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Environmental taxation in the right place can increase business productivity

January 7, 2016

Environmental taxation in the right place can increase business productivity

Environmental regulation is essential to limit the effects of human activity on the environment. However, some claim that this generates additional costs for businesses, and thus negatively affects industrial competitiveness. The argument put forward is that complying with environmental regulations generates higher operating costs, and so may decrease investments, productivity, and profit margins.

In the 1990s, this view was challenged by economist Michael Porter. He suggested quite the opposite – that strict environmental regulations improve efficiency, promote innovation and increase commercial competitiveness. The hypothesis of his name proposes that properly designed environmental regulations, even if stringent, can improve firms’ innovation and productivity by highlighting underlying inefficiencies, with a further positive effect on other sectors and even on national economic competitiveness.

However, empirical studies have failed to reach a conclusion on whether these effects are really occurring. This study put the Porter hypothesis to test, by investigating the effect of environmental regulations on innovation and productivity in manufacturing companies in Europe. The researchers assessed eight European countries and 13 different manufacturing sectors over the years 2001–2007. The EU-funded researchers used an empirical framework, which investigates the links between the strictness of environmental regulation, innovation, and productivity.

Read more at : "Science for Environment Policy": European Commission DG Environment News Alert Service, edited by SCU, The University of the West of England, Bristol.

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