Can Environmental Regulations be Good for Business? an Assessment of the Porter Hypothesis (original) (raw)
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The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness?
2010
Twenty years ago, Harvard Business School economist and strategy professor Michael Porter stood conventional wisdom about the impact of environmental regulation on business on its head by declaring that well designed regulation could actually enhance competitiveness. The traditional view of environmental regulation held by virtually all economists until that time was that requiring firms to reduce an externality like pollution necessarily restricted their options and thus by definition reduced their profits. After all, if there are profitable opportunities to reduce pollution, profit maximizing firms would already be taking advantage of those opportunities. Over the past 20 years, much has been written about what has since become known simply as the Porter Hypothesis ("PH"). Yet, even today, there is conflicting evidence, alternative theories that might explain the PH, and oftentimes a misunderstanding of what the PH does and does not say. This paper provides an overview of the key theoretical and empirical insights on the PH to date, draw policy implications from these insights, and sketches out major research themes going forward.
2006
While consumption and degradation of natural resources and the environment continue to grow worldwide, worries about declining competitiveness of European industry vis-à-vis US and Asian competitors persist. Against this background, the question of what drives environmental innovation in industry and what role regulation plays in this regard has become ever more relevant. Ten years ago Porter and van der Linde popularized the win-win proposition, stating that environmental regulation could induce innovation by making industry aware of and willing to exploit otherwise missed opportunities. This, they claimed, would result in environmental benefits and increased competitiveness. The Porter hypothesis has spurred a substantial amount of research on the influence of environmental regulation on innovation, but the results have so far remained inconclusive. We discuss the key problems in extant research and outline a comprehensive analytical framework for studying the effects of environmental regulation on innovation alongside firm-internal conditions and external market forces. This framework also takes into account varying opportunities for direct customer benefits across areas of environmental innovation. Very few political scientists have, thus far, ventured into this research area. Those who have have focused on the sectoral, national or systemic (international) level. To complement this research we propose to improve the micro-foundations of our understanding of environmental innovation by applying the framework outlined in this paper at the firm and innovation field level within and across firms, industries, and countries. 1 This publication reports preliminary results from an OECD study that covers more than 4000 facilities in seven OECD countries.
Environmental regulations, innovation and firm performance: A revisit of the Porter hypothesis
Journal of Cleaner Production, 2016
This paper examines the relationships between environmental regulations, firms' innovation and private sustainability benefits using nine case studies of UK and Chinese firms. It aims to unravel the mechanisms by which a firm's environmental behaviour in improving its private benefits of sustainability is influenced by its relationship with the government, which primarily enacts regulations to maximise public sustainability benefits in the interests of society as a whole. This paper takes the cue from the Porter hypothesis to make some broad preliminary assumptions to inform the research design. A conceptual framework was developed through inductive case studies using template analysis. The results show that depending on firms' resources and capabilities, firms that adopt a more dynamic mindset to respond to environmental regulations innovatively and take a proactive approach to manage their environmental performance are generally better able to reap private benefits of sustainability.
Environmental Regulation of Polluting Firms: Porter's Hypothesis Revisited
This paper provides a theoretical explanation for a regulation-driven win-win situation along the lines of Porter's hypothesis. Using a Cournot duopoly with polluting ¯rms we show that in the absence of government intervention there exist parameter values such that in the resulting Nash equilibrium, both ¯rms choose the old, high polluting technology even though adoption of a new, low polluting technology yields higher pro¯ts for both ¯rms (prisoner's dilemma). We then show that government intervention in the form of direct emission controls can eliminate the prisoner's dilemma situation and induce both ¯rms to adopt the modern, low polluting technology provided that the regulation is su±ciently strict. In this case, the reduction in market size for polluting ¯rms is strong enough to reduce pro¯ts. By investing in a new, low polluting technology, ¯rms avoid any quantity restrictions on output and enjoy higher pro¯ts despite the initial cost of investing in the new techno...
2003, Environmental regulation of polluting firms: Porter’s hypothesis revisited
2013
This paper provides a theoretical explanation for a regulation-driven win-win situation along the lines of Porter's hypothesis. Using a Cournot duopoly with polluting¯rms we show that in the absence of government intervention there exist parameter values such that in the resulting Nash equilibrium, both rms choose the old, high polluting technology even though adoption of a new, low polluting technology yields higher pro¯ts for both¯rms (prisoner's dilemma). We then show that government intervention in the form of direct emission controls can eliminate the prisoner's dilemma situation and induce both rms to adopt the modern, low polluting technology provided that the regulation is su±ciently strict. In this case, the reduction in market size for polluting¯rms is strong enough to reduce pro¯ts. By investing in a new, low polluting technology,¯rms avoid any quantity restrictions on output and enjoy higher pro¯ts despite the initial cost of investing in the new technology.
The Negative Influence of Environmental Regulatory Standards on Environmental Innovation
Environmental innovation enables breaking the common linkages between industrial growth and environmental impacts. Such decoupling is essential since the world's carrying capacity for absorbing environmental waste is limited. In many cases, the social benefits of innovation do not reflect the firm's interests, and thus the private incentive to adopt innovative environmental solutions may be low or non-existent. The market failure that results from the divergence between private interests and social optimization warrants policy interventions that encourage innovation. Such policies should account for the social costs and benefits as well as the factors that influence decision-making by industrial firms. The contribution of environmental regulations to technological innovation has been widely discussed during the last two decades (Jaffe et al., 1995, 2002). On the one hand, strict "command and control" regulations have an important role in the promotion of environmental technology change and innovation (Ashford 2002). The justification for this approach is that regulations impose higher compliance costs to industry and higher compliance costs drive environmental innovation (Brunnermeier & Cohen, 2003). But, on the other hand, many researchers also view the consensus between the regulators and the industry as very important for technology transfer and innovation and the need for flexible regulations rather than direct regulations
The environmental Porter hypothesis: theory, evidence, and a model of timing of adoption
Economics of Innovation and New Technology, 2009
The Porter Hypothesis postulates that the costs of compliance with environmental standards may be offset by adoption of innovations they trigger. We model this hypothesis using a game of timing of technology adoption. We show that times of adoption are earlier the higher the non-adoption tax. The environmental tax turns the preemption game with low profits into a game with credible precommitment yielding high profits (pro-Porter). If there is a precommitment game without environmental taxes, the introduction of a tax leads to lower profits (anti-Porter). An evaluation of the empirical literature indicates that the Porter hypothesis holds even for profit-maximizing firms under multiple market imperfections such as imperfect competititon, X-inefficiency, and agency costs. These are more likely to be present in sectors with large firms. In many case studies that we evaluate, though, we detect an element of explicit or implicit subsidies for environmentally friendly behaviour, which is in line with Pigovian policies.
Environmental Policy Without Costs? A Review of the Porter Hypothesis
International Review of Environmental and Resource Economics, 2009
This paper reviews the theoretical and empirical literature connected to the so-called Porter hypothesis; that is, it reviews the literature connected to the relation between environmental policy and competitiveness. According to the conventional wisdom environmental policy, aiming for improving the environment through, for example emission reductions, does imply costs since scarce resources must be diverted from somewhere else. However, this conventional wisdom has been challenged and questioned recently through what has been denoted the "Porter hypothesis". Advocates of the Porter hypothesis challenge the conventional wisdom on the ground that resources are used inefficiently in the absence of the right kind of environmental regulations, and that the conventional neoclassical view is too static to take inefficiencies into account. The conclusions that can be drawn from this review are: (1) that the theoretical literature can identify the circumstances and mechanisms * The authors gratefully acknowledge financial support from the Foundation for Strategic Environmental Research (MISTRA), the Swedish Research Council for Environment, Agricultural Sciences and Spatial Planning (FORMAS), and the Swedish Energy Agency (STEM). The authors wish to thank participants at MISTRA's Workshop on Sustainable Investments