with targeted public environmental R&D subsidies, green infrastructure investment and emerging clean-tech niche protection policies; market Figure 2 Policy stringency index Figure 3 Additional Event-time coefficient plots for TA LUFT in Germany Directing environmental innovation toward radical clean technologies for sustainable transitions: Market-based vs. command-and-control policies Public Policy BULLETIN
4 Follow Us on Social Media Contact Us (852) 3469 2721 ppolpr@ust.hk The Hong Kong University of Science and Technology c/o Division of Public Policy (PPOL) Room 4611, Academic Building, Clear Water Bay, Kowloon, Hong Kong Masaru Yarime is an Associate Professor at the Division of Public Policy and the Division of Environment and Sustainability and Co-Director of the AI Ethics and Governance Lab at HKUST. He also holds appointments as an Honorary Associate Professor in the Department of Science, Technology, Engineering, and Public Policy at University College London and as a Visiting Associate Professor in the Graduate School of Environmental Studies at Tohoku University. He is interested in exploring datadriven innovation to address sustainability challenges and implications for public policy and governance. He serves on the editorial board of Sustainability Science, Environmental Science and Policy, Data & Policy, and Frontiers in Sustainable Cities (Innovation and Governance). He received a B.Eng. in Chemical Engineering from the University of Tokyo, an M.S. in Chemical Engineering from the California Institute of Technology, and a Ph.D. in Economics and Policy Studies of Innovation and Technological Change from Maastricht University. Main Reference Gebhardt, S., Hou, Y., & Yarime, M. (2026). Directing environmental innovation toward radical clean technologies for sustainable transitions: Market-based vs. commandand-control policies. Research Policy, 55, 105446. https://doi.org/10.1016/j.respol.2026.105446 Sebastian Gebhardt is a PhD Candidate in Innovation, Policy & Entrepreneurship (IPE). His main interest is how technologies can improve human well-being around the globe. He has a background in Mechanical Engineering, with studies at TH Ingolstadt and Seoul National University of Science and Technology, and holds a master’s degree in Technology Management from National Taiwan University of Science and Technology. His research is situated in innovation studies, with a particular focus on environmental innovation and the diffusion of innovation across borders. He primarily uses large-scale patent, firm-level and text data, drawing on quantitative methods as well as natural language processing and machine learning techniques to examine how institutions, firms, and inventors shape the direction and global spread of new technologies. Dr. Yun HOU is an assistant professor at the IPE Thrust, HKUST(GZ). She is interested in researching and teaching innovation and entrepreneurship. She got her Ph.D. degree at the Department of Strategy and Policy, NUS Business School, and her Bachelors’ and master’s in economics from Peking University. Her main research area is innovation and entrepreneurship. On one hand, she studies the effects of the institutional environment on innovation and technology strategies. On the other hand, her research focuses on resource mobilization and strategic decision-making of entrepreneurs. She primarily utilizes field experiments to collect and analyze first-hand data on the entrepreneurial process. Directing environmental innovation toward radical clean technologies for sustainable transitions: Market-based vs. command-and-control policies Public Policy BULLETIN
ebookshelf.hkust.edu.hkRkJQdWJsaXNoZXIy NDk5Njg=