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Baker Homes Blog

OECD study finds environmental regulation improves productivity

Posted by Emma Jones on 20/02/15 24:30

In the area of measuring the economic effects of environmental policy, data has been lacking. Past studies focused largely on individual policies in specific contexts, it has been difficult to draw informed conclusions, while weak or absent evidence has allowed for interpretations favouring firms and sectors targeted by specific policies.

The Organisations of Economic Cooperation and Development (OECD) has conducted research into the stringency of environmental policies across 24 countries, specifically looking into the effects on productivity of environmental policies. The results are very robust.

Environmental policy stringency

To begin with, the OECD has created a measure of environmental policy stringency (EPS). By examining both the implicit and explicit costs of a policy, it is then given a score between 0 and 6 (where 0 means the policy is absent, and 6 means it is the most stringent). They assigned a value to the policies of the 24 OECD countries between the years 1990 and 2024 and found that over this period, policies had become more stringent. As can be seen in the graph, the strictest policies were found to be in Northern Europe and the least in Ireland and Greece. The UK and the USA fall just under the OECD average.

Productivity rises for industry

The research also looked at the effects on productivity of these policies by focusing on three different levels – country, industry and firm.

Overall, there were found to be no long term effects on productivity, increased stringency does not harm growth. On an industry level, there was an overall increase in productivity, while at the firm level, the effects depend on the level of productivity of the individual firm rather than the pollution intensity. More successful firms increased in productivity, whereas low performing ones often suffered a decrease. This could be because higher performing firms are more able to adapt to changes, investing in greater efficiencies and innovations, whereas less successful firms drop out of markets all together. These differences in outcomes at the firm level largely balance out any effects at the sector or country level.

Stringent policies don’t necessarily have negative impacts

The characteristics of policies were also investigated with a questionnaire looking at the burdens to the economy due to environmental policies. Again, countries were given a score between 0 and 6 based on barriers to entry and competition and evaluation of environmental policy effects on the economy. The findings showed that the quality of the policy in question had a greater effect on productivity rather than stringency. There is no evidence that there is a trade-off between stringency and market-friendliness, which means that even highly stringent policies don’t necessarily have a negative impact on economic growth. Policies that are more market-friendly have a lower burden on the economy, so governments should try to avoid increasing barriers to competitiveness when designing policies.

The key results of the paper were:

  • Effects of environmental policies are not dependent on EPS levels
  • More advanced firms experience temporary increase in productivity
  • Less productive firms experience a fall in productivity
  • These changes are likely from changes in production processes and entry/exit of firms from industry
  • These effects have nothing to do with EPS levels
  • Market-friendly policies are better for productivity growth than non-market instruments

This research was conducted across 24 countries. It took the OECD over two years to analyse and write up. The findings show that, green policies increase the productivity of industry, and can, if designed properly, have a positive impact on the economy as well as the environment.

Andrew Eagles had this to say of the conclusion. "This research has significant implications for the next government. Green regulations, such as those aiming to improve millions of leaky UK Homes, which we advocate, can boost the economy and create tens of thousands of jobs and improve quality of life. It is heartening to see this in-depth research from the OECD finding that environmental regulation, when done right, can have some many benefits. Let’s hope the Government are listening."

For further information on the report, click here.

Topics: Regulations & Standards, Environment

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