2.3 The Porter hypothesis
According to Lundgren & Marklund (2010), the common
argument against strict ER is that companies are obliged to decrease
production, or shift capital investment to particular assets that might be less
productive. Therefore, both the level and the growth of the productivity might
be hindered, and consequently the competitive position of the firm and its
revenues. In other terms, the ER is not appreciated by managers since they
consider only the considerable incremental costs caused to their business.
Nonetheless, Michael Eugene Porter, Harvard Business School Professor, looked
critically into these arguments (Porter, 1991) and came to the conclusion that
«right kind stringent environmental regulation», such as market based
instruments i.e. «pollution taxes, tradable permits, and deposit-refund
schemes» (Porter and van der Linde. 1995, p. 111), might on the contrary
increase the competitiveness of businesses. This argument is known nowadays as
the Porter Hypothesis. This premise is detailed in the article written by
Porter with the collaboration of van der Linde (1995). The authors exposed as
their main argument the fact that the link between business's competitiveness
and ER must not be observed from a static point but rather for a dynamic one.
The dynamic understanding of this relationship allows figuring out the positive
impact on the performance of business through `over-time adjustments'. To put
it differently, firms must adapt themselves in order to comply with the ER by
incorporating process and technological innovation that that will enhance
business competitiveness. Henceforth, the profit increase may be so important
that the costs of compliance induced by the ER are
offset. In view of that, ER has an ultimate positive effect on
both the business through enhanced competitiveness and the society with less
environmental damages. This situation is commonly called the
«win-win» PH or the double dividend, furthermore, this
«win-win» situation is seen in the academic literature as the
«strong» Porter hypothesis. Likewise, the situation where ER will
stimulate only certain kinds of eco-innovations without a direct effect on the
competitiveness of the firm is presented as the «weak» Porter
Hypothesis (Jaffe and Palmer, 1997). A third version of the PH is the
«narrow» one; it stresses the fact that flexible ER is more likely to
achieve the expected results than command and control type of environmental
policies. (Lanoie, et al., 2011)
2.3.1 The weak Porter hypothesis
The neoliberal economic view is that economic agents (firms,
consumers) behave effectively under the rules the free market. Supply and
demand will determine the prices on each market which will send a signal to
economic agents so that they can take the right decisions. In fact, if the
market works perfectly, scare resources available to the company will be
allocated optimally (Lanoie & TANGUAY, 1999).
If this is the case then government intervention in economic
affairs is to be avoided since the market is efficient. Indeed, government
intervention will only be useful for redistributional activities or when
markets do not play well their role, in other words, in case of a market
failure (Lanoie & TANGUAY, 1999). This is precisely what happens in the
case of environmental externalities. In fact, one of the essential features of
the well-functioning of the markets is the existence of well-defined property
rights (Coase, 1960). Clearly, in case of environmental resources such as air
and water where property rights are very difficult to define, the governmental
intervention is necessary. Since, air and water belong to no one (and everyone
at the same time), the economic agents can use them at a zero cost, while the
actual cost for the whole society is far from being null. The polluters are
given the wrong incentives and, as they use these resources without paying for
their real cost, they intend to overuse them. Therefore, the market mechanisms
alone generate too much pollution compared to what is desirable or optimal.
Government intervention is legitimate in order to control pollution and reduces
it to a level that is tolerable. To do so, the regulator has an array of
instruments such as regulation or taxation that can ensure that the polluters
receive the right signal and face the true costs of the environmental
externalities that they cause (Lanoie & TANGUAY, 1999).
In light of this reasoning, the consideration of the
environmental externality and its internalisation is necessarily associated
with increased costs for companies that used to pollute without suffering any
consequences. The environmental protection is perceived as a trade-off between
those who desire stricter environmental standards and those who have to comply
with these norms, namely the businesses. The challenge is consequently to
balance the desires of society for a cleaner environment and the additional
costs imposed on firms.
| 
