Does environmental policy stringency foster innovation and productivity in OECD countries?

In this paper, we test the weak and strong versions of the Porter hypothesis using data from 14 OECD countries over the period 1990–2011. Our analysis makes two contributions to the literature on the topic. First, we use a newly released environmental policy stringency index (EPS) provided by the OECD as an indicator for the stringency of environmental regulations, which addresses the multi-dimensionality of environmental regulations. Second, as a suitable method to deal with asymmetric distributions of the dependent variables, we use a panel-quantile regression model, which allow us to test whether or not the hypothesis holds for all quantiles of the distribution of the corresponding dependent variable. The findings indicate that in the short term a more strict environmental policy is associated with an increase in the number of patent applications and in total factor productivity (TFP) for the highest quantiles of the distribution of patents and for all quantiles of TFP, respectively. Moreover, environmental stringency has a positive effect on research and development expenditures (RD) only in the lower quantiles (10, 25). In the long term, the EPS is affecting RD, patents and TFP in all quantiles, and hence more stringent environmental regulations promote cleaner production processes that could help improving energy efficiency.