Abstract
This paper provides novel empirical insights into the Porter hypothesis (PH) and its dynamic nature. The PH posits that well-designed environmental regulations induce eco-innovations at polluting firms that improve both their environmental and business performance via ‘innovation offsets.’ We conduct an econometric test of this proposition, using Swedish pulp and paper plants as empirical application. Swedish environmental regulation of polluting industries provides an interesting case because it has been praised, due to containing elements of ‘well-designed’ regulations, for being conducive to accomplishing the ‘win-win’ situation of mutual environmental and economic benefits. The empirical results indicate that flexible and dynamic command-and-control regulation and economic incentive instruments have induced innovation offsets through improved energy efficiency. Our study bears important implications: empirical tests of the PH that do not account for its dynamic nature, and that do not measure ‘well-designed’ regulations, might provide misleading conclusions as to its validity.
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