payments are triggered by recorded weather data rather than expensive claims-handling of crop damage in multiple small farms); (ii) no moral hazard (as payouts are independent of farmers‘ practices); (iii) no adverse selection or over-representation of high-risk insured in the pool (as there is a balance of information about the weather on part of insurer and insured). A pilot scheme during the 2005-06 season that bundled bank loans with the insurance (so that farmers could pay for both the premium and high-yield seeds) demonstrated that the scheme could operate without ongoing subsidies (after the mechanism was set in place and start-up expenses were covered by the government). The scheme decreased crop losses by offering incentives to change cultivation practices to become more resistant to drought. And it decreased vulnerability by increasing productivity in good seasons: with a doubling of their cash crop in good seasons, famers were able to save, both raising and smoothing their income over time.

The experience highlights the importance of absorptive capacity at the individual level. A survey revealed that only 55% of farmers reported understanding the scheme before joining it, highlighting the need to substantially improve communication and education. The survey also revealed a lack of trust among farmers in the weather station measurements, highlighting the importance of institutional trust as a challenge in scaling up operations. Source: Kunreuther and Michel-Kerman (2011) and Suarez and Linnerooth-Bayer (2010).

Finally, three issues are particularly relevant for developing countries. First, as global green technologies improve, the **falling costs of adoption** relative to existing non-green technologies facilitate their adoption by firms. They also lower the costs of adopting the relevant environmental regulation by governments. In their study of the adoption of regulations limiting emissions of nitrogen oxides (NOX) and sulfur dioxide (SO2) at coal-fired plants across 39 developed and developing countries, Lovely and Popp (2011) show that countries adopting these regulations at later dates do so at lower levels of per capita income than adopters who enacted similar regulations earlier. The availability of the technology at lower cost should help shape the regulation that is required as incentive for firms in lower income countries to adopt it.

The second issue concerns the potential **longer-run benefit of well-designed environmental regulation** in enhancing innovation and competitiveness, and the extent to which benefits may more than fully offset the cost of the regulation.<sup>38</sup> Especially in less mature markets characterized by inadequate physical and institutional business infrastructure prevalent in many developing countries, firms may miss profitable green investment opportunities because they are too risky, too costly for the manager, or out of the manager‘s habits, routines and technical expertise. By making these investments more profitable or requiring them, environmental regulations can help the manager overcome these problems. In line with this view, Alpay et al. (2002) estimate the productivity of the Mexican food-processing industry to be increasing with the pressure of environmental regulation. And in a sample of 17 Quebec manufacturing sectors, Lanoie et al. (2008) have found that stricter regulations led to modest long-term gains in productivity – first reducing productivity in year one, having a slightly positive effect in year two, and then resulting in more positive outcomes in years three and four, more than offsetting the first year‘s loss. Most empirical studies of the impact of well-designed environmental regulations in high-income countries have found that they stimulate innovation by firms as measured by R&D spending or patents. However, there is relatively little overall evidence to-date that the induced innovation is sufficient to overcome the added costs of regulation, with 10 of 13 studies surveyed by Ambec et al. (2011) finding that the net effect of environment regulation on productivity or profitability is negative. In terms of design of

> 38 This view has come to be known as the Porter hypothesis, based on an initial statement that strict environmental regulations do not inevitably hinder competitive advantage against rivals but can often enhance it, at least in the long run (Porter 1991), and a subsequent set of case studies (Porter and van der Linde 1995). See Ambec et al. (2011) for a review of the literature.

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