The Intersection of Environmental Policy and Economic Growth

March 6, 2015
Denise Mullen

The argument often goes: increased environmental regulation makes for a better society and facilitates economic growth. Some in the business community may disagree. To date there have been academic studies in support of both sides of the discussion but the answer has remained elusive. There is no doubt that much environmental regulation helps shape the conduct of individuals and firms by creating limits and articulating responsibility for actions and performance. But a proliferation of poorly designed and badly implemented regulations may have negative consequences for the economy, deterring investment and undercutting the competitive position of affected firms in trade-exposed industry sectors. The challenge for policymakers is to determine the right degree and type of regulations that balance the goals of environmental protection and economic development and growth. We also need some tools that help to make the discussion more rational.

To this end, in a recent paper[1] the OECD attempts to link the effects of environmental policies on private sector productivity growth, in particular. Two composite indices are presented: (a) one on environmental policy stringency (EPS), with data from 1990 to 2012; and (b) a second that gauges burdens on the economy due to environmental policies (BEEP). The EPS index groups a number of policies that mainly cover air pollution and climate change, and then assigns a “stringency” rating based on how high or low the externality[2] price is; a higher price is assumed to signify a stringent regulation than a lower price, as it increases the related opportunity costs.[3]BEEP is made up of attributes that measure impediments to competition (e.g., administrative burden from permitting and licensing procedures, and direct impediments to competition such as more strict regulation for new entrants than for existing firms).

Not unexpectedly, the OECD analysis shows that environmental stringency has increased since the early 1990s among the advanced economies. It also finds that Canada is a “middle country” on the scale, coming in slightly above the average; the latter result may surprise those in the ENGO community who like to paint Canada as a bottom-of-the-barrel performer.

Figure 1: The Stringency of Environmental Policies Across Time for OECD countries

Also not news is that Canada is mid-ranked on the BEEP index. When industry says that the environment-related administrative burden is onerous, it turns out that this is pretty accurate, based on the conclusion of the OECD study. In fact, Canada has the highest administrative costs in this regard, as noted in the figure below. This is troubling. Administration-related costs do not add to environmental protection, but they can frustrate economic development and increase paperwork requirements. We need to do a better job of focusing the public policy discussion so that the development and implementation of environmental rules concentrates on the behaviours we want to see changed. This idea is linked to the role of market-based models in meeting environmental goals; these often work better than command-and-control forms of regulation. Market-based approaches tend to perform better in part because they are more flexible and adaptable and can achieve the goals set by policymakers at a lower overall cost to society.

Figure 2: The BEEP indicator: coutrny rankings and subcomponents

What is instructive about these OECD indicators is that they seem to be fairly stable across countries and time, rely on time series data that start in 1990, and allow for cross-country comparison. This is important for thinking about, formulating and implementing environmental policies given the economic realities and industrial structures we have in Canada and British Columbia.

[1] Do Environmental Policies Matter for Productivity Growth? Insights from New Cross-Country Measures of Environmental Policies, Silvia Albrizio et al, Economics Department Working Paper No. 1176, Organization for Economic Co-operation and Development, December 2014.

[2] An externality occurs when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

[3] Opportunity cost: whenever there are choices to be made in a world of scarce resources, there is a “cost” linked to the alternative(s) not selected. Therefore, opportunity cost can be considered as the benefits one foregoes from choosing one alternative over another.

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