The relationship of environmental protection to international competitiveness, job creation and development Note by the UNCTAD secretariat 15 April 1996 Prepared by UNCTAD for the Commission on Sustainable Development Fourth Session New York, 18 April - 3 May 1996 New York CONTENTS Page I. INTRODUCTION 3 A. Background 3 B. Rationale for analysing competitiveness effects of environmental policies 4 C. Limitations of studies on competitiveness effects of environmental policies 7 II. THE COMPETITIVENESS DEBATE 8 A. Competitiveness at the firm or sector level and national welfare considerations 8 B. The state of the debate 9 C. Cost-benefit analysis and reducing adverse competitiveness effects 11 D. Environmental policies and employment 12 III. EMPIRICAL EVIDENCE 12 A. Problems of empirical analysis 13 B. Empirical evidence in OECD countries 13 C. Factors identified in developing countries as affecting competitiveness 15 IV. PRELIMINARY CONCLUSIONS 19 I. INTRODUCTION A. Background 1. At its third session, held in 1995, the Commission on Sustainable Development invited UNCTAD: "... to carry out an analytical study on the relationship of environmental protection to international competitiveness, job creation and development, with the input of Governments, regional economic integration organizations, the private sector and non-governmental organizations as well as other relevant regional and international organizations." 1/ 2. The present note, prepared by the UNCTAD secretariat under its own responsibility, should not be regarded as a comprehensive summary of the debate on environment and competitiveness linkages, but as a preliminary identification of issues, in particular those requiring further analysis, prepared with a view to inviting comments, information and inputs from Governments and other concerned entities. 2/ It has not yet incorporated comments from other international organizations which have undertaken work in this area, such as OECD, 3/ UNIDO, FAO and others. 4/ It is expected that the completed study will be presented to the fifth session of the CSD in 1997. B. Rationale for analysing competitiveness effects of environmental policies 3. Initially, the rationale for studying competitiveness effects of environmental policies was related principally to demands for "levelling the competitive playing field". Concern was expressed that countries with stringent environmental regulations could lose trade or investment to countries where standards are less stringent or where enforcement is difficult. Thus demands were made by industrial groups and NGOs (who feared that competitiveness concerns could postpone the introduction of more stringent environmental standards) to levy "green countervailing duties" on imported products in order to compensate for the perceived competitiveness effects. 4. It is now widely accepted that the case for such measures is very weak. Firstly, to date, environmental policies do not seem to have had significant impacts on trade and investment patterns, particularly in the case of developed countries. Secondly, the implications for competitiveness of differing environmental standards are no different in principle from those of other policy differences across nations, including social or welfare policies, and as acknowledged by the CSD at its second session, there are legitimate reasons for differences in standards. Thirdly, it is now widely believed that fears of "eco-dumping" or relaxation of environmental standards in order to attract investments or gain export competitiveness are largely unfounded. Empirical and analytical work of UNCTAD and OECD has been crucial in clarifying these issues. UNCTAD's Ad Hoc Working Group on Trade, Environment and Development joined OECD Governments in firmly rejecting "demands sometimes made to introduce so-called "green countervailing duties", or other protectionist or WTO-inconsistent trade measures, to compensate for negative competitiveness effects, whether real or perceived, of environmental policies". 5/ 5. Even though there is already a better understanding of the complex relationship between environmental policies and international competitiveness as compared to earlier stages of the debate, there is still an interest in analysing the competitiveness effects of environmental policies. A main concern, particularly in the developed countries, is about domestic environmental standards and their competitiveness impacts, and the related question of whether competitiveness concerns may prevent or postpone the implementation of more stringent domestic environmental standards. Indeed, it is possible that in the future more stringent environmental policies with more pronounced competitiveness impacts will be implemented. Accordingly, fears of future competitiveness impacts cannot be dismissed even if impacts at present have remained relatively small. Also, as environmental cost internalisation proceeds, some competitiveness impacts are bound to arise, since the very purpose of environmental cost internalisation is to affect relative prices in order to induce environmentally desirable changes in producer and consumer behaviour. Another question of key interest in particular to developed countries is to what extent high environmental standards can provide countries with a competitive advantage in the growing market for environment-related technologies, equipment and services. 6. In the developing countries, competitiveness concerns tend to focus on the effects of environmental requirements emerging from external markets on export competitiveness and access to developed country markets. Thus, reasons for studying competitiveness include the following: (a) Environmental policies of major export markets can restrict developing country market access, which, as has been recognized in Agenda 21, is an important condition for achieving sustainable development; (b) They may exacerbate other existing constraints such as lack of marketing skills, technology, and raw materials which have to be alleviated in order to gain export competitiveness; (c) Compliance with external environmental requirements may be of limited environmental benefit to the developing country itself, but may nevertheless entail significant costs; (d) It is necessary to identify policies which will promote competitiveness and to devise cost-effective environmental measures; and (e) At early stages of economic development, a large share of economic activity is concentrated in relatively polluting sectors, thus making developing countries especially vulnerable to the competitiveness effects of external environmental policies. 7. With regard to the trade and competitiveness effects on developing countries of environmental policies in the developed countries, a number of considerations arise from a policy perspective. First, it has been observed that in many cases the effects of environmental policies on trade may be similar to or exacerbate those arising from constantly changing conditions in the marketplace, such as changes in technology, consumer preferences, price, and availability of raw materials. 6/ Such effects can be seen as part of the relationship between trade-related economic activity and environmental policies and may be addressed in the wider context of development policies. They may also be relevant in the context of technological and financial cooperation and export promotion programmes. 7/ 8. From a trade policy perspective, however, two major issues arise: first, whether environmental policies may discriminate against imports and serve protectionist purposes; second, whether the policy instrument chosen results in unnecessary restrictions on trade. It is therefore important to ensure that certain trade rules and principles are taken into account in the design and implementation of environmental policies which may affect trade. While a number of principles are already well established, there may be a need to build consensus on additional principles and concepts. 9. Consideration must also be given to the competitiveness and development effects of policy harmonization, especially in the context of multilateral environmental agreements (MEAs). Indeed, while yielding global environmental benefits, MEAs have broad economic effects. The costs of standard implementation may differ widely among parties to an MEA based on variables such as the specificity of the standard, the availability and adequacy of substitutes, the degree of patent protection of specified technologies, existing environmental standards prior to the implementation of the international standard, administrative costs and other factors. Standard implementation in the framework of MEAs shows that the same environmental standards may not have similar competitiveness effects across all countries and across all situations. Thus, whereas in the case of domestic environmental policies, most of the debate has focused on the competitiveness effects of differing standards across countries, an analysis of the competitiveness effects of standard implementation pursuant to MEAs can provide a better understanding of the effects of factors such as levels of development on the competitiveness effects of similar standards. 10. The need for detailed information on the nature and extent of competitiveness impacts of environmental policies stems from the fact that appropriate design of policy instruments, as well as implementation of enabling measures and Government support, may reduce adverse competitiveness impacts. Identifying such adverse impacts beforehand would not necessarily mean that the environmental policy objective should be given up. For example, there may be environmental policies which have long-term negative competitiveness effects, but which may nevertheless be implemented for pressing environmental reasons. In such cases, alleviating measures may be required if the society wishes to maintain the affected firms in operation because of employment or other concerns. 8/ 11. Adequate knowledge of competitiveness impacts would help to prevent unfounded fears of competitiveness loss from inducing calls for protectionist measures, as well as from obstructing the introduction of environmental policies. C. Limitations of studies on competitiveness effects of environmental policies 12. It is sometimes argued that studies on the competitiveness effects of environmental policies may be of limited use for a number of reasons: (a) Since there are many factors on account of which firms or industries may gain or lose competitiveness, and since it is difficult to isolate environmental from other factors, it is difficult, if not impossible, to draw any general conclusions; (b) The empirical evidence that exists to date is mostly anecdotal in nature, and more research is required; (c) To the extent that environmental requirements would be no different from other market forces, they would not require special consideration; (d) Since successful firms have a broad-based capacity to respond to market changes, including environmental regulatory processes, government would have no major role to play in mitigating competitiveness effects; and (e) Since losses by less successful firms or certain sectors could be compensated by gains by others, competitiveness effects at the firm or sector level would be of relatively little concern. 13. Others have contended that more policy-oriented analysis is needed for the following reasons: (a) To identify factors that may mitigate adverse or strengthen positive competitiveness effects of environmental policies and that can be promoted through appropriate Government policies; (b) To avoid trade friction or the postponement of environmental policies on account of unfounded competitiveness concerns; (c) A trade-off may exist between responding to environmental requirements and meeting other market challenges such as quality requirements; (d) To stimulate innovative responses at the firm level through appropriate government policies or close cooperation between government and the private sector; (e) Competitiveness effects of environmental policies could raise sector-specific issues, and sector-specific policies may be useful in finding cost-effective solutions to both sector-specific and more general environmental problems; (f) There could also be scale-specific competitiveness effects of environmental policies warranting special consideration. The above factors would indicate that the relationship between environmental policies and competitiveness is indeed an important policy question, in particular for developing countries. II. THE COMPETITIVENESS DEBATE A. Competitiveness at the firm or sector level and national welfare considerations 14. Discussions on competitiveness impacts of environmental policies are at times blurred by failure to define the term competitiveness. What is normally referred to is international competitiveness: that of firms, sectors or the national economy. From the point of view of international trade rules and principles, it may be appropriate to study competitiveness effects at the firm or sector level, as technical standards and regulations or other non-tariff measures are not expected to have generalised effects on trade. On the contrary, it is expected that environmental regulations will only affect some firms and some sectors. 15. At the level of domestic policy-making, a broader analysis may be needed. Whereas some firms may lose their competitive position, others may in turn gain. Moreover, dynamic impacts between sectors and the social benefits of environmental protection also enter the picture. It is contended that international competitiveness is only one of the factors that Governments will take into account in assessing the efficacy of environmental policies. In considering various policy options, economic theory indicates that the set of environmental, social and trade policies that in combination provide the greatest welfare gain for the country should be adopted. However, while it is essential to take the economy-wide macro view so as not to arrive at sub- optimal solutions, information on competitiveness effects on all economic agents is seldom available to Governments or other policy-making bodies. 16. Competitiveness effects may also differ between the short and the long run. While in the short run the competitiveness effects of environmental policies may be negative, in the long run they may be less significant or even positive. Dynamic effects are more likely to be positive when there are more possibilities for innovation. How considerations in the short run are eschewed for benefits in the long run depends on the discount rates applied, which necessarily differ between developed and developing countries. In any case, complete information on short and long run competitiveness effects, in both developed and developing countries, is desirable. Furthermore, this information would help countries to learn from each other's experiences. B. The state of the debate 17. Lately, the view that environmental regulations necessarily harm competitiveness has been significantly revised in the developed countries. A dynamic approach to analysing the linkages between environmental policies and competitiveness tends to emphasise the positive over the negative effects. According to the "Porter hypothesis", well designed environmental policies can improve competitiveness even at the firm level by inducing innovation or creating incentives to increase efficiency. 9/ The European Commission notes that "economic performance and environmental performance are not necessarily incompatible. While achieving environmental benefits may in some cases entail additional short-term costs, there are a wide range of "win-win" opportunities in the design and implementation of environmental policies, which could improve resource efficiency, competitiveness and employment. Indeed, high environmental standards can create the conditions under which businesses investing in cleaner, more efficient technologies could improve their competitive position." 10/ However, another report by the US Office of Technology Assessment maintains that "while pollution prevention can ease conflicts between environmental protection and industrial competitiveness, it does not eliminate it". 11/ 18. In its report on trade and environment to the OECD Council at ministerial level, the OECD Joint Session of Trade and Environment Experts states that "high levels of environmental protection in response to government policy or consumer preferences can have positive effects on the competitiveness of domestic producers and countries. They can spur technological change, stimulate investment, improve production efficiency, and promote new industrial sectors and new market niches. However, concerns over the potential loss of competitiveness - whether real or perceived - are sometimes raised, and can be an obstacle to Governments in strengthening environmental protection. While research on the competitiveness effects of environmental policies is still ongoing, the Joint Session has not identified a systematic relationship between existing environmental policies and competitiveness impacts." 12/ 19. In addition, it has often been proposed that environmental policies may actually stimulate competitiveness by improving the prospects of sectors which produce environmental goods and services (EGS). The global environmental industry is estimated to be presently worth around $250 billion annually, with a growth rate of 8 per cent. 13/ Increasing consumer demand for environmentally friendly products in some sectors may also give a marketing advantage to companies investing in environmental protection, although the significance of the "green" niche market and the availability of price premiums is difficult to predict. 14/ At the national level, gains like these may compensate for losses of competitiveness elsewhere in the economy; such changes may even increase national welfare. But in countries whose export basket comprises only a few products, compensating opportunities may be limited compared to diversified and dynamic economies. Moreover, since most EGS are not traded internationally, it is difficult to estimate the export- related competitiveness effects from growing environmental markets abroad. International trade in EGS centres on relatively sophisticated manufacturing goods, engineering and project management services, and technology licences, in all of which developing countries do not have a comparative advantage. 15/ 20. Developing countries fear that external environmental policies could be used for protectionist purposes and that compliance with such policies and measures may entail additional costs. Furthermore, while the competitiveness impacts of environmental policies may in the longer term be neutral or even positive, many developing country producers fear that they may not be in a position to overcome the short-term losses involved. 16/ In general, their view is that environmental policies are most likely to be implemented successfully and yield the maximum environmental benefits if they go hand-in- hand with development policies. Thus, both the policies required and the responses generated in developing countries may be significantly different from those in the developed countries. 21. Developing countries, particularly the least developed among them, are frequently at a disadvantage on account of several factors which adversely affect competitiveness, such as lack of information, access to inputs and technology, finance, and infrastructure. Other reasons of concern to developing countries include the sectoral composition of their exports and their typically undiversified export basket; the important role of small and medium-sized enterprises (SMEs) in exports; the emergence of new environmental requirements in sectors of export interest to developing countries; the low domestic demand for environmentally friendly products; and the homogenous nature of exports and the price-taker position of developing countries that make any cost increases critical. 22. The debate on environmental policies and competitiveness seems inconclusive at the present time. The dominant view in the developed countries appears to be that, at their existing levels, environmental policies are unlikely to have significant adverse effects on trade and competitiveness, and their effects can even be positive. Future impacts, however, may be different if the level of environmental protection is significantly raised. The developing countries, for their part, continue to be concerned that environmental policies, particularly when they are based on PPMs, may affect market access or be used for protectionist purposes. This difference in perceptions is especially important in the context of MEAs and when environmental requirements emerge from external markets. C. Cost-benefit analysis and reducing adverse competitiveness effects 23. In the developed countries, two divergent arguments on competitiveness effects of environmental policies are prevalent. Some argue that the enactment of environmental legislation should not be deterred by considerations of competitiveness, while others argue that a rigorous cost-benefit analysis (CBA) of a proposed environmental measure is necessary. 17/ The difficulties of quantifying the benefits of an environmental measure and of conducting risk assessments prior to implementing an environmental measure are widely recognized. Thus, it may not always be feasible to carry out a full CBA, and the precautionary principle needs to be taken into account in the face of scientific uncertainty. Also, political considerations such as strong public pressure could outweigh the results of CBA. 18/ 24. Linked to CBA, proportionality between economic costs and environmental benefits is an important concept requiring further analysis. In domestic policy-making, cooperation between government and industry in setting environmental regulations may implicitly bring in the concept of proportionality. It has also been pointed out, however, that it may be sufficient to examine the cost-effectiveness of environmental policies, particularly since the concept of proportionality may be difficult to implement. 25. Appropriate design of environmental policies can also reduce negative competitiveness effects without compromising the environmental goals. Selection of cost-efficient instruments, gradual implementation and transitory arrangements are important in this respect. Consultations between industry and Government when preparing environmental policies can help to set realistic requirements and ensure industry cooperation. Greater transparency in setting standards and information dissemination on environmental regulations can help foreign producers to adjust to new requirements. D. Environmental policies and employment 26. The links between environmental policies and employment have been little explored by the existing literature. A World Resources Institute study notes that shifting resources always destroys some jobs and creates others; even if jobs may be threatened in polluting industries, they will be created elsewhere. The sectors in which pollution abatement costs are relatively large (such as petroleum refining, chemicals manufacturing, pulp and paper, and primary metals) belong to the least labour-intensive industries measured by the number of employees per million dollars in shipments. These sectors are less labour-intensive than manufacturing in general, and probably also less labour-intensive than the pollution control industry. Thus, although increased environmental protection may lead to an increase or decrease in employment in particular industries, overall employment is not necessarily reduced. 19/ 27. It is also felt that environmental policies should be implemented because of environmental goals, and other objectives should not be added on in the implementation of environmental policies. Indded, some have questioned the futility of analysing these linkages, likening it to the concept of "digging holes and filling them up". 20/ 28. The problems of small and medium-sized companies in complying with environmental requirements are especially important, bearing in mind the fact that, in contrast to many developed countries, a large share of developing country exports originates from the small-scale sector and the role of SMEs in providing employment is critical. Various other effects such as industrial restructuring may also affect employment. III. EMPIRICAL EVIDENCE 29. The extent to which environmental policies influence the international competitiveness of domestic producers is ultimately an empirical question. Existing evidence in most OECD countries confirms that the links between environmental costs and export competitiveness are on a par with those of capital, labour, and research and development, and the effects of environmental costs on competitiveness have in general been small. Neither does available empirical evidence suggest that cost differences due to environmental standards have significant effects on the relocation of industries. 21/ The experience of developing countries in this context is relatively limited. However, the effects of environmental policies on the competitiveness of developing countries may be somewhat different from those of the OECD countries. A. Problems of empirical analysis 30. Empirical analysis is complicated by the fact that there are several variables besides the level of environmental protection requirements that impinge on competitiveness. To neutralise the effects of these variables on environment-related competitiveness impacts may be impossible. B. Empirical evidence in OECD countries 22/ 31. Several empirical studies have been conducted in OECD countries to test whether environmental regulations have adverse effects on competitiveness, whether they improve competitiveness, or whether the (positive or negative) effects are so small that one can speak of neutral impacts. The relationship has been analysed by asking whether: (a) The trade performance of highly regulated sectors has deteriorated compared to less regulated sectors; (b) Production or investment from highly regulated sectors has moved to countries where regulations are less stringent; (c) There is a negative correlation between stringency of environmental regulations and profitability; and (d) Basic indicators such as productivity are adversely affected in firms in highly regulated sectors. 23/ 32. With regard to question (a), a 1994 World Bank study found that contrary to common perceptions, higher environmental standards in developed countries have not led to a decrease in exports of environmentally sensitive goods. Germany, for example, which has stringent environmental standards, has actually increased its export share in such goods while losing market shares in manufactures as a whole. In addition, a 1992 study by the World Resources Institute shows that the United States bilateral trade deficit with Japan has been large even though Japanese environmental standards were stricter than American standards in several respects, lending support to the proposition that overall exports are not necessarily affected by environmental standards. 24/ 33. With regard to question (b), data on investment flows provide little or no support for the contention that transnational corporations (TNCs) are relocating environmentally sensitive industries to countries or territories with low standards. A study on Argentina, Brazil, Colombia, Hong Kong, Malaysia, Nigeria, Philippines, Republic of Korea, Singapore, Taiwan Province of China, Thailand and Venezuela shows that foreign direct investment (FDI) in the pollution-intensive industries represents a smaller share of total FDI than in the 1960s and 1970s. This was so despite the fact that environmental regulations had tightened in the home countries. 25/ 34. With regard to (c), if profitability were taken as an indicator of competitiveness, it is equally unclear whether firms with superior environmental performance tend to be more or less profitable compared to establishments with inferior environmental performance within the same industry. For example, across the entire range of manufacturing industries included in the study by the World Resources Institute, correlations between profitability and the intensity of toxic releases are weak. Even when the age and scale of a plant and the amount of recent investment in plant and equipment are taken into account, there is no overall tendency for plants with superior environmental performance to be less profitable. 26/ 35. With regard to (d), the relationship between environmental regulations and productivity varies considerably across sectors. Studies in the United States on three sectors, namely steel, oil and paper, have found that there may be a negative relationship between a plant's pollution abatement costs and its total factor productivity and growth rate. Abatement costs may also be negatively associated with labour productivity growth. However, while paper mills with a higher enforcement of environmental standards did tend to have slower productivity growth, the results for steel and oil were neither significant nor consistent. Moreover, while heavier polluters tended to have lower productivity levels and slower productivity growth, effects were rarely significant or consistent across industries. 27/ It should also be mentioned that methodological problems abound in this kind of analysis. 28/ 36. Overall, empirical studies in OECD countries have found no systematic evidence showing that higher environmental standards would have led to notable adverse competitiveness effects. It has been emphasised that in most cases, environmental costs constitute such a small proportion of overall costs (usually 1 to 2 per cent) that they do not have a significant impact on competitiveness compared to other factors, for example costs of labour, capital and technology. It has also been suggested that due to competitiveness concerns, the stringency of environmental requirements may have remained low enough so as not to cause important competitiveness effects. One of the reasons why economy-wide empirical studies on environmental regulations and export competitiveness have not found any systematic relationship between these two variables could also be that the relationship indeed is not uniform: the competitiveness effects of environmental regulations may vary greatly between different economic sectors and under different economic circumstances. C. Factors identified in developing countries as affecting competitiveness 37. So far, systematic empirical studies on environmentally related competitiveness effects have focused on assessing the impacts of domestic environmental measures on domestic industries in developed countries. One of the first attempts to analyse trade and environment linkages in developing countries is being undertaken in the context of the UNCTAD/UNDP and UNCTAD/UNEP country case studies. 29/ Other studies on developing countries have been undertaken or are under way elsewhere. 30/ 38. With regard to the relationship between environmental policies and competitiveness in developing countries, the country case studies have highlighted the importance of factors which have hitherto received little attention in discussions on competitiveness. Many of these factors may be equally relevant in developed countries. For example, in general it is more difficult for small firms to comply with environmental regulations and standards, both domestic and external, than it is for large firms. Environmental policies may thus need to specially address the concerns of small firms. UNIDO's work has shown that SMEs and resource-intensive industries are more likely than other firms or industries to suffer adverse competitiveness effects as a result of certain types of environmental policies. 31/ 39. According to an ITC survey, SMEs' share was around 50 per cent of total exports in a number of Asian developing countries. Their share was much higher for certain sectors such as textiles, footwear and toys. For example, while the share of SMEs in India's total exports was about 32 per cent, their share in exports of textiles and leather was about 80 per cent. Similarly, in the Republic of Korea, while SMEs accounted for 40 per cent of total exports, their share in exports of electric and electronic products was about 60 per cent. 32/ This indicates, however, that there may be a need to examine the possible conflict between the export promotion strategies of developing countries and their need to comply with environmental requirements of their major export markets. 40. The constraints faced by SMEs in meeting environmental standards and regulations can be divided into two categories: (a) those which are endemic to the nature of their operation, and (b) those which can be specifically linked to environmental requirements. The first category includes factors such as poorer access to information, raw materials, capital and technology. The second category includes constraints such as the fact that the economic use of environmentally sound technologies may require a minimum scale of operation, often beyond that of small firms. This raises important policy questions: whether and how small firms could be provided with more assistance, whether environmental policies may lead to industrial restructuring, and whether that is socially desirable. It also suggests that special measures may be needed to promote innovation in small firms. 41. Additionally, the sectoral composition of developing countries' exports to markets in developed countries may lead to adverse competitiveness effects for two main reasons: (a) the high level of export concentration on a relatively small number of products/sectors, based on comparative advantage; and (b) the emergence, in the developed countries, of environmental policies, standards and regulations in these particular sectors. 42. Other factors identified by the country case studies that have an important bearing on the effects of environmental policies on competitiveness include those listed below: 33/ (a) Economic growth. The competitiveness effects of environmental policies in the case of developing countries are to a large extent determined by the ability of the country to trade and to grow, stagnant economies being less able to implement environmental standards. Such economic growth should be seen to imply not more of the same kind of goods, but cleaner products produced with cleaner processes. Furthermore, growth allows negative effects in some sectors to be compensated elsewhere. (b) Openness of the economy. The more open and dynamic the economy, the greater is its adaptability to environmental requirements, for example because of better availability of information, inputs and technologies. However, increased openness will be more effective in mitigating adverse competitiveness of environmental policies if it is accompanied by other positive measures such as better access to markets, technology, and finance. Economic openness may also induce industrial restructuring, which may result in environmental improvements. (c) Infrastructural development. Improvements in infrastructure can also play a vital role in reducing the costs of compliance, particularly for small firms. For example, improved infrastructure will reduce the cost of compliance with effluent standards, as part of the expense would be borne by municipalities which install waste water treatment facilities. Better sanitation and education would also reduce the costs of compliance with environmental policies. (d) Destination of exports. The stringency of environmental requirements and level of customer consciousness of environmental issues in the main export markets have an immediate bearing on the extent to which producers will be affected by environmental requirements, both mandatory and voluntary. In addition, if export markets are large, there is a greater incentive to improve environmental standards of products. (e) Capacity for innovation. Whether firms can find innovative and cost-saving responses to environmental requirements determines whether compliance costs can be offset or even competitiveness improvements gained. To promote innovation, Governments can either provide broad enabling conditions for innovation, or take a more active part in fostering innovation. Often, the intensification of competition that results from increased economic openness can induce innovation. (f) Standard-setting process. Cooperation of industry with the authorities in the standard-setting process can ensure the design of feasible standards and facilitate their implementation. (g) Price-based competition. If export competitiveness is based on price, environmental policies that lead to cost increases are more likely to have an adverse impact on competitiveness. In the case of commodities, a large proportion of total costs is accounted for by the cost of raw materials, and thus environmental policies affecting raw material costs may have significant competitiveness effects. (h) Transaction costs. If the environmental regulations vary greatly between the target markets of an exporting country, overall costs of producers are increased by costs of finding information on all the requirements and modifying production to comply with the different demands. (i) Level of domestic environmental regulation. The greater the difference between environmental requirements in the producer country and those in the importing country, the more the producers who have to comply with the latter can be affected. The fact that many developing countries are now implementing increasingly stringent regulations and standards can reduce the scope for trade friction in this respect. (j) Relationship with foreign firms. Companies that have already been exposed to stringent environmental standards through commercial or investment links with foreign firms are likely to find it easier to comply with environmental requirements. (k) Level of Government support. Government policies, for example through support for research and development, can greatly facilitate the ability of firms to respond to environmental challenges. (l) Availability of raw materials, specialized inputs, technology and information. The availability of all these (which is generally improved by economic openness) impinges on the cost impacts of producing in a more environmentally friendly manner. Competitiveness effects are more pronounced according to whether the standard or regulation requires a change in the process or technology. Even if the regulation is product-related, it may require a change in technology, which may be expensive. In addition, even if there are no mandatory process regulations, importers may nevertheless request the use of specific PPMs. This may require a change in technology and thus have an impact on export competitiveness. IV. PRELIMINARY CONCLUSIONS 43. Studies on environmental policies and competitiveness, particularly in the developed countries, have so far concentrated on an examination of whether environmental policies have a positive or a negative effect on competitiveness. While these studies have been useful, from the perspective of environmental policy-making it may be equally useful to analyse and enumerate the specific factors that have led to positive effects. In this context, sectoral studies would be particularly useful, as would the comparison of cases where the same policy has had diverse competitiveness effects in the same country. Governments and other concerned entities are requested to provide the UNCTAD secretariat with such examples and such studies. 44. Studies also show that the design and implementation of environmental policies are crucial in reducing adverse competitiveness effects. In this context, it would be interesting if Governments could provide information on their experiences with the use of cost-benefit analysis in domestic policy- making, so that other countries, particularly developing countries, can benefit from their experience. 45. In the context of sustainable development, protecting the environment while raising living standards and maintaining competitiveness requires growth-inducing technological change. Some have argued that most new technologies use fewer inputs, including energy, per unit of output, and are less polluting than the old technologies they replace. Much of the increasing environmental friendliness of newer technologies is induced by efforts to produce at lower costs and with greater efficiency. 34/ When economic incentives do not produce this result, public policy can create the incentive structures that ensure that technological change increases environmental friendliness, and facilitate the acquisition of environmentally friendly technologies. Again, examples of the kind of public policies and incentive structures used both in developing and developed countries would greatly facilitate the compilation of a comprehensive report on competitiveness. 46. Environmental policies may be insufficient to generate significant environmental protection in developing countries, unless they are accompanied by economic development. To promote environmental protection without affecting the growth prospects of developing countries requires both national and international initiatives. Specific examples of successful initiatives at national and international levels would provide valuable learning experiences for all countries. There is also a need to further identify positive measures which are effective in assisting developing countries in achieving the objectives of sustainable development. 47. Compliance with environmental policies tends to be more difficult for small and medium-sized enterprises (SMEs) than for large firms. Thus, specific measures to promote adaptation and innovation in small firms may be needed. This also indicates that the need to comply with environmental standards may have some effects on the level of industrial concentration. Information on competitiveness effects on small firms and alleviating mechanisms used in both developed and developing countries would be of relevance in this context. 48. On MEAs, the tentative conclusion appears to be that international conventions may have diverse effects on trade and competitiveness. Whereas in the case of domestic environmental policies most of the debate has focused on the competitiveness effects of differing standards across countries, an analysis of the competitiveness effects of standard implementation pursuant to MEAs can provide a better understanding of the impact of factors such as levels of development on the competitiveness effects of similar standards. Here again Governments and other concerned entities could provide valuable information. 49. In light of the above conclusions, major gaps and research needs could be broadly grouped as follows: (a) systematic analysis on the factors affecting competitiveness impacts and the conditions under which such impacts could be positive; (b) full incorporation of the development perspective in the analysis; and (c) the employment effects of environmental protection. 50. Considering that the topic of environmental protection, job creation and employment has been little researched, Governments and other entities are particularly requested to bring their experiences regarding this topic to the knowledge of the UNCTAD secretariat. 51. UNCTAD's Ad Hoc Working Group on Trade, Environment and Development has recommended some future work on the relationship between environmental protection and international competitiveness which may also be useful in the context of the study envisaged for the Commission. These work areas include the following: (a) Competitiveness effects of environmental policies, through country case studies and sectoral cross-country studies; competitiveness effects of new and emerging environmental policies in sectors of export interest to developing countries; (b) Short and long term competitiveness effects of environmental policies on small and medium-sized firms, taking into account their importance in the exports of developing countries, in particular the least developed among them; (c) Positive and negative trade and competitiveness effects of MEAs in parallel with an analysis of facilitating mechanisms and incentives under different MEAs, taking due account of the ongoing work of UNEP; (d) Environmental and competitiveness effects of economic instruments such as subsidies and taxes. Information provided by Governments and other concerned entities on all or any of the above-mentioned areas would greatly facilitate the work of the secretariat in compiling its final report to the fifth session of the CSD. For further information, comments, or contributions requested above, please contact Ms. Leena Alanen, Trade and Environment Section, UNCTAD, Palais des Nations, 1211 Geneva 10, Switzerland (fax 41-22-907 0044, e-mail email@example.com). Notes 1/ Paragraph 62 of the report of the Commission on Sustainable Development on its third session. See: Official Records of the Economic and Social Council, 1995, Supplement No. 12, E/CN.17/1995/36 and E/1995/32. 2/ UNCTAD's Ad Hoc Working Group on Trade, Environment and Development has considered the trade and competitiveness impacts of environmental policies from the development perspective. To aid these discussions, the UNCTAD secretariat prepared two linked reports, "Environment, trade and competitiveness: conceptual and empirical issues" (TD/B/WG.6/6) and "The policy debate on trade, environment and development" (TD/B/WG.6/10). As part of the preparations for UNCTAD IX, the Government of Finland and the UNCTAD secretariat organised a topical seminar on "Environment, competitiveness and trade: A development perspective", in Helsinki, on 18 and 19 January 1996. The objective of the seminar was to discuss trade, environment and development linkages in order to advance consensus-building on these issues. (See Report of the Topical Seminar "Environment, Competitiveness and Trade: A Development Perspective", UNCTAD IX/Misc.2). Competitiveness issues were also a major topic of discussions at the fourth session of UNCTAD's Standing Committee on Commodities, which had before it the document "Sustainable development and the possibilities for the reflection of environmental costs in prices" (TD/B/CN.1/29). 3/ OECD has undertaken extensive analytical work on environmental protection and competitiveness. The work programme carried out by the OECD Joint Session of Trade and Environment Experts, jointly sponsored by the Trade Committee and the Environment Policy Committee, has also given special emphasis, inter alia, to the effects of environmental policies on competitiveness. See "Report on trade and environment to the OECD Council at ministerial level", OECD, Paris 1995. OCDE/GD(95)63. Expert workshops have provided further technical basis for discussions. 4/ See also E/CN.17/1996/8 5/ TD/B/WG.6/11. 6/ An interesting question in this context concerns the extent to which environmental requirements are different from other standards and regulations. Compliance with environmental standards may be less likely to yield a price premium than compliance with, for example, quality standards. Furthermore, environmental requirements, especially those related to processes and production methods (PPMs), may be based more on value judgements than other standards, and pressure groups may be especially vocal on issues of environmental protection, even outside their own countries. 7/ In this context, a recent OECD report recognizes that "complying with the environmental requirements of importing countries may raise particular competitiveness concerns for developing countries and countries with economies in transition. Preferred methods for OECD countries would be to facilitate market access and to provide them with technical and financial assistance directed towards environmental capacity-building". OECD, Report on Trade and Environment to the OECD Council at Ministerial Level, OECD/GD(95)63, paragraph 39. 8/ UNCTAD IX/Misc.2. 9/ Porter, M. and C. van der Linde, "Green and Competitive", Harvard Business Review, September-October 1995, pp 120-134. 10/ European Commission, Communication to the Council and to the Parliament on trade and environment, 1996. 11/ US Congress, Office of Technology Assessment, Industry, Technology and the Environment: Competitive Challenges and Business Opportunities, OTA- ITE-586, US Government Printing Office, Washington, DC, 1994. 12/ OECD, op.cit. 13/ European Commission, op.cit. 14/ See UNCTAD, "Eco-labelling and market opportunities for environmentally friendly products", TD/B/WG.6/2, October 1994. 15/ US Congress, op.cit. 16/ UNCTAD IX/Misc.2. 17/ Repetto, R., "Jobs, Competitiveness and Environmental Regulation: What are the Real Issues?", World Resources Institute, 1995. 18/ UNCTAD IX/Misc.2. 19/ Repetto, op.cit. 20/ The Economist, June 3rd-9th, 1995, pp 14. 21/ Repetto, op.cit. 22/ TD/B/WG.6/10. 23/ Jaffe A. B., S. R. Peterson, P. R. Portney, and R. N. Stavins, "Environmental regulations and international competitiveness: What does the evidence tell us?", Washington, DC, Resources for the Future Discussion Paper, December 1993. 24/ Sorsa, P., "Environmental Protectionism, North-South Trade and the Uruguay Round", IMF Working Paper, 1995, WP/95/6. 25/ UNCTAD, World Investment Report 1992. Transnational Corporations as Engines of Growth. 26/ Repetto, R., op.cit. 27/ Gray and Shadbegian, "Environmental Regulation and Manufacturing Productivity at the Plant Level", 1993, NBER Working Paper No. 4321. 28/ US Congress, op.cit. 29/ Country-specific studies, carried out in around 20 developing countries and countries in transition by local research institutes under the joint UNCTAD/UNDP project on "Reconciliation of environmental and trade policies" and the joint UNCTAD/UNEP project on "Capacity-building on trade and environment", are inter alia analysing factors affecting the relationship between domestic and external environmental policies, standards and regulations and competitiveness. 30/ See for example: Imme Scholz et al. Medio Ambiente y competitividad: el caso del sector exportador chileno, Instituto Aleman de Desarrollo, Berlin, 1994. The ASEAN secretariat has commissioned country studies on trade and environment linkages from leading research institutes in member States of ASEAN (ASEAN Workshop Report. Trade and the Environment: Issues and Opportunities. Manila, Bangkok, Kuala Lumpur, Jakarta 11-23 May 1995. ASEAN Secretariat, October 1995). Similarly, the ESCAP secretariat is carrying out a synthesis study based on experiences of several Asian countries. UNIDO and FAO have also carried out work in this area (see E/CN.17/1996/8/Add.1). A number of studies have been carried out on competitiveness effects of MEAs: for example, UNEP's Economics Options Committee has undertaken a series of studies on the economic implications of the Montreal Protocol on Substances that Deplete the Ozone Layer. 31/ Commission on Sustainable Development, Trade, Environment and Sustainable Development: Addendum to the Report of the Secretary General, April 1996 (E/CN.17/1996/8/Add.1). 32/ See United Nations, Expansion of Manufactured Exports by Small and Medium-Sized Enterprises (SMEs) in ESCAP Region. Vol II : National Studies, New York 1995, for a detailed study of small-scale enterprises. 33/ For a detailed discussion on factors affecting competitiveness impacts and examples in developing countries, see UNCTAD/TD/B/WG.6/6. 34/ Lipsey, R.G., 1994, "Sustainable Growth, Innovation, Competitiveness, and Foreign Trade", background paper for the Traditional Institute on Innovation, Competitiveness and Sustainability, Whisler, B.C., Canada.
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Date last posted: 3 December 1999 10:27:35