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  1. Introduction
  2. Domestic Sources of International Environmental Policy | The MIT Press
  3. Political economy
  4. See a Problem?

The theory developed in this paper argues that the goals of raising revenue and industry competitiveness overwhelm the goal of improving environmental quality when politicians set green taxes. This theory is empirically tested with a political economy model using data on OECD countries. The results suggest that policymakers do not set taxes with a specific concern for the environment, but to generate revenues.

The model also demonstrates the concavity of the revenue function with respect to emissions; taxes are raised up to an optimal point beyond which raising them would discourage emissions, and thus revenues. Harmful behavior is not discouraged through the imposition of the taxes, since less healthy populations are taxed less.


Emissions generated by industries that are exempted from taxation are offset by the industries that are taxed. When polluting products constitute a high share of the exported products, revenues from environmentally related taxes drop. These results help explaining the lack of environmental orientation of green taxes in the OECD countries.

Unable to display preview. Download preview PDF. Skip to main content. Advertisement Hide. This is a preview of subscription content, log in to check access. Ackerman, B. Google Scholar. Aidt, T. Barde, J. Bringing Business on Board. Barnett, A. Wagner ed.

Becker, G. Bergstrom, T.

  • Environmental Protection & the States: “”Race to the Bottom”” or “”Race to the Bottom Line””?!
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  • Environmental Protection & the States: “”Race to the Bottom”” or “”Race to the Bottom Line””?.

Breusch, T. Buchanan, J. Cahn, M. Clean Air Working Group. The Clean Air Working Group. Governors and legislators support environmental proposals that promote safe drinking water or provide adequate sanitation not because Washington requires it but because public health is a precondition to prosperity.

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  6. And tourism accounting for nearly 10 percent of U. Firms that require large amounts of pure water, for example — computer-chip manufacturers, food-processing companies, and breweries, to name a few — have economic incentives to keep streams, rivers, and groundwater uncontaminated. At the other extreme, spending money to clean up pollution that drifts, flows, seeps, or can be transported into other states is likely to be viewed as a poor prospect by state politicians.

    Domestic Sources of International Environmental Policy | The MIT Press

    And giving up prime development land to protect endangered species is usually seen as offering scant economic or political benefits. Environmental scientists must consider effects of development on future generations. When poor investments for states are priorities for the nation, rigorous federal oversight is needed. In general, though, support for environmental protection is a result, not a cause, of prosperity. At least at the extremes, states with strong economies tend to support relatively strong environmental protection programs while those with weak economies often support weaker programs.

    In the s, the real competition among states is not a race to the bottom to minimize environmental protection, but a race to the bottom line to improve property values and increase tax revenues. States compete to gain prosperity in an economy where firms are consolidating, capital is increasingly mobile, and skilled workers are sometimes in short supply. Because experience has shown that wealthy economies devote more resources to environmental protection than do struggling ones, we should be concerned about the future of pollution control and conservation in relatively poor states.

    Some research has suggested direct links between prosperity and environmental protection. An analysis by the Institute for Southern Studies in found that 9 of the 12 states that were strongest in environmental protection also were strongest in economic growth, while 12 of the 14 states that were weakest in environmental protection also ranked among the lowest in economic growth. States that have been dependent on oil, timber, mining, or other natural resource industries may face special problems with improving environmental protection and with assembling the ingredients of lasting growth.

    Such differences among states are not surprising. State boundaries were drawn by accidents of settlement and political compromise, not by a desire for equity.

    Political economy

    Those chance divisions have produced variations in political culture and history that, in general, we celebrate. They have also produced variations in natural resources and taxable assets. State environmental protection, which lies at a junction of economic forces, political will, and historical tradition, naturally reflects such enduring differences. One danger, though, is that states that are weak in both economic growth and environmental protection are particularly vulnerable to a funding squeeze that may turn out to be an important political dynamic during the next 10 years — the prospect of increasing demands for environmental protection that no one is willing or able to pay for.

    Many of the least prosperous states depend most heavily on federal funds to finance environmental protection at a time when such funds are increasingly scarce. And their budgets are likely to be more heavily burdened by demands like welfare and Medicaid and less easily expandable by tax increases or borrowing. None of this is an argument for economic determinism, however. State economies are constantly changing as markets change, and experience has shown that political will and fortuitous circumstances can overcome obstacles to growth. Booming high-tech industries and tourism made the Rocky Mountain states, traditionally dependent on mining, timber, and agriculture, the fastest-growing region of the country in the early s.

    Giving up on the simplistic theme of a race to the bottom among states to minimize environmental protection opens the way for considering harder questions. How much flexibility should states have to make choices about environmental measures?

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    6. How can national priorities not in the interest of any one state best be advanced? How should chronic inequities among states be dealt with? A number of initiatives already under way suggest partial answers. Variations on national themes. Setting clear national goals and giving states as much flexibility as possible in how to carry them out is the best way to mediate between national priorities and state differences.

      Supplementing standards with wider use of market incentives, negotiated solutions, and business self-monitoring can broaden local choices while respecting national priorities. The federal government should concentrate oversight wherever states are weakest, as the National Academy of Public Administration has suggested. And as information improves, state progress should be judged by environmental conditions, not by numbers of inspections and permits.

      All this is, of course, much easier said than done. After 30 years of efforts and billions of dollars spent, the United States does not yet have a reliable system of measuring trends in environmental conditions that could be a basis for setting national goals and marking progress toward them. Information as regulation. For example, Greenstone, List, and Syverson find that while nonattainment of ozone concentrations negatively affects productivity, nonattainment of carbon monoxide concentrations leads to statistically significant increases in productivity.

      However, the authors do not discuss reasons for these differences in outcomes across pollutants. Berman and Bui b find that although refineries located in the Los Angeles South Coast Air Basin area experience a short-run decrease in productivity due to increased regulatory stringency between and , this effect appears to be temporary; after a few years they enjoy significantly higher productivity than other refineries in the United States despite the more stringent air pollution regulations.

      Similarly, Lanoie, Patry, and Lajeunesse find that the negative short-run effects of regulation on the Quebec manufacturing sector are outweighed by subsequent positive effects on multifactor productivity MFP growth. In one of the few European studies to date, Rubashkina et al. In fact, they find that an increase in environmental stringency is associated with a short-run increase in productivity growth, which translates into permanently higher MFP levels.

      Albrizio, Kozluk, and Zipperer also find that the most productive industries and firms experience the highest gains in productivity, while less productive firms see negative effects, possibly because highly productive firms are better able to profit from changes required by environmental regulations. In sum, the evidence indicates that environmental regulation has both negative, short-term impacts on productivity in some sectors and for some pollutants and positive productivity impacts in others.

      From an economic perspective, it is critical for environmental regulations to provide incentives for technological change because new technologies may substantially reduce the long-run cost of abatement Jaffe, Newell, and Stavins From a political perspective, such policy-induced innovation may also improve the acceptability of environmental policies. Thus there is growing literature that seeks to quantify the link between environmental regulations and technological innovation. Many studies have clearly shown that environmental regulations can indeed encourage the development of pollution-reducing technologies.

      For example, Jaffe and Palmer and Brunnermeier and Cohen show that stricter regulation proxied by higher pollution control expenditures leads to higher research and development expenditures and more environment-related patents. Similarly, higher energy prices have been shown to induce the development of energy-efficient technologies Newell, Jaffe, and Stavins ; Popp These results are confirmed in recent studies that use firm-level data, which allows them to control for macroeconomic factors that might affect both environmental regulation and innovation at the sector level.

      For example, using data on approximately 3, firms in the car industry, Aghion et al. From a policy perspective, an important issue is determining which regulatory instruments provide the strongest incentives for innovation. The theoretical literature suggests that market-based instruments provide stronger incentives for innovation than technology mandates and performance standards, and that among market-based instruments, emissions taxes and auctioned emission permits encourage more innovation than freely allocated emission permits Milliman and Prince ; Fischer, Parry, and Pizer ; Parry, Pizer, and Fischer However, the handful of empirical studies on this issue appear to at least partly contradict the hypothesis that market-based policies encourage more innovation than command-and-control regulations.

      For example, Popp shows that following passage of the CAAA, which replaced command-and-control regulation with permit trading, innovation activity actually decreased in intensity. Taylor shows that for both the U. SO 2 emissions cap-and-trade program and the U. Ozone Transport Commission NO x Budget Program, patenting activity collapsed when traditional regulation was replaced by cap-and-trade.

      Thus further research is needed on this issue. While there is evidence that the actual cost of achieving an environmental objective is usually smaller than anticipated because of induced innovation see, e. In theory, environmental regulation can increase productivity growth and hence competitiveness if it leads to a permanent increase in the rate of innovation.

      There is some emerging evidence, however, that regulation-induced environmental innovations tend to replace other innovations, leaving the overall level of innovation unchanged. For example, in their study of paper mills in the United States, Gray and Shadbegian found that more stringent air and water regulations improved environmental innovation, but that the increased investment in emissions and water abatement technologies came at the cost of other types of productivity-improving innovation.

      Popp and Newell find that alternative energy patenting crowds out other types of patenting at the firm level. Aghion et al. Several studies have examined the causality chain implied by the Porter hypothesis—from regulation to innovation to profitability—and find that the positive effect of innovation on business performance does not outweigh the negative effect of the regulation itself Lanoie et al. Thus environmental regulation is costly, but it is less costly than if one were to consider only the direct costs of the regulation itself and ignore the ability of innovation to mitigate those costs.

      Porter and van der Linde a also argue that countries that take early action in environmental protection will induce higher costs for domestic firms in the short run, but that the induced innovation will generate economic benefits in the long run by giving domestic firms a competitive advantage over foreign firms, which will be constrained by the same regulation later on. However, to our knowledge, no study has empirically analyzed whether this first-mover advantage actually leads to competitiveness improvements in the long run.

      Popp and Newell find that the social value of renewable energy patents, as measured by patent citations, is higher than the social value of patents in conventional fossil fuel technologies that are crowded out. Thus regulation-induced innovation in clean technologies might increase the innovation activity and possibly the competitiveness of some unregulated companies through knowledge spillovers.

      This would improve the net social benefit or reduce the net cost of the regulation without cancelling out the competitiveness effects on regulated companies. The cost burden of environmental policies has often been found to be very small.

      See a Problem?

      The recent evidence shows that taking the lead in implementing ambitious environmental policies can lead to small, statistically significant adverse effects on trade, employment, plant location, and productivity in the short run, particularly in pollution- and energy-intensive sectors. However, the scale of these impacts is small compared with other determinants of trade and investment location choices such as transport costs, proximity to demand, quality of local workers, availability of raw materials, sunk capital costs, and agglomeration.

      Moreover, the effects tend to be concentrated on a subset of sectors for which environmental and energy regulatory costs are significant—a small group of basic industrial sectors characterized by very energy-intensive production processes, limited ability to fully pass through pollution abatement costs to consumers whether due to regulation or international competition , and a lack of innovation and investment capacity to advance new production processes Sato et al.

      For these subsectors, where pollution leakage and competitiveness issues represent a genuine risk, a critical avenue for future research is to assess and evaluate the various policy options available to prevent adverse impacts on trade and investment without dampening the incentives to develop cleaner processes and products Martin et al. This article has also shown that there is strong evidence that environmental regulations induce innovation activity in cleaner technologies. Thus far the benefits from these innovations do not appear to be large enough to outweigh the costs of regulations for the regulated entities.

      Of course, this does not preclude the ability of environmental regulations to foster the development of global leaders in innovation, but it does suggest that the evidence for the most controversial interpretation of the Porter hypothesis i. As regulatory designs and combinations continue to be explored, further research will be needed to identify the combinations of research and development and environmental policies that best encourage innovation in green technologies Burke et al. This review raises the question of why the effects of environmental regulations on international industry relocation have been found to be so small and narrow given the strong concerns about competitiveness in public policy circles.

      One explanation could be that regulated companies have an incentive to overstate the potential competitiveness impacts of regulations as a strategy to lobby against stringent policies by attributing unpopular offshoring decisions to public policy rather than to underlying economic factors such as the shifting locus of supply and demand in global manufacturing or decreasing transport costs.

      An alternative explanation for the lack of empirical support for the large pollution haven effects discussed in the literature is that environmental policy is endogenous , i. To avoid such an outcome, further research is needed to accurately measure and monitor the competitiveness effects of environmental regulations to help ensure that policy is based on robust evidence. We are grateful to three anonymous referees for very constructive comments and suggestions. Oxford University Press is a department of the University of Oxford.

      It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. Sign In or Create an Account. Sign In. Advanced Search. Article Navigation. Close mobile search navigation Article Navigation. Volume Article Contents. Measuring Competitiveness Effects Empirically. Conclusions and Priorities for Future Research.

      Editor's Choice. Oxford Academic. Google Scholar. Misato Sato. Cite Citation. Permissions Icon Permissions. Table 1. Source: Authors. In general, it refers to the ability of a firm or sector to survive competition in the marketplace, grow, and be profitable Bristow Some concepts of competitiveness discussed in the literature include the ability to sell which reflects the capacity to increase market share , ability to earn the capacity to increase profit , ability to adjust, and ability to attract see e.

      As we will discuss, in practice, measuring relative policy stringency across different forms of regulation and enforcement regimes is far from straightforward. How firms respond to pricing has important distributional consequences. However, it is less of a problem when using data at a disaggregated level, because changes to trade of a single company are unlikely to affect exchange rates.

      Moreover, local pollution levels depend heavily on weather patterns in particular, wind and precipitation , which are unlikely to be systematically related to local manufacturing sector activity Greenstone, List, and Syverson See Copeland and Taylor for a detailed discussion of the pollution haven arguments. This analysis also finds that PACE is endogenous and suggests that policy stringency is determined strategically by governments. Because they use data from only one country, they can estimate the effects of environmental regulation on trade only by comparing sector-level net imports as a function of industry characteristics.

      The variation in pollution abatement expenditures across sectors may reflect unobserved heterogeneity rather than relative stringency. However, this literature mostly uses ex ante modeling and is thus excluded from our review. The carbon leakage literature can be distinguished from the literature on trade-embodied carbon e. See Balistreri and Rutherford for a discussion of the consequences of using the Melitz model for competitiveness in a computable general equilibrium CGE setting. Carbon taxes, path dependency and directed technical change: evidence from the auto industry.

      Search ADS. Empirical evidence on the effects of environmental policy stringency on productivity growth. Google Preview. Productivity growth and environmental regulation in Mexican and US food manufacturing. The Porter hypothesis at can environmental regulation enhance innovation and competitiveness? Subglobal carbon policy and the competitive selection of heterogeneous firms. Environmental regulation and French firms location abroad: an economic geography model in an international comparative study. Environmental regulation and labor demand: evidence from the South Coast Air Basin.

      EU ETS, free allocations and activity level thresholds: the devil lies in the details. Carbon leakage and competitiveness of cement and steel industries under the EU ETS: much ado about nothing. Environmental policy and directed technological change: evidence from the European carbon market. The impacts of unilateral climate policy on competitiveness: evidence from computable general equilibrium models. Do environmental regulations cost jobs? An industry-level analysis of the UK. Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China. Moving to greener pastures?

      Multinationals and the pollution haven hypothesis. Instrument choice for environmental protection when technological innovation is endogenous. Environmental regulations and productivity growth: the case of fossil-fuelled electric power generation. The impacts of environmental regulations on industrial activity: evidence from the and Clean Air Act Amendments and the Census of Manufacturers.