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The effect of environmental regulation on environmental innovation
Author(s) -
Pickman Heidi A.
Publication year - 1998
Publication title -
business strategy and the environment
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.123
H-Index - 105
eISSN - 1099-0836
pISSN - 0964-4733
DOI - 10.1002/(sici)1099-0836(199809)7:4<223::aid-bse164>3.0.co;2-s
Subject(s) - unobservable , pace , ordinary least squares , economics , ex ante , environmental regulation , environmental compliance , technological change , porter hypothesis , public economics , control variable , environmental policy , econometrics , natural resource economics , macroeconomics , environmental protection , statistics , environmental science , mathematics , geodesy , geography
Environmental expenditure estimates resulting from US environmental policy are based on current technology which may overstate policy's true costs. Existing evidence shows that ex ante cost estimates are greater than realized costs due to unexpected technological progress. This research programme asks whether innovation is a response to environmental regulation or whether the true regulatory compliance costs are overestimated ex ante when technological advancement is ignored? The author conducts an empirical study of the US manufacturing industry's environmental patent activities and environmental regulation as measured by pollution abatement and control expenditure (PACE) data. She finds a statistically significant positive relationship between environmental regulation and innovation when estimated by ordinary least squares (OLS). However, the OLS coefficient of pollution abatement costs is inconsistent because of a correlation between the explanatory variable and unobservable variables. Two‐staged least squares addresses the inconsistency problem, resulting in positive and significant PACE coefficients. Thus, there is evidence that innovation is a response to environmental regulation. © 1998 John Wiley & Sons, Ltd and ERP Environment.