Essays on enviromental regulation and firms' performance

The increasing concerns over the environmental sustainability of current development trajectories have brought numerous countries to adopt “greener growth strategies”. However, given the numerous failures that hinder the well- functioning of market mechanisms in relation to the environment, environmental regulations are considered as necessary to align private and public marginal benefit (and cost) curves. This dissertation aims at contributing to the on-going debate in literature on the impact of environmental policies on economic growth. To this end, the first essay of this thesis reviews the literature on the link between economic performance and environmental policy. The assessment underlines the different views on the effects of environmental regulations on firms’ productivity proposed by the neoclassical economic theory and by the so- called Porter’s hypothesis. The former considers environmental regulations as necessary to cope with market failures related to environmental externalities but as detrimental to firms’ productivity. Michael Porter challenged this interpretation almost 25 years ago by arguing that “well-designed” policies do not necessarily hinder the competitiveness of firms but might actually increase it. Within this context, the essay first reviews the wide empirical literature on the Porter’s hypothesis and highlights the often contrasting results. In fact, the number of studies estimating a negative effect of tighter environmental norms on firms’ competitiveness appears to be almost equal to those finding a positive impact. Then, the multifaceted nature of environmental regulation is discussed as a potential explanation for the non-homogeneous results across studies. In fact, notwithstanding Porter and van de Linde (1995) underline how “well- designed” regulations may lead to higher competitiveness for firms, the vast majority of studies mainly focus on the stringency of enforced norms. Instead, a number of other aspects of regulations are likely to play a key role in determining their overall impact on economic performance. Building on the literature examining what features a “well-designed” environmental regulation should exhibit, the essay finally discusses the role that elements such as stringency, flexibility or policy-induced uncertainty may have in shaping the economic outcomes of environmental policies. The proceedings of this work constitute the backbone of an article published in the journal “Energia” (edited by Stefano Clò, published in Italian) in September 2016 The review of the first chapter underlines the presence of several gaps in the literature in relation to the impact of environmental regulation on innovation. In fact, while market-based instruments are often highlighted by scholars as providing higher dynamic incentives than non-market-based regulation, few papers have been able to empirically test such claims within the same study also given the difficulties of comparing environmental policy norms across countries. Secondly, in a resources-constrained world, environmental policy is more likely to steer the direction of technological change toward rather than increase green innovation. Nonetheless, studies on the Porter’s hypothesis have often omitted to 4 consider the impact of environmental policies on the technologies not explicitly targeted by the introduced regulation. To this end, the second essay focuses on the consequences of increasingly stringent regulation on the technologies the environmental policy aims to promote and on other innovation. Building on the discussion of what a well-designed regulation entails, the paper distinguishes between market- and non-market-based policies. In order to capture the full extent of induced innovation, we adopt a cross-sectoral approach. This is due to the assumption that innovations designed in order to comply with environmental regulation are not necessary developed in the regulated industry. In line with theoretical results, market-based instruments are shown to be the main driver of increased innovation in the technological field that environmental policy wishes to promote. At the same time, the estimations suggest that non- market-based regulations mainly decrease inventive efforts directed towards non-environmental technologies, possibly because of a negative impact on “polluting technologies”. In addition, the results show the presence of path- dependency in innovation. This work has been presented at the 2016 AIEAR Annual Conference in February 2016 and at the University College of London within the seminar series “Innovation and Technological Change Research” in April 2016. The third essay adopts an experimental approach and focuses on a second feature often highlighted as characterizing well-designed regulation in the literature, namely (limited) uncertainty. More precisely, the paper assesses how policy-induced risk may affect investment decisions in renewable power plants. To this end, the paper first reviews the main characteristics of auction frameworks across Europe since these are being increasingly adopted by OECD and Non-OECD countries to support renewable energy deployment but are limitedly studied in the literature. The review underlines how auction designs can vary along a number of dimensions, including how planning, winner selection, construction and operation stages are regulated. Since the policy features connected to the winner selection stage are the most novel and most unique to renewable energy technologies (RET) support through auction, these are discussed in more detail. Then, a stated preference approach is leveraged to investigate how auction design and the uncertainty regarding the future arrangements between the UK and the EU contribute to determine the cost of equity for renewable energy projects. The results show that improved design can lead to a moderate decrease in the cost of equity. The largest decrease is provided by the introduction of moderate financial bid-bonds but the analysis also underlines how long-term auction programs strengthen the cost reduction effects typical of tendering competition. The adoption of “technology-specific” auctions seems also to decrease business risks. The evidence on Brexit is rather weak and, if anything, suggests the higher relevance of these negotiations for English-based investors rather than for those based in EU27.