"There is no such thing as a free lunch." Does the adage not apply to the environment? Can strict environmental policy lead to "win-win" situations?
Business Week magazine seems to think so.
First, some economic principles. Textbook theory says that profit maximizing business firms that compete with other profit maximizers will produce goods and services at the lowest possible cost. Environmental policy leads to increased production costs as firms must divert labor and capital away from production and toward clean up activities.
The Porter Hypothesis, on the other hand, argues that environmental policy will actually reduce the costs of production as firms discover efficiencies (free money, courtesy of a suggestion from Uncle Sam).
An article in this week’s Business Week mag, Top Green Companies, provides examples of the Porter Hypothesis. It seems that U.S. business firms are realizing that climate change is happening and that the government will attempt to regulate greenhouse gases at some point in the future. In response they are readying themselves in advance.
For example, if firms are expecting that the environmental policy involves marketable emissions permits, then a rational response is to develop technology to lower their abatement costs (“endogenous technical change”) so that they can sell their permits on the open market, making money. Spillover efficiencies reduce costs overall.
In the BW article each of the top ten green companies claim that they have reduced emissions and cut costs. Number one reducer DuPont has:
Reduced energy consumption 7% below 1990 levels, saving more than $2 billion -- including at least $10 million a year by using renewable sources
Yet, much of the economic research leaves me wondering if these companies are fibbing a bit. From the abstract of a Sept 2005 JEEM article:
…in the presence of learning, implementing a stricter environmental policy with the aim to reach a certain target of emissions reduction has a stronger negative effect on industry profits, which implies quite the opposite as to what is described by the Porter hypothesis.
Another recent paper illustrates how and why some firms (8-24%) might experience increased profits with regulation while overall industry costs rise.
Most environmental economists, I think, remain skeptical that there is free money associated with stricter environmental policy. The research that supports the Porter Hypothesis always seems, to me, to focus on extreme situations and tortured logic (note: this observation is based solely on my shallow understanding of this literature). If anything, the "top green companies" are (1) picking the "low hanging fruit" that wasn't worth picking without the incentive to abate or (2) attributing unrelated cost savings to environmental innovation.
I'm sticking with my simple upward sloping marginal abatement cost curve that implies increased production costs with reduced emissions.
