Tailored Funding Drives Green Innovation
Research
06.08.2026
ZEW Study on Government Funding for Environmentally Friendly Innovations
Government funding can help companies to implement environmentally friendly innovations, provided that the funding instrument is suited to the specific innovation project. A recent study by ZEW Mannheim and Technical University of Applied Sciences Augsburg shows that general investment grants from the federal states and the federal government play a role primarily in encouraging the adoption of environmental technologies, for example when companies replace fossil fuels with renewables. Specific federal research and development grants, on the other hand, are particularly relevant for the design of new production processes that reduce CO₂ emissions.
“Our findings show that it is important to promote environmental innovations with targeted funding, tailored to the specific environmental objective. When it comes to implementing technologies that are already available, general investment grants help to overcome financial hurdles,” explains Dr. Christian Rammer, deputy head of ZEW's “Economics of Innovation and Industrial Dynamics” Research Unit. “If, on the other hand, companies first need to develop new technological solutions, research grants are the more appropriate instrument. Particularly in the case of low-CO₂ production processes, such grants can mitigate risks that private investors are often unwilling to take.”
Regional funding supports green technologies
Eco-innovations vary considerably in terms of costs, risks and technological complexity. Replacing fossil fuels with renewable energy sources, for example, often requires substantial investment in plants, buildings or production processes. Frequently, the necessary technologies are already available, but their deployment can place a heavy financial burden on companies.
The study shows that general funding measures and regional aid, in particular, are linked to such innovations aimed at widespread adoption. Regional programmes can be better tailored to the local economic system and specific investment needs. National research funding, by contrast, is less important for this type of technological transformation.
Research funding promotes new production processes
The situation is different when companies need to develop new production procedures. Innovations aimed at reducing CO₂ emissions may require in-house research and development work as well as testing of new technologies. Such projects are riskier and more difficult to finance through traditional loans. Specific research grants are especially relevant here. The analysis reveals a particularly strong link between federal research funding and process innovations that reduce CO₂ emissions. European Union funding is used significantly less frequently by environmental innovators.
About the methodology
The analysis is based on three survey waves conducted by the Mannheim Innovation Panel for the reference years 2020, 2022 and 2024. Six types of funding are examined: general and research-related funding provided by the federal states, the federal government and the European Union. Using panel probit models, the authors analyse the statistical correlations between these types of funding and the respective environmental innovations. In 2024, 26.8% of companies had introduced at least one environmental innovation with a significant environmental impact; 41.5% of these environmentally innovative companies had utilised at least one form of public funding.
