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Do environmental regulations hamper productivity growth? How accounting for improvements of firms' environmental performance can change the conclusion

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Abstract

Many economists maintain that environmental regulations hamper productivity growth. However, recently, an opposing view has gained advocates. Indeed, it has been suggested that the empirically detected inverse relationship between environmental regulations and productivity growth is an almost inevitable consequence of the current methods used to measure productivity - methods that fail to account for improvements in environmental performance. We apply a method that amends this methodological shortcoming of previous empirical studies, and perform a regression analysis of regulatory stringency and a measure of productivity growth that accounts for emission reductions. To credit a firm for emission reductions, we include emissions as inputs when calculating the Malmquist productivity index (EMI); and for the sake of comparison, we also calculate the traditional Malmquist productivity index (MI) where emissions are not included. The regression analysis shows that the sign of the relationship is positive when EMI is employed as measure of productivity growth; but not statistically different from zero when MI is applied. Hence, the present paper provides the first empirical support for the claim that evaluations or recommendations of environmental policies that are based on a traditional measure of total factor productivity can be biased.

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  • Kjetil Telle & Jan Larsson, 2004. "Do environmental regulations hamper productivity growth? How accounting for improvements of firms' environmental performance can change the conclusion," Discussion Papers 374, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:374
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    1. Hailu, Atakelty & Veeman, Terrence S., 2001. "Alternative methods for environmentally adjusted productivity analysis," Agricultural Economics, Blackwell, vol. 25(2-3), pages 211-218, September.
    2. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
    3. Annegrete Bruvoll & Torstein Bye & Jan Larsson & Kjetil Telle, 2003. "Technological changes in the pulp and paper industry and the role of uniform versus selective environmental policy," Discussion Papers 357, Statistics Norway, Research Department.
    4. Jenkins, Rhys, 1998. "Environmental Regulation and International Competitiveness: A Review of Literature and Some European Evidence," UNU-INTECH Discussion Paper Series 01, United Nations University - INTECH.
    5. Nyborg, Karine & Telle, Kjetil, 2004. "A dissolving paradox: Firms’ compliance to environmental regulation," Memorandum 02/2004, Oslo University, Department of Economics.
    6. Runar Brännlund & Rolf Färe & Shawna Grosskopf, 1995. "Environmental regulation and profitability: An application to Swedish pulp and paper mills," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 6(1), pages 23-36, July.
    7. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
    8. Gollop, Frank M & Roberts, Mark J, 1983. "Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 654-674, August.
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    Keywords

    Environmental regulation; Productivity; Malmquist index;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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