Abstract
In this chapter, we will briefly introduce the theoretical literature on the impact of environmental regulations on the competitiveness of firms. Then, we will explore the relationship among environmental regulations, innovation and (international) competitiveness theoretically when the environmental agency uses tradable emission permits regulation system. In such a regulation system, incentives for innovation is larger since firms can earn revenues by selling extra permits. Thus, it is of interest to determine the impact of the parameters of permit market, such as price elasticity of permit demand, on the regulation-competitiveness debate. In so doing, we will also identify how the features of innovation process, like cost of and returns to innovation, and the probability of successful innovation, affect post-regulation competitiveness of the firms subject to higher regulation.
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Notes
Strong (weak) standards mean that the marginal damage from pollution is less (higher) than marginal cost of abatement.
If we had assumed a different average emission rate, r, across firms, then the firm with smaller emission rate would have produced more.
We assume away the positive spillover effects of innovation across firms as it is not a major component of this debate.
We assume that this parameter is smaller than e1 and it is certainly less than e2.
A detailed explanation on the mentioned condition will be given below.
Even without the following considerations, this proposition does not present an unconditional evidence for the Porter hypothesis as can be seen from its conditional nature.
For ease of exposition, here we assume that home and foreign production are perfect substitutes for each other; however, our results are independent of this assumption.
One can also show that total production falls and so price of the good rises after regulation.
If we reverse this assumption, the profits of the foreign firms will increase with stricter regulation as in previous proposition.
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© 2002 Springer Science+Business Media Dordrecht
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Alpay, S. (2002). Competitiveness and Environmental Regulations: A Theoretical Inquiry. In: Trade and The Environment. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-0271-5_10
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DOI: https://doi.org/10.1007/978-1-4615-0271-5_10
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4613-4997-6
Online ISBN: 978-1-4615-0271-5
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