porter & linde, toward a new conception o the environment-compettiveness relationship.pdf

8/12/2019 PORTER & LINDE, Toward a New Conception o the Environment-Compettiveness Relationship.pdf

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Journal ofEconomicPerspectives Volume9 Number 4 Fall 1995 Pages97118

Toward a New Conception of theEnvironment-CompetitivenessRelationshipMichael E. Porter and Claas van der Linde

The relationship between environmental goals and industrial competitive-ness has normally been thought of as involving a tradeoff between socialbenefits and private costs. The issue was how to balance society's desire for

environmental pro tection with th e econom ic bu rden on industry. Framed this way,environmental improvement becomes a kind of arm-wrestling match. One sidepushes for tougher standards; the other side tries to beat the standards back.Our central message is that the environment-competitiveness debate has beenframed incorrectly. The notion of an inevitable struggle between ecology and theeconomy grows out of a static view of environmental regulation, in which technol-ogy, produc ts, processes and customer n eeds are all fixed. In this static world, wherefirms have already made their cost-minimizing choices, environmental regulationinevitably raises costs and will tend to reduce the market share of domestic com-panies on global markets.However, the paradigm defining com petitiveness has been shifting, particularlyin the last 20 to 30 years, away from this static m odel. T he new paradigm of inter-national competitiveness is a dynamic one, based on innovation. A body of researchfirst published in The Competitive Advantage ofNations has begun to address thesechanges (Porter, 1990). Competitiveness at the industry level arises from superiorproductivity, e ither in terms of lower costs than rivals or the ability to offer produ cts

Michael E.Porteris the C. RolandChristensen ProfessorofBusinessAdministration Har-vard BusinessSchool, Boston Massachusetts. Claas van der Linde is on the faculty of theInternational Managem ent Research Institute of St. Gallen University St. GallenSwitzerland.


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98 Journal of Economic Perspectives

with sup erior value tha t justify a prem ium price.1Detailed case studies of hun dred sof industries, based in dozens of countries, reveal that internationally competitivecompanies are not those with the cheapest inputs or the largest scale, but thosewith the capacity to improve and innovate continually. (We use the term innovationbroadly, to include a product's or service's design, the segments it serves, how it isproduced, how it is marketed and how it is supported.) Competitive advantage,then, rests not on static efficiency nor on optimizing within fixed constraints, buton the capacity for innovation and improvement that shift the constraints.This paradigm of dynamic competitiveness raises an intriguing possibility: inthis pape r, we will argue that properly designed environmental standards can trig-ger innovation that may partially or more than fully offset the costs of complying

with them . Such innov ation offsets, as we call them , can not only lower the ne tcost of meeting environmental regulations, but can even lead to absolute advan-tages over firms in foreign countries not subject to similar regulations. Innovationoffsets will be common because reducing pollution is often coincident with im-proving the productivity with which resou rces are used . In short, firms can actuallybenefit from properly crafted environmental regulations that are more stringent(or are imposed earlier) than those faced by their competitors in other countries.By stimulating innovation, strict environmental regulations can actually enhancecompetitiveness.There is a legitimate and continuing controversy over the social benefits ofspecific environmental standards, and there is a huge benefit-cost literature. Somebelieve that th e risks of pollution have been overstated; othe rs fear the reverse. Ourfocus here is not on the social benefits of environmental regulation, but on theprivate costs. Our argum ent is that whatever the level of social benefits, these costsare far higher than they need to be. Th e policy focus should, then, be on relaxingthe tradeoff between competitiveness and the environment rather than acceptingit as a given.

Th e L in k from Regulation to Prom oting InnovationIt is sometimes argued that companies must, by the very notion of profit seek-ing, be pursuing all profitable innovations. In the metaphor economists often cite,$10 bills will never be found on the ground because someone would have alreadypicked them up. In this view, if complying with environmental regulation can beprofitable, in the sense that a company can m ore than offset the cost of com pliance,then why is such regulation necessary?

1At the industry level, the m ean ing of competitiven ess is clear. At the level of a state or natio n, h owever,the notion of competitiveness is less clear because no nation or state is, or can be, competitive in every-thing. The proper def init ion of competi t iveness a t the aggregate level is the average productivityof in-dustry or the value created per unit of labor and per dollar of capital invested. Productivity depends onboth the quality and features of products (which determine their value) and the efficiency with whichthey a re p roduced .


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Michael E. Porter and C laas van der Linde 99

Th e possibility that regulation migh t act as a spur to innovation arises becausethe world does n ot fit the Panglossian belief that firms always make op timal choices.This will hold true only in a static optimization framework where information isperfect and profitable opportunities for innovation have already been discovered,so that profit-seeking firms need only choose their approach. Of course, this doesnot describe reality. Instead, the actual process of dynamic competition is charac-terized by changing technological opportunities coupled with highly incompleteinformation, organizational inertia and control problems reflecting the difficultyof aligning individual, group and corporate incentives. Companies have num erousavenues for technological improvement, and limited attention.Actual experience with energy-saving investments illustrates that in the real

world, $10 bills are waiting to be picked up. As one example, consider the GreenLights program of the Environmental Protection Agency. Firms volunteering toparticipate in this program pledge to scrutinize every avenue of electrical energyconsumption. In return, they receive advice on efficient lighting, heating and cool-ing operations. When the EPA collected data on energy-saving lighting upgradesrepo rted by companies as part of the Green L ights program , it showed that nearly80 percent of the projects had paybacks of two years or less (DeCanio, 1993). Yetonly after com panies became part of the program , and benefitted from informationand cajoling from the EPA, were these highly profitable projects carried out. Thispaper will present numerous other examples of where environmental innovationproduce s n et benefits for private com panies.2We are currently in a transitional phase of industrial history where companiesare still inexperienced in dealing creatively with environmental issues. The envi-ron m ent has not been a principal area of corporate or technological emphasis, andknowledge about environmental impacts is still rudimentary in many firms andindustries, elevating uncertainty about innovation benefits. Customers are also un-aware of the costs of resource inefficiency in the packaging they discard, the scrapvalue they forego and the disposal costs they bear. Rather than attempting to in-novate in every direction at once, firms in fact make choices based on how they

perceive their competitive situation and the world around them. In such a world,regulation can be an imp ortant influence on the direction of innovation, either forbette r or for worse. Properly crafted environmental regulation can serve at least sixpurposes.First, regulation signals com panies abou t likely resource inefficiencies and po-tential technological improvements. Companies are still inexperienced in measur-ing their discharges, understanding the full costs of incomplete utilization of re-sources and toxicity, and conceiving new approaches to minimize discharges or

2 Of course , there are many nonenvironmental examples of where industry has been extremely slow topick up available $10 bills by choosing n ew approa ches. For examp le , tota l quali ty man age me nt program sonly came to the Un ited States an d Eu rop e decade s after they ha d bee n widely diffused in Ja pa n, an donly af ter Japa nese f irms had devasta ted U.S. and Euro pean com peti tors in the m arketplace . Th e analogybetween searching for product quali ty and for environmental protection is explored la ter in this paper .


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eliminate hazardous substances. Regulation rivets attentiononthis areaofpotentialinnovation.

3Second, regulation focusedoninformation gatheringcanachieve majorben-efits by raising c orpo rate awareness.Forexam ple, Toxics Release Inventories, whichare published annuallyaspartofthe 1986 Superfund reauthorization, require mo rethan 20,000 manufacturing plantstoreport their releasesofsome320toxic chem-icals. Such information gathering often leadstoenvironmental improvem ent with-out mandating pollution reductions, sometimes evenatlower costs.Third, regulation reducestheuncertainty that investmentstoaddressthe en-vironm ent willbevaluable. Greater certainty encourages investmentin anyarea.Fourth, regulation creates pressure that motivates innovation andprogress.

Our broader researchoncompetitiveness highlightstheimpo rtant roleofoutsidepressurein theinnovation process,toovercome organizational inertia, fostercre-ative thinkingandmitigate agency problem s. Econom istsareusedto theargumentthat pressureforinnovationcan come from strong competitors, demandingcus-tomersorrising pricesof rawmaterials;we arearguing that properly craftedreg-ulationcanalso provide such pressure.Fifth, regulation levelsthetransitional playing field. Duringthetransitionpe-riod to innovation-based solutions, regulation ensures thatonecompany cannotopportunistically gain positionbyavoiding environm ental investments. Regulationsprovideabuffer u ntil new technologies becom e provenandlearning effects redu cetheir costs.Sixth, regulationisneededin thecaseofincomplete offsets.Wereadily adm itthat innovation can not always completely offset thecostofcomp liance, especiallyintheshort term before learningcanreducethecostofinnovation-based solutions.In such cases, regulation willbenecessaryto improve environmental quality.Stringent regulationcan actually produce greater innovationandinnovationoffsets tha nlaxregula tion . Relativelylaxregulationcan bedealt with increm entallyand without innovation,andoften with end-o f-pipe orsecondary treatmentso-lutions. More stringent regulation, however, focuses greater company attentionondischargesandem issions,andcompliance requires m ore fundam ental solutions,like reconfiguring productsandprocesses. W hilethecostofcompliancemay risewith stringency, then,thepotentialforinnovation offsets may rise even faster. Thusthe netcostofcompliancecanfall with stringencyand mayeven turn intoa netbenefit.

Ho w Innovation Offsets OccurInnovationinresponsetoenvironm ental regulationcantake two broad forms.

The first is that companies simplyget smarter abouthow to deal with pollution3Reg ulation also raisesthelikelihood that pro duc tandprocessingeneral wil l incorp orate environ men talimprovements .


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Toward a N ew Conception of theEnvironment Competitiveness Relationship 101

once it occurs, including the processing of toxic materials and emissions, how toreduce the am ount of toxic or harmful material genera ted (or convert it into salableforms) and how to improve secondary treatment. Molten Metal Technology, ofWaltham, Massachusetts, for example, has developed a catalytic extraction processto process many types of hazardous waste efficiently and effectively. This sort ofinnovation reduces the cost of compliance with pollution control, but changes noth-ing else.The second form of innovation addresses environmental impacts while simul-taneously improving the affected product itself and/or related processes. In somecases, these innovation offsets can exceed the costs of com pliance. This secondsort of innovation is central to ou r claim th at environm ental reg ulation can actually

increase industrial competitiveness.Innovation offsets can be broadly divided into product offsets and process off-sets. Product offsets occur when environmental regulation produces not just lesspollution, but also creates better-performing or higher-quality products, safer prod-ucts, lower product costs (perhaps from material substitution or less packaging),products with higher resale or scrap value (because of ease in recycling or disas-sembly) or lower costs of product disposal for users. Process offsets occur whenenvironmental regulation not only leads to reduced pollution, but also results inhigher resource productivity such as higher process yields, less downtime throughmo re careful m onitoring and ma intenance, materials savings (due to substitution,reuse or recycling of production inputs), better utilization of by-products, lowerenergy consumption during the production process, reduced material storage andhan dling costs, conversion of waste into valuable forms, red uce d waste disposal costsor safer workplace conditions . These offsets are frequently related , so that achievingone can lead to the realization of several others.

As yet, no broad tabulation exists of innovation offsets. Most of the work do nein this area involves case studies, because case studies are the only vehicle curren tlyavailable to measure compliance costs and both direct and indirect innovation ben-efits. Th is jou rnal is no t the place for a com prehensive listing of available casestudies. However, offering some examples should help the reader to understandhow common and plausible such effects are.Innovation to comply with environmental regulation often improves productperformance or quality. In 1990, for instance, Raytheon found itself required (bythe Montreal Protocol and the U.S. Clean Air Act) to eliminate ozone-depletingchlorofluorocarbons (CFCs) used for cleaning printed electronic circuit boardsafter the soldering process. Scientists at Raytheon initially thought that completeelimination of CFCs would be impossible. However, they eventually ad opted a newsemiaqueous, terpene-based cleaning agent that could be reused. The new m ethodproved to result in an increase in average product quality, which had occasionallybeen com prom ised by the old CFC-based cleaning agent, as well as lower opera tingcosts (Raytheon, 1991, 1993). It would not have been adopted in the absence ofenvironmental regulation mandating the phase-out of CFCs. Another example isthe move by the R obbins Com pany (a jewelry company based in A ttleboro,


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Massachusetts)to aclosed-loop, zero-discharge systemforhandlingthewater usedin plating (Berube, Nash, MaxwellandEhrenfe ld, 1992). Robbins was facingclo-suredue toviolationof itsexisting discharge permits.Thewater pro ducedby pu-rification through filteringand ionexchangein the newclosed-loop system was40times cleaner than city waterand led tohigher-quality platingandfewer rejects.The result was enha nced competitiveness.Environmental regulations mayalso redu ce prod uct costsbyshowinghowto eliminate costly materials, reduce unnecessary packagingor simplify designs.Hitachi responded to a 1991 Japanese recyclinglaw by redesigning productstoreduce disassembly time.In theprocess,thenumberofpartsin awashing mach inefell16percent,and thenumberofpartson avacuum cleaner fell30percent.Inthis way, movestoredesign pro ductsforbette r recyclabilitycanleadtofewer com -ponentsandthus easier assembly.Environmental standardscanalso leadtoinnovation tha t reduces disposal costs(or boost scraporresale value)for theuser.Forinstance, regulation that requiresrecyclabilityof productscanlead to designs that allow valuable materials to berecovered more easily after disposalof the product. Either thecustomeror themanufacturer who takes back used p roducts reaps g reater value.These haveallbeen examplesofproduct offsets,butprocess offsetsare com-monaswell. Process changestoreduce emissions frequently resultinincreasesinproduct yields.AtCiba-Geigy's dyestuff plantinNew Jersey,theneedtomeetnewenvironmental standards causedthefirmtoreexamineitswastewater stream s.Twochangesin itsproduc tion processreplacing iron witha different chemicalcon-version agent thatdid notresultin theformationofsolid iron sludgeandprocesschanges tha t eliminatedthereleaseofpotentially toxic prod uct intothewastewaterstream not only boosted yieldby 40percentbutalso elimina ted wastes, resultingin annual cost savingsof$740,000 (Dorfman, MuirandMiller, 1992).4Similarly, 3M discovered tha tinproduc ing adhesivesinbatches th at were trans-ferred to storage tanks,one bad batch could spoiltheentire contentsof a tank.Th e result was wastedrawmaterialsandhigh costsofhazardous waste disposal.3Mdevelopeda newtechniqueto runquality tests more rapidlyon newbatches.Thenew techniq ue allowed 3Mtoreduce hazardous wastesby 10tonsperyearatalmostno cost, yieldinganannu al savingsof more than $200,000 (Sheridan, 1992).Solving environmental problemscanalso yield benefits in termsofreduceddowntime. Many chemical production processesatDuPont,for example, requirestart-up time to stabilizeandbring ou tpu t within specifications, resulting in aninitial period during which only scrapandwasteis produced. Installing higher-quality monitoring equipmenthasallowed DuPonttoreduce production interrup-tionsand theassociated wasteful production start-ups, thus reducing waste gener-ationaswellasdowntime (Parkinson, 1990).

4Wesho uld n ote that this pla nt was ultimately closed. However,theexample descr ibed here does i l lus-tratetheroleofregulatory pressureinprocess innovation.


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Michael E. Porter and Claas van der Linde 103

Regulation can trigger innovation offsets through substitution of less costlymaterials or better utilization of materials in the process. For example, 3M facednew regulations that will force many solvent users in pa per, plastic an d m etal coat-ings to reduce its solvent emissions 90 perc ent by 1995 (Boroughs and Carpen ter,1991). The company responded by avoiding the use of solvents altogether anddeveloping coating p rodu cts with safer, water-based solutions. At another 3M plant,a change from a solvent-based to a water-based carrier, used for coating tablets,eliminated 24 tons per year of air em issions. The $60,000 investment saved $180,000in unneeded pollution control equipment and created annual savings of $15,000in solvent purchases (Parkinson, 1990). Similarly, when federal and state regula-tions required that Dow Chemical close certain evaporation pond s used for storingand evaporating wastewater resulting from scrubbing hydroch loric gas with causticsoda, Dow redesigned its production process. By first scrubbing the hydrochloricacid with water and then caustic soda, Dow was able to eliminate the need forevaporation ponds, reduce its use of caustic soda, and capture a portion of thewaste stream for reuse as a raw material in other parts of the plant. This processchan ge cost $250,000 to implem ent. I t redu ced caustic waste by 6,000 tons pe r yearand hydrochloric acid waste by 80 tons per year, for a savings of $2.4 million peryear (Dorfman, Muir and Miller, 1992).

The Robbins Company's jewelry-plating system illustrates similar benefits. Inmoving to the closed-loop system that purified and recycled water, Robbins savedover $115,000 pe r year in water, chemicals, disposal costs, and lab fees and reducedwater usage from 500,000 gallons per week to 500 gallons per week. The capitalcost of the new system, which completely eliminated the w aste, was $220,000, com-pared to abou t $500,000 for a wastewater trea tm ent facility that would have broughtRobbins' discharge into com pliance only with curre nt regulations.At the Tobyhanna Army Depot, for instance, improvements in sandblasting,cleaning, plating and painting operations reduced hazardous waste generation by82 percent between 1985 and 1992. That reduction saved the depot over $550,000in disposal costs, and $400,000 in m aterial purc hasing and handling costs (PR News-wire,1993).Innovation offsets can also be derived by converting waste into more valuableforms. The Robbins Company recovered valuable precious metals in its zero dis-charge plating system. At Rhone-Poulenc's nylon plant in Chalampe, France, di-acids (by-products that had been produced by an adipic acid process) used to beseparated and incinerated. Rhone-Poulenc invested Fr 76 million and installed newequipment to recover and sell them as dye and tanning additives or coagulationagents, resulting in annual revenues of about Fr 20.1 million. In the United States,similar by-products from a Monsanto Chemical Company plant in Pensacola, Flor-ida, are sold to utility com panies who use them to accelerate sulfur dioxide rem ovaldur ing flue gas desulfurization (Basta and Vagi, 1988).A few studies of innovation offsets do go beyond individual cases and offersome broader-based data. One of the most extensive studies is by INFORM, anenvironmental research organization. INFORM investigated activities to prevent


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104 Journal of Econom ic Perspectives

waste generationso-called source reduction activitiesat 29 chemical plants inCalifornia, Ohio and New Jersey (Dorfman, Muir and Miller, 1992). Of the 181source-reduction activities identified in this study, only one was found to have re-sulted in a net cost increase. Of the 70 activities for which the study was able todocument changes in product yield, 68 reported yield increases; the average yieldincrease for the 20 initiatives with specific available data was 7 percent. These in-novation offsets were achieved with surprisingly low investments and very shortpayback periods. One-quarter of the 48 initiatives with detailed capital cost infor-mation required no capital investment at all; of the 38 initiatives with payback pe-riod data, nearly two-thirds were shown to have recouped their initial investmentsin six months or less. The annual savings per dollar spent on source reductionaveraged $3.49 for the 27 activities for which this information could be calculated.The study also investigated the motivating factors behind the plant's source-reduction activities. Significantly, it found that waste disposal costs were the mostoften cited, followed by environmental regulation.To build a broader base of studies on innovation offsets to environmentalregulation, we have been collaborating with the Management Institute for Environ-ment and Business on a series of international case studies, sponsored by the EPA,of industries and entire sectors significantly affected by environmental regulation.Sectors studied include pulp and paper, paint and coatings, electronics manufac-turing, refrigerators, dry cell batteries and printing inks (Bonifant and Ratcliffe,1994; Bonifant 1994a,b; van der Linde, 1995a,b,c). Some exam ples from that efforthave already been described her e.A solid body of case study evidence, then , dem onstra tes that innovation offsetsto environmental regulation are common.5Even with a generally hostile regulatoryclimate, which is not designed to encourage such innovation, these offsets cansometimes exceed the cost of compliance. We expect that such examples will pro-liferate as companies and regulators become more sophisticated and shed oldmindsets.

Early-Mover Advan tage in International MarketsWorld demand is moving rapidly in the direction of valuing low-pollutionand energy-efficient products, not to mention more resource-efficient productswith higher resale or scrap value. Many companies are using innovation to com-man d price premium s for gr ee n products and open up new market segments.For example, Germany enacted recycling standards earlier than in most other

5Of course, a list of case examples, however long, does not prove that companies can always innovateor substitute for careful empirical testing in a large cross-section of indus tries. Given our curr ent abilityto capture the true costs and often multifaceted benefits of regulatory-induced innovation, reliance onthe weight of case study evidence is necessary. As we discuss elsewhere, the re is no countervailing set ofcase studies that shows that innovation offsets are unlikely or impossible.


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Toward a N ew Conception of theEnvironment Competitiveness Relationship 105

cou ntries , which gave Germ an firms an early-mover adva ntage in develop ing lesspackaging-intensive products, which have been warmly received in the market-place. Scandinavian pulp and paper producers have been leaders in introducingnew environmentally friendly prod uction processes, and thus Scandinavian pulpand p ape r eq uipm ent su ppliers such as Kamyr and Sunds have made m ajor gainsinternationally in selling innovative bleaching equ ipm ent. In the U nited States,a parallel example is the development by Cummins Engine of low-emissionsdiesel engines for trucks, buses and other applications in response to U.S. en-vironmental regulations. Its new competence is allowing the firm to gain inter-national market share.Clearly, this argum ent only works to the e xtent tha t national environm entalstandards anticipate and are consistent with international trends in environ-mental protection, rather than break with them. Creating expertise in cleaningup aban don ed hazardou s waste sites, as the U.S. Superfund law has don e, doeslittle to benefit U.S. suppliers if no other country adopts comparable toxicwaste cleanu p re quire m ents. But when a competitive edg e is attained, especiallybecause a company's home market is sophisticated and demanding in a waythat pressures the company to further innovation, the economic gains can belasting.

Answering Defenders of the Traditional ModelOur argument that strict environmental regulation can be fully consistent withcompetitiveness was originally p ut forward in a shortScientific Americanessay (P orter,1991;see also van der Linde, 1993). This essay received far more scrutiny than weexpected. It has been warmly received by many, especially in the business com-munity. But it has also had its share of critics, especially am ong econom ists (Jaffe,Peterson, Portney and Stavins, 1993, 1994; Oa tes, Palmer and Portney, 1993; Palmerand Simpson, 1993; Simpson, 1993; Schmalensee, 1993).One criticism is tha t while innov ation offsets are th eoretically possible, theyare likely to be rare or small in practice. We disagree. Pollution is the emissionor discharge of a (harmful) substance or energy form into the environment.Fun dam entally, it is a ma nifestation of econ om ic waste and involves unnecessary,inefficient or incomplete utilization of resources, or resources not used to gen-era te t heir highes t value. In m any cases, emissions are a sign of inefficiency andforce a firm to perform non-value-creating activities such as handling, storageand disposal. Within the companyitself, the costs of poor resource utilizationare most obvious in incomplete material utilization, but are also manifested inpoor process control, which generates unnecessary stored material, waste and

defects. There are many other hidden costs of resource inefficiencies later inthe life cycle of the product. Packaging discarded by distributors or customers,for example, wastes resources and adds costs. Customers bear additional costswhen they use polluting products or products that waste energy. Resources are


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also wasted when customers discard products embodying unused materials orwhen they bear the costs of prod uct disposal.

6As the many examples discussed earlier suggest, the opportunity to reduce costby diminishing pollution should thus be the rule, n ot the exception. H ighly toxicmaterials such as heavy metals or solvents are often expensive and hard to handle,and reducing their use makes sense from several points of view. More broadly,efforts to reduce pollution and maximize profits share the same basic principles,including the efficient use of inputs, substitution of less expensive materials andthe minimization of unneeded activities.7A corollary to this observation is that scrap or waste or emissions can carryimp ortant information about flaws in prod uct design or the produc tion process. A

recent study of process changes in 10 printed circuit board manufacturers, forexample, found that 13 of 33 major changes were initiated by pollution controlpersonnel. Of these, 12 resulted in cost reduction, eight in quality improvementsand five in extension of production capabilities (King, 1994).Environmental improvement efforts have traditionally overlooked the systemscost of resource inefficiency. Improvement efforts have focused on pollution controlthrough better identification, processing and disposal of discharges or waste, aninherently costly approach. In recent years, more advanced companies and regu-lators have embraced the concept ofpollutionprevention , sometimes called sourcereduction, which uses material substitution, closed-loop processes and the like tolimit pollution before it occurs.But although pollution prevention is an im portan t step in the right direction,ultimately companies and regulators must learn to frame environmental improve-ment in terms ofresourceprodu ctivity, or the efficiency and effectiveness with whichcompanies and their customers use resources.8 Improving resource productivitywithin companies goes beyond eliminating pollution (and the cost of dealing withit) to lowering true econom ic cost and raising the true economic value of products.At the level of resource productivity, environmental improvement and competitive-ness come together. The imperative for resource productivity rests on the privatecosts that companies bear because of pollution, not on mitigating pollution's socialcosts. In addressing these private costs, it highlights the opportunity costs ofpollutionwasted resources, wasted efforts and diminished product value to thecustomernot its actual costs.

6At its core, then, pollution is a result of an intermediate state of technology or managem ent m ethods.Apparent exceptions to the resource productivity thesis often prove the rule by highlighting the role oftechnology. Paper made with recycled fiber was once greatly inferior, but new de-inking and othertechnologies have made its quality better a nd b etter. A pparen t tradeoffs between energy efficiency andemissions rest on incomplete combustion.7Schmalensee (1993) counters that NOxem issions often result from thermodynamically efficient com-bustion. But surely this is an anomaly, not th e rule , and may repre sent an inte rme diate level of efficiency.8On e of th e pio neerin g efforts to see environme ntal improvem ent this way is Joel Makower's (1993)book, Th eE-Factor: The Bottom Line Approachto EnvironmentallyResponsibleBusiness.


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This view of pollution as unproductive resource utilization suggests a helpfulanalogy between environmental protection and product quality measured by de-fects. Companies used to promote quality by conducting careful inspections duringthe prod uction process, and then by creating a service organization to correct thequality problems tha t turn ed up in the field. This approach has proven misguided.Instead , th e m ost cost-effective way to improve quality is to build it into the entireprocess, which includes design, purchased com ponents, process technology, ship-ping and handling techniques and so forth. This method dramatically reduces in-spection, rework and the need for a large service organization. (It also leads to theoft-quoted phrase , quality is free. ) Similarly, the re is reason to believe that com-panies can enjoy substantial innovation offsets by improving resource productivitythroughout the value chain instead of through dealing with the manifestations ofinefficiency like emissions and discharges.Indeed, corporate total quality management programs have strong potentialalso to reduce pollution and lead to innovation offsets.9Dow Chemical, for exam-ple, has explicitly identified the link between quality improvement and environ-mental performance, by using statistical process control to reduce the variance inprocesses and lower waste (Sheridan, 1992).A second criticism of our hypothesis is to point to the studies finding high costsof compliance with environm ental regulation, as evidence tha t there is a fixed tradeoffbetween regulation and competitiveness. But these studies are far from definitive.

Estimates of regulatory compliance costs prior to enactment of a new ruletypically exceed the actual costs. In part, this is because such estimates are oftenself-reported by industries who oppose the rule, which creates a tendency to infla-tion. A prim e example of this type of thinking was a statement by Lee Iacocca, thenvice president at the Ford Motor Company, during the debate on the 1970 CleanAir Act. Iacocca warned that compliance with the new regulations would requirehuge price increases for automobiles, force U.S. automobile production to a haltafter January 1, 1975, and do irreparable damage to the U.S. econom y (Smith,1992). Th e 1970 Clean Air Act was subsequently enacted , and Iacocca's p rediction sturne d out to be wrong. Similar dire predictions were made during the 1990 CleanAir Act debate; industry analysts predicted tha t burd ens on the U.S. industry wouldexceed $100 billion. Of course, the reality has proven to be far less dramatic. Inone study in the pulp and paper sector, actual costs of compliance were $4.00 to$5.50 per ton com pared to original industry estimates of $16.40 (Bonson, M c-Cubbin and Sprague, 1988).Early estimates of compliance cost also tend to be exaggerated because theyassume no innovation. Early cost estimates for dealing with regulations concerningemission of volatile compounds released during paint application held everything

9 A case study of pollution prevention in a large multinational firm showed those units with strong totalquali ty manag em ent pro gram s in place usually und ertak e m ore effective pollution prevention effortsthan units with less commitment to tota l quali ty management. See Rappaport (1992) , c i ted in U.S.Congress, Office of Technology Assessment (1994).


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else constant, assuming only the add ition of a hood to cap ture the fumes from pain tlines. Innovation that improved the p aint's transfer efficiency subsequently allowednot only the reduction of fumes but also paint usage. Further innovation in water-borne paint formulations without any VOC-releasing solvents made it possible toeliminate the need for capturing and treating the fumes altogether (Bonifant,1994b). Similarly, early estimates of the costs of complying with a 1991 federa l cleanair regulation calling for a 98 percent reduction in atmospheric emissions of ben-zene from tar-storage tanks used by coal tar distillers initially assumed that tar-storage tanks would have to be covered by costly gas blankets. While m any distillersopposed the regulations, Pittsburgh-based Aristech Chemical, a major distiller ofcoal tar, subsequently developed an innovative way to remove benzene from tar inthe first processing step, thereby eliminating the need for the gas blanket andresulting in a saving of $3.3 million instead of a cost increase (PR Newswire, 1993).Prices in the new market for trading allowances to emit SO 2 provide anothervivid exam ple. At the time the law was passed, analysts projected that the marginalcost of SO 2controls (and, therefore, the price of an emission allowance) would beon the order of $300 to $600 (or more) per ton in Phase I and up to $1000 orm ore in Phase II. Actual Phase I allowance prices have turned ou t to be in the $170to $250 range, and recent trades are heading lower, with Phase II estimates onlyslightly highe r (after adjusting for the time value of money). In case after case, thedifferences between initial predictions and actual outcomesespecially after in-dustry has had time to learn and innovateare striking.Econometric studies showing that environmental regulation raises costs andharms competitiveness are subject to bias, because net compliance costs are over-estimated by assuming away innovation benefits. Jorgenson and Wilcoxen (1990),for example, explicitly state that they did not attempt to assess public or privatebenefits. Other often-cited studies that solely focus on costs, leaving out benefits,are H azilla and Kopp (1990) and Gray (1987). By largely assuming away innovationeffects, how could economic studies reach any other conclusion than they do?Internationally competitive industries seem to be m uch better able to innovatein response to environmental regulation than industries that were uncompetitiveto begin with, but no study measuring the effects of environmental regulation onindustry competitiveness has taken initial competitiveness into account. In a studyby Kalt (1988), for instance, the sectors where high environmental costs were as-sociated with negative trade performance were ones such as ferrous metal mining,nonferrous mining, chemical and fertilizer manufacturing, primary iron and steeland primary nonferrous metals, industries where the United States suffers fromdwindling raw material deposits, very high relative electricity costs, heavily subsi-dized foreign competitors and other disadvantages that have rendered them un-competitive quite apart from environmental costs.10Oth er sectors identified by Kalt

10It should be observed that a strong correlation between environm ental costs and industry competi-tiveness does not necessarily indicate causality. Omitting environmental benefits from regulation, and


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Toward a N ew Conception of theEnvironment CompetitivenessRelationship 109

as having incurred very high environmental costs can actually be interpreted assupporting our hypothesis. Chemicals, plastics and synthetics, fabric, yarn andthread, miscellaneous textiles, leather tanning, paints and allied products, and pa-perboard containers all had high environmental costs but displayed positive tradeperformance.A num ber of studies have failed to find th at stringent env ironm ental regulationhurts industrial competitiveness. Meyer (1992, 1993) tested and refuted the hy-pothesis that U.S. states with stringent environmental policies experience weak ec-onomic growth. Leonard (1988) was unable to demonstrate statistically significantoffshore movements by U.S. firms in pollution-intensive industries. Wheeler andMody (1992) failed to find that environmental regulation affected the foreign in-vestment decisions of U.S. firms. Repetto (1995) found that industries heavily af-fected by environmental regulations exp erienced slighter reduc tions in their shareof world exports than did the entire American industry from 1970 to 1990. UsingU.S. Bureau of Census Data of more than 200,000 large manufacturing establish-men ts, the study also found that plants with poo r en vironmen tal records a re gen-erally not more profitable than cleaner ones in the same industry, even controllingfor their age, size and technology. Jaffe, Peterson, Portney and Stavins (1993) re-cently surveyed more than 100 studies and concluded there is little evidence tosupport the view that U.S. environmental regulation had a large adverse effect oncompetitiveness.Of course, these studies offer no proof for our hypothesis, either. But it isstriking that so many studies find tha t even the poorly designed environm ental lawspresently in effect have little adverse effect on competitiveness. After all, traditionalapproaches to regulation have surely worked to stifle potential innovation offsetsand imposed unnecessarily h igh costs of compliance on industry (as we will discussin greater detail in the next section). Thus, studies using actual compliance coststo regulation are heavily biased toward finding th at such regu lation has a substantialcost.11In no way do such studies measure the potential of well-crafted environm en-tal regulations to stimulate competitiveness.

A third criticism of our thesis is that even if regulation fosters innovation, itwill harm competitiveness by crowding out other potentially more productive in-vestments or avenues for innovation. Given incomplete information, the limitedreporting obvious (end-of-pipe) costs but not more difficult to identify or quantify innovation benefitscan actually obscure a reverse causal relationship: industries that were uncompetitive in the first placemay well be less able to innovate in respons e to environ men tal pressures, and thus be p ron e toend-of-pipe solutions whose costs are easily measured. In contrast, competitive industries capable of addressingenviron men tal prob lems in innovative ways may repor t a lower complianc e cost .11Gray and Shadbegian (1993) , anothe r of ten-men tioned study, suffers f rom several of the problem sdiscussed here . The ar t ic le uses industry-reported co mplian ce costs and doe s not co ntrol for plant tech-nology vintage or the extent of other p roductivity-enhancing investments a t the plant . High com pliancecosts may well have been borne in old, inefficient plants where firms opted for secondary treatmentra the r than innovation. M oreover, U.S. prod ucers may well have been disadvantaged in innovating giventhe n ature of the U.S. regulatory processthis seems clear ly to have been the case in pulp an d paper ,one of the industr ies studied by the Management Insti tute for Environment and Business (MEB).


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attention many companies have devoted to environmental innovations and th e in-herent linkage between pollution and resource productivity described earlier, itcertainly is not obvious that this line of innovation has been so thoroughly explo redthat the marginal benefits of further investment would be low. The high returnsevident in the studies we have cited support this view. Moreover, environmentalinvestments rep rese nt only a small percentage of overall investment in all but a veryfew industries.12A final counterargument, more caricature than criticism, is that we are assert-ing that any strict environmental regulation will inevitably lead to innovation andcompetitiveness. Of course, this is not our position. Instead, we believe that if reg-ulations are properly crafted and companies are attuned to the possibilities, theninnovation to minimize and even offset the cost of compliance is likely in manycircumstances.

Designing E nvironmental Regulation to E ncourage InnovationIf environmental standards are to foster the innovation offsets that arise fromnew technologies and approaches to production, they should adhe re to three prin-ciples. First, they must create th e maxim um opportun ity for inno vation, leaving the

approach to innovation to industry and not the standard-setting agency. Second,regulations should foster co ntinuous im provement, ra ther than locking in any par-ticular technology. Third, the regulatory process should leave as little room as pos-sible for unce rtainty at every stage. Evaluated by these principles, it is clear that U.S.environmental regulations have often been crafted in a way that deters innovativesolutions, or even renders them impossible. Environmental laws and regulationsneed to take three substantial steps: phrasing environmental rules as goals that canbe met in flexible ways; encouraging innovation to reach and exceed those goals;and administering the system in a coordinated way.Clear Goals Flexible ApproachesEnvironmental regulation should focus on outcomes, not technologies.13Pastregulations have often prescribed particular remediation technologieslike cata-lysts or scrubbers to address air pollutionrather than encouraging innovativeapproach es. Am erican environm ental law emphasized phrases like bes t availabletechnology, or bes t available con trol techno logy. But legislating as if one par-12In paints and coatings, for exam ple , environm ental investments were 3.3 percen t of tota l capita l in-vestment in 1989. According to Depar tm ent of Com merc e (1991) data (se lf -reported by industry) , capita lspending for pollution control and abatement outside of the chemical , pulp and paper , petroleum andcoal, and pr imary metal sectors made up just 3.15 perc ent of tota l capita l spendin g in 1991.13Th ere will always be instances of extremely hazardo us pollution requir ing imm ediate action, w hereimposing a specif ic technology by com ma nd and control m ay be the best or only viable solution. However ,such methods should be seen as a last resor t .


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ticular technology is always the be st almost guara ntees that innovation will no toccur.Regulations should encourage product and process changes to better utilizeresources and avoid pollution early, rather than mandating end-of-pipe or second-ary treatm ent, which is almost always more costly. For regulato rs, this poses a ques-tion of where to impose regulations in the chain of production from raw materials,equipment, the producer of the end product, to the consumer (Porter, 1985).Regulators must consider the technological capabilities and resources available ateach stage, because it affects the likelihood that innovation will occur. With that inm ind, the governing principle should be to regulate as late in the produc tion chainas practical, which will normally allow m ore flexibility for innovation the re and inupstream stages.Th e EPA should move beyond the single medium (air, water and so on) as theprincipal way of thinking about the environment, toward total discharges or totalimpact.14 It should reorganize around affected industry clusters (including sup-pliers and related industries) to better unders tand a cluster's products, technologiesand total set of environmental problems. This will foster fundam ental rather thanpiecemeal solutions.15

Seeding and Spreading Environmental InnovationsWhere possible, regulations should include the use of market incentives, in-cluding pollution taxes, deposit-refund schemes and tradable permits.16 Such ap-proaches often allow considerable flexibility, reinforce resource productivity, andalso create incentives for ong oing innovation. M andating outcom es by setting emis-sion levels, while preferab le to choosing a particu lar technology, still fails to provideincentives for continued and ongoing innovation and will tend to freeze a statusquo u ntil new regulations appear. In contrast, market incentives can encou rage theintroduction of technologies that exceed current standards.The EPA should also promote an increased use of preemptive standards byindustry, which appear to be an effective way of dealing with environmental

14A first step in this direction is the EPA 's rece nt ad justm ent o f the tim ing of its air rule for th e p ulpand pap er industry so that i t wil l coincide with the ru le for water , a l lowing industry to see the d ual imp actof the rules and inno vate accordingly.15Th e EPA's regulatory c luster team con cept, un der which a team from relevant EPA offices appro achesparticular problems for a broader viewpoint, is a first step in this direction. Note, however, that of the17 c luster grou ps formed, only four were organized aro und specif ic industr ies (petroleum ref ining, oiland gas prod uctio n, pulp a nd p aper , pr int ing) , while the remain ing 13 focused on specific chemicals ortypes of pollution (U.S. Congress, Office of Technology Assessment, 1994).16Pollution taxes can be im plem ented as eff luent charges on the quan ti ty of pollution d ischarges, asuser charges for public treatment facilities, or as product charges based on the potential pollution of aprodu ct. In a deposit- refund system, such pro duc t charges may be rebate d if a produ ct user disposes ofit properly (for example, by returning a lead battery for recycling rather than sending it to a landfill) .Un der a tradable perm it system, like that included in the recent Clean Air Act Am endm ents, a max imu mam ou nt of pollution is se t, and r ights e qual to that cap are distr ibuted to f irms. Firms must hold eno ughrights to cover their emissions; firms with excess rights can sell them to firms who are short.


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regulation. Preemptive standards, agreed to with EPA oversight to avoid collusion,can be set and me t by industry to avoid government standards that m ight go furtheror be more restrictive on innovation. They are not only less costly, but allow fasterchange and leave the initiative for innovation with industry.The EPA should play a major role in collecting and disseminating informationon innovation offsets and their consequences, both here and in other countries.Limited knowledge about opportunities for innovation is a major constraint oncompany behavior. A good start can be the clearin gho use of information onsource-reduction approaches that EPA was directed to establish by the PollutionPrevention Act (PPA) of 1990. The Green Lights and Toxics Release Inventoriesdescribed at the start of this paper are other programs that involve collecting andspreading inform ation. Yet another imp ortant initiative is the EPA program to com-pare emissions rates at different companies, creating methodologies to m easure thefull internal costs of pollution and ways of exchanging best practices and learningon innovative technologies.Regulatory approaches can also function by helping create demand pressurefor environmental innovation. On e example is the prestigious German Blue An-gel eco-label, introduced by the German government in 1977, which can be dis-played only by products meeting very strict environmental criteria. One of the la-bel's biggest success stories has been in oil and gas heating appliances: the energyefficiency of these appliances improved significantly when the label was introdu ced ,and emissions of sulfur dioxide, carbon monoxide and nitrogen oxides were re-duced by more than 30 percent.Another point of leverage on the demand side is to harness the role of gov-ernment as a demanding buyer of environmental solutions and environmentallyfriendly produc ts. While there are benefits of governm ent proc urem ent of prod uctssuch as recycled paper and retreaded tires, the far more leveraged role is in buyingspecialized environmental equipment and services.17One useful change would beto alter the current practice of requiring bidders in competitive bid processes forgovernm ent projects to only bid with pro ven technologies, a practice sure tohinder innovation.The EPA can employ demonstration projects to stimulate and seed innovativenew technologies, working through universities and industry associations. A goodexam ple is the project to develop and dem ons trate technologies for super-efficientrefrigerators, which was conducted by the EPA and researchers in government,academia and the private sector (United States Environmental Protection Agency,1992). An estimated $1.7 billion was spent in 1992 by the federal government onenvironmental technology R&D, bu t only $70 million was directed toward researchon pollution prevention (U.S. Congress, Office of Technology Assessment, 1994).Incentives for innovation must also be built into the regulatory process itself.The curr ent perm itting system un der Title V of the Clean Air Act Am endm ents, to17See Marron (1994) for a de mo nstration of the m odest productivity gains likely from governm entprocurem ent of standard items, although in a static model.


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Toward a New Conception of theEnvironment Competitiveness Relationship 113

choose a negative example, requires firms seeking to change or ex pand their pro-duction process in a way that might impact air quality to revise their permit exten-sively, no matter how little the potentialeffecton air quality may be.This n ot only d etersinnovation, but drains the resources of regulators away from timely action on sig-nificant matters. On the positive side, the state of Massachusetts has initiated aprogram to waive permits in some circumstances, or promise an im mediate perm it,if a company takes a zero-discharge approach.A final priority is new forums for settling regulatory issues that minimize liti-gation. Potential litigation creates enormous uncertainty; actual litigation burnsresources. Mandatory arbitration, or rigid arbitration steps before litigation is al-lowed, would benefit innovation. There is also a need to rethink certain liabilityissues. While adequate safeguards must be provided against companies that reck-lessly harm citizens, ther e is a pressing nee d for liability standards that m ore clearlyrecognize the countervailing hea lth and safety benefits of innovations that lower oreliminate the discharge of harmful pollutants.Regulatory CoordinationCoo rdination of environm ental regulation can be improved in at least threeways: between industry and regulators, between regulators at different levelsand places in government, and between U.S. regulators and their internationalcounterparts.In setting environm ental standards an d regulatory processes to encourage in-novation, substantive industry participation in setting standards is needed rightfrom the beginning, as is common in many European countries. An appropriateregulatory process is one in which regulations themselves are clear, who m ust m eetthem is clear, and industry accepts the regulations and begins innovating to addressthem , rather than spend ing years attempting to delay or relax them . In our c urre ntsystem, by the time standards a re finally settled and clarified, it is often too late toaddress them fundamentally, making secondary treatm ent the only alternative. Weneed to evolve toward a regulatory regime in which the EPA and other regulatorsmake a commitment that standards will be in place for, say, five years, so that in-dustry is motivated to innovate ra ther than adop t increm ental solutions.Different parts and levels of governm ent m ust coordinate and organize them-selves so that com panies are no t forced to deal with multiple parties with inconsis-tent desires and ap proaches. As a matter of regulatory structure, the EPA's proposednew Innovative Technology Council, being set up to advocate the development ofnew technology in every field of environmental policy, is a step in the right direc-tion. Another unit in the EPA should be responsible for continued reengineeringof the process of regulation to reduce uncertainty and minimize costs. Also, anexplicit strategy is nee ded to coord inate and harm onize federal a nd state activities.18

18Th e c luster-based approach to regulation discussed ear l ier should a lso help e l iminate the practice ofsending multiple EPA inspectors to the same plant who do not ta lk to one another , make conflic t ing


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A final issue of coordination involves the relationship between U.S. environ-men tal regulations an d those in othe r countries. U.S. regulations should be in syncwith regu lations in other coun tries an d, ideally, be slightly ahead of them . This willminimize possible competitive disadvantages relative to foreign competitors whoare not yet subject to the standard, while at the same time maximizing exportpotential in the pollution control sector. Standards that lead world developmentsprovide domestic firms with opportunities to create valuable early-mover advan-tages. However, standards should not be too far ahead of, or too different in char-acter from , those that are likely to apply to foreign com petitors, for this would leadindustry to innovate in the wrong directions.Critics may note, with some basis, that U.S. regulators may not be able to pro-ject be tter than firms what type of regulations, and resultant dem ands for environ-mental products and services, will develop in other nations. However, regulatorswould seem to possess grea ter resources and information than firms for understand -ing the pa th of regulation in othe r c ountries. Moreover, U.S. regulations influencethe type and stringency of regulations in other nations, and as such help definedemand in other world markets.

Imperatives for CompaniesOf course, the regulatory reforms described here also seek to change howcompanies view environmental issues.19Companies must start to recognize the en-vironm ent as a competitive op portunity not as an annoying cost or a postpona blethrea t. Yet many com panies are ill-prepared to carry out a strategy of environmentalinnovation that produces sizable compensating offsets.For starters, companies must improve their measurement and assessmentmethods to detect environmental costs and benefits.20 Too often, relevant infor-ma tion is simply lacking. Typical is the case of a large pro ducer of organic chemicalsthat retained a consulting firm to explore opportunities for reducing waste. The

client thou gh t it had 40 waste streams, but a careful audit revealed th at 497 differentdemands and waste t ime and resources. The potentia l savings f rom cluster- and multimedia-or ientedperm itt ing and inspection p rogram s appear to be substantia l . Durin g a pilot mu ltimedia test ing prog ramcalled the Blackstone Project , the Massachusetts Department of Environmental Protection found thatmultim edia inspections required 50 perc ent less t ime than conv entional inspectionswhich a t that t imeaccounted for near ly one-fourth of the depar tment 's operating budget (Roy and Dillard, 1990) .19For a mo re deta iled perspective on chan ging com pany mind sets about competi t iveness and environ-mentalism, see Porter and van der Linde (1995) in the Harvard Business Review.20Accoun ting meth ods that are currently being discussed in this context include full cost accoun ting,which attemp ts to assign all costs to specific pro duc ts or processes, and tota l cost acc ou nti ng , whichgoes a step further and attempts both to allocate costs more specifically and to include cost items beyondtraditional concerns, such as indirect or hidden costs (like compliance costs, insurance, on-site wasteman agem ent, op eration of pollution control a nd future l iabil ity) and less tangible benefi ts ( l ike revenuefrom e nha nce d co mpan y imag e) . See White , Becker and Goldste in (1991) , c i ted in U.S. Congress, Officeof Technolog y Assessment (1994) .


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waste streams were actually present (Parkinson, 1990). Few companies analyze thetrue cost of toxicity, waste, discharges and the second-order impacts of waste anddischarges on other activities. Fewer still look beyond the out-of-pocket costs ofdealing with pollution to investigate the opportunity costs of the wasted resourcesor foregone productivity. How much money is going up the smokestack? Whatpercentage of inputs are wasted? Many companies do not even track env ironmentalspen ding carefully, or subject it to evaluation techniques typical for no rm alinvestments.Once environmental costs are measured and understood, the next step is tocreate a presumption for innovation-based solutions. Discharges, scrap and emis-sions should be analyzed for insights about beneficial product design or processchanges. Approaches based on treatment or handling of discharges should be ac-cepted only after being sent back several times for reconsideration. The responsi-bility for environmental issues should not be delegated to lawyers or outside con-sultants except in the adversarial regulatory process, or even to internal specialistsremoved from the line organization, residing in legal, governm ent or environmen-tal affairs departments. Instead, environmental strategies must become a generalmanagement issue if the sorts of process and product redesigns needed for trueinnovation are to even be considered, much less be proposed and implemented.

ConclusionWe have found that economists as a grou p are resistant to the notion that evenwell-designed environmental regulations might lead to improved competitiveness.This hesitancy strikes us as somewhat peculiar, given that in other contexts, econ-omists are extremely willing to argue that technological change has overcome pre-dictions of severe, broadly defined environmental costs. A static model (amongother flaws) has been behin d m any dire predictions of economic disaster and hu-man catastrophe: from the predictions of Thomas Malthus that population would

inevitably outstrip food supply; to the Limits ofGrowth (Meadows and Meadows,1972), which predicted the de pletion of the world's natural resources; to The Pop-ulationBomb (Ehrlich, 1968), which predicted that a quarter of the world's popu-lation would starve to dea th between 1973 and 1983. As econom ists are often eagerto point out, these models failed because they did not appreciate the power ofinnovations in technology to change old assumptions about resource availabilityand utilization.Moreover, the static mindset that environm entalism is inevitably costly has cre-ated a self-fulfilling gridlock, where bo th regulators and industry battle over everyinch of territory. The process has spawned an industry of litigators and consultants,driving up costs and draining resources away from real solutions. It has been re-ported that four out of five EPA decisions are currently challenged in court (Clay,1993,cited in U.S. Congress, Office of Techno logy Assessment, 1994). A study bythe Rand Institute for Civil Justice found that 88 percent of the money paid out


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116 Journal ofEconomic Perspectives

between 1986 and 1989 by insurers on Superfund claims went to pay for legal andadministrative costs, while only 12 percent were used for actual site cleanups (Actonand Dixon, 1992).

The United States and other countries need an entirely new way of thinkingabout the relationship between environment and industrial competitivenessonecloser to the reality of modern competition. The focus should be on relaxing theenvironment-competitiveness tradeoff rather than accepting and, worse yet, steep-ening it. The orientation should shift from pollution control to resource produc-tivity. We believe that no lasting success can come from policies that promise thatenvironmentalism will triumph over industry, nor from policies that promisethat industry will triumph over environmentalism. Instead, success must involveinnovation-based solutions that promote both environmentalism and industrialcompetitiveness.

Theauthors are gratefultoAlan Auerbach,BenBonifant, Daniel C.Esty, RidgwayM.Hall, Jr., DonaldB.Marron,JanRivkin, NicolajSiggelkow,RDavid SimpsonandTimothyTaylorforextensive valuable editorialsuggestions.We arealso gratefultoReed Hundt forongoingdiscussionsthat havegreatly benefittedourthinking.

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