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“It Pays to be Green” – A Premature Conclusion?

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Abstract

It has been claimed that good environmental performance can improve firms’ economic performance. However, because of e.g. data limitations, the methods applied in most previous quantitative empirical studies on effects of environmental performance on economic performance of firms suffer from several shortcomings. We discuss these shortcomings and conclude that previously applied methods are unsatisfactory as support for a conclusion that it pays for firms to be green. Then we illustrate the consequences of these shortcomings by performing several regression analyses of the effect of environmental performance on economic performance using a panel data set of Norwegian plants. A pooled regression where observable firm characteristics like e.g. size or industry are controlled for, confirms a positive effect of environmental performance on economic performance. However, the estimated positive effect could be due to omitted unobserved variables like management or technology. When the regression model controls for unobserved plant heterogeneity, the effect is generally no longer statistically significant. Hence, although greener plants tend to perform economically better, the analysis provides little support for the claim that it is because they are greener. These empirical findings further indicate that a conclusion that it pays to be green is premature.

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Acknowledgements

I am indebted to Iulie Aslaksen and Terje Synnestvedt for valuable discussions, comments and suggestions. I am also grateful to an anonymous referee, Knut Einar Rosendahl and Terje Skjerpen for helpful comments and suggestions, and to Bente Halvorsen for valuable discussions and suggestions in the initial part of the project. Financial support from the Norwegian Ministry of the Environment is gratefully acknowledged.

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  1. Research Department, Statistics Norway, P.O. Box 8131 Dep.,, NO-0033, Oslo, Norway

    Kjetil Telle

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Telle, K. “It Pays to be Green” – A Premature Conclusion?. Environ Resource Econ 35, 195–220 (2006). https://doi.org/10.1007/s10640-006-9013-3

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