We examine the cyclicality of carbon productivity and consider innovation as a potential mechanism. We use unique data on greenhouse gas emissions matched with comprehensive administrative data sources for manufacturing firms. To identify causal effects, an input-output approach is applied, where the output of downstream industries serves as an instrument for upstream industries’ output. Our findings reveal that carbon productivity is procyclical. Specifically, 2SLS results show that a one percentage point increase in industrial output leads to a cumulative 20% rise in carbon productivity over two years. While innovation activities are unlikely to be the primary mechanism behind these results, the growth in carbon productivity is attributed to emission reductions and firms having more environmentally conscious top management. Overall, our results support the notion that economic growth can be achieved alongside ecological sustainability.
Industry and Innovation, 1–14, 2025.
