Dr Antoine Dechezleprêtre and Dr Misato Sato explain the findings of their latest report, ‘The impacts of environmental regulations on competitiveness’ published  by the Grantham Research Institute on Climate Change and the Environment at London School of Economics and Political Science. The report was produced as part of the Grantham Research Institute’s programme on ‘Growth and the economy’, sponsored by the Global Green Growth Institute.

Our research has shown that environmental regulations have small impacts on productivity and employment, only marginally affect international competitiveness and induce businesses to develop new clean technologies, which may boost economic growth.

Although concerns have been expressed since the 1970s about the effect of environmental regulations on businesses, we conclude that few studies in the UK, United States and other countries over the past 40 years have found evidence of major negative impacts.

The report reviews the existing evidence on the impacts of environmental regulation on productivity, employment, trade, industry location and innovation and symthesises findings. A key finding is that the benefits of environmental regulations often vastly outweigh the costs.

For instance, even when job losses at polluting businesses are taken into account, the estimated health benefits from the introduction of the Clean Air Act in the United States in 1963, and subsequent amendments to it, are more than 100 times greater than the employment costs of the regulation. The costs of environmental regulations therefore need to be weighed up against the benefits they provide and which justify the regulations in the first place.

We find that environmental regulations can reduce employment and productivity by small amounts, in particular in pollution- and energy-intensive sectors, at least during the transitory period when the economy moves away from polluting activities and towards cleaner production processes. Job effects are more likely to occur within countries, where relocation barriers are low, than across borders. This suggests that government policies encouraging labour mobility, such as flexible labour markets, affordable housing and lifelong training, can help reduce or offset the costs of environmental regulations.

There is ample evidence that environmental regulations encourage businesses to undertake innovation in clean technologies, and discourage research and development in conventional polluting technologies. Yet, there is evidence that low-carbon innovations induce larger economic benefits than the ‘dirty’ technologies they replace. This is because clean technologies are radically new compared to old polluting technologies and hence they generate more knowledge in the economy, which can be used by other innovators to further develop new technologies across various sectors.

This makes it plausible that the switch from ‘dirty’ to ‘clean’ technologies could generate economic growth and justifies strong public support for clean technology development.

Although the lessons can be equally applied in developing countries, almost all of the existing studies use data from developed countries. Our research identified a clear need for more studies focusing on developing countries.