Testing the Porter hypothesis: the effects of environmental investments on efficiency in Swedish industry

• Published in: Journal of productivity analysis Vol. 40; no. 1; pp. 43 - 56
• Main Authors: Broberg, Thomas, Marklund, Per-Olov, Samakovlis, Eva, Hammar, Henrik
• Format: Journal Article
• Language: English
• Published: Boston Spring Science+Business Media 01.08.2013; Springer US; Springer Nature B.V
• Subjects: Accounting/Auditing; Adaptation; C61; Capital expenditures; Climate change; Climate policy; Costs; D21; D24; Econometrics; Economic models; Economic statistics; Economic theory; Economics; Economics and Business; Economics and Finance; Efficiency; Ekonomi och näringsliv; Emission standards; Emissions; Emissions control; Environmental economics; Environmental policy; Environmental protection; Environmental protection investments; Environmental regulation; Environmental regulations; GDP; Gross Domestic Product; Hypotheses; Industrial efficiency; Industry efficiency; Investment policy; Manufacturing; Microeconomics; Operations Research/Decision Theory; Pollution control; Porter hypothesis; Prevention; Production estimates; Productivity; Pulp & paper industry; Pulp and paper industry; Q50; Q58; Regulation; Stochastic models; Stochastic production; Stochastic production frontier; Studies; Sweden; Environmental protection investments; Industry efficiency; D21; Porter hypothesis; Stochastic production frontier; Q58; D24; Q50; C61
• ISSN: 0895-562X; 1573-0441; 1573-0441
• DOI: 10.1007/s11123-012-0335-6

The main objective of this paper is to test the Porter hypothesis by assessing static and dynamic effects of environmental policy on productivity. According to the hypothesis, stringent environmental regulations have dynamic effects on firm performance, and these effects eventually generate profits that offset the adaptation costs. We extend previous analyses by using unique data on environmental protection investments in the Swedish manufacturing industry as a proxy for environmental stringency. These data enable us to separate environmental protection investments into pollution prevention and pollution control. This distinction is crucial since the hypothesis claims that it is investments in prevention that have positive dynamic effects on firm performance. To test the hypothesis, a stochastic production frontier model is estimated where firm inefficiency is a function of investments in environmental protection. In general, we find no support for the Porter hypothesis within the time frame of our study, indicating that environmental regulations lead to efficiency losses. This result is even stronger in the harshly regulated pulp and paper industry.