Ithaca, New York – Critics claim that environmental regulations hurt productivity and profits, but the reality is more subtle, according to an analysis of environmental policies in China by two economists from Cornell.
The analysis found that, contrary to conventional wisdom, market-based or incentive-based policies may benefit regulated firms in the conventional and “green” energy sectors, by stimulating innovation and improvements in production processes. On the other hand, policies that impose environmental standards and technologies may seriously harm production and profits.
“The conventional wisdom is not completely accurate,” said Shuyang Si, PhD student in applied economics and management. “The type of policy matters, and the policy impacts differ by company, industry and sector.”
Si is the lead author of “The Effects of China’s Environmental Policies on GDP, Production and Profits,” published in the current issue of the journal. Energy economics. C.-Y. Cynthia Lynn Lowell, Associate Professor at the Charles H. Dyson School of Applied Economics and Management and Chair of Robert Dyson Sysquenscentennial in Environmental, Energy and Resource Economics is co-author.
Si mining Chinese regional government websites and other online sources to compile a comprehensive dataset of nearly 2,700 environmental laws and regulations in effect in at least one of the 30 provinces between 2002 and 2013. This period came just before China declared “the war on” Pollution “the foundation of major regulatory changes that shifted the long-standing priority of economic growth over environmental concerns.”
“We have deeply researched the policies and carefully examined their features and provisions,” said Si.
Researchers classified each policy as one of four types: “command and control”, such as authorizations to use part of the electricity from renewable sources; Financial incentives, including taxes, subsidies, and loans; Prizes for reducing pollution or improving efficiency and technology; And prizes that are not cash, such as general recognition.
They assessed how each type of policy affected China’s GDP, industrial production in traditional energy industries and profits of new energy sector companies, using publicly available data on economic indicators and publicly traded companies.
Si and Lin Lowell concluded that command-and-control and non-monetary reward policies had significant negative impacts on GDP, production and profits. But the fiscal stimulus – loans to increase the consumption of renewable energy – and improvement in industrial production in the petroleum and nuclear power industries, and financial rewards for reducing pollution have boosted profits for the new energy sector.
The researchers write that “environmental policies do not necessarily lead to a decrease in production or profits.”
This finding, they said, is consistent with “Porter’s hypothesis” – Harvard Business School professor Michael Porter’s 1991 suggestion that environmental policies can stimulate growth and development, by stimulating technology and commercial innovation to reduce pollution and costs.
While some policies benefited companies and organized industries, the study found that these benefits came at a cost to other sectors and the overall economy. However, Si and Lin Lowell said, these costs must be weighed against the benefits of these policies for the environment, society, companies and regulated industries.
Lin Lowell said economists generally favor market-based environmental policies or incentives, with a carbon tax or tradable permit system being the gold standard. She said the new study that Cie led provides further support for these types of policies.
“This action will make people aware, including companies that may be against environmental regulation, that these regulations do not necessarily have to be detrimental to their profits and productivity,” said Lin Lowell. “In fact, if the policies that promote environmental protection are carefully designed, there are some policies that these companies might actually like.”
Other co-authors who contributed to the study were Mingjie Lyu from Shanghai Lixin University of Accounting and Finance, and Song Chen from Tongji University. The authors acknowledge financial support from the Shanghai Science and Technology Development Fund and the company’s Exxon-Mobil ITS-Davis grant.
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