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.
Foreign direct investment and energy prices
Outward foreign direct investment (FDI) is the focus of this chapter. Globally, foreign direct investment increased substantially over the past four decades, particularly in the manufacturing sector. This sector heavily depends on energy as a production input and could experience a loss in competitiveness when energy prices rise because of more stringent environmental regulation. This chapter investigates whether firms have redirected investment towards foreign countries with lower energy prices and laxer environmental policies, thereby shifting polluting emissions – a potential consequence of asymmetric environmental policies, known as the pollution haven effect. Empirical studies on this topic have so far mostly focused on outward FDI from a single country. This study sheds light on the relation between industrial energy prices and FDI flows in a cross-country setting. The effect of higher energy prices on firm-level outward FDI is estimated for a sample of 3 364 listed firms operating in nine manufacturing sectors across 24 OECD countries over the time period 1995-2008, using an instrumental variable method. The results show that higher domestic energy prices relative to energy prices abroad are indeed positively associated with the share of foreign assets firms hold. This effect is, however, small in magnitude. Moreover, while firms increase their share of foreign assets following an increase in domestic energy prices, a decrease in domestic energy prices is not followed by an increase in the share of domestic assets.
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