Disentangling economic crisis effects from environmental regulation effects: Implications for sustainable development

Abstract

With climate change becoming more severe, policy makers must impose environmen-tal regulations that will lead firms to adopt sustainable corporate models. Accordingto the Porter hypothesis, environmental regulation can favour the implementation ofbusiness strategies that improve economic and environmental performances. In thisstudy, we examine how one such form of regulation, the European Union EmissionTrading Scheme (EU ETS), impacts firm performance, and we subsequently widen theexamination beyond the regulation to evaluate an economic crisis which couldpotentially confound regulation effects. We estimate a panel model with time- andfirm-fixed effects for different subsamples that disentangle the effect of the EU ETSpolicy from the 2008 economic crisis. The results indicate that the EU ETS policy inits third phase can activate the Porter hypothesis and is effective in fuelling theimplementation of sustainable corporate models by firms. However, we also find thatthe economic crisis neutralises the effects of the regulation on firm performance,precluding the triggering of the Porter hypothesis in severely affected firms.