Energy StudiesReview Vol.14. No.2. ]006 pp42-62
Can Environmental Regulations be
Good for Business?
An Assessment of the Porter Hypothesis
STEFAN AMBEC and PHILIPPE BARLA
ABSTRA CT
The P011e r hyp oth esis asserts that polluting firms can ben efit from env iro nme nta l policies,arguing that well -d esign ed envi ro nme nta l regulati ons
stimulate innovati on. This is ach ieve d by increasin g eithe r productivit y or product va lue which lead s to privat e ben efits. As a conse que nce, env ironme nta l regulations would ben efit both society and regulated firms. Thispoint of view has found a receptive audie nce amon g policy mak er s and the popular press but has been severe ly criticized by economis ts. In this paper, we presen t some of the argume nts in this deb ate and review the empir ica levide nce availab leso far in the econo mic literature.
Stef an Ambeciswith thelNRA-GAEL.UniversitePierre Mendes-France BP47.3804 0 Grenoble. Cedes 9. France
PhillipeBarla is thecorrespondingauthor withtheGREENand Departmentof Economics.UniversiteLaval.Quebec.Quebec.G/K 7P4 Canada.
Ambec&Bar/a 43
INTROD UCTION
Since the earlyseventies, the scope of Environme ntal Regul ations(ERs) in most devel op ed econo mies has considera bly broadened resulting in increased pollution control expen ditures. For example, in the US, pollution abatement investme nts inc reased by 13 7% over the 1979-1994 per iod. In the early nineti es, total pollut ion abateme nt costs represe nte d bet ween 1.51% and 2.5% of the US GDP (see Berma n and Bui, 200 1). The sa me trend has been observed in Cana da where env ironme ntalprotection expe nd itures bybusin ess incr eased by 27% from 1995 to 2002 (Stati stic s Canada, 1995 and 2002 ). Given the growingconcern for environmen talqua lity and the threatof clima te cha nges, sig n ificant increases in ERs and pollution contro l expe nditures are very likely to cont inue in the near future. Further mo re, ERs is espec ially relevant in the energy sector for it includes severa l "pollution inten sive" industri es suc has petroleumor power generation.
The tradition al view among economists- ERs impose private costs on regul ated industries - was recentl y cha llenged by Porter (199 1) and Port er and van der Linden (1995). In fact, what is now referr ed as the Porter Hyp oth esis (P H) states that stringe nt, well-design ed ERs lead not only to socia l benefits but may vel:\,oftenalso result in private ben efits for regulated compani es. Much of the controversy in this debat e has cent er ed around the "vel:\, often" give n the genera lconse nsus that there does indeed exist cases whe re ERs have improved polluting firms'profit. Critics ofthePH argue that such success stor ies are not the norm and that overa ll, improving env iro nme nta l quali ty is not a "free lunch". Obv ious ly, the policy implications of this question are potenti allyhuge.
In Section II, we re view the main argume nts in this debat e and present some of the theoretical foundations of the PH. In section III, we assess the empirica l evide nce avail abl e thus far in the economic lite rature. Since the controve rsy centere d on whether there is systematic positive or negat ive relatio ns hip between ERs and regul ated firms' perfo rmance, we ign ore case studiesand foc usoneconometric ana lyses.
1. BACKGROUND
44 EnergyStudiesRevi ew Vol. 14.No. ::
capital stoc k but not itsproductive capacity . In other words, ERs redu ce firm product ivit y thereb yincrea sing costand lowerin g profit.'
For Porter and van der Linden (1995 ), the trad itionalview has a narrow static perspective on firms ' react ion to ERs. Indeed,faced with the prosp ect of higher abateme nt costs, firms will invest in innovation activ ities to find new ways to meet new regulatory requirement s.' The resulting new production processor newproduct spe cifications would reduce pollutionand at the same time lower product ion costs or increase product market value:' These bene fits will very often offset and even exceed the costs initia lly imposed by regulations. Clearly, thenature of the ERs here is critical. They should be stringe nt enoug h to trigger firms to overh aul the ir production process, but offer firms sufficient latitude regarding how to ach ieve the env ironme ntal target s..J Figur e I summarizes the main causa l links invol ved in thePH.
StrictBut Flexible ERS
Increased R&D
ProcessOffset
Product Offset
CostReduction
Increased Product Value
Improved Com petitiveness&
Profitability
Figure 1.Schematic represent at ionofthePorter Hypothesi s
1Othcr reason sjustifying a negati ve relationship between ERs and produ ctivit y include: i) emiss io ncontro l techn ology may red uce the produ cti on process efficiency: ii) ERs may redu ce investm ent s if they incre ase ene rgy prices. an input that is compleme nta ry to capita l: iii)investm ent s in abatem en t capita l may crowd out produ cti ve investm ent s; iv) stricter ERsfor newplant smay delay introd uctionof new and mo re prod uctivecapita l. 2Stricter ERsmay also boostR&D activitiesby the ceo-industryi.e.firms specializing inthe
produc tion and del ivery of abatemen t orcleaner techno logy. This ind ust ry is presently boom ingwith worldw ideearn ingexpectedto reach overS700 billionby 2010(see Da vid andSinc lair- Desnaanc,2005).
.1Ado ptingstrictERs-m71Yalso be a wayfor acountrytobecom e alead erin develop ing ne w, clean er expo rta ble technologies, as othe r countries ado pt mo re stringe ntenv iron me nta l norms.
liter ature on behavioural econom ics also offers ways to For example, several researches have formalized Ambec& Bar/a 45
Two main criticisms ofthe PH(see Palmer,Oatesand Portney, 1995) are as foll ows: first, this hyp oth esis rests on the idea that firms syste ma tica lly ignore profit abl e oppo rtunities. In othe r words, why wou ld regulation actua lly be needed for firms to adopt profit-inc reasing inn ovation s? In fact, Porter and van del' Linden directly question the view that firms are profit-maximizing entities: "The possibility of regulation might act as a spur to innovation arises because the world does not fit the Panglossian bel ief that firmsalways mak e optima l
c
hoices."
Second, even if there aresyste ma tically- pro fita b le busin essopportunities that are missed ("low ha ng ing fruit"), the next question is how could ERs cha ngethat reality? Are bureaucrats better informedabout bus inesscondi tions than managers? Porter and van del' Linden argue that ERs may hel p firms identify inefficient use of costly resources. They may also produ ce and dissemin ate new inform ati on (e.g. best practic e techn ol ogi es ) and help overco me organi zationalinertia.
A few research pap ers have set forth forma l theoretical mod els underlining condi tions unde r which profit increasing projects may systematically be missed and how ERs could potentially help. A first set of expla natio ns departs from the neo-classic profit maximizing framework. Kenn ed y (1994) exam ines the R&D investm ent deci sion of a risk-averse man ager." Since theoutcom e ofthe R&D program isuncert ain,the man ager will not choose an investment level that minimizes expec te d costs. He will have a tende ncy to under -invest in R&D as he places mor e weight on bad outcomes than on good ones. In this context, ERs may br ing the manager's decisioncloser to the optimal one by affecting the marginalvalue of an extra dollar spe nt on R&D.7 Therefore,ERs would leadto a reductionin expected costs. A necessary cond itio nto obta in thisresult is that ERs increase bene fits assoc iated with good R&D outcom es more than those resulting from bad outco mes thereby, offsetting the impact of risk aversion. It is difficult to precisely access the empirical relevance of this condition. However, Kennedy' smodelsuggests that testing fora positive relationship between ERs and R&D activities may provide some indication on the validity of the PH. As we will see below, this approach has been adopte d in a few emp irica l works.
The boom ing justify the PH.
5Porter andvan del'Linden (1995 I.p.99.
6 Rather than maximizing expected profits. the manager is assumed to maximize a utility functionthatisconcave in thelevelofprofit.
46 Energy StudiesReview Vol.14.No.2
procrastination behaviours by assuming that individuals have present-biased preferenc es: "W hen consid erin g trade-offs between two future moment s, present-bi ased preference s give stronge r relati ve weight to the earlier moment as it gets close r'Y
In
this contex t, good investment opportunities ("low han gin g fruits") may be missed by a present-biased manager that has the tendenc y to procrastinate costs. A simple exa mple can illustrat e this point. Supposethat a manager has the opportunityto invest c inoneperiodto obtainVin benefits in thenext per iod. Tradi tio na lly, economists have assumedthat
investme nt will occur whenever c«5V with(5<1 representing the man age r's discount rate. A present-biased manager is also assu med to trade-offbetween any two consecutive future periods using 6. However, when it comes to trading off betw een "now" or "late r", he isassumed to use adifferentdiscount factor
f3c5
with/3
<
1. These"beta-delta"preferenc es, as they are referred in the literature, implies that when looking into the futur e, the manager plans to undertak e every inves tment project such that c«)V Yet, in reality, he onlyunderta kes those that respect c <
jX
5V
In
other words,he has a tendenc y to continuo usly procrastinate projects that are suc h thatjX5
V<c
«
5V
ERs maytherefore help the manager to overco me his self-co ntro l problem." Note however that if the manager is "sophisticate" (i.e. award of his self-control
problem), he may also try to control his tendenc y to procrastinate by implem enting incenti ve devic es that comm its his "torn orrow-se lf" to invest. An example of suc h a devic e could be an ISO 14001 certifica tion which commits the firm to continuously improveits env ironmenta l performance.10
In
the traditional profit maximi zin g paradi gm , thePH
can be explained by intra-firm ineffi cienci esdue to asymmetric information. Ambec and Barla(2002) dev elop a principa l-agent model with renegotiation to formalize the idea that ERs may overcome organi zationa l
i
nertia
,
IIIn
thei r model, amanager (agent) has private informat ion about the outco me of an R& D investment. A successful R& D program mean s a more product ive and less polluting technology becomes available.
In
order to favor revelation by the agent ,the shareholde r(i.e. the principal)must offer a compen sation structu re with a bonus, known as "informa tiona l rent " , when success is reported . To lower this rent, the principal would like to lower the agent welfare when failure isreported . Without renegotiation,this could be achi eved bylowerin g the firm's level of production when the agent announces failure since his8O'Donoghu cand Rabin.1999.page103. Secalso Akc rlo f.1991or Laibson.1997.
9Obviously. theproj ect shouldalso improvethcfirm's env ironmental perform ance.
10See alsoGabe landSinc lair- Desgagne(1998). Goldstein (2002) andAmbcc and Barla (2005) for further discussions on why "behav ioural" managers migh t miss profitable business opportunitieswitho utERs.
II See also Campbel l (2003) for a model where enviro nme ntal regulat ions imp rove the
Ambec&Bar/a 47
remunerati on is a function of output. The problem isthat thisdisto rtion isnot credib le: the agent reali zes that the principal will renegoti ate ex post (imposi ng the distorti on also reduces the prin cipal ex post profit). By imposing lim itat ion s onproduction (e.g. quotas, standards) or
sup
pl
e
m
entary
production cost (taxes on emissions), ERs renders the production distortio n credible, the reby mini mizing the rent and increasing the principal ex ante profit. The level of R& D investment is also increased and thus cleaner techno logy is also more likelytobe ado pted.A third set of theor etical explanations reli es on inter-firm imperfect competi tion. In a strateg ic trade mod el, Simpson and Brad ford (1996) show that a government may provide a strategic adva ntage to its domestic industry by imposing a strict ER. The ER acts as a commitme nt device for the industry to invest aggressively in R&D activities that reduce marginal costs. Once again, very spec ific condition s (in terms of parame ters and rival behavior) are necess ar y to obtain the Porter result. Greak er (2003) also showed that str ict ERs may improve a domesti c firm's competitiveness in intern ati on al mar kets if it tran sforms some of its variab le costs into sunk expendit ures. Interestingl y,he shows that theexistence of economiesof scale inaba teme ntmay leadto suc hanoutco me.
Also usin g an inter-firm argume nt but with technologi cal spillove rs, Mohr (200I) shows that coordination failure may prevent introduction of cleane r and more producti ve technolo gies. In his mod el, new technology product ivit y increases with theindustry ' s accumu latedexperie nce . Therefore, this new techno logy may not be introduce d because nobody wantsto bearthe init ial learn ing cost. An ER forcing ado ption may thus result in long- ter m privategains for theindustr y.
Xepa pa deas and Zeeuw (1999) also ana lyz e the impac ts of ERs on the dynamics of capital acc umu lation. Specifica lly, they exami ne the effec ts of emiss ion tax on the compos ition of capita l usin g a vintage capita l model. They show tha t under some condit ions,anemissio n tax lead s to retirem ent of older vintage capital, thereby increasi ng average productivity. However, despite this productiv ity gain, the tax negatively impacts firms' profit. Furthermo re, Feichti nge r etal. (2005) shows the oppos ite may alsooccur : an em iss ion tax mayincrea sethe cap ital'saverageage .
From this overview of theor et ical contr ibutio ns, we can draw the followi ng conc lusio ns.12 Justify ing the PH requires either giving up the traditio nal profit-max imizing hypoth esis or using a framework with specific conditions. Indeed, in the traditional paradig m,the Porter outcome seems to only occur when the externa lity associated with pollu tion is combined with
48 EnergyStudiesReview Vol.14,No,2
anothe r source of distortion (asymme tric information, market power, technolog ical spillovers). In such a context, ERs should not only reduce pollution but also affect the otherdistortionsin a way that improves regulated firms' profit. For example, ERs increase market power or reduce firms ' agency costs. In otherwords,the PH requires fairly specific condi tions whose prevalence sho u ld be empirica lly evaluated. Moreover, the type of ERs
suscep tib le to gene rate the Port er outco me will dep end upon the nature ofthe
interactin g distorti on s. For examp le,it isnot obv ious that flexibl e regulations are the best way to overcome orga niza tiona l inertia. Next, we turn to the
empirica levide nce availableso far.
2. EMPIRICAL EVIDENCE
While theoretical analyses underline conditions favoring the PH, its ultimate validity shou ld be empirically evalua ted.':' Table I provides a basic
summary ofthe empiricalstudies we cons idered for this review. Rath er than
bein g exha us t ive, we have tried to pro vide an overv iew of the various
emp irica lstra tegies that help access the PH. Most of the selected resea rch es
have been published in peer -reviewed journa ls. Moreove r, we have
privileged studies relat ingto the ene rgy sector.
2.1 Impact ofERs onInnovation
The first strategy for accessing the Porter argument is to test whether strict ERs do indeed stimulate innovation. In fact, this is a necessar y if not
suffic ient cond ition for the PH. Looking at a pane l of US manu factu ring
industr ies for the 1973-1991 period, Jaffe and Palm er (1997) estima ted a redu ced- form equat ionto testthe rel ationship between totalR&D expe nd iture
and pollutio n aba te me ntcost (aproxy for envi ronme nta lseverity). Besid ethe
abatementcost,the autho rs contro lled the industryvalue added(a measure of
size), a proxy for government-funded R& D within the industry and fixed effects associated with industries and years. They found that total R& D expenditure increased by 0.15% with pollution abatement cost increases of 1% (aproxy for environmental severity). Interestingly, theirresults suggest a
somewhat la rger impact for the petrol eu m refining and extract io n industry.
They did not find any stat istica lly significa nt link between the number of
successfu l patent applica tions by U.S. corporations (a proxy for success of
R&D activ ities )andERs.l~ How eve r,Brunnerm eier andCohen(2003) report a positive but small rel at ionsh ip bet ween ERs and the num be r of
U Foranearlier re view seeJaffeetal.(J995).
1-1 In this equation. theyreplac e thegove rnment fundingproxyfor avaria ble repre sentingthe
Anibec& Bar/a 49
environmentally-related successful patent app lications." Research results
thus far suggest a weak positive link between ERs and innovation, but the
evidence is sti ll incon c lusive given the scarcity of studies conduc ted on this
topi c. Moreover,one limitat ion ofthis app roac h isthat even ifstrict ERs do not stimu late R& D activit ies in the regulated industry it may very well do so in the abatement equipment industry.
2.2 ERs and Productiv ity
Anot her necessary condition for profit to increase as a result of process
offset is that ERs lead to productivity gains. The relationship between these two variab les has long been explore d by the economic liter ature. Two broad method olo g ical appro aches can be distingu ished . Some studies deri ve productivity changes from the estima tion ofthe technology that inc lude ERs proxies as explanatory variab les (for examp le Gollop and Robert, 1983,
Alpay, Buccola and Kerkvliet, 2002). Others proceed in two steps: first, a
productivity index is comp ute d then,it is regressed on ERs proxies andother
contro l varia bles (for exampl e Dufour, Lanoie and Patry , 1998, Gray and
Sha dbegian,2003 ). The listin Table I is a fairly represe ntative samp leof the
resu lts found in the literature: most studies report a negative relat ions hip
between ERs and productivity (or productivity grow th). The impact may be quite import ant forsome pollutio n-inte nsive indu stri es. For example, Gollop and Rob ert (1983) found that S02regul at ion s slowe d product ivity growth of'
US elec tric utilities by as much as 43% in the seventies. Two studies provide
some support ofPH. Berman and Bui (200I) reports that refineries located in the Los Angeles area, where stringent air pollution contro l regulations came into effect in the late eighties, enjoyed significantly- hig he r produ ct ivit y than
othe r US refineri es, suggesting that pollution contro l investm ent s also
enha nce d productiv ity ." Alpay, Buccola and Kerkv liet (2002) provide
somewhat similar results for the Mexican food processing industry faced with increasing envi ron mental regulations in the nineties. Their empirical results
show these inc reas ing pressures were associated with producti vity growth.
They estima te that a 10% increase in pollution regul ati on pressure resu lted in
an average 2.8% increase in productivity growth. However, despite this positive impact,they show that ERs negatively affect profits. Moreover,they
15They use a method ologica l approach sim ilar to Jaffe and Palmer (1997). Their contro l
variab les arc however some what different (see table I). Using simple descriptive
statistics. Landjouw and Mod y (1996 ) and Popp (2004 ) also find someevide ncesof a
positive link bet ween patent applicatio n and envi ronme nt a l severity usin g internati on al
data.
16There is no obviousfacto rexplaining this positive result. The ERs were not partic ular ly
50 EnergyStudiesReview Vol.14. No.2
do not find a sim ilar patt ern for the U.S. food industry. Overall, the bulk of evide nce is for a negati ve impact ofERs on productivity. Note however that all these researchesuse "traditiona l" produ ctivity measures i.e. measu res that do not directly include pollutio n in the produc tion process. It can easily be shown that these measures bias down product ivitygains by firms or industries that improve their env ironme nta lperforma nce (see Kolstad, 1999). While a grow ing literature proposes producti v ity indexes that include pollutio n as an input or an undesirable output (see for example Fare, Gross kopf, Lovell and Pasurk a, 1989), these researches do not directly address thequestion of how ERsaffect prod uctivity.
2.3 Evidence on product offset
We did not find any studies spec ifica lly exam ining how ERsper se may have result ed in increased product value ("produc t offset") . However, the literatur e contai ns an increasing number of attempts to evalua te the premium consumersmay be willing to pay for more environmenta lly-friend ly products. We review some of these works in Table 1.17 These researches indicate that products withgreen attributes (e.g. eco-labeled) enjoysomemar ket adva ntage either through higher prices or inc rease d market share. While these researches do not directl y test the PH,they provide at least some indicat ion s on how cons umers' choices may be affec ted by env ironme ntal conce rns. FU11herstudies are however necessary to test if consumers are also willing to pay more for produc ts that become less pollu ting followi ng the imp lementation of new ERs and ifthese prem iums do trans late into hig her industry profit s.
2.4 Impact ofERs on Investmentand Capital
Theoretically, ERs may affect regul ated firms costs and profits by changing the ir investme nt deci sions. A few empirical contrib utio ns have addressed this questi on . Contrary to the modern izat ion effect underlin ed by thetheor eti cal ana lys isof Xepapadeas and Zeeu w (1999 ),Nelsonet al.( 1993) finds that ERs increase the average capital age in US electric utiliti es. However,this result is likely to be driven by the fact that stricter regul ations are imposed on new power plants thereby slow ing down investme nt in new facilities. For the US pulp and paper industry, Gray and Shabegian (1998) find that State ERs significantly affect technologi cal choices and somewhat reduce investm ent level s. Moreove r, a I% abate me nt investm ent increase
Antbec& Bar/a 51
would crowd out productive investment by 1.88%. Therefore. these results
more strong lysupport the traditiona l hyp oth esis.
2.5 ERs and Fin ns' Financial Performance
Some studies ha ve examined the impac t of environmenta l regulation on
firms' financia l per forman ce the reby direct ly testing for the Porte routco me .
For examp le, Brannlund
e
t
a
1.
(1995) shows that ERs reduce the short- term profit ofthe Swe d ish pulpand pap er industr y,whiIe King and Le nnox (2001) found evide nce of a positive relatio nship betwee n ER prox ies and Tobin's Qusing data from the US manufact uring sector. However, this latt er resul t is
only statistica lly signi fica nt in one of the four specificatio ns reported in thei r
pap er. For US elec tric utilities. Filbeck and Gorma n (2004 ) finds that ERs
negati vely impact financia l returns. More resear ch work on this link is
require d but, at this stage, no clear pos itive relat ionship betw een ERs and
profit ability seems to eme rge.
It is also useful to men tion a growing emp irica l liter ature exami ning the
relationship s between firm s ' environment al and financial performance. This
research usu all y show that bad (go od) unexpect ed news about a firm' s
environ me nta l per forma nce resu lt in signi fican t negative (positive) abno rma l
returns. If. as expected, envi ronmenta lperforma nce is posi tivel y affected by ERs, this wou ld imply a posit ive impact of ERs on return . However, this conc lus ion may be misleading for seve ra l reason s. First, high er env iro nmenta l perform an ce may be a signa l for investors of good
man agem ent the reby creating an "artificia l" corre lation betwee n returns and
environ me nta l result s. Second, it may also signa l lowe r than expec te d
abate me nt costs. In contras t, poor env iro nme nta l result s are bad new s for
investor s as they anticipa te increased future liability cos ts and inten sifyin g
regul ator scrut iny.
2.6 Evidence on the"Pollution Haven Hypothesis"
Lastly,the literature on the impact ofERs on firm locati on deci sion and
cross-cou ntries trad e patt ernsmay also be useful inaccessing the PH. In fact,
usua lly tested in the litera ture is the "pollutio n haven hypothesis," which
states tha t str ict ERs are likely to hurt the compe titive ness of domestic
polluting firms, ther eb y reducing thei r mark et share or eve n drivin g them to move to countries with less stringe nt regul ation s. Obviou sly, ifthe
PH
holds,one sho uld observe no trad e diversion effect and even a trad e stimu lating
effect of ERs. Rath e rthan reviewing this literat ure in deta il, we can directl y
refer to Brunnerme ier and Levinson (2004) for an up-to-d ate overview of this
52 Energy StudiesReview Vol. 14.No.2
on cross -sectiona l analy sis typically tended to find that env iro nme nta l
regulations did not significa ntly affect firms ' location decisions. However,
seve ra l recent stud ies usin g pan el data to control for unobser ved
heterogen eit y, or instrument sto control for endogene ity, do find statist ica lly
-significa nt pollution haven effects ofreason abl e magn itude". Once again the
evide nce doesnot support thePH.
CONCLUSIONS
From thisreviewthe fo llowingconc lus ions can bedrawn :
• The re is only scanty, weak evide nce to dat e showing that ERs
stim ulate innovation acti vit y. More research is necessary to provid e
conclus ive resultsregarding that relationship.
• Most ev ide nce points towards ERs as having a negative impact on productivit y grow th. For pollution-inten si ve industri es, this impact
cou ld be significa nt.
• The re is mounting evide nce tha t a price premium exists for more
env ironme nta lly- frie nd ly products. It remain s to be establishe d if
forcing green products in the market through regulations also results in increasedproductvalue .
• The scar ce evide nce available suggests that ERs may have a
significa nt negati ve impact on investm ents and increase the averag e age ofcapita l.
• There is mixed evide nce on the relat ions h ip between finan cial and
env iro nme nta l performance. Severalstud ies find that investors react
positi vel y to unexp ect edgood env ironmenta l performance. Howev er,
it is not clear whether this result actuall y support s the PH. Studies directl y exam ining the impact of ERson firms ' financialperforman ce have generated contradi ctory resu lts.
• Recent studies suggest that ERs may have an impact on businesses' locali zati onthat is contra ry to thePH predi ct ion .
Overall ,it appearsthat to date,moreevid ence has been reported again st,
than in favor of, PH. However , it wou ld be unreason abl e, at this stage, to
simp ly reject this hypoth esi s. Indeed, the existing emp irica l research efforts
are taint ed withseveral weaknesses. First,most stud ies examine theimpact of
Anibec& Barla 53
Indeed ,the proxies now used inthe literatur e are usually crude and possi bly mislead ing . For examp le, high pollut ion- control expe nditures may not only result from ER severity, but also from poor managem ent practi ces. A negative relation ship between a firm' s financial performance and its abate me nt expe ndi tures may therefore simp ly refl ect that ineffi cient firms have both high er polluti on- con trol costs and weak financia l resu lts. A thi rd. probl em is related to the indica to rs used to access a firm's per formance. For exam ple, stud ies examining the impact of ERs on productivit y usuall y use productivity indicators that underestimate the producti vit y grow th rate of firm s that reduce emissio ns. Indeed, these "traditional" measures tak e into account the negati ve effect on produ ct ivity of reduc ing pollut ion (inc reased use of pollution control inputs) but compl etely ignore the reduc tion of "bad outputs" that may be valua ble for the firm.IS Fourth, while the PH is in
esse nce a dynamic hyp oth esis, most emp irica l research use emp irica l spe c ification with a very simp le dyn ami c struc ture or non e at all. In a wor king pap er, Lan oie et 01. (200I) shows that allowi ng rich er dyn am ic effects may drasticall y chang e the rel ati onship between pollut ion control
expenditure and productivity growth in the Queb ec manufacturing sector.
Lastl y, future em p irica l research shou ld take into acco unt recent theoreti cal contri butions showing tha t the Porter results require interact io ns of several distorti on s. This cou ld help to more acc urate ly pinpoi nt whe re to look for Porter effects.
Table I.Empirica lstudies relevant foraccessing thePorterHypoth esis.
SIlt{~I' Data Methodology Main Results
I.ImpactofERs on Innovation
Jaffe and Palmer • Panelof U.S.
(1997) manufacturing
industries-1
973-1991.
• Reducedform model.
• Innovationproxy:R&D
investmentsandnumberof
successful patentapplications.
• ERs proxy:Pollution control
capitalcosts.
•Controlvariables:industryvalue
added,aproxyfor
government-funded R&Dwithin the industry,
timeandindustryfixed effects.
• R&D significantly
increaseswith ERs.
Elasticity:+0.15.
•Nosignificant impact of
ERson numberof patents.
54 Energy StudiesRevi ew Vol. 14.No.2
Study Dolo Methodology Main Results
II. Impact of ERs011Productivity
Gollop and
Robert (1983)
Smith and Sims
(1983)
Gray(1987)
•56U.S. electric
utilities,1973- 1979.
• 4 Canadian beer
breweries, 1971
-1980.
·450U.S.
manufacturing
industries,1958
-1978.
• Productivity measure:derived
fromtheestimationof a cost
functionthatincludes theERs
proxy.
• ERs:the intensityof S02
regulations based onactual
emissions,statestandard andthe
utility estimated unconstrained
emissionlevels.
• Productivity measure:derived
from theestimationof acost
function.
• Twobrewerieswere submitted
to aneffluentsurcharge and two
brewerieswerenot.
• Change in averageannual total
factorproductivitygrowth between
1959-69period andthe1973-78
period regressesonpollution
control operating costs.
• Control variables: occupational
safety and health inspections rate,
average industry shareofenergy
and capital,changein growth rate
of production workershoursand
changeinproductivitygrowth rate
inthe sixties.
• ERs reduce productivity
growth by43%.
• Average productivity
growthregulated breweries
-0.08%comparedto+1.6%
fortheunregulatedplants.
• 30% of the declinein
productivitygrowth in the
Ambec& Bor/o 55
SI/I({r DOlo Methodology MainResu lts
Dufour,Lanoie ·19Quebec • Totalfactorproductivitygrowth • ERs havea significantly
and Patry(1998) manufacturi ng regressed on changesin the ratioof negativeimpacton
industries,1985- the valueofinvestmentin pollution- productivitygrowth rate.
1988. controlequipmenttototalcost. •Control variables:occupational
safetyand health inspectionrate,
timeand industry dummies,shareof
energycostsin total cost,
Berman andBui • USpetroleum •Comparisonoftotalfactor • Stricterregulations imply
(2001) refiningindustry, productivityofCaliforniaSouth Coast higherabatementcosts.
1987-1995. refineries (submitted tostricterair However,these investments pollutionregulations) with otherUS appearto increase
refineries. productivity.
• ERsseverityismeasuredbythe
number ofenvironmental regulations
each refineryissubmitted.
Alpay,Buccola •Mexican and U.S. • Productivitymeasure obtained • US:negligible effect of
and Kerkvliet processedfood through theestimation ofa profit ERs on bothprofit and
(2002) sectors(1962-1994) function that includespollution productivity.
abatement expenditures (US)and •Mexico:ERshave a
inspection frequency (Mexico)as negativeimpact onprofits
proxies forERs. buta positiveimpacton
productivity.
Grayand • 116U.S.paper • Regressionof totalfactor • Significant reductionin
Shadbegian mills,1979-1 990. productivityon pollutionabatement productivityassociated with
(2003) operatingcosts,technologyand abatementefforts
vintage dummiesandinteraction particularlyinintegrated
terms between thedummiesand papermills.
the abatement variable.
•Estimation ofa production
functionthat includesbesideinput
prices,pollution abatementcosts
56 Energy StudiesRevi ew Vol.14.No.2
Studv Data Metho dology Main Result s
II I.Price prem iu m s for envi ro n me nta lly-fr ie nd lyproduc ts
Roeetal.(2001) • Survey Goint • Econometric analysis of price
analysis) 835 premium for greenlabel electricity
respondents. as dependant upon demographic
• Cross-sectionof21 characteristics and product
greenelectricity attributes .
productsand
attributes(2000)
Teils, Roe and
Hicks (2002)
Bjorner et al.
(2004)
• 66months of post
-labeltime series
obtainedfrom
scannerdata in3000
US supermarkets
• Panel data for
1,596 Danish
households from
1997to 2001.
• Impact of dolphin-safe labelson
consumer purchases of tuna.
Estimation of a demand system
(almost ideal demandsystem) for
canned proteinmarketexpandedto
include information effects(label).
Impact of Scandinavian
environmentallabel (Nordic Swan)
on consumer choices for toilet
paper,paper towelsand detergent
brands.Estimation ofamixedlogit
modelofbrandselection.
• Smallpremiumfor
tangibleimprovementsin
airemissionsevenwithout
altering fuel mix.
•Significantlylarger
premium ifreliance upon
renewable fuelsincreases.
• Significantimpact ofec
o-label.
• Small positive impactof
thelabel on market share.
• Statistically-significant
pricepremiumforlabeled
toiletpaper:13%to 18%.
• Premiumfor detergent: 17
to 29%.Small premium for
paper towels (less
statistically-significant
results).
IV.Imp act of ERs on Investm ents
Nelson
(1993)
et al. • 44 U.S. electric
utilities over the
1969-1983period.
• Three-equationrnodel: i)ageof
capital;ii)emissions;and iii)
regulatoryexpenditures.
• Model includestwo ERproxies:
airpollutioncost andtotal pollution
control costs per KWcapacity.
•ERs significantlyincrease
ageofcapital (elasticity:
+0.15).
•Age ofcapitalhasno
statistically-significant
impactonemissions.
• Regulationhas impacted
Swell' Dala Metltodolovvc»,
Ambec&Barla 57
Main Results
Gray and
Shadbegian
(1998)
o Panel of 116 U.S. 0Multinomiallogit for technological
paper mills (1972- choice(Kraft,sulfite,mechanical,
1990). etc.),and investmentlevelequation.
oER proxies:i)proenvironmental
votes byStatecongressional
delegation:and ii) indexofairand
waterregulation severity.
oTechnologicalchoice
significantlyaffected byERs.
oNegativeimpact ofERs on
investmentlevel(marginally
significant).
oProductive investment is
significantlyreducedby
abatement investments (
-188%).
V. Im pact of ERson Firms' Financia lPerformance
SWc!I' Data Me thodo log v Main Results
Khannaeta/. 091U.S.Chemical oEvent study:test forabnormal
(1998) firms over1989-1 994 returnsfollowing annualdisclosure of
period toxicrelease inventory.
oPanelregression modeltoidentify
determinantsof abnormal returns.
Particularly on-site/off-sitereleases
and firm ranking withinindustry.
oTestimpact of negativeabnormal
returns onfuture on-site/off-siteand
totalreleases.
Dasguptaand o126 eventsinvolving oEvent study:test for abnormal
Laplante(2001) 48 publicly-traded returnsfollowing positive (investment
firmsin Argentina, inpollutioncontrol,awards)or
Chile,thePhilippines negative(complaints, spills)
and Mexico environmentalnews.
Brannlundet a/.
(1995)
o41Swedishpulp and
papermills -1
989-1990.
oEstimationof regulatedand
unregulatedprofitusing a non
-parametricmodelof the technology.
oAveragereduction in profits
due to regulation-between
4%and17%.However,
between66%and88%of
mills are unaffected by
regulation.
oNegativeabnormalreturns
duringone-dayperiod
following disclosure.
oAbnormal losses are higher
forfirmsthat do not reduce
emissionsorwhose
performanceworsens
comparedto other firms.
oAbnormallosses push firms
toincrease wastes
transferredoff-site.
o20outof 39positiveevents
leadto positiveabnormal
returns (+20%in firm value
over a11dayswindow)
o33of85negative events
leadtonegative abnormal
58 EnergyStudiesReview Vol. /4.No.::
511 /(1\' Data Methodology Main Res ults
KingandLenox • Panel of 652 U.S. • Tobin'sQregressed oncontrol • Positiveimpact ofERs on
(2001) manufacturingfirms variables,firms'environmental financial performance but
(1987-1996). Firms performance andproxyfor ERs. onlysignificant in one
must beincluded in • ERs:numberof environmental specification.
theEPA'sToxic permitsrequired and average • Positive linkbetween
ReleaseInventory. pollution per capitainpolluting financial andenvironmental
industriesin State offirm's performance.
operations.
Filbeck and •24U.S.electrical •Impactof environmentalrequlation • Negative relationship
Gorman(2004) utilities1996-1 998. compliance indexonfinancialreturns betweenreturns and
environmental regulation
compliance.
Gupta andGoldar •17 Indian pulp and •Event study: test forabnormal •Negativerelationship
(2005) paperplants,15 auto returnsfollowingpublicrelease ofa between abnormalreturns
firmsand18chlor GreenRatingby an NGO. andenvironmental rating.
alkalifirms(1999- • Greenrating based on best
2001). practice.
ACKN OWLEDGEMENTS
The Authors wouldliketothankNatural ResourcesCanada for theirfinancial
assistanceand the two referees for their comme nts. Theviews expresse d in this
paper and therem aining errors are howeverthe sole resp on sibilityofthe authors
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