Environmental laws reduce air and water pollution, protecting health, the economy, and natural resources. They may also foster innovation of environmentally-friendly products, processes and end management solutions.
Regulated costs tend to outweigh their benefits in terms of improved air and water quality; however, regulation-induced productivity losses do threaten competitiveness in industries with significant energy- and pollution-intensive needs.
Compliance
Environmental regulations force businesses to invest in pollution control equipment and change production processes, increasing direct costs while simultaneously decreasing productivity. Some may decide to relocate their business operations abroad in order to lower compliance costs; others may shut down altogether.
Economists investigate the competitiveness impacts of environmental regulation using various methodologies, including surveys, engineering analyses and econometric modeling. In rigorous studies using installation-level data or long panels that compare across countries, differences in stringency have small negative effects on employment in polluting sectors.
Furthermore, these studies do not rule out the possibility that more stringent environmental policies could encourage investment in cleaner technologies that lower abatement costs and total production costs and thus help address competitiveness concerns. This phenomenon is known as Porter’s hypothesis; though its veracity remains controversial. Short term, it is likely that companies will pass along some of their increased compliance costs through higher prices or reduced profits margins to their customers.
Enforcement
Establishing voluntary programs, joining trade associations and investing in pollution prevention technologies and efficient technologies can reduce business costs while showing regulators your company is committed to environmental protection. Furthermore, taking this approach may also help maintain competitive edge by drawing customers who value eco-friendly products into your customer base.
Environmental regulations place costs on firms, and this difference in cost may impact relative productivity. Productivity measures like total factor productivity include all inputs into production as well as indirect costs such as energy and pollution abatement costs – meaning reducing pollution increases inputs while simultaneously decreasing productivity.
Different levels of regulatory stringency can have a significant impact on regional and international trade flows. If stringent environmental policies discourage firms from locating in a jurisdiction, politicians may modify them in order to attract firms and encourage investment and production. Numerous studies have examined these effects using various measures of environmental stringency.
Adaptation
Environmental regulations may require businesses to use more efficient materials, processes or equipment that reduce pollution while cutting costs and increasing competitiveness. While environmental regulations can have positive effects on business competitiveness overall, their effects can also vary widely between industries; costs savings might offset by complying with regulations.
Geographic location can significantly impact competitiveness impacts by altering where firms locate production facilities and invest in foreign direct investment. Firm-level data has proven invaluable in addressing this challenge and providing more accurate analyses of competitiveness impacts.
Some businesses adapt to environmental regulations to benefit both customers and the general public; an example would be installing a water tank on a farm to increase freshwater availability during dry spells. Other adaptations have more direct benefits to individual businesses themselves; an energy upgrade to meet new energy standards could reduce air pollution levels, for instance.
Prevention
Businesses can help the environment by working with trade associations and government agencies to craft environmentally friendly regulations, while simultaneously taking measures to reduce their environmental footprint by installing pollution control equipment and altering production processes. They may also save money through stricter vehicle efficiency standards or by purchasing energy-saving equipment.
Environmental regulation may even increase business productivity. Research has demonstrated this; for instance, command and control policies and nonmonetary awards for pollution reduction reduce industrial output and profits, while monetary rewards for pollution reduction boost production and profits.
Greenstone and List’s study indicates that regulatory approaches vary greatly for various pollutants. Nonattainment of ozone concentrations leads to lower manufacturing productivity while nonattainment of carbon monoxide concentrations produces statistically significant increases. This indicates that different regulatory requirements could lead to distortions in competitive product markets by polluting firms gravitating toward countries with more lax regulations – creating pollution havens. One way of countering this potential impact would be creating an international environmental agreement which provides uniform rules across nations.