The Macroeconomic Impact of the Porter Hypothesis: Sustainability and Environmental Policies in a Post-Keynesian Model

ABSTRACT

The aim of the paper is to propose a post-Keynesian analysis of the Porter Hypothesis (PH) according to which regulation policies can bring about new economic opportunities by generating ‘green’ environmental innovations. Firstly, I illustrate the main features of the PH. Secondly, a Post-Keynesian growth model is developed by focusing on the macroeconomic impact of the PH. Finally, two equations of the model are estimated, an investment function and a green productivity function, by applying the GMM for panel data to European countries, over the period 1999–2012. The theoretical findings concern the potential rebound effect of regulation if its multiplier effect is greater than its innovation effect and the need for a policy mix to achieve environmental and socio-economic goals together. The empirical section verifies both the weak version of the PH, according to which environmental policies can stimulate green productivity, and (indirectly) the strong version of the PH by estimating the positive impact of green productivity dynamics on private investment.

KEYWORDS:

• Sustainability
• environmental policies
• post-Keynesian model
• Porter Hypothesis

JEL CODES:

• B12
• Q01
• O13

Acknowledgements

I would like to thank Jeff Althouse, Carlo D’Ippoliti, Andrea Fabrizi, Giuseppe Garofalo, Gabriel Porcile and the three anonymous referees for their careful reading of manuscript and their many insightful comments and suggestions. The usual disclaimer applies.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 For fuller treatment of the debate on appropriate measurements and usages of eco-efficiency see Ehrenfeld (2005), Hukkinen (2001), Casadio Tarabusi and Guarini (2018).

2 The main idea is to capture the dynamics of capital accumulation due to the productivity embedded in new capital. In the case of environmental productivity, one could claim that it is more capital replacement, rather than capital accumulation, that leads to CO₂ reduction. In this case, depreciation should be a function of productivity (as shown in Lavoie 1992).

3 Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxemburg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom.

4 The log of the investment-GDP ratio is used in many empirical growth analyses such as Nonneman and Vanhoudt (1996), Grigorian and Martinez (2000), Serven (2002), Guisan (2008), Cordella, Ricci, and Ruiz-Arranz (2010), Kourtellos, Stengos, and Tan (2013).

5 As in Fabrizi, Guarini, and Meliciani (2018), I disregard the green R&D component of the EPS Index in order to focus more closely on regulation.

6 In order to take into account the potential endogeneity, in the GMM estimations all regressors are considered endogenous. In particular, the potential endogeneity between green productivity and GDP is analyzed in Guarini, Garofalo, and Federici (2016).