In recent years, the concern about environmental problems and increasing environmental regulation represents a challenge for profit-maximizing firms. There are suggested approaches toward a so-called win-win situation where both industry and environment can benefit. According to ‘Porter Hypothesis’, environmental regulation can act as a trigger to shoot the target. In the way that, more stringent regulation system will be imposed on a firm, more a firm will be motivated to innovate. The environmental innovation has been divided in two categories: Treatment innovation and Prevention innovation. From the Porter school point of view those firms, which invest in environmental prevention technology, will enjoy innovation offset. Innovation offset can exceed the compliance cost and firms can increase their benefit.
In this thesis, this idea that prevention innovation is more profitable than treatment innovation has been investigated. The analysis is based upon Statistic Norway and Norwegian Pollution Control Authority database, which includes observation from approximately 4323 firms in five industrial sections over four years. In general, the empirical finding of this thesis does not support the idea. On the contrary, there is a strong support for profitability of treatment innovation.