Assessing the Economic Impacts of Environmental Policies
Evidence from a Decade of OECD Research
Over the past decades, governments have gradually adopted more rigorous environmental policies to tackle challenges associated with pressing environmental issues, such as climate change. The ambition of these policies is, however, often tempered by their perceived negative effects on the economy. The empirical evidence in this volume – covering a decade of OECD analysis – shows that environmental policies have had relatively small effects on economic outcomes such as employment, investment, trade and productivity. At the same time, they have been effective at reducing emissions from industry. The policies can however generate winners and losers across firms, industries and regions: while the least productive firms from high-polluting sectors are adversely affected, more productive firms and low-pollution sectors benefit. Environmental policies can be designed and combined with other policies to compensate workers and industries that may lose and to emphasise their positive impacts.
Induced investment through environmental policies
Investment decisions of firms are the focus of this chapter. Adapting to new environmental regulations ultimately requires investment by firms. These could be investment in abatement capital or more environmentally-friendly/less polluting machines. Firms could respond by downsizing their capital investment or increasing investment and thereby modernising their capital stock. They might also shift more of their capital investment into foreign countries, circumventing stricter environmental regulations at home. The empirical literature on the investment responses of firms to stricter environmental policies has been inconclusive so far. This study sheds more light into this relationship by estimating a reduced-form model of firms’ capital demand. Using sector-specific energy prices as a proxy for environmental policies, this study analyses data on over 12 000 listed firms in 30 OECD countries over the period 1995 to 2011 and is able to differentiate investment effects across sectors as well as across domestic and foreign capital investment, contributing to the empirical evidence around the so-called Pollution Haven Hypothesis. The results show that higher energy prices are associated with a small but significant decrease in total investment, though in the most energy-intensive sectors, total investment increases. Differentiating between domestic and foreign investment shows that domestic investment of all sectors is negatively correlated with increasing energy prices, indicating that energy-intensive sectors offshore some of their investment to foreign countries.
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