Environmental Engineering Reference
In-Depth Information
damage; later in the chapter, I discuss cases where environmental capital is signi
fi
cantly
a
ff
ected.
Competitiveness hypothesis under production-generated pollution: theory
The theory behind the competitiveness hypothesis is straightforward. Consider an indus-
try where pollution is generated during production, and suppose that more stringent envi-
ronmental policy increases production costs. Higher production costs shift domestic
supply curves inward and reduce net exports or increase net imports. Hence the domestic
industry becomes less internationally or regionally competitive.
This theory predicts that more stringent environmental policy will, all else equal, shift
some pollution-intensive production away from the jurisdiction that tightens environ-
mental policy. But it does not predict that the production will move to a region with
weaker environmental policy. Production will move to a region with lower costs, but there
are many factors in addition to environmental policy that a
ect costs. It is, for example,
consistent with the competitiveness hypothesis for production to shift to a region with
more stringent environmental policy, but with lower labor costs.
The main alternative to the competitiveness hypothesis is the Porter hypothesis. Porter
and van der Linde (1995) argue that more stringent environmental policy can increase
international competitiveness and shift supply curves outward. Many economists are
skeptical because if
ff
t maximizing, they should already be using least-cost
production methods, and so it is di
fi
rms are pro
fi
cult to see how imposing additional constraints on
fi
rms via regulation can lower their costs. However, some authors have developed models
consistent with the Porter hypothesis. In Greaker (2006), tighter environmental policy
increases the demand for abatement technology, and this can spur innovation in the envir-
onmental services sector. If the cost-reducing e
ff
ect of such induced innovation is greater
than the cost-increasing e
ff
ect of tighter regulation, then the polluting industry could
become more competitive.
Competitiveness hypothesis: evidence
The competitiveness hypothesis predicts that, all else equal, jurisdictions with more strin-
gent environmental policy should attract less pollution-intensive industry and have higher
net imports (or lower net exports) of pollution-intensive goods. To test this hypothesis,
researchers need data on trade or investment
fl
ows, the stringency of environmental
policy, and other factors that a
ff
ect trade and investment. These data are needed for a
large number of di
erent jurisdictions, and it is desirable to have panel data with time
series and cross-sectional variation. Unfortunately, such data sets are rare.
The major challenge for researchers in this
ff
eld has been to come up with a cross-
jurisdictional series of data on the stringency of environmental policy. Such data are not
available for most countries, and as a result, much of the available research has used data
from the USA. Pollution taxes would be ideal, but they are rarely used by governments.
China has adopted a system of pollution charges and some authors, such as Dean et al.
(2005), have used variation in these charges across provinces in China to test the compet-
itiveness hypothesis. Levinson (1999) used taxes on hazardous waste across US states.
Most countries have fuel taxes, but these are imposed for many reasons and so they are
not a good proxy for a pollution tax. A number of studies have used county-level non-
attainment of the air quality standards in the US Clean Air Act as a proxy for stringent
fi
