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Environmental tax and productivity in a decentralized context: new findings on the Porter hypothesis

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Abstract

This paper studies, for the first time, the effects of environmental taxes on efficiency gains and the growth of the regions. To this end, we have estimated a dynamic panel-data model to the context of the Spanish regions that reflects the effects of environmental taxation and regulation separately. The results provides further empirical evidence in favour of the Porter hypothesis, to the extent that a strict environmental policy implemented via green taxes rather than regulation may raise productivity, which may be because they drive organizational and technological change in firms seeking to reduce their tax payments.

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Notes

  1. Environmental taxes are those that have the capacity to alter the behavior of the agents in a manner favorable to the environment. For more information about the definition, design and properties of environmental taxes can see Gago and Labandeira (1999).

  2. See Bovenberg (1999), López et al. (2006), and Gago et al. (2007).

  3. This argumentation could really relate to CSR literature (Galán 2006; McWillams et al. 2006 and Porter and Kramer 2006).

  4. Palmer et al. (1995) point out certain weaknesses in the arguments for the Porter hypothesis, including the assumption that private firms systematically ignore opportunities and inefficiencies, whereas the regulator can identify and, what is more, correct market failures of this kind. They also criticize the use of case studies as empirical evidence. Finally, the notions of competitiveness and rivalry are fundamental to the Porter hypothesis, requiring close proximity between competitors, and between firms and their customers (clustering).

  5. Recently, Urpelainen (2010) has argumented that technological standards and market instruments are complements.

  6. Although the Spanish regions have never officially used green taxes as part of a green tax reform (seemingly, they have employed these green taxes to raise extra revenues, with the minimum possible effect on their citizens and hoping for stability), however it is also possible to think that it can be taking place an incipient process of green tax reform at the regional level, as various reforms of direct taxation at the level of the state have cut regional revenues (Income tax rates have diminished, Wealth Tax has been recently eliminated, …), the regions have undertaken a race to the bottom in the Estate and Gift Tax, etc, sometimes making it necessary to impose proportional environmental taxes to offset the revenues lost. These processes may, in turn, have given rise to a “double dividend” with effects on economic growth.

  7. We are aware of the green regional taxes are scarce in Spain (in number and in revenue-raising capacity), so their impact on growth a la Porter in a context of Spanish regions could be limited, especially considering as these burdens can be shifted to other economic agents in the regions (in fact, the coefficient for this variable that we obtain in the empirical estimation is not very quantitatively important). Although the weight of the regional green taxes revenues is not marginal in relation to the own tax of the regions (in 2001, the green regional taxes/own taxes ratio was 76 %), its weight in relation to Gross Domestic Product of the Autonomous Communities scarcely reaches values between 0.05 and 0.08 %, which is probably more revealing (Carrera 2008). Anyway, a study of green taxes is especially appropriate in the case of Spain, given the regions’ interest in balancing their budgets in response to budgetary stability legislation.

  8. Some papers analyse the role of decentralization in addressing environmental problems (see Dalmazone 2006). And recently, Fredriksson et al. (2010) shed new light on the determination of environmental tax policies in majoritarian federal electoral systems, such as the US, and derive implications for the environmental federalism debate on whether the national or local government should have authority over environmental taxes.

  9. All of the requirements necessary for the Porter hypothesis are present in Sweden, but empirical results do not support it. It was recently noted by Ambec and Barla (2006) that the majority of the studies that have sought to test the Porter hypothesis use empirical structures based on very simple or non-existent dynamic structures. These authors point to the work of Lanoie et al. (2001), who obtain positive results for Quebec in a study based on a more dynamic structure that was better aligned with the nature of the Porter hypothesis.

  10. This is what could be deduced from the recent works of Lanoie et al. (2008) and Lundgren and Marklund (2012) that account for dynamics, although Lundgren and Marklund (2010) obtain inconclusive results.

  11. Catch-up economies may be well placed to grow faster than the technological leader by imitating state-of-the-art technologies, while the leader incurs the costs and delays associated with development. It is likely that technologies will spread faster at the regional level, unhindered by the cultural and institutional barriers to the transfer of knowledge that exist internationally.

  12. Multi-factor productivity (MFP) growth is often used as a proxy for technological progress, although it also captures the impact of efficiency gains related with improvements in management, organizational change and other innovations in production methods, as well as the level of competition in markets. MFP estimates are residual rates of variation of gross valued added (GVA) after discounting the weighted contribution of changes in the capital and labour production factors. Consequently, these estimates include various assumptions about the measurement of outputs and inputs. Firstly, given data limitations, we have used total employment as a measure of the labour input, and the total capital stock as a measure of the capital input, which means that we do not consider changes in the composition of the labour force or the stock of capital. Furthermore, these estimates of MFP growth reflect both disembodied and embodied components of technological progress. The disembodied component captures technological and organisational improvements that increase output for a given amount of –qualitatively and compositionally adjusted- inputs. However, we also want to assess the extent to which improvements in the quality of labour and capital boosted productivity in industries and countries that have invested in them. This second component of technological progress is embodied and proxies for improvements in production capacity due to shifts to higher quality factor inputs [Greenwood et al. (1997), Hercowitz (1998), and Nicoletti and Scarpetta (2005)]. Secondly, the weightings assigned to the factors of production in the MFP, or residual growth, calculation should represent the marginal productivity of labour and capital. Nevertheless, these values are not observable, and we have therefore followed the standard procedure of proxying them using income shares. These procedures are based, inter alia, on the assumptions that product and input markets are perfectly competitive and that there are constant returns to scale [Morrison (1999), Scarpetta et al. (2000), and Scarpetta and Tressel (2002)].

  13. See Scarpetta and Tressel (2002) for further details of this productivity model. Similar specifications will be found in Griffith and Redding (2000) and Fuente and Doménech (2006).

  14. Some scholars have suggested that retards should also be included for the variables capturing regulatory activity and green taxes, and also the interaction between these variables and technology gap. We have also included explanatory variables which reflects the political environment, such as differences between regions in the levels of competencies or financial autonomy enjoyed by the regions; the traditional distinction between left-wing and right-wing parties in the government of regions; the relative weight of the electoral support obtained by the governing party (colligations and absolute majorities); and the square of the regulation and tax variables to test the hypotheses that the relationship between these variables and growth may not be linear. We have not found any of these variables significant so we have not incorporated them into the model.

  15. All of the variables obtained from the National Institute of Statistics may be consulted at http://www.ine.es.

  16. See http://www.meh.es/es-ES/Estadistica%20e%20Informes/Paginas/estadisticasV2.aspx.

  17. There are numerous publications about drinking water and waste water management in Spain for the quoted time period, explaining that the costs of these activities were not covered by appropriate revenues from the provision of these commodities and services (drinking water prices and waste water treatment charges). See, among others, García (2005), Ministerio de Medio Ambiente (2007), Barberán et al. (2008), Vallés and Zárate (2012a, 2013)). This fact might suggest that if green taxes are supposed to increase productivity, then, by an analogous argument, awarded green subsidies dubbed as negative green taxes would have implied the opposite effect. This question could be analyzed in a future extension of this work.

  18. This database formed the embryo of the Spanish Senate’s APCA database of parliamentary activity in the Spanish regions, which contains information drawn from the official publications of the Regional Parliaments. These databases are based on Eurovoc, a multidisciplinary and multilingual thesaurus developed by the European Parliament and the Office for Official Publications of the European Communities (OOPEC) used for indexing in at least fifteen European Parliaments. For further discussion of methodological aspects concerning the data obtained and the construction of the regulation variable, see http://www.senado.es/basesdedatos/index.html y http://europa.eu/eurovoc/.

  19. See, for example, OECD (1997b), OMB (1997, 1998, 2000 and 2001) and ORR (ORR 1995–1996).

  20. The additional lags were eliminated in the case of environmental regulation and its interaction with the technology gap after it was confirmed that these variables have no effects beyond 1 year. This was also done with the interaction between environmental variables and the technology gap.

  21. The key descriptive statistics and the correlation matrix for the principal variables are shown in Tables 8 and 9 in the “Appendix”.

  22. Some studies suggest that regulation, environmental taxes and economies of scale could be endogenous. Consequently, we have treated these variables as endogenous in the estimates and they are not used as instruments.

  23. This is a test for over-identifying restrictions. The test statistic is asymptotically distributed as Chi squared with the same degrees of freedom as the number of over-identifying restrictions tested. Given that the available sample size is not particularly large in the present case, we report t statistics instead of Z statistics, and F statistics instead of chi-squared statistics.

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Acknowledgments

We acknowledge financial support provided by the Spanish Ministry of Science and Education and the European Regional Development Fund, project SEJ2007-66654.

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  1. University of Zaragoza, Zaragoza, Spain

    Anabel Zárate-Marco & Jaime Vallés-Giménez

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  1. Anabel Zárate-Marco
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  2. Jaime Vallés-Giménez
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Correspondence to Anabel Zárate-Marco.

Appendix

Appendix

See Tables 6, 7, 8 and 9.

Table 6 Parliamentary acts contained in the database of the Spanish Institute of Public Law
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Table 7 Types of parliamentary acts contained in the database of the Spanish Institute of Public Law
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Table 8 Descriptive statistics for the main variables
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Table 9 Correlation matrix for the main variables
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Zárate-Marco, A., Vallés-Giménez, J. Environmental tax and productivity in a decentralized context: new findings on the Porter hypothesis. Eur J Law Econ 40, 313–339 (2015). https://doi.org/10.1007/s10657-013-9400-5

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