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Environmental laws are NOT pushing chemical producers out of the EU

Chemical Industry

Environmental laws are NOT pushing chemical producers out of the EU

It’s Mythbuster Wednesday at ChemSec, and we thought we’d poke a hole in the false idea that progressive environmental legislation is forcing chemical producers out of the European Union. Here’s why that is not true.

Published on 05 Jun 2024

It’s like a broken record. Chemical industry complaining about environmental legislation, saying that if the screws are tightened even more, European companies will be forced to move their operations elsewhere. This narrative has been around forever it seems and keeps popping up time and again in policy discussions.

A recent example comes from the widely discussed Antwerp Declaration for a European Industrial Deal, which suggests that environmental policy targets in the EU are forcing investments to “move to other regions”.

Another example comes from the Belgian Prime Minister Alexander De Croo’s speech to the Chancellor of Germany, in which he claims that Europe is “a continent of sticks” (in other words, legal requirements) and that industrial production moving out of the region “is a real risk”.

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These are just two of countless occasions where this fearmongering narrative has been used to push for softer sustainability standards.

But are environmental laws really killing the European manufacturing business, forcing companies to move elsewhere?

Here’s what science says:

Numerous scientific studies have examined whether environmental regulations cause companies to move their production or invest elsewhere. The verdict? Well, research shows that environmental regulation costs only slightly influence a company’s decision to relocate.

As one study puts it: “Environmental regulations can affect the location of firms at the margin, but environmental regulation costs are just one of many costs that firms have to consider when deciding to relocate”.

Just as a chef considers many ingredients when creating a dish, companies weigh multiple factors when deciding where to invest. Environmental regulations are like a pinch of salt in a recipe; they influence the final outcome but are far from the main ingredient.

“The regulatory quality of the European Union countries improves its foreign investment balance”

Other factors, such as a stable political environment, access to cheap energy and a skilled labour force, are all of equal — if not greater — importance to attracting or retaining so-called foreign direct investment (which is basically when a company from one country invests in a business or asset in another country).

One study, in fact, shows that the high regulatory standards in European Union countries attract foreign investments: “The paper also finds that outward Foreign Direct Investment is not driven by environmental regulation, and the regulatory quality of the European Union countries improves its foreign investment balance”.

So, European companies do not move production abroad primarily due to environmental regulations. That’s just not true.

Companies are already invested in other regions

What is true, however, is the fact that some European companies invest heavily in other regions — like China — and that chemical companies are cutting staff in Europe. But the investments in China are made to supply the vast and growing Chinese market, and the cost-cutting in Europe is due to high energy prices and lack of demand.

Don’t believe us? Just look at this tweet from German chemical giant BASF (which has recently been cutting staff in Europe while investing heavily in China), emphatically refuting the rumour that the company is “moving” to China.

In conclusion, companies invest in other regions because of market opportunities and other economic reasons — not because of the EU’s strict environmental regulations.

That persistent but unsubstantiated myth has just been busted.