THE RELATIONSHIP BETWEEN ENVIRONMENTAL INNOVATIONS AND CLIMATE CHANGE

This research examines the long-term impact of eco-innovation on global climate risk. Examining the potential impact of environmental innovations, this study de- constructs global climate risk into physical and transition risks. The study focuses on potential environmental innovations that could aid in temperature reduction and global warming mitigation in general as well as its associated risks. We find that eco- innovation shocks have a substantial impact on the global climate risk. The impact is highly persistent over time and may be adverse due to substantial research and development expenditures. Our evidence suggests that all available environmental innovations are fundamentally important for the mitigation of global climate risk and its associated risks. Therefore, eco-innovations can lead to reduced temperature variability, lower greenhouse gas emissions, lower welfare costs of premature deaths caused by high temperatures, and improved environmental policy stringency thanks to increased R&D intensity. KEYWORDS: Eco-innovation; Global warming; Physical risk; Transition risk; Global climate risk; Bayesian VAR