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Why economic arguments against environmental regulation should be questioned

This Op-ed is written by ChemSec’s Policy Advisor Theresa Kjell and was originally published in Chemical Watch’s Global Business Briefing, March 2015.

People tend to believe that environmental regulations have a negative impact on industry. Economic loss, unemployment and competitive disadvantages are fears flagged up by parts of industry and authorities in three important current debates: authorisation under REACH; criteria for endocrine disrupting chemicals; and EU chemicals policy linked to the Transatlantic Trade and Investment Partnership (TTIP).

When we look at past experience, however, we find that upfront estimates of the negative impacts of environmental regulations have been greatly exaggerated – deliberately or not. In our recent report, “Cry Wolf”, we gathered examples from the past showing that industry fears are systematically exaggerated, when in fact environmental regulation can provide economic benefits for industry.

We ask decision makers to learn from this and to be aware of the common pitfalls of cost estimates that are used in current regulatory debates. Our report identifies three common problems with cost estimates that you should be aware of:

first, the cost models used are often too static and limited. The static model is a tactic used to show that any regulation will incur unacceptably high costs for industry. It assumes that industry, and perhaps more surprisingly, the market, does not adapt to changes. These models ignore established principles, including the fact that the price of a new innovation tends to decline over time and as the market grows;

second, studies have shown that the cumulative burden of regulations on companies is considerably lower than the sum of individual regulations. This is something that is frequently ignored in cost estimates;

third, the beneficial effects on industry are often underestimated or ignored. More and more studies point to the benefits that arise from environmental regulation. These include increased innovation and competitiveness.


Current debates influenced by ‘cries of wolf’

While our report is based on older cases, to permit comparison between predictions and outcomes, cost calculations that are based on these flawed assumptions are frequently still used today.

Criteria for endocrine disrupting chemicals are under development, as a first step towards biocide and pesticide regulation. Here, upfront cost estimates from industry associations ignore the capacity of industry to innovate. As one example, yield losses for a specific crop are estimated at 100% if a current pesticide is banned, when, in fact, alternatively grown crops are already available on the market. The reduced need for pesticides due to Integrated Pest Management (IPM), which has been compulsory under EU law since January 2014, is also ignored in many cost estimates.

The authorisation process in REACH is designed to drive innovation by phasing out Substances of Very High Concern (SVHCs) where alternatives are available. There is a public consultation element for alternatives, before Echa committees give their opinion on the granting of an authorisation. Applications for authorisation have only been considered for a few substances so far. We can already see some major problems, however, mainly when it comes to the economic assessments. Cost estimates are calculated as if the company was isolated in the market and as if the price of alternatives was static.

A recent example is the use of lead chromates in paints, substances that were phased out by several European companies many years ago. Nevertheless, a single company is about to be granted authorisation to use these substances for another twelve years. Limiting the cost analysis to a single company and ignoring large parts of the market makes regulation counter-productive. We believe that authorisation should be granted, only when alternatives are not available on the market.

Our greatest concern lies in the fact that this approach disadvantages producers and users of alternatives, who should instead be given the market opportunity to sell products, without having to compete with companies that are still allowed to use SVHCs after their sunset dates. This leads to the failure of a possible market shift towards less hazardous chemicals. We would like the Commission to support producers and users of alternatives to SVHCs, and to refuse authorisation when alternatives are available on the market.

In discussions concerning TTIP, stringent chemicals regulation by the EU is once again brought up as an obstacle to companies and to trade. One of the conclusions of our report is that environmental policy seems to account for broadly similar costs for firms operating in the EU, Australia and the US.


The ‘silent’ companies

Companies that are proactive are often prepared for regulatory changes well ahead of time. They have already done the work, absorbed the costs and would therefore benefit from a levelling of the playing field through stricter regulation. A recent OECD report shows that well-designed environmental regulations do not hinder overall productivity growth and actually boost that of companies with high productivity. Unfortunately, those companies do not see the need to speak up and are rarely heard.

Having had good relations with a number of market-leading downstream users of chemicals for more than a decade, we are convinced that there is no conflict between the environmental performance of a company and doing good business. Our report and others show that this is also true right across industry. We hope that more and more companies will see the benefits of a proactive approach and that regulators, before taking decisions, should scrutinise upfront cost estimates, bearing in mind the innovative capacity of modern industry.

In times when we are told that the economy is shaky, we tend to see environmental concessions as a luxury, something that we can cut out when needed. Forgetting for a second the overarching objectives of environmental regulation, to avoid damage to our health or the ecosystem, consider this thought: might not a shaky economy be a very good reason to introduce or maintain stringent environmental regulations?

Download Chemical Watch Global Business Briefing