Climate Innovation and Carbon Emissions: Evidence from Supply Chain Networks

We examine the role of climate innovation in reducing firms' carbon emissions along supply chain networks. Using a large panel of U.S. firms, we find that climate innovation of suppliers causally reduces carbon emissions of downstream customers, driven by product innovations, on both the intensive margin (existing customers) and the extensive margin (newly acquired customers). A one standard deviation increase in the supplier's climate patent ratio reduces direct emissions by approximately 11% over the next five years for existing customers and similarly for new customers. Moreover, we find that customers, particularly those with strong decarbonization incentives, actively reconfigure their supply chains in favor of suppliers with climate patents, especially after they obtain high-value patents. Various identification strategies combine instrumental variables (state-level R&D tax subsidies and examiner busyness) with a difference-in-differences design and exogenous shocks from supplier mergers. Our results underscore that climate innovation not only directly reduces emissions but also fosters the formation of new supply chains that amplify the knowledge diffusion effect.