The Stringency of Environmental Regulations and Technological Change: A Specific Test of the Porter Hypothesis

Trade creates wealth through economic growth, and increased level of income effects environment in different ways. Firstly, when people become wealthier, their demand for environmental protection will increase because their priorities will change from employment, income, food or housing to more qualitative measures such as cleaner environment. Through increased level of income, trade can save people from the poverty versus environmental degradation circle which forces the poor people to exploit the environment in order to survive. Secondly, with rising level of national income, the governments and/or private firms could increase the expenditures targeting environmental development. These changes resulting from wealth increase may also improve environmental rules and regulations. Usually the goal of environmental policies is to protect the environment by imposing restrictions on firms and/or consumers. These policies are often criticised as it is claimed that the international competitiveness of domestic firms is reduced. However, in contrast to this cost biased argument Michael Porter formulated the hypothesis that environmental policies could also serve as a vehicle to enhance the competitiveness. However, Michael Porter formulated the hypothesis that says environmental policy spurs innovation which makes firms better off in the long run, since it increases their competitiveness (Porter (1991), Porter and van der Linde (1995)). The aim of this paper is test for the validity of the Porter hypothesis and trade liberalisation effect on environment in the EU, the Persian Gulf and in North-South countries regions. Our results confirm the Porter hypothesis in these regions. Also, trade liberalisation increases the CO2 emission per capita in the Persian Gulf, EU and North-South countries regions.