The Porter Hypothesis and the Economic Consequences of Environmental Regulation

Combining the public choice literature on political decision making with the Neo-Schumpeterian literature on innovation, this valuable new book develops a conceptual model of how environmental regulation is designed. The author presents a novel perspective on the Porter Hypothesis, arguing that the effect of environmental regulation is too weak to induce technological change. This implies that environmental policy intervention has little, if any, economic consequences which has significant repercussions for environmental decision-making. Since radical technological advance is unpredictable, this implies that environmental regulation induces, at the very most, incremental improvements of existing designs. Moreover, due to the high political costs of disrupting existing industry structures, regulation objectives are often adjusted or the compliance costs reduced through subsidies. Due to this limited inducement effect, the author finds that environmental regulation does not produce outcomes consistent with the Porter Hypothesis, nor does it have any palpable negative economic impact. Using detailed case-study evidence, each step of his argument is skilfully illustrated. The book concludes with a number of concrete policy recommendations as to how existing and future regulations might be improved and how the development of radically novel cleaner technology may be fostered. This book provides a comprehensive assessment of the negotiation process that leads to the design of regulatory policy objectives. It also represents a first attempt to study the possibilities and limitations of environmental regulation as a policy tool to stimulate the development and diffusion of cleaner technologies. Environmental economists, resource managers and policymakers interested in environmental regulation and technological change will welcome this valuable addition to the literature.