Abstract
This paper provides an empirical analysis of the relationship between the stringency of environmental regulation and total factor productivity (TFP) growth in the Quebec manufacturing sector. This allows us to investigate more fully the Porter hypothesis in three directions. First, the dynamic aspect of the hypothesis is captured through the use of lagged regulatory variables. Second, we argue that the hypothesis is more relevant for more polluting sectors. Third, we argue that the hypothesis is more relevant for sectors which are more exposed to international competition. Our empirical results suggest that: (1) the contemporaneous impact of environmental regulation on productivity is negative; (2) the opposite result is observed with lagged regulatory variables, which is consistent with Michel Porter’s conjecture; and (3) this effect is stronger in a subgroup of industries which are more exposed to international competition.
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Notes
More details on the computation of the \( T\dot{F}P \) are given in Dufour et al. (1998).
Note that, given the nature of our dependent variable, all the independent variables (except of course the fixed effects) are expressed in first difference.
The categories of investments considered in the calculation of the numerator are (1) Capital expenditures on Construction: Pollution Abatement and Control; Waste Disposal Facilities; Sewage treatment and disposal plants Sanitary and storm sewers; Lagoons; Other sewage construction; Treatment plants and pumping stations; Tailing disposal systems and settling ponds, and (2) Capital expenditures on Machinery and Equipment: Pollution Control and abatement; Sanitation equipment, see Statistic Canada (1994) Catalogue 61–223. These items are part of the two general categories included in the cost of capital: (i) Construction and (ii) Machinery and Equipment. They represent on average for the sample under study 0.2% of the cost of capital.
The total cost is the sum of the expenditures on the five categories of inputs mentioned above.
The nature of our results was not affected when we used the ENVIRONMENT variables in absolute terms instead of ratios. Results available upon request.
Beyond a three-year lag, we would face a problem of degrees of freedom.
This inventory was first published in 1994, the last year of our sample. It includes air and water pollutants. For a complete list of the regulated pollutants, see http://www.ec.gc.ca/pdb/npri/2006Guidance/Substance_list2006_e.cfm.
The actual distribution across sectors is (in thousands of tons): Clothing (N/A), food and beverage (51.96), leather (61.54), machinery (130.8), textiles (472.7), electrical and electronic products (482.96), furnitures and fixture (558.93), wood (703.42), printing and publishing (1396.57), metal fabricating (1914.69), rubber and plastics (4344.18), transportation equipment (8112.96), petroleum and coal products (10851.09), primary metals (20608.43), non-metallic minerals (24978.09), paper and allied products (32321.57), and chemicals (57207.90).
One could argue that this variable is potentially endogenous. A Hausman test (using SCALEit−1 or the lagged GDP per sector as an instrument) did reject the hypothesis of exogeneity. We thus report results of estimations in which SCALE it has been instrumented with SCALEit−1. Results are robust to the choice of instrument. Results with lagged GDP per sector as an instrument are available upon request.
See Greene (1997:512) for a discussion of short and long-run impact multipliers. The pattern observed with our ENVIRONMENT variables is also present when we include these variables one by one in the regressions (results available upon request).
Note that, when we do not use moving averages, the impact of the 1 year lag ENVIRONMENT variable is not significant for the less polluting sectors.
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Acknowledgments
Financial support from the Fonds FQRSC is gratefully acknowledged. We also thank Jeremy Lucchetti-Laurent, José Bourque and Jean-François Houde for very good research assistance on this project. The usual disclaimer applies.
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Lanoie, P., Patry, M. & Lajeunesse, R. Environmental regulation and productivity: testing the porter hypothesis. J Prod Anal 30, 121–128 (2008). https://doi.org/10.1007/s11123-008-0108-4
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DOI: https://doi.org/10.1007/s11123-008-0108-4