Environmental regulations don’t alway have a negative effect on profits. A new study finds that the US Clean Water Act, when implemented in the right balance, can improve firms’ profitability.
Between January 1995 and June 2001, when chemical manufacturing companies faced stringent wastewater discharge limits, but not strict government monitoring, or vice versa, companies were able to increase profitability compared with companies simultaneously facing both loose limits and lax monitoring.
“If an environmental agency pushes hard on a pollution limit but does not monitor the limit too stringently, the agency creates a space in which companies can be creative and discover ways in which they can either market their environmental protection efforts to customers and secure a bigger market share or find less costly ways of manufacturing their products or dealing with waste,” says Dietrich Earnhart, an economics professor at the University of Kansas and lead author of the study published in the Journal of Regulatory Economics.
“The regulations put a different pair of glasses on companies; by looking through a new lens, companies get creative.”
Earnhart and coauthor Dylan Rassier, an economist with the US Bureau of Economic Analysis, examined wastewater discharge limit and government monitoring inspection data from the Environmental Protection Agency’s Permit Compliance System database. They also looked at profitability data available for publicly traded firms from Securities and Exchange Commission filings.
They found when wastewater discharge limits were stringent and inspections were frequent, profits declined, which follows conventional economic thinking. However, under conditions when one was stronger than the other, profits improved, consistent with the Porter hypothesis, which asserts that properly designed environmental regulations motivate businesses to innovate, eventually increasing profitability.
Earnhart says it is plausible, by working to reduce the amount of discharged wastewater, firms became more thoughtful and assessed their operations more closely, finding new marketing opportunities or cheaper management practices.
“With a new perspective and with new information, these companies could find a way to defy conventional wisdom,” he says.
If there’s a win-win situation, Earnhart says, everyone should want to learn about it.
“Any agencies working on clean water or clean air regulations should be concerned about how they induce compliance and what the tradeoffs are,” he says.
Source: University of Kansas