The Porter Hypothesis in a Two-Area Ecological Stock Flow Consistent Model: Should Political Decision Making Rely on Current Calculations of Leakage Rates?

In this paper, we investigate how the complex relationship between environmental regulations and competitiveness can be modeled through changes in technological developments. We do so by introducing the effects presented by the Porter Hypothesis in a two-area ecological Stock Flow Consistent model for
Denmark and the rest of the world. Due to empirical evidence, we find it valid to model two underlying effects presented by the Porter Hypothesis. The first introduces a relationship between environmental regulations and innovation. The second introduces a relationship between technological development, as a
result of innovation, and competitiveness of the green side of the economy. We show how the introduction of the PH framework into a macroeconomic model, as expected, will lower
carbon leakages through international trade. We argue that the PH framework should be given equal consideration alongside the Pollution Haven Hypothesis as suggested by empirical findings when making political decisions based on carbon leakage for a small open economy like Denmark.