That lobbying enables patent holders to forestall green innovation.

Over the last few decades, increasing attention to climate change has led companies to invest in green innovation, developing new technologies that enable a transition to cleaner modes of production and consumption. Green innovation offers new growth opportunities and competitive advantages, which firms protect through patents. However, these new opportunities are accompanied by new challenges: there is considerable uncertainty about the speed of transition to greener modes of operation. One key source of uncertainty relates to future regulation. In the face of such uncertainty, we examine how firms complement their innovation with efforts to influence the regulatory agenda through lobbying.

Lobbying decisions can be related to firms’ innovation activities in different ways. On the one hand, firms’ efforts to shape the competitive landscape and hedge uncertainty may take the form of lobbying for the new technologies they are developing. That is, firms engaging in green innovation may lobby to increase demand for their products and services. Such dynamics suggest that lobbying would expedite progress toward a greener future. However, lobbying may also have distortionary effects. Suppose green technologies are protected by patents held by firms that derive most of their current cash flows from brown activities. Such firms might employ lobbying to maintain the status quo, i.e., to protect their brown cash flows into the future. As stated by Zingales (2017): “Most firms are actively engaged in protecting their source of competitive advantage through a mixture of innovation, lobbying, or both. As long as most of the effort is along the first dimension, there is little to worry about. (…) What is more problematic is when a lot of effort is put into lobbying.”

To examine the interaction between innovation and lobbying, we construct a dataset that combines information on both the patenting and lobbying activities of public firms over the period 1999-2020. First, we obtain all patents granted to U.S. firms, and we determine whether each patent relates to green technologies and whether it relates to clean or dirty technologies, using the classifications of OECD and Dechezlepretre, Muckley, and Neelakantan (2020), respectively. Second, from the Senate Office of Public Records (SOPR), we parse and extract information on the timing, amount, and subject of lobbying. Using a combination of textual analysis and machine learning techniques, we identify the subset of lobbying transactions that relate to environmental issues. Finally, we obtain the political contributions of each lobbyist, and we use this information to infer whether each lobbying transaction is pro-environmental (which we refer to as green) or anti-environmental (which we refer to as brown). This is one of the first papers to map such a large and detailed amount of lobbying information to the universe of U.S. firms, including the details of the lobbying transaction and the individual lobbyist.1

We start by examining firms’ propensity to engage in environment-related innovation. Descriptive evidence is striking. Patents related to green technologies and dirty technologies are concentrated within the same set of industries. The fraction of firms with at least one green patent is highest within chemical and allied products, consumer durables, and manufacturing. These same three industries also rank highest in the likelihood of having at least one dirty patent. While Cohen, Gurun, and Nguyen (2022) show that oil and gas firms engage in green innovation, we find that the propensity for firms in brown industries to hold many green patents is much more widespread.

Industries with the highest level of innovation in environment-related issues also tend to spend the most money lobbying on these issues, and the vast majority of these firms focus their lobbying almost entirely in either green or brown directions. However, green innovation does not predict green lobbying. While many firms both invest in green innovation and strive to shape the regulatory agenda, in many cases firms’ investments along these two channels are in direct contradiction with each other. We pose two non-mutually exclusive hypotheses to explain this puzzling pattern.

First, the Current Cash Flow Hypothesis posits that firms’ innovation and lobbying activities reflect an effort to balance current cash flows against an uncertain future. Bloom and Van Reenen (2002) show that patenting generates valuable real options because patents provide exclusive rights to develop new innovations, enabling firms to delay investments. While a growing number of firms are applying for and being granted patents for green-related technologies, it is possible that only a portion of these firms use these technologies in their current business operations. This hypothesis predicts that firms whose current business relies less on green technologies will be more likely to lobby brown, irrespective of the firms’ intensity of green patenting. Lobbying brown would enable them to protect their current (brown) sources of cash flows, and thereby slow the transition to greener modes of operation. Only firms whose current business relies more on green technologies would tend to lobby green.

Our second hypothesis is the Market Power Hypothesis. On average, firms with substantial market power have fewer incentives to invest in new technologies (Arrow, 1962). They do not want to make their existing products obsolete, and the lower competitive pressure lessens their incentive to incur the necessary switching costs (Holmes, Levine, and Schmitz, 2012). To the extent that incumbents have more market power than new entrants, this idea is also consistent with the theoretical and empirical results of Akcigit and Kerr (2018), who argue that incumbents have an incentive to invest in existing rather than new technologies, and to improve their existing products. Moreover, as argued by Zingales (2017), firms with market power are more effective at exerting political influence through lobbying. Given that existing technologies are more likely to reflect a brown orientation, we predict that market leaders will be more likely to lobby brown. These effects should be particularly strong within more concentrated industries.

To test the Current Cash Flow Hypothesis, we require a measure of firms’ current reliance on green technologies. To this end, we use textual analysis to quantify the cosine similarity between each firm’s business description and green technologies, as represented in firms’ 10-Ks and the technology descriptions of green patents, respectively. Consistent with this hypothesis, we find that firms whose current business is more green-oriented are significantly less likely to lobby brown, compared to firms whose current business is more brown-oriented. In economic terms, firms in the top quartile of operational greenness allocate 8.6 percentage points less to brown lobbying, which is equivalent to 15% of the unconditional average allocation to brown lobbying (57.4%). These findings highlight the extent to which green innovation is an incomplete measure of firms’ true focus on transitioning to greener modes of operation.

To test the Market Power Hypothesis, we define a firm as a dominant player within the industry if it is one of the top three firms in terms of market share. On average, across Fama-French 48 industries, the top three players hold an aggregate 34.9% market share. Results provide evidence in support of this hypothesis as well. We find that the dominant players within each industry spend significantly more on brown lobbying, in particular within concentrated industries where dominant players can accrue more of the gain from suppressing competitors (Cowgill, Prat, and Valletti, 2022). Moreover, we find that market leaders’ green innovation efforts have no predictive power for the direction of their environmental lobbying: irrespective of the stock of green patents, market leaders are more likely to lobby brown, compared to other firms within the industry.

In terms of transition toward a greener future, our findings highlight a dark side of lobbying. On average, 44.2% of green patents are held by market leaders within each industry, but these market leaders are more likely to strive to protect the status quo through brown lobbying efforts.2