Assessing the Economic Impacts of Environmental Policies

Evidence from a Decade of OECD Research

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Over the past decades, governments have gradually adopted more rigorous environmental policies to tackle challenges associated with pressing environmental issues, such as climate change. The ambition of these policies is, however, often tempered by their perceived negative effects on the economy. The empirical evidence in this volume – covering a decade of OECD analysis – shows that environmental policies have had relatively small effects on economic outcomes such as employment, investment, trade and productivity. At the same time, they have been effective at reducing emissions from industry. The policies can however generate winners and losers across firms, industries and regions: while the least productive firms from high-polluting sectors are adversely affected, more productive firms and low-pollution sectors benefit. Environmental policies can be designed and combined with other policies to compensate workers and industries that may lose and to emphasise their positive impacts.


Productivity growth, environmental policies and the Porter Hypothesis

The link between environmental policies and productivity growth is the focus of this chapter. New regulations often impose additional costs on firms, thereby reducing their productivity. However, new regulations might also trigger productivity increases through a redesign of production processes or a reallocation of resources within firms. This hypothesis is known as the Porter Hypothesis and has been the subject of a number of empirical studies. However, the evidence is inconclusive so far, especially at the cross-country level as a comparable measure of environmental policy stringency was missing to date. This study uses the OECD EPS indicator, a cross-country indicator for environmental policy stringency, to provide new evidence on the Porter Hypothesis. Using an extended neo-Schumpeterian productivity model, it looks at productivity developments at the industry and firm level of 17 OECD countries over the period 1990 to 2009. The results suggest that better environmental protection is associated with a short-term increase in industry-level productivity growth in countries that are considered to be at the technology frontier. The firm-level analysis shows that only the most productive firms are able to reap productivity gains while the least productive ones face a productivity decline.


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