Environmental regulation, innovation and competitiveness - making the link

1. 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

3. 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 Competitive”by 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 > US > Sweden > Taiwan > Denmark > 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.

6. European Competitiveness and China “We’ve got to drive toward getting everyone’s skill levels up,…” “If you’re 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]

7. 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.”

8. 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]

9. 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].

10. 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 company’s capacity to change and the extent of its knowledge that change is possible. • Opportunity • Supply side: technology exists or could be developed • Demand side:regulatory 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.

11. 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?

12. 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

13. 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

14. 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

15. 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/innovationreport.pdf • AEA Technology, An evaluation of the Air Quality Strategy. December 2004: Didcot, Oxfordshire, UK. http://www.defra.gov.uk/environment/airquality/strategy/evaluation/pdf/exec-summary.pdf • AEA Technology, A Comparison of EU Air Quality Pollution Policies and Legislation with other Countries, 2004, DG Enterprise: Brussels, Belgium. http://europa.eu.int/comm/enterprise/environment/reports_studies/reports/study1.pdf • Porter, M.E. and C. van der Linde, Green and Competitive: Ending the Stalemate. Harvard Business Review, 1995(September-October): p. 120-134. • European Commission DG Economics and Financial Affairs, The EU Economy: 2004 Review. 26th October 2004: Brussels, Belgium. http://europa.eu.int/comm/economy_finance/publications/european_economy/the_eu_economy_review2004_en.htm • Ashford, N.A., Government and Environmental Innovation in Europe and North America. American Behavioral Scientist, 2002. 45(9): p. 1417-1434. https://dspace.mit.edu/handle/1721.1/1579 • Stuart, H., Why Mr Brown went to China, in The Observer. 27th February 2005: London, UK. p. 3. • International Chemicals Secretariat, Cry wolf. 29th April 2004: Gothenburg, Sweden. http://www.chemsec.org/documents/Cry%20wolf%20final%20220404.pdf • World Economic Forum, Global Competitiveness Report 2004-2005. October 2004. http://www.weforum.org/site/homepublic.nsf/Content/Global+Competitiveness+Programme%5CGlobal+Competitiveness+Report • Ackerman, F. and R. Massey, The true costs of REACH. October 13th 2004, Global Development and Environment Institute, Tufts University: Boston, USA. http://www.regeringen.se/content/1/c6/03/09/11/84de48ff.pdf