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Abstract
The transformation of waste into a valuable resource is a key process towards sustainable development and green growth and therefore represents a major concern for policy-makers. Technological innovation plays a crucial role in waste management and therefore understanding the way in which regulation may spur innovation in this domain constitute is crucial. This article aims at testing the weak version of the Porter hypothesis in waste management, by analysing the dynamic relationship between the stringency of environmental regulation and innovation in a European cross-country setting. Results confirm that the stringency of regulation positively affects innovation, but the effect is non-linear, suggesting the existence of an optimal cap to the stringency of regulation. Furthermore, the overall environmental conditions of the country, as well as the presence of highly polluting sectors hinder the development of environmental innovations.
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Notes
3 According to Porter and van der Linde (Citation1995), regulation is needed for six main reasons: (1) to provide incentives to companies to innovate; (2) to improve the environmental quality when innovations and improvements in resource productivity do not completely offset compliance costs; (3) to increase the awareness of resource inefficiencies; (4) to increase the likelihood that innovations will be environmentally friendly; (5) to create demand for environmental improvement until companies and customers are able to better evaluate resource inefficiencies and the true cost of pollution; (6) to have a ‘level playing field’ during the transitional phase towards innovation-based environmental solutions, ensuring that companies do not gain positions by avoiding environmental investments.
4 Given that regulation poses additional constraints, this version does not predict productivity gains, but simply a change in the nature of the output.
9 The Directive 31/1999 on the landfill of waste requires Member States to reduce the amount of biodegradable municipal waste going to landfill sites to 75% by 16 July 2006, to 50% by 16 July 2009 and to 35% by 16 July 2016.
10 PatStat (April 2009 edition), database maintained by the European Patent Office.
11 We use EPO patents instead of patents granted by national offices to allow for a more even comparison across countries. Firms have different propensities to apply for patents in different countries and they are more inclined to patent their inventions in the home country of the inventor. As such, national offices have a very high number of patent applications from residents and this may provide biased information on the magnitude of domestic innovative activity. On the contrary, EPO is a regional patent office and therefore is not biased towards a particular home country (Criscuolo Citation2006).
12 http://www.wipo.int/export/sites/www/freepublications/en/patents/434/wipo_pub_l434_09.pdf (Last retrieved 27 October 2014).
13 In fact, de Vries and Withagen (Citation2005) use the ‘Index of Environmental Sensitivity Performance’ developed by Cagatay and Mihci (Citation2003) only to define levels of environmental stringency. The index is used to generate dummy variables relating to different stringency levels, assuming that stringency is constant across years.
14 It is important to notice that what actually matters is the change in emission levels, more than their absolute value. Stocks may be relatively constant over time, thus poorly capturing shifts in regulation/policy.
15 See www.psiru.org.
16 As recently demonstrated by Reed (Citation2015), lagging an independent variable is not a consistent way to deal with endogeneity. However, it is still a way to check for possible biases affecting the magnitude of our effects.