The effect of within-sector,upstream and downstream energy taxes on innovation and productivity

The aim of the paper is to investigate the e ffect of environmental stringency on innovation and productivity using a cross-country panel made up of 7 European countries for 13 manufacturing sectors over the years 2001-2007. This research topic goes under the heading of Porter Hypothesis (PH) of which diff erent versions have been tested. We take into consideration both the strong and the weak versions while adding some peculiarities to the analysis. Firstly, we assess the role played by a speci c environmental regulation, that is environmental taxes, that have rarely been empirically tested as factors that can favour PH hypothesis to be verifi ed. Secondly, we do not consider, within the same framework, only the eff ect of environmental taxes in the same sector (within-sector), but also the role played by environmental taxes in upstream and downstream sectors in terms of input-output relationship. Thirdly, we test these relationships also `indirectly' by verifying whether innovation can be one of the channel through which higher sectoral productivity can be reached. The main findings suggest that downstream stringency is the most relevant driver for innovation and productivity and that most of the e ffect of regulation on productivity is direct, while the part of the e ffect mediated by induced innovation is not statistically signi cant.