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A thought-provoking question, the economic and political debate over regulation and efficiency is one that has plagued governments long before the US Environmental Protection Agency was created. But with the EPA’s role in regulating pollution (among other things, of course) has come the question of whether corporations can actually benefit in the long run as a result of more stringent requirements that prevent wanton waste, for instance, being put in public waters. Sarah DeWeerdt reports:

According to conventional economic wisdom, the cost of complying with environmental regulations represents a burden that eats into companies’ profits. But another view, known as the Porter hypothesis, holds that environmental regulations can spur innovation and increased efficiency, ultimately increasing profitability.

Economists have debated these ideas for the past two decades but have had little direct empirical evidence to help settle the matter. Now, researchers Dietrich Earnhart of the University of Kansas and Dylan Rassier of the U.S. Department of Commerce have provided such a real-world test with a look at the U.S. chemical manufacturing industry between 1995 and 2001.

The researchers point out that the strictness of environmental regulations depends both on the pollution limits set out in laws and regulations, and on how vigorously those limits are enforced. Theirs is the first study to tease out the effect of each of these two components of regulation on profitability.

To do so, they gathered information on Environmental Protection Agency permits that prescribe pollution limits for wastewater discharge from individual manufacturing facilities. They also tracked how often these factories were visited by government inspectors. Finally, they folded in data on profitability of chemical firms from Securities and Exchange Commission filings.

Environmental regulations can indeed increase profits—but only under specific conditions, the researchers reported recently in the Journal of Regulatory Economics.

Wastewater discharge permits may give factories a quantity limit (e.g., pounds of pollution per day), a concentration limit (e.g., milligrams of pollution per liter of wastewater), or both. When regulations focus on quantity limits—the absolute amount of pollution a facility can release—tighter limits increase profitability, regardless of how strictly the limits are enforced. That finding supports the Porter hypothesis.

But quantity limits generally depend on the scale of the facility, so the researchers argue that concentration limits are probably more broadly applicable. And when it comes to concentration limits, they found, profitability depends on the balance of legal limits and enforcement efforts—or more precisely, it depends on an imbalance between the two.

For example, when factories face both tight scrutiny and stringent concentration limits, this results in lower profits, in line with conventional wisdom.

But if monitoring is absent, then tighter limits on the concentration of pollution released in wastewater increase profits.

Read the rest of the article at Conservation Magazine.