david popp presentation - the porter hypothesis at 20: can environmental regulation enhance...

The Porter Hypothesis at 20:Innovation & Environmental Regulation

David PoppThe Maxwell SchoolSyracuse University

David Popp The Maxwell School of Citizenship and Public Affairs Syracuse University

Technological Change & the Environment

• The Porter Hypothesis depends on innovation– “By stimulating innovation, strict environmental

regulations can actually enhance competitiveness.” (Porter and van der Linde 1995)

• I’ll address:– The extent to which environmental regulation stimulate

innovation– Uncertainty and offsets– Policy design: “picking winners”


Technological Change & the Environment• Market forces provide insufficient incentives for the

development and diffusion of environmentally-friendly technologies– Environmental Externalities

• Pollution created in the production or use of a product are not normally included in the price of the product

• Thus, neither firms nor consumers have incentive to reduce pollution on their own

• This limits the market for technologies that reduce emissions, which in turn reduces the incentives to develop such technologies

• Addressed by environmental policy



development and diffusion of environmentally-friendly technologies– Environmental Externalities – Knowledge as a Public Good

• New technologies must be made available to the public for the inventor to profit

• When this happens, some or all of the knowledge that makes up the invention also becomes available to the public.

• Public knowledge may lead to knowledge spillovers—additional innovations, or even to copies of the current innovations, that provide benefits to the public as a whole, but not to the innovator

• Addressed by science and technology policy• May be general (IP) or specific (subsidies for renewable R&D)



development and diffusion of environmentally-friendly technologies– Environmental Externalities – Knowledge as a Public Good

• Note that Porter focuses only on environmental externalities, as “the focus is not on the social benefits of environmental regulation, but on the private costs.” (Porter and van der Linde 1995)– Thus, the focus is on environmental policy, not R&D policy


Innovation responds to incentives• Innovation responds quickly to incentives

– Energy prices• Newell et al. (1999) & Popp (2002) both find most of the response of

R&D to higher energy prices occurs within 5 years

– Responses to policy are even faster


U.S. NOX Post-Comb. Treatment Patents

0

10

20

30

40

50

60

70

80

1967 1972 1977 1982 1987 1992 1997

priority year

nu

mb

er

US Foreign Japan Germany

Source: Popp (JEEM, 2006)


Source: Dechezleprêtre et al. (2009)

Innovation and Climate Policy

0

.005

.01

.015

.02S

ha

re o

f clim

ate

-rela

ted in

ven

tion

s

1978 1983 1988 1993 1998 2003Year

USA & Australia Other Annex 1 countries


Source: Johnstone et al. (ERE, 2010)

Number of EPO patent applications for renewables by type of technology

Uncertainty and R&D

• These studies all focus on R&D outcomes, and demonstrate that environmental policy does stimulate R&D.

• However, the value of stimulated R&D is uncertain.– The distribution of outcomes is skewed, with most R&D

ending in failure.



Source: calculated using data from Popp (EINT, 2006)

Uncertainty and R&D• These studies all focus on R&D outcomes, and

demonstrate that environmental policy does stimulate R&D.

• However, the value of stimulated R&D is uncertain.– The distribution of outcomes is skewed, with most R&D

ending in failure.

• Popp (2005) shows that uncertainty reconciles:– Micro-level evidence of innovation offsets– Macro-level studies generally finding costs to environmental

policy


Uncertainty and R&D• In this paper, I model a firm that can choose to do

R&D to reduce pollution.

• I calibrate the model so that the expected value of innovation is only positive with regulation.

– Thus, the firm only chooses to innovate when facing regulation.

– Because some R&D outcomes have high returns, 8-24% of simulations result in cases where post-regulation profits are higher than pre-regulation profits.


Implications• Complete offsets are more likely when more R&D is

induced.– Major breakthroughs are more likely to result from

significant changes to production processes, as opposed to smaller research projects that simply tinker at the margins.

– This supports Porter and van der Linde’s call for regulations that “create the maximum opportunity for innovation” (p. 110) so as to foster “fundamental, rather than piecemeal solutions” (p. 111).


Implications• Role of followers

– The simulation (as do most case study examples) ignore spillovers

– Firms (or countries) that wait to regulate can take advantage of successful innovation without taking on its risks.

• Over time, Lovely and Popp (2008) find countries adopt environmental regulation at lower levels of per capita income

– As pollution control technologies improve, the costs of adopting environmental regulation fall

– International trade improves access to technology, leading to earlier adoption of regulation

• Does this offset Porter’s first-mover advantage?


Design of Policy Instruments• How to develop long-term technologies?

– Problems such as climate change will require a diverse range of technologies

– Will market-based policies produce a diverse range?

• Policy optionsTechnology neutral

• Carbon tax• Cap-and-trade• Renewable Energy Certificates/Renewable Portfolio Standards

Technology-specific• Feed-in tariffs• Investment subsidies


Design of Policy Instruments: “Picking Winners”?

• Policies that let the market “pick winners” will focus research efforts on technologies closest to market (Johnstone et al. 2010)– Renewable energy mandates => wind innovation– Guaranteed prices (e.g. feed-in tariffs) => solar innovation

– Consider, for example, solar energy in Germany

• However, policies that promote specific technologies may increase short-run compliance costs– Government R&D emerges as an option to support long-

term research needs


Thank You!


david popp presentation - the porter hypothesis at 20: can environmental regulation enhance...

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