Introduction

Climate change is a defining global challenge, with green innovation identified as essential for a successful transition that enables emissions reductions while sustaining economic growth. While it is commonly understood that economic downturns lead to reduced research and development (R&D) spending due to tighter credit conditions and lower revenues, this research provides a detailed anatomy of how innovation cyclicality differs between green and non-green technologies. Based on an analysis of the universe of patents filed in the United States, the report documents that while overall patenting activity is procyclical, green patenting is countercyclical, increasing during economic contractions.

Green innovation over the business cycle

The research defines green innovation as the development of clean technologies that replace or reduce reliance on carbon-intensive ones, specifically identifying patent families in the Cooperative Patent Classification (CPC) Y02 and Y04S classes. Analysis of data from 1986 to 2019 shows that non-green patenting moves procyclically with the business cycle, whereas green patenting increases during downturns. This pattern is robust across OECD countries and globally, and holds true at both the aggregate and firm levels.

Large, mature firms are the primary drivers of green innovation in the United States. Firms in the top size quartile account for more than four out of five green patents filed between 1986 and 2019, despite these patents representing a moderate share of their total portfolios. Interestingly, these large innovators often exhibit high greenhouse gas (GHG) emission intensity. The countercyclical nature of green innovation is striking: a 1% fall in GDP growth leads to an increase in the green patent share by nearly 0.3 percentage points.

A model of directed technical change over the cycle

To explain these findings, the report develops a dynamic stochastic general equilibrium (GE) model featuring endogenous green and non-green innovation. A key mechanism is the “green duration channel,” which identifies that green patents have a more backloaded profit structure compared to non-green patents. As the economy transitions towards clean energy, green varieties generate higher profits in the future. Because business cycle shocks are typically transitory, the value of green patents is less sensitive to short-term fluctuations.

This mechanism is reinforced in general equilibrium by the skilled labour market. During recessions, reduced non-green innovation lowers the aggregate demand for skilled labour (scientists), leading to a decline in wages. These lower wages decrease the cost of R&D, providing an incentive for firms to undertake more green innovation, which offsets the partial equilibrium effects of the recession.

Evaluating model predictions

Empirical evidence supports the model’s key mechanisms. Using market-implied values of U.S. patents, the research finds that green patent values fluctuate less over the business cycle than non-green values. Conditional on monetary policy shocks, non-green patent values fall significantly, while green patent values are much less affected. Furthermore, a 25-basis-point contractionary monetary policy shock results in a significant 1.3% increase in cumulative green patenting and a 3.4% decline in cumulative non-green patenting over 20 quarters.

Data from the skilled labour market also aligns with model predictions. Following a contractionary monetary policy shock, scientist earnings fall significantly, while the number of green inventors at firms increases. This suggests a reallocation of inventive talent towards green technologies during downturns when the opportunity cost of innovation is lower.

State-dependent effects of R&D subsidies

The countercyclical nature of green innovation suggests that the effectiveness of R&D subsidies is state-dependent. Because skilled R&D wages are lower during downturns, a given dollar of subsidy spending can generate more innovation in a recession than in a boom. In the calibrated model, a 1% decline in GDP raises the total innovation subsidy multiplier by 2.0%. This effect is more pronounced for green innovation, where the multiplier rises by 2.2%, compared with 1.8% for non-green innovation. A subsidy deployed in a recession where GDP is 3% below its no-shock path is approximately 12.5% more effective than one deployed during a boom.

Conclusion

This research demonstrates that transitory economic shocks can have permanent technological legacies by altering the composition of innovative activity. The countercyclicality of green innovation, driven by backloaded payoffs and shifting labour costs, challenges the view that innovation declines uniformly during recessions. Policymakers can improve the cost-effectiveness of the green transition by conditioning innovation subsidies on macroeconomic conditions, as these interventions are significantly more powerful during economic downturns.