Green and Competitive: Ending the Stalemate

Article excerpt

The need for regulation to protect the environment gets widespread but grudging acceptance: widespread because everyone wants a livable planet, grudging because of the lingering belief that environmental regulations erode competitiveness. The prevailing view is that there is an inherent and fixed trade-off: ecology versus the economy. On one side of the trade-off are the social benefits that arise from strict environmental standards. On the other are industry's private costs for prevention and cleanup -- costs that lead to higher prices and reduced competitiveness. With the argument framed this way, progress on environmental quality has become a kind of arm-wrestling match. One side pushes for tougher standards; the other tries to roll them back. The balance of power shifts one way or the other depending on the prevailing political winds.

This static view of environmental regulation, in which everything except regulation is held constant, is incorrect. If technology, products, processes, and customer needs were all fixed, the conclusion that regulation must raise costs would be inevitable. But companies operate in the real world of dynamic competition, not in the static world of much economic theory. They are constantly finding innovative solutions to pressures of all sorts -- from competitors, customers, and regulators.

Properly designed environmental standards can trigger innovations that lower the total cost of a product or improve its value. Such innovations allow companies to use a range of inputs more productively -- from raw materials to energy to labor -- thus offsetting the costs of improving environmental impact and ending the stalemate. Ultimately, this enhanced resource productivity makes companies more competitive, not less.

Consider how the Dutch flower industry has responded to its environmental problems. Intense cultivation of flowers in small areas was contaminating the soil and groundwater with pesticides, herbicides, and fertilizers. Facing increasingly strict regulation on the release of chemicals, the Dutch understood that the only effective way to address the problem would be to develop a closed-loop system. In advanced Dutch greenhouses, flowers now grow in water and rock wool, not in soil. This lowers the risk of infestation, reducing the need for fertilizers and pesticides, which are delivered in water that circulates and is reused.

The tightly monitored closed-loop system also reduces variation in growing conditions, thus improving product quality. Handling costs have gone down because the flowers are cultivated on specially designed platforms. In addressing the environmental problem, then, the Dutch have innovated in ways that have raised the productivity with which they use many of the resources involved in growing flowers. The net result is not only dramatically lower environmental impact but also lower costs, better product quality, and enhanced global competitiveness. (See the insert "Innovating to Be Competitive: The Dutch Flower Industry.")

This example illustrates why the debate about the relationship between competitiveness and the environment has been framed incorrectly. Policy makers, business leaders, and environmentalists have focused on the static cost impacts of environmental regulation and have ignored the more important offsetting productivity benefits from innovation. As a result, they have acted too often in ways that unnecessarily drive up costs and slow down progress on environmental issues. This static mind-set has thus created a self-fulfilling prophecy leading to ever more costly environmental regulation. Regulators tend to set regulations in ways that deter innovation. Companies, in turn, oppose and delay regulations instead of innovating to address them. The whole process has spawned an industry of litigators and consultants that drains resources away from real solutions.

POLLUTION = INEFFICIENCY

Are cases like the Dutch flower industry the exception rather than the rule? …