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Directorate-Generalfor Enterprise

EuropeanCommission

STUDY N°1STUDY N°1A Comparison of EU Air A Comparison of EU Air

Quality Pollution Policies and Quality Pollution Policies and Legislation with Other Legislation with Other

CountriesCountries

Series: Environmental measures and Enterprise policy

Unit E.1 : Environmental Aspects of Enterprise Policy

A Comparison of EU Air Pollution Policies and Legislation with Other Countries

Review of the Implications for the Competitiveness of European Industry

January 2004

Contents

Introduction 1 Air Pollution Policy in Europe vs. Other Regions 2 Implementation Approach 9 The Future Policy Landscape for Air Pollution 14 The Economic Effects of Legislation 16 Environmental Expenditures 20 The Evidence for Competitiveness Effects 23 Summary of Effects 29 The Economic Effects of Future Legislation 30 Report on the Conference Parallel Session 31 Conclusions of the Parallel Session on Air Emissions 34 References and Bibliography 35

Research on behalf of DG Enterprise by AEA Technology Environment and Metroeconomica.

Prepared under the Framework on the Economic Costs and Benefits of Environmental Measures for Enterprises - Lot 3 (Water and Air Policy) Ref: E1/ENTR/02/34-CC-LOT3. 1st order: Comparison of EU Policies and Legislation and Implications for the Competitiveness of European Industry FIF.20030674 January 2004. Authors: Paul Watkiss, Dan Forster, Alistair Hunt, Alison Smith and Tim Taylor. Contact Details:

Paul Watkiss AEA Technology Environment UK Telephone +44 (0)870-190-6592 [email protected] Disclaimer: We would like to thank DG Enterprise for their input and guidance for this study. We also would like to thank other organisations and individuals that have provided input or contributions. Whilst we acknowledge the contribution made to the study, the results and conclusions presented do not necessarily represent the views of any of these organisations.

An Analysis of EU Air Pollution Policies: Implications for the Competitiveness of European Industry

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Introduction

Concern over the health and environmental effects of air pollution have led to major policies being introduced in Europe over the last decade. Similar initiatives have been implemented in the US and other OECD countries. This paper, prepared by way of follow-up to the conference on ‘The Environmental Performance of EU Industry’ (see box below), compares the legislation in these different areas, and looks at how this legislation has been implemented. The paper also considers the air pollution policy landscape in future years in these regions. The paper also assesses the potential impact on industry from this legislation, reviewing the evidence for any impacts on trade and competitiveness. By doing so, it considers whether future air pollution policy in Europe might change competitiveness relative to other regions. Finally, the paper incorporates the presentations and conclusions of the session on air emissions at the conference.1

The Environmental Performance of EU Industry. Brussels, 24-25th November 2003. The aim of the Conference was to debate:

q The considerable progress European industry has made to improve its environmental performance over the last 20 years, which has resulted in an absolute decoupling between increased production and its impact on the environment.

q How to achieve the balance between the pillars of sustainable development, which require both a focus on the cost-effectiveness of environmental policies and strong economic growth, thereby providing the resources for social progress and environmental protection.

q How various industry sectors are being proactive to secure further improvements in a cost-effective way, providing examples how they have successfully responded to environmental challenges.

q What actions are being taken to move towards a more sustainable structure of production?

Four parallel sessions examined the performance of industry in the fields of climate change, air emissions, waste and chemicals in detail. This paper reports on the Air Emissions Parallel Session, which included case studies from the petroleum, automotive and solvents industries. The Air Emissions session presentations, and the debate during the parallel session, were based around the following questions:

q What are the major reasons in your experience which might have led industry to improve its environmental performance in terms of reducing emissions to air, for example national legislation, EU regulations, technological innovation, drive for energy and cost efficiency etc.

q What has been the impact of environmental improvements on the sector’s /company’s economic performance? Have there been effects on competitiveness within EU and outside, productivity or employment? Has air quality regulation led to the delocalisation of companies in your sector?

q Looking ahead, the EU is currently reviewing its air quality policy framework within the context of the Clean Air for Europe programme and a Thematic Strategy on Air Pollution will be proposed in 2005. What are the views of your industry on possible future measures to further reduce air emissions?

1 All presentations are available at: http://europa.eu.int/comm/enterprise/environment/events/env_performance/index.htm


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Air Pollution Policy in Europe/Other Regions

European industry has made considerable progress in improving its environmental performance over the last 20 years, as measured by reductions of the emissions of the major pollutants of concern. The European Commission’s Competitiveness Report 20022 analysed the environmental performance of EU manufacturing industry over the last two decades and documented the progress EU industry has made on the basis of four measures of emissions - greenhouse gases, ozone-depleting gases, acidifying gases and ozone-precursor gases. The data for emissions of air pollutants (acidifying gases and ozone precursors) are shown below. These show major reductions in emissions. What is interesting is that these emission reductions have been achieved despite an increase in manufacturing production. This suggests that the manufacturing industry has been able to achieve high economic growth without increasing environment pressures.

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Figure 1. Emissions in European Manufacturing. Index 1980 = 100

Source: European Commission’s Competitiveness Report 2002.

q Conclusion. European industry has achieved large reductions in air emissions over the last two decades and a decoupling of emissions from economic growth.

This is consistent with the pattern that with increasing economic development, environmental pressures fall, in response to the demand for increased environmental quality (and also because additional resources are provided). One of the key drivers in this environmental quality improvement, i.e. the fall in emissions, has been air pollution policy. For industry, this policy has affected both the direct emissions of pollutants (i.e. process emissions) and also energy related combustion emissions. Moreover, as well as policy that directly affects industry, there has been legislation that affects product specifications, notably the Auto-oil process which has led to Euro standards for vehicles and fuel quality standards. 2 website link to Commission report: http://europa.eu.int/comm/enterprise/enterprise_policy/competitiveness/index.htm


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The air pollution policies introduced in Europe have included a number of different approaches. These include:

q Legislation concerning emission limits for individual plants/processes or road vehicles (and also fuel quality standards limiting the content of certain compounds in fuel);

q Emissions limits or ceilings at a national level; q Legislation for local air quality concentration limits (often concerning local plant or processes); q National or European air quality concentration limits, mandating threshold levels to be met at

ambient background areas (objectives or standards). q National economic instruments (energy or pollution taxes and charges). The combination of all the above policies has led to the improvement in emissions shown in Figure 1 above 3. The main drivers that make up the current air pollution regulatory framework across Europe for industry are: the UNECE protocols; the Air Quality Framework Directive (and the four daughter directives); the National Emission Ceilings; the Auto-Oil Programme, the Solvents Directive; the Waste Incineration; and the IPPC Directive. In addition to this European level policy, there has been other, specific legislation on a country-by-country basis, including specific national legislation (e.g. air emissions or air quality limits, integrated pollution control legislation, etc) and economic instruments (in the form of energy and pollution taxes and charges). However, to date, there have been no European wide economic instruments targeting air emissions. The legislation in Europe has also been compared with other main international competitors, notably the United States and Japan. The key question for this report is:

‘Whether EU legislation is stricter than other regions, i.e. is there a potentially higher burden for European Industry’

Not surprisingly, similar environmental concerns exist in other regions. The US has a long history of air pollution legislation, notably with the US Clean Air Act, which came into force in 1970, and which was subsequently amended in 1990. Similarly, Japan embarked on major air pollution policy initiatives in the 1970s, and has progressively amended the legislation over time. The relative legislative policies in Europe, the US and Japan are summarised, in a simplified form, in the Figure below. Although it may appear that Europe has a longer list of policies, consideration also has to be made of the form of legislation – the US Clean Air Act includes a list of 189 hazardous air pollutants that the EPA regulates and encompasses many of the policies in individual Directives in Europe. The European legislation addresses specific sources of emissions (e.g. waste incineration, large combustion plants) and specific pollutants (e.g. CO, benzene, VOCs, etc.) The US Clean Air Act also identifies categories of sources and then issues regulations – an approach that is likely to be harmonised in Europe through the IPPC legislation.

3 The role of other potential factors is thought to be low in reducing industrial emissions. For example, increasing external competitive pressure on companies (e.g. through market reform), or by adopting incentives for resource conservation techniques or managerial standards (e.g. ISO14001).


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2000

EUROPE The US JAPAN

1968 Air Pollution Control Lawnational air quality targets – and emissions standards for industrial facilities (SOX, NOX, soot).

1974 Air Pollution Control Law introduced a system of ‘total emission control ’ for SO2 in 1974 and for NO2 in 1981.

Ambient air quality standardsfor SO2, NO2, SPM, Ox and COwere set during the 1970s

1970 Clean Air Act sets Nationwide Air Quality Standards (NAAQS) ,

1990 sees major revisions to the Clean Air Act to meet the problems of acid-rain, ground -level ozone, stratospheric ozone depletion, and air toxics.

Sulphur dioxide cap and trade system introduced (Phase 1 begin 1995).

1997 Clean Air Act Revision to the air quality standards for ozone, COand particulates .

2000 2nd phase of the SO2 Cap and Trade scheme began.

2003. 4 th Daughter Directive set targets value for PAH, monitoring/reporting for HM

2002 3rd Daughter Directive sets target values for ozone.

2001 National Emissions Ceilings Directive - national emissions limits for SO2, NOX, VOCs and NH3

2001 LCPD revision

2000 Waste Incineration Directivedefines limit values.

2000 Control of ozone depleting substances .

1999 1st Daughter Directive AQ limit for SO2, NO2, NOX PM10 and Lead.

1999. Sulphur content of liquid fuels

1998 Heavy Metals Protocol

1996 Integrated Pollution Prevention and Control (IPPC) Directive . Technology based approach to environmental protection

1996 Air Quality Framework Directivedeveloped a framework for a common strategy for ambient air quality

Second UNECE sulphur protocol , 1994 into force 1998.

1994 Directive limiting emission of VOCsfrom storage and distribution facilities

Directives in 1989 defined emission limit values for existing and new municipal waste incineration plants

1988 Large Combustion Plant Directiveset emission limits for SO2, NOX and Dust

UNECE Control of Emissions of Nitrogen Oxides adopted 1988 in force 1991.

First UNECE Protocol on the Reduction ofSulphur emissions 1985, in force 1987.

1999. Law Concerning Reporting, etc. of Releases to the Environment of Specific Chemical Substances and Promoting Improvements in Their Management

1999. Law concerning special measures against dioxins

1998. Regulatory Measures against Air Pollutants Emitted from Factories and BusinessSites (Amendment)

1997. Target to reduce the total amount of dioxin emissions by 2002 to ~ 10 per cent of the amount in 1997.

1996 Air Pollution Control Law Amendment.

Plus Prefecture Plans for emissions reductions and area pollution control plans. e.g. Tokyo Metropolitan Area

Figure 2. Current Map of Key Air Pollution Policy for Europe, the US and Japan. Note the figure does not include legislation relating to vehicle emission standards – these are present in all three regions. Unfortunately, it is extremely difficult to interpret the information in Figure 2 above, and directly match the legislative emission limits (e.g. for national emissions ceilings) between regions, because it requires detailed analysis of the scale of industry. Nonetheless, we can extract some general trends from the comparison of eco-efficiency in Europe and the US, shown in Figure 3. For greenhouse gas emissions and acidifying pollutants, there is a clear trend of greater eco-efficiency in Europe: eco-efficiency is higher and has improved more quickly than in the US. However, the opposite is true for ozone precursors, where US eco-efficiency is greater (and emissions are lower). The difference between the regions is related to the air quality problems in the two regions – historically Europe has had severe problems with acidifying pollutants, whilst the US has had problems with urban ozone (smogs), reflected in the drive to control pre-cursor species. Both regions also set emissions limits for certain sectors. An obvious example is for vehicle emissions standards. Direct comparison of standards is complex because of differences in test cycles and fuel composition in the US and Europe. An initial assessment for this study has mapped the emission limits for petrol cars between the two regions. While there are some differences for specific pollutants (reflecting the importance of specific pollutants in the two regions), the comparison has concluded that the initial US standards were consistent with European Euro I standards, and that the US has progressed through similar standards to Europe, such that the latest standards are similar to Euro III - IV. The emission limits between the regions are therefore broadly comparable.


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Figure 3a. Comparison of Eco-efficiency of manufacturing: EU vs. US: Greenhouse gases

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Figure 3b. Comparison of Eco-efficiency of Manufacturing: EU vs. US: Acidifying Gases

(million € per ktonne acid equivalent)

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Figure 3c. Comparison of Eco-efficiency of Manufacturing: EU vs. US: Ozone Precursors

(million € per ktonne Total Ozone Forming Potentials)

Source: European Commission’s Competitiveness Report 2002.


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The other main area where a relatively direct comparison is possible is for air quality standards or limit values. These are set for ambient air quality concentrations. The levels in place in the three areas are shown in Table 1 below, along with the recommended World Health Organisation limits. In all cases the standards are based around levels deemed to protect human health, and so would be expected to be very similar. The review shows that standards in Europe are broadly similar to the equivalent air quality standards in the US and Japan – though, the European targets are generally strictest. However, a number of factors must be taken into account in interpreting this conclusion: q The US and Japanese standards have been in place for many years – many of the EC limits have

emerged in recent years with the Air Quality Framework Directive and the four Daughter Directives. To illustrate, the standards below for Japan mostly relate to the 1973 Act, with only benzene compounds (1997) and dioxins (1999) appearing recently.

q Most of the EU targets are not due to be met until 2005 or even 2010. In the years before the target date (for limit values), there is an allowed ‘margin of tolerance’ (a percentage of the limit value by which this value may be temporarily exceeded), which is higher than the limit value. Some care must therefore be taken in comparing the regions, because future changes in US or Japanese standards may occur through to 2005/2010.

q Many (European) standards specify a number of allowed exceedences each year, for example, the EU 24 hour value for SO2 may be exceeded on 3 days per year and the PM10 limit may be exceeded on 35 days per year, which offsets the fact that the limit is lower than the equivalent level in the US. The logic here is that even the most robust management plan cannot account fully for the weather, and that infrequent events can cause elevated emissions. This reduces the severity of the European targets.

q Air quality standards are harder to meet in some areas than others, because of emission density and regional pollution – this is important for Europe and Japan, because of the high population density and the high levels of trans-boundary pollution. This means that equivalent targets in Europe and Japan may actually be harder to meet due to higher background concentrations.

The final area that is relevant for the study is the status of air pollution legislation with non-OECD countries, including those countries that are likely to emerge as major competitors in future years, particularly China. The air quality standards in place in China are also shown in Table 1. The study has compared the legislation in Europe/US with that of China. It has been found that there is a substantial body of legislation on air emissions and air quality in place in China and indeed in some areas, this policy is comparable with OECD countries. Moreover, Chinese policy is proceeding at a similar pace as many western countries, with continued updates and consideration of different approaches to air quality improvements. The Chinese Government has developed a reasonably comprehensive legislative framework using technical standards, air quality guidelines/standards and fiscal measures (China has a pollution levy that includes SO2 and also particulates), to address their air quality problems. Note the Chinese system of air quality standards is different to that adopted elsewhere, in that limits vary according to the type of location to which they apply, be they residential, commercial, industrial or agricultural. Comparison of Chinese standards with those in Europe and the USA demonstrates similar levels for many pollutants, and indeed, in some cases, the Chinese standards are stricter than elsewhere, particularly than the USA. In other cases the standards are more relaxed and permitted levels in ‘industrial zones’ are much higher than the WHO guidelines. The values in Table 1 can be more easily compared in the Figure below – showing the relative level of targets in different regions, relative to Europe (i.e. where Europe is a value of 1). Note, that the two European limit values for SO2, the 24 hour PM10 limit value, and the 8 hour ozone target value, include an allowed number of exceedences, and so are actually less stringent compared to other regions than they may first appear. Moreover, the US has standards for some pollutants (PM2.5) that are not included in the EU legislation.


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Figure 4. Relative level of comparable air quality standards/limit values by region (Europe = 1) Note the EU 24 hour, and the annual average SO2 limit values and the EU 24 hour PM10 limit values, and the EU 8 hour ozone target value, all allow a number of exceedences. The EU targets are also for future years (2005: 2010) and include a margin of tolerance for earlier years (including current year). When comparing legislation in place between OECD and non-OECD region, there are two issues that are relevant:

q How the legislation compares to equivalent emission controls or standards in OECD countries.

q Whether the legislation is robustly enforced - whilst legislation is often in place in many developing countries, the level of enforcement may actually mean low levels of compliance.

Monitoring in most large urban areas in China shows that air quality exceedences are routinely exceeded, sometimes by very large margins. Progress is being made to address this, primarily through air quality plans and emission limits. The latter are applied to individual devices or factories, and also to entire provinces through emission ceilings (usually through a Five Year Plan). Emission limits are in place for boilers, power plants, kilns, cement plants, road vehicles, and cement plants. There is also an integrated emission standard of air pollutants, that applies to all industries not covered under other standards. The latter provides standards for new and existing sources, and standards for 33 different compounds and elements. A comparison with the standards (e.g. comparing new Chinese coal fired plants against the EU’s LCPD) shows that the 1988 EU standards are broadly similar to those under the Chinese regulations for SO2 and NOX, but the limits in the revised LCPD are significantly stricter than the Chinese equivalents. Controls on dust emissions in Europe are much stricter than for China under both the 1988 and revised Large Combustion Plant Directive (AEAT Environment, 2003). As a final note, whilst emission standards are generally lower in China than the latest equivalent in Europe, and air quality standards are exceeded, there is growing pressure for air quality improvements. This is partly being driven from within China, due to real concerns and growing awareness about the health effects of air pollution, but also from external pressures. It is now recognised that poor air quality is becoming a barrier to inward investment in China.


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Table 1. Current/Planned Air Quality Limits/Guidelines in Europe, the US, Japan and China.

EU US Japan WHO China I* China II* China III* SO2 ppb ppb ppb ppb ppb ppb ppb 1 hour mean 1321 100 56 188 263 3 hour mean 500 24 hour mean 472 140 404 47 19 56 94 Annual mean 83 30 19 8 23 38 NO2 ppb ppb ppb ppb ppb ppb ppb 1 hour mean 1055 105 63 63 126 Daily average of 1 hour 40 to 604 42 42 63 Annual mean 21 53 21 21 21 42 PM10 µg/m3 µg/m3 µg/m3 µg/m3 µg/m3 µg/m3 Hourly 200 24 hr mean 506 150 1007 50 150 250 Annual mean 40 50 40 100 150 PM2.5 µg/m3 µg/m3 µg/m3 µg/m3 µg/m3 µg/m3 24 hour mean 65 50 150 250 Annual mean 15 40 100 150 CO ppm ppm ppm ppm ppm ppm ppm 8 hour mean 9 9 20 9 1 hour mean 35 26 9 9 17 Daily average of 1 hour 10 Ozone ppb ppb ppb ppb ppb ppb 8 hour mean 408 80 60 1 hour mean 120 60 80 100 Benzene µg/m3 µg/m3 Annual 5 Yearly 3 Photochemical Oxidants ppb Hourly mean 60 Lead µg/m3 µg/m3 Annual 0.5 0.5 1.0 1.0 1.0 PAH ng/m3 ng/m3 ng/m3 ng/m3 benzo-a-pyrene 1 10 10 10

1. Can be exceeded up to 24 times per year 2. Can be exceeded up to 3 times per year 3. Annual and winter mean for protection of ecosystems 4. Daily average of 1 hour figure 5. Can be exceeded up to 18 times per year 6. Can be exceeded up to 35 times per year 7. suspended particulate matter, daily average of 1 hour value 8. target value, can be exceeded on 25 days/yr averaged over three years * Zone I – residential areas, Zone II – commercial areas, Zone III – industrial areas. Note many of the EU standards are set for 2005, rather than in terms of current concentrations. In the years before the limit value date, there is an allowed margin of tolerance above the limit value. Note the WHO values are guidelines, not standards.


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Conclusions: q It is very difficult to compare the legislation between regions, in terms of the emission limits

from processes and the relative burden to industry. q A mixed pattern emerges for eco-efficiency: Europe has higher eco-efficiency for greenhouse

gas emissions and acidifying pollutants relative to the US, but the opposite is true for ozone pre-cursors, where the US has higher eco-efficiency than Europe. This is likely to reflect the relative historical problems and air pollution priorities in the different regions.

q We conclude that air quality concentration limits are broadly similar between Europe, the

US and Japan, but for some pollutants there are tighter air quality limits in Europe. This may reflect the fact that the Europe legislation has been updated most recently. However, the European limit values are set for future years and currently allow a margin of tolerance above the values. They also allow a number of exceedences of the targets each year, which reduces the severity of some of the limit values.

q The emissions and air quality limits and legislation in OECD countries are generally stricter

and more extensively enforced than in some of the major developing countries that are competing, or expected to compete with Europe in future years, notably in China. However, the pressure to improve air quality in such countries is becoming much greater and extensive air quality improvement programmes are in place.

Implementation Approach

The other main trend to examine is how the legislation above has been implemented. While different regions may have similar objectives in improving air pollution, they may set out to reach these objectives using different types of policies – for example with national emission limits, air quality limit values, or economic instruments. The European approach has largely been based around EU and national level legislation (command and control) setting national emission ceilings or air quality standards, as well as specific emission limits for large power plants, vehicle emission standards (for road transport vehicles), fuel quality standards, and Integrated Pollution Prevention and Control measures for individual factories. A command and control approach has also been introduced in Japan with regulation based air quality standards and emission standards, though Japan has also introduced metropolitan based air quality improvement plans. However, there has been some progress with taxation of air pollution (economic instruments – see box below) at a national level in Europe. A recent review (Watkiss et al, 2003) found: o SO2 taxes are in place in Sweden, France, Italy, Denmark, and the Czech Republic, either as a tax

on SO2 emissions or the sulphur content of the fuel. o NOx taxes have been implemented in France, Italy, Sweden, and the Czech Republic. All of these

are direct taxes charged per tonne emitted, but some have varied rates for different areas and levels of emissions. Many of the taxes are limited to specific types of plant, most commonly large combustion plants. The Swedish NOx tax is significantly higher than anywhere else.

o A limited number of other air pollution taxes are in place. Switzerland has a direct charge on volatile organic compounds (VOCs), the Czech Republic has charges on particulates, carbon monoxide (CO), hydrocarbons (HCs), and “Other polluting substances”.


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o Tax exclusions have been included for business when there are disproportionately negative effects. o Most European SO2 and NOX taxes have been set too low to lead to significant emissions

reductions. The exception is Sweden, where the NOX tax has been noticeably effective. o Denmark appears to be the leader in the use of relatively fair, direct taxes on atmospheric

pollutants, closely followed by the other Scandinavian countries (Denmark derives the highest percentage of revenue from such taxes by some margin). The Danish government has recent signalled a major shift in environmental policy making towards greater use of market-based approaches (under the remit of ‘getting more environment for the money’).

o Higher taxes can be introduced and accepted if revenues are recycled to companies, as with the Swedish NOx system, i.e. this approach ensures a more acceptable approach for industry.

o Tax rates may be varied by area to reflect the level of impact of atmospheric pollutants in different areas of population density, ecological sensitivity, etc., i.e. to take account of sensitive areas. Such a scheme (with variable pollutant charges) has been introduced in Australia.

Economic Instruments The logic for Economic Instruments is centred on the concept of fair and efficient prices (‘getting the prices right’ – one of the EC’s key sustainability indicators). Air pollution has important environmental burdens, such as impacts on human health, the built environment (buildings and crops) and natural and semi-natural ecosystems. These burdens lead to environmental and economic impacts that are typically not paid for by providers or users. These damages are commonly known as external costs or externalities. It is widely acknowledged that difficulties can arise when external costs are not reflected in the prices paid, and that the appropriate way to handle this is to correct this position where appropriate using economic instruments (e.g. taxes, tradable emissions permits, etc). These economic instruments are considered the most cost-effective instrument to implement the ‘polluter-pays’ principle. Whilst the theory for environmental taxation and trading is long established, it is only over the last decade that such schemes have been practically implemented. Indeed, the taxation of environmental pollutants has become increasing prevalent in OECD countries, where it has gained popularity both as an alternative to command and control regulation, but also as an alternative revenue raiser to more traditional taxes (e.g. away from labour taxes). Environmental taxes are generally considered as being beneficial when compared to command and control legislation, because of reduced administrative costs, and because costs to operators are in proportion to their level of pollution. Environmental taxes may have positive benefits not only for the environment but also for economic efficiency, for example, by encouraging greater energy efficiency and so reducing energy consumption and bills. Much is also made of the ‘double dividend’ of environmental taxes, i.e. the benefit to the environment and the benefit from reducing the effect of labour taxation on the economy (and so towards more equitable taxation). There is therefore a current move towards implementing environmental taxes or trading schemes at the same time as a move away from more traditional labour taxes. Market based emission trading schemes are also growing in popularity, driven by their success in the US. These usually work with tradable permits. The total volume of permits issued equals the quantity of emissions allowed and their value is determined by trading between permit holders. The use of open markets provides the most efficient and cost-effective way of providing reductions in emissions. Such schemes set an overall target covering a group of organisations, and then let participants decide how to achieve their own target. Participants can meet their target in house by reducing their own emissions, reduce their emissions below their target and sell or bank the excess emissions allowances, or let their emissions remain above their target, and buy allowances from other participants. The best strategy will depend on the price of allowances in the market compared to the costs of making emission reductions. Across the whole scheme, those with lower cost emission reduction opportunities will sell allowances to those with higher cost options, reducing the overall cost of delivering the emissions benefits. The wider the participation in the scheme the greater these cost reductions are likely to be.

The success of environmental (green) taxes is generally positive. Prospective analyses show mostly positive environmental effects and negligible economic effects, whereas retrospective analyses are


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relatively scarce, are hampered by methodological and data problems, and show mixed results (Vos, 2002). A recent European study (EC, 2001) explored whether taxes and charges have brought about environmental benefits and whether the concerns that are raised regarding their impact on employment and competition were real. It concluded that the design of levies tended to be conservative, with low introductory levels and a significant range of exemptions to protect those most affected. As a result, it found that the impact on competition and trade is generally negligible, since the potential for such impacts is eliminated at design, and that there were no significant negative impacts on employment from taxes and charges in place. Interestingly it did find that even low charges could lead to behavioural change. This suggests that the environmental benefits are greater than would be estimated based on simple concerns on price impacts, given the levy’s additional role of raising awareness. The move of Member states towards environmental taxation has been assessed (both by Eurostat and the European Environment Agency). The use of environmental or green taxation has increased significantly over the past 20 years, though there are some indications that the increase is falling – the latest figures from Eurostat (2003) showed green tax revenues stabilised in 2001 (at €237.7 billion in the EU-15 countries). The main reason was due to stabilisation of energy taxes, which dominate environmental taxes at around 77% of environmental tax revenues (transport taxes make up around 21% of revenues, and pollution taxes make up only around 2%). Environmental taxes as a proportion of all taxes fell from 6.6% to 6.5% and environmental taxes as a share of GDP fell from 2.8% to 2.7%. The review considered Denmark, Sweden and Germany to be at the forefront of continued green taxation. The EEA also assessed environmental taxation and found the shift from labour taxation to environmental taxation is currently small (EEA, 2002). The progression towards ecological tax reform – that is a transfer to environmental taxation from other forms of taxation – is shown by country in the Figure below.

Figure 5. Progress towards ecological tax reform – transfer to environmental taxes from other forms of taxation (Reproduced from EEA 2002)

The analysis shows a strong difference in ecological taxation between countries. In some states, there is a lack of progression, or even negative progression (away from environmental taxation and towards other forms of taxation). However, there is a substantial shift in countries such as Denmark, Finland and the Netherlands (see Speck and Ekins 2000).


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The US approach is based around the Clean Air Act legislation. National government sets air quality standards; regional and local governments translate these into emission permits for point sources. However, a key feature has been the widespread use of market based instruments, specifically emission trading schemes to minimise the cost to industry of reducing emissions, with the existing SO2 trading scheme (established in 1995), a NOX trading scheme (established in 1999), and the planned extension under future legislation to cover mercury. The US Sulphur Dioxide trading (cap-and-trade) scheme was initiated as part of the Acid Rain Programme introduced as the fourth amendment to the 1990 Clean Air Act. Phase I of the scheme, applying to the largest electricity generating plants began in 1995. Phase II of the scheme began in 2000, and brought smaller power generating units into the scheme. The trading scheme has allowances that permit each plant to emit SO2. Allowances are allocated among SO2 sources based on emissions performance standards and representative fuel use. Plants must have enough allowances to cover their annual emissions, which are measured by EPA-certified equipment at power plants. Unused allowances may be sold, traded, or banked for future use. There has been a fall in SO2 emissions from 11.87 million tons in 1995 to 10.6 million tons in 2001, and the cap for 2010 is set at 8.95 million tons. The scheme has demonstrated the benefits of using an instrument with a defined environmental outcome – in terms of emission levels - but one that leaves the decisions to plant operators on how to determine the most economically efficient method of emission reduction. A number of regional schemes have also been established, with a multi-state NOx trading scheme (‘Northeastern NOX Budget Program’), which is thought to have led to emission cuts that are 30% below baseline levels (within the emissions trading programme – and without including predictions of likely future cuts) and NOX and SO2 trading in the Los Angeles basin (under the ‘RECLAIM Program’), which is thought to have led to emission cuts of around 40%. Recent evidence (Ellerman, 2003) has concluded that the limited US examples (the schemes above) do indicate that environmental benefits from these market-based instruments are similar to other approaches such as command and control4. The main reason for introducing such schemes has been to reduce compliance costs for industry. Indeed, the cost out-turns of the programme were lower than expected, with permits selling at $100 per ton of SO2 compared to initial industry estimates of $1500 per ton. An estimate of cost savings based on an econometric comparison of the trading programme against a uniform emissions standard has indicated cost savings of about $250 million per year under Phase 1 and $784 million per year during Phase 2 of the programme5. This is 43% of the compliance costs under a uniform standard. Compared to a programme of enforced scrubbing, savings are $1.6 billion per year. This illustrates that allowing flexibility in choosing the method of pollution reduction can reduce compliance costs. The trading market is considered to have initiated a search for cheaper methods of reducing emissions, in which, for example, coal mining companies competed with scrubber manufacturers to deliver low sulphur at lower cost and improve the efficiency of scrubbers. Of course, the same would be true of an emissions standard that did not specify a technology. The declining compliance costs over the programme period since 1995 are also attributable to factors unrelated to the trading programme, including declining fuel costs and improvements in generating efficiency (which both tend to reduce the cost penalty for using low sulphur coal). Burtraw and Palmer (2003) reviewed the effects of the US sulphur trading programme on the whole economy, based on general equilibrium modelling studies. They took into account the increase in electricity prices stemming from the costs of compliance with the programme, and the impact of this

4 An argument against emissions trading is that it can lead to hot spots of pollution where a major point source buys in permits rather than reducing its emissions, though this can be avoided provided local air quality standards are maintained in parallel with the trading system. 5 Carlson et al 2000, cited in Burtraw and Palmer (2003).


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price increase on the economy. They found that the overall impact on the economy was only slightly less than that under a command-and control scenario to emission reduction. However, they also concluded that the cost of the trading system to the economy could have been reduced significantly if the initial permits were allocated by auction, with the revenues used to offset other taxes, rather than by grand-fathering. Many OECD and non-OECD countries are planning to implement pollution charges or increasingly, emission trading schemes6. There is also greater use of flexible approaches, for example through voluntary schemes with some elements of market-based schemes7. In most cases, the justification for the schemes is that they have economic advantages over command and control legislation, in respect to meeting defined environmental objectives in the least-cost approach. Recent European wide policies are starting to mirror this trend, at least for greenhouse gas emissions with the EU greenhouse gas emission allowance trading scheme8. Planned future US policy (Clear Skies) is also likely to follow this approach (see later section). The EU’s Clean Air for Europe programme is reviewing the current air pollution regulatory framework. It is not yet known if future EU legislation for air pollution will follow a more command and control based approach, or consider a move towards more market based approaches.

Conclusions q Europe has historically adopted a command and control approach, with specific pollution

legislation for emissions and air quality limit values, though there has been an increase in the use of economic instruments (pollution taxes) at the national level across Europe over the past decade. The use of economic instruments is growing in other OECD and non-OECD countries, and in particular, the use of market based instruments (emission trading schemes).

q The US has introduced more market-based instruments (emission trading schemes) over the

last decade, with plans to extend this approach in proposed legislation q The evidence suggests that economic instruments have lower costs to industry, because costs

to operators are in proportion to their level of pollution, and because it offers a way (especially through market based emission trading schemes) to ensure least cost reductions between sectors or companies.

6 Recent schemes include the Danish Greenhouse Gas Emissions Trading Scheme and the UK Emission Trading Scheme (ETS). There have been advanced proposals for GHG trading schemes in the Netherlands and Norway, and there have been investigation of schemes in Germany, Australia, Japan, Canada, and New Zealand (UNCTD (2001)). A number of these countries are also considering trading schemes covering air pollutants. 7 For example, the SO2 tax on process industries in Norway was removed in 2001 and replaced with a voluntary agreement. Under the agreement, industry continues to pay the equivalent of the former SO2 tax into an internal fund for financing cleansing equipment, but it allows companies to choose which of their plants will install cleaning equipment, thereby finding the most cost-efficient solution. 8 Note greenhouse gas emissions lend themselves particularly well to trading schemes, because the location of emission is not as important (i.e. a tonne of emissions abated anywhere in Europe has the same benefit). This is not true for air emissions, where the locations of emissions can have a strong influence on the benefit of the reduction, because of population density or sensitive ecosystems.


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The Future Policy Landscape for Air Pollution

As well as looking at the current position – with existing or planned policies – it is also useful to look at the future legislative landscape for air pollution. By doing so, we hope to address the question.

‘Will future air pollution legislation differ in Europe compared to other regions and so create a different competitive environment for Europe?

Whilst there remains considerable uncertainty, there are a number of major policy initiatives going on in Europe and the US that are likely to lead to changes in the existing legislation. The future policy initiatives (horizon scanning) in the next decade are shown in the figure below.

Current

EUROPE The US JAPAN

2005 Clean Air for Europe (CAFE)thematic strategy on air pollution , outlining the environmental objectives for air quality

Clear Skies Act has been proposed to supplement the Clean Air Act provision on acid gases – extending the Cap and Trade scheme to cover SO2, NOX, and mercury.

No Formally announced future plans

Figure 6. The Future Air Pollution Legislation Map for Europe, the US and Japan. In Europe, a number of pieces of legislation are likely to have very large effects on future air pollution policy and EU industrial performance:

q The Clean Air for Europe (CAFE) is a programme of technical analysis and policy development that will lead to the adoption of a thematic strategy on air pollution under the Sixth Environmental Action Programme in 2005. The major elements of the CAFE programme are outlined in the Communication on CAFE (COM(2001)245)). The programme was launched in March 2001. Its aim is to develop a long-term, strategic and integrated policy advice to protect against significant negative effects of air pollution on human health and the environment. The European Commission will present its thematic strategy on air pollution in July 2005, outlining the environmental objectives for air quality and measures to be taken to achieve these objectives.

q The EU greenhouse gas emission allowance trading scheme aims to reduce the EU emissions of greenhouse gases cost-effectively and meet its obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol. The first phase of the proposed scheme will take place between 2005 and 2007. Whilst this policy is directed at reducing emissions of greenhouse gas emissions, it is likely to have a major effect in reducing the emissions of the regulated air pollutants, because of the association between these sets of pollutants for many common emission sources (e.g. fossil fuel combustion).

q The Integrated Pollution Prevention and Control (IPPC) Directive, which aims to prevent or minimise air, water and soil pollution by emissions from industrial installations in the Community. The Directive, which applies to all existing installations by 2007, lays down a procedure for applying for, issuing and amending operating permits for industrial installations and minimum requirements to be included in any such permit (e.g. emission limit values for pollutants,


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minimisation of long-distance or trans-boundary pollution). The legislation will have an impact on air pollution reductions on the basis technology-based standards.

There is also likely to be a focus in Europe to concentrate on key pollutants of concern, rather than reductions in all emissions. For example, it is possible that the European Commission may propose a shift in the focus of air quality legislation on particulate matter (PM) from PM10 (particles under ten microns in diameter) to PM2.5, as a result of new scientific evidence from the WHO and other institutions showing that finer particles are more hazardous to human health than larger ones. The US government also has a major future proposal, the Clear Skies Act, which has been proposed to supplement the Clean Air Act provision on acidic gases – extending the Cap and Trade scheme to cover not only SO2 and NOX, but also mercury from electricity generation plants9. The trading programme sets long term goals for 70% reductions in total SO2, NOx and mercury emissions (see Table below), the caps will not begin to operate until 2008 at the earliest. Even by 2018, the total emissions will be well above the emissions that would have been released under strict enforcement of the existing Clean Air Act programmes to achieve the national air quality standards (estimated by the EPA as 1.25 million tonnes of NOx, 2 million tonnes of SO2 and 8 million tonnes of mercury in 2018.

Under the proposal, much of the existing Clean Air Act air quality legislation would be removed, including a requirement for modifications to existing power plants to meet certain minimum technical standards (the New Source Review10/Performance standards – see below). The New Source Review is a section of the Clean Air Act, which requires installation of modern emissions control equipment when a new major pollution source is constructed, whether as part of a new facility or during expansion or replacement of existing facilities. It requires them to either prevent additional pollution by offsetting any increases with reductions in other sources at the same plant site, or obtain a clean air permit demonstrating that the best available pollution control technology has been installed. Changes to the New Source Review legislation currently being proposed will largely exempt modifications to existing power plants from this requirement (i.e. exempt units participating in the new trading programme from complying with the individual plant emission limits). This is a more controversial proposal, in that it could be interpreted as a relaxation of the process for standards setting, i.e. offering lower emission reductions than under the existing Clean Air Act for existing plants, with economic benefits of older plants (through avoidance of planned legal action by the EPA to impose penalties for past non-compliance with standards). There are also concerns over the ‘threshold’ proposals for

9 The program was submitted as proposed legislation in the US House of Representatives in July 2002 and in the US Senate later the same month. The program was reintroduced in the US House of Representatives and the US Senate (as the Clear Skies Act of 2003 in February, 2003. http://www.epa.gov/clearskies/ 10 The term “New Source Review” is used to refer to the combined “Prevention of Significant Deterioration (PSD) and Non-Attainment New Source Review (NSR) provisions of the Clear Air Act. The changes to the New Source Review are deemed by the US government to affect mainly the electricity generating industry, pulp and paper industry, chemicals and pharmaceutical industries.


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permit prices, above which extra permits will be issued, in that this might lead to a weakening of controls for ‘hot-spots’. The Clear Skies bill contains a “safety valve” feature that caps the price that power companies would have to pay for Hg, SO2, and NOx allowances. If pollution permit prices reach a certain threshold level, operators may purchase additional permits from the government at a fixed price to enable them to meet their emissions. The corresponding cap on emissions would therefore be effectively relaxed. It should be noted that there are a number of competing bills for reducing NOx, SO2 and mercury emissions – based on cap-and-trade systems, but with stricter targets, tighter timescales and including CO2 emissions. The US also has some initial proposals for Greenhouse Gas Emissions Trading (e.g. Emission Trading to Reduce Greenhouse Gas Emissions in the United States: The McCain-Lieberman Proposal), though plans are considerably behind the EU proposals and even if successful, would be implemented later. It is stressed that all these potential proposals are subject to major changes, not least because of the forthcoming elections in the US. At present, there do not appear to be formalised Japanese plans for future air pollution legislation, and plans for domestic greenhouse gas emissions trading have only been explored at an academic level. Finally, it is also relevant to look at the legislation in non-OECD countries. These countries would be expected to increase their environmental performance, as they increase their economic output (consistent with the earlier discussion), and there is evidence to show that legislation and enforcement is increasing in countries such as China, in response to internal and external pressures.

Conclusions:

q Both Europe and the US have future programmes of air pollution legislation – with the forthcoming Thematic Strategy on Air Pollution in Europe (CAFE) and the Clear Skies Act in the US. At present, there do not appear to be similar programmes for Japan.

q It is impossible to compare the output from the EU and US future policies. Whilst they are

both likely to continue the legislative development of air pollution policy in the two regions, it is impossible to say if this will be towards similar emission limits or air quality standards.

q However, it is possible to conclude that the US future policy does appear to have a strong

focus towards the continued use of market based instruments, with the extension of current emission trading schemes.

The Economic Effects of Legislation

The primary driver of air pollution policy has been to reduce health and environmental impacts11. It is clear that the policies implemented over the last decade in Europe have been extremely successful in improving air quality. For example, the policies have led to large emission reductions compared to the expected out-turn that would have occurred in the absence of these policies12. The benefits of these air quality improvements are significant, in terms of the effects on health, the man-made and the natural environment, and have a large economic benefit. To illustrate, the anticipated economic benefits (to health and the environment) of air pollution policy implemented over the last decade in the UK has

11 Note there are also benefits to industry from the reduction in lost time at work from the reduction in air pollution related illness. 12 Though other factors may have contributed at least in part to these emissions reductions, for example the influence of structural factors (the increase in the service sector, the decline in traditional heavy industry, and for some sectors such as power generation, the introduction of market liberalisation).


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recently been estimated at over Euro 10 billion/year for the transport and electricity generation sectors alone (Watkiss, 2004). However, whilst these benefits show the positive outcomes of air pollution policy, it is also important to note that such policy does have costs, and that these costs are primarily borne by industry (see the findings of the European Competitiveness Report, in the box below).

Conclusions of the European Competitiveness Report 2002 The report on sustainable development in the manufacturing industry (EU, 2002) concluded that: o The costs of environmental performance improvement had largely been funded by the manufacturing

industry itself; o Consistent and comparable data on environmental expenditure in the EU was fairly scarce, but that EU and

national environmental legislation had increasingly led to a drift upwards in spending by manufacturing on environmental protection;

o EU environmental protection expenditures (manufacturing and the energy sector) were 2% of total industrial value added (EUR 32000 million in 1998), with expenditure on aerial emissions at 0.6%. Some sectors (refineries, chemicals, and paper and pulp) had higher expenditures. It concluded that there may be some underestimation of these expenditures, partly due to environmental improvements that are made as part of normal expenditure, e.g. investment in new production equipment (note the converse of this would also be true – that some environmental expenditure is probably part of natural investment and replacement cycles).

o Taxes on industrial energy consumption have also risen. While the direct costs of legislation to date are strongly justified by cost-benefit analysis, it is important to recognise there are a number of indirect costs or wider economic effects, which are important. The question we are trying to answer here is therefore:

‘What is the effect of air pollution policy on European trade and competitiveness’?

Regulation has a potential cost to industry. With increasing legislation, more end of pipe abatement equipment or higher expenditures (to change production) are potentially required, and so the marginal costs of abatement are likely to rise. This cost is not (generally) associated with an output. Such a pattern is illustrated with a typical cost-curve below13. It is generally assumed that as legislation becomes stricter, the costs to industry rise sharply, as the most cost-effective options are already implemented, i.e. environmental expenditure rises, but delivers less eco-efficiency benefit. However, there is also evidence that in many cases, costs do not always - or even usually - follow this pattern. Costs arising from environmental technology can be counterbalanced by cost reductions due to improvements in technology. This issue is discussed later. Given environmental regulation or policy has the potential to raise industry’s production costs by requiring the adoption of new, cleaner, technology, it may therefore affect its competitiveness in both internal and external markets. Before looking at the empirical evidence relating air pollution legislation to competitiveness, it is worth defining terms what do we mean by “competitiveness”?

13 Cost-curves plot marginal or total costs against, e.g. emission reduction targets. The option that leads to the greatest reduction in emissions per unit of expenditure is the most cost-effective measure and is plotted first, followed by the second most cost-effective measure, etc. In doing so the cost-curve describes the order in which abatement measures should be introduced all else being equal. Given that the cost-curve does not account for the benefits of reducing emissions it does not provide any guidance on the extent to which it is desirable to abate – but it does show how much it is likely to cost to reach, e.g. certain air quality objectives, and provides a way to filter options to ensure this target can be achieved at least cost.


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00

Abatement (arbitrary units)

Mar

gina

l cos

ts (a

rbitr

ary

units

)

e.g. with increasing Legislation

Cost Out-turn (hypothetical)

Cost Out-turn (with innovation)

Figure 7. Cost-Curve showing the Potential Effect of Air Pollution Legislation on Direct Costs.

Competitiveness can be viewed at different scales – industrial or sectoral – as well as domestically and internationally. The focus of this report is competitiveness at the industry level (the aggregation of companies). We define competitiveness as the ability of a company – and by aggregation an industry - to sell its goods and services in both local and international markets. Note that this company definition should be distinguished from a broader definition – such as in the Commission's competitiveness report, which states that ‘Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment, on a sustainable basis.’14 The possible linkages between air pollution regulation and competitiveness at the company level are outlined in the box below.

Faced with a new environmental regulation, companies generally have the following options:

a) If the related compliance costs are not significant to the company’s production costs, the effect is minimal and operations are not affected;

b) If the company acts as a price-maker, they can shift the extra cost to their customers (when competitive pressure is low, there is a greater possibility to do this);

c) The company can modify the production of their products, for example, to reduce the carbon intensity, via substitution of lower carbon-intensive inputs and/or introduction of more carbon efficient processes;

d) The company can relocate production to where they are not subject to the legislation:

e) The company can cease operations.

14 the WEF definition of competitiveness at a national or European level is “the ability of a country to achieve sustained high rates of growth in GDP per capita”.


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Increased production costs may be passed on in the form of higher final prices (transferring costs to consumers) or absorbed by the producer, thereby reducing profits. The economic consequences of an increase of production costs depend on the magnitude of the cost increase in relation to the total production costs, and the price-elasticity of the demand for the produced good – that is, the (percentage) change in the quantity demanded of a good in response to a (percentage) change in price. Thus, where there is a more than proportional fall in quantity demanded in response to a given change in price, there are fewer possibilities for the producer to pass on increased production costs to the final price without experiencing reductions in sales. The literature suggests five reasons why environmental policy may limit competitiveness where the policy is not applied to all competing firms: q Investments in more pollution control may crowd out other investment; q More stringent abatement requirements for new plant may prolong the life of older, less

productive, plant; q Pollution control equipment requires labour to operate and maintain with no contribution to

saleable output; q Compliance with environmental regulation absorbs managerial and administrative resources with

no contribution to saleable output; and q Uncertainty about present and possible future regulations may inhibit investment. EU legislation, in harmonising its impacts across EU countries and on imports to the EU, is assumed to have negated any major potential impacts on competitiveness to affected European sectors. To illustrate, the effects of legislation affecting manufacturing will be uniform across the EU and so within the EU, the impacts on competitiveness are minor in macro-economic terms. However, as the conference conclusions highlight (see later section), there may be EU wide differences because of country specific implementation and interpretation. There is also the issue of the effect on international competitiveness. The severity of the international competitiveness effect will depend on the degree of exposure to the international market that the industry or sector has. There may also be further effects where higher product prices have resulted from the regulation. If, for example, the affected sectors are major export earners, and imports remain constant then exchange rate depreciation may occur – assuming a floating exchange rate regime. Imported inflation may then occur with further indirect negative macroeconomic effects, which can exacerbate a decline in national competitiveness.

Conclusion:

q Effects on industry competitiveness should only be important if environmental policy in different countries imposes different levels of costs on competing companies.

Pearson (2000) argues that the international competitive effects of the increase in costs may be modest to the point of view of no policy concern, and this is more likely when:

q Foreign competitors are also undertaking pollution-abatement expenditures, q The financing of abatement expenditures is internationally harmonised under the Polluter Pays

Principle, q Environmental costs are passed backward to factor returns (i.e. absorbed) rather than forward in

prices, and q The environmental protection costs are small relative to other production costs such as wages, raw

materials, transport etc.


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It is important to estimate the magnitude of the quantitative extent of the effects of environmental regulation on the level and pattern of production. Examples of competitiveness indicators in this regard include: measures of profitability, productivity, output levels and market share, the balance of sectoral trade, and trade intensity of exports. Before looking at the evidence on these indicators in the context of air pollution regulation it is important to highlight the size of expenditures that have been incurred by economic agents (mainly firms) in meeting the requirements of air pollution regulation. Summary data is presented below. As outlined above, these expenditures (or compliance costs) are those that - when incurred – lead to higher product prices and/or smaller profit margins and can be seen as an interim input into the assessment of competitiveness. Expenditure measures are also sometimes used as a proxy for competitiveness itself – on the assumption that larger absolute expenditures will have a greater impact on competitiveness than smaller expenditures.

Table 2. Transmission mechanism between environmental legislation and competitiveness Status of compliance costs related to total production costs

Possible actions Possible consequences for competitiveness

Insignificant No action Business as usual Increase in final prices Decrease in sales, loss of market share (a) Absorb the extra cost Decrease in profits, less investments (a)

Significant

Modify production function

Depend on how new inputs affect final prices.

Relocate Depend on legislation at new site. Very Significant Cease operation Out of market

(a) Effects depend on price-elasticity of demand for the good in analysis.

Environmental Expenditures

In assessing the potential effects on competitiveness, it is essential to look at compliance costs (environmental expenditures) made in order to reduce air pollution. As noted above, it is the extent of these costs that determines the likely extent of the competitiveness effects, and as such, these costs are an intermediate proxy for competitiveness effects. Note, however, that looking at environmental expenditures in aggregate does not allow conclusions to be drawn on the relative competitiveness of the regions as a whole. Rather, they indicate relative levels of financial burden borne by air polluting economic sectors between regions and – implicitly – the possible effects on their relative competitiveness with each other. Data does exist for the estimated EU expenditures, and this can be compared with estimates made in the US and Japan. Environmental protection expenditure (EPE) is defined as the money spent on all activities directly aimed at the prevention, reduction and elimination of pollution or any other degradation of the environment: ‘an activity can be said to take place when resources such as equipment, labour, manufacturing techniques, information networks or products are combined, leading to the creation of specific goods or services’ (Commission of the European Communities, 2002) The EC, (Eurostat, 2002), has undertaken a study - using the OECD Pollution Abatement Costs and Expenditures (PACE) methodology - to estimate the environmental protection expenditures at industry and economy-wide levels for the EU-15. The results of this exercise for 1999 are presented in Table 3


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below, where expenditures relating to air pollution reduction are disaggregated from the expenditure on all environmental domains. Note that use in this report of data based on the PACE methodology is primarily driven by its comparability to other world regions for the year concerned. Other expenditure accounting methodologies such as the EUROSTAT SERIEE’s Environmental Protection Expenditure Account (EPEA) may also be used.

Table 3. EU-15 expenditure on air quality, and total environmental expenditure, 1999

Current expenditure

€bn

% value added1

Capital expenditure

€bn

% value added1

Total expenditure

€bn

% value added1

3.7 0.2 3.6 0.2 7.3 0.4 Air protection – Industry - Total 4.0 0.05 3.9 0.05 7.9 0.10

13.6 0.8 8.7 0.5 22.3 1.3 All Env. Domains – Industry - Total 90.3 1.2 40.6 0.5 130.9 1.7 Sources: Eurostat (2002) and Eurostat (2003). 1Note that the gross value added (GVA) percentages for the industry and total expenditures are derived from GVA estimates for industry and the whole economy, respectively. The Eurostat (2002) study, also reported in Johansson, (2002), shows that in most EU Member States, manufacturing accounts for more than 80 percent of the total amount of money industry spends on environmental protection. The three highest spending industries account for approximately 60 percent of total industry spending on environmental protection. The most important industries in terms of environmental protection expenditure are:

q Chemicals, rubber & plastics, which is the highest spending industry in Italy, Belgium, Netherlands, Denmark, France and Spain and the second highest in all other Member States except Sweden, Portugal and Greece.

q Metal products, which is the industry with the highest spending in UK and Austria and the second highest in Italy, Sweden, France, Spain and Portugal.

q Food, beverages & tobacco, which is the industry that spends most in Ireland and Denmark and is the second highest spending industry in Netherlands.

q Pulp & paper, which is the industry with the highest spending in Finland and Sweden. Regarding the distribution of environmental protection by domain, over 80 percent of the total spending on environmental protection by industry in the EU in 1999 was in the core environmental protection domains: air, wastewater or waste. The relative importance of different domains was related to the industry structure in individual countries; for example, a large energy sector based on fossil fuels could for example be one reason for relatively high expenditure in the air domain in Germany, while a large pulp and paper industry could be one explanation for high expenditure in the wastewater domain Finland. There are also inherent differences in the capital intensity between the different environmental domains - air protection is generally a capital-intensive activity. Measures to reduce air emissions accounted for a majority of the environmental protection investments in eight of the Member States (in contrast waste collection and treatment was more dependent on labour). The EU-15 data for industry can be compared to equivalent data in US and Japan for the same year (1999). In the US, the U.S. Census Bureau undertakes the OECD PACE survey – including approximately 21,000 plants in U.S, classified in manufacturing, mining and electric utility industries. The results for 1999 are summarised in Table 4. As in the case of the EU-15, the manufacturing sector comprises about 80% of the total industrial expenditures on environmental protection.


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Table 4. Summary pollution abatement capital expenditures and operating costs by industry in the USA, 1999, in billion Euro and in % of GVA

Environmental domains Capital

expenditures Operating

costs Total

Industry – all environmental domains (€bn) 5.4 11.2 16.6 % of gross value added 0.3 0.7 1.1 Industry – air protection (€bn) 2.4 3.6 6.0 % of gross value added 0.11 0.29 0.4

Source: Adapted from U.S. Census Bureau (2002). For Japan, environmental expenditure data was presented in OECD (2002) and OECD (2003). A summary of this data is presented in Table 5 below. The expenditures for “all environmental domains” are for 1999. The expenditure on “air protection” for industry is derived from an estimate made in 1996 for manufacturing, mining and energy companies with a capital stock of more than €100 million each (OECD, 2002). The expenditure on “air protection” for the public sector is for 1999. If we make an assumption that the 1996 business expenditure remains similar to 1999, we may sum the two values to get indicative air protection expenditure total for 1999 of €10 billion. It is reported that this figure has fallen in subsequent years and therefore represents a high bound estimate. The manufacturing sector accounts for the majority of environmental protection expenditures in Japan (OECD, 2002). Again, the OECD PACE data collection methodology was adopted thereby helping international comparability.

Table 5. Environmental protection expenditure in Japan.

Total expenditure €bn

% value added1

Air protection – Public o Industry o Total

7.2 2.8 10

0.1 0.3

36 1.6 All Env. Domains – Industry - Total 66.7 2.0

Sources: Based on OECD (2002) and OECD (2003) 1Note that the gross value added (GVA) percentages for the industry and total expenditures are derived from GVA estimates for industry and the whole economy, respectively. The key data on air quality improvement expenditures for the three world regions considered here are summarised in Table 6 below. Comparability is limited by the fact that total economy-wide expenditures on air pollution in the US are unavailable for 1999. The lack of expenditure disaggregated to the industrial sector in Japan for 1999 further limits the comparison, as does the fact that the split between public and industrial expenditures is not entirely transparent in the Japanese statistics available. Given these important caveats we can identify some features of the data. It shows absolute expenditure by industry to be highest for the EU-15 and lowest for Japan. More meaningfully, when we compare industrial expenditures as percentages of gross value-added we find that in the EU-15 and the US these expenditures both account for the same percentage (0.4), whilst Japan has a lower percentage (0.1). At the economy-wide level, however, the percentage of gross value-added is higher in Japan (0.3) than the EU-15 (0.1).


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Table 6. Summary of Air Quality Expenditures by Region.

€ bn % GVA EU-15 Industry 7.3 0.4

Total 7.9 0.1 US Industry 6 0.4

Total Japan Industry 2.8 0.1

Total 10 0.3 It is not easy to identify whether these differences are due to differences in the strictness of air quality regulation, or in industrial and compliance technologies. Moreover, the incompleteness of the data and the fact that it is in any case only a snap-shot of one time period makes any robust conclusions regarding possible differences in competitiveness effects impossible to draw at this stage. One might however suggest that the expenditures of GVA as a percentage of industrial GVAs are in all three regions rather small. This suggests that the competitiveness impacts will not be very significant in these regions as a whole.

Conclusions: q The statistics on air pollution expenditures suggest broadly similar absolute levels of

expenditures between Europe, US and Japan. q As percentages of industrial GVA expenditures we find that Japan accounts for the lowest

percentage (0.1), whilst the US and the EU-15 are similar (0.4) – which suggests that the potential impacts on competitiveness in the EU and the US will be similar to each other but greater than in Japan.

q However, the size of these percentages suggests that competitiveness effects – and differences

in competitiveness effects between regions – are actually small in real terms.

The Evidence for Competitiveness Impacts

While there are a large number of studies assessing the potential effect on competitiveness from environmental legislation, there is little consensus on the evidence, and many studies present contradictory conclusions. Furthermore, it is rare that such studies account for the indirect impacts on competitiveness of environmental legislation15. Price and quantity impacts The empirical evidence that relates air pollution regulation to impacts on industrial competitiveness relates most specifically to a few sectors thought to be particularly vulnerable to losses in competitiveness. Whilst the evidence is sparse in the EU there have been more studies undertaken in the US. It would be expected that the number of EU studies will increase as the requirements for

15 One study that does this at the EU level is AEA (1999) which suggests that the benefits of reduced absenteeism as a result of improved health from improved air quality might be equivalent to as much as 10% of total abatement costs.


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undertaking regulatory impact analysis grow more demanding. Two case studies illustrate some general trends. Automobile sector. A recent study (Watkiss et al, 2004) examined the compliance costs of national transport policies, looking at both the ex ante (predicted) and ex post (actual) costs. These are clearly important to the assessment of the competitiveness impacts of air pollution legislation on the automotive sector. The study examined the ex ante costs of Euro legislation (I to IV) and compared this to the available price increases seen to consumers. In nearly all cases, the estimated ex ante costs were significantly higher than actually occurred (as seen in the ex post cost analysis) – to illustrate, the costs of Euro I to IV technology for the average car (from ex ante studies) were predicted to lead to a cumulative increase of between 10 and 20% price for new vehicles (over the period from 1993 onwards). An analysis of actual new vehicle prices over the same period showed that in real terms, the price of the vehicles had fallen by 7%. The costs predicted to consumers were therefore significant over-estimates of the total cost (cost of compliance) to the UK of meeting new legislation. It would clearly be wrong to conclude that equipping cars with sophisticated equipment for emission control reduces prices. However, it is apparent that any effect of improving the capacity of cars to meet new emission limits is very much secondary to other determinants of price. What this example shows is that it can be seen that it is difficult to assess the competitiveness impacts of air pollution legislation in an area where more important determinants of price are occurring. The study also provides some information on how important the costs of legislation actually are. It has often been suggested that in ‘ex ante’ studies (studies of the costs before the legislation is implemented as in policy appraisal or regulatory impact assessment), the costs are systematically over estimated and the benefits under estimated when compared to the actual ex post evaluation (i.e. analysis after implementation of the legislation – as in policy evaluation). This example, and similar studies in the Europe and the US (see box below) do provide some evidence to back this up. However, it is also stressed that there have been cases where the ex post costs are higher than anticipated (see box). Cement Industry. Based on a sample of 41 plants in Germany, Italy, Spain, the UK, and Poland, the competitiveness impacts of the introduction of best available techniques (BAT) requirements were assessed in a study carried out by the Institute for Prospective Technologies, Joint Research Centre, European Commission (Hitchens et al, 2001). Two other cases studies analysed the implications on the competitiveness of BAT on the non-ferrous metals and pulp and paper industry. Cement Industry: most important competitive disadvantages identified by country Importance Germany Italy Spain UK Poland First Labour costs Environmental

Costs Labour quality Location Age of plant

Second Enforcement of environmental regulation

Age of plant Location Age of plant Size of plant

Third Environmental Costs

Labour costs Quality of raw material

Size of plant Manufacturing costs

Source: Based on Hitchens et al (2001) The Impact of Best Available Techniques (BAT) on the Competitiveness of European Industry. Report to European Commission, November 2001.


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Comparing ex ante and ex post costs A number of studies have compared estimates of costs made before legislation was implemented (ex-ante estimates) with actual costs after implementation (ex-post estimates). o The SEI report (1999), produced for the Swedish Ministry of the Environment, considered environmental

policy in 5 areas. The paper found that the estimates of the UNECE Protocols on acidification and the 1988 Large Combustion Plant Directive from the European Commission for the UK forecast increases in electricity generating costs of up to 30%, based on the assumption that plant would need to be fitted with flue gas desulphurisation equipment to meet the regulations that were under discussion. In contrast, a recent analysis estimated that costs increased by only 2.5% to 5% over a 15 year period. The study also found that the costs of the catalytic converter technology to meet the Euro 1 standards, including adoption of catalytic converters on cars were significantly overestimated before introduction.

o US Industry estimated that the 1990 Clean Air Act amendment would cost between $51 and $91 billion/year whilst the USEPA forecast costs of $22 billion/year. Industry sources also estimated that there would be between 20,000 and 4 million job losses across the US. An assessment by the USEPA in 1997 found that the total costs of the Clean Air Act from 1970 to 1990 (i.e. not including the 1990 Amendment) were equivalent to between $20 and $25 billion per year.

o A number of US studies have assessed ex ante and ex post costs for vehicle emissions and fuel quality standards. Studies of emissions (e.g. Clackette (1998), Anderson and Sherwood (2002)) report similar findings to the European studies above, with higher ex ante costs than borne out by the ex post analysis. Harrington et al. (2001) in a wider review of environmental legislation in the US found numerous instances where actual compliance costs were lower than predicted costs because of unanticipated use of new technology. The study also noted that the more flexible rules are, the more difficult it is for regulators or anyone else to anticipate the technical responses to regulation and what the costs might be. The most flexible emission reduction policies involve substantial use of economic incentives, and it was noted that for economic incentive policies, the cost was overestimated or the quantity of emission reductions was underestimated. Four other reasons were identified for the errors: quantity errors (which may imply that benefits are overestimated), changes in the regulation after the cost estimate is prepared, use of maximum cost estimates, and asymmetric error correction.

Overall, there has been a historical trend that ex ante costs of legislation are higher than actually occur ex post. In many cases, the difference between ex ante and ex post costs appears to be that lower cost options are achieved (or that derogations reduce costs), rather than always than that technological cost are over-estimated ex ante. However, it is also stressed that there are cases where the technology has proved to be more expensive than originally anticipated. Moreover, there are also examples where appraisals (ex ante) have significantly underestimated the likely costs of legislation. For one such case (EC, 1997), on the costs of meeting the 1st Daughter Directive, the ex ante analysis suggested that the standards being proposed could be met without the need to adopt additional measures in most places. Where action was necessary it was proposed that standards could be met through the application of a limited number of measures. This led to total compliance costs for the whole EU 15 of around Euro 15 billion. However, subsequent preliminary analysis in the Netherlands estimated that the costs of meeting the NO2 standard throughout this country alone could be €16 billion, or selectively at all locations where people live, in a range of €1 billion to €3 billion. The reason for the underestimate was not in the cost estimates, but in the air quality modelling analysis. The models that were used factored in an urban enhancement, but in doing so merely indicated what future urban background concentrations would be. In contrast, the framework directive relates to concentrations in any area outdoors and outside the workplace where people may be exposed to levels in excess of the air quality standards. In this way the directive is not limited to consideration of urban background locations, but also to ‘hot-spots’. As these were not explicitly modelled, the scale of urban pollution problems in the context of the Directive was underestimated.

The cement industry study findings were q Primary measures have a positive cost and quality implication; they have positive paybacks and

positive implications for competitiveness (as defined by a reduction in costs). q Secondary BAT for NOX, SO2, dust and noise have either mixed, neutral or negative effects. It is

from this set of BAT that negative competitiveness implications can arise.


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q Strong existing environmental performance does not negatively affect the economic performance of the cement sector within a country, the example of Germany being presented as a country where there is strong environmental performance.

q Competitive advantages and disadvantages were mainly connected with product quality and range, raw material quality, plant location relative to the market and transport costs. More stringently regulated German and Italian plants did report environmental standards and costs as a major competitive disadvantage primarily as a consequence of secondary measures for NOX and SO2. The report argues that despite the additional costs, these plants were profitable in part as a consequence of costs counterbalanced by the use of cheaper alternative fuels (improved cost competitiveness and profitability were the main drivers behind the use of cheaper fuels).

Conclusions: q The actual costs and wider economic effects to industry from air pollution legislation remain

unclear. There is some evidence of increased costs, though these are usually small in relation to wider price effects, competition, etc, in the market.

q To date there is very limited evidence for there being significant competitiveness effects

resulting from air pollution legislation on a general level. q In the majority of cases, the pattern of direct costs in both Europe and the US follow a

similar pattern –air pollution policy seems to have had less impact on direct costs than originally anticipated, though this is by no means a guarantee that this will remain the case for future legislation.

Relocation Impacts If air pollution legislation specifically, and environmental legislation generally, is thought to have the potential to raise costs sufficiently to threaten significant changes in e.g. market share and profitability to a firm, that firm might judge it best to move to a location where regulation is less stringent and so where these costs might be avoided. In this case one region or country may suffer a loss of economic activity and employment (though another presumably gains). The decision of where to locate a production facility involves a number of factors, including the cost of labour, access to markets, social and political conditions in the country concerned, the infrastructure facilities in the country concerned and the regulatory framework. The last includes environmental regulations but they are only part of the set of regulations. A lot of evidence exists to the effect that investors look not only at current regulations but also at the stability of the regulatory framework (how frequently governments change the rules). The theory behind the relocation of industry due to differing environmental standards has been dubbed the pollution haven hypothesis. It stems from the literature on comparative advantage, suggesting that lax environmental standards may create a comparative advantage in pollution-intensive goods for that country. The models used are based on North-South models of trade flows and are based on different critical assumptions on policy and trade regime. This issue is contentious as the migration of “dirty” industry implies a distributional burden of the impact of such industry towards poorer countries, as well as the wider competitiveness impacts. Trade liberalization has also been included in a number of models, as it is expected that this process, acting together with lax environmental standards in countries, may lead to the creation of pollution havens. It is also important that the wider determinants of company location are taken into account as


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countries vary widely in terms of education, infrastructure, availability of capital, and endowments of natural resources. The empirical evidence on relocation is relevant to two issues: 1) The movement out of OECD countries to other countries with weaker environmental standards. A number of factors are important in determining location decisions, one of which could be to take advantage of lax environmental regulations. Studies of multinational corporations have shown that the most important factor in relocation are labour costs, access to markets and the existence of a developed industrial base. Factors such as environmental regulations and corporate tax rates emerge as less important. At the same time, however, a study of majority-owned affiliates of OECD-based companies in developing countries shows that those involved in pollution intensive industries did increase their investment slightly faster than did all manufacturing industries. One such study has been conducted by the World Bank (Smarzynska and Shang-Jin Wei, 2001). This study investigated whether the lack of a pollution haven effect in previous studies could be explained by the fact that since there is often a positive relationship between lax environmental standards and FDI-discouraging corruption in individual countries, the latter effect distorts the linkage between relocation and environmental standards in statistical analysis. However, in an analysis of 24 host countries in Central and Eastern Europe, even after correcting for this factor and using firm-level data, (as opposed to sectoral level data that has previously been used), the authors found evidence of the pollution haven effect to be weak at best, and negligible once the analysis was subject to further tests of robustness. This evidence notwithstanding, the paucity of empirical findings relating environmental regulation to industrial relocation in NACs (Newly Associated Countries) does not allow strong conclusions to be drawn on this issue at present. Other studies have supported these findings, i.e. there is little evidence of industrial relocation because of different environmental regulations. For example, the World Bank (2000) looked at how the import/export ratios of polluting industries changed over time as environmental regulations tightened in North America and Japan – in relation to local markets in Latin America and Asia respectively. They found only a short-term effect, when the import-export ratios were greater than one. Similarly for Europe, the study shows no significant impact on trade flows, with the import-export ratios for polluting industries close to one over the period from 1963-1993. Even the maquiladora programme (which permitted US firms to locate on the Mexican side of the US-Mexico border on advantageous terms) found that pollution abatement costs were not a significant determinant of the trade generated by the programme. It is also stressed in these studies that even when pollution intensive industries do locate in developing countries, they often adopt similar technology and pollution controls as in the home country. This is partly in response to the public image and partly in recognition of the fact that regulations are almost certain to become stricter in the developing countries (pre-emptive action may well be cost effective). 2) The movement within the OECD due to changing environmental standards. The relocation of industry within the OECD, due to changes in environmental standards, is one area where there may be some evidence A number of studies in the US (where the federal structure can lead to differing environmental laws) have concluded that there is no significant link and that the location choice of most manufacturing plants is not systematically affected by differences in interstate environmental policy. However, more recent studies have uncovered a significant relocation of polluting industries from more to less polluted areas, as well as other structural changes within the industries. Moreover, there is some evidence that abatement costs have had a moderate negative effect upon foreign investment (e.g. World Bank, 2000).


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Conclusions: q 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.

q 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.

Other economic effects Whilst most of the effects listed here are negative, there are some potential benefits to industry from cleaner and more sustainable production.

q There is some evidence that employment effects in sectors that are responsible for supplying technologies that meet the requirements of the legislation might be significant, i.e. that there might be some benefits from environmental legislation. However, as the costs of legislation are often less than originally anticipated, the employment benefits have been lower than anticipated (ex ante). Moreover, the benefits of extra employment in a climate of full employment are not considered relevant for current appraisal.

q There is also some evidence to suggest that the overall impact of environmental standards may be to improve efficiency and so reduce costs overall. It is argued that in some cases environment regulation may lower industry’s long-term costs through energy savings, in-plant resource recovery, and accelerated investment in more productive equipment. This effect is plausible when moving from a low environmental basis in developing countries, where it may be to improve efficiency and so reduce costs overall, though it is less apparent to what extent the effect might occur in OECD countries.

q Finally, there may also be "green" niche markets that are easier to exploit with e.g. the adoption of lower emission technology.

It should be noted, however, that all these “win-win” solutions raise the question as to why these opportunities have not been exploited in any case, in the absence of the regulation and suggests that there are attendant costs that are not made explicit.


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Summary of Effects

To date there is very limited evidence for there being significant competitiveness effects resulting from air pollution legislation on a general level and it has not been possible to disaggregate between the impacts on different sectors. The main reasons cited in the literature to explain why air pollution regulations generally do not appear to have a major impact on competitiveness include:

q Costs arising from environmental technology (integrated process measures) are often counterbalanced by cost reductions due to improvements in technology, so that there are no price rises or decreases in profitability overall. However, in the case of end-of-pipe technologies, this counterbalancing effect is less obvious.

q Industrial air pollution expenditures as percentages of industrial GVA expenditures appear to be similar in EU-15 and the US but greater in both than Japan. However, since these expenditures are less than 0.5% of industrial GVA in all three world regions, the competitiveness effects are likely to be limited.

q When considering whether to relocate, companies tend to place higher emphasis on other factors such as cost of labour, access to markets, stability of the economic and political climate and availability of materials and resources, rather than just environmental legislation. This tends to mitigate against relocation to developing countries for environmental reasons. Relocation to another developed country is less prone to these considerations, but on the other hand environmental standards tend to be broadly comparable between developed countries.

q Nevertheless, some studies do cite evidence for pollution-intensive companies relocating or selecting locations for new plants in order to avoid environmental costs, particularly several recent studies examining relocation within the US. A recent study that looks at transition countries as host countries (pollution havens) finds a small effect of this sort. It is also possible that legislation may in some cases have a disproportionate effect on smaller firms, and may lead to industrial restructuring and mergers which may eventually lead to price rises for consumers, with indirect impacts on competitiveness in other sectors.

q Costs of compliance are often overstated in ex-ante assessments of legislation, though this is only partly because technological improvements or other innovations tend to reduce compliance costs. However, there are some cases where ex ante costs have significantly underestimated the costs of legislation.

q Costs can also be reduced by strategic planning – taking into account anticipated legislation when upgrading or installing new plant.

q In terms of employment impacts, effects tend to be minor (although evidence is very limited) and any reduction in the sectors affected may be compensated for by increases in employment in companies supplying environmental equipment.

q Where it is possible to meet legislation by adoption of more modern and efficient production processes and avoidance of waste, this can have a beneficial impact on a company’s economic performance. Benefits also accrue through improvements to a company’s public image and thus the marketability of its products.

q Given that a number of important directives have not yet been fully implemented, for example the IPPC directive, the National Emissions Ceiling Directive, Air Quality Framework daughter directives, the amended Large Combustion Plant Directive, and the Greenhouse Gas Emissions Directive, the economic costs to industry are still a matter of conjecture and the costs depend on how the individual national authorities have implemented the legislation. The costs of this legislation could have cumulative effects on certain industry sectors.

What is clear from the results of this review is that there is considerable scope for further research in this area in the European Union.


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The Economic Effects of Future Legislation

The question we are trying to address here is:

‘Will future air pollution legislation create a different competitive environment for Europe’?

It is stressed that these issues will be addressed in future policy work (both EU and US programmes have/will undertake cost-benefit analysis that includes the analysis of the wider economic costs16.). However, it is possible that while cost-benefit analysis may show a strong overall justification for future policy in the US or Europe (i.e. the benefits to society as a whole outweigh the costs), it is still possible that legislation could potentially affect competitiveness. This could potentially occur, for example, if future environmental policy in different regions imposes different levels of costs on competing companies. At present it is impossible to answer this question. It will depend on the future air pollution policy that is implemented in Europe (the Thematic Strategy on Air Pollution), the US (Clear Skies), and in other regions.

Conclusions: q Given the status of the planned EU and US programmes (e.g. the Thematic Strategy on Air

Pollution, Clear Skies) it is currently impossible to predict whether future policy will create a different competitive environment in Europe.

q Based on historical trends, it would be expected that, relative to major EU competitors,

future air pollution legislation in Europe would not be so significant as to have a major effect on international competitiveness. Note however, that a number of important directives have not yet been fully implemented (for example the IPPC directive, the National Emissions Ceiling Directive, Air Quality Framework daughter directives, the amended Large Combustion Plant Directive, and the Greenhouse Gas Emissions Directive), and the cumulative effects of this legislation could still have economic implications.

q However, the US is likely to implement future improvements through market-based

instruments, which may offer a lower cost approach for US industry. q Air pollution policy in other competing regions, including China, is likely to increase

markedly in future years, which may help reduce the gap between Europe and non-OECD countries.

16 The details of the US and European Commission (Clean Air for European) programme can be found at http://yosemite1.epa.gov/ee/epa/eed.nsf/pages/SelectReports.html and http://europa.eu.int/comm/environment/air/cafe/index.htm


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Report on the Conference Parallel Session

The issues of competitiveness were discussed at the recent DG Enterprise conference on ‘The Environmental Performance of EU Industry’ held in Brussels on the 24th and 25th November 2003. As part of the conference, a parallel session on air emissions was held (in addition to parallel sessions on waste, climate change and chemicals). The air emission sessions included the following presentations:17

q Emissions of Atmospheric Pollutants in Europe, 1990-2000 - Introductory Presentation. Manfred Ritter. European Topic Centre on Air and Climate Change.

q Petroleum Industry. Peter Tjan, European Petroleum Industry Association (EUROPIA).

q Paint-shop Technology at Volkswagen. Technical Progress and Environmental Protection. Michael Mrowietz. Volkswagen AG.

q Mitigating Air Emissions And Improving Environment Performance” A Case Study On The Solvents Industry. Bert Fokkema. European Solvents Industry Group/Shell Chemicals.

This was followed by a discussion by delegates, broadly in response to five key questions raised. The response to each of the questions is summarised below18:

Question 1. What are the major reasons in your experience which might have led industry to improve its environmental performance in terms of reducing emissions to air, for example: national legislation; EU regulations; technological innovation; the

drive for energy and cost efficiency, etc?

The primary response from the presentations and from delegates was that EU Environmental Legislation was the main reason for environmental performance improvement. Note this includes legislation affecting direct emissions and also products (e.g. automobiles or fuels). However, delegates also stressed that this was not an unexpected conclusion, given the large number of pieces of legislation that had emerged. A number of other, secondary drivers were identified including:

q Voluntary agreements;

q Best practice;

q Group environmental policy;

q Integrated technology;

q Resource consumption and economic considerations.

Question 2. How to assess and define environmental performance? What benchmarks are applied?

Although this issue was not discussed in as much detail as other areas, speakers and delegates raised a number of relevant points. These included:

o That industry has a contribution to data collection and performance tracking;

17 http://europa.eu.int/comm/enterprise/environment/events/env_performance/index.htm 18 Note these reflect individual speaker or delegate views, not the views of the session.


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o That industry had a role for environmental improvement within the context of sustainable development, including the setting of quantitative environmental targets;

o That in terms of environmental improvement, company responsibility went beyond competitive advantage, and was a requirement for a long-term license to operate;

o That it was important to capture environmental benefits adequately – so that these can be compared against the costs;

o That in measuring environmental performance, it was important to consider performance from ‘well to wheel’ (i.e. a life-cycle approach), to ensure benefits in one area were not offset by dis-benefit elsewhere.

The last point led to most discussion, following several examples in the conference presentations. The key issue raised was that the emissions reduction of air pollutants achieved by the refining industry in producing cleaner fuels (which give rise to lower air emissions when used in vehicles), could be at the expense of higher overall CO2 emissions, as these fuels were more energy intensive to produce.

Question 3. What has been the impact of environmental improvements on the sector’s /company’s economic performance?

o The Europia presentation concluded that in the last decade the share of investment related to

regulatory requirements has increased from 35% to over 50% in the refineries sector (mostly due to environmental regulation). As a result, the proportion of investment for growth was lower – and a higher proportion of investment was needed just to stay in business. However, some delegates raised the issue that legislation was an incentive for industry to perform better and more profitably.

o In the plenary session, one of the main speakers stated that air pollution policy seems to have had less impact on direct costs than originally anticipated (as borne out by studies in the literature reviewing the ex ante and ex post costs of legislation).

o Several speakers/delegates raised the issue that legislation needed to link with investment cycles, because legislation very often necessitated fundamental changes to processes (or new facilities).

Question 4. Have there been effects on competitiveness within EU and outside, productivity or employment? Has air quality regulation led to the delocalisation of

companies in your sector?

o The effects on competitiveness should only important if air pollution policy in different countries

imposes different levels of costs on competing companies. This can arise is there are differing legislative standards or enforcement. EU harmonisation should remove any such effects in Europe, though speakers/delegates reported that there is significant variation in national implementation or enforcement of EU legislation, which means this is not always the case.

o A key issue raised was competition outside of Europe. There was a perception that there was different legislation in different regions, with stricter legislation in the EU. The effect was felt to be greater for non-OECD countries – with the view that environmental legislation was a consideration in Europe, but not elsewhere.

o There was discussion on whether relocation was a major factor in delocalisation. It was stressed by several speakers and delegates that other factors, namely labour costs and access to market, are much more important than environmental legislation. However environmental legislation is one of a large number of factors that affects location decisions. It was also noted that these issues


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might be more important in deciding the location when considering new investment, rather than re-location (i.e. moving existing production facilities).

Question 5. Looking ahead, the EU is currently reviewing its air quality policy framework within the context of the Clean Air for Europe (CAFE) programme and a Thematic Strategy on Air Pollution will be proposed in 2005. What are the views on

possible future measures to further reduce air emissions?

A number of conclusions (from speakers and delegates) emerged in relation to this question: 1) Make Sure that Legislation is Appropriate, for which the following points were raised: o Speakers and delegates welcomed the integrated approach for all pollutants in CAFE; o It was raised that before new legislation was considered, there was a need to take existing

legislation into account, as improvements will be substantial; o Future legislation should be based on science and cost benefit analysis; o The definition of Best Available techniques should not lead to emission reduction demands below

the limits of the (VOC) directive; o There was a need for consistency of standards with other regions that was wider than EU

harmonisation; o That there was creative thinking needed to allow tailored controls to deal with remaining local

issues; o That local measures were needed to deal with remaining air quality issues – and that there was no

need for further pan-European legislation; o There was a need to balance air emission improvements against CO2 production.

2) Make Sure that Legislation is Cost-Effective, for which the following points were raised: o That in some cases, industry in a number of member states will bear costs of future legislation, but

no longer benefit directly from further reductions in ozone precursors; 3) Make Sure that Legislation is Flexible (Easing the Burden – allowing the User to Make the Balancing Act and Fitting the Business Cycle), for which the following points were raised: o That no more command and control legislation should be introduced, as it was complex to

develop, stifled innovation, was anti-globalisation, anti-liberalisation, and had disproportionate socio-economic impacts;

o That voluntary initiatives provided effective support; o That flexible handling of deadlines was necessary – with synchronisation of investment cycles and

model change, to develop new systems. It was raised that industry works on long-term investments, with a life-span of more than 20 years, and this needed to be considered for legislation;

o That long term environmental strategies were needed for business planning.


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Conclusions of the Parallel Session on Air Emissions

The conclusions of the session were summarised (and agreed by delegates) as follows: Environmental Performance and Competitiveness o EU Industry has significantly improved environmental performance over past two decades – with

major reductions in emissions and decoupling from economic growth; o EU Environmental legislation is the primary reason for emissions reductions (though this is

expected given the legislative framework in Europe over the past two decades); o This legislation has led to increased cost to industry and manufacturing; o Harmonisation of most emissions legislation should level the playing field (reduce anti-

competitiveness effects) within Europe, but variation in national implementation of EU legislation (interpretation) causes differences;

o European environmental legislation was considered to be stricter (or not as well enforced) than other regions, particularly non-OCED regions. As a result, environmental legislation is a consideration in EU, but not necessarily elsewhere;

o It was unclear if there were significant competitiveness effects resulting from air pollution legislation, and that it was difficult to specifically attribute potential effects to this legislation rather than wider legislation, or wider economic effects;

o Environmental legislation was one of many issues determining re-location, but it was not the primary issue;

o For benchmarking and environmental performance there was a need to consider a life-cycle approach, especially in relation to the greenhouse gas emissions

o Industry does have a responsibility towards environmental performance improvement.

Future Legislation o That industry welcomed the integrated approach for all pollutants in CAFE; o It was essential to have well-drafted and effective legislation; o There was a need to properly capture and quantify benefits; o Legislation should not be rushed. The EU should only introduce new legislation (limits) that can

be scientifically justified, and where the benefits outweigh the costs, i.e. legislation should be appropriate;

o There is a need for a level playing field within Europe with no national variations; o There is a need for a level playing field with the US and other regions; o There is a need for more targeted (and creative) approaches to tackle remaining local air quality

problems – avoiding pan European legislation, i.e. legislation should be cost-effective; o That there should be use of Market Based Instruments and other approaches (including voluntary

approach), with a shift away from command and control legislation; o That long-term environmental strategies needed to be clear for business planning and investment

cycles; o That legislation needed to be synchronised with business investment cycles and there needed to

flexible deadlines, i.e. legislation should allow flexibility.


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