The Impact of Environmental Policy Stringency on Industrial Productivity Growth : A Semi-Parametric Study of OECD Countries

This paper employs a semi-parametric varying coefficient system approach to investigating the impact of environmental policy stringency on a nation's productivity growth using data for a panel of OECD countries over a period of two decades. A new cross-country proxy of environmental policy stringency is employed. Our results show that while stricter environmental policies might shift a country's total cost in production upward, for countries which have already adopted relatively more stringent environmental policies, further increasing their policy stringency seems to enhance these countries' productivity in the long run. We also find that more stringent environmental policies seem to render a country's use of intermediate inputs more inelastic to their own prices and decrease the substitutability between labour and intermediate inputs in the long run. We argue that more stringent environmental policies would exert tighter control over the use of several intermediate inputs such as energy, raw materials, pollution-intensive services etc., leading to the use of these inputs being less sensitive to changes in their market prices. Tighter control over the use of these intermediate inputs would also render them less of a substitute to labour input