The impacts of environmental regulations on competitiveness

This paper has been now been published as an article in the Review of Environmental Economics and Policy

Headline issue

Ever since the first major environmental regulations were enacted in the 1970s there have been concerns about their impacts on businesses. The recent economic downturn, combined with increased competition from emerging economies, has heightened these concerns, particularly in relation to climate change policies. This review of the growing body of peer-reviewed evidence from the United Kingdom, United States and other countries concludes that environmental regulations only have a marginal impact on productivity and employment, and can boost economic growth by encouraging innovation by businesses.

Key findings

• Environmental regulations can reduce employment and productivity by small amounts, in particular in pollution- and energy-intensive sectors, at least during the transitory period when the economy moves away from polluting activities and towards cleaner production processes.
• There is little evidence to suggest that strengthening environmental regulations deteriorates international competitiveness. The effect of current environmental regulations on where trade and investment take place has been shown to be negligible compared to other factors such as market conditions and the quality of the local workforce.
• The benefits of environmental regulations often vastly outweigh the costs. For instance, even when job losses at polluting businesses are taken into account, the estimated health benefits from the introduction of the Clean Air Act in the United States in 1963, and subsequent amendments to it, are more than 100 times greater than the employment costs of the regulation.
• There is ample evidence that environmental regulations induce innovation in clean technologies and discourage research and development in conventional (polluting) technologies. Thus, environmental regulations can help economies break away from a polluting economic trajectory and move to a ‘clean’ one.
• There is evidence that low-carbon innovations induce larger economic benefits than the ‘dirty’ technologies they replace because they generate more knowledge in the economy, which can be used by other innovators to further develop new technologies across various sectors of the economy. This makes it plausible that the switch from ‘dirty’ to ‘clean’ technologies could generate economic growth and justifies strong public support for clean technology development.
• A key area for future research is to identify where environmental regulations can be strengthened to deliver clear social benefits, in terms of health or new technologies, with little risk of reducing competitiveness.