Environmental Policy Stringency and the Development of Environmental Technologies: Revisiting Porter Hypothesis

ABSTRACT This study examines the impact of environmental policy stringency on the development of environmental technologies by re‐evaluating the Porter hypothesis within a panel data framework. The analysis covers 18 European Union countries over the period 2000–2020 and employs advanced panel data estimation techniques to identify long‐run relationships among the variables. The results reveal nonlinear and heterogeneous effects between environmental policy stringency and environmental innovation. Specifically, the marginal effect of policy stringency follows a U‐shaped pattern, indicating that moderate levels of regulation stimulate environmental innovation, whereas excessive stringency reduces innovation returns. These findings suggest that while the Porter hypothesis holds under certain conditions, its validity is nuanced and highly dependent on the optimal design of environmental regulations. Moreover, the results show that corporate taxation, in its current structure, constrains the effectiveness of the Porter mechanism by dampening firms' incentives to invest in environmental technologies. Consequently, revising corporate tax rates to better support green innovation could enhance the effectiveness of environmental regulations and strengthen innovation‐driven competitiveness.