The Impacts of Environmental Regulations on Competitiveness

This article reviews the empirical literature on the impacts of environmental regulations on firms' competitiveness as measured by trade, industry location, employment, productivity, and innovation. The evidence shows that environmental regulations can lead to statistically significant adverse effects on trade, employment, plant location, and productivity in the short run, in particular in a well-identified subset of pollution- and energy-intensive sectors, but that these impacts are small relative to general trends in production. At the same time, there is evidence that environmental regulations induce innovation in clean technologies, but the resulting benefits do not appear to be large enough to outweigh the costs of regulations for the regulated entities. As measures to address competitiveness impacts are increasingly incorporated into the design of environmental regulations, future research will be needed to assess the validity and effectiveness of such measures and to ensure they are compatible with the environmental objectives of the policies.