Environmental regulation and investment: Evidence from European industry data

This paper contributes to the empirical literature on the effects of environmental regulation on investment. In particular, we ask whether and how strongly an industryʹs investment responds to stringency in environmental regulation. Environmental regulation is measured as (i) an industryʹs total current expenditure on environmental protection, and (ii) a country-industryʹs revenue from environmental taxes. Focusing on European data of manufacturing industries between 1998 and 2007, we estimate the differential impact of environmental stringency on four types of investment: gross investment in tangible goods, in new buildings, in machinery, and in ‘productive’ investment (investment in tangible goods minus investment in abatement technologies). Both environmental variables enter positively, and their quadratic terms exhibit significantly negative parameter estimates. This, in turn, indicates a positive but diminishing impact of environmental regulation on investment.