Greening of industry: an ecological economic appraisal of eco-innovations and eco-labelling
Hussain, Syed Salman
In a market economy, the behaviour of firms determines the extent and type of anthropogenic impacts that affect natural ecosystems. As such it is critical that the regulation of corporate behaviour is closely appraised. All economic production systems use natural resource inputs and release waste emissions to environmental sinks; they also contribute to sustainability in terms of income generation. The analysis of economic efficiency is thus coined in terms of juxtaposing and balancing these effects and the role of regulation is to intervene so that the outcome (in terms of corporate behaviour) approximates to this theoretical social optimum. Determining optimal regulation is the core focus of this thesis. The role of environmental regulation has become prominent of late owing to developments in the science (and social science) of climate change and ecosystems functioning. It has also been strongly influenced by the Porter Hypothesis (PH) which challenges the non-interventionist doctrine of neo-classical economics in favour of stricter environmental regulation, based on the presumption that significant pollution offsets are available if and only firms are forced to search for eco-innovations. In order to progress the argument vis-à-vis optimal regulation it is first essential to explore the role of the firm in society, i.e. what the responsibilities of industry ought to be with respect to the sustainability agenda. I juxtapose and critically appraise functionalist theory and its associated utilitarian ethic with social permission theory; the outcome of this analysis is the contention that ‘I&We’ deontological theory is the most defensible alternative and as such a firm’s fiduciaries ought to balance the conflicting claims of stakeholders, i.e. shareholders are important but not paramount. Given this outcome, the role of the regulator is to intervene when the market for ‘green’ corporate behaviour does not function. There are various reasons outlined as to why such intervention might be required. On the demand side, evidence is presented of consumers’ willingness-to-pay for perceived environmental quality. This product attribute is typically a credence attribute and there is asymmetric information; there is an incentive for ‘greenwashing’, i.e. false or misleading environmental marketing claims. The strategic behavioural model developed herein implies that the status quo is potential sub-optimality in that consumers play a mixed strategy and, over time, there is the potential for a vicious cycle in that progressively less and less ‘green’ marketing claims are genuine. On the supply side, firms may be ‘satisficing’ as opposed to optimising with respect to eco-innovations; a firm’s search for and selection of innovation is path-dependent, i.e. the history of innovations is influential. This supports the PH in that stimulating a shift to an eco-innovation trajectory realises benefits not only in the current time period but into the future. I also demonstrate that firms may be ‘locked in’ to technological paths that are sub-optimal (and environmentally damaging) owing to ‘coordination effects’ and as such there is a further role for economically efficient regulatory intervention on the supply side. Well-designed regulation can improve economic welfare in that it might propagate a shift in (as opposed to movement along) abatement cost curves. This in turn implies a convergence between the ‘best’ level of pollution for the polluter and for society, therein ameliorating the potential deadweight losses from the strategic interaction between the polluter and the regulator.