Structural Change and Economic Dynamics 53 (2020) 108–115

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Structural Change and Economic Dynamics

journal homepage: www.elsevier.com/locate/strueco

The impact of eco-innovation on CO2 emission reductions: Evidence

from selected petroleum companies
Sami Fethi a,∗, Abdulhamid Rahuma b
a
Department of Business Administration, Eastern Mediterranean University, P.O. Box 99628, Famagusta, North Cyprus
b
Department of Banking and Finance, Eastern Mediterranean University, P.O. Box 99628, Famagusta, North Cyprus

a r t i c l e i n f o a b s t r a c t

Article history: 80% of the world’s energy demand is supplied by petroleum companies, whose operations are respon-
Received 8 December 2018 sible for 37% of the greenhouse gas emissions. This paper uses the Porter hypothesis to examine the
Revised 18 November 2019
dynamic impact of eco-innovation on CO2 emission reductions in selected petroleum companies. Second-
Accepted 19 January 2020
generation panel regression econometric techniques are conducted employing quarterly data over the
period 2005–2016. Three actual eco-innovation indicators namely, investment (INV), training (TR), and,
Keywords: research and development (R&D), are used to capture the impact of eco-innovation on CO2 emission
Eco-innovation reductions in both short and long-term periods. The results reveal that INV significantly reduces CO2
CO2 emissions emissions in the long-term, whereas R&D and TR make significant reductions in CO2 emissions in the
Porter hypothesis
short-term. This paper is a novelty that adds an original contribution to the relevant literature and has
Environmental strategy
valuable implications for petroleum companies’ managers to achieve growth purposes, efficient use of
ARDL model
resources, and reducing harm to the environment.
© 2020 Elsevier B.V. All rights reserved.

1. Introduction the development of sustainable products, and processes that

In spite of the growth in alternative sources of energy, 80% of
the world’s energy needs are still met by petroleum industry which
retains their title as one of the biggest culprits in world pollution,
bearing responsibility for 37% of global greenhouse gas emissions
(Hughes and Rudolph, 2011; Ismail et al., 2013; Yanez et al., 2018).
Increasing awareness of climate change and carbon dioxide
(CO2 ) emissions, coupled with tighter regulatory frameworks such
as the Kyoto Protocol, are leading petroleum companies to intensify
their efforts for integrating eco-innovation into their operational
processes and strategic plans (e.g., Porter and Kramer, 2006;
Chao and Hong, 2018). Such proactive environmental strategies
play a vital role in the reduction of pollution, thereby enhancing
corporate environmental performance for both the short and long
term (Hart and Ahuja, 1996; Liou, 2015; Iwata and Okada, 2011;
Wu et al., 2012).
An environmental strategy is defined as the planning of ac-
tions to manage a business under consideration of environmental
standards to reduce any negative impact on the environment
(Rodrigue et al., 2013, P. 303). A major factor that helps to achieve
the goals of various environmental strategies is eco-innovation,
∗
Corresponding author.
E-mail addresses: sami.fethi@emu.edu.tr (S. Fethi),
1760 0 061@student.emu.edu.tr (A. Rahuma).
minimize a company’s negative impact on the environment
(Aragon-Correa, 1998; Rennings, 20 0 0; Porter and Kramer, 2006;
Dangelico and Pujari, 2010).
It has been observed that eco-innovation is an effective ap-
proach to improve operational efficiency as well as environmental
performance and future sustainability (Aggeri, 1999; Agulere-
Caracuel and Ortiz-de-Mandojana, 2013). Porter’s hypothesis states
that inspiring eco-innovation has positive effects on business
and environmental performance, resulting in a win-win scenario
(Porter, 1991; Porter and Van der Linder, 1995; Ramanathan et al.,
2017).
In this context, implementing eco-innovation at company level
needs long-term commitments in form of staff skills training
(TR), investments in physical assets (INV), and expenditures for
research and development (R&D) (Roome, 1994; Sharma, 20 0 0;
Aragon-Correa et al., 2008; Cucchiella et al., 2017; Fernandez et al.,
2018). Investment in R&D is considered as an effective tool to
enhance environmental strategies, which often involve the de-
velopment of new environment-friendly technologies such as
more sustainable products and services and more efficient, less
resource-hungry operational processes (Porter and Van der Lin-
der, 1995; Gottlieb et al., 1995; Nasirtousi, 2017). Staff skills refer
to all human resource training and development that encourages
employees to be more creative and committed to environmen-
tal issues (Chen and Chang, 2103). Physical assets indicate that

https://doi.org/10.1016/j.strueco.2020.01.008
0954-349X/© 2020 Elsevier B.V. All rights reserved.
 S. Fethi and A. Rahuma / Structural Change and Economic Dynamics 53 (2020) 108–115
investments in form of new capital assets and software make
the operation processes by involving drilling, refining, and being
eco-friendlier environment working system (i.e., new technologies)
such as developing new infrastructural assets to reduce gas flaring
(García-Granero et al., 2018).
However, applying an environmental strategy at the company
level to simultaneously protect the environment and maximize
economic benefits is not without significant challenges (Lee and
Kim, 2011). In order for companies to meet these challenges,
they must be informed by empirical studies that analyze the
performance of environmental strategies. There is some evidence
to suggest that companies with proactive environmental strategies
are more likely to reduce their CO2 emissions and improve general
productivity (Nishitani et al., 2017). Companies with successful
environmental strategies are observed to have greater protection
against financial risks arising from violating environmental regu-
lations due to a reduction in their overall environmental impact
(Anatasia, 2015; Bhupendra and Sangle, 2016). Furthermore, com-
panies with environmental strategies are also more likely to reduce
environmental risks by implementing R&D activities, improving
employees’ skills, and investing in new technologies related to
eco-innovation (Sharms and Vredenburg, 1998; Aragon–Correa and
Sharma, 2003).
Although existing studies have enriched our understanding of
how eco-innovation affects CO2 emission reductions, the task of
reducing CO2 emissions by utilizing eco-innovation is an unsolved
problem (Ghisetti and Rennings, 2014; Wijethilake et al., 2018;
Zhang et al., 2017). More specifically, further research is needed
on how companies should invest their resources to ensure that
eco-innovation initiatives result in substantial CO2 emission reduc-
tions (Youndt et al., 2004; Costa and Freeao, 2010). In the current
literature, there are few studies provide strong evidence to guide
companies in achieving their environmental performance goals.
The majority of these studies are survey studies that observe the
policy rather than the actual performance (Garica-Granero et al.,
2018). Besides, empirical studies related to this field deal with one
or two actual indicators of eco-innovation to explain the impact of
eco-innovation on CO2 emission reductions. However, determining
the impact of eco-innovation on CO2 emissions should consider
all implemented eco-innovation indicators with an environmental
benefit. Such considerations are missing in empirical research
(Kemp and Pearson, 2007; Garica-Granero et al., 2018).
In response to the call of Garica-Granero (2018) and utilizing
the Porter hypothesis, we try to fill the gap in research knowl-
edge about the impact of eco-innovation activities on the CO2
emission reductions at petroleum companies. Although there
are some studies in the existing literature which did focus on
the impact of eco-innovation on CO2 emission reductions, these
studies do not focus on the actual activity of eco-innovation that is
responsible for the adoption of environmental strategy. Therefore,
this paper is the first study that uses three actual implemented
eco-innovation indicators to examine the effects of eco-innovation
on CO2 emission reductions to offer a more comprehensive and
explicit account of cause-effect relationships on the subject.
The precise definition of eco-innovation used in this study is
adopted from Renining (20 0 0) who defined as the application of
new ideas and technologies to improving operational processes to
reduce CO2 emissions. By using a sample of seventeen petroleum
companies, this paper identifies three implemented eco-innovation
indicators for chosen companies namely R&D, TR, and INV. It
is noteworthy that the three indicators explain the effect of
eco-innovation on CO2 emission reductions as well as the use of
panel data for both long and short periods at the company level
which are novel contributions made by this study. Thus, it helps to
resolve the debate concerning the actual relationship between eco-
innovation and CO2 emission reductions by offering some guiding
109
implications for applying and evaluating environmental strategy.
Petroleum companies are chosen because of their contribution to
CO2 emissions, their ability to invest in eco-innovation, and the
availability of their data in terms of both annual and sustainability
reports. The quantity of CO2 is used as a dependent variable while
R&D, TR, and INV are used as explanatory variables.
Although the Kyoto protocol and environmental regulations
have made an unequivocal commitment to limit pollution emis-
sions, there is evidence that the target of slowing the growth of
CO2 has not yet been achieved and this is becoming an increas-
ingly urgent problem to be solved (Jaio et al., 2018). Within the
context of CO2 emission reductions, petroleum companies are
increasingly taking measures to reduce CO2 emissions in order
to avoid litigation risk (Yáñez et al., 2018). However, previous
studies in this field paid little attention to the actual impact of
eco-innovation on CO2 emission reductions. The main motivation
in writing this paper lies in the fact that this kind of study has
not been undertaken before. This study investigates the impact of
eco-innovation on CO2 emission reductions as such innovations
also improve the efficiency of operational processes at the com-
pany level. This makes this study the first of its kind to the best
of our knowledge.
This paper deals with panel data where relying on the assump-
tions of cross-sectional independence may lead to inaccurate esti-
mation if the panel data are cross-sectionally dependent.1 Accord-
ingly, second-generation panel models, namely, the CAD unit root
test, the CIPS unit root test, Westerlund co-integration test, and
the autoregressive distributed lag model (ARDL) are applied which
consider cross independence issues in the estimation procedures.
The diagnostic test of confidence ellipse is also employed to test
the stability of ARDL coefficients so that the study’s findings are
obtained through accurate and robust analytic methods. Decision-
makers can deduct from the concluding remarks that future plan-
ning of eco-innovation can be formed in terms of the relative sizes
and timing of investments in infrastructure, in research & develop-
ment, and in training. This may guide the companies’ managers to
formulate their decisions accordingly to minimize CO2 emissions.
The remainder of the paper is organized as follows: the second
section includes literature review that focuses on a literature
concerning CO2 emission reductions under the Porter hypothesis.
The third section includes a data description and a model specifi-
cation for testing the hypothesis. The fourth section discusses the
empirical results and presents a wider discussion of the topic at
hand. The final section includes the concluding remarks and some
recommendations for future research.
2. Literature review
In 1995, the Porter hypothesis left little doubt about the
ability of companies to induce eco-innovation to enhance their
environmental performance (Porter and Van, 1995; Busch and
Hoffmann, 2011). Since then, many studies have focused on the
relationship between eco-innovation and CO2 emission reductions,
but the debate concerning their relationships are still ongoing.
Because, majority of these studies are survey and qualitative
studies, and they only reflect the policy intentions rather than the
actual corporate behaviors and their impact on the environment
(Schultz and Trommer, 2012).
Petroleum sector, one of the most pollutive industries on
earth, contributes 37% of the global greenhouse gas emissions
(Kolk and Levy, 2001; Yáñez et al., 2018; Wang and Li, 2018). With
increasing social pressures and tighter environmental regulations,
1
If the number of observations (N) is large and the time-series (T) is small, we
need to conduct cross-sectional dependence test to avoid inaccurate estimation re-
sults (Hsiao et al, 2012).
110 S. Fethi and A. Rahuma / Structural Change and Economic Dynamics 53 (2020) 108–115
petroleum companies consider CO2 emissions as potential financial
risks where failing to meet environmental standards results in
higher taxes and penalties. Consequently, the oil companies are
proactively formulating strategies to incorporate environmen-
tal targets regarding CO2 emissions in both the short and long
terms by improving their operational processes and resource use
(Kapusuzoglu, 2014; Kalayci and Koksal, 2015). In fact, one of their
main strategic aims is to decrease the negative impact on the
environment and to minimize the risk of heavier regulation and
penalties (Ozcan and Ari, 2017; Çetin and Ecevit, 2017; Gonec and
Schholtens, 2017; Wang and Li, 2018).
The traditional view on the environment holds that increased
social demand to protect the environment has positive effects on
the environment but negative effects on business operations and
profits (Costa-Campi et al., 2017). However, in 1995, this point of
view was challenged by the Porter hypothesis. The Porter and Van
indicated that companies could benefit from social demand and
regulation by using their resources in an ecologically innovative
way to make operational processes more efficient (Porter and Van
der Linder, 1995; Cucchiella et al., 2017).
Adopting environmental strategies at the company level
requires long-term commitments, especially financial commit-
ments in relation to the amount of investment required for
eco-innovation (Roome, 1994). Companies’ ability to envision a
sustainable environmental strategy can result in improved en-
vironmental performance whilst at the same time improving
operational efficiency. Thus, environmental strategy plays a vital
role in both CO2 emission reductions and business performance.
Eco-innovation is a key indicator in implementing a sound en-
vironmental strategy that ensures sustainability. Eco-innovation
can be defined as the ability of a company to reduce the negative
impact on the environment (Kemp and Pearson, 2007, p.5). In
the realm of operation processes, eco-innovation can be defined
as the ideas that develop new operation processes and new
products as well as moves that enhance investment in R&D and
new technology (Renning, 20 0 0). Companies can benefit from
adopting eco-innovation because their environmental performance
will improve as well as their operation processes.
Hitherto, the Porter hypothesis suggested that there is an op-
portunity to benefit from environmental regulation by reallocating
resources and investing in eco-innovation to enhance environ-
mental performance and protect the environment. However, the
recent arguments suggest that the Porter hypothesis is not precise
about the definition of innovation and how eco-innovation affects
companies’ operations and reduces their negative impact on the
environment (Orlitzky et al., 2003; Lee and Min, 2015). On the
other hand, some authors suggest that factors such as resources,
managerial obligation, and ability of companies to conduce eco-
innovation are important in improving simultaneously a business
performance and environmental performance at the same time
(Lopez-Gamero et al., 2010).
The studies on eco-innovation can be divided into two cat-
egories. The first category of eco-innovation studies consists
of survey research studies that have focused on the impact
of eco-innovation on a company’s environmental performance.
Doran and Ryan (2012) used data from an Irish company and
found that higher spending levels on knowledge and R&D, as
an eco-innovation indicator, have positive effects on company
performance. Similarly, Eiadat et al. (2008) observed positive
relationships between eco-innovation and business performance
for twenty-two sectors in Jordan. Ramanathan et al. (2017) ex-
amined the relationship between environmental regulations,
eco-innovation, and sustainability benefits in terms of pollution
reduction and environmental impact among British and Chinese
companies. They observed that companies that rely on their
resources and capabilities actually improve their contributions to-
wards sustainability through reductions in pollution and improved
performance.
The second category of eco-innovation studies consists of
empirical research that analyzes the impacts of both eco-
innovation and Carbon emissions on corporate performance.
Lee and Min (2015) used green R&D as a proxy of an eco-
innovation variable and examined its effect on environmental and
financial performance. In their study, they used Japanese manufac-
turing as a sample in the period 2001–2010 and found a negative
relationship between R&D and Carbon emissions. On the contrary,
Zhang et al. (2017), who measured the effect of eco-innovation
on Carbon emissions in China for the period 20 0 0–2013, found
that in most cases eco-innovation have positive effects on the
reduction of Carbon emissions. M.S. Alam et al. (2019) investigated
the impact of R&D investment on the company’s environmental
performance in G-6 countries and found that the investment in
R&D has a positive and significant impact on energy consumption
and CO2 emission reductions. Furthermore, they indicated that the
R&D and knowledge of innovation play a vital role in the reduc-
tion of Carbon emissions. In summary, eco-innovation can help
companies to reduce CO2 emissions by improving the efficiency of
the operational processes.
Even though the previous studies enriched our understanding
of how eco-innovation effects CO2 emission reductions, these
studies relied on qualitative assessments that took the presence
of eco-innovation intentions in strategic documents, rather than
looking at when and how much actual eco-innovation investments
are made and their outcomes on performance and CO2 emission
reductions. Such qualitative studies do not reflect the actual rela-
tionship between policy and performance because the assessments
they contain typically do not involve any objective, actualized
measure of the impact on emissions of the various actions and
expenditures undertaken by the company in relation to their
strategic statements (Chatterji et al., 2009; Schultze and Trom-
mer, 2012; Bhupendra and Sangle, 2016). Besides, existing studies
fail to provide concrete, tangible recommendations for reducing
CO2 emissions through eco-innovation. Considering this gap, this
paper is undertaken to fill the gap in the relevant literature for
investigating the impact of actual eco-innovation indicators on
CO2 emission reductions at the company level. Therefore, this
paper makes a novel contribution to the literature by revealing the
impact of actual eco-innovation investments in the short and long
term, thereby providing insights to petroleum company managers
in their short and long term plans for achieving efficient resource
use and profitability without sacrificing the environment.
3. Data description, theoretical model and methodology
3.1. Data description
In order to investigate the impact of eco-innovation on CO2
emission reductions, we follow Gonenc and Scholten (2017) who
suggested that future studies should look not at the corporate eco-
innovation intentions but also at the extent and nature of actions
taken by corporations in a line with such intentions. As summa-
rized in Fig. 1, we first searched the official corporate web sites of
petroleum companies to gather sustainability reports. Second, we
identified the various intentions and planned activities that are
contained in environmental strategies. Third, we selected key indi-
cators that reflect how much each firm actually carried out actions
towards implementation of its environmental strategy. Fourth, we
collected data from both sustainability and annual reports.
The first step, visiting the web sites, resulted in the identifi-
cation of seventeen oil and gas companies, who are all using the
same eco-innovation strategy and about whom data are available
through their sustainability and financial reports (Morad et al.,
 S. Fethi and A. Rahuma / Structural Change and Economic Dynamics 53 (2020) 108–115
Table 1
Variable definitions.
Notation Variable names Measures
LCO Carbon dioxide emissions Measured
LRD Research and development Measured
LTR Employee training Measured
LINV Environmental investment Measured
Fig. 1. Methodological steps of data collection.
2013). Oil and gas industry are a good choice with regards to
the availability of sustainability data because oil firms are legally
obliged to make such environmental information available (Lopez-
Gamero et al., 2010). At the same time, looking at oil and gas com-
panies, who are major polluters, to analyze how eco-innovations
help reduce pollution, is especially interesting because if it is
possible to reduce pollution even in this sector, then it should be
possible to do so in all others (Gonenc and Scholten, 2017). These
companies include Eni, ExxonMobil, Petrobras, OMV, MOL, BP,
Hess Corporation, Shell, Total, Rosneft, Ecopetrol, Repsol, Gazprom,
Chevron, Imperial, ConocoPhillips, and Hellenic Petroleum.
We employed the quantity of CO2 emissions as the dependent
variable in relation to measuring impact of corporations on the en-
vironment (Fernandez et al., 2018). We also used three explanatory
variables as proxies to explain the impact of eco-innovation on the
reduction in CO2 emissions. These three variables were chosen be-
cause they are used as key indicators of eco-innovation in the sus-
tainability reports of the sampled corporations. The first variable,
R&D, shows company expenditure in the development of new tech-
nologies that may improve operational processes and contribute
to CO2 emissions reduction. The second variable, TR, illustrates
employees’ development and skills, which also improves internal
operations and reduces errors. The third and last eco-innovation
variable, INV, indicates the investment in physical assets that are
responsible for reducing CO2 emissions. Financial data regarding
R&D, TR, and INV are measured in millions of dollars, and CO2
emissions are measured in millions of equivalent tonnes. All vari-
ables are expressed in the logarithmic form to avoid any possible
size effects. Data collected manually from both sustainability and
annual reports for each company. Because of this, matching errors
were lower than in the case of multi-data sources (Table 1).
3.2. Theoretical model
This paper investigates the impact of actual eco-innovation on
CO2 emission reductions. For this, we follow the Porter hypothesis
(i.e., eco-innovation improves a company’s operations and reduces
negative impacts on the environment), and similar perspectives
111
as the logarithm of total quantity of CO2 emissions in million tonnes.
as the logarithm of total investment in research and development in million dollars.
as the logarithm of total spending on employee training in million dollars.
as the logarithm of total environmental investment in million dollars.
in related studies such as (Tello and Yoon, 2008; Thoumy and
Vachon, 2012; Antonioli et al., 2013; Ramanathan et al., 2017;
You et al., 2019) that suggest eco-innovation improves business
performance. Based on the discussions, the expected relationship
between CO2 emission reductions and eco-innovation can be
illustrated in the following model:
C O2 = f (Eco−innovation ) (1)
Eq. (1) indicates that CO2 emissions are a function of stated
variables of eco-innovation. Hence, the model in Eq. (1) can be
transformed into a regression model as follows:
LC O2,τ = β0 + β1 LRDτ + β2 LT Rτ + β3 LINVτ + ετ (2)
Here, LCO2 represents the logarithmic quantity of CO2 emis-
sions and is used as a measure of CO2 reduction; LNRD is
logarithmic of R&D; LNTR represents the logarithmic of training;
LNINV is logarithmic of investment in the environment. The nonfi-
nancial data (emissions) are expressed in millions of tonnes while
the financial data (LRD, LTR, and INV) are expressed in millions of
dollars.
3.3. Methodology
First, we need to use a cross-sectional dependence (CSD) test
due to the small cross-section in panel-data where the number of
the cross-section is small (i.e., seventeen companies) and the num-
ber of time series is large. Although our case is in the borderline,
we conducted a CSD test to check whether or not cross-sectional
dependence exists in our panel-data model. It is well known
that the estimated results might suffer from a cross-sectional
dependence problem (Dogan and Seker, 2016). Therefore, we apply
cross-sectional dependence (CSD) developed by Pesaran (2004).
In addition to this process, if the result of the test indicates that
the variables are cross-sectionally independent, the Dickey-Fuller
(CADF) and (CIPS) unit root tests will be applied to get more
accurate results and eliminate inconsistency, cross-section depen-
dency problem (Pesaran, 2007). In the third step, since the benefit
of eco-innovation activity happens both in the short and in the
long-term (Roome, 1994; Martensson and Westerberg, 2016), we
would need to apply a second-generation panel co-integration
test to determine whether or not the variables have a long-run
relationship. If the variables are not stationary at the same order,
the autoregressive distributed lag (ARDL) approach, proposed by
Pesaran, Shin and Smith (1998), is more appropriate.2 The ARDL
model can be conducted in the following form:
q−1
y j, t = øEC j, t + β i, t  X i, t − j
j=0
 p−1
+ λi, j yi, t − j+ ∈ j, t (3)
j=1
When the case is mixed-order, its applicability is a more signif-
icant approach than the other types of cointegration tests (i.e., Jo-
hansen cointegration test, Westerlund and Edgerton cointegration
2
When the case is mixed-order, its applicability is a more significant approach
than the other types of cointegration tests (i.e., Johansen cointegration test, West-
erlund and Edgerton cointegration test, etc...) for determining the long- and short-
term relationships among variables in a small sample (Pesaran et al., 1998).
112 S. Fethi and A. Rahuma / Structural Change and Economic Dynamics 53 (2020) 108–115

test, etc.…) for determining the long- and short-term relationships Table 4
Error-Correction Panel co-integration test.
among variables in a small sample (Pesaran et al., 1998).
Where: y is the Carbon dioxide emissions (LCO), EC j,t = yi , t-1 Statistic Value Z-value P-value
– X i , t - θ is the error correction, θ is the long-term coefficient, Gt −1.911 −0.811 0.209
ø is the adjustment coefficient, X is a vector of independent Ga −5.708 1.388 0.918
variables; Research and development (LRD), Training (LTR) and Pt −7.817 −1.821 0.034
Investment (LINV), β is the short-term coefficient of independent Pa −6.051 −1.163 0.122

variables, λ is the short-term coefficient of dependent variable, i Notes: All tests are applied constant and with trend. This table indicates the
and t represent company and time respectively, q is the number of tests where p-values are asymptotic normal distribution values.
lag for independent variables, P is the number of lag for dependent
variable, є is the disturbance term.
4.3. Panel co-integration test

Consideration of the results of the cross-section dependence

4. Empirical results and discussion test as well as the unit root tests, lead us to apply the sec-
ond generation of co-integration developed by Westerlund and
4.1. Cross-sectional dependence test Edgerton (2007). The second-generation test has the power for
identifying the co-integration among panel time-series data in
The result of the CD test, as shown in Table 2, indicates that case of cross-independence issues, whilst assuming that the null
the associated p values reject the null hypothesis of independent hypothesis has no co-integration. The results, shown in table 4,
cross-sections for panel data. Henceforth, the second genera- demonstrate that the null hypothesis of no co-integration can be
tion of panel unit root tests will be robust and sufficient for rejected in the model; LCO, LR&D, LTR, and LINV, when the P test
cross-sectional dependence issues. shows that the p-value is (0.034). This finding suggests that there
is a long-term relationship due to the adoption of eco-innovation
activity between the eco-innovation variables and CO2 emissions
4.2. Panel unit root test result at the 5% level. This result shows that the eco-innovation variables
have long-term and short-term impacts on CO2 emissions in an
Taking into consideration the result of the CD test, the CADF ARDL model.
and CIPS models test the null hypothesis about whether or not
4.4. ARDL estimation
the variables contain a unit root. The results of the panel unit root
tests are reported in Table 3 and indicate that all variables except
The ARDL approach is applied to estimate the variables in
LTR are stationary at their first differences, or equivalently, I (1) at
Eq. (2). The Akaike Information Criteria (AIC) was used to select
a 1% significance level. LTR is stationary at their levels, or equiv-
the appropriate model with the smallest lag length and minimize
alently, I (0) at 1%, 5% significance level for the CADF and CIPS
the loss of degrees of freedom. The result of the estimations
tests, respectively. This finding justifies that the ARDL approach
in Table 5 shows that the long-term estimation of ARDL has a
can be employed for a co-integration relationship because the
negative and long-term relationship between LINV and LCO, at a
variables are in a mixed order of co-integration. This means that
1% significance level. This means that, in the long-run, a 1% in-
the results are consistent with the general characteristics of most
crease in investment decreases CO2 emissions by 6.7%. This finding
macroeconomic and financial variables, thus we are in a position
points to the benefits of environmental investment in the long-run
to carry out a co-integration test to check for the presence of a
whereas the short-term estimation shows that the lagged error
long-term relationship between the variables.
correction term is negative and significant, at 1%. The coefficient of
−0.104 suggests that the deviation from the long-term equilibrium
of LCO in one quarter is corrected by 10.4% over the following
Table 2
Cross-sectional dependence tests. quarter. The elasticities of LCO and LRD are negative and statisti-
cally significant, at 1%, which indicates that when LRD increases
Variables Breush-Pagan LM Pesan-scaled LM Perasan CD df(n = 816)
∗∗∗ ∗∗∗ ∗∗
LCO 1631.29 90.665 2.395 136
LRD 1977.238∗∗∗ 111.641∗∗∗ 19.134∗∗∗ 136 Table 5
LTR 1070.357∗∗∗ 56.653∗∗∗ 4.282∗∗∗ 136 ARDL estimation.
LINV 1214.514∗∗∗ 65.394∗∗∗ 2.013∗∗ 136
Variable Coefficient t-Statistic
∗∗∗ ∗∗
Note: , denote statistically significant at 1%, 5% respectively. Long Run Equation
LRD 0.151033∗∗∗ 3.596328
LTR 0.166326∗∗∗ 5.801126
Table 3
LINV −0.067171∗∗∗ −2.982313
Panel unit root test.
Short Run Equation
Variables CADF CIPS COINTEQ01 −0.104195∗∗∗ −3.764202
LCO (−1) 0.323879∗∗∗ 7.053221
Constant Trend Constant Trend
LRD −0.050718 −0.805849
LCO −2.026 −2.542 −1.479 −1.903 LRD (−1) 0.051039 1.241342
LRD −1.989 −2.433 −1.682 −2.003 LRD (−2) −0.075433∗∗∗ −3.307909
LTR −2.581∗∗∗ −3.063∗∗∗ −2.687∗∗∗ −2.687∗∗ LTR 0.488959∗∗ 2.525856
LINV −1.692 −1.953 −1.279 −1.760 LTR (−1) −0.215311∗∗ −2.361141
LCO −4.609∗∗∗ −4.705∗∗∗ −4.569∗∗∗ −4.578∗∗∗ LTR (−2) −0.100182 −0.841363
LRD −3.570∗∗∗ −3.763∗∗∗ −4.531∗∗∗ −4.537∗∗∗ LINV 0.078875 1.320383
LTR −4.094∗∗∗ −4.132∗∗∗ −4.409∗∗∗ −4.465∗∗∗ LINV (−1) −0.044773 −0.792994
LINV −3.263∗∗∗ −3.495∗∗∗ −4.334∗∗∗ −4.526∗∗∗ LINV (−2) 0.005976 0.188813
C 0.056947∗∗ 2.072273
Note: ∗ ∗ ∗ , ∗ ∗ denote statistically significant at 1%, 5% respectively.  indicates
∗∗∗ ∗∗
first deference. Note: , denote statistically significant at 1%, 5% respectively.
 S. Fethi and A. Rahuma / Structural Change and Economic Dynamics 53 (2020) 108–115
Fig. 2. Coefficient diagnostic with confidence interval.
by 1%, LCO emissions decrease by 7.5%. The elasticities of LCO and
LTR are negative and significant at 1% and this result indicates
that a 1% increase in LTR decreases LCO by 21.5%. Practically, these
results show that the three eco-innovation indicators, utilized in
this study, do possess significant and critical explanatory powers
for accounting for reductions in CO2 emissions resulting from
operational process improvements. Accordingly, it can be sug-
gested that companies pursuing eco-innovative strategies are more
likely to improve their environmental performance. It should be
noted that the contribution of each of the eco-innovation factors
to CO2 emissions differ considerably, with contributions ranging
from 21.5% for LTR, to 7.5% for LRD and 6.7% for LINV respectively.
The much larger contribution of LTR may be due to the fact
that these companies rely much more on human resources (see
Bevilacqua and Braglia, 2002), and that such knowledge-intensive
workforces have higher levels of awareness about the environment
and hence are more willing to participate in activities aimed
at reducing emissions (see Lee et al., 2015). Our results suggest
that eco-innovation has a positive and significant impact on CO2
emission reductions at the company level (see Ekins 2010). This
supports the Porter hypothesis and may be attributed mainly
to improvements in operational processes that result from the
adoption of eco-innovation activities at the company level.
The paper’s findings reveal the significance of eco-innovation
activities for simultaneously improving internal operating pro-
cesses and CO2 emission reductions, thereby making eco-
innovation a central tenet for environment-friendly corporate
strategies. Our study points out that integrating environmental
considerations into corporate operations and processes does im-
prove environmental performance (CO2 reduction) and corporate
reputation as well as internal operations.
Having estimated the ARDL output as can be illustrated in
Table 4, It is noteworthy to mention that the results of the diag-
nostic test of confidence ellipse in Fig. 2 reveal the stability of the
ARDL coefficients, which are captured within the center of the el-
lipse (see Alola and Alola, 2018). Hence, this implies that the three
coefficients (LRD, LTR, and LINV) are suitable for explaining the fu-
ture change of CO2 emissions.
5. Conclusion and policy implication
Although there are some studies in the relevant literature that
have focused on the impact of eco-innovation and CO2 emissions,
113
there are none that analyze the impact of actual eco-innovation
on CO2 emission reductions (Garica-Granero et al., 2018). This
paper breaks new ground by investigating the impact of actual
eco-innovation on CO2 emission reductions based on panel data
for seventeen international petroleum companies over the pe-
riod 2005–2016. The ARDL model was employed by using the
quantity of CO2 emissions as a dependent variable, and three
eco-innovation indicators (R&D, TR, and INV) as independent
variables. The results obtained show that LINV has a positive
and significant impact on LCO in the long-term, whereas LRD
and LTR have a positive and significant impact on LCO in the
short-term. However, our finding illustrates that spending on LRD,
LTR, and LINV leads to significant reductions in CO2 emissions at
the company level. These findings are consistent with the funda-
mental arguments of the hypothesis of Porter, and fundamental
theoretical arguments of Sharma and Vredenburg (1998), Aragon–
Correa and Sharma (2003), Bhupendra and Sangle (2016) and
Nishitani et al. (2017) that pursuing eco-innovative at company
level improves their environmental performance where empirical
studies such as Lee and Min (2015), Zhang et al. (2017) and
Fernandez et al. (2018) point out that eco-innovation activity at
company level improves business operation and environmental
performance (CO2 reduction).
Furthermore, this paper reveals that investments in training,
rather than research and development have particularly high rates
of return on lowering CO2 emissions. Such a finding has impli-
cations for human resource departments planning their training
budgets as well as for top management in prioritizing budgetary
resources for eco-innovation initiatives.
Last but not least, considerations should be made of the lim-
itations of this study when applying its recommendations and
when designing future studies on the subject. Initially, due to
data limitations, our paper focused only on seventeen companies
within the petroleum sector that aim to reduce CO2 emissions
from the operation process. This may provide only limited insights
into the effects of eco-innovation on CO2 emissions and our result
cannot be easily extrapolated to other industries that aim to
reduce pollution emissions. So, further studies are more likely
to replicate this study when they employ different strategy’s key
indicators in the different sectors or industries. This kind of differ-
ences in industries or sectors should be considered otherwise the
policymakers may be misguided about the implications. Second,
our study does not create a link between the reduction of CO2
emissions and the strategic target. Thus, it’s not clear whether the
strategy is successful or not and future research may establish a
link to target a successful strategy.
However, it is interesting to note that our findings highlight
the significance of implemented eco-innovation activities which
have positive impacts on CO2 emission reductions. In an ultimate
conclusion, these findings have significant policy implications for
environmental strategy since it provides new empirical evidence
for the importance of spending on eco-innovation at the company
level to improve business operations and reduce CO2 emissions.
More importantly, the implementation of a CO2 reduction strategy
could be applied in the other polluted sectors that emit large
amounts of CO2 .
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