President Biden is reassessing environmental rules and regulations promulgated by the Trump administration, raising questions on whether new environmental rules could present obstacles to economic growth. (ddp)

In the latter half of the twentieth century, it was common to view environmental regulations as an incremental net cost on business and an obstacle to global competitiveness. And it's easy to understand why the theory prevailed. Some portion of the labor and capital, which otherwise would have been engaged in industrial production, must be diverted towards compliance with government regulations. The diversion is a quantifiable cost to business in the form of personnel expenditures or the expenditure of capital for emission controls.

Michael Porter, an economist at Harvard, challenged the hypothesis 30 years ago. In a seminal research paper published in 1991, Porter argued that well-designed and consistently-enforced environmental standards actually enhance the global competitiveness of US industry.[1]

He argued that policymakers have focused incorrectly on the static cost of environmental regulation, while ignoring the more important offsetting productivity benefits from innovation. Complying with new pollution standards, for example, forces industries to use raw materials more efficiently and inevitably reveals flaws in the production process.

In a subsequent paper, he used the example of a semiconductor manufacturing facility where pollution control requirements required 13 changes to the production process. Twelve of the changes resulted in cost reductions.[2]

Theories, of course, are a dime a dozen, and business owners are the ones obliged to abide by new regulations. Porter concedes that the US has a mixed record when it comes to environmental regulation. While coherent standards can improve productivity over the long run, the US has a tendency to deter innovation by mandating specific technologies and imposing unrealistic timeframes for adoption.

The US is now faced with a formidable industrial competitor in China. As the Biden Administration begins to roll out new regulations focused on climate change, the Porter Hypothesis will be tested again. To the extent that new rules focus on the overall objectives of a cleaner environment and avoid the imposition of rigid solutions from inside the Washington Beltway, a more stringent regulatory environment doesn’t need to undermine longer-term economic growth.

Main contributor: Thomas McLoughlin

See original blog post Do environmental regulations enhance competitiveness? 18 Feb 2021

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[1] Stefan Ambec, Mark Cohen, Stewart Elgie, and Paul Lanoie, "The

Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness", University of Chicago, Review of Environmental Economics and Policy, Volume 7, Number 1, 2010

[2] Michael E. Porter and Claas van der Linde, "Green and Competitive: Ending the Stalemate", Harvard Business Review, September 1995.