Abstract
While there is a near global consensus about the need to address climate change, most countries are hesitant to employ sufficiently stringent policies in fear of sacrificing economic growth. The objective of this research is to examine the impact of environmental policy on economic growth, using the OECD’s Environmental Policy Stringency (EPS) index across 21 OECD countries from 1990 to 2014. An augmented Solow Model with the inclusion of variables to represent human capital, trade openness and the EPS index is used to assess whether policy stringency affects growth with empirical analysis comprised of a pooled mean group estimator, dynamic OLS, fixed effects and pooled OLS to estimate the short and long run effects. The results reveal that policy stringency negatively affects economic growth in the short run but pays dividends of positive growth in the long run. There appears to be a threshold level of the EPS, beyond which the dividend is realized in the long run. The results are expected to be of interest to policy makers who strive to address climate change without trading off economic growth.
Similar content being viewed by others
Notes
British Columbia (BC), Canada implemented the first comprehensive revenue-neutral tax on carbon in North America in 2008.
Saskatchewan is one of Canada’s ten provinces.
Martínez-Zarzoso et al. (2019) used the EPS index to test the Porter Hypothesise described in 2.1.
The Solow Model assumes that both technology and labour grow at a constant rate. This formulation of technology is referred to as labour-augmenting. In essence, technology is making labour more effective. Solow’s economic growth model can be written as follows (see Zhao 2019):
$$Y_{t} = K_{t}^{\alpha } \left( {A_{t} L_{t} } \right)^{{1 - \alpha }}$$Further, we assume that technology does not only make labour more efficient, it can also contribute to the productivity of capital. So, ‘A’ in our theoretical discussion is a separate long-run variable.
See Martínez-Zarzoso et al. (2019) for a concise explanation of the components of the EPS index.
See Brunel and Levinson (2016) for more discussion on the challenges of developing a useful and accurate measure of environmental policy stringency.
Given that the dependent variable is in log form and EPS is not in log form, we need to subtract 1 from the exponent of the coefficient and then multiply the value by 100 to determine the effect of EPS on the growth of per capita GDP.
References
Albrizio S et al (2014) Do environmental policies matter for productivity growth?: insights from new cross-country measures of environmental policies. OECD Economics Department working papers, no. 1176, OECD Publishing, Paris
Allan G, Lecca P, McGregor P, Swales K (2014) The economic and environmental impact of a carbon tax for Scotland: a computable general equilibrium analysis. Ecol Econ 100:40–50
Alpay E, Buccola S, Kerkvliet J (2002) Productivity growth and environmental regulation in Mexican and US good manufacturing. Amer J Agric Econ 84(4):887–901
Amar AB (2021) Economic growth and environment in the United Kingdom: robust evidence using more than 250 years data. Environ Econ Policy Stud. https://doi.org/10.1007/s10018-020-00300-8
Ambec S, Cohen MA, Elgie S, Lanoie P (2013) The Porter hypothesis at 20: can environmental regulation enhance innovation and competitiveness? Rev Environ Econ Policy 7(1):2–22
Barbera AJ, McConnell VD (1990) The impact of environmental regulations on industry productivity: direct and indirect effects. J Environ Econ Manag 18(1):50–65
Beck M, Rivers N, Wigle R, Yonezawa H (2015) Carbon tax and revenue recycling: impacts on households in British Columbia. Resour Energy Econ 41:40–69
Bernard JT, Kichian M, Islam M (2018) Effects of BC’s carbon tax on GDP. USAEE research paper series, 18-329
Berman E, Bui LT (2001) Environmental regulation and productivity: evidence from oil refineries. Rev Econ Stat 83(3):498–510
Bhattacharya M, Paramati SR, Ozturk I, Bhattacharya S (2016) The effect of renewable energy consumption on economic growth: evidence from top 38 countries. Appl Energy 162:733–741
Bildirici ME, Gökmenoğlu SM (2017) Environmental pollution, hydropower energy consumption and economic growth: evidence from G7 countries. Renew Sustain Energy Rev 75:68–85
Blackburne EF III, Frank MW (2007) Estimation of nonstationary heterogeneous panels. Stand Genomic Sci 7(2):197–208
Bosquet B (2000) Environmental tax reform: does it work? A survey of the empirical evidence. Ecol Econ 34(1):19–32
Botta E, Koźluk T (2014) Measuring environmental policy stringency in OECD countries. OECD Economics Department working papers no. 1177
Bovenberg AL, Smulders S (1994) Environmental quality and pollution-saving technological change in a two-sector endogenous growth model. Fondazione ENI Enrico Mattei, Milano
Brunel C, Levinson A (2016) Measuring the stringency of environmental regulations. Rev Environ Econ Policy 10(1):47–67
Cohen MA, Tubb A (2018) The impact of environmental regulation on firm and country competitiveness: a meta-analysis of the porter hypothesis. J Assoc Environ Resour Econ 5(2):371–399
Dasgupta S, Wheeler D, Mody A, Roy S (1999) Environmental regulation and development: a cross-country empirical analysis. The World Bank
De Vries FP, Withagen C (2005) Innovation and environmental stringency: the case of sulfur dioxide abatement. Center discussion paper no. 2005-18. Tilburg University
Dechezleprêtre A, Nachtigall D, Venmans F (2018) The joint impact of the European Union emissions trading system on carbon emissions and economic performance. OECD Economics Department Working Papers No.1515, OECD Publishing, Paris. https://doi.org/10.1787/4819b016-en
Dees P, Auktor GV (2018) Renewable energy and economic growth in the MENA region: empirical evidence and policy implications. Middle East Dev J 10(2):225–247
Dufour C, Lanoie P, Patry M (1998) Regulation and productivity. J Prod Anal 9(3):233–247
Elgie S, McClay J (2013) Policy Commentary/Commentaire BC’s carbon tax shift is working well after four years (attention Ottawa). Can Public Policy 39(Supplement 2):S1–S10
Feenstra RC, Inklaar R, Timmer MP (2015) The next generation of the Penn world table. Am Econ Rev 105(10):3150–3182
Frank B (2018) Carbon pricing works in Sweden. Ecofiscal Commission Blog (April 11, 2018). https://ecofiscal.ca/2018/04/11/carbon-pricing-works-in-sweden/
Freire-González J, Puig-Ventosa I (2019) Reformulating taxes for an energy transition. Energy Econ 78:312–323
Gollop FM, Roberts MJ (1983) Environmental regulations and productivity growth: the case of fossil-fueled electric power generation. J Polit Econ 91(4):654–674
Gray WB (1987) The cost of regulation: OSHA, EPA and the productivity slowdown. Am Econ Rev 77(5):998–1006
Gray WB, Shadbegian R (2003) Plant vintage, technology, and environmental regulation. J Environ Econ Manag 46(3):384–402
Halkos G, Psarianos I (2016) Exploring the effect of including the environment in the neoclassical growth model. Environ Econ Policy Stud 18(3):339–358
Hansen BE (1999) Threshold effects in non-dynamic panels: Estimation, testing, and inference. J Econometr 93(2):345–368
Hassan M, Oueslati W, Rousselière D (2020a) Exploring the link between energy based taxes and economic growth. Environ Econ Policy Stud 22(1):67–87
Hassan M, Oueslati W, Rousselière D (2020b) Environmental taxes, reforms and economic growth: An empirical analysis of panel data. Econ Syst 44(3):100806
Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econometr 115:53–74
International Labour Organization database. http://www.ilo.org/global/statistics-and-databases/lang--en/index.htm. Accessed 30 Jan 2018
IPCC (2018) Global warming of 1.5°C. An IPCC special report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte V, Zhai P, Pörtner H-O, Roberts D, Skea J, Shukla PR, Pirani A, Moufouma-Okia W, Péan C, Pidcock R, Connors S, Matthews JBR, Chen Y, Zhou X, Gomis MI, Lonnoy E, Maycock T, Tignor M, Waterfield T (eds)] (in press)
Jaffe AB, Palmer K (1997) Environmental regulation and innovation: a panel data study. Rev Econ Stat 79(4):610–619
Koźluk T, Timiliotis C (2016) Do environmental policies affect global value chains?: a new perspective on the pollution haven hypothesis. OECD Economics Department working papers, no. 1282. OECD Publishing, Paris. https://doi.org/10.1787/5jm2hh7nf3wd-en
Lanoie P, Patry M, Lajeunesse R (2008) Environmental regulation and productivity: testing the porter hypothesis. J Prod Anal 30(2):121–128
Lanoie P, Laurent-Lucchetti J, Johnstone N, Ambec S (2011) Environmental policy, innovation and performance: new insights on the Porter hypothesis. J Econ Manage Strat 20(3):803–842
Lin B, Jia Z (2018) The energy, environmental and economic impacts of carbon tax rate and taxation industry: a CGE based study in China. Energy 159:558–568
Liu L, Huang CZ, Huang G, Baetz B, Pittendrigh SM (2018) How a carbon tax will affect an emission-intensive economy: a case study of the Province of Saskatchewan, Canada. Energy 159:817–826
Lu C, Tong Q, Liu X (2010) The impacts of carbon tax and complementary policies on Chinese economy. Energy Policy 38(11):7278–7285
Maji IK (2015) Does clean energy contribute to economic growth? Evidence from Nigeria. Energy Rep 1:145–150
Mankiw G, Romer D, Weil D (1992) A contribution to the empirics of economic growth. Q J Econ 107(2):407–437
Martínez-Zarzoso I, Bengochea-Morancho A, Morales-Lage R (2019) Does environmental policy stringency foster innovation and productivity in OECD countries? Energy Policy 134:110982
Murray B, Rivers N (2015) British Columbia’s revenue-neutral carbon tax: a review of the latest “grand experiment” in environmental policy. Energy Policy 86:674–683
Nong D (2018) General equilibrium economy-wide impacts of the increased energy taxes in Vietnam. Energy Policy 123:471–481
Nordhaus WD (2018) Projections and uncertainties about climate change in an era of minimal climate policies. Am Econ J Econ Pol 10(3):333–360
OECD (2016) How stringent are environmental policies? Policy perspectives. http://oe.cd/eps
OECD (2018) Environmental policy stringency index (edition 2017). OECD Environment Statistics (database). https://doi.org/10.1787/b4f0fdcc-en. Accessed 26 June 2018
Omri A (2013) CO2 emissions, energy consumption and economic growth nexus in MENA countries: evidence from simultaneous equations models. Energy Econ 40:657–664
Palmer K, Oates WE, Portney PR (1995) Tightening environmental standards: the benefit-cost or the no-cost paradigm? J Econ Perspect 9(4):119–132
Pesaran MH, Smith RP (1995) Estimating long-run relationships from dynamic heterogeneous panels. J Econometr 68:79–113
Pesaran MH, Shin Y, Smith RP (1999) Pooled mean group estimation of dynamic heterogeneous panels. J Am Stat Assoc 94(446):621–634
Porter ME (1991) America’s Green strategy. Sci Am 68:168
Porter ME, Van der Linde C (1995) Toward a new conception of the environment-competitiveness relationship. J Econ Perspect 9(4):97–118
Ragan C (2017) Supporting carbon pricing: how to identify policies that genuinely complement an economy-wide carbon price. Canada's Ecofiscal Commission
Ricci F (2007) Channels of transmission of environmental policy to economic growth: a survey of the theory. Ecol Econ 60(4):688–699
Rubashkina Y, Galeotti M, Verdolini E (2015) Environmental regulation and competitiveness: empirical evidence on the Porter Hypothesis from European manufacturing sectors. Energy Policy 83:288–300
Runar B, Amin K, Patrik S (2017) Convergence in carbon dioxide emissions and the role of growth and institutions: a parametric and non-parametric analysis. Environ Econ Policy Stud 19(2):359–390
Sato M, Singer G, Dussaux D, Lovo S (2015) International and sectoral variation in energy prices 1995–2011: how does it relate to emissions policy stringency? (no 187). Grantham Research Institute on Climate Change and the Environment
Sauvage J (2014) The stringency of environmental regulations and trade in environmental goods. OECD trade and environment working papers, no. 2014/03. OECD Publishing, Paris. https://doi.org/10.1787/5jxrjn7xsnmq-en
Silva S, Soares I, Pinho C (2012) The impact of renewable energy sources on economic growth and CO2 emissions-a SVAR approach. Eur Res Stud 15:133
Smith JB, Sims WA (1985) The impact of pollution charges on productivity growth in Canadian brewing. Rand J Econ 16(3):410–423
Solow RM (1956) A contribution to the theory of economic growth. Q J Econ 70(1):65–94
Soytas U, Sari R (2009) Energy consumption, economic growth, and carbon emissions: challenges faced by an EU candidate member. Ecol Econ 68(6):1667–1675
Stock JH, Watson MW (1993) `A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica 61:783–820
Sutter JD, Berlinger J (2015) Final draft of climate deal formally accepted in Paris. CNN. Cable News Network
Taghvaee VM, Shirazi KJ, Boutabba MA, Seifi Aloo A (2017) Economic growth and renewable energy in Iran. Iran Econ Rev 21(4):789–808
Van den Bergh JC, van Veen-Groot DB (2001) Constructing aggregate environmental-economic indicators: a comparison of 12 OECD countries. Environ Econ Policy Stud 4(1):1–16
Van Heerden J, Blignaut J, Bohlmann H, Cartwright A, Diederichs N, Mander M (2016) The economic and environmental effects of a carbon tax in South Africa: a dynamic CGE modelling approach. South Afr J Econ Manage Sci 19(5):714–732
Van Leeuwen G, Mohnen P (2017) Revisiting the Porter hypothesis: an empirical analysis of green innovation for the Netherlands. Econ Innov New Technol 26(1–2):63–77
Weyant JP (1993) Costs of reducing global carbon emissions. J Econ Perspect 7(4):27–46
World Bank (2016) When It Comes to Emissions, Sweden Has Its Cake and Eats It Too, Feature News Story (May 16). http://www.worldbank.org/en/news/feature/2016/05/16/when-it-comes-to-emissions-sweden-has-its-cake-and-eats-it-too
World Bank Database (2017) World Development Indicators. https://data.worldbank.org/indicator/
Yamazaki A (2017) Jobs and climate policy: evidence from British Columbia’s revenue-neutral carbon tax. J Environ Econ Manag 83:197–216
Zhang X, Guo Z, Zheng Y, Zhu J, Yang J (2016) A CGE analysis of the impacts of a carbon tax on provincial economy in China. Emerg Mark Financ Trade 52(6):1372–1384
Zhao R (2019) Technology and economic growth: from Robert Solow to Paul Romer. Human Behav Emerg Technol 2019(1):62–65
Acknowledgements
We thank Dr. Peter Tsigaris, who inspired this research with preliminary work and discussion about a potential relationship between carbon addiction and economic growth across countries. We also thank the editors and anonymous reviewers whose suggestions led to a more robust and overall better quality paper.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
About this article
Cite this article
Aziz, N., Hossain, B. & Lamb, L. Does green policy pay dividends?. Environ Econ Policy Stud 24, 147–172 (2022). https://doi.org/10.1007/s10018-021-00317-7
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10018-021-00317-7