Today’s post is by Maroussia Klep of the OECD Environment Directorate
In today’s hard times, policy-makers can find it difficult to sell their environmental policies. To many, these policies represent a burden on the economy. They might secure the well-being of our grandchildren, sceptics argue, but risk preventing the growth we badly need today.
In this context, recent OECD findings provide renewed optimism. As revealed by thorough economic assessments, well-designed green policies not only secure long-term wellbeing, but can uphold current productivity levels too. In other words, it is possible to increase the economic pie and make it greener at the same time.
As ecological concerns gained momentum in the last decades, many studies have attempted to identify the impacts of environmental policies on the economy, with varying conclusions. In the United States for instance, scholars tried to relate the economic slowdown in the 1970s to the introduction of such policies; but their results were largely inconclusive. On the opposite side, economist Michael Porter suggested in a 1991 article that stringent policies could actually increase competitiveness: “strict environmental regulations do not inevitably hinder competitive advantage against rivals”, says Porter, “indeed, they often enhance it.”
In a report published this month, OECD splits the difference. The in-depth empirical analysis across OECD countries in the last twenty years revealed that well-designed green policies can sustain current levels of productivity growth.
When new policies are put in place, the more productive and technologically advanced firms are usually those able to reap the most benefits. They have indeed the firepower to seize market opportunities and rapidly adopt new technologies. Besides, once technological improvements are realized in an industry, the positive economic effects will often spread out across industries and countries via integrated production chains. According to OECD, these positive outcomes can be further encouraged if environmental policies offer flexibility for compliance, a reason to favour market-based instruments (such as taxes) over rigid regulations and standards.
In parallel, the less productive and technologically advanced firms may require more investment in order to comply with regulations, and may even have to drop out of the market if they are unable to adapt to changing conditions. In a competitive market, such entry and exit should lead to a swift reallocation of capital and sustain overall industry productivity.
It is therefore essential for policy-makers to support market competition. In particular, the design of environmental policies should as far as possible guarantee a level-playing field among competitors.
This brings us back to our recipe: which are the key ingredients for a “growing green cake”?
First and foremost, OECD argues, legislators shall ensure that the burdens imposed on competition by new policies are minimised and do not inhibit the entry of new and potentially cleaner firms and technologies. As highlighted in the report, countries such as Canada, New Zealand and Israel could further reduce the high administrative costs imposed on new entrants and facilitate access to environmental licences. In the same vein, instruments that favour incumbents, such as subsidies based on past performance, may put young firms at a disadvantage and impede market entry.
But the report also provides encouraging examples. In many countries, green policies and economic wellbeing go already hand in hand. The Netherlands, Switzerland and Austria, for instance, have implemented relatively stringent environmental policies that remain competition-friendly. For this, they have set measures to facilitate market access for new entrants, minimize red-tape and provide fair and equal conditions to all market players. These successful case studies can inspire policy-makers in OECD countries and beyond when designing green policies or revising existing ones.
Of course, the priority of environmental policies is to secure long-term sustainability. However, if the right conditions are put in place, greening the economy while upholding today’s growth trends could become a piece of cake.
The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? by Ambec et al. in the Review of Environmental Economics and Policy