Green Policies and Firms'competitiveness
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2018 Inclusive solutions #GGSD #GGKP6 Forum & Annual Conference for the OECD, Paris green transition 27-29 November Issue Paper Green policies and firms’competitiveness Antoine Dechezleprêtre Environment Directorate, OECD Misato Sato Grantham Research Institute, LSE OECD GREEN GROWTH AND SUSTAINABLE DEVELOPMENT FORUM The GGSD Forum is an OECD initiative aimed at providing a dedicated space for multi-disciplinary dialogue on green growth and sustainable development. It brings together experts from different policy fields and disciplines and provides them with an interactive platform to encourage discussion, facilitate the exchange of knowledge and ease the exploitation of potential synergies. By specifically addressing the horizontal, multi-disciplinary aspects of green growth and sustainable development, the GGSD Forum constitutes a valuable supplement to the work undertaken in individual government ministries. The GGSD Forum also enables knowledge gaps to be identified and facilitates the design of new works streams to address them. AUTHORSHIP & ACKNOWLEDGEMENTS This issue note was prepared for the 2018 GGSD Forum to steer discussion around the theme of Session 2 on “Green growth and Competitiveness: firms who win, firms who lose.” A previous version of this note was published as “The impacts of environmental regulations on competitiveness” (2017), Review of Environmental Economics and Policy 11(2), 183–206. The authors are Antoine Dechezleprêtre (OECD) and Misato Sato (Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science). The note benefitted from comments and suggestions by Enrico Botta and Jaco Tavenier from the OECD. The previous version was reviewed by Milan Brahmbhatt, Raphael Calel, Baran Doda, Damien Dussaux, Carolyn Fischer, Matthieu Glachant, Colin McCormick, and Dimitri Zenghelis. The note was produced under the supervision of Kumi Kitamori, Head, Green Growth and Global Relations Division, OECD. Financial contribution by the Global Green Growth Institute, the Grantham Foundation for the Protection of the Environment, the European Union Seventh Framework Programme and the UK Economic and Social Research Council through the Centre for Climate Change Economics and Policy is gratefully acknowledged. The opinions expressed herein do not necessarily reflect the official views of the OECD member countries. This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimination of international frontiers and boundaries and to the name of any territory, city or area. 2 Table of Contents 1. INTRODUCTION .................................................................................................................................... 3 2. HOW DOES ENVIRONMENTAL REGULATION AFFECT FIRMS’ COMPETITIVENESS? ................ 4 Asymmetric Environmental Regulations and Relative Production Costs .................................................. 4 The Pollution Haven Hypothesis vs the Porter Hypothesis ....................................................................... 5 Key conclusions ......................................................................................................................................... 7 3. MEASURING COMPETITIVENESS EFFECTS EMPIRICALLY ........................................................... 8 Measuring competitiveness at the micro-level with firm data ................................................................... 8 Measuring environmental stringency ......................................................................................................... 8 Key conclusions ......................................................................................................................................... 9 4. EMPIRICAL EVIDENCE: IMPACTS ON TRADE, INDUSTRY LOCATION, AND EMPLOYMENT .. 10 Impacts on trade ...................................................................................................................................... 10 Impacts on Location of Production and Foreign Investment ................................................................... 11 Impacts on Employment .......................................................................................................................... 13 Key conclusions ....................................................................................................................................... 16 5. EMPIRICAL EVIDENCE: IMPACTS ON PRODUCTIVITY, INNOVATION AND COMPETITIVENESS ................................................................................................... 17 Environmental Regulations and Productivity ........................................................................................... 17 Environmental Regulations and Innovation .............................................................................................. 18 Key conclusions ....................................................................................................................................... 20 6. CONCLUSIONS AND PRIORITIES FOR FUTURE RESEARCH ....................................................... 21 REFERENCES ............................................................................................................................................. 23 3 1. Introduction A major concern in the context of the green transition is the potential impacts of environmental policies, and of green growth policy packages more generally, on the competitiveness of companies affected by these regulations. Businesses and policy makers fear that, in a world characterised by integrated global value chains and capital flows, differences in the stringency of environmental policies across countries could shift pollution-intensive production capacity towards regions with less ambitious regulation. For example, many countries are concerned that their efforts to achieve carbon emission reductions will put their own carbon- intensive producers at a competitive disadvantage in the global economy, and such concerns are often used by policy makers as a justification for not introducing more ambitious environmental policies. Yet, environmental regulations are sometimes viewed as potential drivers of economic growth. For example, the famous Porter hypothesis (Porter and van der Linde, 1995a) argues that more stringent environmental policies can actually have a net positive effect on the competitiveness of regulated firms because such policies promote cost-cutting efficiency improvements, which in turn reduce or completely offset regulatory costs, and foster innovation in new technologies that can help firms achieve international technological leadership and expand market share. The growing importance of this debate among policy makers has given rise to a large number of studies that attempt to quantify the effects of environmental regulations on key aspects of firms’ competitiveness, including trade, industry location, employment, productivity, and innovation. The objective of this briefing note is to review this recent empirical literature in order to inform the political debate concerning the potential economic impacts of the green transition. The note starts by explaining how environmental regulation may cause competitiveness effects and how these effects are measured. It then reviews the existing empirical evidence, discussing first the impact of relative environmental stringency on trade, industry location and employment, and then examining the effects on productivity and innovation, which could also impact firms’ competitiveness. It concludes with a summary identifying knowledge gaps and a discussion of priorities for future research. Competitiveness concerns stem largely from differences in environmental regulation across countries. Thus, this note focuses primarily on studies that empirically examine cross-country differences in environmental stringency. It also includes some studies that examine differences between smaller-scale jurisdictions (e.g., cross-county differences in the United States). Importantly, the review covers only ex post evaluation studies, thus excluding ex ante modelling studies, which have recently been reviewed by Carbone and Rivers (2017). It also focuses on environmental regulations that affect the manufacturing sector and target industrial emissions, which are at the centre of most competitiveness debates.1 1 Regulations on fishing, agriculture, forestry, mining, or waste, which are sometimes directed explicitly at protecting the environment and human health, are not included. 4 2. How does environmental regulation affect firms’ competitiveness? In the context of environmental policies, competitiveness2 effects result from differences or asymmetries in regulatory stringency3 applied across entities (e.g., firms or sectors) that are competing in the same market. For example, some firms may be regulated while others are exempt; some sectors may face stricter pollution standards than others; or environmental stringency may vary across jurisdictions as is the case with climate change mitigation policies where different regions are expected to take carbon mitigation action at different speeds under the UNFCCC’s Paris Agreement. If two competing firms face identical regulation, then competitiveness effects are not an issue.4 Thus, competitiveness effects can be distinguished from the general effects of regulations on polluting firms' economic outcomes, which are