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Environmental policies don’t have to hurt productivity

As environmental pressures continue to rise, governments, just as businesses, have not been sitting back. If anything, the stringency of policy measures in the OECD area has been increasing on the whole, not least to combat pollution and climate change. But what about the effects of these actions on productivity?

New evidence from the OECD shows that more stringent environmental policies of recent years have had no negative effect on overall productivity growth. True, there may be winners and losers, but any effects have tended to fade away quickly.

The results show that before tighter environmental policies came into effect, a country’s overall productivity growth slowed, possibly because firms anticipated the changes and prepared themselves for new operating conditions. However, a rebound in productivity growth soon followed, with no cumulative loss reflected in the data.

What’s more, the most productive, technologically advanced firms saw a temporary boost in productivity after rules become more stringent, as they took advantage of new, more environmentally friendly opportunities, tapped into their supply networks and reaped the fruit of earlier innovations. Less advanced firms saw their productivity fall, and some went out of business altogether.

The overall outcome of all of this was neutral, because of policy efforts and the fact that resources can be reallocated into fast growing firms. This suggests that more stringent environmental policies, when properly designed, can be introduced to benefit the environment without any loss in productivity.
This is important, because as while our economies still suffer from the aftermath of the economic crisis, and try to unleash more growth and jobs, they must also step up efforts to tackle climate change, pollution and other environmental challenges. Some may worry that there is a conflict between these imperatives.

Our new evidence shows that environmental stringency policies do not have to hurt productivity. On the contrary, efforts to improve growth and achieve ambitious environmental goals can go together, and should be stepped up. Indeed, environmental policies can and should be shaped to spawn new ideas, mobilise cleaner technologies and encourage new business models that benefit both the economy and the environment.

Governments should persevere with stringent environmental policies to tackle environmental problems, but should devote resources to designing them properly. As a rule of thumb, administrative procedures should be streamlined where possible so as not to create barriers to doing business. Policies should avoid providing unwarranted advantages to existing firms, while more emphasis should be placed on flexible, market-based instruments, including taxes, as a key part of the policy mix.

The aim is to orientate policies to foster new, cleaner technologies and allow competitive measures to remove old, dirty technologies and processes that hurt both growth and the environment.

BEEP warning


To help policymakers strike the right balance, the OECD has developed the Environmental Policy Stringency Indicator (EPS), which summarises and compares the stringency of policy instruments among countries and over time. The indicator currently focuses on climate and air pollution in energy and transport, and covers such policies as taxes, feed-in tariffs, renewable energy certificates, research and development subsidies and emission limit values. Though a proxy, the indicator is the broadest and most comprehensive measure of its kind. Moreover, it is aligned with business perceptions of stringency.

To test the effectiveness of various environmental stringency indicators, users can check them off against another innovation: the OECD BEEP, or Burdens on the Economy due to Environmental Policies. Though still under development, the BEEP shows that stringent environmental policies can be designed and implemented in different ways, and adjusted in relation to barriers to competition or administration costs.


The chart shows the patterns among OECD countries. Austria, Netherlands and Switzerland, for instance, combine stringent environmental policies with a relatively competition-friendly stance of such policies. Stringent environmental policies with high administrative burdens and measures that impede competition reflect the situation for the Nordic countries and Germany, indicating a more competition-friendly stance could be encouraged in these countries without reducing their environmental stringency. In contrast, the UK could likely afford more stringent environmental policies without hurting competition.

Click to enlarge


The OECD intends to broaden the analysis of economic outcomes of environmental stringency policies to such areas as investment, employment, trade patterns and firm location–in particular to see if “pollution havens” are forming elsewhere because of outsourcing, for instance, with no overall environmental gain to the planet. This means extending the indicators to cover more OECD and non-OECD countries, which would also help test the robustness of the results of the work so far.

And it would further assist policymakers in safely introducing stringent environmental policies without hurting productivity. 



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 Paper
No. 1176. OECD Paris


Kozluk, T. and V. Zipperer (2014), “Environmental policies and productivity growth: a critical review of empirical findings”, OECD Journal: Economic Studies, Vol. 1, 2014, OECD Paris


OECD (2014) "Green growth: environmental policies and productivity can work together", OECD Policy Brief, 2014, OECD Paris.

See also www.oecd.org/policy-briefs

©OECD Observer No 301, Q4 2014