Environmental regulation can in fact increase worker productivity and overall capital accumulation, according to new research from Italian economists, with green taxes having the largest potential effect on productivity.
Their findings, published Jan. 12 in International Economics, confirm the Porter Hypothesis, an economic theory that predicts that environmental policy will lead to innovative growth and productivity, and counter previous theories that environmental policy is a burdensome cost to companies, the researchers noted.
“In the past, firms were somehow against the environmental stringency, the environmental policy stringency,” said Roberta De Santis, a senior economist at the Italian National Institute of Statistics and co-author of the research. “Adding this … might somehow incentivize firms to implement environmental policy.”
The Porter Hypothesis was first proposed by Michael Porter and Claas van Der Linde in the Journal of Economic Perspectives in 1995. The theory says — and De Santis’ research confirms — that when strict environmental policies are implemented, it forces companies to innovate, which in turn improves production techniques in an environmentally friendly way.
“So it is basically a win-win solution, because on the one side, firms improve their competitiveness,” De Santis said. “On the other side, it also adds to the environment.”
To conduct their research, De Santis and her co-authors examined 14 countries that are members of the Organisation for Economic Co-operation and Development, primarily those in Europe and North America that have closely followed OECD environmental guidelines, between 1990 and 2015. The researchers measured environmental-adjusted labor productivity as environmental-adjusted gross domestic product for pollution abatement in per hour terms, which allowed for the consideration of a country’s technological capabilities and economic structure.
The researchers found that both market- and non-market-based policy measures positively affect labor and multifactor productivity growth, a measure of economic performance that compares the amount of output to the amount of combined inputs such as labor, capital, energy and materials.
Market-based policies include taxes, renewable-energy credits, energy-efficiency credits and feed-in tariffs, among others. Non-market-based policies include environmental standards, such as limits on emissions, subsidies for research and development and government expenditures.
Green taxes, or taxes levied on businesses and individuals in order to promote environmentally friendly practices, had the largest impact on multifactor productivity, though De Santis and her colleagues wrote that green taxes need to be paired with complementary redistributive policies, such subsidies and grants for companies transitioning to environmentally friendly practices, in order to avoid damaging productivity.
“What is clear is that you have to face this increasing environmental policy stringency, and as a firm, probably the best is if you try to create this win-win solution so it’s passed through an improvement in technology,” De Santis said.
This is the third paper De Santis has written about environmental policy; in addition to examining the Porter Hypothesis, she has also studied how environmental policy impacts international trade.
“I found it very interesting that starting from the [2007-08] financial crisis, many countries … were forced to find alternative economic growth sources, and the green economy was found among the most promising,” she said.
Other potential research avenues, De Santis added, include further study of how specific policies trigger productivity growth and the redistributive impact of new environmental policies implemented by the European Commission.
“According to what we found [in this paper], it will have a positive impact on productivity,” she said, “but what is not in the paper is what might be the redistributive impact,” such as the European Commission supporting EU countries that depend on fossil fuel and carbon commodities.
The European Union has already allotted €150 billion to support these countries through its Just Transition Mechanism, part of the European Green Deal effort to create a climate-neutral economy in Europe by 2050.
“Basically, this is a very promising sector,” De Santis said. “Obviously because it will help the environment, but also because it might provide a lot of employment and GDP growth.”
The study “Environmental regulation and productivity growth: main policy challenges,” available online on Jan. 12, 2021, from International Economics, was authored by Roberta De Santis, Italian National Institute of Statistics and Luiss University; Pasquale Esposito, University of Cassino and Southern Lazio and Luiss School of European Political Economy; and Cecilia Jona Lasinio, Italian National Institute of Statistics and Luiss University.
scwizard on January 23rd, 2021 at 14:06 UTC »
Looks like growth is being defined differently here than in some other studies.
brojito1 on January 23rd, 2021 at 13:07 UTC »
I feel like this is arguing against the wrong problem for business when it comes to environmental regulation.
The problem is that with globalization you are competing with businesses in other countries who do not face the same regulations.
As a real life example of this, virtually all of the vinyl used for things in the US like furniture etc comes from China. It's not because they do it better, it's because the environmental regulations we have in the US (mainly the exposing of some chemicals) makes it extremely cost prohibitive so it is impossible to compete.
Btw I'm not saying env regulations are bad. I'm happy living a safer life. Just pointing out that the idea of this study is missing the point.
Express_Hyena on January 23rd, 2021 at 11:44 UTC »
Green policy is good for the economy. Some early assumptions in the literature explain why this is counter intuitive for some.
Early economic literature assumed that any country reducing CO2 emissions would only incur local costs, because any benefits of preventing global warming would be diluted across the entire globe. These early assumptions influenced other academic disciplines, and formed the framework for everything from international climate negotiations to the beliefs of the layperson (Stern 2015, section 4). Economic literature has since moved on, but the rest of us haven’t quite caught up yet. Current evidence suggests that the immediate local benefits of reducing fossil fuel combustion compensate or outweigh costs, regardless of what other countries do.
While early literature focused only on CO2 emissions, fossil fuel combustion generates other pollutants which impose immediate local costs. Among these are particulate matter (PM), nitrogen oxides (NOx), sulfur dioxide (SO2), carbon monoxide (CO), and others. These pollutants contribute to four of the five leading causes of mortality in the United States1, 2, 3, 4, 5, 6. Considering these pollutants gives us a more complete picture of the societal cost of fossil fuels (Shindell 2015). Decreasing fossil fuel use reduces these other pollutants as well, generating significant additional social co-benefits (Barron 2018).
Scovronick 2019 finds that “The optimal climate policy (carbon pricing) has immediate and continual monetized global net benefits when accounting for health co-benefits. This overturns the findings from standard cost-benefit optimization models, which ignore health co-benefits and thus imply that optimal climate policy has net costs for much of this century.” Vandyck 2018 (fig. 6) finds that the co-benefits of unilaterally reducing fossil fuel use exceed costs in most countries, even without accounting for benefits of avoiding climate damages. Other recent research comes to similar conclusions (Barron 2018, Stern 2015, Shindell 2018)
30 years of real-world data on countries with carbon prices shows that “carbon taxes have a zero to modest positive impact on GDP and total employment growth rates” even if you ignore health and climate benefits. When accounting for health and climate benefits, reducing emissions on a 2°C pathway would result in a net benefit of nearly $1 trillion per year in the US.
The IMF (Coady 2019, page 5) states that “Energy pricing reform therefore remains largely in countries own interest, given that about three quarters of the benefits are local.” Among economists publishing on climate change, 77% say that the U.S. should reduce greenhouse gases “regardless of the actions other countries have taken thus far.”