You’re Being Lied to: Environmental Regulation Actually Boosts the Economy

It seems like common knowledge that government regulations are burdensome for companies. In many cases, this is true, as regulations create obstacles for businesses, which limits their output and requires more resources to overcome. Many free-market advocates echo this sentiment when they talk about “reducing government red tape” and wanting “smaller government.” They see it as a tug-o-war between private industry and government.

This is especially true with environmental regulations. Laws like the Clean Water Act and the Clean Air Act put strict limits on dumping and emissions, both of which are seen by some as hindering the economy. In fact, the Trump administration rolled back more than 100 such rules because they felt the freehand of the market was too constrained. Trump was so overzealous with his anti-environmentalism that his administration faced well over 100 lawsuits against various states for his executive overreach.

Fortunately though, new research confirms the Porter hypothesis, which states that environmental regulations have the counterintuitive effect of boosting the economy.

The Porter Hypothesis

In their 1995 paper “Toward a New Conception of the Environment-Competitiveness Relationship,” Michael Porter and Claas van der Linde claimed that “Detailed case studies of hundreds of industries, based in dozens of countries, reveal that internationally competitive companies are not those with the cheapest inputs or the largest scale, but those with the capacity to improve and innovate continually.” Of the many ways this could be achieved, they believed that environmental regulation and government assistance played an important role.

One example of this that they provided was the Green Lights program, created by the US Environmental Protection Agency in the early 90s. Organizations participating in this program agreed to scrutinize all possible forms of energy consumption, and, in return, they received free advice on new methods for implementing efficient lighting, heating, and cooling. When the EPA analyzed its data, they found that 80% of the organizations that utilized their advice and made the appropriate upgrades recouped the cost of doing so in 2 years or less. Therefore, the private-public partnerships not only helped the environment but businesses as well.

When it came to environmental regulations, Porter and van der Linde listed six benefits:

1. “signals companies about likely resource inefficiencies and potential technological improvements.” Many companies aren’t aware of the most recent innovations or lack the incentive to implement them.

2. “focused on information gathering can achieve major benefits by raising corporate awareness.” For example, Toxics Release Inventories is a publication that requires over 20,000 factories to report the amount of 320 toxic chemicals they are releasing. This type of information sharing has resulted in a reduction of environmental damage, without specific laws being created.

3. “reduces the uncertainty that investments to address the environment will be valuable.” In other words, regulation provides investors with a solid set of rules on which to make decisions, thus creating confidence and therefore more investments. Without regulation, a factory, for example, might do something unpredictable to curb their environmental impact.

4. “creates pressure that motivates innovation and progress.” Environmental regulations can redirect organizational inertia, empower employees, and spur creative thinking. For example, in 1990, environmental regulations forced Raytheon to eliminate ozone harming CFCs from a product used for cleaning circuit boards. Raytheon scientists didn’t think this was possible, but they wound up developing a terpene based product that not only didn’t contain CFCs but could be reused and was not nearly as corrosive as the original.

5. “levels the transitional playing field.” Environmental regulations ensure that one organization cannot gain an advantage by not investing resources to transition to more environmentally friendly practices. During the transition, a firm could have the upper hand by not spending the money, but if it is the law, then it is financially safe for all firms do it.

6. “needed in the case of incomplete offsets.” As a business transitions to move to more environmentally friendly practices, it may not initially reap the benefits, as they often are long-term. Therefore, environmental regulations are necessary to push it forward.

Porter and van der Linde’s paper has been controversial since they published it, mainly because the data backing it up was scarce. Thankfully, though, it seems we have the data we’ve been waiting for.

Environmental Regulation Is Good For Business

In January 2021, Robert De Santis from the Italian National Institute of Statistics and Luis University and others published a study that looked at 14 countries from the Organization of Economic Co-operation (OECD). These countries adhered to the OECD’s environmental regulations, and De Santis analyzed how doing so affected their economies over a 25 year period (1990–2015). In particular, they looked at changes to multifactor productivity caused by both market and non-market environmental policies.

Multifactor productivity is an excellent measure of economic performance which is a comparison of total output and numerous input variables, including capital, energy, labor, materials, etc. Market policies include tariffs, credits, taxes, etc. Non-market policies include emission limits, soil and water testing, environmental degradation studies, etc. Over the 25 years studied, these 14 countries implemented and altered a vast array of environmental policies, each having a measurable affect on their multifactor productivity.

The authors found that both market and non-market environmental regulation boosted the economy. In particular, they found that green taxes had the biggest impact. Green taxes are levied against a business for not adhering to environmentally friendly practices and regulations. Overall, they said that “Our findings support the hypothesis that environmental policies generate positive productivity returns through innovation as suggested by Porter and Van Der Linde (1995).”

Where Do We Go From Here?

The above research seems to confirm the Porter hypothesis by demonstrating the counterintuitive idea that environmental regulation hurts the economy. In fact, it’s shown that it benefits the economy. However, environmental regulations were rolled back over the last few years, especially in the US and Brazil because the politicians in control subscribed to the idea that they were stifling the economy. Of course, this has accelerated the human caused 6th mass extinction.

Therefore, we need strict environmental policy now. If environmental regulation actually boosts the economy, then what’s the problem? Fear of change and misinformation are two possible answers. For example, the Union of Concerned Scientists said “Instead of acknowledging the harmful effects of their products and committing to swift and deep reductions in global warming emissions, many of the world’s largest fossil fuel companies have knowingly deceived the public about the climate science and policy-and they continue to do so today.” This campaign of lies goes back 50 years. Why? Because the leaders of Exxon, Shell, etc. are scared of losing their market shares, although we’ve seen this may now not be the case.

Another problem is lack of science education. In many counties, especially the US, large segments of the population don’t trust scientists or don’t understand how science works. Instead, they believe in conspiracy theories and other pseudoscientific nonsense. Therefore, part of the solution is properly educating the public on climate change, environmentalism, policy making, renewable energy, and even economics.