Causal Links between Tax Incentives, R&D Subsidies, and Environmental Innovation: A Dynamic Panel VECM Approach in OECD Economies

This study explores the dynamic and causal links between R&D tax incentives, public research funding, and environmental innovation across 20 OECD countries from 2000 to 2024. Using a Panel Vector Error Correction Model (VECM), we identify both short-term movements and long-term equilibrium relationships. The findings reveal a strong, bidirectional connection between R&D tax incentives and environmental innovation, where each supports the other. In contrast, public research funding exhibits weaker and more volatile effects, with its impact on innovation being inconsistent and mainly short-term. Impulse response functions and variance decomposition confirm the sustained and immediate effects of tax incentives, whereas the influence of direct subsidies diminishes quickly. Notably, the results indicate that public funding may crowd out the effectiveness of tax incentives, while innovation positively influences public funding allocations, though with a time delay. These insights underscore the importance of coordinated policy strategies. Fiscal incentives and direct support should be balanced and adapted to national contexts and firm characteristics. This research adds to innovation policy by providing empirical evidence on how different R&D support tools vary in effectiveness for promoting environmental innovation in advanced economies. JEL Classification: C33; H25; O38; O31; Q55; Q58