Constraining or Enabling Green Capability Development? How Policy Uncertainty Affects Organizational Responses to Flexible Environmental Regulations

AuthorJörgen Sandberg, Preston Teeter
Publication Date01 Oct 2017
British Journal of Management, Vol. 28, 649–665 (2017)
DOI: 10.1111/1467-8551.12188
Constraining or Enabling Green Capability
Development? How Policy Uncertainty
Aects Organizational Responses to
Flexible Environmental Regulations
Preston Teeter and J¨
orgen Sandberg
School of Business, University of Queensland, St Lucia Campus, Brisbane, QLD 4067, Australia
Corresponding author email:
Despite their growing popularity, flexible environmental regulations are increasingly
characterized by high levels of policy uncertainty. This uncertainty poses numerous chal-
lenges for managers, policymakersand researchers, for we still have a poor understanding
of how such uncertainty aects organizational responses and the ability of organizations
to generate unique capabilities. This paper presents findings of a qualitative studyof how
organizations respond to the introduction of flexible environmental regulations amidst
extremely high levels of policy uncertainty. Through an investigation of Australia’s com-
plex, and ultimately brief, carbon pricing scheme, we find that policy uncertainty forces
organizations to focus their responses on short-term investments and dealing with that
very uncertainty,thereby precluding the development of green capabilities and preventing
flexible regulations from achieving their intended policy results. However, we also find
that organizations are able to develop innovativeregulatory coping capabilities and that
variation in regulatory response results in a variation in these capabilities.
Flexible regulations, those in which a central
authority sets a policy target and then grants
organizations freedom in finding the lowest-cost
method of meeting that target, are increasingly
being used to tackle some of the most serious
environmental problemsof our time, including cli-
mate change, acid rain and solid waste pollution.
However, despite their growing popularity, flexible
environmental regulations across the globe have
suered from high levels of policy uncertainty.
Of primary concern, policy uncertainty has be-
set numerousnational and subnational regulations
on carbon emissions, resulting in seesawing car-
bon policies in Australia, Canada, China, the EU,
India, Japan, New Zealand and the US
(Engau and Homann, 2011b; Pinkse and Kolk,
2010; World Bank, 2014) and a growing body of
literature questioning the ecacy of and motives
behind flexible carbon trading schemes (e.g.B ¨
Misoczky and Moog, 2012; Levy and Egan, 2003;
Lohmann, 2009; Pellizzoni, 2011). The uncertainty
over these regulations poses numerous challenges
for managers, policymakers and researchers, for
we have a very poor understanding of how such
uncertainty aects organizational responses to
flexible regulations(Engau and Homann, 2011b).
Theoretically, there are competing views on
how organizations respond to flexible regula-
tions under policy uncertainty. On the one hand,
the often-cited Porter hypothesis argues that
uncertainty prevents flexible regulations from
stimulating investment and the development of
green capabilities (Crotty and Smith, 2006; Porter,
1991; Porter and van der Linde,1995). Conversely,
resource-based view (RBV) scholars argue that
policy uncertainty increases the motivation and
© 2016 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
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650 P. Teeter and J. Sandberg
opportunities for environmental proactivity and
capability development (e.g. Arag´
and Sharma, 2003; Carrera et al., 2003; L´
Gamero, Molina-Azor´
ın and Claver-Cort´
2011). Empirical evidence is slowly emerging but
currently only oers a fragmented and mixed
assortment of results, with few studies being able
to isolate the eects of policy uncertainty.
In response to this lack of understanding and
to test competing explanations, this study oers
a unique investigation into Australia’s short-
lived carbon pricing scheme of 20122014. As
Australia’s scheme contained unprecedented
coverage, flexibility and uncertainty, our study is
able to oer a rich and focused look at how policy
uncertainty aects organizationalresponse and ca-
pability development. This paper thus contributes
to the growing literature on ‘green management’
issues, which includes an increasing focuson func-
tional management specializations such as green
supply chain management (e.g. Srivastava, 2007)
and green human resource management (e.g.
Renwick, Redman and Maguire, 2013; Wagner,
2013). Our contribution here lies in the man-
agement of green policies and environmental
Flexible environmental regulations,
competitive advantage and policy
In contrast to command-and-control environmen-
tal regulations such as best available technology
standards and government subsidies, flexible envi-
ronmental regulations set a specific policy target
and then allow organizationsto decide how best to
meet that target,usually by engaging in the trade of
permits. The design of flexible regulations is based
on economic theories developed by scholars such
as Ronald Coase (1960) and John Dales (1968),
who argued that ownership rights and bargaining
would result in the most ecient distribution of
resources and rapid technological advances.
Soon after the inception of these regulations,
Michael Porter (1991) and Claas van der Linde
(Porter and van der Linde, 1995) oered further
theoretical support for their implementationby ar-
guing that environmental regulations that adopt
flexible approaches and focus on outcomes, not
technologies, trigger innovation in organizations
that can not only oset the cost of compliance but
also lead to absolute advantage over firms in for-
eign countries (see also Hoppmann et al., 2013;
Lim and Prakash, 2014). This theory is commonly
referred to as the Porter hypothesis amongst envi-
ronmental scholars. The latter part of the Porter
hypothesis rests on the assumption that domestic
regulations can correctly anticipate international
trends, thus enabling domestic firms to develop
‘internationally transferable green capabilities’
(Rugmanand Verbeke, 2000). Building on this the-
ory, scholars have proposed that proactive firms
that quickly adaptto new regulations can even gain
a first-mover advantage in their domestic market
through the development of localized capabilities
(Loader and Hobbs, 1999; Rugman and Verbeke,
2000). Taken together, these propositions suggest
that flexible environmental policies constitute a
true winwin scenario in which both the environ-
ment and regulated organizations benefit.
However, a somewhat unsettling trend is the in-
creasing degree of policy uncertainty surrounding
the adoption and implementation of flexible envi-
ronmental regulations. The origins of policy uncer-
tainty concerning these regulations are numerous,
including factors such as the intense lobbying and
public opinion campaigns of fossil fuel industries
and their think-tank ospring, the potential (or al-
leged) costs of such regulations to both consumers
and economic development, and the highly com-
plex and historically contested science behind en-
vironmental issues such as climate change (see,for
example, Kolk and Pinkse, 2007; Levy and Egan,
2003; Pellizzoni, 2011). As a result, flexible envi-
ronmental regulations have remained in a dynamic
state of stakeholder contestation over the past two
decades, with vested interests on opposite sides of
the political spectrum playing an active role in the
construction (and at times destruction) of these
Ultimately, this uncertainty can take on two
broad forms. First, there can be uncertainty over
the technical components of the legislation, such
as its detailed rules, measurements and imple-
mentation procedures, and second, there can be
uncertainty over the political (including public)
support for the legislation, which ultimately
translates into uncertainty over the actual passage
or continuation of the legislation. According to
the Porter hypothesis, these forms of uncertainty
should have a deleterious eect on the eventual
outcomes of flexible regulations (see also Crotty
and Smith, 2006; Majumdar, 1997). Without
© 2016 British Academy of Management.

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