The environmental Porter hypothesis: theory, evidence, and a model of timing of adoption

Abstract

The Porter Hypothesis postulates that the costs of compliance with environmental standards may be offset by adoption of innovations they trigger. We model this hypothesis using a game of timing of technology adoption. We show that times of adoption are earlier the higher the non-adoption tax. The environmental tax turns the preemption game with low profits into a game with credible precommitment yielding high profits (pro-Porter). If there is a precommitment game without environmental taxes, the introduction of a tax leads to lower profits (anti-Porter). An evaluation of the empirical literature indicates that the Porter hypothesis holds even for profit-maximizing firms under multiple market imperfections such as imperfect competititon, X-inefficiency, and agency costs. These are more likely to be present in sectors with large firms. In many case studies that we evaluate, though, we detect an element of explicit or implicit subsidies for environmentally friendly behaviour, which is in line with Pigovian policies. Keywords AbstractThe Porter Hypothesis postulates that the costs of compliance with environmental standards may be offset by adoption of innovations they trigger. We model this hypothesis using a game of timing of technology adoption. We show that times of adoption are earlier the higher the non-adoption tax. The environmental tax turns the preemption game with low profits into a game with credible precommitment yielding high profits (pro-Porter). If there is a precommitment game without environmental taxes, the introduction of a tax leads to lower profits (anti-Porter). An evaluation of the empirical literature indicates that the Porter hypothesis holds even for profit-maximizing firms under multiple market imperfections such as imperfect competititon, X-inefficiency, and agency costs. These are more likely to be present in sectors with large firms. In many case studies that we evaluate, though, we detect an element of explicit or implicit subsidies for environmentally friendly behaviour, which is in line with Pigovian policies.

Goals and Principles of Environmental Policy

“…Nevertheless it triggered substantial theoretical research focused on alternative strategies for technology adoption and diffusion. See e.g., Xepapadeas and de Zeeuw (1999) and Kriechel and Ziesemer (2009) to appreciate the seriousness of analytical endeavour aimed at analyses of the Porter hypothesis.…”

Clean Energy Technology and the Role of Non-Carbon Price-Based Policy: An Evolutionary Economics Perspective

“…This has given rise to the so called Porter hypothesis which has inspired a large body of supportive empirical studies (eg. Lanoie et al 2008;Horbach, 2007;Costantini, and Crespi, 2007;and Kriechel and Ziesemer, 2009). However, other economists have rejected such case-study based approaches by arguing the examples used are special cases and that across the economy it is just as likely environmental regulations come at a net cost, as well as embodying a significant opportunity cost.…”

Banning the bulb: Institutional evolution and the phased ban of incandescent lighting in Germany

“…That tighter environmental standards can not only reduce costs directly, but also spur further cost reducing innovation, boosting competitiveness -the so called Porter hypothesis -has inspired a large body of supportive empirical studies (e.g. Lanoie et al 2008;Horbach, 2007;Costantini, and Crespi, 2007;and Kriechel and Ziesemer, 2009). However, others have rejected this case-study based approach by arguing such examples are special cases and that across the economy it is just as likely environmental regulations come at a net cost, as well as embodying a significant opportunity cost.…”