No.633 Green Innovation Under Pressure

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Green Innovation Under Pressure

As the impacts of climate change intensify, firms must overcome the technical challenges of emission reduction while coping with damage from frequent disasters. This paper provides novel evidence on how firms adjust the pace and direction of their innovation in response to costly physical disasters. Leveraging granular data on the joint spatial distribution of climate hazards and economic activity across the U.S., we do not find firms exposed to acute physical risks cut their R&D expenditure after disaster shocks. Instead, our patent analysis reveals a subsequent shift in these firms’ innovation efforts toward green technologies. To examine the underlying mechanisms, we extend the directed technical change framework by incorporating regulatory incentives and firms’ learning about future risks. Our findings demonstrate that post-disaster recovery, when the advantage of “dirty” vintages weakens, presents a unique window of opportunity for policies to accelerate the low-carbon transition while enhancing climate resilience.