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Environmental Policy, the Porter Hypothesis and the Composition of Capital: Effects of Learning and Techonological Progress

In this paper, the effect of environmental policy on the composition of capital is investigated. By allowing for non-linearities, it generalizes Xepapadeas and De Zeeuw (Journal of Environmental Economics and Management, 1999) and determines scenarios in which their results do not carry over. In particular, we show that the way acquisition cost of investment decreases with the age of the capital stock is of crucial importance. Also, it is obtained that environmental policy has opposite effects on the average age of the capital stock in the case of either deterioration or depreciation. We also focus more explicitly on learning and technological progress. Among others, we obtain that in the presence of learning, implementing a stricter environmental policy with the aim to reach a certain target of emissions reduction has a stronger negative effect on industry profits, which implies quite the opposite as to what is described by the Porter hypothesis.