Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 11: Policy-induced Competitiveness in the United States
INTRODUCTION Over the past 60 years we have greatly improved our understanding of the process of technological innovation. We have progressed from ‘confessions of ignorance’, where time is the only ‘explanatory’ variable in technological progress, towards a better understanding of the mechanisms that drive productivity change and improved measurements of various components of productivity change (Managi et al., 2004). Technological progress and productivity increase play a key role in the solution of environmental problems in the face of these increasingly stringent environmental regulations (Akao and Managi, 2007). Therefore, environmental policy needs to be properly designed to promote technological innovation, and to favor its diffusion (Kneese and Schultze, 1978; Jaffe et al., 2002). There has been some debate over whether environmental regulations have played a major causal role in impairing the competitiveness of industries. Conventional wisdom says that environmental regulations impose significant costs to industry and slow productivity growth and impede technological progress (Jorgenson and Wilcoxen, 1990; Portney, 1994; Jaffe et al., 1995; Palmer et al., 1995). Within this context, the key issue is how to design environmental regulations to attain environmental goals while controlling the adverse impact on industry to the extent feasible, that is, minimizing productivity loss. Recently, however, revisionists propose the alternative hypothesis that environmental regulations can have a positive effect on competitiveness in the industry. Environmental regulations pressure firms to innovate and thus enhance growth and competitiveness, this is called the ‘Porter hypothesis’ (Porter, 1991; Porter and van der Linde, 1995).1 While there are market failures...
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