Analysis of Linkages between Environmental Policy Instruments and Innovation: A Case Study of End-of-Life Vehicles Technologies in Japan

Environmental policies are designed to deal with externalities either by internalizing environmental costs or imposing specific standards for environmental pollution. This study aims to examine the impact of environmental regulations related to End-of Life Vehicles (ELV) on innovation in Japan. We determined whether there is any statistical difference in patent activity comparing the periods before and after the regulations were enacted. In order to control for exogenous factors such as business cycles, we also analyzed the ratios of ELV and total environmental patents during the same periods. Results showed that environmental regulations drive innovations and the number of ELV-related patents were larger even after controlling for such exogenous factors. We concluded that environmental policy for ELV in Japan was effective in inducing innovation. However, we also found that the weakness in these types of command and control policy is the lack of incentives for further innovation.