Do environmental policies matter for productivity growth?

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12 December 2014

New research from the Organisation for Economic Co-operation and Development (OECD) shows that more stringent environmental policies of recent years have had no negative effect on overall productivity growth. While regulations have resulted in winners and losers, any negative effects have tended to fade away quickly. 

The research shows that, in general, prior to tighter environmental policies coming 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. 

The most productive, technologically advanced firms saw a temporary boost in productivity after rules became more stringent, as they moved to take advantage of new, more environmentally friendly opportunities, tap into their supply networks and reap the fruit of earlier innovations and their favourable market position. Less advanced firms saw their productivity fall, while some may have ceased activity altogetherHowever, policy efforts and the fact that resources can be reallocated into fast growing firms meant that the overall outcome was neutral, and aggregate productivity was unaffected.

The policy message of the research is clear: more stringent environmental policies, when properly designed, can be introduced to benefit the environment without any loss in productivity.

Complimenting the work, and to help policymakers set the right balance, a set of new OECD environmental policy indicators has been developed: Environmental Policy Stringency (EPS) and the Burdens on the Economy due to Environmental Policies (BEEP). Learn more about the work here.