ABSTRACT

Industry is increasingly affected by changing competitive realities shaped by their customers and the societies in which they operate. This study focusses on competitive challenges and opportunities for two types of U.S. industries that are affected by environmental regulation: 1) environmental technology and service firms; and 2) manufacturing firms in general that are responding to requirements for reduced pollution.

In the first case, environmental firms may be able to benefit from unprecedented opportunities to expand into new markets likely to develop as more countries establish or tighten environmental standards. U.S. firms are competitive but not dominant in most environmental industry sectors and face growing competition from European and Japanese firms. Firms from other industrialized and newly industrialized countries also have a growing presence in environmental markets. Global markets for environmental goodsand services (EGS) are in the $200 billion to $300 billion range and are expected to grow quickly. Most of this demand is filled locally. However international trade is still sizable, accounting for perhaps 10% to 15% of global EGS. Trade centers on relatively s sophisticated equipment and services.

For regulated manufacturing firms, environmental requirements that benefit society as a whole represent a competitive challenge. While pollution control is not a top-ranking factor affecting competitiveness, it does add to costs. Difference in compliance costs among countries do have the potential to affect relative competitive position. Compliance costs for U.S. manufacturers appearto exceed those of most European countries and Japan. Also, a number of industrial countries provide greater assistance than the United States does to their manufacturers to meet environmental requirements.

The report examines various policy options to promote development and diffusion of environmentally preferable technologies, to develop more cost- effective regulatory approaches, to use export promotion and development assistance for environmentally and developmentally sound technologies, and to lessen conflicts between trade and environment.

This study analyzes the international competitiveness of two sets of U.S. industries that are affected by environmental policies:

1. firms that develop and market environmental technologies and services; and,
2. companies (especially manufacturing firms) that must meet U.S. environmental requirements, often while competing with firms from countries that have weaker standards or provide more assistance to their industries.

Both sets of industries operate under new competitive realities realities shaped not only by intensifying global competition but also by the environmental expectations of their customers and the societies in which they operate.

Environmental problems of new urgency now confront all countries. Some argue that a conceptual shift is beginning to occur in the world marketplace: as recognition grows that economic activity can do serious harm to both the local and global environment, and in the process harm human health and interfere withdevelopment objectives, business increasingly will have to internalize a new imperative of avoiding harm to the environment--an approach embodied in the term sustainable development.

Over time, according to this view, environmental imperatives could join the front ranks of business precepts, such as providingquality products at a competitive price, that no business can afford to ignore.

Recognition of global environmental problems, as well as greater attention to local needs in a growing number of countries, are producing new markets for environmental technologies, and could spur technological innovation to meet those needs. In some cases, such as global climate change, technological remedies and strategies have only recently been sought, with responses still in the early stages of development. In other cases, such as wastewater treatment and control of some air pollutants, technologies are well developed but widely used in only a few countries.

Some analysts believe that the expanding global market for environmental technologies will produce major commercial opportunities; how U.S. firms will fare in those new environmental markets has become subject of debate in Congress. Germany, Japan, and other countries with strong environmental industries are also asking how they might capture a greater share of this growing global market.

While environmental regulations produce business opportunities for environmental firms, they also impose costs on the manufacturing firms and other businesses that buy their goods and services. U.S. environmental standards are likely to remain among the world's most stringent. In a more competitive global economy, it will be important to find ways for U.S. industry to achieve environm ental goals while avoiding competitive handicap.

The report's two subjects--the industry for which environmental regulations often mean costs and the industry for which environmental regulations mean business--are usually thought of separately. But they are linked. The linkages are pertinent to debate about the competitive impact of environmental regulations on U.S. manufacturing firms and about the federal government's role in promoting U.S. environmental in dustries.

Among the linkages:

• Technological advancement (including hardware, technical and scientific knowledge, and management expertise at the business and societal levels) is increasingly necessary to address both competitiveness and environmental needs. A number of initiatives and proposals have been made at federal and state levels to better integrate environmental objectives within technology policy. Some industries support consortia, involving firms and government or university laboratories, to undertake research and development (R&D) on processes and product s that would be environmentally preferable to those now in use.
• The industrial market for environmental equipment and services is likely to be greatly affected by a shift away from conventional pollution control to pollution prevention and cleaner production processes. This shift, now in its early stages, will have repercussions for both environmental companies and manufacturing firms. Integrating environmental, productivity, and quality objectives early in the technology development process will yield environmental and economic payoffs. Manufacturing firms that use such processes are likely to reduce compliance costs and, in some cases, production costs.
• A globally competitive environmental goods and services (EGS) industry is more likely to find more cost-effective approaches to reducing pollution, which can help U.S. manufacturers overall. Also, technologies that lower environmental compliance costs may fare better in global markets.
• New forms of regulations allowing firms to adopt innovative approaches for addressing pollution can help botdevelopers and users of environmental technology. These include performance standards, economicincentives, and adjusting permitting procedures to stimulate the development and adoption of innovative environmental technologies.
• At the same time, government policies can affect these two sets of industries in quite different ways. Policies to speed use of cleaner production processes that offer competitive benefits to firms that must comply with environmental regulations can also reduce the need for remedial or end-of-pipe technologies. Likewise, policies that continue to promote end-of-pipe solutions for environmental problems can impede adoption of cleaner production and pollution prevention approaches.

Environmental and economic policies have often been viewed as in opposition and, for the most part, have been developed separately. Nonetheless, more andmore, policymakers see benefits in addressing the two together. The interactions between environmental concerns and industrial competitiveness have ramifications for many policy areas, including pollution control and waste management, technology development and diffusion, export promotion and development assistance, and trade policy and negotiations. Addressing these interactions could require changes in U.S. Government programs. Among proposals now on the table are those to:

• devise a strategy to promote development and export of U.S. environmental technologies
• create mechanisms to integrate environmental objectives into government support for manufacturing industry R&D and technology diffusion
• develop regulatory approaches that allow industry more options to innovate while maintaining or exceeding current environmental objectives
• work toward bilateral and multilateral agreements on environmental standards that further environmental goals, lessen the likelihood of adverse competitiveness impacts for U.S. firms and workers, and expand opportunities for U.S. environmental firms at home and abroad.

Principal Findings

THE GLOBAL ENVIRONMENTAL MARKET

1. The market for environmental technologies and services is growing in the United States and abroad, in both industrialized and developing countries. Most of the current market is for well-known, widely used approaches and technologies for end-of-pipe pollution control, waste disposal, and remedial clean-up of pollution. According to a widely cited estimate, this global market probably amounted to $200 billion in 1990, and could grow to $300 billion annually by the year 2000.(see

endnote 2.) Another estimate claimed a global market of nearly $300 billion in 1992 poised to grow well in excess of $400 billion by 1997. (see endnote 3.) The projected market would be much larger if cleaner production technologies and products were included, but there are no good projections of the potential size of this market.

2. As more countries respond to their environmental problems, the global environmental market is likely to continue to expand--although not as rapidly as predicted in the late 1980s when recession-proof growth in environmental marketswas widely assumed. Over the next 10 or 15 years, the advanced industrial economies likely will still account for most of the growth. However, markets are rapidly emerging in the newly industrialized countries and many developing countries, particularly in the Pacific Rim and Latin America. The transforming economies of Central and Eastern Europe offer large potential markets, although there, as elsewhere, scarcity of financing limits environmental investments. Bilateral and multilateral aid is a significant source of environmental investment in some areas.

3. While the global environmental market is large, most environmental expenditures go to day-to-day operations and construction of facilities that use locally available labor, materials, and parts. International trade thus fills only a small portion of EGS demand. The exact amount of trade is uncertain, because the quality of the data is very poor. However, traded items and services probably do not account for more than 10 or 15 percent of the total market. Even so, this fraction represents a significant amount of trade, which may grow in volume as the world market grows. The most significant prospects for U.S. exports are for relatively sophisticated equipment and professional services. W hile the attendant growth in U.S. employment probably will be modest, many of these jobs are likely to be high-wage jobs in management, engineering and other technical professions, as well as some blue collar manufacturing jobs.

4. In the long term, cleaner technology and production processes mayhave the potential to generate more export-related growth and jobs than conventional pollution control equipment. Government technology and export promotion policies aimed at strengthening environmental industries need to take into account the technical possibilities and commercial opportunities in cleaner production.

5. The shift toward cleaner production is likely to occur incrementally over the next 15 or 25 years, as manufacturers build new facilities or upgrade existing plants. There likely will be growing global demand for cleaner and more energy-efficient industrial facilities, including those for power generation, chemical processing, smelting, oil refining, papermaking, food processing, and product assembly. Countries with firms that are competitive suppliers in these areas will benefit from the jobs and commerce generated from trade in capita l equipment and related professional services. Moreover, as these countries'domestic producers in other industries invest in cleaner technologies, they may make changes that will enable them to compete more effectively against firms in other countries.

6. Regulations and enforcement (including liability and fees) are likely to continue to drive markets for environmental technologies and services. However, a number of other factors may affect these markets. Energy efficiency investments are often cost-effective even in the absence of regulation as are some pollution prevention projects. Potential users often know little about these alternatives, but as knowledge about their cost-effectiveness grows, they may be used more widely. Some companies also may make environmental investments out of concern for their environmental image among customers, investors, and the public,especially where reporting requirements or consumer labeling exist.

THE COMPETITIVE POSITION OF U.S. ENVIRONMENTAL FIRMS

1. Global competition for environmental markets has become fierce during the last decade. The U.S. environmental industry's overall international performance is mixed. In many foreign markets, U.S. firms remain competitive but not dominant; in other areas, the U.S. position has eroded. Estimates of market shares in major Latin American countries show U.S. sales accounting for about half of environmental imports, but note growing European and Japanese presence. U.S. performance in other regions (including the fast growing Pacific Rim) is less strong. As with conventional environmental equipment, U.S. firms that design, construct, and manufacture cleaner and more energy-efficient capital goods and facilities can expect intense foreign competition.

2. Large and highly competitive environmental industries exist in Germany, some other European countries, and Japan--countries with firms that have a stronger export orientation than many U.S. environmental companies. Several newly industrialized and advanced developing countries have nascent environmental industries that supply basic environmental goods for their own markets and also for export; as developing country environmental investments grow, some of these firms may well become important regional suppliers.

3. While some U.S. environmental firms are major international players, most focus on the huge domestic environmental market, which is by far the world's largest. Here, too, American firms face competition. For European and Japanese environmental firms, the United States is an attractive export market. It also offers major opportunities for licensing of technologies, joint ventures, an d acquisitions of U.S. companies. In the last decade, U.S. firms have becomemore reliant on foreign technology and foreign capital in a number of environmental sectors. For example, half of the 10 largest U.S. manufacturers of wastewater treatment equipment are foreign owned. Also, U.S. companies have become more dependent on foreign air pollution control and incineration technologies. In some cases these technologies were first developed in the United States and then licensed and improved abroad.

4. To succeed in foreign markets, U.S. firms may need to adapt products developed for U.S. needs to the sometimes quite different conditions in other countries. While U.S. environmental standards and technologies enjoy a good reputation, potential customers in developing country markets sometimes see U.S. products as too expensive or sophisticated. Further, some U.S. suppliers are viewed as insufficiently concerned with service, training of personnel, and provision of parts.

5. Most U.S. environmental firms (especially smaller ones) have little export experience; firms in Japan and many European countries have more. Private export financing in the United States is scarce (especially for smaller firms); it is more plentiful in Japan and several European countries, where firms also get more government help with export marketing and financing than in the United States. The U.S. government's help is also poorly coordinated and difficultto access. The U.S. government also provides less concessional financing, and structures its development assistance programs in ways that provide less help to national firms bidding on large capital projects.

6. Technological innovation is likely to be increasingly important for environmental firms competing in global markets. U.S. regulatory and permitting procedures present some impediments to environmental technology innovation. Companies may find it too expensive, uncertain, or time-consuming to secure regulatory permits for R&D and testing of innovative environmental technologies. Regulated industries hesitate to employ innovative technologies not only because of technical uncertainties associated with new approaches but also because of regulatory uncertainties. Permitters often shy away from approving unfamiliar technologies and tend to prefer environmental technologies with established track records. Limited technical expertise, small budgets, and lack of incentives for championing new approaches account for risk-averse behavior by permit writers.

COMPETITIVE IMPACT OF ENVIRONMENTAL REGULATIONS

1. While comparisons are difficult, the compliance costs incurred by U.S. manufacturers for pollution control and abatement are among the highest in the world. Firms in a handful of countries such as Germany face equal or higher costs, but they are the exception. Japanese manufacturers appear to spend less on pollution control than U.S. industry and that gap has been growing. However Japanese industries pay more for energy, leading them to implement more energy efficient measures, which provide some environmental benefits. (Also Japanese standards for electric utility and vehicle emissions are among the most stringent.) Some countries (including Germany and Japan) provide greater financial incentives (tax incentives, loans, grants) to companies for compliance with the ir nations' environmental requirements.

2. For most U.S. manufacturing sectors, pollution control and waste management regulations are not among the top ranking factors determining international competitiveness. Even sectors with the highest compliance costs--chemicals, primary metal production, pulp and paper, and petroleum refining--represent a range of competitive positions. However, some U.S. firms face increasing competition for nonenvironmental reasons, and for these firms even small cost differences can erode relative competitive position. Conventional forms of regulation can have effects other than just raising production costs. For example, complex and time-consuming permitting procedures can make it difficult for manufacturers to continuously improve production processes and rapidly introduce new products.

3. A number of experiments are underway across the United States as regulators and industries seek new regulatory approaches that protect the environment effectively while reducing competitive impacts on firms. These experiments include emphasis on pollution prevention; use of multimedia regulation, permitting,and inspections; development of facility-wide emission caps and performance st andards; allowing good environmental performers more choices in selecting how they will comply with regulations; and introduction of economic incentives, including tradable permits and fees. The techniques explored in these experiments can complement and enhance the present regulatory tool kit, but they have yet to be widely adopted.

4. In many cases, economic incentives could lower environmental compliance costs. With tradable permit systems, for example, firms able to reduce pollution cheaply have an incentive to go beyond what otherwise would be required, while firms with higher marginal control costs would not need to do as much as otherwise if they purchase credits from the lower compliance cost firms. Incentives could also stimulate development of innovative, lower cost compliance approaches. While incentive systems can lower compliance costs, they cannot be applied in all cases. They are a supplement, not a replacement, for the regulatory system.

5. The traditional means for complying with pollution abatement laws--use of end-of-pipe or remedial technologies to deal with pollution or waste after it has been created--almost always add to manufacturing costs. Pollution prevention alternatives (which include source reduction) and recycling of industrial pollutants and wastes are promising ways for lowering compliance costs. Some source reduction and recycling projects quickly pay for themselves through reduced material and energy use and savings from recovered materials. Source reduction sometimes speeds technical change, leading to increased investment in new plant and equipment. Source reduction and recycling usually pay off when compared to the cost of treating or disposing wastes. But, many projects are not cost-effective in the absence of regulatory requirements.

6. As the simpler steps for pollution prevention become widely adopted, a significant source of environmental improvement will lie in new generations of manufacturing process technologies that are cleaner, and often more productive, than older generations. Cleaner technology has only recently emerged as an objective for industrial R&D. With the exception of some energy related technologies, public and private funding has been limited.

7. Technical assistance can help firms, particularly small and medium-sized firms, implement pollution prevention and recycling measures and more effectively meet environmental regulations. Yet, U.S. programs are very small; many of them, by focusing only on pollution prevention, do not consider productivity and quality issues that could more fully meet manufacturers' needs.

Policy Options in Brief

standards will continue at their current levels, which makes them among the highest in the world, and that the standards may well become more stringent in the future. OTA does not consider the option of lowering U.S. standards as a competitive response to weaker standards elsewhere. Hence, the major competitive questi ons in this study are:

1. Given continuation of strong standards, how can U.S. manufacturing maintain or enhance its industrial competitiveness?
2. How can the United States benefit from high standards through an internationally competitive U.S. environment industry? OTA has examined the pros and cons of a wide range of policy options that bear on these questions, both domestically and abroad. Domestic measures, for example, might include:
   • coordinating federal support for environmental and manufacturing industry R&D;
   • encouraging states and federal agencies to integrate delivery of environmental and manufacturing technical assistance to better assist small and medium-sized firms;
   • starting or expanding industry R&D consortia to address sector-wide environmental problems;
   • supporting integration of environmental components into engineering and business school curricula;
   • giving firms that are strong environmental performers more options to determine how they will meet environmental standards; and,
   • additional experiments in alternative regulatory approaches, streamlining R&D permits, and establishing sectoral fora for environmental cooperation.

The federal government also might do a better job of promoting exports of U.S. environmental goods and services. Authorizations in recent laws directed at this goal provide a starting point. Additional measures could be considered. Some steps taken primarily for domestic purposes might enhance exports. For example, the federal government could oversee independent evaluations and performance verifications of U.S. environmental technologies, and make this information available to foreign purchasers.

Greater international cooperation and technical assistance (bilateral and multilateral) could expand developing country environmental management capacity while creating EGS markets. Both competitiveness goals and environmental goals might be served if the U.S. government were to negotiate agreements with other countries to upgrade their environmental standards. Better monitoring of international environmental agreements and work toward a global business charter for environment would be useful.

The options could be adopted singly or in packages. Many of the options could be accomplished through more effective integration, coordination, or reorientation of federal programs. While such steps could be useful, some actions--such as development of next generations of cleaner manufacturing technologies, or increasing access to export financing for U.S. firms--would require new funding beyond the current modest levels.

Endnotes:

(1) Based on U.S. Congress, Office of Technology Assessment, "Industry,

Technology, and the Environment: Competitive Challenges and Business Opportunities" (Washington, DC: U.S. Gov't Printing Office, January 1994) [U.S. GPO order no. S/N 052-003-01362-2]

OTA also produced two background papers as part of this assessment examining trade and environment and the connections among export promotion, development assistance, and environmental technology. See U.S. Congress, Office of Technology Assessment, "Trade and Environment: Conflicts and Opportunities" (Washington, DC: U.S. Gov't Printing Office, May 1992)[U.S. GPO order no. S/N 052-003-01282-1] and U.S. Congress, Office of Technology Assessment, Development Assistance, "Export Promotion, and Environmental Technology" (Washington, DC: U.S. Gov't Printing Office, August 1993)[U.S. GPO order no. S/N 052-003- 01332-1] Full reports available from the U.S. Government Printing Office (tel: 1-202-783-3238) P.O. Box 371954, Pittsburgh, PA 15250-7954 USA and National Technical Information Service tel: 1-703-487-4650 or try telnet to fedworld.gov Summary of "Industry, Technology, and the Environment" may be available at no charge from OTA: e-mail pubsrequest@ota.gov

(2) Organization for Economic Co-Operation and Development, "The OECD Environment Industry: Situation, Prospects and Government Policies," OCDE/GD(92)1 (Paris: OECD, 1992). Estimates do not include cleaner production and energy efficiency products or services except for some pollution prevention consulting ser vices

(3) Grant Ferrier, Environmental Business International, presentation to Environmental Business Council of the United States conference, Washington, DC, June 7-9, 1993. The estimate does not include cleaner technology except for renewable and cogenerated energy.

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