Environmental Policy Stringency and Economic Output

Abstract: This analysis examines the correlation between the stringency of environmental policies and the economic output in terms of real GDP. The data is covering real GDP, the stringency of market based as well as non-market based environmental policies, interest rates, total factor productivity and human capital. 33 countries, among the OECD and the BRICS, are being analyzed in the regression model during a time period from 1990 to 2015. The analysis is also examining the potential delaying effects of environmental regulation on real GDP, with lag times of 0 years, 10 years and 20 years, as well as potential differences between countries. The results show that no significant correlation exists for neither of the three models. Nor are any significant differences in outcome, between the OECD and the BRICS countries, observed. This indicates that the relationship between environmental regulation and economic output is not as profound as previously assumed, for example by the Environmental Kuznets Curve. Hence, the results suggest that environmental reforms can be implemented without adversely effecting economic output, as emphasized by the Porter Hypothesis. Previous research on the subject have reported similar results which further supports this conclusion. The robustness of the results could be discussed with regard to country specific and time specific effects, an unbalanced data panel or an insufficient number of control variables. Also, the relevance of the real GDP measure could come into question in this type of study, where other potential effects from environmental regulation might be more relevant to examine. Future research, with different type of measures and control variables, is therefore required in order to fully understand the complex relationship between environment and economics.