New research has found that when companies are faced with stricter environmental regulations at home, they pollute even more abroad.
A newly published report by The Harvard Business Review (HBR) has found that harmful emissions in countries with stricter environmental regulations have decreased as those regulations have been implemented. This would be great news if the report didn’t also discover that emissions in countries with laxer environmental regulations have gone up during that time period.
For their data analysis, HBR collected the data of over 1,800 international firms and they tracked the firms’ CO2 emissions between the years 2008 to 2016. Their research found that “in countries with tight environmental regulations, companies have 29% lower domestic emissions on average.” However, these tighter restrictions resulted in a 43% increase in overseas emissions by those same companies. Importantly, although firms were likely to emit more emissions abroad when domestic regulations became rigid, their amount of overall emissions didn’t increase. In fact, HBR discovered that when countries implemented stricter environmental rules, global CO2 emissions dropped by about 15% for the companies in the study. Based on this data, the report concluded that stricter environmental legislation is helping reduce global emissions, but that companies “have to take a collective action to bring down overall global emission levels further.”
The researchers at HBR also examined companies’ governance mechanisms. Their research found that companies with “good governance mechanisms, such as strong shareholder monitoring, may dissuade managers from pursuing…short-term goals and push them toward production with lower emissions.” However, if a company was lacking in those types of mechanisms and was focused on short-term gain versus long-term success, that company is more likely to increase its emitting activity abroad.
Another factor in the likelihood of a firm to increase its pollution overseas in the face of stricter domestic regulations is the type of industry the firm is in. HBR‘s report listed a few industries who were “more susceptible to exporting pollution abroad than others.” The industries with the heaviest polluters were electricity, gas and refineries, steam and air conditioning supply, air and water transport, and mineral/metal producers. HBR‘s study shows that companies in these industries are less likely to adhere to domestic environmental regulations and more likely to “export more pollution abroad.” The study also observed that if environmental legislation targetted these industries more directly, the impact on global emissions would be greater.
Overall, more robust environmental regulations are having a positive impact on global CO2 emissions, but the HBR report proves that they’re not enough. “National regulation can be beneficial, but it can only do so much to effectively combat pollution and climate change…Countries need to take concerted action to ensure that the overall CO2 balance will not increase,” the report concluded. If environmental regulations become more strict on a global scale, then international companies won’t have pollution havens where they can divert their emitting activities, and global air quality will greatly be improved.