“Toward a New Conception of the Environment – Competitiveness Relationship” Michael Porter & Class Van der Linde Journal of Economic Perspectives, Fall 1995

Introduction Typically environmental economics states that tradeoff exists b/w social benefits and private costs. Their hypothesis is that environmental protection can improve competitiveness Skeptics say that if environmental regulation is profitable, why is regulation necessary? E.g. why don’t we find $10 bills lying on the ground?

Environmental Regulation’s Six Purposes 1.Signals companies about resource inefficiencies 2.Raises corporate awareness 3.Reduces uncertainty of investment 4.Pressure for innovation 5.Regulation levels playing field - no opportunism to avoid regulation until innovation based solutions become proven 6.Incomplete offsets: environmental innovation cannot always pay for itself

Innovation’s Two Forms 1)Smarter in handling pollution 2)Improve product/process: 2 innovation offsets 1)Product offset: less pollution, but also getter performing products, safer, lower costs 1)Raytheon-eliminated use of CFCs for cleaning printed electronic circuit boards after solder 2)Robbins (jewelry company in Massachusetts) -closed-hoop, zero- discharge system for waste water used in plating 3)Hitachi: 1991 Japanese recycling law caused them to reduce washing machine parts by 16% and vacuum cleaner parts by 30% 2)Process offset: reduce emissions and also increase product yields 1.Ciba-Geigy (dyestuff plant in New Jersey) replaced iron with different chemical that did not form solid iron sludge & boosted yield by 40% and lowered costs by $740, M reduced hazardous wastes from adhesives by 10 tons/year at no cost, yielding annual savings of $200,000

Early Mover Advantage 1) Early movers in environmental innovation can gain an advantage selling their expertise internationally 2) But must anticipate the worldwide demand for environmental protection

Answering Defenders of Traditional Model 1)Innovation offsets are possible but rare – they disagree 2)High compliance costs – biased due to self reporting 1) e.g. pulp & paper actual costs $4.00 to $5.00/ton vs. original industry est. of $16.40 for 1990 Clean Air Act 2)e.g. SO 2 trading allowances price estimates were over $300 to $600/ton in Phase I and $1,000 in Phase II but turned out to be $170 to $250/ton 1) Cites Meyer (1992) unpublished 3)Crowding out other investment opportunities 1)They believe evidence shows high returns for environmental regulation 4)Strict environmental regulation leads to innovation & competitiveness 1) They only claim that it is likely