Working Papers, Konjunkturinstitutet - National Institute of Economic Research
Does environmental leadership pay off for Swed-ish industry? - Analyzing the effects of environ-mental investments on efficiency
(), Per-Olov Marklund, Eva Samakovlis
() and Henrik Hammar
Swedish environmental policy often emphasizes the
importance of “taking the lead”. For example, Sweden has chosen a more
ambitious climate policy target than required by the European Union (EU),
namely a reduction of Swedish emissions of greenhouse gases by 40 percent
by 2020 compared to the 1990 level. Government Bill 2008/09:162 emphasizes
Sweden’s role as a good example in making an effort to re-duce climate
change by showing that an offensive climate policy can indeed be com-bined
with high economic growth. This view of environmental policy is, however,
the subject of constant debate.
A common argument is that environmental
requirements induce private costs by forc-ing firms to make investments
that crowd out other more productive investments, which hampers
productivity growth and therefore competitiveness. Professor Mi-chael E.
Porter of Harvard questioned this argument, and his view has become known
as the Porter hypothesis (Porter, 1991). This hypothesis implies that
levying stringent environmental regulations on firms enhances their
productivity compared to competi-tors not subject to, or subject to lax,
environmental regulations. A central message is that the connection between
environmental regulation and competitiveness should be scrutinized within a
dynamic framework (Porter and van der Linde, 1995).
The main objective
of this paper is to test the Porter hypothesis by assessing static and
dynamic effects of environmental policy on productivity within the Swedish
manufac-turing industry, specifically on the component total efficiency.
The paper adds mainly to previous literature by using unique data on
environmental protection investments, divided into investments in pollution
control and pollution prevention, as a proxy for envi-ronmental regulation.
The distinction between these types of investments is crucial to the
understanding of the outcomes anticipated by the Porter hypothesis.
international literature studying the Porter hypothesis is extensive. A
comprehen-sive review reveals that neither theoretical nor empirical
literature gives general sup-port for the hypothesis (Brännlund and
Lundgren, 2009). We argue that, to some ex-tent, the Porter hypothesis has
not yet been given a fair chance in the empirical litera-ture, as dynamic
effects are often neglected in empirical tests. Two exceptions are Managi
et al. (2005) and Lanoie et al. (2008), who first estimate Total Factor
Produc-tivity (TFP) scores that then are used as dependent variables in
regression analyses where explanatory lagged environmental stringency
measures model dynamic effects. A disadvantage with these studies is,
however, that environmental stringency is ap-proximated by the cost of
complying with environmental command- and-control regulations, such
regulations are not emphasized by the Porter hypothesis.
test of the Porter hypothesis is performed as a two-step procedure, where
total efficiency scores are first estimated by adopting a stochastic
production frontier function approach. In the second step, the efficiency
scores are used as the dependent variable in random effects regression
analyses, where the independent vari-ables are, e.g., investment in
pollution control and pollution prevention. In order to assess whether
these investments have dynamic effects on total efficiency these vari-ables
are also lagged. If positive effects are established we cannot reject the
claim that environmental leadership will benefit the Swedish industry. The
estimations are based on firm level data from five Swedish industries for
the period 1999-2004, and carried out for the pooled data as well as for
the industries separately.
45 pages, June 2010
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