| Summary: | The aim of this study is to examine the effects of a market-based greenhouse gases price on green innovation by testing the Hicksian theory of induced innovation. To test whether causality exists, panel data compiled of 30 countries over 13 years (2005-2017) have been used. The study is restricted to the European Union emission trading scheme, where the price of EUA has been used as a market-based price for greenhouse gases. To capture the effect on innovation, an approximation for innovation in the form of patent counts have been employed using the patent category Y02 constructed by the EPO. The result suggests that green innovation is affected by the price of the EUA, total CO2 emissions and tax revenue from energy. This study employed a knowledge stock variable that was not found to be significant, contrary to previous literature on induced innovation. The incidence rate ratio associated with the permits price indicates that a one euro increase in price would result in a 1.135 % increase in the patenting of green technology. The result suggests that a higher price in permits would stimulate innovation of green technology within the European Union.
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