FEEM working papers "Note di lavoro" series
2014 .080

Environmental Regulation and Competitiveness: Empirical Evidence on the Porter Hypothesis from European Manufacturing Sectors


Authors: Yana Rubashkina, Marzio Galeotti, Elena Verdolini
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Environmental Regulation, Innovation, Productivity, Competitiveness, Porter Hypothesis
JEL n.: Q50, Q52, Q55, Q58, O31
JEL: Energy Policy
Pages: Volume 83, Pages 288-300
Date: 08/2015

Abstract

This paper represents an empirical investigation of the “weak” and “strong” Porter Hypothesis (PH) focusing on the manufacturing sectors of European countries between 1997 and 2009. By and large, the literature has analyzed the impact of environmental regulation on innovation and on productivity generally in separate analyses and mostly focusing on the USA. The few existing studies focusing on Europe investigate the effect of environmental regulation either on green innovation or on performance indicators such as exports. We instead look at overall innovation and productivity impact that are the most relevant indicators for the “strong” PH. This approach allows us to account for potential opportunity costs of induced innovations. As a proxy of environmental policy
stringency we use pollution abatement and control expenditures (PACE), which represent one of the few indicators available at the sectoral level. We remedy upon its main drawback, that of potential endogeneity of PACE, by adopting an instrumental variable estimation approach. We find evidence of a positive impact of environmental regulation on the output of innovation activity, as proxied by patents, thus providing support in favor of the “weak” PH in line with most of the literature. On the other front, we find no evidence in favor or against the “strong” PH, as productivity appears to be unaffected by the degree of pollution control and abatement efforts.

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Suggested citation: Yana Rubashkina, Marzio Galeotti, Elena Verdolini, Environmental regulation and competitiveness: Empirical evidence on the Porter Hypothesis from European manufacturing sectors, Energy Policy, Volume 83, August 2015, Pages 288-300, ISSN 0301-4215, http://dx.doi.org/10.1016/j.enpol.2015.02.014

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