Environmental regulation, innovation and competitiveness making the link

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Environmental regulation, innovation and
competitiveness - making the link

• Michael Warhurst
• Chemicals Science and Policy Project
• Lowell Centre for Sustainable Production
• University of Massachusetts, Lowell, USA

2
Contents

• Challenges for the European economy
• Sustainability
• Competitiveness
• What is competitiveness?
• What countries are the most competitive?
• How can Europe become more competitive?
• Do companies move away from environmental
  regulation?
• What is innovation?
• How will REACH impact on innovation and
  competitiveness?
• Conclusions

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Two key challenges for the European economy

• Sustainability
• How to achieve a major increase in efficiency of
  resource use, and prevent pollution?
• Competitiveness
• How to ensure that European businesses are able
  to compete globally, and create and retain jobs?
• Is there a contradiction between these
  challenges?
• There needs not to be
• We have to achieve both

4
Green and Competitiveby Porter van der
Linde, 1995

• Companies can improve resource productivity by
  producing existing products more efficiently or
  by making products that are more valuable to
  customers products customers are willing to pay
  more for.
• Increasingly, the nations and companies that
  are most competitive are not those with access to
  the lowest-cost inputs but those that employ the
  most advanced technology and methods in using
  their inputs.
• Environmental progress demands that companies
  innovate to raise resource productivity and
  that is precisely what the new challenges of
  global competition demand.
• A truly competitive industry is more likely to
  take up a new standard as a challenge and respond
  to it with innovation. An uncompetitive industry,
  on the other hand, may not be oriented toward
  innovation and thus may be tempted to fight all
  regulation. 4

5
European competitiveness

• The World Economic Forum publishes a
  competitiveness list every year.
• The top 6 in 2004 9
• Finland gt US gt Sweden gt Taiwan gt Denmark gt Norway
• Four out of the top six countries are bound by EU
  product regulations (EU or EEA member)
• All the EU/EEA countries in top 6 are Nordic
• All the EU/EEA countries in the top 6 have a
  tradition of strong environmental regulation.

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European Competitiveness and China

• Weve got to drive toward getting everyones
  skill levels up,
• If youre trying to compete only on price, you
  will fail, and you will go bust and China will
  have your lunch.
• If you move into innovation, and high
  value-added products, you have nothing to worry
  about. Britain has got a tremendous future.
• Digby Jones, president of the Confederation of
  British Industry, in The Observer, 27th February
  2005 7

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But environmental regulation makes companies move
away?

• Does environmental regulation affect location of
  factories?
• Not according to the research.
• E.g. From a 2004 study by AEA for DG Enterprise,
  looking at air pollution legislation 3
• It is extremely difficult to assess the impacts
  of air pollution legislation on relocation from
  the other factors that determine location
  decisions, though it is clear that labour costs
  and access to market are much more important than
  environmental legislation.
• A review here has found that industrial
  relocation for reasons of different environmental
  standards is not found to be significant from
  OECD countries to non-OECD countries.
• However, the evidence data on movement within
  OECD countries does show some evidence both for
  and against an effect.

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DG Economics and Finance on relocation

• Evidence on crowding out of dirty industries to
  pollution havens in third countries seems to be
  very shaky and not convincing at all.
• This might not come as a surprise given that
  other factors normally drive decisions of
  investment locations, and given the convergence
  of environmental standards around the world,
  including developing countries.
• The EU Economy 2004 Review 5

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Environmental regulation - the impact of
innovation on costs

• Previous experience has shown that costs of
  regulation are often overestimated due to
  innovation, even by governments
• A report by AEA technology for the UK Government,
  published in Dec 2004 examined the costs and
  benefits of past air pollution regulation 2
• The analysis of individual ex ante and ex post
  costs has shown that in most cases, ex ante costs
  were over-estimates. In many cases, these
  over-estimates were very significant. Note this
  also leads us to the conclusion that legislation
  itself acts as a spur to research and
  innovation.
• In cost-benefit analysis, the typical
  assumption has been that the cost estimates are
  far more accurate than the benefits analysis. The
  data in this study shows that this conclusion is
  rarely valid.
• Costs of improved vehicle emission standards for
  the UK
• Ex-ante estimation 16.1-22.8 billion for
  1990-2001
• Ex-post estimation 3 billion for 1990-2001
  (4.3 billion)
• NB Total cost of REACH is estimated at 2.8-5.2
  billion over 11 years for the entire EU
• Many other examples of overestimates exist 8.

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What is innovation?

• Innovation has two components 1
• The rate of innovation is the quantity of
  innovations produced over a given period of time
• The direction of innovation is related to the
  quality of innovation produced and its socially
  beneficial or damaging consequences.
• E.g. in the direction of sustainability, or the
  opposite
• Innovation theory states that three factors are
  required for innovation to happen 6
• Willingness
• Including a companys capacity to change and the
  extent of its knowledge that change is possible.
• Opportunity
• Supply side technology exists or could be
  developed
• Demand sideregulatory requirement opportunity
  to save costs or add to profits pressure from
  workers or public
• Capacity
• Knowledge about better techniques, and the level
  of skill base at the company.

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Are REACH costs prohibitive?

• Many claims have been made about the cost of
  REACH
• Two - by ADL and Mercer - were extremely
  exaggerated, and widely condemned by economists,
  but have been remarkably persistent in the
  political debate
• Others have compared REACH costs with other
  business costs 10
• Price changes of the same magnitude as the
  costs of REACH are commonplace in industry, and
  do not prevent profitable operation.
• The spot price of crude oil varies by a greater
  percentage in almost every week, while the EU-15
  price index for all intermediate manufactured
  goods varies by a greater percentage in almost
  every month.
• The key question is therefore not, what is the
  cost of REACH?, but
• How much can REACH increase competitiveness
  through increasing innovation?

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REACH - promoting innovation

• REACH includes direct provisions for innovation
• It reduces the burden of regulation on new
  chemicals
• It creates new research and development
  exemptions
• Research has shown that innovation is improved by
  close contacts with customers, which REACH
  promotes 1
• REACH increases market pressure for safer
  products e.g.
• Registration is simpler for chemicals not
  classified as dangerous, with no exposure
  assessment or risk assessment required.
• Authorisation process only for chemicals meeting
  criteria of very high concern
• A limited requirement for use of safer
  alternatives in authorisation
• Increased flow of information on chemical
  properties and risk management requirements will
  encourage downstream users to use the safest
  chemicals

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REACH - redefining the value chain

• REACH also changes distribution of costs in the
  value chain
• Adding to the costs of chemical assessment for
  chemical producers and importers.
• They are best placed to do this analysis
• Reducing chemical assessment costs for downstream
  users, freeing them to focus on the service
  provided by chemicals
• These changes create new opportunities for
  innovation
• Chemical producers will be encouraged to create
  and assess new exposure scenarios, promoting new
  uses of their products
• Downstream users will be able to innovate with
  uses of chemicals, knowing that uses will be safe
  if they follow exposure scenarios in the Chemical
  Safety Reports
• Formulators and distributors will have new
  opportunities to produce exposure scenarios to
  support their own customers

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Conclusions

• The world has a massive challenge in achieving a
  more sustainable future
• Europe has a major responsibility in leading this
  transformation
• European companies will benefit from being at the
  leading edge - not following up behind
• European companies exist in a competitive global
  economy
• Europe is not going to compete in this global
  economy on the basis of low labour costs
• Europe has to compete on providing the products
  people want - by innovating towards better, safer
  products
• Good regulation promotes innovation
• REACH will promote innovation
• Through direct measures such as deregulation of
  new chemicals
• Through a re-ordering of the value chain
• By pushing EU industry to innovate towards safer,
  greener chemicals, gaining a first mover advantage

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References

• Berkhout, F., M. Iizuka, P. Nightingale, and G.
  Voss, Innovation in the chemicals sector and the
  new European Chemicals Regulation. September
  2003, Science Policy Research Unit (SPRU),
  University of Sussex, Brighton, UK.
  http//www.wwf.org.uk/filelibrary/pdf/innovationre
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• AEA Technology, An evaluation of the Air Quality
  Strategy. December 2004 Didcot, Oxfordshire, UK.
  http//www.defra.gov.uk/environment/airquality/str
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• AEA Technology, A Comparison of EU Air Quality
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• Porter, M.E. and C. van der Linde, Green and
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