Environmental policies don’t have to hurt productivity

OECD Observer
Page 11 

As environmental pressures continue to rise, governments, just as businesses, have not been sitting back. If anything, the stringency of policy measures in the OECD area has been increasing on the whole, not least to combat pollution and climate change. But what about the effects of these actions on productivity?

New evidence from the OECD shows that more stringent environmental policies of recent years have had no negative effect on overall productivity growth. True, there may be winners and losers, but any effects have tended to fade away quickly.

The results show that before tighter environmental policies came into effect, a country’s overall productivity growth slowed, possibly because firms anticipated the changes and prepared themselves for new operating conditions. However, a rebound in productivity growth soon followed, with no cumulative loss reflected in the data.

What’s more, the most productive, technologically advanced firms saw a temporary boost in productivity after rules become more stringent, as they took advantage of new, more environmentally friendly opportunities, tapped into their supply networks and reaped the fruit of earlier innovations. Less advanced firms saw their productivity fall, and some went out of business altogether.

The overall outcome of all of this was neutral, because of policy efforts and the fact that resources can be reallocated into fast growing firms. This suggests that more stringent environmental policies, when properly designed, can be introduced to benefit the environment without any loss in productivity.
This is important, because as while our economies still suffer from the aftermath of the economic crisis, and try to unleash more growth and jobs, they must also step up efforts to tackle climate change, pollution and other environmental challenges. Some may worry that there is a conflict between these imperatives.

Our new evidence shows that environmental stringency policies do not have to hurt productivity. On the contrary, efforts to improve growth and achieve ambitious environmental goals can go together, and should be stepped up. Indeed, environmental policies can and should be shaped to spawn new ideas, mobilise cleaner technologies and encourage new business models that benefit both the economy and the environment.

Governments should persevere with stringent environmental policies to tackle environmental problems, but should devote resources to designing them properly. As a rule of thumb, administrative procedures should be streamlined where possible so as not to create barriers to doing business. Policies should avoid providing unwarranted advantages to existing firms, while more emphasis should be placed on flexible, market-based instruments, including taxes, as a key part of the policy mix.

The aim is to orientate policies to foster new, cleaner technologies and allow competitive measures to remove old, dirty technologies and processes that hurt both growth and the environment.

BEEP warning

To help policymakers strike the right balance, the OECD has developed the Environmental Policy Stringency Indicator (EPS), which summarises and compares the stringency of policy instruments among countries and over time. The indicator currently focuses on climate and air pollution in energy and transport, and covers such policies as taxes, feed-in tariffs, renewable energy certificates, research and development subsidies and emission limit values. Though a proxy, the indicator is the broadest and most comprehensive measure of its kind. Moreover, it is aligned with business perceptions of stringency.

To test the effectiveness of various environmental stringency indicators, users can check them off against another innovation: the OECD BEEP, or Burdens on the Economy due to Environmental Policies. Though still under development, the BEEP shows that stringent environmental policies can be designed and implemented in different ways, and adjusted in relation to barriers to competition or administration costs.

The chart shows the patterns among OECD countries. Austria, Netherlands and Switzerland, for instance, combine stringent environmental policies with a relatively competition-friendly stance of such policies. Stringent environmental policies with high administrative burdens and measures that impede competition reflect the situation for the Nordic countries and Germany, indicating a more competition-friendly stance could be encouraged in these countries without reducing their environmental stringency. In contrast, the UK could likely afford more stringent environmental policies without hurting competition.

Click to enlarge

The OECD intends to broaden the analysis of economic outcomes of environmental stringency policies to such areas as investment, employment, trade patterns and firm location–in particular to see if “pollution havens” are forming elsewhere because of outsourcing, for instance, with no overall environmental gain to the planet. This means extending the indicators to cover more OECD and non-OECD countries, which would also help test the robustness of the results of the work so far.

And it would further assist policymakers in safely introducing stringent environmental policies without hurting productivity. 


Albrizio, S., et al (2014), “Do environmental policies matter for productivity growth? Insights from new
cross-country measures of environmental policies”, OECD Economics Department Working Paper
No. 1176. OECD Paris

Kozluk, T. and V. Zipperer (2014), “Environmental policies and productivity growth: a critical review of empirical findings”, OECD Journal: Economic Studies, Vol. 1, 2014, OECD Paris

OECD (2014) "Green growth: environmental policies and productivity can work together", OECD Policy Brief, 2014, OECD Paris.

See also www.oecd.org/policy-briefs

©OECD Observer No 301, Q4 2014

Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly

Online edition
Previous editions

Don't miss

  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa. blogs.worldbank.org
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017