Drivers of environmental innovation - Vinnova

on the theory of terms of trade. A firm’s or country’s competitiveness is shaped
by its ability to take advantage of costs lower than their competitors. Trade
between two countries begins when one has a comparative advantage
compared to the other. This in turn is the consequence of the fact that the
countries are differently endowed in terms of their factors of production.
Translated to the context of pollution and emission control, it could be argued
that when a firm pollutes it is using a natural resource in the form of a clean
environment. When the firm is forced to reduce the emissions it seems that it
suddenly has relatively less of this resource. The firm loses all or a part of its
right to pollute and, therefore, loses more or less of its competitive advantage.
This results in lower exports of the products for which the environment was
used as a factor of production (Marklund, 1997).
Critique and attempts to test the Porter Hypothesis
There have been many reactions to the articles by Porter and van der Linde.
Researchers have attempted to test their ideas. Agencies and governmental staff
alike have considered these new ideas to be important and of interest to policy
making regardless of their verification difficulties. If there is a possibility to
decouple the conflict between environmental protection and competitiveness,
there is much to gain for the industry and the individual nations, the question
then becomes how to make this happen.
Porter and van der Linde do not, in a formal sense, test whether the hypothesis
can be rejected or not. Instead they offer examples in the form of case studies to
verify the hypothesis. In part this is what the opponents of the hypothesis
criticise, as the studied firms are just a fraction of the industry in question. As
Palmer et al express: “It would be an easy matter for us to assemble a matching
list where firms have found their costs increased and profits reduced as a result
of environmental regulations, not to mention cases where regulation has
pushed firms over the brink into bankruptcy” (Palmer et al, 1995). Jaffe and
Palmer call the evidence of the case studies, provided in support of the
hypothesis, “largely anecdotal”. They continue: “while these case studies
indicate that environmental regulation may create incentives for innovation in
certain situations, they do not provide a general assessment of the impact of
environmental regulation on innovative activity.”
Jaffe and Palmer also argue that a more systematic economic analysis of the
hypothesis is hindered by ambiguity as to exactly what the hypothesis is. One
example of this ambiguity is that Porter points to the importance of regulation
focusing on outcomes and not processes. Jaffe and Palmer argue that this
implies that certain types of environmental regulation stimulate innovation, but
other types do not. Unfortunately, they write, almost all of the existing U.S.
environmental legislation is not of the type prescribed by Porter but rather it is
setting both the goals of regulation and the processes for achieving those
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