When environmental regulation benefits polluters: an overview of the theoretical underpinnings of the Porter hypothesis.

Summary The paper presents in a non-technical way some of the possible theoretical underpinnings of Porter's hypothesis that strict environmental regulations can improve the profit of industries subject to them. After a brief presentation of the hypothesis, the arguments based on the existence of imperfections within the firm are reviewed. The market imperfections that could potentially justify Porter's hypothesis are then discussed. The main conclusions of this overview are: (i) the Porter hypothesis requires the interaction of the environmental externality with at least one other source of distortions, (ii) the type of public intervention that can lead to a Porter effect depends on the nature of the interacting distortions. Achieving the optimum may require the use of several instruments, (iii) the empirical exploration of the Porter hypothesis must, to be valid, allow for the presence of these multiple distortions.