Which Government Subsidies are Relevant for Eco-Innovation? Empirical Evidence from Firm Level Panel Data
ZEW Discussion Paper No. 26-031 // 2026Eco-innovations are highly important for mitigating climate change and transitioning towards a circular economy. There is extensive literature on the determinants of eco-innovation. The analysis of the role of government subsidies, however, is still under-developed. Subsidies are controversially discussed because they may distort competition and lead to less efficient solutions. At the same time, eco-innovations may produce positive externalities both at the innovation stage (knowledge spillovers) and the diffusion stage (reducing environmental damage). Subsidies may hence be important to avoid private under-investment in such innovations. The paper investigates which types of subsidies (e.g. general vs. research oriented, regional vs. national vs. supranational) are used by firms that engage in different fields of eco-innovation. The analysis is based on panel-econometric estimations using data from the German part of the Community Innovation Survey (CIS), covering the years 2020 to 2024. The results show that regional subsidies and general industry support are important for the diffusion of eco-innovations, such as the substitution of fossil fuels by renewables, because they help to overcome financial constraints. Specific R&D subsidies are important for innovations leading to less CO2 emissions in production processes.