Essays on Environmental Policy and Green Investment

Abstract

This PhD thesis provides abundant empirical evidence on the effectiveness of environmental policy instruments alone and as a policy-mix, looking at its effect on green investment and employment. Finally, it also studies the social welfare outcomes of the implementation of the two environmental policy instruments – environmental taxes and public financing. The most direct and obvious conclusion that can be extracted from this thesis is that properly designed policy-instruments are necessary to incentivise firms to invest in green technologies, especially if we want to encourage investment in cleaner production technologies over pollution abating technologies, which is not an easy task to do.

I refer to the industrial and energy firms because on one hand, they contribute significantly to air pollution, waste pollution and address resource scarcity, making it even more important for them to invest in technologies that would significantly address the negative externalities. In this regard, this thesis contributes to the literature on causal evidence of environmental policy instruments on firm behaviour, as well as social welfare outcomes arising from different policy scenarios.

More specifically, the second chapter of this thesis contributes to the literature on social welfare outcomes arising from the different environmental policy scenarios. In the analysed model we are faced with the asymmetry of decision making. While the regulator favours green investment, which reduces the total pollution level, firms prefer to keep producing using their dirty technology in the symmetric scenarios. The question that arises, therefore, is how such an equilibrium can be induced? It might be the case that with more money being directed at R&D, technologies would become more efficient and cheaper, making it more desirable for firms. From the policy perspective, especially investment in private environment R&D is highly encouraged.

In the third chapter of this thesis, I contribute to the literature on drivers of eco-innovations by identifying crucial regulatory factors and firms’ organizational capabilities for encouraging enterprises to invest in green technologies. We observe differences between the drivers of investment in cleaner production and end-of-pipe technologies. In addition, we distinguish between investments with the purpose to reduce air pollution and energy consumption.

Firstly, environmental taxation in Spain seems to be rather ineffective at stimulating investment in greener technologies, both for end-of-pipe as well as for cleaner production technologies. We argue that in the Spanish context this might be caused by relatively low rates, environmental taxes might not be doing their task effectively. At the same time, firms react positively to investment subsidies and investment tax incentives. Tax credits seem to be especially successful at financing cleaner production technologies while subsidies are positively related to both EP and CP investments. The implication derived from these findings reveals that direct policies such as subsidies help firms to convert into greener companies, while tax credits lead to reductions in production costs for firms, that pursue a substantial transformation of their production process.

Additionally, we can conclude that organization capabilities matter for investment in green technologies. Admittedly, hiring green employees is a strong factor pushing each firm towards green investments, while the relationship between green procedures and certifications is not clear.

The fourth chapter of this thesis is aimed at evaluating the effectiveness of environmental taxes in Spain at different levels of taxation, in the absence and in combination with public finance - an equally important market-based instrument addressing the market failure of firms. The evaluation is performed with regards to whether the implementation of such environmental policy instrument in Spain is successful at encouraging adoption of green technologies among manufacturing firms.

Our results suggest that environmental taxation is effective at encouraging adoption of both types of green technologies. That being said, once we split our treatment to different categories, we find that low levels of environmental taxation do not induce further investments in process eco-innovations. Therefore, we show that the average treatment effect masks substantial heterogeneity across the taxation level groups. Results also consistently show that increasing the amount of taxation increases also the subsequent adoption of green technologies. In the sample of fully supported environmental tax payers, it seems to emerge that firms that are required to pay around EUR 2,500 per year already exhibit significantly higher investment in green technology than under lower amounts of taxation.

Additionally, our findings seem to suggest that even low levels of environmental taxation can be effective at inducing investment in green technology if combined with public financing. However, once again the effect is the largest when environmental taxation is at the medium level. That being said, if the regulator is reluctant to increase the taxation level in fear of hurting firms' competitiveness, even low levels of taxation can be effective in combination with public support. Large levels of environmental though very effective on its own, are not strongly encouraged with combination of public financing.

The fifth chapter of this thesis analyses, in turn, a large-scale national tax incentive program in Spain, which started in 1996 and finished in 2015. Due to data availability, I focus on the 2008-2014 time window. The findings seem to suggest that encouragement to eliminate the EI tax incentives from the Spanish Corporate Income Tax and fears that they were not successful enough was unwarranted. While it is true that the EI tax credit favoured pollution abating over energy efficient technologies, it did increase substantially investment – and even in the times of financial crises, when the capital market failure was particularly severe. The EI tax credit was found to have positive indirect effects on both number of green employees and private environmental R\&D, which could have additional positive spill-over effects. With regards to the policy change, which was aimed at disincentivizing financing of pollution abating technologies and encouraging – it was assessed as semi-effective. While it is true that it did discourage investment in end-of-pipe technologies, especially those aimed at air-pollution reduction, we could not observe investment in cleaner production technologies increasing as a result. This could suggest that tax incentives should be more clearly defined, as to avoid (1) technological lock-down in old technologies, (2) encourage technologies that do change the production process and result in smaller usage of natural resources e.g energy consumption. One of the caveats of the studied EI tax credit was the confusion it created not only with respect to eligibility criteria but also the definition of technologies that it aimed to finance. Lastly, it is quite comforting to observe, however, that the tax incentive seemed to have addressed the capital market failure of small firms for the investment in cleaner production technologies. The results from the heterogeneous analysis also point out to the fact that this positive effect exists in stark contrast to the reduction in the investment suffered by the big firms.