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Rules That Improve the Business Environment?

As the Porter Hypothesis — that well-structured environmental regulations can help businesses — marks two decades, resistance to the concept remains strong.
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Harvard business professor Michael Porter floated an idea in a one-page essay in Scientific American 20 years ago that many of his colleagues at the time thought ridiculous. Good environmental regulation, he suggested, could actually spur innovation, making companies more competitive even as they adjust to stricter environmental standards.

The idea was the exact opposite of conventional wisdom as it was discussed then among business leaders and taught in economics classrooms. Even 20 years later, it seems to contradict the premise that underlies every policy dispute in Washington over climate and energy regulation — that we must chose between business and the environment, between jobs and resources, between competitive corporations and environmentally friendly ones.

In the years since, Porter’s radical idea has spawned an entire library of literature testing his hypothesis, and many converts in the process, in both the business world and academia. But as environmental economists celebrate the 20th anniversary of what they now call the “Porter Hypothesis,” one key group remains as resistant to the idea as ever.

THE IDEA LOBBYMiller-McCune's Washington correspondent Emily Badger follows the ideas informing, explaining and influencing government, from the local think tank circuit to academic research that shapes D.C. policy from afar.

Miller-McCune's Washington correspondent Emily Badger follows the ideas informing, explaining and influencing government, from the local think tank circuit to academic research that shapes D.C. policy from afar.

“I want to be absolutely clear: There’s still a lot of people — and I will say there’s still a lot of people in this town — that still believe that the relationship between environmental improvement and the corporation is adversarial, inherently so,” Porter said this week during a lecture marking the idea’s 20th anniversary coming-of-age at the Washington think tank Resources For the Future.

Nonetheless, younger Americans are leading a dramatic shift in public attitudes toward the environment, which gives Porter hope.

Porter looked around at a full conference room that included business executives, retired politicians and one former EPA administrator and remarked that his theory is as relevant now as ever.

“This whole question of American competitiveness and the role of regulations in American competitiveness has really risen again to the top of the radar screen of the debate in this country,” he said. “At the same time, there’s a tremendous angst and even tension between business and government, the private sector and the public sector.”

That much has been clear in Congress’ failure to pass an energy bill last year, in a slew of lawsuits against EPA over regulation of greenhouse gases, and in the particularly militant opposition of the state of Texas. Just this week, Politico reported that energy lobbyists have been in closed-door meetings with key congressional Republicans to strategize how to “handcuff the Obama administration’s climate change agenda.”

Porter’s hypothesis, though, suggests that the businesses trying to derail regulation might actually benefit from it — and that the politicians responsible for crafting new rules would do well to understand this.

Porter first started to suspect this might be true in looking at other countries. German companies are among the world’s most competitive in environmental technologies, in spite of (or perhaps because of) strict environmental regulations, just as Japan has become a leader in pollution-control equipment and clean technology in an atmosphere of tight regulation.

“Basically, the one-liner is ‘look for the win-win solution,’” Porter said of the policy implications of his idea. “This says that there could be, and can be, often win-win solutions where we can have environmental performance and, at the same time, make the company more productive, more innovative, improving the value of its products and making it more competitive. We need to do everything we can to widen the circumstances where that can happen.”

To do that, he says, the U.S. must deploy the right kind of regulation (his hypothesis does not say that just any environmental regulation will make every company more competitive). For starters, regulation must specify standards without dictating to companies how to achieve them — that’s where the innovation comes in. Regulation should allow for phase-in periods that align with new product cycles, and they should give businesses as much certainty as possible about future standards (the doomed cap-and-trade bill, for example, left many people wondering exactly what future emissions permits would cost).

The regulatory processes should also be as simple as possible (making them less costly to comply with), and they should be designed in harmony with international regulation.

All of this requires a significant shift in thinking on the part of businesses and politicians who are still unconvinced. But Porter also singles out the government itself.

“The Environmental Protection Agency,” he wrote in the original 1991 article, “must see its mandate as stimulating investment and innovation, not just setting limits.”