What’s good for the environment can also be good for profit
Environmental regulation for companies may lead to more innovation and increase profitability for businesses. That’s the conclusion of Jan Weiss, who has tried the Porter hypothesis in his PhD thesis at Jönköping International Business School.
The Porter hypothesis argues that environmental regulation can increase company innovation, which in turn can strengthen competitiveness while it lessens the impact on the environment. The hypothesis was founded by economist Michael Porter in the 1990s.
In his studies, Jan Weiss has found a clear relationship between environmental regulation and innovation. These innovations relate primarily to new technologies that lead to cleaner and more resource-efficient manufacturing processes.
“For example, my studies show that a stricter environmental regulation leads to an increase in recycling of waste, water or raw materials. It also contributes to a decrease in energy and material use per unit of output”, says Jan Weiss.
Jan Weiss has studied the Swedish paper works, with historically high emissions. In this sector seen it can be profitable for the company to replace fossil fuels with biofuels.
“The use of biofuels is not only an environmental innovation in the production process, resulting in a reduction of fossil carbon emissions, but also a reduced cost; because biofuels are significantly cheaper than fossil fuels. But it requires an initial investment, which may be one reason that many companies are hesitant”, Jan Weiss explains.
There are different types of environmental regulation that allow companies to improve the environment. But Michael Porter also claims that well-designed regulations are required in order to turn this into a win-win situation. Examples of such regulations are economic instruments such as green taxes and green certificate trading, as well as and regulatory requirements on emissions instead of prescribing a certain environment-friendly technology.
“Requirements for maximum emission and economic instruments can create a win-win situation, in that they are considered to be more cost effective when companies are given more freedom and flexibility to implement environmentally friendly solutions. My studies show evidence of this. Meanwhile, my results show that the authorities must give companies some time to implement new solutions and modify their production processes. Then chances are greater that companies manage to be both profitable and more environmentally friendly”, Jan Weiss explains.
In Sweden, the operational environmental supervision often done at the local level. In the municipalities where the Swedish green party has a higher representation in the City Council, Jan Weiss has seen that companies use biofuels to a greater extent than in other municipalities.
“There shouldn’t be a difference. Coordination between the local and the national level could be improved”, says Jan Weiss.
Jan Weiss successfully defended his doctoral thesis Essays on externalities, regulation, institutions, and Firm Performance on Friday, 13 March 2015.