This paper addresses the claim that environmental policies stimulate the domestic economy. I parse the effect of environmental policy into two parts: the consequences for innovation and the consequences for manufacturing production. Each of these activities can either take place at home or abroad, and where they take place determines the policy consequences for the domestic economy. The empirical evidence is based on measures of policy, patent activity, and trade in the renewable energy sector (solar, wind, geothermal, biomass and waste) of 36 OECD countries between 1980 and 2003. Accounting for the endogeneity of environmental policies by exploiting the heteroscedasticity of my model, I find that environmental policies lead to a rise in patent filings through increased licensing of foreign technologies while the effect on the development of new technologies at home is small. These results are robust to different measures of policy stringency. In turn, policy-induced innovation does not only lead to a surge in imports of renewable energy technologies but also to a significant rise in the domestic production and exports of these technologies. Therefore, environmental policies do stimulate the domestic economy through manufacturing, but much less through innovation.