UNU-MERIT Working Papers

Environmental regulation and competitiveness are issues that seem to be
at odds. However, the `Porter Hypothesis' states that firms can actually
gain in competitiveness if they are subject to stricter environmental
regulation. We show in a simple model the basic setting of the problem
to apply it then to a Hotelling framework. A non-adoption tax (adoption
subsidy) is shown to destroy a non-adoption equilibrium in a closed
economy model. We show that taxes not directly targeting the
non-adoption problem may fail to have an adoption incentive on the
firms. In an open economy model the Porter Hypothesis is shown to hold
if (i) non-adoption taxes are higher than adoption costs for one country
and lower for the other, and (ii) the returns of second adoption are
insufficient to cover the net adoption costs.