More stringent environmental policies correlate with slower economic growth

A new study from the OECD is making the media rounds.  As The Economist noted in its coverage:

Environmental regulations may not cost as much as governments and businesses fear ...

Researchers at the Organisation for Economic Co-operation and Development (OECD), a club mostly of rich countries, recently constructed the first comprehensive set of data on environmental strictness and its effect on productivity. The researchers got around the difficulties of incomplete national accounts by calculating an index based on the explicit or implicit price of green policies.

If a price is explicit -- say, that of a traded pollution permit -- the calculation is reasonably straightforward. If it is implicit -- arising from restrictions on vehicle emissions, for example -- the researchers estimated a relative score based on a scale of zero to six (zero means the policy is absent; six represents the most stringent measure in force). They combined this and other data to create a composite indicator of 'environmental policy stringency' (EPS) for 24 OECD countries from 1990 to 2012.

The narrative being spun is that increasingly stringent environmental regulations need not hinder economic growth.  But this storyline has difficulty standing up to even a cursory examination.

Here are the EPS scores for 2012 among the OECD countries examined:

And here is a plot of the EPS rank versus real per capita GDP growth over the last five years for the 14 nations with above-average environmental stringency scores from the OECD.

Clearly Spain – being one of the infamous PIIGS nations – is an outlier, as we would expect, given its unique macroeconomic circumstances.

Among all other nations, the relationship is unequivocally clear: more stringent environmental policies correlate very strongly with substantially lower rates of economic growth.  The countries with the most stringent environmental policies – Denmark, the Netherlands, Finland, and Norway – are seeing their economies stagnate, or even go backward.  In contrast, nations with less stringent environmental policies – such as the Slovak Republic, Canada, South Korea, Poland, and even Japan – have experienced much higher economic growth.

Some other interesting results are evident in the EPS dataset.  The OECD ranks Canada (11) as having much more stringent environmental policies than the U.S. (15) as of 2012, which contradicts the hysterical narrative being peddled in the left-wing Canadian media that conservative prime minister Stephen Harper has gutted all of Canada's environment laws and led us down the path to eco-Armageddon, especially when compared to the pro-environment President Barack Obama.

Even more interesting is that the EPS score for the USA under Obama hardly changed (2.56 [2008; year before taking office] to 2.79 [2012]), whereas that of Canada under Harper increased from 2.25 (2005; year before taking office) up to 3.24 in 2012.  So much for claims by Canadian environmentalists that "Canada's environmental laws are the weakest in the industrialized world," findings by think-tanks that Canada "ranks last when it comes to environmental protection," or statements on Twitter directed at pro-oil industry private citizens by federal Liberal Party politicians claiming that Canadian oil producers don't need to meet some of the toughest environmental standards on the planet.

Actually, it appears as though Canada's environmental policies are still far too stringent (and even getting more stringent over time), and that its economy would benefit from a relaxation of these standards rather than the dramatic increase that has taken place under a supposedly conservative government.  Of course, almost all OECD members suffer under onerous environment regulations.  As the analysis above suggests, this ecological red tape is harming wealth creation.

A new study from the OECD is making the media rounds.  As The Economist noted in its coverage:

Environmental regulations may not cost as much as governments and businesses fear ...

Researchers at the Organisation for Economic Co-operation and Development (OECD), a club mostly of rich countries, recently constructed the first comprehensive set of data on environmental strictness and its effect on productivity. The researchers got around the difficulties of incomplete national accounts by calculating an index based on the explicit or implicit price of green policies.

If a price is explicit -- say, that of a traded pollution permit -- the calculation is reasonably straightforward. If it is implicit -- arising from restrictions on vehicle emissions, for example -- the researchers estimated a relative score based on a scale of zero to six (zero means the policy is absent; six represents the most stringent measure in force). They combined this and other data to create a composite indicator of 'environmental policy stringency' (EPS) for 24 OECD countries from 1990 to 2012.

The narrative being spun is that increasingly stringent environmental regulations need not hinder economic growth.  But this storyline has difficulty standing up to even a cursory examination.

Here are the EPS scores for 2012 among the OECD countries examined:

And here is a plot of the EPS rank versus real per capita GDP growth over the last five years for the 14 nations with above-average environmental stringency scores from the OECD.

Clearly Spain – being one of the infamous PIIGS nations – is an outlier, as we would expect, given its unique macroeconomic circumstances.

Among all other nations, the relationship is unequivocally clear: more stringent environmental policies correlate very strongly with substantially lower rates of economic growth.  The countries with the most stringent environmental policies – Denmark, the Netherlands, Finland, and Norway – are seeing their economies stagnate, or even go backward.  In contrast, nations with less stringent environmental policies – such as the Slovak Republic, Canada, South Korea, Poland, and even Japan – have experienced much higher economic growth.

Some other interesting results are evident in the EPS dataset.  The OECD ranks Canada (11) as having much more stringent environmental policies than the U.S. (15) as of 2012, which contradicts the hysterical narrative being peddled in the left-wing Canadian media that conservative prime minister Stephen Harper has gutted all of Canada's environment laws and led us down the path to eco-Armageddon, especially when compared to the pro-environment President Barack Obama.

Even more interesting is that the EPS score for the USA under Obama hardly changed (2.56 [2008; year before taking office] to 2.79 [2012]), whereas that of Canada under Harper increased from 2.25 (2005; year before taking office) up to 3.24 in 2012.  So much for claims by Canadian environmentalists that "Canada's environmental laws are the weakest in the industrialized world," findings by think-tanks that Canada "ranks last when it comes to environmental protection," or statements on Twitter directed at pro-oil industry private citizens by federal Liberal Party politicians claiming that Canadian oil producers don't need to meet some of the toughest environmental standards on the planet.

Actually, it appears as though Canada's environmental policies are still far too stringent (and even getting more stringent over time), and that its economy would benefit from a relaxation of these standards rather than the dramatic increase that has taken place under a supposedly conservative government.  Of course, almost all OECD members suffer under onerous environment regulations.  As the analysis above suggests, this ecological red tape is harming wealth creation.