Drivers of environmental innovation - Vinnova

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Appendix 2 Environmental policy and competitiveness This appendix will try to summarise an on-going debate among researchers on the issue of whether environmental policy can strengthen a firm’s competitiveness. A central theme in this debate focuses on innovation and so we will also return to the question of whether regulation drives innovations or not. Environmental regulation has from the viewpoint of traditional economic theory been seen as raising the cost of production. However, during the 1990s this theory has been questioned, especially by Michael E Porter and Claas van der Linde. In the discussion below we shall outline the arguments of Porter and van der Linde and present some studies that have contributed to the debate, and test what has come to be called the Porter hypothesis. The Porter Hypothesis Porter criticises the perceived wisdom that firms always seek to minimise costs and/or maximise profits, and that they are assumed to possess perfect information. Porter argues that the conflict between environmental protection and economic competitiveness stems from a static view of competition. Strict environmental regulations do not inevitably hinder a firm’s competitive position against its foreign rivals, but could instead enhance it. He argues that tough standards trigger innovation and upgrading (Porter, 1991). Porter also argues that the U.S. has lost in competitive performance in environmental technologies since the mid-1970s. In the same period there has been a foot-dragging in implementing environmental legislation. Other nations, such as Germany and Japan, have instituted tight environmental regulations, and appear to have a lead in the patenting and exporting of environmental technology. Both countries also continue to surpass the U.S. in the rates of GNP and productivity growth. The U.S. as well as Britain has suffered, with the large majority of pollution control equipment being imported into these countries at the time of the article in 1991. In areas where the U.S. happens to have the strictest regulation, for example in pesticides, the country has a lead. Porter goes so far as to say, “the resurgence of concern to the environment, should be viewed not with alarm, but as an important step in regaining Americas preeminence in environmental technology.” The mandate for the Environmental Protection Agency should be to stimulate investment and innovation, not just to set limits (Porter, 1991). Porter and van der Linde oppose the view that environmental policy and competitiveness are negatively correlated. Environmental regulation inevitably raises costs in a static economy where technology, products and customer needs are fixed and firms make cost-minimising choices and are profit maximisers. According to the authors, competitive advantage rests neither on static 58
efficiency nor on optimising within fixed constraints, but on the capacity for innovation and improvements that alter these constraints. Porter and van der Linde argue that properly designed environmental standards can trigger innovation that may partially or more than fully offset the costs of complying with them. When complying, by innovatings, firms can obtain advantages over foreign firms that are not subject to similar regulations. The possibility that regulation might act as a spur to innovation arises because firms do not always make optimal choices. In reality, “the actual process of dynamic competition is characterised by changing technological opportunities coupled with highly incomplete information, organisational inertia and control problems reflecting the difficulty of aligning individual, group and corporate incentives.” Porter and van der Linde argue in support of the so-called early mover advantage. They state that firms that foresee the changing world demand towards more environmentally adapted products and production processes and adapt to this, will have a competitive advantage. As long as the regulations are designed in an appropriate way they can provide at least six advantages: 1. Regulation can signal to firms areas of likely resource inefficiencies and potential technological improvements. 2. Regulation focused on information gathering can achieve major benefits by rising corporate awareness. 3. Regulation reduces the uncertainty that investments to address environment will be valuable. 4. Regulation creates pressures motivating innovation and progress. 5. Regulation levels the transitional playing field. During the transition period to innovation-based solutions, regulation ensures that one firm cannot opportunistically gain position by avoiding making environmental investment. 6. Regulation is needed in the case of incomplete offsets. When innovation cannot completely offset the cost of compliance, especially in the short term, learning can reduce the cost of innovation-based solutions. Porter and van der Linde also argue that more stringent regulation, rather than lax ones, focuses firm attention on discharges and processes, and compliance requires more fundamental solutions, such as reconfiguring products and processes. According to the authors, innovation in response to environmental regulation can take two broad forms. Firstly, the firms become smarter about how to deal with pollution once it occurs. Secondly, and central to the claims that regulation 59
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Drivers of environmental innovation
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Drivers of environmental innovation
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Preface Innovations such as new pro
Page 7 and 8: Sammanfattning Denna rapport är en
Page 9 and 10: Övergången mot ett mer marknadsdr
Page 11 and 12: Summary This study aims to provide
Page 13 and 14: 1 Introduction ”7KH# RQO\# SDWK#
Page 15 and 16: But there are also problems with a
Page 17 and 18: 2 Environmental innovations in firm
Page 19 and 20: ”sustainable development is a key
Page 21 and 22: was in general no larger change in
Page 23 and 24: positive environmental effects alth
Page 25 and 26: That location also plays an importa
Page 27 and 28: adapted, with the latter indicating
Page 29 and 30: 4 Environmental policy instruments
Page 31 and 32: oth in the regulated industry and o
Page 33 and 34: Table 1 Summary of innovation effec
Page 35 and 36: marginal cost of abatement is lower
Page 37 and 38: according to Hemmelskamp (Forthcomi
Page 39 and 40: The Dutch studies looked for the pr
Page 41 and 42: Kemp claims that the effectiveness
Page 43 and 44: Table 5 Summary of innovation effec
Page 45 and 46: There is clearly a need for more em
Page 47 and 48: conditions. These perspectives are
Page 49 and 50: This study shows that the way envir
Page 51 and 52: Hemmelskamp, J. (Forthcoming) “En
Page 54 and 55: Appendix 1 Theoretical approaches t
Page 56: and their interaction. It opens up
Page 61 and 62: on the theory of terms of trade. A
Page 63 and 64: egulation may lead to increases in
Page 65 and 66: average productivity increases. Thi
Page 68: VINNOVA, SE-101 58 Stockholm, Swede
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