Ever since the first major environmental regulations1 were enacted in the 1970s, there have been concerns about their potential impacts on businesses. Managing the balance between environmental constraints and economic impacts has been an ongoing dilemma. The recent economic downturn, combined with increased competition from emerging economies, has made the debate even more acute, particularly in relation to climate change policies.

Economists traditionally think environmental regulations add costs to companies and slow down productivity. Environmental regulations may thus affect the competitiveness of the domestic industry if the stringency of policies differs across countries, putting some firms at a disadvantage to their foreign competitors. An alternative view is that environmental regulations may foster innovation in environmentally-friendly technologies, help regulated firms achieve technological leadership and boost broader economic growth. These views have received a great deal of attention from policy makers, particularly in the context of the recent economic downturn.

The growing importance of this debate in policy circles has led to a large number of studies that attempt to quantify the impact of environmental regulations on businesses. These studies have analyzed many aspects of the economic performance of regulated businesses, including productivity, innovation, employment, profitability, output and trade. This policy brief aims to provide an up-to-date assessment of the results from this vast and growing literature.

The policy brief asks questions that are of particular interest to policy makers. We start by discussing what competitiveness means, at the level of firms, sectors and countries. We explain how competitiveness effects occur, why it is important to assess them and how they are measured. We then turn to the heart of this policy brief: a review of the existing evidence. We focus on ex post evaluation studies. Ex ante modelling studies are not included. We discuss the impact of environmental regulations on productivity, employment, trade, industry location and innovation. We conclude by discussing what the literature teaches us about improving environmental regulations and identifying priorities for future research.