Industry, Technology, and the Environment: Competitive ...2 I Industry, Technology, and the...

Industry, Technology, and theEnvironment: Competitive Challenges and

Business Opportunities

January 1994

OTA-ITE-586NTIS order #PB94-134616

GPO stock #052-003-01362-2

Recommended Citation:U.S. Congress, Office of Technology Assessment, lrzdustry, Technology, andthe Environment: Competitive Challenges and Business Opportunities, OTA-ITE-586 (Washington, DC: U.S. Government Printing Office, January 1994).

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ISBN 0-16 -043023-2

Foreword

Debate about environmental concerns and industrial competitiveness hasbeen underway at least since the early 1970s, when the United Statespioneered strong environmental standards, Today, the debate has newurgency: the world is becoming more aware of the global nature of many

environmental problems at a time of intensifying international economiccompetition.

This report finds both competitive challenges and opportunities fromthese trends for two sets of American industries affected by environmental regu-lation: those in the business of making and selling environmental technologies,and the manufacturing firms that are among their major customers.

For U.S. environmental firms, the years ahead could pose unprecedentedopportunities to expand into new markets as more countries develop or tightenenvironmental standards. Yet, as the report documents, they already face strongcompetition from firms in Europe, Japan, and from some newly industrializedcountries.

Perhaps their greatest challenge in the long term will be to integrateenvironmental concerns into the next generation of manufacturing technologies.Compliance costs in many U.S. manufacturing sectors are already among thehighest in the world. Cleaner, more cost effective production technologies couldhelp these firms lower compliance costs while still meeting the U.S. standardsthat are likely to remain among the toughest in the world.

Policymakers, not only here but in Europe and Japan, are actively debat-ing new approaches to address twin concerns about intensifying global economiccompetition and global environmental problems. More than is usually the case,government policies play a central role, since regulations both create markets forenvironmental technologies and the conditions for compliance faced by industry.Other policy areas not traditionally thought of as affecting environmental con-cerns, including manufacturing research and development, industrial extension,and export promotion, also affect competitive outcomes.

This is the final report in a series of three in OTA’s assessment ofAmerican industry and the environment, which was requested by the SenateCommittee on Finance, the House Committee on Energy and Commerce, and theHouse Committee on Foreign Affairs. The first publication, Trade andEnvironment: Conflicts and Opportunities, discusses the interactions betweenthese two policy areas. The second, Development Assistance, Export Promotion,and Environmental Technology, explores links between foreign aid and exportassistance.

Roger C. Herdman, Director. . .Ill

Advisory Panel

Roland W. Schmitt, ChairmanRensselaer Polytechnic Institute

Edgar BerkeyNational Environmental

Technology Applications Corp. (NETAC)

Judith DeanSchool of Advanced International

StudiesJohns Hopkins University

Robert E. DriscollU.S.-ASEAN Council for Business

and Technology, Inc.

Peter EmersonEnvironmental Defense Fund

Harry L. FosterGeneral Motors Co.

Stewart J. HudsonNational Wildlife Federation

Mary KellyTexas Center for Policy Studies

Jeffrey LeonardGlobal Environment Fund

David S. MarshMarsh Plating Corp.

Jessica Matthews*World Resources Institute

Robert S. McNamaraU, S.-Japan Foundation

J.A. MeyerChevron Corp.

T.C. ParsonsCenter for Industrial ServicesUniversity of Tennessee

Lawrence RossCenter for Waste Reduction

TechnologiesAmerican Institute of Chemical

Engineers

Martyn RiddleInternational Finance Corp.

Paul RelisCalifornia Integrated Waste

Management Board

Maxine SavitzGarrett Processing DivisionAllied-Signal Aerospace

Samuel A. SchulhofGeneral Electric Co.

James SeloverSelover Associates

Peg SeminarioDepartment of Occupational Safety

and HealthAFL-CIO

John J. SheehanUnited Steelworkers of America

Sally SheltonGeorgetown University

*Resigned April 1993

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel.The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for thereport and the accuracy of its contents.

iv

Project Staff

Peter D. Blair, Assistant Director, OTAIndustry, Commerce, and International Security Division

Audrey B. Buyrn, Program ManagerIndustry, Technology, and Employment Program

Wendell Fletcher, Project Director

Robert Atkinson, Senior Analyst

Rodney Sobin, Analyst Robert Weissler, Senior Analyst

Sebastian Remoy Susan H. Lusi Takashi Mashiko

Elizabeth Sheley, Editor

ADMINISTRATIVE STAFF

Louise Staley,l Office AdministratorCarol A. Bock,2 Office Administrator

Diane D. White, Administrative SecretaryMadeline Gross, Contractor

C O N T R A C T O R S

David T. Allen (UCLA)Hirschhorn and Associates, Inc.

Stephen H. LipmannCurtis A. Moore and Alan S. Miller

N. McCubbin Consultants, Inc.F.A. Steward Consulting, Inc.

Konrad von Moltke

PUBLISHING STAFF

Mary Lou Higgs, Manager, Publishing Services

Chip Moore Dorinda Edmondson Susan Hoffmeyer

IFrom Oct. 1, 19932unti1 Sept. 30, 1993

contents

PART I. Summary, Policy, and Conceptual Framework

1

2

3

Summary 1Executive Summary 1Organization and Scope of the Report 7Extended Summary 8

Issues and Options 39Options for U.S. Policy 40

Context and Conceptual Framework 71Global Environmental Trends 72A Framework for Classifying Environmental Activities 75The Environmental Goods and Services Industry 79The Environment and Competitiveness Context:

The Case of Manufacturing 81

PART H. Providers of Environmental Technology andServices: The Environmental Industry

4

5

6

The Global Environmental Market: Trendsand Characteristics 89Market Drivers 91Defining the Industry and its Market 93Global, Regional, and National Markets 97Conclusions 116

US. Competitiveness in Environmental Technologiesand Services 117Environmental Trade 117Factors Affecting Competitiveness 121Sector Descriptions and Analyses 128Conclusion 149

Export Promotion Programs 151Efforts To Develop U.S. Strategy 154U.S. Export Promotion Programs in International Context 159Assistance for Export Planning and Marketing 160Technology Verification and Demonstration 173Use of Foreign Aid To Promote Exports 173Financing 177

“

vii

PART Ill. Users of Environmental Technology:US. Manufacturers

7 Environmental Requirements and U.S. ManufacturingIndustry Competitiveness 183Overview 185U.S. Pollution Abatement and Control Expenditures 186Private Sector Compliance Costs Compared With Other Nations 197Effects of Regulation on Innovation, Trade, and Industrial

Location 214Conclusion 221

8 Pollution Prevention, Cleaner Technology, andCompliance 229Major Findings 230The Rate of Adoption of Pollution Prevention and Recycling 231Pollution Prevention, and Recycling and Economic Performance 232Pollution Prevention Options 237Factors Limiting the Adoption of Pollution Prevention 244Pollution Prevention Technology Development 250Technical Assistance for Pollution Prevention and Environmental

Compliance 251Financial Assistance 260

9 Regulations and Economic Incentives in a CompetitiveContext 263Principal Findings 264Regulatory Reform 265Incentive-Based Regulations 277

PART IV. Government Support for EnvironmentalTechnology Development, Here and Abroad

10 Research, Development, and Demonstration 291United States 294Japan 310European Programs 314

APPENDICESA Effects of Environmental Regulations on Economic Growth:

A Review of Research 321

B List of Acronyms 327

INDEX 329

. . .Vlll

PART I.Summary,

Policy, andConceptualFramework

Summary 1

T his study analyzes the international competitiveness oftwo sets of U.S. industries that are affected by environ-mental policies:

1. firms that develop and market environmental tech-nologies and services; and,

2. companies (especially manufacturing fins) thatmust meet U.S. environmental requirements, oftenwhile competing with firms from countries that haveweaker standards or provide more assistance to theirindustries,

EXECUTIVE SUMMARYBoth sets of industries operate under new competitive

realities—realities shaped not only by intensifying globalcompetition but also by the environmental expectations of theircustomers and the societies in which they operate.

Environmental problems of new urgency now confront allcountries. Some argue that a conceptual shift is beginning tooccur in the world marketplace: as recognition grows thateconomic activity can do serious harm to both the local andglobal environment, and in the process harm human health andinterfere with development objectives, business increasingly willhave to internalize a new imperative of avoiding harm to theenvironment-an approach embodied in the term sustainabledevelopment (see ch. 3), Over time, according to this view,environmental imperatives could join the front ranks of businessprecepts, such as providing quality products at a competitiveprice, that no business can afford to ignore.

Recognition of global environmental problems, as well asgreater attention to local needs in a growing number of countries, 1

2 I Industry, Technology, and the Environment: Competitive Challenges and Business Opportunities

are producing new markets for environmentaltechnologies, and could spur technological inno-vation to meet those needs. In some cases, such asglobal climate change, technological remediesand strategies have only recently been sought,with responses still in the early stages of develop-ment. In other cases, such as wastewater treat-ment and control of some air pollutants, technolo-gies are well developed but widely used in only afew countries.

Some analysts believe that the expandingglobal market for environmental technologieswill produce major commercial opportunities;how U.S. firms will fare in those new environ-mental markets has become subject of debate inCongress. Germany, Japan, and other countrieswith strong environmental industries are alsoasking how they might capture a greater share ofthis growing global market.

While environmental regulations produce busi-ness opportunities for environmental firms, theyalso impose costs on the manufacturing firms andother businesses that buy their goods and serv-ices. U.S. environmental standards are likely toremain among the world’s most stringent. In amore competitive global economy, it will beimportant to find ways for U.S. industry toachieve environmental goals while avoiding com-petitive handicap.

The report’s two subjects—the industry forwhich environmental regulations often meancosts and the industry for which environmentalregulations mean business-are often thought ofseparately. But they are linked. The linkages arepertinent to debate about the competitive impactof environmental regulations on U.S. manufactur-ing firms and about government role in promot-ing U.S. environmental industries.

Among the linkages:

● Technological advancement (including hard-ware, technical and scientific knowledge, andmanagement expertise at the business andsocietal levels) is increasingly necessary toaddress both competitiveness and environ-mental needs. A number of initiatives andproposals have been made at Federal and Statelevels to better integrate environmental objec-tives within technology policy. Some indus-tries support consortia, involving firms andgovernment or university laboratories, to un-dertake research and development (R&D) onprocesses and products that would be environ-mentally preferable to those now in use.

■ The industrial market for environmental equip-ment and services is likely to be greatlyaffected by a shift away from conventionalpollution control to pollution prevention andcleaner production processes. (These processesproduce less waste and pollution, thus reducingthe need for waste treatment or disposal. Theyoften use materials and energy more efficientlythan conventional processes.)

w This shift, now in its early stages, will haverepercussions for both environmental compa-nies and manufacturing fins. Manufacturingfirms that use cleaner production processes arelikely to reduce compliance costs and, in somecases, production costs. An environmentalgoods and services (EGS) industryl that devel-ops more cost-effective approaches to reducingpollution may fare better in global markets.

w New forms of regulations allowing firms toadopt innovative approaches for addressingpollution can help both developers and users of

I The environment industry, as defined in chapter 3, refens to firms that develop and market products, equipment or services that haveenvironmental improvement as a primary or significant secondary benefit. The report focuses on fm that sell technologies and semices tocontrol, trea4 cleanup, and prevent pollution and waste (including cleaner production and cleaner energy technologies). Environmentalmanagement technologies and services used in a@uMure, foreshy, fisheries, and mining are not discussed in detail. Firms selling consumerproducts claimed to be environmentally preferable might be considered part of the environmental industry, but are not covered in this report.

Chapter 1-Summary 3

environmental technology. These include per-formance standards, economic incentives, andadjusting permitting procedures to stimulatethe development and adoption of innovativeenvironmental technologies.At the same time, government policies canaffect these two sets of industries in quitedifferent ways. Policies to speed use of cleanerproduction processes that offer competitivebenefits to firms that must comply with envi-ronmental regulations can also reduce the needfor remedial or end-of-pipe technologies. Like-wise, policies that continue to promote end-of-pipe solutions for environmental problems canimpede adoption of cleaner production andpollution prevention approaches.

Environmental and economic policies haveoften been viewed as in opposition and, for themost part, have been developed separately. None-theless, more and more, policymakers see bene-fits in addressing the two together. The interac-tions between environmental concerns and industrialcompetitiveness have ramifications for manypolicy areas, including pollution control andwaste management, technology development anddiffusion, export promotion and developmentassistance, and trade policy and negotiations.

Addressing these interactions could requirechanges in U.S. Government programs. Amongproposals now on the table are those to:

devise a strategy to promote development andexport of U.S. environmental technologiescreate mechanisms to integrate environmentalobjectives into government support for manu-facturing industry R&D and technology diffu-siondevelop regulatory approaches that allow in-dustry more options to innovate while main-taining or exceeding current environmentalobjectiveswork toward bilateral and multilateral agree-ments on environmental standards that furtherenvironmental goals, lessen the likelihood of

adverse competitiveness impacts for U.S. firmsand workers, and expand opportunities for U.S.environmental firms at home and abroad.

I Principal FindingsTHE GLOBAL ENVIRONMENTAL MARKET

1. The market for environmental technologiesand services is growing in the United States andabroad, in both industrialized and developingcountries. Most of the current market is forwell-known, widely used approaches and tech-nologies for end-of-pipe pollution control, wastedisposal, and remedial clean-up of pollution.According to a widely cited estimate, this globalmarket probably amounted to $200 billion in1990, and could grow to $300 billion annually bythe year 2000. The projected market would bemuch larger if cleaner production technologiesand products were included, but there are no goodprojections of the potential size of this market.

2. As more countries respond to their environ-mental problems, the global environmental mar-ket is likely to continue to expand—although notas rapidly as predicted in the late 1980s whenrecession-proof growth in environmental marketswas widely assumed. Over the next 10 or 15years, the advanced industrial economies likelywill still account for most of the growth. How-ever, markets are rapidly emerging in the newlyindustrialized countries and many developingcountries, particularly in the Pacific Rim andLatin America. The transformingg economies ofCentral and Eastern Europe offer large potentialmarkets, although there, as elsewhere, scarcity offinancing limits environmental investments. Bi-lateral and multilateral aid is a significant sourceof environmental investment in some areas.

3. While the global environmental market islarge, most environmental expenditures go today-to-day operations and construction of facili-ties that use locally available labor, materials, andparts. International trade thus fills only a smallportion of EGS demand. The exact amount oftrade is uncertain because the quality of the data


is very poor. However, traded items and servicesprobably do not account for more than 10 or 15percent of the total market. Even so, this fractionrepresents a significant amount of trade, whichmay grow in volume as the world market grows.The most significant prospects for U.S. exportsare for relatively sophisticated equipment andprofessional services. While the attendant growthin U.S. employment probably will be modest,many of these jobs are likely to be high-wage jobsin management, engineering and other technicalprofessions, as well as some blue collar manufac-turing jobs.

4. In the long term, cleaner technology andproduction processes may have the potential togenerate more export-related growth and jobsthan conventional pollution control equipment.Government technology and export promotionpolicies aimed at strengthening environmentalindustries need to take into account the technicalpossibilities and commercial opportunities incleaner production.

5. The shift toward cleaner production is likelyto occur incrementally over the next 15 or 25years, as manufacturers build new facilities orupgrade existing plants. There likely will begrowing global demand for cleaner and moreenergy-efficient industrial facilities, includingthose for power generation, chemical processing,smelting, oil refining, papermaking, food proc-essing, and product assembly. Countries withfirms that are competitive suppliers in these areaswill benefit from the jobs and commerce gener-ated from trade in capital equipment and relatedprofessional services. Moreover, as these coun-tries’ domestic producers in other industriesinvest in cleaner technologies, they may makechanges that will enable them to compete moreeffectively against firms in other countries,

6. Regulations and enforcement (includingliability and fees) are likely to continue to drivemarkets for environmental technologies and serv-ices. However, a number of other factors mayaffect these markets. Energy efficiency invest-ments are often cost-effective even in the absence

of regulation as are some pollution preventionprojects. Potential users often know little aboutthese alternatives, but as knowledge about theircost-effectiveness grows, they may be used morewidely. Some companies also may make environ-mental investments out of concern for theirenvironmental image among customers, inves-tors, and the public, especially where reportingrequirements or consumer labeling exist.

THE COMPETITIVE POSITION OF U.S.ENVIRONMENTAL FIRMS

1. Global competition for environmental mar-kets has become fierce during the last decade. TheU.S. environmental industry’s overall interna-tional performance is mixed. In many foreignmarkets, U.S. firms remain competitive but notdominant; in other areas, the U.S. position haseroded. Estimates of market shares in major LatinAmerican countries show U.S. sales accountingfor about half of environmental imports, but notegrowing European and Japanese presence. U.S.performance in other regions (including the fastgrowing Pacific Rim) is less strong. As withconventional environmental equipment, U.S. firmsthat design, construct, and manufacture cleanerand more energy-efficient capital goods andfacilities can expect intense foreign competition.

2. Large and highly competitive environmentalindustries exist in Germany, some other Europeancountries, and Japan-countries with firms thathave a stronger export orientation than many U.S.environmental companies. Several newly indus-trialized and advanced developing countries havenascent environmental industries that supplybasic environmental goods for their own marketsand also for export; as developing country envi-ronmental investments grow, some of these firmsmay well become important regional suppliers.

3. While some U.S. environmental firms aremajor international players, most focus on thehuge domestic environmental market, which is byfar the world’s largest. Here, too, American firmsface competition, For European and Japaneseenvironmental fins, the United States is an

Chapter 1-Summary ! 5

attractive export market. It also offers majoropportunities for licensing of technologies, jointventures, and acquisitions of U.S. companies, Inthe last decade, U.S. firms have become morereliant on foreign technology and foreign capitalin a number of environmental sectors. For exam-ple, half of the 10 largest U.S. manufacturers ofwastewater treatment equipment are foreign owned.Also, U.S. companies have become more depend-ent on foreign air pollution control and inciner-ation technologies. In some cases these technolo-gies were first developed in the United States andthen licensed and improved abroad.

4. To succeed in foreign markets, U.S. firmsmay need to adapt products developed for U.S.needs to the sometimes quite different conditionsin other countries. While U.S. environmentalstandards and technologies enjoy a good reputa-tion, potential customers in developing countrymarkets sometimes see U.S. products as tooexpensive or sophisticated. Further, some U.S.suppliers are viewed as insufficiently concernedwith service, training of personnel, and provisionof parts.

5. Most U.S. environmental firms (especiallysmaller ones) have little export experience; firmsin Japan and many European countries have more.Private export financing in the United States isscarce (especially for smaller firms); it is moreplentiful in Japan and several European countries,where firms also get more government help withexport marketing and financing than in the UnitedStates. The U.S. government’s help is also poorlycoordinated and difficult to access, The U.S.government also provides less confessional fi-nancing, and structures its development assist-ance programs in ways that provide less help tonational firms bidding on large capital projects.

6. Technological innovation is likely to beincreasingly important for environmental firmscompeting in global markets. U.S. regulatory andpermitting procedures present some impedimentsto environmental technology innovation. Compa-nies may find it too expensive, uncertain, ortime-consuming to secure regulatory permits for

R&D and testing of innovative environmentaltechnologies. Regulated industries hesitate toemploy innovative technologies not only becauseof technical uncertainties associated with newapproaches but also because of regulatory uncer-tainties, Permitters often shy away from approv-ing unfamiliar technologies and tend to preferenvironmental technologies with established trackrecords, Limited technical expertise, small budg-ets, and lack of incentives for championing newapproaches account for risk-averse behavior bypermit writers.

COMPETITIVE IMPACT OF ENVIRONMENTALREGULATIONS

1. While comparisons are difficult, the compli-ance costs incurred by U.S. manufacturers forpollution control and abatement are among thehighest in the world. Firms in a handful ofcountries such as Germany face equal or highercosts, but they are the exception. Japanese manu-facturers appear to spend lesson pollution controlthan U.S. industry and that gap has been growing.However, Japanese industries pay more for en-ergy, leading them to implement more energyefficient measures, which provide some environ-mental benefits. Some countries (including Ger-many and Japan) provide greater financial incen-tives (tax incentives, loans, grants) to companiesfor compliance with their nations’ environmentalrequirements.

2. For most U.S. manufacturing sectors, pollu-tion control and waste management regulationsare not among the top ranking factors determininginternational competitiveness. Even sectors withthe highest compliance costs-chemicals, pri-mary metal production, pulp and paper, andpetroleum refining-represent a range of compet-itive positions. However, some U.S. firms faceincreasing competition for nonenvironmental rea-sons, and for these firms even small cost differ-ences can erode relative competitive position.Conventional forms of regulation can have effectsother than just raising production costs. Forexample, complex and time-consuming permit-


ting procedures can make it difficult for manufac-turers to continuously improve production proc-esses and rapidly introduce new products.

3. A number of experiments are underwayacross the Nation as regulators and industries seeknew regulatory approaches that protect the envi-ronment effectively while reducing competitiveimpacts on fins, These experiments includeemphasis on pollution prevention; use of multi-media regulation, permitting, and inspections;development of facility-wide emission caps andperformance standards; allowing good environ-mental performers more choices in selecting howthey will comply with regulations; and introduc-tion of economic incentives, including tradablepermits and fees. The techniques explored inthese experiments can complement and enhancethe present regulatory tool kit, but they have yetto be widely adopted,

4. In many cases, economic incentives couldlower environmental compliance costs. Withtradable permit systems, for example, firms ableto reduce pollution cheaply have an incentive togo beyond what otherwise would be required,while firms with higher marginal control costswould not need to do as much as otherwise if theypurchase credits from the lower compliance costfirms. Incentives could also stimulate develop-ment of lower cost compliance approaches. Whileincentive systems can lower compliance costs,they cannot be applied in all cases. They are asupplement, not a replacement, for the regulatorysystem.

5. The traditional means for complying withpollution abatement laws—use of end-of-pipe orremedial technologies to deal with pollution orwaste after it has been created—almost alwaysadd to manufacturing costs. Pollution preventionalternatives (which include source reduction) andrecycling of industrial pollutants and wastes are

promising ways for lowering compliance costs.Some source reduction and recycling projectsquickly pay for themselves through reducedmaterial and energy use and savings from recov-ered materials. Source reduction sometimesspeeds technical change, leading to increasedinvestment in new plant and equipment. Sourcereduction and recycling usually pay off whencompared to the cost of treating or disposingwastes. But, many projects are not cost-effectivein the absence of regulatory requirements.

6. As the simpler steps for pollution preventionbecome widely adopted, a significant source ofenvironmental improvement will lie in new gen-erations of manufacturing process technologiesthat are cleaner, and often more productive, thanolder generations. Cleaner technology has onlyrecently emerged as an objective for industrialR&D. With the exception of some energy relatedtechnologies, public and private funding has beenlimited.

7. Technical assistance can help fins, particu-larly small and medium-sized firms, implementpollution prevention and recycling measures andmore effectively meet environmental regulations.Yet, U.S. programs are very small; many of them,by focusing only on pollution prevention, do notconsider productivity and quality issues thatcould more fully meet manufacturers needs.

I Preview of Policy OptionsIn this study, OTA assumes that U.S. pollution

control and abatement standards will continue attheir current levels, which makes them among thehighest in the world, and that the standards maywell become more stringent in the future.2 OTAdoes not consider the option of lowering U.S.standards as a competitive response to weaker

2 Other types of environmental laws and regulations, such as those governing land use, resource managemen~ and protection of species,are not addressed in this assessment.

standards elsewhere.3 Hence, the major competi-tive questions in this study are:

1. Given continuation of strong standards,how can U.S. manufacturing maintain orenhance its industrial competitiveness?

2. How can the United States benefit fromhigh standards through an internationallycompetitive U.S. environment industry?

OTA has examined the pros and cons of a widerange of policy options that bear on thesequestions, both domestically and abroad (seetable 1-4 and additional discussion further on andch. 2). Domestic measures, for example, mightinclude coordinating Federal support for environ-mental and manufacturing industry R&D; en-couraging States and Federal agencies to integratedelivery of environmental and manufacturingtechnical assistance to better assist small andmedium-sized firms; and giving firms that arestrong environmental performers more options todetermine how they will meet environmentalstandards.

The Federal Government also might do a betterjob of promoting exports of U.S. environmentalgoods and services. Authorizations in recent lawsdirected at this goal provide a starting point.Additional measures could be considered. Somesteps taken primarily for domestic purposes mightenhance exports. For example, the Federal Gov-ernment could oversee more independent evalua-tions and performance verifications of U.S. environ-mental technologies, and make this informationavailable to foreign purchasers.

Greater international cooperation on environ-mental matters could produce new commercial

Chapter 1-Summary ! 7

opportunities for U.S. environmental firms andease negative competitive impacts for manufac-turing fins. For example, both competitivenessgoals and environmental goals might be served ifthe U.S. Government were to more vigorouslynegotiate agreements with other countries toupgrade their environmental standards. It couldalso help developing countries build their envi-ronmental capabilities on a multilateral basis.

The options could be adopted singly or inpackages. OTA has formulated two strategies—an incremental approach and a more aggressiveeffort—that could guide U.S. efforts (see box 1-Dfurther on and ch. 2). Many of the options couldbe accomplished through more effective integra-tion, coordination, or reorientation of Federalprograms. While such steps could be useful, someactions—such as development of next genera-tions of cleaner manufacturing technologies, orincreasing access to export financing for U.S.fins-would require new funding beyond thecurrent modest levels.

ORGANIZATION AND SCOPE OFTHE REPORT

This report is the third and final publication ofan assessment of environmental issues and Amer-ican industry that was requested by the HouseForeign Affairs Committee, the House Energyand Commerce Committee, and the Senate Fi-nance Committee.4 The final report examines:

■ how American business and the U.S. economymight benefit from the growing global interestin controlling emissions, treating wastes, andpreventing pollution; and

s This assessment does not examine environmental priorities or goals. Nor does it examine risk assessment/management as a way to setenvironmental spending priorities. The latter approach is advocated by those who argue that the present environmental protection system directstoo much spending to areas of relatively little environmental risk and too little to areas posing much higher risks. Another OTA study isexamining the research base to improve risk assessment, including environmental pollutants.

4 The House Foreign Affairs Committee also asked OTA to provide interim products on trade and environment issues, and on environmentalindustries. OTA produced two background papers in respome. See U.S. Congress, Office of Technology Assessment Trade and Enviromnent:Conj7icfs and Opportunities, OTA-BP-ITE-94 (Washington, DC: U.S. Government Printing Office, May 1992) and U.S. Congress, OffIce ofTechnology Assessment, Development Assistance, Export Promotion, and En~’ironmental Technology, OTA-BP-ITE-107 (W~hingto@ DC:U.S. Government Printing Office, August 1993).


ways to counteract competitive disadvantagesfor U.S. manufacturers that compete with firmsin countries with weaker environmental stand-ards or with firms from countries that providemore government help for compliance withenvironmental standards.

Part 1 is comprised of this summary chapter, achapter on policy issues and options, and achapter about the report’s conceptual framework.

Part 2 discusses opportunities for U.S. business

in providing environmental technologies andservices to a growing global market. The discus-sion covers, first, the traditional sectors thatmarket equipment and services for control, dis-posal, and remediation of industrial pollution andhousehold waste, and, second, on a more selectivebasis, cleaner production technologies and relatedservices. The latter sector can be thought of as an“invisible’ environmental industry of pollutionprevention and improved energy efficiency. (Greenconsumer products are not addressed in detail).Government export promotion policies of theUnited States and some competing countries arealso discussed.

Part 3 examines the difficulties manufacturingfirms face against competitors in countries withweaker or more flexible regulations or that getmore help in complying with environmentalregulations or improving technology. It examinesways to reduce potential competitive impactswhile maintaining or strengthening standards.These include an increased focus on pollutionprevention (including public and private efforts todevelop and diffuse cleaner production proc-esses), use of economic incentives, and modifica-tions to make the regulatory system operate moreefficiently.

Part 4 examines the organization of environ-mental technology R&D in the United States andsome other nations.

EXTENDED SUMMARYResults from the report are discussed more

fully below. The section immediately belowdiscusses the environmental market and U.S.environmental industry competitiveness. This isfollowed by discussion of environmental compli-ance costs, regulations, pollution prevention, andmanufacturing industry competitiveness. The finalsection discusses policy issues and options in 6areas: technology policy; diffusion of best prac-tices and technologies to industry; regulatoryreform and innovation; development assistance,export promotion, and environmental industries;trade and environment interactions; and dataneeds for policymaking.

I Environmental Markets and U.S.Environmental Industry Competitiveness

Estimates of the current and future size of theglobal market for environmental goods and serv-ices vary widely. A study by the Organization forEconomic Co-operation and Development (OECD)estimated the 1990 market for environmentalservices and for traditional pollution control andwaste treatment equipment at $200 billion, withthe potential to grow to $300 billion in the year2000. 5 Another estimate placed the 1992 marketat $295 billion worldwide, with potential to growto $426 billion for 1997.6 Different definitionspartly explain the variation. Also, the quality ofdata varies.

Neither estimate fully accounts for cleanerproduction technologies (referred to as invisibleEGS) which could become a fast-growing seg-ment of the environmental market. Manufacturers

f’ Orgarliza tion for Economic Co-Operation and Development (OECD), The OECD Environment lndusrry: Siruarion, Prospects andGovernment Policies, OCDE/GD(92)l (Paris: OECD, 1992). OECD’S estimates do not include cleaner production and energy eftlciencyproducts or services except for some pollution prevention consulting services.

b Grant Ferner, Environmental Business International, presentation to Environmental Business Council of the United States conference,Washingto% DC, June 7-9, 1993. The estimate does not include cleaner technology except for renewable and cogenerated energy.

—

Chapter 1–Summary 9

Box 1-A—Leaders in Cleaner Technologies

in the United States, several northern European countries, and Japan, efforts to develop andestablish cleaner technologies are underway. The primary motivation is to further environmentalobjectives through pollution prevention, reduced use of toxic and hazardous substances, improvedenergy efficiency, and product reuse or recycling.

In contrast to pollution control, pollution prevention is integral to process and product; therefore,cleaner production technologies change (and can sometimes improve) production systems. In somecases, developers, vendors, and early users of these technologies can gain competitive advantage.

The United States is a leader in the development of many cleaner production technologies. R&Dhas been spurred by the expense and liability of hazardous substance disposal, phase-out of ozonedepleting substances, a requirement that firms report their releases of toxic substances, and increasedregulation of volatile organic compounds and toxic air pollutants. As a result, many U.S. firms areactively seeking substitutes and ways to reduce the use of these substances when they cannot beeliminated. Aqueous metal cleaning baths, low emission paint nozzles and coating formulations,advanced curing technologies, better catalysts and chemical reactor designs, and cleaner pulpingtechnologies are among advances that the United States can capitalize on through technology exportsand improved domestic production. U.S. firms are a dominant market presence in some clean energytechnologies such as gas turbines. There is, however, strong competition from abroad in severalrenewable energy technologies, some advanced combustion technologies, and emerging technologieslike fuel cells. The United States also has pioneered demand-side management approaches for electricpower conservation.

Germany appears to be moving toward greater emphasis on pollution prevention. As in the UnitedStates, there are strong efforts for replacement and recovery of organic solvents and toxic chemicals.German environmental compliance costs are on the same order as in the United States; industry canfind lowest cost solutions through pollution prevention. In addition to pollution prevention, Germany isestablishing strong requirements for recycling. Initially focused on packaging, German product takeback requirements could soon apply to a wide variety of products including automobiles, computers, andother machinery. Such requirements can give German industry significant impetus to design productsfor ease of recycling and to create processes to aid in recovery and reuse. Initial implementation,

(continued on next page)

and designers of less-polluting and more energy- duction processes, and energy efficiency into aefficient equipment for power generation, indus-trial processing, buildings, and transportation arelikely to find increased trade opportunities inmany regions of the world. In the long run,cleaner production technologies may cut into(although not eliminate) demand for end-of-pipetechnologies.

It is very difficult to estimate the current andpotential size of the market for cleaner technolo-gies and production processes. Some projectionscombine conventional technology, cleaner pro-

single forecast for a seemingly enormous envi-ronmental market ($600 billion or more) a decadefrom now. Such projections suggest the growingimportance of environmental factors in the de-mand for a wide range of products and services.While the commercial potential of cleaner tech-nologies is high, development efforts are still intheir early stages; aside from the United States,most of the activities are occurring in a fewEuropean countries and Japan (see box l-A).


Box 1-A—Leaders in Cleaner Technologies--Continuedhowever, has proven difficult.1 If they are adopted in other countries, requirements that makemanufacturers responsible for disposal of products could alter the relative competitiveness of Americanand German firms. German firms are also highly competitive suppliers of renewable energy and othercleaner energy technologies.

Other northern European countries that strongly promote pollution prevention include theNetherlands and the Scandinavian countries. The large Swedish/Swiss environmental and electricalmachinery conglomerate, ASEA Brown Boveri, is a major provider of advanced turbines and a leaderin some advanced combustion technologies. Scandinavian pulp and paper firms and suppliers areamong the world leaders in cleaner pulp and papermaking technologies. In the energy sector, Denmarkis the major competitor of U.S. firms in wind energy.

The Dutch use their tax code to promote the development and use of clean manufacturingtechnologies. Firms that install innovative pollution prevention or control technologies can depreciatetheir investment in 1 year instead of 10. The tax break only applies to a list of innovative technologiesthat is annually revised by a group of industry and government experts. Technologies are dropped fromthe list when they gain a significant marketshare or are required by regulation. Overall, the Dutch spendclose to $500 million a year on environmental technology (equivalent on a per capita basis to $9 billionin the United States), and a significant share is for pollution prevention and energy technologies.

Because of high energy prices and aggressive government policies adopted after the energysupply shocks of the 1970s, Japanese industry has made significant strides in adopting energy efficienttechnologies, which provide direct and indirect environmental benefits. Japan is contending forleadership in some clean energy fields including photovoltaic power and fuel cells. Since early 1992, theJapanese Government has supported its fuel cell industry by subsidizing purchases by hospitals, hotels,and schools. Moreover, Japan is active in recycling technology, a logical interest for a nation that ishighly dependent on imported materials and has little space for landfills. Japanese firms also have beenvery active in developing CFC substitutes. However, in contrast to conventional wisdom, the Japanesedo not appear to be in the forefront in other areas of industrial pollution prevention. The distinctionbetween prevention and control of pollution seems to be less advanced in Japan than in the UnitedStates and Northern Europe.

1 $’@r~ny”S TrOU~@ DSD Offers l.essom on Product Takeback Policy”, WslneSS and the fivl~n~nt,vol. IV, No. 7, Juty 1993, f). 2.

According to the OECD estimate, the industri- market as a whole. Much of the demand in thesealized countries accounted for more than 80percent of the 1990 market for environmentalservices and conventional equipment. The UnitedStates accounted for 40 percent of the globalmarket, making it the largest national market.Industrial country markets (the OECD memberstates) are likely to account for most EGS demandover the next 10 to 20 years.

While small now, some markets outside theOECD may grow more rapidly than the OECD

nations is for environmental infrastructure, suchas water and wastewater treatment, and otherbasic sanitation services, and control of urban airpollution. The fast-growing East Asian area,already a significant market for some environ-mental technologies, could emerge as a majornew market for a full range of technologies,including cleaner production processes and facili-ties.

Chapter 1--Summary I 11

Singapore, one of the four Asian economictigers, has in place environmental standards thatrival those of some OECD countries. SouthKorea, Taiwan, Thailand, and Malaysia planmajor environmental expenditures in comingyears. Some less prosperous nations, includingChina and Indonesia, may grow into significantenvironmental markets. But U.S. firms seeking toexpand into the East Asian markets will faceJapan’s already strong commercial presence,Some efforts, such as the public/private UnitedStates-Asia Environmental Partnership, attemptto give U.S. firms a more visible role in the region.

Latin America is another promising region forAmerican technologies and services. Mexico andBrazil plan multibillion dollar investments totreat drinking and wastewater, and hope to tackleother urban and industrial environmental prob-lems. Other Latin American countries, includingArgentina, also plan major environmental invest-ments. The nations of Central and Eastern Europeand the former Soviet Union are trying to repairsevere environmental damage. These huge poten-tial markets are likely to be constrained by the rateat which these countries progress economicallyand move to successful market-based economicsystems.

Many factors affect the size and nature ofenvironmental markets, The most important is thestrength of a country environmental regulationsand its ability to enforce the regulations. Most ifnot all end-of-pipe and remedial controls are notcost-effective in the absence of regulatory re-quirements. Other factors are also important. Ahealthy economy is important for environmentalmarket growth; contrary to some past predictions,the EGS industry is not immune to recession evenin countries with strong regulations. The possibil-ity of saving money and realizing gains in qualityand productivity can make some investments insource reduction, and waste recycling, and partic-ularly energy efficiency cost-effective even in theabsence of regulation. In addition, new technolo-gies to improve productivity often have concomi-tant environmental benefits.

Lk.,-.,

Basic services, such as water supply, sewerage, andrefuse collection, are major environmental needs inmost developing countries.

Also, some consumers are choosing productsproduced in ways deemed environmentally pref-erable; this can influence producers even incountries without strong standards. To somedegree, environmental investments in countrieswithout strong standards may be driven by thedecisions of some multinational companies toapply their home country environmental stand-ards. Public financing agencies and private lend-ers increasingly consider environmental factors(e.g., possible future liability) in making loans inareas that lack strong standards.

While the worldwide market is large, mostspending for environmental infrastructure (water,sewer, and waste utilities), major industrial airand water pollution abatement installations, andremedial treatment is for local construction,fabrication, and operation. In many cases lowervalue materials like cement and sheet metal willbe procured locally rather than imported. Opera-tion of environmental facilities, including trashcollection and disposal, and water and sewerservice, largely involves local or regional laborforces. Environmental industries are developingin many countries, In local and regional marketsthese firms may increasingly compete with Amer-ican and other OECD-based firms. In some cases,local content regulations and tariffs can limitexport opportunities although the development of


local pollution control expertise may create de-mands for more sophisticated technologies morelikely to be supplied by imports or licensing.

For all these reasons, international trade fillsonly a fraction of the demand for goods andservices associated with environmental projects.Still, that fraction represents a significant amountof trade, for which competition is intense. Tradedata and information are inadequate. However,Germany and the United States are believed to bethe largest exporters of EGS.

According to one estimate,7 Germany, theUnited States, and Japan exported $23 billion inenvironmental products in 1992—about 7.8 per-cent of an estimated world environmental prod-ucts and services market of $295 billion. U.S.product exports were estimated to be nearly $7billion, or about 20 percent of U.S. environmentalgoods production. German and Japanese productexports were estimated to be $11 billion and $5billion, respectively. U.S. service exports wereestimated to be $3.5 billion-less than 10 percentof U.S. solid waste management revenues, and 5percent or less of sales for engineering, hazardouswaste, analytical, and other services. (Imports,non-U.S. service exports, and the proportion ofproduction exported by other countries were notestimated).

According to OECD’s study, Germany, theUnited States, and Japan had 1990 trade surpluses—including license royalties-of $10 billion, $4billion, and $3 billion, respectively. Britain andFrance had estimated trade surpluses of $500million each. The Netherlands and Sweden appar-ently also were net exporters.

An EPA study, based on analysis of severalproduct trade codes deemed environmental, con-cluded that the United States ($1.7 billion total,$1.1 billion net), Germany ($1.5 billion total, $0.7billion net), and Japan ($0.7 billion total, $0.3

billion net) were the largest exporters of environ-mental products.

Environmental services, including engineeringand management services, are an expandingcomponent of environmental expenditures. Inter-national sales in products center on relativelysophisticated equipment and supplies such asmonitoring and control instruments, specializeddevices (e.g., aerators, falters) and chemicals, andancillary equipment (e.g., construction and ma-terials handling machinery). Licensing of tech-nologies is also common.

Environmental components are also embeddedin other products or services that are traded. Thiscan complicate analysis. For instance, while U.S.companies are major producers of automotivecatalytic converters, the United States importsforeign-assembled catalytic converters that areattached to imported automobiles. And, whilethere is growing world demand for engineeringdesign services for environmental projects (e.g.,waste treatment facilities or scrubbers), suchservices can be a component of larger contractsfor design of whole production facilities (e.g.,power plants, refineries, or chemical plants). Ascleaner production becomes a more importantobjective, those engineering firms that are mostadept at integrating environmental objectives intothe design of full facilities may have a competi-tive leg up (see box l-B).

U.S. ENVIRONMENTAL INDUSTRYCOMPETITIVENESS

It is difficult to assess national competitivenessin most environmental sectors. As discussedpreviously, data on environmental products tradeare limited, while data on trade in services arelargely unavailable. Licensing, joint ventures,and multinational acquisitions further complicateanalysis. Many large environmental firms nowoperate on several continents. Flows of profits

7 Grant Ferner, op. cit., footnote 6. The estimate in the next paragraph above is ffom OECD, op. cit., footnote 5; that in the second paragraphthat follows above is from U.S. EPA, “International Trade in Environmental Protection Equipment: An Analysis of Existing Data, ” EPA230-R-93-O06, Washington DC, July 1993.

Chapter 1-Summary 13

Box l-B—Engineering Services and Cleaner Production Facilities

Engineering and construction firms could play a role in moving industrial production from a largelyend-of-pipe approach toward pollution and waste to a cleaner production orientation. In addition todesigning and building wastewater treatment plants, waste disposal facilities, and major air pollutionabatement installations, these companies also design power plants, chemical plants, pulp and papermills, petroleum refineries, steel mills, and other industrial production facilities. In theory, these firms arewell-positioned to integrate improved energy efficiency and cleaner production processes into facilitydesign.

Design of whole production facilities could be more commercially rewarding than contracts fordiscrete environmental add-ens. While potential markets for discrete environmental goods and servicesare large, the markets for industrial production capital plants and machinery are far larger. Wards ofdesign contracts to U.S. companies can contribute to U.S. exports through fees earned by t hose firms,and indirectly, because U.S. designers are more Iikely to incorporate U.S. standards and products intotheir plans. Furthermore, environmental design responsibilities for a facility often may lie with the overallfacility designer. The United States is highly competitive in the engineering field and possesses highcompetency in process engineering. However, major competition is presented by European andJapanese firms that can often bring to the table financial packages sweetened by their governments.

and royalties are difficult to compare with em- 2. Fiscal and other domestic incentives forployment and export earnings. For instance, someenvironmental companies in the United States aresubsidiaries of foreign firms but export goods andservices from the United States. At the same time,a number of American companies have foreignoperations that mainly serve local markets.

Generally, the most competitive environmentalindustries are found in countries with stringentenvironmental regulations. However, many otherfactors are involved, Some, including cost ofcapital, general export promotion policies, andoverall workforce ability, are common to most orall industries. Others are more particular to theEGS sector.

Among the major competitiveness factors are:

1. Strength and form of home country environ-mental regulations. Leading internationalenvironmental firms generally come fromcountries with the toughest regulations.Also, the form of regulations can influenceinnovation, which in turn can lead to newproduct offerings and to export opportuni-ties.

adoption of innovative environmental tech-nologies or approaches. Countries may usetax incentives, loans, utility regulation, andother techniques to encourage domesticindustry to make environmental invest-ments. National environmental firms maybe helped as a result.

3. Industrial structure, including company sizeand financial strength. While small en-trepreneurial firms can be innovative, largecompanies have easier access to capital andpossess the resources to pursue exportopportunities.

4. Promotion abroad of home country stand-ards, practices, and testing protocols. Thiscan help create markets for technologiesknown to meet the standards.

5. Export awareness and support. Many U.S.environmental firms are not attuned toexport opportunities, while some foreigncompetitors are more focused on interna-tional business.

6. Financing packages, including developmentassistance. For projects in developing coun-


Figure 1-1--Overlap of Selected Environmental Compliance Costs and EGS

EGS market revenue Industrial compliancecosts

Market Revenues

[Noncompliance cost-based EGS Market

[

■ Municipal garbagecollection

■ Municipal water supply■ Some cleaner energy

\

technologies [

Compliance costsin EGS market

● Hazardous wastemanagement

~ Water pollution control● Air pollution controlo Motor vehicle emission

SOURCE: Office of Technology Assessment, 1993.

tries, foreign government aid donors some-times offer attractive financing packagesbenefiting their firms that American compa-nies cannot meet.

7. Appropriate technologies, products, andservices. Many countries lack resources ordo not have the expertise to obtain ormaintain advanced technologies. Some prod-ucts used in high-standard countries maybetoo expensive and sophisticated for othermarkets.

8. Research, development, and demonstration.R&D can yield new and improved technolo-gies, while demonstrations and independenttechnology evaluation can play an impor-tant role in diffusing innovative technolo-gies domestically and internationally.

Compliance costsnot in EGS market

8

8

■

In-plant labor formental compliance

Energy and some materialsused to control pollution

Regulatory fees)/

No single factor explains leadership in all EGSsectors. For instance, tough standards in homecountry markets help explain the strength ofGerman, Japanese, and Scandinavian firms inselling some sulfur dioxide (SO2) and nitrogenoxide (NOX) control technologies. But, Britishand French wastewater treatment companies arestrong performers in the international marketeven though British and French standards areweaker than those in the United States and someother European countries. Strong cash positionsfollowing privatization and experience in provid-ing integrated services as large utilities contributeto British and French success.

The U.S. environmental industry is the world’slargest, estimated at over 34,000 firms employingover 900,000 people and earning $112 billion inrevenues (not including private water utilities or

Chapter 1-Summary [ 15

publicly operated water, sewer, and solid wasteoperations). 8 The revenue estimate is not ameasure of final demand or of the total contribu-tion to GDP. Sales from EGS firms to other EGSfirms may be double-counted. Sales of somecleaner technologies may not be counted. Therevenue estimates also do not include internalcosts (e.g., labor) by complying firms. Hence, therevenue estimate differs from estimates of U.S.environmental compliance costs (figure l-l).

The U.S. industry is comprised of a few largefins, some of which operate on a worldwidebasis, and a large number of small- or medium-sized enterprises. Many of their major Europeanand Japanese competitors belong to large, well-capitalized conglomerates that operate in othermajor markets, including the United States. Thereare indications that these firms sustain higherlevels of private R&D than most of their Ameri-can rivals. Many major U.S. and foreign firms areactive in several businesses, such as engineeringand construction, chemicals, power generation,petroleum, transportation, instrumentation, elec-trical equipment, and materials.

OTA has analyzed international competition in8 major environmental industry sectors encom-passing both goods and services. Most of thecases feature end-of-pipe control, disposal, andremedial technologies and services but some,more selectively, highlight pollution preventionand cleaner production. The cases examined are:

1..2.3.4“

5.6.7.

design and construction services;stationary source air pollution controls;mobile source air pollution controls;water and wastewater treatment equipmenttechnologies;solid and hazardous waste management;contaminated site remediation;cleaner energy technologies, including gasturbines, advanced coal technologies, re-

Some large environ mental firms operate on aworldwide basis. This hazardous waste treatmentfacility in Hong Kong is run by a subsidiary ofa U.S. firm.

newable energy, and end-use energy effi-ciency; and

8. cleaner industrial production technologies.

U.S. companies remain competitive, althoughnot dominant, in most environmental sectors.However, the U.S. position has eroded in someareas, Foreign ownership of U.S. environmentalfirms has increased over the last decade. U.S.companies seem to depend more on air, water,and incineration technologies developed abroad.Foreign technologies as well as U.S. subsidiariesof foreign-owned firms are prominent in suchFederal technology development and demonstra-tion programs as the Clean Coal TechnologyDemonstration Program. Clearly, competition ininternational environmental markets has intensi-fied.

American technologies often have a goodreputation abroad. However, particularly in de-veloping and newly industrialized countries, theyare sometimes perceived as over-engineered andtoo expensive for local needs. US. vendors aresometimes seen as providing poorer after-sale

8 Grant Ferrier, op. cit., footnote 6.


service than Japanese, German, and some otherforeign vendors.

Because international trade fills only a smallfraction of world demand, the growth in export-related jobs in the United States and leadingexporters will be smaller than suggested by thesize of the global market. However, these export-related jobs are likely to include many high wageengineering and management positions, and rela-tively skilled blue collar jobs in the manufactureof components and machinery. Some jobs couldaccrue from exports of ancillary goods such asconstruction equipment used in building environ-mental projects.

In the long term, opportunities for the export ofcleaner production goods—that is, capital goodsfor factories, mines, mills, power plants, and otherproduction facilities--could become an impor-tant source of export-related jobs. Manufacturersof environmentally superior capital goods, espe-cially those incorporating cost-saving improve-ments in energy or materials efficiency, will havean advantage as other countries tighten theirenvironmental requirements. The distinction be-tween the visible EGS sector of environmentalequipment and the invisible EGS sector of cleanerproduction goods may blur over time.

While some U.S. environmental companies arekeen competitors for international markets, thegreat majority do not export. Most U.S. environ-mental firms are small or medium-sized, withmodest capitalization. They often lack the interestor the resources to exploit-or even learn about—export opportunities. Even many larger U.S. firmsare not well-represented in international markets.The size of the U.S. domestic market has createda large, vibrant, domestic industry that often haslittle interest in exporting; at the same time, theU.S. market attracts foreign competitors. (Table1-1 illustrates some of the relative strengths andweaknesses of U.S. environmental industries.)

Increasing export awareness and interest amongsmall and medium-sized U.S. environmental

firms will be important for improving U.S. exportperformance. Improving export awareness amonglenders is important as well; banks outside of themajor U.S. money centers are often inexperiencedin international transactions. As is discussed inchapter 6, U.S. firms receive less export assist-ance from government than their counterparts insome European countries and Japan.

Both EGS competitiveness and manufacturers’ability to comply with regulations is affected bygovernment support for environmental technol-ogy research, development, demonstration, andevaluation. As is discussed in the policy sectionbelow and chapter 10, U.S. government agenciesspend substantial funds for R&D pertinent toenvironmental technologies. While there are majorexceptions, commercial objectives have not beena key priority for most of these programs. Also,Federal R&D support has not been centrallycoordinated (although two interagency bodieshave recently been formed). Recent legislationand administration initiatives, if vigorously pur-sued, could result in more governmentwide coor-dination and a more commercial orientation;several pending bills address Federal environ-mental technology R&D.

In Europe and Japan, government support forenvironmental technology R&D often is fundedor coordinated by agencies with industrial policymissions, such as the Japan’s Ministry for Interna-tional Trade and Industry (MITI), Britain’s De-partment of Trade and Industry, Germany’sMinistry for Research and Technology (BMFT),and the European Community’s Directorate-General XII. The R&D programs focus on tech-nologies with domestic and international com-mercial promise. The usefulness of R&D toindustry is a key concern; for example, Japan’sNew Energy and Industrial Technology Develop-ment Organization (NEDO), a MITI affiliatedquasi-public corporation, directly funds industrytechnology development projects.

Chapter 1--Summary 17

Table l-l—The U.S. Environmental Industry: Strengths, Weaknesses,Opportunities, Threats

Strengths:Large domestic market supports U.S.EGS development

Head start; toughest standards in manyareas

High technical capability of industry

Good reputation of EPA technicalinformation abroad

Strong Federal and university R&Dcapacity

Many small innovative firms

U.S. political, economic, technical,and cultural leadership

Opportunities:Growing U.S. and foreign demand

Possibility y of others adopting U.S.-basedstandards and practices

Development assistance can promoteU.S. exports

Internationalization of EGS business:—Acquisitions of foreign firms

(U.S. gets profits)—Licensing abroad (royalties)—License from abroad (U.S. jobs)

Opening of many countries to greatertrade, foreign investment, privatization

Weaknesses:Large domestic market inhibits desire toexport

Other nations often perceive U.S. tech-nology as too expensive/sophisticated

Spotty public/private links in R&D, exportpromotion

Limited Federal effort to certify or provideobjective evaluations of technologies

Slow transfer of technology to themarketplace

Small firms have difficulty accessing capi-tal, exploiting export opportunities

Limited effort to understand foreign cul-tures, languages, business practices

Limited role of industry associations intrade and R&D

Some regulatory measures impede envi-ronmental technology innovation

Threats:Growing foreign environmental industrycapacity, including penetration of U.S.market

Foreign standards highest in some cases

Possibility of others adopting foreignstandards and practices

Other donors’ use of tied aid credits keepU.S. firms from winning some business

Internationalization of EGS business:—Acquisition by foreign firms

(foreigners get profits)--Licensing abroad (jobs abroad)—License from abroad (royalty paid)

Strong foreign public/private cooperationin R&D, export promotion

Stronger foreign trade association role intrade promotion and R&D



Table 1-2-Some Economic Costs and Benefits of Environmental Regulation

Potential costs Potential benefits

●

●

●

●

End-of-pipe investments divert funds from moreproductive investments, thus slowing productiv-ity growth

Some plants facing high environmental compli-ance costs relocate to pollution havens or close

Increased production costs for high compliancecost sectors, therefore reducing exports andincreasing imports

Reduced innovation (e.g., uncertainty aboutregulatory acceptability of new products orprocesses)

●

●

●

●

●

Increased benefits from a cleaner environment(e.g., reduced health costs, increased naturalresource productivity)

Production process changes that increaseproductivity

Job creation in environmental goods and serv-ices sectors

Possible trade surplus in the environmentalgoods and services sectors and increasedsales from consumer demand for greenproducts

Increased innovation (e.g., more efficientproducts)


B Environmental Regulation andManufacturing Industry Competitiveness

The impact of the current system of environ-mental regulations for U.S. manufacturing mustbe viewed in the context of an increasinglycompetitive world economy. As other OTAreports have documented, U.S. manufacturingindustries have been challenged in the last decadeby able foreign competitors from other advancedindustrial nations and from some newly industri-alized countries.9

Environmental regulations, while providingimportant societal benefits, can have negativeimpacts for individual fins. In addition to highercosts from treating or controlling wastes, firmsmay be affected by regulatory delays, and in somecases may avoid using new technologies becauseof regulatory risks. Of course, some firms maybenefit from environmental requirements if theycan upgrade production processes and become

more efficient. Table 1-2 shows representativecosts and benefits.

Environmental regulations are not a principaldeterminant of industrial competitiveness, Otherfactors, such as management savvy and timehorizon, capital cost and availability, workforceskills, market access and foreign trade practices,and technology innovation and diffusion, playmore significant roles. However, because envi-ronmental regulations do play some role incompetitiveness, reducing environmental com-pliance costs while maintaining current levels ofenvironmental protection can improve U.S. in-dustrial competitiveness. Moreover, certain in-dustrial sectors are affected far more than others.

Efforts have begun to make our environmentalprotection system more efficient and to reduce thetradeoffs between environment and economics.One way to do this is pollution prevention. Manysource reduction and recycling options yield net

9 Sce for example, U.S. Congress, Office of Technology Assessment, Competing Economies: America, Europe, and thePacific Rim, OTA-ITE-499 (Washington, DC: U.S. Government Printing Office, October 1991); U.S.-Mexico Trade: Pulling Togetheror Pulling Apart?, OTA-ITE-546 (Washington, DC: U.S. Government Printing Office, October 1991); Making Things Better:Compering in Manufaczurr”ng, OTA-ITE-443 (Washingto~ DC: U.S. Government Printing Oftlce, February 1990); InternationalCompetitiveness in Electronics, OTA-ISC-200 (Washington DC: U.S. Government Printing Office, November 1983); and Technologyand Sreel Industry Competitiveness, OTA-M-121 (Wa.shingtoq DC: U.S. Government Printing Office, June 1980),


positive rates of return equaling nonenvironmen-tal investments; others are less attractive as aninvestment, or cost money, although usually lessthan end-of-pipe treatment. While pollution pre-vention can ease conflicts between environmentalprotection and industrial competitiveness, it doesnot eliminate it.

U.S. INDUSTRY’S COMPLIANCE COSTSAccording to a Commerce Department survey,

U.S. businesses spent $42 billion on pollutionabatement and control in 1991. While only about0.8 percent of total manufacturing sales, compli-ance costs are more significant when measuredagainst other demands for a fro’s resources. Forexample, U.S. firms spent about $43 billion in1991 on formal training for their workers, andabout $78 billion on research and development.

Manufacturing firms alone spent $21 billionfor pollution abatement and control in 1991. (Forreasons discussed inch. 7, their expenditures maybe underreported by 20 to 30 percent). Processindustries experience higher compliance coststhan the discrete parts manufacturers and assem-blers. Just four process industries-chemicals,petroleum, pulp and paper, and primary metals—account for nearly three-fourths of pollutionabatement capital expenditures by manufacturers(but only 22 percent of manufacturers’ valueadded). These industries also account for adisproportionate share of pollution and hazardouswaste generation by manufacturers.

Compliance costs are not a major share of totalcosts for any industry, and are only one of manyfactors determining competitive advantage. Forexample, of the high compliance cost sectorsmentioned above, chemicals and wood pulp arehighly competitive internationally, with signifi-cant trade surpluses. The primary metals industryis struggling. These four sectors devoted anaverage of 15 percent of their capital expendituresto pollution abatement and control, compared to3.2 percent for all other manufacturing sectors.Their pollution abatement and control expendi-tures amounted to 4.85 percent of their value

added, compared to the average of 1.72 percentfor manufacturing as a whole. Some subsectorshave much higher compliance costs than thesector average. For example, while the fabricatedmetals industry as a whole spent 4.6 percent ofcapital on environmental protection, the metalplating and polishing subsector spent over 27percent.

Pollution control and abatement regulationscan also make it harder for firms to alterproduction processes quickly. Flexibility is espe-cially important for batch manufacturers (e.g.,specialty chemicals) and discrete part manufac-turers (e.g., semiconductors). As more U.S. man-ufacturers seek to adopt production systemsamenable to continuous improvement and rapidnew product introductions, some features in theregulatory system may need to be modifiedaccordingly. As discussed below, there are anumber of options to lessen adverse competitiveimpacts on firms that are good environmentalperformers, and to do so without jeopardizingenvironmental standards.

As has been discussed, some environmentalcompliance costs for manufacturing industriesrepresent equipment and services provided byenvironmental fins. However, there is not aone-to-one relationship between compliance costsand EGS industry revenues. As shown in figure1-1, some compliance costs are for labor or otherinternal costs. And some revenues (e.g., forgarbage collection or for water purification andsupply) are income for environmental firms butare often not considered a regulatory cost.

FOREIGN ENVIRONMENTAL REQUIREMENTSEnvironmental cost data for different nations

are limited and of varying quality. Even so,judging from the available information, it appearsthat pollution control and abatement costs in mostof the other OECD nations, with the exception ofGermany and possibly some of the Nordic coun-tries, are lower than in the United States. Japanesemanufacturers’ compliance costs appear to besignificantly lower than U.S. costs. While Japa-


U.S. automakers spend large sums to build and operate facilities to control painting emissions. Ford estimatesthat it has spent between $150 to $180 million to build its recent paint shops, of which $20 to $40 million is tocontrol pollution. The paint shop (on the left) of this Ford truck plant in Virginia is larger than the assembly linebuilding on the right.

nese industry made high levels of investments forpollution control in the early 1970s, U.S. industryover the last 15 years has paid more for pollutioncontrol and that gap is growing. For example,pollution abatement capital expenditures by U.S.automobile firms (to control pollution from theproduction process) are approximately five timesgreater than those of automobile firms in Japan asa percent of total capital investments; they arethree times more as a percent of sales. Japaneseindustry did, however, make major investments inenergy efficiency technologies over the sameperiod.

There is also significant variation in the degreeto which governments provide both financial andnonfinancial assistance to help polluters meetenvironmental requirements. A number of coun-tries, including Germany and Japan, offer taxincentives, R&D funds, technical assistance, andloans to firms to help them cover the costs ofimplementing environmental technologies. Thisnot only helps their manufacturers with compli-ance but also helps their environmental firms

make sales, For example, in 1992, the JapaneseGovernment provided the equivalent of over $2billion in low-interest loans to firms installingpollution control equipment.

The U.S. Government provides relatively littlefinancial help to its industries to meet environ-mental standards, U.S. industry must depreciatepollution control equipment over a longer periodthan firms in some other countries. Some techni-cal assistance is available through State pro-grams, although this also is quite limited.

Compliance costs in newly industrialized coun-tries (NICs) and developing countries are muchlower than in most OECD nations, as most ofthese countries have only recently begun to put inplace and enforce environmental standards. Hence,a regulatory gap between the United States andmost other countries will continue throughout thisdecade and beyond. An important issue is whetherthis gap will make U.S. products more expensive,or encourage U.S. firms to relocate to countrieswith fewer or less stringent regulations. Thesequestions are now more prominent due to debate


about liberalizing trade and investment withdeveloping and newly industrializing nations.10

These issues are difficult to analyze, andstudies offer mixed results. Most find that envi-ronmental regulation has had little overall effecton U.S. trade performance. However, a number ofstudies detect greater impacts in some sectorswhere U.S. firms have higher compliance coststhan their competitors. As for siting facilities,market access, wages, and labor standards aremuch more important overall, but environment isa more prominent location criterion for U.S. firmsin industries with high compliance costs orregulatory burdens.

To the extent that U.S. manufacturers aredisadvantaged, various responses (including bothtrade and domestic measures) are possible. Trademeasures such as countervailing duties could beconsidered, although there are concerns abouttheir administrative practicality and consistencywith trade rules.

11 The United States also couldnegotiate with other countries for higher stand-ards, as is discussed in the policy section belowand in chapter 2, Another possibility, discussedbelow and in chapters 8 and 9, would be to makeit easier for U.S. industry to adopt lower costcompliance strategies through incentives for pol-lution prevention and changes in the regulatorysystem to encourage innovation.

POLLUTION PREVENTION, CLEANERPRODUCTION, AND COMPLIANCE COSTS

It is difficult to document the current extent ofsource reduction or recycling by industry. Someargue that U.S. firms have already done what iseasy and inexpensive, and therefore future gainswill be small. However, significant source reduc-tion opportunities still appear to exist, particu-larly those arising from industrial process modifi-cations and the adoption of new technologies.

Widespread diffusion ofexisting off-the-shelftechnologies could go a long way in furtherreducing pollution. However, many in industry,particularly small businesses, are unaware ofpollution prevention options. Some technicalassistance is available to industry through Stateprograms and other sources, but programs aresmall. More importantly, by considering pollu-tion prevention separately from other manufac-turing needs, such as productivity and qualityimprovements, most programs fail to develop thevital synergies and working relationships withmanufacturers that are essential to drive bothpollution prevention and increased manufactur-ing competitiveness. Recently, some innovativeprograms in this country and in Europe haveattempted to bridge this gap (see box l-C).

A key to further advances in pollution preven-tion is development of new cleaner productiontechnology. In some industries, new technologiesin development or under consideration offer thepotential to reduce pollution, often at lower coststhan conventional treatment or disposal methods,and in some cases with lower production costs.The greatest promise is in sectors with highenvironmental impact and compliance costs, suchas the chemical industry, pulp and paper, andmetals finishing; however, even when technolo-gies are available, obstacles to their use remain.

As is discussed in chapter 8, a number ofemerging technologies in the chemical processindustries have the potential to cut pollution,often more cheaply than alternative end-of-pipemethods. New catalysts can increase chemicalreactor yields, cutting waste generation signifi-cantly. Approaches such as catalytic distillationoffer opportunities to cut waste and possiblyreduce capital and operating costs. However, thedevelopment of new catalysts and reactor designsto cut wastes is still in its infancy, and new reactor

lo For [u flher discussion, see U.S. Con~ess, Office of Technology Assessment, U.S.-Mexico Trade.” Pulling Together or Pulling Apart, oP.CII., footnote 9; and U.S. Congress, Office of Technology Assessment, Trade and Environment: Conflicts and Opportunin”es, op. cit.,footnote 4.

11 see, for Cxmp]e, Trade and En}’ironment, op. cit., foo~ote 4, PP ’68


Box 1-C--Technical Assistance for Pollution Prevention andEnvironmental Compliance

Widespread diffusion of best management practices and off-the-shelf pollution preventiontechnologies would further economic and environmental goals. However, many companies, particularlysmall and medium-sized firms, need technical assistance to identify and implement pollution preventionmeasures.

Technical assistance programs for pollution prevention in the United States tend to be small.Moreover, manufacturers may hesitate to use these services, which often are housed in State regulatoryagencies. Nor is technical assistance for pollution prevention usually undertaken as part of an effort toaddress other manufacturing concerns such as productivity, quality, and worker training. Hence, mostprograms fail to create synergies between pollution prevention and increased manufacturingcompetitiveness.

However, a number of programs have begun to better address the linkages between environment,energy, worker safety and health, quality, and productivity. These programs appear to be more fullydeveloped in Europe, where efforts to integrate technical assistance, including industrial networkprograms, grants for technology demonstration, and industrial service centers are more common.

In Italy, the Centro Ceramico, a research/industrial services center funded by 500 ceramics firmsin the Bologna area, helps its members solve environmental problems. The Center Conducts researchto quantify the environmental impact of ceramic processes and to develop clean ceramic productiontechnologies and technologies for sludge and residue reuse. The center also provides research andtechnical assistance to help firms reduce energy consumption, develop new materials and products,and put in place more efficient processes.

In Denmark, a national program to seed industrial networks helped create an industrial ecosystemwhere a power station, oil refinery, plasterboard factory, biotechnology firm, and the City of Kalundborgnow exchange and reuse what were formerly wastes.1

In Holland, a nationwide network of 18 regional innovation centers, responsible for encouragingtransfer of technological knowledge to small and medium-sized Dutch firms, recently received increasedfunding to work with firms on innovative and lower cost environmental technologies.

There are examples in the United States, as well. One of the older programs is the Center forIndustrial Services, established in the early 1960s at the University of Tennessee. Since the mid-1980s,it has operated a pollution prevention program. The Environmental Services Program, a division of theGreat Lakes Manufacturing Technology Center (funded by the National Institute of Standards andTechnology) works with manufacturers to help them meet environmental regulations and adopt pollutionprevention technologies. In both programs, staff are often able to design solutions that result in greaterproductivity, reduced pollution, and energy savings.

Some programs have begun to work with groups of manufacturers facing common problems. Forexample, Massachusetts’ Center for Applied Technology formed a group of six firms involved in metalstamping, ranging from Gillette to a small company with 20 employees, to help identify, test, and usea set of lubricants that are environmentally preferable, as well as optimize tool performance.

1 Hardin B. C. Ti~, ’’lfldustrial Eooiogy:An Envkonrnental Agendaforlndustry,” ~o/e_rth/?evlew, winter1992, pp. 4-19.


designs are generally only feasible when newplants or major retrofits are made.

In the pulp and paper industry, new processescould substitute for chlorine bleaching processesor make them less polluting. Also, several delig-nification (chemical pulping) processes havebeen developed that recover one-third to two-thirds of the organic substances that wouldotherwise be discharged to the mill effluenttreatment system, including some that are notbiodegradable. Many of these technologies, whilerequiring capital for installation, can lower oper-ating costs.

In metal finishing, a number of technologies forin-process recycling can either extract certainmaterials for reuse or extend the life (and reducepollution) of plating baths. Also, several proc-esses under development have the potential toreplace wet-based electroplating, which hascaused environmental problems. Currently, highcapital costs and low throughput rates impedewider application.

If cleaner technology is to be developed morequickly, industry will need to consciously incor-porate environmental concerns into industrialprocess technology development. While a num-ber of public and private entities now conductR&D on cleaner industrial production, efforts aresmall and uncoordinated, and effective transfer oftechnology to a broad array of industrial usersmay not happen. Researchers and pollution pre-vention specialists in the field seldom worktogether to identity problems and areas of poten-tially valuable research. Coordination and coop-eration with programs in other countries that fundcleaner production technology development, suchas those in Northern Europe, are also limited.Some international activities, such as the UnitedNations Environment Program, are underway butsparsely funded.

Estimates of Federal spending are imprecise,but it appears that no more than $70 million a yearis spent on R&D devoted to waste minimizationin industrial processes, although other industrialR&D (e.g., for energy-efficiency) also can ad-

vance pollution prevention. Some Federal cleanerproduction technology R&D programs have in-volved industry to identify needs, problems andsolutions. Some industry-government partner-ships and consortia exist as well. However, morecan be done to involve industry, and an overallFederal R&D strategy and institutional coordina-tion for cleaner production technology has beenlacking.

THE REGULATORY SYSTEM ANDENVIRONMENTAL COMPLIANCE COSTS

At present, differences in compliance costsprobably reflect variations in regulatory strin-gency (including enforcement) among nations.However, among firms from countries with com-parable standards, those that are more efficient incomplying with regulations will incur lowercompliance costs. Moreover, the nature of gov-ernment regulations and the availability of eco-nomic incentives for adopting new technologiesaffect compliance costs. For these reasons, theform of the U.S. regulatory system and itsimplications for competitiveness is attractingattention.

It is difficult to generalize about the regulationsto control industrial pollution that have been putin place over the last two decades in the UnitedStates. However, there is wide agreement aboutsome of its prominent features. For example,end-of-pipe approaches continue to be empha-sized. Separate laws, regulatory offices, andenforcement procedures exist for air, water,hazardous waste, and other media. Rather thansetting an overall emission limit for a facility,regulations and permits often require control ofspecific sources within a plant at specifiedemission rates. The system is usually character-ized as command-and-control. In addition, local,State, and Federal laws and reporting require-ments often overlap. The system is highly adver-sarial, with frequent challenges to administrativeactions taken by all sides long after laws are firstpassed. Finally, there is relatively little emphasison technology development or technical assist-


Table 1-3—Approaches to Environmental Regulation

PrevailingElements System Innovations

Rulemaking process Adversarial

Policy tools Regulations

Pollution targets

Breadth of regulations

Specificity y of control

Level of emission

End-of-pipe treatment anddisposal

Single-media

Individual sources controlled(one facility may need manypermits)

Uniform release rates byfacility

Enforcement mode Sporadic but inflexible

Agency organization Media-organization (e.g., airoff ice, water office)

Training Narrow, focused on singlemedia

Technical development Minor focusand assistance to industry

Intergovernmental mode EPA-led (headquartersoriented)

Negotiated or mediatedwhere possible

Regulations may be sup-plemented by incentives,and voluntary programs(e.g., 33/50 program)

Priority given to sourcereduction

Multimedia if possible

Facilitywide prevention andcontrol

Flexible, determined bytaxes or marketablepermits

Systematic, but flexible

Industry sector focus (e.g.,petroleum refining, metalsfinishing)

Broad-based, but with tech-nical focus

Important focus

EPA-State partnership (e.g.,negotiated strategies)


ance to help industry meet requirements. (Repre-sentative features of the prevailing system arelisted in the second column of table 1-3).

While major strides have been made under thissystem in controlling industrial pollution, it ishard to argue that the level of environmentalprotection enjoyed today could not have beenachieved in a more cost-effective fashion. Thesystem was first put in place at a time when fewsources were well controlled. But now, as morestringent controls are required, cost-effectivenessand competitive impact are growing concerns.

There is considerable interest in finding ways toachieve comparable or higher levels of environ-mental protection at lower costs and with lesspotential for adverse competitive impacts on U.S.industry.

Federal and State regulators and industry inmany areas around the country are experimentingwith new approaches that, if replicated elsewherein an appropriate manner, could ease adverseimpacts on competitiveness while reducing pollu-tion and waste. State and local regulatory offi-cials, who administer most of the Nation’s

Chapter 1--Summary ! 25

environmental permits and regulations, have ini-tiated many of the more innovative approaches toenvironmental management. (The third column intable 1-3 lists some characteristic features of theseinnovations, which are discussed in more detail inch. 9).

These innovations typically involve one ormore of the following:

1.

2.

3.

4.

5.

6.

7.

efforts to negotiate areas of agreementamong government, industry, environmentalgroups, and other nongovernmental organi-zations in devising rules and implementa-tion plans;setting strict emission goals, but lettingindustry choose among several means tomeet these goals;addressing all emissions from a facility,rather than addressing sources or kinds ofpollutants individually;paying attention to total emissions in ageographic area, rather than just individualplants or sources, thus making it possiblefor firms to reduce emissions on the basis ofthe lowest marginal costs;placing more priority on prevention ofpollution rather than end-of-pipe treatmentand disposal;organizing regulatory offices and proce-dures to allow an industry-sector orienta-tion; andpromoting technological innovation anddiffusion as an additional method of meet-ing environmental goals.

As long as a backdrop of strong regulation andenforcement is fully maintained, a number ofsteps could be taken to reduce the competitiveimpacts on industry while still achieving environ-mental goals. Some options are discussed in thepolicy section later in the summary.

Although not addressed in the options, use ofeconomic incentives in environmental regula-tions also could lower compliance costs. (See ch.9). The marginal costs of pollution control usually

differ among firms, and among processes withinthe same firm or facility. These variations incompliance cost stem from differences in size,age, technology, cost of substituting inputs,location, management practices, and other fac-tors. Allowing or encouraging more use of marketincentives or facility-based performance stand-ards could allow firms to select less costlycompliance strategies or strategies more consist-ent with other objectives, such as modernizing aproduction line.

Two principal market incentive approaches aremarketable permits and taxes and fees. Marketa-ble permits allow firms to meet regulations byeither releasing no more than permitted levels ofpollution, or by buying the rights to pollute froma firm that has reduced pollution below permittedlevels. Alternatively, releases might be taxed sothat firms with high marginal costs of controlwould choose to pay the tax while firms with lowcosts would reduce releases. In theory, bothapproaches could be structured so that overallemission levels would be no higher than withregulation alone, but compliance costs would belower. Firms would also have an incentive todevelop technical approaches to reduce pollutionbecause they could get economic benefits fromperforming better than standards require.

Although economic incentives can reduce com-pliance costs, they may not always be appropriate.Usually, there will continue to be a need for toughstandards and enforcement to protect health andthe environment. Moreover, taxes and fees andauctioning of permits could raise total compli-ance costs for industry, even if abatement expen-ditures were reduced. However, fees and auctionincome can be rebated back to companies so thatthey are revenue-neutral. Another OTA assess-ment on new approaches to environmental regula-tions is examining incentives.

I Federal Policy OptionsIt is increasingly difficult to separate environ-

mental policy questions from issues of trade,


technology, and competitiveness. Similarly, it isbecoming harder to consider economic and tech-nology policies without also considering theirenvironmental ramifications.

Many government policies (in this country andabroad) will affect both the international competi-tiveness of the U.S. environmental industry andthe ability of U.S. manufacturers to meet environ-mental regulations with minimal competitivedisadvantage. These include domestic policies topromote the development and diffusion of new orcleaner technology (e.g., tax incentives and othersupport for R&D, industrial extension, tax incen-tives to encourage capital investments). Thecompetitiveness of U.S. environmental firms willalso be affected by trade, export promotion andforeign assistance policies-here and elsewhere.

If Congress wishes the Federal Government toplay a more active role in addressing theseconcerns, there are number of steps it couldconsider, each with its pros and cons. Six issueareas are discussed below, and in more detail inchapter 2. The issue areas are:L

A.B.

c.D.

E.F.

Federal Technology R&D Policy;Diffusion of Best Practices and Technolo-gies to Industry;Regulatory Reform and Innovation;Development Assistance, Export Promo-tion, and Environmental Industries;Trade and Environment Issues;Data and Information Needs for Policymakers.

Table 1-4 presents over 30 options in theseissue areas that Congress may wish to consider.The options could be adopted either singly or indifferent packages. Box 1-D identifies two strate-gies-an incremental approach and a more ag-gressive approach. The two strategies and eachoption are discussed in detail in chapter 2.

ISSUE AREA A: FEDERAL TECHNOLOGY R&DPOLICY (OPTIONS 1-5 IN TABLE 1-4)

Debate in Congress about the Federal role incommercial technology development has beenunderway for some time. Environmental technol-ogy has become a focus of this debate, withseveral bills proposed in the 103d Congress.12 Inaddition, the Clinton administration has beendeveloping an environmental technology initia-tive.

Issues include how to identify environmentallycritical technologies, how to set related Federalpriorities, interagency coordination, and whetherto undertake more partnerships with industry todevelop cleaner technologies.

New priorities and projects will compete forlimited R&D dollars. Precise figures are notavailable, but the Federal Government probablyspent $1.8 billion or more in fiscal year 1993 onR&D pertinent to the environmental technologiescovered in this report. (Larger estimates exist, butthese have a more inclusive definition of environ-mental.) The largest portion, about $1 billion, isfor energy-related technologies including cleancoal, renewable energy, and cleaner and moreefficient energy conversion and use technologies.Another large portion (exceeding $500 million) isfor R&D on remediation technologies to cleanupcontaminated Federal sites. Federal R&D supportfor advancing end-of-pipe technologies is in theneighborhood of $100 million per year. Pollutionprevention R&D probably accounted for onlyabout $70 million of the total (although someindustrial energy-efficiency R&D also advancepollution prevention objectives).

Much of industry’s pollution prevention efforthas focused on relatively simple housekeepingand process modifications, which offered largepayoffs for little effort. More significant advanceswill require greater emphasis on fundamentalimprovements in manufacturing process technol-

IZ BlllS ~Cludes. 978, tie propos~ National Environmental Technology Act of 19!3S, as reported by the semk EIlvbnment and mblicWorks Committee on July 30, 1993;S.811, the proposed Environmental Competitiveness Act of 1993; H.R. 2224, a proposal to set up a nationalenvironmental technology office; and H.R. 3603, the proposed Environmental Technologies Aet of 1993.

Chapter 1---Summary ! 27

Table 14-Summary List of Options

Issue Area A. Federal Technology R&D Policy:1 Review Federal progress to:

. set priorities and coordinate R&D for environmentally critical technologies● integrate cleaner production in R&D program missions

2 Review Environmental Protection Agency (EPA) clean technology priorities3 a) Fund pertinent Department of Energy (DOE) RD&D programs

b) Make cleaner production a central mission of DOE’s Office of industrial Technology4 Increase support for National science Foundation dean technology work5 Fund startup or expansion of industry sector R&D technology consortia

Issue Area B. Diffusion of Best Practices and Technologies to Industry6 Evaluate incentives to diffuse cleaner technology to industry7 Make cleaner production and pollution prevention a mission and service of manufacturing extension services8 Direct EPA to oversee more technology evacuations, and disseminate results here and abroad9 Support efforts to integrate environmental components in engineering and business school curricula

Issue Area C. Regulatory Reform and innovation:10 Set up an EPA pilot project to experiment with innovative permits for firms that are first rate environmental performers11 Give incentive grants for regulatory reform innovation projects to States and firms12 Upgrade training of permit and regulation writers13 Set up industry sector consortia/cluster groups14 Modify R&D permitting to better accommodate R&D, such as fixed site permits for R&D centers15 Set up an environmental cooperation institute and sector cooperation councils

issue Area D. Export Promotion, Development Assistance, and Environmental Firms:161718192021

22

2324

25

Work to setup a program to help developing countries identify needed environmental technologiesMake cleaner production/pollution prevention a priority in multilateral aidFund EPACT programs for AID-DOE transfer of innovative energy and environmental technologies to developing countriesincrease Trade and Development Agency funding for feasibility studiesEncourage U.S. firms to emphasize training of developing country personnel in equipment and services contractsConduct early oversight on the Trade Promotion Coordinating Committee’s environmental working group strategy andproposed budgetEncourage commercial interactions through:. increasing overseas commercial officers or contractors;. increasing outreach to industry associations;● operating through environmental business centers here and American business centers overseas.Disseminate information about U.S. technologies abroadProvide resources for one stop shopping and regional centers to help smaller firms access and make use of available exportassistanceConsider ways to expand export financing while keeping environmental safeguards

issue Area E. international Trade and Environmental Policy:26 Conduct oversight on U.S. policy development for GAIT and OECD trade/environment discussions27 Expand efforts to develop multilateral or bilateral agreement on environmental standards to address competitive impacts28 Combine technical assistance with efforts to upgrade developing country environmental standards in advance of trade

discussions29 Work for more effective monitoring and enforcement of multilateral environmental agreements30 Work to establish a global business charter on environmental standards31 Encourage other countries to require firms to report toxic release inventoriesissue Area F. Data Needs for Policy Making:32 Direct pertinent agencies to:

. collect and analyze more commercially relevant data on trade and environmental goods and services

. facilitate flow of commercial information to companies● verify and assess ways to improve pollution abatement cost data● identify and quantify benefits of regulations through study

33 Gail for periodic assessment of competitive effects of differing levels of environmental regulations among countries, and fordevelopment of strategies to address any adverse effects



Box 1-D--Strategies for Federal Policy

The options discussed in this report are intended to further two competitiveness objectives: (1)realizing opportunities for benefit to U.S. business and society from providing environmentaltechnologies to a growing global market; (2) reducing the adverse competitive impacts faced by U.S.firms in complying with environmental regulations.

These options could be adopted singly or in various packages. Taken singly, they would be modeststeps in addressing either issue. Taken together, they would comprise a fundamental shift in how theUnited States addresses the interactions between its environmental policies and commercial policies.

Several recent laws authorize new programs and initiatives relevant to these objectives. Examplesinclude the Energy Policy Act of 1992 (Public law 102-86), the Export Enhancement Act of 1992 (Publiclaw 102-429), and the Aid, Trade and Competitiveness Act of 1992 (TitIe lll of Public Law 102-549). TheClinton administration has announced several plans or initiatives important to commercial andenvironmental technology policy, export promotion, and pollution prevention. Depending on futurelevels of funding and other indicators of commitment to implementation, these laws and initiatives couldbe a basis for partly addressing the two competitiveness objectives above.

The incremental approach assumes that some steps will be taken. There are two fundamentalchanges in the more aggressive approach: (1) more efforts to develop and diffuse environmentallypreferable technology to U.S. industry and to promote environmental technology exports; and, (2) muchmore effort to integrate environmental and competitiveness policies, both domestically and internation-ally. Under this strategy, environmental objectives would be integrated within U.S. Government supportfor commercial technology research, development, and diffusion, with more emphasis on diffusion ofcleaner and more energy-efficient technology to U.S. industry. Changes in Federal regulatory policieswould allow a facility more flexibility, including using pollution prevention, with safeguards to keepenvironmental standards high and to prevent and detect abuses.

ogies to make manufacturing both greener and and disposal technologies could require moremore productive.

U.S. firms are making some progress in devel-oping new generations of cleaner productiontechnology. Environmental concerns are slowlybeing integrated into manufacturing process tech-nology development. However, these efforts aread hoc, and probably small, although data is poor(see box l-E). The risks to individual firms inproceeding alone with needed R&D on eithercleaner production or new pollution controltechnology could be too great, given the uncer-tainty about the acceptance of new technologiesin the regulatory system, and difficulties incapturing benefits that accrue widely across anindustry and across society as a whole.

Developing cleaner technologies and moreeffective and cost-effective control, recycling,

funding and new ways to conduct government-industry partnerships. If Congress wished theFederal Government to do more to encouragedevelopment of such technologies by industry, itcould consider a number of steps (see options 1-6in table 1-4).

Better coordination is one need. Federal sup-port for research on pollution and waste preven-tion, control, and recycling relevant to manufac-turing industry has not been coordinated, limitingits effectiveness and making it difficult to transferthe results to industrial users.

The administration has announced steps formore interagency coordination, and has called onFederal R&D agencies to adjust their missionsand priorities to take into account both environ-mental and industrial competitiveness objectives.

Chapter 1--Summary ] 29

Box 1-E–Private Sector Environmental R&D

According to one estimate, U.S. industry spends a significant share of funds on environmentalR&D, as high as 13 percent of its total R&D1 although methodological problems suggest that thisestimate is too high. OTA’s calculations suggest that the actual amount is significantly less, between1.3 and 2.6 percent of total R&D, or between $1 and $2 billion dollars a year.

About half of this spending appears to be by the regulated industry to help it meet environmentalrequirements, particularly by industries with high compliance costs. For example, in 1990, the petroleumindustry spent an estimated$175 m ill ion on environmental R&D, including an estimated $50 m ill ion onreformulated gasoline, with nonproduct pollution control R&D amounts to about 6 percent of total R&D.Pollution control R&D by regulated industry is likely to increase in the 1990s, as firms seek to complywith more stringent environmental regulations.

Information about R&D by environmental firms is limited. Relative to manufacturing as a whole,which spends approximately 3.3 percent of sales on R&D2, the environmental equipment sectorappears to spend less as a share of sales, perhaps between 2.5 and 3 percent. Small, R&D-intensivestartup firms might spend more as a share of sales, although overall expenditures are likely to be small.Environmental service firms, including waste management firms, appear to spend much less.

This suggests that the EGS sector might be spending on the order of $750 million to $1 billion peryear on R&D. While this figure is just a guess, it does suggest that the U.S. EGS sector is not highly R&Dintensive and moreover, that at least about half the private environmental technology R&Din the UnitedStates is not done by EGS firms, but rather by regulated industry.

1 Brian Rushton, ’’How Protecting the Environment Impacts R&Din the United States,” Research TechnologyManagement MayJune 1993, p. 13.

2 un~~ish~ cja@ Nat[onal Science Foundation.

For example, agencies now supporting cornmer- 3). It also could review RD&D priorities under thecial technology R&D could add environmentalobjectives into their mission statements andplanning. Congress could review progress at anearly date (Option 1).

Other steps could involve increased funding ofgovernment environmental technology programs.The Clinton administration has proposed moreEPA funding for environmental engineering andtechnology development; if it provides thesefunds, Congress could make sure that cleanertechnology and pollution prevention is a priorityin EPA R&D (Option 2). The administration alsohas proposed more funding for the Department ofEnergy’s Office of Industrial Technology, whichnow cost-shares some R&D projects with indus-try. Congress could give this office a more directcleaner production technology mission (Option

Energy Policy Act of 1992 (EPACT, Public Law102-486) to assure that funding is adequate forcontinued progress in environmentally pertinentenergy technologies (e.g., renewable energy, fuelcells, and improved combustion). Some otheragencies (e.g., the National Science Foundation)also support industrially relevant clean technol-ogy research activities; these could be expanded(Option 4).

The most far-reaching option considered herewould be to seek greater involvement by industrysector organizations. Such organizations couldplay an important role in the development anddiffusion of cleaner production, improved pollu-tion control, and recycling technologies by identi-fying technology needs, organizing R&D efforts,and diffusing results. The Federal Government


could support the start-up or expansion of suchorganizations, and also share R&D costs withthem (Option 5). To be eligible, an organizationwould need to serve an industry sector with highenvironmental impact or high compliance costsand include as participants many firms in theindustry. While industry governance and fundingwould be crucial, the organization could workcooperatively with Federal laboratories. The or-ganizations could undertake many different activ-ities:

B serving as a forum for industry to collectivelyidentify R&D needs related to environment;

■ arranging partnerships among researchers, equip-ment makers, and industrial users to developnew manufacturing technology that is moreenergy efficient and cleaner;

■ supporting demonstration of cleaner technolo-gies, and improved control, recycling, anddisposal technologies;

■ identifying and diffusing innovations and bestpractices in pollution prevention as well ascontrol and recycling to industry; and

■ identifying regulatory barriers to more efficientenvironmental solutions, and training inspec-tors and permit writers on pollution preventionand control in that particular industry. (Seefurther discussion in Option 17 in Issue Area Cbelow).

While these options would encourage greaterindustrial activity on cleaner production technol-ogy, they could have drawbacks. If efforts atenvironmental integration led to set-asides inmanufacturing R&D, for example, there could begame playing in identifying environmental pro-jects or, if the set-aside was too large, interferencewith other crucial objectives. Similarly, at a timeof very limited Federal funds, development ofmore cost-effective remedial technologies forFederal site cleanup may have a special claim onFederal money for environmental R&D. Even so,the long-term benefits to U.S. industry andsociety from cleaner industrial technologies could

be very large, and it is not certain that industrywill act on its own to develop these technologiesunless it is clear that government is committed totheir use in environmental compliance.

ISSUE AREA B: DIFFUSION OF BEST PRACTICESAND TECHNOLOGIES TO INDUSTRY (OPTIONS 6-9IN TABLE 1-4)

Often, new technologies are not necessary toachieve cleaner, more efficient production; exist-ing technologies and approaches would suffice,but are not well-known to firms. The gap betweenbest industry practice and prevailing practices canbe great, especially for small and medium-sizedcompanies with limited resources, managementtime, and capacity to seek out, evaluate, and adoptunfamiliar approaches.

As discussed below, a number of steps could betaken to help diffuse knowledge about bestpractices to industry, including use of economicincentives, technical assistance, and enhancedefforts to evaluate technologies. In the long term,some of the greatest opportunities lie in strength-ening environmental components in engineeringand business school education.

Economic incentives might be considered todiffuse improved environmental practices through-out industry. A variety of approaches, rangingfrom accelerated depreciation and favorable loansto green fees (pollution taxes), could speedadoption of these technologies; an evaluation ofthe best choices, and their costs and benefits,could be conducted before deciding to proceed(Option 6).

As part of this evaluation, or separately,Congress also might direct the administration toprovide initial evaluation of it use of Federalprocurement to achieve environmental goals-ashas been the thrust of several recent ExecutiveOrders issued by President Clinton.

Because the government is so large, its pro-curement policies and practices greatly influenceprivate sector management practices and productofferings. Federal agencies themselves are oftenmajor contributors to environmental problems.


The Federal Government already providessome technical assistance to small and medium-sized enterprises. Most states and a few localitiesalso have modest pollution prevention technicalassistance programs. However, these services arealmost always provided separately from otherservices to manufacturers. As a result, manufac-turers find it difficult to locate assistance, and theprograms have limited capacity to carry outpollution prevention under an overall objective ofincreasing the fro’s manufacturing competitive-ness. Moreover, some firms may hesitate to seekassistance from regulatory agencies for fear ofenforcement action. Thus, Option 7 proposes thatpollution prevention be made part of the missionof federally supported manufacturing extensionservices, and that additional funds be provided tosupport this expanded mission. (These centershave been singled out for possible expansion invarious bills before the 103d Congress and byPresident Clinton.) Alternatively, EPA might bedirected to provide more pollution preventiongrants to state or local industrial extensionservices. EPA could do this now, through itspollution prevention grant program. However,most of its grants have gone to branches of Stateregulatory agencies or other environmental serv-ice organizations.

One disadvantage of the integrated approach isthat it may not target firms that contribute little toState economic development objectives, even ifthey cause environmental damage. 13 If the toppriority is to reduce waste, putting pollutionprevention programs in manufacturing moderni-zation programs may dilute this focus. This couldbe addressed in part by requiring waste reductiongoals to be an emphasis in the environmentalprogram of the manufacturing extension service.Another possible disadvantage is that separating

technical assistance from the regulatory functionmight further perpetuate regulators’ focus onend-of-pipe solutions. Integrating regulatory andtechnical assistance functions can offer an oppor-tunity to educate regulators on the merits andcomplexities of pollution prevention.

There is surprisingly little independent infor-mation about the performance of environmentaltechnologies, or appropriateness of specific tech-nologies for specific needs. Technology develop-ers now meet market resistance from users ofenvironmental technologies who fear that theywill not meet standards or that new technologywill be more costly than anticipated. This markethesitancy toward new environmental technologyalso makes venture capitalists and other investorswary. Independent evaluations or performanceverifications could help; Congress might directEPA to expand its support for evaluation activi-ties, which now center primarily on remedialtechnologies, to include more control and preven-tion technologies of pertinence to industry14

(Option 8). Firms seeking to enroll their technolo-gies for evaluation would pay most of the costs;EPA’s cost would primarily be evaluation anddissemination of results.

Such evaluations would also give U.S. firmswith good products added credibility with foreigncustomers. While U.S. Federal authorities do not(and probably ought not) certify or endorseparticular technologies or suppliers, independentevaluations of U.S. technologies could help boostU.S. environmental exports--as is further dis-cussed in Option 25 in Issue Area D. A disadvan-tage of the Government-sponsored evaluation ispossible unintentional favoring of some firmsover others, if demand for evaluation servicesoutstripped EPA’s capacity to respond.

13 For example, many State pollution prevention programs have worked to encourage pollution prevention in sectors such as auto rep~.dry cleaning, small print shops, and other local serving fiis. While these sectors may have an environmental impact, they have little impacton State or natioml competitiveness. It should be noted, however, that neither these nor industrial extension programs have generally workedwith the most polluting sectors such as chemicals.

14 ~cre we sm~l ev~uation pro&ms for innovative municipal solid waste and industi waste reduction technolo@es.


Ultimately, the ability of firms to addressenvironmental matters with the least degree ofadverse competitive impact depends on knowl-edgeable, well-trained engineers and managers.Working such matters into the mainstream engi-neering and business school curricula is the job ofschools and professional societies, but Congresscould increase funds to the National ScienceFoundation or EPA for projects to facilitate thisprocess (Option 9). This could provide longerterm benefits as new engineers and businessexecutives enter the workforce and become to-morrow’s business and technical leaders.

ISSUE AREA C: REGULATORY REFORM ANDINNOVATION (OPTIONS 10-15 IN TABLE 1-4)

As discussed earlier, and in chapter 9, currentapproaches to regulation and enforcement some-times make it difficult for firms to put in place thelowest cost option to control pollution.

Some potentially lower cost approaches havebeen difficult to integrate into EPA’s operations.Part of the reason is EPA’s organization intomedia-specific offices, each principally concernedwith controlling pollutants to one particularmedium. For example, pollution prevention oftenhas been carried out as a separate function, withprojects peripheral to EPA’s main regulatory andenforcement role.15 While the basic concept andrhetoric of pollution prevention are understood,many managers have a single-medium end-of-pipe orientation to pollution abatement that haschanged only slowly. Also, regulations are oftenbiased toward end-of-pipe approaches. In princi-ple, many regulations are performance-based andallow alternative compliance options, but thecurrent reward system and lack of adequatelytrained personnel for innovative permitting im-pede use of alternatives to established pollutioncontrol technologies.

As long as strong regulation and enforcementare fully maintained, a number of options couldbe considered to allow firms to implement morecost-effective approaches to controlling pollutionwithout jeopardizing environmental goals. Somealternatives are discussed below (Options 10-15).

Increasingly, manufacturers find that they mustcontinually innovate to respond to rapidly chang-ing technologies, customer demands, and thecompetition-making expeditious and flexiblepermitting a competitive need.

Several steps could be taken. For example,EPA might launch a pilot program to experimentwith more flexible approaches, and authorizeStates to conduct experiments in cases whereEPA has delegated responsibilities to the States.(Option 10). Incentive grants might be given toStates to experiment with different approaches,such as full facility permits and tradable permits.(Option 11).

Examples might include:

pilot projects for firms or facilities with frostrate environmental records and performance totest more flexible approaches. Participatingfirms might be given more options to determinehow to meet an overall emission cap; moreflexibility to change processes within certainparameters without permit revisions; and whenpermits are needed, priority to get expeditedreviews.experiments with innovation waivers or fail-safe strategies with firms that are first rateenvironmental performers. For example, par-ticipating firms could be granted innovationwaivers that allow limited noncompliance whiledeveloping new approaches that promise alarger environmental pay-back.

While experience with such means is growing,a number of barriers and concerns would need tobe addressed before these techniques could be

15 Recent deve]oprneu~, such as the June 1993 pollution prevention policy statement from the EPA Administrator, my Wed up the Press.Memorandum of Carol M. Browner, Administrator, to all EPA employees, June 15, 1993, titled “Pollution Prevention Policy Statement: NewDirections for Environmental Protection.’


widely used, Assurance would be needed thathealth and the environment would be fullyprotected. Safeguards would be necessary toguard against, and quickly detect, abuses. Newtechniques allowing continuous monitoring ofemissions would be helpful. It also could bedifficult to develop eligibility criteria for qualify-ing facilities with good environmental recordsand performance, Concerns exist that flexibilitycould lead to favoritism or foreclose enforcementoptions. Thus, EPA could be required to evaluatethese regulatory experiments, identify areas forimprovement, and provide technical assistance tostates to implement these new approaches

Pollution prevention and other alternative tech-nologies are often specific to particular industriesand processes. Without greater industrial exper-tise, it may be difficult for regulators to craftregulations that allow industry to meet environ-mental goals most efficiently. As a result, regula-tory agencies, now organized along media lines,may need more orientation toward industry-sector groups with expertise in all areas, includingnew technology, pertinent to a given industry.

EPA could significantly expand its ongoingefforts to cluster regulations for specific industrysectors—a step that could deepen regulators’understanding of industry problems and techno-logical solutions specific to each industry. Insome cases, there could be both environmentaland economic benefits if regulations and rulescould be developed that collectively apply toemissions in all media (air, water, and land).

To enable firms to more easily use alternativetechnologies, permit writers and inspectors wouldneed strong technical backgrounds to deal with amore complicated permitting process and to makejudgments about whether alternative approachesare appropriate. Thus, provision would need to bemade for training (Option 12), adding to adminis-trative costs.

Regulations and permitting procedures cansometimes impede technology innovation anddiffusion. Some of these barriers might be over-come if there were closer links between technol-

ogy developers, users, and regulators. EPA couldwork with industry technology organizations(e.g., the centers discussed in Option 5) on suchissues as the implications of foreseeable regula-tions for technology priorities, development, anddiffusion. This task could be assigned to industry-sector groups at EPA (Option 13).

The form of domestic environmental regula-tions can affect innovation by the environmentalindustry. Best available technology (BAT) orsimilar standards that tend to make complyingfirms select and install technologies used asbenchmarks by regulatory agencies can assuresuccessful EGS developers of a market. WhileBAT standards are favorable for suppliers ofapproved technology, they may inhibit develop-ment of new and innovative technology by others.Complying firms are likely to stay with tried-and-true technologies that seem to be endorsed by theregulations.

Environmental technology developers also oftenfind it difficult to obtain a R&D permit under theResource Conservation and Recovery Act or touse ad hoc procedures under the Clean Air Actand Clean Water Act. There is some anecdotalevidence of firms moving technologies abroad fordevelopment and testing. Adjusting procedures toaccommodate the needs of innovators, providingpermits for fixed R&D and testing facilities, anddevelopment of quicker and more predictablepermitting procedures might help U.S. innovators(Option 14),

The options discussed above would help stimu-late innovation. However, they would still becontroversial and, while experimentation withsuch procedures are already underway, there is nocertainty that even demonstrably successful ap-proaches would win broad acceptance with indus-try, environmental organizations, or regulators.Over the years, many regulated industries havetended to focus on reducing levels of regulation,rather than improving the efficiency of theregulatory system. Moreover, many in industryfear that new approaches to regulation, such aspollution prevention, could in time lead to more


burdensome requirements. For their part, manyenvironmental groups have been more concernedwith defending existing gains than with changingthe system to make it deliver equal or greaterenvironmental benefits at lower costs. Withinregulatory agencies, many are reluctant to em-brace anew system that departs from accustomedways of doing things. Moreover, managers mayresist efforts to break down organizational walls,particularly when resources are scarce.

Without more trust and commitment amongthese key parties, the cooperative basis fordevelopment of a more effective and efficientregulatory model is unlikely, and the optionsidentified above are likely to have limited appli-cation. Thus Congress might consider ways tobuild more cooperative relationships betweengovernment, industry, and environmental organi-zations (Option 15). One possibility would be tofund an institute for environmental cooperation topromote innovative cooperative projects.16 EPAcould set up a small number of councils, com-prised of industry, academic specialists, andrepresentatives from environmental organizations ,and other nongove r n m e n t a l organizations, forsectors with high environmental impacts andcompliance costs.

Although not addressed in the options, marketincentives can focus pollution reduction on thelow-cost sources for reducing pollution. Twosystems are normally proposed to do this: taxesand fees, and tradable permits. OTA’s assessmenton new approaches to environmental regulations,scheduled for completion in late 1994, is examin-ing the potential of these approaches to achieveenvironmental goals.

ISSUE AREA D: DEVELOPMENT ASSISTANCE,EXPORT PROMOTION, AND ENVIRONMENTALINDUSTRIES (OPTIONS 16-26)

Debate is occurring about U.S. governmentexport promotion programs, development assist-ance programs, and their interactions-both forU.S. exports as a whole and for environmentalexports in particular. Several bills pertaining toenvironmental export promotion have been pro-posed in the 103d Congress.17 In addition, shortlybefore this report was sent to press, the Clintonadministration submitted a proposed action planon U.S. trade promotion programs in response toa 1992 congressional directive, and issued anenvironmental export strategy. The administra-tion had also proposed major changes in U.S.foreign assistance programs. See chapter 6 foradditional discussion of export issues.

Multilateral Cooperation for Technical Assist-ance (Options 16 and 17)--As the size of theglobal environmental market grows, many coun-tries are pursuing or considering policies to helptheir firms participate in these markets, includingdeveloping country markets. There is a potentialfor conflict between development assistance ob-jectives aimed at meeting the needs of developingcountries (e.g., for environmentally sound devel-opment) and the commercial objectives of donorcountries (e.g., encouraging exports of environ-mental technologies whether or not the particulartechnology is the most suited for the developingcountry). While a certain level of such tensions isinevitable, the potential for conflicts could belessened if there were better, more objectiveinformation available about the products, ap-proaches, and technologies being sold. This is

16 A.lso, EPA could H ~~eQSUS-building el%rts through university programs, For instance, the Massachusetts Institute of Technologyhas been working with industry, govcrnmen~ and nongovernmental organizations to form mutual understanding on issues related to the useof chlorine in industry.

17 ~ee &lu& H*R. 2112, ~ pm~ N~o@ ~~nm~~ T~de Development At of 1993, (re~~d out of the House MerchantMarine and Fisheries CommI“ttec on June 30, 1993); H.R. 2096 to promote exports of environmental technology, goods, and services; S. 979,the proposed Greentech Jobs Initiation Aet of 1993; and S. 1074, the proposed National Environmental Trade Development Act of 1993.

Chapter 1--Summary ! 35

always a problem, but especially so in developingcountries that increasingly need environmentaltechnologies, but have little information about thebest choices.

One option for addressing developing countryneeds while still facilitating U.S. exports wouldbe for the U.S. Government to work with othercountries to set up an expanded technical infor-mation capability through the United NationsEnvironment Program or another internationalagency to provide objective information andtechnical advice about environmental technolo-gies (Option 16).

As well as helping developing countries, suchinformation could help U.S. firms with appropri-ate technology compete when it is up againstinferior foreign technology marketed more ag-gressively (such as with foreign tied aid credits).

Developing countries also could benefit frompollution prevention and cleaner technology ap-proaches. Efforts to increase support for suchactivities through multilateral agencies couldhelp these countries while benefiting U.S. firmsthat provide such services (Option 17).

Bilateral Foreign Assistance and Export Promo-tion (Options 18-20)---The United States nowspends about $650 million per year on environ-mental and related energy development assist-ance to developing countries. Relatively little ofthis aid supports transfer of technology. Provi-sions in the 1992 Energy Policy Act wouldauthorize increased support for transfer of innova-tive energy and environmental technologies todeveloping countries. Funding for such programs(Option 18) could help developing countries andalso encourage exports of U.S. environmentalgoods and services.

An increase in U.S. Trade and DevelopmentAgency (TDA) funding of feasibility studies forcapital projects in developing countries alsomight lead to more business for U.S. firms(Option 19). The TDA’s mission is to assist U.S.firms in exporting goods and services for majorcapital projects in developing and middle-income

The U.S. Government and industry have cooperated todevelop and demonstrate technologies for cleanerburning of coal, including retrofit technologies usedin this Illinois power plant.

countries. TDA’s annual budget is about $40million, most of which pays for project feasibilitystudies by U.S. firms, chosen for the likelihoodthey will lead to follow-on work by U.S. fins.Many of the projects are for environmentalinfrastructure or have an environmental compo-nent. TDA’s feasibility studies have been suc-cessful in promoting U.S. exports; funding forthem could be increased, in time, to greater paritywith a comparable agency in Japan, which fundsan estimated $200 million per year of feasibilitystudies by Japanese fins.

The U.S. Government also could begin tosupport capital projects in developing countries—something USAID now does rarely. Care wouldbe needed to assure that support went only toenvironmentally and developmentally sound pro-jects. Some contend that an emphasis on capitalprojects would run counter to U.S. efforts todiscourage other donors from using mixed creditsor other tied aid loans.

Many U.S. environmental technologies requirehighly skilled operators and maintenance work-ers; this can be an obstacle to their use indeveloping countries. While training needs to beworked out by the contracting parties, the U.S.Government could help U.S. exporters locatetraining facilities and personnel in developingcountries. Development assistance support for


training can sweeten bids of U.S. fins. Trainingnot necessarily linked to a particular project canpromote exports by familiarizing potential cus-tomers with certain technologies and by helpingU.S. firms to make contacts abroad. TDA spendsabout $7 million per year on training programsdesigned to promote exports related to capitalprojects, many of them environmental or with anenvironmental component. If TDA’s budget wereexpanded, it might support additional trainingactivities. (Option 20).

A capacity to develop and enforce environ-mental regulations is a prerequisite for environ-mental market growth in developing countries.U.S. technical assistance and training can helpbuild such capacity while familiarizing recipientswith U.S. standards, procedures, and equipment.Some other aid donors have recognized potentialcommercial benefits of this approach by equip-ping reference laboratories used by developingcountry environmental agencies.

Several recent public-private partnerships havebeen set up to involve U.S. industry in helpingdeveloping countries address environmental prob-lems. The United States-Asia EnvironmentalPartnership (US-AEP) works with U.S. agenciesand firms to encourage use of U.S. technologiesand expertise in addressing Asian environmentalproblems. The U.S. Environmental Training In-stitute, established jointly by the U.S. Govern-ment and some businesses, brings developingcountry personnel to the United States to takeshort courses that include presentation of U.S.firms of their technologies. While it is too soon toevaluate these initiatives, they may, if successful,provide models for further replication.

Other Export Promotion Issues (Options 21-26)—The U.S. Government provides relatively littlesupport to U.S. manufacturing firms for export-

ing. Recent laws authorize a stronger Federal role.The 1992 Export Enhancement Act (Public law102-429) called on the interagency Trade Promo-tion Coordination Committee (TPCC) to developan overall export promotion strategy and topropose an annual unified export promotionbudget. The initial TPCC report, with over 60proposed steps, was submitted to Congress at theend of September, 1993. TPCC was unable topropose a budget, but did say such a budget wouldbe worked out for the fiscal year 1995 appropria-tion cycle.18 The 1992 law also called for a Federalstrategy for environmental exports. The adminis-tration issued a strategy in November 1993 as thisreport went to press.

19 Congress could monitor itspriorities and implementation plans, including theneed for additional actions (Option 21).

One question concerns the nature and degree ofprivate sector involvement. Some contend thatthere needs to be more private sector involvementin the process, and have proposed creation of apublic-private council to prepare an action plan toimplement the strategy. The danger is, of course,that such a plan would become a form of specialpleading by its private sector members. However,some precedents already exist for industry in-volvement in priority setting. One example is theCommittee on Renewable Energy Commerce andTrade, which could become a model for othersubsectors.

A number of other export promotion optionscould be considered. One possibility would be toincrease U.S. foreign commercial service repre-sentation, both in general and for the environmentper se (Option 22). When agriculture is notconsidered, the United States spends very littlefor export promotion-far less than our majorcompetitors. Our foreign commercial service islightly staffed: Canada has more overseas com-

18 Trade ~omotion cwr~~g co~tte, ~owur~ a ~ationa~ Expo~ Smafegy (w~~toq Dc: U.S. Government Wthg Offke,September 1993), For a critique of the plan see statement of Alan I. Mendelowitz, U.S. General Accounting OffIce, before the EconomicPolicy, Trade and Environment Subcommittee, House Foreign Affairs Committee, Sept. 29, 1993.

19 Ron~d H. Brow H~el o’~v, Cuol Bro~er, Environmental Technologies Exports: Strategic Framework for U.S. Leadership,

November 1993.


mercial officers, despite an economy one-tenththe size of the United States.

The U.S. Government could also assist indisseminating information about U.S. environ-mental technologies to potential customers inother countries (Option 23). This possibilitycould be carried out in conjunction with anexpanded effort to support independent evalua-tion of U.S. technologies (discussed in Option 8of Issue area B).

Certain steps also might make it easier for U.S.firms to get the information they need to expandtheir export activities (Option 24). Environmentalexports might be used as a case for demonstratingone-stop shopping to make Federal programseasier for small firms to access. A more far--reaching approach, proposed in legislation beforethe 103d Congress, might be to encourage exportsthrough a network of environmental businesscenters in the United States and American busi-ness centers in countries with promising environ-mental markets .20 US-AEP has opened a numberof environmental business centers in Asia; theirefforts could be monitored for efficacy andpossible replication.

The U.S. Government assists a much smallershare of its exports with public export financingthan several competitor countries; there are alsoindications that U.S. programs are harder forfirms to use. (See ch. 6).

Given this favorable circumstance for foreignfins, a key export promotion issue is the limitedpublic and private funds available here for export-ing. Congress might consider export financingneeds as it evaluates alternative uses for availableFederal resources (Option 25). Funding for fi-nancing environmental exports could be in-creased, of course, but whether this could be donewithout cutting into other needs remains to beseen.

A disparity exists not only in ordinary exportfinancing, but also with respect to confessional

financing. European and Japanese firms oftenappear to have greater access to confessionalproject financing from their home countries thando U.S. companies. The United States has a WarChest in the Export-Import Bank (Eximbank) tomatch confessional financing (below marketrates) packages put together by foreign competi-tors, and Congress recently increased its authori-zation to $500 million in grant funds (whichwould support about $1.5 billion in confessionalloans). Increased War Chest use could be aneffective tool to enable U.S. bids to win on theirmerit in the face of foreign governments conces-sional financing. However, this benefit must bebalanced against other uses for Eximbank’slimited budget, since each dollar of confessionallending reduces by several dollars Eximbank’scapacity to make ordinary loans or loan guaran-tees.

ISSUE AREA E: TRADE AND ENVIRONMENTISSUES (OPTIONS 26-31)

As mentioned, the United States has strongerenvironmental requirements than many competi-tors. Recent efforts to negotiate trade agreementsand the emergence of several strong competitorsin newly industrialized and advanced developingcountries have raised renewed concerns aboutcompetitive impacts for the United States. Envi-ronmental issues were important in the debateabout the North American Free Trade Agreementfor Mexico, the United States, and Canada. Inaddition to provisions in the NAFTA itself, a sideagreement addressing environmental matters wasnegotiated.

Environmental matters will almost certainlyarise if other efforts to liberalize trade areundertaken in Latin America or elsewhere. Withor without such liberalization, concerns aboutcompetitive impacts from differing levels ofenvironmental regulations will arise. One possi-ble response might be for the U.S. Government to

20 See, for example, Sections 7 and 9 of H.R, 2112, the proposed National Environmental Trade Development Act of 1993, as reported bythe House Merchant Marine and Fisheries Committee on June 30.1992.

38 [ Industry, Technology, and the Environment: Competitive Challenges and Business Opportunities

become more active in negotiating environmentalagreements with other countries-partly to ad-dress competitive effects (Option 27). Agree-ments could be combined with U.S. technicalassistance to help countries develop and imple-ment appropriate standards (Option 28). As dis-cussed in Options 29-31, the potential for adversecompetitive impacts also might be reduced ifthere were more effective monitoring and en-forcement of agreements, if businesses wereencouraged to adhere to developed country stand-ards throughout the world, and if other countriestook steps such as calling on business to reporttheir releases of toxic substances, as they arerequired to do in this country.

These approaches would be controversial, bothhere and in other countries. Moreover, past effortsto adopt such policies have had little success. Yetthere could be long-term benefits for the environ-ment and, quite possibly, a more positive climatein this country for trade liberalization withcountries that now have weaker environmentalstandards.

Some might argue that there is no competitivereason for such negotiations, because, they claim,strict environmental regulations can lead to in-creased competitive advantage. Firms withincountries having strong regulatory demands onindustrial processes can find that aggressiveenvironmental actions, particularly pollution pre-vention, make them more competitive relative toother domestic competitors. However, as a group,firms within countries with strict regulations willface higher compliance costs relative to foreigncompetitors in countries with more lax standardsand enforcement. When waste disposal costs andrequirements are high, firms can sometimes save

money by controlling pollution and reducingwastes. However, these actions are usually notjustified from an economic perspective alonewhen waste disposal costs and requirements arezero or minimal. Still, as has been mentioned,strong domestic regulations are often a key factorin competitiveness of environmental goods andservices industries.

ISSUE AREA F: DATA AND INFORMATION NEEDSFOR POLICY MAKING (OPTIONS 32-33)

Data and information in several areas areflawed or often lacking. While the need for datais seldom so pressing as to preclude rationalpolicymaking, improved information would behelpful (Option 32). For example, it would bevery useful to have verification of data obtainedfor the Census Bureau’s Pollution Abatement andControl and Expenditure surveys. Better data ontrade and production in environmental goods andservices would be helpful. Also, while there aremany estimates of the costs of regulations, thereis a need for better ways of estimating the benefitsof environmental regulations, and for accommo-dating such benefits in models measuring theimpacts of regulation on the economy.

There is an important need for periodic assess-ment of potential competitive impacts to Ameri-can industry and the U.S. economy arising fromdifferences in environmental standards amongcountries. Congress has in the past called on theexecutive branch to conduct such assessmentswhen enacting some new environmental laws,and to identify strategies for addressing suchimpacts. As standards and competitive conditionschange, periodic undertaking of such assessmentsand strategies would be helpful (Option 33).

I

I t is increasingly difficult to separate environmental policyissues from those of trade, technology, and competitive-ness. It is also becoming harder to consider economic andtechnology policies without also considering their envi-

ronmental ramifications.This is so because:

■ Environmental problems became a major policy concern in theUnited States (and in a few other advanced industrial countrieslike Japan and Germany) about two decades ago, at a timewhen many took U.S. industrial supremacy for granted. Sincethen, a number of events-a slow-down in productivitygrowth, oil embargoes and energy shocks, and the emergenceof Japan as an economic superpower, to name a few—havedeepened concerns about U.S. economic competitiveness.

■ U.S. industry now competes not only with Japan, Germany,and other Western European countries having comparativelystrong environmental regulations, but also with producers innewly industrialized or advanced developing countries. Manu-facturers operating in these countries pay lower wages, andusually do not have to meet environmental, health, and safetystandards as strict as those in the United States.

■ There is a growing sense that economic development in allregions of the world will need to be carried out in ways thatproduce less harm to the environment (see ch. 3). Someenvironmental issues (depletion of stratospheric ozone, globalwarming, loss of biological diversity) are now widely viewedas globally significant problems. Major regional environ-mental problems (e.g., those in Eastern Europe and the formerSoviet Union) have dramatized the serious health and eco-

Issuesand

Options 2

39


nomic costs that can result when industry andgovernment pay too little attention to theenvironment.Global expenditures to address environmentalproblems are increasing rapidly, creating newmarkets for environmental goods, technolo-gies, and services. In the next decade or so,many more countries are likely to begin enforc-ing environmental standards to a greater extentthan before.

These concerns have prompted interest in thecommercial implications of environmental poli-cies and the environmental implications of differ-ent commercial policies.

Environmental policies and policies to pro-mote competitiveness both aim to influenceindustrial behavior. Environmental policies oftenrequire industries to control their processes andmodify products to meet certain standards. Otherdomestic policies, including technology policies(R&D support, extension services, and tax poli-cies to encourage R&D and capital investment)also influence industrial actions.

The competitiveness of U.S. industry (includ-ing the environmental industry) is affected bytrade, export promotion, and foreign assistancepolicies-for example, policies to open foreignmarkets to U.S. goods and services, to promoteU.S. exports, and to link foreign aid to commer-cial benefits for U.S. firms.

OPTIONS FOR U.S. POLICYThis assessment takes it as a given that U.S. air,

water, and waste standards will continue to beamong the world’s toughest.1 Within this frame-work, OTA has examined many options to furthertwo competitiveness objectives:

1. realizing the opportunities for benefit toU.S. business and society from providingenvironmental technologies to a growingglobal market; and,

2. reducing adverse competitive impacts facedby U.S. firms in complying with environ-mental regulations.

Later sections of this chapter discuss six issueareas and related policy options pertinent to thesecompetitiveness concerns. The issue areas are:

a. Technology and R&D policy;b. Diffusion of best practices and technologies

to industry;c. Regulatory reform and innovation;d. Export promotion, development assistance,

and environmental fins;e. Interactions between trade policy and envi-

ronmental policy;f. Data and information needs for policymakers.

This chapter discusses the pros and cons ofover 30 options in these issue areas. The policytables in the chapter list options for each issuearea along with the goals furthered by theseoptions and their likely costs to the FederalGovernment. All of the options are presented intable 1-4 (in ch. 1).

The options could be adopted either singly orin different packages. Some pertain to one objec-tive only (e.g., development assistance optionsare limited to environmental technologies andservices) while others apply to both (e.g., technol-ogy policy, trade, and environment policy).

In many cases, successful implementation ofthese options will depend on extensive andcontinuing involvement by industry, environ-mental organizations, and other affected parties.Outcomes would depend not only on specificpackages of options and resources available, butalso on strategy, leadership, and continuing com-mitment to implementation. Two strategies forgovernment action, incremental and aggressive,are discussed below.

1 This assessment does not examine the interactions between competitiveness and other types of environmental laws and regulations suchas those affecting land use, fisheries, and species protection.

Chapter 2–Issues and Options 41

ONE: The incremental approach would entailcontinued implementation of existing policies,with some new emphases:■ Efforts to develop more cost-effective or im-

proved technology for Federal site clean-up,especially Department of Defense and Depart-ment of Energy sites, would continue. Cleanerenergy technology R&D would continue to bethe largest category of environmentally prefer-able technology supported by the Federalgovernment. Federal programs for other indus-trially pertinent technologies for pollution con-trol and prevention or cleaner production wouldcontinue at recent modest levels of support.Government-industry cost-sharing of coopera-tive research and development agreements(CRADAs) on environmental matters mightincrease, subject to budgetary constraints.

■ Programs for independent evaluation or verifi-cation of the performance of U.S. technologieswould be expanded to give more emphasis toprevention and control technologies in additionto the current emphasis on contamin ated siteremediation. Such information, which is neededfor domestic users, could also help foreignconsumers select among competing technolo-gies.

■ Clearinghouses, trade publications and associa-tions, and State technical services programswould be used to disseminate informationabout cleaner technology and more cost-effective compliance approaches to small andmedium-sized manufacturing firms.

E On the regulatory front, EPA and State regula-tory agencies would experiment with incen-tives for technological innovation and withalternative permitting and compliance proce-dures, and encourage wider replication ofsuccessful approaches.

■ Federal export assistance programs would bet-ter coordinate services. The U.S. Trade andDevelopment Agency would fund more feasi-bility studies in developing countries, creatingbusiness for U.S. consultants and some follow-on orders for U.S. exporters. Other export

promotion services, including commercial rep-resentation abroad, training of foreign nationalsin U.S. technologies and approaches, and trademissions, would expand modestly.

■ Efforts to develop multilateral guidelines ad-dressing interactions between trade and envi-ronmental issues would continue.

TWO: The aggressive approach differs fromthe incremental approach in strategy, degree ofhigh-level leadership, and level of resources.■ Much effort would be made to integrate envi-

ronmental and economic issues at a high levelwithin the government. Technology policies,trade policies, and environmental regulationswould be developed and implemented withawareness of their interactions and their syner-gies—positive and negative.

■ A major effort would be made to enlist U.S.industry-especially industry sector technol-ogy organizations-in cleaner technology de-velopment and diffusion. Government wouldshare the cost of R&D, demonstration, anddiffusion, and better address regulatory prob-lems for those sectors with high environmentalimpact or compliance costs.

■ Steps would be taken to integrate pollutionprevention services with manufacturing mod-ernization services offered at the State level andin new Federal manufacturing extension cen-ters.

■ There would be accelerated experimentationwith more flexible regulatory approaches thatmeet environmental requirements. Companieswith excellent environmental records might beeligible for expedited whole facility permitting.For example, such companies might be givenfacility-wide emissions caps and more optionsto choose among different pollution abatementapproaches. Regulations would be made morefriendly to environmental technology innova-tors.

s On the international scene, the United Stateswould signal to developing and newly industri-alizing countries that their environmental stand-


ards would need upgrading well in advance ofpossible bilateral discussions on trade liberali-zation. Through framework agreements or otheragreements, the United States might offer moreaid for technical assistance and technologytransfer to developing countries (with U.S.companies gaining some business from theaid).The executive branch would assess differencesin regulatory stringency among countries, andrelated competitive impacts on U.S. firms;alternatives for addressing adverse impactswould be developed for congressional consid-eration.Government efforts to promote U.S. exports,including environmental exports, would inten-sify.Foreign assistance would be tapped to encour-age exports of environmentally and develop-mentally sound technologies and services (e.g.,renewable energy technologies, pollution pre-vention services) to developing countries. On alife cycle basis, such projects could be lessexpensive for developing countries than con-ventional technology. In some cases, capitalproject financing would be made available toencourage transfer of U.S. technology.The United States would continue to work tolimit commercial advantage from use of mixedcredits and other tied aid credits by aid donors;however, when other countries use these creditsfor unfair commercial advantage, it wouldrespond in kind but use environmental guide-lines to prevent transfer of inappropriate tech-nologies.

This strategy might recognize the need to givemore priority to broad-based adjustment assist-ance for U.S. workers. It is seldom feasible toisolate the causes of plant closings and layoffs;

the major causes are patterns of trade andinvestment, changes in consumer preference, andobsolescence of plant and equipment from tech-nological change. Sometimes environmental fac-tors also contribute. While the implications oftechnological upgrading for U.S. employment asa whole are likely to be positive, the diffusion ofcleaner, more energy efficient technologies toindustry is bound to produce some displacement.

Not all of the steps listed in either strategywould require new legislation, as several recentlaws authorize pertinent programs and initiativesalong these lines. Examples include the EnergyPolicy Act of 1992 (EPACT, Public Law 102-486), the Export Enhancement Act of 1992(Public Law 102429), and the Aid, Trade, andCompetitiveness Act of 1992 (Title III of PublicLaw 102-549). The Clinton administration hasannounced several plans and initiatives related tocommercial and environmental technology pol-icy, export promotion, and pollution prevention.Depending on future levels of funding and otherindicators of commitment to implementation,these laws and initiatives could form part of abasis for the strategies.

B Issue Area A. Technology and R&D PolicyDebate is underway in Congress about the

Federal role in encouraging the development andcommercialization of innovative commercial tech-nologies. Environmental technology has been. gaining attention in this debate. The EnergyPolicy Act of 1992, enacted at the end of the 102dCongress, authorized expanded Federal supportfor development and application of energy-related environmental and industrial technolo-gies. Several environmental technology bills havebeen proposed in the 103d Congress,2 as well asbills pertaining to the Federal role in commercialtechnology development as a whole.3 An admin-

2 See, for example, S. 978, the proposed National Environmental Technology Aet of 1993, as reported by the Senate Environment and PublicWorks Committee on July 30, 1993; S. 811, the proposed Environmental Competitiveness Act of 1993; and H.R. 3603, the proposedEnvironmental Technologies Ad of 1993.

3 See H.R. 820, tbe proposed National Competitiveness Act of 1993 passed by the House on May 19, 1993, and S. 4.


Table 2-1—issue Area A. Federal Technology R&D Policy

co

Policy goals promotedb

1 Review Federal progress to:. set priorities and coordinate R&D for environmentally

critical technologies s Y P P P● integrate cleaner production in R&D program missions s Y Y P P

2 Review Environmental Protection Agency (EPA) clean technologypriorities s N ‘i P P

3 a) Fund pertinent Department of Energy (DOE) RD&D programs; L N Y P Pb) Make cleaner production a central mission of DOE’s Office of

Industrial Technology M-L N Y P P4 Increase support for National Science Foundation clean technology

work M N Y P P5 Fund startup or expansion of industry sector R&D technology consortia L Y Y P ?

a s~ma[l ($ I o million or le~); M-moderate ($1 O to $100 million); L-large ($100 million plus); a range indicates that it depends on how the optionis implemented.

b y=yes; P=potentially yes; N=no; ?=effect iS Unciear


istration environmental technology initiative isalso under development.

For the most part, Federal environmentalregulations-their form and strictness-have beenthe primary government action determining de-velopment and use of environmental technologyby industry. This will continue to be the case.However, nonregulatory forms of technologypolicies—support for research, development, anddemonstrations, for example--could spur devel-opment and use of environmentally preferableproducts and processes. While not necessarilydeveloped to further specific regulatory aims,such products and processes in some cases couldmake compliance easier and cheaper for firms.

Discussed below are three issues germane tothe question of whether the U.S. Governmentshould expand its support for development of

cleaner, more cost-effective technology byindustry:

goals and objectives for Federal environmentaltechnology policy,coordination of Federal activities relevant tocleaner technology, andpartnerships with industry to develop cleanertechnologies.

Five options pertinent to these issues aresummarized in table 2-1, and presented in greaterdetail at the end of the discussion for this issuearea.

GOALS FOR FEDERAL POLICYAn expanded Federal role in developing cleaner

technologies or more cost-effective pollutioncontrols could require more funding and new


ways to conduct government-industry partner-ships. The Federal Government already spendsnearly $2 billion per year on R&D pertinent to theenvironmental technologies covered in this re-port.4 (See ch. 10.) Over $650 million is spent bythe Department of Energy (DOE), the Departmentof Defense (DOD), and the Environmental Pro-tection Agency (EPA) on remediation technolo-gies for contaminated sites. Large commitments,nearly $1 billion, are also made to cleaner energyresearch, development, and demonstration (RD&D).This includes renewable energy programs, theClean Coal Technology Demonstration Program(which demonstrates pollution control and pre-vention technologies), advanced engine and fuelcell R&D, and electric and other cleaner vehicletechnologies, among other areas. Federal R&Dsupport for cleaner industrial process technolo-gies and for improved end-of-pipe controls formanufacturing operations is only a small share ofthe total-probably on the order of $150 million.

The question of whether, how, and to whatdegree the Federal Government should supportadditional initiatives to develop innovative envi-ronmental or environmentally preferable technol-ogies depends in part on available resources andFederal priorities.

Several candidate R&D priorities may vie forlimited funds, including:

Putting the Federal House in Order—Most re-mediation R&D centers on clean-up of contami-nated defense-related facilities--clearly a Federalor national responsibility. Developing lower costor more effective clean-up technologies is likelyto be a key Federal environmental and fiscalpriority for many years to come. Defining tech-nology goals and objectives and securing clean-up R&D resources for this area alone will posecontinuing challenges.

Estimates suggest that, using current technolo-gies, it could cost the U.S. taxpayer tens ofbillions of dollars in the coming years to clean uphazardous and radioactive wastes at DOD andDOE facilities. Improved remediation technolo-gies might reduce clean-up costs and also aid inmanaging abandoned hazardous waste sites—aFederal responsibility under Superfund.

To some degree, the improved technologiesand processes resulting from Federal clean-upR&D could produce export opportunities for U.S.environmental firms. However, most countriesnow give much more priority to pollution controland prevention than to clean-up of contaminatedland. Remediation markets abroad are relativelymodest. Also, some of the U.S. R&D no doubtmay support further development of processescreated by firms in other countries.

Helping Industry Meet Requirements at LessCost—Another Federal R&D priority might be toencourage development of cleaner productiontechnologies (or, in some cases, more cost-effective end-of-pipe or clean-up equipment).This might further both environmental and indus-trial competitiveness goals. U.S. industries spendmore on environmental compliance than theircounterparts in most other countries. Even whencompliance costs are comparable, some coun-tries, such as Germany, provide more governmenttechnical and financial help to their fins.

It would make sense to concentrate on industrysectors that produce large environmental impactsor that have high compliance costs, For example,as is discussed in Option 5 at the end of thissection, the government might share the costs ofRD&D efforts with industrial consortia to addressindustrywide environmental challenges. Regula-tory and tax incentives for development and early

4 Larger estimates exist, but they include other technology support, such as for agriculture, climate monitoring, health effects, managementof nuclear wastes, and mass transit that are not addressed in this report, See U.S. Library of Congress, Congressional Research Service, TheCurrenrStatus ofFederczlR&D:Environmental Technologies, 92-675 SPR (Washington DC: Congressional Research Service, Aug. 25, 1992).


use of innovative environmental approaches canalso be useful.

Spurring Development of Environmentally Pref-erable Products and Processes-The FederalGovernment can help ensure that cleaner technol-ogy or production priorities are considered in thetechnology development activities that it sup-ports, directly or indirectly. With the wide rangeof R&D funded by the U.S. Government, thelong-term effect in stimulating development ofcleaner technologies could be significant. Addi-tionally, Federal, State, university, and profes-sional association support for integration ofenvironmental matters in engineering educationcan help effect a cultural change by bringingenvironmental criteria from the periphery to thecore of product and process design.

Meshing environmental with commercial R&Dgoals could be beneficial. It could producetechnologies and techniques that allow compa-nies to meet their environmental obligations atless cost. For the environmental industry as wellas manufacturers of cleaner capital goods, betterand more economical pollution control and cleanerproduction technologies offer new business op-portunities at home and abroad. And, of course,the economy, the environment, and public healthwill benefit if new technological approachesallow better environmental protection at less cost.

Government procurement practices could beused to spur markets for environmentally favora-ble products and processes, as well. Some exam-ples include specifying cleaner printing andpainting, procurement of recycled materials, pro-motion of energy efficiency in Federal buildings,and acquisition of cleaner vehicles. Militaryspecifications also could be rewritten to address

the environmental impacts arising from manufac-ture of products for DOD. Several executiveorders on these matters have been issued or areunder consideration in the Clinton administration.Using government buying power as an instrumentof environmental policy is controversial withsuppliers of conventional products and otherindustries who fear they might be adverselyaffected.

Supporting Sustainable Development and Ex-port Opportunities for U.S. Firms-In the years tocome, global demand for cost-effective, environ-mentally preferable technologies can be expectedto grow in a wide range of industry sectors. Oneobjective of Federal technology policy might beto encourage development of such technologies inthe interest of global environmental improvementand boosting export earnings and jobs for Ameri-can fins. Joint R&D and industrial consortiaamong environmental fins, regulated industries,and government can help develop and demon-strate technologies that provide environmentalsolutions both at home and abroad. In addition tosupport for R&D, the U.S. Government can helpby disseminating information on U.S. technolo-gies abroad and developing export awareness inthe United States. Technical assistance to im-prove foreign environmental management capac-ity and negotiation of standards and practices inother countries compatible with those employedin the United States can also promote thiscountry’s interests.

COORDINATION AND FUNDINGAs additional Federal roles in environmental

technology are considered, some see an emergingneed to articulate an overall strategy5 and priori-

5 Developing an environmental technology strategy is one purpose of some environmental technology proposak under consideration inthe 103d Congress. The strategy proposed in S.978 as reported by the Senate Environment and Public Works Committee would, among othermatters, identify and rank priorities that would benefit from critical environmental technologies; recommend public-private partnerships;recommend measures to encourage commercialization and Use of the technologies, especially by small business; and identify barriers,incentives, and appropriate actions for developmen~ use, and exports of the technologies Critical environmental technologies, as defined inthe bill, would embody a significant technical advance, have potential to bring about large, cost-effective reductions in health or environmentalrisks; apply broadly at the precommercial stage; and be tikely to have a favomble ratio of social to private returns if adopted.


ties for a coordinated response by pertinentagencies.

Several agencies play, or could play, prominentroles in environmental and/or commercial tech-nology development—including DOE, DOD, theDepartment of Commerce, and EPA. Working outappropriate roles among these and other agencieswill be an important issue for policy makers inCongress and the Executive Branch. Lack ofcoordination of these programs could limit theireffectiveness, as well as complicate technologytransfer to industry.

Administration efforts and plans to addressenvironmental technology include:

an environmental technology strategy. In April1993, President Clinton directed the Secretaryof Commerce to chair an interagency group forcreation of a national strategy for environ-mental technology development, diffusion, andexport promotion. Other key agencies includeEPA and DOE. This body was expected to issuea report in the fall of 1993.an expanded EPA role in environmental tech-nology development. Over a 9-year planninghorizon, the projected increase would be $1.85billion (much of which might pass throughEPA to other agencies). The purpose would beto develop more advanced environmental sys-tems and treatment techniques to produceenvironmental benefits and exports of environ-mental technologies.more funding for RD&D activities under the1992 Energy Policy Act. (Among other things,EPACT authorized increased Federal supportfor environmentally significant energy technol-ogies, including renewable energy, cleanervehicles and fuels, advanced engines, fuel cells,and heating, cooling, and other building tech-nologies. One title authorizes more R&D sup-port for industrial technology related to energyconservation, including waste reduction. Forexample, it calls for more work on pulp andpaper technologies and improvement of energy

efficiency and cost-effectiveness of pollutionprevention technologies in energy intensiveindustries-activities supported by the DOE’sOffice of Industrial Technology. Funding forthis office’s work on energy efficiency andwaste reduction is authorized to grow fromabout $97 million in fiscal year 1992 to about$137 million in fiscal year 1994.)the administration’s overall technology initia-tive calls on key Federal agencies including theDepartments of Commerce, Defense, and En-ergy, to incorporate environmental goals whensupporting manufacturing R&D. The NationalInstitute of Standards and Technology (of theDepartment of Commerce) would help smalland medium-sized firms improve energy effi-ciency and performance (see Issue Area Bbelow).

Two subgroups of the interagency FederalCoordinating Council on Science, Engineering,and Technology (FCCSET) are working on envi-ronmental technology priorities. The Subcommit-tee on Environmental Technology of the Commit-tee on Earth and Environmental Sciences wasestablished to focus on environmental technologyissues. Also, the Committee on Manufacturing,which seeks to define Federal priorities fordeveloping and diffusing manufacturing technol-ogy to the private sector, plans to look at theenvironmental aspects of Federal manufacturingR&D. These activities could be affected by plansto reorganize FCCSET.

With so many Federal activities underway orsoon to be proposed, Congress might wish toconduct early oversight—with special attentionto overall goals and objectives, and the extent towhich clean technology objectives are addressed.(See Option 1 at the end of this section). It mightalso review funding and priorities for specificFederal programs pertinent to cleaner technologydevelopment, such as those by EPA, DOE, andthe National Science Foundation (NSF), as dis-cussed in Options 2 through 4 below.

Chapter 2–Issues and Options ! 47

PARTNERSHIPS WITH INDUSTRY TO DEVELOPCLEANER TECHNOLOGY

As standards become tougher, more cost-effective ways to improve environmental per-formance will be needed. To date, industrialpollution prevention efforts typically involvesimple housekeeping and process modifications,which often offer large payoffs for little effort.More fundamental improvements in manufactur-ing process technologies to make manufacturingboth cleaner and more productive could requiresubstantial R&D. In some cases, advances incontrol and disposal technologies also couldrequire more R&D.

While U.S. firms are making some progress inintegrating environmental concerns into manu-facturing process and product development, mostefforts are small and ad hoc. The risks toindividual companies in proceeding alone withthe needed R&D often appear too great, giventechnical uncertainties, questions about the ac-ceptance of new technologies in the regulatorysystem, and difficulties in capturing benefits thataccrue widely across an industry or to society asa whole. Companies have been reluctant todevelop and try new generations of add-onpollution controls for similar reasons.

Programs carried out through industry consor-tia or cooperative research and developmentagreements with Federal laboratories may offeruseful vehicles for assuring industry involve-ment.6 An industry sector focus for these activi-ties could help allocate efforts toward thosesectors that pose the most significant environ-mental threat or that face the highest compliancecosts. While DOE supports some cooperativeR&D in specific sectors (e.g., pulp and paper,steelmaking, and foundries), firms tend to sign on

for a specific project rather than develop thecontinuing relationship that a consortium implies.A more aggressive alternative, centered on highenvironmental impact, high compliance cost in-dustries, is discussed under Option 5 below.

While consortia may hold promise, there aredrawbacks. Funding more industrial RD&D couldtake scarce dollars away from other worthwhileclaims on Federal resources. To the extent thatnew Federal funds are available, getting theFederal Government’s own house in orderthrough clean-up of Federal sites might seem amore pressing claim. The substantial funds fortechnology development in this effort offer prom-ise for new remediation technologies that couldbe applicable to commercial remediation.7

However, the Federal clean-up efforts areneeds-driven and highly specialized. Clean-upR&D is not intended to produce technologies forindustry to control emissions or to producecleaner technologies that prevent pollution. In-stead, the technology is mostly intended to dealwith already contaminated sites.

Many in both government and industry lookaskance at partnerships and similar attempts bygovernment to influence private sector R&D.Some believe that such partnerships amount tofavoritism. Others contend that most such activi-ties would be ineffective, thus wasting the taxpay-ers money, or, worse, could deflect R&D awayfrom other objectives that could turn out to bemore important.

One skeptical analysis of the premise that strictenvironmental regulations might enhance indus-trial competitiveness also questioned the conten-tion that R&D subsidies for environmental tech-

6 k this reg~d, Tide II of the House passed version of H.R. 820, the proposed National Competitiveness Act, would autioti= tie CommerceDepartment’s National Institute of Standards and Technology to SUppOt-t large-scale research and development consortia. Among criteria foran award: significant contribution to environmental sustainability.

7 Further, Federal funds supporting research on environmental sciences are limited. Such research could lead to better understanding of therisks that environmental degradation poses to human health, natural processes, and ecosystems. Improved understanding of the nature of suchrisks could contribute to more effective policymaking.


nologies would help promote U.S. industry.8

Government R&D subsidies might be needed toobtain socially desirable investments in environ-mental improvements. However, in a world ofmultinational firms and international markets,capturing the benefits of the R&D for domesticdevelopers might be difficult.

Even so, the long-term benefits to U.S. industryand society from cleaner industrial technologiescould be very large, and it is not certain thatindustry will act on its own to develop thesetechnologies unless it is clear that the governmentis committed to their use in environmentalcompliance.

Following from the discussion above, a num-ber of options might be considered by Congressif it wishes to broaden the Federal role toencourage development and deployment of newgenerations of environmental technology by in-dustry. Some are discussed in the two followingsections (technology diffusion, and regulatoryreform and innovation). Among those that relateto the Federal Government’s direct role in sup-porting R&D activities are the following:

OPTION 1: Begin oversight at an early date onthe administration’s progress to:

■ coordinate and rank Federal R&D priorities forenvironmentally critical technologies (includ-ing those most pertinent to industry);

■ integrate cleaner production objectives intomissions of commercial technology R&D pro-grams.

OPTION 2: If Congress expands EPA’s role intechnology development, it could direct theagency to work with other agencies and industryto emphasize cleaner technology and pollutionprevention, and to seek to link regulatory devel-opment more closely with technological priori-ties.

OPTION 3: With regard to Department ofEnergy programs:

Review funding priorities and monitor progresson Energy Policy Act R&D for renewableenergy, clean coal, and other environmentallypertinent technologies. (Option 18 below dis-cusses EPACT provisions for export promotionand transfer of some of these technologies).Explicitly add environmental technology to themission of DOE’s Office of Industrial Technol-ogy;Fund more research, development, demonstra-tions, and evaluations on cleaner productiontechnologies and pollution prevention proc-esses.

OPTION 4: Increase National Science Founda-tion support for cleaner technology research,through industry-university research centers, en-gineering research centers, and individual investi-gator grants offered through NSF’s environmen-tally benign manufacturing program.

OPTION 5: Authorize support for initiating (orexpanding) R&D cost-sharing with industry sec-tor organizations to:

serve as a forum for industry to collectivelyidentify R&D needs related to environment;arrange partnerships among researchers, equip-ment makers, and industrial users to developmanufacturing technologies that are more en-ergy efficient and cleaner;arrange similar partnerships to develop morecost-effective control, recycling, and disposaltechnologies for pollution and wastes;support demonstration of cleaner technologiesand new control, recycling, and disposal tech-nologies;identify and diffuse innovations and best prac-tices in pollution prevention and control toindustry; and share information on cost effec-tiveness of pollution prevention relative tocontrol technologies; andidentify regulatory barriers to more efficientenvironmental solutions, and train inspectors

g Karen L. Palmer and R. David Simpsonj ‘‘Environmental Policy and Industrial Policy,’ Resources: Resources for the Future, summer1993, No. 112, pp. 17-21.


Table 2-2—issue Area B. Diffusion of Best Practices and Technologies to Industry


6 Evaluate incentives to diffuse cleaner technology to industry LC yc Y Y P7 Make cleaner production and pollution prevention a mission and

service of manufacturing extension services M N Y ‘? ?

8 Direct EPA to oversee more technology evaluations, and disseminateresults here and abroad M N Y Y Y

9 Support efforts to integrate environmental components in engineering

and business school curricula s N Y P P

a s+mall ($10 ~lllion or less); M=rnoderate ($10 to $100 million); L-large ($100 m iliion plLJs); a range indiates that it depends on how the option

IS implemented,b y-yes; p-potentially yes; N-no; ?-effect is unclearC ~SumeS action IS taken after review or evacuation


and permit writers on pollution prevention andcontrol in particular industries. (See furtherdiscussion below in Issue Area C: RegulatoryReform and Innovation.)

To be eligible, an organization would need toserve an industry sector with significant environ-mental impact or high compliance costs (e.g.,chemicals, petroleum refining, primary metals,metals finishing, and pulp and paper). In sectorsthat now have such organizations, Federal sup-port could focus on pollution prevention andenvironmental technical assistance. While indus-try governance and funding would be crucial, theorganization could work with Federal laborato-ries.

1 Issue Area B. Diffusion of Innovations toU.S. Industry

As discussed in chapter 8, there is a wide gapbetween best environmental practices in industryand prevailing practice. Many firms, especially

small and medium-sized companies, have limitedknowledge or access to information about innova-tions that might help them address environmentalproblems in a more cost-effective manner. Theexisting regulatory system often encourages com-pliance-driven approaches that, in the long run,are often not optimal from either an environ-mental or a competitiveness standpoint. In thefinal analysis, better integration of environmentaland economic considerations will require changesin the educational system for both engineers andmanagers. Discussed below are several issues andoptions to encourage diffusion of innovations toindustry: incentives; technical help to smallercompanies; evaluation of technology perform-ance; and integration of environmental matters inbusiness and engineering curricula. Table 2-2lists these options,

INCENTIVES FOR DIFFUSIONCompanies are often reluctant to install innova-

tive technologies. The costs and risks of being


first lead many companies to stick with tried-and-true environmental control approaches. In addi-tion to alteration of regulations and programs fortechnology verification and demonstration (de-scribed elsewhere in this chapter), Congress couldconsider a range of incentives for innovativeenvironmental technology development and use.To aid in this process, Congress might direct theadministration to provide analysis of the costs andbenefits of several specific mechanisms (seeOption 6 at the end of this section).

Accelerated depreciation and tax credits, loanprograms, and environmental taxes are amongapproaches used in some other countries. Accel-erated depreciation is used in the Netherlands,where firms that install innovative pollutionprevention or control technologies can depreciatetheir investment in 1 year instead of 10. The listof eligible technologies is revised each year inconsultation with industry and government ex-perts. Technologies that have gained significantmarket share or that are required to be installed byregulation are ineligible. This kind of approachcould also be applied to programs of tax credits orlow interest loans.

Environmental taxes applied to production ofpollutants or waste is another alternative orcomplement to the incentives just described. Ifthe added costs are high enough, polluters mayseek to avoid such taxes through pollution pre-vention, or look for alternative technologies.Environmental taxes could provide an incentivefor companies to perform better than standardsrequire. Some studies indicate that taxes onpollution and other “bads" can be economicallypreferable to taxes on “goods” such as labor,investment, and savings.9 Revenues from envi-ronmental taxes could be used for general reve-nue, to displace income and other taxes, or tofinance the above mentioned environmental inno-vation incentives.

Government procurement can both encourageor discourage the development of markets forenvironmentally preferable technologies and prod-ucts. Environmental objectives underlie recentchanges in procurement policies for such items aspaper (postconsumer recycled fiber content), lightbulbs (energy efficiency), and vehicle fleets (lesspolluting fuels). Other steps (e.g., an ExecutiveOrder by President Clinton to reduce toxic wasteemissions from Federal facilities to one half by1999) could encourage development and marketsfor alternative products. In some cases, otherpolicy objectives may slow adoption of alterna-tive products. Changes in procurement policiescan be highly controversial, and provoke heatedopposition by affected industries. As part of theOption 6 evaluation, or separately, Congressmight call on the administration to assess theearly experiences with these changes in procure-ment policies.

TECHNICAL ASSISTANCE TO SMALL ANDMEDIUM-SIZED COMPANIES

Technical assistance programs can help manu-facturers, particularly small and medium-sizedenterprises (SMEs), understand and cope withenvironmental regulations, and select low-costalternative technologies and approaches, such aspollution prevention. Most States and a fewlocalities have pollution prevention programs,which provide information and technical assist-ance services.

The Federal Government provides some fund-ing and technical support to these programs.However, resources are small relative to need.Some EPA-supported programs are housed inState environmental agencies. Wary manufactur-ers may not use these services, for fear oftriggering enforcement actions.

Pollution prevention is one of several kinds ofState or federally supported technical assistance.Company officials may view other needs (e.g., for

g Robert Repetto, Roger C. Dower, Robin Jenkins, and Jacqueline Geoghega~ Green Fees: How a Tax Shift Can Workfor the Environmentand the Economy (Washington DC: World Resources Institute, November 1992).


manufacturing modernization, worker training,

and quality improvement) as more important.Few programs provide fully integrated services;in some states, there may be separate technicalassistance programs for energy conservation,worker health and safety, pollution prevention,and technology modernization. Manufacturersmay not know which program to contact; thefragmentation of services thus limits opportuni-ties to offer pollution prevention in the context ofa manufacturer’s needs for productivity andquality improvements. Moreover, most programsfocus on fabrication and assembly industries, noton highly polluting process industries, such aschemicals or steel.

There are advantages to offering pollutionprevention, energy conservation, and manufactur-ing technology modernization in an integrated orcoordinated fashion. Providing services throughone-stop centers (or at least through closelycoordinated services) might improve efficiency,technical consistency, and cost-effectiveness. In-tegrated service organizations can respond to awide range of industry needs and can rely onexisting field staff for leads. These organizationscan aid technology transfer, by conveying infor-mation to firms about new technologies, and aidtechnology development by providing informa-tion to developers about industry needs. Asoutlined in Option 7 at the end of the section, thereare several alternatives Congress might consideras ways to provide integrated or coordinatedservices.

Such a broad mission might be given to orcoordinated with new manufacturing technologycenters administered by the National Institute ofStandards and Technology in the CommerceDepartment. 10 While some of these centers havealready been established, President Clinton has

proposed expanding this system, as have variousbills proposed in the 103d Congress. The missionof these centers could be broadened to includeenergy conservation and pollution preventionalong with training, modernization, and quality.Such a move could help integrate pollutionprevention into the service infrastructure regu-larly used by manufacturing firms. The centerswould not need to offer these services directly, forthey could coordinate with the providers.

One disadvantage of this more integratedapproach is that it might not target the firms thatproduce the most waste or cause the mostenvironmental damage.

11 If the top priority is to

reduce pollution and wastes, putting pollutionprevention programs in existing manufacturingmodernization programs may dilute this focus.However, this matter could be addressed bymaking sure that the environmental component ofthese organizations concentrate on achievingpollution and waste reduction goals.

EVALUATION OF TECHNOLOGIES ANDDISSEMINATION OF INFORMATION

Objective information about performance ca-pabilities could make it easier to commercializeinnovative American environmental technolo-gies. Some users of environmental technologiesare reluctant to try innovative technologies forfear that they will not meet requirements or willbe more costly than anticipated. Rather than takethe risk, they may stick with established technolo-gies that could be less cost-effective for theenterprise and less effective from an environ-mental standpoint. Independent technology eval-uations might help overcome some of the uncer-tainties accompanying new environmental tech-nologies; hence, Congress might wish to encouragesuch evaluation activities (see Option 8 at the endof this section).

10 S. 978 as rcport~ t)y the Senate Environment and Public Works Committee would call on EPA and the commerce Depammt to ent~into agreements so that EPA would provide technical assistance and support to the centem for this purpose.

I I For example, many State pollution prevention programs have encouraged pollution prevention in sectors such as aUtO re@, @cl*&small print shops, and other local sewice firms. The environmental problems of these firms might get less attention m a program with moreof an economic development or competitiveness focus.


Evaluation information also could aid U.S.environmental firms in marketing their productsand services abroad by providing potential cus-tomers with a more solid basis for choosingamong technologies. Often, such clients holdEPA in high regard as an unbiased source ofenvironmental information. While EPA does not,and probably should not, endorse particulartechnologies or vendors, some U.S. companiessay that lack of governmental endorsement can bean impediment in marketing abroad, and claimthat foreign competitors sometimes obtain suchblessings from their home governments.

Legislation proposed in the 103d Congresswould authorize more extensive Federal supportin evaluation of environmental technologies.Among its other evaluation programs, S. 978 (theproposed National Environmental TechnologyAct of 1993), would establish an EPA program toevaluate, verify, and disseminate performanceand cost information on environmental technolo-gies. One function of this program would be todevelop protocols and testing procedures. Aclearinghouse would disseminate informationabout technologies that meet or exceed evaluationguidelines. Another bill, the House passed ver-sion of H.R. 820, the proposed National Competi-tiveness Act, would authorize the CommerceDepartment’s National Institute for Standards andTechnology to serve as testbed for advancedtechnologies, including prototype clean manufac-turing systems.

EPA already sponsors some evaluations ofinnovative technologies developed by U.S. ven-dors, with the vendor picking up most of the costs.Its Superfund Innovative Technology Evaluation(SITE) Program is the largest and best knownexample. Technology developers pay to design,install, and operate their technologies while EPA

pays for site preparation and evaluation. SmallerEPA efforts are the Municipal Innovative Tech-nology (MITE) Program and the Clean Technol-ogy Demonstration Program.

Evaluations would not necessarily need to befederally administered; federally supported cen-ters could perform this function. For example, theNational Environmental Technologies Applica-tions Corp. (NETAC), a nonprofit corporationfounded by EPA in 1988 and associated with theUniversity of Pittsburgh Trust, has providedindependent laboratory evaluations on oil biore-mediation agents. EPA apparently prefers anindependent entity to oversee testing and reviewof technical data on environmental technologies. 12

Evaluation programs have their drawbacks.The SITE program received early criticism forevaluating few truly innovative technologies .13 Inaddition, vendor demand for evaluations couldexceed available resources; in such cases, evalu-ated technologies might receive a competitiveadvantage over comparable or even superiorunevaluated technologies. Nonetheless, perform-ance verification could be a useful step that wouldhelp domestic and foreign customers chose amongalternatives. It could be a low cost way to promoteU.S. exports in an environmentally desirable way.(See subsequent discussion of Option 23).

ENGINEERING AND BUSINESS EDUCATIONIf U.S. industry is to better meld environmental

with competitive demands, it will need engineerswho are adept at integrating environmental con-siderations with other cost, quality, and technicalperformance criteria, and managers who under-stand how different environmental solutions im-pinge on cost, quality, and marketing. Environ-mental goods and services firms also will needsuch technical and managerial talent to offer

12 ‘CEpA C~IS for ~&pen&nt Environmental Technology Review Office,’ Inside EPA, Aug. 6, 1993,

13 Offl% of Tec~olo~ Assessment Coming Clean: Supetjimd Problems Can be Solved, OTA-ITE-433 (washgtom DC: Us.Government Printing OffIce, 1989), pp. 182-183.


customers a full range of environmentally andeconomically sound solutions. Yet such environ-mental matters are addressed on the periphery, ifat all, in most engineering and business educationprograms.

In some engineering schools, environmentalengineering programs train students to design andoperate end-of-pipe pollution control and dis-posal systems. These students may have a limitedunderstanding of the industrial production proc-esses in which pollution prevention opportunitiesarise.

Students in traditional engineering disciplines(chemical, civil, electrical, and mechanical engi-neering) and related areas (e.g., architecturematerials engineering, food science, and indus-trial engineering) usually do not receive muchtraining on how to consider environmental factorsin designing or modifying products, processes,and structures. *4 Environmental criteria, such asemissions standards, recyclability, and toxicity ofmaterials, tend to be thought of as externallyimposed constraints that are often treated as anafterthought in the design process, As a result,opportunities to improve the environmental per-formance of industrial processes and productswhile keeping costs low and quality high may lieunrecognized. Thus, integration of environmentalissues and perspectives in the mainstream engi-neering curriculum could be useful.15

As is discussed in Option 9 below, Federalagencies, such as the National Science Founda-tion (NSF) and the Office of EnvironmentalEducation at EPA, might contribute to efforts tochange engineering education. For instance, NSFcould assemble and disseminate course materialsfor use in undergraduate curricula. It could help

professors and lecturers learn how to addressenvironmental factors in their courses. NSF couldsupport or complement some existing efforts. Forinstance, the Center for Waste Reduction Tech-nologies of the American Institute of ChemicalEngineers has developed a manual for incorporat-ing pollution prevention design and homeworkproblems in chemical engineering courses. Gov-ernment, industry, professional associations, anduniversities can work together to produce and usethese educational materials. Such materials couldhelp in training undergraduate engineering stu-dents and in retraining practicing engineers, suchas those leaving defense-related jobs or partici-pating in continuing education.

Business schools tend to treat environmentalissues as a peripheral matter, Their students areseldom taught to account for and properly assignall environmentally related costs. Without ade-quate environmental accounting and accountabil-ity, managers and engineers may not attack theirenvironmental problems in the most cost-effective way. The costs of waste disposal maynot be assigned to individual processes andproduct lines, for example. Regulatory costs,potential liability, or loss of community orcustomer goodwill also may not be fully takeninto account. Finally, ways to mesh environ-mental performance with better quality and pro-ductivity are seldom studied. The analogy be-tween environment and quality is discussedfurther in chapter 8.

Some business schools are beginning to re-spend.16 However, only about 1 in 10 has or isdeveloping environmental courses .17 The FederalGovernment, in cooperation with professionalassociations and universities, could support as-

14 For discussion of is~es relat~ to incorporation of environmental factors in the design of products, see U.S. cOfWMS office ofTechnology Assessment, Green Products by Design: Choices for a Cleaner Environment, OTA-E-541 (Washingto~ DC: U.S. GovernmentPrinting OffIce, October 1992).

15 Rob@ A. FrOSch and Nicholas E. Gallopoulos$ ‘‘S~te@es for Manufacturing, ‘‘ Scientific American, vol. 261, No. 3 (September 1989),pp. 144-152.

16 J.E. Post, “The Greening of Management, ” Issues in Science and Technology, vol. 6, No. 4 (summer), pp. 68-72.17 ~omation provided by SUM of he Management Lnstitute for Environment and Buskess, AU8USL 1992.


sembly and dissemination of relevant coursematerials to business schools (see Option 9below). For example, the Management Institutefor Environment and Business seeks to encouragebusiness schools to integrate environmental con-cerns into their curricula. It has produced a bookof case studies on environment and industrialcompetitiveness.

OPTION 6: Direct the administration to iden-tify and evaluate that best choices among eco-nomic incentives (e.g., accelerated depreciation,loans, or fees) to speed diffusion of cleanertechnologies to industry. EPA, the Department ofCommerce, the Department of Energy, and theTreasury Department could examine the competi-tive, environmental, and fiscal impacts of suchapproaches. Congress also might direct the ad-ministration to provide initial evaluation of its useof Federal procurement to achieve environmentalgoals-an approach promulgated in several re-cent executive orders.

OPTION 7: Make pollution prevention andenergy conservation specific mission objectivesand services to be provided or facilitated bymanufacturing extension services. (Expansion ofthese services is proposed in legislation before the103d Congress.) Fund efforts at the State andlocal level, through existing industrial moderni-zation organizations, to help promote pollutionprevention. Use funding currently channeledthrough several existing Federal technical assist-ance programs to support full-service industrialextension, including manufacturing moderniza-tion, pollution prevention, energy conservation,worker training, and worker safety and health.

Alternatively, Congress could expand EPA’sPollution Prevention Incentives for the States(PPIS) program or the Waste Minimization As-sessment Centers (WMAC), and direct that somegrants be provided to State industrial extensionservices. PPIS provides $3 million a year to Statepollution prevention technical assistance pro-grams. The three WMACs receive $200,000 ayear and are housed at universities where faculty

and staff perform free, in-depth waste minimiza-tion assessments for small and medium-sizedbusiness.

OPTION 8: Direct EPA (either itself or througha center) to undertake independent evaluations ofthe technical, environmental, and economic per-formance of innovative environmental technolo-gies. As remediation evaluation programs alreadyexist, this activity could be oriented to pollutionprevention and control and cleaner technologyoptions. Firms seeking to have their technologiesevaluated would pick up most of the costs.

Provide resources to ensure timely dissemina-tion of results, including possible translation intoforeign languages.

OPTION 9: Provide seed funds through NSF orthe EPA Office of Environmental Education forintegration of environmental components intoengineering school and business school curricula.The objective should not be to produce newcourses labeled pollution prevention (in the caseof engineering schools) or business and theenvironment (at business schools) but to incorpo-rate environmental methodologies into basic cur-ricula.

1 Issue Area C. Regulatory Reform andInnovationIt is difficult to generalize about the U.S.

system of environmental regulations, even whenthe focus is just on manufacturing firms. How-ever, there are some common characteristics. Forexample, there continues to be a focus on singlemedia; there tends to be more emphasis oncontrolling or treating pollution after it has beengenerated; and there is relatively little directencouragement for technology development orinnovation.

As discussed in chapter 9, traditional ap-proaches to regulation and enforcement some-times make innovation difficult. Complying firmsalso can find it difficult to implement the lowestcost approaches.


For example, it has been difficult to integratethe mission of pollution prevention into EPA’soperations. (Recent developments, such as theJune 1993 pollution prevention policy statementfrom the EPA Administrator, may speed up theprocess. )18 Pollution prevention often has beencarried out as a separate function, with projectsperipheral to EPA’s main regulatory and enforce-ment role. Many regulations and rules reinforcereliance on end-of-pipe technology. Even forperformance based regulations, personnel respon-sible for permitting may not have adequatetraining to recognize appropriate opportunitiesfor use of pollution prevention alternatives.

Strong environmental regulations and enforce-ment are essential to encourage firms to adoptpollution prevention and to encourage innova-tion. However, prescribing pollution preventionpractices or techniques could make it difficult formanufacturers to develop pollution preventionsolutions that make the most sense for theiroperations. Better results might be achieved byencouraging (or even mandating) pollution pre-vention planning, modifying regulations to allowmore pollution prevention, and increasing techni-cal assistance and support for technology devel-opment.

As long as strong regulation and enforcementare fully maintained, steps could be taken toexplore approaches that allow firms to use morecost-effective approaches without jeopardizingenvironmental goals. Innovative experiments con-ducted in many places around the country arepromising and could be attempted elsewhere. Forexample, full-facility studies examining all pol-lutants and waste generated by different types ofindustrial facilities can be useful for guidingcompany pollution prevention efforts and helping

regulators establish more effective but less costlyenvironmental protection requirements. The AmocoYorktown study, jointly managed by Amoco Co.,EPA, and the Commonwealth of Virginia, identi-fied many pollution prevention and control op-tions that could achieve greater pollution reduc-tion than now required by regulation. Suchstudies done for other types of facilities, such aspulp mills, or various classes of chemical plants,would be useful.

EPA has been assessing additional steps thatmight be taken to encourage innovation, such assetting up reinvention laboratories (or pilot proj-ects) staffed by experienced EPA and state permitwriters. 19 Concern exists within EPA about itsauthority to undertake such efforts .20 If Congresswishes to encourage more innovation, it couldexplicitly authorize and fired options such asthose listed for Issue Area C in table 2-3 anddiscussed below.

OPTION 10: Congress could provide funds toEPA for a pilot project program with industry todemonstrate regulatory approaches that give firmsthat are first rate environmental performers morechoice in the means they use to meet environ-mental requirements. Firms showing commit-ment to environmental excellence (e.g., signifi-cant pollution prevention efforts, participation inEPA voluntary programs, and willingness toconduct facility-wide environmental and pollu-tion prevention audits) might be eligible for suchbenefits as:

coordinated multimedia permitting and inspec-tion (rather than single media permits withmultiple inspections),facility-wide emission caps, rather than indi-vidual source limits,

IS Memomnd~ of Cml M. Browner, Adminis~ator, to all EPA employees, June 15, 1993, titled “POhhOn prevention Policy statement:New Directions for Environmental Protection. ”

IQ For discussion of this concept and severat other steps to encourage innovations, see U.S. Environmental Protection Agency, ‘‘Report ofEPA’s Environmental Technology Team for the National Performance Review, ’ August 1993, mimeo.

m Ibid., p. 17.


Table 2-3--Issue Area C. Regulatory Reform and Innovation


co

10 Set up an EPA pilot project to experiment with innovative permits forfirms that are first rate environmental performers M N Y ‘? 7

11 Give incentive grants for regulatory reform and innovation projects toStates and firms M N Y ? ?

12 Upgrade training of permit and regulation writers M N Y ? ?13 Set up industry sector Consortia/cluster groups s Y Y 7 ?

14 Modify R&D permitting to better accommodate R&D, such as fixed sitepermits for R&D centers s Y Y Y 7

15 Set up an environmental cooperation institute and sector cooperationcouncils s Y Y ? ?

a Sfima[l ($Io mjllion or Ies); M_m~erate ($ I o to $100 million); L-large ($100 million plus); a range indicates that it depends on how the optionis implemented.

b Y=Yes; p-potentially yes; N-no; ?=effect is unclear

SOURCE: Off Ice of Technology Assessment, 1993,

use by participating firms of any technicalapproach that meets environmental standards,andaccelerated permitting in some circumstances.

OPTION 11: Congress could give EPA fundsto make incentive grants for innovative regulatoryreform projects, and funds for innovations byState environmental agencies. For example,grants could be used to conduct full-facilitystudies examining all sources of pollution andpollution prevention options, provide training toimplement new approaches, integrate informationmanagement technologies into compliance moni-toring, and conduct multimedia inspections. Inaddition, EPA could actively work to encouragecoordination, and disseminate information aboutthe States experiences.

* * *While experience with such approaches as

those in Options 10 and 11 is growing, a number

of barriers and concerns would need to beaddressed before these techniques could be putinto widespread use. Assurance would be neededthat health and environmental standards would bemaintained. Safeguards to guard against, andquickly detect, abuses would be needed. (Hence,new techniques allowing continuous monitoringof emissions would help.) It also would bedifficult to develop criteria to use in determiningwhat constitutes a good environmental record forqualifying fins. Concerns exist that flexibilitycould lead to favoritism or foreclose enforcementoptions.

For all these reasons, evaluation of the activi-ties undertaken under Options 10 and 11 would beessential to identify the most effective approachesand needed areas for improvement. EPA could bedirected to provide for such evaluations, and toprovide technical assistance to states seeking toimplement these approaches on a wider basis.


Widespread use of these approaches couldstress regulatory agencies now organized alongmedia lines for end-of-pipe compliance. Theskills needed by permit writers would changefrom narrow and specialized to broad based, yetthe permit writers would need strong technicalbackgrounds to deal with a more complicatedpermitting process and to judge whether alterna-tive approaches are appropriate. Provision wouldneed to be made for training.

OPTION 12: Congress might increase EPA’sresources to hire or train inspectors and permitwriters to recognize and evaluate a variety oftechnical approaches for meeting environmentalstandards.

* * *

Regulations and permitting procedures cansometimes impede technology innovation anddiffusion. Best available technology (BAT) orsimilar standards can assure successful environ-mental technology developers of a market, butcan make acceptance of alternative environ-mental technologies harder, Complying firmsmay install technologies used as benchmarks byregulatory agencies on the assumption that it isbetter to stick with proven technologies that seemto be endorsed by the regulations. While BATstandards are favorable for suppliers of approvedtechnology, they may inhibit development of newand innovative technology by other vendors anddevelopers.

Some of the impediments might be overcomeif there were closer links between technologydevelopers and regulators, EPA could work withindustry-sector technology organizations (e.g.,the organizations discussed in Option 5) onenvironmental issues facing the industry, includ-ing the implications of foreseeable regulations fortechnology priorities, development, and diffu-sion. This task could be assigned to industry-sector groups at EPA with expertise on a givenindustry. Better training of permit writers, so thatthey might more confidently judge innovativealternatives, would also help.

OPTION 13: Congress could direct EPA toexpand its industry sector-based activities. EPAcould be given resources to develop more sectoralspecific expertise at EPA and within the States.With more industry sector expertise, efforts todevelop regulations that realistically anticipatecompliance problems could be enhanced.

* * *

Firms complain about the complexity, uncer-tainty, cost, and time required to obtain aninnovative environmental technology R&D per-mit under RCRA or under ad hoc proceduresunder the Clean Air Act (CAA) and Clean WaterAct (CWA). Some technology developers havemoved technologies abroad for development andtesting. Adjusting procedures to meet the needs ofinnovators, provide permits for freed R&D andtesting facilities, and develop quicker and morepredictable permitting might help U.S. innova-tors, but would need to be done in ways that avoidthe potential for abuses.

OPTION 14: Modify permitting in RCRA,CAA, and CWA to better accommodate research,development, demonstration, and testing. R&Dpermits lack the flexibility required to encourageresearch; ad hoc administration of innovativetechnology testing lacks predictability. Congressmight therefore institute streamlined and flexiblepermitting for innovative technology, includingpermitting of testing centers.

* * *

The options discussed above are intended tohelp stimulate innovation. However, they wouldstill be controversial. While experimentation withsuch procedures is already underway, even somedemonstrably successful approaches might notwin acceptance with industry, environmentalorganizations, or regulators. Over years of debateabout regulations, regulated industries often haveconcentrated more on reducing levels of regula-tion than on improving the efficiency of theregulatory system. Many in industry fear that newapproaches to regulation, such as pollution pre-vention, could lead to more burdensome require-ments. For their part, many environmental groups


have been more concerned with defending exist-ing gains than in making the system deliver equalor even greater environmental benefits at lowercosts. Within regulatory agencies, many arereluctant to embrace a new system that departsfrom accustomed ways of doing things. Also,managers may resist efforts to break downorganizational walls, particularly when resourcesare scarce.

Without a sense of trust and commitmentamong these key parties, the cooperative basis fordeveloping more effective and efficient regula-tory approaches will be limited, Thus Congressmight consider ways to build more cooperativerelationships between government, industry, andenvironmental organizations, as in Option 15.

OPTION 15: Congress could fund an Institutefor Environmental Cooperation to promote inno-vative cooperative efforts between industry, envi-ronmental groups or other nongovernmental or-ganizations, and government. The institute couldbe a forum for collaboration, bringing variousparties together to explore new approaches and tocraft new solutions. Moreover, the institute couldstudy innovative cooperative efforts and dissemi-nate lessons learned from these approaches.

Universities could also serve as forums forconsensus building and collaboration. One exam-ple is an effort at the Massachusetts Institute ofTechnology in which industry, nongovernmentalorganizations, regulators, and academics are ex-amining issues related to industrial chlorine use.Such efforts could be supported as part of anInstitute for Environmental Cooperation.

Congress might also want to explore creatingsectoral industry councils within EPA. A smallnumber of councils might be formed for thoseindustries with the greatest environmental im-pacts, with membership from industry and envi-ronmental organizations. If EPA moves towardsectorally based, multimedia rulemaking, thesecouncils could support these efforts.

# Issue Area D. Export Promotion,Development Assistance, andEnvironmental Firms

Compared to several competitors, the U.S.Government provides relatively little support forU.S. manufacturing firms for exporting. RecentU.S. laws give new legislative priority to Federalexport promotion programs; someplace emphasison environmental technologies and services spe-cifically. Several bills pertaining to promotingexports of U.S. environmental technologies andservices also have been proposed in the 103dCongress.

Responding to a congressional directive, theClinton administration issued a proposed exportpromotion strategy with over 60 recommendedactions in September, 1993, While many of theproposed steps do not require congressionalaction, debate about level of funding and supportfor these new programs will continue. Theadministration also issued an environmental ex-port strategy in November 1993 just before thisreport went to press.

While most of the environmental market is inadvanced industrial countries, markets in newlyindustrialized countries are growing rapidly. Mostdeveloping countries have limited experience inaddressing environmental matters. However, de-veloping country environmental problems aregreat, and some are beginning to invest inenvironmental protection. They thus have be-come a focal point in debate about policies andprograms to promote exports of environmentaltechnologies, not only in this country but in othercountries with large environmental industries. Inthis case, alternative governmental roles in pro-moting exports need to be evaluated in thebroader context of encouraging internationalcooperation to improve the environment, which isthe shared heritage of all countries, and in

Chapter 2–Issues and Options I 59

Table 2-4—issue Area D. Export Promotion, Development Assistance, and Environmental Firms


Multilateral cooperation for technical assistance:16 Work to setup a program to help developing countries identify needed

environmental technologies17 Make cleaner production/pollution prevention a priority in multilateral

aidBilateral Foreign Assistance/Export Promotion:18 Fund EPACT programs for USAID- DOE transfer of innovative energy and

environmental technologies to developing countries19 Increase Trade and Development Agency funding for feasibility studies20 Encourage U.S. firms to emphasize training of developing country

personnel in equipment and services contractsExport Promotion21 Conduct early oversight on the Trade Promotion Coordinating Commit-

tee’s environmental working group strategy and proposed budget22 Encourage U.S. foreign commercial interactions through:

● increasing overseas commercial officers or contractors● increasing outreach to environmental industry associations● operating through environmental business centers here and Ameri-

can Business centers overseas.23 Disseminate information about U.S. technologies abroad24 Provide resources for one-stop shopping and regional centers to help

smaller firms access and make use of available export assistance25 Consider ways to expand export financing while keeping environmental

safeguards

s

M

LM-L

M

s

MM

Ms

M

LC

N

N

Y

Y

Y

Y

NN

YY

YY

7 Y YN

N Y Y

NY

YY

PP

NN

YY

YY

yc ? Y P

yc ‘? Y P

a S-ma[l ($ I o million or less); M-moderate ($1 O to $100 million); L-large ($100 million plus); a range indicates that it depends On how the optionis implemented.

b y-yes.; p-potentially yes; N=no; ?-effect is unclearC ~SumeS action is taken after review Or evahJatiOn


furthering developmentally sound progress in thedeveloping world.

Discussed below are three matters that bear onwhere to draw the line between competition formarkets and environmental cooperation: the roleof multilateral aid to developing countries; linksbetween development assistance and export pro-motion; and the Federal export promotion role

more generally. A number of options, summa-

rized in table 2-4, are discussed.This ordering is deliberate: this report finds

that efforts by developed countries to promoteenvironmental exports need to take place withina context of bilateral and multilateral actions toimprove the environmental capabilities of devel-oping countries.


There is a potential for tensions betweendevelopment assistance objectives aimed at meet-ing the needs of developing countries (e.g., forenvironmentally sound, sustainable development)and the desire of many donor countries to realizecommercial benefit from their aid (e.g., encourag-ing exports of environmental technologies whetheror not the particular technology is best suited forthe developing country). A background paperprepared for this assessment, Development Assist-ance, Export Promotion, and EnvironmentalTechnology, discusses this issue in some detail.21

MULTILATERAL COOPERATION FOR TECHNICALASSISTANCE

Developing countries have a great need forappropriate environmental technologies and serv-ices. Yet few developing countries have thenecessary information or technical resources tomake the best selections; nor can they be sure ofthe objectivity of other nations in providingtechnical help when commercial transactions areinvolved. These concerns might be addressedthrough multilateral and bilateral efforts to pro-vide developing countries with technical informa-tion and assistance about environmental technol-ogies and services.

As discussed in Option 8, U.S. agency supportfor independent evaluations of environmentaltechnology could be expanded. Expansion toinclude more emphasis on evaluation of preven-tion and control technologies as well as remedia-tion could benefit U.S. firms seeking foreignclients. However, even with independent infor-mation, officials in developing countries often donot have enough information about availableoptions. In some cases, relatively simple technol-ogies may suffice. Information and technicalassistance provided by national governments orby firms could be suspect. Hence, a multilateralapproach could be helpful.

One possibility (see Option 16 at end ofsection) would be for the U.S. Government(acting through the Department of State, USAID,or another agency) to work with other countries toexpand the ability of international agencies likethe United Nations Environment Program toprovide objective information and technical ad-vice about environmental technologies (includingcleaner technology choices).

The costs of needed environmental improve-ments in developing countries could be great.With end-of-pipe solutions, developing countriesmight easily need to invest over $50 billion peryear (1 percent of their projected gross domesticproducts in the year 2000) to factor environmentalmatters into their development plans.

Most of the costs of environmental protectionin developing countries will need to be paid for bythe developing countries themselves or throughresources made available through increased tradeand investment. However, bilateral and multilat-eral aid might serve a catalytic function inprompting action. As discussed in OTA’s Devel-opment Assistance, Export Promotion, and Envi-ronmental Technology, industrial countries pro-vided about $5 billion in bilateral and multilateralenvironmental aid in 1991.22 This aid has proba-bly increased; Japan claims its 1992 environ-mental aid was more than twice that in 1991—over $2 billion.

Cleaner technologies and pollution preventionare promising options to keep life cycle costs forenvironmental infrastructure manageable. Somepollution prevention approaches are very inex-pensive, although requiring technical assistanceand training of personnel. In other cases, cleanertechnologies entail higher front end costs thanconventional equipment; however, they can bemore attractive than conventional options whenoperating and maintenance costs are considered.Technical assistance to provide reliable informa-

Z1 US. con~ms Office of TeclmoIogy Assessmen~ Development Assistance, Export Promotion, and Enw”ronmental Technology,OTA-BP-ITE-1O7 (Washington, DC: U.S. Government Prinitng (Mce, August 1993).

22 Ibid.


tion about alternatives could be useful to develop-ing country decisionmakers. U.S. firms and con-sultants are among the leaders in providing suchservices.

The United States offers substantial assistanceto developing countries to enhance their environ-mental management capabilities.23 If Congresswished to pursue more multilateral activities tohelp develop information needed for environmen-tally and economically sound choices, the follow-ing options might be considered:

OPTION 16: Support establishment of a tech-nical information program by an internationalagency such as the United Nations EnvironmentProgram, the United Nations Development Pro-gram, or the Global Environment Facility toprovide objective information and technical ad-vice about environmental technologies to devel-oping countries.

OPTION 17: Through multilateral channels,support cleaner technology and pollution preven-tion services to developing countries in additionto the existing USAID bilateral environmentalpollution prevention project.

BILATERAL ASSISTANCE ANDEXPORT PROMOTION

The United States Government now spendsabout $650 million per year on environmental andrelated energy aid to developing countries. U.S.aid programs are not as overtly commercial assome other countries’ programs are perceived tobe. Use of aid to support commercial transfer ofU.S. environmental technologies has been lim-ited. However, some forms of assistance canbenefit a donor country’s commercial goals inways that are compatible with the developmentaspirations of developing countries.

Some recently initiated public-private partner-ships aim to involve U.S. industry in efforts by

developing countries to address environmentalproblems. The United States-Asia EnvironmentalPartnership (US-AEP), launched in 1992, workswith U.S. agencies and firms to encourage use ofU.S. technologies and expertise in Asian countryenvironmental efforts. It is too soon to evaluateUS-AEP. If it succeeds, US-AEP’s regionalemphasis might be attempted in other promisingmarket areas. The U.S. Environmental TrainingInstitute (USETI), another recently launchedpublic-private partnership, brings business andgovernmental decisionmakers to the UnitedStates for training through which U.S. firms canshowcase their technologies.

Newly authorized programs, such as major newenvironment and energy technology transfer pro-grams called for in the 1992 Energy Policy Act,emphasize an USAID role with the Department ofEnergy in transferring technologies to developingcountries, in part because of the potential benefitsto U.S. firms and the U.S. economy. As indicatedin Option 18, Congress might consider fullerfunding for these programs.

Helping developing countries with capacitybuilding also can bring commercial benefits todonors. Support for the development of centrallaboratory facilities-equipment and training—for the environment agencies of developingcountries could create preferences for U.S. stand-ards, protocols, instruments, and other equip-ment. Such laboratories may set nationwidestandards for environmental monitoring that mayproduce further orders for U.S. equipment fromprivate sector and State/provincial/municipal lab-oratories. 24

Technical training is another area where adonor’s commercial interests and the recipient’sdevelopmental and environmental interests maycoincide. The United States has an advantage inthat many engineers in developing countries have

23 Ibid., pp. 58-61.m J~pm for fi~ce, ~ ~d~ me Enviro~en~ mgement Center for the Indonesian environmental agency. me Center ~clude$ a

central reference laboratory that will be outtltted with Japanese instruments. Some expect that provincial and private laboratories might adoptsimilar Japanese instruments so that they will be compatible with the central government laboratory.


received university education here. programs likeUSETI offer a way to expose developing countryofficials in both the public and private sectors toU.S. technology. However, there is also a need totrain developing country personnel who willoperate and maintain equipment and plants oncefacilities are constructed. Support for operationstraining could be an effective way to meet bothdevelopment assistance and export promotiongoals.

Grants to developing countries for projectfeasibility studies conducted by U.S. firms isanother form of support; often, these studies leadto subsequent purchase of technologies or prod-ucts made in the United States. The U.S. Tradeand Development Agency (TDA) contends thatits feasibility study grant program generates over$20 in U.S. sales for every Federal dollar spent.Compared to some other countries, such as Japan(over $200 million per year), funding for TDA islow—about $40 million in fiscal year 1993; anincrease to $60 million has been proposed. Sincemany TDA feasibility studies contain environ-mental components, such an increase wouldlikely encourage more environmental exports. Inits recent export promotion strategy, the Clintonadministration proposed consolidation of all Fed-eral feasibility studies for major projects primar-ily intended to promote U.S. exports.25

Compared to some donors, the United Statesprovides little aid for capital projects—projectsthat often involve internationally traded goodsand services. If undertaken in a developmentallyand environmentally sound way, funding capitalprojects could create many commercial opportu-nities for U.S. firms. Some would contend thatsuch a change would ruin months to years of U.S.efforts to encourage other donors to reduce theiruse of mixed credits and other tied aid loans.

If Congress wishes to place more emphasis onlinks between foreign aid and environmentalexport promoting, it might consider several op-tions:

OPTION 18: Fund provisions in the EnergyPolicy Act of 1992 (Public Law 102-486) that callon the Secretary of Energy, acting throughUSAID or other Federal agencies, to encouragetransfer of environmentally preferable energytechnologies to developing countries. Three newprograms were authorized: an innovative envi-ronmental technology transfer program, a cleancoal technology transfer program, and a renew-able energy technology transfer program. (Theauthorized funding level for each of these programsis $100 million per year through fiscal year 1998.)Also fund the developing country training programon renewable energy authorized by the law.

OPTION 19: Increase funding for the Tradeand Development Agency for project feasibilitystudies.

OPTION 20: Encourage U.S. firms to providetraining of developing country personnel for useof U.S. equipment and services. This might beaccomplished through TDA funds.

EXPORT PROMOTION POLICY AND STRATEGYThe Export Enhancement Act of 1992 gave

new emphasis to the need for better coordinatedFederal export promotion efforts, including thosepertinent to environmental exports. In addition,several environmental export promotion bills hadbeen proposed in the 103d Congress.26

The Clinton administration’s initial exportpromotion strategy, prepared in response to theExport Enhancement Act by the Trade PromotionCoordinating Committee (TPCC), was issued in

~ ‘Trade Romotion Cmrdinafig Committee, ~owarda~ationaz ~orr~rraregy (Washington, DC: U.S. Government mt@ Office, Sept.30, 1993), p. x.

26 See, for e~ple, H.R. 2112, tie propos~ National Environmental Trade Development Act of 1993, as reported by the HOUX MerchantMarine and Fisheries Committee on June 30, 1992; Hi?. 2096, to promote exports of environmental technology, goals, and semices; S. 979the proposed Greentech Jobs Initiative Act of 1993; and S. 1074, the proposed National Environmental Trade Development Act of 1993.


September 1993.27 The Act also gave statutorydirection for an environmental trade workinggroup as part of the TPCC. The Department ofCommerce, the Department of Energy, EPA andsome other Federal agencies had just issued anenvironmental export strategy when this reportwent to press.

28 Congress could monitor its

priorities and implementation plans, includingmechanisms for private sector involvement andpriorities for the export potential of cleanertechnologies (Option 21).

Federal Agency Export Promotion Budget—Several U.S. agencies and programs work topromote U.S. exports. Five agencies, the Com-merce Department, Eximbank, the AgricultureDepartment, USAID, and the Small BusinessAdministration (SBA), account for 90 percent ofFederal outlays and most Federal field opera-tions.29 Other agencies with important roles in-clude TDA and the Overseas Private InvestmentCorp. (OPIC). Numerous other agencies, includ-ing DOE and EPA, may have some involvement.

The Export Enhancement Act charged theTPCC with proposing an “annual unified” Fed-eral export promotion budget. In its initial yearunder the new Act, the TPCC was unable toaccomplish this--deferring development of thebudget proposal to the fiscal year 1995 budgetprocess. A particularly thorny issue concernsagriculture’s budget share: according to the U.S.General Accounting Office, agriculture, in fiscalyear 1991, accounted for 10 percent of U.S.exports, but 75 percent of the Federal exportpromotion budget.

Private Sector Role--A key question in exportpromotion generally, and in environmental ex-ports specifically concerns the nature and degree

of private sector involvement strategy develop-ment and priority setting. Some contend that thereneeds to be more private sector involvement indeveloping an environmental export strategy, andhave proposed creation of a public private councilto prepare an action plan to implement thestrategy after it is accepted. The danger is, ofcourse, that such a plan would become a form ofspecial pleading by its private sector members.However, some precedents already exist forindustry involvement in priority setting. Oneexample is the Committee on Renewable EnergyCommerce and Trade (CORECT) which couldbecome a model for other subsectors.

Financing-Inability to put together an accept-able financing package often limits U.S. fins’ability to secure overseas projects. Moreover, theU.S. Government has few funds available forcapital project financing in its aid program. Someother exporting countries offer more accessibleand lower cost financial help to their firms inexporting (see ch. 6). The U.S. Eximbank doesmaintain a War Chest, but it is used defensivelyto counter unfair financing packages put togetherwith support from other countries. Increasedfunding for the War Chest was authorized byCongress in 1992; it could be used to help U.S.environmental firms with financing when facedby a competitor with an unfair package. The WarChest also might be used proactively, to help U.S.firms finance projects that are more favorablefrom an environmental standpoint that might nototherwise be able to compete with lower cost,environmentally less favorable projects.

Another approach would be to give specialpriority to environmental projects by opening aspecial window for environmental loans at close-to-market rates at the Eximbank or other financ-

17 Toward a National Export Straregy, op cit., fOomOte 25.

28 Ronald H. Brown, Hazel O’Leary, Carol Browner, Environmental Technologies Exports: Strategic Framework for U.S. Leadership,November 1993.

19 Stataent of AlIan L. Mendelowitz, ‘ ‘Export Promotion: Initial Assessment of Governmenhvide Strategic PlarL” testimony before theHouse Committee on Foreign Affairs Subcommittee on Economic Policy, Trade and Environmen~ September 29, 1993, U.S. GeneralAccounting Office, GAO/T’-GGD-93-48, p. 9.


ing institutions. These institutions are now ex-pected to give special attention to projects that areenvironmentally preferable.

Foreign Commercial Service Representation—The United States & Foreign Commercial Service(US&FCS), part of the Commerce Department,maintains offices in this country and overseas. Itis understaffed relative to the commercial officesof several competing countries. (See table 6-6 inch. 6.) Congress could consider increasing thenumber of commercial officers. It also couldprovide resources to improve the timeliness andquality of commercial information from overseasoffices to U.S. fins. Such steps might helpincrease U.S. exports of goods and servicesgenerally, not just in the environmental arena.

In some countries, the few US&FCS officersthat are available must help sell a great range ofAmerican products, from textiles to nuclearpower plants. It might help if some commercialofficers could specialize in specific industries,such as environmental products where a poten-tially large market exists-a step authorized bythe Export Enhancement Act.30 While more offi-cers could be assigned overseas, it might becheaper to employ local nationals or American’sliving overseas. While increasing environmentalofficers would be useful in this sector, the moregeneral issue of staffing and resources for US&FCSremains.

A more far-reaching approach would be to setup American business centers in key market areasto facilitate interactions between U.S. firms andpotential clients. An environmental trade measureunder consideration in the 103d Congress, H.R.2112, proposes such an approach.

Information Clearinghouses and One-StopShopping—Many U.S. companies (including smalland medium-sized enterprises) find it difficult tomake use of government export assistance pro-grams. They may not know how to obtain

information about environmental opportunities inother countries. An information clearinghouseand a one-stop shopping process might help. Sucha process would allow a business to tap into allU.S. export promotion and financing programs ata single source. Small companies have specialdifficulties financing market research in othercountries, especially when they are inexperiencedwith exports.

Many potential exporters are unaware of exist-ing Federal export support services. Better mar-keting of these services, such as the 1-800-USA-TRADE DOC Trade Information Center, US&FCSregional offices, and the National Trade DataBank, through advertising in business and indus-try publications could heighten export awareness.

If Congress wishes to provide more emphasison environmental export promotion, it couldconsider several steps:

OPTION 21: Conduct early oversight of theadministration’s environmental export strategy,including mechanisms for private sector involve-ment in implementation, and the priority given toexport opportunities associated with cleaner tech-nologies.

OPTION 22: Provide resources for US&FCSto hire industry sector specialists, includingenvironmental industry specialists in key coun-tries.

OPTION 23: Call for dissemination of evalua-tions of U.S. environmental technologies topotential foreign customers (see also Option 8).

OPTION 24: Call for demonstration of one-stop shopping approaches for export promotion,using environmental technologies and services asone area of emphasis. This activity would gobeyond the initial efforts by United States-AsiaEnvironmental Partnership and the Committee onRenewable Energy Commerce and Trade toconsolidate application forms by providing arange of services to small businesses with limitedexport experience.

JO me US.&ia fivfiowen~ P~er5hip has rWe@ opened business ot%ces in a number of Asian capitals as a complement to US8CFCSin promoting U.S. environmental business opportunities.


Congress also might direct Federal exportpromotion programs to take steps to make U.S.firms more aware of available services by adver-tising in business and industry publications,increasing outreach to industry associations, cham-bers of commerce, and industry conferences, andincreasing support and collaboration with Stateand local export promotion programs and WorldTrade Center institutes.

A more far-reaching approach, proposed inH.R. 2112 in the 103d Congress, would be toencourage exports through a network of environ-mental business centers in the United States andAmerican business centers in countries withpromising environmental markets.

OPTION 25: Consider ways to expand exportfinancing while maintaining environmental safe-guards. One possibility would be to offset extracosts borne by U.S. firms in designing environ-mentally preferable projects when going upagainst a project proposed by a foreign firm withinadequate safeguards.

9 Issue Area E: International Trade andEnvironmental Policy

The potential for conflict between environmentand trade objectives seems to be increasing.Environmentalists contend that the environmentalimplications of the Uruguay Round trade discus-sions at the General Agreement on Tariffs andTrade (GATT) were overlooked by trade negotia-tors. Trade officials, for their part, are wary thatsome measures ostensibly taken to protect theenvironment could be used as means for tradeprotection.

U.S. positions on trade and environment issueswill need to be developed for internationaldiscussions over the next few years. Since 1990,the Organization for Economic Cooperation andDevelopment (OECD) has been sponsoring mem-ber country discussions about possible trade and

environment guidelines. Both trade agencies andthe environmental agencies of member countries(mostly, advanced industrial nations) are in-volved so that the discussions could lead togreater integration. However, some disputes in-volve developing countries, which are not mem-bers of OECD.

GATT, long inactive on trade and environmentmatters, has begun to review these questions fromthe trade perspective. A working group is examin-ing trade measures in international environmentalagreements, the trade transparency of nationalenvironmental regulations, and the trade effectsof environmentally oriented packaging and label-ing requirements. GATT groups have begun todiscuss possible ways to follow up on a recom-mendation from the United Nations Conferenceon Environment and Development (UNCED) thatmultilateral agencies work to make environmentand trade mutually supportable in the service ofsustainable development. While environmentalmatters have not been addressed in the UruguayGATT Round, the possibility of addressing tradeand environment questions in a subsequent GATTround has been raised by some trade officials.

An OTA background paper, Trade and Envi-ronment: Conflicts and Opportunities, discussessome of the difficulties entailed in developingU.S. positions during the initial period of theOECD discussions.31 The complexity and diffi-culty of the subject matter, and the number ofagencies involved (the United States Trade Rep-resentative, the State Department, the Environ-mental Protection Agency, and several othermission agencies) partly explained the slowprogress. More importantly, it was difficult toarticulate goals for U.S. negotiating positions,since trade, economic, and environmental per-spectives all need to be taken into account indefining U.S. positions. Such differences inperspective continue even when administrationschange. To assure adequate formulation of U.S.

S1 U.S. Con=ss, Office of Technology Assessment, Trade and Environment: Conflicts and Opportunities, OTA-Bp-~-94 (w~~gto~DC: U.S. Government Printing OffIce, May 1992).


Table 2-5-issue Area E. International Trade and Environmental Policy

Policy goals promoteda

a S+mall ($10 ~jllion or le~); M-moderate ($1 O to $100 million); l--large ($1 ~ million plus); a range inrJ@es that it depends on h~ the optionis implemented.

b y-y~; p-potentially yes; N-no; ?-effect Is un~ear


policy in this area, Congress may wish to conductoversight or provide guidance to the administra-tion (Option 26 discussed at end of this sectionand discussed in table 2-5).

NEGOTIATING ENVIRONMENTAL STANDARDSCompared to many other countries, the United

States imposes relatively strong environmentalstandards on industry. While there has long beenconcern about possible competitive impacts ofsuch standards, much of the research conducted inthe 1970s and 1980s found only minor impacts.However, recent efforts to liberalize trade andinvestment rules, and the emergence of severalnewly industrialized and advanced developingcountries as strong competitors, have againbrought attention to possible competitive im-pacts.

Environmental issues were central in the de-bate about the North American Free TradeAgreement for Mexico, the United States andCanada. Aside from the NAFTA itself, a sideagreement addressing environmental matters hasbeen negotiated. (Congress had just approvedNAFTA when this report went to press).

Environmental matters will almost certainlyarise if other efforts to liberalize trade areundertaken in Latin America, the Asian Pacificregion, or elsewhere. With or without tradeliberalization, there is special concern about thepotential for competitive and investment impactsfor the United States when firms in other coun-tries have lower labor costs as well as less stricthealth, safety, and environmental standards orenforcement.

Given this context, some have suggested thatthe U.S. Government should do much more to

Chapter 2–Issues and Options ! 67

encourage other countries to upgrade their envi-ronmental standards as part of a strategy toimprove the environment, expand opportunitiesfor U.S. environmental firms, and avoid negativecompetitive impacts for U.S. firms and workers.(Option 27). Legislation to that effect has beenintroduced in the 103d Congress.32

An aggressive effort to negotiate bilateral andmultilateral environmental agreements would bea departure from policies in the 1980s, and wouldrequire high level guidance and coordination.33

Such an effort would be controversial withdeveloping countries, and is not likely to succeedunless accompanied by help for capacity buildingand technical assistance. It might also be opposedby those who see such efforts as steps towardglobal bureaucracy. The strategy would be diffi-cult to carry out without continuing, high levelcommitment.

As discussed in Options 29-31, the potential foradverse competitive impacts also might be re-duced if there were more effective monitoring andenforcement of agreements, if businesses wereencouraged to adhere to developed country stand-ards throughout the world, and if other countriestook steps such as calling on business to reporttheir releases of toxic substances, as they arerequired to do in this country.

The approaches set forth in Options 26-31would be controversial, both here and in othercountries. Moreover, past efforts to adopt suchpolicies have had little success. Yet there could belong-term benefits for the environment and quitepossibly, a more positive climate in this country

for trade liberalization with countries that nowhave weaker environmental standards.

To some extent, officials in developing nationsmay believe they are in a prisoners dilemma withregard to environmental regulations. If one coun-try raises standards, it risks losing out on invest-ments by multinational corporations to neighborswith lower standards. As a result, standards maystay lower than they might be otherwise. Ifcompanies applied high standards in their facili-ties around the world, concerns about competitivedisadvantage from strict regulation would beeased. While some multinational companies (in-cluding a number of U.S. firms) say they do thisalready, they may well be the exceptions.

Some might argue that there is no competitivereason for such negotiations, because, they claim,strict environmental regulations can lead to in-creased competitive advantage. Firms withincountries having strong regulatory demands onindustrial processes can find that aggressiveenvironmental actions, particularly pollution pre-vention, make them more competitive relative toother domestic competitors. However, as a group,firms within countries with strict regulations willface higher compliance costs relative to foreigncompetitors in countries with more lax standardsand enforcement. When waste disposal costs andrequirements are high, firms can sometimes savemoney by controlling pollution and reducingwastes. However, these actions are usually notjustified from an economic perspective alonewhen waste disposal costs and requirements arezero or minimal. Still, as has been mentioned,

32 see fOr ~xmple, H R 1830 the propos~ Global Environmental Cleanup Act and H.R. 1446, the proposed W’estem HernlsPhere. .Envuonmental, Labor, and Agricultural Standards Act of 1993. Other approaches, such as treating the absence of strict standards as an unfairtrade practice for which countervailing duties might be imposed, have also been proposed. For discussion on how such approaches might beviewed in the context of the GATT, see Trade and Environment: Conjlicts and Opportunities, op. cit., pp. 66-68.

33 It should& noted tit congress has required strategies in the past. Section811 of the 1990 Clean Air Act Amendments (p.L. 101-549)required the President [o provide Congress with a strategy for addressing competitive impacts arising from differences in national standardsthrough ‘‘trade consultations and negotiations. ’ Although due in May 1992, the strategy had yet to be submitted in September, 1993. Section6 of the 1972 Federal Water Pollution Control Amendments (P.L. 92-500) directed the President to negotiate international agreements to applyuniform performance standards or uniform controls for some categories of pollutants in order to head off possible competitive impacts. Effortsby the Carter administration in 1978 to raise pollution and workplace heatth standards in Tokyo Round GA’IT talks encountered strongopposition from business and foreign countries. See H. Jeffrey Leonard, Are ErwironmentaI Regulations Driving U.S. Induso-y Overseas?(WaWngtonj DC: The Conservation Foundation, 1984), pp. 8, 13.


strong domestic regulations are often a key factorin competitiveness of environmental goods andservices industries.

Steps Congress could consider include:OPTION 26: Conduct oversight on develop-

ment of U.S. positions on trade and environmentmatters. Several agencies (USTR, State, EPA,etc.) have missions that relate to trade andenvironment questions; efforts to use interagencydiscussions to develop positions have been inef-fective. Without high level guidance, informed byother high level strategy documents (e.g., apossible administration policy on internationalenvironment, trade policy, etc.), it will be difficultfor the United States to present appropriatepositions at OECD, GAIT, and other forums.

OPTION 27: Call on the administration toexpand efforts to develop multilateral or bilateralagreements on environmental standards, not justfor environmental reasons but also to offsetcompetitive impacts arising from different levelsof regulation. The U.S. Government could en-courage other countries to strengthen their do-mestic environmental standards, and providetechnical assistance on how to implement andenforce standards. Such discussions and activitiescould be carried out in advance of any formaldiscussions about trade liberalization. This ap-proach would require close coordination amongagencies with roles to play in foreign assistance,the environment, international trade, and exportfinancing and promotion.

OPTION 28: Increase emphasis in U.S. devel-opment assistance on technical assistance todeveloping countries for implementing and en-forcing environmental standards. (See additionaldiscussion under Issue Area D.)

OPTION 29: Work to develop more effectivemonitoring and enforcement provisions for multi-lateral environmental agreements.

OPTION 30: Encourage establishment of aglobal business charter under which participatingmultinational companies agree to use home coun-try standards when investing in other nations.

OPTION 31: Encourage other countries tomake use of reporting requirements (such as thatrequired for U.S. firms by the toxic releaseinventory).

I Issue Area F: Data and InformationNeeds for Policymaking

Data on commerce in environmental productsand services, and on costs borne by industry tomeet environmental standards are often poor,often inconsistent, and frequently not available.The economic consequences of pollution are evenless well-documented, though they are real none-theless.

Trade and production figures collected by theDepartment of Commerce and foreign equiva-lents often do not correspond closely to manycategories of environmental products. In manycases the distinction between an environmentaland nonenvironmental good is difficult to discern--a blower, pump, or measuring instrument may beused in environmental equipment or not—anddiscruminating between the two types of goods islikely to become more difficult as pollutionprevention approaches become more widely used.However, better data gathering is possible. Forinstance, since 1971 the U.S. Bureau of Censushas been collecting yearly data on orders andshipments of selected industrial air pollutioncontrol equipment—yet such data series seem notto have been collected for industrial wastewaterand waste treatment equipment. Another examplecomes from the Japan Society of IndustrialMachinery Manufacturers, which publishes dataon orders for environmental equipment catego-rized by media (air, water, waste, noise, andvibration) and by user (manufacturing, nonmanu-facturing industry, government, and export).

OPTION 32: Improve the collection and analy-sis of commercially relevant environmental dataincluding production and trade of environmentalgoods and services, environmental compliancecosts for businesses, and economic costs ofpollution and environmental degradation. Such

Chapter 2—Issues and Options ! 69

Table 2-6--issue Area F. Data Needs for Policy Making

co


32 Direct pertinent agencies to:

● collect and analyze more commercially relevant data on trade andenvironmental goods and services s N 7 Y Y

● facilitate flow of commercial information to companies M P Y Y Y

. verify and assess ways to improve pollution abatement cost data s N P N N

. identify and quantify benefits of regulations through study M N ? ? 7

33 Call for periodic assessment of competitive effects of differing levels ofenvironmental regulations among countries, and for development ofstrategies to address any adverse effects s N Y P P

a S+ma]l ($10 million or le~~); M=m~erate ($10 t. $100 milllon); L-large ($100 million plIJs); a range indicates that it depends on how the option

is implemented.b y=ye~; p=potentially yes; N=no; ?-effect is unclear


efforts could be coordinated with the OECD andperhaps the UN Statistical Office. As part of this,Congress would:

Support a small effort at the Census Bureau toverify accuracy of the Pollution Abatement andControl Expenditure Data and to determineways to improve the data. Support a small effortat the International Trade Commission or theDepartment of Commerce to improve data andreporting of environmental products and serv-ices trade.Fund a reasonably large scale study to morecarefully identify and quantify the benefits of

environmental regulations. Ensure that thefindings can be readily incorporated into eco-nomic models measuring the impact of regula-tions on the economy.

OPTION 33: Call for periodic reassessment ofthe competitive impacts of different levels ofenvironmental standards among different coun-tries. The research could focus on comparison ofrelative strictness of pollution control and wastetreatment actions required of industries in othercountries, and identification of competitive ef-fects for business operations in the United States.

These options are listed in table 2-6.

—

Context andConceptualFramework 3

N ew questions have emerged in the debate about environ-mental concerns and industrial competitiveness thatsuggest a need to re-ex amine traditional views. Willenvironmental concerns in time fundamentally alter the

way in which business is done? Will concepts like sustainabledevelopment come to have a major influence on the way in whichdevelopment decisions are made? To what extent will environ-mental needs influence the dynamics of the market? What are therisks for companies—and countries-that fail to accuratelygauge the dynamics of this market? What impact will morestringent environmental regulations have for manufacturingindustry competitiveness, especially for countries with strongerregulations than their competitors? What, if anything, needs to bedone to address the linkages between environmental policy andcompetitiveness? And what implications do such issues have forjobs and employment? Such questions, while not lendingthemselves to hard and fast answers, will need to be addressed inthe competitive strategies of companies and countries; just assurely, the competitive impacts and commercial implications ofenvironmental policy choices will confront policy makers moreand more.

This chapter begins with a discussion of global environmentaltrends and the likely implications of these trends for both theenvironmental goods and services industry, and for manufactur-ing firms generally. A conceptual framework depicting therelationship between environmental and economic factors illus-trates the growing importance of environmental considerationsin business. This is followed by presentation of a classificationof the environmental goods and services industry (specific casesare taken up in detail in ch. 5). The next section exploresrelationships between environmental issues and economic com- 71


Finding ways to boost living standards for the world’spoor while avoiding environmental damage is acritical challenge for sustainable development.

petitiveness. OTA has focused on environmentand competitiveness in manufacturing, drawingon examples (discussed in subsequent chapters)from such sectors as chemicals, pulp and paper,and metals finishing. The interactions betweenenvironmental regulations and competitivenesscould be quite different if other sectors—agriculture and forestry, extractive industries(e.g., mining, energy extraction)--were consid-ered.1 The concluding section reviews the linkagebetween environmental and industrial policies.

GLOBAL ENVIRONMENTAL TRENDSMaking economic development and environ-

mental protection more compatible will be acritical challenge for a human population likely tomore than double in the next 100 years. Findingsfrom the World Commission on Environment andDevelopment (the Bruntdland Commission), the1992 United Nations Conference on Environmentand Development, and a host of reports emanatingfrom such bodies as the World Bank, the Organi-zation for Economic Cooperation and Develop-

ment, and the Business Council for SustainableDevelopment, have warned that a continuation ofcurrent patterns of economic growth could resultin levels of environmental degradation severeenough to jeopardize the ability of future genera-tions to meet basic needs.

Global environmental problems, including lossof biodiversity, climate change, and stratosphericozone depletion, have become increasingly im-portant. Problems of air and water pollution andtoxic waste disposal are common in all industrial-ized nations. In developing nations, millions lackaccess to sanitation services and safe drinkingwater, while dust and soot in air contribute tohundreds of thousands of deaths each year.2

Moreover, serious damage from pollution andoveruse of renewable resources challenge worldfisheries, agriculture, and forests, with significantadverse effects for productivity and biologicaldiversity.

At the same time, an improved standard ofliving is a critical need for a substantial portion ofthe world’s population. As a result, the key issueis not whether there should be additional growth,but rather how to achieve it without thwartingimportant social, economic, and environmentalgoals.3

The relation between environmental damageand economic growth is complex. Pollution andenvironmental damage are a result of the size ofthe population, per capita income levels, and theamount of environmental damage associated witheach unit of gross domestic product (whichdepends on the level of emissions of the produc-tion technology itself and the level of pollutiontreatment and control).

Population growth and per capita incomegrowth will put new strains on the global environ-ment. In 1960, the world’s population was about

1 OTA is currently conducting a study of agriculture, trade and the environment scheduled for completion in late 1994.

z For discussion, see U.S. Congress, Office of Technology Assessment Development Assistance, Export Promotion, and EnvironmentalTechnology, OTA-BP-ITE-1O7 (Washington DC: U.S. Government printing Office. August 1993).

3 World Resources Institute, in collaboration with the United Nations Environment Rogramme and the United Nations DevelopmentProgramme, World Resources, 1992-1993: A Guide to the Global Environment (New York, NY: Oxford University Press, 1992).

Chapter 3-Context and Conceptual Framework 73

3 billion; today, it stands at 5.3 billion and,according to the World Bank, could grow toroughly 9 billion-a 70 percent increase by 2030under a midrange forecast. Moreover, global percapita incomes are estimated to increase by over80 percent between 1990 and 2030, and develop-ing country per capita incomes may grow by 140percent. 4 As a result, by 2030, world economicoutput could, by one projection, grow to as muchas $69 trillion, 3.5 times more than presents Ifpollution rose in step with this projected develop-ment, according to the World Bank, the resultwould be appalling environmental and humancosts, Figure 3-1 projects the increase in produc-tion of key materials that would be needed if allof the world’s current population were to enjoy aper capita consumption level equivalent to that inthe United States.

Since continued population growth seems likelyand since income growth for a substantial fractionof the world’s population is essential, reducingthe amount of environmental damage for eachadded unit of world product (or, as one analyst putit, per unit of human advance6) will be crucial. Infact, to simply hold steady at the current level ofenvironmental damage, significant reductions indamage intensity will be needed. Some of thismay occur if the expected growth in the develop-ing nations is less materials-intensive and pollut-ing than current economic activity in developednations. Even given differences in types ofgrowth, however, economic activity overall willhave to become less environmentally damaging ifwe are to hold constant or have only smallincreases in total environmental damage.

Figure 3-l-World Production of Materials NeededTo Match U.S. Per Capita Consumption

Mllllon metric tons

‘“”T ‘-’–---’------”5001

I

4oo -

2ooj

I100

0 II

----1 m 1990 world production1

~ Production at U.S. rate~

Plastlc Aluminum Copper Potash Synthetic Nitrogenfibers

SOURCE: U.S. Bureau of Mines

The intensity of damage could be reducedthrough existing technologies and approachesthat use resources more efficiently (e.g., energyconservation, recycling and reuse of materials andproducts, and more efficient operation of existingindustrial equipment).7 Technological evolutionoften results in new generations of technologythat use materials or energy more efficiently thantheir predecessors (see table 3-l). One studyconcluded:

In a surprising number of cases, the technologiesthat lead to increased material-efficiency andreduced emissions are also the most economicallyefficient. The somewhat ironic effect is that arobust and competitive economy encouragingnew investment in plant and equipment can leadto a decline, instead of an increase, in thedeleterious environmental and health effects ofeconomic activity.8

4 Calculated from data contained in the World Ba& World Deveiopmenr Report, 1992 (Washington DC: World Banlq 1993).5 Ibid., p. 32.

6 See Robert S. McNamara, ‘A Global Population Policy to Advance Human Development in the 21 st Century, ’ Rafael M. Saks MemorialI.ecture, United Nations, New York, Dec. 10, 1991.

7 See U.S. Congress, Office of Technology Assessment, Green Products by Design, OTA-E-541 (Washington, DC: U.S. GovernmentPrinting Office, October 1992).

g Hen~ C, Kelly, Peter D. Blair, and John H. Gibbons, “Energy Use and Productivity: Current Trends and Policy Implications,’ AnnualReview of Energy, Jack M. Hollander, cd., vol. 14, 1989, p. 333.


Table 3-1—ExampIes of Technological Evolution Leading to More EfficientUse of Energy and Materials

Lumber mills

Pulp and paper mills

Paints and coatings

Polyethylene production

Steelmaking

Computerized processcontrols

Fiber optics

Computer-assisted selection of saw lines during milling can increase lumberyields by 20 percent, permit sawing to higher grades, and reduce roundwood requirements.

Press drying technology can increase burst and tensile strength needed insome applications, while saving 20 percent on energy. Extended rookingand ozone delignification of pulp can significantly reduce bleaching needed,lowering organo-chlorine emissions, including dioxin.

Higher solid content paint can cover more space with less volatile organiccompound emissions than conventional paints, while water-based coatingscan eliminate VOC emissions.

Low pressure polyethylene production saves energy and avoids use ofsolvents and minimizes costly separation steps relative to high pressuremethods.

Basic oxygen furnaces and increased use of electric furnaces in mini-millsreduce pollutants compared to open hearth furnace steelmaking. Continu-ous and thin slab casting reduces energy use through increased yields. Thedevelopment and introduction of cokeless steelmaking offers potentiallygreater reductions in pollution.

Applied to a variety of manufacturing processes, better controls increaseefficiencies and overall yields.

Optical cables use far less material than copper cables per unit ofcommunication. Furthermore, environmental damage from copper miningand smelting can be avoided.


Of course, this is no hard and fast rule. Manytechnological innovations have greater impactson the environment than the systems they re-placed.

With stepped up efforts, cleaner manufacturingprocesses and technologies that produce feweremissions and are more efficient from a materialsand energy standpoint may become availablesooner. Also, environmental matters are beingaddressed earlier in the design of products.9 (Seebox 3-A). Reducing the use and emissions oftoxic chemicals will have to be a special focus ofsuch technology developments, since toxic chem-ical emissions tend to increase with greaternational per capita income.10

Finally, environmental health depends not onlyon new and more efficient production processes,but also on the degree to which residual pollutionis controlled. Countries that are members of theOrganization for Economic Cooperation and De-velopment (OECD) have spent, on average,between 0.8 and 1.5 percent of Gross NationalProduct (GNP) on environmental improvementover the last 20 years. Developing nations haveinvested much less in pollution control andabatement. If environmental problems are to bereduced, these nations will have to increase suchexpenditures. As developing country per capitaincomes grow, they will be better able to affordsuch investments.

9 Green Products by Design, op. cit., foomote 6, discusses the potential to use the design process to address environmental concerns.10 David ~ee]er, f~hgs from tie World Industrial Pollution Project, Environment Department, World Batdc, WaSh@tOU DC, 1992.

Chapter 3--Context and Conceptual Framework 75

Box 3-A—Environmental Design and Manufacturing Competitiveness

An estimated 70 percent or more of the cost of a product’s development, manufacturing, and useare determined during the initial design stage.1 The environmental attributes of a product also are largelyset in t he design stage through choice of materials, and consideration given to such factors as productreuse, recycling, and disposal, energy requirements, and pollution emitted. Product design alsoinfIuences production processes and associated wastes and emissions. In turn, process modificationsoften entail changes both in products used by the process and the end product itself. For instance, theprocess of reducing volatile organic compounds (VOCs) in parts painting may require low emissionspainting booths, paint applicators, and new paint formulations. OTA has found that “green design islikely to have its largest impact in the context of changing the overall systems in which products aremanufactured, used, and disposed, rather than in changing the composition of products per se.”2

In many manufacturing industries, success in integrating environmental performance into productand process design is becoming more important to competitive outcomes. Many products already areregulated or labeled by environmental characteristics that may prompt process changes or alter productmarkets. For instance, in the United States and an increasing number of other countries, air pollutionstandards for automobiles have led to changes in vehicle design and introduction of catalytic converters.Petroleum refiners in turn have had to modify their processes to produce unleaded gasoline and lowsulfur motor fuels. In many countries, various pesticides and toxic chemicals are restricted and in somecases banned. Chloroflorocarbons (CFCs) are being phased out globally. In Germany, packagingdesign is influenced by legal requirements for manufacturers and distributors to collect packaging forrecycling. Germany may later extend recycling requirements to durable goods as well. Eco-labels in

1 AS Cited in U.S. Congress, Office of Technology Assessment, Green Products by Design: ChOiCOS for aCleaner Hwkonment, OTA-E-541 (Washington, DC: US. Government Printing Office, October 1992), p. 3.

z Ibid., p. 9.(continued on nexf page)

A FRAMEWORK FOR CLASSIFYING 3) they result in fewer emissions of harmfulENVIRONMENTAL ACTIVITIES

The definition of environmental activity hasbecome more and more vague as concern for theenvironment has developed, Environmental is-sues cover matters as diverse as energy conserva-tion, control of pollution from factories, develop-ment of renewable energy sources, tropical rainforests and endangered species, preservation,reduced use of toxic chemicals, and recyclinghousehold solid waste. Environmentally prefera-ble activities differ from less preferable activitiesin one or more of the following ways:

1) they often use less energy or material;2) they have less impact on natural systems,

the land, or communities; and

pollutants or wastes (including toxic orhazardous waste).

Each stage in a product’s life cycle (includingmaterials extraction, processing, manufacturing,product use, and, finally, disposal) may need to beexamined to determine its environmental implica-tions. As a result, as global environmental prob-lems have grown, there has been an unprece-dented interest in the commercial implications ofenvironmental policies.

The sheer scope of environmental activitiesmakes it necessary to develop a framework toclassify activities and undertake analysis. Table3-2 provides one framework, and also delineatesthe scope of activities this report will examine.


Box 3-A—Environmental Design and Manufacturing Competitiveness-Continued

Canada, Germany, Japan, and the Nordic countries as well as those being developed by the EuropeanCommunity and two private U.S. organizations may potentially affect market shares earned bymanufacturers. At times environmental product standards have become the subject of internationaltrade disputes as in a European Court case involving a 1981 Danish regulation on reuse of beveragecontainers.3 With direct regulation of products, even the cleanest and lowest cost production processmay be insufficient for gaining markets if the product itself fails to meet standards.

As for industrial processes, environmental regulations can increase demand for conventionalpollution control equipment and cleaner production processes and reduce demand for technology thatis less preferable environmentally. The phase-out of CFCs and other ozone depleting substancesaffects the manufacturers of those chemicals and their substitutes and the design of manufacturingprocesses and capital goods. For instance, markets are developing for new machines to clean metaland electronic parts that use alternatives to CFCs. Designers increasingly need to come up with processinnovations to deal with new regulations limiting VOC emissions. In addition to paint and paintingequipment, cleaning machines are being developed that recover VOCs or use alternative solvents.Cleaner burners, ultrafiltration devices, and new catalysts are among other examples of industrialproducts being developed to meet new environmental regulations.

The links between environmental performance, materials use, industrial processes, and productdesign extend vertically among suppliers and customers as well as horizontally across a sector’s firms.In some cases, industry consortia or other cooperative mechanisms might help overcome environ-mental challenges in manufacturing. Such consortia could benefit regulated industries through thedevelopment of cleaner processes that allow lower cost environmental compliance and even costsavings or product improvement. Suppliers to those industries would benefit through the developmentof new product lines that can be sold domestically and abroad as environmental regulation andenforcement tightened. Furthermore, supplier firms depend on the competitiveness of their customersfor their own survival and prosperity.

s U.S. Congress, Office of Technology Assessment, Trade and Environment: Conflicts and @/WfUnifies,OTA-BP-ITE-94 (Washington, DC: U.S. Government Printing Offioe, May 1992), p. 89-90.

The first dimension for classifying economic reduce volatile organic compound (VOC) emis-activities is the degree to which environmental sions but also to save money). Hence, it is oftenconcerns spur the undertaking of a given eco- difficult to know the degree to which environ-nomic activity or purchase.11 The importance of mental factors or other concerns, such as cost,environmental considerations among rationales energy use, performance, and quality, are re-for undertaking an activity ranges from minimal fleeted in choices of economic activities. The lineor none (e.g., conventional mining of materials) to between what is and is not an environmentalalmost 100 percent (e.g., installation of advanced activity is fuzzy and can change over time.wastewater treatment systems or scrubbers), to However, it is important to note that the environ-any possible range in between (e.g., firms may ment industry consists of not just those activitiesinvest in solvent recovery systems not only to that are undertaken almost solely for environ-

I I ~s should not & Confused with tie environmental impact of the activity, which may or may nOt be relakd tO the fipOflanCe ofenvironmental considerations in undertaking the activity or making the purchase.


Table 3-2—A Framework for Classifying Economic Actions by Primacy of Environmental Motive

Environment is prime motivationfor undertaking activity or de-veloping/buying product

Cell A

Resource Biodegradable oil drilling fluidsmanagement and Turtle exclusion devicesextraction Wetlands restoration

Abandoned mine reclamationOil spill cleanup

Cell D

Manufacturing/ Pollution prevention:

commercial Desulfurized diesel fuelactivities Chlorine free pulp production

Non-CFC solvents

End-of-pipe:incineratorsWaste water treatmentCatalytic reduction of NOX

flue-gas desulfurization

Consumerproducts

Ceil G

Reformulated gasolineZero or ultra low emission carsPaper with recycled contentLow mercury/lead batteriesPhosphate-free detergents

Environment is one motivationamong several for undertakingactivity or developing/buyingproduct

Cell B

Integrated pest managementDrip irrigationEco-tourism

Cell E

Recycling facilityHVLP paint applicatorsSolvent recovery equipmentNo-clean solder techniquesindustrial controlsEfficient catalytic reactorsRedesigned pulp digestersSolar cellsHigh efficiency gas turbines

Cell H

Fuel-efficient automobilesEnergy-efficient appliancesMinimal packagingResidential energy controls

Environment is not a motivationfor undertaking activity or de-veloping/buying product

Cell C

Unrestricted loggingStrip miningDrift net fishing

Cell F

Bleached-kraft pulp processesOrganic solvent decreasingMercury cell chloralkali productionConventional circuit board

manufacturingOpen hearth and basic oxygen

steelmaking

Cell I

Leaded gasolineMany disposable productsMany household cleanersLeaded paints


mental reasons (cells A, D, and G, table 3-2) butincreasingly of activities that are strongly influ-enced by environmental factors (cells B, E, and H,table 3-2).

Activities can also be differentiated by theirplace in the product cycle.12 Environmentalconsiderations underlie the development of thefeatures of some products (cell G, table 3-2).Other products, such as high-mileage autos,which are partly driven by environmental con-cerns and partly by economic concerns, might ormight not be considered an environmental prod-uct (cell H, table 3-2). Both areas will have

potentially significant economic implications ei-ther as regulation drives product choices or asconsumers include environmental factors in theirpurchasing decisions. How corporate manage-ment responds to such new demands may be acritical factor in determining competitiveness.

A second area concerns resource managementand extraction (cells A, B, and C, table 3-2). Landand waterway use, preservation of natural areassuch as wetlands, agricultural chemical use andfarming practices, sustained yield forest manage-ment, depletion of nonrenewable resources, wild-life preservation, and a host of other issues affect

12 See OTA, Green Products by Design, op. cit., foomote 6


Research is underway to develop advancedsteelmaking processes that could lower environmentalimports. This pilot scale research smelter nearPittsburgh, PA to test direct steelmaking is conductedjointly by the American Iron and Steel Institute andthe U.S. Department of Energy.

resource management. For people involved infisheries, farming, mining, quarrying, and oil andgas exploration, such issues are likely to becomemore central to their economic well-being.

Third is the processing of materials and theproduction of goods and services (cells G, H, andI). This includes materials used in production,energy generation, and production equipment, aswell as end-of-pipe treatment equipment used byindustry. Also included are public or privatewater, sewer, and solid waste utilities. Thisframework allows for a definition that goesbeyond the conventional environmental goodsand services (EGS) industry, to include produc-tion technologies that inflict less environmentaldamage than conventional production equipment(cell D, table 3-2). For example, solvent recoveryequipment, no-clean soldering equipment, andlow-VOC paints would all be part of the EGSindustry under this framework, since their devel-opment and use is driven largely by environ-mental considerations (cell E, table 3-2). Simi-larly, some alternative energy technologies, suchas solar cells and wind turbines, would fit here.

As defined here, the environmental industryincludes firms that develop and provide products,equipment, or services that have as a primary orsignificant secondary benefit the improvement ofthe environment. (Those firms providing con-sumer products said to be environmentally prefer-able are not discussed in detail in this report.)Because manufacturers often need to improve theenvironmental performance of their productionprocess, they are often the principal consumers ofthese goods and services. Environmental firmsoften are themselves manufacturing fins. Also,traditional manufacturers may develop and mar-ket products that improve the environmentalperformance of their own and others’ manufactur-ing processes. To the extent that the EGS industrydevelops processes that lower the cost and raisethe effectiveness of environmental goods andservices, then U.S. industry as a whole willbenefit. Conversely, to the extent that U.S.industry continues to prosper, it can serve as amajor market for domestic EGS firms.

This report focuses in large part on the activi-ties taking place in cells D and E, activities relatedto the production process and being driven to alarge or moderate degree by environmental fac-tors. However, it is important to note that the linebetween areas is not immovable.

It maybe that the preferable actions are indeedthose in the middle cells where both environ-mental and other factors motivate action. Manypollution prevention activities, which are oftenpreferable to end-of-pipe solutions, fall into thiscell. Moreover, because other factors, such ascost, quality, and reliability, are more likely toenter decisionmaking for activities in these mid-dle cells, widespread adoption of these activitiesis more likely than for those activities executedsolely for environmental reasons.

The chapters on competitiveness emphasizemanufacturing, as opposed to other sectors, forseveral reasons. First, concern about U.S. manu-facturing competitiveness has assumed center

Chapter 3-Context and Conceptual Framework ! 79

stage in the debate about U.S. economic competi-tiveness. 13 Second, manufacturing accounts for adisproportionate amount of pollution relative toits share of total economic activity (see figure3-2). For example, while manufacturing repre-sents approximately one-third of GNP in OECDnations, it accounts for 60 percent of biologicaloxygen demand in water and 75 percent ofnoninert waste.14 Third, along with electric utili-ties and mining, manufacturing bears a majorportion of environmental compliance costs. (seech. 7).

As economic activity influenced by environ-mental factors (cells A, D, and G) becomesincreasingly important in solving environmentalproblems, it is important to note that not allenvironmental problems have the same world-wide consequences. Some such problems (ozonedepletion is perhaps the most conspicuous exam-ple) are global: activity in one location can affectthe Earth’s environment as a whole. Other prob-lems, while not necessarily global, have effectsthat cross national borders (e.g., sulfur dioxideemissions in one country contributing to acid rainin another). Finally, some problems have princi-pally local effects, although, the line betweenlocal and nonlocal effects is arbitrary. Locallyused toxic substances can be transported far fromtheir points of origin. For example, pesticides,polychlorinated biphenyls (PCBs), lead, and di-oxins are found in Arctic regions, far from theirpoints of release.15

THE ENVIRONMENTAL GOODS ANDSERVICES INDUSTRY

The issues discussed in this chapter illustratethe competitiveness context that affects bothindustries that supply environmental goods andservices and those that use such products. The

Figure 3-2—Manufacturing’s Share of

Wateruse

N O ,

‘/o GDP

Energy

SO*

Greenhousegases

BOD

Non Inertwastes

TOXIC

emlsslonsto water

Pollution in OECD CountriesPercent of total

D“-t-----------m

H

L–-..--–—-——— -!t 1

-—.—

–i1- ——.. —.———

0 20 40 60 80 100

SOURCE: Organisation for Economic Cooperation and Development,1991.

perspectives and interests of environmental prod-uct suppliers and users can be quite different,although some firms fill both roles.

As discussed in chapter 4, a large industryamounting to $200 billion or more annuallyworldwide has developed to provide goods andservices for the end-of-pipe control, treatment,disposal, and remediation of pollution and envi-ronmental damage. If business opportunities forpollution prevention or cleaner production werealso included-but the size of such markets isvery difficult to estimate-a still larger marketwould be apparent.

Not all environmental expenditures translate tospending in the environmental goods and servicesindustry. For instance, many industrial firms havesubstantial internal environmental activities thatonly partially correspond to purchases of goodsand services from outside source. There are,however, companies that have used their accumu-

] J U,S, conge~~, office of Tec~ol~= A~~e~~ment, M&ing Thing~Eetter: competing in ~onufactu~”ng, OTA-ITE-443 (waShiIlgt04 ~:

U.S. Government Printing Office, February 1990).

1A Orgmlsation for &onomic Cooperation and Development, The S~are of rhe Environment (pariS: OE~, 1991).

15 Curtis C. Travis and Sheri T. Hester, ‘‘Global Chemical Pollution,’ Environmental Science & Technology, vol. 25, No. 5, May 1991, pp.814-819. Travis and Hester refer to E. Dewailly et al., Bulletin of Environmental Contamination and Toxicology, vol. 43, 1989, pp. 641-646.


lated internal expertise to establish environmentalbusiness units.

Although some may view the environmentalindustry as limited to firms that provide end-of-pipe and remediation equipment and services,many of the most significant opportunities forimproving the environmental performance ofindustrial production lie in the realm of pollutionprevention, cleaner production, and improvedenergy efficiency. Such business opportunitiesare expanding as enterprises seek to improve theirenvironmental performance under pressure fromregulators, public opinion, and, in some cases,investors and corporate leaders. This report there-fore defines the environmental industry to includepollution prevention goods and services.

By these criteria, products such as advancedgas turbines could be viewed as environmentalproducts. While such turbines offer cost andtechnical advantages over other power-generatingtechnologies, a significant part of their appealderives from less complex siting and permittingthat accompanies their cleaner performance andlower pollution abatement costs relative to othertechnologies (e.g., coal-fired steam turbines).Likewise, while industrial controls technologiescan improve industrial productivity and productquality, diminished pollution can influence acompany’s decision to install or upgrade auto-mated monitoring and control equipment.

Competitiveness in the remedial or end-of-pipepollution abatement industry is affected by thestate of cleaner production and pollution preven-tion technologies. Over time, as pollution preven-tion becomes more widely practiced, some pollu-tion control technologies could be obviated bypollution prevention technologies. Whether ornot this occurs, the interplay of pollution preven-tion and pollution control is important to thedevelopers and vendors of environmental tech-nologies and to policymakers concerned withcompetitiveness in the environmental industry.

Box 3-B illustrates how pollution prevention andcontrol businesses can interact.

There are other pertinent dimensions beyondthe distinction between end-of-pipe and pollutionprevention to an assessment of environmentalindustry competitiveness. One is the distinctionbetween technologies and industries for whichthere are already large markets and those that arenow precompetitive or niche-competitive butoffer very large potential markets in the future.Competitiveness policies may differ dependingon whether a U.S. industry is fighting to gain ordefend a share in an existing market or whether itis competing for prospective markets wheremajor benefits may accrue to early entrants.16 Insome cases, such a market is likely, but thetechnology is not yet cost-effective (e.g., utility-scale photovoltaic cells). In other cases, thetechnology is already well understood but a largemarket has not developed because few countriescurrently require the technology (e.g., tertiarywastewater treatment).

The pace and characteristics of technologicalchange also affect environmental industry com-petitiveness. In some cases, technologies aremature and now enjoy a substantial market (e.g.,secondary wastewater treatment). In other cases,incremental improvements in the cost and per-formance of existing technologies might open upa large market (e.g., wind turbines). In still othercases, the industry is likely to be subject to radicalinnovations because of rapid changes in funda-mental understanding and competition amongrival technological approaches. This categoryincludes bioremediation, photovoltaic cells, andadvanced coatings that can obviate existingdirtier processes.

Examples of how a variety of environmentaltechnologies fall into the categories of end-of-pipe versus pollution prevention and relativelymature versus relatively dynamic technologicaltrajectories appear in table 3-3.

16 See W. Brian Arthur, “Positive Feedbacks in the Economy,” Scientl~c American, vol. 262, No. 2, February 1990, pp. 92-99 for adiscussion of how early entrants can gain enduring benefits from introduction of new technologies.

Box 3-B—interaction Between Pollution Prevention and Pollution Controlf

An example of how a technology not usually considered to be within the environmental industry canemerge as an environmental business opportunity at the expense of traditional disposal and controlindustries is provided by a recent demonstration project sponsored by the Illinois Hazardous Waste

Research and information Center and the U.S. Environmental Protection Agency (EPA) under the CleanTechnology Demonstration Program.

Steel delivered to the R.B. White, Inc. plant, a steel-shelving manufacturer in Illinois, must haveoil-based rust inhibitors, coolants, and lubricants removed in a decreasing bath prior to painting.Phosphating reagents are present in the bath to promote paint adhesion and corrosion resistance of thesteel. The company used to dump its phosphating/degreasing bath periodically as oil built up in the bathand compromised product quality. This process generated about 15,000 gallons a year of hazardouswaste that cost the company about $1 per gallon, or $15,000 a year, for hauling and incineration in acement kiln.

After bench and pilot scale demonstrations, the R.B. White plant installed an ultrafiltration systemfrom Koch Membrane Systems to remove oils from the phosphating/decreasing bath and greatly extendbath life. Koch makes membrane-based filtration systems for pollution control and prevention andin-process materials filtration. Ultrafiltration is normally used in a number of industrial processes,including the concentration of milk and fruit juices. For R.B. White, ultrafiltration lowered the volume ofhazardous waste by over 99 percent, to about 30 gallons a year and greatly reduced disposal costs.From the perspective of R.B. White, ultrafiltration was a cost-effective process technology that paid foritself in under 7 months, For Koch Membrane Systems and other manufacturers of ultrafiltrationproducts, the environmental problems of the metal finishing industry offer new market opportunities. Butfor the environmental companies that haul and treat R.B. White’s wastes, ultrafiltration means lostbusiness.1

1 This discussion draws extensively from Gary D. Miller etal., ‘(Evaluation of Ultrafiltration to Remove Oil andRecover Aqueous Iron Phosphating/Degreasing Bath,” draft, Hazardous Waste Research and Information Center,Champaign, IL, and Tim Lindsey, Hazardous Waste Research and Information Center, personal communication,Jan. 11, 1993.

THE ENVIRONMENT ANDCOMPETITIVENESS CONTEXT:THE CASE OF MANUFACTURING

There have long been differing views about theenvironment and manufacturing industry compet-itiveness. One view is that pollution and wastecontrol regulations (by imposing costs on compa-nies, diverting scarce resources to purposes dis-tant from a company’s strategy, etc. ) are a dragoncompetitiveness. While few analyses put suchregulations at the top of those factors affectingU.S. industrial competitiveness, compliance canbe expensive. For U.S. manufacturing in 1991,pollution control and abatement compliance costs

accounted for 1.72 percent of value added. Someindustries, such as chemicals, spend a highportion (13 percent or more) of their capitalbudgets on environmental protection. As detailedin chapter 7, money and resources (includingmanagement time) devoted to environmentalcompliance are money and time not spent onconcerns more central to a firm’s mission. More-over, if foreign manufacturers face fewer con-straints, they may gain a competitive advantage.

A contrary view is that pollution and wasterequirements (at least if properly structured andimplemented) could spur competitiveness byprompting technological innovation, encouragingcompanies to make more efficient use of energy


Table 3-3-A Framework for Categorizing Environmental Technologies*

Examples ofend-of-pipe/remedialtreatmenttechnologies

Pollutionpreventionandcleanertechnologies

Incrementala Dynamic b

Primary/secondary sewage Hazardous waste remediationtreatment (e.g., bioremediation)

Catalytic converters Emissions monitoringFlue-gas desulfurization Advanced vapor recoveryTertiary sewage treatment (e.g., membranes)

C02 recovery

Incrementala

Dynamicb

Fuel oil desulfurization Industrial monitoring and Controlsc

Cogeneration c

CFC substitutesAdvanced gas turbinesc

Advanced Coatingsc (e.g., vaporLow VOC Coatingc (e.g., UV curing) deposition)No chlorine paper production Biocatalysis c

Wind turbines PhotovoltaicsFuel cellsc

a incremental ~ean~ fundamental technol~icai Changes are not expect~, progress wiii come Iargeiy through

innovation based on existing technology.b Dynamic means that significant technological evoiution is expected as fundamental scientific understanding

changes.C Th= twhno@ies offer ~Omk ort~ni~i advantages in some instan~ in addition totheirenvironmentai attributes.

● The examples offered are illustrations rather than specific sectors examined in this assessment. The distinctionsbetween the different categories, particularly concerning projected technological change, are necessarily judgmental.


and materials, and stimulating the development ofnew products (e.g., cleaner, more efficient boil-ers) that, over the long term, will benefit econo-mies that produce them (see box 3-C). Some whohold this view cite Japan’s success in interna-tional competition during a period when Japaneseindustry began to comply with new environ-mental standards.

In exploring the relationship between environ-ment and competitiveness, this report discussesmanufacturing industries in general, with particu-lar attention to chemicals, pulp and paper, andmetal finishing. These industries have high envi-

ronmental impact or compliance costs, but arange of competitive circumstances (see table3-4). Other industry sectors, such as auto assem-bly and steelmaking, also receive some attention.

There are several ways in which environmentalregulations might contribute to competitiveness.There are also several ways environmental regu-lation might hinder competitiveness. Major argu-ments on both sides are outlined below (see alsotable 1-2 inch. 1). For further discussion of theseissues, see chapter 7 and appendix A. Theconcluding section of this chapter discussesemployment issues.


Box 3-C-Does Environmental Regulation Improve Competitiveness?:The Michael Porter Hypothesis

In his book, The Competitive Advantage of Nations and in an essay in Scientific American, MichaelPorter, a professor at the Harvard Business School, discussed the possible positive relationshipbetween some types of regulations and economic competitiveness.1 As a result, a number of peoplehave cited Porter’s hypothesis as evidence that environmental regulations help competitiveness.However, such benefits cannot be assumed to arise without careful case-by-case analysis.

Porter argues that while environmental regulations impose costs and other constraints on industry,they may also stimulate innovations and/or efficiency gains which may offset costs. These can occurthrough increased economic activity in the environmental goods and services industry or increasedinnovation in the regulated sector itself, either through new products from product regulations or moreefficient processes from process regulations. In contrast to many economists, who concentrate on theshort-term static effects of compliance costs, Porter stresses that it is important to also look at the longerterm dynamic effects of regulation on innovation. Porter acknowledges, however, that these offsets maynot completely compensate for the costs of pollution control borne by industry.

Porter discusses four major ways that innovation can help offset the negative impact of compliancecosts on competitiveness.

First, stringent environmental regulations can lead to a competitive advantage in the environmentalgoods and services industry. Countries with strict regulations are more likely to develop strong firmsproviding the environmental goods and services used by industry to meet regulations. Porter citesseveral examples, including Swedish low-noise compressors and the purported German and Japaneseleads in air pollution equipment stemming from early and strict SO2 and NOX regulations on stationarysources. Chemical companies may gain a competitive advantage from developing Iow-VOC paints andcoatings and from CFC-substitutes, if their customers are faced with environmental requirementsleading to the need to use these products. However, their customers, the regulated community, mayface higher costs in using these materials or products. (The impact of regulations on the environmentalgoods and services industry is discussed in chs. 4 and 5.)

Second, Porter points to a number of cases where regulations stimulated the development ofinnovative or higher quality products. For example, the German Solingen law set rigid standards fort he

1 Mi@ael E. porter, The Competitive Advantage of IVatlons (New YW NY: ne f%ee mess, Iwo);“America’s Green Strategy,” Scientific Arnetican, vol. 264, No. 4, April 1991, p. 16S.

(wnthwedon next page)

WAYS IN WHICH ENVIRONMENTAL REGULATION health care costs, increased agricultural and laborMIGHT HELP COMPETITIVENESS: productivity, and lower costs in other parts of the

Improved Environmental Conditions--If envi- economy resulting from reduced pollution.17

ronmental regulations create benefits in excess of These benefits may accrue to firms both directlycosts, then they can improve economic welfare. and indirectly (cheaper supplies and inputs).Lower levels of pollution may lead to lower While it is important to include data on these

17 See Orgafimtion for Economic Cooperation ~dDevelopmen~ EnvironmenralPolicy Bene@: Moneta~Vah@ion (pfis: OECD, 1989).


Box 3-C-Does Environmental Regulation Improve Competitiveness?:The Michael Porter Hypothesis-Continued

quality of cutlery.2 Other examples are Japanese energy conservation laws and taxes that led todevelopment of internationally competitive energy efficient products. However, regulatory impacts onproducts are different than on processes. Consumers can identify and value the regulatory impact onthe product and as a result, firms can translate this into competitive advantages It is not clear how muchconsumers care about the presence or absence of environmental controls in the production of an item(although this kind of valuation appears to be growing). Moreover, the majority of the costs ofenvironmental regulations probably arise from regulations on processes not products.

Third, Porter argues that properly constructed process standards can encourage companies tore-engineer technology to reduce not only pollution but also costs, as production processes becomemore efficient. However, as discussed in chapter 8, only a small share of investments to comply withenvironmental regulations are for in-process changes, and of these, it is not clear how many pay forthemselves in savings. Environmental regulations often raise capital and operating costs, even withaggressive pollution prevention efforts.

Finally, Porter argues that while some regulations can lead to competitive advantage, those thatprescribe particular technologies, as opposed to performance-based standards, do not. To extend thispoint, it should be noted that regulation that Ieads to abatement or cleanup, rather than prevention, willincrease, not lower, costs for manufacturers. Regulations that make it risky to innovate (e.g., nophase-in periods, strict penalties for companies unsuccessfully trying innovative approaches) will alsoreduce offsets. As discussed in chapters 8 and 9, many aspects of the regulatory system make it moredifficult for industry to develop innovative and low-cost responses to pollution control regulations.

Some forms of regulatory reform will increase the potential of these innovation offsets, but it is byno means clear that these offsets will outweigh the costs and stimulate competitiveness. Nonetheless,Porter enumerates several offsetting benefits for industry from environmental regulation. In the debateon the effect of regulations on industrial competitiveness, it is important, however, to keep in mind thatthe principal purpose of regulations is to produce a clean environment and protect public health; theresulting societal benefits may justify the added costs to producers and consumers.

z Ibid., p. 647-649.

3 EpAhas~mmlssioned astudyto examine the Porter hypotheses and itIOXamining a number of indust~esaffected by regulations. However, most of these are either environmental industries (scrubbers) or products (paintsandcoatingsandpestlcides). Making the case that process regulations hasheiped competitiveness of the regulatedindustry is more difficult.

benefits in any assessment of the relationship gain a short-term competitive advantage that maybetween regulation and economic growth, currentmeasurements are inadequate.

Even if net benefits from regulations exceedcosts, the expenditures normally occur in thepresent while the benefits often occur in thefuture. If other countries choose to minimizeshort-term costs by limiting regulation, they may

continue well into the future.

Improved Manufacturing Efficiency—Anotherview is that pollution and waste regulation canimprove manufacturing efficiency and save money.Pollution prevention may increase competitive-ness if it results in firms paying closer attention to


Table 3-4—Economic and Environmental Factors for Selected Industries, 1991

Important environmental Pollution control Salesimpacts of the investments as 0/0 of 1990

Industry production process Competitive position capital investments ($ billion)

Motor vehicle Volatile organic compounds Decreased domestic market 2.9 % 214production (VOCs) from painting share, strong Japanese com-

petition

Chemicals Large quantities of VOC air Strong, $18.8 billion trade 13.4 % 288emissions, heavy metals, surplushazardous wastes

Metal finishing Acids and heavy metals in Generally not traded but over- 27.5 % 4.5wastewater and sludge seas firms are strong

Pulp and paper Waterborne pollutants, dioxin Strong, net exporter of 11.8 13.8 “/o 131million tons of paper, pulp andpaperboard

SOURCE: Office of Technology Assessment; U.S. Census Bureau, Po//ution Abatement Cost-Expenditures, 1991, (MA200 (91 )-1 (Washington, DC:U.S. Government Printing Office, 1993); U.S. Census Bureau, Annual Survey of Manufacturers, 1990 M90 (AS)-1 (Washington, DC: U.S.Government Printing Office, 1992).

energy and materials efficiency and continuousprocess improvement.18 However, even thoughan aggressive pollution prevention effort canreduce compliance costs, particularly when com-pared to the current end-of-pipe approach, indus-try still faces compliance costs that increaseproduction costs (see ch. 8). Regulation couldalso drive modernization if it led industry toupgrade production facilities or to invest in new,more productive facilities.

Recently, some corporate leaders have arguedthat correct pricing of pollution can increasecompetitiveness.

19 If firms must pay the full costs

of polluting (e.g., through a fee or tax), thenenvironmentally conscious firms will gain acompetitive advantage if all firms competing inthe industry face equivalent costs. In such asituation, firms can reduce costs by becomingcleaner. However, given that firms in othercountries do not pay the full costs, such a scheme

would raise U.S. production costs relative toforeign costs, unless there were some means, suchas a border tax, to impose similar costs on importsand provide rebates for exports.

Increased Innovation-When properly struc-tured, regulation stimulates innovation in theenvironmental control industry (see ch. 5). Inaddition, regulations may create pressures onfirms to develop new products, thus adding to thedynamism of the economy. For example, regula-tion is credited with encouraging a number of newautomobile technologies.20 In some cases, over-coming problems related to regulation may haveenhanced fins’ problem-solving capacities andcontributed to commercial innovation.

Early Mover Advantages-If U.S. regulationsare copied by other countries, then technologydeveloped to meet U.S. regulations could give

18 See U.S. ConPeSS, OffIce of Technology Assessment Sen’ous Reduction of Hazardous Waste,” For POllun”On prevenfi”on and Itiustn”ai.Eficiency, OTA-ITE-317 (Washington DC: U.S. Government printing Office, September 1986); also Michael Porter, “America’s GreenStrategy, ” vol. 264, No. 4, April 1991, p. 168.

19 “Viewpoint,” Chemical & Engineering News, vol. 71, No. 2, Jan. 11, 1993, p. 8.20 Robefl D, Atkinson and I-es Garner, ‘‘Regulation as Industrial Policy: A Case Study of the U.S. Auto Industry, ’ Economic Development

Quurter/y, vol. 1, No. 4, November 1987, pp. 358-373.


U.S. companies an advantage in foreign marketswhen similar regulations are adopted. Firms inother countries may have to invest sizable amountsto come up to speed and, because they have lessexperience in dealing with pollution, may do so atrelatively higher costs. Therefore, one importantcharacteristic of regulations is whether they leadwhere other countries are likely to follow. U.S.mobile source air pollution regulations have doneso, leading to a competitive U.S. industry incatalytic converters. As U.S. Superfund regula-tions have not been copied, the cleanup technol-ogy developed in response has had only modestuse in foreign markets.

Increased Consumer Demand--Regulation couldalso help competitiveness if it leads businesses todevelop products made in less environmentallydamaging ways and if consumers value theseproducts more than other products. Leading areasof consumer demand for products manufacturedin environmentally friendly ways are in paper,and, to some extent, products manufacturedwithout CFC’s. Scott, the world’s largest tissuemanufacturer, recently dropped from among itspulp suppliers three with the worst environmentalperformance.

21 Similarly, pressure from Euro-

pean paper consumers are leading pulp suppliersto move to chlorine-free pulp making.22 Suchpressures are relatively weak in North America.23

Moreover, it is unclear the extent to whichconsumers will prefer other products made inenvironmentally preferable ways. If they do not,and regulation imposes costs on the productionprocesses, then firms may be less competitive.

Adaptation to the Future Economy—Finally,some argue that a ‘‘green economy’ is a more

24 Along theseeconomically efficient economy.lines, it is argued that many U.S. companies arewedded to an old production system that useshigh levels of energy and materials. This reason-ing maintains that since future economies willforce firms to take these factors into account, U.S.firms will then be at a disadvantage. However,these green savings normally stem from increasedefficiency from energy conservation, the develop-ment of renewable energy sources, and increasedmaterials recycling. While these changes mayincrease economic welfare, they do not directlyaddress the issue of the effect of environmentalcompliance costs on manufacturing processes.

WAYS IN WHICH ENVIRONMENTAL REGULATIONMIGHT HURT COMPETITIVENESS:

Societal Costs May Exceed Benefits-Even ifpollution and waste-related compliance costs arehigher in the United States than in other nations,it is possible that in the long run the nation maynot suffer competitive disadvantage since societybenefits from these expenditures. Some analystsargue that currently the costs of regulation exceedthe benefits and that, therefore, both GDP andsocial welfare will be lower as a result ofenvironmental regulation.

Analyses focusing on the costs of regulation,particularly the price to industry, often ignore orminimize the benefits of regulation and as aresult, findings of net costs are assured.

Regulation May Inhibit Innovation--Some main-tain that regulation may inhibit innovation, lead-ing to relatively large costs over the long term.

21 Paul Abr-s, *’Scott’s Clean Sheet, ’ Financial Times, NOV. 4, 1992, p. 14.

22 ~ces of cMorine-free pulp are slightly higher than pulp made conventionally.23 A relatively sw ~rwntwe of us. pulp is exported to Europe. &fwIy of tie miUS that prodU@ pulp fOr expOll me mOVhlg tO ~Ze

or elimimte chlorine bleaching. (Neil McCubbin, ‘‘Environment and Competitiveness in the Pulp and Paper Industry,’ OTA contractor repom1993.)

2A Mictiel Renner, Jobs in a Sustainable Economy (Washingto% DC: WorldWatch MthUte, 1991).


Regulation can hinder innovation by divertingfunds from capital investment in new plant andequipment and commercially oriented R&D.Because regulatory requirements are often stricterfor new facilities (which often must install bestavailable technology) than for older plants, newinvestments may be discouraged. Regulation canalso delay the introduction of new industrialprocesses if permit applications take a long timeto be processed. Finally, regulation can increasethe risk of innovation. If firms feel that regula-tions are likely to change so as to make pendinginnovations obsolete or unusable, they may waituntil they receive clearer signals.

Regulation May Increase Production Costs—Regulation raises the costs of production for U.S.firms. If U.S. firms face higher environmentalcompliance costs than companies in other na-tions, and the benefits they receive do notcompensate for the costs, their relative competi-tiveness will decline, resulting in net exportlosses; some firms might relocate to countrieswith weaker regulation. In addition, high compli-ance costs mean that domestic firms will have lesscapital and human resources to invest in newproducts and production processes, thus reducingproductivity. Some jobs losses may result, al-though the size of these impacts is uncertain.

1 Employment and Environmental TradeFew aspects of environmental regulations

prompt as much debate as their potential foremployment effects, Yet, studies of the employ-ment implications of pollution control regulationsare poorly developed. Some argue that regula-tions cost jobs either from plant closures, from thehigh cost of regulations, or from reduced con-sumer demand for products produced with highenvironmental compliance costs. Others argue

that environmental regulations create jobs in theenvironmental goods and service industry, andalso environmental jobs in companies complyingwith regulations.

Estimates of the number of jobs in the U.S.EGS industry vary widely. The EnvironmentalBusiness Journal estimates that total EGS em-ployment in 1992 was 1,073,000. However, someof these jobs are not related directly to regula-tions, including many in water supply utilities,alternative energy, and private refuse collection.

It is, however, difficult to declare as benefitsjobs to meet domestic EGS demands without alsoknowing how many jobs are lost in pollutingindustries due to reduced domestic consumption.These EGS jobs represent resources transferredfrom one activity to another and, in a sense, arethe price we pay to clean the environment.

The better measurement of net employmentbenefit offered by the EGS industry would befrom net jobs created through foreign trade. If theUnited States exports more in EGS than itimports, the net job creation should be countedagainst the jobs lost due to higher prices fordomestic goods from environmental regulations.

Some also argue that investments in environ-ment and energy-efficiency create more jobs perdollar of investment than highly polluting indus-tries and that, therefore, regulation increasesemployment. 25 If this is true, productivity andwages in these EGS industries, and in particularin the indirect economic activity created fromthem, would need to be less than in highlypolluting industries, such as chemicals and oil andgas. As a result, there may be a tradeoff in theshort term between more jobs at lower wages (andpossibly lower skill levels) and fewer jobs athigher wages (and possibly skill levels). In themedium and longer term however, net job crea-tion should equalize.

2 5 Howu~ fJ~~c~, John DICiCC~, and Stip ~i~er, Energy ~ficienqj und Jo~ Creation (w~ti~o~ DC: &IleriCm COUUCd fOr anEnergy-Efficient Economy, October 1992); also Michael Renner, Jobs in a .$ustainable Economy (Washington, DC: WorldWatch Institute,1992).

PART II.Providers of

EnvironmentalTechnology and

Services: TheEnvironmental

Industry

The GlobalEnvironmental

Market:Trends and

Characteristics 1 4

T he global market for environmental goods and services(EGS) is large and growing. The Organisation forEconomic Co-operation and Development (OECD) esti-mates that the global market for environmental services,

combined with pollution control and waste management equip-ment and goods, stood at $200 billion in 1990 and will reach$300 billion by the year 2000.2 Another calculation of the globalmarket claims the 1992 market was $295 billion and projects aglobal demand of $426 billion by 1997.3 These projections do notfully capture business opportunities for preventing pollutionthrough cleaner production. While calculations of environmentalmarket sizes should be viewed with caution due to varyingquality of data and definitions of the market, it is clear that theenvironmental sector is sizable. For comparison, in 1990 theaerospace products industry commanded a global market of $180billion and the chemical products industry stood at $500 billion.4

In order for environmental markets to exist, there must be boththe will and resources available to address environmentalproblems. Regulations and enforcement, including assignmentof liability, are the main drivers of environmental markets.Prosperity is an important determinant of environmental marketsize; contrary to previous expectations, the environmental

1 This chapter discusses size, trends, and drivers of environmental markets; ch. 5discusses competitiveness in environmental industries.

2 Organisation for Economic Co-operation and Development (OECD), The OECDEnvironment Industry: Situation, Prospects and Government Policies, OCDE/GD(92)l(paris: OECD, 1992).

3 Grant Ferrier, president of Environmental Business International, presentation at theEnvironmental Business Council of the United States meeting, Washington DC, June8-9, 1993.

4 OECD, op. cit., footnote 2. 89


industry is not immune to economic slow-downs.Fiscal incentives now in an early stage ofapplication, such as pollution fees and tradableallowances, may also promote demand. Corpo-rate interest in appealing to the environmentalconcerns of customers and investors is increasing,particularly where reporting requirements placecorporate environmental performance in publicview. And opportunities for cost-effective envi-ronmental improvement through pollution pre-vention and improved energy efficiency arebecoming better understood; such cleaner produc-tion approaches may some day obviate the needfor certain end-of-pipe pollution controls.

Environmental priorities differ by country andregion. In most low and many middle-incomecountries, key needs include provision of water,sewer, and refuse services, as well as basicpollution control equipment. In more affluentcountries, there is growing demand for moresophisticated equipment and services for pollu-tion prevention, control, and remediation. Thelargest environmental markets are in the industri-alized nations of the OECD, which account forperhaps 80 percent of the international market.5

The largest single market, about 40 percent of thetotal, is the United States. However, markets insome non-OECD nations, including a number ofrapidly industrializing countries in Asia and LatinAmerica, are poised for rapid expansion.

National markets can be thought of as fallingwithin several broad categories:

■ The United States, Japan, Germany, and sev-eral other Northern European countries havethe most strict environmental regulations. Nosingle country is most stringent for all pollut-ants or media. Much progress has been madeagainst traditional soot and sewage problems.New problems and those that have resistedprevious solution—including smog, acid rain,toxic substances, nonpoint pollution, and cli-mate change—are now being addressed. These

countries are at the forefront of environmentalmanagement and are sources of demand fornew or improved environmental technologies.The United Kingdom, France, Italy, and severalother OECD countries form a second tier ofcountries that have relatively strong environ-mental standards and enforcement but have notled in environmental management.Portions of the European Community (EC),including Spain, Portugal, and Greece, oftenlack adequate infrastructure for wastewater,solid waste, and hazardous waste treatment.Significant efforts are necessary to bring thesecountries into compliance with EC standards.Their level of environmental investments willdepend on economic growth and EC funding.Rapidly industrializing countries in Asia—including the four ‘tigers’ (Hong Kong, SouthKorea, Taiwan, and Singapore), Malaysia, Thai-land, and the Philippines, and the larger coun-tries of Indonesia, India, and China-are nowexpending more resources on the environment.This region is probably the fastest growingenvironmental market, due to investments inwater, sewer, and waste disposal infrastructure,and from environmental factors now beingincorporated into new investments in energyand industrial production. Economic growth isproviding many of these countries with theresources to pay for environmental invest-ments.Several Latin American countries also haverapidly expanding environmental markets. Mex-ico and Brazil are the largest. This region, too,offers strong environmental business pros-pects. As in the rapidly growing Asian econo-mies, investment in public environmental infra-structure is increasing. Tougher regulation andenforcement are creating markets for pollutioncontrol equipment. As more countries developenvironmental capabilities, the market for mon-itoring equipment is also growing.

5 Ibid.

—

Chapter 4–The Global Environmental Market: Trends and Characteristics 91

Central and Eastern Europe, including thestates of the former Soviet Union, have a legacyof environmental mismanagement. Basic con-trols of air and water pollution and wastes areoften lacking or in disrepair. While the poten-tial market is great, the actual market is limitedby lack of financial resources. Political andeconomic uncertainties inhibit foreign invest-ment.Many developing countries in Africa, Asia, andLatin America have limited capacities formanaging industrial and urban environmentalchallenges. Development assistance is a keysource for environmental investment in thesecountries.

As discussed in chapter 5, most environmentalgoods and services are not internationally traded.Even so, substantial trade occurs; estimates ofinternational environmental business transactionsrange from the low billions of dollars to over $20billion annually.

American firms face growing challenges fromforeign companies both overseas and in thedomestic U.S. market for the provision of bothtraditional environmental products and cleanertechnologies (see ch. 5).6 Germany, Japan, Aus-tria, the Netherlands, Switzerland, Sweden,France, Britain, and Canada have environmentalcompanies that are competitive with U.S. firms onthe world market. Foreign firms also are competi-tive sources for a variety of cleaner productiontechnologies. In countries like South Korea,Taiwan, and Mexico, environmental industriesare developing in response to increased regulationand enforcement, although they remain depend-ent on OECD-country suppliers for many envi-ronmental products and services. Examples ofsectors and technologies where U.S. firms main-

tain an advantage and where foreign firms havegained advantage are discussed in chapter 5.

MARKET DRIVERSEnvironmental markets arise primarily when

regulations are put in place and enforced.7 Otherfactors also contribute; for instance, pollutionprevention measures are sometimes cost-effective even in the absence of strong regulation,and corporate concerns about public image canpromote demand for EGS. However, regulationremains the driving factor. This is becausepolluters seldom on their own pick up the coststhat pollution and environmental degradationplace on third parties and society as a whole. Ineconomic terms, pollution is a negative external-ity and the services nature provides (e.g., cyclingair and water, maintaining soils and biologicaldiversity, and so forth) are free goods. Thesemarket imperfections diminish the welfare-maximizing force that free markets can theoreti-cally deliver. In short, without regulation (andenforcement), people will pollute excessively.Externalities and public goods as types of marketimperfections are classically justified reasons forgovernment regulation.

Environmental laws and regulations createmarkets for many kinds of goods and services.Obvious examples include pollution prevention,control, and clean-up equipment and supplies,and operation of waste disposal and pollutionabatement systems, Analytical instruments tomeasure contaminants and monitor pollution, andspecialized services (including engineering, man-agement consulting, construction, and laboratoryanalysis) are also needed. Regulations also stimu-late demand for environmental impact assess-

6 Cleaner production and energy technologies can be found in v Wy all economic sectors. A few examples are direct steetrnaking,renewable energy technologies, advanced gas turbines, chromium-free leather tanning, chtorine-hx paperrnakm“ g, no-clean soldering, betterindustrial controls, less polluting paint applicators and formulations, and improved catalysts.

7 Here regulation includes the use of environmental taxes and charges, marketable pollution allowances, and assignment of liability onpolluters, as well as conventional comma rid-and-control approaches that require achievement of performance-based or technology-basedenvironmental standards.


Routine environmental services such as refusecollection and disposal, while locally provided, cancreate trade opportunities for equipment suppliers.

ment, legal, and information services. Further-more, the force of regulation can lead to demandfor substitute or alternative products or processes.Examples include alternative solvents, fuel switch-ing, or no-clean soldering.

Sometimes environmental laws and regula-tions create markets directly by mandating certainstandards. In the case of performance-basedstandards, a number of environmental technolo-gies and practices might allow achievement ofstandards. In contrast, technology-based stand-ards require installation of particular environ-mental devices, thus stimulating large markets forthose devices. Innovation may suffer becausecompeting technologies and approaches are notsanctioned. 8 Sometimes regulations are formallyperformance-based, but, in practice, permittingand administrative procedures still favor specificreference technology.

Regulations can promote environmental mar-kets by making pollution and waste very expen-

sive to generators. For instance, the U.S. Re-source Conservation and Recovery Act (RCRA),among other things, places stringent requirementson storage, transport, and treatment of hazardouswastes. This not only stimulates expenditures forhazardous waste handling and disposal, but alsoencourages waste producers to find ways to cutdisposal expenses by minimizing waste.

Similarly, pollution taxes and fees may stimu-late environmental technology sales. It is not yetclear the degree to which marketable pollutionallowances might spur environmental technologyinnovation and sales by placing real dollar valueon pollution. Companies may avoid environmentaltechnology expenditure-for instance, by switch-ing to low sulfur coal instead of buying scrubbersin the case of electric utilities. (Chapter 8discusses the implications of different environ-mental regulatory approaches for manufacturingindustries. 9) Other innovative regulatory approaches,such as utility pricing rules that encouragedemand-side management (DSM) in electric utili-ties, have spurred business opportunities in en-ergy efficient products and related services thatmay be environmentally preferable.

Threats of future liability are an impetus forenvironmental markets; the U.S. Superfund lawthat retroactively ascribes liability for contami-nated sites is a noteworthy example. Reportingrequirements, like the Toxic Release Inventory(TRI) of the U.S. Superfund Amendments andReauthorization Act (SARA, Title III), can alsostimulate pollution prevention and control efforts.TRI requires manufacturing enterprises to pub-licly disclose information about their production,release, and disposal of several hundred toxiccompounds. These reporting requirements ledsome companies to adopt aggressive waste reduc-tion goals.10

8 Robefl Rep~o, George Heato~ and Rodney Sob@ Transforming Technology: An Ageti for Sustainable Growth in the 21st Cenmv

(Washingto% DC: World Resources Institute, 1991), p. 23.

g Another OTA assessment, due for completion in late 1994, is examining new approaches to environmental regulation.

10 See Bruce Smti (~.), Beyo~Comp/jance: A New Industry View of the Environment (Washington, DC: World Resourees ~titut% Apfi1992) for several examples.

Chapter 4-The Global Environmental Market: Trends and Characteristics ] 93

Although the combination of regulation andenforcement has been the most potent driver ofenvironmental markets, it is not the only force,The environmental concerns of consumers andinvestors are a factor, as is the threat of additionalfuture environmental regulation because of unfa-vorable public image. These concerns explain thepotency of TRI in stimulating environmentallyfavorable corporate action. They also help explaincases of pressure on corporations from peers,suppliers, and customers as forces for environ-mental investment and cleaner production. TheU.S. Chemical Manufacturers Association’s Re-sponsible Care program (which is mandatory formembers) and similar chemical industry pro-grams abroad, as well as environmental chartersof the Business Council for Sustainable Develop-ment, the International Chamber of Commerceand the Keidanren (Japan’s major industry associ-ation), are among examples of business initiativesto promote improved industrial environmentalperformance.

Finally, as has been noted, some environmentalinvestments in pollution prevention and espe-cially energy efficiency are cost-effective even inthe absence of regulations, Markets may developas these opportunities become better known.

DEFINING THE INDUSTRY ANDITS MARKET

The previous section refers to EGS, cleanerproduction, and the environmental industry with-out crisp distinctions. This is because definitionsof the industry and its market are inconsistent andsometimes nebulous, and data are often lacking.The reasons why data are inadequate and the

differing definitions of the market used by severalstudies are discussed below. As is discussed inchapter 3, this assessment does not adhere to arigid definition of EGS.l1 Instead, it examinesmarkets and competitiveness in a number oftraditional environmental areas-air, water, andwaste management, including services-with il-lustrative cases from cleaner production impor-tant to the energy and manufacturing sectors.

Information on environmental markets andindustry size is inadequate for several reasons:

9

■

—

Little effort has been made by the United Statesand other countries to track EGS productionand trade. U.S. Standard Industrial Classifica-tion (SIC) codes and the international Harmo-nized Code (HC) do not correspond well withenvironmental product categories .12 Thus, offi-cial data on production and trade are of limitedvalue. (See ch. 5 for discussion of environ-mental trade.) Many products used in environ-mental equipment and facilities are also used inother applications. It is often not possible todetermine whether the end use of a product isenvironmental.Production data are difficult to obtain becauseof the industry’s structure. It has been estimatedthat about 200 public companies account forroughly one-third of U.S. environmental reve-nues but that over 58,000 privately held fins,averaging $1.3 million in annual revenues each,account for the remaining two-thirds.13 Pri-vately held companies are not required by theSecurities and Exchange Commission to pub-licly divulge financial information. There maybe over 10,000 environmental fins, mainlysmall, in Western Europe.

11 ,& ~revloUSly discussed, sever~ impo~t aspects of environmental teChllOIOgieS inclllding a@c~w~ tec~olo@es! geophysid andecological modelmg, technologies for assessing health effects, and nuclear-related technologies are not examined in this asessment. Greenproduct design was the subject of another recent OTA assessment, U.S. Congress, Office of Technology Assessment, Green Products byDesign: Choices for a C’/eaner Environment, OTA-E-541 (WaShingtO~ DC: U.S. Government Printing Office, September 1992).

IZ one exception is SIC 35646~C g4Q 139, Selected ~dus~al Air Pollution Control Equipment. Several o~er categories P~allY cover

EGS products. Further discussion of this issue is found inch. 5.13 ~nk,ironmenfa~ Business Journal, vol. 5, No, 4, April 1992, p. 7. Over 24,000 of ~ese compa~es me priVate water utilities averaging

.$400.000 in annual revenues.


■

■

Many environmental companies, including largeconglomerates, are active in a variety of indus-trial sectors; they generally do not report theirenvironmental business separately. Engineer-ing and construction companies have provideddesign and construction management servicesfor environmental projects for many years.Instrument manufacturers produce lines ofequipment for environmental monitoring andanalysis. Producers of boilers and power gener-ation equipment sell air pollution control equip-ment (as well as less-polluting combustionsystems and turbines). A number of chemicalcompanies have spun off commercial hazard-ous waste management businesses in additionto producing specialized chemicals for water,air, and waste treatment. And, with the end ofthe Cold War, many defense contractors areseeking environmental business opportunitiesranging from clean-up of Federal facilities todevelopment of electric vehicles.14 A fewcompanies in other sectors facing tough times,such as the Pacific Northwest forest productsindustry, are redirecting their efforts toward theenvironment (see box 4-A).Industrial establishments operate in-house air,water, and waste treatment facilities and serv-ices. These operations, while recorded as pollu-tion abatement expenditures in corporate ac-counts, are seldom included in estimates ofenvironmental goods and services. This partlyexplains why sales by environmental firmsdiffer from national estimates of environmentalcompliance cost (see ch. 7). Internal corporateenvironmental expertise and facilities some-times provide a basis for new businesses. For

instance, Amoco, Dow, DuPont, and Rhone-Poulenc are among the chemical concerns thathave established hazardous waste managementbusinesses. 15

Most estimates of the size of the environmentalindustry focus primarily on clearly identifiableend-of-pipe pollution and waste control, treat-ment, and remediation. Even here, however,coverage varies, as is shown in the followingstudies:

9 The OECD divided the market into four equip-ment and related service sectors—water andeffluents treatment, waste management, airquality control, and “other’ (which includesland remediation and noise abatement)--plus aseparate general environmental services cate-gory.l6 Cleaner production or pollution preven-tion products are not included, although somerelated consulting services are.ECOTEC, a British consulting firm, uses fourprimary categories: air pollution control, waterand wastewater treatment, contaminated landreclamation, and waste treatment and disposal(including consulting and analytical servicesrelated to these areas) .17 It does not includemunicipal solid waste collection, noise abate-ment, construction of environmental infrastruc-ture, or cleaner production.Farkas Berkowitz & Co., a U.S. consultingfirm, divides the American environmental in-dustry into air, water, solid waste, hazardouswaste, consulting, and “other” (which in-cludes analytical and information services, andlandfill liners, among other things).18 Watersupply and solid waste handling equipment (for

14 For a~ysis of defense convemion issues, see U.S. Congress, OffIce of Technology Assessment Ajler the Cold War: f.iving With hwer

Defense Spending, OTA-I’TE-524 (Washingto~ DC: Governrnent Printing ~lce, February 1992), and U.S. Congress, OffIce of TechnologyAssessment Defense Conversion: Redirecting R&D, OTA-ITE-553 (Washingto~ DC: Government Printing Office, May 1993).

15 Environmental Business Journal, op. cit., footnote 13, p. 9.

16 OECD, op. Cit., fOOtnOte 2, p. 5$

17 ECC)TEC Research and (lmsdtig, Opportunities for the Environmental Protection and Waste Management lndusOy in Europe~.

umingharn, U.K.: June 1990).IS Farkas Berkowitz& Co., The Fifih Annual State-of-the-Industry Report ~ashingtoq w: 1993).

Chapter 4–The Global Environmental Market: Trends and Characteristics 95

Box 4-A–Forest Product Supply Firms and Environmental Business Opportunities

In Oregon, some forest products firms and suppliers are pursuing environmental businessopportunities in response to declining forest harvesting and processing.’ For instance, the Eugene-based Ross Corp., a designer and manufacturer of heavy equipment used to extract and transport logs,has capitalized on its experience to develop materials-handling equipment for municipal solid wastedisposal and recycling. Examples include balers, conveyors, sorting systems, and scrap handlers. Thecompany also designs municipal recovery facilities: one such facility is operating in Washington State.Offices in Canada and New Zealand support international marketing activities.

Another Eugene-based firm, Bulk Handling Systems, has adapted its materials handlingmachinery expertise, in this case for the lumber, panelboard, and paper industries, to manufacturehandling, sizing, and storage equipment for waste and scrap materials. The company also makesequipment for power plants that use agricultural and forestry wastes as fuel. Phoenix Industrial Park inEugene was a virgin plywood manufacturing facility until a lack of old growth logs put it out of business.The site now houses a plant for reclaiming and processing urban and industrial wood wastes; also atthe site is an oil recycling facility. International Resources Unlimited’s engineering consulting businessused to concentrate on the forest products sector. The firm now works on a wider variety of structuralmaterials. With U. S., Finnish, and Hungarian collaborators, it is developing a number of products usingmixed waste paper and mixed paper, cardboard, and plastic wastes to displace virgin wood inpanelboard and fiberboard construction materials.

Contraction of the forest products industry in the Pacific Northwest has parallels to declines indefense-related industries. Redirection of economic development and adjustment assistance areurgently needed by displaced workers and their communities. While opportunities in environmentalgoods and services, as well as environmentally preferable materials, probably will not cancel outdeclines in the forest products industry, they do provide some options for economic development andgrowth. This has been recognized by Washington, Oregon, California, and British Columbia, which haveall identified environmental technologies and services as a key sector for development.

1 Eugene I=. Davis, president, international Resources Uniimited, Eugene, OR, protiwd infor~tion forthisand the following paragraph.

instance, garbage trucks) are omitted but mu- 4. asbestos abatement,nicipal refuse services are included. Recycling 5. water infrastructure (water and wastewaterof municipal solid wastes and hazardous indus- treatment equipment and supplies),trial chemicals are listed but recovery of 6. water supply utilities,industrial scrap is not. 7. engineering/consulting,

■ One of the most comprehensive estimates, that of 8. resource recovery (includes recycling),the Environmental Business Journal, divides the 9. instrument manufacturing,U.S. environmental industry into 12 categories: 19 10, air pollution control,

1. analytical services, 11. waste management equipment, and2. solid waste management, 12. environmental energy sources (includes3. hazardous waste management (includes re- renewable energy and cogeneration).

mediation),

19 E~\ironme~tal Business Journal, Op. Cit., fOO~Ote 13.


The journal tracks private companies (publiclyand privately held) and publicly owned water andwaste utilities. However, the mobile source airpollution control sector is not included.

None of the studies fully account for pollutionprevention and cleaner technology-processesand products that use energy and materials moreefficiently, that generate less total waste and lesshazardous waste, and that decrease use of toxicsubstances. Unlike add-on environmental tech-nologies, which are additional costs to industry,this mostly invisible environmental sector cansometimes lead to improvements in productivity,efficiency, and product quality. And even whencleaner production and pollution prevention arenet costs to business, they are usually lessexpensive than end-of-pipe pollution control andwaste disposal.20

Cleaner technologies may be adopted specifi-cally to meet environmental requirements-forinstance, replacement of chlorofluorocarbons (CFCs)in light of CFC phase-out laws or new paintapplicators stimulated by tough regulations forvolatile organic compounds (VOCs)--or theymay be chosen for primarily nonenvironmentalreasons+. g., low pressure polyethylene produc-tion offers advantages (lower cost and avoidanceof high pressure reactions) over high pressurepolyethylene production while using less organicsolvent and saving energy.

21 Environmental per-

formance will remain one of a number of factors--technical performance, cost, consumer prefer-ences, worker safety, and so on—that engineersand managers will consider in production tech-nology choice and product design.

To the extent that cleaner production is notincluded in estimates of the environmental indus-

try, then environmentally inspired business op-portunities will be understated. For instance, inthe 1990s, developing country and Central andEastern European capital investment for theelectric power sector may reach $1 trillion.22 If astudy on environmental business opportunitiesassociated with power sector investment were toconcentrate on end-of-pipe pollution abatement,waste handling, and restoration of coal miningsites, it would miss very large commercial andenvironmental opportunities offered by moreefficient power generation technologies, electric-ity and heat cogeneration, cleaner fuels, andrenewable energy. A narrow environmental sec-tor definition would also miss the great potentialof selling negawatts--or improved energy effi-ciency—to power users.

In addition, studies that focus only on end-of-pipe technologies may neglect the possibility thatsuch technologies could be displaced by cleanerproduction approaches. For instance, if organicsolvents are replaced by mechanical or aqueousprocesses (e.g., powder coatings and water-basedpaints), markets for VOC control devices maybediminished. As another example, cleaner com-bustion processes and non-fossil energy sourcescould dampen long-term demand for add-onemission control equipment, although near-termmarkets for these devices are robust.

Yet, an all-encompassing definition of envi-ronmental technology offers little practical guid-ance in assessing environmental markets andcompetitiveness. Nonetheless, the realization thattechnology-not just environmental goods andservices-and environment are intimately boundtogether has broad implications for the molding of

~ mere are alSO c~es where add-on pollution controls can allow manufacturers to maintain high W@ products Wtile rn~tinS

environmental requiremenkfor instance, catalytic converters have allowed automobile engines to be optimized for power or fuel economywhile decreasing emissions.

2’ William H. Joyce, “Energy Consumption Spirals Downward the Polyolefii Industry, “ in Jefferson W. Testor, David O. Wood, andNancy A. Ferrari (eds.), Energy and the Environment in the 21st Century: Proceedings of the Conference Held at the Massachusetts Instituteof Technology, Cambridge, MA AZarch 26-28, 1990 (Cambridge, MA: MIT Press, 1991), pp. 427435.

22 World Bati Capital ExpendituresforEIectric Power in the Developing Countries in the 1990s, IENEnergy Series Paper No. 21, February1990, in World Bank, The Bank’s Role in the Elecm”c Power Sector, Industry and Energy Department, box 5.

Chapter 4–The Global Environmental Market: Trends and Characteristics I 97

technology, environmental, and economic poli-cies.23 Some long-term technological trends suchas ‘‘dematerialization" 24—which includes thesubstitution of knowledge-intensive productionfor resource-intensive production, precision con-trol of processes, and, generally, doing more withless material and energy—have salutary environ-mental effects. For instance, fiber optics isarguably an environmentally preferable technol-ogy because fiber optic cables require much lessenergy and material per unit of communicationthan do copper cables (and concommitantly lessenvironmental damage from mining and manu-facturing); they have allowed the development ofnew monitoring and control technologies that canincrease production efficiency and decrease waste;and they allow further substitution of communi-cation for transportation.

GLOBAL, REGIONAL, ANDNATIONAL MARKETS

The OECD estimates that over 80 percent ofthe 1990 market for environmental services,pollution control, and waste treatment occurred inthe 24 member countries of the OECD.25 (Seetable 4-1 and, for European national data, table4-6.) The remainder is split between EasternEurope/former U.S.S.R. (7.5 percent) and ‘Other’(10.5 percent). The United States is by far thelargest national market ($78 billion) followed byJapan ($24 billion), western Germany ($17 bil-lion), and France ($10 billion). The study antici-pated higher-than-average growth in Canada,Japan, several European Community countriesthat need substantial environmental investment tomeet Community standards, and the “other’category, which includes the dynamic economiesof the Pacific Rim. The lowest growth rates areanticipated in the Nordic countries, Germany, the

Table 4-1--OECD Estimate of EnvironmentalMarket Sizes and Growth by Region

(in 1990 dollars)

Annual1990 2000 growth

($ billion) ($ billion) (percent)

OECD North AmericaUnited StatesCanada

OECD Europe a

OECD Asia-PacificJapanAustraliaNew Zealand

OECD total

Non-OECD totalEastern Europe/Former U.S.S.R.Other Non-OECD

World total

84.078.0

7.0

54.0

26.224.02.00.2

164.0

36.0

15.021.0

200.0

125.0113.0

12.0

78.0

42.039.0

2.80.3

245.0

55.0

21.0

34.0

300.0

4.13.85.5

4.1

4.3

3.44.9

4.1

a S- table 4-6 for European national data.NOTE: Percentage growth was recalculated from the original source asa compound annual rate.

SOURCE: OECD, The OECD Environment Industry: Situation, Pros-pectsand Government Polities, OCD!3GD(92)1 (Paris: OECD, 1992).

Netherlands, Switzerland, and Austria, whichalready possess relatively advanced environ-mental management capabilities; the U.S. marketis expected to expand more slowly than theOECD average. OECD’s analysis suggests thatCentral and Eastern Europe’s environmental mar-ket will experience above-average growth, al-though the combined Eastern Europe/former So-viet Union category rate could be below average.

By environmental sector, 24 percent of OECDcountries’ environmental industry 1990 outputwas for environmental services, 30 percent forwater and wastewater treatment equipment, 20percent for waste management equipment, 15percent for air quality control equipment, and 11

23 HmtoL Repetto, and sobi~ op. cit., footnote 11; George Heaton, Robert Repetto, and Rodney Sobin, Backs fo the ~uture: U.S.Government Policy Toward Environmentally Critical Technology (Washington DC: World Resources Institute, June 1992).

~ R. He~~ S.A. Ardekani, and J.H, Ausubel, ‘‘Dematerialization, “ in Jesse H. Ausubel and H.E. Sladovich (eds.), Technology andEnvironment (Washington, DC: National Academy Press, 1989), pp. 5069.

25 Data for these several paragraphs are from OECD, op. cit., footnote *.


Table 4-2—OECD Estimate of EnvironmentalMarkets by Sector (in 1990 dollars)

Table 4-3—Environmental Business InternationalEstimate of the Global Environmental Market


($ billion) ($ billion) (percent)


($ billion) ($ billion) (in percent)

Equipment 152 220 3.8

Water/wastewater 60 83 3.3Waste management 40 63 4.6Air quality control 30 42 3.4Other 22 32 3.8

Services 48 80 5.2

Total 200 300 4.1

NOTE: Percentage annual growth was recalculated from the originalsource as a compound annual rate.

SOURCE: OECD, The OECD Errtircmment Mustry: Situation, Pros-pects ancf Gcwerrrrnent Po/kes, OCDE/GS(92)l (Pans: OECD, 1992).

percent for other forms of EGS, including con-taminated land remediation and noise control (seetable 4-2). Within OECD, the highest predictedgrowth rate is within the service sector and lowestin water and wastewater treatment. Much of thegrowth in the “other” sector is likely to be basedon expanded efforts in contaminated site remedia-tion.

An analysis by Environmental Business Inter-national (publisher of the Environmental Busi-ness Journal) suggests a significantly largerenvironmental market (see table 4-3). The esti-mate also is much more optimistic than the OECDabout the growth potential of the EGS industry,projecting a 5-year annual average growth rate ofbetween 7 and 8 percent.

These analyses provide only a general indica-tion of the global environmental market, ratherthan definitive estimates. Furthermore, estimatesof national and international environmental mar-kets are not the same as estimates of eitherenvironmental compliance costs or the environ-mental sector’s contribution to gross domesticproduct (GDP). As discussed previously, manyenvironmental expenditures are internal to the

United StatesCanadaMexicoOther Latin AmericaWestern EuropeEastern Europe/Former

U.S.S.R.JapanAustralia/New ZealandSoutheast AsiaRest of world

Total

13410

16

94

1421

366

295

180172

10132

2731

513

9

426

6.111.214.910.87.0

14.48.1

10.816.78.4

7.6

NOTE: Percentage annual growth was recalculated from the original asa compound annual rate.

SOURCE: Grant Ferrier, president of Environmental Business interna-tional, presentation at the Environmental Business Council of theUnited States meeting, Washington, DC, June 8-9, 1893.

firm and do not accrue to the environmentalindustry. And total environmental firms’ reve-nues do not represent total contributions to GDPbecause they do not measure final demand or totalvalue added by the environmental industry. Manysales by environmental companies are to otherenvironmental companies; for instance, wastemanagement service companies buy equipmentfrom environmental product manufacturers, andenvironmental contractors often subcontract jobsto other environmental companies. In other words,total revenues overstate contribution to GDP bydouble-counting expenditures.

As has been mentioned, pollution preventionand improved energy efficiency are only partlycovered in environmental market estimates.26 Ananalysis done for the Department of Energyprojects annual global energy efficiency exportmarkets at $8.4 billion annually during the years1990 to 2000, doubling to $16.8 billion annually

21S Enviro~ent~ Consultfig related to po~ution prevention is often included and the Environmental Business Journal includes renewableand co-generated power.

——

Chapter 4-The Global Environmental Market: Trends and Characteristics 99

Table 4-4-Environmental Business Journal Estimate of U.S. Environmental Industry Revenue and Growth($ billions, percent growth)

● From U.S. Department of Commerce, Survey of Current Business and Statisfica/Abstracf of the United States 1992.

SOURCE: Environmental Business Journal, April 1992 and April 1993.

during the years 2000 to 2010.27 About half of themarket is likely to be in developing countries.OTA has identified improving energy efficiencyas an especially valuable opportunity for simulta-neously assisting environmental protection andinternational development.

28 Descriptions of major

regional and national environmental marketsfollow.

9 United StatesBecause of the Nation’s large size and its

relatively strict environmental regulations, theUnited States is the world’s largest producer andconsumer of EGS. Many U.S. environmentalfirms have focused exclusively on the domesticmarket. However, the size and relative openness

of the U.S. market has made it attractive to foreigncompetitors, and competition is intensifying (asdiscussed in greater detail in ch. 5).

As previously noted, estimates of the U.S.environmental market vary, due to differences indefinitions, methodologies and interpretations.OECD estimated the market to be $78 billion in1990. The Environmental Business Journal re-ported U.S. EGS industry revenues of $126billion in 1990 and $133.7 billion in 1992,although mobile source air control revenues—mainly catalytic converters-of about $8.3 bil-lion in 1990 were not included29 (see table 4-4).Farkas Berkowitz and Co. produced an estimateof $75 billion in 199230 (table 4-5). EPA reportedU.S. 1990 environmental expenditures tobe$115

27 U.S. Department of Energy, ‘ ‘National Energy Strategy Technical Annex No. 5: Analysis of Options to Increase Exports of U.S. EnergyTechnologies,” 1991/1992, pp. 67-68.

28 us Conwess, Offlw of Te~~ology Assessment, Fue[ing Development: Energy Technologies For Developing Counttief, OTA-E-S16

(Wa.shingtom DC: U.S. Government Printing Office, April 1992).

29 Environmen tal Bu~ine~~~ournu/, vol. 6, No, 4, April 1993, and vol. 5, No. 4, April 1992; U.S. Department of Commerce ~ ICFReso~wsand Smith Barney, Harris Upham and Company Inc., Business Opporruniries of~he New Clean Air Act: The Impact of the CAAA of 1990 onthe Air Pollution Control Industry, August 1992, p. 1-2.

30 Fm~s Berkowitz & Co., op. cit. footnote 18.


Table 4-5--Farkas Berkowitz Estimate ofU.S. Environmental Industry Revenue

Segment Percent

Environmental consulting 12Hazardous waste and remediation 8Air pollution control (mobile and stationary) 12Solid waste 37Water quality 17Other 14

Total Estimated 1992 Revenue $75 billion

SOURCE: Farkas Berkowitz & Co., The Fifth Amwa/ State-ot-the-hdustry Report (Washington, DC: 1993).

billion.31 However, as noted, these are not identi-cal to environmental industry revenues.

Future environmental market growth in theUnited States could come from several directions.For instance, an analysis of business opportuni-ties offered by the Clean Air Act Amendments(CAAA) of 1990 estimates that cumulative reve-nue increases (in 1990 dollars) for stationary andmobile source air pollution control equipmentproducers will be $35 to $49 billion by the year2000. 32 Engineering, design, and constructionfirms could bring in another $2 to $4 billionduring this period. Makers of instruments andmonitoring systems might see revenues grow $1to $3 billion over the period. The CAAA also isexpected to increase revenues for natural gas,low-sulfur coal, and reformulated and oxygenatedgasoline producers. In some cases, the ability toswitch to low-sulfur coal or natural gas allowsmanagers of electric power plants and otherfacilities to avoid installing add-on pollutioncontrol equipment. (These revenue estimates aresensitive to assumptions about timing of regula-tions, scope of facilities regulated, technologychoices made by regulated industries, and costs oftechnologies. A slow economy and uncertaintiesabout CAAA implementation make the air pollu-

tion control estimates presented above seemoverstated.)

The CAAA tightens emissions control require-ments for both stationary and mobile sources. Itorders major reductions in sulfur and nitrogenoxides (SO2 and NOX respectively) emissionsfrom power plants and other major sources;strengthens controls on volatile organic and toxicair pollutants; requires cleaner vehicles and fuel;expands monitoring requirements for powerplants; and regulates disposal of CFCs.

State and local air quality requirements (someof which are required by Federal law) will alsoaffect the market for both traditional EGS andcleaner products and processes. Examples includethe South Coast Air Quality Management Dis-trict’s tough regulations to control smog insouthern California and California’s require-ments for development and marketing of low-,very low-, ultralow-, and zero-emission vehiclesover the decade. Other States are consideringadoption of California’s automobile standards.(See box 7-B for discussion of some regulatedindustry responses to California’s air regula-tions.)

Growth in U.S. demand may occur for otherenvironmental sectors. New drinking water stand-ards under the Safe Drinking Water Act’s 1986amendments and storm sewer management regu-lations mandated by the Clean Water Act’s 1987amendments are being implemented. The CleanWater Act, Safe Drinking Water Act, Superfund,and the Resource Conservation and Recovery Actare scheduled for congressional reauthorization.If the laws are strengthened, environmental mar-ket growth is likely. Meanwhile, State and localregulation of wastes and recycling increases.

Contamin ation and waste from decades of U.S.military activity and weapons production duringthe Cold War are now major environmental

31 ICF Reso~ces and Smith Barney, op. cit., footnote 29, pp. I-2, I-3, original estimates in A. Carlin and the Environmental Law hstitute,Envirorvnermd Invesmwnts: The Cost of a Clean Environment Summary, EPA-230-12-90-084 (Washington DC: U.S. EnvironmentalProtection Agency, December 1990) were expressed in 1986 dollam and were inflated 15 percent to derive 1990 dollars.

32 ICF Reso~ces and Smith Barney, op. cit., footnote 29, p. W-3

Chapter 4-The Global Environmental Market: Trends and Characteristics I 101

issues. Many Department of Defense (DOD) andDepartment of Energy (DOE) facilities are badlycontaminated with various wastes, ranging fromradioactive byproducts of nuclear weapons pro-duction to spills of common fuels and solvents.This hazardous legacy threatens health and theecology. Decontamination of decommissionedmilitary facilities is important if those lands are tobe made viable for civilian use and commercialinvestment. Some estimates of the costs forclean-up, decontamination, and waste manage-ment of the Nation’s nuclear weapons complexreach $75 to $105 billion through the year 2010.33

DOE’s estimated fiscal year 1994 outlay forenvironmental restoration and waste managementwill be over $5 billion, while DOD’s environ-mental restoration outlays will be about $2billion .34

9 CanadaAccording to OECD, Canada’s environmental

market was $7 billion in 1990, and might grow to$12 billion by 2000 (5.5 percent annualgrowth). 35 Environmental Business Internationalestimated a $10 billion Canadian market for 1992,and projects $17 billion by 1997 (1 1.2 percentannual growth).36 Both studies suggest that theannual growth rate for the Canadian market willbe above the OECD-country and global average,

Canadian environmental problems and responseshave mirrored those in the United States but, attimes, with a lag. The national Green Plan,announced in December 1990, calls for a varietyof measures, such as antismog actions, acid rain

controls, CFC phase-out, stronger toxic effluentand emissions standards, clean-up of hazardouswaste sites, reduced urban wastes, and limits ongreenhouse gas emissions. Provincial and localauthorities will upgrade sewer and waste disposalsystems while continuing to promote recycling.

A study for the Ontario Environment Ministryindicated that U.S. regulatory policies oftenprecede and influence practices in Canada.37

Some Canadian jurisdictions use U.S. experiencewith environmental technology for regulatoryguidance. And many subsidiaries of U.S. compa-nies operating in Canada may adopt parentcompany environmental practices.

Trade may eventually lead to greater conver-gence of U.S. and Canadian standards. SurveyedOntario industrial firms indicated that the UnitedStates was the source for most imported environ-mental products and services.38 Canadian envi-ronmental firms see the United States as theirmajor export market.

I Western EuropeThe EC and Western Europe can be divided

into three major tiers of environmental prioritiesand capabilities.39 The top tier countries alreadypossess relatively advanced environmental man-agement systems, including comprehensive legis-lation, tight standards, capable administration,and good infrastructure. Denmark, Germany, andthe Netherlands of the EC, along with Finland,Norway, Sweden, Switzerland, and Austria, fallinto this tier.

33 U.S. Gener~ A~oun~g OffIce, brig-Term Plans to Address Problems of the Weapons Compiex Are Evolving, GAO~CED-9@219,

September 1990. The GAO also includes $50 billion for modernkition of the Weapons Complex.34 Exe~tive Office of tie ~esiden~ OffIce of Management and Budget, Budget of the United States Government, Fiscxd Yw 1994, pp.

App.-46l, App.-462, App,-570..

35 OE~, op. cit., footnote 2.

36 Gmnt Ferner, op. cit., fOOtnOte 3.

ST on~o ~i~u of Envhoment, Stiy @ the Onran’o Environ~n~a/ Protection fnd~~~ (Queen’s Prirlter for (lntario, 1992),

pp. 134-35.

38 Ibid.

39 Richard Haines, ‘Pollution Control Market to Flourish in Post-1992 Europe,’ PoZZution Prevention, vol. 1, issue 2, April 1991, pp. 11-20.


Table 4-6-Western European Environmental Markets ($ billion)

Annual AnnualECOTEC estimate rate OECD estimate rate1990 1995 (percent) 1990 2000 (percent)

Germany (west) 14.4France 6.5United Kingdom 8.9Italy 4.2Netherlands 2.2Switzerland 1.5Spain 1.4Sweden 2.0Belgium/Luxembourg 0.8Austria 1.3Finland 1.0Denmark 0.7Norway 0.7Portugal 0.3Greece 0.2Ireland 0.3

OECD-Europe* 44.3

20.09.5

11.56.42.81.82.52.51.21.81.30.90.90.60.50.4

64.4

6.78.0

10.68.75.34.8

12.74.88.46.03.87.05.3

13.514.18.3

7.8

17.010.0

7.05.02.71.91.81.51.41.31.01.00.70.40.30.3

54.0

23.015,011.07.73.72.53.02.02.31.81.31.21.00.70.50.5

78.0

3.14.14.64.43.22.35.22.95.13.32.71.83.65.75.25.2

3.7

● Does not include Iceland and Turkey.NOTE: ECOTEC’S analysis does not include civil engineering work, waste collection costs, and noise abatementincluded in OECD’S estimates. Figures are rounded to nearest $0.1 billion. Percentage growth rates were recalculatedfrom the original sources as compound annual rates.

SOURCE: ECOTEC Research& Consulting, Ltd., and OECD, The OECDEnvironmerIt /nuiWry: Situation, Prospectsand Government Po/ices, OCDE/GD(92)l (Paris: OECD, 1992).

The middle tier includes Belgium, France,Ireland, Italy, Luxembourg, and the United King-dom, which now have less rigorous environ-mental policies. Environmental markets in thesecountries may grow as they move to meet ECenvironmental standards.

The bottom tier countries-Greece, Portugal,and Spain-lack sufficient environmental experi-ence, environmental infrastructure, and the abilityto enforce strong environmental policies. Theyneed to boost their environmental managementcapabilities to meet EC standards. Their environ-mental markets may grow most rapidly of theWestern European countries.40’41

Two estimates of Western European environ-mental markets are presented in table 4-6. Table4-7 presents market estimates by environmental

sector. The eastern portion of Germany, ananomolous environmental market where the ruin-ous environmental legacy of Communist rulemeets the economic strength and tough environ-mental standards of Federal Germany, is dis-cussed in box 4-B.

Western Europe thus includes markets for bothcutting edge technologies and catch-up equip-ment and processes. Both markets may exist evenin countries with strong standards. For example,some German air quality standards are morestringent than U.S. requirements; almost all majorsources of SO2 and NOX in western Germany arewell-controlled. Yet Germany is still phasing inautomotive catalytic converters, first introducedin Germany 1986 but only now (1993 model year)required for all size classes of new automobiles.

@ OEm, op. cit., footnote 2.

Al ECO’I”EC Rese~ch & Consulting, The EuroPean Pollution Conrrol and Wusre Management itfarker.’ An ~ve~ie~ @i*gh, U. K.:

January 1992).


Table 4-7—Western Europe’s EnvironmentalMarkets by Environmental Sector ($ billion)

Annualgrowth

1990 1991 1995 (percent)

Air pollution control 9.6 10.3 12.8 4.3Water/wastewater

treatment 12.8 13.8 21.3 9.1Contaminated land

reclamation 1.0 1.1 2.3 16.1Waste management 20.9 22,5 28,0 4.5

Total 44.3 47.7 64.4 8.5

SOURCE: ECOTEC Research & Consulting, Ltd. (ECOTEC’S environ-mental market definition does not include construction work, watersupply, or municipal waste collection.)

Most other Western European states have not yetreached western German levels of stationarysource air pollution control or American levels ofmobile source controls, Both will be areas ofmarket growth. It is also possible that futureEuropean policymakers may look toward California-type air standards as a model. Industrial VOCcontrols are another area of EGS demand inWestern Europe.

Water and wastewater treatment technologiesand markets are relatively mature in much ofWestern Europe. Yet lack of infrastructure in thesouthern EC states—where primary and second-ary sewage treatment often is unavailable-andinvestment needs in the UK are reasons forforecasts of significant capital expenditure in thissector. Due to EC directives, most countries willupgrade systems and improve water qualitymonitoring. Treatment chemicals and advancedtreatment technologies, such as use of membranesand ion exchange, are other areas of growth.42

In remediation of contaminated lands andhazardous waste handling, Europe lags behind the

United States in experience and policy .43 Anestimated 62,000 contaminated sites associatedwith closed industrial facilities and refuelingstations are known, with perhaps many more to bediscovered. The 1990 market, primarily in North-ern Europe, was estimated at $1 billion a year butcould shoot to $2.3 billion by 1995, stimulated bymore stringent laws. Likewise, markets to treat ordispose of hazardous waste may triple, from $2.5billion to $7.6 billion by 2000. This would reflectan anticipated rise in landfilling costs due tocapacity constraints, stricter controls, greaterquantities of hazardous substances generated,44

and more waste pretreatment requirements.As with water and wastewater treatment, mu-

nicipal and hazardous waste treatment is charac-terized by poor infrastructure--often open dumps—in parts of Western Europe at the same time otherareas are advancing the state of the art.

Western Europe’s large environmental markethas stimulated a very capable environmentalindustry in some countries and sectors. In 1990,there were an estimated 10,000 environmentalfirms in the Western Europe; 65 percent of thesecompanies had annual revenues of under $5million. 45 About one-fourth of Western Europe’senvironmental companies are German.46 Another15 percent are British, 12 percent are French, and10 percent are Italian. The number of such firmsin the Netherlands (7 percent), Sweden (5 per-cent), Switzerland (4 percent), and Denmark (3percent) is small but disproportionately highrelative to population or GDP. This reflects therelatively strong and well-established environ-mental regulations in those countries. OtherWestern European countries each accounted forbetween 1 and 3 percent of the total. As illustratedin the following chapter, companies from Ger-

4Z H~neS, op. cit., footnote 39; ECOTEC, op. cit., foomote 41.

43 Ibid. for data in this paragraph.

~ ~s will Owm p~y by definition as more substances are defined m tidous.

45 ECOTEC Research & Consulting, op. Cit., foomote 41.

46 ~o~m e~timte suggests tit 9,~ to lo,~ env~onm~~ f- may be feud in German y alone. Ariane Genillard, “IndustrialClean-up on a Grand Scale, ” Financial Times, Sept. 16, 1993, p. 12.


Box 4-B-Environmental Needs in Eastern GermanyThe “new Laender’-’-the new states of the Federal Republic of Germany--have an environment

damaged by decades of abuse under inefficient central economic planning, which gave the environmentvery little consideration in the course of industrial and agricultural development. The result has beendamage to public health and degradation of air, water, soil, and biological resources. One directenvironmental consequence of the Cold War is 800 known sites in eastern Germany where oldmunitions have been buried.1 Eastern Germany’s reliance on low-quality, high-sulfur coal for 75 percentof its energy also produced severe environmental contamination. Emissions of a number of air and waterpollutants are comparable to the highest levels occuring in western Germany 20 to 30 years ago; S02

emissions are the highest per unit of area of any European country.2 The Association of GermanElectricity Producers (VDEW) estimates it will take $25.5 billion over 10 years to bring eastern Germanpower plants into compliance with Federal German environmental standards.3 Many industries, as wellas water supply, wastewater treatment, and solid waste utilities, will require substantial investment tomeet Federal German and European Community environmental standards. New facilities must meetFederal standards; existing facilities are subject to a compliance timetable that extends to the year2005.4 Some estimates of eastern German environmental needs are great. (See table 4-B-1.)

While the transition of the eastern Ger-man economy to a market basis is difficult,the region has an advantage over its easternneighbors because it is hitched to the mostpowerful economy in Europe. Even with theGerman recession of the early 1990s, theflow of money from western Germany, plusthe stability of Germany’s Iegal, political, andeconomic system, make investment andtrade with eastern Germany less risky thansimilar transactions with other former sovietbloc countries in Central and Eastern Europe.

Over $3.5 billion in loans and grantswere made by the federal government forimprovement of the eastern German envi-ronment in 1990 and 1991.5 The federal

Table 4-B-l-Needed Environmental Expendituresfor Eastern Germany 1992 Through the Year 2000

(billion 1992 dollars)Best

Environmental sector Low High estimate

Wastewater management 33.9 86.0 80.2Drinking water improvement 10.8 19.2 10.8Waste disposal 1.9 22.0 22.0Air pollution 3.2 22.4 14.4Contaminated site remediation 1.9 44.8 6.8Noise abatement 1.3 2.6 1.3

Total 53.0 205.7 135.4

SOURCE: IFO Institute for Economk Research in OECD, OECf)EnW0WwntalP6d0rrna ntx ReWwvs:Gwnwn y(Park:OECD, 1993),p. 91.

government may bear 60 percent of $8.3 billion presumed to be needed for remediation of contaminatedeastern sites through 1998, with additional funds provided by states.6 Much remedial work will beassociated with privatization of state-owned enterprises. While some American firms may concedeeastern German environmental markets to Germany’s strongly competitive environmental industry, themarket may still be particularly attractive. American environmental firms could even find that acquisitionsand investments in Germany can offer a platform for expansion into Central and Eastern Europe.

1 U.S. ~timsnt of Commerce, “Market Insight Report: Environmental Market Opportunities in -ternGermany,” March 1992.

a OECD, OECD aVhtWIWW Performance Retdews: Germany (Paris: OECD, 1993), p. 33-90.3 U.S. ~W~~of~~r~~e, ~ 2,1992, in U.S. Department of Commerce, Nati*Tmde ~ta

Bank.4 C)ECD, op. dt, footnote 2.5 [~.

6 ~vjn~tia) Scjence & T~no/09Y, vol. 27, No. 8, 1993, p. 1461.


many, Sweden, the Netherlands, Britain, France,Austria, and Switzerland are strong competitorswith American and Japanese companies in mostof the world, including the domestic U.S. market.

I JapanBehind the United States, Japan has the second

largest national environmental market, estimatedby OECD as $24 billion in 1990 and expected togrow to $39 billion by 2000.47 Japan, like theUnited States, Germany, and several other OECDcountries, has stringent environmental regula-tions. And as in those countries, environmentalmarkets will reflect strengthening of already strictstandards in some areas and efforts to matchbetter foreign performance in other areas.

Some air quality markets in Japan are the mostdeveloped in the world—Japan operates overthree-quarters of the world’s stack gas desulfuri-zation and denitrification facilities48--yet airpollution control requirements continue to bebolstered. For instance, Japanese diesel truck andbus manufacturers are under pressure to meet NOX

reduction requirements of 17 and 35 percent by1994-1995 for heavy- and light-duty trucks,respectively, with longer term reduction goals of38 and 56 percent.49 However, stationary sourceVOC emissions and toxic air pollutants are lesstightly controlled than under the United States’1990 Clean Air Act Amendments.

Additional efforts are envisioned in the waterand waste sectors. At the end of fiscal year 1990,

only 44 percent of Japanese residents were servedby centralized sewage treatment, and only 62percent had flush toilets.50 The Five-Year Pro-gram for Sewerage Construction and Basic Pro-gram for Public Investment anticipates sewerageservices for 70 percent of Japan’s residents by2000. Meanwhile, improvement of residentialseptic systems is underway. Although alreadyincinerating three-quarters of its municipal solidwastes, the Japanese waste treatment infrastruc-ture is pressured by lack of space for landfills andfor new waste disposal facilities. Recycling andwaste reduction-related EGS, and improved in-cineration and resource recovery are growingneeds. Japanese hazardous waste treatment andcontaminated land remediation requirements donot appear as strong as those in the United States.

# Central and Eastern Europe and theFormer Soviet Union51

The once centrally planned economies ofCentral and Eastern Europe and the former SovietUnion have inherited grave economic and envi-ronmental problems resulting from decades ofgrossly inefficient management.52 The regionserves as a cautionary example of the dangers ofignoring the environment when pursuing indus-trial development. Central planners promotedheavy industry and intensive agriculture, withminimal attention to environmental protection.Therefore, many factories do not have pollutionabatement equipment; in other cases, existing

47 oE~, op. cit., footnote ~.

48 coal Tcchno]ogy Research Institute, “World’s Emission Purification Techniques,” Japan Ministry of Foreign Affairs, “Japan’sEnvironmental Endeavors,” April 1992, p. 10.

49 * ‘Tmck M~er~ ~essed T. Reduce Ni@ous Oxide Emissions, ” Nikkei Sangyo Shimbun, Dec. 4, 5, and 6, 1991, in Foreign BroadcastInformation Service, YPRSReporr:Environmenral issues, JPRS-TEN-92-001-L, Mar. 25, 1992, pp. 17-21. ‘f%ree-partseriaf rtewspaperarticlesby Hirofumi Tanaka.

50 En;,ironment ~~ Development : Japan’s &p~rience uti Ac~ievemenf, Japan’s national qofi to mCED 1992, December 1991, pp.32-33.

SI Anotier OTA assessment on environmental and ener~ technology transfer to Central and Eastern Europe is underway. U.S. CongressOffice of Technology Assessment Energy Eflciency Technologies for Central and Eastern Europe, OTA-E-562 (Washi.ngto~ DC: U.S.Government Printing Office, May 1993) is the fwst report of that assessment; a second report, to be released in 1994, will address issues ofenergy supply and provide additional analysis of energy efficiency.

52 see ~x 4_B for discussion of the former East Gefmany.


equipment is often in disrepair. Reliance on poorquality high-sulfur coal is very high, accountingfor 80 percent of Polish and 62 percent of Czechand Slovak energy consumption.53 Sewerage andeffluent treatment is usually inadequate-wherepresent. Safe waste disposal sites are lacking. Thelist of health and environmental impacts is lengthy—diminished lifespans, high rates of lung disease,extremely high heavy metal levels in children’sblood, cities blackened with air pollution, deadrivers and lakes, ground saturated with spilt oil,eroded and saline soils, dying forests, Chernobyl,and so on—and is documented elsewhere.54

Industrial production itself is hampered bypollution; reportedly 65 percent of the rivers andstreams in the Katowice region of southwesternPoland—and 30 percent nationwide—are so pol-luted that they are unusable for industrial pur-poses. 55 The major factors of production-labor,capital, and natural resources-have all beenimpaired by environmental damage, And, con-tamination inhibits Western investment.

While the needs are great, the resources aremodest. Clean-up of Poland alone might require$260 billion over 25 to 30 years, of which $70billion would be for pollution abatement and mostof the rest for restructuring the energy andindustrial sectors.56 The pursuit of a cleanerenvironment is handicapped by intense economic

and political difficulties in moving to marketsystems of exchange, and from ethnic friction andwarfare in some areas. However there remainsinterest in improving the environment. For in-stance, Poland committed about $1 billion toenvironmental investments in 1991, of which allbut $60 million was raised in-country, primarilyfrom environmental fees and fines; these locallyraised funds were expected to double in 1992.57 Inaddition to local currency funds, which might betranslated into export commodities such as oil andgas, financial resources come from the EuropeanBank for Reconstruction and Development, theWorld Bank, the Nordic Investment Bank, theEuropean Investment Bank, EC’s PHARE pro-gram, and bilateral assistance agencies of theUnited States and other countries. Still, manyenvironmental products, as well as expertise,must be imported into the region.

Warsaw Pact forces treated their real estatewith less care than U.S. and other Westernmilitary forces, and the former Soviet nuclearcomplex is probably an extraordinary challengeto safety and environment.58

Water quality is a major environmental prior-ity. Almost two-thirds of Poland’s environmentalexpenditures in 1991 were for the water sector.59

Polish environmental spending for 1991-1995 isanticipated to reach $1.29 billion for water

53 1989 statistics, united Nations !jtatistical Office, U.N. Energy Thpes (New Yor~ NY: United Nations, 1991) in World Resources Mtitute,World Resources 1992-93 (New York NY: Oxford University Press, 1992), T 5.1.

54 see, for ~S~nce, M. &jhbach and A. Friendly, Jr, Ecocide in the USSR: Health andNature Under Siege (New York NY: Basic Books,1992); Bedrich Moldan and Jerald L. Schnoor, “Czechoslovakia: Examking a Critically Ill Environment,’ Environmental Science andTechnology, vol. 26, No. 1, 1992, pp. 14-21; Ministry of Environmental Protection, Natural Resources, and Forestry, The Stare of theEnvironment in Poland: Damage and Remedy (Warsaw, Poland: 1992); World Resources Institute, WorldResources 1992-93 (New York NY:Oxford University Press, 1992), Ch. 5; The World B@ Environment Strategy Study reports for Bulgaria, Poland, and Czechoslovakia.

55 James F. Manji, ‘‘Cleaning up in Eastern Europe,“ Automation, May 1991, pp. 20-21.56 me world Ba~ “pOland Draft Environment Stllltegy Study, ” ~~t summ ary, conclusions, and recommendations (Washington DC:

The World B@ 1989), p. iii; % World Resources Institute, World Resources 1992-93 (New York: Oxford University Press, 1992), p, 57,ST ~ek Now~ows@ Director for mternatioml Cooperatio~ Ministry of Environmental Protection of Poland, presentation at GLOBE ’92,

Vancouver, BC, Canada, Mar. 19, 1992.58 See U.S. Conflss, Office of Technology Assessmen~ Dismantling the Bomb and Managing the Nuclear Materials, OIX-O-572

(Washington DC: U.S. Government Printing Office, September 1993) for discussion of environmental, health, and safety issues related todismantling and disposing of military nuclear materials.

59 Ke~e~ J. Macek and Grego~ K. Schw~z, “Domestic Environmental products and Services Sectors: Poland, ” TMS ManagementConsulting, Framingham, MA, October 1991. Municipal solid waste or equivalent was not a listed category,


supply, $3.05 billion for water protection, $2.67billion for air pollution, and $360 million forindustrial waste. Hungary intends to spend over$1 billion on water supply and sewerage treat-ment infrastructure out of a total $2.5 to $3.5billion environmental investment in 1992 -1996.60

Air pollution is a very visible problem. Baghousesand other filters, cyclones, and electrostatic pre-cipitators are relatively simple, low-cost, andeffective means of controlling the health threatsposed by particulate found in smoke and dust.Coal-cleaning technologies can improve combus-tion efficiency. Heavy reliance on high-sulfurbrown coals leads to a market for desulfurizationtechnologies. Control or prevention of NOX andVOC emissions for both stationary sources andvehicles are additional needs.

The large stock of obsolete and inefficientcapital provides an opportunity for the provisionof cleaner production and energy efficiencytechnologies for both retrofit and new facilities. Arecent study estimates that six former EasternBloc countries (Poland, Hungary, Bulgaria, Ru-mania, Czech Republic and Slovakia, and theformer Yugoslavia) offer a $19.4 billion potentialmarket for industrial-sector energy-efficiency equip-ment—meters, analyzers, thermometers, steamtraps, fluorescent lights, combustion equipment,insulation, and others.61 This estimate was de-rived from results of a U.S. Agency for Interna-tional Development (USAID) energy assistanceprogram in which 48 industrial facilities in thesecountries had energy audits and were providedwith over $1 million of U.S.-manufactured energy-efficiency equipment. The equipment providedwas low-cost and was chosen to offer simple

payback within 3 years, although most installa-tions yielded much faster payback—in somecases measured in days.

Monitoring and control technologies, includ-ing industrial process control and residentialthermostats, offer large environmental and com-mercial opportunities in these countries.62 Forinstance, some urban areas are heated fromdistrict heating plants, which in principle canoffer superior efficiency because of the opportu-nity to cogenerate electricity and useful steam.District heating also obviates the need for sepa-rate heating plants in each building served.However, in Moscow and other cities, apartmentslack thermostats, so overheated apartment-dwellers open their windows in mid-winter, whilethose in apartments further down the steam linehave insufficient heat; the result is tremendousenergy waste and discomfort.63 Companies suchas Honeywell are investigating opportunities inthis area.64 Business opportunities for energyservice companies (ESCOs) may also arise.ESCOs, pioneered in the United States, identifyand provide equipment and services for improvedenergy efficiency to industrial and commercialclients. Their earnings come from a portion of themoney saved from clients’ energy bills.

In some cases, existing facilities are so ineffi-cient as to be beyond salvage. This leads to thepossibility of phasing out dirtier methods of thepast-open hearth steelmaking and mercury-consuming chlor-alkali production, for instance—and introducing cleaner production technology,In the long run, gas turbines burning the region’splentiful natural gas may produce electricity morecheaply and with less pollution than existing

60 Kemeti J. Macek, ‘‘Domestic Environmental Products and Services Sectors: Hungary,’TMS Management Consulting, Framingham,MA, January 1992.

61 -k Hopk~, Bu$ine$$ Oppotiunities in Ea$tern Europe for Energy .Efi.&nt I&~s~ia~ products (WNJlhgtO~ IX: The Alliance tOSave Energy, January 1992).

62 us, conwe~~, Office of TecJ-molou Assessment, Energy Eficiency Techno[ogiesfor central and&stern Europe, op. cit., footnote 51,pp. 55, 65-67.

by Ibid., p. 65.

M fbid., pp. 88-89.


plants. Similarly, fluidized-bed combustion andother clean coal technologies are likely to provesuperior to air pollution controls on existingpower plants. Long-term markets for more eco-nomically efficient and environmentally prefera-ble industrial production technologies may farexceed the demand for retrofitted pollution abate-ment and waste treatment equipment. Some newfacilities will be needed before others; for exam-ple, capacity to produce unleaded gasoline andlow-sulfur motor fuels will bean early need if theregion adopts EC-like vehicle standards.

9 Latin AmericaGrowing environmental awareness and liberal-

izing of trade are opening up Latin Americanenvironmental markets. The region is character-ized by a heretofore modest commitment toenvironmental protection and by continuing pov-erty in both rural and urban areas. However, thetraditional view of environment and developmentas in opposition is softening. And some countries,have committed growing financial, legal, andadministrative resources to environmental mat-ters; for example, the Mexican environmentagency’s budget grew from $4.3 million in 1988to $78 million in 1992, essentially doublingyearly in real terms.65 In April 1992, Mexico, withWorld Bank aid, began a $126 million program tostrengthen environmental management capacityat federal, state, and local levels.66 Mexico andBrazil are and will continue to be the region’slargest environmental markets.

Mexican environmental markets are of particu-lar interest to the United States because of a long

Table 4-8-Mexico City Air PollutionControl Program ($ million)

By category of expenditureClean fuels/fuel substitution 2,153Rehabilitation & expansion of public transport 1,536Emissions control and monitoring 639Reforestation 327Training and R&D 27

By source of fundingMexico 3,671Japan Overseas Economic Cooperation Fund 689Japan Export-Import Bank 228Interamerican Development Bank 46World Bank 44

SOURCE: Comprehensive Pollution Control Program for the MexicmCity Metropolitan Zone, April 1991 in U.S. AID, Energy and Environ-ment Market Conditions in Mexico (Washington, DC: U.S. AID, March1992).

shared border, environmental issues associatedwith the proposed North American Free TradeAgreement (NAFTA), and growth of commercialties (e.g., American-owned maquiladora plants)and trade. Extreme air pollution in Mexico Cityand a 1992 disaster in which portions of theGuadalajara sewer system exploded, resulting insignificant loss of life, are among the situationsthat have raised the visibility environmentalissues in Mexico and have aroused the interest ofEGS exporters and investors abroad. Significantfunds are now available for environmental protec-tion; for instance, $4.6 billion is budgeted for a4-year Mexico City air pollution control programthat started in 1991, and $4.5 billion is planned forwater/wastewater investments during 1990 to1994 67 (see tables 4-8 and 4-9). An additional$460 million over 3 years is being committed forthe Mexican side of the U.S.-Mexican border

tis Ser@o Reyes LuJa% subse~e~of Wo]om, SEDUE (Secretariatfor mo]ogyand Urban Development), Mexico, Presen~tion at GJ-OBE

’92, Vancouver, B. C., Canada, Mar. 19, 1992. The Mexican environment agency is now part of SEDESOkthe Secretariat for SocialDevelopment.

66 U.S. Agency for hternation~ Development Environmental Market Conditions and Business Opportunities in Key btin Arnen”cunCountries, Business Focus Series, (available through USAID, Arlingto~ VA), October 1992.

67 U.S. Agency for ~te~tio~ Development Offke of Energy & Infrastructure, Energy and Environment Marker COnditiOnS in Me.xico,Business Focus Series, (available though USAID, ArlingtoU VA), March 1992.

68 Jm Gflbrea~ Rich, $ ‘Financing Environment~ and Infrastructure Costs Under a North American Fme Trade Agreement With Emphasison the Texas-Mexico Border, ” draft presented to the Institute of the Americas conference “Latin American Environment and TechnologicalCooperation’ La Jolla, CA, NOV. 17-19, 1991.


Table 4-9—1 990-94 Water Supply and Sanitation Sector Plan ($ million)

1990 1991 1992 1993 1994 Total (%)

Water supply 206.1 674.1 695.6 690.8 728.1 2,994.7 (66.5)Sewerage 63.7 232.6 252.1 247.0 238.0 1,033.4 (23.0)Treatment 16.0 121.5 107.5 112.9 117.6 475.5 (10.5)

Total 285.8 1,028.2 1,055.2 1,050.7 1,083.7 4,503.6

NOTE: Does not include Mexico City, Guadalajara, Monterrey, and some U.S.-Mexico Border Plan water andwastewater investments. The inter-American Bank has loaned $300 million for Guadalajara and $325 million forMonterrey that are not included in the figure. Mexican projects in the U.S.-Mexico Border Plan allocate an addition $220million for ‘%vastewater treatment and recycling projects.”

SOURCE: World Bank, 1991 and U.S. AID, Energy and Environment Market Conditions in Mexico (Washington, DC:U.S. AID, March 1992)

region.68 The World Bank recently signed an

agreement with Mexico to provide $1.8 billion inloans, matched by $1.2 billion from the Mexicangovernment, for environmental clean-up duringthe years 1994 to 1996.69

A special facility for financing environmentalinfrastructure projects along the Mexican-UnitedStates border region has been proposed as part ofan environmental side agreement to NAFTA.(Congress had not yet voted on NAFTA when thisreport went to press).

Table 4-10 provides a partial estimate ofMexico’s environmental market size. Of an esti-mated 1992 total environmental market of $614million, imports accounted for $150 million, ofwhich $85 million (about 56 percent of imports)came from the United States.70 U.S. Departmentof Commerce data from 1989 indicate that U.S.companies garnered about a quarter of Mexico’sair pollution import market. Other major playersincluded Germany, Japan, and Switzerland. U.S.producers dominated equipment imports for waterpollution (60 percent of imports) and solid andhazardous waste (over 70 percent of imports) in1989; German, Japanese, French, and Swiss firmswere prominent rivals .71 Although not included inthese figures or table 4-10, a U.S. Department ofCommerce analysis found that the Mexican solid

Table 4-10—Mexican Environmental Markets($ million)

1992 1993-951990 1991 (est.) (est.)

Air pollution 78 90 104 119-157Water pollution 105 126 400 500-780Solid/hazardous waste” 83 95 110 127-167

Total” 266 311 614 746-1104

● See text for discussion of environmental products that maybe omittedfrom these figures,

SOURCE: U.S. Department of Commerce in U.S. AID, EnvironmentalMarket Conditions and Business Opportunities in Key Latin AmericanCountries (Washington, DC: U.S. AID, October 1992).

waste handling equipment market (garbagetrucks, waste compactors, street cleaners, andother equipment) amounted to $500 million in1991 and was expected to reach $625 million in1992; U.S. suppliers of this equipment sold $233million (69 percent) of the $337.5 million Mexicoimported in 1991.

There are significant environmental marketselsewhere in Latin America. Tables 4-11 and 4-12present 1992 estimates of the six largest marketsand their imports. Environmental spending isexpanding for the provision of public water,sewer, and refuse disposal services as well as forindustrial environmental activities. Major buyersof air and water pollution control equipment

@ Gary Lee, “World B* Mexico Agree on Pollution Cleanup Funds, ” Washington Post, Sept. 29, 1993, p. A18,TO U.S. Agency for Internation~ Developmt@ Environmental Market Conditions and Business Opportunifi”es in Key htln Amen”can

Countries, op. cit., foomote 66.

7) Ibid.


Table 4-1 l—Major Latin American EnvironmentalMarkets in 1992($ million)

Air Water Solid/Hazard Total

Argentina 53 100 15 168Brazil 120 845 50 1,015Chile 195 350 15 560Colombia 20 15 10 45Mexico” 104 400 110 614Venezuela 25 9 10 44

Total 517 1,719 210 2,446

● See table 4-10 for details and note.

SOURCE: U.S. Agency for International Development Entirorvnenta/Market Conditions and Business Opportunities in Key Latin AmericanCountries (Washington, DC: October 1992).

Table 4-12—Major Latin American EnvironmentalImport Markets in 1992 ($ million)

Total Percent Importsimports of total from U.S. Total

Argentina 42 25 11 168Brazil 190 19 92 1,015Chile 500 89 200 560Colombia 35 78 10 45Mexico 150 24 85 614Venezuela 43 97 38 44

Total 960 39 436 2,446

SOURCE: U.S. Agency for International Development Enwronmenta/Market Conditions and Business +portunities in Key Latin AmerkanCountries (Washington, DC: October 1992).

include chemical, petroleum refining, steel, pulpand paper, food, textile, and other process indus-tries. For instance, Brazil’s steel, pulp and paper,and cement sectors plan environmental invest-ments that could reach $300 million a year ormore. 72 The electric power sector is another

important market for environmental equipment.Economic liberalization and loosening restric-

tions on foreign investment in energy and otherindustries may assist in the diffusion of cleanerproduction technologies to the region.73 Multina-tional firms from the United States and Europe aremajor purchasers of environmental equipmentand services.

As in Central and Eastern Europe and theformer Soviet Union, cleaner production opportu-nities in Latin America arise from the building ofnew facilities and introduction of cleaner proc-esses. For instance, the Chilean copper industry isconsidering investment in new and modernizedsmelters, copper dryers, and sulfuric acid recov-ery units that will prevent air pollution.74 Pemex,the Mexican national oil company, has beenadapting refineries to produce unleaded gasolineand low-sulfur fuels.75 One low-sulfur fuelsproject, costing $450 million in 1992, involvestransfer of technology from U.S. companies(HRI, Texaco, and Foster Wheeler) to severalMexican refineries. Anticipated 6 to 8 percentgrowth in annual electricity demand in Mexicothrough 200076 could produce markets for cleanerand more efficient electricity generation andend-use technologies as well as for pollutionabatement equipment. These examples are illus-trative and could apply generally to other expand-ing industrial sectors throughout the region.

~ South Korea and TaiwanSouth Korea and Taiwan are the two largest of

the four East Asian ‘‘tigers,’ the other two beingHong Kong and Singapore. These Newly Indus-trialized Countries (NICs) have engineered sus-tained high rates of economic growth. Their

72 Ibid., p. 41.73 Bird~ md Whwler provide limited empirical evidence horn Latin America that relatively open economies adopt Ckaner tWhOIO@eS

more readily than relatively closed economies. Nancy BirdsaU and David Wheeler, ‘‘Trade Policy and Industrial Pollution in Latin America:Where are the Pollution Havens?, ” Patrick Low (cd.), Infernatiomd Trade and the Environment (Washington DC: The World Bank, Aprit1992) pp. 159-67.

74 U.S. Agency for ~ternation~ Development Environmental Market Conditions and Bufl”ness Opportunin”es in Kt?y hin Amen”can

Countries, op. cit., footnote 66.

‘s Ibid., p. 27.T6 U.S. Agency for kte~tio~ Developmen~ Energy and Environment Market Conditions in Mm-co, Op. cit., foomote 67.

Chapter 4-The Global Environmental Market: Trends and Characteristics ! 111

Table 4-13—Republic of Korea Environmental Investment Plan 1991-95 ($ million)

1991 1992 1993 1994-95 Total

Air pollution $1,384.2 $1,342.5 $598.9 $1,094.0 $4,419.7Water pollution 622.5 872.0 1,110.4 1,624.7 4,229.7Waste management 204.7 364.5 493.6 1,890.0 2,952.8Soil conservation 12.6 15.4 17.7 47,6 93.3Marine conservation 21.9 25.3 24.0 13.3 84.5Nature conservation 0.3 0.7 1.3 3.2 5.4R&D 2.7 12.0 12.7 25.7 53.1

Total 2,248.9 2,632.5 2,258.7 4,698.3 11,838.5

SOURCE: Ministry of Environment (Republic of Korea), White Paper 7990, 1991, in Ral Woo Lee, “Perspective ofEnvironmental Industry in Korea,” paper presented at GLOBE ’92, Vancouver, BC, Canada, Mar. 16-20, 1992.(Categories may not add to total due to rounding off.)

export-led strategies of industrialization are mod-els for other developing countries. Neighboringcountries Thailand, Malaysia, and Indonesia as-pire to be the next tigers, while other countries inAsia, Latin America, and Africa try to distill thetigers’ formulae for success and adapt them totheir own contexts. However, the tigers’ eco-nomic success has occurred with significantadverse impacts on environmental quality.

Inadequate or nonexistent sewerage and indus-trial effluent treatment facilities, improper han-dling of municipal and hazardous wastes, andpoor control of air emissions affect the health andwell-being of Koreans and Taiwanese. Drinkingwater resources are threatened, as are coastalfisheries (which are also overfished).

Both countries have substantially boosted theirenvironmental protection efforts in recent years.The Korean Ministry of Environment has out-lined a $10.5 billion, 5-year program of publicand private environmental investment from 1991to 199577 (see table 4-13). The Korean environ-mental investment plan includes large allocationsfor SO2 controls, waste landfills and incinerators,

and wastewater treatment. Investments in cleanerfuel infrastructure, such as liquefied natural gasfacilities, are part of Korea’s air quality invest-ment plans. The plan includes construction of 60wastewater treatment plants and 55 incineratorsby 1995. Thirty-four sanitary landfills may bebuilt over the next two decades.

In 1991, South Korean businesses spent about$732 million on pollution control facilities, ofwhich $375 million was for the water sector, $314million for air quality, and $37 million for noiseabatement. 78 Reportedly, $181 million of EGSwere imported to South Korea in 1991, with theU.S. share accounting for 14 percent.79 As stricterair and water pollution standards come into effectin 1995 for air and 1996 for water, environmentalinvestments could grow from $1.25 billion in1992 to $4.5 billion in 2000, according to sourcesfrom South Korea’s Energy and Resources Minis-

try.80Requirements for catalytic converters in.

new automobiles will create large markets. Grow-ing environmental concerns have led to anexpanding Korean environmental industry--over$750 million of environmental projects were

77 ~is~ of Environment (Republic of Korea), White Paper 1990, 1991, in T~ WOO he, “Perspective of Environmental Industry inKorea, ” paper presented at GLOBE ’92, Vancouver, BC, Camda, Mar. 16-20, 1992.

78 “Businesses Spend More on Pollution Facilities in 1991, ” Yonbap (S. Korean news agency), Mar. 9, 1992, in Foreign BroadcastInformation Service, JPRS Report: Environmental Issues, JPRS-TEN-92-O08, May 5, 1992, pp. 4546. Business expenditures on solid wastefacilities were not noted.

79 ‘ ‘Korea Needs U.S. Equipment; Problems Remain, ’ NewsACTION, VO1.7, No. 1 (spring 1992), pp. 16-17.go “Businesses Spend More on Pollution Facilities in 1991, ’ Op. cit., footnote 7*.


Table 4-14-Selected Environmental Projectsin Taiwan

Wastewater treatment $4.7 billion 21 projectsSolids waste disposal 3.5 billion 23 projectsGeneral projects/other 1.6 billion 9 projectsa

Air and noise pollution 532 million 7 projectsEnvironmental monitoring 256 million 5 projects“Environmental sanitation” and

toxic wastes 53 million 3 projectsa me ~mjwt of the Chinese Petroleum Corf30ration for “Industrial

Pollution Control” accounts for $1.3 billion in this category.

SOURCE: International Business Development, Northwestern Univer-sity. (Peter Hage, “U.S. Execs Hear Details of Taiwan’s Hot Market,”NewsACT/ON, vol. 7, No. 1 (spring 1992), pp. 5-7, published by theInternational Business Development program, Northwestern Univer-sity.)

awarded to 631 registered environmental firms inSouth Korea in 1991.81

The Taiwan Six-Year National DevelopmentPlan for 1992 to 1997 lists $305 billion of publicinfrastructure and state-owned industrial proj-ects.82 Of these 775 projects, 68 (accounting for$10.7 billion) are under partial or completepurview of the Taiwan Environmental ProtectionAdministration or local environmental agencies(see table 4-14). Additional projects of theTaiwan Six-Year Plan that are environmentallysignificant call for installation of cleaner produc-tion technologies, including combined-cycle gasturbine generators for Taiwan Power Co., cogen-eration and heat recovery projects for the state oiland steel companies, fuel desulfurization facili-ties, and various efficiency upgrades in state-owned industrial fins.

Taiwan’s environmental market was $907 mil-lion in 1991, of which imports supplied 68percent, including $210 million for U.S. goodsand services.83 Details are summarized in table4-15.

Table 4-15-Taiwan Environmental Equipment,Instruments, and Services Market and Trade

($ million)

Est. RealAnn.

Growth1989 1990 1991 (percent)

Total market 645 745 907 20-25

Imports 450 520 620 20Exports 3 5 8Local production 198 230 295

1990 import market share (percent):U s . 34Japan 29W. Germany 17Sweden 5United Kingdom 4

SOURCE: U.S. Department of Commerce and American Institute inTaiwan.

I India and ChinaThe two most populous nations in the world,

China and India, face major challenges in mesh-ing economic development and environmentalprotection. The two Asian giants suffer frominsufficient water, sanitary, and refuse disposalservices for their populations. The industrialsectors of both nations are growing fast, includinghighly polluting sectors such as chemicals, met-als, electric power, and cement. Both countriesrely on large deposits of cheap coal that createsignificant pollution problems, particularly whenboth fuel combustion and energy use are ineffi-cient. These countries are struggling to providebasic environmental services at the same timethey face growing toxic and hazardous threatsposed by modern industry. The tragic toxicchemical release at Bhopal, India in 1984 focusedattention on environmental safety in the growingIndian chemicals sector.

al ‘{s~cter G~de~~ for Environmen~ Protection” The Korea Times, Aug. 18, 1992, in Foreign Broadcast Information service, JpRSReports: Environmental fssues, JPRS-TEN-92-017, Sept. 21, 1992, p. 29.

62 ~eficm~ti~te in’IdwaD, ‘Listing of Taiwan’s Six-YWDevelopment Plan Projects (Partial List) & Status Report on Selected MajorProjects,” August 1991.

63 ~e~cm ~ti~te in mwan and U.S. Department of Commerce, International Trade Administration Market Research Reports:Taiwan-Pollution Control J@ipmen~ July 1991.


Environmental markets in these two countriesare modest by industrial nation standards. TheU.S. Department of Commerce estimated that thetotal Indian market for pollution control equip-ment in 1990 was $400 million, of which importsaccounted for 20 percent ($80 million).84 Thegreat majority of environmental equipment ismade in-country by Indian firms, a number ofwhich are affiliated with U. S., Swedish, andGerman EGS suppliers via licensing or partner-ship arrangements. British, Japanese, and SwissEGS suppliers are also active in the Indianmarket. About 45 percent of pollution controlequipment demand in India is thought to comefrom the electric power and chemical sectors.Indian environmental equipment markets areprojected by the U.S. Department of Commerceto grow 25 to 30 percent annually over thefollowing several years. Estimates of demand forenvironmental consulting and other services werenot available.

China’s environmental investments are in-creasing. The Five-Year Plan for 1991-95 allo-cates about $15 billion for environmental protec-tion, or about double the spending allocated in the1986-90 Plan.85 The government goal is for statespending on environment to reach 0.8 percent ofGDP by 1995. Much of the money is likely to bespent on countering pollution from coal-burningby means of fuel switching and improving heatingsystem efficiency, as well as end-of-pipe emis-sions controls. Japan has targeted part of its Green

Aid toward Chinese power plants for leasing andadaptation of flue-gas desulfurization technol-ogy. 86 American clean coal technologies mightmeet some of China’s needs.

Water quality spending in China is consider-able, with an equipment and instrument marketestimated at about $433 million in 1991.87 How-ever, imports accounted for less than $50 millionof this market; Japan (40 percent), Austria (25percent), and the United States (8 percent) weremajor suppliers.88 Solid and hazardous wastehandling and disposal are also acute needs; Chinahas few landfills or incinerators that can meetindustrial country standards for environmentalprotection. As in the case of India, an indigenousenvironmental industry is developing. Over 4,000enterprises with an estimated output of $1 billioncomprise the Chinese environmental industry.89

~ Other East Asian MarketsEnvironmental markets elsewhere in Asia are

also expanding. Like Taiwan and South Korea,the Association of South East Asian Nations(ASEAN) countries (Brunei, Indonesia, Malay-sia, the Philippines, Singapore, and Thailand)have been experiencing rapid economic growthand industrialization. But environmental degra-dation accompanying industrialization has be-come significant and recognition of the problemis only recent. A very rough estimate of the 1993aggregate ASEAN environmental market is $1.8billion. 90 (Environmental issues related to for-

S4 U.S. Dep@ment of Commerm, International Trade Administration, Market Research Reports: India-Pollution COn@Ol @pment inthe Chemical & Power Generation Sector, July 1991 for all information in this paragmph.

85 “C~a Batfles Hard To Clean Up Environment, ” China Daily, Oct. 8, 1992, p. 4, in Foreign Broadcast Information Service, JPRSReports: Environmental Issues, JPRS-TEN-92-021, NOV. 12, 1992, p. 6.

86 “Japan TO ROPOW cm bae Equipment To Trap Sulfur From Coal-Burning Plmts,” International Environment Reporter, May 19,1993, p. 375.

ST U.S. Dep~ment of Commerce, International Trade Adrninistratio~ Market Research Reports: China-Urban Water stitatio~ISA9109, Dec. 23, 1992.

88 Ibid.89 ~Ua news agency, ‘‘First Market for Environmental Protection Products, ’Aug. 9, 1993 in Foreign Broadcast Information Service,

JPRS Report: Environmental Issues, JPRS-TEN-93-022, Sept. 3, 1993, p. 2.

90 Jomthm Ma=, Acting &SiS@nt secretary for Trade Developmen~ U.S. Department of Commerce, WTitten testimony before theSubcommittee on Environment and Nahmd Resources of the House Committee on Merchant Marine and Fisheries, Feb. 25, 1993.


estry are very important in this region but are notdiscussed in this assessment.)

Singapore has instituted relatively strong envi-ronmental requirements, which accompany arelatively advanced economy. The country Min-istry of Environment has allocated $609.3 millionto environmental programs for 1992 and aspiresto take regional leadership in the environmentalindustry.91 Unleaded fuels and stricter emissionrequirements have been introduced, and CFCsubstitution for the country’s electronics industryis underway. Hong Kong, another city-state (andnot an ASEAN member), has emphasized landfillsand sewage treatment. Browning-Ferris Indus-tries (U.S.), for example, was recently awarded ajoint venture contract valued at $400 million over25 years to build and operate a landfill in HongKong. 92 A $15 billion sewerage infrastructureprogram is in progress, with extensive Britishbusiness involvement.93 Hazardous wastes arealso a growing concern in this rapidly industrial-izing region; Hong Kong, Singapore, and Indone-sia have integrated hazardous waste facilities inoperation or under development by Waste Man-agement International, subsidiary of WMX Tech-nologies (U.S.), and Malaysia has recently awardeda contract for such a facility to I. Kruger(Denmark).

Water and wastewater treatment, includingindustrial effluent treatment, are prioritiesthrough most of ASEAN.94 River water is oftenhighly polluted, sewerage service and safe tapwater are often unavailable. Oil and chemicalspills are another concern in this region becauseof a high concentration of petroleum production

and refining facilities. The World Bank and AsianDevelopment Bank have over $2.5 billion ofurban water and wastewater projects under devel-opment in Indonesia, although that country’s1992 market for water pollution control equip-ment was estimated at only $23 million.95 Malay-sia’s 1991-1995 development plan allocates over$1.5 billion for water resources, of which about aquarter is for sewerage and urban drainage.96

Air emissions are also of growing concern.Clean coal and other cleaner energy technologiesare important features in Thailand’s environmentand development plans. Recent Thai utility awardsof flue-gas desulfurization contracts to Japanesesuppliers and gas turbine power plants to U.S.companies are examples of energy and air qualitybusiness opportunities in the area. Vehicles emis-sions are becoming more problematic and it is notunreasonable to believe that other nations of theregion will follow Singapore, South Korea, andTaiwan in adopting cleaner motor fuels andvehicles.

Again, as illustrated in previous sections, rapiddevelopment creates opportunities for the provi-sion of both traditional environmental productsand cleaner industrial and energy technologies.

U Near EastEnvironmental protection is an emerging con-

cern in the Near East as human populations,industrial activity, and agricultural productionincrease in scale and concentration. In mostcountries of the region, environmental regula-tions are still at an early stage of development.

91 V~C~ntYipandBfi~Flm~~ “c~HongKong, As~coun~es~ ~ontier~ke~,’’New~c~]ON, VO1. 7, No. 1 (sp@ 1992),

pp. 14-16.92 ~ ‘Browning-Ferns Gets Contract to Operate a Hong Kong Dump,” Wall Srreet JournaZ, June 29, 1993, p. A8.93 Yip and F~e4 op. Cit., fOOtUOte 91+

94 U. S.-ASEAN Council for Business and Technology, “A SEAN Environmental Markets: Opportunities for U.S. Equipment and SemiceCompanies” (Washington, DC: 1991).

95 U. S..ASEAN Council for Business and Technology, “ASEAN Wastewater Treatment Markets: Opportunities for U.S. Companies,”draf~ 1992.

96 Ibid.


Table 4-1 6—Egypt’s Estimated EnvironmentalMarket ($ millions)

1992 1997

Municipal water and wastewater

treatmentWaste recyclingIndustrial wastewater treatmtAir pollution control

Water purification systems

Municipal solid waste

Renewable energy (mainly wind)

Mobile source air pollution

Air/water monitoring/testing

Environmental consulting

Total

350’59

N Ab

30NA12

06

15a

430

550-7008-10

100-150100-150

50-60NA20101040

890-1,150

a Current spending chiefly from development assistance.b NA denotes information not available

SOURCE: Project in Development and Environment and U.S. AID,Profile of the Environment Business Sector in Egypt (Arlington, VA:October 1992).

Water is the major environmental concern ofthe region. Estimates of Egypt’s environmentalmarket indicate that water and wastewater treat-ment is by far the greatest priority in that country(see table 4-16). Currently, 90 percent of Egypt’seffluents are untreated.97 Twenty percent ofMorocco’s 1988-1992 National Investment Budgetwas dedicated to sanitation.98 Efficient water useand wastewater recycling are important compo-nents of Israeli environmental practice; 66 per-cent of sewage is reused for irrigation and dripirrigation apparatus is employed to minimizespread of water borne pathogens.99

Waste management is a public health concernparticularly in urban areas. Greater Cairo haslandfill and comporting capacity to handle only22 percent of wastes generated; most wastes insmaller Egyptian cities are not collected.100 Tur-

.> . ———— - -w

Abu Rawash Wastewater Treatment Plant, Egypt.Many newly industrialized and developing countries,and nations in Central and Eastern Europe, planlarge investments in water related infrastructuredevelopment, often with support of international aidagencies. These projects offer business opportunityfor suppliers of equipment and engineering andconstruction of firms.

key reportedly has no modern landfill or waste101 With growing industrialincineration capacity.

production, lack of hazardous waste treatmentand disposal capability is also an issue. Airpollution is a major concern in urban areas asindustry, motorized transport, and electric powergeneration increase.

1 Other Developing CountriesEnvironmental markets in most of Africa, other

parts of Asia, other parts of Latin America, andthe small island nations are not well-documented.Environmental needs vary with the level ofindustrialization and urbanization. For most de-veloping countries, provision of basic water,

97 ~ojwt in Development and Env~onment and U.S. Agency for International Development, PrOfi/e of the En}’ironmenf ~USlnf3SS ~ect~rin Egypt (Arlington, VA: October 1992), p. 9.

98 U.S. Dep~ment of Commerce, Market Research Reports, Morocco--Water Sanitation Muipment, Dec. 23, 1992.

99 Yom Avnimelec~ ‘ ‘Irrigation With Sewage Effluents: The Israeli Experience, ’ Environmental Science & Technology, vol. 27, No. 7,hdy 1993, Pj). 1278-1281.

lm ~ojcct in Development and Ikwircmrntmt and U.S. Agency for International Development, Op. Cit., footnote 97, P. 10.101 IntamtloMl Fimnw Cowomtiom ~nve~ting in the Environ~nt: B~~ine~~ oppormni~ie~ in De},e/oping coun~’es (W&liXl@O~ ~:

World Bank and International Finance Corporation 1992), p. 16.


sewer, and refuse disposal services are the majorenvironmental priorities. Often in these countries,techniques and technologies appropriate for ruralvillage application (which are not examined inthis assessment), such as improved cookstoves,forest management, and improved agriculturalpractice, are of great importance.

Relative to larger or more industrialized devel-oping countries, these national environmentalmarkets are small. Environmental regulations andenforcement are often weak and the availability oftechnical and managerial expertise limited. Mostless-developed countries must rely on assistancefrom multilateral institutions and bilateral donorsto build their environmental management capa-bilities and their environmental infrastructure.For environmental product and service providers,aid and foreign investment are likely to be themajor funding sources for environmental busi-ness.

CONCLUSIONSMarkets for environmental goods and services,

including cleaner production technologies, aregrowing throughout the world. The character ofthese markets depend on the environmental andeconomic situations in each country. Perceptionsof risk and available resources-financial, techni-cal, and others-determine what environmentalmarkets will be like.

The largest markets are in the industrializednations. A leading tier of countries (including theUnited States, Japan, and Germany) continues totoughen their relatively stringent regulations whilesome other industrial nations play catch-up. Evenwithin the leading tier, regulatory stringencyvaries-a country may have the strictest regula-tions for some pollutants and more lax ones forothers.

The NICs (South Korea, Taiwan, Singapore,and Hong Kong) and advanced developing coun-tries, including several countries in ASEAN andLatin America (especially Brazil and Mexico),

have recently made environment a prominentfeature of governmental attention and nationalinvestment. The industrialized nations and themore prosperous of the newly industrializedstates have the money to spend on environmentand will likely dominate environmental marketgrowth in the decade ahead. A number oflow-income countries, including China, India,and Indonesia, also present environmental busi-ness opportunities.

Central and Eastern Europe and the formerSoviet Union have enormous environmental prob-lems and financial resources that are sparse incomparison--except for eastern Germany, whichcan rely on the wealth, stability, expertise, andstrong currency of its western compatriots. Whilenations like Poland are now dedicating localcurrency resources and adopting policies (likerational energy pricing) that are more conduciveto improved environmental performance, theregion’s unstable institutions of business, prop-erty, law, and governance may dissuade someforeign investment. However, foreign assistancefrom development banks and bilateral programsis significant, and innovative investors might takereturns in the form of oil, gas, fertilizer, and otherexport products. Political and social unrest makeportions of the region financially and evenphysically unsafe (e.g., former Yugoslavia, theCaucasian republics) for investment. An advan-tage the region has over much of the developingworld is their highly educated workforce andhighly trained technical and scientific talent.

Most of the developing world is struggling todeal with the environmental stresses often exacer-bated by a lack of basic environmental infrastruc-ture and services, like running water, sewerage,and refuse collection. In less-developed coun-tries, environmental product and service export-ers and investors may find profitable optionslimited to projects financed through foreignassistance. Careful investment, however, mayproduce successful local enterprises.

T

U.S. Competitivenessin Environmental

he United States’ environmental goods and services(EGS) industry appears to be competitive in mostsectors. Environmental industries in Japan, Germany,and several other Western European countries are also

strong. They compete with U.S. companies in all sectors of theindustry in all parts of the world. Indeed, foreign firms andtechnologies have garnered noteworthy shares of the U.S.environmental market through direct exports, licensing oftechnologies, and acquisitions of U.S. firms. Also, newlyindustrialized and developing countries are building their owncapabilities to meet part of their domestic environmental needsand to compete in export markets. Thus, competition is likely toincrease.

This chapter discusses international competitiveness in envi-ronmental technologies and services. It begins with an overviewof the limited data on trade in this area. This is followed by adiscussion of competitiveness factors. Most of the chapterconsists of brief sector analyses of eight major areas.

ENVIRONMENTAL TRADESeveral estimates of international trade in environmental

goods and services are discussed below. Because of datalimitations, these estimates should be approached with caution.

Information on EGS trade, profits, and productivity is limited,making analysis of competitiveness difficult. The StandardIndustrial Classification (SIC) and international HarmonizedCode (HC) systems used to tabulate trade data do not conformwell to EGS categories. For example, the United States, theEuropean Community (EC), and Japan put industrial air pollu-tion control devices in different categories, making direct

117


Table 5-l—Estimates of Environmental Exports($ billion current dollars)

OECDa Env. Bus. Int.b EPAC JSIMMd

Net goods,services, Total Total Net Total

& licenses products services equipment equipment1990 1992 1992 1991 1991

United States 4.0 6.9 3.6 1.11 NAGermany 10.0 11.0 NA 0,72 NAJapan 3.0 5.0 NA 0.48 0.35France 0.5 NA NA 0.01 NAUnited Kingdom 0.5 NA NA 0.29 NA

SOURCES AND NOTES: NA denotes data not available.

a OECD, me OECD &rvirmrrrtmf hfustry; Situation, Prospects and Government Policies, OCDBGD(W) 1 (Paris:OECD, 1992). Includes income from technology licenses.

b Environmental Business International, San Diego, CA.c U.S. EPA, “International Trade in Environmental Protection Equipment,” EPA 230-R-93-006, July 1993. Based on

trade categories considered environmental by authors.d Japan Smlety of Industrial Machinery Manufacturers, May 1992.

comparison difficult.1 In some cases, categoriesinclude environmental products and nonenviron-mental goods.2 And many products-e. g., pumps,motors, chemicals, measuring devices—have en-vironmental applications not identified in tradestatistics. Furthermore, data for existing environment-related categories have only recently becomeavailable; EC data prior to 1988 are more highlyaggregated, and U.S. data prior to 1989 did notconform to the HC system that permits compara-bility across nations.3

Table 5-1 summarizes trade estimates from 4sources. The estimate shown for the OrganisationEconomic Cooperation and Development (OECD)is for net exports of environmental products and

services, including income derived from licenses.4

The study concluded that Germany was thelargest environmental exporter, producing $10billion of trade surplus, of which half came fromexports to other European OECD countries. TheUnited States and Japan followed, each withseveral billion dollar surpluses. Britain, France,the Netherlands, and Sweden were also believedto be net exporters. Major importers of EGS werenot identified.

The estimate by Environmental Business Inter-national in table 5-1 also ranked Germany, theUnited States, and Japan as the world’s threelargest environmental exporters, respectively.5 Itsanalysis is limited to product exports for the three

1 U.S. categories include HC 8421390010 Dust Collection and Air Purification Equipment, 8421390020 Electrostatic Precipitators, and8421390030 Industrial Gas Cleaning Equipment ‘not elsewhere specified or indicated. The European Community has additional categories,whereas Japanese trade statistics combine these categories with 8421390050 Gas Filtering or Purifying Machinery to form an aggregatecategory containing an unknown proportion that is not related to air pollution control.

2 HC 8421210000 Water Filtering or purif~g Machinery and Apparatus and 8417800000 Industrial or Laboratory Furnaces and Ovens,Including Incinerators are two examples.

s The National Trade Data Bank (U.S. Department of Commerce), Eurostat (EC), and Japan Trade Monthly were consulted.4 OECD, The OECD Environment Industry: Situation, Prospects and Government Policies, ’ OCDE/GD(92)l (Paris: OECD, 1992).

OECD’S definition of EGS includes water and effluent treatmen~ waste heatment and disposal, air pollution control, contaminated landreclamatio~ noise control, and environmental services. It does not include trade and markets in cleaner production and energy efficiencyproducts or services except for some pollution prevention consulting services explicitly identified as environmental consulting.

s Grant Ferrier, Environmental Business International, presentation to Environmental Business Council of the United States conference,Washington, DC, June 7-9, 1993. Environmental Business International is the publisher of the Environmental Business Journal.

Chapter 5-–U.S. Competitiveness in Environmental Technologies and Services 119

countries and U.S. environmental service ex-ports. 6 The study, using information from fins,concluded that about 20 percent of U.S. environ-mental goods production was exported. As forU.S. services, the study concluded that under 10percent of solid waste management revenues andunder 5 percent of revenues for engineering/consulting, hazardous waste management, andanalytical services originated abroad.

An Environmental Protection Agency (EPA)study that examined official trade statistics cameto markedly different conclusions.7 As shown intable 5-1, it concluded that the United States wasthe largest exporter of environmental goods,earning $1.1 billion of surplus out of total exportsof nearly $1.7 billion in 1991. Germany wassecond with over $700 million in surplus from$1.5 billion of exports. Japan followed, withalmost a half-billion dollar surplus from almost$700 million in exports. However, due to datalimitations, the EPA study understates environ-mental trade in some respects and overstates it inothers. As discussed above, many trade categoriesinclude goods that have both environmental andnonenvironmental applications. For instance, thestudy did not analyze product categories thatinclude many types of treatment chemicals,analytical and control instruments, refuse han-dling equipment, and pumps and valves, and othergoods. At the same time, trade codes for gasseparation and purifying equipment, liquid filter-ing and purification equipment, and industrial andlaboratory furnaces (including incinerators) wereincluded even though industry uses much of theequipment in these categories for nonenviron-mental purposes. (EPA did not estimate trade inenvironmental services or revenue flows from

Table 5-2-Japanese Production and Exports ofEnvironmental Equipment ($ million 1991)

Total PercentYear production Exports Exported

1987 4086.0 160.9 3.91988 5211.3 170.1 3.21989 5314.0 589.5 11.11990 5262.0 365.5 6.91991 8054.6 350.2 4.3

SOURCE: Japan Society of Industrial Machinery Manufacturers, May1992.

technology licenses; official trade data are notsuited to such analysis.)

The Japan Society of Industrial MachineryManufacturers collects data on Japanese environ-mental equipment production and exports but notimports (see table 5-2). Its information indicatesthat between 3 and 11 percent of Japanesemanufactured pollution control equipment (forair, water, wastes, and noise/vibration control ortreatment) was exported during the years 1987-1991.8 For 1991, about $350 million of a total of$8 billion of environmental machinery produc-tion was exported. This figure is smaller thanEPA’s calculation of Japanese exports and is farsmaller than estimates from OECD and Environ-mental Business International.

The U.S. Department of Commerce tracksproduction of some industrial air pollution con-trol equipment (see table 5-3 and figure 5-l). U.S.production of these items grew from $600 millionto $900 million (1991 dollars) from 1987 to1991. 9 During those years between 10 and 16percent of production was exported.10 Unfortu-nately, similar data series for U.S. water pollutionand waste-related equipment trade and produc-tion are not available.

6 License revenues are not included nor were import levels calculated.7 U.S. Environmental Protection Agency, ‘‘International Trade in Environmental Protection Equipment: an Assessment of Existing Data, ’

EPA 23@ R-93-006, .hdy 1993.8 Japan Society of Industrial Machinery Manufacturers, May 1992.9 U.S. Department of Commerce, Bureau of the Census, ‘‘Current Industrial Reports: Seh.xted Industrial Air Pollution Control Equipment, ’

MA35J, various issues.10 Ibid,, and IJ.,S. Deptirnent of Commerce, Natioml Trade Data Bti.


1,400

1,200

y 1,000(u=o; 800u)c

.—; 600

&2 400

200

0

Figure 5-1—Selected Industrial Air Pollution Control Equipment—U.S. Production and Exports

O t h e r n Partmulate ernlsslons

~ Gaseo.sernissions _ T o t a l e x p o r t s

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

SOURCE: Bureau of the Census and National Trade Data Bank, U.S. Department of Commerce.

Table 5-3-Recent U.S. Production and Trade inSelected Industrial Air Pollution Control Equipment

($ million 1991)

Year Production Exports Imports Trade surplus

1989 772.2 113.9 78.8 35.11990 861.9 119.3 76.1 43.21991 936.6 149.0 74.9 74.1

SOURCE: U.S. Department of Commerce, Bureau of Census andNational Trade Data Bank.

Data from environmental equipment manufac-turers is too limited to compare productivity andquality trends among firms from different coun-ties. The growth in joint ventures, licensingagreements, international acquisitions, and for-eign branch operations further complicates na-tional comparisons and efforts to define nationalpolicies for environmental industries.11 Is issu-ance of a license a strength because it indicatesownership of a technology that will yield royaltyincome? Or does licensing indicate forgonereturns from manufacturing (including exportsand export-related jobs)? As in other industries,

there are cases of foreign-owned firms employingAmericans to make products for export and theU.S. domestic market, and cases of Americanfirms with significant manufacturing operationsabroad.

1 Export Related EmploymentFrom a national perspective, economic benefits

of a strong environmental industry include in-come and jobs that come from exports (or fromavoiding imports) and revenues derived fromlicenses and operations abroad. However, be-cause most EGS is not internationally traded, theexport-related employment from growing envi-ronmental markets abroad is difficult to estimate.A major portion of expenditures for large environ-mental projects, such as wastewater treatmentplant construction, landfill or incinerator devel-opment, or power plant scrubber installation, isfor local construction and assembly and forlow-value materials that can often be morecheaply provided locally. For instance, estimatesfrom the United States indicate that over half of

11 For more on tie bl~g of oatio~ corporate identifies, see IJ.S. Congress, Office of Technolo~ Assessmen4 MU/RWlfiOflU/s U~d ~h

Natiorud Interest: Playing by Different Rules, OTA-ITE-569 (Washington, DC: U.S. Government Printing OffIce, September 1993).

Chapter 5--U.S. Competitiveness in Environmental Technologies and Services 121

municipal wastewater treatment capital expendi-ture is for construction, as is about three-quartersof public water supply treatment capital spend-ing.

12 In developing countries, where labor is

often cheap and capital in short supply, suchprojects may be more labor-intensive than inmore industrialized countries. This, in turn, maylimit ancillary exports of construction machineryassociated with environmental infrastructure de-velopment. Much environmental spending is forday-to-day operation of water and wastewaterutilities and refuse collection and disposal. Thesejobs, too, are staffed locally.

Thus, international trade is centered on rela-tively sophisticated manufactured goods, engi-neering and project management services, andtechnology licenses. The most significant oppor-tunities for growth in U.S. EGS exports probablylie in these areas. While export related growth inthe number of jobs in such areas will probably bemodest, many of these jobs are likely to behigh-wage jobs in management, engineering andother technical professions, as well as somemanufacturing jobs.

While most environmental technologies arewell-established, a small high-technology sectordoes exist. The technological trajectories for newapproaches such as bioremediation and advancedbiological treatment,13 supercritical fluid extrac-tion and oxidation, new and improved catalysts,and advanced monitoring technology, amongothers, are hard to discern.

Over time, the environmental technology land-scape may shift considerably toward pollutionprevention and cleaner production. Business op-portunities may expand for producers of cleanertechnologies that prevent pollution, supplantingsome demand for end-of-pipe pollution control,

waste disposal, and remedial clean-up in ad-vanced industrialized countries (see box 3-B foran example). Also, fast growth in industrialproduction and infrastructure in many developingand newly industrialized countries and recon-struction in Central and Eastern Europe open upopportunities for firms able to integrate cleanerand more efficient processes and equipment intonew and replacement capital stock. Designers andequippers of cleaner power plants, chemicalworks, pulp and paper mills, smelting operations,steel mills, oil refineries, assembly plants, andother industrial facilities can position themselvesto benefit from the growing interest in sustainabledevelopment.

FACTORS AFFECTING COMPETITIVENESSThe competitiveness of a country’s environ-

mental firms is determined by a variety of factors.Some factors are fairly specific to environmentalbusinesses, including domestic environmentalregulations and the use of development assistanceto promote environmental goals. Other factors areshared with other industries, including cost ofcapital, export promotion policies, workforceskills, industrial structure, and strength of indus-try associations.

The U.S. environmental industry enjoys avariety of strengths and suffers from a number ofweaknesses that affect its performance in theglobal marketplace. Emerging threats and oppor-tunities will determine its performance in thefuture. Table 1-1 in chapter 1 presented a short listof major strengths, weaknesses, opportunities,and threats for the U.S. environmental industry.Several factors impinging on U.S. and foreign

12 Willi~T. ~rew & CO., 1992 Updat~ater Pollution Control Industry Outlook (Concord, NH: William T. l-oreu & CO., APril 192),pp. 244, 287.

13 see U.S. congress, Office of Technology Assessment, Biotechnology in a GlobalEconomy, OTA-BA-494(Washingtou DC: BvernmentPrinting Office, October 1991) ch. 8 for an analysis of environmentrd applications of biotechnology.


environmental industry competitiveness specifi-cally are discussed below.14

I Strength of Domestic RegulationsCountries with the strongest regulations and

enforcement—which can include environmentalliability, reporting requirements, and environ-mental fees-create markets for new and im-proved types of EGS. Domestic environmentalfirms can be in a better position than foreign firmsto develop products and services to help domesticindustries comply with environmental require-ments. If comparable regulations are later adoptedin other countries, these companies may befavorably positioned to export to the new mar-kets.

The strength of the United States, Germany,and Japan in environmental technologies-alongwith the disproportionately strong position ofseveral smaller countries, including the Scandi-navian nations, the Netherlands, and Switzerland—supports the thesis that countries with the strong-est domestic requirements are the most competitiveproviders of EGS. The relative growth in strengthof Japanese and German firms in (sulfur dioxide(SO2) and nitrogen oxides (NOX) control technol-ogies during the 1980s, when their domesticstandards became stronger than U.S. require-ments, as well as the relatively strong position ofAmerican hazardous waste remediation technolo-gies, further supports this point.

But the situation is complex. The strongperformance of recently privatized British and

French water and wastewater treatment fins,despite tighter environmental requirements else-where in Europe and in the United States, is oneexample. In the automobile catalyst business, twoof the largest companies are U.S. fins, as mightbe expected because the United States has thelargest market and, with Japan, the stricteststandards. But the single largest firm is headquar-tered in the United Kingdom, despite a history ofmuch weaker requirements in Britain and Europe.And Japanese firms have smaller market sharesdespite Japan’s strict vehicle emissions standards.

I Form of Domestic RegulationsTwo countries with the same numerical emis-

sions or effluent standards for a given pollutantmay still provide different incentives for compa-nies to develop and market innovative environ-mental technologies.

15,16 Technology approval

and permitting procedures, if lengthy and expen-sive, can be burdensome to developers seeking tobring new technologies to market. Some Ameri-can environmental technology developers claimto have gone abroad because of difficulties inobtaining proper permits to continue R&D in theUnited States (see box 5-A).17 Uncertainty inpermitting innovative technologies may dissuadeventure capitalists and other investors from fund-ing environmental technologies in the vital stagebetween the laboratory and proven commercialapplication. 18

Technology-based standards that mandate orfavor the use of specific technologies or ap-

14 For discussion of broader facton affecting competitivene,w, see U.S. Congress, Office of Technology Assessment Op. Cit., fOO@Ote 11,and U.S. Congress, OffIce of Technology Assessment, Competing Economies: America, Europe, and the Pacijic Rim, OTA-ITE-499(was@tom DC: U.S. Government Printing Office, October 1991).

15 N. rqo~ of the Natio~ AdvisoV CoWcil for Enviro~en@ Policy and Tec~ology (NACEPT), arl ~viso~ gTOUp to EPA, examinethe effect of U.S. permitting and compliance policy on environmental technology and innovation: U.S. EPA, “Permitting and CompliancePolicy: Barriers to U.S. Environmental Technology Diffusiou” EPA 101/N-91/001, January 1991; and U.S. EPA, “TmnsforrmingEnvironmental Permitting and Compliance Policies Tb Promote Pollution Prevention: Removing Barriers and Providing Incentives To FosterTechnology Innovatio& Economic Productivity, and Environmental Protection” April 1993.

16 ~othm OTA ~sessment is exarnfig characteristics and implementation issues of alternative environmental regulatory approaches.

17 Grant Ferner, president, Enviro~en~ Business International, Inc. and Editor-in-Chief, Environmental Business JOM@ teStimOny athearings before the House Merchant Marine and Fisheries Committee, Subcommittee on Environment and Natural Resources, Feb. 25, 1993.

18 Dag S@st, Teckology Funding, testimony at h earings before the Senate Committee on Environment and Public Works, May21, 1993.

Chapter 5-–U.S. Competitiveness in Environmental Technologies and Services I 123

Box 5-A-Regulations and Environmental Technology Innovation

How to accommodate research, development, and demonstration of new technologies is animportant issue in pollution control and waste treatment Iaws.1 If permitting is too easy, enforcementloopholes could develop; if too strict, innovation could be dampened. This can impede the ability ofregulated industries to install technology to Iower compliance costs (see ch. 9) and diminish incentivesfor environmental companies to develop and commercialize new technologies in the United States. TheU.S. Clean Air and Clean Water Acts have no testing permit provisions and rely on ad hoc administrativeprocedures that Iack predictability. The RD&D permitting provision of the Resource Conservation andRecovery Act (RCRA) are little used. Firms complain that the procedures needed forgetting a permitare time consuming, inflexible, and costly. Commercialization of innovative technologies can also bemade difficult by inflexible and costly procedures for demonstrating the efficacy and safety of newapproaches.

Some U.S. innovators have taken environmental technologies abroad because of burdensome

U.S. regulatory standards. One example is offered by a major company that is developing a vitrification

technology that turns wastes into a stable glass.2 An early use of t he technology is for hazardous fIy ash,but it may be applicable to a wide variety of hazardous wastes. Under RCRA rules, any material derivedfrom a hazardous waste is itself considered to be hazardous until the material is delisted following teststo show that it is non-hazardous. This provision is necessary to protect public health and theenvironment. However, delisting is a lengthy, expensive, and uncertain process often taking 2 to 3years, or longer. EPA requires separate delisting procedures for each individual type of waste mixturevitrified rather than allowing delisting of a family of materials. Since waste streams often vary incomposition, the separate delisting procedures for each mixture likely to be encountered duringtreatment places an expensive and time-consuming burden on technology innovators. In thiscompany’s case, further development of the technology was moved to Europe, where a subsidiary isworking with a European firm in what they perceive to be a friendlier climate for hazardous wastetreatment R&D. If the technology is successfully commercialized, the foreign partner will benefit fromtechnological expertise and financial gains that might have stayed in the United States.

1 National Advisory Council For Environmental Policy and Technology, Permitting and compliance po/icY:Barriers to U.S. Environment/ Technology Innovation, U.S. EPA, EPA 101/N-91/001, January 1991.

2 This paragraph based on discussions with a senior company representative on May 4 and 19, 1993.

preaches for pollution control can have mixed Performance-based standards that do not favoreffects on environmental industry competitive-ness. For instance, many environmental regula-tions in the United States, Germany, and Japan arebased on best available technology (BAT) orsimilar criteria. BAT-type standards can guaran-tee a large market in a short time to vendors offavored technologies and help environmentalequipment manufacturers achieve economy-of-scale benefits. However, such standards, if notfrequently updated, can freeze existing environ-mental technologies and discourage innovation.

particular types of hardware can allow environ-mental technology innovation-although evenhere permitting procedures and administrationmay still favor a particular reference technology.Also, as in the case of technology-based stand-ards, if performance-based standards are notregularly updated, incentives for innovation mayweaken.

Environmental taxes or fees may provideincentives for performance better than standardsrequire and for technical innovation. So might


tradable emissions or effluent permits that allowpolluters to trade pollution rights. The likelyextent of their impact on innovation is difficult topredict. While these approaches might provideincentives for technological innovation, they mayalso diminish the possibility of large uniformmarkets for new environmental products andservices. Lack of experience with these newregulatory approaches means that empirical dataon their efficacy and their effects on innovationare limited. However, they do allow more cost-effective achievement of environmental goals ascompared to other regulatory approaches.

The division of environmental standard-settingand enforcement authority among national, re-gional, and local authorities can affect innovationin environmental technologies and the ability ofenvironmental firms to achieve scale economies.The U.S. federal system places major responsi-bility on States for administering environmentalrequirements. The ability of States to sanctionflexible regulatory approaches and, in somecases, to impose stronger-than-Federal standardsmay spur environmental innovation. Germanstates and Japanese prefectures can sometimesrequire adherence to higher-than-national stand-ards. However, varied standards and permittingprocedures fragment the environmental marketand can slow the development and diffusion ofnew environmental technologies.

B Fiscal and Other IncentivesThe stick of environmental regulation can be

supplemented with the carrot of subsidy or otherkinds of incentives. To help regulated industriescomply with environmental requirements, somecountries and states provide tax credits, acceler-ated depreciation, or low-cost loans for theinstallation of environmental equipment. (Thesemechanisms, widely used in Japan, Germany, and

the Netherlands, are discussed in ch. 7.) Suchincentives can help secure markets for the devel-opers and vendors of environmental technologies.Sometimes they promote innovation. For in-stance, the Netherlands has a tax-incentive re-gime (accelerated depreciation) that applies toearly installers of listed innovative environmentaltechnologies (both pollution prevention and end-of-pipe controls). As such equipment becomescommercially established, the technology is sup-posed to be removed from the list. (It is too earlyto evaluate this approach.)

Incentives can help jump-start industries. In theUnited States, Federal and State tax credits,combined with high energy prices, stimulated analternative energy industry in the 1970s. Ger-many and Japan employ subsidies to buildmarkets for clean energy technologies.19 The U.S.Public Utility Regulatory Policy Act helpedcreate a market for electric power co-generators.The United States has also pioneered demand sidemanagement (DSM) for promoting electricity-use efficiency. State utility commissions, in somecases, allow utilities to make a profit on energysaved. Some utility commissions’ costing proce-dures penalize more polluting energy sources andreward selection of cleaner energy. DSM hasstimulated the creation of energy service compa-nies that earn money through improving theenergy efficiency of clients.

Another innovative approach is the use ofbounties for early developers of technologies thatmeet new environmentally superior standards. Aconsortium of 24 electric utility companies, incooperation with the Electric Power ResearchInstitute, EPA, and Department of Energy (DOE)recently ran a contest in which a refrigeratormanufacturer that met future Federal energyefficiency standards and other performance cri-teria without use of CFCs won $30 million.20

19 For Cxmple, Japan’s Mfis@y of Internation~ Trade and Industry (MITI) has budgeted nearly .$40 dliOnfOrflSCalyt%U 1994 to subsidizetwo-thirds of the cost of residential photovoltaic systems. MI’IT’s goal is 70,000 systems installed by 2000. Nihon Keizai Shimbun, Aug. 22,1993.

20 John Holusha, “whirlpool Takes Top Prize in Redesigning Refrigerator, ” New York Times, June 30, 1993, p. D4.

Chapter 5–-U.S. Competitiveness in Environmental Technologies and Services! 125

As discussed in the previous section, environ-mental taxes and tradable pollution allowancesmight, as supplements to conventional environ-mental regulations, influence sales and develop-ment of environmental technologies.

S Firm Size and Financial StrengthMost environmental companies in the United

States (roughly 34,000, not including water utili-ties) and Europe (10,000 or more fins) are smallto medium-sized enterprises (SMEs).21 Some SMEsthat offer innovative technologies or servicessuccessfully enter foreign markets, often throughlicensing or joint venture arrangements. How-ever, large, well-capitalized companies have sig-nificant advantages in marketing abroad. Theycan spend significant time and effort investigat-ing foreign markets. They can buy local marketaccess by acquiring local companies or takinglarge equity stakes in joint ventures. They canafford to conduct R&D (although they mightactually do little) or acquire innovations fromothers. These companies also have better accessto capital than smaller fins.

Larger firms can supply customers and clientswith integrated services or one-stop shopping.U.S. companies such as WMX Technologies(formerly Waste Management, Inc.) and Air &Water Technologies are attempting to developsuch capability. Others offer environmental prod-ucts and services complementary to core busi-nesses. For example, a number of major interna-tional producers of boilers and power generationequipment also sell air pollution abatement equip-ment. Various engineering and construction firmsdesign and install environmental equipment aspart of their general design and construction

businesses. Other large environmental companiesare divisions of strong multinational conglomer-ates such as Asea Brown Boveri (ABB), GeneralElectric, Metallgesellschaft, Hitachi, Mitsubishi,and Kawasaki, among others.

1 Promotion of Techniques and StandardsThe respect accorded abroad to domestic stand-

ards and technological solutions can contribute tocompetitive position. The United States is widelyregarded as a leader in many categories ofenvironmental technology. EPA is widely re-spected abroad, and some U.S. professionalsociety standards and guidelines, such as those ofthe American Water Works Association and theWater Environment Federation, are observedabroad. American firms sometimes contend thatEPA’s inability or unwillingness to certify theirproducts as meeting U.S. standards leaves them ata disadvantage compared to some foreign firmsthat claim certifications from their governments.As is discussed in chapter 2, an expanded Federalrole supporting demonstration and independentevaluation of American environmental technolo-gies is under consideration. If undertaken, suchprograms could disseminate objective perform-ance and cost evaluations of U.S. products butavoid potential problems (and, perhaps, loss ofcredibility) from government endorsement ofparticular technologies and companies.

Countries sometimes pattern their environ-mental regulations after those of another countrywhose environmental firms may thus derive anadvantage over rivals that meet somewhat differ-ent home country standards. Training programs,technical assistance, and grants and loans forequipment might influence the standards and

21 En},ironmenta/ Business Journal, vol. 5, No. 4, April 1992; ECOTEC Research and Comulttig, ‘‘The European Pollution Control andWaste Management Market: An Overview, ’ Birmingham, UK, January 1992. Studies of Japanese environmental industry structure have notbeen found, The Conference for Promotion of High Technology Pollution Control Equipment, an affiliate of the Japan Society of IndustrialMachinery Manufacturers, listed 130 engineering and manufacturing enterprises as members in 1990. Members, including divisions ofJapanese conglomerates and affiliates of foreign firms, are certified as being capable of producing EGS that meets Japanese environmentalstandards,


practices employed by the recipient country. TheUnited States and other countries have technicalassistance and training programs. Japan’s fundingof environmental research centers in severalAsian countries, including the outfitting of Indo-nesia’s central environmental reference labora-tory, 22 could affect these countries’ environ-mental standards and practices.

1 Export Awareness and SupportThe very large U.S. domestic environmental

market supports a strong U.S. environmentalindustry, yet it also dampens the desire of manyU.S. firms to pursue export markets and attractsforeign environmental fins.

U.S. companies interested in exports frequentlyface difficulties accessing private finance orFederal assistance. Some companies that winexport orders do not cultivate long-term relation-ships with foreign customers or find partners ableto provide service in export markets—thus hurt-ing future export prospects. Export awareness andsupport in the environmental sector is discussedextensively in chapter 6.

Environmental exports are sometimes impededby tariff and nontariff trade barriers. Promotion ofliberalized trade in the context of the GeneralAgreement on Tariffs and Trade (GATT), theNorth American Free Trade Agreement (NAFTA),and other trade negotiations may diminish suchbarriers.

U FinancingProject financing is a large factor in the ability

of environmental firms to obtain contracts, partic-ularly in cash-strapped developing countries andthe restructuring nations of Central and EasternEurope and the former Soviet Union. The attrac-tiveness of financial packages is often moreimportant than the technological credentials of

competing environmental companies. Loan aid ormixed credits from Japan and several Europeancountries is often perceived to be linked tocommercial benefits for home country fins. U.S.bilateral assistance places less emphasis on capi-tal projects likely to generate equipment exportsthan does European and Japanese developmentassistance. The use of tied aid and mixed creditsis a contentious issue discussed in the OTAbackground paper Development Assistance, Ex-port Promotion, and Environmental Technol-ogy.23 The use of official financing sources to winbusiness for a donor country firm in a developingor restructuring country can have long-termcompetitive implications that go beyond thescope of a specific project. Projects can generatecontinuing business for spare parts and supplies.Early entrance into an emerging market canestablish familiarity and brand loyalty that in turnyield future business.

9 Appropriate Technologies, Products, andService

Customers in developing countries often can-not afford technologies designed to meet the morerigorous environmental requirements of the UnitedStates, Japan, and Northern Europe. Even if theycan afford state-of-the-art technologies, they maylack the financial resources and trained personnelneeded for adequate operations and maintenance.Cheaper, more easily maintained technologiescan be environmentally preferable to complextechnology that is unused or falls into disrepairdue to poor operation and maintenance.

Customers in some developing countries ad-mire U.S. environmental technology but regard itas too expensive and complex, a problem that alsofaces Japanese, German, and other industrialcountry competitors. Japan has begun a programto adapt flue gas desulfurization technologies for

22 BApEDAL (~donesian Environment Agency) Briefing to U.S. Environmental Technology and Business Mission Participants, J-,Oct. 26, 1992.

23 U.S. Conwess, office of Technology Assessment, Development Assistance, Export Promotion, and Environmental Technology,

OTA-BP-ITE-1O7 (Washington, DC: Government Printing Office, August 1993).

Chapter 5-–U.S. Competitiveness in Environmental Technologies and Services! 127

developing Asian markets.24 Some technologiesavailable or under development in the UnitedStates—for instance, engineered wetland waste-water treatment-are relatively low-cost. Of greatpotential are pollution prevention and cleanerproduction technologies that often offer morecost-effective avoidance of environmental dam-age than do conventional pollution controls.Energy-efficiency improvements-both supplyand use-could limit environmental impact, savemoney, and promote development in less-developed countries.

25 Relatively low-cost op-

tions are also available for reduction of wastesand for decreasing use of toxic substances.

However, a tension may develop between saleand transfer of low-cost environmental technolo-gies to developing and restructuring countries,and the desire to increase export income throughthe sale of more expensive technologies that canalso generate more sales of parts, supplies, andservice.

I Research, Development, andDemonstration

New environmental technologies, whether re-lated to cleaner production, end-of-pipe controls,or remediation, are products of research anddevelopment (more thoroughly discussed in ch.10). A country’s private sector, university, andgovernment R&D system can contribute to itsenvironmental industry’s competitiveness. TheR&D endeavor, however, extends beyond thelaboratory bench and the pilot plant to thedemonstration and testing needed to convincepotential customers of the economy and efficacy

of new technologies. And attention to manufac-turing technology is important for achievingcontinuous improvements in product quality andprice. As made clear in the recent past, withconsumer electronics, automobiles, memory chips,and many capital goods, possession of the mostable scientific research establishment does notensure commercial predominance.26

Germany and Japan are this country’s principalrivals in environmental technology R&D andrelated energy technology research. Japaneseenvironmental technology is chiefly under thedirection of the Ministry of International Tradeand Industry (MITI). German environmental tech-nology R&D is mainly under the Federal Ministryfor Research & Technology and its state equiva-lents. Both Germany and Japan have a history ofindustrial policies that feature public-private co-ordination and research consortia. These ap-proaches are less extensively used in the UnitedStates.

The U.S. Government provides more than $1.7billion per year for R&D related to the environ-mental technologies covered in this report, butthis support is scattered and uncoordinated.27

American public-private partnerships have in-creased, however. For example, several cost-shared Department of Energy programs supportdevelopment and commercialization of environ-mentally pertinent energy technologies and lesswasteful industrial processes. EPA evaluates anddisseminates information on innovative contami-nated site remediation technologies; somewhatsmaller programs fund evaluations of municipalsolid waste and industrial waste reduction tech-

~ ~nternan”onal Environment Reporter, “Japan To Work With China in Developing Cheap Desulfurization Units for Plants, ” July 29, 1992,p. 497.

25 us, ConWe~s, Office of Te~~ology Assessment Fue/ing Development: Energy Technologies for Developing Counm”es, OTA-B516

(Washington DC: U.S. Government Printing OffIce, April 1992), pp. 5-12.

26 U.S. Con flcss, Office of Technology Assessment, Making Things Better: Competing in Manufacturing, OTA-ITE-443 ~as~gtoq ~:U.S. Government Printing Office, February 1990) provides an analysis of manufacturing competitiveness.

27 The Congressional Research Service concluded that Federal environmental technology R&D support amounts to $2.5 to $3 billion

annually, but this includes support for areas not addressed in this assessment such as agricultural technology, technology for assessingtoxicological and other health effects, and modeling and monitoring of ecological and geophysical processes. U.S. Congress, CongressionalResach Service, “The Current State of Federal R&D: EnviromnentaJ Technologies, 92-675 SPR, Aug. 25, 1992.


nologies. Other examples are discussed in chapter10. However, R&D consortia among environ-mental fins, regulated industries, and govern-ment to address widespread environmental prob-lems by industrial sector remain uncommon in theUnited States.

SECTOR DESCRIPTIONS AND ANALYSESThese are only a few of the factors that affect

the competitiveness of the American environ-mental industry. As is shown in the brief casestudies that follow, these factors weigh differ-ently on different EGS sectors and technologies.Some of the cases pertain to environmentaltechnologies that are capital-intensive, whileothers are not. Some technologies are new andchanging rapidly, while others are mature. In eachcase, the role of tough regulations, technologicalsophistication of companies, and access to capitalwill have varying effects on firms in the industry.It is often difficult to say which countries’industries are ahead.

1 Design and Construction Services28

Such environmental projects as wastewaterinfrastructure, waste treatment facilities, andlarge air pollution abatement installations requiresubstantial design and construction management.A large international business exists to providesuch design and construction services.

Engineering firms are not only important fordesigning discrete add-on pollution controls andwaste disposal facilities. The engineering con-sulting industry also could play a key role inincorporation of pollution prevention and cleaner

production into whole plant design and processengineering (see box l-B). Although explicitwaste minimization and pollution preventionactivities now make up less than 5 percent of U.S.environmental engineering consulting business,this segment is likely to grow quickly .29 Cleanerproduction may increasingly be integrated intoengineering design such that the proportion ofdesign activities attributable to environmentalconcerns becomes more difficult to identify.

American companies are strong competitors inproviding design services. This can have ramifi-cations for U.S. manufacturers, as they may havea better chance of winning orders for American-designed facilities than for foreign-designed proj-ects. This may not be because of any explicitpreference for American goods by U.S. designersso much as their greater familiarity with thosegoods.

U.S. design firms are internationally prominentin environment-related projects; a long list ofcompanies are involved.30 Some of these compa-nies provide a wide range of architecture andengineering services. Others specialize in envi-ronmental projects such as wastewater systemdesign. 31 Subsidiaries of other environmentalfirms such as Metcalf & Eddy (part of Air &Water Technologies), Wheelabrator, and RustInternational (both part of WMX Technologies)also perform international engineering services.There are overlaps between the design andcontracting categories, as some construction firmsalso provide engineering services.

As for construction contractors, U.S. firms(including a U.S.-based ABB subsidiary) are the

28 ~s section dWs not discuss en@~r@ design conducted by manufacturing industries for their product and process development.National Research Council, Improving Engineering Design : Designingfor Competitive Advantage (Washington DC: National Academy Press,1991) assesses the state of engineering design in U.S. manufacturing indushy. U.S. Congress, OMce of Technology Assessment GreenProducts by Design: Choicesfor a Cleaner Environment, OTA-B541 (Wash.ingtop DC: U.S. Government Printing OffIce, September 1992)discusses environmental aspects of product design.

29 “E/C Firms Position for Prevention, ” Environmental Business Journal, vol. 6, No. 8, August 1993, p. 1.30 Environ~ntal ll~iness Journal, vO1. 6, No. 4, April 1993.

J 1 Even mom s~ciali~d engineefig design is provided by some vendors of proprietary air pollution COIMJ1 and WiiSteWater BfXtCmCXM

technology. In some cases, technology vendors have no in-house manufacturing at all; their products are engineering and intellectual property.

Chapter 5-–U.S. Competitiveness in Environmental Technologies and Services! 129

Table 5-4-Largest Winners of International Contracts in Selected Market Sectors

Sewer/waste Hazardous waste

1.2.3.4.5.6.7.8.9.

10.

1.2.3.4.5.6.7.8.9.

10.

Bouygues (France)Parsons Corp. (U. S.)Mitsubishi Heavy Industries (Japan)

Bilfinger+Berger Bauaktieng.(Ger)Foster Wheeler (U. S.)

NCC Internation (Sweden)Consolidated Contractors (Greece)Kajima (Japan)Skanska International Civil Engineering (Sweden)The Badger Co. (U. S.)

WaterDUMEZ (France)Bechtel Group (U. S.)Fiatimpresit (Italy)SGE Group (France)lmpresit-Girola-Lodigiani IMPREGLIO (Italy)Bouygues (France)Hochtief (Germany)Girola (Italy)GTM-Entrepose (France)Morrison Knudsen (U. S.)

Parsons Corp. (U. S.)Bechtel Group (U. S.)ABB Lummus Crest (U. S.)Bouygues (France)Foster Wheeler (U. S.)The Badger Co. (U. S.)CEGELEC (France)Jacobs Engineering Group (U. S.)Bilfinger+Berger Bauaktieng. (Ger.)Spie Batignolles (Italy)

PowerCRSS (U. S.)Mitsubishi Heavy Industries (Japan)Spie Batignolles (Italy)Bechtel Group (U. S.)DUMEZ (France)ABB SAE Sadelmi (Italy)Guy F. Atkinson (U. S.)John Brown/Davy (U. K.)CEGELEC (France)Ansaldo (Italy)

SOURCE: Engineering News Recurd, Aug. 24, 1992, p. 37.

eight largest winners of international contracts.32

In four categories relevant to environmentalinfrastructure, several U.S. firms are among thetop 10 winners of contracts (see table 5-4). U.S.firms also appear in the top 10 four and eighttimes, respectively, in the manufacturing andindustrial/petroleum markets.33 French, British,Italian, German, and Japanese contractors are thelargest rivals. Swedish and Greek firms alsoappear on these listings.

Beyond the top 10 listing, there are many otherU.S. construction companies with significantinternational presence engaged in environmentalprojects or projects with major environmentalcomponents. 34

Among the more important issues affecting thecompetitiveness of firms in this industry is theavailability of financing. This is particularlyimportant for projects in developing countries andthe cash-poor nations of Central and EasternEurope and the former Soviet Union. Bilateraldevelopment assistance and loans from the WorldBank and other multilateral lending institutionsare important sources of funds in these markets.As has been mentioned, significant controversysurrounds the use of tied aid and mixed credits asmeans for countries to link development assist-ance to sales by home country businesses. Theseissues are discussed extensively in the previouslycited OTA background paper, Development As-

3’2 “me Top 1nterMfiOn~ contractors, ” Engineering News Record, Aug. 24, 1992, p. 38.

33 “Firms Set Sail For Hot Markets, ’ Engineering News Record, Aug. 24, 1992, p. 37,

34 Environmental Business Journal, vol. 5, No. 4, April 1992, p. 3; Engineering Ne~ls Record, Aug. *4, 1992, PP. 38-45.


sistance, Export Promotion, and EnvironmentalTechnology .35

Some in the engineering industry point to theU.S. Trade and Development Agency (TDA)support for project feasibility studies as beingparticularly useful in their pursuit of opportuni-ties abroad. Other countries also recognize thevalue of feasibility and prefeasibility studies—which can help determine which firms win bidsfor project development, Japan allocated $226million for this function in 1992, while TDA’sfiscal year 1993 budget was $40 million.36 TheUnited States and other countries have createdspecial funds attached to the World Bank forfeasibility studies that some believe help winWorld Bank contracts for contributing nationfins. Use of feasibility studies is further dis-cussed in chapter 6.

9 Stationary Source Air Pollution ControlThis sector of the environmental industry

includes designers and manufacturers of devicesto control air emissions from power plants,incinerators, and industrial facilities. Americancompanies remain competitive but are strugglingagainst very strong air quality industries that havedeveloped abroad. In addition, foreign compa-nies, directly and through licensing, have madesignificant inroads into the U.S. domestic market.Air pollution control technologies-particularlysulfur and nitrogen oxide controls-illustratehow the competitiveness of different countries’environmental firms can be affected by differ-ences in regulations.

The timing and stringency of air regulations inthe three major air pollution control markets-the

United States, Japan, and Germany-have deter-mined the sequence of air pollution controltechnology development. In the mid-1970s, U.S.regulations to control sulfur dioxide (SO2) createda market for flue gas desulfurization (FGD)scrubbers. Soon, however, the domestic marketfor scrubbers stagnated, as most existing indus-trial and utility sources of SO2 were shielded fromthe need to retrofit with FGD and new powerplantconstruction slowed from weak electricity de-mand growth.

Although early FGD had cost and reliabilityproblems, the approach was adopted abroad.Japan embarked on a strong program of FGDinstallation and retrofit in the 1970s and 1980s.This was followed in Germany in the mid-1980sby requirements ensuring that virtually all majorsources of SO2 in former West Germany would beoutfitted with FGD within the decade. Germanstandards (called TA Luft) for SO2 and other airpollutants are periodically updated to reflect newstate-of-the-art control technologies. They aremodels for air regulation in Switzerland, Den-mark, Italy, and the Netherlands.37

The FGD market is again growing in the UnitedStates as the 1990 Clean Air Act Amendments areimplemented. FGD accounts for about 32 percentof U.S. stationary source air pollution controlequipment revenues in 1992, about $1.7 billion.38

The law requires that SO2 emissions in 2000 behalf of what they were in 1980. According to ananalysis for EPA, a cumulative revenue increaseof $1.6 to $4.8 billion will accrue to SO2 controlequipment suppliers over the years 1992-2000because of the Amendments.39 However, theestimate is sensitive to a number of assumptions

35 U.S. Conmss, Office of TtxhnoIogy Assessment, Development Assistance, Export Promotion, and Environmental Technology, op. cit.,

footnote 23.

36 ibid., p. 43.

ST In(ermn”om[Enj,iron merit Reporter, “NewNational Guidelines Available for Setting Emissions Limits for Industry,” July 15, 1992, pp.466-467.

38 Environment~ Business International, 1993 Survey of APC Equipment Manufacturers, San Diego, CA.

39 ICF Reso~ces, hc. md smith B~ney, Harris Upham and Co., Inc., Business Opportunities ofrhe New Clean Air Act: The Impact of the

CAM of1990 on the Air Pollution Control Industry (Washington, DC: ICF Resources, Inc., August 1992), p. III-38.

Chapter 5--U.S. Competitiveness in Environmental Technologies and Services! 131

about the cost of control, the use of low sulfurcoal, and other factors. Continued sluggishness ofthe economy may slow the rate of investment inFGD by utilities and industrial polluters.

In 1993, American companies continue toproduce their own proprietary FGD technologiesbut no longer dominate the global market. Ger-man, Scandinavian, and Japanese suppliers ag-gressively compete with U.S. providers interna-tionally, including growing Asian and Centraland Eastern European markets. They are alsoadvancing into the U.S. market. While the largestand third largest FGD suppliers to the U.S.market, Babcock and Wilcox and General Elec-tric, are U.S.-based and use U.S. technology, theSwedish-Swiss conglomerate ABB is the secondlargest supplier.

40 ABB combines the assets of

Flakt, a Swedish air pollution control subsidiary,with Combustion Engineering, a major U.S.supplier of FGD and other air pollution controls,which it purchased. Numerous other U.S. suppli-ers license FGD technology from Japanese andEuropean firms, and there is a U.S.-Japanese jointventure marketing Japanese-developed FGD tech-nology. Innovative foreign-developed FGD tech-nologies are being demonstrated in DOE’s CleanCoal Technology Program and, in one case, wasinstalled in Poland via a U.S. licensee withFederal support.

41,42,43 Foreign technologies li-

censed by U.S. firms can yield income and jobs inthe United States. For instance, Joy Technologies(U. S.) won a contract worth over $100 million toinstall four FGD units in Taiwan.44 The technol-

ogy, which Joy has also sold in Canada, wasdeveloped by a German firm.45

Control of nitrogen oxides (NOx), a precursorof smog and acid rain, from stationary sources didnot receive major attention from U.S. regulatorsin the 1970s and 1980s. Thus, markets forselective catalytic reduction (SCR)---a U.S. in-vented technology-and other NOx control tech-nologies did not materialize in the United States.Instead, the frost commercial market for SCRmaterialized in Japan. Japan claims to operateover three-quarters of the world’s stack gasdenitrification and desulfurization facilities.46

Germany is the second largest market for SCR asthat country’s power plants and industrial boilersretrofit NOX controls. As with SO2 controls, the1990 Clean Air Act Amendments are spurringU.S. markets. California air quality requirementsare an additional impetus. Some of the earliestU.S. installations of SCR are in California,although the current national NOX control marketonly accounts for 2 percent of 1992 U.S. station-ary source air pollution equipment revenues (onthe order of $100 million).47

Japan is the dominant provider of SCR technol-ogy. Several Japanese conglomerates, includingKawasaki, Mitsubishi, Hitachi, and IshikawajimaHarima, license SCR to U.S. and European airpollution control companies.48 There are also anumber of joint ventures between U.S. andJapanese fins. However, SCR is one of the moreexpensive NOX control options available. U.S.companies have been developing Selective Non-Catalytic Reduction (SNCR) and other technolo-

a The McIlvaine Co., “A is Pollution Management: Utility Air Pollution Awards Scorecard,” No. 116, November 1992.4 i Daniel Kaplan, ‘ ‘Georgia Power Begins Tests On Innovative Fiberglass Scrubber,” Energy Daily, Nov. 9, 1992, p. 4.

42 Daniel Kaplan, ‘ ‘TVA, DOE Test promising Scrubber Alternative,” Energy Daily, Oct. 28, 1992.43 Dafi~l Kapla~ 4 ‘DOE, pol~d Asks Industry for CCT Help,’ Energy Daily, sePt. 22, 1992, PP. 1-2.

44 Waste Tech New.~, vol. 5, No. 4, Jan, 25, 1993, p. 9.

45 waste Tech News, VOI. 4, No, 15, July 13, 1992, p. 9.

46 “ World’s Emission Purification Techniques,” Coal Technical Research Institute, in Ministry of Foreign Affairs, ‘Japan’s EnvironmentalEndeavors,” April 1992, p. 10.

47 Enviro~ent~ Business ~ternational, 1993 Survey of APC Equipment Manufacturers, San Diego, CA.48 panorama of EC Itiu$try, “The Environmental Services Industry, ” p. 139.


gies that are less effective but also less expensivethan SCR. Combustion modifications, such aslow-NO X burners, are the lowest cost controloptions. While Japanese dominance of SCR is aconcern, particularly as North America and Eu-rope try to clean up their smoggiest regions, U.S.providers may be at par or ahead on a number oflower cost control technologies that may garner alarge proportion of the NOx control market inareas not requiring as strict measures.

The competitive situation in some other airpollution control sectors is less clear. Particulatecontrol, often using fabric filters and electrostaticprecipitators, is a relatively mature technologicalsector in which U.S. companies remain active andsuccessful sellers abroad. In the United States,particulate controls constitute 55 percent of sta-tionary source air pollution control equipmentrevenues.49 In most other countries that propor-tion would be higher because fewer controls areneeded on other types of emissions.

In contrast to particulate controls, control ofVOCs and toxic air pollutants is relatively newand the market is immature. U.S. and Germanregulations are more stringent than Japaneserequirements for these pollutants; California’sregulations may be the strictest. Activated carbonadsorption, incineration, and catalyst-based sys-tems for VOC control are available in the UnitedStates and Europe from major vendors. CalgonCarbon (U. S.) and Lurgi (Germany) are amongmajor suppliers of activated carbon systems.Biofilters for VOC and odor control are very newapproaches under investigation in Germany, theNetherlands, and the United States.

Licensing, joint venture, and multinationaloperations make assessment of competitivenessand national economic benefits difficult. Thesnapshot of growing U.S. use of foreign technolo-gies should be understood in the context of

growing technological interdependence. Germanand Japanese companies license environmentaltechnologies to each other as well as to U.S. firms.American companies do sell air pollution controltechnology in the home markets of major compe-titors and derive benefits from ownership ofsubsidiaries in those markets. It is difficult togeneralize about the economic implications offoreign ownership of American air pollutioncontrol firms. The American subsidiary may belimited by the parent in its export opportunities,or conversely, the parent company might opennew export markets for its U.S. subsidiary.Employment implications of licensing and jointventures in air pollution control maybe relativelymodest—most FGD and other large pollutionabatement projects involve large amounts of localfabrication and construction that do not involvemuch international trade. However, profits, royal-ties, and income from engineering design workconducted in the home market can be substantial.Some air pollution control company executivessuggest, as a rule-of-thumb, that perhaps 30percent of expenditures for major installations arefor internationally tradable engineering servicesand sophisticated components, while 70 percentis for local materials and assembly.50

Controlling air pollution from large powerplants and other large facilities entails majorexpenditures. Hence, availability of financing isoften an important determinant of successful salesto developing countries. Japan’s MITI, throughits Green Aid Plan, has targeted Asia for technicaland financial assistance in air pollution controlincluding FGD. The Plan will include adaptationof FGD to lower cost and removal efficiencylevels appropriate for some countries.51 MITI hasalso announced plans to lease air pollution controlequipment to address acid rain problems. How-ever, a number of American companies already

@ fivimmen~ Business hternatioti, 1993 Survey of APC Equipment Manufacturers, San Diego, CA.

SO OTA staff discussions witi air pollution control company executives.

5 I lnternationa/Environment Reporter, ‘‘Japan to Work With China in Developing Cheap Desulfurwa“ tion Units for Plants,” July 29, 1992,p. 497.

Chapter 5--US. Competitiveness in Environmental Technologies and Services I 133

produce less expensive lower efficiency controltechnologies.

Competition in the air pollution control sectorcomes not only from rival producers of airpollution abatement products but also from alter-native technology developers and vendors. In thestationary source area, cleaner production tech-nologies, including low-NOX burners, gas tur-bines, several clean coal technologies, and recov-ery and replacement of organic solvents inindustrial processes, may limit or even obviatesome types of air pollution control equipment.Some issues related to competitiveness in cleanenergy production are discussed in a subsequentcase analysis.

I Mobile Source Air Pollution ControlEstimates of the U.S. mobile source control

market range from $6 billion to $8.2 billion.52,53

The global vehicle emissions control market hasbeen estimated as $12.5 billion and may grow to$29 billion by 2000.54 The market includescatalytic converters, diesel filters, inspection andmaintenance equipment, evaporative emissionscontrols, and some engine controls. U.S. manu-facturers are active exporters and also havesubsidiaries and licensees abroad. U.S. membersof the Manufacturers of Emission Controls Asso-ciation reported that they sold $250 million ofcatalyst and filter technologies outside the UnitedStates and Canada in 1992; these firms projectedsuch annual sales to reach $400 million by 2000which could add 2,000 new jobs.55

The United States pioneered strong vehicleemissions controls. The introduction of the cata-

First required by the United States in the 1970s, use ofcatalytic converters to control automotive emissionshas become a worldwide business. The three-waycatalytic converter shown here is used in a growingnumber of countries. Recent tightening of U.S.standards may require further developments in thetechnology.

lytic converter, removal of lead from gasoline(necessary for catalytic converter operation), anddesulfurization of diesel fuel were undertaken inthe 1970s in response to emissions standards ofthe 1970 Clean Air Act. Japan quickly adaptedsome of its requirements to meet U.S. standards,in part to qualify Japanese-made automobiles forexport to the United States. Both countriesrequired oxidation catalysts starting in modelyear 1975 and then, several years later, requiredmore effective three-way catalysts.

It was not until the late 1980s that more than ahandful of other countries required catalyticconverter use.56 By 1993, the European Commu-nity had adopted EC-wide catalytic conversion

52 Fakas Berkowitz & CO., “The Fifth Annual State-of-the-Industry Report,’ Washington DC, 1993.

53 U,S, Department of Comrneme in ICFResowes and Smith Barney, Harris Upham and Company Inc., Business Opportunities o~the NewClean Air Act: The Impact of the CAM of 1990 on the Air Pollution Control Industry, op. cit., footnote 39, p. I-2.

54 ~c~e] p, W~s~ t ‘Motor Vehicle Pollution Control: The Global ~ket—s~t “ Arlingto~ VA, Oct. 5, 1993.

55 Bruce Bertelsen, “Clean Air Act Spurs Growth of U.S. Motor Vehicle Emission Control Industry,” Clean Air Technology News(published by the Institute of Clean Air Companies and Manufacturers of Emission Control Association) summer 1993, pp. 2-3.

56 H&w M_gement Science Consultmts, ‘~temtio~ Mobile Source Emissiom Conmls Market S~dy: Update No. l,” prepared for

the Manufacturers of Emission Control AssoeiatioG August 1990. Australia, Austria, Canada, Denmark, Norway, Swedeu and Switzerlandadopted catalytic converters in the late 1980s.


requirements, although delays were permitted fora number of member states, and larger cars had tomeet an earlier 1989 deadline. Two NICs, Taiwanand South Korea, adopted these requirements by1991. Mexico is phasing in catalytic convertersand unleaded gasoline. Over the course of the1990s a number of other countries in Central andEastern Europe, Asia, and Latin America willlikely adopt similar requirements. Diesel emis-sions controls using catalysts and particulate trapsare also a growing market as the United States,EC, and other countries compel their use.

The most significant force for improving cata-lytic conversion technology is the set of Califor-nia vehicle emissions regulations that will bephased in over the next two decades. While theultimate goal of the California program is com-mercialization of zero emission vehicles—toaccount for 10 percent of in-state automobilesales by 2003—intermediate standards for lowemitting, very low emitting, and ultra-low emit-ting vehicles might be met by improved catalyticconverters used in conjunction with gasoline oralternative fuels. Several other States may followsuit with these requirements. California regula-tions and proposed Federal requirements are alsodriving catalytic converter development for smallengines (e.g., lawn mowers, chain saws, snowblowers); limited application has already oc-curred in Europe.57

A handful of major producers dominate theglobal catalytic converter business. The largestsupplier of catalysts is Johnson Matthey, a Britishfirm with major U.S. operations, estimated tohave a 27 to 28 percent market share.58 TwoAmerican suppliers, Allied Signal and Engelhard,each garner about a fifth of the market withdomestic and overseas plants. Degussa of Ger-many (which has an American plant) is estimatedto have less than 10-percent share, with theremainder split among a number of Japanese and

Taiwanese companies. W.R. Grace (U.S.), whichsupplies industrial catalysts, and other companiesare trying to enter the market by developingdevices that will meet future California require-ments. The substrates on which catalysts lie—usually ceramic or stainless steel—are made by anumber of U. S., Japanese, and European firms.Corning is a major producer of ceramic substratewith a plant in Germany and a license to aJapanese manufacturer. Several American com-panies including Donaldson Co., Corning, and3M, and the Canadian firm Engine ControlSystems are active in the diesel control markets.

American producers are strong competitors inthe catalytic converter market and strict Califor-nia standards may drive them to produce moreeffective catalysts that could become national andforeign standards. However, other automobileproducing nations also have strong incentives todevelop emissions control systems that will meettightening U.S. Federal and State standards sothat their exports qualify for the American mar-ket. Japanese, German, Swedish, and Canadiancompanies and governments have significantR&D programs for vehicles powered by alterna-tive fuels, fuel cells, and electricity. Some foreigncompanies have been working on projects de-signed to address California’s automotive re-quirements. 59 Some of these alternative vehicle

technologies could eventually obviate emissionscontrol technologies.

USCAR, a collaboration involving the U.S.Government, the Big Three U.S. automobilemanufacturers (General Motors, Ford, and Chrys-ler), and component suppliers, is an importanteffort toward creating the clean car while revital-izing the U.S. automobile industry (see ch. 10).The Advanced Battery Consortium and a low-emissions vehicle initiative are components ofUSCAR.

57 Julie Edelson Halpert, ‘‘Cleaner Garden-Variety Engines, “ New York Times, Sept. 26, 1993, p. F1O.

58 Stephen Lipmann, ‘‘U.S. Environmental Companies’ Competitive Strategies: Eleven Case Studies,’ OTA contractor repofi March 1993.w South Cowt Air Qua~ty M~gement District, Technology Advancement Office, 1992 Progress Repo% July 1992.


U.S. companies’ strength in this sector hasbenefited the United States through export earn-ings, license royalties, and profits. The employ-ment benefits are less clear when catalytic con-verters are often imported into the United Statesalready attached to the automobiles.

~ Water and Wastewater TreatmentTechnologies

The U.S. water and wastewater treatmentmarket is relatively mature, yet in much of theworld basic water sanitation is an acute need. Theprovision of drinkin g water and treatment ofdomestic and industrial effluents are not onlyprominent in the plans of less developed countriesbut are also important priorities for environmentalinvestment in the rapidly industrializing countriesof the Pacific Rim and Latin America. Asdiscussed in chapter 4, multibillion dollar waterand sewer projects are underway or planned inmany of these countries. A high priority on wateris evident in the environmental plans of Centraland Eastern European countries. Even within theOECD countries, there is some room for improve-ment in the water and wastewater treatmentsector. For instance, centralized sewage treatmentis provided to only 44 percent of Japaneseresidents60 versus 75 percent in the United States.A number of EC countries will need to makesignificant investments to meet EC water stand-ards. And U.S. regulations continue to tighten.

OECD estimated the global market for waterand wastewater treatment goods and relatedservices at $60 billion in 1990.61 Most spendingrelated to water and wastewater projects is forlocally provided construction labor, lower valuematerials, and operations. In the United States,

about 75 percent of municipal water treatmentand over 50 percent of municipal wastewatertreatment capital expenditures are for construc-tion; the remainder are for engineering andequipment.62 Of the portion of water industry-related expenditures that is likely to be interna-tionally traded, much will accrue to engineeringand construction firms for design and construc-tion management. However, there is significantcommerce in equipment and supplies such asaerators, falters, pumps, flow meters, monitoringinstruments, and chemicals for treatment systems.This section centers on competitiveness of suppli-ers of such goods and technologies. There is anoverlap with the engineering/construction indus-try and water supply utilities-firms in both ofthese service sectors have major interests inequipment manufacturing fins. Also, because ofsite-specific conditions, engineering services areoften integral to equipment sales.

U.S. drinkin g water and wastewater standardsare among the world’s most demanding; German,Dutch, French, and Scandinavian country stand-ards are also high. Standards of U.S. professionalassociations, including the Water EnvironmentFederation and American Water Works Associa-tion, are used abroad. And U.S. water technolo-gies are respected abroad. The Water and Waste-water Equipment Manufacturers Associationrow), an industry association with about70 member firms accounting for nearly $1 billionof annual sales, reports that the majority of itsmembers sell abroad—mainly secondary andtertiary wastewater treatment equipment anddisinfection systems.63 U.S. companies, amongthem Nalco Chemical, Betz Laboratories, and

60 Environment ad Development.. Japan’s Experience and Achievement, Japan’s National Report to the Ufit~ Nations Conferenu onEnvironment and Development (UNCED), December 1991, pp. 32-33.

c1 OEC’D, op. cit., fOOtnOte 4.

62 Willlam T. ~renz & Co., op. cit., fOO@Ote 12.63 Dam fistof, Resident, Water ~d WasteWater Eq~pment ~n~ac~ers Associatio~ prso~ cornmwication, June 2, 1992.


W.R. Grace, are major international providers ofwater treatment chemicals and services.64

Over the last decade Swiss, Swedish, French,and British companies have been active in acquir-ing U.S. water and wastewater equipment compa-nies .65 Of the 10 largest U.S. providers oftreatment equipment, 5 are European-owned.66

And while U.S. companies license technologiesabroad, some observers believe that there is a netinflux of foreign water and wastewater treatmenttechnologies into the United States.67 Europeanfirms also export directly into the U.S. market.

Despite good reputation and interest in export-ing, a number of factors impede the U.S. waterand wastewater equipment industry’s competi-tiveness. The 70 members of WWEMA averageunder $15 million in annual sales and operatewith low profit margins.68 The estimated 2,400 ormore other companies in the sector are yetsmaller. 69 Low profit margins leave limited re-sources for R&D and for exploring foreignmarkets. In some regions, such as Southeast Asia,local environmental firms feel that the UnitedStates has been late in entering the market andthat Japanese and European firms have theadvantage of greater familiarity.70 Some of thesefirms believe Japanese and European providersoffer better after-sales service than U.S. suppliers.

As in other environmental sectors, U.S. compa-nies have difficulty competing in developingcountry markets against some foreign supplierswith superior access to confessional aid finance.

With multibillion dollar projects planned orunderway in a number of developing countries(see ch. 4), aid can serve as a lever to shiftbusiness--both equipment supply and engineering/construction services-to a donor country’s fins.The lever may be the formal or informal tying ofaid to spending in the donor country or it may betraining, technical assistance, and other supportthat makes recipients more familiar with-andmore likely to choose-technologies and vendorsfrom the donor country. Except for projects inEgypt ($2 billion over 14 years in the watersector), 71 recent U.S. development assistance hasnot emphasized large capital projects that cangenerate exports, unlike aid from Japan andseveral European countries.72 Japan’s reportedcommitment of $1 billion to a $4 billion, 10-yearBrazilian clean-up of Rio de Janeiro’s GuanabaraBay,

73 its funding of environmental centers in

Indonesia and other Asian countries, and otherforms Green Aid may yield commercial benefitsto Japanese fins. The United States and Euro-pean countries also consider potential commer-cial benefits of aid.

~ Rick M~~, ‘ ‘water Tr@ment Chemicals and Services, ’ Chemicahveek, May 13, 1992, pp. 3240; Michael Roberts, “Europe: NewLaws, New Markets,” Chemiculweek, May 13, 1992, pp. 46-47.

6S Dawn Kristoff, op cit., footnote 63.

~ ‘‘EBJ’s ‘I@ Water/Wastewater Equipment Companies,’ Environmental Business Journal, vol. 6, No. 3, March 1993, p. 5. The listingdoes not include revenues from treatment chemicals, instruments, pipes, and valves.

67 ~~wa~r/wmtewater Markets Remain Diverse, ” Environmental Business Journal, vol. 6, No. 3, March 1993, pp. 1,3-5.68 Dawn ~stoff, op. cit., footnote 63.

69 Env~romen~a/Bu~jnes$ JowM/, vol. 5, No. 4, Apfi 1~, p. T. TWeny-fiVe publicly ~dcd companies averaged $259.5 fni.lliOn in 1991

revenues and 2,500 privately held companies averaged $2.4 million.70 ~v~mm~ _gement and Rcsc~Ch Association of Malaysia, Bnefmg for Participants of U.S. ~vfinmenti T’*oIogY &

Business Missiom Kuala Lumpur, Malaysia, Oet. 30, 1992.71 Rojat ~ D~elopm~t and he Environment, Profile oft~e Envi~onmental fl~ines~ ~ecto~ in Egypt (Washington, IX: (ktok 1992),

p. 19.72 U.S. cowss, ~lce of ‘l’’ec~o]ow Assessment, De~telop~ntAssistance, Export promotion, arldEnviron~ntal Technology, Op. cit.,

footnote 23.73 U.S. MD, Enviromntal Mar~t co~itio~s and Business oppor~nities in Kq ~tin Awn-can countries, Busilltxs FOCUS StXkS

(Arl.ingtox.L VA: October 1992), p. 50.

Chapter 5–-U.S. Competitiveness in Environmental Technologies and Services! 137

Judging form the limited data that is availablefrom the U.S. Department of Commerce,74 theperformance of U.S. water and wastewater equip-ment exporters in emerging markets has beenmixed. U.S. and Japanese firms each supply abouta third of Taiwan’s import market. U.S. suppliersprovide the majority of Mexico’s imported waterand wastewater equipment but fare no better thanGerman, Swedish, and British rivals in theBrazilian industrial wastewater market. The cor-relation between aid and exports can explain thestrength of U.S. suppliers in Egypt, Japanesecompanies in China, and French firms in Tunisia;in each case the largest aid donor is the largestprovider of imported water-related goods andservices.

Among foreign competitors in the water andwastewater market, the French and recentlyprivatized British water utilities have emerged asparticularly important players. Compagnie Gen-erale des Eaux-Dumez and Lyonnaise des Eauxfrom France, and several British companies(Severn Trent, Northwest Water, Wessex, andThames Water among the largest) have utilityoperating experience and healthy financial posi-tions. They offer customers integrated waterindustry services ranging from equipment todesign to operations. Some of these companiesalso provide construction services. They havediversified into the waste disposal sector and havebeen active acquirers of companies in the UnitedStates and elsewhere. In contrast, it is difficult forthe American water and wastewater industry tomatch the integrated services. The U.S. water andwastewater industry is more fragmented-mostdesigners and contractors do not operate waterfacilities, 75 water and sewer utilities are usuallylocal government entities or small private firmsthat only operate in a limited service area, and

Advanced water treatment technologies such as thisultraviolet/ozone disinfection unit are at an earlystage of deployment.

equipment suppliers often lack operating experi-ence.

Competition is very tough for American firmsproviding water and wastewater equipment, andcontinues to increase as newly industrialized anddeveloping countries expand their environmentalindustries’ capability for providing water-relatedequipment for their domestic markets and forexport.

Advanced systems; Advanced water and waste-water systems may move toward alternatives tochlorine disinfection, such as ozonation andultraviolet irradiation. New biological methodsfor sewage and industrial effluent treatment couldfind growing application. The use of polymerwater treatment chemicals is increasing. Ionexchange for metals recovery and membrane-based systems (ultrafiltration and reverse osmo-sis) will likely find greater industrial uses forsome add-on treatment and in-process wasteminimization and water conservation. Organiccontaminant destruction by incineration or otheroxidative processes may expand as controls onVOCs and air toxics tighten. Engineered wetlands

74 VFAOUS indusq sector analyses from the National Trade Data Bati Department of Commerce country desk offlcen. and U.S. A.rDBusiness Focus Series reports are sources for market share data.

75 There me some exceptions. Some U.S. environmental firms, including Metcalf & Eddy (part of Ak & Water Teckologi=) andWheelabrator Technologies (affiliated with WMX Technologies) do operate a few facilities in addition to offering engineering services.


and similar nature-based aquatic treatment sys-tems offer low-cost options for small communi-ties in both industrialized and developing coun-tries; however, the employment and incomeassociated with export of the know-how to buildsuch systems is likely to be quite modest.

Advanced water technologies may not belimited to markets in advanced industrializedcountries. For instance, RMA Dornier, a subsidi-ary of Deutsche Aerospace, is introducing ionexchange in Malaysia as a cost-effective alterna-tive to conventional treatment and disposal ofmetal-laden effluents from that country’s grow-ing electronics industry.

76 In another example,

new bacterial degradation technology from Micro-Bac International (a Texas based firm) is used bya quarter of Brazil’s chicken processing industryfor wastewater treatment, as well as by a numberof sewage systems; applications for individualbuildings and households and for toxic wastes areunder development.77

The competitive situation in advanced andalternative treatment approaches is hard to assess,for the market is at an early stage. Even incountries with the most stringent regulations,effluents are regulated using traditional indicatorsof water quality such as pH, turbidity, biologicaland chemical oxygen demand (BOD and COD),and total dissolved solids. Regulation of toxicchemicals is still evolving and markets areimmature. U. S., German, and other Europeancompanies are competitive suppliers of ion ex-change resins. Calgon Carbon and Nalco Chemi-cal are among major U.S. suppliers of activatedcarbon systems for removal of many organiccompounds from water and air. Lurgi, a majorGerman competitor in air pollution control, is alsoa large supplier of activated carbon, providingsystems in 50 countries.78 Membrane systems,ultraviolet and ozone disinfection, ion exchange,

real-time monitoring of effluents, engineeredwetlands, and other newer developments are onlyin the early stages of use.

9 Solid and Hazardous Waste IndustryThe waste sectors consist of service companies

that collect, treat, recycle, and dispose of wastes,and firms that produce and market the equipmentand technologies needed by waste service compa-nies. Types of technologies and equipment usedin the industry range from garbage trucks andbalers to sorting machines for mixed recyclableto incineration technology and specialized treat-ment technologies for hazardous wastes.

Among service providers, the U.S. domesticsolid waste industry has undergone significantconsolidation over the last two decades, as manysmall local refuse collectors and landfill operatorswere acquired by large waste service companies.WMX Technologies (formerly Waste Manage-ment, Inc.) and Browning Ferris Industries (BFI)are the two biggest U.S. solid waste service fins.Laidlaw (Canada) and Attwoods (U.K.) havesignificant U.S. operations. Europe is also devel-oping a more concentrated waste service industry,comprised of companies whose main business iswaste handling and disposal and firms that arewaste subsidiaries of major water (e.g., Compag-nie Generale des Eaux, Lyonnaise des Eaux, andSevern Trent) and electric (e.g., RWE, the largestGerman electric utility) utilities.

WMX and BFI are part of the consolidationtrend abroad. Out of WMX’s $8.6 billion in total1992 revenues, almost $1.7 billion arose fromoperations outside of the United States. WMX haswaste services in 20 countries in Europe, Asia,and Latin America, including hazardous wastefacilities in operation or under construction in theNetherlands, Hong Kong, Singapore, and Indone-sia. The firm recently acquired a 90-percent

76 Env~~o ’92 Cotierence and Trade Show, Kuala Lumpur, Malaysia, Oct. 30, 1992.

77 International Environment Reporter, “U.S. Biotechnology Used to Treat Sewage, Industrial Waste in Brazil, ” Sept. 23, 1992, pp.

599-600.

78 Me~l]gesellsc~t AG, 1990/91 Annual Repom


interest in Sweden’s largest hazardous wastecompany.

79, 80 BFI is the second largest American

international waste service competitor, althoughits services are limited to nonhazardous wastes. Ithas operations in nine foreign countries and ispursuing additional international opportunities.81

The large U.S. waste service companies bring tothe international market their extensive experi-ence in operating facilities and handling diversewastes under strict U.S. regulations. Both WMXand BFI have significant financial strength andgood access to capital. WMX is attempting toreorganize itself into an integrated environmentalservice company incorporating air, water, andwaste services under one roof.

Another American waste service competitor ofnote is Safety-Kleen. It is the largest recoverer ofused solvents and motor oil in the United Statesand believes itself to be the largest solventrecycler in the world.82 Collected solvents andoils are recycled, rerefined, or burnt for energy inindustrial furnaces. The company is also a majorprovider of parts cleaning equipment, particularlyto the automotive repair industry. Safety-Kleenhas brought its recovery services to severalEuropean countries and has several licensees inthe Pacific Rim, including Japan. The companyowns Germany’s largest solvent recycler andbiggest parts-cleaning service firm.83

Smaller hazardous and specialized waste-related companies in the United States have beenentering foreign markets. U.S. companies mayhave the advantage of operating under tough toxicwaste regulation for longer than foreign rivals.The Resource Conservation and Recovery Act of1976 was the first comprehensive U.S. Federallaw regulating hazardous wastes, The later pas-sage of Superfund legislation further propelled

the U.S. hazardous waste industry by makingimproper disposal of hazardous wastes a veryexpensive risk for companies. No other countryimposes hazardous waste liability burdens asgreat as those under Superfund. Interestingly,growth of the hazardous waste industry mayultimately be limited by increasingly stringenthazardous waste standards. As the costs ofdisposal and liability grow, generators haveincreased incentives to practice pollution preven-tion through avoidance of toxic compounds andminimization of hazardous residuals. Some wasteservice firms also offer waste minimization serv-ices.

Although the U.S. waste service industry ishighly competitive worldwide, it is not withoutrivals. Canada’s Laidlaw has a noteworthy pres-ence in the United States and has entered Europe.The Danish firm I. Kruger, a subsidiary ofCompagnie Generale des Eaux (France), waschosen over a U.S. company to establish anintegrated hazardous waste facility in Malaysia.Berzelius Umwelt-Service AG, a subsidiary ofMetallgesellschaft of Germany, is a major recy-cler of industrial materials, including metal-ladenwastes, plastics, and used foundry sand. The firmhas a 45-percent stake in Horsehead ResourceDevelopment Co., the largest U.S. recycler ofelectric arc dust.84 Although the United States andJapan host significant recycling R&D efforts,growing German recycling requirements anddisposal regulations, which could be adopted byother European countries, may further propelGerman expertise and technology in the area.Japanese firms do not appear to be prominent inproviding waste services internationally.

In the equipment and technology sector of thewaste industry, American suppliers face tougher

79 LJpmann, op. cit.. footnote 58.

so Watre Tech ~~e~~s, vol. 4, No. 19, Sept. 7, 1992, p. 9.al BH was rewntly awmded a $4.00 million 25-year joint venture contract to build and operate a landfdl iII Hong Kong. “Bm wning-Ferns

Gets Contract to Operate a Hong Kong Dump, ”Wall Street Journal, June 29, 1993, p. A8.

8Z Lipmann, op. cit.,“ footnote 58.

83 Ibid.

84 Memllgesellsc~t 1990/91 Annual Repofi.


competition. Swiss, German, and French firmssuccessfully market comporting and recyclingmachinery in the United States. European andJapanese companies are major providers of wasteincineration technology. With less land availablefor landfills, Europe and Japan incinerate more oftheir waste than does the United States. Von Rollof Switzerland and Martin of Germany are majorinternational providers of incineration technol-ogy. Deutsche Babcock licenses incinerationtechnology in Japan.

85 Japan has numerous incin-

erator builders; Ebara, a major engineering-construction concern and an important providerof fluidized bed incinerators, maybe the largest.86

Numerous U.S. waste-to-energy firms rely onEuropean-licensed technologies .87

There have been some U.S. successes in theequipment field; for instance, Detroit Stoker’sgrate system is a significant U.S. contribution toincineration technology.88 Wheelabrator is build-ing a facility in Germany. Basic EnvironmentalEngineering has licensed combustion technolo-gies that will be used in a tire burning waste-to-energy facility in Britain.89 U.S. companies arealso successfully marketing recycling and waste-handling equipment and landfill liners abroad.

For hazardous wastes, new treatment technolo-gies may provide viable alternatives to conven-tional incineration and treatment. With a numberof alternative technological approaches in variousstages of development and early commercializa-tion, it is difficult to predict commercial leader-ship. Supercritical fluid extraction and oxidation—

which uses carbon dioxide or water at hightemperature and pressure to remove or destroyorganic materials-is one approach under studyin the United States. Molten Metal Technologies(U. S.) is developing a molten iron bath system fordestroying wastes and recovering materials. AU.S.-Mexican joint venture enterprise is consid-ering this technology for a planned Mexicanhazardous waste treatment facility.90 Vitrification—turning materials into a glassy substance—is stillanother approach. A number of innovative treat-ment technologies being developed for contami-nated site clean-up (see next section) may beapplicable for waste treatment.

9 Contaminated Site RemediationThe United States has more experience than

any other country in dealing with contaminatedland and groundwater. Congress passed the Com-prehensive Environmental Response, Compensa-tion, and Liability Act (CERCLA, or Superfund)of 1980 to bring some order to Federal laws ontoxic substance clean-up and compensation.91

The law applied joint and several liability retroac-tively on site owners, former operators, wastegenerators, and waste haulers associated withhazardous wastes found in abandoned or inactivesites. A Hazardous Substance Response Fund(Superfund) was created to clean up sites in caseswhere parties responsible for contamination can-not be located or are unable to pay. A number ofStates have adopted mini-Superfunds. Althoughsubject to extensive criticism as inefficient,92 the

85 GWa Heavy Industries, 1992 annual report.M ~sato 1tiw% f ‘Fl~~ed B~ ~cineratom Drawing Interest, ’ The Nikkei Weetiy, Sept. 12, 1992.

87 Willlm T. ~re~ & Co., ]991 up~t~olid Waste Control ]ndus~y outlook (concord, NH: willh T. bxenz & CO., June 1991) p.486.

as Ibid., p. 446.69 Waste Tech News, vol. 4, No. 19, Sept. 7, 199*, p. 6.

90 “MexicaU U.S. Bus~essmen Plan to Build Treatment Plant in Mexico, ” International Environment Reporter, Jan. 15, 1992, p. 7.91 Frederick R. ~de~om Daniel R. M~delker, ad A. Dan TMIK~ Environmental protection: tiw and policy (BOStOIl: Little, Brown

and Co., 1984), p. 568.w See, for ~s~nce, U.S. Conpess, Ofilce of Technology Assessment, Coming Clean: Superjimd Problems Can Be Solved, Om-lT’E433

@Ci.shington, DC: U.S. Government Printing Office, October 1989).

Chapter 5-US. Competitiveness in Environmental Technologies and Services I 141

Superfund Act propelled the emergence of ahazardous waste remediation industry. Otherspecialized remedial services have sprung up inresponse to regulations and concerns about leak-ing underground storage tanks, asbestos, and leadpaint.

America’s focus on remedial environmentalclean-up has heightened in the last several yearsas it has become clear that it will require billionsof dollars in annual expenditures for many yearsto manage environmental contamination a t v a r i -ous Department of Energy (DOE) and Depart-ment of Defense (DOD) installations. DOE’sestimated fiscal year 1994 outlay for environ-mental restoration and waste management will beover $5 billion, while DOD plans to spend about$2 billion for the same purpose.93 Federal sitecontaminants range from common fuels andsolvents often found at civilian sites to radioac-tive substances, explosives, and propellants.94

European and Japanese remediation laws andprograms are less extensive than those of theUnited States. Hazardous waste remediation ex-perience in Europe has thus far been limited toGermany, France, Great Britain, the Netherlands,Denmark,95 and perhaps other Nordic countries.Japan and Western Europe are still assessing theextent of soil and groundwater contamination i ntheir countries. Germany’s eastern states, therestructuring countries of Central and EasternEurope, and the former Soviet Union offerformidable remediation challenges and, if moneycan be found, business opportunities.

Competitiveness is hard to assess in this sector,where there are many technologies to handlemany types of contaminants. Incineration andsolidification are conventional techniques, butnewer innovations-including bioremediation,vitrification, vapor extraction, thermal desorp-tion, soil cleaning, and chemical treatment, amongothers—are vying for markets.96 Site characteri-zation technologies, including monitoring tech-nologies and groundwater modeling systems, arealso being advanced.

Firms in the U.S. industry range from verysmall, technology-based entrepreneurial firms tolarge waste and engineering companies. Despitenew technologies, much remediation work in-volves labor-intensive activity such as earth-moving and construction. U.S. technologies ap-pear to fare well as international markets arise.Japan’s Environment Agency plans soil contami-nation research using U.S.-developed technolo-gies.97 Terra Vac Corp., an early developer of

vapor extraction technology, is an example of asmall U.S. firm exporting remediation services.The company has joint venture partners andbusiness activities in Western Europe, Japan, andthe Czech Republic.98 WMX’s European andAsian hazardous waste facilities may be posi-tioned to serve remediation markets.

Foreign competitors are now emerging, how-ever. For example, Metallgesellschaft (Germany)established a remediation and hazardous wastemanagement subsidiary in 1989. It has wonindustrial and military site decontamination con-

g~ Executive Office of the ~esiden~ Offlc.e of Management and Budget, Budget of the United States Government, Fiscal Yw 1994, Pp.App.-46l, App.-462, App.-57O.

94 see us ConWe~~, Office of Technolo~ Assessment, Comp[u Cleanup: The Environmental f.egacy of Nuclear Weapons Production,

OTA-O-484 (Washington, DC: U.S. Government Printing Office, February 1991) for discussion of clean up of DOE’s nuclear weaponsfacilities.

95 ECOTEC Research& Consulting, “The European Pollution Control and Waste Mamgement Market: An Overview, ” January 1992, p.24.

pf See U.S. EPA, ‘cleaning Up the Nation’s Waste Sites: Markets and Technolo~


tracts within Germany and, in partnership withMesserschmitt, is seeking munitions site decon-tamination business in Russia.99 Heidemij Restst-offendiensten, a Dutch company, is operating an80,000-ton-a-year soil washing facility in theNetherlands. 100 The plant could be the world’slargest. German technology is being tested by aU.S. firm for cleaning up groundwater at MarchAir Force Base in California.101 As their remedia-tion markets grow, European and Japanese com-petitors are likely to expand their remediationtechnology capabilities, using their own technol-ogies or adapting and improving those developedin the United States.

The strong U.S. emphasis on remediation hascreated an environmental industry sector that hasthe potential to export its products, services, andtechnologies. But, in much of the world, includ-ing developing and newly industrialized coun-tries, Central and Eastern Europe, and the formerSoviet Union, it is not clear whether or whenclean-up of existing contaminated sites willreceive much emphasis. The Environmental Ac-tion Program developed by the OECD and WorldBank for environmental aid to the former EasternBloc places high priority on air pollution, drink-ing water, and nature conservation; the absence ofremediation as a priority is striking.102 The planwas adopted by almost 50 environment ministersfrom Europe, the United States, Canada, andJapan. However, privatization of state-ownedenterprises in eastern Germany and other parts ofCentral and Eastern Europe may propel someremediation markets as authorities seek to makefacilities more attractive to investors, Manydeveloping countries have had a relatively short

history of hazardous chemical-intensive indus-ties and activities, so they may have few sitesrequiring remediation. While particular sites couldpresent extraordinary hazards or have leakedchemicals and fuel that may be recovered for use,remediation will usually be a lower priority thanprevention and control.

U Cleaner Energy TechnologiesEnergy extraction, conversion, and use is the

major contributor to a wide variety of environ-mental ills, ranging from the global build-up ofgreenhouse gases to regional acid rain and smogto local air pollution and oil spills. Demand forenergy and requirements for energy-related in-vestment are likely to increase substantially overthe next two decades. For instance, an analysisdone for the U.S. National Energy Strategy in1991/1992 projects that over $2 trillion of invest-ment, amounting to over 1,000 gigawatts ofcapacity, in the electric power supply sector willoccur outside the United States during the years1991-2010.103 A little over half of this investmentmay occur in developing countries, about aquarter in OECD countries (other than the UnitedStates), and the remainder in Central and EasternEurope and the former Soviet Union,

The World Bank estimates that non-OECDelectricity capital investments may reach $1trillion during the 1990s. l04 Whether or notgrowth in demand for electricity or energy occursat such a rapid pace, there is greater realization ofthe need to address the environmental problemscaused by energy development. Business oppor-tunities will arise for pollution abatement equip-ment, more efficient and cleaner energy extrac-

~ Me~lgesellsc~t Annual Report 1990/91.

100 WaSre Tech News,, vol. 4, No. 24, NOV. 16, 1992, p. 6.

101 Enviro~en@ Science& Technology, vol. 27, No. 10, October 1993, pp. 1957-1958.

1~ Marlise Simons, “West Offers Plan To Clean Up Eas4° New York Times, May 4, 1993, p. A13.Ios us. Dep~ent of Energy, “National Energy Strategy Technical Annex 5: Analysis of Options to Increase Exports of U.S. Energy

Technology,” 1991/1992, p. 7.1~ World Ba~ C ‘Capiti Expendiwes for Electric Power in the Developing CO~13’ieS, ‘‘ KEN Energy Series Paper No. 21, February 1990,

in World BardG ‘‘The Bank’s Role in the Electric Power Sector, ’ draft, Industry and Energy Departmen\ Box 5.

Chapter 5–U.S. Competitiveness in Environmental Technologies and Services I 143

tion and conversion technologies, and moreefficient energy end use.

This section discusses competitiveness in cleanerenergy technologies, in particular electricity sup-ply, and features several classes of electric powertechnologies including gas turbines (also calledcombustion turbines), advanced coal technolo-gies, and several renewable energy technologies.While some of these technologies offer certainadvantages even in the absence of environmentalbenefits, their environmental attributes can spurtheir development and use. For example, gasturbines and combined cycle power plants thatcombine steam and gas turbine cycles can offeradvantages in cost, efficiency, and flexibility ofuse over conventional steam plants; however,significant advantages also accrue from theircleaner performance, including lower pollutionabatement costs, easier permitting, and less diffi-cult facility siting. These environmental benefitsare major factors in the adoption of these technol-ogies and could be viewed as environmentalbusiness opportunities.

COMBUSTION OR GAS TURBINESNew gas turbine technologies offer extensive

environmental and operational advantages overconventional steam turbine power plants. Formore advanced models and configurations, suchas combined cycle (linking gas and steam turbinecycles), steam injected, and intercooled steaminjected, electrical generating efficiencies of 45 toover 50 percent are possible, in contrast to 30 to35 percent for conventional steam plants.105 Netenergy efficiencies may exceed 80 percent ifcogenerated heat is recovered. Improved effi-ciency translates into less environmental damage

per unit of electrical generation or capacity;carbon dioxide emissions are less than those fromconventional power plants, while particulate,VOC, and SO2 emissions can be very low.(Controls for NOx may still be necessary.) Gasturbines can be economically and quickly in-stalled in small increments-in contrast to large,capital-intensive, centralized steam plants. Ad-vanced gas turbines may have the flexibility to beconfigured for both peaking-power and base-loadperformance. Natural gas, oil, and gasified coaland biomass can be used as fuels.

There are about 15 manufacturers of gasturbines in the world; 106 the United States fareswell in this business. General Electric (GE) is thelargest supplier, with roughly half the U.S.domestic market and, with its European andJapanese business associates, who assemble tur-bines using key GE components, about the sameproportion of the world market.

107 The company

has had success in selling gas turbines in the homemarkets of competing nations; 56 percent ofEuropean orders in 1991 accrued to GE and itsassociates log and Japan has been a good GE gasturbine customer. Pratt & Whitney and Westing-house are other U.S. gas turbine suppliers. So farGE and Pratt& Whitney dominate the productionof aeroderivative gas turbines (derived, in part,from jet engine technology) that are expected tobe in growing demand. 109 Major foreign competi-tors include ABB, Siemens (Germany), and RollsRoyce (U.K.), which have been increasing theirU.S. market share.

International partnerships and licensing ar-rangements are proliferating. GE’s overseas asso-ciates include major Japanese and Europeanengineering firms and machinery manufacturers,

PP.PP

lot OA ~~ge Na[io~ ~bomto~, Energy Technology R&D: What CouldMakea Difference?, vol. 2 (ORNL-6541/Vl/P2) December 1989,41-46; and R.H. Williams and E.D. Larson, ‘‘Aeroderivativc Tbrbines for Stationary Power, ’ Annual Review of Energy, vol. 13, 1988.429-489.

1~ us, Dcp~mcnt of Energy, op. cit., footnote 103, pp. 46-47.

107 Eugene ~]tman, Gener~ Eltxtric, persoml communication, Feb. 3, 1993

l~s * ‘GE Fo~s New European Marketing Arm, ” Energy Daily, Oct. 21, 1992, p. 4,

‘w Jim Clarke, “EPRI Official: Interest in Advanced Thrbines Increasing,” Energ? Daily, June 26, 1992, p. 4.


Ohio Power Co. Tidd Plant, Brilliant, Ohio.Pressurized fluidized bed combustion is one of avariety of technologies being demonstrated underDOE’S Clean Coal Technology Program. Clean coaltechnologies may have growing markets as coal-dependent countries around the world addressenvironmental concerns.

Westinghouse has partnerships and agreementswith Rolls Royce, Mitsubishi, and Fiat Avio(Italy). Rolls Royce has a separate partnershipwith ABB in Europe. And Pratt & Whitney has apartnership with Siemens. General Electric Co. ofGreat Britain is linked with Alsthom of France.Competition has intensified as the number of gasturbine manufacturers has grown. Several of thepartnerships just noted were forged to challengeGE’s and Pratt & Whitney’s position in theaeroderivative market. Firms in newly industrial-ized countries might enter the market as well.

ADVANCED COAL COMBUSTION ANDCONVERSION TECHNOLOGIES

Fluidized bed combustion (FBC) and coalgasification are two major types of clean coaltechnologies that may see considerable marketdevelopment as ways are sought to make coal usemore compatible with environmental protection.

Along with several other new cleaner combustiontechnologies, they are being developed and dem-onstrated under the U.S. Department of Energy’sClean Coal Technology Program. The program isa Federal-private cost-sharing effort to demon-strate new ways of using coal cleanly, includingprecombustion coal cleaning, advanced combus-tion and conversion, and postcombustion clean-up. Over $2.7 billion of Federal money iscommitted to five rounds of demonstrations fromfiscal year 1986 through fiscal year 1995.110 Of$4.6 billion committed to 41 projects at the end of1992, 40 percent was from DOE and 60 percentfrom industry.111 Other DOE and Electric PowerResearch Institute (EPRI) research has beenimportant in advancing combustion technologiesin the United States.

Two major variants of fluidized bed combus-tion are Atmospheric FBC (AFBC) and Pressur-ized FBC (PFBC). Both can effect high rates ofsulfur removal and are alternatives to conven-tional pulverized coal plants using flue gasdesulfurization. AFBC has been employed forbiomass and waste combustion, and can use lowquality fossil fuels like lignite and oil shale.112

PFBC, a less mature technology, offers higherefficiency in less space than either conventionalor AFBC plants. These technologies may beviable for repowering existing plants as well asfor new installations.

U.S. vendors of AFBC systems face consider-able competition from Europe and Japan. Indiaand China are developing AFBC for their domes-tic needs. Less complex variants of AFBC havebeen built mainly for biomass burning and wasteincineration. For larger utility scale applications,the emphasis has been on more advanced circulat-ing AFBC. Lurgi (Germany) and Ahlstrom/Pyropower (Finland) have led with 40 and 30plants, respectively, in operation or under con-

110 U.S. Congress, Congressional Researc h Semice, “DOE’s Clean Coal Technology Program: Goals and Funding,” CRS Issue BriefIB88071, updated July 20, 1993,

11 I Dafiel ~pla% ‘*DOE ~~ to Fu~m in FM Clean cod Technology Solicitation’ Energy Daily, Dec. 10, 1992, p. 4.

112 E. Stratos Tavoulareas, “Fluidized Bed Technology, ” Annual Review of Energy and Environment, vol. 16 (1991), pp. 25-57.

Chapter 5--U.S. Competitiveness in Environmental Technologies and Services! 145

struction by 1990.113 Two Swedish companies areprominent competitors; one has licensed itstechnology to U. S., Japanese, and Spanish fins.Keeler/Dorr-Oliver and Foster Wheeler are themajor U.S. providers of AFBC technology. Com-bustion Engineering, a U.S. subsidiary of ABB, isanother supplier and a participant in DOE’s cleancoal technology demonstration program. 114 OtherAFBC variants are being developed by U.S. andGerman companies.115

PFBC is an immature technology that is not yetcommercially available. ABB has dominated thefield as supplier of all three major PFBC demon-stration projects (in Spain, Sweden, and theUnited States).116 Demonstration units have beensold to Japan and the former Czechoslovakia.ABB hopes to sell commercial-sized facilities inthe United States and Japan. Deutsche Babcock(Germany), Foster Wheeler, and Air Products andChemicals are working together to demonstrate aPFBC system in DOE’s clean coal technologyprogram.

117 Ahlstrom/Pyropower, using Finnish

technology, hopes to become a PFBC supplier,with a U.S. demonstration plant planned forcompletion later in the decade.118

Integrated gasification combined cycle (IGCC)is another clean coal approach. Gas is derivedfrom coal while polluting ash and sulfur are left

behind, The gas, like natural gas, can be burnedrelatively cleanly and at high efficiency in acombined cycle power plant. Most existing coalgasification projects produce gas for chemicalfeedstock rather than for electric power produc-tion. The gasification process may be adaptablefor gasification of biomass as well. IGCC pro-duces far less waste than fluidized bed combus-tion because sorbents are not needed to absorbsulfur from the combustion chamber. This is alsoan advantage over FGD on conventional powerplants. There are only a handful of gasificationprocesses in competition from U. S., German,Dutch, and British firms.119 Japan’s governmentand electric utilities are working together todevelop coal gasification and liquefaction tech-nologies.

120 The major processes that appear to be

making commercial inroads are from Texaco,Dow, Shell (Netherlands), and British Gas/Lurgi. 121 The Texaco process seems to be mostused; there are facilities in the United States,Japan, and Germany using the process, mostly forchemical feedstock production. Texaco has re-ceived contracts in China and Italy, and isworking with Venezuela to promote IGCC usewith heavy Venezuelan oil for the U.S. andCaribbean markets.122 Several DOE clean coaldemonstrations feature IGCC.

‘‘3 Ibid.114 S+ B, AIp~ 1‘Clea coi-d Technology and Advanced Coal-Based Power plants, ’ Annual Review of Energy and Environment, vol. 16

(1991), pp. 1-23.1 IS mid.

1 lb Robefl smock ‘ ‘Pressurized Fluid Bed Demonstration Units Operate Successfully, ‘‘ Power Engineering, vol. 97, No. 3, March 1993,pp. 42-45.

117 R.C. Rittenhouse, “Clean Coal Technology: Where Does It Go From Here?,’ Power Engineering, Vol. 97, no. 7, July 1993, pp. 17-22.*‘a Ibid.

119 O* Ridge Nation~ Laboratory, Op cit., footnote 105, p. 27.

120 Agency for ~dusrn~ Scienm and Technology, Shikenkenyusho Kenkyu Keikaku 1992 (Oct. 1992), as repotied in Foreign Bro~cast

Information Service, Foreign Media Notes, FB PN 93-330, July 28, 1993.121 ~Wfi, op. cit., fOOmOte 1141 P. 20.

’22 George Lobenz, “Texaco, Venezuela Sign Accord Linking Orimulsio~ IGCC,” Energy Daily, June 18, 1992, p. 3,


RENEWABLE ENERGY123

Renewable energy sources, other than hydro-electric, make up only a small portion of commer-cial electric power generation today. However,that proportion is likely to grow, perhaps rapidly.Technological improvements that have loweredcosts, concerns about greenhouse gas emissions,and continuing worries about the safety of nuclearpower add to renewable energy’s appeal. Renew-able energy is key for pursuit of sustainabledevelopment. Photovoltaic cells (PVs) and windturbines are among the renewable energy technol-ogies that might make important contributions topower supply in coming decades.

The United States pioneered development ofPVs, which found early applications in space assatellite power sources. Today, PVs are beingused for remote location power production—which is particularly important in developingcountries without widespread national powergrids-and are being evaluated for some utilityapplications. U.S. PV manufacturers face verystrong competition from their Japanese, German,and other European counterparts. The world’slargest manufacturer of PVs is Siemens SolarIndustries, a U.S. subsidiary of Siemens (Ger-many), which recently bought ARCO Solar in theUnited States.124 The company accounts for overhalf of U.S. production, of which it exports 75percent.

U.S. and Japanese producers each garneredabout one-third of the global market in 1992; upfrom one-quarter for U.S. producers and downfrom half for Japanese producers in 1986.125,126

European production grew from about 15 percent

to nearly 29 percent in that period. Some Asiancompetitors have built up production experienceby making PVs for calculators, watches, andsimilar devices. They now produce cells andmodules for remote sites, residential use, andutility demonstration in competition with U.S.manufacturers. There are at least a dozen U. S.-owned PV manufacturers. Several, includingSolarex (an Amoco subsidiary), Mobil Solar, andTexas Instruments, are parts of large companies.Energy Conversion Devices (ECD) has formed apartnership with Canon (Japan), called UnitedSolar Systems Corp., to manufacture PVs in theUnited States.127 ECD has separate PV jointventures in India and the former Soviet Union.The United States, Germany, and Japan are theleading funders of research, development, anddemonstration of PV technology; several Euro-pean countries have lesser efforts.

Wind turbines are providing utility powertoday, with most installations in California,Hawaii, and Denmark. Several improvements indesign, materials, and siting may make wind acost-effective electric power source in a large areaof the United States and abroad.128 DOE’s goal isto achieve price reductions from a current averageof 8 cents per kilowatt-hour to 5 cents by themid-1990s, a cost similar to that of a new fossilfuel plant. U.S. Windpower (a subsidiary ofKenetech) claims to have already achieved thisgoal with a new variable speed turbine.129 U. S.,Danish, Belgian, Dutch, Japanese, German, andBritish companies make utility-scale wind tur-bines. By the late 1980s, several Danish manufac-turers were supplying over 50 percent of U.S.

lx A foficorning OTA ms~sment, Renewable Energy Technology: Research, Development, ad CO~ercial PrOSpectS, wti ~ayze

technological and commercial aspects of renewable energy including competitiveness issues.

1~ M~k Crawford, ‘‘Sevm Companies Awarded DOE Solar Grants, ” Energy Daily, Apr. 24, 1992, p. 3.

lx Photovol(aic News, vol. 12, No. 1, JmuM)J 1993, P. 1.

lx Photovo/taic News, vol. 11, No. 2, February 1992, p. 1.

127 Lipm~ op. cit., foomote 78.

IU Cul J. Weinberg and Robert H. Willi~S, “Energy From the SurL” Scientific American, vol. 263, No. 3, September 1990, pp. 146-155.129 cC~L ~Mches sol~ ~Oj@~” Energy Daily, NOV. 4, 1991, p. 4; Kimhrly r)OZkr, ‘‘USW Touts Wind Thrbine Breakthrou~”

Energy Daily, Nov. 6, 1991, pp. 1-2.


wind-based generation capacity.130 Mitsubishientered the U.S. market in 1987. Belgian andBritish machines also operate in the UnitedStates. While there are a number of U.S. windturbine manufacturers, U.S. Windpower has beenthe dominant U.S.-based supplier of utility-scalemachines, accounting for over 90 percent of U.S.manufactured machines.

131 U.S. Windpower has

been working on projects in Europe, Latin Amer-ica, Egypt, and New Zealand. At least nine otherU.S. companies are working with DOE’s Na-tional Renewable Energy Laboratory on cost-shared wind energy technology developmentprojects. 132

Pioneers in commercialization of renewableenergy technology do not necessarily enjoy com-mercial success. In California, LUZ Internationaldeveloped several solar thermal electric powerplants. The technology uses mirrored troughs tofocus sunlight on tubes containing liquids that arethen used to generate steam for electric powerproduction; natural gas is used as a supplementalfuel. The LUZ facilities are the largest commer-cial solar thermal electric plants in the world. Thecompany achieved economies of scale as itsfacilities grew; its latest 80 megawatt unitsgenerate power at 8 cents per kilowatt hour versus24 cents for its first 15 megawatt unit in 1984.133

However, despite this progress, the company hasgone bankrupt. Research, development, and dem-onstration of other solar thermal systems contin-ues in the United States and abroad.

The American renewable energy industry istechnologically strong and competitive-but soare foreign suppliers. As in other arenas ofenvironmental technology competition, some for-eign suppliers obtain more favorable financing

U.S. manufactured wind turbines at the Altamont Pass,California. Technical advances are making renewableenergy sources more economically viable. U.S.producers of such technologies face tough foreigncompetition in the U.S. and international markets.

from home governments than do U.S. firms. Thisis particularly important in developing countries,which are an important export market for U.S.renewable energy products.

Help for manufacturing R&D and developmentof domestic markets can be important determi-nants of competitiveness. Japan and Germanyhave strong programs for R&D, demonstration,and evaluation of renewable and other alternativeenergy technologies. They also employ tax incen-tives and subsidies to encourage installation ofrenewable energy and other environmentallypreferable energy technologies (e.g., fuel cells).For example, Japan’s Ministry of InternationalTrade and Industry (MITI) has earmarked nearly$40 million for fiscal year 1994 in a multiyearprogram to subsidize two-thirds the cost ofhousehold PV installations; the goal is to have

1~ oak Ridge National Laboratory, op. cit., footnote 105, pp. 145-147.

131 Ibid

132 ‘‘NREL Launches Solar Projects, ’ Energy DaiZy, Nov. 4, 1991, p. 4; “NREL Funds Wind Turbine R&D Efforts, ” Energy Daily, Dec.4, 1992, p. 4.

133 Michael ~tker, “B~ers to Commercialization of Large-Scale Solar Electricity: I.ssons Learned From the LUZ Experience, ’ SandiaNational Laboratory contractor report, SAND91-7014, November 1991.


70,000 systems installed by 2000.134 The 70,000systems would amount to about 340 percent of theworld’s current annual PV production capacity.These countries’ technology policies balanceefforts for improving the supply of new technol-ogy (R&D) and demand for new technology(market creating incentives).

DOE is cooperating with renewable energytechnology manufacturers, electric utilities, andother industries to promote manufacturing R&Dand utility applications of renewable. (See ch.10.) The PV Manufacturing Technology Pro-gram’s goal is to prevent loss of the PV industryto Japanese and German manufacturers by help-ing domestic companies improve their manufac-turing capability. PVUSA—Photovoltaics for Util-ity Scale Applications-is helping to developutility PV markets through testing of variousmanufacturers systems and identification feasibleutility applications. Other cost-sharing U.S. gov-ernment-industry programs exist for wind andgeothermal R&D. A number of State utilitycommissions’ rules for incorporating social costsof pollution could help the U.S. market andindustry.

END-USE ENERGY EFFICIENCYImprovement of energy use efficiency as an

international market opportunity is still in anascent state. The energy efficiency sector is verydiverse, including products ranging from instru-ments and controls to high-efficiency appliances,heating, lighting, cooling, and motors to insula-tion and improved windows. Although highlyuncertain, global trade in energy efficiency prod-ucts and services is estimated at $8.4 billion peryear during the period 1990 to 2000, doubling to

$16.8 billion annually in the decade leading to2010; about half of that market is expected to bein less-developed countries.135 U.S. AID esti-mates that U.S. companies can realistically cap-ture only about 8 percent of the global energyefficiency export market and 10 percent of theannual exports to developing countries.136 Japa-nese and European firms provide tough competi-tion for American companies.

Japanese and German producers are alreadystrong exporters of many capital goods, some ofwhich incorporate energy efficiency improve-ments that have helped those countries’ industriesachieve higher energy efficiencies than someAmerican sectors. More often than U.S. compa-nies, Japanese and European companies havealready established substantial presence in devel-oping countries. 137 Low-cost manufacturers in

Taiwan, South Korea, and other rapidly industri-alizing countries provide additional competitionfor U.S. companies, or, at least, U.S.-basedmanufacturing. Indeed, the United States is itselfa net importer of some energy-efficient products,such as compact fluorescent lighting ballasts.138

As in other environment and energy sectors, theavailability of financing affects the performanceof U.S. vendors vis-à-vis foreign competitors indeveloping country markets. U.S. suppliers areexpected to be most competitive in supplyinghigher technology energy efficiency productsincluding industrial process controls and instru-mentation, as well as industrial and residentialenergy load management systems and controls(e.g., thermostats). However, German and Frenchsuppliers are also competitive in these sectors.

1~ Nihon Keizai Shihun, Aug. 22, 1993, as cited in Foreign Broadcast Information Service, pacific Rim Economic Review, VO1. 2, No. 1*,

Sept. 8, 1993, p. 7.

135 us Dep~ment of Energy, op. cit., footnote 103, pp. 67-6*.

136 Ibid., pp. 68-69.

137 Ibid., p, 69.138 InterMtio~ ~ti~te for Ener~ Conservatio~ Seizing the Moment: Global Opportunities for the U.S. Energy Eflciency ItiusfrY

(Wi.stigton, DC: ~tematioti Institute for Energy Conservation December 1992), p. 4.


9 Industrial Pollution Prevention andCleaner Production

As in the case of energy end-use efficiency, thisbusiness is less a sector than an agglomeration ofproviders of many types of goods, services, andtechnologies that are usually integrated intoproduction processes and are often hard to teaseout as separate items. Nonetheless, as discussedearlier in this chapter and in chapter 8, pollutionprevention and cleaner production present impor-tant environmental market opportunities.

In some cases, equipment and technology usedfor pollution prevention is similar to some formsof conventional add-on environmental controls.For instance, activated carbon, ion exchange, andmembrane-based technologies may be used forin-process pollution prevention, for recovery ofmaterials for recycling, or for end-of-pipe orremedial separation of pollutants for destructionor disposal. The same vendors provide theirproducts for application across this continuum ofenvironmental activities. In other cases, the pollu-tion prevention technology may only be weaklyassociated with conventional environmental prod-ucts; extended cooking in the paper and pulpindustry or improved process controls in mostindustries are examples, The design of many otherindustrial products and processes are stronglyaffected by environmental concerns and, thus, areenvironmental business opportunities. For exam-ple, environmental considerations are leading tochanges in painting and coating technologiesincluding development of high efficiency paintsprayers; powder coatings; ultraviolet, infrared,and microwave paint curing; and alternative paintformulations.

While assessment of competitiveness in cleanerproduction as a whole is difficult, because thearea is so broad, assessments could be made ofparticular components such as cleaner painting,metal cleaning, pulp and papermaking, or asdescribed above, electric power generation. As inmost of the sectors discussed, the United States,Germany, and Japan are the major players with

competition from several smaller Northern Euro-pean states. Regulations have certainly propelledmany cleaner production development activities.The phase-out of CFCs has inspired searches foralternative solvents, for solvent-free options, andfor closed-loop processes that avoid solventrelease; the United States appears to be a strongcontender in this area. California’s stringent airpollution regulations have spawned partnershipsamong government, energy utilities, and industryfor low emissions processes and fuels. Thewinners in clean production innovation-in addi-tion to public health and the environment--can beboth the regulated industry that seeks cheaperways to comply with regulations and suppliers ofcleaner production technologies that may findgrowing markets for their innovations domesti-cally and abroad.

CONCLUSIONThe strength and form of environmental regu-

lations in the home market are major determinantsof environmental industry competitiveness. How-ever, a variety of other factors, including develop-ment assistance policies, export promotion, sup-port for R&D and technology demonstration anddiffusion, and industrial structure also influenceenvironmental industry competitiveness.

The United States is competitive in manyenvironmental industry sectors but faces growingcompetition from foreign companies, most seri-ously German and Japanese fins. The interna-tionalization of environmental industries and lackof data, and the early stage of deployment forsome environmental technologies, make defini-tive assessments of competitiveness difficult, Ina number of sectors, including stationary sourceair pollution control and wastewater treatment,foreign companies are making significant inroadsin the U.S. domestic market through exports,technology licensing, and acquisitions of U.S.fins. In addition, newly industrialized and devel-oping countries are increasing their environ-mental industry capability. Pollution prevention,


cleaner technology, and energy efficiency pro- environmental controls; such opportunitiesvide significant business opportunities that can should not be overlooked in policies for environ-often allow higher degrees of environmental mental industrial support.protection at lower cost than many end-of-pipe

-———

ExportPromotionPrograms 1 6

T he U.S. environmental industry faces a number ofchallenges in exporting. Some of these challenges arefairly specific to the industry whereas others are sharedwith other exporting industries.

U.S. firms in general export much less, as a percentage of totalsales, than firms in many counties that are members of theOrganisation of Economic Cooperation and Development (OECD)(table 6-l). This is not surprising. For several decades, the UnitedStates’ large domestic market often made exporting unnecessaryfor a fro’s success. In addition, the United States is far awayfrom markets of comparable size, making exports often seem notworth the bother. A tradition of exporting is ingrained inEuropean culture. National markets are smaller, making exportsmore often necessary; similarly sized export markets are right athand. Japan, too, has a long tradition of exporting. It hastraditionally thought of itself as an island nation, poor in naturalresources, that must export to pay for the imports it needs. Inrecent decades, exports have been central to its strategy foreconomic growth and development.

As discussed in chapters 4 and 5, data on environmental goodsand services (EGS) export patterns are limited. Some estimatessuggest that key sectors of the U.S. environmental industry aremuch less export-intensive than those of Japan and Germany:environmental product exports, as a percentage of environmentalproducts and services production, is much less in the United

1 Parts of this chapter that pertain to the export promotion effect of foreign assistanceprograms are discussed more fully in OTA’S background paper: U.S. Congress, Office ofTechnology Assessment, Development Assistance, Export Promotion, and Environ-mental TechnoJog@ackground Paper, OTA-BP-ITE-1O7 (Washingto~ DC: U.S.Government Printing Office, August 1993). 151


Table 6-l—Export Intensity of SelectedOECD Countries, 1991

Exports as a percentageCountry of Gross Domestic Product

Belgium 69.3Ireland 68.7Netherlands 54.1Norway 44.8Austria 40.9Denmark 36.9Germany 38.5Switzerland 35.1Portugal 36.6”Sweden 28.1United Kingdom 23.4Canada 24.4France 22.7Greece 22.6Finland 22.3Italy 18.0Australia 17.7Spain 17.3United States 10.5Japan 10.4

a B=~ on 1990 data.

SOURCE: Derived from data on exports of goods and services, and onGDP, in International Monetary Fund, /r?ternzWona/ FirIancikl Statistics,vol. XLVI, No. 4, September 1993.

States (table 6-2). One factor that could inhibitU.S. exports is that the industry has so many smallfins. One analysis estimates that in 1991 theU.S. environmental industry consisted of 207public companies averaging $198.3 million reve-nue each ($41.0 billion total revenue) and 58,700privately held companies each averaging $1.3million in revenue ($78.4 billion total).2 Smallercompanies have a harder time exporting, and areoften reluctant to try.3 There is some inconclusiveevidence that EC environmental firms are larger;data for Japan are lacking. Environmental indus-try structure is discussed further in chapter 4.

Without exporting more, some U.S. environ-mental sectors could become less competitive intime. Foreign firms are increasingly penetratingthe relatively open U.S. environmental market(ch. 5). Without expanding exports, U.S. firmscould lose out in sales and experience comparedwith foreign firms. Lost sales mean reduced fundsfor market development and R&D, reduced econ-omies of scale, and reduced payoff for improvedproduction efficiency. Lost experience means lessfeedback for improving product or service qual-ity.

U.S. exports might increase if there weregreater industry commitment and more effectiveassistance by government or industry associa-tions. Firms that are serious about exporting mustinvest substantial time and resources to exploremarkets and cultivate business relationships abroad.While government programs can provide marketinformation and facilitate contacts abroad, gov-ernment commercial officers and company mar-keting brochures are no substitute for face-to-facecontacts between would-be exporters and poten-tial customers. In many cultures, business isconducted on the basis of personal relationshipsthat seldom jell from a single encounter at a tradeshow. Partnering with local firms is often re-quired, sometimes by law, to do business. Oncean order is won, a continuing presence (via a localpartner if not directly) is needed to provide partsand service and to cultivate additional business.Differences in language, culture, business prac-tices, standards, and legal requirements can be bigchallenges to U.S. firms (particularly smallerones) new to a market. Exports also requirearrangements and expenses for shipping, fmanc-

2 Environmental Business Journal, vol. 5, No. 4, April 1992, p. 7. However, 24,000 of these were water supply utilities (not normally exportcandidates) averaging $400,000 in annual revenue.

3 William E. Nothdurft, Going Global: How Europe HeIps Smal/FirmsExporr (Washington DC: Brookings Institute, 1992), esp. pp. 12-19.Personat communications with: Donald Comors, Environmental Business Council, Massachusetts, October 1992; Arthur Chu, Vice l%esiden~Technical and Strategic Development, Ebasco Environmental International, Inc.; Robert Driscoll, U. S.-ASEAN Council for Business andTechnology, Nov. 5, 1992. Joseph Harrisoq Director of OffIce of Capital Goods, International Trade Administratio~ Deprutment ofCommerce, as quoted in William Maggs,“Commerce Looks to Boost Green Technology Exports,” Environment Week, Sept. 9, 1991.

ing, anddomestic

Chapter 6–Export Promotion Programs I 153

Table 6-2—Environmental Production and Exports, 1992

Production ofenvironmental Exports ofproducts and environmental Product exports as aservices products percentage of products($ billion) ($ billion) and services production

Japan 21 5 24

Germany 36 11 31

United States 134 7 5

SOURCE: Presentation by Grant Ferrier, Environmental Business International, at Environmental Business Council ofthe United States meeting, June 7-9, 1993, Washington, DC.

insurance, beyond those required forsales. Given the large domestic market

for environmental products and services, manyU.S. environmental firms may feel that exportingis not worthwhile.

The U.S. Government provides some assist-ance, as do State and local governments. How-ever, firms often find U.S. export assistancedifficult to access and poorly coordinated. More-over, U.S. policymakers disagree about whetherexport promotion is a desirable governmentfunction.

The situation in some other countries is differ-ent, with the result that:

Major foreign competitors dedicate proportion-ately more resources to export promotionservices than does the United States. They alsoperform more high level advocacy, in whichministers or even heads of state promote theirnational firms to foreign governments.U.S. firms appear to have more difficultyobtaining export financing compared to rivalsin some other countries. Also, exporters insome other countries have more access toconfessional financing that their governmentsoffer developing countries. Small businessesoften can not export without financing. Also, asis discussed in chapter 5, financing can beimportant in winning export contracts for many

large projects with an environmentalnent.

Recent Congressional and Executiveactions, however, emphasize a stronger

compo-

BranchFederal

role in promoting exports. In 1992, Congresscalled for a national strategy to promote exports;in September 1993, the Clinton administrationdelivered its first report aimed at framing such astrategy.4

In addition to the overall export strategy,Congress also called for a national environmentalexport strategy. The Clinton administration’sinitial environmental strategy is expected to beissued in the fall of 1993. In addition, as isdiscussed in chapter 2, several bills to give addedemphasis to environmental export promotionhave been proposed in the 103d Congress.

Some specific areas of government policy areespecially pertinent to promotion of environ-mental exports:

■ As discussed in chapter 5, demand for environ-mental goods and services is driven largely byregulations and enforcement. Technical assist-ance offered as part of foreign aid can helprecipient countries build environmental man-agement capacity, which often stimulates de-mand for environmental goods and services(EGS). If the recipient adopts the donor’sapproach, the assisting country’s firms may

4 Trade Promotion Coordinating Committee, Toward a Nutionul Export Strategy, report to the United States Congress, Sept. 30, 1993.


gain some advantage in supplying technologiesknown to meet the requirements. Promotion ofvoluntary and professional standards of envi-ronmental management may also help stimu-late environmental product demand.Foreign customers, particularly in developingand newly industrialized countries, are oftenunsure about the performance and suitability ofenvironmental technologies offered. Technol-ogy performance evaluations and verificationsby the Environmental Protection Agency (EPA)(or other credible third parties) can help U.S.environmental firms and foreign customersalike without compromising EPA’s reputationfor objectivity. Indeed, they could also helpdiffuse new technologies in the domestic mar-ket. Technology demonstrations done abroadcan also help U.S. technology developers.Aid plays an important role in developingcountries’ environmental projects, which ofteninvolve government and require outside assist-ance. Apart from confessional financing, aidprograms can promote exports in several ways.For example, grants for feasibility studies bynational firms can help national firms winfollow-on projects. Training grants can sweetennational fins’ bids. Aid personnel can pass onto national firms information about recipientcountries’ upcoming projects and procure-ments, as well as information about possiblemultilateral funding sources. Some other coun-tries’ aid programs seem more attuned to thesecommercial considerations.

Some efforts to coordinate assistance for envi-ronmental exports are already underway.

For example, the Committee on RenewableEnergy Commerce and Trade (CORECT), setupin 1984, works to facilitate interaction betweengovernment officials and private industry topromote renewable energy exports; its conceptmight be transferable to other subsectors of theenvironmental field (box 6-A).

In 1992, the Bush administration launched theUnited States-Asia Environmental Partnership(US-AEP) which seeks to help developing coun-tries in the Asia-Pacific region solve environ-mental problems by using U.S. environmentalgoods and services. Federal agencies can useUS-AEP (a public-private partnership) to coordi-nate environmental export activities to the region,and to provide one-stop-shopping. US-AEP hasrecently, through the National Association ofState Development Agencies (NASDA), given$700,000 in matching grants to assist small andmedium-sized firms in exporting.5

Another public-private partnership launched in1992, the United States Environmental TrainingInstitute (USETI), brings developing countrydecisionmakers to the United States for training.U.S. vendors have the opportunity to showcaseenvironmental technologies.

EFFORTS TO DEVELOP U.S. STRATEGYAs indicated in figure 6-1, Federal export

promotion and financing responsibilities are di-vided among many agencies. The Department ofCommerce, the Export-Import Bank of the UnitedStates (Eximbank), and the U.S. Trade andDevelopment Agency (TDA, formerly the Tradeand Development Program) all have export pro-motion as a major mission. The Overseas PrivateInvestment Corp. (OPIC) has the mission ofencouraging investment abroad, which often leadsto exports. The Office of the U.S. Trade Repre-sentative (USTR), the Department of State, andthe U.S. Treasury develop trade policy andconduct international negotiations. The Depart-ment of Agriculture promotes U.S. agriculturalexports. Other agencies also participate in tradepromotion. Several U.S. Agency for InternationalDevelopment (USAID) programs and activitiesencourage U.S. private sector involvement indevelopment assistance. The Department of En-

Chapter 6–Export Promotion Programs 155

Box 6-A-Committee on Renewable Energy Commerce and Trade: A Possible Model forPromotion of Environmental Technology Exports

CORECT was setup in 19841 to coordinate Federal policy and programs to promote exports in therenewable energy field. Chaired by the Secretary of Energy, CORECT includes 14 Federal agenciesand industry, often represented through the United States Export Council for Renewable Energy(ECRE), a consortium of 9 U.S. renewable energy trade associations.2

CORECT’s structure encourages a close relationship among Federal agencies and industry.Industry representatives meet frequently with Federal agency officials to ask for Federal help withspecific export promotion efforts. Meetings are held separately for four market regions, and involveworking-level staff with detailed knowledge of market opportunities. Once a task is identified as meritingsupport, each agency can commit resources depending on its own mission and expertise. CORECTalso receives funds directly from Congress for project seed money and administration; for fiscal years1992-1994 this funding has been $2 million per year.

It is difficult to evaluate the impact of CORECT on exports of U.S. renewable energy technologies,because public trade data are incomplete and the industry reveals little about its trading activities. Arecent U.S. General Accounting Office report3 notes that CORECT did not meet a congressionaldeadline to formulate a plan for increasing renewable energy exports. Still, it has identified barriers toexport, investigated markets, and sponsored trade promotion events, which could comprise basiccomponents of a trade plan. CORECT and ECRE have established a uniform application form to makeit simpler for firms in the renewable energy field to apply for financing from USAID, Eximbank, theOverseas Private Investment Corp. (OPIC), and TDA. GAO also concluded that CORECT has beensuccessful in pulling together financial resources from Federal agencies and industry for tradedevelopment activities, as well as from multilateral institutions, and has been instrumental in developingnew financing mechanisms. U.S. renewable energy technology firms still, however, encounter verycompetitive foreign financing and subsidization schemes.

DOE is trying to form a parallel group for energy efficiency, the Committee on Energy EfficiencyCommerce and Trade (COEECT). As of October 1993, COEECT had not yet met because norepresentative consortium like ECRE existed for the energy efficiency industry. The fiscal year 1993funding has been used for efforts to build such a consortium. It is possible that the CORECT approachcould work for still other specific subsectors of the environment industry (for example, air pollutioncontrol), though no such proposals have been made.

1 Renewa~e Energy Industry Development Act of 1983, Public Law 98-370, as mn*d by the RenewableEnergy and Energy Efficiency Technology Competitiveness Act of 1989, Public Law 101-218.

2 The factual des~iption of CORECT in this ~x is based largely on IJ.s. General Accounting offi~, Export

Promotion, Federal Efforts to Increase Exports of Renewable Energy T5chno/ogies, GAO/GGD-93-29 (Gaithers-burg, MD: U.S. General Accounting Office, Deoember 1992), and on discussions with CORECT staff.

3 Ibid.

ergy (DOE) and the Small Business Administra- With so many programs and agencies, there hastion (SBA) are involved in export promotion to been growing recognition that Federal exportfurther specific agency missions. Other agencies, promotion programs are poorly coordinated andsuch as the Environmental Protection Agency often duplicative, and that a strategy to guide(EPA), may become involved because of their Federal activities has been lacking. In addition tospecial expertise or responsibilities. specific initiatives mentioned above for coordi-

156 \ Industry, Technology, and the Environment: Competitive Challenges and Business Opportunities

Figure 6-l—Selected Federal Programs That Can Promote EGS Exports

Activity

Department/Program”1.m ss Ions Studlf? s

& lravel —— ---1 cooper at I on—.

Agency for International Development—

American Business Initiative x x

Bureau for Private Enterprise x xMarket and Technology Access Project x

U S -Asia Environment Partnership x x x x x xEnergy Technology Innovation Project x x xEnergy Training Project

—x x

Environmental Credit Program x

Environmental Enterprises Assistance Fund x

Energy Efficiency Centers in E. Europe x xPrivate Investment and Trade Opportunities x x x xProject in Development & the Environment x x x

Environmental Improvement Project x x x xCapital Development Initiative x x x

Department of CommerceU.S. & Foreign Commercial Service x x x x x

Eastern Europe Business Info. Centers x x x xL. Am./Carib. Business Development Center x x x xE. Europe Enviro. Business Consortium xNat'l. Enviro. Technologies Trade Initiative x x x

Department of Energy

Export Initiative Program x x

Coal and Coal Technology Export Program x x x xSupport to Energy Efficiency Centers x xCommittee on Renewable Energy Commerce

and Trade x x x x xFederal International Trade and Develop-

ment Opportunities Program x

Environmental Protect ion Agencv,Office of International Activities x x x x

U.S. Environmental Training Institute x xRegional Environment Center (Budapest) x x xCaribbean Environm’t. & Developm’t Instit. x x xCIearinghouses x xTechnical Information Packages x

;xport-import Bank 1 x I 1 I I

Overseas Private investment Corp. x x xGIobal Environmental Emerging Markets

Fund, L.P. (not yet capitalized) x

Small Business Administration I x I I x I x I I I

Trade & Development Agency I 1 x I 1 x x 1 I x

● Programs in italics involve substantial interagency, State or private sector participation in managing the program.


Chapter 6-Export Promotion Programs ] 157

nated government action (CORECT, US-AEP),Congress and the executive branch have takensome recent actions to improve program coordi-nation and develop a more strategic emphasis forall government export promotion efforts, and forenvironmental export promotion as a wholesector, as discussed below.6

I Trade Promotion Coordinating CommitteeThe interagency Trade Promotion Coordinat-

ing Committee (TPCC), chaired by the Secretaryof Commerce, was set up in May 1990 byPresident Bush to consolidate and streamlineFederal export promotion activities. In the ExportEnhancement Act of 1992, Congress formallyestablished TPCC as a permanent institution.7

The Act directs TPCC to set strategic priorities,eliminate duplicative activities, improve intera-gency coordination, and propose to the Presidentan annual unified trade promotion budget. Onestrategic priority issue is the share of fundinggiven to agricultural vs. industrial export promo-tion. In 1991, the Department of Agriculturereceived 74 percent of total government outlaysfor export promotion, although only 10 percent ofall U.S. exports were agricultural.8 Whether aninteragency process alone can effectively identifypriorities for a meaningful budget is uncertain.

TPCC delivered an initial report in September1993.9 That report does not set strategic prioritiesor propose a unified budget, although it commitsto doing both in time for the fiscal year 1995

budget. 10 The report lists four goals for Federalexport promotion:

Create a more customer-focused, coherent, andeffective USG-wide export promotion strategywithin existing resource constraints to assist theprivate sector in creating jobs and fuelingeconomic growth.Leverage US government resources by strength-ening city/state and public/private partnershipsdomestically and in our overseas networks.Remove or reduce government-imposed obsta-cles to exports wherever appropriate.Seek to reduce foreign export credit subsidiesthrough multilateral negotiations and level theplaying field, when appropriate, by counteringforeign competitors’ efforts in financing.11

The report also lists 65 concrete recommenda-tions covering resource allocation, export promo-tion services (including domestic field services,Washington-based services, overseas services,coordination with State export promotion activi-ties, and advocacy), financing, and regulatoryobstacles to exports. Many of these address theissues of duplication and coordination identifiedby Congress.

The Export Enhancement Act also directsTPCC to ‘‘provide a central source of informationfor the business community on Federal exportpromotion and export financing programs.”12

TPCC has set up an information clearinghouse,the Trade Information Center. The Center, whichhas a toll-free phone number, receives 200

c Both the spec~Jc initiatives and the Trade Promotion Coordinating Cornmittes (below) are also discussed in U.S. Congress, OffIce ofTechnology Assessment, Development Assistance, Export Promotion, and Environmental Technology, op. cit., footnote 1, app. B.

7 Expofl Enhancement At of 1992, Public LAW 102-429, sec. 201. A predecessor to the TPCC, tie ~temgency Task Force on Trade, wasnever established by statute. Headed by a Director of the Export-import Bank of the United States, the Task Force was dissolved when theDirector left office. U.S. General Accounting Office, Export Promotion: Federal Programs Lack Organizational and Funding Cohesiveness,NSIAD-92-49 (Gaithersburg, MD: U.S. General Accounting Office, Jan. 10, 1992), p. 7.

s U.S. Congress, General Accounting Oftlce, Export Promon’on: Federal Programs Lack Organizan”onal and Funding Cohesiveness, op.cit., footnote 7, p. 5.

9 Trade ~ornotion coordinating Committee, Toward a National Export Strategy, op. cit., footnote 4.

10 Ibid., pp. 9-10.I I ~id,, p. 6, These four goals am quoted directly from the source.

12 Expofl Enhancement Act of 1992, op. cit., footnote 7.


inquiries a day from new-to-export and new-to-market fins, and directs them to appropriateFederal agency programs for assistance. Sincecompanies must still apply separately to theindividual agencies for assistance, the Centerdoes not provide one-stop-shopping.

E Environmental Trade PromotionWorking Group

The 1992 Export Enhancement Act declaredthat it is the “policy of the United States to fosterthe export of United States environmental tech-nologies, goods and services. In exercising theirpowers and functions, all appropriate departmentsand agencies of the United States Governmentshall encourage and support sales of such technol-ogies, goods, and services.”13 Toward this end,the law directed the President to establish anEnvironmental Trade Working Group as a sub-committee of TPCC, to include representativesfrom all TPCC member agencies and EPA. Thesubcommittee is charged to be comprehensiveand strategic; it is “to address all issues withrespect to the export promotion and exportfinancing of United States environmental tech-nologies, goods and services, ’ and ‘‘to developa strategy for expanding United States environ-mental technologies, goods and services.’’14

An environmental section was included in theTPCC’s September 1993 report. That sectionidentifies 11 problem areas, which could begrouped as follows:

the need for more strategy:

1.

2.

No agency has identified or targeted themost attractive export promotion opportuni-ties.There are “conflicting or uncoordinatedpolicies toward developing and middle-

income markets, which may require long-term market development efforts; issuesinclude ‘‘the appropriate role of develop-ment assistance in favoring U.S. commer-cial interests (e.g., tied aid), investment intraining, financing of demonstration pro-jects, and establishing regulatory and test-ing protocols favorable to U.S. industry.

the need for better coordination and data:

3. “Export promotion activities are poorlycoordinated.

4. “At virtually all USG agencies there is alack of knowledge of existing programsrelating to environmental technologies. ’

5. “There is no single coherent source ofinformation available to the public aboutthe range of government activities in envi-ronmental technologies or industry datacollected by the government. ’

6. “No data exists for tracking and under-standing the industry.’’15

the need to consider the effect on exports orexport potential when fashioning policies on:

7. Environmental technology development, es-pecially at DOE and EPA.

8. U.S. regulatory standards.9. U.S. positions in negotiations for interna-

tional standards and multilateral environ-mental treaties.

the need to better reach smaller fins:

10. Small firms new to exporting.11. Small and medium-sized firms in need of

financing assistance.

The TPCC report was followed in November1993 by an environmental technologies export

]3 ~id., ~~~, 2@$.

14 Ibid.15 me repo~ noted that it is ‘‘unclear to what extent this lack of data is perceived as a problem by the industry. ’ However, such data would

help government in setting strategic priorities and evaluating the success of its efforts.

Chapter 6-Export Promotion Programs I 159

strategy issued by an interagency group estab-lished by President Clinton.16

9 State EffortsAlthough not discussed in detail here, efforts

by State governments and private sector organiza-tions to promote environmental exports meritnotice. More and more States are providing exportpromotion services. In 1992, the States appropri-ated a total of $97 million for internationalactivities, and had 546 domestic and 303 overseasfull-time-equivalent staff, of which 392 domesticand 178 overseas full-time-equivalent were de-voted to export promotion.17 In 1992, 39 Statesdid in-house market research.18 Some States haveenvironmental export promotion programs.

I Private Sector EffortsPrivate organizations, such as the United States-

ASEAN19 Council for Business and Technology,the Environmental Business Council of the UnitedStates (EBC), and the U.S. Environmental Tech-nology Export Council (ETEC), are working tofacilitate U.S. exports of environmental technolo-gies.

A complicating factor in developing a Federalpolicy is that the environment industry consists ofmany separate sectors and subsectors. Currently,no industry groups represents the entire industry,though two groups, EBC and ETEC, are seekingthat role. There are also several other industryassociations for particular subsectors of the indus-

try.

U.S. EXPORT PROMOTION PROGRAMS ININTERNATIONAL CONTEXT

Countries provide several kinds of assistance tohelp their firms export. The following sectionswill briefly describe U.S. and foreign efforts infour areas: assistance for export planning andmarketing, technology verification and demon-stration, use of foreign aid, and financing. Thissection gives some overall comparisons.

I Level of FundingJapan and many European countries fund

export promotion (especially nonagricultural ex-port promotion) at a higher level than the UnitedStates, As discussed below, this is true for exportplanning and marketing, and export financing. Inaddition, Japan, France, and Germany, whencompared with the United States, structure theirforeign aid programs in ways that tend more topromote exports.

1 Level of Expectations and ImportanceIn some ways, other countries seem to have

higher expectations for, and place higher impor-tance on, government’s role in export promotion.(Often the higher expectations go hand-in-handwith higher funding.) Some examples, discussedbelow, include: more ambitious assistance withexport planning; larger staffs posted abroad,capable of rendering more assistance; more high-level advocacy to influence foreign governmentprocurement; a ‘‘needs’ versus ‘‘entitlements’approach to export financing; and a more aggres-sive use of tied aid credits.

16 Ron~d H, Brow H~el o’~w, cmol Browner, Environmental Technologies Exports: s~ategic Fra~workfor U.S. ~ad~ship~

November 1993. In an April 1993 Eartb Day address, President Clinton directed the Department of Commerce (DOC) to lead an InteragencyWorking Group on Environmental Technology. With EPA, DOE, and other agencies participating, this group was to develop strategies tofurther environmental exports, environmental technology development and domestic diffusion of environmental technology.

IT Nation~ Association of S@te Development Agencies, NASDA State Eqort Program Database (SEpD): 1992 (wm@3toU ~: NASD~

not dated), tables 6, 9. International activities can include export promotio~ attracting foreign investmen~ promoting tourism, and otheractivities. While staffing figures are available broken down by these purposes, budget figures are not. Ibid., p. 9.

‘8 Ibid., table 14.19 ASE~ is he Association of Soutieast Asian Natiom4


I Degree of Centralization20

The U.S. approach to export promotion isdecentralized, with several agencies having im-portant roles, as discussed later in this chapter.Japan’s approach is also decentralized;21 andGermany limits Federal Government involve-ment, with trade associations playing a majorrole. France and the United Kingdom have acentralized approach.

1 StrategyThe United States has lacked a strategic plan

for promoting exports of nonagricultural goods.22

The September 1993 TPCC export strategy reportis a first step toward a strategic plan. Japan andGermany lack a strategic plan, though in Japansome individual agencies (e.g., MITI) have strate-gic priorities. France and the United Kingdomeach have a strategic plan.

~ Private Sector InvolvementIn Japan, France, Germany, and the United

Kingdom, private sector organizations (includingchambers of commerce and industry associations)play a major role in helping firms (especiallysmaller firms) to learn about and to use govern-ment export promotion services. In some cases,this private sector involvement stems from tradi-tions and institutions not necessarily transferableto the United States. In Germany, local chambersof commerce, financed by mandatory dues, arethe primary point of contact to connect firms withgovernment services, overseas chambers of com-merce, and other relevant government and private

organizations. Overseas chambers of commerceserve functions similar to those of the CommerceDepartment’s United States & Foreign Commer-cial Service (US& FCS). The German IndustryCouncil for Exhibitions and Trade Fairs (DieAusstellungs-und Messe-Ausschuss der DeutscherWirtschaft, or AUMA), a private organization,coordinates domestic and overseas trade events.In France, local, regional, and overseas chambersof commerce play important roles, as does theFederation of Small and Medium-Sized Indus-tries. Local chamber of commerce membership ismandatory in some cases. Chambers of commerceplay an important role in the United Kingdom,and trading companies and industry associationsplay important roles in Japan.

In the United States, the private sector role inassisting access to Federal programs is morelimited. However, some environmental industryassociations play this role to some extent, includ-ing the U.S.-ASEAN Council for Business andTechnology, the United States Export Council forRenewable Energy, ETEC, and EBC. AmericanChambers of Commerce and American BusinessCouncils abroad can potentially play an increasedrole.

ASSISTANCE FOR EXPORT PLANNINGAND MARKETING

Export planning and marketing services in-clude educating firms about the export process;gathering and disseminating market information;helping firms to make contacts in foreign mar-kets, such as by sponsoring trade fairs and trade

Zo The discussion of degree of cen~alizatio~ strategy, and private sector involvement is drawn in part from U.S. congress, Gen-Accounting Office, Export Promotion: A Comparison of Programs in Five Indusm”aiized Nations, GGD/92-97 (Gaithersburg, MD: U.S.General Accounting Offke, June 22, 1992), pp. 16-22; U.S. Congress, Office of Technology Assessment Development Assistance, ExportPromotion, and Environmental Technology, op. cit., footnote 1, pp. 55-69.

ZI ~jor ~ctiom me p~om~ by the Japan External Trade Organization (JETRO), the Small Business Corporation (SBC), and tieExport-Import Bank of Japan (JEXIM). Aid functions with export promotion effect are performed by the Japan International CooperationAgency (JICA) and the Overseas Economic Development Fund (OECF), These functions are all performed punsuant to policies formed by theMinistry of International Trade and Lndushy (MITI), Ministry of Finance (MOF), Economic Planning Agency, and Ministry of Foreign Affairs(MOFA). Several other agencies have signifkant roles.

22 As used here, a ‘‘strategic plan” is a plan that sets priorities for what exports to promote (normally by industry sector and geographicregion), to guide all agencies’ programs.


Table 6-3—U.S. General Accounting Office Estimates of 1990 National GovernmentExport Promotion Outlays, Excluding Agriculture

Spending ($) Spending ($)Spending per $1,000 per $1,000($ million) exports GDP

Francea 417 1.99 0.35Germany 93 0.22 0.062Italy 309 1.71 0.284United Kingdom 298 1.62 0.305United States 231 0.59 0.043

a Fren~ ~fficial~ were unable t. separate the agricultural spending from the total but stated that most of the total show

is for nonagricultural programs.

NOTE: Exchange rates used (average for t990) are: U.S. $1 equals 5.7 FF (France), 1.7 DM (Germany), 1254.3 L(Italy), 0.592 (UK).

SOURCE: U.S. Congress, General Accounting Office, Export Promotion: A Comparison of Programs in FiveMustrialized Nations, GGD/92-97 (Gait hersburg, MD: U.S. General Accounting Office, June 22, 1992), p. 24. Basedon GAO analysis of information provided by government officials.

missions;23 and high-level advocacy to influenceforeign government procurement. Judging fromthree U.S. Government reports--one by theGeneral Accounting Office (GAO), and the othertwo by the Department of Commerce (one pub-lished in 1992 and the other in 1988)24—theUnited States appears to have spent proportion-ately less on such services than several competitorcountries (at least in the period 1987-1990). Thisdifference appears more pronounced when agri-cultural export promotion is excluded. Together,these reports paint the following picture: the U.S.Government, by many measures, spends less,often many times less, than every major competi-tor studied, except for Germany, which by somemeasures the United States outspends. In additionto spending less overall, the United States allo-cates funds lopsidedly to agricultural (rather thanindustrial) exports compared to the four othercountries for which such data are available.

The GAO Report (table 6-3) covers fivecountries: France, Germany, Italy, the UnitedKingdom, and the United States. It is restricted tospending at the national government level, and,

except for France, excludes spending on agricul-tural export promotion. French officials did notbreak out the agricultural portion but stated thatthe majority of the spending shown was fornonagricultural export promotion. The table showsthat, for nonagricultural export promotion, theUnited States spends far less per $1,000 exports,and many times less per $1,000 Gross DomesticProduct (GDP), than France, Italy, and the UnitedKingdom. The United States is closer to Ger-many, spending more per $1,000 GDP but less per$1,000 exports. However, in Germany the role ofentities other than the national government (in-cluding officially sanctioned chambers of com-merce) is relatively large; when these are included(as in the 1988 DOC report, discussed below),Germany’s expenses appear somewhat larger.

The 1992 DOC Report, restricted to nationalgovernment budgets, shows the U.S. commitmentas many times less than those of the Europeancountries per $1,000 Gross National Product(GNP) and per total national government budget,and far behind the European countries per $1,000exports and per capita (table 6-4). (Again, Ger-

ZJ Trade missions ~c Wkcting trips by a number of firms together to foreign countries; trade faizs are exhibitions at home or abroad ofproducts and services by many vendors to potential customers.

~ Citatiom I. fie rqo~s tie given in tables 6-3 through 6-5. For the information discussed here, both DOC reports relied p rimarily on 1987data. However, the 1987 data presented in these two DOC reports do not appear to agree. The GAO report is based on 1990 data.


Table 6-4--U.S. Department of Commerce Estimates of National Government Budgetsfor Export Promotion in 1987

Exportpromotionbudget aspercentageof total

Budget ($) Budget ($) national Budget ($)Budget per $1,000 per $1,000 government per

Country ($ million) exports GNP budget capita

CanadaFranceGermanyItalyJapana

South KoreaUnited KingdomUnited Statesb

432.9189.161.5

196.9285.0

54.2190.9257.2

4.751.270.211.691.041.141.410.88

1.170.210.060.260.100.420.280.06

0.470.110.0410.580.0610.0300.1220.002

16.973.441.013.362.301.292.811.05

a UXS 19s9 data. Consists of JETRCYS budget ($91 million) plus MITI’s and the Ministry of Foreign Affairs’ budget forcommercial services.

b Consisb of IJS&FCS budget ($57.8 million), Commerce and State Departments’ budgets to prOI?IOM industrialexports, and Department of Agriculture’s budget ($157 million) to promote agricultural exports.

NOTE: A footnote to the original table states, “Numbers from 1987 Department of Commerce study unless otherwiseindicated.” OTA infers that 1987 refers to the year studied, though it could instead refer to the year in which the reportwas published.

SOURCE: U.S. Department of Commerce, Foreign Government Cornrnerckd Services.’ A Comparative Stu@,undated, table 2. This report appears to be the final version of a draft report of the same title, dated April 1992, issuedby the U.S. & Foreign Commercial Service as Strategic and Technical Reviews Working Paper SR 91-15, although aDOC staff contact could not verify this.

many is an exception.) This study includesCanada, South Korea, and Japan, which the othertwo studies do not. Canada’s budget far exceedseven the European budgets; South Korea showsthe same pattern as the European countries.Japan’s budget, while not providing as sharp acontrast with the United States, still is substan-tially greater per $1,000 exports and per $1,000GDP, over twice as great per capita, and over 30times greater as a fraction of the national govern-ment budget.

The 1988 DOC Report presents spending bythe United States and seven European countries.25

In some ways it is the most detailed and completeof the three reports. It includes, separately stated,spending by the national government, local gov-ernments, quasi-governmental agencies, and co-operating nongovernmental organizations (table

6-5). The inclusion of all of these spendingentities makes Germany’s spending appear some-what larger compared to the United States than itdoes in the other two reports, which cover onlynational government spending (or budgets). Ofthe eight countries studied, the United States waslowest in total export promotion spending per$ 1,000 GNP, per total national government spend-ing, and per capita; it was sixth (ahead ofGermany and Belgium) in total export promotionspending per $1,000 of exports. As in the twoother studies, foreign spending figures were oftenmany times the corresponding U.S. figures.

For Belgium, France, Italy, the United King-dom, and the United States, the 1988 DOC reportalso separates agricultural from industrial exportpromotion, both in absolute spending and inspending per $1,000 of that type of export. The

n me Comace Dep~ment noted that ‘‘Japanese totals are not provided, due to major gaps in available spending data. ”

Table 6-5—U.S. Department of Commerce Estimates of Total Export Promotion Spending in 1987a

Total Total Totalspending for spending on spendingagricultural industrial Total (on export

Total Total export exportSpending

spendingSpending by

promotion)spending for spending for promotion promotion per Total per $1,000

Spending Spending by quasi- cooperating agricultural industrial per $1,000 per $1,000 $1,000 spending total national Totalby National by local gov’t non-gov’t Total export export agricultural industrial total per $1,000 government spendinggovernment government agencies organizations b spending promotion($ million) ($ million) ($ million)

promotion exports($ million) ($ million) ($ million)

exports exports($ million)

of GNPC spending per capita($) ($) ($) ($) ($) ($)

Belgium 45.8 0.5 16.6 NA 62.9 4.5 58.4 0.46 0.74 0.71 0.40 1.09 6.35Canada 484.3 60.7 0.0 1.8 548.8 43.7 503.1 NA NA 6.00 1.48 6.02 21.44France 330.1 NA 2.5 8.1 340.7 2.5 338.2 0.09 2.01 2.18 0.47 1.95 6.19Germany 61.5 12.6 9.2 18.8 102.1 5.1 97.0 NA NA 0.35 0.11 0.68 1.67Italy 209.3 NA 10.0 NA 219.3 30.7 188.6 9.30 1.78 2.00 0.29 0.64Sweden

3.7410.0 1.5 60.0 0.9 72.4 2.2 70.2 NA NA 1.65 0.46 1.33 8.72

United Kingdom 190.9 NA 2.7 0.5 194.1 2.7 191.4 0.29 1.51 1.43 0.28 1.24 2.85United States 261.6 30.0 2.4 0.0 294.0 173.0 121.0 5.95 0.54 1.16 0.06 0.29 1.20a spending levels are minimum estimat=, based only on amounts that could clearly be accounted for. NA indicates that no data were available even for minimum estimates.

Accordingly, actual spending could conceivably be much higher that the totals shown.b Cwperating nongovernmental organizations include only those thata~t in ~ncertwiththe government Or on i~ behalf as an integral component of the government’s organizational strategy.c Gross Domestic pr~uct (GDp) is used instead of Gross National product (GNp) for Canada and haly.

NOTES:Exchange rates used : U.S. $1 equals 35 BF (Belgium), 1.36 C$ (Canada), 6.05 FF (France), 1.8 DM (Germany), 1300 L (Italy), 138 yen (Japan), 6.40 SEK (Sweden), 0.59 f (U. K.)The source document could be interpreted to indicate that for a few entries in this table, 1987 data were not available and data from an earlier year were substituted.

SOURCE: U.S. Department of Commerce, Export Promotion Activities of Major Competitor Nations, September 1988, p. 6 (table A) and p. 58 (app. 1).


United States ranked second highest in agricul-tural export spending per $1,000 of agriculturalexports, but lowest in industrial export promotionspending per $1,000 of industrial exports. TheUnited States only spent one-eleventh as much onindustrial exports as on agricultural exports, per$1,000 of each type of export. In contrast, Francespent 29 times as much on industrial exports, theUnited Kingdom 5 times, Belgium 1.6 times, andItaly one-fifth as much.

I Export EducationBoth DOC and SBA provide short, introduc-

tory export seminars. For example, many localSBA offices run half-day workshops organized bythe Service Corps of Retired Executives (SCORE),a nationwide network of retired executives. Intro-ductory seminars typically give rationales forexporting, explain the steps required, and de-scribe Federal export promotion programs.

Most export education for U.S. firms is under-taken by States and local trade associations,chambers of commerce, world trade center insti-tutes, and other groups. In 1992, all States heldexport seminars, probably in total close to athousand; many were cosponsored by DOC orSBA. Some were general seminars; others wereon market opportunities in a particular country, aspecialized topic such as documentation or freight-forwarding, or current events.26

Some European Community and Nordic coun-tries are experimenting with more comprehensiveprograms that assist firms over an extended timeto formulate an export strategy. One example is apilot program run by the Danish TechnologyInstitute, with six firms each from Denmark,Ireland, and the Netherlands, funded in part by the

country governments and the EC Social Fund.27

Over 18 months, these firms participated in sixnational seminars and three international semi-nars on export planning,28 plus regular progress-and-advice visits by facilitators. Each company pro-duced a 2- to 5-year strategic plan to internationalizeits operations; almost all successfully imple-mented the plan. This program has since ex-panded to other countries.

Denmark, Norway, and Sweden run exportmanager-for-hire programs to help small compa-nies develop and implement export strategies.29

On a cost-shared basis, the governments provideexport managers. In Sweden, companies can hirearound 20 to 40 percent of an export manager’stime for 2 to 4 years. The managers are exportprofessionals with substantial private sector expe-rience. In 1987, the Swedish Trade Councilretained 23 such professionals under contract.The export manager develops an export strategywhile training company personnel in exporttechniques. In the first year, the companies pay 49percent of the manager’s cost; the companies pay75,95, and 100 percent for the second, third, andfourth years respectively, For firms that need lesshelp, the Swedish Trade Council will also coverup to 60 percent of up to 60 hours of exportconsulting.

I GeneraI Market InformationSome of the market information governments

provide to exporters is collected and disseminatedroutinely, rather than in response to specificrequests from particular firms. Such informationincludes: trade statistics; studies of foreign mar-kets in particular sectors; descriptions of foreigntechnology; and data on foreign countries’ econo-

Z6 Natio~ Association of Smte Development Agencies, NASDA State Export Program Database, op. cit., fOOtiOte 17, p. 22 ~d table 20.

27 Discussion of this program is based on Nothdurft, op. cit., footnote 3, pp. 19-*1.

28 Each of these seminars required signifkant preparation by the companies. The national seminar s were on general managemen$ exportmarketing management, f~ncial controls managemen$ technology and production managemen~ leadership and organization culture, andstrategic management and planning. The international seminars discussed export marketing, technology and productio~ and leadership andorganization.

29‘rhis p-graph is based on Nothdurf~ op. cit., footnote 3, pp. 31-32.

Chapter 6–Export Promotion Programs ! 165

mies, business cycles, regulations, tariffs andother trade barriers, government purchasing, in-vestment climate, aid projects, and trade fairs. Italso includes specific trade leads collected by thegovernment’s normal monitoring, though suchleads are often old. Because general informationis much cheaper than specific market research,some companies hope these services by them-selves will pinpoint customers. However, thishope is unrealistic; rather, general informationjust points to markets where firms might look forcustomers .30

France, Germany, Japan, the United Kingdom,and the United States all appear to offer similarservices for general market information.31 U.S.firms may contact DOC desk officers that trackinformation for particular countries. In addition,DOC publishes information for relatively lowprices. In the National Trade Data Bank (NTDB),a monthly compact disk service, DOC providesinformation about foreign markets and Federalservices. From September 1989 to November1992, the NTDB contained 101 Industry Subsec-tor Analyses (ISAs) on the pollution controlequipment markets in 38 countries, almost 5percent of all ISAs in the NTDB.32 DOC providestwo other sources with information similar to thatin the NTDB: an Electronic Bulletin Board.which is more timely, and printed journals, whichare less timely .33 All three sources provide bothgeneral information and specific leads; however,even the most timely Electronic Bulletin Boardprobably provides leads only after they are knownto firms with an active presence and strategy inthe country.

B Helping Firms Find CustomersWhile general market information can be

helpful, exporters need quite specific marketinformation and ways to contact potential cus-tomers. It is difficult to get data that accuratelycompares different countries’ programs, in partbecause these programs are organized differently,often described in different terms, and not alwaysprecisely described. The data presented in thissection, while not definitive, suggest that U.S.programs are often less ambitious than programsin competitor countries.

MARKET RESEARCH SUPPORTTable 6-6 shows assistance that several coun-

tries give for custom research. This can includein-house research; research contracted out; andpublished reports that fit a firm’s special needs.The United States and Germany furnish reports;the United States charges full cost and Germanysubsidizes the cost. France, Scandinavia, and theUnited Kingdom support firms in hiring their ownconsultants or doing research in-house; the UnitedKingdom also similarly supports trade associa-tions. In some cases, only smaller businesses areeligible.

The U.S. assistance seems to be much less, onan absolute scale, than that provided by Franceand the United Kingdom,34 even though theUnited States has a much larger economy andexport volume, The United States contracts withlocal firms for about 160 studies per year, passingthe full contract price on to the requesting U.S.firm; the United Kingdom subsidizes about 600consultant studies per year (plus some in-houseresearch and some purchasing of published re-

30 Ibid., p. 43.

31 See for exmp]e, tie coun~ appendices in U.S. Department of Commerce, Foreign Go]’ernment Commercial Services: A comparative,Sttiy, draft, April 1992, issued by the U.S. & Foreign Commercial Service as Strategic and Technical Reviews Working Paper SR 91-15.

32 ~dy Bihm, U.S. Dep~ment of Commerm, I_Jnited States and Forci~ Commercial Service, international Market Research Divisio%facsimile transmittal of computer printout, “Industry Subsec(or Analyses (ISA) on Pollutlon Control Equipment, ” Nov. 24, 1992.

33 me Elec~ofic Bullet~ Bored co~t~ $35 per y~, plus a pcr.minute charge (after tie first 2 hou~ each year) of $.05 tO $.20, dependingon time of day.

34 The sowces for ~ble 6-4 do not present comparable data for Germany and Scandinavia cOunrneS.


Table 6-6—National Government Assistance for Individualized Market Research

Country Service

France

Germany

ScandinavianCountries

United Kingdom

United States

France funds up to half the cost of hiring a consultant to carry out detailed researchon a market, up to about $30,000 (average cost is about $10,000 ).a Firms apply totheir regional government or chamber of commerce and industry. Only small andmedium-sized enterprises (SMEs) are eligible. About 100-150 consultancies peryear are approved in the Paris area alone.

France’s export insurance and guarantee agency also offers insurance againstunprofitable export research. The insurance covers up to 75 percent of a firm’s“fixed costs”b to investigate overseas markets which exceed related export profits.Both domestic and overseas costs are covered.

Through local chambers of commerce, the German government’s Office of TradeInformation provides custom studies at below-cost prices.c

The “Export Manager for Hire” schemes run by Denmark, Norway, and Swedensubsidize the hiring of export managers, who conduct research for the firm.

Through a program managed by the Association of British Chambers of Commerce,the British Overseas Trade Board (BOTB) provides to trade associations and tofirms with under 200 employees:● Free consulting on how to conduct export marketing research.● Up to half the cost of hiring a consultant outside the EC, up to a grant of £20,000

(equal to $33,898 in 1990). Trade associations get better terms. Roughly 600consultancies are approved per year, with an average cost of about $20,000.d

● For in-house research on non-EC markets, up to half of travel costs andinterpreters’ fees, plus a daily allowance for one researcher, up to the same

Q20,000 limit.

● Up to one-third the cost of published market research reports.

The Department of Commerce provides “Customized Sales Surveys” reporting onoverall marketability, key competitors, price of comparable products, customarydistribution and promotion practices, trade barriers, possible business partners,and applicable trade events. DOC contracts out these studies and charges firmstheir full cost, which is $800 to $3,500 per country. DOC provided 151 of thesestudies in FY 1993, and 171 in FY 1992.

a The source ~~ment (Nothdurft) does not specify whether these numbers are maximum and aVerage COStS for the

whole study or just the government’s share.b The source (GAO) does not define this term.c ~ile thb table compares national government supprt, we note that in 11 German states, the state Ministry of

Industry, wofi”ng through the national Association of Chambers of Industry and Commerce (IHK), pays 25 to 30percent of the cost of custom studies prepared by IHK’s affiliated bilateral Chambers of Commerce Abroad.

d it is not clear from the source document (Nothdurft) whether the $20,000 represents the total cost, or just thegovernment’s share.

SOURCE: U.S. Congress, General Accounting Office, Export Promotion: A Comparison of Programs in Five/ndustria/izedNations, GGD/92-97 (Gaithersburg, MD: U.S. General Accounting Office, June 22, 1992), p. 29; WilliamE. Nothdurft, Going G/oba/: How Europe He/ps Sma// Firms Export (Washington, DC: Brookings Institute, 1992), pp.43-45; Trade Promotion Coordinating Committee, “Export Programs: A Business Directory of U.S. GovernmentResources,” April 1993; telephone conversations with DOC staff (for U.S. program).

ports), and France subsidizes 100 to 150 consult- thus, the foreign studies are probably moreant studies per year for firms in the Paris area substantial.alone. In addition, the costs of the U.S. studies The British Overseas Trade Board (BOTB), the($800-$3,500) are much less than the average United Kingdom’s export promotion agency,costs of the consultant studies subsidized by reports that its consultant study subsidy programFrance ($10,000) and the United Kingdom ($20,000); has the highest customer satisfaction rate of all


BOTB advice and information services, andclaims that virtually all companies using thisprogram have started exporting to their targetmarkets. 35

TRADE FAIRSA trade fair is an event at which many vendors

exhibit their products or services to potentialcustomers. The U.S. Government and manyforeign governments help their firms participateat international trade fairs run by the governmentand some run by third parties. The CommerceDepartment runs or sponsors about 80 interna-tional trade fairs per year.36

While precise comparative data is difficult toobtain, it appears that U.S. firms receive lessgovernment support than firms in several othercountries for participation in trade fairs, Fromtable 6-7 it appears that foreign firms typicallyhave some of their exhibit-related expenses (e.g.,space rental) paid for, while U.S. firms do not.Some argue that this difference in subsidiessubstantially decreases U.S. firms’ participation,compared to foreign counterparts. Some foreigngovernments started or increased their support tocorrect what they viewed as inadequate trade fairparticipation by national fins. In contrast, theU.S. Government’s response to low participationrates by U.S. firms was to cut back its trade fairprogram.

In 1992, State governments sponsored anaverage of 5.8 trade fairs; 13 State governmentsprovided some type of financial assistance forparticipating firms.37

TRADE MISSIONS

A trade mission is a trip by a group of firms(most often in one industry sector) to one or moreforeign countries to meet potential customers andto learn about the nation(s), the market(s), andhow to do business there. When U.S. firms go ontrade missions, they may also meet U.S. andforeign government officials responsible for tradeand investment. Data are not readily available tocompare U.S. support for trade missions with thatprovided by other governments.

Nonagricultural missions run by the FederalGovernment are usually run by DOC, thoughother agencies such as USAID, DOE, EPA, andOPIC are sometimes co-sponsors. In fiscal year1993, DOC ran 44 missions, of which four hadenvironmental themes .38 DOC and other agenciesalso can sponsor missions run by non-Federalorganizations such as trade associations, Stateand local governments, and chambers of com-merce. In fiscal year 1993, DOC sponsored 41such missions, of which none had environmentalthemes. 39 Box 6-B describes an environmentalmission in which several Federal agencies coop-erated. For most DOC-run missions, participantspay fees of $2,000 to $5,00040 plus their owntravel expenses. Fees are lower for DOC’s moremodest Matchmaker Delegations, which are forcompanies that have not yet exported to the targetcountry. SBA at one time provided qualifyingcompanies up to $700 for a Matchmaker trip,which according to one DOC official was a keyincentive for small business; but this was sus-pended in March of 1992.41

35 Nothdurft, op. cit., footnote 3, p. 44.

36 Trade ~omotion Coordinating cO133mitkX, “Export Programs: A Business Directory of U.S. Government Resources,” April 1993,p. 26.

37 Nation~ Association of S@te Development Agencies, NASDA Stare Export Program Database, Op. Cit., foo~ote 17, pp. 3@31.

38 ~ s~f, facsimile communicatio~ OCt. 19, 1993.

39 Ibid.

@ TrMe ~omotion Coordinating comfnittc% ‘‘Export Programs: A Business Directory of U.S. Government Resources, ’ op. cit., footnote36.

41 U.S. Congess, GemmdAxxmnting Office, EWort Promotion: Problems in the Small Business Administration’s Programs, GGD/92-77(Gaithersburg, MD: U.S. General Accounting Office, Sept. 2, 1992), p. 11.


Table 6-7-National Government Support for Participation in Trade Fairs

Country Support

France

Germany

Italy

United Kingdom

EuropeanCommunity

United States

Refunds 50-60 percent of the firm’s “total cost”a of participation in government-sponsored and government-organized international trade fairs if the fair is notprofitable for that firm.

Firms pay for “exhibition space rental and freight transportation”; government(through nongovernment fair organizers) pays “the remaining costs.” In practice,this means that the government pays “roughly 30 percent of the cost ofparticipation.” b

For government-sponsored foreign trade fairs, pays all “indirect costs, such aspublicity and representational events,” and pays “direct costs such as constructionof displays and space rentals on a cost-sharing basis with the participating firms.”c

Industry consortia and overseas chambers of commerce also run trade shows, andcontribute support ultimately provided by the government. The so-called R.O.M.E.consortium, for example, pays up to 70 percent of “total expenses.”d

Pays up to 50 percent of estimated cost of providing space, stands, utilities, anddisplay aids in selected trade fairs.

Pays up to 50 percent of the firm’s “total cost,” including space rental andconstruction expenses,e in EC-sponsored fairs.

For DOC-run fairs, firms must reimburse DOC for all “direct” expenses excludingsalaries and overhead. This includes “booth construction, transportation, interpret-ers’ charges, and space rental.” For major international trade fairs, the “minimumcost charged by the Department of Commerce. . . may range from $3,000 to$7,500.”

a It is not ~~r~ether ‘total cost” is meant to include the firm’s own travel costs, or just the government’s or other fairorganizer’s coats initialty charged to the firms (e.g., space rental).

b It IS not cf~r whether the figure of 30 percent reflects a consideration of all costs-for example, the firm’s personal

travel expenses, and the cost of publicity or government staff time.C ~ is not clear what the CoSt-Shafing percentages are. [t IS not clear whether firms’ travel expenses are cost-shared.d it is not clear Mat ‘?otai expenses” includes.e It is not ~lear fiat else ‘~otal cost” indudesr

SOURCES: U.S. Congress, General Accounting Office, Export Promotion: A Cornpatison of Programs in FiveIndustddzedlbbtlons, GGD/92-97 (Gaithersburg, MD: U.S. General Accounting Office, June 22, 1992), pp. 28-28, anddiscussions with GAO staff; some information on the United Kingdom is from documents supplied by the BritishEmbassy in Washington, DC.

OVERSEAS COMMERCIAL REPRESENTATIONA well-funded and staffed overseas commer-

cial service can help companies identify andpursue trade opportunities. The Commerce De-partment’s U.S. & Foreign Commercial Service(US&FCS) has staff posted abroad in U.S.embassies. Compared to its European competi-tors, Canada, and Japan, the United States has thelowest ratio of foreign posted commercial staff toexports, and by far the lowest ratio of foreignposted commercial staff to GDP (table 6-8).

After the United States, Japan has the nextlowest staffing ratios. However, Japan’s overseascommercial service strengths vis-à-vis the UnitedStates are not all reflected in the table’s numbers.Japan’s staff appears to be concentrated in themost significant markets. For example, DOCreported that when the Japan External TradeOrganization (JETRO) employed 74 commercialofficers and 144 total staff in the United States(the latter amounting to a quarter of JETRO’stotal overseas staff), the US&FCS employed only

Chapter 6–Export

. -—

Promotion Programs ! 169

Box 6-B-The Mae Moh, Thailand, Power Project

The Mae Moh power project was an attempt by U.S. industry and several U.S. Government

agencies to act in concert to sell clean coal technologies to Thailand. The project provides a case studyof interagency and government/industry cooperation.

In June 1992, the U.S.-ASEAN Council for Business and Technology1, with the support of the U.S.Agency for International Development (USAID), the Department of Commerce (DOC), the Departmentof Energy (DOE), and the Environmental Protection Agency (EPA), organized an eight-firm trademission to Indonesia and Thailand. The Trade Promotion Coordinating Committee, an interagencygroup, partly facilitated the organization of the mission, through its Coal Technology Export Group.TPCC also helped gain agency support for the trade mission, kept the agencies briefed on the missiondevelopment, and provided a forum where all participants could agree on what message to send thehosts. In-country organization was orchestrated through the U.S. and Foreign Commercial Service(US&FCS) and USAID’s ASEAN Regional Office in Bangkok. The U.S.-ASEAN Council helpedincorporate industry input and planned the mission from the U.S. side.

Participants identified an opportunity to supply the Electricity Generating Authority of Thailand(EGAT) with U.S. clean coal technologies. EGAT plans to increase its coal (including lignite) generatingcapacity from 2,100 MW to 11,775 MW by 2006. Desulfurization technologies (retrofit and newinstallations) were identified as a market opportunity at EGAT’s active mine development project at MaeMoh.

After the June trade mission, the U.S.-ASEAN Council wrote a draft mission report that identifiedmarket opportunities and mapped out a plan for followup action. This draft was reviewed byrepresentatives from industry and the four participating agencies, and was released in the first week ofSeptember.2 Recommendations included funding for feasibility studies, a reverse trade mission, and ademonstration project at Mae Moh to inform Thai officials about U.S. technology and its potential to meettheir needs. Although there was general agreement that such activities should be pursued, the fourparticipating agencies were slow to provide funding. Because EGAT wanted fast action, US.companies considered whether they should go it alone without government assistance. Without thesupport of the U.S. Government, however, Thai officials were less likely to be certain that they werebeing offered the most appropriate technologies.

The U.S. Government and industry periodically sent officials to Thailand to maintain interest in theU.S. proposal. The U.S. Trade and Development Agency sent two consultants to conduct a definitionalstudy for a pre-feasibility study. The head of the U.S.-ASEAN Council and an Assistant Secretary ofCommerce made a detour from another trade mission to check in with EGAT officials, and AID’s Off iceof Energy and infrastructure also sent officials to Thailand. These trips may have helped reassure EGATofficials that the United States took this project seriously.

The project became more urgent after a temperature inversion and power plant emissions createda health emergency in the vicinity of Mae Moh in October 1992. in the meanwhile, US. industry receivednews that Japan had packaged and submitted a proposal to the Thai Government in October 1992.

1 ASEAN is the Assodatiorl of South East Asian nations consisting of Brunei Darussaiam, indonesia,Malaysia, the Philippines, Singapore, and Thaiiand. The US.-ASEAN Councii for Business and Technology is aprivate organization promoting trade and investment between the United States and ASEAN countries.

2 U. S..ASEAN Councii for Business and Technology, inc. “Mission Report; U.S. Coal Tectmoiogy Mission toThailand and Indonesia.”

(Continued on next page)


Box 6-B–The Mae Moh, Thailand, Power Project-Continued

Thai officials asked EPA to conduct health and environmental assessments. In January 1993, EPA andDOE assessed health and environmental damage from the October emergency and identified U.S.sulfur dioxide control technologies appropriate for the Mae Moh facilities. A reverse trade missionbrought Royal Thai Government and EGAT officials to the United States in March 1993. USAID’sBangkok office monitored and communicated progress at Mae Moh.

in the end, a Japanese company won contracts to provide fluegas desulfurization technology tonew and existing boilers at Mae Moh.3 Reportedly, last minute concessional financing from theJapanese government tipped the balance away from the U.S. contenders which had submitted a lowerbid than the Japanese and which-according to some Thai officials--offered the better technology.Japanese contacts with EGAT officials were probably a factor as well. A U.S. firm did win a sole sourcecontract to provide computerized process monitoring services for all units at Mae Moh. Another U.S.company is well-positioned to earn a contract to provide air quality monitoring equipment at Mae Mohand other Thai facilities. Both of these American companies believe that this presence in the Thai marketwill lead to long term business opportunities in Thailand and the region.

The Mae Moh experience provided some lessons. While TPCC coordinated the trade mission, ithad problems coordinating follow-up action and funding. And although TPCC served as a usefulinformation clearinghouse among participating agencies, it was not the primary motor for action. TheTPCC’s Coal Subgroup met only twice over the period of this project. Most of the day-today work wascarried out by the U.S.-ASEAN Council, which served as a liaison, persuading industry and the agenciesto make commitments and informing agencies of progress and of the activities of other agencies. As anon-governmental body, the Council may have been able to facilitate cooperation, and work through turfissues. It maybe that private multiplier entities will play a key role in packaging disparate Federal exportpromotion services for environmental companies. The U.S.-ASEAN Council, agency participants, andfirms are hopeful that coordinated project-focused export promotion efforts can be improved andemployed elsewhere.

Perhaps the major lesson is that money talks. Despite the various actions Federal agencies tookin support of the US. company contenders and the apparent ability of the U.S. firms to provideappropriate technology at a good price, foreign government concessional financing determined theoutcome for a major portion of the project.

3 Len Jornlin, U.S.-ASEAhl Council for Business and Technology, personal Communication, ~. 14, 1993.

11 commercial officers in Japan.42 JETRO’s industry, JETRO officers maybe more attuned tocommercial officers are not rotated as often as industry needs.U.S. staff, better allowing them to become experts In addition, table 6-8 includes only JETROon specific markets.43 Because of their nondiplo- staff; it omits diplomatic staff. ‘ ‘Japan’s diplo-matic status and their close relationship with matic corps regards export promotion as a major

42 U.S. r)ep~rnent Of Commace, Foreign Government Commercial Services:A Comparative Study, undated. ~s report appems to be fiefinal version of the draft cited in footnote 31, though a DOC staff contact could not verify this.

43 Ibid., p. 7.

Chapter 6-Export Promotion Programs 171

Table 6-8-Foreign Commercial Service Staffing,a 1990

Total TotalLocal staff per staff per

Overseas Commercial professional Total $100 billion $1 billionCountry posts officers staffb staff of GDP of exports

France 180 100 1,130 1,230 108 5.87Germany 50’ N Ad

NA 960e 67 2.28Italy 83 170 580 750 72 4.14Japanf 76 300 300 600 18 1.72United Kingdom 185 523 961 1,484 159 8.05United States 123 155 460 615 11 1.56

a Thi~tab{e ~xclude~ staff foragri~[tural export promotion. General Accounting office staff, peC30nal COr?lrnUniCatiOn,

Oct. 25, 1993.b The United states employs foreign nationais as ~mmer~al specialists, who are Calied “foreign service nattonais”

(FSNS). For the United States, the number given represents FSNS; forothercountries, the number given representsFSN equivalents.

c ~ese posts are all chamber of commerce Offices.d NA denotes not available.e Includes 900 commercial staff in overseas chambers of commerce.f Staffing and ~sts ~ of March 1992; GDp and export data for 1 Ml. staffing ad pOSfS are those of the Japan ~ernal

Trade Organization (J ETRO).

NOTE: Exchange rates used: one U. S.doliar equals 5.7 francs (France); 1.7 DM (Germany); 1,254.3 i ire (Itaiy); 134.7yen (Japan); 0.59 E (United Kingdom).

SOURCES: U.S. Congress, General Accounting Office, Export Promotion: A Comparison of Programs in Fivehxfustrkdized Nations, GGD/92-97 (Gaithersburg, MD: U.S. General Accounting Office, June 22, 1992), p. 25 (basedon GAOanalysis of information provided by government of fiaais), anddiscussionswith GAOstaff. ForJapan posts andstaffing: JETRO, “JETRO: Japan External Trade Organization,” not dated, p. 17 (reporting data as of March, 1992).For GDP data, and for export data for Japan: International Monetary Fund, /nternafiona/ Financ3a/SfatkWcs, September1992 and Aprii 1993.

priority, "44 though staffing figures are not avail-able. On the other hand, table 6-8, which givesJETRO’s total overseas staff, could overstateJETRO’s export promotion staffing. The reason isthat recently JETRO has expanded its missionfrom export promotion to include import promo-tion as well. In response to international pressureon Japan to increase its imports, JETRO staff areexpending substantial effort to help U.S. firmssell in Japan’s market; JETRO may be doing thesame for firms in other countries. JETRO claimsthat its primary mission is now import promotion.However, this claim is difficult to verify, and sucha shift would be surprising in view of Japan’shistorical philosophy and policies and its continu-ing drive to compete for world market share.Thus, it seems likely that JETRO’s mission is still

predominantly to promote exports. Moreover, acore JETRO function is gathering information onforeign firms and markets and reporting that toJapanese firms; and even staff nominally engagedin import promotion are in a good position tocontinue that function.

Another factor is the overseas export promo-tion staff’s sectoral expertise and focus. In thisregard, U.S. agriculture (not included in table 6-8)is well represented; as of September 1993, theU.S. Department of Agriculture’s Foreign Agri-cultural Service had export promotion staff in 79overseas offices covering 117 countries, whichtogether represented 100 percent of the market forU.S. agricultural exports.45 In contrast, US&FCSofficers are generalists working to promote alltypes of nonagricultural exports. However, the

44 Tr~e ~omotion Coor&Mfig Comittee, Toward a National Export Smategy, op. cit., f~~ote 4, P. 75.

45 Ibid., p. 28.


Export Enhancement Act of 1992 could lead toplacement of some environmental specialists.That Act authorizes the Secretary of Commerce todesignate a Foreign Commercial Service Officeras an Environmental Export Assistance Officer inany country ‘‘whose companies are importantcompetitors for United States exports of environ-mental technologies, goods, and services, ’ or“that offers promising markets for such ex-ports." 46 That Officer’s duties would include‘‘assess[ing] government assistance provided toproducers of environmental technologies, goods,and services in such countries, the effectivenessof such assistance on the competitiveness ofUnited States products, and whether comparableUnited States assistance exists”; pointing U.S.producers to assistance programs; informing U.S.firms of foreign standards and regulations; help-ing companies identify market opportunities andpotential customers; and helping them obtainnecessary business services abroad.47

In addition, since the time covered in table 6-8,US-AEP has opened nine business offices inAsian capitals to strengthen commercial repre-sentation for U.S. environmental products andservices. The USAID-funded Private Investmentand Trade Opportunities Organization has staff inthe ASEAN region to promote exports andinvestment, with emphasis on environment, en-ergy, health care, and food industries.

OUTREACH TO POTENTIAL CUSTOMERSProviding databases to potential customers is

one form of outreach. EPA, USAID, and DOEco-sponsor the Environmental and Energy Effi-

cient Technology Transfer Clearinghouse, anon-line computer service of linked databases thatprovides users with vendor, technical, and regula-tory information for pollution control, renewableenergy, and energy efficient technologies. Man-aged by the World Environmental Center (anonprofit organization), the Clearinghouse as ofDecember 1992 operated in four Mexico Citylocations, in Vienna at the United Nations Indus-trial Development Organization, and in Washing-ton at EPA and the Inter-American DevelopmentBank; other locations are planned.48 EPA makesits Vendor Information System for InnovativeTreatment Technologies (VISITT), a database onU.S. technologies to treat contaminated ground-water, soils, sludges, and sediments, available toforeign companies. The most recent databasegives has technical descriptions and vendor infor-mation for over 230 technologies offered by 140vendors, although some of these technologies arenot yet proven at full commercial scale.49

Another outreach activity is the reverse trademission, in which foreign government and indus-try officials travel here for presentations by U.S.fins. The U.S. Trade and Development Agency(TDA), discussed in more detail later in thischapter, brings officials from low- and middle-income countries to the United States on suchmissions. In fiscal year 1992, TDA spent $1.9million on reverse trade missions to show U.S.technology to developing country private andpublic sector representatives planning major capi-tal projects.50

Other countries may have similar outreachactivities; no comparison is attempted here.

~ ~e Export Eticement Act of 1992, op. cit., footnote 7, sec. 204(a), adding 15 U.S.C. 4728(d).

47 Ibid.48 ~A, C CGlo~ Markets for Enviro~ent~ Technologies: Defining a More Active Role for EPA Within a Broader U.S. GOve~ent

Strategy,” Report of the EPA lhsk Force on Technology Cooperation and Export Assistance, December 1992, p. 5.49 EPA, ‘‘WSIIT Vendor I~omation System for Innovative Treatment Technologies: User Manual (VISIIT Version 2.0), ’ EPA

542-R-93-O01, No. 2, April 1993.~ U.S. Trade and Development Agency, 1992 Annual Report, ww@to@ DC. 1993, P. 8.

Chapter 6-Export Promotion Programs 173

I High-Level Advocacy to InfluenceGovernment Procurement

Foreign governments have sometimes beenforceful advocates for their national firms whenbidding on other countries’ government projects.Even heads of states have made personal appealsto procuring governments. While the U.S. gov-ernment has done some high-level advocacy, ithas done much less than many other governmentsand has not set strategic priorities for advocacy.The Clinton administration plans to greatly in-crease high level advocacy and to set strategicpriorities. 51

TECHNOLOGY VERIFICATION ANDDEMONSTRATION

An important aspect of selling goods andservices is to convince potential customers thatthey will work as claimed. In the environmentfield, testing by the customer is often not practi-cal, and a technology’s failure to perform asadvertised could have not only environmental butregulatory consequences. In this context, inde-pendent evaluation of the technology by a credi-ble third party can help to lessen a potentialcustomer’s doubts. Such an evaluation wouldreport the technology’s cost and performanceunder specified conditions.

In many ways, the U.S. Government is in agood position to foster such independent evalua-tions. It can provide land test sites; guarantee nolegal liability if a test fails; and lend its credibilityto independent evaluations by performing themitself or hiring persons to do them under govern-ment supervision. In particular, EPA’s worldwidetechnical reputation could make a test done underEPA auspices quite persuasive abroad, as well asuseful at home. As is discussed in chapter 5, someAmerican firms contend many foreign govern-ments often endorse technologies of their national

fins, giving them a leg up in competing forcontracts.

Technology demonstrations performed abroadunder U.S. Government auspices may also be auseful tool to familiarize foreign customers withU.S. technical capabilities and their application inforeign conditions. Technology developers get toshowcase their capabilities and may gain techni-cal and commercial insights that can help themadapt their products and services for foreignmarkets. Demonstration projects can also be anavenue for technology cooperation and transfer,and an opportunity for training and technicalassistance (discussed below).

The government’s role in technology verifica-tion and demonstration can be seen either asexport promotion (the subject of this chapter) oras a late stage of technology development (thesubject of ch. 10). Chapter 10 discusses evalua-tions under EPA’s SITE program. An expandedgovernment role in environmental technologyevaluation and verification has been proposed inlegislation before the 103d Congress, as dis-cussed under Option 8 in chapter 2.

USE OF FOREIGN AID TOPROMOTE EXPORTS

Development assistance programs can promoteexports, including environmental exports, as dis-cussed in detail in OTA’s background paper,Development Assistance, Export Promotion, andEnvironmental Technology. 52 The background

paper discussed certain structural features ofdevelopment assistance programs that affect ex-port promotion potential, and compared leadingdonors’ practices. Such features include sectoralemphasis; formal and informal tying; linkagesbetween bilateral and multilateral aid; use ofloans with aid components; funding of feasibilitystudies; and technology cooperation. This section

S I Trade Promotion co.ordm~g Committee, Toward u National Export Strategy, Op. cit., foo~ote 4, pp. 34-38.

52 U.S. congress, Office of Technology Assessment, Development Assistance, Export Promon”on, and Erwironmental Technology, op. cit.,footnote 1.


discusses in detail only feasibility studies andtechnology cooperation (the latter is also dis-cussed in ch. 10); use of loans with aid compo-nents is mentioned in the next section, onfinancing. Chapter 2 discusses policy issues andoptions (see Issue Area D: Export Promotion,Development Assistance, and Environmental Firms).

As is discussed in chapter 5, aid can beimportant to commercial outcomes in specificenvironmental sectors. The purchaser of environ-mental infrastructure projects is often a govern-ment (e.g., in its role as a utility owner), whosepurchasing behavior can be influenced by aidprograms. Environment-related capital projectsare often quite large, so that financing packages,especially those incorporating an aid component,are often important in making sales. Private-sector environmental sales are largely driven byenvironmental regulations and their enforcement;a donor’s assistance to the government in devel-oping regulations and monitoring compliance canincrease private sector demand and may to somedegree influence environmental requirements inways that favor goods and services from the donorcountry’s fins.

As developing countries begin to address theirenvironmental problems, some analysts see thepotential to link development assistance andpromotion of environmental exports as a poten-tially important business opportunity. Others seeit as a means to transfer needed environmentaltechnology to developing countries, and stillothers as a potentially dangerous course thatcould result in transfer of inappropriate technolo-gies that do not meet recipients’ developmental orenvironmental needs. OTA’s background paperdiscussed these tensions between export promo-tion goals and development and environmentalgoals in some detail. In brief, the potential for

transfer of inappropriate technologies could bereduced through safeguards to keep export pro-motion efforts consistent with developmental andenvironmental objectives (see ch. 2).

Japan’s aid programs pose the most commer-cial challenge to U.S. firms. Japan is, with theUnited States, the largest donor of aid andprobably of environmental aid, and it has made acommitment to expand its environmental aidsubstantially. Japanese aid, though becomingmore geographically dispersed, still focuses onEast Asia, with its potentially large market forenvironmental goods and services, and whereJapan has a strong commercial presence.53 Japan’said includes two types of programs whose exportpromotion effects can last far beyond the time ofthe aid, with benefits far exceeding the size of theaid program: funding for feasibility studies, andtraining programs. Corresponding U.S. programsappear to be smaller, though they could grow.

I Feasibility StudiesLarge capital projects are usually preceded by

preliminary study of the project’s context, scope,planned methods of implementation, and likeli-hood of success. Donors often use aid to fund suchfeasibility studies-often tying the funding (i.e.,requiring the recipient government to hire a donorcountry firm to do the study). This often makes itmore likely that a firm from that donor countrywill be selected to do the follow-on engineeringand construction, even if bidding for the construc-tion phase is open. If the company performing thestudy bids on the engineering and constructionphases, it is likely to have an informationaladvantage. Even if the firm itself cannot bid onthe project, it maybe more familiar with, and thusrecommend, technical specifications that can bemet by donor country technologies or vendors.54

53 fiid., pp. 36,43,23 @OX 2-B). While Jap~’s aid programs historically were motivated by a desire to promote exports, Japan’s governmentdenies tit this motivation exists today. However, regardless of motive, Japan’s aid is still (albeit somewlmt less than before) structured in waysthat appear to enhance the aid’s export promotion potentitd. See ibid., pp. 37-38,4146.

M S~~ly, if tie fm doing tie feasibility study is selected o@ to manage the constructio~ it is likely to use its position of settingspecifications and advising the recipient country on procurement in a way that steers construction business toward fms from its own counby.

Furthermore, the firm performing the study estab-lishes or maintains an in-country presence thatcan help it make other sales.

The Japanese International Cooperation Agency(JICA) seems to have an annual budget of about$200 million for tied feasibility studies.55 Thecorresponding U.S. budget is much smaller. Theprimary agency involved is the U.S. Trade andDevelopment Agency (TDA, formerly the Tradeand Development Program). TDA’s mission is‘‘to assist the U.S. private sector in exportinggoods and services for major capital projects indeveloping and middle-income countries.’’56 TDA’sappropriations were $35 million for fiscal year1992 and $40 million for fiscal year 1993.57 Thefiscal year 1994 appropriation remained at $40million, although the administration had re-quested $60 million. TDA estimates that for everydollar of TDA program expenditure, over $25 arereturned to the U.S. economy in export income;however, an unknown portion of those exports arethemselves financed or otherwise supported byother U.S. Government agencies such as USAIDand Eximbank, so the ratio of outlays received toU.S. Government program expenditures would belower. 58 By sector, TDA’s fiscal year 1992program spending was 33 percent for energy andnatural resources and 12 percent for water andenvironment; transportation and manufacturingwere also emphasized.59

In fiscal year 1992, TDA spent $39 million onprogram activities (including some funds trans-


ferred from other agencies), of which $25 millionwent to bilateral grants for feasibility studies (79studies costing an average of $319,000), andanother $2.5 million to similar grants for multilat-eral development banks to evaluate proposedprojects.61 (Most of the rest was spent on training,discussed below.) To receive feasibility studyfinding, projects must meet four criteria aimed atmaximizing export impact:

9

■

■

■

Development priority. Projects must be devel-opment priorities of the host country, and likelyto be implemented; the host country mustrequest TDA assistance, and the U.S. embassymust approve.Export potential. Potential sales of U.S. goodsor services must be large relative to the cost ofthe feasibility study.Open to U.S. firms. It must be likely that theproject will be open to bidding by U.S. fins,and that financing will be available that is notrestricted to firms of particular countries.Competition. It must be likely that U.S. firmswill face strong competition from foreigncompanies with foreign government support.62

One study funded in fiscal year 1992 was for afacility to treat industrial and municipal waste-water in the Asuncion and Lake Ypacarai regionin Paraguay. TDA reports that the study costs$680,000, and states that the U.S. export potentialin mechanical and electrical equipment and engi-

55 U.S. Confless, Office of Technology Assessment, Development Assistance, Export Promotion, and Environmental Technology, op. cit.,footnote 1, p. 43.

56 U.S. Trade and Development Agency, 1992 Annual Report, Op. Cit., fOO@IOte 50, P. 5.

57 Ibid., p. 4.

s~ See U.S. Congess, OffIce of Technology Assessmen~ Development Assistance, Export Promotion, and Environmental Technology, op.cit., footnote 1, p. 88 & note 14.

59 U.S. Trade and Development Agency, 1992 Annual Report, op. cit., foo~ote 50, pp. El, 18.

60 ~id, p. 22+ ~ogm activities acco~ted for 92 ~rcent of TDA’s expenditures; he rW WaS for oPerat~g expe~~es.

61 ~ld, pp. c1, 7 me Cltiton AW5@ation Plain to consolidate US~D feasibili~ s~dy f~ds for capiml projects in TDA. Trade

Promotion Coordinating Committee, Toward a National Export Strategy, op. cit., footnote 4, p. 50.

62 u s Trade and Development Agency, 1992 Annual Report, op. cit., foo~ote ‘* P 6“. .


neering and project management services is over$149 million.63

I Technology Cooperation“Technology cooperation” means coopera-

tion between or among countries (either government-to-government or with private sector participa-tion) in developing or transferring technology. Itincludes technology demonstrations, research anddevelopment centers, training programs, and tech-nical assistance to nascent institutions such as agovernment environment agency. Technologycooperation can encourage environmental ex-ports in several ways. For example, exporters maywork with potential clients in another country toadopt technologies to local needs, thus makingt h e p r o d u c t a m o r e a p p e a l i n g p u r c h a s e . T e c h n o l -ogy cooperation also can provide access for onecountry’s firms to key government and industrydecisionmakers in the other country. Where aid isinvolved, training grants may help to develop theneeded technical and managerial skills in therecipient country to make use of the donorcountry’s technology.64

Training will be discussed in detail below;technology development and demonstration, inchapter 10. Technical assistance to new institu-tions will not be discussed in detail, but is asignificant factor. Both the United States andother aid donors provide assistance in developingregulations, testing protocols, and compliancemeasurements. This assistance can increase therecipient country’s environmental market. If therecipient country adopts standards and practicessimilar to those of the donor country, donorcountry equipment and service vendors couldhave an advantage (see ch. 5).

TRAINING BY THE UNITED STATESTDA spent $7.4 million, about a fifth of its

fiscal year 1992 budget, on training.65 Some ofthis went to sweetening the bids of U.S. firms oncapital projects meeting TDA’s four criteria(listed above); some familiarized potential cus-tomers with U.S. technology, in cases wherefuture projects meeting those criteria seemedlikely. TDA also spent over half a million dollarson technical seminars for government and indus-try officials, on topics such as sewage treatmenttechnology. 66

The United States Environmental TrainingInstitute (USETI), a nonprofit organization estab-lished jointly by the U.S. Government and someU.S. businesses, also supports training for devel-oping country decisionmakers.67 Under USETI,firms provide training at their own expense, inreturn for which they can showcase their proventechnologies. U.S. Government agencies such asEPA, TDA, and USAID also contribute instruc-tors. U.S. embassies and commercial officespromote the courses. USETI only commencedtraining in December 1992; it estimates that bythe end of 1993 over 450 people will be trained.Its 1993 courses covered subjects such as solidwaste management, pollution prevention, effi-ciency in energy use, and air pollution control;courses were 2 weeks long. For 1994, USETIplans to train about 1,300 persons.

USETI’s 1993 budget was $3.4 million, includ-ing both cash and the value of in-kind resources(primarily training). The level of private sectoreffort was $2.1 million, of which all but $0.2million was in-kind. Over 20 firms, trade associa-tions, and other organizations participated, in-cluding a technical school in Thailand. The public

63 Ibid., p. 7.64 T. properly Seine a developing COUIIq’S needs, a capital development project based on @30rted t~hnolo8Y Wuires ~~ed lo~

operators; this is true of many environment-related projects. Some projects have not provided for enough training. U.S. Congress, Office ofTechnology Assessment, Development Assistance, Export Promotion, and Environmental Technology, op. cit., footnote 1, p. 12.

65 U.S. Trade and Development Agency, 1992 AnnualReport, op. cit., footnote 50, pp. Cl, 8-9 (Etig ~d teChniCd assismce categories).66 ~ld., pp. cl, 8-$) (kCh&d symposia catego~).

67 ~S discussion is based on information provided by USETL


sector contribution (from nine Federal agencies,plus small contributions from the World Bank andthe International Finance Corp.) was $1,3 million,primarily in scholarships for travel and livingexpenses and in training.

US-AEP funds environmental fellowships forprofessionals from Asia and the Pacific islands towork in business, government, and nongovern-mental organizations (NGOs). These fellowships,administered by the Asia Foundation, last 1 to 4months and cover both technology and policy.During the period 1993 to 1995, 125 fellowshipsare planned, 35 of them at EPA. Some fellow-ships, such as those at EPA, might involve nodirect U.S. commercial contacts or implicationsbut might nevertheless help another country towrite and enforce environmental regulations, thuscreating demand for U.S. environmental technol-ogies and services.

TRAINING BY JAPANJapan’s MITI funds the International Center for

Environmental Technology Transfer (ICETT),established in 1990. ICETT’s first project in-volved training nine Mexican engineers on gasemission controls. ICETT plans to train 10,000engineers from developing nations by 2001.68

ICETT will work with environmental protectionspecialists from developing countries, includingEastern Europe.

The Japan International Cooperation Agency(JICA) also runs a training program for foreignofficials and has 10 training centers throughoutJapan. While none are called environmentaltraining centers, many of the fields officiallycovered likely have substantial environmentalcontent. Of 7,556 people accepted for training by

JICA in 1990, 1,456 were in the area of publicworks and utilities, 837 in mining and industry,713 in public health and medicine, and 211 inenergy. 69 In 1991, JICA offered training coursesin Japan on environmental maters to about 690participants from developing countries. The train-ing covered water quality monitoring, air pollu-tion monitoring, technologies to reduce CFCs,waste disposal, and conservation of the agricul-tural environment, among others. JICA has fundedconstruction of three environmental technologycenters in Asia with training components: theThai Environmental Research and Training Cen-ter; the Japan-China Friendship EnvironmentalPreservation Center; and the Indonesia Environ-mental Management Center.70

The extent to which Japan’s government offerstraining to sweeten the bids of Japanese firms (asthe United States’ TDA does) is not known.

FINANCINGMost exporters need at least short-term financ-

ing to cover the time between when they shipgoods and when the customer pays. Some requirelonger term financing for customers that demandan extended payment plan. Long term financingis critical for funding large capital projects suchas wastewater treatment plants and powerplantenvironmental controls. Smaller businesses mayneed ‘‘working capital’ loans to pay for produc-tion or marketing before export sales are made.

In the United States, private sector exportfinancing (without government help) is inade-quate to meet exporters’ needs (especially thoseof small exporters); many competitor countries dobetter. There are several reasons for this.71 Exportfinancing tends to be more labor-intensive and to

66 Cctid Offered t. Clearl Enviro~ent Abroad; Help for Soviets in the Works at MITI, ” The Nikkei Weekly, July 27, 1991.

69 JIq 1 IJICA, For the Furure of the Earth, ” not dated, p. 6.

TO AS cited in Jap~ Intermtioti Cooperation Agency, JICA Newsletter, July 1993, and Gverment Of JaPW ~nviro~fft adDeveZopmenr: Japan’ sEqerience and Achievement, Japan’s National Report to UNCED 1992, December 1991, pp. 25-26.

71 ns discussion of private sector export financing is based on James S. Ahchul, “The Export Finance Crisis” (Washington DC:Economic Strategy Institute, July 1992), pp. 1-10; TPCC Working Group on Trade Finance,“National Export Initiative Bankers Meetings onTrade Finance, ’ not dated (reporting on workshops held with bankers in 1991); and Nothdurf4 op. cit., footnote 3, p. 56.


have lower profit margins than other bankingactivities, making it less attractive for banks. Inthe United States, the profitability of exportfinancing is often further reduced because ofunfavorable tax consequences, and real or per-ceived unfavorable reserve requirements; further,some U.S. banks’ accounting rules make exportfinancing appear less profitable than it is.

The low profitability of export financing hasmattered more in recent years because U.S. bankshave switched away from relational banking, inwhich banks considered relationships with clientsto be paramount and therefore provided lessprofitable services within the context of thoserelationships, to transactional banking, in whicheach type of transaction is scrutinized anddropped if not sufficiently profitable. (In Europe,relational banking still predominates.)

Because many U.S. banks incurred majorlosses in the 1980s from unrepaid loans made todeveloping countries, most U.S. banks havebecome wary of lending to these nations, and ofinternational lending in general U.S. banks oftenfeel unqualified to judge foreign risks-theygenerally lack the international experience ofEuropean banks. U.S. banks are particularlycautious about medium- and long-term loans forexports to countries outside the industrializedWest and Japan, which the banks consider themost risky.

The situation is particularly difficult for smallexporters. Smaller banks tend not to handleexport financing, and larger banks may find smallexports (below about $300,000) not worth theirwhile .72 U.S. banks are rarely willing to makeworking capital loans for production or market-ing. Even when an exporter has an order and isready to ship, U.S. banks normally will not,without a government loan guarantee, finance

simply against foreign receivables; they normallydemand that the exporter get a confirmed letter ofcredit, which is a promise by the customer’s localbank to pay once documents conveying title to thegoods are delivered, guaranteed by a U.S. bankthat processes international transactions. (Euro-pean banks more readily finance against foreignreceivables.) The minimum charge for a con-fined letter of credit is often at least $400,73

which can take a fair bite out of the profit of asmall order. An order of $20,000, for example,might have a profit margin of $2,000 beforefinancing costs. Letters of credit also requiremeticulous documentation when title to the goodsis delivered; inexperienced exporters often needinstruction on how to prepare documents, andfrequently prepare them incorrectly, which delayspayment for the goods.

To some extent foreign banks operating in theUnited States are filling the demand unmet byU.S. banks. However, their services concentrateon larger firms and larger transactions. Moreover,foreign banks seem interested primarily in pro-viding financing for sales already in hand, ratherthan working with firms to put together competi-tive bids.74 A foreign bank might be particularlyreluctant to work with U.S. firms to put togethera bid that would compete against one of thebank’s clients in its home country.

Not only do U.S. exporters get less exportfinancing help from the private sector than theircounterparts in many major competitor countries;at least for nonagricultural exports, U.S. exportersalso get less help from the national government.U.S. Government assistance for nonagriculturalexports is provided primarily by the Export-Import Bank of the United States (Eximbank),which in fiscal year 1992 assisted $14.0 billion in

72 US.AEP is WoI-I@ with the Bank Assoe~tion for Foreign Trade to link local banks with commercial banks experienced in internationaltransactions .Lewis Reade, Director-General, US-AEP, presentation at the Clean Air Marketplace Conference, Washington DC, Sept. 9, 1993.

73 J~es S. Altshcu~ op. cit., footnote 71, p. 7.

74 ~ si~tiom involving Eximbank’s msis~nce, U.S. banks have shown a greater willingness than foreign banks to work in this way withUs. fiis.


exports.75 In 1991, perhaps 13 percent of Exim-

bank’s assistance (by volume of exports assisted)has gone directly to small business76; if the sameproportion held for 1992, about $1.8 billion insmall business exports were assisted in that year.As shown below, Eximbank’s assistance is lim-ited in several respects: total amounts, criteria forassistance, and ease of administrative access.

However, Eximbank has taken measures to im-prove access, especially for small business, and islikely to finance environmental exports more.

Eximbank’s financing programs cover a muchsmaller share of exports than analogous programsin major competitor countries. One report cover-ing 1989 showed U.S. coverage at about 2 percentof total exports, compared with 32 percent forJapan, 21 percent for France, 20 percent for theUnited Kingdom, and 4 percent for Germany .77

Eximbank’s limited export coverage results inlarge part from budgetary constraints:

While Eximbank must consider the budget impli-cations of transactions, regardless of ‘need’ (i.e.,whether Eximbank has the budget resources tocommit to a particular transaction), its Europeanand Japanese competitors generally have thebudget flexibility to pursue creditworthy transac-tions which fall within their stated parameters.78

Also, Eximbank requires more justification forassistance in particular cases than most majorforeign competitor agencies require:

In general, U.S. economic policy is guided by a‘‘needs based’ principle, and such is the case forEximbank. Specifically, this policy translates toEximbank supporting exports facing officiallysupported competition, or transactions for whichthe private sector is unwilling or unable toprovide financing. Therefore, Eximbank gener-ally must find evidence that one of these condi-tions exists to provide support for a transaction. Incontrast, most of our major competitors viewexports as being crucial to their countries’ eco-

TS Eximbank, Annual Report 1992, p. 2, This takes into account Eximbank’s loans, 10MI wmtees, and insurance.

76 GAO repo~ed 13 percent. Congress, General Accounting OffIce, The U.S. Export-Import Bank: The Bank provides Direct and ItiirectAssistance to SmalZ Businesses (Gaithersburg, MD: U.S. General Accounting Office, Aug. 21, 1992), pp. 2-5, 13, Direct assistance includesonly fmncing provided directly to small businesses; it does not include financing provided to subcontractors working through larger businessesthat receive Eximbank financing. GAO did not count some Unvetiled dat% and noted problems with some data that it did count. Eximb@which counted both direct and indirect assistance, reported that it assisted small business exports of $2.1 billion in 1991 out of total exportsof $12.1 billion+ or 17 percent, Ibid, pp. 2-5; Eximb@ op. cit., footnote 75, pp. 3, 14-15.

~1 First Washington Associates, Ltd. (Arti@on VA), Comprehensive Directoq of the World’s Eport Credit Agencies (October 1991).These figures include exports assisted by loans, loan guarantees, and insurance. The figures omit certain agencies, including the United States’Small Business Administration for which data were unavailable. (SBA assists under $100 million of exports per year-less than 1 percent ofwhat Eximbank covers.) The U.S. figure includes 0.5 percent for Exirnbank and 1.5 percent for the Foreign Credit Insurance Agency (FCIA),which issued insurance for Eximbak FCIA’S operations have since been absorbed into Eximbank itself.

A report covering 1987 gave similar figures, and a figure of 12 percent for the Netherlands. Altschul, op. cit., footnote71, p., 11, citing TradeFinance & Banker Internationa/, January 1990, p. 32-4, and speech by Albert H. Hamilton to the American Bankers Association, May 1989meeting on small business.

Both of these studies omit financing for agricultural exports by the U.S. Department of Agriculture’s Commodity Credit Corp., while thefigures for the foreign countries probably include agricultural expert promotion. Thus, the U.S, financing and foreign countries’ financing are,strictly speaking, not being compared on the same basis. However, the Commodity Credit Corp. covers only about 1 percent of U.S. exports,so including it would just raise the U.S. figures by 1 percent (see figures for 1991 in First Washington Associates, Ltd. (Arlington VA),Comprehensive Direcfory of the World’s Export Credit Agencies (forthcoming in 1993)); this would not change the result that the othercountries listed have much higher export coverage (except perhaps for Germany). Also, some of the foreign countries probably offer limitedagricultural export financing, so that the figures reported in the study are correct or nearly correct comparisons of nonagricultural exportfinancing. In 1990, as a percentage of total exports, agricultural exports were only 17 percent in France, 5 percent in Ge rmany, 0.4 percent inJapan, 24 percent in the Netherlands, and 7 percent in the United Kingdom. U.S. Department of Agriculture, Economic Research Semice, WorldAgriculture, Statistical Bulletin # 815 (September 1990); U.S. Department of Agriculture, Foreign Agricultural Semice, Foreign Agriculture1992 (Washington, DC: USDA, December 1992), pp. 53, 93.

78 Eximba~ Report to the U.S. Congress on Export Credit Competition and the Export-Import Bank of the United States for the pe~”odJanuary 1, 1991 through December 31, 1991 (July 1992), p. 8.


nomic well-being and security. To this end, theyprovide export credit on more of an “entitle-ment” basis by broadly defining their targetaudience and parameters, and allowing automaticaccess to their programs when the parameters aremet.79

These differences mean that U.S. companiesapplying for Eximbank assistance, comparedwith foreign firms applying to counterpart agen-cies, must expend more effort in applying andhave less certainty of receiving help. U.S. firms,especially small business, could therefore bediscouraged from applying.

Other factors have impeded access to Exim-bank assistance, though Eximbank is trying tochange that.80 Eximbank now has 6 domesticoffices, compared to only one full-service officebefore 1992; France’s export-import bank has 22.Eximbank has no overseas offices; Japan’s export-import bank has 16. Companies have consistentlycomplained that Eximbank is slow in processingapplications. 81

While Eximbank traditionally has relied oncommercial banks to reach small business, manyU.S. banks have discontinued international lend-ing. Eximbank hopes to fill the gap with itsCity/State Program, by which State and citydevelopment and finance agencies can help firms

to apply for Eximbank assistance while perhapsadding their own financing to the package. Begunin 1987, this program by early 1992 included 18States, Puerto Rico, a city, and a port authority.Eximbank’s other steps to improve service tosmall business include creating a high-level smallbusiness unit, streamlining approval for mostsmall (under $2.5 million) working capital loanguarantees, increasing marketing efforts, andimproving coverages.82

The Small Business Administration (SBA)also provides export financing. However, theexports assisted are under $100 million peryear83; this is tiny, compared to Eximbank, whichassists (see above) an estimated $1.8 billiondollars per year of small business exports. TheGeneral Accounting Office has also found evi-dence that export promotion, including exportfinancing, is not a priority at SBA.84 The Clintonadministration has proposed harmonizing andultimately merging SBA's and Eximbank’s work-ing capital programs.85

The Export Enhancement Act of 1992 requiresEximbank to encourage ‘‘the use of its programsto support the export of goods and services thathave beneficial effects on the environment ormitigate potential adverse environmental effects.Eximbank is to report annually on this effort.86

‘g Ibid.go The ~omtion ~ this and tie next paragraph is taken in part from U.S. Congress, General Accounting Office, E~ort Finance: The Role

of the U.S. Export-]rnport Bank, GAP/GGD-93-39 (Gaithersburg, MD: U.S. General Accounting Office, Dee. 23, 1992), pp. 22-29; U.S.Congress, Generat Accounting Office, Export Promotion: A Comparison of Programs in Five Industrialized Nations, op. cit., footnote 20, p.31; and Eximbank, Report to the U.S. Congress on Export Credit Competition, op. cit., footnote 78, pp. 27, 32-35.

61 See, forex~ple, Kenneth D. Brody, letter to Donald W. Riegle, Jr., Chairman, Senate Committee on Banking, Housing and Uhan Mtis,and to Henry B. Gonzalez, Chairma n+ House Committee on Banking, Fimnce and Urban Affairs, July 30, 1993, reprinted in Eximb@ Reportto the U.S. Congress on Export Credit Competition and the Export-Import Bank of the United States for the Period January 1, 1992 throughDecember 31, 1992 (July 1993). Access to Eximbank programs is also impeded, especially for small business, because, as discussed above,there is no “one-stopshopping” for export services; firms must seek assistance individually from Eximbank and other agencies involved inexport promotion.

82 U.S. Cowess Gene~ Accounting Office, Export Finance, op. cit., foomote 80, p. 24. When it issued this report GAO found @tit was,too early to evaluate the success of these efforts.

83 U.S. Conmss, Gener~ Accounting Office, Export Promotion: Problems in the Small Business Administration’s programs, op. cit.,footnote 41, pp. 8-9.

84 Ibid., pp. 10-12.65 Trade ~omotion Coordinating Committee, To~ard a National Export Strategy, Op. Cit., fOO~Ote 4, p. 47.

86 The Expofl E~ancement Act of 1992, op. cit., footnote 7, sec. 106.

Chapter 6-Export Promotion Programs ! 181

Pursuant to the statute, the Bank’s board hasappointed an officer to advise it on ways to useEximbank programs to support environmentalexports .87

In 1992,20 States provided export loans and/orloan guarantees. California had the largest pro-gram, assisting $180 million in exports over 1year; Minnesota assisted $2.6 million in exports.In addition, some States provided export insur-ance. 88 California also provides seed money topartially cover costs of putting together exportdeals (e.g., the cost of an investment banker’sservices) in the energy field, many of whichconcern energy efficiency or renewable energy. Inits fifth year, California’s International EnergyFund has provided $250,000 per year in contin-gent loans, to be repaid (with interest) only if theproject generates revenues. The loans are match-

ing funds, and projects are selected by a stiffcompetition. 89

9 Financing with an aid componentCountries sometimes use aid funds to sweeten

an export financing package, creating so-called“tied aid credits.” The United States has usedtied aid credits less aggressively than manycompetitor countries. Other countries’ use of tiedaid credits appears to be declining, but is stillsubstantial. Power generation is one sector in theenergy/environment realm that attracted substan-tial tied aid credits; it is possible that tied aidcredits will focus more on the environmentalsectors in response to changes in internationalrules. Tied aid credits are discussed in detail inOTA’s background paper.90

al Ex~~ Ann~l Report 1992, op. cit., fOO~Ote 75, p. 8.

88 Natio~ Association of State Development Agencies, NASDA State Ewort Program Database (SEpD): 1992, Op. cit., fW~Ote 17, PP.27-29.

89 Tim @oq California Energy Commissiou personal communication, Oct. 22, 1993.~ U.S. Conpss, Mice of TechnoIo~ Assessment, Development Assistance, Export Promotion, and Environmental Technology, op. cit.,

footnote 1, pp. 46-54.

PART III.Users of

EnvironmentalTechnology: U.S.

Manufacturers

EnvironmentalRequirements and

E

I

U.S. ManufacturingIndustry

Competitiveness 7nvironmental regulations can produce substantial bene-fits in the form of improved human health and a healthierecosystem, with reduced costs in these areas. However,these benefits accrue to society as a whole, while

individual firms that bear the higher compliance costs experiencehigher production costs as a result. l

Total U.S. spending (both public and private) on pollutioncontrol and abatement (including local solid waste collectioncosts) rose from approximately $52 billion in 1972 (1990 dollars)to $108 billion in 1990. As a share of gross national product(GNP), these expenditures grew more slowly, from 1.52 percentof GNP in 1972 to 1.95 in 1990. Expenditures could increase tobetween $133 and $147 billion (1990 dollars) by the year 2000,or between 2.0 and 2.2 percent of GNP.2

Relative to total production costs, the cost of pollution controlto U.S. manufacturers is small-amounting, by one estimate, to$21 billion or about 1.72 percent of manufacturing value addedin 1991. Moreover, the differential in compliance costs borne byU.S. firms compared to foreign fins, especially in advancedindustrial nations, is not great. Factors other than environmentalregulations, such as market access, management capability,financing, work force skills, labor costs, and technology, playmore prominent roles in determining competitive advantage.Also, pollution control costs have not increased significantly

1 For discussion of the many factors that conrnbute to a firm or muon’s competitiveness see Michael Porter, The Comperin”}~e Ad}’antuge ofNurions (New York NY: The FreePress, 1990); and U.S. Congress, Office of Technology Assessment, CompetingE~onomies: Americu, Europe, and the Pacijic Rim, OTA-ITT3-498 (WJashingtou DC:U.S. Government Printing Office, October 1991).

~ U.S. Environmental Protection Agency, EnvironmenfaZ lnvesrments: The Cost cfAClean .En\/ronment (Washingto~ DC: Island Press, 1991). 183


since the mid-1970s as a share of sales. However,these costs may be more troublesome to U.S.manufacturers now, due to intensifying demandsof international competition. In an era when U.S.firms face increasing competition from able andeffective competitors from both advanced anddeveloping nations, even relatively small costdifferences can affect relative competitive advan-tage.

Pollution control expenditures by manufactur-ers in the United States differ significantly bysector. For some industries, particularly processindustries (e.g., chemicals, petroleum, pulp andpaper, primary metals), pollution control expen-ditures can be a relatively large share of totalcapital expenditures and a small but significantshare of value added. For example, as a share ofvalue added, the petroleum industry spends over15 percent on pollution control, primary metalsand pulp and paper each spend over 4 percent, andchemicals spends over 3 percent. Most otherindustries, particularly discrete parts manufactur-ers and assemblers, spend much less. (It ispossible, moreover, that these expenditures onpollution control by manufacturers are underre-ported, perhaps by as much as 20 to 30 percent.See app. 7-A.)

Expenditures are only part of the picture. AsU.S. manufacturers seek to continuously improveproduction processes and rapidly introduce newproducts, complex and time-consuming permit-ting procedures and regulatory inflexibility canpresent serious obstacles. Many analysts arguethat the U.S. regulatory system is more adversar-ial and rigid than those of most other nations.

While it is difficult to accurately comparepollution abatement and control costs amongnations, it appears that compliance costs for U.S.industry are among the highest in the world.Manufacturers in western Germany and perhaps

a very few other Northern European countriesincur comparable costs; elsewhere in Europecosts are lower. Japanese pollution control costsfor manufacturers have been lower than those forthe United States since 1977, and that gap hasbeen growing.

3

For example, compared to firmsin Japan, in 1990 automobile manufacturers in theUnited States spent over five times more as apercent of total capital investments and threetimes more as a percent of sales to controlpollution from the production of automobiles.

4

Pollution control and abatement costs in newlyindustrialized and developing nations are signifi-cantly lower than in the United States.

Some of these cost differentials might be due tomore efficient regulatory systems. However, themajor source of difference appears to stem fromvariances in regulatory requirements and theintensity of their enforcement (or the degree ofcompliance). Finally, U.S. firms often receiveless government financial and technical help(e.g., tax deductions, loans, and R&D grants) thantheir counterparts in Japan, Germany, and someother countries.

Several attempts to assess the competitiveimpacts of environmental regulation on the econ-omy have been conducted since the early 1970s.These studies differ in methodology, assump-tions, and conclusions, and, because of thecomplexity of the research question, offer limitedinsight. The little research on employment effectssuggests that in the medium to long-term, theimpact on jobs from pollution and waste controlrequirements is likely to be minimal. However, itappears that pollution and waste control regula-tions had a small negative impact on manufactur-ing productivity, industrial innovation, balance oftrade, and the location of industrial investment.While the effects are small, this does not meanthat they are insignificant and should not be

3 Compared to the United States, much of the private sector spending for pollution control in Japan is not by manufacturers, but rather byelectric utilities to control nitrogen oxides (?NOx) and sulfur dioxide (SOZ). Moreover, regulations of many pollutants, including volatile organiccompounds and hazardous wastes, are much stronger in the United States than in Japan.

4 Japanese automobile firms maintain higher capital investment rates as a percent of sales than do U.S. automakers,

—-

Chapter 7–Environmental Requirements and U.S. Manufacturing Industry Competitiveness [ 185

Figure 7-l—External Determinants of Environmental Compliance Costs

Location ,1 Weak(e.g., density of environmentalnearby pollution regulations and

sources and enforcementpopulation)

— J 1 —


addressed+ specially if analysis could point theway to more effective and less burdensomemethods of achieving environmental goals. Thisis particularly true given stricter pollution controlrequirements which will come into effect in themid and late 1990s.

This chapter first discusses the costs of com-plying with U.S. pollution control regulations formanufacturers in the United States. It then dis-cusses costs and regulatory requirements formanufacturers in other nations, including Japan,Germany, and Holland. Finally, it discussesresearch on the effects of regulation on technol-ogy innovation and foreign trade and investment.Appendix A discusses effects of regulation onGDP and productivity.

OVERVIEWExternally imposed environmental compliance

costs are determined in at least four ways (seefigure 7-1).

First, geographic location and density of pollu-tion sources can be a factor. Firms located insparsely populated areas with very low levels ofpollution from other sources, may not have tocontrol pollutants as strictly to meet overallambient standards (unless, of course, require-

Direct

subsidies ofenvironmental

compliancecosts

I

More efficient

regulatory system(e.g., pollution

prevention,

Marketable permits)

ments are in place to prevent any significantdeterioration of existing environmental condi-tions).

Second, companies may bear few costs if theyare located in nations or regions that allow themto pollute heavily, even where there are highpollution loads. Moreover, while few data com-pare worker health and safety costs in differentnations, U.S. firms may carry higher costs in thisarea compared to those in many competingcountries, particularly newly industrialized anddeveloping countries.5

In the long term, nations may pay more forthese implicit subsidies (e.g., through increasedhealth costs and reduced natural resource produc-tivity). In some cases this penalty maybe so largeas to impede economic growth, as the currentsituation in Eastern Europe and the former SovietUnion illustrates. However, just as other subsi-dies can create industrial competitive advan-tages, 6 so can environmental subsidies, whetherin the form of lax regulations or direct assistance.

Some argue that strict environmental regula-tions can lead to increased competitive advan-tage. 7 Firms in countries with strict regulations onindustrial processes might find that aggressiveenvironmental actions, particularly pollution pre-

5 See Ixiwrence J. MacDomell, “Government Mandated Costs: The Regulatory Burden of Environmental, Health and Safety Standards, ’Resources Policy, March 1989, pp. 75-96.

6 U.S. Congress, Office of Technology Assessment op. cit., footnote 1.7 A n~ber of analysts use Michael porter’s, article, “America’s Green Strategy” Scientific Ameticun, April 1991, vol. 264, No. 4, p. 168

as evidence of this relationship. Porter’s writings on this relationship suggest a more limited view (see box 3-2).


vention, make them more competitive relative toother domestic competitors having to complywith the same standards. However, as a group,firms within countries with stringent environ-mental regulations may often face a competitivedisadvantage in a global marketplace where theymust compete with firms in foreign countries withmore lax standards. When waste disposal costsare high and regulatory requirements are strin-gent, firms can sometimes save money by control-ling pollution and reducing wastes. However,these actions are seldom financially justifiable inthe absence of waste treatment or pollutioncontrol requirements.

The third factor in determining compliancecosts is the degree to which nations or regionsprovide financial or technical assistance to meetpollution control regulations. Although the Or-ganization of Economic Cooperation and Devel-opment (OECD) has adopted the polluter paysprinciple, which states that the polluter shouldbear the expenses of carrying out measures toprotect the environment, the principle is notstrictly adhered to in any developed or developingcountry. However, there is significant variation inthe degree to which governments provide bothfinancial and nonfinancial assistance to helpindustry meet environmental requirements. Rela-tive to some countries, the United States provideslittle help to its industries to comply withpollution abatement requirements.

Fourth, firms in nations that structure theirregulatory systems more efficiently (e.g., fewerdelays, more flexibility) while maintaining simi-lar levels of protection, may face lower costs thanfirms in nations that achieve the same level ofprotection in less efficient ways. To some extent,market incentives (e.g., taxes and fees, tradable

permits) and performance-based standards mayproduce lower costs (see ch. 9). While no countryhas used these approaches extensively, a numberof other countries’ systems do appear moreflexible than the United States, which may enablethem to achieve more pollution reduction percompliance dollar spent. Another source of envi-ronmental efficiency is to reduce pollutionthrough prevention (in-process changes) as op-posed to end-of-pipe methods. Countries appearto differ little on the relative extent of in-processchanges.

Some analysts have argued that some environ-mental regulations impose sizable costs on theeconomy, but deliver quite small benefits.8 Suchanalysis is complex and requires a greater under-standing of costs and benefits than currentlyexists. As a result, this report does not examinethe issue of whether U.S. environmental regula-tions are too strong (or too weak). Rather, itdiscusses the extent to which U.S. regulationsaffect economic competitiveness. Chapters 8 and9 examine ways in which pollution controlregulations can be modified to minimize theirnegative effect on industrial competitiveness,while achieving stable or greater levels of envi-ronmental protection.

U.S. POLLUTION ABATEMENT ANDCONTROL EXPENDITURES

The Bureau of Economic Affairs (BEA) in theDepartment of Commerce estimates that U.S.pollution abatement and control costs in 1991were $91.5 billion, or 1.61 percent of GDP.9 TheEnvironmental Protection Agency (EPA) reportsa higher figure of $108 billion in 1990, or 1.95

8 Some have called for regulations increasingly informed by sounder scientilc informatio~ often based on risk assessment techniques todetermine relative risks, benefits, and costs. It is beyond the scope of this study to examine the potential for such approaches to lower complia.neecosts while maintaining current levels of environmental protection.

g Gary L. Rutledge and Mary L, Leonard, “Pollution Abatement and Control Expenditures, 1987-91,” Survey o~Current Business, vol.73, No. 5, May 1993, p. 61. These are net costs, which subtract the savings firms received from recovered energy and materials due to pollutioncontrol. In 1991, these amounted to approximately $1.6 billion, Gross pollution abatement and control costs were $93.1 bdlion.

Chapter 7–Environmental Requirements and U.S. Manufacturing Industry Competitiveness 187

percent of GDP.10 Box 7-A discusses the differentmethods for measuring costs.

Total pollution control and abatement expendi-tures (constant dollars) declined slightly in theearly 1980s, then steadily increased throughoutthe rest of the 1980s (see figure 7-2). Expendi-tures increased from $52 billion in 1972 to $108billion (by EPA calculations) in 1990 (inconstant1990 dollars) .11 However, as a share of GNP,environmental expenditures have increased lessrapidly, from 1.52 percent in 1972 to 1.95 in1990.12

According to BEA, business accounted forslightly over half, or $48 billion, of the $91 billionspent on pollution control and abatement in 1991(see table 7-l.) Most of the cost to business wasfor acquisition and operation of pollution controlequipment; a smaller share was for fees topublicly owned wastewater treatment works andfor costs of pollution control devices on automo-biles and trucks purchased by business. Of thebusiness expenditures, approximately $21 billionwas incurred by manufacturers: $6.4 billion forelectric utilities; $1.6 billion for mining; and therest by other sectors, including expenditures onwaste collection and sewage treatment.

Expenditures by manufacturers are displayedin figure 7-3. The high level of capital expendi-tures in the mid-1970s reflects initial acquisitionof equipment as industry complied with the 1970Clean Air Act and the 1972 Clean Water Act. Theportion of capital expenditures for pollutionabatement and control then tapered off for severalyears. It appears to be increasing again, in partbecause of the 1987 Clean Water Act amend-ments and the 1990 Clean Air Act amendments.Operating costs have increased slowly and stead-ily, as the stock of pollution control equipment

Large fans and ducts transfer exhaust emissions fromautomobile paint booth operations to the next stage ofthe emission control system. The $35 million dollarsystem reduces solvent emissions.

has grown. In 1991, capital expenditures tocomply with air and water requirements ac-counted for almost 85 percent of pollution controland abatement capital expenditures; solid waste,including hazardous waste, accounted for the rest.Operating costs were divided almost equallybetween the media (see figure 7-4).

I Pollution Abatement and ControlExpenditures by Sector

Pollution control costs for industry can bedefined as the direct and intentional outlays byindustry for pollution abatement and control.These costs differ significantly by sector. Ingeneral, process industries (e.g., chemicals, petro-leum) experience higher compliance costs than

10 However, EPA includ~ some expen~~es that are only tangential to pollution abatement, such as 100 percent Of the $17 billion spenton municipal solid waste collection costs. The EPA figures for 199(I arc estimates. Environmental Protection Agency, op. cit., footnote 2.

11 fivfi~en~ prot~tion Agency, Op. Cit., foomote 2.

12 Histofic s~tistics are gen~~y expressed as a share of Gross National Product (GNP) whereas more current statistics =e expressed ~a share of Gross Domestic Product (GDP), Differences between the two measures are insigni.t3cant.


Box 7-A-Government Measures of Pollution Abatement and Control Costs

Figure 7-A1—Differing Measures of EnvironmentalCompliance Costs

120

100

80

60

40

20

0

+ Annual expenditures

+ Amortized costs

) I , I I I 1 r I I ! I 1 [ I I I

1972 74 76 78 80 82 84 86 88 90

2“5~

o.5- + Annual expenditures

--+- Amortized costs

o I I I 1 I I I 1 I 1 I I f I I t r

1972 74 76 78 80 82 84 86 88 90

SOURCE: EnWonmental Prot@tbn Agency, Environmental hwesfrnds(Washington, DC: Island Ress, 1991).

There are three main sources ofdata on U.S. environmental compliancecosts:the Environmental Protection Agency(EPA) published a report in 1990 on totalpollution abatement and control costs;the Census Bureau publishes an annualreport on manufacturers abatement costs;and the Department of Commerce’s Bu-reau of Economic Analysis (BEA) annu-ally publishes data on total costs that relyin part on the Census Bureau data.

BEA and EPA estimates differ signif-icantly. One reason is that the EPA studyincluded all costs ($17 billion) for solidwaste management collection. BEA in-cludes only 70 percent of these costs.EPA includes all superfund costs ($4.2billion). BEA includes a smaller but indeter-minant share. Because garbage has beencollected for at least 100 years, It makeslittle sense to include all these costs whenconsidering the effect of regulation oneconomic competitiveness. EPA (but notBEA) also included a share of expendi-tures for water supply ($4 billion), pesti-cide and fungicide regulations ($2 billion),and nonpoint source water pollution con-trols ($0.77 billion).1 Both include thecosts from mobile source pollution control(primarily automobile pollution control de-vices), but BEA’s estimate ($14.6 billion)was almost double the EPA estimates of$7.7 billion.

EPA and BEA account for capitalexpenditures for environmental protec-tion indifferent ways. BEA counts capital

expenditures and operating costs in the year they are made. In contrast, the EPA study converted thedata into annualized expenditures (the sum of operating costs for the year in question plus amortizedcapital costs, which include interest and depreciation associated with accumulated capital investment).

1 IJ.S. EnVirOn~t~ Protection Agency, Ern4romnenta/ h?vestments: me COS! of A C/=n End~lW@(Washington, DC: isiand Press, 1991).

.—

Chapter 7–Environmental Requirements and U.S. Manufacturing Industry Competitiveness I 189

Box 7-A-Government Measures of Pollution Abatement and Control Costs-Continued

In other words, if a firm spent $20million in 1975 on capital equipmentwith a useful life of 20 years, the EPAstudy would record $1 million for eachyear from 1975 to 1994, and add inannual interest payments.2 The EPAstudy provides both actual and annu-alized costs, but its annualized num-bers have been more widely reported.

While EPA’s actual and annu-alized measures are both valid, thelatter measure gives the impressionthat the environmental regulatory costburden has risen steadily and signifi-cantly (278 percent) since 1972, when,in fact, annual expenditures (operatingcosts plus capital costs in the yearpurchased) increased only 77 percent

Figure 7-A2—EPA Environmental Compliance CostProjections

00-)0-)4 -+ Amortized costs

40 + Annual expenditures

-+-- Annual expenditures (minus fnUniClpal

garbage collection costs)

0! ( I 1 I I {

1990 92 94 96 98 2000

(adjusted for inflation, figure 7-Al). SOURCE: Environmental Protection Agency, Envkomnenta//nvesfmenk(Wash-Using the annualized method, ington, DC: Island press, 1991).

EPA estimated that the cost of envi-ronmental compliance will increase significantly in the 1990s, increasing 61 percent from 1990to$185billion in 2000, assuming full implementation of all existing and new regulations currently underdevelopment or proposed by EPA. However, nonannualized expenditures in 2000 will increaseto$147billion, and $127 billion if local garbage collection is not included (figure 7-A2).

Since 1973, the Census Bureau has annually reported pollution abatement and controlexpenditures for manufacturers (SIC 20-39).3

in 1990, when Census surveyed over 20,000 randomly

selected manufacturing establishments, over 90 percent responded to the survey.4 Appendix 7-1discusses the validity of this data.

2 This is a particularly important distinction to make in estimating environmental industry revenues, sinceamortized costs measure depreciation, intere~ and operating expenses.

3 U.S. Department of Commerce, Economics and Statistics Administration, Bureau Of the Census, Po)lm~onAbatemntCostsandExpendifures MA200 (Washington, DC: U.S. Government Printing Office, published annually).

4 There are two mistakes commonly made when interpreting Census data. First while Census rewrts totalgross operating costs, net costs should be used. To calcuiate net costs, operating costs reccwered (usuaiiy throughrecycling or energy production) are subtracted from gross operating costs. Semnd, totai environmental expendituresare sometimes calculated as the sum of capital expenditures and annual operating costs. However, thisoverestimates total costs since operating costs already include costs of depreciation of capitai equipment.Subtracting depreciation fromthe total operating costs and capital expenditures provides a more accurate measureof total spending,


Figure 7-2—U.S. Environmental Compliance Costs

2.5

2

c1 1.5

z%$1

0.5

0

● ‘/o of G N P

I Expenditures ($1990)

1 1 1 1 1 1 1 1 1

1972 74 76 78 80 82 84 86 88 90

SOURCE: Environmental Protection Agency, Envhtmnenfa/ invest-ments (Washington, DC: Island Press, 1991).

Figure 7-3-Trends in Pollution Abatement

1

0.8

(n 0.6QImIn%s 0.4

0.2

Expenditures for U.S. Manufacturers

12

I *

t

Operating expenses

Capital expenditures

o o1973 75 77 79 81 83 85 87 89 91

SOURCE: U.S. Census Bureau, Po//ution Abatement Costs andExpenditures (Washington, DC: U.S. Government Printing Office,various years).

the discrete part manufacturers (e.g., electronics,automobiles). In large part, this is because processindustries use significant amounts of energy andprocess large amounts of materials to produceoutput. This transformation of raw materials into

Table 7-l—Composition of Spending on PollutionAbatement and Control in 1991 ($ millions)

Sector Amount Share

Personal consumption $18,544 20%Government b 24,653 27%Business 48,259 53°/0

Plant & equipment 42,515Motor vehicle emission abatement 5,744

Net total $91,456 100%

Estimates of sectoral composition of businessplant & equipment operating and capital expenditures

Sector Amount Share

Manufacturing $20,910 49%Electric utilities 6,385 15%Mining 1,562 4%Other businessd 13,658 32%Total business $42,515 1OO%

a l~ludes mobile source pollution control, private septic systems and

sewer connections linking household piumbing to street sewers, andhousehold payments for sewage treatment.

b lwlud~ government direct expenses, principally for investments and

operation of municipal water treatment facilities, as well as costs ofregulation and monitoring, and research and development.

c [nciudes ca~tal expenditures and annual operating Costs, such as

payments to government units for sewage services and wastecollection and disposal. Excludes the cost of mobile source (automo-bile and truck) pollution control equipment.

d ~hersectors, such as construction, services, retail trade, etc., while

perhaps not bearing large pollution control costs related to stationarysource capital equipment, do bear costs through payments forsewage services and solid waste collection and disposal.

SOURCE: Derived by OTA from data provided in Gary Rutledge andMary Leonard, “Pollution Abatement and Control Expenditures, 1987-91 ,“ Survey of Current Business, May 1993, pp. 55-59; U.S. Bureau ofthe Census, Pollution Abatement Costs and Expenditures, 1991,MA200 (91)-1 (Washington, DC: U.S. Government Printing Office,1993), and other unpublished data provided by Gary Rutledge.

products is often pollution-intensive. Four broadindustrial sectors (chemicals, petroleum refining,pulp and paper, and primary metals) that produceslightly over 20 percent of U.S. manufacturingvalue added account for over 70 percent of allpollution control capital expenditures by manu-facturers, approximately 80 percent of all criteriaair emissions by manufacturers (particulate,sulfur oxides, nitrogen oxides, volatile organiccompounds, and carbon monoxide), nearly 70percent of Toxic Release Inventory emissions,


Figure 7-4-Manufacturers’

Capital expenditures

Water. 450/0

Pollution Abatement Costs by Media:

Annual operating costs

Water, 32.5!40

rr( //’---+ , ,sold waste, 13.9%.

‘\/ hazardous: 5.2Y0nonhazardous: 8.7°/0

1991

\

\Solld waste, 35.5?40

hazardous: 16.2Y0

/ / ‘~ nonhazardous: 19.3°/0

‘“~i / ‘iiiAir, 41 YO Air, 31 .9°/0

,/’

//

SOURCE: U.S. Census Bureau, Po//utkmAbatement Costs andExpendihms, 1991 (Washington, I) C:U.S. Government Printing Office, 1993) page12.

and over 70 percent of manufacturing energyusage13 (see figure 7-5).

In 1991, 7.9 percent of capital expenditures bymanufacturers in the United States went towardpollution control equipment. The share can behigher in particular industries. For example, overone-quarter of new capital expenditures by thepetroleum industry were for pollution control,while the chemical industry spent over 13 per-cent. In contrast, the rubber, machinery, andprinting industries spent less than 2 percent ofcapital expenditures for pollution control. How-ever, significant differences among subsectors areobscured when looking at broad industrial catego-ries. For example, while only 4.6 percent ofcapital expenditures for the fabricated metalsindustry as a whole went for pollution control,one subsector—the metal plating and polishingindustry—spent over 27 percent.

Total compliance costs (capital costs plusoperating costs minus depreciation) as a share of

sales and value added also differ by industry. Thepetroleum industry spends the most, about 2.2percent of sales, while the pulp and paper,chemicals, and primary metals industries allspend over 1.65 percent of sales on pollutionabatement and control. Share of value added maybe a more accurate measure of environmentalregulatory burden, since it measures the level ofeconomic activity performed by the firm, anddoes not include the cost of materials purchased.Using sales as the denominator understates thetrue cost of pollution control to a firm, since thepollution control costs embedded in the firms’purchased products are not included in theirpollution control costs, but are included in thesales figures.14

As a share of value added, the petroleumindustry spends over 15 percent on pollutioncontrol, the pulp and paper and primary metalsspends over 4 percent, and the chemical industryspends over 3 percent. For manufacturing overall,

13 U.S. Census Bureau, 1990 Annua/ survey ofManufactures: Value of Producf Shipments, M90(AS-2) (wm~gto% DC: U.S. @vernmcnt

Printing Office, 1990); U.S. Congress, Office of Technology Assessment, Industrial Energy Efficiency, OTA-E-560 (Washington, DC: U.S.Government Printing Office, August 1993); U.S. Environmental Protection Agcney, Office of Pollution Prevention and Toxics, 1991 ToxicRelease ln~entory, Public Data Release (Washingto~ DC: Environmental Protection Agency, May 1993).

la Without the use of more sophisticated models relying on input/output tables, it is not possible 10 assess tOtil pOlhltiOn control cos~ to tiefirm embedded in its purchases. For example, firms that purchase large amounts of energy (e.g., aluminum or industrial gas producers) paymore for electricity due to environmental controls on electrical utilities.


Figure 7-5--Manufacturers’ Pollution Control Expenditures and Value Added, 1991

Pollution control expenditures Value added

Other, 38°/0Petroleum, 16Y0

Pulp and paper, 11 ?40

. . . ......:.,.:.:.,.:.:.:.::: :: :,:; :; :::; :: :, :,:.:.,,.: .;.:...,.:.. .. :.:.:..,.,.,..,,.,:,:,: ,:,:.:,; ,:. . . . . . . . . . .,, ,,,.,.. ,,,. ,,, . . . . . . ... . . . . . . . . . . . .. . . . . .. . . . . . . . . .. . . .. .. . . .. .. ., ....:. ,.,, .,,. ,. ..,.,.,. ,. ..,....,,.,,,,

Otl

Chemicals, 25°/0

$20.9 billion $1,028 billion

SOURCE: U. S. Census Bureau, Pd/utionA~temat ti&8ti~tiditures, 1991 (Washington, C) C: U. S.Government Printing Office, 1993); U.S.Census Bureau, 1991 Annual Survey of Manufactures, Statistics forlndafry Grwps andlndstries (Washington, DC: U.S. Government PrintingOffice, 1992).

these costs are less--0.80 percent of sales and1.72 percent of value added in 199115 (see table7-2.) As discussed in appendix 7-A, these figuresmay underreport actual costs, possibly by asmuch as 20 to 30 percent.

Even among most high-compliance-cost sec-tors, pollution control costs are only one of manyfactors affecting competitive advantage. Not allhigh-compliance-cost industries are heavily in-volved in international trade. Among those thatare, some industries, such as chemicals and woodpulp, are highly competitive internationally, with

significant trade surpluses.16 Others, such as

primary metals, have struggled competitively .17Because environment is seldom the primaryfactor in determining competitive advantage, it ismisleading to look at the performance of sectorsas a measure of the effect of pollution abatementcosts on competitiveness. It is possible, forexample, that lower compliance costs in thechemical industry could make it even morecompetitive. Moreover, when compared to othercorporate expenditures these costs are not trivial.For example, while business spent $43 billion on

15 At least one ~ysis claims that COStS are much higher. A report by the National Commission for ~p@XIEnt pO~iCy (hfeUSUfi~g

Employment Eflecrs in the Regulatory Process, Washington, DC: January 1993), uses Census data to assert that total abatement expendituresaccount for 3.48 percent of sales. However, this figure appeans to signMcantly overstate the actual cost effect. The authors overestimated Censuscosts (double counting capital expenditures and depreciation and failing to subtract recovered costs) and used a methodology resulting ininflated costs,

Is me chem.ic~ industry’s exports in 1991 w~e $43 billion and the trade surplus was $18.8 billion. U.S. ChemicaZ Industry Statistical

Yearbook, 1992 ~ashingtoq DC: Chemical Manufacturers Association 1992). However, developing nations, which genendly have weakerregulations, increased their share of chemical exports faster than developed nations between 1980 and 1991. Earl Andersou “DevelopingNations’ Chemical Exports Surge, ” Chem”cal and Engineen”ng New, Aug. 2, 1993, pp. 14-15. The United States has enjoyed a trade surplusin pulp since 1987, importing $1.9 billion worth of pulp in 1992 and exporting $3.1 billion. However, the paper industry ran a $2 billion tradedeficit in 1992. U.S. Department of Commeme, U.S. ZndustriaJ Outlook, 2993, (WSShingtoq DC: U.S. Government Printing Office).

17 k 1992, tie U.S. mn a $S biuon trade deficit in steel mill products (U.S. Department of Commeree, International Trade khkkXiOII+U.S. Indusm’al Outlook, ’92 (VkAingtonj DC: U.S. Government Printing Office, 1992), p, 142.

Chapter 7–Environmental

Table 7-2—Pollution

Requirements and US. Manufacturing Industry Competitiveness I 193

Abatement Expenditures by U.S. Manufacturing Industries, 1991a

(millions of dollars)

PollutionCapital Expenditures Total Pollution Control Expenditures

% of Net O/. ofIndustry & Total Operating % of Value(SIC Code)* $ Capital Exp. costs $ Sales Added

Petroleum (29)Primary (33)

Blast furnace (331)Paper (26)

Pulp Mills (261)

Chemical (28)Inorg.Chem (281)

Stone (32)Lumber (24)Leather (31 )Fabricated (34)

Plating (3471)

Food (20)Rubber (30)Textile (22)Electric (36)T r a n s p o r t .

Motor Vehicles (371)Furniture (25)Machinery (35)Miscellaneous (39)Instruments (38)Printing (27)Tobacco (21 )

Total U.S. manufacturers $7,390

a This table lists expenditures and costs reported by industry to the U.S. Census Bureau. As discussed in the teti, thesefigures may underreport actual costs, possibly by as much as 20 to 30 percent.

Net operating costs =Total operating costs and payments to governmental units minus casts recovered and equipmentdepreciation.

Total pollution control expenditures _ Total operating costs plus payments to governmental units plus total capitalexpenditures minus costs recovered and equipment depreciation,

● Pollution abatement and control cost data are only for establishments with 20 employees or more. To ensurecomparability, total capital expenditures, value-added, and sales were estimated for establishments of 20 emptoyeesor more, using ratios from 1987, the most recent year the Census provides data for, (U.S. Bureau of the Census, 1987Census ofhfardactwes, MC87-S-I [Washington, DC: U.S. Government Printing Office, 1991).

SOURCES: U.S. Bureau of the Census, Pollution Abatement Costs and Expenditures, 1991 MA200 (91)-1(Washington, DC: U.S. Government Printing Office, 1993); U.S. Bureau of the Census, 1991 Annual Survey ofManufacturers, Statistics for/ndusfry Groups and krdustries M91 (AS-1 ) (Washington, DC: U.S. Government PrintingOff Ice, 1993).


Table 7-3-Selected Corporate Costs, 1991(billions of dollars)

Non-environmental new plant and equipmenta $519Corporate R&Db 78Pollution abatement and control 43Employee trainingc 43

a U.S. B“~~~” of the ~ngu~, Statjst&/ ~$t~t of the U. S., 1992

(Washington, DC: U.S. Government Printing Office, 1992), p. 538.Capital expenditures for environmental control were subtracted fromtotal expenditures on plant and equipment.

b Nationai ~e~ Foundation/Seienee Resourees &udies, ~atio~lPatterns of R&D Resources: 1992 (Washington, DC: NationalScienee Foundation, 1993), table tE3.

C ~is f~ure kM3UdSS nonmilitary related training expenditures ingovernment. Jack Gordon, Wraining Budgets: Recession Takes ABite,” Training, October 1991, p. 37.

plant and equipment for pollution abatement andcontrol in 1991, it spent $43 billion on formaltraining and $78 billion on R&D18 (see table 7-3.)To the extent that pollution control expendituresmake a claim on the resources of the firm, theycould divert funding from these activities.

~ Future CostsNew and stricter environmental regulations

put in place in the 1990s may increase pollutioncontrol costs, particularly for some industries.Currently, about one-third of compliance costs(public and private) result from regulations underthe Clean Air Act, another third from the CleanWater Act, and the remainder from a variety oflaws covering drinking water contamination,pesticides and herbicides, chemical productionand use, and solid and hazardous waste dis-posal. 19 Assuming full implementation of allexisting and pending regulations and rules, cleanair spending (nonannualized) could increase about

85 percent between 1990 and 2000.20 Compliancecosts for water are expected to increase moreslowly, by approximately 28 percent. Costs forhazardous waste disposal and cleanup will con-tinue to grow, particularly for Superfund, whosecosts are expected to rise from $3.6 billion in1990 to $9.5 billion in 2000. Federal Governmentcosts, principally for Department of Defense(DOD) and Department of Energy (DOE) cleanupof contaminated sites, are also likely to growsignificantly.

EPA projects that with full implementation ofpresent laws, environmental costs will rise 40percent by 2000, to $147 billion, including localgarbage collection ($127 billion excluding gar-bage collection) .21 As a share of GDP, environ-mental costs (including garbage collection) wouldrise from 1.95 percent in 1990 to 2.25 percent in2000.

Future reductions in pollution may be moreexpensive if firms must reduce pollution to verylow levels. As cheap reductions are exhausted,more expensive methods may be needed. Yetthere are reasons why costs may, in fact, be lowerthan EPA estimates. First, full implementation ofall laws—including bringing all cities into attain-ment with the national ambient air quality stand-ard for ozone and satisfying the nation’s munici-pal wastewater treatment needs to bring aboutfishable/s wimmable water quality-may not occuror may occur more slowly than EPA projects.Assuming 1990 levels of implementation, EPAforecasts costs to increase only to about $133billion, by 2000, $13.7 billion less than with fullimplementation.22 In addition, in estimating costs,

la U.S. bUS&M is widely viewed as placing too little emphasis on tmining and R&D. U.S. Congress, Offlce of TdmOIOSY ASSWSMXKWorker Training: Competing in the New International Economy, O’E4-ITE-547 (Washington DC: U.S. Government Printing OfIice,September 1990).

19 ~~ond J. Kom, Paul R, pO~y, and D&ne E. DeWit$ “International COmpdsOIIS Of EIIvirOD.mentd Reguktiou” Enviro~~aJPolicy and fhe Cost of Capita/, Monograph Series on ‘k and Environmental Polities and U.S. Capital Costs (Wasbingtoq DC: AmericanCouncil for Capital Fonnatioq Center for Policy Researeh, 1990).

~ ~vironmen~ mt~tion Agency, Environmental Investments, Op. cit., fOOhIOte 2.z] l’bid.

22 Ibid.

Chapter 7—Environmental Requirements and U.S. Manufacturing Industry Competitiveness 195

.’

-.. . .’

o , --‘ . - .’, .-. ,. . .

–>–>+–>–>->–>>.—l) u’


EPA assumed that future compliance will beattained with current technologies. Technologicalinnovations could lower compliance costs ascome on line.23 For example, in the pulp

paper industry, new in process methods towaste cost slightly more than conventionalterns, but result in lower operating costsavoided end-of-pipe costs, with the resulttotal costs are lower.24

9 Accuracy of the Cost Estimates

theyand

treatsys-andthat

The principal source of data on pollutionabatement and control costs for manufacturers isfrom the survey of abatement expenditures by theBureau of the Census. There are various ways thedata could overstate or understate the actual costs.

There are several potential sources of overre-porting, although their extent appears to be minor.Anecdotal evidence indicates that respondentsmay include, as pollution control costs, thosecosts that were incurred for worker health andsafety. 25 In addition, firms may include all the

cost of an expenditure when only part of it isattributable to environmental regulation. How-

ever, one study suggests that, if anything, firmsare likely to underreport expenditures when theydo not have full information. Plant managers mayclassify some investments as environmental inorder to get projects approved more easily,particularly when the return on investment (ROI)is low.26 In addition, firms may lack full knowl-

27 Finally, while there isedge of recovered costs.no evidence of this, some analysts speculate thatsome respondents exaggerate costs in order toinfluence regulation.28

The preponderance of evidence suggests thatthe survey underreports pollution control costs.For example, while Census figures indicate thatpollution control costs added 4 cents per pound tothe price of copper in 1985,29 at least four othersources, based on actual examination of coppersmelting fins, found that the expenses weremuch higher, ranging from 7.5 to 15 cents perpound.30 Some industry association surveys ofcompliance costs also report slightly higher coststhan Census.31

Census surveys may underreport for two rea-sons. First, survey respondents normally do nothave complete knowledge of all expenditures,

23 R~b@ hone, c ‘s~~~ Complication ~ the M~s~ement of Environment Control hpacts: A c~e Stidy of Water pollution ControlS,

Socio-Economic Planning Science, vol. 12, No. 3, 1978.

U ~tewiew wl~ Ned McCubb@ N. McCubbin Consultants, Inc. December 1992.25 ~Pond J. Kopp and Paul R. PofieY~ “Estimating Environmental Compliance Costs for Industry: Engineering and Economic

Approaches, ‘‘ in Workshop on Effects of Environmental Regulation on Industn”al Compliance Costs and Technological Innovation, NationalScience Foundation Division of Policy Research and Analysis, (WashingtotL DC: Sept. 10-11, 1981).

26 Beth sne~ ~d Bob unswo~ ( ‘Ev~uation of Unckrtfity Associat~ ~~ Air PoUution Abternent Compliance Cost Estimates—

Stationmy Sources,” (memorandum) Cambridge, MA: Industrial Economics Inc., Oct. 13, 1992.27 one es~ate suggests that this leads to a l-percent overreporting of net COStS. @id., P. 5.)

28 Richtid Arldrews, ‘‘ Summary,’ ‘ Workshop on E~ects of Environmental Regulation on Industrial Compliance Costs and TechnologicalInnovation (Washington DC: Nationat Science Foundatio~ September 1981).

29 Data on pollution con~o] co5~ from the us+ B~au of the ce~~, pollution A~tement co~t~ and EWenditures, 1985, MA-200(85)- 1

(Washington DC: U.S. Government Printing Office, 1987),30 see us. conme5~, Offlce of Technology Assessmen~ copper: Technology und competitiveness, OT4-J3-367 (wZ3hiIlgtOQ DC: U.S.

Government Printing Office, September 1988)----10 to 15 cents per pound; National Research Council, Competitiveness of the U.S. Mineralsand Metals Industry (Washington, DC: National Academy Press, 1990)--9 to 15 cents per pound;‘‘Counting the Cost of Clean Air,’ E&MJ,January 199(_&7.5 cents per pound; Duane Chapmq “Environmental Standards and International Trade in Automobiles and Copper: TheCase for a Social Tariff,” Natural Resources Journal, vol. 31, winter, 1991, pp. 449-461-10 to 15 cents per pound. Total U.S. copperproduction costs averaged 65 cents per pound.

31 For exmple, see: A sumey of pulp andpaperlndu$~ En~YironmentalProtection Expenditures - ]990 (New York NY: National COUIICflof the Paper Industry for Air and Stream Improvement, Inc., 1991); Petroleum Industry Environmental Pe~ormance, 1992 (Washington DC:American Petroleum Institute, 1993).

Chapter 7–EnvironmentaI Requirements and US. Manufacturing Industry Competitiveness ! 197

including the costs of environmental controls inretrofits and for environmental operating expen-ditures, since firms tend not to classify these asdiscrete categories in their accounting systems.32

Second, the Census survey does not ask respon-dents to report interest expense; productivitylosses; fees, taxes, and frees; administrative andR&D costs; and training costs.33

Without establishment-level studies, assuringthe validity of these cost data is difficult. Itappears, however, that actual costs may be 20 to30 percent higher than reported costs. Appendix7-A discusses possible sources of underreportingand, in some cases, the likely associated costs.

Compliance costs do not provide a completepicture of either total industry level expendituresor effects on GDP.34 A complete picture wouldaccount for the costs of dislocations associatedwith regulation, including costs resulting fromclosed plants due to regulation or from reducedoutput (e.g., laid-off workers) due to higherprices.

35 If a regulated firm goes out of business

and the products are made all or in part by firmsoutside the United States, the costs will be greaterthan if another U.S. firm increased production tofill demand. Also, if regulated firms cut backproduction because of regulations, this may becompensated for by increases in production byfirms supplying environmental goods and serv-ices. Macroeconomic costs may exceed industrycompliance costs if impacts of increased prices,reduced productivity, and other factors reduceeconomic activity36 (see app. A).

A complete picture would also need to accountfor the significant benefits of environmentalregulations, or, put another way, the costs compa-nies, workers, and society would bear if environ-mental regulations were not in place. A cleanerenvironment lowers health care expenditures andimproves human health, increases natural re-source productivity, and provides valuable amen-ities (e.g., swimmable rivers). Only now isresearch being undertaken to accurately quantifythese benefits.37

PRIVATE SECTOR COMPLIANCE COSTSCOMPARED WITH OTHER NATIONS

U.S. pollution abatement costs would have noimpact on U.S. economic competitiveness if firmsin other countries faced equivalent regulatorycosts and burdens. To the extent that they do not,U.S. firms could face a competitive disadvantage.Unfortunately, the literature comparing environ-mental management is sparse and largely limitedto Western Europe, Japan, and North America,making accurate comparisons of environmentalregulations across all nations extremely difficult.Few studies compare various countries’ ap-proaches to regulation, for the information iseither not available or not always comparable.

There are several ways to compare regulatorystrictness. First, pollution abatement compliancecosts can provide a measure of regulatory burdenby delineating the costs borne by fins. However,cost data are available from only a handful ofnations, and differences in definitions and rneas-

32 Duane c~pmam “Environment@ standards and International Trade in Automobiles and Copper: The Case for a SOCial T~f)’ Ibid

33 me Ccmus Bwwu does not survey firms wi~ fewer than 20 employees, Howev~, one estimate suggests bat small fhXllS aCCOUIlt fOrless than 2 percent of the total costs, and about 5 percent of sales. (Beth Snell and Bob Unsworth, op. cit., foomote 26)

M See U.S. Conwess, Congressional Budget Office, “Assessing the Costs of Environmental I@slation’ (staff working paper, May 1988).35 see ~ureen L. Croppr and Wallace E. Oates, ‘‘Environmental fionomics: A S~eY~ ‘‘ Journal of Econon’c Literature, vol. 30, June

1992, pp. 675-740.M c+c Mic~el Hazilla and Raymond J. KOPP~ ‘‘The Social Cost of Environmental Quality Regulations: A General Equilibrium Analysis, ’

Journal of Political Economy, vol. 98, No. 4, 1990, pp. 853-873.37 Debm s. ~opmn and Richmd A. smi~ ‘ “20 yeas of the cl~n wat~ Act: HM U.S, water Qu~ity unproved’?’ Environment,

January/February, 1993. vol. 35, No. 1; Organization for Economic Co-Operation and Development Environmental Po/icy Benefits: MonetaryVa/uarion (Paris: OECD, 1989). The EPA, as mandated by the 1990 Clean Air Act Amendments, Section 812, is conducting a study to quantifythe benefits of U.S. air pollution regulations. This study will not be released until late 1994.


urement complicate comparisons. Because coun-tries vary in their shares of highly pollutingindustries, it is best to compare costs for particularindustries.

Second, emission standards can indicate dif-ferences in regulatory strictness. However, stand-ards are often difficult to compare without ex-haustive analysis. First, some standards are measuredin hours, others in days; some apply to the overallplant, others to particular sources. Also, differentcategories of polluters may be regulated todifferent standards (e.g., new sources v. existingsources). Second, and more importantly, thepresence of standards gives little clue to theirapplication in practice—strict laws maybe looselyenforced. Third, air standards for some pollutants(e.g., NOx,ozone) give no indication of therelative degrees of control placed on differentsources, such as large and small stationarysources and mobile sources. Some places withlow standards may also have significantly lessmobile source emissions, necessitating relativelyless control on industry. Finally, many of thecomparisons of regulatory strictness emphasizeair regulations, particularly of oxides of nitrogen@OX) and sulfur oxides (SO2). Because this isone major area where U.S. regulations may havelagged behind several other nations in the past,simply focusing on common pollutant air regula-tions can give a misleading picture of regulatorystrictness. It is important to focus on all regula-tions, including volatile organic compounds (VOCs)and air toxics, water and solid and hazardouswastes.

Third, it is possible to compare ambient con-centrations of pollutants to ascertain regulatorystrictness. However, differences in industrialstructure, geography, climate, population concen-tration, and energy and transportation use mayhave a greater effect on ambient concentrationsthan differences in regulatory strictness.

Fourth are comparisons of rules and regula-tions governing the regulatory process and form.This assumes that the process by which regula-tions are formed and implemented can affectoutcomes. For example, the degree of publicinvolvement in regulation-making and in prompt-ing enforcement actions differs markedly bycountry. The United States has a relatively openprocess, which can make the process of finalizingregulations lengthy and difficult. However, theopenness of the U.S. system does provide anopportunity for many parties to have their voicesand viewpoints heard and considered. In addition,permitting systems vary in flexibility.

I Pollution Abatement and Control Costs inSelected Countries

Unfortunately, environmental cost data fordifferent nations are limited and of varyingquality. A number of OECD nations provide timeseries data for some years, going back to the1970s, on total private and public sector environ-mental expenditures .38 Because these data arereported by individual countries, possibly usingdifferent methodologies, they are best seen asproviding a general yardstick to compare compli-ance costs. Data are often not available forindustries located in countries with less stringentstandards.

A very few countries (including the UnitedStates, Germany, Japan, and the Netherlands)provide data for environmental capital expendi-tures by individual manufacturing sectors (e.g.,chemicals, pulp and paper). However, there aredifferences in definition, which must be adjustedfor to make meaningful comparisons. For exam-ple, some surveys exclude equipment when it isrequired by the manufacturing process for techni-cal reasons (e.g., United States, the Netherlands,Denmark, Sweden), while others include it (Ger-many). Some surveys include the costs of interest

38 Japa ~mvid~~ dab on pUbllc Sw{or expendi~res, M not on total private sector expenditures. It does provide ~m on pollution control

capital expenditures for some industries.


payments on equipment (Canada, Holland), whileothers exclude it (United States). Some countries(Germany and Japan) include noise abatementexpenditures, while the United States does not.

Because investments can fluctuate signifi-cantly between years, and because some countriesmay have imposed stricter regulations sooner, itis more accurate to examine time series of data.Some costs are not the result of strict standards inthe home country, but rather demands arising inother nations that the country exports to. Forexample, much of the recent increase in pollutionabatement expenditures by the Canadian andSwedish pulp and paper industries may resultfrom consumer pressure from Europe (particu-larly Germany) for chlorine-free paper, not solelyfrom higher standards.39 In spite of these limita-tions, the industry-level cost data can provide abroad picture about the different pollution controlburdens placed upon industry in different coun-tries,

OVERVIEW OF DIFFERENCES IN COSTSThere are several different data sources pre-

senting pollution abatement compliance costs fora number of countries, including total privatesector compliance costs and costs by particularindustry. All point to the conclusion that U.S.private sector pollution control costs are amongthe highest in the world as a percentage of bothGDP and total private sector investments.

A study of five countries, which attempted tocontrol for differences in survey methods dis-cussed above, found that during the period from1978 to 1981, U.S. industry investments inpollution control were between 10 to 50 percenthigher than European countries (see table 7-4).For example, in 1980, investments in environ-ment as a percent of total Dutch industry invest-ments were only 70 percent of the U.S. rate,

Table 7-4—Relative Investments in PollutionControl by Industrya (U.S. percentage of

investments defined as 100)b

Country 1978 1979 1980 1981

United States 100 100 100 100Germany 76 67 74 89The Netherlands 67 72 72 85Denmark 64 41 66 81Sweden 52

a The author adjusted the data for each COUntry to be generally

comparable. For example, in comparing Dutch and U.S. figures, hedid not include Dutch investments in noise control, since U.S. studiesdid not collect data on these costs for U.S. industry. He d’d notcompare all countries together, but rather compared the Dutch to theother countries individually. In addition, because of differences indefinitions, German figures are pmbabty slightly overstated relative totheothernations. As a result, these data should be seen as indicativeof the direction and magnitude of differences, but should not be seenas exact measures of differences in spending.

b lnv~tment in pollution control by industry divided by total capitalexpenditures by industry in the country, normalized to the U.S. valueat 100.

SOURCE: Based on data in “international Comparison of IndustrialPollution Control Costs, ” L. H.E.C. Plooy, Statist&d Journa/ of theUnited Nations, 1985, pp. 55-68.

despite its having some of Europe’s strictestregulations. Differences between the UnitedStates and most other European countries wereprobably greater.

According to OECD information, U.S. privatesector pollution control costs as a share of GNPwere nearly twice that of any European country inthe 1970s, although in the 1980s the gap narrowedwith a few countries40 (see table 7-5.) Forexample, as a portion of GNP, German privatesector expenditures were approximately 60 per-cent of those in the United States in the 1970s, butby 1990 the two were about equal. Spending byFrench and Dutch companies continued to be less.U.S. private sector pollution control expendituresas a percentage of GNP are higher or as high asany other OECD nation that reported private

39 Intemiew tih Nd McCubb@ N. McCubbfi Consultants, bC., December 1992.

@ OECD Environment ~onograp~, No. 38, Pollution Control andAbatement Expenditures in OECD Counm”es (paris: OE~, Novern~r1990); also OECD Environment Monographs, No. 75, Pollution Control andAbaternent Expenditures in OECD Countries (Paris: OECD, June,1993).


Table 7-5-Private Sector Pollution Control Expenditures as Percentage of GNPa

Country 1972 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

sector data as a whole .41 While these numbers givea sense of the magnitude of differences in costs,they should be interpreted cautiously.

INDIVIDUAL COUNTRIESJapan—The view is frequently held that Japa-

nese manufacturers spend significant amounts ofmoney on pollution control; in fact they spendsignificantly less than U.S. manufacturers. Inpart, this view is fueled by the fact that theJapanese have placed high levels of emphasis onenergy conservation and on recycling of indus-trial and consumer products, logical steps for anation that imports almost all of its energy andmaterials and has little space for landfills. Energyconservation has contributed to a reduction insome air pollutants. Moreover, much of thepollution control spending by industry in Japan isby electric utilities. Between 1972 and 1990,Japanese electric utilities spent 2.8 times more on

pollution control equipment as a share of capitalexpenditures than manufacturers did. In 1990,they spent 2,5 times more, while U.S. electricutilities spent 14 percent less than manufactur-ers.42 As a result, much of the money spent onpollution control in Japan is spent by utilitiesrather than manufacturers. This is also consistentwith the Japanese stress on controlling commonair pollutants.

Japanese industry made high levels of invest-ments for pollution control in the early 1970s.However, since 1977, U.S. industry has paid moreto control pollution, and that gap is growing(figure 7-6). In 1975, Japanese pollution controlinvestments by manufacturing firms peaked at 16percent of total investments, while U.S. invest-ments were around 10 percent.43 However, in-vestments by Japanese firms fell sharply after thisinitial surge (much of it was to comply with new

41 private sector expenditures excluded mobile source control expenditures, although it appews tit the United States pays more per GDPfor mobile source control than other countries. Japanese data were limited to a survey of a sampling of industrial firms and are discussed below.

42 Jap~eSe m5~ of Interlu[luml Tmde and Industry, Shuyo-Sangyo no Sersubi-Toshi-Kei&aku Hei.rei 4 @lants ~d %Uipment

Investments of Major Industries, 1992); U.S. Census Bureau, Pollution Abatement Costs andExpenditures, 1990, MA-200(90)-1 (WashingtonDC: U.S. Government Printing Office, 1987).

43 ‘rhis ~omtion is deriv~ from a survey by the Japanese Ministry of International Trade and Industry, Plants andEquipmenrInvesrmentsofhlajor lrrdusm’es. In 1992, the most recent year MITI reported &ta (for 1990), MITI surveyed the approximately 3,000 Japanese fms withcapital stock of over 100 million yen. MITI received 812 usable responses. MITI asked the fm to report capital equipment purchased forenvironmental protection. Given the possibility that responding firms have higher expenditures than the sample as a whole, it is not likely thatthe sampling methodology causes underreporting. (Interview with MITI officials, May, 1993.)


Figure 7-6—Pollution Control Capital Expenditures by U.S. and Japanese Manufacturers

2 0 T – ‘ — - - ‘———— —

(na) I ~ United States

Ea)v&

CL

15 i_ Japan

1973 1975 1977 1979 1981 1983 1985 1987 1989

SOURCE: U.S. Census Bureau, Pollution Abatement Costs and Expenditures (Washington, DC: U.S. Government Printing Office, various years);Japanese Ministry of International Trade and Industry, Shuyo-Sar)gyo no Setsubi-Toshi-Keikaku /4eisei4(Plants and Equipment Investment of MajorIndustries, various years).

Japanese NOX and SO2 regulations) and haveaveraged around 2 percent of total investments inrecent years.

44 In contrast, while U.S. investments

never reached this peak, they also did not declineto as low levels and have shown signs ofincreasing since the late 1980s to over 6.25percent in 1990 (and 7.9 percent in 1991), whileJapanese costs appear stable.45 Between 1973 and1990, manufacturers in Japan spent an average of4.4 percent of investments on pollution abate-ment, while manufacturers in the United Statesaveraged slightly more, 5.3 percent.46 Japanesecosts are lower than U.S. costs in all media, but

particularly in solid and hazardous wastes, wherethey spend very little47 (see figure 7-7).

These differences are not caused by differentindustrial structures, for the trends and differ-ences are consistent across sectors. For example,trends in spending by the chemical industry showa similar pattern (figure 7-8). Similarly, spendingfor the automobile industry shows consistentdifferences (see box 7-B). Capital and operatingcosts associated with the 1990 Clean Air ActAmendments could increase this differential fur-ther. Moreover, this differential does not appearto be due to more efficient approaches to pollution

44 D1ffe-.ence~ in the ~lze of tie envlromen~] goods or ~~ices @GS) ~kets in tie Utited S@tes and Japan are consistent tith thesedifferences in compliance costs, Controlling for differences in size of population the Japanese EGS market is 60 percent of the U.S. EGSmarket. (B,ased on OECD data m ‘‘The OECD Environment Industry: SituatioC Prospects and Government Policies, ’ OCDE/GD(92)l (Paris:OECD, 1992).

45 Japan MifistV of Intermtioml Trade and Indus@y, Planrs atiEquipmenrInvestmenrs @Ma@rlndu$tn”e~, v~ous yems; and U.S. BWMUof the Census, Pollution Abatement Costs and Expenditures, various years, op. cit., footnote 42.

46 Japan, does, however, include noise pollution expenditure, while the United States does not. AS a resdt, Japanese inves~en~ ~ ‘oise

abatement were subtracted from total costs. It is not known how much U.S. firms spend on noise pollutiorL although it may weIl be less. Evenso, these Japanese expenditures arc relatively small, accounting for about 10 percent of total pollution control capital expenditures in 1990.

47 Japan doe5 not have sup~und we provi510ns for tie cleanup of contafn~at~ sites. ~ addition, whi]e the United states regu]ata OVm

425 chemicals under RCRA, Japan has no “hazardous wastes” category per se, although roughly 30 hazwdous substances are monitored.Moreover, over 75 percent of Japanese municipaJ solid waste is incinerated through 1,900 incinerators, with many used to generate electricityor heat. Louise Jacobs and Leigh Harris, Public-Pn”vate Partnerships in Environmental Protection, A Study of Japanese and AmericanFrameworks for Solid Wastes and Air Toxics (Lexingto~ KY: The Council of State Governments, 1991).


Figure 7-7—PolIution Control Capital Expendituresby Media by U.S. and Japanese Manufacturers,

19909

Air

I

m United States

_ Japan

Water Solid waste

SOURCE: U.S. Census Bureau, Po//ution Abatement Costs andExpenditures (Washington, DC: U.S. Government Printing office,various years); Japanese Ministry of International Trade and Industry,Kogai to Tasaku (Pollution and Anti-Pollution Measures) vol. 27, No.15, 1991.

control. Despite progress on industrial energyefficiency, anecdotal evidence suggests that Japa-nese industry has not emphasized pollution pre-vention in managing industrial waste.

Germany--In the 1970s, West German manu-facturers spent less on capital expenditures forpollution control (as a percent of total capitalexpenditures) than did American manufacturers.For example, while in 19786.3 percent of U.S.capital expenditures went to pollution control,only 3.6 percent of German manufacturers’ capi-tal was spent for this purpose. The gap hasnarrowed since the mid-1980s, to where spending

now appears to be about the same (see figure 7-9).In 1990, as a share of total capital expenditures,pollution control expenditures were lower inWest Germany than in the United States in 12 of17 manufacturing sectors, and were lower formanufacturing as a whole (4.2 percent v. U.S.spending of 6.25 percent, see figure 7-10).48

However, because German capital expenditurerates as a percent of sales are higher thancomparable U.S. rates, pollution control capitalinvestments as a share of sales are slightly higherthan in the United States (0.26 percent of sales v.0.22 percent).

Other European Countries-Germany, Austria,and some of the Scandinavian countries areconsidered to have the strictest pollution controlregulations and enforcement in Europe. But thefact that U.S. and German costs appear equivalentsuggests strongly that U.S. costs are higher thanfor most other nations in Europe. The sector-based data available for the Netherlands and, to alimited extent, for France, support this view.OECD data suggest that industry in countriessuch as Great Britain and Canada also have lowercosts. 49

Pollution control costs for Dutch industry weremuch lower than U.S. costs through the mid-1980s. For example, in 1975, when over 10percent of manufacturing investments in theUnited States went to pollution control, only 2percent of Dutch investments did (figure 7-1 1).However, Dutch spending appears to have in-creased, so that it is now only slightly lower thanU.S. spending as a portion of capital expendi-tures. In 1990, 6.25 percent of manufacturinginvestments in the United States went to pollution

48 -m ~~ ~~lude a n@a of cos~ not ~clud~ ~ be Us, &@. Expn~~es h WiSC abtemen~ lad purchss~, ~d capital for

environmentally friendly products are included. The data repofled here subtract these costs (approximately 19 percent of total costs) from thetotal German data to make it more comparable to U.S. data,

49 ~sto~c~ly, private ~tor ~~utioncon~l exwndi~es in the United Kingdom have been lower him iII he Utited s~t~ ~d ~~Y.However, in 1989, public water authorities in England and Wales became privately owned companies, As a result, in 1990, U.K. private sectorexpenditures (1 percent) as a share of GNP were actually slightly higher than in Germany (0.8 percent) and the United States (0.86 percent).However, after reallocating the estimated costs of the formerly public water treatment authorities to the public sector, pollution controlexpenditures by the private sector in the U.K. amount to approximately 0.75 pement of GNP.

Chapter 7–Environmental Requirements and U.S. Manufacturing Industry Competitiveness ! 203

Figure 7-8—Trends in Pollution Control Capital Investments by U.S. and Japanese Chemical Firms

QK —-L)J I

25

20

15

10

5

0 Ii1 9 7 3

1

1975b-k1977

_ U.S. chemical

~ Japanese chemical

I I I

1979 1981 1983 1985 1987 1989

SOURCE: U.S. Census Bureau. Pollution Abaterrrent CosCS and Expenditures (Washington, DC: U.S. Government Printing Office, various years);Japanese Ministry of Internatiorial Trade and Industry, Shuyo-S4ngyo no Setsubi-Toshi-Keikaku Heisei4 (Plants and Equipment Investment of MajorIndustries, various years).

control compared to 5.1 percent in the Nether-lands. After adjusting for differences in method,Dutch operating costs (0.57 percent of sales) forpollution control by industry are also lower thanU.S. costs (0.72 percent) .50

According to a recent survey, French manufac-turing industry spent approximately 2.9 percentof new capital expenditures on pollution controlin 1991 (compared to 7.9 percent in the UnitedStates). 51 These differences were consistent acrosssectors; for example, the share of pollutioncontrol investments in chemicals was 6.5 percentin France and 12.9 percent in the United States,and in transportation, including automotive, 0.9percent in France and 3 percent in the UnitedStates, The article also cites European Commis-

sion data, indicating that pollution control costs inItaly are significantly lower than in France.52

Newly Industrialized and Developing Country

Costs-Evidence suggests that pollution controlcosts in developing and newly industrialized(NICs) are significantly lower than in the UnitedStates. For example, environmental compliancecosts are estimated at 0.24 percent of GDP inThailand and 0.38 percent in Indonesia and Korea(1987) compared to 1.63 percent in the UnitedStates (1990).53 Moreover, a greater share of thesecosts may be for public infrastructure (e.g.,sewage treatment plants) than is true in the UnitedStates. In addition to having lower environmental

50 o~er ~ tie ufited s~t~~, ~~ N~~e~~& is he o~y coun&y tit provides dab on opaa~ ss well ss CS@id COStS at he indus~

level. The Dutch survey includes a number of costs not included in the U.S. data, including the costs of interest on capital equipmen~ R&Dexpenditures, expenditures on noise and landscaping, and environmental taxes and fees on fuels used or the exha costs of fuels with low sulfurcontent. To make the data more comparable, these items were subtracted from total Dutch costs.“Statistics on the Costs of EnvironmentalControl by Industry,” paper from the Netherlands Central Bureau of Statistics, Department of Manufacturing and CortstructiorL undated.

51 Robefl Quivaux and Philippe Sabot, ‘‘Antipollution Investments by Industry,’ Industries (Paris), July-Aug 1993, in Foreign BroadcastInformation Service, JPRS Report: Environmental Issues, JPRS-TEN-93-022, Sept. 3, 1993, pp. 15-19.

SZ ~ld.

53 D~a I%antumvanit and Theodore Pamlyotou, “Industrialization and Environmental Quality: Paying the Price,’ paper presented at the1990 TDRI conference, Industrializing Thailand and Its Impact on the Environment Dec. 8-9, 1990.


Box 7-B—Pollution Control and Automobile Production in

Competitive Context

Relative to many materials intensive process industries, such as chemicals, the automobileproduction process is not highly polluting. As a result, the industry faces Iower f acility compliance coststhan some other industries, although imposition of Clean Air Act and other regulatory requirements willraise them.

While automakers face regulatory requirements in a number of areas, including hazardous wastecleanup and disposal and water pollution, the major source of pollution and compliance costs is relatedto air emissions from the automobile painting process. Paints have traditionally been applied in a liquidform, with organic solvent-based carriers that upon application, evaporate and are emitted into the air.Automakers have three basic control options: changing the coating formulation, improving transferefficiency, and adding on controls. Modified coatings, including higher solids paints (increasing the paintcontent relative to the solvent content), water-based coatings containing few organic solvents, andsolvent-free powder coatings can reduce emissions of volatile organic compounds (VOCs). However,technical limits and retrofit costs inhibit wider use of water-borne and powder technologies in the nearterm. Improving transfer efficiency means that more sprayed paint adheres to the car and is not wasted.In the last 20 years, automakers have Improved transfer efficiency substantially-in part to cut paintcosts-and additional improvements are sought. Finally, incinerators are used to burn VOCs in ovenand paint booth exhausts, supplemented in several installations by carbon adsorption units toconcentrate the solvents.

The United States has regulated VOCs from automobile painting since the late 1970s. As a result,most U.S. plants have, at minimum, electro-deposited waterbased primecoats, low VOC coatings (usinghigh solids paints), high efficiency electrostatic spray applicators, and oven exhaust incineration.1

Because of these requirements, automobile assembly plants (SIC 3711) in the United States spent anestimated $82 million in 1991 on capital equipment to control VOCs, amounting to 63 percent2 of their$130 million for pollution control capital expenditures, the Iatter accounting for 6.4 percent of their totalcapital expenditures. According to estimates by the American Automobile Manufacturers Association,VOC control costs might triple if stricter lowest achievable emission rate (LAER) standards are requiredat every facility.

Regulations also impose indirect costs. Permitting requirements can reduce operational flexibilityneeded to accommodate changes in the production process. Moreover, they can potentially delayintroduction of new production, particularly when permits are required prior to construction. Becausedemand for autos fluctuates and models change, operational flexibility and timely regulatory decisionscan bean important competitive factor. Finally, regulatory requirements may affect product quality,particularly the paint finish.

Automobile and truck producers in Japan appear to face less stringent and detailed requirementsand therefore lower compliance costs and probably greater operational flexibility and product qualityadvantages. In 1990, U.S. automobile and truck producers, including parts suppliers (SIC 371) spentover five times more on pollution control equipment than Japanese firms as a percent of total capital

1 Energy and Environ~nta[ Analysis, inc., *’Comparison of U.S. Air Quality Standards and controls to theAir Poiiutlon Controis in Japan, Germany, Canada Mexioo, and South Korea,” draft report prepared for the Officeof Poiicy Anaiysis and Review, Office of Air and Radiation (Washington, DC: U.S. Environmental Protection Agency,1992).

2 me majodty of this is presurna~y for paint VOC controis. U.S. Census Bureau, POhJtbn ~te~nt andContro/ =pendltures, 7997 (Washington, DC: U.S. Government Printing Offioe, January 1993).


investments, and three times more as a percent of sales.3 Moreover, Japanese permitting requirementsare generally much simpler, with VOC sources and changes to them not requiring permits or priorgovernment approvals.4 Finally, it is widely asserted that weaker VOC regulations make it possible forautomakers in Japan to achieve very high quality finishes on their premium models (smoother andhigher gloss) without facing the environmental control costs U.S. automakers would incur.

If the U.S. motor vehicles industry (SIC 371) spent the same share of investments on controllingpollution from production facilities as the Japanese, they would have spent $247 million less in 1990 inpollution control capital expenditures and $410 million less in operating expenses. Differences in air,water, and waste regulations on the automobile industry (not including costs of regulation on supplierindustries, such as steel, glass, rubber) added approximately $50 to the cost of a $15,000 car (salesprice of original equipment manufacturer).5

While regulatory requirements will likely increase, there are a number of technical changes andregulatory modifications that could minimize the competitive burden. First, new approaches to VOCcontrol may reduce compliance costs relative to end-of-pipe control. The United States Council forAutomotive Research (USCAR), an umbrella organization for the big three U.S. automobilemanufacturers, has formed along-term low emission paint systems consortium to conduct research anddemonstrate VOC reduction alternatives, including electro-coating, powder-based primers, surfacecoats, and clear-coat paint systems, and waterbased base coats (see ch. 10).

Second, a number of regulatory modifications, including use of facility-wide emissions caps,performance standards, expedited permitting, and emissions trading, could make it easier for theindustry to comply with regulatory requirements (see ch. 9). Some specific changes advocated by theauto industry include expanding pre-construction activities which can commence prior to New SourceReview permit issuance, determining Best Available TechnoIogy/Lowest Achievable Emission Raterequirements at the time the permit application is complete, and prompt development by EPA ofMaximum Available Control Technology standards for automobile production paint facilities.

3 J~~ane~ ~tom~le firm tnairttah higher capital investment rates as a permnt of sales than do IJ-S-automakers. Japan Ministry of International Trade and Industry, P/ants and Equipment /r?vestments of Wjor/ndustnesr 1992 (Tokyo: MITI, 1992), pp. 480-493; and U.S. Bureau of the Census, Polh.MonAbaten?ent Costs andExpenditures, 1990, op. cit.

4 Energy and Environmental Analysis, inC., Op. cit.

5 This includes ~[lution ~ntro[ ~pita[ and operating expenditures andassumes Japanese industries spendthe same ratio of operating costs to pollution control capital rests. OTAcalculations based on data from U.S. CensusBureau, Pollution Abaterr?ent and Control Expenditures, op. cit.; and the Japanese Ministry of International Tradeand Industry, Plants and Equipment /investments of Major h?dustries, 1992, op. cit.

compliance costs, these nations also have signifi- their higher home country standards to theircantly lower labor costs. investments or plants in less-developed nations.

While many less-developed countries have However, little systematic evidence has beenminimal regulations, or poor enforcement, some presented to evaluate this claim.54 Moreover,multinational corporations (MNCs) claim to apply while U.S. maquiladoras firms in Mexico say that

M Onc Sumey of U.S. rnultinatio~s Suggests that only around 20 percent had written policies to meet or exceed U.S. regulations overseas~hcn foreign laws are less stringen~ while 40 percent of the respondents said this was very important. Margaret Flaherty and Ann Rappaport,Multinational Corporufiom and the Environment: A Survey of Global Practices (Medford, MA: Thfts University, Center for EnvironmentalMamgement, 1991).


Figure 7-9—Trends in Pollution Control Capital Expenditures by U.S. and German Manufacturers

12 ~————

o

o

—

— — — Ml11984

D United States

m Germany(Western only) a

Ilk1985 1986 1987

Ill1989 19901975 1976 1977 19’78b 1979 1980 1981 1982 1983

a Gernl~n d~t~ includes costs f~rnoiseabatement, land ~rch~es, and~~ta[ forenvironmentally friendly products that are not included ifl the U.S.

data. To make the data comparable, expenditures on these items (approximately 19 percent of total costs) were subtracted from total Germancosts.

b German cost data not collected prior to 1978.

SOURCE: U.S. Census Bureau, Po//ufkmAbaternerrt Costs and Expenditures (Washington, DC: U.S. Government Printing Office, various years);Statistisches Bundesamt, hwestitionerr fur Umweltschutz im Prodzierenden Gewerbe f990(Wiesbaden: Metzler Peoschel, 1992).

Figure 7-10—Pollution Control Capital Expenditures by U.S. and German Manufacturing Industries, 1990

- United States

D Germany (Western only)

7

1

20 22 24 26 27 28 29 30 31 32 34 35 36 37 38 39 T o t a l

SIC code

SOURCE: U.S. Census Bureau, Pollution Abatement Costs and Expenditures, 1990 (Washington, DC: US. Government Printing Office, 1992);Statistisches Bundesamt, /rrvestitionen fur IJmwe/tschutz im Pro&zierenden Gewerbe 1990 (Wiesbaden: Metzler Peoschel, 1992).


Figure 7-1 l—Trends in Pollution Control Capital Expenditures

1I

1975 1980 1982 1983 1984

by U.S. and Dutch Manufacturers

—

- United States

~ Netherlands

IIr1985 1986 1987

SOURCE: U.S. Census Bureau, Po//ufior? Abatement CcJsfs and Expenditures (Washington, DC: U.S. Government Printing Office, various years);“lndustrlal Investments for the Protection of the Environment, 1990,” Government of the Netherlands.

they don’t illegally pollute, others dispute thisclaim and argue that sewage and other runoff fromthe area is often highly infused with industrialwastes.55 Even if MNCs abide by home countrystandards, they may receive a cost advantage forproducts shipped to countries with higher regula-tions if their local suppliers are unregulated.

I Government SupportSupport for industry to comply with pollution

control regulations follows similar patterns for

industr ia l development ass is tance overa l l - the

United States tends to provide less direct assist-

ance to industry than many of its major industrial

competitors, and relies principally on regulatorymeasures to ensure environmental protection.56 Incontrast, a number of European nations supple-ment regulation with explicit use of technologyand industrial policies to help industry reducepollution, particularly through support of devel-opment and diffusion of innovative environ-mental technologies.57

Several countries provide direct assistance tohelp firms address pollution control require-ments. The Japanese Government contends thatprivate commercial banks are not necessarilywilling to finance unprofitable pollution controlinvestments, and that government-sponsored fund-

SS For cxamplc, see Joseph La DOU, ‘ ‘Deadly Migration: Hazardous Industries’ Flight to the Third World, ” Technology Review, vol. 94,No. 5, July 199 i; Sanford Lewis et. al., “Border Trouble: Rivers in Peril. A Report on Water Pollution Due to Industrial Development inNorthern Mexico, ” National Toxws Campaign Fund, May 1991; Diane M. Perry, Roberto Sanchez, William H. Glaze, and Marisa Mazari,“Binational Management of Hazardous Waste: The Maquiladora Industry at the U.S.-Mexico Border, Environmental Management, vol. 14,No. 4, 1990, pp. 441 -450; Sandy Tolan, “Hope and Heartbreak, ’ The New York Times Magazine, reprinted from Best of Business Quarterly,Winter 1990-9 1; U.S. Congress, General Accounting OffIce, ‘‘U.S.-Mexico Trade: Assessment of Mexico’s Environmental Controls for NewCompanies,” GAO/GGHD-92-l 13, August, 1992.

56 U.S. Congess, Office of Technology Assessment, Competing Economies, Op. Cit., footnote 1.

57 Alan C. Williams, “A Study of Hazardous Waste Minimization in Europe: Public and Private Strategies to Reduce Production ofHazardous Wmtc,” Bosron College Environmental Affairs Law Review, V. 14, Winter 1987, pp. 167-255; Kenneth Geiser, Kurt Fischer, andNorman Beecher, “Fort-ign Practices in Hazardous Waste Minimization: A Report to the U.S. Environmental Protection Agency (Medford,MA: Tufts lfniversity, Center for Environmental Management, August 1986).


Oil Shale Plant in Estonia. Compared to expendituresby industry in the United States for pollution control,firms in most developing countries and EasternEurope face significantly lower costs.

ing is needed. Between 1975 and 1990, theJapanese Development Bank, the Japan FinanceCorporation for Small Business, the Japan Envi-ronment Public Corporation, and other institu-tions provided approximately 35 percent of allfunds invested by Japanese industry for pollutioncontrol and, in 1992, provided over $2 billion inloans.58 The loans have interest rates 1 to 2 pointslower than commercial loans, interest paymentsdeferred for the first 2 to 3 years, and longerterms. 59 Many Japanese prefectures and largercities provide direct technical assistance to help

firms manage wastes, and most Chambers ofCommerce maintain a Pollution Control Office.60

European nations are generally less active, butmany still provide more financial assistance thanthe United States. Germany provides interest-subsidized loans for the installation of pollutioncontrol equipment.61 Industry associations man-age government grants that pay half the costs ofenvironmental consultants to small and medium-sized enterprises.62 Germany also provides partialgrants for some pollution control investments andR&D. At least 97 distinct programs for environ-mental assistance to German industry have beenidentified. 63 Several other European countries,including the Netherlands and Denmark, providesizable grants for the development of cleantechnologies (see ch. 10).

Publicly supported pollution control financingprograms in the United States are quite small.Prior to 1986, air and water pollution controlfacilities were eligible for tax exempt IndustrialDevelopment Revenue Bonds (IDB’s). However,the 1986 Tax Reform Act severely restricted theuse of these bonds for pollution control equip-ment by industry, as these were increasinglyconsidered more of a subsidy to private industryinstead of support for public infrastructure. As aresult, very few IDBs are issued for industrialpollution control equipment.64

The Pollution Control Loan program operatedby the U.S. Small Business Administration (SBA)made only four loans totalling $3.7 million in1991 and 1992. (Some pollution control loans

58 The QW/i~ of EnvirOn~nt in Japan, 1992, Environment Agency, Government of Japan, 1992, p. 133. ThiS included approbtely $1billion through the Small Business Corporation for energy and environmental loans.

59 “Bus~ess of Japan Enviro~ent Public Corporation,’ Environment Administration 1992.

@ &iser, Fischer, and Beecher, op. cit., fOOtIIOte 57, p. 54.61 ~g~ation for fiono~c C@ OPmtion ad Development, OECD Environmental pe~o~nce Reviews: Germany (Ptis: OECD,

1993).62 Komad von Mel&e, C ‘~eficm ~dus~ ~d tie Enviro~ent: ~plicatio~ for Trade ~d Competitiveness, ” contractor IRpOII prepared

for the Office of Technology Assessmen4 November 1992.

63 Ibid.64 us. Con=ess, Gener~ ~com~g Office, The Eflecr of the v~~~me cap on fnve~~~en~ in Environmental ]nfrasfrucrure (Gaithersburg,

MD: U.S. General Accounting Office, Oct. 28, 1993).


may be funded under the regular SBA 7A loanguarantee program, but SBA does not report theseloans by purpose).

The Federal Government also provides somesupport to U.S. industry for development ofcleaner technologies. For example, DOE’s Officeof Industrial Technologies funds industry consor-tia for the development of more energy-efficientand cleaner technologies. These activities arediscussed in chapter 10.

A number of other countries have more generaltax incentives for pollution control. Accelerateddepreciation is the most common tax incentive forpollution control investment.65 Many countriesoffer special rates for the depreciation of pollutioncontrol equipment that allow at least 80 percent ofthe cost to be written off after no more than 3years. 66 The Japan Ministry of Finance estab-

lishes a much shorter life span for pollutioncontrol equipment than for other fixed assets.Japanese industry can depreciate pollution con-trol equipment in 7 years, and some ‘‘urgentlyneeded’ equipment even faster.67 In addition,Japan allows a special capital cost allowance of20 percent of the acquisition cost of pollutioncontrol equipment for the first year of use. MITIhas proposed reducing fixed asset taxes onCFC-free equipment and has allowed new pur-chases to be depreciated more quickly.

Although no longer in effect, German firmswere until recently allowed to take accelerateddepreciation of pollution control investments.68

In 1989, their net value was estimated at morethan DM1 billion, or about 13 percent of totalprivate sector environmental capital investments.69

(In accordance with European Community pol-icy, the net subsidy effect of accelerated deprecia-tion may not exceed 15 percent of the net cost ofthe environmental portion of the investment.)Taiwan allows air and water pollution controlequipment to be depreciated in 2 years, whileMexico allows a first year deduction of 90percent. While these subsidies may provide anadvantage to firms in other countries, they mayalso stimulate needed environmental investments.

Some countries target abatement incentives forinnovative technologies or pollution prevention.In the Netherlands, for example, companiesinvesting in innovative environmental technolo-gies (as selected by the environment ministry) candeduct the full amount of expenditures fromtaxable income in the first year, instead of the10-year depreciation period that usually applies.(A broader tax incentive was in effect until 1984,but proved too expensive.)

In the United States, special provisions forwriting off investments in pollution control equip-ment only apply to plants in operation in 1976 orbefore. As new plants replace old ones, thewrite-off has declined in importance. Even forfacilities in operation in 1976, it takes 5 years formost manufacturers to fully write off the cost ofpollution control equipment certified under sec-tion 169 of the U.S. tax code. The recovery periodis far longer for manufacturing firms that aresubject to alternative minimum tax. Finally, whilethe law includes equipment that prevents thecreation of pollutants, in addition to equipmentthat reduced and controlled pollutants, the amor-

65 Stephen F. Clarke, “The Tax Treatment of Expenditures on Antipollution Equipment and Facilities in Selected Foreign Countries,” inU.S. Ern’ironmenra/ Policy and Economic Growth: How Do We Fare?, Monograph Series on Tax and Environmental Policies and U.S. CapitalCosts (Washington, DC: American Council for Capital Formation+ 1992), pp. 53-61.

66 Ibid.

67 Bruce Aronson, “Review Essay: Environmental Law in Japa~” Harvardlhwironrnemal Luw Review, vol. 7, No, 1, 1983, p. 158.

68 In 1988, 73 percent of all investments in water, 68 percent in air, and 48 percent in waste management claimed an accelerated depreciationallowance. OECD Technology and Environment program, “Background Paper on Policy Tbols and Their Applications in Various MemberCountries” (Paris: OECD, June 3, 1991).

~~ Komad von Moltke, op. cit., p. 61.


tizable cost of the facility must be reduced by theamount of savings generated.70

While Federal incentives for investment inpollution control facilities are limited, 38 Statesoffer incentives in the form of sales and propertytax exemptions, tax credits, and accelerateddepreciation of equipment.71 However, becauseState tax rates are much lower than Federal, theeffect of these incentives is generally quite small.Many also contain a bias against pollution pre-vention.

1 Environmental Standards andEnforcement

While OTA has not made detailed comparisonsof regulatory strictness, some broad generaliza-tions can be made. Taking into account allcompliance actions demanded of industry, U.S.air, water and waste regulations appear to beamong the strictest, but the differences are notlarge among the leading OECD nations. Whiledifferences exist among media, Germany, Aus-tria, Sweden, and some other Northern Europeancountries also impose strict regulations on theirfirms (see app. 7-B). The differences in regulationbetween the United States and the middle tier ofcountries are somewhat larger. A number ofdeveloped nations fall into this group, includingAustralia, Britain, Canada, and France.

Assessing regulatory stringency in Japan isdifficult, in part because while Japanese regula-tions to control several common air pollutants

(NoX, SO2), have been stricter than U.S. regula-tions (although they will probably be comparableas the 1990 Clean Air Act Amendments areimplemented), in some other areas Japaneseregulations are less strict. The Japan EnvironmentAgency, the main regulatory body, is relativelyweak in comparison to other Japanese ministries,such as MITI.72

Differences between the United States and thelagging OECD nations, Eastern European na-tions, and NICs is more significant. For example,Greek laws to control pollution are poorly devel-oped and enforcement is lax.73

Enforcement of standards in Eastern Europeand the former Soviet Union was very low.Standards and enforcement in the NICs, such asHong Kong, Korea, and Taiwan, is low, althoughthere are now efforts to strengthen them.74 (Sin-gapore’s environmental regulations are consid-ered on a par with those of several advancedindustrial nations.)

Developing countries’ standards and enforce-ment remain low. In 1985 and 1989 the WorldHealth Organization surveyed 116 countries todetermine their ability to control key environ-mental problems, and included such factors aslegislation, enforcement, and staffing. They foundthat while all industrialized countries met most ofthe requirements needed to control pollution, only18 percent of the moderately to rapidly industrial-izing countries and less than 5 percent of the less

To -e tie united Sbtes dom p~vide less targeted assistance, this does not measure overall levels Of Corporate mtio~ which we ~sodifferent between nations. See: Organization for Economic Co-operation and Development, Tution in OECD Countries, 1993 (Paris: OECD,1993).

71 Nation~ ASsoc~tion of Stite Nelopment Agextcies, Directory of lncentivesfor Business Investment and Development in the United

States (Washington DC: The Urban Institute Press, 1992),72 Some schol~ su~est that the Japanese Environment Agency does not have signMcmtpowerand cannot sfford to offend indushy. (Cited

in Alan S, Miller and Curds Moore, “Japan and the Global Enviromnen~” Environmental L.uw and Policy Forum,, vol. 1, 1992, p. 38; alsoBruce E. Aronsou “Review Essay: Environmental Law in JapaU” Harvard Environmenta/Law Review, vol 7, No. 1, 1983, p, 145).

73 For exmple, in May of 1992 Greece passed its fmt law to control urban air pollutiom and much of the focus was on automobiles, nOtindustry. Thecountry’s fmt general environmental law was not passed until 1986 and was not begun to be implemented until late 1990. (“GreekParliament Passes Country’s First Air Pollution Law As Conditions Worseu” International Environmental Reporter, June 3, 1992,p. 353.)

74 Stacy Mosher, “Hong Kong: Going Greeq” Far Eastern Econonu”c Review, Feb. 27, 1992, p. 17,


developed countries, did s0.75 For example, inThailand, industrial hazardous wastes are oftendumped into rivers and landfills, or stored indrums on site with little or no treatment. Mostbiodegradable waste is discharged untreated intopublic water bodies.76 Many of these countrieshave highly competitive manufacturing sectors insome areas, boosted not only by low environ-mental standards and enforcement, but also bylow labor costs, and lower standards for workerhealth and safety.

Standards tell only part of the story. Enforce-ment and compliance make up the rest. While nocountry can staff full enforcement, the gapbetween regulation and enforcement is normallysmaller in OECD nations. Developing and newlyindustrialized nations’ standards might be high,but enforcement is often virtually nonexistent.77

For example, Argentina’s new environment sec-retariat has little power to even inspect pollutingplants.78

Hong Kong has in place environmental

legislation, but extremely lax enforcement meansthat industry is required to spend little andpollution levels remain high.79 South Koreaamended its air pollution law in 1991, butmonitoring of discharge by industry is verylimited, particularly for pollutants other than SO2

and particulate.80 Relying solely on emission

standards would lead to an overestimation of thestrictness of environmental regulation.

~ Regulatory StylesWhile confirming data are difficult to obtain,

many analysts conclude that the U.S. regulatorystyle is more rigid than those of most othernations. 81 The relationship between regulatory

styles and regulatory stringency is complex, inpart because many countries with more coopera-tive styles of regulation appear to place lessstringent environmental demands on business.However, it is important to consider standardsseparately from regulatory styles. When goals andlaws are set and commitment to enforcement isevident, cooperative frameworks can make im-plementation easier and more cost-effective, with-out necessarily weakening performance. As such,regulatory styles can affect competitiveness.

While increased attention is being paid to morecooperative regulatory processes (e.g., negotiatedregulations), the U.S. system is still characterizedby adversarial relations between industry andregulators (see figure 7-12). Many U.S. firmsspend significant time and effort fighting regula-tions and delaying implementation, while regula-tory agencies often enforce standards in ways thatmake it harder and more expensive for industry tocomply. Short rigid deadlines can lead firms toinvest in readily available end-of-pipe approachesrather than pollution prevention. If all facilitiesface equal strictness, inflexible regulatory de-mands can raise the costs of regulation beyondthose that would follow adjusting control to the

75 counties tit did not meet most of tie r~uiremen~ include some of the most populated nations, iIIcIuding Brazil, In&& Mexico, andChina, which collectively account for approximately 40 percent of the world’s population. Countries meeting most standards contain only 24percent of the world’s population. Morns Schaefer, Combating Environmental Pollution: National Capabilities for Health Protection (Geneva:World Health Organization, 1991).

76 phantumvanit and Pamyotou, op. cit., foo~ote 53.

77 1‘C~: Brea~g the Air of Success, ’ The Economist, vol. 322, No. 7746, Feb. 15, 1992, p. 40.78$ ‘~gentfi: Jailing of Executives for Water Pollution Prompts Debate Between Secretariat COurtS,” InternatiOnU/ Environmental

Reporter, May 20, 1992, p. 308.

79 Emily Lau, ‘ ‘Hong Kong: A License to Pollute, ’ Far Eastern Economic Review, May 10, 1990, p, 23,80 Enerw ~d )2nv1romen~l ~~ysls, ~c,, Compan”$on of us. Air QUa[ipsta&rdS and con~ol$ TO the Air Pollution Controls in Japan,

Germany, Canada, Mem”co, and South Korea, prepared for Offke of Policy Analysis and Review, Office of Air and RadiatioU U.S.Environmental Protection Agency, February 1992.

81 David Vogel, Nationol s~]es of Re,g~latio~: Environmental Regulation in Great Bn”tain a& the united states @hllCil, ~: COITldUniversity Press, 1986).


Figure 7-12-Qualitative Mapping Along KeyEnvironmental Political Variables

USA

Sweden

Netherlands

Germany

Japan

FranceUK

Rigid/statutory > Flexible/negotiated

Approach toenforcement/implementation

SOURCE: Derived from Clinton Andrews, “Policies to EncourageClean Technology,” eds., Clinton Andrews, Frans Berkhaut, RobertSocolow, and Valerie Thomas, Intistrial Ewlogyand Global Change(Cambridge, England: Cambridge University Press, Forthcoming,1 994).

actual technological conditions of the facility. Insome cases, technology based standards canfreeze environmental control technologies andimpede industry’s willingness to develop or applymore cost-effective control or prevention ap-proaches.

82 Finally, permitting in the United

States is often arduous and time-consuming,requiring extensive studies and documentation.

In many other countries there is a morecooperative relationship between regulators andindustry, and relative flexibility in enforcement.This can be helpful if firms need additional time

to meet a standard, particularly through pollutionprevention. However, public and nongovernmentalorganization (NGO) involvement is more re-stricted than in the United States and measures toassure compliance may be weaker in some cases.

Some European countries have establishedmultipartite, collaborative efforts with industry,government, academia, and occasionally NGOs,to formulate and implement pollution controlregulations. The Netherlands Environmental Pol-icy Plan formulates objectives to be achieved by2010. The Environment and Economics Minis-tries consult with individual branches of industry(e.g., chemicals, printing, metal products) todevelop objectives, schedules, and strategies foreach sector. In addition, representatives fromindustry, government, NGOs, and academicsconsult on specific issues (e.g., waste minimiza-tion) to develop strategies and assess technologyneeds and developments.83 As part of this, theEnvironment Ministry, in consultation with in-dustry and academics, identified 30 key wastestreams and organized groups of producers andusers for each material to develop consensus onmethods of waste minimization.

In Germany, which is often characterized ashaving the most command-and-control-like sys-tem in Europe, there is significant bargaining overthe terms of regulatory actions between enforce-ment agencies and their clients.84 The CanadianGovernment recently established the NationalRoundtable on Environment and Economy tobring together government, industry, and NGOsto reach a consensus on problem definition andenvironmental action needed in Canada.85

82 U.S. Enviro~ent~ Protection Agency, The National Advimry Council for Environmental Policy md T~tioIo~ (NACE~), ~~prOvingTechnofogyDIfisionjorEnvironmenra/Projection, Technology Innovation and Environment Committee’s 1991 Report and Recommendations(Washington DC: Environmental Protection Agency, 1991).

83 See J. Crmti, B. de ~t, ~d G. Stratm, ‘‘The Netherlands’ NEEP: Can Environmental Goals Be Met Through NEEf’ Measures,Pollution Prevention, (European Edition), vol 2. August 1992, pp. 25-8.

u Joehen Hucke, ‘‘Implementing Environmental Regulations in the Federal Republic of Germany, ’ Policy Studies Journal, vol. 11, No.1, September 1982, p. 130 see also Arieh A. Ullmann, “The Implementation of Air Pollution Control In German Industry, ” Policy StudiesJournal, vol. 11, No. 1, September 1982, p. 141.

85 Jean Pasquero, ‘ ‘Supraorganizational Collaboration: The Canadian Environmental Experimen~” Journal ofApp2iedBehaviora/ ScienceVO1. 27, No. 1, March 1991, pp. 38-64.


Firms in other countries often face less arduouspermitting requirements, allowing them higherlevels of operational flexibility. Danish environ-mental inspectors have discretion to make excep-tions to the regulations, particularly if the presentproduction equipment’s lifetime has not permit-ted sufficient amortization or if the firm needsextra time to deploy the environmental technol-ogy.86 Japan, prefectural governments have 60days to decide to issue a new permit, after whichthe firm can legally operate according to itspermit request specifications.

87 In Britain, regula-

tors operate with considerable discretion.88

In some cases, such flexibility may come at thecost of less vigorous enforcement, however.

H Information Disclosure and Public AccessWhile some European countries are discussing

measures similar to the U.S. Toxic ReleaseInventory (TRI) system, only the United Statesrequires companies to routinely disclose to thepublic information about their emissions.89 InGermany, companies are not required to submitconfidential information and there is no equiva-lent to U.S. freedom of information programs forthe public at large.90 The Japanese Governmentdiscloses little environmental information aboutcompanies to the public.91 To the extent that

competitors can reverse-engineer proprietary proc-esses on the basis of information provided toregulatory agencies, companies operating in theUnited States may beat a disadvantage relative tothose in countries that collect less information orbetter maintain its confidential nature.92

The degree of public participation in theformation of regulations and rules also differs bycountry. Many U.S. environmental laws explic-itly require public participation in formulation ofrules and regulations and other administrativeactions (see figure 7-12). Several laws alsoauthorize citizen suits against parties (includinggovernment agencies) alleged to be in violation ofthe law. In contrast, some European countries andJapan limit participation rights.93 For example,Japanese law seldom if ever gives environmentalorganizations the right to sue the government.The national government has no freedom ofinformation laws, while only a small number ofJapan’s prefectures and municipalities have them.94

Japanese Government practices and laws contrib-ute to the weakness of environmental organiza-tions. 95 The environmental movement has facedopposition from industry and government.96 Evenin the EC, NGOs cannot bring suit in theEuropean Court of Justice against countries thatviolate EC laws.97

86 OE~, ‘‘Back~ound paper on Policy Tools and their Applications in Various Member COmpatdes, ’ Op. cit., fOOtnOte 67.

87 Ibid.88 Vogel, op. cit., footnote 81.

89 Under the TRI (mandated in Section313 of the Emergency Planning and COmmtity Right-to-Know Act of 1986), cm manufacturersin the United States must report on an annual basis the amounts of over 300 toxic chemicals that they release to the air, water, or land.

%) SRI ~nter~tio~, “Analysis of Impact of U.S. Federal and State Reporting Requirements on Sensitive and Proprietary CompanyInformatio~” prepared for the U.S. Chemical Manufacturers Associatio~ Washingto~ DC, July 1992.

91 “Interview with m. Saburo Kate: The Subsidization of Johkasu,” Water Report ~okyo), VO1. 1, No. 3, 1991, P. 9-10.

92 SW Internatio~, op. cit., fOOtnOte 90.

93 von Moltke, op. cit., footnote 6*.

9A Jacobs and Harris, op. cit,. footnote 47, p. 14.

95 Jim Gfifit~ ‘ ‘The Environrnentti Movement in Japa%’ Who[e Earth Review, winter 1990, pp. 90-97.96 ~lcr and Moore, op. cit., foomote 72.

97 Hill~ Frcnc@ ‘ ‘The EC: Environmental proving Ground, ’ World Watch, vol. 4, No. 6, November/December 1991, pp. 26-33.


U.S. publicly-held companies must also dis-close more in securities reporting, particularlypotential future significant liabilities. In contrast,such information is very scanty among Europeanfirms,98 and virtually non-existent among Japa-nese companies.

1 Future DirectionsRegulations on industrial pollution appear to

be getting stricter in many countries. In Europe,while EC-wide regulations will increase theregulatory stringency of the countries with theweakest standards, it is unlikely that regulationswill be harmonized at the level of the strictestnations. Moreover, when EC directives have beenissued, many countries have either not adoptedthem or been extremely slow to adopt them,99

particularly in the area of water quality.100 Inade-quate EC enforcement, at least in the near term,will remain a problem.101 Countries in otherregions are also raising standards, but progress isslow. Many of the newly industrialized countriesare giving increased attention to the environment,both in setting and enforcing standards.102 Forexample, while standards are low in countriessuch as Hong Kong, Korea, and Taiwan, andenforcement even lower, there is increasingpressure by government and the public to regulateindustry more stringently. However, industryresistance makes this a slow process, and enforce-ment is spotty. Over the long term, however, thelikelihood is that enforcement will improve.

EFFECTS OF REGULATION ONINNOVATION, TRADE, AND INDUSTRIALLOCATION

Since enactment of the major pollution laws inthe early 1970s, many have claimed that regula-tions controlling industrial pollution and eco-nomic growth and development are inverselyrelated. More recently, however, a number ofanalysts have argued that environmental protec-tion and economic growth are compatible and thatvigorous environmental protection is necessary toachieve sustainable long-term economic develop-ment (see ch. 3.)

The debate has often been characterized bylack of data, poor analysis, and sweeping general-izations of only limited applicability. It is not thepurpose of this report to address definitively thequestion of the relationship between environ-mental regulations and economic competitive-ness. However, this section reviews some studieson the effects of environmental regulation oninnovation, trade, and industrial location. Appen-dix A reviews the literature examining the rela-tionship between environmental regulations andGDP and industrial productivity.

S Effects on InnovationA number of studies attempt to explain the

relationship between environmental regulation

9L7 For ex~p]e, see ‘UK Study Says Corporate Environmental Reporting Does Not Disclose Enough Concrete h.fOKMitiOLL’ ~US~fICSS U~the Environment, September 1992, p. 8.

99 Under EC law, d~Wtives f~g ~der ~cles 130 R and S, which cover most env~nmen~ ~ttem, must be approved UM~0U51yby the Council of Ministers. This may prove difficult if countries with low standards resist the new measures. “Business Can Expeci TougherMeasures as a Result of the Maastricht Summit, Report Says, ” International Environmental Reporter, June 3, 1992.

1~ “TheEC ~dEwironmerMa.1 Policy and Regulations, United Statm Department of Commeme, International Trade Adrninistratiom Oct.1, 1991.

lo] By 1990, the EC hd identfl~ 303 -es in which member nations had incorrectly or incompletely implemented EC envkonmentddirectives and 60 cases where they had not been implemented at all. Hillary F. Frenck “The EC: Environmental Proving Ground, ” op. cit.,footnote 97, p. 26-33.

Im pad Cullen Beately, ‘‘The Benefits of a Global Environmental Compliance Strategy,’Corporate Management, vol. 158, No. 3, June1989, pp. 14-19.


and technological innovation.103 Depending onits form, regulation can help or hinder thedevelopment and application of new technologiesthat will permit more efficient solutions toenvironmental problems. Sometimes regulationscan discourage use of new environmental tech-nology. Most studies have found that the directimpact of environmental regulation on nonenvi-ronmental technological innovation was nega-tive, although weak. But because competitivenessin advanced industrial nations is based increas-ingly on innovation, such negative effects couldbe harmful.

Regulation could hinder innovation in severalways. First, by diverting funds from capitalinvestment in new plant and equipment to pollu-tion control, regulation could retard the diffusionrate for new process innovation and could reducefunds available for commercially oriented R&D.Regulatory requirements are often stricter for newfacilities (which usually must install the bestavailable technology) than for older investments;some argue that such regulations discourage newinvestments. 104 However, it is rare for regulationto be the decisive factor in choosing to develop anew facility.

Second, regulation can delay the introductionof new industrial processes. Delays may stemfrom lack of agency staff for permit processing,from poorly prepared industry applications, andoccasionally from citizen review of new or

modified permits. For industries that depend oncontinuous innovation to maintain competitiveadvantage, permit delays can be a significantproblem. Permitting delays can sometimes im-pede the introduction of environmentally benefi-cial technology.105

Finally, regulation can increase the risks of”innovation. If firms feel that regulations are likelyto change so as to make pending innovationsobsolete or unusable, they may wait until theyreceive clearer signals.

However, there can be circumstances whereregulation stimulates innovation. Regulations maypressure firms to develop new products or proc-esses, thus adding to the dynamism of theeconomy (see ch. 5). For example, regulation iscredited with encouraging a number of newtechnologies in automobiles, including some(e.g., computerized engine controls) not directlyrelated to pollution control. In addition, overcom-ing problems related to regulation may sometimesenhance a fro’s problem-solving capacities andcontribute to commercial innovation.106

The way in which regulations are designed andimplemented often affects innovation (see ch. 9).The use of technology-based standards ratherthan performance standards can dictate particulartechnological solutions, leading to increased dif-fusion of an existing technology but retarding thediffusion or development of superior new tech-nologies. 107 The regulatory focus on end-of-pipe

103 Roy Rothwell, ‘ ‘Industrial Innovation and Government Environmental Regulation: Some Lessons From the Past, ” Technovutzon, vol.12, No. 7, October 1992, pp. 447-458; A. Irwin and P. Vergragt, “Rethinkm“ g the Relationship between Environmental Regulation andIndustrial Innovation The Social Negotiation of Technical Change,’ Technology Analysis and Strategic Management, vol. 1, No. 1, 1989, pp.57-70; Organization of Economic Cooperation and Development, EnvironmentaZPoZicy and Technical Change (Paris: OECD, 1985); NicholasA. Ashford and George Heaton, “Regulation and Technological Innovation in the Chernieal Industry, ” Law and Contemporary Problems, VOI46, No, 3, 1983, pp. 109-157.

1~ Robert Crandall, “pollutionCon~ols and Productivity Growth b Basic ~dusties, ‘‘ Productivity Measurements in RegulatedIndustries,ed. Thomas G. Cowing and Rodney E. Stevenson (New York, NY: Academic Press, 1981).

105 For exmple, acCordlng t. one pe~ole~ indus~ Some, in tie co~se of reb~ding pm of a p~ole~ refinery in Texas, the company

sought to also rebuild older inefficient furnaces (making them more energy efficient and less polluting), However, the State indicated it wouldnot be able to issue a permit for the furnace rebuild for at least 9 months to a year. Because the other construction work was to be completedbefore this, the company choose to not improve the furnaces, since this would have involved shutting down production at a later date.

106 Roy Ro~we]l, op. cit., footnote 103.

’07 Wesley A. Magat, ‘‘The Effects of Environmental Regulation on Innovatio~’ Law and Contemporary Problems, vol. 43, winter-spring,1979, pp. 4-25.


treatment diverts attention away from fundamen-tal process changes. In addition, a rigid regulatorysystem can make firms unwilling to risk seekingnew ways to solve environmental problems, forfear that if the solutions do not fully meetenvironmental regulations, they will waste timeand money, and be penalized for noncompliance.Tight compliance deadlines may also lead firmsto choose existing technological solutions ratherthan develop new, potentially more effectiveones.108 Finally, the current regulatory systemgives firms little benefit if they outperformregulatory standards; as a result, they have littleincentive to innovate.

I Impacts on Trade and Industrial LocationThe impact of environmental regulation on

trade and overseas investment was discussed indetail in a prior report in this assessment, Tradeand Environment: Conflicts and Opportunities,and therefore will be only summarized here.109

Environmental regulation could affect trade nega-tively if, by raising the costs of U.S. goodsrelative to producers in nations with lowerenvironmental control costs, U.S. exports fell andimports rose. Some studies find it impossible to

isolate the effect of environmental regulation ontrade because other variables such as the cost ofcapital and labor and exchange rate fluctuationsovershadow the effects of increased environ-mental regulation costs.110 A recent OECD work-shop concluded that environmental regulations“have had minimal effects on overall tradebalance between OECD and non-OECD coun-tries."111

However, other studies claim larger impacts.112

One study concluded that a l-percent increase incost due to environmental regulation would haveresulted in a net reduction of the U.S. balance oftrade of $6.5 billion in 1982.113 The studyconcludes that this is a small effect. However, itis worth noting that, if a similar impact hadoccurred in 1991, the $101 billion U.S. merchan-dise trade deficit that year would have increasedby $8.6 billion. Yet another study found that if ahypothetical pollution tax were imposed onimported Mexican products equal to the differ-ence in environmental control costs borne bycounterpart U.S. industries, Mexican exports tothe United States would decline 1.2 to 2.6percent.114 This would reduce U.S. imports fromMexico by $600 million a year. Moreover, most

108 Nicholm A- A~hf@ 14A u~~d T~c~ology.B~ed s~tegy for ~co~o~~g concerns About Risks, costs, and @llly hl Set-

National Environmental Priorities, ’ paper presented at the Conference on Setting National Environmental priorities, Resources for the Future,NOV. 16-17, 1992.

109 See ~so, pad po~ey, A- J~fe, Steven Peterson ~d Robefl S@viIIS, Environ~nta/ Regu/arions and the Competitiveness Of U.S.

Indusr?y (Cambridge, MA: Economics Resource Group, 1993).I 10 U.S. Department of Commerce, “U.S. Pollution Control Costs and Iriternationzd Trade Effects-1979 Status Report” (mimeo),

September 1979, p. 3; also J. Tobey, “The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Tes~”Kyklos, vol. 43, No. 2, 1990, pp. 191-209.

111 ~ga~tionfor~ono~c C& OWrationand Developmen~ “EnvironmentalP olicies andIndustrial Competitiveness, ” (ptis: OECD,

1993).112 ~ga~tion for Economic c~opration ~d Development Jfacroco~omics Evaluation o~Environmenr~/ Programmed, 1978, p. 11,

OECD, h4acro-Economic Impact of Environmental Expenditures (Paris: OECD, 1985); Carl A. Pasur@ “Environmental Control Costs andU.S. Effective Rates of protectio~” Public Finance Quarterly, vol. 13, No. 2, April 1985, pp. 161-182; Joseph P. Kalt, “The Impact ofDomestic Environmental Regulatory Policies on U.S. International Competitiveness,” A. Michael Spence and Heather A. Hazard (eds.),International Competitiveness (Cambridge, MA: Ballinger Publishing Co., 1988); Carl Pasurka and Deborah Vaughn Nestor, “Trade Effectsof the 1990 Clean Air Act Amendments,’ report prepared by the Economic Analysis and Research Branc& Of17ce of Policy, Planning andEvaluation, U.S. EPA, Mar. 24, 1992.

113 H. David Robison, ‘‘Industrial Pollution Abatement: the Impact on Balance of Trade, ’Canadian Journal ofEconomics, vol. 21, No. 1,February 1988,

114 pa~ck~w, “Trade M~sures and Environmental Quality: Implications for Mexico’s Exports, ” paper presented at the SympOSiUm onInternational Trade and the Environment, sponsorwi by the World Bank, WashinttgoIL DC, Nov. 21-22, 1991.

Chapter 7–Environmental Requirements and US. Manufacturing Industry Competitiveness I 217

studies rely on data that, as discussed previously,appear to underreport environmental compliancecosts. Higher costs would result in greater im-pacts.

Some studies suggest that sectoral effects aremore significant than economy-wide effects.115

For industries with high compliance costs, such aspulp and paper, copper refining, and steel, theeffects on trade can be larger.

116 For example,

OTA concluded that the cost to the U.S. copperindustry, particularly copper smelting, of envi-ronmental regulation “has been large, with sub-stantial negative impacts on competitiveness andcapacity. "117 Robinson found that between 1973and 1982 the United States increased its netimports of goods more from industries withhigher environmental control costs than fromthose in which such costs were lower. 118 Becausethe products of many highly polluting industriestend to be standardized intermediate goods pur-chased by other industries (e.g., chemicals, petro-leum, minerals) with high price elasticity ofdemand, small changes in price may cause largerchanges in sales.119

Some argue that uneven regulation may induceU.S. firms to migrate to countries with lower

levels of regulation-the so-called pollution haveneffect. There are reasons to suggest that themigratory effect of environmental regulation islikely to be less than the trade effect. Mosteconomy-wide studies suggest a low impact oninvestment from differing environmental regula-tion; 120 one study found no significant effects.121

A study of U.S. maquiladora plants (plantslocating in Mexico near the U.S. border througha special Border Industrialization Program) foundno relationship between the level of low Mexicanregulations and U.S. investment.122 However, inpart, these findings may result from limitations inresearch methodologies making it difficult toisolate effects of environmental regulations fromthe effects of a large number of other variables(e.g., labor costs, market access).

On the other hand, anecdotal evidence, casestudies, and surveys of businesses suggest thatlower environmental regulations do play a role.For example, one study found that 26 percent ofmaquiladora operators in Mexicali cited Mex-ico lax environmental enforcement as a major orimportant reason for their relocation there 123 (seebox 7-C).

I IS Organ17AtiOn for ~OnOmic Co.operationand Development, su~~RepOrt Of (he wor~shop On En\~ironmenfalPolicies and Industn”al

Competitiveness, 28-29 January 1993 (Paris: OECD, 1993).116 U,S, Dep~f~ent of Commerce, 1979, op. Cit., footnote 1~, p. 12; public ReSe~Ch ~ti~te, TheE&eCt~ ofEfluent Discharge ~intira~zons

on l“oreign Trade in Selected Industries, Report to the U.S. National Commission on Water Quality (Arlington, VA: February 1976).117 U.S. ConWes~, Offlce of Tcchnoloa Assessment, copper: Technology and cornpe~tiven~~~, OTA-E-367 (Washingto~ DC: U.S.

Government Printing Office, September 1988).

1 Is H. David Robinson, “Industrial Pollution Abatement: the Impact on Balance of Trade, ” op. cit., footnote 113.

119 General Ageement on Tariffs and Trade (GA~ Secretariat, ‘‘Trade and the Environment, ” Feb. 12, 1992, p. 20.I 20 For ~~~ple, see kgo ‘alter$ ‘ ‘Environmentally Induced Industrial Relocation to Developing Countries, ” Seymour J. Rubin and Thomas

R. Graham (eds.), Environment and Trade (hmdon: Frances Pinter Ltd., 1982); Hege Merete Knutsen, “Internatiotud Location of PollutingIndustries: Review of the Literature, ” Department of Human Geography, University of Oslo, Norway, unpublished manuscrip~ 1991.

Iz1 H Jeffrey, ~omd, Pol{ution ad the Srruggzefor the World Product (New Yorh NY: Cmbridge University ‘esst 1988).

122 Gene M. Grossman and Alan B. KIWeger, ‘ ‘Environmental Impacts of a North American Free Trade Agreemen~’ paper presented at theconference on the US ,-Mexico Free Trade Agreement sponsored by the Mexican Secretmy of Commerce and Industrial Development, Oct.8, 1991.

123 ~fieenpacent of me ffis said tit w~er env~onmental legislation w~ a ~jor factor in selecfig Mexico, while another 13 percentsaid it was an important factor. (Roberto Sanchez, “Health and Environmental Risks of the Maquiladora in Mexicali, ” Natural ResourcesJourna~, vol. 30, winter 1990.) One economic development officiat for the Mexican state of Sonora suggests, “The red tape and expense ofAmencanenvwonmental law is a powerful incentive for some companies to locate in Mexico. I’ve had a couple of companies come down solelyfor that reason.” (Quoted in Sandy ToIan, “Hope and Heartbreak” op. cit., footnote 55.)


Box 7-C-Regulations and the Furniture Industry in Los Angeles

Environmental regulations in the Los Angeles area are among the strictest in the nation,particularly with regard to air pollution emissions. As a result, regulations have been singled out as acontributor to the relocation of industry out of Southern California. Disentangling the importance ofenvironmental regulations in this industrial migration is difficult, as a host of other factors seem to beoperating, including high direct and indirect labor costs, high taxes, land costs, and declining quality oflife-including pollution.1

The wood furniture industry has been the focus of significant attention because of strict regulationson air emissions. California ranks second in the nation in the production of household furniture; abouthalf of its furniture firms are within the South Coast Air Basin.2 Claims have been made that furnituremanufacturing is being displaced from the Los Angeles economy to Mexico for environmental reasons.The California industry is dominated by a large number of small firms.3 These firms pay relatively lowwages, 4 employ relatively low-skilled workers, have low levels of technology adoption, and have lowprofit margins. Avery large percentage of the furniture industry workforce is Hispanic. The industry hassought to retain competitive advantage through low costs, while in turn depending on low wage rates.The segments of the industry producing coated wood furniture is particularly affected by environmentalregulations. The environmental impacts of furniture manufacturing are due to t he presence of solventsin wood finishing products. Within this segment, the ability to control solvent emissions varies widelyaccording to the nature of the product being finished. Much of the increase in regulatory pressure onthe wood furniture industry came about as a result of local regulations in 1987, which were directed atsolvent and coating use for wood furniture producers.

Reported pollution control costs are relatively low for California furniture firms. In 1990, theyreported $9.7 million in pollution control expenditures.5 Even assuming that these costs fall solely ona selected group of SIC codes that use wood finishes, they amounted to only about 0.6 percent of salesand about 1.2 percent of value added. However, air regulations in the furniture industry can reduceproductivity and lower product quality. For example, new coatings that comply with South Coast airquality rules often take longer to apply and dry, there are more rejects, and finish quality is poorer.6

These costs are not reflected in the reported expenditure figures. Increased costs of coatings maybeexcluded. (Some savings in coatings are obtained from switching to high-volume, low-pressure sprayguns.)

Other factors affect the decisions of these firms to move out of Los Angeles, including salary costs(especially worker’s compensation), the rising cost (or value) of land in relation to the value added ofthe production facilities, and the desire to retain existing advantageous permit conditions when facilities

f Barry Ft. ~dlik and Robert H. Herzstein, Business Chafe In !kWherf? Cdifomia (Rosmead, CA:Southern California Edison, November, 1991).

z LLJ~ f-fi~, ‘Lne Role of Environmental Regulations in Industrial Location: Furniture Manufacturing inSouthern California” Masters thesis, Department of Urban Planning, UCLA, 1992, p. 92.

3 Over 70 percent of the establishments in 1989 had less than 50 employees, and 54 percent had kss than20 employees. ibid.

4 wages range from an average of $5.11 an hour for assemblers wfth few skills, to $10.97 for rnaintenanCemechanics. Furniture industry wages were 65 percent of regional manufacturing average in 1987, down from 87percent in 1977. ibid., p. 43.

5 However, because Rule1136 did not get adopted until August 1988, It is P(Xsible that ~m@ianCe ~sts Nilincrease. These costs are for establishments with greater than 20 employees. Share of saies figures werenormalized to reflect this.

6 Luci Hise, op. cit.


must move or expand rather than having to meet new source standards in the region.7

In contrast, Mexico had no established standards regulating emissions from paint coatings andsolvents in wood furniture manufacturing.* In 1991, Mexico employed approximately 255 pollutioninspectors, roughly the same number of inspectors for the South Coast Air Quality Management District,which covers four counties in the Los Angeles area.9

While the difference between environmental regulation in Los Angeles and Mexico is stark,differences in wages are also large. Mexican furniture industry wage levels are less than 10 percent ofLos Angeles wages .10 Because of the high cost of living, Los Angeles Iabor costs are also one-third morethan in parts of Texas, Colorado, and Oklahoma.11 Moreover, workers’ compensation is nonexistent inMexico and quite high in California. From 1980 to 1989, workers compensation rates more than doubledfor wood furniture manufacturers, from $9.06 to $19.40 per $100 dollars of labor costs.12 Otherworker-related costs are also higher, including health care and retirement benefits, and expensesrelated to worker safety and health. Southern California utility rates areas much as 50 percent higherthan those in other States. Land prices are among the highest in the Nation. The 1990 average pricefor a single family home in the State was $210,000, more than double the national average.13

The U.S. General Accounting Office found that between 11 and 28 wood furniture manufacturersin the Los Angeles area relocated to Mexico between 1988 and 1990, taking with them 960 to 2,547jobs.14 About 80 percent of the firms cited stringent air pollution standards as well as lower labor costsas major factors in t heir location decision. In Mexico, these firms faced no air pollution standards fort heapplication of paint coatings and solvents.15 But the majority of firms that relocate from SouthernCalifornia go to other U.S. States, rather than to Mexico.

Clearly, the ability of manufacturing industries to stay in an area with increasing population, risingproperty values, and associated environmental pressures that drive more stringent environmentalstandards is heavily dependent on the degree of value added of the activity in question. Lowvalue-added industries that face environmental pressures will have a harder time staying in the area.Differences in labor compensation (wage rates, benefits, workmens’ compensation insurance) betweenfurniture workers in Mexico and Los Angeles appear to be driving the relatively small amount ofrelocation that is occurring. However, strict environmental regulations governing the furniture industry

in Los Angeles and their absence in Mexico appear to be exacerbating this situation.16

7 Konradvon Moltke, “American Industry and the Environment: Implications forTrade and Competitiveness,”contractor report prepared for the Office of T~hnology Assessment, November 1992, p, 51.

8 Lljci t+se, op. cit.

9 “can Mexi~ Clean Up Its Act?” Los Angeles Times, November 17, 1991, p. Al.

10 GAO reports that the average wage in wood furniture in Los Angeles was $8.92 an hour, while H was $0.77for wood furniture workers in the maquiladora program (p. 4).

11 Ibid. In 1991, average hourly earnings of workers in Los Angeles were $11.17 while in San Antonio, Txthey were $8.19, In the nonmetro areas of these States, the wage rates are lower. Bureau of Labor Statistics,En?p/oyment and Earnings (Washington, DC: May 1991).

12 Ann M. ~SperanM, “Air QuaJity R~ldatiOnS and Their Impact on Industrial Growth in California, Basedon Census Data: A Case Study of the South Coast Air Quality Management District Rule 1136 and the %odProducts Coating Industry,” Masters thesis, Department of Environmental Health Saences, University of California,1991.

13 Richard L. Stern and John H. Taylor, “IS the Golden State Losing k?” l%rbes, OCtOber 29, 1990, p. 67.

14 U.S. congress, U.S. General Accounting Office, “U.S.-Mexico Trade: Some U.S. Vkod Furniture FirmRelocated From IJN Angeles Area to Mexico,” April 1991.

15 Ibid.

16 Luci HiSe, op. cit; Anne L0Sp0ranC8, Op. cit.


Case studies may find greater impacts becausepollution control requirements affect some indus-tries more than others. Industries such as mineralprocessing, toxic products, and intermediate or-ganic chemicals, which face relatively high com-pliance cost, are more likely than others torelocate for environmental reasons.124 For exam-ple, one 1988 study found that U.S. operationsthat moved to Mexico were either relativelylabor-intensive, low-polluting light manufactur-ing operations that moved principally to takeadvantage of low wages, or producers of hazard-ous waste such as asbestos.125 As a result, for thesubset of industry that is labor-cost sensitive, isrelatively footloose, or is making new investmentdecisions, and has high environmental compli-ance costs, weak environmental regulations canadd to the cost advantage gained by low laborcosts.

However, some analysts maintain that environ-mental regulations could positively affect trade.One argument is that, if the United States is a netexporter of environmental goods and services(including environmentally preferable technol-ogy), then the country receives net economicbenefits that should be counted against costs ofregulation (see ch. 5). Some also argue that, evenif U.S. firms are subject to more stringentregulations now, other countries’ regulations willcatch up. U.S. firms could then beat an advantagehaving had more experience in producing goodsable to meet strict standards. Most importantly,firms in other countries may have to invest sizableamounts to come up to speed and, because theyhave less experience in dealing with pollution,

may do so at relatively higher costs. These nationsand their resident firms may then be at acompetitive disadvantage.126 In the meantime,U.S. firms still face higher costs.

INDUSTRIAL LOCATION WITHIN THEUNITED STATES

A number of studies have examined h o wenvironmental regulations affect investment andgrowth among U.S. States. Their finding is thatdifferences in environmental regulation are not amajor factor governing industry location withinthe United States. However, it may affect thelocation of highly polluting industries and influ-ence the location of industry between adjacentStates. For example, one study found no statisti-cally significant effect of State environmentalregulations on the location of most branchplts olzT However, the results regarding theeffect on highly polluting industries was lessconclusive. A study of the location of motorvehicle branch plants found that while environ-mental regulations had little effect on location,there was some evidence that firms were deterredat the margin from locating in regions whereground level ozone problems were particularlysevere.128 According to a survey and interviewswith managers responsible for 162 new branchplants of large U.S. corporations, traditionallocation factors, such as labor cost and availabil-ity, access to markets and materials, and transpor-tation were the key determinants of locationchoices between regions.129 As expected, envi-ronmental regulations were more important formore polluting plants than less polluting ones, buteven for these plants, other factors carried greater

[~ Ibid.

IM ~O~d, op. cit., footnote 121.

126 Mormvcr) ~ do~~ s. ~c. may rely hcav~y on tcc~ology and products developed in MtiOXLS with more advanced environmentalregulations.

127 Tfi B-, ~ ~~e Eff~~s of Environmen~ Re~]ation on Business ~cation in tie United States, GroWth and change, S~ er 1988,In Vlrgfia D. McCoMell and Robert M. Schwab, ‘‘The Impact of Environmental Regulation on Industry bcation Decisions: The Motor

Vehicle Industry, Land Economics, vol. 66, No. 1, February 1990, pp.67-81.129 Howmd Stiord, t ‘Environmental Motectionand Industri~ ~atio~ Anna/~o~r~eA~socia~on ofAmerican Geographers, VO1. 75, No.

2, 19852 Pp. 227-240.


weight. One of the major concerns with environ-mental regulations was the uncertainty aboutwhen necessary permits would be obtained.

A study using an econometric model found thatStates with more stringent environmental stand-ards experienced stronger economic growth in the1980s than States with weaker regulations.130

One reason for this counter-intuitive finding maybe that many States with high concentrations ofindustry not only have more pollution (and thus aneed for stronger regulations), but also havenonregulatory locational advantages (e.g., largemarkets, a large number of input suppliers, goodtransportation and other infrastructure, and aprofusion of vital services). Compliance costs arelikely to be higher in these areas than in less-developed and slower growing places.

CONCLUSIONThe U.S. regulatory system for dealing with

industrial pollution and wastes was set up at atime when the Nation had relatively few worriesabout international economic competition and the

national economy was more insulated from for-eign competitors. In a more closed economy, highregulator-y costs could be passed on to consumers.However, in a more global economy with highlycompetitive foreign fins, many prices are deter-mined by world markets, and firms are less ableto pass on the costs of regulation.

Given the assumption that U.S. regulatorystandards will continue to be as strict as they noware, or get even stricter in the next decade, thereare several possible options for reducing thecompetitive disadvantage of differential compli-ance costs and requirements. For example, theUnited States can work with other nations toencourage them to raise their standards. It alsocould work to develop new technologies thatwould make it cheaper for firms to comply withU.S. requirements. In addition, the United Statescan modify its environmental regulatory systemto make it easier for U.S. industry to comply withregulations, while still meeting environmentalgoals. The latter issues are the topic of chapters 8and 9.

1.30 Stephen M. Meyer, ‘‘Environmentalism and Economic Prosperity: Testing the Environmental Impact Hypothesis, ’ unpublished paper,MIT Project on Environmental Politics and Policy, Cambridge, MA, Oct. 5, 1992.


APPENDIX 7-A. POSSIBLE SOURCES OFUNDERREPORTING OF POLLUTIONABATEMENT COSTS

The U.S. Bureau of the Census’ PollutionAbatement and Control Expenditure (PACE)surveys are the principal source of information onU.S. manufacturing pollution abatement and con-trol compliance costs. However, a number ofresearchers have suggested that these surveysmay underreport the true cost of compliance. It isdifficult to accurately quantify the extent ofunderreporting. Adding the costs of those factorsdiscussed below that are quantifiable increasescosts by approximately 50 percent. However, 60percent of this increase is related to interest costs,which should or should not be used depending onthe definition of costs. The value of other factorscannot at this time be quantified. As a result, areasonable but very rough estimate suggests thatthese costs may be underestimated by as much as25 percent. There area number of areas that maybe underreported, some of which may be ad-dressed by more comprehensive survey methods.

I Underreporting from Omitted Cost ItemsPRODUCTIVITY LOSSES

If a firm has to stop production because ofenvironmental problems, costs are incurred. If ithas to substitute new materials or processes thatare less productive than original ones, productiv-ity could decline. More significantly, if environ-mental equipment is less productive than otherequipment, these costs will not be included.However, most pollution control equipment isadded to the end of the production process and isnot likely to significantly affect production proc-ess rates. Moreover, as discussed in chapter 8, atleast some inprocess changes boost productivityas they improve energy and materials efficiency.

PRODUCT QUALITY IMPACTIn some cases, environmental regulations lead

firms to make changes in materials or processesthat negatively effect product quality. For exam-ple, because of stringent U.S. volatile organiccompounds (VOCs) regulations, U.S. automakersuse ‘‘high-solid’ paints that sometimes producelower gloss finishes. In contrast, Japanese auto-makers can use ‘low-solid” paints that allow fora premium “high gloss’ finish, particularly onsome of the higher priced models.1

POLLUTION CONTROL COSTS EMBEDDEDIN OTHER PURCHASES

For many industries, the costs of materials andsupplies is higher because of environmentalregulations. For example, firms in industries thatuse large amounts of electricity (e.g., industrialgas producers) pay higher prices for electricitybecause of the regulations on electric utilities.The PACE survey would identify the utilities’higher costs due to environmental regulations, butnot added costs for utility customers from higherelectric rates.

INTEREST EXPENSEThe PACE survey does not include interest

expense for equipment. Using a real interest rateof 7 percent and a 20-year life for investments,2

interest expense increases the costs of capitalinvestments by 88 percent. This would addanother $6.5 billion to manufacturing compliancecosts to the $7.4 billion invested in 1991, raisingtotal compliance costs ($21 billion) 31 percent.

FEES AND TAXESCensus figures do not include fees and taxes,

which, while currently small, are likely to be agrowing share of environmental costs, particu-larly as new fees related to the 1990 Clean Air Act

1 American Automobile Manufacturers Association The Effect of Air Pollution Control L.aws on the International Competitiveness of theU.S. Automobile Manufacturers (Washington DC: AAMA, Jan. 5, 1993).

2 U.S. Environmental Protection Agency (EPA) uses a 7-percent interest rate to estimate environmental compliance costs, and assumes auseful life of most pollution control equipment at 20 years. (EPA, Environmental lnvesrmenrs: The Cost ofa Clean Environment, Washingto~DC: Island Press, 1991).)


Amendments take effect. For example, Boeing’sfees and taxes for environmental permits in theUnited States increased from $23,000 in 1985 to$2 million in 1991, while its overall costs forenvironmental compliance exceed $100 millionannually. 3 In addition, taxes on industry tosupport the Superfund Trust Fund are not reportedin the Census data. In 1990, the domestic petro-leum industry paid $295 million, the chemicalindustry paid $273 million, and manufacturerspaid approximately $252 million, for a total of$820 million. Leaking underground storage tanktrust fund taxes were approximately $30 millionin 1990. Together, these two taxes add anadditional 4.1 percent to total annual pollutioncontrol expenditures.4

COSTS OF REGULATORY DELAYSEnvironmental regulation can delay new in-

vestments, as firms wait to obtain permits.Calculating the impact of these delays on costs isvery difficult. However, as competitive pressureson U.S. manufacturing have intensified, thepotential impact of regulatory delays becomesmore serious. Shorter product life cycles, morerapid product introduction, more customized andniche products, and increased use of flexiblemanufacturing systems require firms to be able tomake more frequent and rapid changes in produc-tion. To the extent that the current regulatorysystem is based on an earlier model of manufac-turing, characterized by long runs of standardizedproducts with few changes in operating condi-tions, it can potentially hinder the ability ofmanufacturers to make changes needed to re-spond to changing market demands. As a result,regulatory delays, and slow and inflexible permit-

ting processes can sometimes impede a fro’sefforts to remain competitive.

LOSS OF PROPRIETARY INFORMATIONIn some industries, particularly process indus-

tries, information reported to regulatory agenciesthat becomes available to the public maybe usedby competitors to make inferences about thefirm’s manufacturing process. For example, sincebasic synthesis methods have been published formost commodity chemicals, a chemical com-pany’s competitive edge is often based on know-how or production techniques that provide smallbut significant advantages for efficiency, yield,and cost.5 A recent study by the ChemicalManufacturers Association suggests that the re-ports required by some State environmental laws,if made available to competitors, combined withreadily available information at the Federal level,would give them significant opportunities to‘‘reverse-engineer’ proprietary products and proc-esses. 6 One firm indicated to OTA that they hadlittle faith in environmental agencies’ ability tomaintain confidentiality of sensitive companydocuments, and that the company itself used thissource of information to gain information abouttheir competitors. In part the problem stems fromthe fact that there appears to be no uniformdefinition between agencies and programs ofwhat constitutes proprietary information. More-over, many State environmental agency staff maylack training or experience in this critical area,

RESEARCH AND DEVELOPMENT COSTSR&D costs are also not included, but are likely

to be small. The National Science Foundationestimates that in 1990, total R&D by the private

3 In 1990, Boeing paid approximately $2 million for water discharge and air emission fees and permit charges, $2 million for land disposalfees (tipping fees), and $6,5 million to publicly operated sewage treatment plants (POTWS). (Information provided by the Boeing Co.)

4 U.S. Environmental Protection Agency, Office of Solid Waste and Emergeney Response, “Who Pays for Superfund,” November, 1990.Also unpublished data from this office.

5 Impac( of the Chemical WeaponJ Convention on the U.S. Chemical Industry-Background paper, OTA-Bp-lSC-106 @J.S, con~~s~

Office of Technology Assessment, Washington, DC: U.S. Government Printing Office, August 1993).

e SRI International, Analysis of Impact of US. Federal and State Reporting Requirements on Sensitive and Propn”etary CompanyInformation (Menlo Parh CA: SRI International, Project 3307, July 1992).


sector for pollution abatement was approximately2.4 percent of private sector pollution controlcosts. 7 However, much of this R&D was forautomobile mobile source controls, new products(e.g., reformulated gasoline), and the environ-mental goods and services industry. R&D byfirms toward compliance with process regulationsappears to be less. For example in the petroleumand pulp and paper industries they representedonly 2.2 and 1.0 percent respectively of annualpollution control compliance costs.8

PENALTIES AND FINESIn Fiscal Year 1991, EPA assessed a total of

$87 million in fines and penalties, not all of it tomanufacturing firms.9 While exact data are notavailable on State fines and penalties, estimatessuggest that they total less than $280 million ayear.

10 Assuming that some local air pollution

control authorities also levy frees, it appears thatno more than $400 million is levied in fines.Including all these penalties would increasepollution control costs by approximately 1.9percent.

OTHER COSTSThe survey also excludes several other costs,

including: land needed for pollution controlequipment; noise abatement expenditures; andexpenditures for complying with regulations toprotect worker health and safety, which can besubstantial in particular industries. In addition,the potential negative effect of the Comprehen-

sive Environmental Response, Compensation,and Liability ("Superfund") on business accessand cost of credit is unknown.11

B Underreporting From Lack of FullKnowledge of CostsENVIRONMENTAL COSTS EMBEDDED IN NEWCAPITAL EQUIPMENT

Companies sometimes do not report the envi-ronmental costs embedded in new generations ofproduction equipment. For example, in reviewingreported project expenditures for a segment of theU.S. pulp and paper industry, OTA found that theshare of new equipment costs that were environ-mental were not reported as such. If theseexpenditures are included, environmental capitalcosts as a share of total capital costs increase fromapproximately 12 percent to between 15 and 16percent. 12 Assuming similar shares for all capitalinvestments, total pollution control costs wouldincrease 10 percent.

ADMINISTRATIVE COSTSPACE does not directly ask for costs related to

environmental regulatory compliance, environ-mental auditing, recordkeeping, training, andlegal services to comply with regulations, particu-larly at the corporate level, as opposed to the plantor facility. However, while these costs are notinsubstantial, relative to overall operating andcapital costs they are small. For example, in thepulp and paper industry, corporate environmentaladministrative costs were only 3.5 percent of

7 Unpublished dat% National Science Foundation,

S American Petroleum Institute, Petroleum lnaktry Environmental Peq%rmance, 1992 (Washington, DC: API, 1992); National Councilof the Paper Industry for Air and Stream Improvement Inc., A Survey of Pulp and Paper Industry Environmental Protection Expenditures -1991 (New York, NY: NCASI, 1992).

9 Interview with Rick D@, Environmental Protection Agency, December 1992.10 EPA does publish data on ties levied by statti under RCRA. In FY91 these totaled $148.6 million. RCRA fines appear tO Constitute N

least haLf of all fines, with fines for air and water accounting for the other half.

11 ~em is some evidence that banks are less likely to make IO~S to businesses witi gro~d cent arnination on site. U.S. EnvironmentalProtection Agency, Office of Policy, Plannin g and Evaluation “A Prelidnary Report on the Indirect Effects of the Superfimd Program”(Washingto~ DC: U.S. EPA, May 20, 1992.

12 Neil McCubb@ “Environment and Competitiveness in the Ptdp and pa~r bdus~,” contractor report prepared for the Office ofTechnology Assessment, January 1993.

-——


operating costs.13 However, administrative and

legal fees in the Resource Conservation RecoveryAct (RCRA) and Superfund proceedings can belarger. 14 These costs can be larger as a percent ofsales in small and medium-sized firms.

MANAGEMENT AND ENGINEERING STAFF TIMECompanies may not know or accurately report

the managerial and technical time devoted toenvironmental issues. These issues, particularlyrelated to hazardous waste, occupy a significantportion of time for some top executives—timethat might otherwise be spent on matters morecentral to the corporation’s function.15 In addi-tion, in many firms, a number of departmentheads, technicians, and engineers devote some

share of their time to environmental compliance,which may not be reported.

ENVIRONMENTAL TRAININGTraining for environmental compliance, which

can sometimes be a significant share of corporatetraining expenses, is often not known or reported.

OTHER COSTSOther items, such as asbestos removal, trans-

former replacement to eliminate PCBs, and un-derground storage tank replacement, may also notbe reported as environmental expenditures.16 Inaddition, some operating costs, such as energy useby abatement equipment, may not be separatelyrecorded.

13 NCASI, A .~lIne), Of pulp ad paper Industry Environmental Protecn”on E~enditures -1990, Op. cit., foo~ote 8..14 For eX~pIC, potiey est]mates that costs of litigation and other noncleanup related expenses could exceed 20 percent of tot~ Superfund

cleanup costs. Paul Portney, ‘ ‘The Economics of Hazardous Waste Regulation” U.S. Waste Management Policies: Impacts on EconomicGrowth and lnvesfmenr Strategies, Monograph Series on Tax and Environmental Policies and U.S. CapitaJ Costs (Washington, DC: AmericanCouncil for Capital Formation, Center for Policy Research, 1992).

15 John H. Sheridan, “Environmental Issues Sap Executive Time, ” l?tdustry Week, Mar. 16, 1992.

lb One report to EPA suggests a small degree of underreporting of capital investments due to inadequate information ~d a ~elY effect ofunderreporting of operation and maintenance costs. However, the size of this underreporting is not known. Firms also appear to underreportestimates of recovered costs, which would offset to some degree the undemeporting of operation and maintenance costs. Beth Snell and BobUnsworth, “Evaluation of Uncertainty Associated With Air Pollution Abatement Compliance Cost Estimates-Stationary Sources”(memorandum) (Cambridge, MA: Industrial Economics Inc., Oct. 13, 1992).


APPENDIX 7-B. NATIONAL DIFFERENCESIN POLLUTION CONTROL STANDARDSAFFECTING MANUFACTURINGINDUSTRIES

It is very difficult to develop accurate cross-national comparisons of environmental regula-tions and approaches. With only a few exceptions(e.g., some air pollution standards), relativelylittle information is available.

1 Air PollutionThe most widely available data on ambient

standards concern air quality, particularly forsulfur dioxide (SO2), total suspended particulatematter (TSP), and nitrogen oxides (NOX).

l Inter-national comparisons of ambient air standardssuggest that U.S. standards are very high, al-though nonattainment remains a major problem.Countries such as Germany and Japan may havehigher standards for some pollutants. Germanstandards were especially high, largely in re-sponse to concerns with acid rain. In Japan, localstandards are often stricter than national rules,2

although it is unclear the degree to which industrycomplies with more stringent local standards.3

Comparisons of emission standards show similarpatterns. Again, U.S. standards are among thestrongest, although Japanese and German regula-tions of SO2 and NOX are stricter. However,countries regulations vary by categories of sourcesand fuels. For example, in the United States, older

sources in most cases have not been required tomeet the same performance standards as newfacilities, although recent changes will requiremore retrofitting by utilities. Germany and Japanhave required more retrofits. However, while theU.S. Clean Air Act regulates 189 toxic pollutantsand 6 criteria pollutants, Japan’s Air PollutionControl Law designates only 10 regulated pollut-ants.4

U.S. standards for some emissions, such astotal suspended particulate (TSP) and volatileorganic compounds (VOCs,) appear to be thehighest in the world. When fully implemented,the 1990 Clean Air Act amendments on air toxinswill probably be the most demanding. Notably,Japanese regulations of VOCs and hazardous airpollutants are much weaker than those in theUnited States, and the guidelines are not generallyfollowed. 5 For example, in the organic chemicalindustry, the Japanese regulate only a few se-lected organics as toxics. VOC emissions fromJapanese automobile painting are subject tominimal regulations, allowing the use of “low-solid’ paints that enable a higher gloss finish thanfrom paints with higher solids.6 In contrast, inresponse to U.S. VOC regulations, automakershere use higher-solid paints, making it moredifficult to achieve high gloss finishes. Germancontrols on automobile painting more closelyapproximate those of the United States, while

1 Raymond J. Kopp, Paul R. Portney, and Diane E. DeWitt, International Comparisons of Environmental Regulation (Washington DC:Resources for the Future, September 1990); Clean Air Around the World: The Law and Practice of Air Pollution Control in 14 Countries in5 Continents (Brighto% England: International Union of Air Pollution Prevention Associations, 1988); also, Gregory C. Praw “Air ToxicsRegulation in Four European Countries and the United States,” International Environmental Aflairs, vol. 4, No. 2, spring 1992, pp. 79-100.

2 Energy and Environmental Analysis, Inc., Comparison of U.S. Air Quality Standards and Controls to the Air Pollution Controls in Japan,Germany, Canadk, Ma”co, and South Korea, prepard for Of.fke of Policy Analysis and Review, Office of Air and Radiatiom U.S.Environmental Protection Agency, February 1992 (draft).

j I.muise Jacobs and high Harris, Public-Pn”vate Partnerships in Environmental Protecn”on: A Study of Japanese and AmericanFrameworks for So/id Wastes and Air Toxics (Lexingto~ KY: The Council of State Governments, 1991).

4 Energy and Environmental Analysis, op. cit., footnote 2.5 Energy and Environmental Analysis, Inc., op. cit., footnote 2, p. 1-11. See also “Interview With Dr. Yasumoto Magara: Amendment of

Drinking Water Quality Standards,” Water Report (Tokyo), vol. 1, No. 4, 1991.

6 in part, this maybe because as a strategy to control ground level ozone, the Japanese control NOX more heavily than VOCS. Energy andEnvironmental Analysis, Inc., ibid,

. .


Canadian controls are weaker.7 Most developingnations, including Korea and Mexico, have no setstandards for VOCs, including automobile paint-ing operations. In Mexico, furniture firms face noair pollution standards for the application of paintcoatings and solvents.8

I Water PollutionIn part because standards are often set by

subnational governments, it is more difficult toobtain data and compare water regulations be-tween nations. In spite of this, there is someevidence that many other nations regulate waterpollution less stringently than the United States.For example, Japanese regulations to protectground water were established only in 1990.9

While the Japanese Government has moved toreduce air pollution, it has taken much less actionto reduce water pollution and contamination ofdrinking water.10 Japan lags behind other industri-.

alized countries in setting chemical standards indrinking water, and currently regulates only 26contaminants for water quality .11 Water controls

in other countries are also weaker. 12 For example,Canada is only now requiring that all pulp andpaper mills install secondary treatment, whilevirtually all U.S. mills installed secondary watertreatment after the mid-1970s.13

1 Hazardous WasteU.S. laws regulating hazardous wastes are very

strong compared to most countries. While manyEuropean countries have laws similar to theResource Conservation and Recovery Act (RCRA),none is as restrictive and comprehensive.14 Forexample, while the United States lists approxi-mately 500 wastes as hazardous, the UnitedKingdom designate 31, the French control ap-proximately 100, and the Germans restrict 348.15

One estimate suggests that only 20 percent ofItalian toxic waste is disposed of properly, withthe rest either stockpiled, dumped illegally, orexported. 16 Of the six distinct classifications ofwaste established by OECD member countries,only the United States regulates waste in all six.17

However, EC waste laws appear to be getting

7 Ibid.8 U.S. Congress, U.S. General Accounting Office, “U.S.-Mexico Trade: Some U.S. Wood Furniture Firms Relocated From Los Angeles

Area to Mexico’ (Washington, DC: U.S. Government Printing Office, April 1991); also Ibid.9 Lmuse Jacobs and Leigh Harris, Public Private Partnerships in Environmental Protecfi”on.” A Study of Japanese and Amen”can

Frameworks for Solid Wastes and Air To.rics, op. cit.

10 Cwtls Moore and Alan Miller, ‘‘Japan and the Global Environment, ’ Environmental Lati and Policy Forum, vol. 1, 1992, p. 38; BruceE. Aronson, “Review Essay: Environmental Law in JapaL” The Harvard Environmcnfal Law Review, vol. 7, No. 1, 1983, pp. 135-171; andShigeki Masunaga, “Water Pollution Control in JapaL” Water Report (Tokyo), vol. 2, No. 3, 1992. Japan did take early action to reducemercury and some other toxic heavy metal levels in water, due to mercwy poisoning around several industrial facilities.

11 “~(ewlew wi~ Dr. Yasumoto Magara: Amendment of Drktking Water Quality Standards, ’ Water Report (Tokyo), vol. 1, No. 4, 1991.In contrast, the Uruted States regulates 83 contaminants.

12 One suwey of UtS,-owned chemical facilities in Europe found significantly larger discharges of some toxic chemicals tO water tin inthe United States, According to the study, discharges of three chemicals —benzene, MEK, and xylene-from individual chemical plants inEurope exceed the total discharge to water for the same chemicals from all 26,000 facilities that report to the U.S. Toxic Release Inventory.David Saroki~ ‘ ‘Toxic Releases from Multinational Corporations: Does the Public Have a Right to Know?’ (Washington, DC: The PublicData Project and Friends of the Earth, July 1992).

13 Discussion ~~ offlcia~ from tie National Council on Air and Stream Improvement, New York NY, December 1992.

14 Kopp, ponney, and Dewitt, ]nternationa/ Comparisons of EnvironntenfaZ Regulanon, op. cit.+ foo~ote 1.

15 Kopp, po~ey, and DeWitt, Ibid., P. 28.

16 John Glover, “Italian Industry Aims to Get Greener, But on its Own Terms,” Chemical Week, Feb. 6, 1991.17 sowce: OECD, Tran&on~ier ~o,,emenfs of ~azar~ous waste (paris: 1985); and Reso~ces for The Fu(We, [nternationa[ Comparisons

of Environmental Regulations. (Cited in Steel industry Anntial Report, U.S. International Trade Commission, September 1991, p. 3-30.)


stricter. 18 Japanese ambient standards for dioxiningestion is 5,000 picograms per day for adults, ascompared to the U.S. standard of 50 per day.19

Few other nations have the regulatory provisions(including mandatory planning in some Statesand information disclosure) the United States hasto encourage waste minimization.

The difference between U.S. hazardous wastelaws and those in developing countries is evengreater. Few developing nations have significantlaws regulating hazardous wastes, For example,maquiladora plants in Mexico generate unknownbut evidently large amounts of hazardous wastes,and compliance with Mexican waste laws appearsto be low.20

U.S. law governing abandoned waste sites is byfar the strongest in the world. No other nation hasa Superfund law that imposes strict, joint andseveral, and retroactive liability on industry.While the EC is considering legislation to regu-late contaminated sites, it is likely to only addressfuture and not past liability. Industries in Japanare not subject to similar laws.

***

The discussion above is a selective discussionof national-level environmental standards affect-ing manufacturing; subnational standards (whichin some cases exceed national requirements) are

not considered. A number of areas are notcovered. It does not, for example, include differ-ences in requirements pertaining to global envi-ronmental issues (such as phase out of substancesthat deplete the stratospheric ozone layer). Nordoes it include post consumer responsibility forproduct disposal. For example, Germany is start-ing to make manufacturers responsible for theultimate disposal of the products they sell.Initially focused on packaging, the requirementsmay eventually apply to a wide variety ofproducts, including automobiles, computers, andother equipment. Different countries’ environ-mental requirements affecting land use, resourcemanagement, wildlife, endangered species, couldhave differential effects on manufacturers, but arenot covered here.

As legislative and administrative bodies peri-odically revise and amend prior laws and regula-tions, relative rankings among countries change.Some U.S. environmental laws, including theClean Water Act and the RCRA, are up forreauthorization. The Japanese Diet is consideringchanges in Japan’s basic environmental law.Administering agencies also vary in the commit-ment made to implement standards and require-ments in a timely fashion, and in the resourcesavailable for enforcement.

18 IIEWOW Mwg fio~SS with hviro~erl~ Rcgs” Pollution Engineering, Sept. 1, 1992.19 Moreover, he 2,X)() ~c~emtors & Jap~, tie ~~ so~~ of waste @eatment &e@ we not motitored for dioxill output. LtiIldfiiS Me

scarce in Japan and, as a resul~ the Japanese are constructing landfills in ocean bays and inlets, using the newly created land as industrial sites.Imuise Jacobs and Leigh Harris, Public Private Partnerships in Environmental Protection: A Study of Japanese and American Frameworksfor Solid Wastes and Air Toxics @xington, KY: The Council of State Governments, 1991).

20 By law, ~ese f~ me Supposed t. Ship tidous wastes back to the U. S., but this provision is not well emorced. U.S. ContPess) OffiCeof Technology Assessment, U.S. Mexico Trade: Pulling Together or Pulling Apart?, ITE-545 (Washingto~ DC: U.S. Government PrintingOffIce, October 1992); See also U.S. Congress, Government Accounting Office, U.S.-Mexico Trade: Assessment of Mexico’s EnvironmentalControlsfor New Companies, GAO/GGD-92-l 13 (Washington DC: August, 1992).

PollutionPrevention,

CleanerTechnology, and

Compliance 8

H istorically, environmental compliance efforts in theUnited States have focused principality on treatment ofpollution once it has been released (end-of-pipe ap-proach) rather than on prevention or recycling, two

approaches that in many cases offer a lower cost means ofattaining compliance. End-of-pipe methods often result inincreased costs with no appreciable benefits to the firm in theform of enhanced materials or energy efficiency. In contrast,pollution prevention and recycling investments often not onlylower energy and material usage but also reduce end-of-pipetreatment costs, resulting in decreased disposal expenditures,possible reduced paperwork, and lower liability and insurancecosts, Greater emphasis on prevention and recycling can thuslower environmental compliance costs for U.S. manufacturers.

Congress, in the Pollution Prevention Act of 1990, establisheda hierarchy of preferred options, from elimination or reduction atthe source (including in-process recycling), to out-of-processrecycling (on-site and off-site), pollution control, waste treat-ment, and, finally, land disposal.l This chapter discussespollution prevention and cleaner technology from the standpointof the manufacturing firms that must comply with environmentalregulations, building in part on prior OTA work2 and on contract

1 F. Henry Habicht II, Deputy Administrator, U.S. Environmental Protection Agency,Memorandum “EPA Definition of ‘Pollution Prevention, ’ “ May 28, 1992.

2 U.S. Congress, Office of Technology Assessment, Serious Reduction of HazardousWaste: For Pollution Prevention and Industrial Efi”ciency, OTA-ITE-317 (Washington,DC: U.S. Government Printing Office, September 1986).

229


research undertaken for this assessment.3 Specialemphasis is given to three industrial sectorsfacing high compliance costs and significantenvironmental challenges--chemicals, pulp andpaper, and metal finishing. The chapter alsodiscusses barriers to pollution prevention, andFederal and State government assistance to manu-facturers in the United States to meet environ-mental requirements, particularly pollution pre-vention.

MAJOR FINDINGSPollution Prevention and RecyclingCompared to conventional treatment alone,pollution prevention and recycling investmentsare usually more cost-effective, often resultingin reduced energy and material usage and lowerend-of-pipe treatment costs. Pollution preven-tion can produce significant environmentalbenefits as well, including reduced cross-mediatransfers and reduced environmental impactsfrom avoided energy and materials usage.However, while increased reliance on pollutionprevention and recycling offers a means toreduce the conflict between environmentalprotection and industrial competitiveness, itdoes not eliminate it. While many pollutionprevention and recycling options yield netpositive rates of return equaling nonenviron-mental investments, many others do not, andoften cost money. However, in most cases theexpense is lower than alternative end-of-pipeapproaches.While source reduction is normally preferredon environmental grounds, and usually yieldsthe lowest cost option for reducing pollution,there are cases where recycling is preferred oneconomic grounds. Depending on the material,the size of the facility, and the industry,recycling can be a more economical way of

■

■

9

reducing waste than source reduction. More-over, recycling can be the preferred option if itis less intrusive to the production operations.Emphasis on pollution prevention can also leadto beneficial organizational and technologicalchanges. It can speed technical change withinan industry, leading to increased investment innew plant and equipment. Moreover, integrat-ing pollution prevention into industrial opera-tions can lead firms to pay closer attention tothe efficiency of their production processes andis consistent with new management approaches,including total quality management.A variety of evidence suggests that, whileindustry has increased its pollution preventionand recycling efforts, particularly since the late1980s, significant pollution prevention oppor-tunities still exist, especially those related toprocess modifications. A number of organiza-tional and capital accounting factorsfirms and aspects of the regulatoryretard greater progress.

Pollution Prevention TechnologyDevelopment and Diffusion -

withinsystem

As the simpler steps for pollution preventionbecome widely adopted, a significant source ofenvironmental improvement will lie in newmanufacturing process technologies that arecleaner, and often more productive. Many ofthese approaches to waste reduction are stillunderused and are just now being explored.In spite of the importance of clean processtechnologies, little Federal environmental R&Dsupport goes to this area.4 Moreover, no feder-ally supported institution has taken a broaderpolicy role with regard to clean technologydevelopment, although some agencies are in-terested in doing so.

3 Information on three industries was provided to OTA by outside contractor reports: Neil McCubbin Consultants, Inc., ‘ ‘Environment andCompetitiveness in the Pulp and Paper Industry’ David Allem “Clean Chemical Manufacturing Technologies: Current Practices and bngTerm Potential”; F.A. Steward, Inc., ‘‘Environment and Competitiveness in the Metal Finishing Industry. ’

4 One exception is the Department of Energy’s Clean Coal Technology progrm funded at $415 million in fiscal year 1992 (see ch. 10).

Chapter 8–Pollution Prevention, Cleaner Technology, and Compliance 231

While new technologies are necessary forfundamental gains in pollution prevention,widespread diffusion of existing off-the-shelftechnologies will go a long way to reducepollution. While many in industry want toreduce pollution, a significant share do notknow how to move beyond the simplest meas-ures; some, particularly small businesses, maynot even be aware of pollution preventionoptions.Technical assistance efforts can help thesefirms implement pollution prevention and recy-cling measures. Yet existing programs are verysmall and many do not adequately meet manu-facturers’ needs. Most importantly, by consid-ering pollution prevention separately fromother manufacturing needs, such as productiv-ity and quality improvements, most programsfail to develop the vital synergies and workingrelationships with manufacturers that are essen-tial to drive both pollution prevention andincreased manufacturing competitiveness.

Financial IncentivesGovernment financial support to industry forthe cost of environmental compliance canlessen the competitive impact of environmentalregulations. A number of other countries pro-vide more financial incentives (tax incentives,loans, grants) to help companies comply withdomestic environmental requirements than doesthe United States.

THE RATE OF ADOPTION OF POLLUTIONPREVENTION AND RECYCLING

Because of the dearth of careful studies, it isdifficult to document the extent of adoption.However, while industry has increased its pollu-tion prevention and recycling efforts, particularlysince the late 1980s, the evidence suggests thatsignificant pollution prevention opportunities re-main, particularly those related to process modifi-cations.5

Some industries have made more progress thanothers. For example, such methods have beenextensively exploited in many major chemicalmanufacturing operations. 6 A study of pollutionprevention projects in 21 chemical plants foundthat, while a few projects date back a decade ormore, the majority were launched after 1985.7

The study argues that significant opportunities forpollution prevention are still possible, even atplants that have been implementing pollutionprevention for many years. For example, HoechstCelanese has committed to reducing Toxic Re-lease Inventory (TRI) emissions 70 percent from1988 to 1996, and expects that over three-quartersof these reductions will come from pollutionprevention, with one-half of the total coming fromsource reduction.8

In the metal finishing industry, pollution pre-vention housekeeping practices have been knownfor over 20 years, but many firms have notadopted them, as older facilities tend to perpetu-ate old operating habits. Only a small fraction ofmetal finishers, principally the larger facilities,appear to have taken advantage of some of the

5 There arc many sunilarities between energy conservation and pollution prevention. Each is driven by exterml costs, both are applied atthe margin, neither is done in isolation, and both are part of other productivity improvements in labor, equipment, and materials. When U.S.firms first began to focus on energy conservation they focused first on the‘‘low-hanging fruit’ and then moved to more expensive changesbased on new technologies and processes. However, many companies continue to find new, relatively easy energy-saving opportunities. It ispossible that pollution prevention will follow this same path. (See U.S. Congress, OffIce of Technology Assessment, Industrial EnergyEficienc?, OTA-E-560 (Washington, DC: U.S. Government Printing Office, August 1993.)

b Allen, op. cit7 Mark H. Dorfman, Warren R. Muir, and Catherine G. Miller, Environmental Dividends: Cutting More Chemical Wastes (New York NY:

Inform, 1992), p. 14.8 Discussion with James Connor, Environmental Division, Hoechst Celanese, Apr. 20, 1993. (Under Section 313 of the Emergency Planning

and Community Right To Know Act, certain manufacturers must report releases or transfers of over 3(?0 toxic chemicals.)


Figure 8-l—Adoption of Selected CleanerTechnologies in U.S. Kraft Pulp Mills

60%

50%

40%

30%

20%

10%

O%

Extended /cooking

\Oxygendelignification

\

//

#- - - - --~

I I I ~–~—~198384 85 86 87 88 89 90 91 92 93 94

SOURCE: N. McCubbin Consultants Inc., 1993.

promising opportunities, such as use of advancedconcentrate and return technologies (e.g., reverseosmosis, evaporation, ion exchange) for thereturn of excess solution (dragout) to platingbaths. Of the installations that could achieve a3-year payback, one estimate is that less than halfhave installed the equipment.9

In pulp and paper, there has been a slowincrease in the share of pollution preventiontechnology adopted. In 1984, 25 percent of waterpollution control investments were for in-processmeasures, increasing to 30 percent in 1989 and 56percent in 1991.10 Much of this increase has beendriven by the need to reduce organo-chlorines inwaste water. One way to do this is throughextended cooking in bleached kraft pulp produc-tion. Use of this technique has increased signifi-cantly since 1989; currently over one-third of allpulp is made with this process. In contrast, theadoption of oxygen delignification systems hasbeen slower, with about 27 percent of bleachedkraft production now using it11 (see figure 8-l),

Overall, the share of environmental invest-ments in in-process pollution control appears tobe similar in Europe and the United States (table8-l). Contrary to conventional wisdom, the Japa-nese do not appear to have made significant effortin industrial waste-related pollution prevention.However, because of high energy prices andaggressive government policies, Japanese indus-try has made significant strides in adoptingenergy-efficient technologies, which provide bothdirect and indirect environmental benefits.

POLLUTION PREVENTION, ANDRECYCLING AND ECONOMICPERFORMANCE1 Cost Savings From Pollution Preventionand Recycling

There is disagreement on exactly how eco-nomical pollution prevention is. Some claim thatpollution indicates wasteful and inefficient prac-tices and that, therefore, firms generally savemoney by engaging in pollution prevention. Infact, there are numerous widely publicized indus-trial case studies of very successful pollution

Table 8-l—Estimates of In-Process Changes as aShare of Pollution Control Investments

Belgium* 20%France” 13%Germany a* 18%Netherlands 20%United States** 25%

a One study suggests that pollution prevention investments in Ger-

many between 1975 and 1985 ranged from 16 to 24 percent(Christian Leipert and Ucfo E. Simonis, “Environmental Damage-Environmental Expenditure. Statistical Evidenoe on the FederalRepublie of German,” paper by Wissensehaftszentrum Berlin FurSozialforsehung gGmbh, Berlin.).

SOURCES: ● Commission of the European Communities, Panorama ofEC Industry 1990 (Luxembourg: Offioe of Official Publications of theEuropean Communities, 1990), p. 134.● * U.S. Bureau of the Census, Pollution Abatement Costs andExpenditures, 1990 (MA200), 1992.

9 Steward, op. cit.10 U.S. Bureau of tie Cemus, Pollution Abatement Costs and Expenditures (Washington DC: Government ~dng OffiCe, vtious yeas).11 Mcabbin, op. Cit.

Chapter 8–Pollution Prevention, Cleaner Technology, and Compliance ! 233

Table 8-2—Case Examples of Pollution Prevention Savings

Savingsor payback

Industry period Option Source of savings

Ice cream

Trailers

Valves

Chemicals

Tobacco products

Nylon fabrics

Furniture

Furniture

Furniture

Printing

4 months

4 months

1.4 years

3 years

6 months

5.5 years

1 year

2 years

$70,000

Immediate

Housekeeping

Paint reuse, use of water-based cleaner

Aqueous parts cleaning

Evaporation equipment for ammoniumsulphateSolvent recycling

Dye substitution, process changes

Solvent recycling

More efficient paint spraying

Painter training

Water-based inks

Material savings

Avoided paint purchases, lower disposal costs

Avoided solvent purchase, Iower disposal costs

Avoided EOP, sales of recovered chemicals

Avoided solvent purchase, lower disposal rests

Reduced wastewater treatment charges

Avoided disposal costs

Paint savings, avoided disposal costs

Reduced paint use

Lower ink costs, avoided disposal costs

SOURCES: Information provided bythe Center for Industrial Services, The University of Tennessee; the North Carolina Department of Environment,Health and Natural Resources, Pollution Prevention Program; Case Summaries of Waste Reduction by/ndustries in the Southeast (Raleigh, NC:Waste Reduction Resource Center for the Southeast, July 1989); Karf S. Tsuji, Energy and Environmental Analysis Group, ks Alamos NationalLaboratory, “Waste Reduction in the U.S. Manufacturing Sector, A Survey of Reeent Trends,” unpublished paper, November 1991.

prevention projects, some with payback times of The few studies on the economics of pollution12 But some in industry viewwell under a year. prevention suggest that while there are cases

these highly successful projects as relatively rare, where prevention yields net positive rates ofand there are elements of truth in both sides of the return equaling nonenvironmental investments,argument. more yield either positive, but low, returns, or

13 In controlling pollution, firmsHowever, pollution prevention projects do not negative returns.need to generate a positive rate of return to be normally have a range of options with a range ofsuccessful. Because most pollution prevention economic paybacks. In a few cases the paybackssolutions are cheaper than treating or disposing of are large enough to justify action solely on thewastes, a greater emphasis on prevention can economic merits14 (see table 8-2.) One studyreduce environmental compliance costs, regard- found that, where payback information was re-less of whether pollution prevention is profitable ported, companies were able to recoup theireven in the absence of regulatory requirements. investments rapidly, in 6 months or less, for

12 For example, see “Case Summaries of Waste Reduction by Industries in the Southeas~” Waste Reduction Resource Center for theSouthmst, Raleigh, NC, July 1989; Karl S. Tsuji, “Waste Reduction in the U.S. Manufacturing Sector, A Survey of Recent Trends,” Ims.Mamus N~itional Laboratory, November 1991; Dorfman et. al, op. cit.;“Leaders in Hazardous Waste Reductioq 1989 & 1990, ” PollutionPrevention Program, North Carolina Department of Environment, Health and Natural Resources; Pollution Prevention Case SrudiesCornpcnd[um, U.S. EPA, Office of Research and Development, April 1992.

1~ AS discu5~~ below, firms do not always adequately account for all benefits (and costs) from pollution prevention, ficludfig r~u~dlong-term environmental liability.

14 For example, see Cleaner Production Programme, Cleaner Production Worldwide (Paris: United Nations Environment Programme, 1993).


two-thirds of their investments.15 However, sincecompanies are more likely to implement pollutionprevention projects with larger rates of return,such findings may be skewed and not representthe entire universe of projects.

In other cases, while paybacks maybe positive,they are not high enough to be justified on solelycommercial grounds. Finally, in many cases thereturns are negative, but often represent savingsover alternative end-of-pipe approaches. Compa-nies would normally not invest in these projectswithout some kind of regulatory pressure.

For example, 3M’s gross savings of $516million from 1975 to 1992 in the United Statesthrough its Pollution Prevention Pays (3P) pro-gram is often cited as evidence of potentialsavings from pollution prevention.16 However,3M has also spent over $220 million on pollutionprevention capital investments, and an additional,unspecified, amount on labor to design andimplement these measures. Moreover, not all theprojects had net positive rates of return.17

Approximately half of the projects in DowChemical’s Waste Reduction Always Pays pro-gram (WRAP) cost more to implement than theysave.18 The chemical company Hoechst Celanese

analyzed over 200 projects in its Waste andRelease Reduction Program, focusing on SARA313 releases. The company found that about 20percent of the projects had a positive net presentvalue; the majority showed small but negative netpresent value; and 20 percent had large negativenet present values. As expected, end-of-pipe

treatment projects often yielded the worst returns,with source reduction and recycling showing thebest returns .19

Finally, pollution prevention does not elimi-nate the need for end-of-pipe treatment: thesefirms still expend significant amounts on environ-mental compliance. While 3M saved $47 millionfrom its 3P program in 1992, it also spent over$200 million on environmental compliance.20

The chemical company Monsanto has spent $100million to reduce toxic air emissions throughend-of-pipe and prevention measures, and onlysome of the projects were economically posi-tive.21

Economics of pollution prevention differ byindustry. In the pulp and paper industry, preven-tion is cheaper than end-of-pipe treatment, be-cause far less pulpmaking chemicals are used. Forexample, if a new pulp bleaching plant is installedin a greenfield mill or in rebuilding an existingfacility, the net capital cost of oxygen delignifica-tion systems generally will be close to zero. Thesystem eliminates the need for a chlorine-basedbleach stage and reduces chlorine dioxide con-sumption. In cases of a retrofit, the capital coststypically range from $10 to $20 million, depend-ing on the site. However, operating costs will bereduced by around $10 per metric ton of pulp,equivalent to about $1.5 to $4 million a year attypical production rates. In addition, oxygendelignification generally reduces biological oxy-gen demand (BOD) emissions by about 25percent, lowering water treatment costs by a small

15 Dorfm~ et. al., Op. cit.

lb It is ~ficult to determine actual savings, Actual savings may be lower since 3M calculates prOjeCted Savings at the time Of prOJectinitiation and not after implementation. On the other hand, because savings are only estimated for the first year in operatiow actual savingsmay be greater.

17 ~temiew Mm 3M official, Jmuary 1993.

18 “At~c~ng Wastes and Saving Money. . .Some of the Time, ” Industry Week, Feb. 17, 1992. Full cost analysis may not be done for allprojects, resulting in underestimation of savings,

1P Discussion wi~ Hoechst Celanese official, Apr. 20, 1993.

ZO Data provided by 3M.

21 Marc Reisch, “Monsanto’s Environmental Progress Comes at High COS6° Chemical and Engineering iVew.r, Dec. 14, 1992, p. 16.


Table 8-3—Capital and Operating Costs forSelected Pollution Prevention Measures

in the Wood Pulp Industry

Capital Annualcost savings

Process option ($ million) ($ million)

Base case example mill

Maximum substitution with EOP &existing CIO2 capacity

Extended cooking (if batchdigesters exist)

Extended cooking (if oldercontinuous digesters exist)

Extended cooking (if suitablecontinuous digester exists)

Oxygen delignification

100% substitution without EOP

50% substitution without EOP

10OO/. substitution with EOP

Extended cooking with EOP

Oxygen delignification with 100%substitution

Extended cooking with oxygendelignification

Extended cooking with 100%substitution

Extended cooking with OD and10OO/. substitution

Extended cooking with OD & EOP

0.0

2.8

45.6

32.6

4.6

27.5

15.9

5.0

13.6

47.0

34.7

71.6

54.5

75.2

73.0

0.0

0.5

3.4

2.8

3.7

3.3

(7.1)

(1.9)

(3.2)

3.3

2.0

6.0

0.1

4.6

4.4

Values in parentheses are negative. Savings in parentheses representcosts.OD==oxygen delignificatlon.EOP=caustic extraction reinforced with oxygen and hydrogen peroxidebleaching.Substitution-substitution of chlorine with chlorine dioxide.

SOURCE: Neil McCubbin, Proceedings, International Symposium onPollution Prevention in the Manufacture of Pulp and Paper Opportuni-ties & Barriers, Washington, DC, Aug. 18-20, 1992.

a m o u n t .22 If this negates the need to upgrade the

treatment system for mill expansion or to comply

with regulatory changes, capital savings of sev-

eral million dollars can occur. Finally, oxygen

Oxygen reactors, part of an oxygen delignificationsystem in a pulp mill.

delignification frees up chlorine dioxide generat-ing capacity, allowing the excess capacity to besubstituted for formerly purchased chlorinebleach (table 8-3).

In metal finishing operations, some facilitiessaved significant amounts of money using pollu-tion prevention technologies. However, many ofthese firms are plating with more valuable metals(e.g., gold, silver) where metal recovery makesmore economic sense. Advanced recovery sys-tems are sometimes more expensive than tradi-tional end-of-pipe treatment, although recoveredmetals and chemicals and avoided sludge dis-posal costs do provide savings. Such systemsappear to be more economical in the larger metalfinishing facilities and for more valuable stablebaths and in many cases can provide reasonablepayback times (less than 3 years).

Z’2 Similarly, in the electric utility industry, investing in heat rate improvements can reduce scrubber and waste disposal expemes, mom thanoffsetting the costs. Robert C. Carr, ‘‘Integrated Environmental Control in the Electric Utility Industry,” Journal of the Air Pollution ControlAssociation, vol. 36, No. 5, May 1986, pp. 652-657.


Future increases in sludge disposal costs or incosts of input metals and chemicals would makethese operations more cost-effective. For exam-ple, Freon 113 is becoming more expensive dueto the tax aimed at reducing use of ozone-depleting substances. As a result, some pollutionprevention solutions that had once been tooexpensive are now cost-effective.23

M Organizational and Technological Changeand Pollution Prevention

A focus on pollution prevention can sometimeslead to beneficial organizational and technologi-cal changes. A driving force for new productiveinvestments is often technological obsolescence.Improved environmental performance of produc-tion technology often goes hand in hand withincreased productive performance. As a result, afocus on pollution prevention can speed technicalchange within an industry, leading to increasedinvestment in new plant and equipment.

In some industries, process technologies arerelatively mature, with only slow rates of evolu-tionary change. However, increased concern withreducing pollutants, particularly at the source, canlead to reexamination of long-used technologiesand practices and may induce more rapid rates oftechnical change.

24 For example, pulp and paper

technology evolved relatively slowly between the1940s and 1970s. Increased concern with envi-

ronmental performance has led to renewed inter-est in the production process, with a number ofmajor new process innovations being developedwithin the last decade, and further developmentslikely to occur in the 1990s. The innovations caninvolve improvements in productivity or effi-ciency.

In the drive to become more competitive, manyU.S. manufacturers are organizing technologyand production processes in new ways (e.g.,computer-integrated manufacturing, just-in-time(JIT) delivery, and lean production) and rethink-ing their management systems (total qualitymanagement or TQM).25 Pollution prevention isconsistent with these approaches.26 For example,the environmental waste reduction program of thetextile firm Milliken grew out of its TQMprogram, which received the Malcolm BaldridgeQuality Award in 1989. Similarly, as some firmshave moved to JIT delivery systems, they havebeen able to eliminate decreasing and othercleaning steps. Moreover, there is some evidencethat an increased focus on pollution preventioncan encourage production workers to presentideas for improvement to process engineeringmanagers .27

There are a number of similarities betweenpollution prevention and TQM/manufacturingmodernization 28 (see table 8-4.) In both, firmsexamine their production process in great detail

23 For exmple, managers at the GE compressor plant in Columbia, Tennessee replaced their freon degreaser with a $600,000 WUmuswashing unit, Without the increase in cost of 113 freon to $84 per gallon (from $45 recently) the new unit would not be cost-effective underthe company’s cost accounting system.

~ previous OTA work hag found that “a new focus on pollution prevention offers an opportunity to reappraise and modefize plant processtechnology.” Serious Reduction of Hazardous Waste, p. 30.

25 U.!j. con~ess, OKlce of Technology Assessment, Making Things Better: Competing in Manufactun”ng, OT24-ITE-443 (Washington DC:U.S. Government Printing OffIce, February 1990); and U.S. Congress, OtXce of Technology Assessmen4 Worker Training: Competing in theNew International Economy, OTA-ITE-457 (Washingto~ DC: U.S. Government Printing Office, September 1990).

26 ~ a study of pollution prevention in a large multinational fii, the units that had strong TQM programs k place undertook morewide-ranging and effective pollution prevention efforts than divisions with less commitment to TQM. (Ann Rappaport, Development and

Transfer of Pollution Prevention Technology Within a Multinational Corporation, Dissertation Department of Civil Enginwring, TbftsUniversity, May 1992.)

27 Andrew K~g, ‘Cooperatively arning BetweenPollution Control and process Engineering Departments in the Printed Circuit FabricationIndustry, ” paper presented at The IEEE International Symposium on Electronics and the Environment May 10-12, 1993, Arlington, VA .

28 For exmp]e, S= .JMVin A~ “Pollution Prevention and TQ~’ Environmental Science and Technology, vol. 26, No. 3, 1992; dso GeneBlake, “TQM and Strategic Environmental Management” Total Quality Environmental Management, spring 1992.

— — .

Chapter 8-Pollution Prevention, Cleaner Technology, and Compliance 237

Table 8-4-Organizational Aspects of Pollution Prevention andTotal Quality Management

Factor TQM and pollution prevention

Central focus Focus on continuous improvement of the production process(goal of zero defects and zero emissions)

Source of improvement Quality and pollution prevention built into the production process

Desired results Increased efficiency and reduced waste (scrap and pollution)

Measurement process Benchmarking progress

Internal coordination Cross-departmental cooperation/coordination

Decision process Workers at all levels (including shop-floor) involved in decision making

Accounting system Activity-based and full-cost accounting


and focus on continually improving the process toimprove quality and productivity and reducescrap and pollution. Both practices incorporatenew cost accounting and measurement to assignall costs to particular products or productionprocesses. Benchmarking progress is encouragedin both.29 In TQM, firms strive for zero defects,while in the best pollution prevention efforts,firms strive for zero discharges.

The process of decisionmaking is also similar.Both practices aim to involve all parts of com-pany, rather than just the quality or environmentaldepartments. For example, in pollution preven-tion, representatives from purchasing, marketing,R&D, production, and design are all encouragedto work together to find ways to prevent pollution.Similarly, both stress the importance of workforceinvolvement and the key role of shop-floorworkers in improving quality and preventingpollution. Many programs report that their bestsuggestions to prevent pollution come from the

shop floor employees.30 Both pollution preven-tion and manufacturing modernization effortssucceed best when shop-floor employees areinvolved.

I n s ummary, when firms focus on pollutionprevention it facilitates the better focus on thebroader task of continuous productivity improve-ment.31 Preventing pollution through source re-duction requires managers to improve materials,energy, and resource efficiency.

POLLUTION PREVENTION OPTIONSStrategies for reducing waste generation in

manufacturing include: good housekeeping, main-tenance, and operating practices; product refor-mulation and raw material substitution; relativelysimple process modifications employing cur-rently available technologies; and, perhaps mostimportantly, more fundamental process modifica-tions, many requiring technological innovation.32

29 Ann C. Smith, “Continuous Lrnprovement Through Environmental Auditing,” Total Qualiry Environmental Management, winter199 1/92.

30 .S1filti resul~ ~Ve b~n found ~~ reg~d to energy conservation. (See Employee Participation in Energy Conservation: The U.S. ati

Japan Experience. University of Michigw Institute of Labor and Industrial Relations, 1983).

31 There arc a number of components of ISO 9000 (the International Standards Organization standard for quality mamgement) tit ~econsistent with pollution prevention. For example, both stress the importance of working with suppliers.

32 R,L. Berglund and C.T. Lawsou ‘‘Preventing Pollution in the CpI, ’ Chemical Engineering, September 1991, pp. 12027; also HarryFreeman et. al. “Industrial Pollution Prevention: A Critical Review” Journal ofAir and Waste Management Association, vol. 42, No. 1, May,1992, pp. 618-656.


1 Good Housekeeping and InnovativeManagement Approaches

Perhaps the simplest and easiest-to-implementpollution prevention strategy is to adopt goodhousekeeping, maintenance, and operating prac-tices. Frequently characterized as low-hangingfruit, many different industries have used suchmethods in varying degrees to cut waste econom-ically.

General improvements in manufacturing effi-ciency can reduce pollution. For example, statisti-cal process control programs, a TQM element,take some variance out of processes that generatewaste. Other improvements include, for example,metal finishing opportunities such as operating atlower concentrations in the bath, better racking orbarrel designs, draining over the tank, reducedwater usage, and use of simple drag-out stationsto catch and return drag-out solution.33 Such goodconservation and process control measures canreduce drag-out by 50 to 60 percent and extendthe life of stable baths.

Innovative management approaches to wasteminimization include working with customersand suppliers to redefine product needs so thatless-toxic chemicals or less-polluting processesare required, renting of chemicals where thesupplier takes them back after use, and improvedoperations management procedures like betterinventory control.34 Similarly, better attention topreventative maintenance to eliminate spills,leaks, and the like, can reduce emissions. Oftenemployee training programs have objectives (e.g.,reducing scrap and waste) that bring pollutionprevention benefits.

9 Product Reformulation and Raw MaterialSubstitution

Coating and cleaning operations are a principalarea for raw material change. A significantamount of effort has gone into replacing chlorin-ated solvents with other, often aqueous-based,solvents. In painting, alternatives to volatileorganic compound (VOC)-based paints includewater-based paints, which can obviate the needfor end-of-pipe VOC controls. For example, theSaturn automobile plant uses a water-based basecoat that gives off no VOCs. In metal finishing,research is underway to find alloy coating materi-als that would be acceptable substitutes forcadmium and chromium.35 On a broader basis, theshift from metal parts to plastic parts in a numberof products has reduced the amount of metalfinishing required. Substitutes, however, do notalways provide identical performance or qualitiesof the materials they replace.

1 Process Modifications Using ExistingTechnologies

While many pollution prevention opportunitiesrepresent relatively unique modifications notgeneralizable between facilities (e.g., fine-tuningprocess computer control systems to lower waste),36

many process modifications involve relativelygeneric process changes. For example, ultrasoniccleaning can greatly reduce solvent usage .37 Moreefficient paint transfer operations can reduceVOC emissions and paint sludge. In metal finish-ing, relatively standard technologies, such asimproved drag-out tanks and ion exchange, can beemployed economically, especially in the larger

33 my of ~me memww fwus on ~S~g that as much of the meti finish is applied to the part as possible, and as little as possible islost as parts are taken out of the plating bath.

34 Personal convemation, Jack Eisenhauer, Energetic, Columbia, MD, Jue, 1993.

35 Dep~ment of Enmgy, LOS AIamOS Natio@ Laboratory, Electroplating Waste Minimization, paper presented at the OffiCe of hdustrialTechnologies Industrial Waste Reduction Program Review, Washington DC, May 21, 1992,

36 For exmple, a Sma he plant reprogrammed its process control computers to reduce water use 65 percent, ad in SO doing avoidedinstallation of a $5 million pretreatment system. (Discussion with Roy Caraw~ North Carolina State University, Department of Agriculture,March 1993.)

37 John A Vaccari, “Ultrasonic Cleaning With Aqueous Detergents, ” American Machinist, April 1993, pp. 41-42.


operations.38 More efficient process controls can

reduce variations in industrial processes, leadingto reduced emissions.

1 Fundamental Process Modifications,Requiring New Technologies

Strategies involving more fundamental processtechnology modifications, many requiring tech-nological innovation, can be employed. Many ofthese approaches to waste reduction are stillunderused and are just now being explored.However, as simpler steps for pollution preven-tion become widely adopted, a significant sourceof environmental improvement will lie in newgenerations of manufacturing process technolo-gies that are cleaner, and often more productive,than older generations. In addition, many of theinnovative clean technologies in the processindustries to date have focused on individualprocesses, whereas process industries are a com-plex web of interconnected processes. Makingeach individual process as clean as possible maynot be as effective as finding the collection ofprocesses that could make an entire industrycleaner.

Process modifications are usually industry-specific+ specially in industries that processraw materials into intermediate materials (e.g.,chemicals, oil, rubber, pulp and paper, steel) .39For example, new methods of pulp delignificationto reduce chlorine bleaching are specific to thepulp and paper industry. Similarly, developmentsin catalysis to produce higher chemical yields arespecific to the chemical industry (see box 8-A). Anumber of new technologies are possible candi-dates to replace electroplating, including mechan-

Water soluble flux for soldering electronic circuitboards developed by an aircraft company allowsreduced use of CFC-based solvent cleaners.

ical plating, physical vapor deposition, and ther-mal spray processes.

Other applications may, with some modifica-tions, be used by a number of industries, particu-larly fabrication and assembly industries (e.g.,electronics, transportation equipment, fabricatedmetals). These include near-net shape metalforming,

40 laser metal cutting, alternative coating

procedures (ion implantation, powder coating),better separation and filtration devices, leak-proofpumps, alternative cleaning (e.g., supercriticalcleaning, no-clean soldering), and design tools,such as process simulators.41

Some fundamental changes in technology mayreduce the need for processes that are highlypolluting. For example, in the steel industry, theshift away from hot rolled ingots to automatedcontinuous casting, followed by cold working and

38 [shwar K. Puri, *’The Metal Finishing and Allied Industries-Issues for Pollution Prevention” (unpublished manuscrip~ University ofIllinois, Ch]cago, 1993).

39 Arncricanpetro[eum Institute, Wa.!te Minimization in the Petroleum Zndusfry: A Compendium ofPractices (was~ao~ DC: API, ~~~).

m Noel Greis, Waste, Energy and Raw Material Reduction Potential of Near Net Shape Metal Forming Processes (Worcester, MA: ~efacCorp., Nov. 15, 1991).

41 Jack ~iscnhaucrand Sbm MGQ~een,Environmental Considerations in Process Design andsimulation, AJointiy Spo~ored Wor~oPby the U.S. Environmental Protection Agency, U.S. Department of Energy, and the Center for Waste Reduction Technology, Dec. 8-9, 1992.


Box 8-A—Pollution Prevention in the Chemical lndustryl

The U.S. chemical industry generates over $250 billion in annual sales and runs a trade surplusof $19 billion. However, the industry also generates large amounts of pollution and is the dominantsource of hazardous waste in the United States. As a consequence, the chemical industry spent $4.8billion in 1990 to control pollution and will spend increasing amounts throughout the 1990s to complywith new, tougher environmental standards.

Over 80 percent of air and water pollution abatement capital expenditures went to end-of-pipetreatment equipment. There are, however, significant opportunities to control much of the pollutionthrough pollution prevention in all major unit operations of chemical processing, and in so doing topotentially lower compliance costs.

Storage Vessels-Methods for reducing tank bottom wastes, fugitive emissions from tanks, andresiduals in shipping containers are abundant and relatively simple. Mechanical mixing or emulsifyingagents can help solubilize tank bottoms and reuse the wastes. Fugitive emissions from tanks can bereduced with a number of fairly simple technologies, including floating roofs, insulated walls, and tanksthat can withstand high pressures, but many of these technologies are expensive and the amount ofmaterial saved will not always cover the capital costs. Such actions as proper location of drainage valvesand dedication of storage containers to specific uses can reduce emissions from shipping containers.

Piping and Valves-The most significant environmental problem associated with valves, pumps,compressors and other pipe fittings are fugitive emissions. Leak Detection and Repair (LDAR) programscan significantly cut fugitive emissions. While such programs are expensive, they can yield significantsavings in material. For example, in a study of pollution prevention options at Amoco’s Yorktown Virginiarefinery, a quarterly leak detection program was projected to yield a 19 percent annual rate of return dueto savings from reduced material Ioss.2

Reactors-Reactors are a key element in any chemical manufacturing process and are particularlyimportant in waste generation. There are several levels of analysis to be considered in improving reactordesigns, including selectivity, contamination, and vessel design. However, a particularly promising areafor reactor improvements involves catalysis. For example, anew selective catalyst increased the yieldof linear polypropylene (product) relative to nonlinear polypropylene (a waste), and hence reducedwaste polypropylene by 90 percent. Similarly, a catalyst system developed for use in makingacetaldehyde cuts chloro-organics formed by over one-hundred-fold. Controlling attrition and limitingdeactivation of catalysts can also decrease wastes. Finally, integration of both reaction and distillationin a single vessel (e.g., catalytic distillation) can offer opportunities to cut waste and possibly reducecapital and operating costs. However, the development and new catalysts and reactor designs to lowerwastes is still in its infancy and new reactor designs are generally only economically feasible with newplants or major retrofits.

Heat Exchangers-Heat exchangers can be a source of waste when high temperatures causefluids to form sludges. Steam-based cleaning produces significant quantities of wastewater.Alternatives include sand blasting with dry ice or recyclable sand. In addition, use of adiabatic expandersto mix high and low pressure steam to achieve optimal heat transfer temperatures is a relatively Iow-costmethod of minimizing waste.

Separation Equipment--Since separation units are designed to further purify products and isolatecontaminants, they are by nature waste-generating, although sometimes unreacted feedstocks or

1 TMS box iS based principally on a contractor report to OTA written by David Allen, Professor of ChemicalEngineering, UCLA.

2 AtTWXXMJ.S. EPA pollution t%vention Pro~ct, Yorktown, Wrginia. Prvject Summary, June 1992, p. 3.22.

Chapter 8–Pollution Prevention, Cleaner Technology, and Compliance I 241

byproducts may be reused or used elsewhere. It is difficult to generalize about separation, while in somecases waste can be reduced economically, while in others it is quite expensive.

Flowsheet restructuring-Much of the focus on pollution prevention in the chemical industry hasbeen on individual unit operations. Another set of methods for waste reduction involves completelyreconfiguring the entire process flowsheet within a facility. Such dramatic process modifications aredone only rarely, but they do offer significant pollution prevention potential.

Byproduct reuse-Some of the waste products from chemical processes may have other uses. Forexample, Arco’s Los Angeles refinery sells its spent alumina catalysts to Allied Chemical and its spentsilica catalysts to cement makers. These were previously characterized as hazardous wastes anddisposed of in a landfill at high costs.3 Solvent recovery also can allow solvents to be reused within theprocess.

Industry-wide analysis--Selection of particular processes to make individual chemicals is quitecomplex and will have different energy requirements and rates of waste generation. Moreover, theselection will influence rates of waste generation in the rest of the chemical industry. For example, ifmethanol is produced via carbon monoxide, it maybe possible to generate carbon monoxide throughpartial oxidation of a material that is currently wasted. On the other hand, to convert carbon monoxideinto methanol requires hydrogen, which is an energy-intensive material. There have been fewsystem-wide analysis of the energy and environmental impacts of chemical processing to inform suchchoices.

Table 8A-1—Reducing Wastes From Unit Operations in Chemical Processes

Examples of Process Modifications for Waste Reduction

Process modificationsChanges in operating Currently feasible requiring technologypractices process modifications development

Storage vessels

Pipes and valves

Heat exchangers

Reactors

Separators

Use of mixers to reducesludge formation

Leak detection and repair pro-grams for fugitive emissions

Use of anti-foulants; innovativecleaning devices for heat ex-changer tubes

Higher selectivity through bet-ter mixing of reactants, elimi-nation of hot and cold spots

Reduce wastes from reboilers

floating roof tanks, highpressure tanks, insulatedtanks

Leakless components

Staged heat exchangers anduse of adiabatic expanders toreduce heat exchanger tem-peratures

Catalyst modifications to en-hance selectivity or to preventcatalyst deactivation and at-trition recycle reactors for cat-alyst recycling

Improvements in separationefficiencies

Process specific changes toeliminate need for storage,particularity intermediates

Process designs requiring theminimum number of valvesand other components

Heat exchanger networks tolower total process energydemand

Changes in process chem-istry; integration of reactorsand separate units

New separation devices, ef-ficient for very dilute species

SOURCE: David Allen, “Clean Chemical Manufacturing Technologies: Current Practices and Long Term Potential ;’’contractor reportprepared for the Office of Technology Assessment, May 1993.

3 Robert A. Frosch and Nichoias E. Gailapouios, “Strategies for Manufacturing,” Scientific American,September 1989, p. 144-152.


Brayton cycle heat pumps allow recovery of solventsand energy from industrial processes. DOE’s Officeof Industrial Technology supports development ofthis technology.

atmospheric annealing, significantly reduces boththe quantity of scale left on the steel’s surface, andthe amount of acid needed for pickling. Over the

long term, it is quite possible that technology will

allow metal goods to be manufactured in such away that the surface does not require separatefinishing, eliminating much metal finishing andthe pollutants it generates. If technically andeconomically feasible, direct steel making willeliminate the highly polluting coke process.

Some technological changes are unlikely tooccur in the near future, but hold significantpromise. For example, the design and operation ofbleached kraft pulp mills without any aqueouseffluent, except clean cooling water, is a realisticgoal. 42 However, little research is being done o n

this. Other possibilities may emerge in the longerterm, such as developing plastics with built-incatalysts allowing them to be broken down into

their constituent chemical components andrecycled.

1 External RecyclingIn the last two decades, businesses have made

greater efforts to deal with wastes. However,these efforts have been highly atomistic, withlittle interfirm or interindustry coordination in thearea of materials and waste management, andwith little consideration of wastes and products atthe ends of their useful lives as potentially usefulinputs to some other industrial process.43

The term ‘industrial ecology’ refers in part, tothe better use of waste and materials amongfirms.44 Increasing the rate of recycle and reuse isnormally more economical than treatment, and,even pollution prevention in some cases. More-over, with regard to materials use, exchange ofwaste products among firms may prove moreefficient than source reduction. optimizing anindividual plant with respect to waste reductionmay be less efficient than optimizing the indus-trial system with respect to that material.45

Similarly, it may sometimes be cheaper to treatpollutants centrally than to install treatment orwaste reduction technologies in the individualplants (see box 8-B) For example, when publiclyoperated treatment works (POTWs) have excesscapacity, it maybe cheaper to have them treat anddispose of some industrial wastes than have theindividual firms pre-treat their wastes.

There are several sources of savings fromrecycling. First, firms generating these materialsno longer have to pay for their treatment ordisposal. Second, and perhaps more important,use of processed materials can generate less

42 Ivkcul)t)in, op. cit.

43 Robe~ A. Fro~Ch, I b~&~&i~ ~~1~~: A p~lo~op~c~ ~~oductio~’ proceedings of the Natio~/ Academy of science, February 1W2,

p. 800.~ c. Kurnar N. Patel, “Industrial Ecology,” Proceedings of the National Academy of Science, February 1992; also Matthew Weinberg,

Gregory Eyring, Joe Raguso, and David Jense% “Industrial Ecology: the Role of Government’ Greening IndusrriaZEcosysrems (WashingtonDC: National Academy of Engineering Press, forthcoming, 1993).

45 me Dep~ment of Ener~ Waste u~~ation and Conversion program f~uses on fiese tids of material reuses issues. (OffiCe Of

Industrial Technologies, Waste Utilization and Conversion: Program Plan, Washi.ngto% DC: U.S. Department of Energy, Apr. 16, 1993).


Box 8-B–External Recycling in the Metal Finishing Industry

Many wastes from metal finishing processes are too small, too low in value, or requiretreatment/recovery technologies too complex to be feasibly processed on-site by the generator.However, because of economies of scale, there are good opportunities to process many of these wastesat an off-site centralized plant that services numerous generators. Such a facility can extract metal andother chemicals from the wastestreams and purify them to commercial standards to produce articles ofcommerce. The economics of such an operation are only minimally dependent on the value of therecovered metal or chemical. Rather, the primary factor making such a central processing planteconomically feasible is the cost to t he waste generator (monetary and on-going liability) for the disposalof waste.

Currently, there are two types of external recycling in the metal finishing industry. Somemetal-bearing sludges (e.g., copper, nickel) are sent to smelters, who refine them along with other metalinputs. In a centralized facility, metal finishers segregate their waste and ship it to a facility where it isrecycled and treated. in the mid-1980s, when new effluent standards were being promulgated for themetal finishing industry, several communities explored establishing centralized facilities before theirmetal finishing firms invested in expensive in-house treatment. However, a number of problems,perhaps most importantly an unwillingness by EPA and state regulators to support these projects inmany cities,1 has meant that only one such facility has been developed in the United States, inMinneapolis.2 In contrast, there area number of such facilities in Japan and Europe.

While operating costs appear to be the same or slightly higher for firms that manage wastesinternally versus those that use a centralized facility, the latter are able to avoid large capitalexpenditures for environmental equipment and instead use the capital for expanding or modernizingproduction equipment. In addition, they can rely on the centralized facility to professionally manage theirwastes. This is especially critical for smallershops that do not have (and cannot afford)the operation/regulatory expertise to effec-tively operate in-plant systems.

The economics of a centralized facilityare such that it depends on fees for asignificant share of revenues. Recoveredchemicals and metals (e.g., copper, copperoxide, nickel carbonate) are generally asmall share (1 O to 20 percent) of revenues.Recovery at such facilities is in many ways,analogous to recycling elements of munici-pal garbage. The feasibility of the effortdepends in part on the marketability andprice of the product produced. Some lowvalue streams, such as those made of A waste recovery and treatment company places thesecommingled metals, will not be economically ion exchange canisters in industries to remove

recyclable, even on a very large scale, until waterborne hazardous wastes for further processingsludge disposal rates increase significantly. and recovery at its centralized facility.

1 ste~en Basler, &~~r~/ Trea~rnenf and Recovery Fao”h’fies for fhe Meta/ Filllshhlg Itldustry: A Fh@ Ci~YComparison, (Chicago: Center for Neighborhood Technology, June 1989).

2 l%e facility is a division of U.S. Filter Corporation, Inc., and is known as U.S. Filter Recovery Systems, Inc.


pollution and requires less pollution abatementspending than the production of virgin materials.For example, pollutants generated from second-ary fiber pulping using recycled paper are quitelow compared to conventional bleached kraftpulp production.

46 Third, in some cases wastes of

one process can be used as inputs to another. Forexample, Dupont found a market in the pharma-ceuticals and coating industry for hexamethyle-neimine, a by-product of nylon manufacturing.The market is now so strong that in 1989, Duponthad to find a way to manufacture what hadformerly been a waste. Dow Chemical recoversexcess hydrochloric acid, which it either reuses orsells on the open market, making a profit of $20million annually.

47 While these examples are not

the norm, it is possible to design processes thataccept the wastes from other processes as inputsand produce their wastes as inputs to otherprocesses.

Even though there are many environmental andeconomic advantages to both in-plant and exter-nal recycling, the regulatory framework oftengives little credit to recycling. Some advocates ofsource reduction argue that by providing firmswith the option of external recycling, they willreduce their efforts at source reduction. It is notclear the extent to which this may be true. Whilesource reduction should be the first option exam-ined, there do appear to be cases where externalrecycling is in fact cheaper.

Some types of pollution cannot yet be pre-vented and must be treated or disposed of. Someprevention solutions may be relatively risky or

unstable under different operating conditions.And some end-of-pipe (EOP) controls allowmanufacturers more flexibility in production. Asa result, there is always likely to be a need forEOP treatment and disposal of pollutants andwastes. Because of this, and because current EOPtechnologies are often expensive, advances inEOP technologies are still necessary, particularlyfor those that lower cost and improve perform-ance (see ch. 10).

FACTORS LIMITING THE ADOPTION OFPOLLUTION PREVENTION

To adopt pollution prevention options, firmsmust first find opportunities, identify solutions,and then authorize and implement them.48 Be-cause there can be impediments at each of thesestages, there are a number of reasons why U.S.manufacturing firms have not made greaterstrides in pollution prevention49 (see table 8-5).Not all firms will face the same impediments,which can differ by industry, firm size, andmanagement practices.

H Finding OpportunitiesPollution prevention is strongly influenced by

the regulatory system. Regulation creates incen-tives by imposing a cost on polluting, which firmscan possibly reduce through pollution prevention.Some regulations, such as the Toxic ReleaseInventory reporting requirements, focus publicattention on emissions and provide an incentivefor reduction, particularly the relatively easy-to-

46 Waste Papti plan~ ~ically produce BC)D in tie range of 5-10 kg. per metric ton and no organochlorines, and use few chemicals ascompared to typical bleached kraft mill, which produces 20 to 50 kg of BOD per metric ton and some organochlorines. (McCubbb op. cit.)

47 Frosch and Gallapoulos, Op. cit.

48 peter Cebou ~ ‘Orga~mtio~ Be~vior as a Key El@ent in Waste Management Decision Making,’ The Environmental Challenges ofthe 1990s (Washingto% DC: Environmental Protection Agency, 1990).

w ~ny of tie re=om are sim&M to hose found for not implementing cost-efilcient energy conservation measures in industry. Se% forexample, James R. Ross, “Energy Conservation in Sewn Products Plants,” paper presented at the 1979 American Institute of IndustrialEngineers annual conference; also Peter Cebon ‘‘High Performance Industrial Energy Conservation: A Case Study’ Kurt Fischer and JohanSchot (eds.) The Greening of Indusrry (Washington DC: Island Press, 1993).

so me rewntc~ges in TRI reporting, where assions are reported even if they are treated, will most likely push pollution prevention evenmore.

———-


Table 8-5-Barriers to Pollution Prevention

Decision process affected

Identify Identify ImplementBarrier opportunities solutions solutions

InformationalLack of knowledge of wastesBias toward end-of-pipe (EOP)Lack of knowledge of alternativesEquipment vendors focused on EOPEnvironmental managers focused on EOP

OrganizationalEnvironmental managers may not fully understand production

processesIndividuals may not be rewarded for pollution preventionWorker involvement may be limitedBuyer process specifications may hinder pollution prevention

TechnologicalAppropriate technologies may not be availableExisting solutions may negatively affect process or product

RegulatoryFirms have hands full with complianceRegulatory definitions of waste limit effortsRegulatory enforcement patterns may raise risks of trying

innovative solutionsRegulations may require EOP solutions or mandate certain sources

be controlledRegulations provide few incentives for going below the standard

AccountingFirms may not measure solutions’ costs/benefitsFirms may incorrectly measure costs/benefits

Financial practicesExisting discretionary funds may go to EOP regulatory projectsFirms may not invest in all profitable projectsCorporate hurdle rates may be too highPlant investment may not be fully amortizedSome industries may grow slowly with low investment rates

xx

——

xxx

—

——

x

——

——

————

xxx

—xx

xx

x—

—

——

——

—————

———

—

x

——

—x

x

xx

xx

xxxxx


reduce emissions.50 Similarly, Superfund liability tion, certain aspects of the current system dampenprovisions encourage firms to reduce, rather than this incentive, and in some cases provide atreat, emissions.51 However, incentives may not disincentive. An important barrier to pollutionbe directed at the most appropriate people or prevention is the single-media, command-and-departments within a firm.52 control focus of the regulatory system.53 The

Moreover, while the regulatory system as a single-media statutory directives, rules, and re-whole provides an incentive for pollution preven- ward systems for EPA personnel reinforce pollu-

S1 However, it is impor-tant to note tbiit pollution prevention options inspired by these provisions may not always be tie most ecOnofi~lyrational.

52 OTA, Serious Reduction of Hazardous Waste, op. cit., p. 5.

53 ~’atlon~ Cotission on the Environment, Choosing a Sustainable Future (Washington, DC: Island Ress, 1993).


tion control efforts, and provide only tokenincentives for actively pursuing pollution preven-tion.54 While EPA top management has promotedpollution prevention, translating this initiativeinto action by middle managers has proven moredifficult. Moreover, EPA funding is geared to-ward end-of-pipe, not prevention, programs. Firmsare often too busy responding to single-media orend-of-pipe regulatory requirements to devotemuch attention to prevention.

Many firms are unaware of pollution preven-tion opportunities or their relative merits overend-of-pipe solutions.55 Small and medium-sizedfirms seldom analyze their wastes streams toidentify prevention opportunities. Moreover, manyfirms lack the time and inclination to make theirway through the complex regulatory maze inorder to identify what is and isn’t allowed.

I Finding SolutionsIn contrast to end-of-pipe treatment, which can

be applied without specific operational knowl-edge of the production process, pollution preven-tion requires those with intimate understanding ofthe production process—line workers, managers,and engineers-to contribute their knowledge.However, responsibility for finding pollutionprevention solutions may not rest with those mostcapable of doing so.56 The tendency of organiza-tions to allocate responsibility for pollution pre-vention to a few agents in the organization is acommon source of many barriers. For example,most plant managers are rewarded for gettingproduct out the door, not for reducing waste. As

a result, they may oppose prevention solutions forfear they will divert resources from productionprojects. Production supervisors may fear thatpollution prevention will negatively affect prod-uct quality or create interruptions. Engineers maysee prevention as diverting them from moreinteresting and valued work. Production lineworkers may not be rewarded for initiatingprevention solutions, and management may ig-nore solutions generated. Moreover, buyer speci-fications may require the use of certain processes,making shifts to pollution prevention difficult.57

Most environmental managers have been trainedin end-of-pipe practices and thus may overlookopportunities for prevention.

Organizational structures can also impede pol-lution prevention. Environmental management isoften the responsibility of a separate departmentthat is physically and strategically peripheral tothe production organization. Cross-departmentalcommunication may then be impeded by thephysical isolation of the environmental person-nel, or by their low status and authority .58

Even when all levels of the organization areinvolved, many firms, particularly small andmedium-sized firms and relatively autonomousbranch plants of large corporations, may eitherlack the knowledge of technical alternatives ornot possess the engineering expertise needed toredesign processes. For example, a survey ofWisconsin hazardous waste generators found thatinsufficient information about how to reducewaste successfully was a significant barrier to

54 me Nation~ Adviso~ CounCil for Env~nmental Policy and Technology, Transforming Environmental permitting and compliance

Policies to Promote Pollution Prevention (Washington DC: U.S. Environmental Protection Agency, Office of the Administrator, February1993), p. 25.

55 For exmple, Sm ]ndus~ SurV~ 92: Barriers to Po/httion Prevention (Baton Rouge, LA: Imuisiana Department Of EnvironmentalQuality, 1992); also “Response to Questions for Top Hazardous Waste Generators and TRI Releasers” (Austin: Texas Water Commission,Task Force 21, Nov. 5, 1991).

56 For example, see Manik ROY, “Pollution Prevention, Organizational Culture, and Social Learning,” Environment/ Luw, vol. 22,No. 149.

57 For exmple, both miliq specifications from DoD, as well as specifications from large corporate buyers or sellers, can be inflexible.

58 Andrew King, ‘‘ Cooperative L.earning Behveen Pollution Control and Process Engineering Departments in tbe Printed Circuit FabricationIndustry, ” op. cit.


further waste reduction.59 Moreover, firms maydoubt that pollution prevention opportunities ortechnologies exist.

To overcome this, some fins, particularlysmall and medium-sized ones, tend to rely onvendors or consultants for information aboutpollution prevention. Anecdotal evidence sug-gests that these may steer companies away fromprevention in favor of more generic end-of-pipeequipment. This may in part be due to the fact thatmost environmental consulting, focuses on end-of-pipe treatment, while most environmental equip-ment vendors sell end-of-pipe equipment.60

Finally, many firms overlook sources of sav-ings such as energy reduction and pollutionprevention, reorientation of materials flow, re-duced inventory, and improved quality, in favorof either increased output or direct cost reductionsrelated to production.

61 This may be because theybelieve that their core production process isalready efficient. While top level managementmight understand the importance of profit maxi-mization, operating managers often emphasizeoutput maximization, making it hard for them togive priority to pollution prevention investmentswhen other matters occupy most of their atten-tion. Investments in these cost-saving activitiesare often seen as tying up capital that could beused for other things, including expanding output.Moreover, because pollution prevention projectsoffer high levels of risk and low rewards fordecisionmakers (if they succeed the processcontinues as usual, but if they fail the managerscan get in trouble), managers will often not makethe change.

As discussed in chapter 9, regulations requirestrict compliance with a standard and seldomprovide firms with innovation waivers or tradablepollution allowances for implementing pollutionprevention solutions that almost attain the stand-ard. Moreover, because pollution prevention so-lutions, particularly those based on more compli-cated process redesign, can take a long time todevelop, and because regulations often give firmsshort lead times to meet regulatory requirements,firms often invest in end-of-pipe.

Finally, some prevention solutions may berelatively risky, particularly with new projects. Inaddition, some end-of-pipe controls allow manu-facturers more flexibility in production. Forexample, the Saturn automobile plant installed astate-of-the-art carbon adsorption unit, whichgives them the ability to use many types ofcoatings on the car, including those with higherVOC content.

Z Authorizing and Implementing SolutionsOnce managers identify and design pollution

prevention solutions, firms must still authorizetheir implementation and provide resources. Topmanagement commitment is important in imple-menting pollution prevention.62 One reason whythe chemical industry has more aggressivelyadopted pollution prevention practices is that topmanagement has made it a priority. Likewise,studies have shown that when educated andprovided with organization position and effectivetechnology, environmental managers can be pow-

59 Reducing Hazardous waste In Wisconsin, Report V: Barriers and Incentives ro Hazardous Waste Reduction (Madison: Bureau ofRe.searclL Wisconsin Department of Natural Resources, August 1992).

a “WC Firms Position For Prevention, ” Environmental Business Journal, vol. 6, No. 8, August 1993.s] O’rA, ]ndu~rriaf Energy Ejkiency, op. cit. A]so, B. Wilhlll Riall, “Nontraditional Equipment Justi.ilcation Methods and Their

Applicability to the Apparel Industry,” prepared for The U.S. Defense Logistics Agency, November, 1988.62 ‘*~even~g po~ution: FOCUS on Organization and Management, ” Technology, Business and Environment Progrq MIT, September,

1991; also Robert Bringer and David Benforado, ‘‘Pollution Prevention as Corporate Policy: AI.mok at the 3MExperience, ” 1989, pp. 117-126.


erful advocates for pollution prevention.63 Not-withstanding, there are still a number of impedi-ments to implementing solutions.

REGULATORY BARRIERSThe characteristics of the current regulatory

system may encourage companies to controlpollution from specific sources (e.g., boilers) withend-of-pipe reference technology. As a result,firms may have little incentive to reduce pollutionfrom other sources that might be less stringentlyregulated or to use pollution prevention to reducereleases below the regulatory standard. Moreover,because end-of-pipe controls are often the defactostandard, firms choose the path of least resistanceand install these, rather than pursue prevention.While permit writers normally understand ge-neric control technologies, they often do notadequately understand industrial processes andpollution prevention techniques.64

CAPITAL ACCOUNTINGEconomic theory holds that managers of an

enterprise will attempt to optimize production tomaximize profits.65 Wastes, as one of several costfactors, should be treated in a fashion in whichmarginal investments are made in pollutionprevention until the point where marginal returnson investments in other areas are higher. How-ever, others argue that in practice, projects

yielding competitive paybacks are routinely ig-nored. There are several reasons postulated forthis.

First, a large proportion of firms do not conductdiscounted cash flow analysis on all investmentprojects, particularly for pollution preventioninvestments often seen as mandatory environ-mental projects that historically cost the firmmoney.

66 Another barrier is that many firms usesimple payback measures, even though the formercount against pollution prevention projects thatnormally have longer term benefits.67

Second, conventional discounted cash flowmethods can underestimate the benefits of pollu-tion prevention projects. These benefits caninclude reduced waste disposal costs, regulatorycompliance costs, insurance and liability costs,and improved public image. One problem indemonstrating the cost advantage of pollutionprevention investments is the inability of somefins’ accounting practices to allocate end-of-pipe costs to specific product lines or processes.Moreover, firms can underestimate labor savingsfrom pollution prevention.

There have been several efforts made todevelop better accounting practices to credit forthe full cost of pollution. Referred to as Total CostAccounting (TCA), such methods attempt toinclude all costs including direct capital andoperating costs, indirect or hidden costs (e.g.,

63 Andrew King, “Innovation From Differentiation: Environmental Departments and Innovation in the Printed Circuit Industry, ” inInternational Product Development Management Conference on New Approaches to Development and Engineering (Brussels, Belgium:EIAS~ 1992).

64 Re@ations fmm other agencies can hinder pollution prevention. For example, pharnulceuticzd f~ must ~eive reI@atory appmvdfrom the Food and Drug Administration to change their processes.

65 Adam B. Jaffe and Robert N. Stavins, ‘ ‘The Energy Paradox and the Diffusion of Conservation Technology,’ (draft), Harvard University,unpublished manuserip~ Feb. 12, 1993.

66 For example, ‘Amoco’s project evaluation approach has usually viewed environmental projects in the limited context of meeting speeiflcregulatory requirements within a freed timeframe. ’ Amoco-U.S. EPA Pollution Prevention Project, Yorktown, Virginia. Project Summary(jointly published by Amoco Corp., Chicago, IL, and U.S. Environmental Protection Agency, Washington, DC: June 1992). See also AllenL. White, Monica Becker, and James Goldste@ Alternative Approaches to the Financial Evaluation of Indusm”al Pollution PreventionInvestments, prepared for the New Jersey Department of Environmental Protection, Division of Science and Research, November 1991, p. 20.

67 Ross feud that for small energy conservation projects financial analysis is usually relatively simple and is supplemented by tiormdadjustments. The result is that for many firms only the most profitable small projects are undertaken. Marc Ross, ‘‘Energy-ConservationInvestment Practices of Large Manufacturers,‘‘ in The Energy Industries in Transition, 1985-2000, Part 2, edited by John P. Weyant andDorothy B. Sheffield, Washington, DC: The International Association of Energy Economists, 1984.


compliance costs, insurance, on-site waste man-agement, operation of pollution control equip-ment), future liability (penalties and fines andpayments due to personal injury and propertydamage), and less tangible benefits (e.g., revenuefrom enhanced company image).68 Some costs aredifficult if not impossible to quantify, such asimproved company image or reduced liability.However, excluding them completely from costanalysis unfairly disadvantages pollution preven-tion projects.

Case studies applying TCA suggest that insome cases, TCA analysis can improve theinternal rate of return of pollution preventionprojects to make them competitive with alterna-tive investments. In addition, as an accountingmethod that leads firms to more accuratelymeasure and assign costs and savings, TCA isconsistent with other improved accounting meth-ods, such as activity-based accounting69 andfull-cost accounting,

70 that have been advocatedfor helping firms make more rational decisionsregarding investments generally.71 However, pre-paring a TCA analysis can involve considerableeffort, limiting its use to larger firms implement-ing projects with considerable costs and savings.

INVESTMENT PRACTICESEven if firms accurately measure costs and

benefits of pollution prevention investments,capital accounting practices and capital availabil-ity may limit the adoption of even profitablepollution prevention projects. Many small and

medium-sized firms find it difficult to get financ-ing for pollution prevention projects, in partbecause banks may not understand the projectsand view them as not generating a cash flow.Many larger firms prefer to fund small capitalprojects (like pollution prevention) from retainedearnings, in part to preserve credit ratings. More-over, large firms often adopt capital rationingsystems where divisions and plants are givenlimited amounts of capital for small projects,regardless of how many profitable projects theyhave.72

Even without capital rationing, small projectsare commonly subject to more stringent hurdlerates. The result of both practices is that much lessdiscretionary spending is undertaken than wouldbe justified by conventional analysis. In suchcircumstances, waste reduction projects (charac-terized by a high number of small-scale invest-ments) with rates of return higher than thecorporate cost of capital may not be funded ifother projects have even higher rates of return.Moreover, because waste reduction projects areoptional and are often proposed by low-statusenvironmental managers, they are more likely tolose out.73

This lack of assertiveness in investing inpositive pollution prevention projects may be partof a larger pattern of lack of investment in a widerrange of productivity-enhancing technologies.The problems in funding profitable pollutionprevention (and energy conservation) projectsmay be symptomatic of deeper problems in U.S.

68 ~te, Becker, and Goldste~ op. cit.; tie Northeast Waste Management Officials’ Association in conjunction Witi the MassachusettsOffIce of Technical Assistance have also developed a manuat for TCA, Costing and Financial Analysis of Pollution Prevention Projects.

69 Robin Cooper, “Implementing an Activity-Based Cost System,’ Cost Management, spring 1990, pp. 3342.To F~I ~st a~o~fig assigns aIl costs to specitlc processes or product lines. TCA is concerned with both this more accurate mocation of

costs as well as the expansion of cost items beyond traditional concerns. (White, Becker, Goldste@ op. cit.)71 For exmple, ~ny ~we tit Conventioti acco~ting me~ods do a poor job of acc~ately meas~g tie savings fTC)m implementation

of flexible automated production equipment. See R,H. Hayes and R. Jakumar, “Manufacturing Crisis: New Technologies, ObsoleteOrganizations,’ HarvardBusiness Review, September-October 1988; atso B. William Riall, op. cit,; also Robert A Howell and Stephen Soucy,Factory 2000+ Management Accounting’s Changing Role (Montvale, NJ: National Association of Accountants, 1988).

72 Marc Ross, “Capital Budgeting Practices of Twelve hge Manufacturers, “ Financial Management, winter 1986.73 Job Erhe~eld, ‘{TW~oloW and me Environment: A Map or a Mobius s~p, ” paper presented at the World Resources 111.Stihlte

Symposium, “Toward 2000: Environment Technology, and the New Century, ” Annapolis, MD, June 13-15, 1990.


business financing that lead U.S. firms to underin-vest in the assets and capabilities required forcompetitiveness (e.g., projects with moderate-term paybacks in energy, technology, training,and productivity) .74

SOCIAL BENEFITSWhen firms do invest in pollution prevention,

there is evidence that expected corporate rates ofreturn eliminate some of projects that would bejustified from a societal perspective because ofthe external costs of pollution. Ross estimates thatif firms applied a longer time horizon to invest-ments (a lower capital recovery rate of 16 percent,instead of the current rate of 33 percent) thatenergy conservation measures would result inconsumption of approximately 20 percent lessenergy. 75 Similar pollution prevention projects

also appear to be overlooked.76 If this is true, theoptimal investment practices of companies willnot maximize societal welfare. High hurdle ratesare often a hedge against high risk, yet pollutionprevention investments often have low risks,possibly deserving lower hurdle rates.

INVESTMENT CYCLESFinally, some firms and industries do not invest

heavily. Some managers are more cautious,focused principally on survival; others aggres-sively seek out innovation and new investment.Some industries with mature markets and equip-ment and low profits (e.g., metal finishing) investless in new facilities, so adding on new environ-mental equipment is harder. In addition, the

recession has further diminished new investmentsin pollution prevention equipment.

One reason for slow implementation, particu-larly in the more capital-intensive process indus-tries, is that many firms have large investments infixed capital. Firms may wait until the capitalequipment nears the end of its useful life (some-times as long as 40 years) before investing innewer, cleaner processes. Moreover, in manyindustries most firms have invested in pollutioncontrol facilities. For example, virtually everymetal finishing firm in the United States has afunctioning wastewater discharge system.77 In theabsence of new regulations, equipment replace-ment, or addition of new production facilities, itoften makes little sense for firms to invest in newpollution control equipment.

POLLUTION PREVENTION TECHNOLOGYDEVELOPMENT

Considerable gains in pollution prevention arepossible through wider deployment of existingtechnology. Greater gains are possible throughdevelopment of new technologies. These environ-mentally preferable process technologies exist orcould be developed in all manufacturing sectors,and hence may be critical to U.S. manufacturingcompetitiveness in an environmentally constrainedworld. 78

Only a small share of environmental R&D isfor pollution prevention technology develop-ment. Of the estimated 1.7 billion dollars theFederal Government spent in 1992 on environ-mental technology R&D, less than 4 percent ($70

74 Councfl on ComWtitiven~s and Harvard Business School, Capital Choices: Changing the Way Amen”ca Invests in Industry (WashingtonDC: Council on Competitiveness, June 1992).

75 For mOst gov~nment projects, Om ~uires a red diSCOUnt rate Of 10 per~nt, w~e EPA r~uires a red discount rate ‘f 5 Wrcent ‘or

evaluating projects under its jurisdiction. Steven R. Booth, Linda K. Trocki, and Laura Bowling (Los Alamos National Laboratory), “AStandard Methodology for Cost Effectiveness of New Environmental Technologies, ’ paper presented at the Hazardous Materials ManagementConference and Exhibition Atlanta, Geor~ Oct. 2-4, 1991.

76 For exmple, b he AIIMCO oil refiiery at Yorlcto~ Virginia, 2 of 11 pollution prevention projects had rates of return greater than 10percent. (Amoco/U.S. EPA, op. cit.)

77 F.A. Steward, op. cit.78 GWrge H=to% Ro~~ ReWfio, ~d Rodney Sob@ 7’runSfOrming Technology: An Agenda for Environmentally Sustaimble Growth in

the Zlsr Century (Washingto~ DC: World Resources Institute, April 1991).


million) went to pollution prevention R&D.Academic research patterns are similar. A surveyof 38 academic research organizations in theUnited States involved in hazardous waste man-agement found that only 28 of 529 projects couldbe described as pollution prevention .79 Moreover,little of the pollution prevention research focuseson the fundamental changes in manufacturingprocesses and methods that may be required tomeet long-term goals for environmental improve-ment at lower cost.

Pollution prevention R&D needs tend to bepoorly defined; if defined, they are only nowbeing acted on. The chemical industry has madeperhaps the greatest effort to identify R&D needs.The Center for Waste Reduction Technologiesdeveloped a list of R&D needs related to chemicalprocess industries.

80 Extensive research will be

necessary to fully exploit pollution preventionopportunities.

As the importance of in-plant measures in-creases, environmental R&D will need to bebetter integrated into the ongoing R&D of indus-trial materials and capital goods suppliers. Inaddition to helping U.S. manufacturers producemore cleanly and cheaply, this R&D can stimu-late economic growth by making the capitalgoods sector more competitive internationally,selling ‘‘green’ machinery and equipment.

Two kinds of R&D will be needed to furtherpollution prevention technology. The first is morebasic research, particularly into chemical proc-esses and reactions.

81 The second need is for more

applied research in new industrial processes intwo areas: infrastructural or generic technologies,where industry tends to underinvest because no

one company can appropriate the full economicbenefits (e.g., environmentally benign cuttingfluids); and strategic environmental R&D, wherebusiness risks and financial constraints combineto slow the development of technologies impor-tant to environmental performance and industrialcompetitiveness (e.g., direct steelmaking, effluent-free pulp mills). Public and private R&D onenvironmental technology, including pollutionprevention, is discussed in chapter 10.

TECHNICAL ASSISTANCE FOR POLLUTIONPREVENTION AND ENVIRONMENTALCOMPLIANCE

Widespread diffusion of existing off-the-shelftechnologies and management and process tech-nology changes will go a long way to reducingpollution. However, many firms, particularlysmall and medium-sized ones, are not aware ofthese measures.

82 Technical assistance can helpthese firms identify and implement pollutionprevention measures. Yet existing programs aresmall. By focusing only on prevention, mostprograms fail to develop synergies and workingrelationships with manufacturers that could con-tribute to pollution prevention and increasedmanufacturing competitiveness.

1 Government Pollution PreventionTechnical Assistance Programs

Most States and a few localities have programsthat provide information and direct technicalassistance to firms on how to reduce pollution,The Federal Government provides a small amountof funding and technical support to these pro-grams.

79 New York state Center for Hazardous Waste Managemen$ Research and Development in Hazardous waste Management @u.ff~O, NY:State University of New York, 1990).

5~ Energetic he., Report on the CWRT Work.rhop on. Waste Reduction R&D Opportunities in Industry (W&tigto% DC: U.S. Dep~mentof Energy, Office of Industrial Tdmologies, September 1991).

81 IIESe uws include understanding tie dxxniml reaction processes at the molecular level, including advances in rmctiOn eJ@neefig,thermodynamic modeling, and particulate formation. Other important tedmologicaJ areas include catalysis and reaction path selectivity,particle technology, process synthesis, and recycle theory. (Allen, op. cit.)

8Z OTA Serlou$ Reduction of Hazardous waste, op. cit.} P. 33.


STATE AND LOCAL PROGRAMSNearly all States have programs to help indus-

try prevent pollution.83 In addition, a number of

localities, including at least 10 in California, haveestablished pollution prevention programs. Mostprograms offer a variety of services, includinginformation and referrals on State and Federalregulations and pollution prevention opportuni-ties, including case studies, reports, and journals.Many have developed waste reduction manualsfor particular industries, such as metal finishing,printing, etc. Programs also conduct seminars,workshops, and mailings to inform industry ofopportunities for waste reduction. Finally, mostprograms provide some technical assistance toindustry, either through telephone consultation oron-site visits. The latter often takes the form ofdetailed waste audits to help firms identifypollution prevention opportunities. These auditsare often conducted by full-time program staff,but many programs also employ part-time retiredengineers to conduct audits.

EPA EFFORTSEPA supports State and local technical assist-

ance through the Pollution Prevention Incentivesfor the States program (funding of $8 million infiscal year 1994). EPA provides a small amountof funding for three hazardous waste minimiza-tion assessment centers located at universities inColorado, Tennessee, and Kentucky. EPA alsomaintains a clearinghouse. Finally, EPA’s RiskReduction Laboratory Pollution Prevention Re-search Branch publishes manuals, fact sheets, andwaste audit guides. EPA also offers indirectassistance by providing some flexibility in media-

specific State grants for pollutionwork.84

1 Limitations of Current EffortsThese pollution prevention efforts,

ful, have significant limitations.

SMALL SIZE

prevention

while help-

In comparison to the need, State and localpollution prevention programs are very smallwith the average State program having three tofour fill-time staff.85 (e.g., Los Angeles’ pollu-tion prevention program conducted 100 on-sitetechnical assistance visits in 1991. At that rate itwould take them 200 years to reach all of thecounty’s approximately 20,000 manufacturers.)Given the magnitude of the problem and opportu-nity, these programs are too small to have anappreciable impact. Moreover, the lack of fundshas meant an emphasis on technical assistance,with relatively little going to applied R&D anddemonstration and testing projects.

One reason programs are understaffed is thatfew charge fees for services, in part because theyfear that their services would not be utilized andthat they would be seen as unfairly competingwith private sector consultants. However, thisfirst fear may stem more from the fact that mostprograms do not have a long-term relationshipwith the manufacturing community. Among thosethat do, such as the Cleveland EnvironmentalServices Program (see box 8-C), manufacturerspay a share of the cost.

These programs get little government money,because they generally receive low priority inEPA national and regional offices, as well asStates, in relation to enforcement and compliance

133 Forrno~ ~o=tionon Sute progrws see: u.S. EPA, Pollution Prevention 1991: Progress on Reducing Industrial Pollutants, OctobCr,1991; Robert E. Deyle, Hazardous Waste Management in Small Business: Regulating and Assisting the Smaller Generator (Westport, CX:Greenwood Press, 1989); and John Hodges Copple, “Strengthening State Pollution Prevention Rograms” Southern Growth Policies Board,January 1990.

84 Memomndum from F. Hem-y Habicht ~, Deputy Admi.nistm, EPA “state Grants Guidance: h3tegratiOII of PO1lution PllXWltiO~” NOV.12, 1992.

ES ~slie Scott and Renee Shatos, “Waste Reduction Technical Assistance Study,” Social and Economic Sciences Research Center,Washington State University, spring 1991.

Chapter 8–Pollution Prevention, (leaner Technology, and Compliance 253

Box 8-C-Pollution Prevention Integrated Into Existing Industrial Extension Programs

At least 28 States have established, sometimes with Federal assistance, programs to help smalland medium-sized manufacturers modernize their production processes and adopt new technologies.As these programs have gained experience in serving the needs of manufacturers, many have begunto broaden the range of services they offer. Several programs, such as Tennessee’s Center for IndustrialServices and the Cleveland Advanced Manufacturing Program, help firms address environmentalrequirements, including pollution prevention.

The Center for Industrial Services (CIS), a part of the University of Tennessee, was establishedin the early 1960s to help firms solve technical problems related to manufacturing. In the mid-1980s,firms started asking the Center for help on addressing RCRA hazardous waste matters. The center nowemploys 13 full-time waste reduction staff (and 20 part-time retired engineers) in addition to its regularextension staff. Its pollution prevention program is integrated into the industrial extension program, andit hires staff with plant and process engineering backgrounds. The center’s extension field agents aretrained in pollution prevention so they can spot opportunities and refer firms to ClS’s pollution preventionstaff for further consultation, In 1992, the program claims to have saved Tennessee industry$12 millionthrough pollution prevention.

The Environmental Services Program (ESP) is a division of the Cleveland Advanced Manufactur-ing Program (CAMP). The state of Ohio formed CAMP in 1984 as one of its nine Edison TechnologyCenters. The center, through three university affiliates, provides research, application, and training innew manufacturing technologies. In 1989, CAMP was awarded a grant from the National Institute ofStandards and Technology to establish and operate the Great Lakes Manufacturing Technology Center(GLMTC), one of seven NIST-funded manufacturing technology centers. GLMTC helps manufacturingfirms adopt modern technologies by providing in-depth, 1 to 5-day evaluations conducted by anexperienced, technical staff of 20 individuals.

Through consultation with industry, the staff became aware that their client companies were findingcompliance with environmental regulations a major problem. They came to believe that pollutionprevention was a logical extension of the continuous improvement philosophy associated with themanufacturing modernization process, and that as a result, they would have a significant capacity toprovide services in this area. Toward that end they formed ESP in 1990.

In some ways, the environmental program is indistinguishable from the manufacturing moderniza-tion program. Both have an assessment component with a distinct protocol. ESP conducts an initialaudit of environmental compliance procedures, followed by a pollution prevention assessment withrecommendations. If a firm wishes to adopt the recommendations, ESP can work with the firm onimplementation, which may involve applied development work.


activities. When measured against the resources LACK OF TRUST

devoted to Superfund and hazardous waste issues, Because many firms are inherently suspiciousEPA efforts in pollution prevention are quite of working closely with regulators, the fact manysmall and ad hoc. The statutory mission of EPA State pollution prevention programs are housed inand State regulatory agencies is to implement regulatory agencies means that these programsnational laws and as a result, these efforts receive must devote much effort to convincing firms tohigher priority.


trust them.86 Since a key component of successfultechnical assistance is the establishment of trustbetween the service provider and the recipient,firms must feel confident that information theyreveal will not be provided to regulators. More-over, many of the programs focus on the processof pollution prevention, rather than on industry-specific technical processes and how pollutionprevention fits into them.

REACTIVE POSTUREMany programs provide assistance to any

requesting firm, even facilities that emit littlepollution. Moreover, programs often respond to afro’s definition of its problems, when a redefini-tion might be more realistic. For example, toreduce the use of CFC-based cleaning solvents,programs sometimes help firms find solventsubstitutes rather than examine whether solventsare needed at all.87 The opportunity to help firmsexpand their capacity to look at the productionprocess in new ways thus may be lost.

LACK OF FOLLOW-UPMost programs visit firms only once and

provide little follow-up to help implement recom-mendations. 88 As a result, the success rate of theseinterventions is often low. In many state programswithout extensive follow-up, only about one-thirdof the firms assisted make any changes afterconsultation .89

LACK OF COORDINATIONWith so many Federal,

tion prevention activities,State, and local pollu-duplication of effort is

a danger. Programs do not share specific informa-tion on a regular basis. In an effort to increasecoordination, EPA developed its Pollution Pre-vention Information Clearinghouse. The Clear-inghouse provides a substantial amount of infor-mation on federal, State, and local pollutionprevention efforts. However, many State andlocal users complain that the information isoverly general and out-of-date. EPA is aware ofmost of these criticisms and is trying to addtechnical case studies. However, even with thesechanges, passive electronic clearinghouses nor-mally play a limited role in information dissemi-nation and coordination.

INADEQUATE TARGETINGThe majority of pollution comes from larger

firms in the materials producing industries. YetEPA and State programs have emphasized pollu-tion prevention efforts for small and medium-sized firms in fabrication and assembly indus-tries. The technical requirements of working withfirms in materials industries (e.g., chemicals,steel) is much greater but State programs cannotgain this level of expertise easily. One reason fortargeting small and medium-sized firms is thebelief that large firms have the technical andfinancial resources to support pollution preven-tion efforts, while small and medium-sized firmsdo not. However, large fins, particularly in somebranch plant operations, are not as strong inprevention as these programs may believe.

SfJ One smey of Sbte ~~ution prevention programs reported that 10 of 11 programs indicated that they felt business wu hesitant to -kassistance from them because of their location in a regulatory agency. Washington State University, op. cit. Similar comments have beenreported about the OSHA consultation program, which often has difficulty working with fm since technicrd assistance providers workingwith the fii cannot guarantee that they will not report OSHA violations.

87 Robert B. poj~~ c ‘Is Your Quest for Solvent Substitutes Preventing You From Evaluating Other Options, ” pollution ~revenfion~eviewwinter 1991/92.

86 Rob~ B. poj~ek and Lawrence J. Cali, ‘‘Contrasting Approaches to Pollution Prevention Auditing,’ Pollution Prevention Review,summer 1991.

M For exmple, Mode Island found that one-third of the firms it assisted made changes. Similarly, about One-third Of the f- @liStCd kthe Blackstone Project in Massachusetts made changes. In Florid% about 40 percent of the fm made changes, Washington State University,op. cit., 1991.


FRAGMENTED SERVICESIn many States, more than one program pro-

vides pollution prevention technical assistance;some specialize in different kinds of waste (e.g.,air, water, hazardous waste). EPA’s own effortscontribute to this duplication, as evidenced by arecent EPA proposal to create a separate hazard-ous waste extension service. The new Statetechnical assistance programs mandated in theClean Air Act will add to the proliferation ofassistance efforts by creating new programsaimed solely at air pollution, although someStates are trying to avoid duplication of effort.

In addition to multiple pollution preventionprograms, other government programs also aim tomodernize production processes. In fact, at leastthree emerged before the interest in pollutionprevention. In the 1970s, State and FederalGovernments established programs to help manu-facturers save energy, including adopting energy-efficient process technologies and modificationof existing process and practices. In the absenceof a visible energy crises, government funding forthese programs declined, but funding by utilitieshas increased. In the mid-1980s, partly in re-sponse to the increased competitive threat to U.S.manufacturing, States and the Federal Govern-ment established programs to help manufacturersmodernize their production processes. SomeStates also assist firms with training workers,especially when adopting new technologies orwork practices. Funding for these programs isincreasing. Finally, in the area of worker healthand safety, OSHA funds State technical assist-ance programs to help manufacturers developsafer work practices.

Methods for providing technical assistance tosmall manufacturers for energy conservation,boosting productivity, improving safety and

health, and reducing waste are similar.90 All fouractivities focus on the manufacturing process.Much of the work involves convincing companiesof the merit of change. Each area involvesassessment, often usually using a standard proto-col. The best approaches generate worker inputand involvement, provide workforce training,focus on continuous improvement, and addressboth fundamental and incremental changes.

In spite of the considerable similarities infunctions, these services are almost always pro-vided by separate programs with little or nocoordination. 91 These programs remain separatein large part because neither the various FederalGovernment departments nor the States think ofthem as part of an overall manufacturing strategy.Instead, they see each program as serving aspecific government objective-+. g., energy con-servation, environmental protection, or job reten-tion.

This fragmented approach causes several prob-lems. Separate programs make it hard for industryto turn to one source for technical assistance andmakes it hard for programs to market theirservices to industry. Moreover, it becomes moredifficult for programs to establish the long-termworking relationships so important to institutingboth pollution prevention and manufacturingmodernization as a continuous process. Perhapsmost importantly, single issue programs may failto identify and promote cross-cutting solutionsthat promote more than one goal.

1 Pollution Prevention Built IntoComprehensive Industrial ServiceOrganizations

Because of the similarity in process, andbecause of the significant advantages of combin-ing industrial services in one organization, one

~ Ki[ty Weisma% David H~so~ and Alice Shorctt, Taming ~he Tom”c Threat: !$mategies To Reduce Hazardous Waste Generan’on in theNorthwest (Pacific Nm-thwcst Policy Center of the University of Washington, September 1990).

91 OTA intewiewed sever~ Stite pollution prevention officials who were not aware of manufacturing modernimtion technid assis~nceprograms m their States, even though there was considerable similarity of function and potential for coordination. While many of themanufacturing modernization officials knew of the pollution prevention programs, none of them had contact with them.


Waste minimization engineer from the University ofTennessee works with an equipment manufacturer’senvironmental coordinator and operator to reducewaste from a cleaning tank.

option for increasing the effectiveness of existingState pollution prevention programs would be tocombine them with existing industry extensionprograms. These programs can have severaladvantages. First, many already have existingrelationships with industry to help them solvetechnical and management problems. Second,this relationship can serve as the means by whichother problems, including pollution preventionand environmental control, are addressed. Fi-nally, these programs can bring firms togetherinto cooperative networks to collectively solveenvironmental problems.

S Sectoral and Industrial NetworkApproaches to Pollution Prevention

While industrial service organizations mightprovide pollution prevention services more effec-tively, most organizations still provide services toone firm at a time. Hence, meaningful ways ofreaching out to more firms are still necessary.Several approaches can extend the range of theseprograms.

First, some programs have developed manufac-turing net works to help firms cooperate in provid-ing common services, such as training, jointbidding on contracts, joint purchasing, and com-

mon facilities and equipment. The area of pollu-tion prevention is ideally suited for networkcooperation. Firms in the same industry or sameprocess can benefit from joint R&D, sharesolutions to reducing waste, and even exchangewaste. A few networks have begun to addressenvironmental problems. For example, Massa-chusetts’ Center for Applied Technology con-vened a group of 6 firms involved in metalstamping, ranging from Gillette to a small firmwith 20 employees, to examine the issue oflubricant replacement. Their goal is to identify aset of lubricants that optimize tool performanceyet are environmentally preferable. Another ex-ample is the Pennsylvania Foundryman’s net-work, which has developed a jointly ownedcorporation that runs a landfill for foundry sandcontaminated with heavy metals, and is exploringpollution prevention solutions.

Firm networks can also be the basis of localindustrial ecologies where the wastes of one firmbecome the inputs of another. In the United Statesthis practice is facilitated by a number of formalwaste exchanges. For example, the NortheastWaste Exchange in Syracuse, New York helpsfirms with wastes identify other firms that mightwant to use these wastes as useful inputs to theirproduction process. However, while these pro-grams are helpful, they essentially rely on passiveinformation sharing-in a sense, waste want ads.More effective approaches are those that activelytry to match fins. (See ch. 1 for a discussion ofan innovative local waste network in Denmark.)

Second, there are economies of scale fromfocusing on the technological needs of firms inthe same industry. Moreover, many of the techno-logical issues in pollution prevention are uniqueto particular industries. As a result, sectorallybased centers might provide a focus for pollutionprevention.

These sectoral approaches are more common inEurope. For example, the Centro Ceramico inBologna, Italy helps its members solve environ-mental problems. The Center is a research/industrial services center funded by the 500

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ceramics firms in the Bologna area that account of70 percent of Italian ceramics production and 30to 40 percent of the world market. The centerconducts research aimed at quantifying the envi-ronmental impact of ceramic processes and todevelop clean ceramic production technologiesand technologies for sludge and residue reuse. Inaddition, the center works one-on-one with mem-ber firms to measure and reduce releases, solveindividual plant problems, and help them comeinto compliance. It has developed close coopera-tive relationships with the local and nationalenvironmental regulatory agencies. The centeralso provides research and technical assistance tohelp firms reduce energy consumption, developnew materials and products, and put in place moreefficient processes.

Most technical assistance in the United Statesis organized on a regional, rather than sectoral,basis. However, some sectorally based effortsmay be emerging. For example, North CarolinaState University Agricultural Extension programrecently organized a meeting of the environ-mental managers of the major food processingfirms in the nation to identify common problemsand needs and discuss how a environmental foodprocessing center could help solve them. Theremay be opportunities for such sectorally basedcenters are developed in a number of industries,including chemicals, lumber and wood process-ing, petroleum refining, pulp and paper, and steel.

9 Other Approaches to TechnicalAssistance

Even if existing government technical assist-ance programs are improved, other approaches toencourage adoption of pollution prevention prac-tices will still be necessary. There are three majornonregulatory approaches: integrating technicalassistance into the permitting and inspection

process, using government procurement to stimu-late pollution prevention, and encouraging pri-vate sector pollution prevention technical assist-ance efforts.

INTEGRATE TECHNICAL ASSISTANCE INTO THEPERMITTING AND INSPECTION PROCESS

State and Federal environmental permit writersand inspectors visit manufacturing plants rou-tinely; some might be able to provide basictechnical assistance. For example, the State ofMaine is interested in having its inspectorspromote pollution prevention and has approachedEPA for guidance.

There are, however, several institutional barri-ers to this. First, in the past, some regulatoryagencies, particularly EPA, have not activelysupported combining enforcement and assistanceroles. If State inspectors visited sites to providetechnical assistance, EPA’s formal policy was tonot count these towards the inspection commit-ments made by the State in its EPA inspectiongrant. 92 In part this reflected EPA’s traditional

end-of-pipe, regulatory culture, which makes itdifficult for them to move towards a moreassistance-oriented role. However, recent guid-ance from EPA to the regional offices suggeststhat this policy may be changing.93 Second,inspectors and permit writers may lack theexpertise to provide technical assistance, al-though a number of State pollution preventionprograms have begun to provide such training toregulatory staff. Still, some inspectors do not feelthat they should even make referrals to technicalassistance programs. Finally, even if permitwriters and inspectors provide minimal levels ofassistance, this will not take the place of the morein-depth assistance provide by extension pro-grams.

92 See for example, letter from Julie Belaga, Regional Administrator, EPA Region 1, to Dean C. Marriott Cotnmisslonti, Mfie mp~~ntof Environmental Protectio@ Mar. 18, 1992. However, EPA may be softening this policy,

93 Memomnd~ from Hem-y Habicht H, op. cit.


FEDERAL PROCUREMENTFederal procurement, particularly by DoD,

could encourage companies to undertake pollu-tion prevention.94 However, DoD procurementpractices often discourage pollution prevention.For example, an increasing number of fins, suchas Allied Signal, Hughes, IBM, and Motorola, areusing no-clean soldering systems to producecommercial electronics products. These systemssave considerable money in avoided cleaning andflux costs, reportedly have as good or superiorperformance, and reduce environmental releases.However, DoD has not formally recognized thesemethods as acceptable alternatives to resin-basedsoldering .95

Unlike commercial industry, typical DoD spec-ification changes take 3 months for simpleadministrative alterations and up to 3 years forcomplex, technical changes.

96 There are large

numbers of specifications that contain environ-mental implications, such as the approximately9,500 military specifications that contain eitherreferences or requirements for use of ozone-depleting solvents.97 Many firms use a program-by-program, piecemeal approach of either applyingfor waivers or changing specifications one at atime. However this is a very time-consuming,paperwork-intensive process, dependent in parton the technical capacity and motivation of theinvolved industry and DoD personnel. As a result,the need to modify military specifications formaterials and processes to cope with changingenvironmental requirements serves as a bottle-

neck in promoting pollution prevention amongmilitary contractors and subcontractors.

Recent Executive Orders issued by PresidentClinton have the potential to enlarge the role ofFederal procurement in energy efficiency andsome areas of pollution prevention. One orderdirects agencies to revise their practices to reduceprocurement of substances that deplete the strato-spheric ozone layer. Another directs agencies doprocure energy efficient computers.98

ENCOURAGE OTHER ORGANIZATIONS TOPROVIDE POLLUTION PREVENTION TECHNICALASSISTANCE

Some private sector organizations have aninterest in helping firms prevent pollution. En-couraging these efforts can expand the scope ofcurrent pollution prevention efforts.

Electric Utility Efforts-Many public utilitieshave tried to boost local economic growth, oftenby trying to convince industry to move to theirservice area.99 However, recently, a small numberof utilities have begun to focus instead onimproving the economic competitiveness of theirexisting manufacturing customers, usually byhelping them save energy, but increasingly byhelping them prevent pollution.

100 For example,

Duke Power established an electro-manufactur-ing technology center, located at North CarolinaState University, to help textile firms adoptcleaner technologies.

94 U.S. ConWess, Senate on Governmental Affairs, Subcommittee on Oversight of Government Managemen~ Hearings on Buying“Green”: Federal Purchasing Practices and The Environment, S. Hrg. 102-563, Nov. 8, 1991.

95 Mk Cmwford, “pentagon Resists New Soldering Technology, ” New Technology Week, Monday, MN. 22, 1993, p. 7.

96 Karla M. Boyle, “Implementing Environmental Alternatives on Military Hardware, ” Hughes Aircraft Co., Corporate EnvironmentalTechnology.

97 Ibid.98 Executive @de~ 12843 and 12845, respectively. Weekly Compilation of Presidential Documents, Monday, Apr. 26, 1993, pp. 638-643.

President Clinton also signed an Executive Order encouraging procurement of alternative fueled vehicles or conversion of existing vehiclesto alternative fuels, and announced plans for an executive order for procurement of recycled materials,

99 For ,axmple, ei~{ pub]ic U{fities active]y q to r~ruif comp~es to move out of California. Business climate in Southern California

(Rosemead, CA: Southern California EdisoIL November 1991.)]00 Dime De Vaul and ~wles B~~~ ‘{How Utifities cm Revi~e Indus~, ” Issuesin Science and Technology, Spfig IWS, pp. 50-56.

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Southern California Edison fears that it couldlose a significant component of its industrial ratebase as firms either move or go out of business inresponse to the strict regulations. As a result, theydeveloped the Customer Technology Applica-tions Center (CTAC), which demonstrates newclean technologies and works with industry tosolve technical problems, mostly with cleanercoatings technologies, such as ultraviolet curing,infrared curing, radio frequency and microwavedrying, and powder coating. For example, FenderGuitar Company was having trouble meeting airquality standards for its coating process. CTACcame up with a new finish using a water-basedcoating with infrared drying that not only meetsrequirements but also has a significantly fasterdrying time and increases productivity.

Public Waste Collect ion, Treatment and DisposalServices-Publicly owned water treatment works(POTWs) receive and process sewage and waste-water. Under the Federal Clean Water Act,POTWs have authority to restrict industrial pol-lutants from the waste water they receive byestablishing pretreatment programs. Through theseprograms, POTWs can require generators ofwaste water to reduce the toxicity of the waterthey send into the treatment plant. The 1,500pretreatment POTWs, while representing only 10percent of the total, treat 80 percent of theNation’s indirect industrial wastewater.101

POTWs often have significant contact withindustry, and their wastewater inspectors oftenhave extensive understanding of industrial proc-ess operations. As a result, they are well-positioned to promote pollution prevention.102

For example, seven of North Carolina’s POTW's

provide technical assistance to industries as aroutine part of compliance inspections. TheNeuse River Waste Water Treatment Plant inRaleigh recommends, when possible, alternativecompounds and processes that eliminate toxicsdischarges. Other POTWs, including those inMilwaukee, Austin, and Orange County, havealso made significant efforts.

In spite of the potential for promoting pollutionprevention, many pretreatment POTWs have notimplemented aggressive pretreatment programseither because they do not know how, or becausethey don’t want to impose requirements on localindustry. Moreover, those that do restrict pollut-ants often encourage end-of-pipe treatment. Inaddition, beyond a small grant program to POTW’sfor source reduction initiatives, EPA does little topromote POTW pollution prevention activities.In fact, EPA management of the pretreatmentprogram leads POTWs to focus on meetingnarrow regulatory requirements that are some-times not related to actual environmental per-formance, serving as a disincentive for them toaggressively and creatively pursue pollution pre-vention. 103

Customer/Supplier Linkages-In the last 10years some U.S. manufacturers have begun toform closer links with their suppliers to help themimprove quality, lower cost and in a few casesprevent pollution.104 For example, Motorola isnow working with its suppliers to ensure that theyeliminate the use of CFCs. The Big Three U.S.automakers, with several State and Canadianprovincial governments, have established a pro-gram to reduce persistent toxic substances that arecontaminating the Great Lakes; as part of this

lol ( cpoTws, ~etrcatment, and pollution preventio~’ unpublished paper, U.S. Environmental Protection Agency, June 1992.

IOZ NatioMl Adviso~ Council for Environmental Policy and Technology, State andbcal Environment Committee, ~~i~ding State u~~calPolfurion Prevention Programs (Washington, DC: U.S. Environmental Projection Agency, December 1992); also, Local GovernmentCommission “Reducing Industrial Toxic Wastes and Discharges, The Role of POTWS, ’ Sacramento, CA, December 1988.

lo~ NatioMl Advisory Council for Environmental Policy and Technology, January 1992, op. cit.

]~ Mic~el Robe flBcmbe, Integrating En\,iro~mentInto Business Management:A Study ofSupplierRelationships in the ComputerIndustry,Master’s Thesis, Department of Civil Engineering, Massachusetts Institute of Technology, February 1992.


program they are encouraging their suppliers tomeet the same goal through pollution prevention.

Trade Associations-Because of their closecontact with industry, industrial trade associa-tions have the potential to assist their memberswith pollution prevention. European trade associ-ations have been more active in this area. Forexample, the Cologne (Germany) Chamber ofCommerce advises its members on the selectionof clean technologies and provides referrals touniversities and private consultants to solveenvironmental problems.105

Most U.S. trade associations provide relativelylittle technical help to their members in solvingenvironmental problems. A few trade associa-tions have become interested in promoting pollu-tion prevention, although they usually lack thestaff or resources to do more than provide generalinformation. For example, the National Associa-tion of Metal Finishers has distributed to itsmembers a pollution prevention checklist devel-oped by California for the plating industry, and isdeveloping a pollution prevention handbook. TheChemical Manufacturers Association (CMA) cre-ated its Responsible Care initiative to helpmember companies improve performance in theareas of worker health and safety and environ-mental quality. The initiative includes specificcodes of manufacturing practices in a number ofareas, including pollution prevention. Each CMAmember is required to make good faith efforts toimplement the program elements.106 The Ameri-can Petroleum Institute has a similar effort for itsmembers.

EPA is working more with trade associations topromote pollution prevention. For example, inconjunction with EPA, members of the Ecologi-cal and Toxicological Association of the Dye-

stuffs Manufacturing Industry developed a pollu-tion prevention guidance manual for the dyestuffsindustry which they distributed to their members.However, it is not yet common practice for EPAand the State pollution prevention programs toinvolve either trade associations or industryconsultants.

FINANCIAL ASSISTANCEGovernment financial support to industry for

the cost of environmental compliance can lessenthe competitive impact of environmental regula-tions. There are two principal possible sources ofsupport, tax incentives (e.g., tax credits andaccelerated depreciation) and direct financing(e.g., loans, loan guarantees, and grants).

However, there are possible tensions betweenfinancial assistance for polluters and the "polluter-pays principle. OECD adopted some conditionsunder which they are not incompatible. Financialassistance should be limited to: target groupswhere severe difficulties would occur otherwise;well-defined transitional periods; and situationswhere international trade is not distorted signifi-cantly.107Supporting development and diffusion.

of innovative equipment and clean technologiesis not inconsistent with the polluter-paysprinciple.

As discussed in chapter 7, a number of othercountries, including Germany and Japan, take theapproach that if firms cannot pay the full costs ofimplementing needed environmental technolo-gies, the government can legitimately help themthrough tax incentives, funding R&D, or directsubsidies. In the United States, however, Federalfinancing of pollution control equipment forprivate industry has diminished. A n u m b e r o fother countries offer more generous accelerateddepreciation schemes. In addition, the limited

lo5 AIm c. willi~s, *‘A Study of Hazardous Waste Minimh tion in Europe: Public and Private Strategies to Reduce Production ofHazardous Waste,” Boston College Environmental Aflairs Law Review, vol. 14, winter 1987, p. 210.

1~ See t ‘R~ponsible Care: Small mcmical Companies Struggle to Meet the Program’s Daunting Challenges,” Chemical aMEngineen”ngNews, Aug. 9, 1993, pp. 9-14.

107 ~ga~tion for fionomic Co-operation and Development OECD and fhe Environment @aris: 1986).


U.S. tax incentives favor end-of-pipe equipmentover pollution prevention.

It is unclear the effect of government financingprograms on environmental behavior. Becausethe limited U.S. support tends to be tied toenvironmental investments required by law, theeffect appears to minimize financial hardship,rather than stimulate increased environmentalinvestment. An OECD study suggests this maybethe case in many member nations.108 However,OECD argues that while financial assistance forindustry in complying with regulations is beingreduced, financial support for clean technologiesis likely to continue. While it is not clear that theFederal Government should do more in this area,its relative lack of support compared to some ofour major industrial competitors could have adetrimental competitive impact, however small.Moreover, it appears that more could be done,without violating the polluter-pays principle.

M Environmental Issues in Private SectorLending

Many smaller enterprises lack the capitalneeded to invest in new environmentally soundtechnologies. Because pollution control loans arelow collateralized loans, marginally profitableventures may have difficulties in obtaining out-side financing, or may face higher interest ratesand shorter terms. Environmental issues may alsohinder small and medium-sized firms in theUnited States in obtaining financing for any typeof activity. A regulated firm subject to highenvironmental capital and operating costs can be

a less attractive financing prospect than anotherfirm not subject to these demands. More impor-tantly, lender liability for environmental claimsrelated to customers’ property may reducelending.

In particular, liability under "Superfund" maymake lenders less willing to loan to companieswith potentially contaminated sites. l09 While theoriginal statute does exempt lenders,110 courtshave interpreted this narrowly, so that in somecases lenders can be liable for cleanup costs forcompanies to which they have made loans.111While it appears that the actual extent of liabilityasserted against lenders has been insignificant,112

the uncertainty of the exemption appears to bemaking lenders more conservative. This issue oflender liability may apply to other types ofpollution covered by other statutes, such asRCRA and the Clean Water Act. If these concernslead lenders to be more cautious in their financingof small and medium-sized manufacturers, eithercapital availability will suffer or interest rates willincrease.113 In addition, firms may choose to notobtain loans if they have to fund expensive teststo determine if their site is contaminated. Eitherway, U.S. manufacturing competitiveness couldbe affected.

To address this uncertainty and resulting cau-tion by the lending community, EPA issued afinal rule interpreting the security interest exemp-tion in April, 1992. However, this rule has beenchallenged and as of August, 1993 was stillpending.

108 Orgal~za~on for Econo~c co-operation and Development, Economic lnsrrumenrsfor Environmental Protection (Paris: JuIY, 1989).

lw ~ese are provisions under tie Comprehensive Environmental Response, Compensation, and Liabilities Act.

110 me exemption protecK from habilityapq‘‘who, wi~out p~cipafig in tie mawgement of a ., . faci~ty, holds indicia of ownershipprimarily to protect [a] security interest in the . . . facility. ” (42 U.S.C. 9601 (20)(A).

111 Ibid., pp. 54-55.112 In fie first 10 ~em of ~RCLA1S existence, EpA issued mom ~ 18,~ notices to potentimy responsible parties. Ordy 8 were sent

to banks and EPA has recovered only $1.5 million in cleanup costs. (Ludwiszewski, p, 63),113 Jo~ M, Cmpbel], Jr. ‘‘~n(jcrL1abi]ity for Environmen~] Cleanup: Effect on tie F~nci~ Swices Industry’ U.S. WcZStt?Ma?Zz?geme?lt

Policies: Impact on Economic Growth andln}esrmenrstiategies (Washingto~ DC: American Council for Capital Formation, May 1992), pp.45-61.

Regulations andEconomic

Incentives in aCompetitive Context 9

w hile the regulatory system that has evolved in theUnited States over the last two decades to controlindustrial pollution is complex, there is widespreadagreement about some of its more prominent fea-

tures. (Some are shown in table 1-3 in chapter 1 in the columnlabeled prevailing system.) Emphasis remains on treatingpollution once it has been released (end-of-pipe approach) ratherthan on preventing it. A single media approach to pollutionpredominates, with separate laws, regulatory offices and enforce-ment procedures for air, water, hazardous waste, and other media.Rather than setting an overall emission limit for a facility,regulations and permits often separately specify emission ratesfor individual sources within the plant. The system is character-ized as command and control. In addition, there are overlappinglocal, State, and Federal laws and reporting requirements. Thesystem is adversarial, with frequent challenges taken by all sideslong after laws are first passed. Finally, there is little emphasis ontechnology development and innovation or on technical assist-ance to help industry meet pollution control requirements(discussed in chs. 7 and 8).

Much progress has been made to control industrial pollutionunder this system. Still, it is hard to argue that the level ofenvironmental protection enjoyed today could not have beenachieved in a more cost-effective fashion, As a result, there isconsiderable interest in finding ways to adjust the U.S. regulatorysystem so that comparable or even higher levels of environmentalprotection could be achieved at lower costs and with less adversecompetitive impacts on U.S. industry. Other countries and

263


regions, including the European Commission,also are looking for new approaches.1

This chapter examines the potential to use newregulatory approaches and economic incentivesin the regulatory system in ways that wouldachieve comparable or higher levels of environ-mental protection at lower costs and with lesspotential for adverse competitive impacts on U.S.industry. 2 It is assumed in this discussion thatthese alternatives are carried out in the context ofa regulatory system with strong standards andvigorous enforcement. Otherwise, the environ-mental objectives might not be achieved.

PRINCIPAL FINDINGS

Regulatory ReformFor the most part, the current regulatory systemis characterized by a one-pipe-at-a-time ap-proach to environmental protection, with sepa-rate legislative, regulatory, and implementationsystems dealing with the different media.Moreover, the current permitting system re-quires individual sources to be controlled andpermitted, and sometimes establishes permitlimits that are defined by particular technolo-gies. Finally, regulators often rely on strictinterpretation of statutes and regulations re-gardless of the environmental record of thefacility.Federal and State regulators and industry inmany parts of the country are experimentingwith innovations that, if widely replicatedelsewhere in an appropriate manner, could easeadverse competitiveness impacts while reduc-ing pollution and waste.3 As shown in the third

column of table 1-3, these experiments includemultimedia regulation, permitting, and inspec-tions; use of facility-wide emission caps andperformance standards; giving more regulatoryoptions to good environmental performers; afocus on pollution prevention; and more em-phasis on technological innovation and techni-cal assistance. Taken as a whole, these experi-ments, in addition to efforts to institute economicincentives, have promise as a way to expand theregulatory tool kit, but they have yet to bewidely adopted.As long as strong regulation and enforcementare fully maintained, a number of steps could betaken to reduce the competitive burden onindustry while still achieving environmentalgoals. The top leadership of EPA in the currentand last administrations has recognized theneed for change (including greater emphasis onpollution prevention), some people in variousEPA offices have been proponents of newmethods, and a limited number of pilot projectsand small programs in alternative regulatoryapproaches have been started. However, wide-spread and systematic rethinking and reshapingof the traditional regulatory system has yet totake place.

Economic IncentivesThe marginal costs of pollution control usuallydiffer between firms, and between processesand facilities within the same firm. Therefore,requiring equivalent pollution reductions byboth high-cost and low-cost sources and pollut-ers can be an expensive way to control pollu-tion. When used as part of a strong regulatory

1 For example, the European Commission reports that, ‘‘. , . achieving integration of the requirements for competitiveness and theenvironment requires the implementation of a strategy based on the coordinated recourse to a wide variety of instruments, within the fields ofboth environmental and industrial policy. ” European Commission Industrial Competitiveness and Protection of the Environment,Communication of the Commission to the Council and to the European Parliament (Brussels: European Commission, 1992). A similarconsideration of alternatives is underway in Germany. Udo E. Sirnonis, ‘‘Environmental Policy in the Federal Republic of Germany,” paperof the Science Center Berlh 1991.

2 Another OTA assessment, due to be completed in early 1995, is examining new approaches to environmental regulation in more detail.3 For example, see Bradley I. Raffle and Debra F. Mitchell, Effective Environmental Strategies: Opportunities forinnovation andFlexibility

Under Federal Environmental Laws, draft (Chicago, 111: Amoco Corp., June 1993).

Chapter 9–Regulations and Economic Incentives in a Competitive Context 265

system, economic incentives can lower envi-ronmental compliance costs by obtaining morereductions from polluters who can reduce mostcheaply, and fewer reductions from those whoface higher marginal control costs.

■ Two principal incentive approaches are mar-ketable permits and taxes and fees. Marketablepermits allow firms to meet regulations byeither releasing no more than permitted levelsof pollution, or buying the rights to pollute froma firm that has reduced pollution below permit-ted levels. Alternatively, emissions can betaxed so that firms with high marginal costs ofcontrol would choose to pay the tax while firmswith low costs would reduce emissions. Intheory, with both approaches, total emissionlevels would be no higher than with a commandand control system, while compliance costswould be lower and firms would possess agreater incentive to develop innovative techni-cal approaches to reducing pollution.

■ Incentive systems have limits. The necessaryaccuracy and timeliness in monitoring may bedifficult to achieve in some situations. Depend-ing on the type of pollutant, the coveredgeographic area might have to be defined quitenarrowly to avoid excessive local concentra-tions of emissions. Unlike tradable permits,reliance on taxes or fees makes it difficult topredict the amount and pace of emissionreductions. There is no assurance that, on net,firms will choose reducing emissions overpaying the tax, However, fee and tax systemsare likely to have lower administrative costassociated with them than with tradable permitsystems. While incentive approaches promisemuch in theory, their use may be more limitedin practice.

I Linkages Among the Alternativesw There are important linkages between and

among these alternatives for regulatory reformand economic incentives. A shift in emphasis topollution prevention (detailed in ch. 8) will

produce more projects that do not fit thestandard regulatory framework. More use oftradable permits might require greater delega-tion of authorities to the States and, at the sametime, a closer working partnership between theStates and EPA. Firms able to sell or tradepollution rights will likely have more incen-tives to undertake pollution prevention to loweremissions below what is required. Full facilitypermitting facilitates pollution prevention, since it enables firms to examine all issues at onceand understand cross-media impacts. Height-ened cooperation between industry, other af-fected interests, and regulators in regulationdevelopment fosters pollution prevention sinceindustry can see in totality all upcomingrequirements and plan for them. An emphasison pollution prevention requires more effortdevoted to technology development and diffu-sion. Organizing regulatory activities more byindustrial sector, rather than media, enablesgreater levels of consultation, reduces paper-work requirements, and facilitates pollutionprevention.

REGULATORY REFORMA number of experiments are underway in the

United States that are testing new ways to achievehigh levels of environmental protection whileminimizing competitive impacts for firms. Insome cases, these efforts lower costs; othersprovide more opportunity for technological inno-vation and production flexibility, and still othersreduce administrative burdens associated withcompliance.

Interest in these new approaches, including useof incentives, can be expected to increase asfurther incremental reductions in emissions be-come more expensive. So far, for a number ofreasons, their adoption has been relatively slow.First, many of these ideas have only recentlyemerged. Moreover, momentum for change willbe based on the results of policy experimentsunderway in testing these approaches. Second,


some in the regulatory and environmental com-munities view regulatory reform the same asregulatory relief, which reduces environmentalprotection. Third, regulators have few resources(time or money) to devote to policy and programinnovation; instead many have their hands fullimplementing existing laws. Fourth, ways toovercome monitoring and administrative difficul-ties will need to be addressed before widespreadreplication occurs.

Most regulatory agencies, including EPA, havefocused principally on developing command andcontrol regulations, and have made less effort todevelop and implement innovative alternatives.Still, a small, but growing number of experimentsare underway. EPA has initiated a number ofprojects to test new approaches, though thesehave yet to fully permeate the mainstream ofEPA’s culture. In contrast, a few States andlocalities are farther ahead in initiating and testingthese approaches. So far, EPA has made only afew efforts to develop State-Federal regulatorypartnerships to support these innovative Stateefforts, and to evaluate, actively use and diffusethe regulatory innovations.4

I Formulation of EnvironmentalRegulations

In the United States, affected interests, includ-ing industry and environmental organizations,compete to influence environmental decisions bylegislative bodies and regulatory agencies. Afterlaws are passed, the rulemaking process allowsthese interests to participate through commentson proposed rules.

Many view the current system of notice andcomment rulemaking as slow, cumbersome, andadversarial. Even some informal rulemaking pro-cedures allow opposing parties to present formalarguments and proof, similar to legal hearings.Currently, four out of five EPA decisions are saidto be challenged in court, suggesting the difficul-ties of achieving consensuses The adversarialprocess encourages polarization, which makesachieving effective solutions more difficult. In-dustry often initially overestimates the costs ofcompliance and the technical difficulties in achiev-ing it, while environmental organizations oftenpromote solutions with little evaluation of costs.Consultation is sometimes less extensive thanoptimal because EPA is often under time pres-sures for rule development, and finds it difficultto engage in more consultative efforts, eventhough more consultation might reduce the totaltime because implementation could then be madeswifter and less contentious.

Some other countries involve regulated partiesmore fully in developing regulations.6 For exam-ple, regulation formation in the Netherlandsinvolves close tripartite cooperation betweengovernment, the scientific community, and indus-try. Because issues of technological feasibility,compliance deadlines, and cost are taken intoaccount at an early stage, it is less likely thatdecisions will be challenged legally or politicallyby industry.7 However, these systems also havedrawbacks. As practiced elsewhere, they areusually less open and less accessible to environ-mental groups or other nongovernmental organi-zations (NGO) outside of industry. As a result,

4 A task force of state and federal regulatory managers was formed by former Administrator William Reilly in 1992 to formulate betterorganization of state-federal relations. Under current Administrator Browner, EPA is developing a management plan to implement theirrecommendations. See State/EPA Committee, “State Capacity: Building the Future for Environmental Management” (Washington DC: U.S.Environmental Protection Agency, Oct. 13, 1992; also Report of the Task Force to Enhance State Capacity: Strengthening EnvironmentalManagement in the United States, (Washingto~ DC: U.S. Environmental Protection Agency, June 21, 1993).

5 Don Clay, ‘ ‘New Environmentalist: A Cooperative Strategy, “ Forum for Applied Research and Public Policy, Spring, 1993, pp. 125-126.

6 Sheila Jasanoff, ‘‘Negotiation or Cost-Benefit Analysis: A Middle Road for U.S. Policy, ” The Environmental Forum, July 1983, pp.37-43.

7 There arc significant institutional and cultural differences between these European nations and the United States that preclude simpleadoption of these policy processes. However, they do point to the advantages of more cooperative approaches.


there may be less incentive for vigorous enforce-ment and possibly weaker regulations,

Some experimentation is underway in theUnited States to involve all affected interests(including environmental organizations) in morecooperative approaches.8 For example, negoti-ated rulemaking (reg-neg) processes use informalbargaining among affected groups and regulatorsthat may culminate in an agreement that becomesthe basis for the rule.9 In theory, these processesmay have several advantages over more adversar-ial processes.

10 First, better outcomes are possible

because all views are heard and can be woventogether as parties become more aware of theneeds and constraints of the other stakeholders.Second, negotiated rulemaking may increase ruleacceptability and make implementation easier,since parties involved in making the rule are lesslikely to oppose its implementation. Third, nego-tiation may speed acceptance of new technologiesand approaches once a law or regulation requiringan outcome is in place. For example, severalmajor petroleum companies engaged in negotia-tions with the California Air Resources Board onreformulation of fuels and, as a result, reduced thetime needed for approval of new reformulatedgasoline products.11

Cooperative approaches can also be used inimplementation. For example, a cooperative ef-fort between EPA and Amoco Corp. provided anopportunity for industry officials and regulatorsto jointly examine emissions, regulatory require-ments and control technologies for Amoco’sYorktown, Virginia refinery, The 2-year projectresulted in a detailed emissions inventory of the

facility. Moreover, it allowed industry and regula-tors to identify the lowest cost sources to controland the most cost effective control technologies—most involving pollution prevention. Besidesdeveloping a large amount of useful knowledgeabout the plant, the cooperative project alsoallowed industry officials and regulators to betterunderstand each other’s concerns and orientationto the problem. While the project itself wassuccessful, the approach has yet to be widelyreplicated. However, both the President’s Councilon Sustainable Development and EPA Adminis-trator Browner have indicated interest in furtherAmoco-like cooperative projects.

Not all issues are subject to negotiations. Forexample, it would be difficult to negotiate astatutory ban on a particular substance, althoughthe timing, uses covered, and extent of technicalassistance might be negotiated. Moreover, negoti-ated rulemaking and other cooperative approachescan be time-consuming and costly for stakehold-ers and regulatory agencies, especially on thefront-end of regulatory development, Finally,care needs to be taken to ensure that all affectedparties are included, particularly the unorganizedor marginally affected. When many parties areinvolved, reg-neg may not be viable.

M Integrated RegulationAs has been mentioned, the current regulatory

system emphasizes a one-pipe-at-a-time approachto environmental protection, with separate legis-lative, regulatory, and implementation systemsdealing with the different media. As a recentreport suggests:

8 For example, EPA began negotiations in 1992 with industry, unions, environmental organizations, and state regulators to craft coke ovencmission IUICS that all p,arties would agree to and not challenge in court.

g ‘ ‘Rethinking ReWlation: Negotiation as An Altermtive to Traditional Rulemaking” (research note), HarvardLuw Review, VO1. 94, 1981,pp. 1871-1891.

lo peter Bohm and Clifford S. Russell, ‘ ‘Comparative Analysis of Alternative policy hls~eflts, ” Handbook of Natural Resources andEnergy Economics, vol. 1, edited by A.V. Knees and J.L. Sweeney (New York: North Holland, 1985).

1 I when ARCO developed reformulated gas, it involved technical staff from the California Air Resources Board (c-) in tie developmentprocess from the beginning. Staff knew how the work was progressing and what the issues were and, as a result, ARCO was able to reducethe time t.akcn to get the new formulauon approved by about a year. Similarly, Chevron worked with CARB to generate rules governingreformulated dlcsel fuel, allowing the company to develop a less-expensive fuel.


EPA is caught in a structure that is oriented toenvironmental media or a particular problem,while its research, enforcement, and planning andevaluation staff struggle for broader approaches.The separate laws that guide each program usedifferent standards for action and provide nooverall mission for the agency .12

This single media approach has been criticizedboth for failing to adequately protect the environ-ment 13 and for unnecessarily adding to U.S.industry’s regulatory burden.

The one-pipe-at-a-time focus makes it difficultto take an integrated approach with multimediabenefits.14 Sometimes efforts to clean up one kindof pollution create problems in another media.Scrubbing of stack gases, for example, createssludge that needs treatment and disposal.

A facility may produce several different kindsof pollution, each subject to requirements that canrun at cross purposes. Firms often report the sameinformation to different media offices and agen-cies. 15 Monitoring, permitting, and reporting

requirements for the various media offices usedifferent timetables and measurement standards.

The media-specific organization of EPA andmost State regulatory agencies has been a barrierto moving more towards lower cost pollutionprevention approaches.16 While some progresshas been made in supporting pollution preven-tion, media office staff have more incentives topromulgate single-media pollution control regu-

lations.17 EPA funding reflects the emphasis onend-of-pipe programs.

The result has been the development of a corpof experts primarily focused on the problems in asingle medium.18 Sharing of expertise and infor-mation among media programs is often limited, acircumstance that can cause delays in rulemaking.Moreover, this structure hinders industry infinding a single point of contact in the agency toaddress data duplication, conflicting rules, orstrategic planning for all media.

An alternative would be to seek to developmultimedia regulations and rules, perhaps organ-ized around particular sectors (e.g., pulp andpaper, petroleum refining). For example, theSwedish environmental program is focused inpart on sectoral industry councils (e.g., pulp andpaper, iron and steel). A few States have begun toorganize more along industry lines. The Wiscon-sin Department of Natural Resources has set upeight technology teams for particular industries.

EPA also has made some efforts to organize itsactivities along industrial lines. In the late 1970s,it established the Integrated Environmental Man-agement Program.19 The agency undertook aseries of industry studies to assess the joint effectsof air, water, and solid waste regulations, boththose in effect and forthcoming, on particularindustries.20 The studies found that sometimes therisks were much higher in a particular media andit made little sense to concentrate equally on all

12 Nation~ Cotission On the fivironmen~ Choosing a Sustainable Future (Washington DC: Island press, 1993), P. 100.

13 B~Rabe, Fragmentation andIntegration in Stafe EnvironmenraliUanagement (Washington, DC: The Conservation Foundatio% 1986).

14 The Nation~ Adviso~ COunCil for EnvironrnentaJ Policy and Technology, Transformhg Environmental permitting and compliance

Policies to Promote Pollution Prevention (Washingto~ DC: U.S. Environmental Protection Agency, Office of the Administrator, February1993).

15 Wendy Cleland-H~ett and Joe Retzer, “Crossing Agency Boundaries, ’ The Environmental Forum, March/April, 1993, pp. 17-21.16 Natio~ Commksion on the Environment Choosing a Sustainable Future, Op. cit., foomote 12.

17 The Natio~ ~visoV Comcfl for Enviro~en~ Policy and Technology, Transform-ng Environmental permitting and Compliance

Policies to Promote Pollution Prevention, op. cit., footnote 14, p. 25.18 mesh p~~d Howard Wee, ‘‘~te~ated Envi.ronrnen@l Management: A Cost-Effective Approach to Protecdng the fivhmeng ”

The Journal of Resource Management and Technology, vol. 21, No. 1, March 1993, pp. 3343.19 Personal Convemation with Michael Gruber, former EPA official, June, 1993.

20 These ~dus~es ~cluded ~hemica~, copper reffig, ~on and steel -g, me~ ffis~, petroleu reftig, ~d pulp and papm.

——


media. Some studies questioned the cost-effectiveness of such approaches. While theseexploratory studies unearthed useful information,they were not linked in a direct way to decision-making. The effort was phased out in the mid-1980s.

EPA has recently reinstituted similar efforts.Under the Agency’s regulatory cluster teamconcept, a team from relevant EPA officesapproaches particular problems from a broader

21 Four industry clusters have beenviewpoint.formed (petroleum refining, oil and gas produc-tion, pulp and paper, and the printing industry) .22

EPA is using clusters to jointly develop effluentguidelines for discharges to water and MaximumAchievable Control Technology (MACT) stand-ards for toxic air pollutants for the pulp and paperindustry.

EPA is also piloting a revised regulatorydevelopment process through its Source Reduc-tion Review Project (SRRP), which commits theagency’s single media programs to jointly inves-tigate and promote pollution prevention duringthe rule development process. The SRRP isEPA’s response to the 1990 Pollution PreventionActs requirement that EPA ascertain the effect ofits regulations on source reduction.23 Its short-term goal is to ensure that source reductionmeasures and multimedia issues are consideredduring the development of air, water, and hazard-ous waste standards affecting 17 industrial cate-gories. The long-term goal is to provide a modelfor a new regulatory development process forEPA.24

However, these cluster and source reductionreview projects are still small and have not yetbeen broadly assimilated within the agency.

There are several reasons for this. EPA oftenfocuses on single media due to statutory require-ments or court-ordered deadlines. The pressure torespond to tight deadlines makes it difficult tocoordinate efforts involving several offices. More-over, the current organization of media programscreates institutional barriers to more coordinatedefforts.

Greater emphasis on industrial sectors mightoffer several advantages. Permit writers andinspectors could focus on a narrower range ofindustries and processes in order to develop moreindepth knowledge of the nature of the pollutionproblems in those industries, the regulationscovering them, and the most effective ways tosolve them, including through pollution preven-tion, Regulators would be more knowledgeableabout industry leaders and laggards in controllingand reducing pollution. Officials would betterunderstand pollution prevention and industrialprocess technology, since, unlike treatment tech-nology, pollution prevention technology is oftenspecific to particular sectors. At present, someefforts to develop integrated regulations sufferfrom lack of indepth understanding of the sectorbeing examined. Moreover, a sectoral orientationcould stimulate new opportunities to experimentwith cooperative interaction among industry,environmentalists, and government. Finally, be-cause all parties would be examining the work-ings of regulation on an industry, it might beclearer when incongruities arise among proposedrequirements. 25

There are several potential drawbacks to suchan approach. Regulators might be more easilycaptured by industry interests if they dealt exclu-sively with that industry. Moreover, some indus-

21 clelan&H~ett and Retzer, op. cit., fOOfIIOte 15.

~~ EPA has formed 17 clusters, most of which do not focus on specif”c industries but rather on chemicals (e.g., lead) or on activities (e.g.,non-point source water pollution).

‘~ Lynn L, Bcrgeson, “The SRRP: Making Pollution Prevention Work, ” Pollution Engineering, July 1993, p. 73-76.‘4 Discussion with Lym Vendenello, EPA Pollution Prevention Office, May 1993.

~s Among the alternatives being considered by EPA for reorganizing its Enforcement Office, N to organize it according to major industrialsectors.


Figure 9-l-Spectrum of Integrated Permit Options

Information Coordination Integrated Permitting

Present Medium-specificpermit system Simultaneous permitters write(Independent in Use common renewal of one multimediaeach medium) facility ID permits permit

least integrated most integrated

Establish Place all data Multimedia Consolidatedcommon on common inspection, Permittingmeasurement information collaborative (multimediametrics system permit permitters

writing, but issue singleseparate permits permit)

SOURCE: James Cummings-Saxton and Robert G. Black, “Integrated Permits: What Are the Data Requirements,” contract report for U.S. EPA,prepared by Industrial Emnomies, Inc., September 1990.

tries might argue that others are not regulatedheavily.

as

~ Integrated Permitting and InspectionPresently, each medium’s program operates

separately, maintaining separate databases, usingdifferent reporting requirements, issuing separatepermits with different timing, and even usingunique definitions and nomenclature.26 Less than15 percent of EPA inspectors perform inspectionsin more than one program area. 27 One studyconcludes:

Relatively few regulated facilities and regulatorshave begun to think in terms other than single-medium pollution control.28

More integrated approaches to permitting arepossible--even including a fully consolidated

permit system where each facility receives onepermit, with allowed releases to the environmentto be determined in a coordinated manner29 (seefigure 9-1). Other less comprehensive approachesinclude coordinated and concurrent permitting.With any of these approaches, permitting toachieve administrative streamlining can be coor-dinated to prevent pollution and avoid crossmedia transfers. For example, the principal pur-pose of New Jersey’s integrated permitting pro-gram is to promote pollution prevention andreduce total releases from a facility.

Several European countries are aggressivelypursuing integrated permitting and inspections.For example, in Sweden many larger regulatedfacilities have only one permit for all emissions.30

The United Kingdom has passed legislation thatproposes that covered installations be regulated

26 Manik Roy, “Pollution preventio~ Organizational Culture, and Social Learning,” EnvironmentaZLuw, vol. 22, 1991, pp. 189-251.

27 U.S. ~viromen~ prot~tion Agency, Office of Cooperative Environmental hlanagemen~ EPA Inspector profile (draft) Sqtetim1989. There has been some growth in multi-media inspections since then.

~ me Natio~ Advisory Council for Environmental Policy and Technology, Technology Innovation s-rid ~OnOmiCS Committ=,Tran#orw”ng Environmental Permitting and Compliance Policies: To Promote Pollution Prevention op. cit., footnote 14, p. 24.

29 James Cumm.ings-Saxton and Robert G. Black ‘Integrated Permits: What are the Data Requirements,’ Contract for U.S. EnvironmentalProtection Agency, prepared by Industrial Economics, Incorporated, September 1990.

W Hm@S H. m, ‘ *AII Integrat~ Framework for Preventing Pollution and Protecting the tivironmen~” Erwironmenfal Luw, VO1. 22.,No. 1, 1992, pp. 1-77. See also, Graham Bemett and Konrad Von Moltke, ‘‘Integrated Permitting in the Netherlands and the Federal Republicof Germany,” in Integrated Pollution Control in Europe and North Amen”ca , edited by Nigel Haigb and Frances Irwin (WashingtorL DC:Conservation Foundation 1990).

Chapter 9–Regulations and Economic Incentives in a Competitive Context! 271

Box 9-A—integrated Inspections in Massachusetts

Traditionally, the Massachusetts Department of Environmental Protection (DEP) conductedmultiple, separate media inspections of each polluting facility. However, since 1987 DEP has beendeveloping an approach to environmental protection that treats each regulated facility as a wholeentity.’ Under a pilot program named the Blackstone Project, individual inspectors conductedmultimedia inspect ions of facilities regulated as major in one media program and m i nor in others, whileteams conducted inspections for facilities regulated as major in more than one media program. Theinspectors were trained to identify and promote pollution prevention opportunities. When more technicalinformation was required, firms were referred to the State’s pollution prevention technical assistanceprogram.

The project was quite successful in the eyes of both the State and the business community.Business liked the team inspection approach because it saved them time and money through thepromotion of pollution prevention. The State liked it because the inspection system took up to 50 percentIess time than conventional inspections, which account for nearly one-fourth of the agency’s $51 millionoperating budget. In addition, inspections were able to find more violations. Multimedia inspections alsobetter facilitated pollution prevention. Based on the Blackstone model, the State launched its WastePrevention Facility-wide Inspections to Reduce Sources of Toxics (FIRST) Initiative for inspections andresulting enforcements of industrial sources. DEP is developing teams in regional offices, traininginspectors to work together, and training them in proficiency in all regulatory areas. Inspectors alsoreceive training to identify and communicate pollution prevention opportunities. Through an agreementwith EPA regarding use of Federal grants, DEP is expanding this approach. Two work groups will seekways to improve reporting requirements and documentation of inspections. A few other States aremaking similar efforts. A pilot program in New Jersey will designate 18 industrial facilit ies for facilitywidepermits, which, in some cases, could replace the hundreds of individual air emission and waterdischarge permits with varying requirements and expiration dates.

1 Manik R~~ and be A. Dillard, ‘iToXics Use R~Ucti~n in Mas~~usetts: llle Blackstone pro]ect,” Jouma/of Air and Waste ManagementAs sociation, October, 1990, 40:10, pp. 1368-1371.

.under a single permit.31 The European Commis- containing all regulatory information on sourcession is considering policies related to pollution and allowing firms to apply for permits andprevention and integrated regulations. The OECD permit modifications directly by computer modem.has also promoted integrated regulations and Massachusetts is establishing an integrated in-pollution prevention. spection program across all media (see box 9-A).

Several U.S. States, including Massachusetts, New Jersey has initiated a pilot program toMinnesota, New Jersey, and Kansas, have taken promote pollution prevention through integrated

32 For example, Minnesotasteps in this direction. permitting. 33

is attempting to develop a computerized database

31 John Falks, “Legal Profile: EC Integrated Pollution Prevention and Control, ” European .!?nviromnenr. vol. 2, Part 6, December 1992,pp. 1012.

32 For more information on the New Jersey efforts, see Barry G. -be, “Environmental Regulation in New Jersey: Innovations andLimitations,” Pubiious, Winter 1991, pp. 83-103.

33 Steven Anderson and Jeame Herb, ‘ ‘Building Pollution Prevention Into FacilityWide pe~t~g, ‘‘ Pollution Prevention Review, vol. 2,No. 4, Autumn, 1992, pp. 415429.


Such projects are few and address only ahandful of firms in the States implementing them.While EPA is providing a small amount of seedmoney and technical assistance to these projectsand working to disseminate lessons, the Agencydoes not appear to have used the lessons arisingout of these experiments to make significantchanges in its own approach to pollution controlregulation, or to actively encourage other Statesto adopt these approaches. Nor has EPA givenStates much encouragement to implement theseinnovative approaches.34 Moreover, single-medium statutes can contain their own permittingrequirements and compliance deadlines, makingcoordination more difficult.

Multimedia approaches have some limitations.First, it is unclear whether these projects r-nightrequire more agency resources than the conven-tional single media approach. If they prove to bemore costly, firms wanting multimedia inspec-tions and permitting might be willing to accepthigher fees in order to cover the marginal costdifferences. Second, while multimedia approachesmight work for both very large facilities whereteams of inspectors are needed and small ones thatdon’t have complex operations, they may be lesssuitable for mid-sized facilities.

Third, a single media focus can manage thecomplex interactions among laws, environmentalemissions, and industrial processes. Regulatorsmay not know enough about the tradeoffs be-tween emissions in one media to another to makeintelligent choices in granting a multimediapermit. Increased training of regulators and in-spectors, particularly to recognize other mediaissues and pollution prevention opportunities,could address this issue. Finally, EPA’s ability tofund multimedia approaches is made more diffi-cult because of statutory limitations.

1 Performance Standards andFacility Bubbles

Normally firms must have a large number ofseparate permits, for different media (e.g., permitsfor air emissions, water discharges) and often forindividual sources within the plant. Many regula-tions require sources to be controlled with releaselimits defined by particular technologies. Thesetechnology-based standards specify the method,and sometimes the equipment, that firms must useto comply with a regulation. Performance stand-ards set a uniform standard of control for firmsand often for their individual processes, but allowthem flexibility in how to meet it. However, evenmost performance standards are usually based onsome form of best available technology (BAT)prescribed in reference technology documents,which, in practice, the regulatory community andindustry usually rely on to ensure compliance (seetable 9-3).

These technology-based standards can discour-age firms from developing or adopting moreinnovative and cheaper methods.35 If standardsdescribe one type of technology, and if firmschoose a different type of technology they canhave difficulty getting approval, since permitwriters often do not have the time or inclinationto approve approaches different from those nor-mally prescribed.36 Moreover, EPA will some-times disallow technologies even if they areapproved by State regulators.

Some performance standards limit flexibility.For example, concentration-based standards foreffluent limitations may discourage pollutionprevention approaches if they result in higherconcentrations of the pollutant due to reducedwater volume, even though the total amounts ofpollutants are lower. In contrast, mass-based

34 For Cxmple, most EPA grant funds are tied to single media permitting and inspection.

35 me Natio@ Advisory COIUICil for Environmental Policy and Technology, Improving Technology Di@sion for Environmental

Protection, U.S. Environmental Protection Agency, October 1992.36 Discussion wi~ Howmd Klee, AmOCO Corporation, April 1993.

Chapter 9-Regulations and Economic Incentives in a Competitive Context 273

standards that measure total pollutants may betterpromote pollution prevention.37

The current permitting system also affectsindustry’s cost-effectiveness in meeting regula-tions, Permitting is time-consumin g, procedu-rally intricate, and technologically complex, bothfor industry and government. This is evidencedby the fact that nearly 50 percent of States’permitting resources are used for the routinereissuance of permits.38 Moreover, the trendtoward more specific operating permits risks lossof firm proprietary information.

Most significantly, the regulatory system some-times has the effect of requiring control of thosesources of emission that are the most expensive tocontrol. It is often difficult for government toknow what sources at a plant pollute the most, andit is virtually impossible for government toidentify which emission sources in a plant costmore to control than others. Facilities in the sameindustry can differ in terms of pollutants becauseof use of different materials, equipment, products,and practices.

For example, the joint Amoco-EPA study ofthe cost of environmental control at Amoco’sYorktown, Virginia refinery found that marginalcontrol costs differed significantly by source, andthat regulations mandated control of the highestcost sources while allowing the lowest costsources (which in this case could have been dealtwith through pollution prevention options) to besignificantly uncontrolled.39 The Benzene WasteOperations National Emission Standards for Haz-

ardous Air Pollutants (NESHAP) focuses on oneemission source to one medium-benzene emis-sions to air from wastewater treatment operations.Yet, by measuring emissions to air from allsources, the joint EPA/Amoco team concludedthat seven times more benzene reductions couldhave been achieved for one-eighth the costs ofmandated controls by such actions as controllingmarine loading losses and installing secondaryseals on tanks. Significantly, the required controlsreduce air emissions, but also create other wastesin the form of spent activated carbon and regener-ator waste gases.

40 In part this stems from the fact

that rules are developed for particular sources andapplied to all facilities, rather than based onfacility-specific plans that try to reduce pollutionmost cost-effectively.

Some other countries approach permittingdifferently. For example, Japanese and Swedishplants are often subject to discharge limits for theplant as a whole, not specific discharge points.Many Dutch plants are subject to only threepermits, one each for air, water, and hazardouswastes, and within a few years may be subject toone permit for discharges from all media. Someargue that inspectors and permit writers in someEuropean countries have more technical experi-ence and as a result are able to provide flexibilityand not require adherence to strict standards witha tight timetable. This flexibility allows Europeanfirms to cut costs they might otherwise bear withenforcement of more inflexible standards.

37 For ~xmple, if~ ~mlt ~~ the pH of ~sc~ge Wata, f~ my s~ply add water ti order to dilute the chemicals until the pH reaches

permitted levels. (The National Advisory Council for Environmental Policy and Technology, Tramforrning Ernironmental Permitting andCompliance Policies to Promote Pollution Prevention, op. cit., foomote 14, p. 34.)

38 E1gh~.five ~rCent of New York’s NPDES pefifi~g r~o~ces were used to review petit ~newals Wth no significant Chnge (Ibid,

pp. 54 and 67.39 AmoC&,S. EpA po~lutio~ pre~~~tion PrO@: Yorktown, Virginia, Project SUmmU~ (mcago, nhlOiS: hlOCO COrpOra[iO13, and

WashingtoXL DC: U.S. Environmental Protection Agency, June 1992). A similar study was done in Sweden of several petrochemical plants,which came up with similar results. Don HinrichserL “Integrated Permitting and Inspection in Sweden, ” Integrated Pollution Control inEurope and North Amen”ca, ed. Nigel Haigh and Frances Irwin (Washington DC: The Conservation FoundatiorL 1990).

40 me Souce r~uction Optiom ~d ~ average cost of $650/ton of pollut~t recover~ Wtile the other options (kirgely treatment and

disposal) had an average cost of $3,200/ton, nearly five times higher. It is important to note that these are Amoco, and not EPA, cost estimates,although EPA and Amoco did generally agree on the results.


Some U.S. States are experimenting withalternative permitting. Also there are some lim-ited efforts at the State and Federal levels to movetoward true performance standards and facilitydischarge limits. Under the 1990 Clean AirAmendments, firms that reduce emissions of airtoxics 90 percent get a 6-year extension on havingto implement Maximum Achievable ControlStandards (MACT). But many in industry aredubious as to whether this is an advantage, sincethey will have already reduced emissions substan-tially and prior to the regulatory deadlines (al-though reducing the first 90 percent should bemarginally cheaper than further reductions). More-over, there is concern that approval for thisextension will be onerous and complex.

The 1990 Amendments also include someprovisions that move in the direction of bubbles.For example, in the air toxics programs, theMACT regulation of Hazardous OrganicNESHAP (HON) allows firms to either control allpoints with reference MACT technologies, or usealternative controls at selected points, so long astotal emissions equal the sum of all emissions thatwould occur if each point source were controlledusing the MACT technology. However, this doesnot allow averaging across source categories andemissions credits obtained through averaging arediscounted.

In a Minnesota pilot program, a 3M plant hasbeen given one air permit for 5 years, and canchange the process with little or no approval, aslong as total emission levels are not exceeded (seebox 9-B). As discussed above, the advantage toindustry of such a system is being able to choosewhat sources to control and how. The advantageto the regulatory agency is not having to spendscarce resources approving small permit modifi-cations and instead being able to focus onsignificant violators.

It is not practical to control all sources withperformance standards, particularly sources that

are difficult to measure. In these cases, installa-tion of reference control technology may be theonly way to ensure compliance. However, withbetter monitoring and compliance strategies itmay be possible to move more in the direction offacility emission caps and performance standards.In addition, prescribing a number of alternativemeans of compliance (including pollution pre-vention or substitute materials), in addition to areference end-of-pipe technology, would giveindustry more options in how they meet regula-tory requirements. Finally, potentially large costsof collecting information and measuring releasescould occur with these approaches. However,emphasizing performance standards and facilitybubbles, as opposed to source-specific technol-ogy standards, might provide more than offsettingsavings, and could better enable both industry andregulatory agencies to reduce pollution at thelowest possible cost.

1 Regulatory FlexibilityManufacturing firms differ greatly in their

level of environmental awareness, ability to meetenvironmental objectives, and commitment topollution prevention. However, the same regula-tory procedures govern both firms seeking exem-plary solutions to environmental problems andlaggards resisting regulations.41 Moreover, per-

mit writers and inspectors have little incentive orinformation to make the system more flexible.Instead, they often rely on strict interpretation ofstatutes and preference for prescribed methodsand technology, generally in the name of creatinga level playing field. As a result, companies havelittle leeway to try solutions that are potentiallymore risky, yet more environmentally and eco-nomically sound, including pollution prevention.

Pollution prevention often entails significantlearning, engineering modifications, and changesin the production process before the best solutions

41 me Nation~ Advisory Council for Environmental Policy and Technology, Transforming Environmental per~”tting ad CompliancePolicies to Promote Pollution Prevention, op. cit., footnote 14, p. 27.

— —


Box 9-B—Flexible Permitting Systems: 3M and the MinnesotaPollution Control Agency

Under the current regulatory system, environmental regulatory agencies often tell industry how tocontrol their pollution rather than letting industry determine how to best operate its plants within theconfines of emission Iimits in a permit. The result is both large work overloads for the regulatory agencieswith the incumbent delays, and increased costs and delays for industry. With shorter product Iifecycletimes and increased manufacturing flexibility, the ability to adjust the manufacturing process isincreasingly critical for manufacturing competitiveness. The current regulatory system does little torecognize this new need for speed.

A new flexible permit recently issued to a 3M plant by the Minnesota Pollution Control Agency offersan alternative approach. 3M operates a Tape Manufacturing Division plant in St. Paul, Minnesota, thatproduces over 2,000 different pressure-sensitive tape and label products on 17 different productionlines. These products are primarily manufactured by coating various solutions containing proprietarysolids and solvents onto a substrate of paper or film. The major source of pollution is from evaporatingvolatile organic compounds (VOCs) from the coatings. In order to remain competitive in specialty tapemarkets, the Division will need to continuously upgrade and modernize its coating and mixing equipmentand provide better and more timely service to its customers.

The area in which the plant is located meets EPA ozone standards; source modifications fall underthe Prevention of Significant Deterioration (PSD) requirements. Many changes potentially could requirelengthy analysis by the Minnesota Pollution Control Agency (MPCA), EPA, and 3M to determineapplicability of PSD rules. While the PSD regulations allow 3M to “net-out” of PSD requirements,determination of whether 3M qualifies is time-consuming and complicated. It can take from 4 to 12months or longer to obtain a PSD permit or determination, and this time may increase as new permitapplications require more information. Moreover, changes to individual lines would normally requireseparate permit modifications.

3M proposed that MCPA issue a 5-year, full facility permit (a cap) for VOC emissions for the entirefacility (rather than the current individual process permits currently used). Under the permit, 3M isallowed less total emissions from the plant than before, but 3M can modify processes as long as t he capis not exceeded. The permit requires 3M to notify MCPA 10 days before beginning construction of themodifications authorized by the permit. 3M has anticipated a host of modification categories it may wishto implement. If the State does not respond within 10 days, 3M can proceed.

Compliance with the VOC emissions cap will be determined daily. A sophisticated emissionstracking system and Continuous Emission Monitoring (CEM) system will be used to factor dailyemissions into a rolling annual total.

3M benefits from the flexible permit as it will be able to make needed changes in production lineswithout delays. In addition, near real time compliance determination reduces environmental liabilityresulting from regulatory or legal action, The State regulatory agency benefits because the system freesup permitting resources that can be devoted to other environmental and administrative priorities. Finally,the environment benefits because of the lower cap on emissions, and because the heightenedmonitoring allows quicker responses to problems.

3M is looking to expand this system to other plants in Minnesota. MCPA is viewing it as a possiblemodel for regulation for other emission sources in the State. However, this model may work best forlarger facilities with the resources to cost-effectively monitor releases.


are found.42 In the process, firms may technicallybe in violation and may have no assurance that thesolution will meet the standards. This is particu-larly true in cases where regulations are promul-gated with limited time allowed for implementa-tion. It is common for regulations to requireimplementation within 6 months to 3 years ofpromulgation. Not surprisingly, firms often relyon tried-and-true, but more expensive, end-of-pipe treatment methods that ensure compliance,even though these may be neither environmen-tally nor economically preferable.43

Moreover, the permit system itself is cumber-some and impedes flexibility. If firms changetheir production process, even sometimes toreduce pollution, they are often required to obtainanew permit, which often takes over 6 months forapproval. 44 Efforts to streamline the permittingprocess have been limited. Permit writers often donot have clear instructions or manuals on whatregulations and rules require from particularsources. In addition, as State permitting decisionsare sometimes challenged or overriden by EPA,States are hesitant to make decisions that mightlengthen the permit process.

When U.S. manufacturing wasby long runs of mass-producedchanged slowly, such a permitting

characterizedproducts thatsystem would

have only incidental impacts on competitiveness.However, in the new manufacturing environment,with more rapid changes in production processes,shorter product life cycles, and more rapidlychanging market demands, the permitting systemcan inhibit needed flexibility.

Some specific regulatory measures impedeflexibility and, in turn, pollution prevention. Inparticular, the regulatory process of defining andmanaging waste limits pollution prevention.45

One of the principal barriers to reusing somewastes stems from a RCRA-derived rule thatdesignates as hazardous waste “any solid wastegenerated from the treatment, storage, or disposal. . . of a hazardous waste. The rule makes itdifficult and costly for firms to employ reuse/recycling approaches to these wastes.% Regula-tions governing storage, transportation, and reusecan all impede pollution prevention and recy-cling.

47 While firms can apply to have wastes

delisted under RCRA, this process is expensive

42 o~ ~~ feud ~tre@toWflexibili~ is also impofiant ~ p~moting ~een desi~ of products and new processes. U.S. Congress, Office

of Technology Assessment, Green Products By Design, op. cit., footnote 3.

43 For exmple, ac~rding to one study, one reason why metal finishers in a number of cities did not develop centralized treatment andrecycling facilities was because they were under the gun to comply with metal finishing rules under the Clean Water Act and would technicallybe out of compliance for a year or two until centralized facilities could be put in place. Valjean McLenigham Sustainable Manufacturing(Chicago: Center for Neighborhood Technology, 1990).

44 For e~ple, one pbceutic~ mandacm facility has more than 200 permits just for air eIIIkiOnS. TO get a tIeW PWld tO modify

their process takes signit3cant time. The state employs one person to process regulatory agency air permits for companies in the region. Becausecompetitiveness in the drug industry is increasingly related to development of new generations of drugs, using new processes that lower-wagecompetitors can’t duplicate, such delays impede the ability to compete.

45 Fore~ple, see R. Lee Beyers, ‘‘RegulatoryBarriers to Pollution Prevention” Pollution Prevention Review, Winter, 1991-92, p. 19-29;also SRI International, The Role of Recycling in Hazardous Waste Management, report prepared for The Business Roundtable (New YorkMmc@ l~); ASO Jack H. Goldman and Jefhey S, Hol~ “Regulatory Impediments to the Reclamation and Reuse of Spent Podiner from

*Muminum productio~’ in Proceedings: International Conference on Pollun”on Prevention: Clean Technologies and Clean Products(WashingtorL DC: U.S. Environmental protection Agency, Gffke of Researeh and Development September 1990).

46 WCUIW weinberg, Gregory Eyring, Joe I@uso, and David Jense% “Industrial Ecology: the Role of Governmen~” in Greeninglndusm”al Ecosystems (Washington DC: National Academy of Engineering Press, forthcoming, 1993).

47 Rob~ A. Frosch, bcbdusti~ EcoIo~: A Philosophical Introduction” Proceedings of the National Academy Of science, Feb. 1992, p.802; R. tie Byers, op. cit., footnote 46.

—


and time-consuming,cess.

48 EPA resources

tions are limited andsingle site, rather than

and has had limited suc-to consider delisting peti-such petitions apply to ato the waste wherever it is

generated. No consensus exists about how toregulate or encourage the recycling of industrialwastes. 49

There are several approaches regulators couldtake to increase regulator-y flexibility withoutreducing environmental protection. Regulatorscould employ fail-soft strategies to go easy oninnovators who come close to standards but fail.50

Similarly, firms could be granted innovationwaivers that allow limited noncompliance whiledeveloping new approaches .51 Fail-soft and waiv-ers would still need to protect health and environ-ment, but would allow near-misses for a limitedperiod of time.

These waivers and greater flexibility might begranted to those firms with good records, similarto how firms are treated under the OccupationalSafety and Health Administration’s Star program,where good performers are given incentives orallowed to use flexible approaches. These incen-tives might expedite permitting, exempt somechanges resulting in pollution reductions, andprovide for more efficient inspections, stream-lined paperwork requirements, and flexibility ontiming and technology. In some cases, the possi-bility of moving to single permit, whole-facility,

performance-based permits could be pursued.Safeguards, including strong monitoring systems,would have to be in place to avoid abuse of thesystem. Moreover, if it was demonstrated thatfirms were abusing the flexibility, regulatorscould impose the conventional system on them.

A number of States have begun to provideincreased flexibility to good performers, althoughthey cannot grant exemptions from Federal re-quirements. Some States are more lenient withfirms that commit to work with the state pollutionprevention technical assistance organizations tosolve problems. California and Texas expeditepermit reviews for businesses that implementpollution prevention. At the Federal level, EPAhas recently proposed an environmental excel-lence program, but one with very few tangibleincentives for industry participation.52

Finally, EPA rules often do not concisely orclearly State compliance needs. This makes itdifficult not only for firms, especially small andmedium-sized businesses, but also for inspectorsand permit writers, to understand regulatoryrequirements .53

INCENTIVE-BASED REGULATIONSMany economists make the case for giving

firms incentives to look for more cost-effective

~~ Energet]cs, Incorporated, Fdera/Legislative and Regulatory Incentives and Disincentives for Industrial Waste Reducfi”on, p=pared forthe U.S. Department of Energy, Office of Industrial Technologies, Industrial Waste Reduction program (J%shingtonj DC: 1991).

4V Scc U.S, Congress, Office of Technology Assessment, Managing Industrial Solid Wastes From Manufactun”ng, Mining, Oil and Gas

Prodliction, and Utility Coal Combustion-Background Paper, OTA-BP-O-82 (Washington DC: U.S. Government Printing Office, February1992).

so The Natloti Advisory Comcil for Environmental Poticy and Technology, Pem”tting and Compliance poiicy: Barn”ers to U.S.

En\rironmenfa/ Technology innovation (Wastigtou DC: U.S. Environmental Protection Agency, Office of the Administrator, 1992).

51 NiCklolas Ashford, Christine Ayers, and Robert F. Stone, “Using Regulation to Change the Market for Innovation,” HarvardEnvironmental LauI Review, vol. 9, 1985, pp. 419-466.

52 Environment~ Protection Agency, ‘‘Environrnentat Leadership Program,” FederaZ Register, vol. 58, No. 10, January 15, 1993. Thisproposal, at least in its current fo~ may be dead.

53 For example, the rule for the Hazardous Organics NESHAP is 700 Pages.

54 OTA IS conducting a separate assessment on the impact of alternative forms of re~lation, including incentive approaches, onenvironmental protection.


ways of controlling pollution.55 The marginalcosts of pollution control usually differ betweenfirms and between processes within the samefirm. These variations in compliance cost stemfrom differences in size, age, and kind of technol-ogy, cost of substituting inputs, location, manage-ment practices, and other factors.56 Therefore,requiring equivalent pollution reductions by bothhigh-cost and low-cost sources can be an expen-sive way to control pollution.

The argument is that market incentives, whiletheoretically producing the same aggregate amountsof pollution control, would do so more cheaply byachieving more reductions from the sources thatcan do it for less, and fewer reductions from thesources that face higher marginal control costs.While incentive systems offer the opportunity tolower compliance costs, and in so doing reducethe competitive impact of regulations on U.S.manufacturers, they cannot be applied in all cases,and hence are best seen as a supplement, ratherthan a replacement, of the present regulatorysystem. This section discusses incentive ap-proaches principally in relation to their role inmore cost-effectively reducing pollution fromindustrial sources.

S Types of Incentive SystemsThere are two major incentive approaches that

apply principally to pollution from industrial

sources: marketable permits, and taxes and fees.With marketable permits, firms are allocatedpermits to release a certain amount of pollution,specified by statute or regulation. Firms that wishto release more pollutants than their permits alloware able to buy allowances from firms that havereduced their releases below the level of theirpermits. In theory, firms facing high control costscould buy allowances from firms facing lowcontrol costs and comply more cheaply than theycould by reducing the pollutants themselves.57

This is the approach taken in the 1990 Clean AirAct with respect to utilities’ sulfur dioxideemissions. Another example is the bubble con-cept, where a facility could trade emission creditsamong various sources within a facility. Thisapproach is discussed above in the section onregulatory reform. With fees, firms are chargedfor each unit of pollution they release.58 Ideally,the fee would be set at a level equal to themarginal costs caused by the pollution. Theoreti-cally, this would lead firms with low cost controloptions to cut emissions and firms with high costcontrol options to pay the fee, while achievingsufficient overall reductions to meet environ-mental objectives.

There are several other incentive systems.59

Deposit-refund approaches have been used toensure recycling or proper disposal of certainproducts, such as batteries or packaging materi-

55 For ~ Oveniew of incentive approaches, see Robert N. Stavins (cd.) Project 88- Harnessing MarketForces to Protect Our Environment:

Initiatives for the New President, A Public Policy Study sponsored by Senator Timothy E. Wix@ Colorado, and Senator John Heinz,Pennsylvania (Washingto~ DC: December 1988). Also Project 8Mound II, Incentives for Action: Designing Market-Based EnvironmentalStrategies (Washington DC: May 1991).

56 me EPA New .%-XMW perform~ce Standards (NSPS) were originally developed from a concept that the eIIVkOIMIIeINd COnEOk on a newunit can be installed mom cheaply than on an existing unit.

57 For ~xmple, ~der me Nox ~ding S&eme in he clem Air Act, Wisconsin Power and Light sold CrtXiitS to Tennessee ~d Pennsylvaniautilities, It was able to do so, because Wisconsin law is more strict than national law, and it had already installed abatement technology thatallowed it to exceed the national guidelines. (Internationcd l?nvironmental Reporter, May 20, 1992.)

58 For ex~ple, see U.S. Congress, Gener~ Accounting Office, Environmental Protection: Implicah”ons of Using polluh”on Taxes to

Supplement Regulation (Gaithersburg, MD: U.S. General Accounting OffIce, February 1993).59 For a discussion of a wide v~ety of incentive approaches to protect the environment see: Alan Casli.n, The United Stares Experience With

Economic Incentives To Control Environmental Pollution (Washington, DC: U.S. Environmental Protection Agency, Office of Policy,Pkmning and Evaluation, July 1992); Economic Incentives Task Force, Economic Incentives: Options for Environmental Protection(Washington, DC: U.S. Environmental Protection Agency, OPPE, March 1991); John L. Moore, et. al, Using Incentives for EnvironmentalProtection: An 01’erview (U.S. Congress, Congressional Research Service, June 2, 1989).


als. They have also been proposed to reduce the

g e n e r a t i o n o f h a z a r d o u s w a s t e .60 Buyers of a

toxic chemical would pay a deposit at the time of

purchase and receive it back when they took the

chemical to a certified recycler or, in cases whererecycling is not possible, to a certified disposalsite. Making information on discharges public,such as through EPA’s Toxic Release Inventoryreporting requirements, can lead to public pres-sure on polluters, which induces them to reducepollution. Liability rules, such as the strict andseveral liability conditions under Superfund,encourage polluters to reduce wastes, since theymay be held liable for future cleanup. Finally,removal of government subsidies for practicessuch as below-cost timber sales and agriculturalprice supports are often advocated as a way toincrease economic efficiency.61

1 Past Experience With Incentive SystemsLimited versions of marketable permit systems

have been in place since the 1970s, when EPAintroduced its emission trading program forcertain air pollutants (see table 9-l). The firsttrading scheme, developed by EPA in 1974,concerned trades within plants that were expand-ing. Rather than stringently control new sourcesof emissions, plants could reduce sources ofpollution in other parts of the plant so that no netincrease in emissions occurred. A firm usingnetting must obtain the necessary emission reduc-tion credits from its own sources within the plant.

In 1976, EPA developed its offset policy toallow major new sources or source modificationsto be sited in nonattainment areas (under theClean Air Act), so long as best control technologyis applied and total emissions reductions areachieved. The new emissions have to be offset by

Table 9-l—EPA Market-Based EnvironmentalIncentives

Incentive Program Date

Offset Program

Offset Banking ProgramBubble Program

Netting ProgramPoint Source Trading in WaterWetland Mitigation BankingSteel Industry Effluent Bubble in WaterLead in Gasoline Phasedown: Trading ProgramPoint-NonPoint Source Trading in WaterLead in Gasoline Phasedown: Banking ProgramHeavy Duty Truck Engine Emissions AveragingEmissions Trading PolicyNew-Source-Performance-Standards Compliance

Bubble PolicyStack Height Emissions AveragingCFC Trading ProgramExtended Heavy Duty Truck Engine Emissions

Averaging (Banking and Trading)Acid Rain Industrial Source Opt-in ProgramAcid Rain NOX Averaging ProgramAir Toxics Early Reductions ProgramAir Toxics Offsets ProgramOxygenated Fuels: Averaging and TradingReformulated Gasoline: Averaging and TradingEconomic Incentives Rules ExpansionMobile-Stationary Source Trading GuidanceAir Toxics MACT AveragingScrappage of Old CarsPoint-Nonpoint Source TradingPrivatization of Wastewater SystemsSafer Pesticides IncentivesStreamlining Regulations of Premature NotificationMunicipal Solid Waste PricingState Grants for Air Incentives

197619771979198019811981198219831984198519851986

198719871988

19901991199119911991199119911992199219921992199219921992199219921992

SOURCE: Council on Environmental Quality, Environmental Ouality,1992, p. 56.

emissions reductions from other sources in thearea. Since 1976 there have been approximately2,500 offset trades.62

Offsets and netting apply only to new sources.In 1979 EPA developed its bubble policy toprovide benefits to existing sources. The name

60 Molly K. Macauley, Michael D. Bowes, and Karen L. Palmer, Using Incentives to Regulafe Toxic Substances (WaShingtOrL DC: Resoums

for the Future, 1992).

61 Robert W. Hahn and Robert N. Stavins, “Incentive-Based Environmental Regulation: A New Era tiom an Old Idea?” Ecology bwQuurterly, vol. 18, No. 1, 1991, pp. 1-42.

62 BW S. Elman, Tom Tyler, and Michael Doonan, ‘‘Economic Incentives Under the New Clean Air Act’ (Washington DC: RegulatoryInnovations Branch OffIce of Policy, Planning and Evaluation, U.S. EPA, May 1992).


derives from the placing of an imaginary bubbleover a group of sources within a plant and treatingall emission sources as one. Bubbles give plantmanagers the option of proposing an alternativeconfiguration of emissions controls for a particu-lar pollutant, as long as the configuration isadequately enforceable and equivalent reductionsare achieved.

Finally, emissions banking allows firms tostore emission reduction credits for future use inthe offset, netting, or bubble programs, or for saleto others. The development of banking rules andadministration of banking programs has been leftup to the States. These programs were codified inEPA’s Final Policy Statement on EmissionsTrading in 1986, but, as discussed below, theiruse, particularly of the bubble policy, has beenless than expected by some analysts.

More recently, EPA used trading and bankingto achieve a nine-fold reduction of lead ingasolines between 1982 and 1987. The purpose ofthe provisions was to allow gasoline refinersgreater flexibility while the amount of lead ingasoline was being reduced. Refineries wereallocated credits based on the amount of gasolinethey refined. EPA estimated that the savings torefineries from banking alone would be $228million, but savings may have been greaterbecause of high participation rates.63 This pro-gram was much closer to the notion of a truemarketable-permit system than the more limitedefforts discussed above, which in part accountsfor its effectiveness. The acid rain control systemsin the 1990 Clean Air Act Amendments incorpo-

rate tradable permits that may save an estimated$1 billion annually, compared with a baseline costof $6 billion.64 EPA is promulgating new rulesallowing States and firms to get credits forgenerating extra reductions from motor vehicles(e.g., by scrapping old, high-polluting cars), andto use these credits to meet reduction require-ments in the stationary source sector. EPA alsoinstituted some effluent trading schemes. Thefrost was used for in-plant trading (between twooutfalls of the same plant) in the iron and steeleffluent guidelines EPA issued in 1982.65

Some regions, States and localities are devel-oping trading programs. The South Coast AirQuality Management District in California hasproposed a NOx trading program (see box 9-C).Massachusetts plans to issue rules for a NOX

trading system. Other States are considering suchapproaches, as well.

The savings achieved under EPA’s tradingprograms, particularly netting, have been moder-ate, although trading has been applied to only asmall share of pollution control efforts. Use of andsavings generated by bubbles and banking, how-ever, have been more limited relative to theirpotential. Because trading is not allowed underthe bubble policy, actual savings are belowpotential savings.66 (Table 9-2 lists the number oftrades and estimated savings from these policies.)

Other incentives to control industrial pollutioninclude taxes on hazardous waste, established bya number of States, increased tipping fees fordisposal of waste, and sewarage discharge fees,

63 us. Environmental Protection Agency, “Costs and Benefits of Reducing Lead in Gasoline, Final Regulatory Impact Analysis, ”(Washington DC: EPA, Office of Policy Analysis, February, 1985).

@ Robefl W. HahII and Robert N. SEWhS, “Economic Incentives for Environmental Protection: Integrating Theory and Practice,” TheAmerican Economic Review, vol. 82, No. 2, May, 1992, pp. 464-468.

65 See Mahesh Podar and Mark Lutmer, U.S. Environmental protection Agency, OffIce of Water, ‘‘Economic Incentives in the Clean WaterAct: Some Prelimhary Results, ” paper presented at the 86th Annual Meeting of the Air and Waste Management Association Denver,Colorado, April 12, 1993.

66 Robin W. Hahn and Gordon L. Hester ‘Where Did All the Markets Go? An Analysis of EPA’s Emission Trading ~OgTWU’ Yde~OUrdof Regulation, vol. 6, No. 1, pp. 109-153, 1989; Daniel J. Dudek and John Palmisano, “Emissions Trading: Why is This ThoroughbredHobbled?” Columbia Journal of Environmental Law, 13:2, 1988, pp. 218-56; Scott Atkinson and Tom Tietenberg, “Market Failure inIncentive Based Regulation: The Case of Emissions Trading’ ’Journal ofEnvironnwntalEconomics andiUanagement, vol. 21, 1991, pp. 17-31.


Box 9-C-RECLAIM: Marketable Permits in Southern California

In 1992, the South Coast Air Quality Management District (AQMD), the regulatory agencyresponsible for air pollution in the Los Angeles region, proposed a major new approach to regulating airemissions. The Regional Clean Air incentives Market (R ECLAIM) is a proposal to allow firms to generateand trade emission reductions credits.’

Air quality in Los Angeles violates the national standard and improvement will require dramaticemission reductions through 2010.2 On the other hand, the region’s economy has been suffering fromrecession, defense cuts, and outmigration of industry to other States and Mexico. This means that airpollution needs to be reduced, but at the lowest possible cost. Moreover, because drastic reductionsare necessary, innovative approaches to reach these goals are needed. Because of this, AQMDproposed to progressively ratchet down permissible air emissions by 85 percent over the next 20 years,while allowing firms to meet these tougher standards by installing add-on controls, reformulating theirproduction process, purchasing excess emissions reductions from other sources, and/or reducingmobile source emissions, including retiring old cars.

All major stationary sources with NOX (488 facilities) and SO2 (47 facilities) emissions, generallygreater than 4 tons per year, will receive an emissions cap and an annual rate of reduction.3 In turn, theemission reduction requirements of more than 30 adopted rules and over 12 future rules are replacedby a single permit that encompasses all NOX or SO2 emission sources at the facility.

The District developed rule language in May 1993 and proposes to fully implement the programby January 1994. There will be two separate markets in the program, for NOX and SO2. Mobile sourcesand companies emitting less than 4 tons of the pollutants are exempt from the program.

In some ways RECLAIM represents a significant departure from the command and controlapproach. While facilities will still be required to obtain permits to pollute, the new permits encompassall NOX or SO2 emission sources at the facility, rather than individual pieces of equipment. Each facilitywill have an overall declining emissions cap that it must meet. However, if a firm believes that it can meet

1 So@h ~ast~r @ality Management District, F?ECbVMRules (Diamond Bar, CA: SCAQMD, May 1~3).

2 APPr~~mately 50 ~ermnt of air poll~ion in the ~s~geles area ~mes from mobile sources (e.g., cars andtrucks), 30 percent from area sources (e.g., dry cleaners) and consumer products (e.g., perfume), and 20 percentfrom stationary sources (e.g., industry).

3 SCAQMD is considering separately the develop~nt of markets for reactive organic compounds (ROCS).

(continuedon next page)

Tipping fees have increased significantly since havior. Incentive approaches have also beenthe early 1980s, although in some places tipping proposed for a wide range of environmentalfees do not makeup for the total government cost. problems, including global warming,67 municipalThe city of Phoenix recently instituted a toxic- solid waste, and nonpoint source water pollution.based fee on the dischargers to the local POTW. While the U.S. incentive approaches haveHowever, these fees may not always be high concentrated on marketable permits, some Euro-enough to encourage significant changes in be- pean countries have more experience using fees

67 Robert W. ~ and Robert N. Stavim, ‘Trading in Greenhouse Permits: A Critical Examination of Design and hnplementation Issu~, ”prepared for Giobal Ciimate Poiicy, edited by William Clark and Henry be (Cambridge, MA: John F. Kennedy School of Government,Harvard University, March 18, 1993).


Box 9-C-RECLAIM: Marketable Permits in Southern California-Continuedits cap more cheaply by purchasing emission reduction credits from other firms, it can do this. It is hopedthat RECLAIM will spur innovative control technologies and other new ways of reducing pollution, andwill allow AQMD to avoid the battles over what is and is not technologically possible. Moreover, byreducing emission limits significantly, RECLAIM hopes to force the development of technology to meetthe new limits.

An important component to the success or failure of the program will be the accuracy of monitoring.AQMD proposes to monitor SO2 and NOX through continuous emission monitors attached to airemission sources. One advantage of the monitoring program is t hat it will result in a better understandingof emissions and air quality.

Compliance costs under RECLAIM, as opposed to a conventional approach, are expected to belower. While it would cost $346 million to reduce emissions over the period of 1994 to 1999 under acommand and control approach, AQMD estimates that under RECLAIM costs wouldbe$182 million,or 47 percent less. Part of these savings are expected to come from advancements in pollution controltechnology stimulated by the RECLAIM incentives. RECLAIM also provides more flexibility for industryand gives facilities the ability to better engage in long-term planning and have more control overmanaging their emissions.

There are, however, a number of limitations in the program that might limit savings. To beconsistent with Federal and State regulations, new, relocated, and modified (resulting in emissionincreases) sources must still meet Best Available Control Technology requirements, as do existingequipment currently permitted under BACT. Facilities that purchase credits to install a new source orincreases above their annual allocation must obtain an amendment to their facility permit, and somefacilities can only buy credits from facilities in the same geographic zone. Finally, because the futureemission targets are so low, in some cases below currently available technology, firms may bankemission credits to meet future reductions.

Moreover, it is possible that the program could exacerbate the migration of industry out of theregion, since firms in the program that relocate or shut down can obtain credits to sell. An additionalpossible problem is that the program could penalize firms that have already significantly cut pollutants.If emission baselines and credits are allocated to firms based on current emission levels, firms that havecleaned up get fewer credits than firms that haven’t. AQMD is proposing to deal with this by basingcredits on emission Ievels for the years 1989 to 1991. Facilities that today operate below their emissionpotential will receive a starting allocation commensurate with their emissions in 19870r 1988. However,these credits cannot be traded and can only be used by the firm to offset emissions increases fromincreased output in the first 3 years of the program.

or taxes on releases, particularly for water pollu- ronment agency (ADEME) charges large emitterstion.68 However, the purpose of these fees is often of SO2, NOX, and hydrochloric acid a tax ofto raise revenues, rather than to induce industry to approximately $30 per ton, while France’s sixcontrol pollution. For example, the French envi- river basin agencies charge fees on effluents of

68 orgafiution for Economic” cooperation and Development, Environmental Policy: HOW M Apply Econonu”c ln~trument~ (pfis: OECD,1991); Huppes, et. al. New Market-Oriented Instruments for Environmental Policies, (London: Graham and Trotma4 for The Commission ofthe European Communities, 1991); Mikael Skou Anderso~ “GreenTaxes and Regulatory Reform: Dutch and Danish Experiences in CurbingSurface Water Pollution, ’ working paper, (Berlin: Wissenschaftszentrum Berlin (WZB), 1991); Gardner M. BrowrL Jr. and Ralph W. Johnsom“Pollution Control by Effluent Charges: It Works in the Federal Republic of GermanJournal, VO1. 24, No. 4, October 1984, pp. 929-966;

Y, WY Not iU tie United States?’ Natural Resources


Table 9-2—Estimates of Cost Savings FromEPA Emissions Trading

Number Amount of savingsType of trades ($millions)

Offsets 2,500 $25*

Bubbles 132 $435**

Banking 100 very small**

Netting 5,000-12,000 $525-12,000’”

SOURCES: “ Daniel J. Dudek and John Palmisano, “EmissionsTrading: Why is This Thoroughbred Hobbled?” Co/umbia Journal ofErwironrnenta/ Law, 13:2, 1988, pp. 218-256. ● * Robert W. Hahn andGordon L. Hester “Marketable Permits: Lessons for Theory andPractice,” Eco/ogy Law CWarfer/y, VOI 16, 1989, pp. 361-406.

BOD and suspended solids. However, in bothcases the taxes are too low to have significanteffects on firm behavior.69 In a few countries, thefees are higher and may affect behavior, Hollandcharges higher fees on water pollution, whichappear to have had an impact on reducingdischarges. 70 Since 1974, Japan has charged a feeon SO2 that may have encouraged some sourcesto install SO2 scrubbers.

E Advantages of Incentive SystemsThere are several potential advantages of

incentives in the regulatory system (see table9-3).

COST SAVINGSMany studies suggest that the total savings

from using incentives rather than traditionalregulations alone could be considerable, primar-ily because differences in compliance costs be-tween sources can be substantial. For example,OTA estimated that the average costs for reducingvolatile organic compounds (VOCs) may rangefrom about $500 per ton for limits on fuelvolatility to about $39,000 per ton for usingmethonal as a vehicle fuel,71 and that the costs ofreducing SO2 emissions from eastern powerplants by requiring wet scrubbers would costbetween 40 and 110 percent more than allowingeach utility to choose the lowest cost controloption (coal washing, low sulfur fuels, and wetand dry scrubbers) .72

A number of studies have estimated thatincentive systems could be two to five times lessexpensive than command-and-control.73 How-ever, many of these estimates, particularly thosebased on more theoretical models, may signifi-cantly overstate the savings from incentive ap-proaches, in part because theoretically pure incen-tive schemes are unlikely to be workable inpractice. 74 First, many firms with high controlcosts have already invested in abatement andtherefore cannot reap savings available if theybuy credits. Second, perfect markets for tradablepermits may not develop. If firms are prohibited

69 @e French ~nvkoment~ Official ~~~ hat fie ties would&veto be 20 to 30 times ti@er in order to serve as an effective iIICentiVe

for fms to reduce pollution.70 Rob~ W, Hfi, $ ‘fionomic pre5criptio~ for EnvironrnenM Problems: How the Patient Followed the Doctor’s Orders, ~ournd of

Economic Perspectives, 3, 1989, pp. 95-1 14; also Hans Bressers, “The Role of Effluent Charges in Dutch Water Quality Policy,” inInrernutional Comparisons In Implementing Pollution Luws, ed. by Paul B. Downing and Kenneth Hanf (Boston: K1uwer-Nijhoff, 1983),

71 ()~y tie upper estimtes we relevm~ however, ~cause most of tie 1ower.cost options me already re@red, U.S. Congress, Office of

Technology Assessment, Urban Ozone and the Clean Air Act: Problems and Proposals for Change, (Washington, DC: U.S. GovernmentPrinting Office, April 1989), pp. 106-108.

72 us. Conpess, Office of Tw~olom Assessment, AcidRain a~Tran~portedAir Pollutant8: /mp/icationsfor public policy, 0~-0-z04

(Washington, DC, U.S. Government Printing Office, June 1984).

73 For ~ discussion of tie ~wretic~ estimates of savings from emissions, see T.H. Tietenberg, ‘‘Emission Tradkg: An Exemlse inReforming Pollution Policy” (Washington: DC: Resources for the Future, 1985; T.H. Tietenberg, Economic Instruments for EnvironmentalRegulation’ Oxford Re-view of Economic Policy, 1990, vol. 6, No. 1, 17-33; and Robert W. Hahn and Robert N. Stavins, “Economic Incentivesfor Environmental Protection: Integrating Theory and Practice, ” The American Economic Review, vol. 82, No. 2, May, 1992, pp. 464-468.

74 Robert N. SlaVtiS, “Transaction Costs and the Performance of Markets for Pollution Control,” unpublished paper (Cambridge, MA:Harvard University, Kennedy School of Government, May 23, 1993).


Table 9-3—Advantages and Disadvantages of Different Regulatory Approaches

Type ofRegulation Advantages Disadvantages

Uniform Easier to ensure compliance More difficult to focus efforts on low-cost sourcestechnology- Able to set overall release targets for facility and within or between plantsbased region Reduces incentives for pollution prevention and tech-standards Ensures large market for producers of best available nology development

technology

Source-based Some incentives for pollution prevention and tech- More difficult to focus efforts on low-cost sourcesperformance nology development within or between plantsstandards Able to set overall release targets for a facility and Monitoring may be difficult(sources regionwithin a plant)

Greater flexibility to use low-cost approaches onregulated sources

Plant-based Can focus efforts on low-cost sources within a plant Monitoring may be difficultperformance Moderate incentives for pollution prevention andstandards technology development(facility bubbles,no trading) Able to set overall release targets for a facility and

region

Tradable Can focus efforts on low cost sources within a facility Monitoring may be difficultpollution or between facilities Can lead to regional/local pollution concentrationspermits Stronger incentive for pollution prevention and May not be appropriate for emissions with threshold

technology development damage functionsAble to set overall release targets for a region Early reducers can be penalizedGreater flexibility regarding when and to what Potentially large transaction costs, which may di-degree reductions are made minish cost savings

If permits are auctioned, can raise total compliancecosts

Pollution Can focus efforts on low-cost sources within a Monitoring may be difficult, if the tax is placed ontaxes facility or between facilities outputs rather than input purchases

Stronger incentive for pollution prevention and Can lead to regional/local pollution concentrationstechnology development May not be appropriate for emissions with thresholdGreater flexibility regarding when and to what damage functionsdegree reductions are made Difficult to set overall release levelsRequire few regulatory approvals Firms may choose to pay tax rather than cut pollutionSet marginal costs of control Because of increased taxes, can raise total compli-Source of government revenues ance costs

Potentially less new source bias


from banking emissions credits for future use or Third, transaction costs, particularly with tradablesale they may engage in early, suboptimal sale of permits, may be high. Firms may have to paycredits. The number of firms in the market maybe consultants to identify sellers or buyers, paysmall, especially when the bulk of pollution brokers to facilitate transactions, and spend timecomes from a small number of widely dispersed negotiating. In addition, for fees or tradablesources or where a few large sources dominate. permits, firms may have to pay to document and


monitor emission reductions, develop applica-tions for a permit revision, and keep detailedrecords. Finally, environmental safeguards andother regulatory constraints can diminish theworkability of incentives. In some cases firmshave to wait up to 2 years to get certification thattheir reductions are legitimate and can in fact besold, Requiring new sources to satisfy new sourceperformance standards, rather than allowing themto install less stringent control technology andbuy credits to make up the shortfall, reducestrading potential.

States and localities can further undercut trad-ing as an option. For example, Illinois passed alaw requiring some utilities to buy scrubbers soutilities would not buy low-sulfur coal fromWestern States and instead buy high-sulfur Illi-nois coal.75 Atkinson and Tietenberg suggest thatin reality, savings achieved would probably be 20to 50 percent of the estimated ideal.76 Notwith-standing these limitations, incentive systems canlower compliance costs, although not nearly asmuch as theory might suggest.

GREATER OPERATING FLEXIBILITYThe development and implementation of a new

pollution control or prevention method entailscertain regulatory risks for the business. Oneadvantage of incentive approaches is that if firmschoose to invest in a new control technology or aclean process solution that is low cost, but fallsslightly short of meeting the regulation, or re-quires additional time to work out problems, theycan buy credits (or pay a fee) to make up for theshortfall.

INCENTIVES FOR INNOVATION INPOLLUTION CONTROL

Under command-and-control, firms have littleincentive to reduce releases below the requiredlevel since they receive no economic benefit.Moreover, regulated firms have limited interest indeveloping more efficient technologies for pollu-tion control since, once developed, these technol-ogies are likely to be mandated by regulators asstandard for other sources in the future. Finally,designation of technology standards make it moredifficult for firms to get alternative approachesaccepted. As a result, command-and-control sys-tems, particularly technology-based standards,can freeze the development of technology thatcould provide control at greater levels or lowercosts. 77

A potential benefit of incentive approaches isthat they could provide firms with financialrewards for developing and adopting new pollu-tion abatement and prevention technologies andother innovative control strategies that reducereleases below required levels.78 Firms adoptinginnovative technologies that reduce pollutionmore than required would benefit financially,either through lower pollution taxes or saleablepollution rights.

While incentives may stimulate new ways ofcontrolling pollution, these may not always leadto development of new technology. For example,firms may decide to use more straightforwardapproaches, such as fuel-switching or substitutionof materials. Thus in some cases, in contrast to atechnology-based standard that may force thedevelopment of a new technology, incentivescould produce less technological innovation,

7S EnergF, Daily, Sept. 3, 1992! P 2“.lh Scott A&inson and Tom Tietenberg, “Market Failure in Incentive Based Regulation: The Case of Emissions Trading” Journal of

En\ironmcntul Economics and Management, 21, 1991, pp. 17-31.

77 For example SW, Malt Mdley, “How to Smother Innovation,” The Wall Sfreef .lournal, June 9, 1993.T~ paul B, Downing and ~~ence J. White, “Innovation h Pollution COn@Ol, ’ Journal of Environmental Economics and Management,

VO1. 13, 1986, pp. 18-29.

7!l A final ~~vantage of incentives is mat hey provide ~ addition~ set of re@ato~ tools to address problems or po~ution sOUSCeS dllit I)Mynot bc effectively addressed using traditional regulatory tools. See Michael H. Levin and Barry S. Elm~ ‘ ‘The Case for EnvironmentalIncentlvcs, ’ The En\’ironmental Forum, January/February 1990, pp. 7-11.


even though they produce lower cost means ofcontrol. 79

1 Limitations and Disadvantages ofIncentive Systems

There are limits to incentive systems. Incen-tives seldom eliminate the need for regulations.Indeed, incentive systems must generally beimplemented within a clear regulatory frame-work. An incentive-based approach, however,may offer more compliance options than a tradi-tional regulatory system.

One key to incentive approaches is accurateand timely monitoring and enforcement. Unlikemany conventional command and control stand-ards where adoption (and proper operation) of acertified control technology ensures compliance,incentive systems normally require accurate mon-itoring of emissions over a period of time. Whilecurrent monitoring procedures and technologyappear adequate for some types of processes andpollutants, they are less so for others. As a result,the application of incentives may be limited tocases where adequate monitoring and enforce-ment are feasible.80 It is one thing to monitorutilities trading sulfur dioxide emissions underthe Clean Air Act’s acid rain provisions, sincethere is a manageable number of facilities in theprogram and technology for continuous stackemission monitoring is available.81 It is quiteanother thing to adequately monitor a vast num-ber of smaller sources and releases associatedwith a wide array of industrial processes. How-

ever, advances being made in new continuousemissions monitoring processes are likely toincrease the potential of incentive approaches.82

Regardless, incentive approaches will generallyincrease the need for and complexity of detailedmodeling, monitoring, and enforcement, whichcould increase the administrative cost to govern-ment and industry. Monitoring is more complexwhen emissions output is regulated and lesscomplex when materials input is taxed (e.g.,carbon taxes in fuels).

Geographical constraints can limit applicabil-ity of incentives. For some pollutants (e.g., airtoxics) the market may have to be defined quitenarrowly, so that trades do not significantlyreduce environmental quality in an area. Safe-guards would be necessary under a tax or tradingsystem to protect the interests of persons living ina place where polluters chose to pay the fee or buythe rights, rather than control pollution. However,even with small trading areas, potential savingsmight be significant.83

In cases where environmental damage is se-vere, there may be a need to use all feasible meansof control and to limit the ability of firms to buypollution rights. For example, in Los Angeles,which has major environmental problems, achiev-ing ambient standards may require strict controlson almost all sources of ozone-causing emissions.In this case, the cost advantage of market-basedapproaches over command-and-control will beless, but still may be significant (see box 9-C).

79 A ~ advan~ge of ~centives is that they provide an additional set of regulatory tools to ZiddreS5 problems Or pOhtiOn SOUrCes tit mynot be effectively addressed using traditional regulatory tools. See Michael H. LevirI and Barry S. Elrmq ‘‘The Case for EnvironmentalIncentives,” The Environmental Forum, January/February 1990, pp. 7-11.

so k some cases, thoug~ tradab]eperrnits and taxes may be easier to monitor and enforce, particularly in the ref@atiOn of tie uSe of pti~achemicals, such as CFCS. Robert Rabiq “EPA Regulation of Chlorofluorocarbons, “ in Making Regulatory Policy, edited by Keith Hakinsand John M. Thomas (Pittsburgh: University of Pittsburgh Press, 1989).

81 Most lwge souNe emissions of NOX and SOX in Japan are monitored by Continuous Emission Monitors (CEMS) and ~s info~tionis automatically fed to local, governmentally controlled monitoring stations by telemetry,

82 However, fi some Cmes, ~went CEMs can ~pede indus~~ perfo~ance. See Gunsefl S. Stief, et. ~., ‘ ‘Selective CaM@c ReductionNOX Control for Small Natural Gas-Fired Prime Movers, ’presented at the 85th Annual Meeting and Exhibitio~ Air and Waste ManagementAssociation Kansas City, June 21-26, 1992,

83 T.H. Tietenberg, “Economic Instruments for Environmental Regulation” op. cit., foomote 73.


Taxes or fees make it difficult to predict theamount and pace of pollution reductions. Moreimportantly, as discussed below, because manag-ers may not optimize and choose low-cost op-tions, firms may choose to pay the fee andcontinue to pollute, even if reducing pollutionwould save them money.84 Unlike fees and taxes,tradable permits allow regulators to ensure anoverall level of pollution reduction. It is difficultfor government to set fees at the correct level toproduce the desired change at the lowest cost.

Moreover, taxes and fees or the auctioning ofpermits could raise total compliance costs forindustry, even if abatement expenditures werereduced. 85 However, fees and auction income canbe rebated back to industry to be revenue neutral.For example, Sweden is planning to initiate a NOX

fee on 150 to 200 of the largest sources. In orderto not discriminate against these, the revenueswill be returned to the affected facilities througha rebate based on the amount of energy theyproduce.

86 Fees could also be returned to firms to

help pay for the cost of pollution control equip-ment. For example, the revenues from the Frenchair pollution charge are returned to those adoptingpollution control equipment.87 The revenue raisedfrom fees can be used to offset other taxes (onindustry or the general public), as well.

Assignment of credits or allowances can beinequitable. Depending on how these rights areallocated, firms that cleaned up early may bepenalized. Similar to the current command-and-control system, a marketable permits programmay penalize new firms and reward existing firms

by making the former buy permits to enter themarket. In addition, marketable permit systemsmay exacerbate industrial relocation, since firmsmoving out of areas with marketable permits maybe able to sell their pollution permits, making itmore profitable for them to leave. One way to dealwith this would be to have closing and movingfirms hand over credits to the local government,which can sell them or give them to firmsrelocating to the area.

Finally, under some systems, firms may getcredit for reductions that they have already made,or for things they would have done anyway, suchas shutting down an obsolete production line. Inaddition, existing permits under some State im-plementation plans may allow some sourcesmany more releases than they are using. Theseexcess releases have in some cases been availablefor trade; the results have been called papertrades. 88 The existence of historic emissionsinventories can reduce this problem of measure-ment as can the assignment of more realisticemission caps. In addition, if the regulatorysystem explicitly accounts for the use of thesepaper credits by requiring lower emission limitsfrom all sources, mandated reductions couldlikely be achieved.

Some oppose incentive systems because theyfeel that industry should not be given the right topollute, and that every single reduction in releasespossible is necessary, particularly in nonattain-ment areas.89 But incentive systems can bedesigned to permit no more pollution than anequivalent command-and-control system.

S4 some have ~Ocd tit slfilm results OCCUr tith regard to adoption of industrial energy conservation practices. There 1S considembleevidence that there are proven, cost-effective, energy conservation technologies not widely used by industry. As in the case of pollution taxes,industry has market incentives (in the form of energy expenditures) to invest.

‘s T H Tictenberg, “Emissions Trading: An Exercise in Reforming Pollution Policy, ” op. cit., footnote 74.

u~ U S. Env~onmental protection Agency, Economic Incentives. Options for Environrnenral Protection, (Washington DC: EPA policy,Planning and Evaluatio~ March 1991).

87 T.H. Tietenberg, ‘ ‘Economic Instruments for Environmental Regulation,’ op. cit., footnote 74.88 peter B~hm and Clifford S. Russell, “Comparative Analysis of Alternative PoIicy hMrurnents,” op. cit., footnote 10.

‘y David Domgcr, ‘ ‘The Dark Side of the Bubble, ’ The Environmental Forum, July 1985, pp. 33-35.


I Why Have Incentives Not BecomeMore Widespread?

Despite their potential to reduce compliancecosts, incentive programs have not been widelyused as a pollution control strategy. Moreover,when the programs have been adopted, they havebeen used less frequently than expected. Mosttrades have been inside firms and, with theexception of the lead-trading program for gaso-line and the mandatory offset trading, there havebeen few trades between fins. There are severalreasons for the limited adoption of incentiveprograms.

First, with the notable exceptions of the 1990Clean Air Act Amendments, Federal legislationhas not encouraged incentives.90 For example,

while the Clean Water Act contains provisionsthat suggest that trading is allowed, it does notexplicitly authorize its use. This has limitedtrading, because of the perceived risk that tradeswill be overturned by the courts or disallowed byregulators. 91 While the Clean Air Act authorizesa variety of incentives, the effects of theseprovisions are only beginning to be felt.92

Second, because incentive systems are theexception rather than the rule, it is much easierfrom an administrative standpoint for firms andregulatory agencies to work within the traditionalregulatory system than to get new incentiveprograms up and running. Procedures for approv-ing trades can further impede the process. Forexample, in the water pollution trading scheme onthe Wisconsin Fox River, firms that entered into

trades were required to either modify or receivenew permits.93 Because firms that applied forbubbles were subject to in-depth reviews of plantfacilities, many were reluctant to use this tool.94

Provisions in the 1990 Clean Air Act Amend-ments will, in some cases, reduce the need forindepth case-by-case reviews.

Third, clear and consistent leadership in sup-port of incentives has been lacking. While the airoffice within EPA has been somewhat supportiveof incentive approaches, other media programoffices have not done as much .95 As a result, Stateand local agencies have not received the guidanceand support needed to put in place incentiveapproaches, nor has EPA aggressively sought toidentify situations where incentives might befruitfully applied. Finally, support from industryand environmental groups for incentive approacheshas been sporadic.

There are also reasons why industry has notused existing programs more extensively. First,transactions costs have been high, particularly fornonuniformly mixed pollutants (e.g., air toxicsand some particulate), where extensive air dis-persion modeling has been required. Moreover,the practice that EPA, instead of the States,approve trades involving dispersion modeling,hindered trading in the early 1980s as few tradesrequiring modeling were approved.

Second, firms may not know about the pro-grams or may prefer the security of command andcontrol where regulatory agencies essentially tellthem what device to buy and how to monitor it.

~ A n~ber of bills recently have considered the use of incentives, See Regulatory Innovations Branch Office Of poIicY, Plming andEvaluation Economic Zncentzves in Environmental Bills Introduced in the Z02nd Congress (Washingto% DC: U.S. Environmental ProtectionAgency, February 1993).

91 US. Congess, Gener~ Accounting Offtce, Water Pollution: Pollutant Trading Could Reduce Compliance Costs if Uncertain fi”es AreResolved, RCED-92-153 (Gaithersburg, MD: U.S. General Accounting Office, June 1992), p. 5.

92 EPArecently issue a proposed de providing guidance to the states on economic incentive programs. EPA, ‘ ‘Economic Incentive ProgrmRules,” Federal Register, vol. 58, No. 34, February 23, 1993. pp. 11110.

93 Robert W. H@ 4 ‘Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor’s Orders, ” Op. cit.,footnote 70. The major reason, however, for the failure of this program was that the marginal costs of reducing emissions did not differsignificantly between the plants, reducing the benefits of trading to the firms.

% For exaple, SW BOX 8-G discussing 3M’s experience wi~ bubbl~.

95 Robert Rabin, “EpA Regulation of Ch.lorofluorocarbons, ” op. cit., footnote 80.


Industry may also worry that they will be required that their use may be more limited. Notwithstand-to install control technologies even after they ing these limitations, the potential for incentive-have purchased credits. Finally, some firms may based approaches to cut costs (and stimulatenot want to be seen as polluters for fear of innovation) has not been reached.damaging their image with the public.96

Incentive approaches promise much in theory,but their application in the real world suggests

96 Some fm feti tit ~ey my be ~=n ~~ buying ~e~ way out of con~ol~g pollution+ Some o~er ~ are concerned about profit@

from controlling pollution. For example, 3M has a corporate policy that they will not profit horn any money made by selling permits.

PART IV.GovernmentSupport for

EnvironmentalTechnology

Development,Here and Abroad

Research,Development, and

Demonstration 10

R esearch and development (R&D) on environmentallypreferable technologies is important not only for solvingenvironmental problems, but also for ensuring that U.S.environmental firms maintain competitive positions in

world markets. R&D directed at lowering the costs of meetingand in some cases going beyond regulatory requirements canhelp both the environmental goods and service (EGS) andregulated sectors. But commercial benefits from much of the $1.8billion the U.S. Government spends each year on R&D for theenergy and environmental technologies covered in this report arelimited.

Several factors are key. First, several agencies have mission-oriented programs, but there has been little strategic direction andcoordination to Federal R&D efforts. Funding agencies generallyhave not worked closely with each other to identify criticalenvironmental problems and common technology priorities,although the Clinton administration is making efforts in thisdirection.

Second, except for various cooperative R&D agreements(CRADAs) and a number of R&D and demonstration programsfor cleaner energy technologies, individual programs pay scantattention to commercial applications. For example, a significantshare of Federal environmental technology funds (over $650million in fiscal year (FY) 1993) support R&D related tohazardous waste remediation technologies for Federal sitecleanup. While these efforts could produce commercially rele-vant remediation technologies, their export potential is likely tobe modest relative to other areas (see ch. 4 and ch. 5).Comparatively little R&D goes for pollution control, cleanerproduction, and recycling, which are of greater relevance to

291


regulated industries and offer greater exportpotential. If recent legislation is vigorously im-plemented and new administration initiatives arepursued, this picture could change toward moregovernment-wide coordination and commercialorientation; several pending bills before Congressaim in this direction (ch. 2).

Third, while CRADAs and other industry-government partnerships (e.g., SEMATECH) arebecoming more prominent, programs operatedprincipally by government agencies often havehad only limited dialogue with industry. Whenindustry is involved, it is often through singlecompanies rather than through broad-based in-dustry consortia. In such cases, government hasnot effectively leveraged and mobilized industry-wide resources, experience, and commitment todevelop and deploy the most important environ-mental technologies for industrial application.

The picture is somewhat different in othernations. Government support for environmentaltechnology R&D in Europe and Japan tends tocenter in agencies with industrial policy missions,such as Japan’s Ministry for International Tradeand Industry and Germanys Ministry of Researchand Technology. In some cases, particularly inJapan, these missions are carried out by lessbureaucratic quasi-public organizations, with in-dustry involvement and governance, that usuallyfocus on subjects and technologies with domesticand international commercial promise. R&D isalso carried out in a manner designed to facilitateusefulness to industry; for example, Japan’s NewEnergy and Industrial Technology DevelopmentOrganization (NEDO) borrows industry research-

ers, who then return to their companies when thework is done, Moreover, industry-governmentcooperation in developing environmental tech-nology is common, with emphasis on increasingcommunication of innovations among firms, in-cluding the use of industry research consortia. Forexample, Japanese steel producers formed theSteel Industry Foundation for the Advancementof Environmental Conservation Technology in1973 to conduct joint R&D on pollution controland energy conservation technology in the steelindustry. The Dutch and the Danish governmentshave focused their environmental technologypolicies on increasing successful cooperationbetween user companies, suppliers, developers,and consultants.1 Such collaborative approachesappear promising in advancing technologies suitedto industry environmental needs.2

In addition, at least one country, the Nether-lands, has begun to think strategically aboutlong-term technology development which sup-ports principles of sustainable development. ItsSustainable Technology Development Program,funded at $2.9 million a year by five agencies,attempts to boost the capacity of Dutch institu-tions (industry, government, academia) to inte-grate environmental goals into technology devel-opment.3 Througha‘‘backcasting process wherethey look at the demands which technology mustmeet in the future (e.g., low levels of resourceuse), the program attempts to identify and achieveconsensus over sustainable technology goals in avariety of areas, including transportation, energyproduction, and manufacturing,

] Johln W. Scot, “Constructive Technology Assessment and Technology Dynamics: The Case of Clean Technologies, ” Science,Tt ch? !,,:> ond Human Values vol. 17, No. 1, winter 1992, pp. 36-56.

z FOreXample, tie Canadian Government Operated its Cooperative Pollution Abatement Research program in the 1970s to develop pOllUtiOncontrol and prevention technologies for the pulp and paper industry. Development and guidance of the program were the responsibility of ajoint industry-government committee, including representatives horn Federal departments, pulp and paper companies, and the industry tradeassociation and industry research organization, (Although many view the program as a success, it was eliminated in 1979 due to lack ofgovernment funds.)

J J.L.A, Jansen and P,J. Vergragt, “Sustainable Development: A Challenge to Technology” (Leidschendam, Netherlands: Ministry ofHousing, Physical PIarming and Environment, Directorate-General for Environmental Protection June 10, 1992).

Chapter 10--Research, Development, and Demonstration! 293

Table 10-1—National Government Funding For Selected Categories of EnvironmentalTechnology R&D in Most Recent Fiscal Year ($ million)a

United StatesClean coalRenewable energyEnergy efficiencyRemediationEnd-of-pipe and prevention

Total

JapanClean coalRenewable energyEnergy efficiencyEnvironment

Total

Percent of total government R&D funds.—15”

12

9“

6

3

0

—

$375230365650150

1,770

85175310130

700

_ Environment

~ Energy

I II I

EC Germany Japan Netherlands UnitedStates

European CommunityEnergyEnvironment

Total

GermanyClean coalRenewables and efficiencyEnvironment

Total

The NetherlandsEnergyEnvironment

Total

0.12

0.09

0.06

0.03

0

Percent of GDP

_ Environment

m Energy

25555

310

47250230

527

198175

373

——.—

uGermany Japan Netherlands Unded

States

a Estimates are for environmental t~hnology categories emphasized in this report, but the estimates may nOt include ~!l national governmentexpenditures. State and local and private spending are not included. Estimates ccwerenvironmentally preferable energy (e.g., renewabbs, energyefficiency, and dean coal); end-of-pipe technologies; pollution prevention; and remediation. Spending on sdence and technology related toenvironmental science and modelllng, nuclear waste handling, agriculture, and manufacturing not primarily related to environmental aims were notincluded. Most U.S. and Japanese expenditures are for FY 1993, most spending by other nations is for ~ 1992.

SOURCE: See Tables 10-3,4,5,6 and 7. GDP figures and exchange rates are from International Monetary Fund, /nterrratlor?a/ F7nar?citilStafLsrks,selected issues.

There are some broad similarities in national In addition, in many nations, including Japan andsupport for environmental technology R&D (see the United States, energy agencies or programstable 10-1). The majority of funding in all have major responsibilitycountries examined goes for environmentally nology development.preferable energy technologies (e.g., renewable, This chapter examinesefficiency, clean coal). With the exception of the ogy R&D by the UnitedNetherlands, much less is spent on end-of-pipe or trading partners.cleaner manufacturing technology development.

for environmental tech-

environmental technol-States and some major


UNITED STATESFragmentation makes it difficult to quantify

Federal support for environmental technologyR&D. Not only is it difficult to identify all of theprograms, but there is no standard definition of‘‘environmental. OTA estimates that the majorR&D programs pertinent to environmental tech-nologies covered in this report amount to approx-imately $1.8 billion, divided among energy ($1billion), remediation ($650 million), pollutionprevention ($70 million), and end-of-pipe tech-nology ($80 million). Other studies offeringhigher estimates have defined environmentaltechnology more broadly, to include spending onitems such as mass transit, nuclear waste trans-portation and storage technology, chemical toxic-ity assessment, and climate modeling R&D. Also,agricultural, forestry, fisheries, biodiversity, andland use related technologies, which are notexamined in this assessment, may be included insome definitions. For example, a 1992 Congres-sional Research Service (CRS) study identified$2.2 to $2.5 billion in FY 1992 Federal appropria-tions for environmental technology develop-ment.4 The Carnegie Commission on Science,Technology, and Government estimated that Fed-eral spending for environmental R&D was $5billion in FY 1992, but much of that is for basicscience and global monitoring technologies for“Mission to Planet Earth” rather than for tech-nologies that prevent, control, or repair environ-mental damage.5

Most Federal support for R&D on environ-mental technologies is devoted to cleaner energy

technologies and hazardous waste remediationtechnologies. The latter technology is supportedin large part to serve agencies’ mission require-ments of cleaning up contaminated sites. Withsome exceptions (e.g., clean coal and renewableenergy R&D, programs often shared with indus-try), export promotion potential has not been amajor consideration in setting R&D priorities.6

Some technologies with stronger export potentialnow, particularly cleaner production processesand end-of-pipe pollution control technologies,receive relatively little Federal R&D support.7

Cleaner energy and production technologies maycome to have an advantage in international tradesince they almost always provide a lower costmeans of environmental protection than end-of-pipe or remedial clean up.

There has been little coordination of Federalenvironmental technology R&D. So far, EPA andother agencies that support environmental andenergy technology development have not devel-oped the necessary dialogue on the interplaybetween environmental problems, future environ-mental regulations, and needed technologies.Cooperation is critical, since EPA’s regulatoryprocess will dictate not only the technologicalneeds of many industries, but also the approachesthat might be taken.

This situation may be changing. With the endof the Cold War and the reorientation of theFederal science and technology system towardcivilian technology, the Federal Government mayhave opportunities to integrate environmentaltechnology concerns into new civilian technology

4 John D. Moteff (coordinator), U.S. Library of Congress, Congressional Research Service, The Current State of Federal R&D inEnvironmental Technologies, 92-675 -SPR, Aug. 25, 1992.

5 Mission to Planet Earth consists of programs and projects to better understand the biological, chemical, and physical processes thatinfluence and control the Earth’s environment. Monitoring, modeling, and analytic technologies are key was of technical development.Carnegie Commission on Science, Technology, and Governmen4 Environmental Research and Development: Strengthening the Federallnfiastructure (New York NY: Carnegie Commissio~ December 1982), pp. 35-37, 115-129.

6 See Trade Promotion Coordinating Committee, Towarda National E~orf Strategy, Report to the United States Congress, Sept. 30, 1993,p. 43.

7 Office of Conservation and Renewable Energy, Office of Industrial Technologies, Federal Agencies Active in Waste Minin”zation andPollution Prevention (Washington DC: U.S. Department of Energy, July 31, 1992); also The Massachusetts lbxics Use Reduction Institute,Toxics Use Reduction Research Directory Owen, MA: University of Massachusetts Lowell, 1992).

Chapter 10-Research, Development, and Demonstration 295

initiatives. Recent and pending legislation call formore commercial orientation of federally fundedenvironmental technology R&D (ch. 2), althoughfunding and implementation are uncertain.

Both the Bush and Clinton administrationshave taken steps to coordinate Federal R&D. Atthe end of the Bush administration, a Subcommit-tee on Environmental Technology was estab-lished within the Committee on Earth and Envi-ronmental Sciences of the Federal CoordinatingCouncil on Science, Engineering, and Technol-ogy (FCCSET), an interagency group chaired bythe President’s science adviser.8 The Subcommit-tee is taking inventory of Federal environmentaltechnology R&D, and considering how it mightbe better coordinated and ranked.9 Pursuant toPresident Clinton’s 1993 Earth Day address, theCommerce Department established an interagencyWorking Group on Environmental Technologyand Trade, chaired by the Chief Scientist inDOC’s National Oceanographic and AtmosphericAdministration (NOAA). The working group,whose report was scheduled for release at presstime, addresses environmental technology devel-opment, diffusion, and exports. It is workingclosely with the Environmental Trade WorkingGroup of the interagency Trade Promotion Coor-dinating Committee (see ch. 6). FCCSET’s Man-ufacturing Committee is also examining the placeof environmental factors in federally supportedmanufacturing R&D.

The administration also established an Envi-ronmental Technology Initiative led by EPA to

foster links with the Department of Agriculture,DOC, DOE, National Science Foundation (NSF),National Aeronautics and Space Administration(NASA), and other agencies. The Initiative seeksto promote an interagency approach to identifyenvironmental problems and work toward poten-tial technical solutions.10 EPA is still in earlystages of implementing the initiative. It remainsto be seen whether EPA will develop a systematicand strategic process, involving other Federalagencies and industry, to best target these funds.Industry involvement is critical for identifyingthe most relevant technological needs and oppor-tunities for a specific industry, particularly cleanerproduction technologies.

The FCCSET efforts and the export report arebeing advanced by a high-level interagencyworking group, formed by the Office of Scienceand Technology Policy (OSTP) and other WhiteHouse offices. That group is working “with theresearch agencies to ensure that all technologyprograms, not just those focused on environ-mental technologies, are considering the environ-mental applications of the technologies they aredeveloping." 11 OSTP is developing an environ-mental technology strategy to guide near-termand long-term Federal policies. Whether thesecoordinating bodies can bring coherence to Fed-eral policy for environmentaltrade, and integrate regulatoryissues into the policy process,question.12

technology andand technologyis still an open

g < ‘Chmer: Subcommittee on Environment Technology, Committee on Earth and Environmental Sciences, Federal Coordinating CoUncilon Science, Engineering, and Technology, ’signed by D. Allan Bromley, Chairman, Federal Coordinadng Council for Science, Engineering,and Technology, Jan. 4, 1993. The Subcommittee includes, among other agencies, NSF, EPA, DOE, NASA, the U.S. Department of Agriculture(USDA), and the Department of Health and Human Services (HI-IS).

9 John H. Gibbons, Assistant to the President for Science and Technology, Director, Office of Science and Technology Policy, testimonyat hearings before the House Committee on Science, Space, and Technology, Subcommittee on Technology, Environmen~ and Aviation, July15, 1993, p. 8.

‘0 Ibid.

11 Ibid.IZ me fiesident, s Council on sust~mble Development might also address how to prioritize Federal environment~ tmhno108Y ‘ffons.


9 Public-Private and Private-PrivateCooperation

The usefulness of Federal environmental tech-nology R&D to industry depends to a large degreeon the nature and extent of Federal/industrycooperation. Such cooperation is largely limitedto some joint technology development at Federallabs and some direct funding of individual firms.

DIRECT FUNDING OF INDIVIDUAL PROJECTSOne common model for Federal-industry inter-

action is for the Government to directly fundspecific industry projects proposed in response toa Federal solicitation. In many cases, industrymust finance part of the research. A number ofprograms follow this model. The National Insti-tute of Standards and Technology’s (NIST) Ad-vanced Technology Program (ATP) makes pro-ject specific grants for half of the cost of R&D. InATP’s first 3 years, NIST awarded $187 millionin grants; 7 percent was for "energy and environ-ment."13 Many DOE programs, including theClean Coal Technology Program, the Office ofIndustrial Technology’s industrial waste minimi-zation and energy conservation programs, thePhotovoltaic Manufacturing Technology Program,and several other renewable energy R&D pro-grams, also fund specific industry projects.

Such efforts can provide companies with fundsto conduct research on specific projects that mightbe too risky to undertake alone. The programsfund promising projects—whether proposed byone firm or many. However, research by one firmdoes not necessarily diffuse through the industry.

This is a drawback for many environmentaltechnologies, for which wide industrial participa-tion is often a key to effective diffusion. More-over, funding of individual projects may not beenough to catalyze broader action on a longerterm research agenda.

FEDERAL LABORATORY TECHNOLOGYCOOPERATION AND TRANSFER

Since 1980, Congress has passed laws topromote the transfer of technology from Federallaboratories to industry .14 Mechanisms includelicensing of patents, industry use of laboratoryfacilities, researcher exchange programs, researchfor hire by companies, and research collaborationbetween a laboratory and industry, either infor-mally or through work agreements.

One kind of formal agreement is the CRADA.15

CRADAs have one major restriction: while thepartner may contribute both money and in-kindresources (personnel, facilities, etc.), the lab maycontribute only in-kind resources. Because indus-try puts up resources, it is likely to support onlytechnology with commercial promise. This coop-erative arrangement enables industry to tacklerisky, long-term, or expensive projects that itmight not be able to afford on its own. Thisleveraging of a fro’s R&D resources is multi-plied when the labs work with an industryconsortium rather than just one firm.

It is difficult to accurately determine how muchenvironmental R&D, including CRADAs, thelaboratories do. One survey of the labs reported

13 “T~~ologies Fuded by ATP: As a percent of $187 M Awarded: ATP Competitions 90-01, 91-01, 92-01,” chart in presentation byGeorge Uriano, NIST, entitled ‘‘The ATP: Current Status and Strategic Plan for Expansio~’ printed in Institute of Electrical and ElectronicsEngineers, Inc., United States Activities, “1993 National Forum: Conversion Modernization% and Restructuring of U.S. Resources: Goals,Strategies and Incentives: Proceedingraphs [sic]: June 29-30, 1993.”

14 See u.S. Con9e55, Office of Technology Assessment Defense Conversion: Redirecting R&D, OTA-ITE-552 (wash@ou ~: U.S.

Government Printing Off3ce, May 1993), pp. 97-99; U.S. Congress, Office of Technology Assessment, Making Things Better: Competing inManufacturing, OTA-ITE-443 (Washington, DC: U.S. Government Printing Office, February 1990), pp. 184, 193.

IS Con~es5explicit~y pe~tt~ CRADAS in 1986 for governrnent-oprated Feder~ laboratories and in 1989 for contractor-operated Federallaboratories (e.g., DOE’s national labs). See Office of Technology Assessmen~ Defense Conversion: Redirecting R&D, op. cit., footnote 14.

—

Chapter 10-Research, Development, and Demonstration ! 297

environmental technology CRADAs and fundingfor some labs, but not others.16 For example, theArmy’s Edgewood Research, Development andEngineering Center reported spending $1.8 mil-lion and signing four environmental technologyR&D CRADAs in 1992. EPA reported having 50active CRADAs in FY 1993, with over $5 millionof total Federal funding (although $3.1 million isfor a CRADA with Exxon for oil spill cleanupresearch).17 Some of these CRADAs may be for

technologies not covered in this report, such asclimate modeling.

OTA found that of the 382 CRADAs signed byDOE through April 1993, with Federal fundingtotaling $321 million, 18 ($6 million) were in theareas of environmental restoration and wastemanagement, and 68 ($24 million) were in the

areas of energy efficiency and renewable energy

(some of those, such as for superconductivity and

bulk power transmission technologies, are be-

yond the scope of environmental technologies

considered in th is repor t ) .18 D O E ’ s O f f i c e o f

Industrial Technology also relies on the DOE

laboratories to conduct joint research with indus-

try on some clean technology and energy conser-

vation technologies.

While CRADAs provide an opportunity to linkthe government’s expertise in environmentaltechnology with industry-they have proven to becumbersome to negotiate, particularly at DOE’slarge weapons laboratories (Los Alamos, Sandia,and Lawrence Livermore). 19

GOVERNMENT SUPPORT OF INDUSTRYCONSORTIA

Perhaps the model that brings industry andgovernment in the closest partnership is govern-ment support of industry consortia. A well-knownexample is SEMATECH, a government-industrypartnership to develop semiconductor manufac-turing technology. Its industry members, includ-ing semiconductor manufacturers, contribute $100million a year, matched by DOD’s AdvancedResearch Projects Agency (ARPA), formerly theDefense Advanced Research Projects Agency(DARPA). While ARPA exercises some supervi-sion over SEMATECH’s operations, industrymembers are largely free to choose how to spendSEMATECH’s budget. The conference report onSEMATECH’s FY 1993 funding authorizationstates that at least $10 million of the $100 million

in government funds ‘‘should be utilized fordevelopment of pollution-preventing, environ-mentally safe microchip manufacturing proc-esses. ’ ’20 SEMATECH believes that more than$20 million of its calendar year 1992 R&Dspending met this requirement. This figure takesinto account both projects with environment asthe sole or principal motivation (e.g., alternativesto the use of CFCs), and an appropriate share offunding for projects with environment as asubordinate motivation (e.g., efficiency improve-ments that reduce the waste generated).

The National Center for Manufacturing Sci-ences (NCMS), funded by industry and theFederal Government, established its environmen-tally conscious manufacturing program in 1991

‘c “Cooperative Technology RD&D Report,’ Federal Technologies Profile Series, Profile 02: Federal Environmental Technologies andR&D Programs, issues January 1993, vol. 3, No. 1 through June/July 1993, vol. 3, No. 6.

17 Discussion wi~ Larry Fdkin, Federal Technology Transfer Act Coordinator, EPA, Office of Research and Development, offla ofScience, Plannlng an(i Regulatory Evatuatiom October 1993.

I ~ Office of Techno]o~ Assessment, Defense Conversion. Redirecting R&D, op. cit., footnote 14, pp. 103-105 (en~ for ~tig so~ce“ER’ m tables 4-1 and 4-2). The tables mistakenly report these amounts as $321,000 and $6,000. However, the amounts represented aremillions, not thousands, as indicated by the text on p. 103.

19 Ibid; a]SO Don Walkovicz, Executive Director, U.S. CAR, personal communication, J~e 18, 1993.

2° N:itiooal Defense Authorization Act for Fiscal Year 1993 [Public Law 102-484], Conference Repofi to Accompany H.R. 5006, HouseReport 102-956, p 633.


Table 10-2—R&D Consortia Formed by theUnited States Council for Automotive Research*

1. Automotive Composites Consortium2. Auto OII/Air Quality Improvement Research Program3. United States Advanced Battery Consortium4. CAD/CAM Partnership5. High Speed Serial Data Communications Research and

Development Partnership6. Environmental Science Research Consortium7. Vehicle Recycling Partnership8. Low Emissions Technologies Research and Develop-

ment Partnership9. U.S. Automotive Manufacturers Occupant Safety Re-

search Partnership10. Low Emissions Paint Systems Consortium11. Automotive Materials Partnership12. Supercomputer Automotive AppIications Partnership

● Items listed in boid type are concerned entirely or in substantial partwith environmental technology

SOURCE: United States Council for Automotive Research.

and developed a list of clean technology projectswhere increased collaboration and sharing wouldproduce significant benefits. NCMS has fundedapproximately 35 projects to date, about half onozone-depleting substitutes and solvent free alter-native processes, and others on technologiesincluding sensor development for better processcontrol, plating emissions controls, reduced leaduse in electronics manufacturing, and wasteremediation. NCMS also established a program tohelp companies build environmental concernsinto the design process.

The United States Council for AutomotiveResearch (USCAR), an umbrella organizationserving the big three U.S. automobile manufac-turers (General Motors, Ford, and Chrysler), wasformed in June 1992 to promote U.S. automobilemanufacturing competitiveness, to monitor andcoordinate cooperative R&D efforts, and to rec-ommend further areas for cooperation.21 Twelve

R&D consortia are under this umbrella (see table10-2).

For example, the Low Emissions Paint Sys-tems Consortium will conduct research on alter-natives to reduce volatile organic compound(VOC) emissions, including electrocoating, powder-based primers, surface coats, clear-coat paintsystems, and water-based base coats (see ch. 7).Some consortia have Federal or State participa-tion and funding, The Environmental ResearchConsortium, for example, cooperated with theMichigan Department of State’s Bureau of Auto-motive Regulations and U.S. EPA to evaluate theeffectiveness of remote vehicle emissions sensingdevices and to measure the impact of routinemaintenance on exhaust emissions.

The auto consortium with the most significantgovernment funding is the Advanced BatteryConsortium (ABC). Through ABC, industry fundsare matched equally by DOE money. Totalfunding (industry plus DOE) for the ABC is $264million. DOE’s share is spent primarily throughresearch contracts to participating companies;also, five DOE laboratories have signed a total ofeight CRADAs with ABC.22

Although USCAR has not surveyed foreigncountry participation in its consortia, it is report-edly not very large.

23 At times, however, partici-

pation of a foreign firm with a key technology isdeemed necessary. For example, the French fir-mSaft Batterie is participating in ABC because itholds the rights to a technology (lithium polymerbattery) that is necessary for the progress of theproject.

The Clinton administration recently announceda partnership with the Big Three automakers(through USCAR) aimed at strengthening U.S.competitiveness, in part by developing technolo-gies for a new generation of vehicles up to three

21 hp~, info~tionabout U.S. CAR comes from Don Waikovicz, Executive Director, USCAR, personal cornmunicatiou June 18, 1993.

22 ~ additio~ C~S~ a non-profit coIIsofi~ desi~ed to foster the development of an electric vehicle industry k Cdiforni% received $4million in Federal funds under the 1991 Intermodal Surface Transportation Efficiency Act.

23 Don Wawovicz, op. cit., footnote 21.

Chapter 10-Research, Development, and Demonstration I 299

times more fuel efficient than today’s car. Theproposal relies heavily on the capabilities of thenational laboratories to conduct the research inpartnership with the automakers, and will bemanaged by the Undersecretary of Commerce forTechnology.

Although not specifically intended to do so,coordination among U.S. auto manufacturersthrough US CAR has facilitated cooperation withFederal entities such as DOE’s national laborato-ries. It is easier for those laboratories to work withan industry consortium than individual fins,because issues such as fairness and intellectualproperty are easier to address. (U.S. subsidiariesof foreign auto companies are not members of theconsortium.) USCAR estimates that the numberof CRADAs in which its consortia participate liessomewhere in the teens.24

Several other industry technology organiza-tions cooperate with the government on R&D anddemonstration projects.

25 The Electric Power and

Research Institute (EPRI) and Gas ResearchInstitute (GRI), which are supported by memberutility companies but receive some Federal funds,are well-known examples. EPRI’s 1993 R&D anddemonstration plan includes $56 million formanagement of air and water quality and utilitywastes; $30.4 million for improved energy-usetechnologies (including electric vehicles); andover $36 million for environmentally significantnonnuclear energy supply and storage technolo-

gies.26 EPRI also supports research germane to

manufacturing industry, in part to develop electro-technologies. These include Brayton-cycle heatpumps to recover solvents in air, reverse osmosisfor reusing water in the food products industry,and thermal reclamation of foundry sand.27 GRIbudgeted $39.3 million for environmental R&Din its 1993 plan, and much of the $64.9 millionallocated for gas-use technology R&D might alsobe environmentally beneficial.28 The AmericanWater Works Association (AWWA), an organiza-tion of U.S. and Canadian water supply utilities,funded about $6 million of R&D related todrinking water quality and water conservation in1993.29 The Water Environment Research Foun-

dation of Water Environmental Federation (WEF)funded approximately $2.6 million in research in1993.30

EPRI, GRI, AWWA, and WEF all conduct orfund R&D jointly with Federal and State agen-cies, member firms, and each other in order toleverage their resources. As utility associations(except for WEF, which also includes manufac-turers and services providers), these organizationsmay be better positioned to conduct cooperativeR&D than some other kinds of industry associa-tions. This is because utility companies do notusually compete directly against one another forbusiness. In other industries, disputes over shar-ing technical data and patent rights could be moreof an issue. However, such disputes may be less

2J Ibid.

‘s Individual utilities also conduct environmental R&D relevant to their own operations and to help their customers meet envumnmentalrequirements. For example, Southern Co., an electric utility holding company, has funded the development of several electro-technologiesimportant to industrial customers.

z~ Electric power Research Instimte, Research, Development& Delivery Plan 1993-1997 (Pa10 Alto, CA: Electic Power Research ~timte,January 1993), p. 21.

27 John Svobada, Foundry Techno/ogy--+in Overview (Pittsburgh, PA: The EPRI Center for Materials productio~ Carnegie MellonResearch Institute, January 1991).

‘s Gas Research Institute, 1993-1997 Research & Development Plan and 1993 Research & Development Program (Chicago, IL: GasResearch Institute, April 1992), p. 40.

29 J:mes F ~nwaring, Executive Director, American water works Association Research Foundation, perSOMl comm~catiom Sept. 21,

1993.

~0 water Environment Res~ch Foundation, 199.?-19$26 Research & Development Plan (Alexandria, VA: Water Environment ResearchFoundation, 1992), p. 13.


prominent for environmental technologies, par-ticularly add-on technologies, than for non-environmental product or process technologiescloser to core areas of business.

Some consortia receive little or no governmentmoney, but could possibly serve as institutionalvehicles for government to support environ-mental technology. For example, the Center forWaste Reduction Technologies of the AmericanInstitute of Chemical Engineering, which in-cludes most of the leading U.S. chemical manu-facturers, spends over $1 million a year princi-pally to support university-based and industrialR&D on pollution prevention related to thechemical industry. Research projects includeultrafiltration, mass exchange networks, VOCemissions recovery, and total water reuse. Itrecently received a $25,000 grant from EPA topromote the development and dissemination ofinnovative pollution prevention technologies.31

The Center also promotes transfer of cleanertechnology to industry and supports educationaland training efforts in pollution prevention.

Through the Petroleum Environmental Re-search Forum (PERF), 24 petroleum companieshave privately funded a small number of environ-mental research projects, many addressing pollu-tion prevention.32 Member companies can fundspecific projects. PERF projects so far have notinvolved government funding.

Channeling government research fundsthrough industry consortia and associations hasseveral advantages. First, industry members aremore likely to know more about which of themany technical options for addressing environ-mental matters have the most promise for com-mercialization. Second, industry consortia canspeed deployment of new technologies, due tostrong internal communication links. Third, con-sortia can help avoid duplication in research, thusconserving funds. Fourth, working with a broad

coalition, the government avoids favoring indi-vidual fins. Finally, the consortium can own theintellectual property developed on terms that giveall members access. This lessens the possibilitythat the owner will not commercialize it or licenseit to others.

1 Specific Agency ProgramsDEPARTMENT OF ENERGY

DOE supports more than $1.3 billion in R&Dpertinent to environmental technologies coveredin this report; most focus on energy and remedia-tion. See table 10-3 for a list of selected U.S. Gov-ernment environmental technology programs.

Remediation and Waste Management—DOE’sEnvironmental Restoration and Waste Manage-ment Technology Development program sup-ports R&D to cleanup environmental contamina-tion from DOE facilities such as those formanufacture of nuclear weapons, and to manageradioactive and other hazardous waste generatedat such facilities.33 Funded at $362 million in FY1993, this is one of DOE’s largest environmentaltechnology R&D programs. Almost half thefunding goes to demonstration, testing, and evalu-ation of new technologies. Developing more costeffective ways to clean up contaminated Federalsites is likely to be a key Federal environmentalpriority for many years to come-given the tensof billions of dollars expected to be spent on thisFederal responsibility. While these technologieshave potential for use in other cleanup efforts inthe United States, foreign efforts for cleanup arenow much more limited than here. Even thoughthe need for cleanup in areas such as Central andEastern Europe and the former Soviet Union ishigh, it is unclear the amount of effort that will bedevoted to this. Similarly, many developingnations are placing a higher priority on prevention

31 At one the it WaS Slattxj to receive close to $500,000, but EPA reduced the ~@ avtible.

32 III 1$)92, 18 s~dies had been completed or were in progress, and 19 others were expected tCI bm shortly.33 DOE M 3,700 kardous, radioactive, and mixed waste release sites, although many are quite stil.


Table 10-3-Selected Federal Programs for the Development ofEnvironmental Technologies

Public Funding

Program ($ millions) Period

Department of EnergyClean Coal Demonstration Program 225 1994Coal R&D pertinent to cleaner coala 142 1994Solar and Renewable Energies 233 1993Environmental Restoration Technology Development Program 362 1993Energy Efficiency—supply and use (includes waste reduction) 316b 1993Fuel Cells 51c 1993National Industrial, Competitiveness through Efficiency

Environment, Energy and Economics (NICE3) 2 . 5d

1993

Department of Defense

Defense Environmental Restoration Program

(DERP) Technology Program 26 1993

R&D in Environmental Compliance 129 1993Strategic Environment R&D Program (SERDP) 170 1993SEMATECH (supervised by ARPA)--environmental component 10e 1993National Defense Center for Environmental Excellence 5’ 1992

Environmental Protection Agencyg

Superfund Innovative Technology Evaluation Program (SITE) 17 1993Environmental cleanup (excluding SITE) 19 1993Global change and air pollution 24 1993Pollution prevention, exploratory grants, and special projects 16 1993Water and waste management 18 1993

Other Departments/AgenciesBureau of Mines -Environmental Technology 17 1993National Science Foundation, environmental technology R&D 25h 1992

a Share of Coa[ R&D devoted to cleaner burning, more efficient coal combustion; does not include liquefaction.b Includes funding on energy efficient bulldlng technologies, industrial technologies including WaSte r~uction,

transportation technologies.c Addltlonal funds are spent on gas turbines and advanced en9ines.d EPA also contributes a share of funds to the program.e National Defense Auth~ri~ation Act for Fi~l Year 1993 [public Law 102-~4], Conference Report to Accompany

H.R. 5006, House Report 102-956, p. 633. At least $10 million is earmarked for environment; actual spending onenvironmental R&D could be greater.

f NDCEE is a nonprofit organization separate from DOD.

9 EPA figure only includes activities funded through EPA’s R&D account. Ofthetotal listed, $39 million is for technologyrelated regulatory support acitivltes. Technology related regulatory support activities separately funded through mediaoffices are not included.

h Estimates derived from U,S Congress, Congressional Research Service, The Currenf State of Federal R&D

Envrronrnenfa/ Technology (Washington, DC: CRS, August 25, 1992).


and control of current sources of pollution than onclean-up of contaminated sites. However, there isgrowing concern in Western Europe and Japanover contaminated sites.

Fossil Fuels--DOE’s Clean Coal TechnologyProgram (CCTP), started in FY 1986, aims todevelop and commercialize technology to burncoal with increased efficiency and reduced emis-sions from its use, including through end-of-pipetreatment and prevention. CCTP’s funding grewto $415 million by FY 1992, making it DOE’slargest program for environmental technologyR&D, and one of the largest such Federalprograms. The administration requested $250million for FY 1994; funding beyond that year isuncertain. CCTP is oriented toward commercial-izing technology for sale at home and abroad. Forexample, it emphasizes demonstration projects,some aimed at foreign buyers; a subprogram, theCoal and Coal Technology Export Program,emphasizes development of technologies withexport potential. In addition, DOE supports cleancoal R&D that is not directly linked to CCTPdemonstration projects ($141 million was re-quested in FY 1994). DOE R&D for improvedengines and turbines and for fuel cells could allowfossil fuels to be used more cleanly and efficiently.

Renewable Energy—34DOE received $233 mil-lion for renewable energy R&D in FY 1993 ($327million was requested for FY 1994).35 Most of themoney went to solar energy technology, includ-ing photovoltaics (PV), solar thermal energy,biofuels, and wind energy. The rest went togeothermal energy, electric energy systems andstorage, and hydropower. Funding of renewableenergy R&D has been quite uneven. It washighest in FY 1979 ($1.24 billion in 1992 dollars)

under President Carter, at the height of the oilcrisis, much lower under Presidents Reagan andBush ($92 million in FY 1990 in 1992 dollars),before recently rising again, as environmentalconcerns increased and the Gulf War heightenedenergy security concerns.

The National Renewable Energy ResearchLaboratory in Golden, CO is the major Federalrenewable energy laboratory, although other DOElabs, including Sandia and Los Alamos, havelong-standing renewable energy research pro-grams. Several R&D programs jointly funded byindustry and DOE aim at improving commercialprospects for solar, wind, and geothermal energy.In 1992, the Photovoltaic Manufacturing Tech-nology Program matched $20 million from sevencompanies with $30 million of DOE funds toimprove PV manufacturing processes.36 The Pho-tovoltaics for Utility Scale Applications (PVUSA)program seeks to promote demand of PV technol-

ogy by bringing together government, utilities,

and suppliers of PV systems and components to

field-test systems and identify initial utility mar-

kets. A multiyear $75 million program to lower

wind energy costs to 5 cents per kilowatt-hour by

the mid-1990s awarded its first $5 million (half

from industry, half from DOE) to eight companies

in late 1 9 9 1 .37 DOE funds geothermal R & D

jointly with industry.

The unevenness in Federal renewable R&D

funding has made potential investors wary, Al-

though funding is now increasing, there is no

guarantee that it will not be reduced once again.

Energy Efficiency—DOE’s Energy Efficiency(EE) (formerly called Conservation) budget for

R&D in FY 1993 was $316 mi l l ion , inc luding

$140 million for the transportation sector, $117million for the industrial sector (including waste

34 Anotier OW proj~t, Renewable Energy Technology: Research, Developmentt and Commercial Prospects, due for completion in ~ly1994, will examine this area extensively.

35 U.S. Dep~ment of Energy, Budger Highlights: FY /994 (Washington DC: DOE, APfi 1993), p. 31.

36 Wk c~wford, “seven Companies Awarded DOE Solar Grants, ’ Energy Daily, Apr. 24, 1992, p. 3.

37 “NREL hmches Solar Projects, ” Energy Daily, NOV. 4, 1991, p. 4.


DEPARTMENTOF

ENERGY

Direct Current, Closed Furnace SiliconINDUSTRIAL WASTE REDUCTION PROGRAM

Technology

;/

00 017

99 QQ

Silicon production technology demonstration supported by the U.S. Department of Energy, Office of IndustrialTechnology. OIT supports the development of cleaner and more energy efficient industrial production processes.

minimization, discussed below), $53 million for separations, sensors and controls, and materialsthe buildings sector, and $5 million for the processing. These programs constitute the majorutilities sector.

38 The FY 1994 funding request is Federal industrial clean technology effort. More-$427 million. 39

Improving energy efficiency in over, unlike most other Federal and State clean

these sectors has the potential to make them both technology efforts targeted at the less-polluting

less polluting and more competitive. assembly and fabr ica t ion industr ies , much of

OIT’s effort addresses the more-polluting process

Waste Minimization—Pollution prevention ac- industries.

tivities at DOE are directed at reducing wastes at OIT’s industrial waste minimization program

both Federal weapons production sites and in was funded a t $17 mi l l ion in FY 1993 , wi th

private industry. The latter effort is centered in expected funding of $23 million for FY 1994.

DOE’s Office of Industrial Technologies (OIT). Slightly over half is for waste reduction, while the

OIT focuses principally on energy conservation remainder i s for waste ut i l iza t ion . Costs for

in industry, but also addresses waste minimiza- technology R&D are split evenly with industry;

tion, particularly in such technological areas as industry interest in participation exceeds supply

38 B~get of the united states Got,ertvnent, Fiscal Year 1994 (Washingto~ DC: U.S. Government Wttig Office, 1993), APP.-58O.

39 Ibid.


of DOE funds . Some of the projects involve

companies and DOE labs. For example, Hughes,

Boeing, IBM, Inland Technologies, Honeywell,

and other companies have CRADAs with Los

Alamos, Sandia, and Pacific Northwest Laborato-

ries for supercritical CO 2 cleaning. Six technolo-

gies have been commercialized so far, including

an ultrasonic tank cleaning process with Dupont

and Merck and a no-c lean solder ing process

developed by Motorola with Sandia and Los

Alamos National Laboratories. The program has

also investigated waste data needs and institu-

tional barriers to pollution prevention, and has

conducted R&D needs assessments.

DOE and EPA joint ly manage the Nat ional

Industrial Competitiveness Through Efficiency:

Energy , Environment and Economics program

( N I C E3), which provides small research grants to

develop technologies that save energy, reduce

waste, and improve competitiveness. Funding is

modest ; $2 .5 mi l l ion was appropr ia ted in FY

1993 , but funding for FY 1994 i s wi l l l ike ly

e x c e e d $ 7 m i l l i o n , w i t h m o s t o f t h e f u n d s

provided by DOE. Other OIT programs have

pol lut ion prevent ion aspects . For example , a

number of projects in DOE’s Metal Initiative

have significant environmental and energy effi-

c iency benef i ts . DOE has provided over $25

million and the American Iron and Steel Institute

has provided over $7.6 million to develop direct

s tee lmaking that would e l iminate the highly

polluting and energy-intensive cokemaking proc-

ess. DOE’s Metal Casting Competitiveness Re-

search Program supports two applied R&D cen-

ters, which are partly funded and administered by

industry. One of the projects involves reuse of

waste foundry sand. 40

T h e E n e r g y P o l i c y A c t o f 1 9 9 2 ( E P A C T ,

Public Law 102-486) authorizes DOE to expand

its industrial energy efficiency and waste reduc-

tion programs. For example, it authorizes a 5-year

program aimed at cost-effective pollution preven-

tion in industry and a 5-year program on advanced

pulp and paper technologies. Several provisions

of the Act a re d i rec ted a t improving energy

efficiency in industry through advanced technol-

ogy , thereby reducing adverse environmental

impacts of manufacturing. In addition, DOE is

investigating a more comprehensive role in pro-

moting cleaner technology .41

Several factors limit the effectiveness of DOE’s

industrial energy efficiency and waste minimiza-

tion programs. First, DOE has not integrated and

coordinated waste programs directed at industrial

problems and those directed at Federal weapons

facilities problems. The labs’ waste programs are

more visible within DOE than the industrial waste

reduction program efforts.

DOE’s energy conservation mission requires

its waste reduction projects to provide some form

of energy savings .42 While o ther fac tors are

considered, such as wastes reduced, cost savings,

and resource use reduct ion , the emphasis on

energy savings may cause some high toxicity but

low volume waste projects to be overlooked or

left to other agencies such as EPA. EPA involve-

ment in the program has been relatively limited,

although efforts to increase cooperation are being

attempted.

Finally, DOE funds projects principally with

individual firms or small groups of companies.

Even though some industry organizations have

worked with the program to identify technology

needs and solutions, the program has not funded

ongoing industry consortia to cooperatively de-

velop clean technologies. As a result, widespread

industrial involvement and commitment has been

harder to attain. However, the program is inter-

~ “profitable Recycling, ” EPRIJournal, March 1992.

4] For example, see “National Clean Industry Initiative Lrnplementation PlaIL Draft, ’ U.S. Department of Energy, June 8, 1993.12 Nation~ Materi~s Advisory Board, National Research Council, Industrial Waste Reduction and Utilization (W@hington ~: Natiomd

Academy Press, 1993).


ested in working more with consortia on industry

directed longer term projects. 43

DEPARTMENT OF DEFENSEDOD has several environmental technology

R&D programs aimed at addressing the environ-mental impacts of its own activities, particularlyremediation of contaminated sites. The DefenseEnvironmental Restoration Program (DERP) pro-vided about $26 million in FY 1993 to developtechnology to assess and clean up contaminatedDOD sites.

A program with broader relevance to industryis the Strategic Environmental Research andDevelopment Program (SERDP), which sup-ported $170 million of R&Din FY 1993. Createdby the National Defense Authorization Act for FY1991,44 SERDP supports not only environmentalrestoration and waste management R&D, but alsopollution prevention technologies. Technologytransfer is an explicit part of SERDP’s mission.As SERDP is authorized to apply industrialtechnology to DOE and DOD environmentalproblems, the program could increase U.S. Gov-ernment purchases of innovative environmentaltechnology from U.S. fins.

ARPA supports some environment-related R&D,although it is unclear how much. In 1992 ARPAissued a solicitation for up to $12.8 million inclean technology projects related to defensemanufacturing. ARPA funds the government’sshare of SEMATECH as discussed above. ARPAincludes environmental technology as one of 11broad R&D areas that it emphasizes in theTechnology Reinvestment program, which inpart attempts to put defense technology to com-mercial use. In particular, ARPA will emphasizeenvironmentally conscious electronic systemsmanufacturing and environmental monitors.45

U.S. Air Force ion vapor deposition R&D. Althoughmost DOD environmental R&D is for remedial clean-up of contaminated sites, some work is dedicated todeveloping advanced manufacturing processes thatlessen environmental impacts.

Many Army, Navy, and Air Force units dealingwith materials, construction, and maintenancehave pollution prevention R&D programs. OtherDOD technology development programs, includ-ing the Manufacturing Technology Program (MAN-TECH) and the Industrial Modernization Incen-tives Program (IMIP), include modest funding forclean technology projects.

In 1990, DOD established the National DefenseCenter for Environmental Excellence (NDCEE) aprivate non-profit organization in Johnstown, PA,to lead and support DOD facilities and theassociated industrial base in adopting pollutionprevention and addressing other high priorityenvironmental issues. NDCEE identifies, evalu-ates, demonstrates and transfers environmentallyacceptable manufacturing processes to its clientbase and provides related information services.Issues addressed included waste minimization,air and water pollution control, and waste man-agement and remediation. It also operates a185,000 sq. ft. demonstration factory to perform

43 ~ pm, ~5 stem5 from ~~tiom in Fe&~ a~sition regulations governing contracts and from the fact Wt OIT does not have ~dsset aside for unsolicited proposals.

44 ~bfic ~w 101-510,” sec. 1801 (a), ~~~~ at 10 USC. 2N1.2904.

45 ARPA, “RoWm ~omtionpac~e for Defense Technology Conversion, Reinvestment, and Transition Assistance, ’ h’iru. 10, 1993,pp. A-1, A-4. The Technology Reinvestment project is an interagency project with ARPA as the lead agency.


process demonstrations, and training. DOD fundedNDCEE initially at $5 million a year, andbetween 1994 and 1998 plans to provide $150million.

ENVIRONMENTAL PROTECTION AGENCYEPA’s expenditures for technology develop-

ment are modest. The CRS study discussedabove46 found that EPA was spending $330million on R&Din FY 1992, but $240 million ofthis was for monitoring, assessing health andenvironmental risks, ecological assessment, anduniversity-based exploratory research. As shownin table 10-3, EPA estimates that it spent $94million on technology related activities fundedthrough its R&D account in FY 93. (This figuredoes not include separately funded media pro-gram technology related regulatory support activ-ities.)

As discussed in ch. 2, the Clinton administra-tion has proposed a major increase in EPA’s rolein developing environmental technology. Theadministration requested $36 million for fiscalyear 1994 and plans $80 million for fiscal year1995 for an EPA-led interagency EnvironmentalTechnology Initiative.47 Up to half (based onAppropriations Report language) of first yearfunding would be for R&D conducted throughother government agencies. But, EPA is still inthe early stages of developing a planning a n ddecision process that involves other Federalagencies as well as industry. The initiative is alsolinked to administration objectives to reduceimpediments to technology development and tosupport export promotion, and to U.S. Technol-ogy for International Environmental Solutions for

provision of technical assistance and adaptationof U.S. technologies abroad.

EPA is focusing increased attention on therelationship between regulations and technologi-cal innovation. An internal Innovative Technol-ogy Council has broad agency participation. Anoutside advisory group to the EPA’s administra-tor, the Technology, Innovation and EconomicsCommittee of the National Advisory Council forEnvironmental Policy and Technology, has pro-duced several reports and recommendations onthe subject.

Most of the SITE program’s funds ($17 millionfor fiscal year 1993) are for demonstratinginnovative remediation and monitoring technolo-gies on Superfund sites. Technology vendorsoperate the technology at their own expense, butEPA bears the costs of preparing sites for thedemonstration, evaluating the results, and dis-seminating the information through bulletins,

48 The Municipalreports and electronic data bases.Innovative Technology Evaluation program (MITE-$1 million for fiscal year 1993) conducts similarevaluations of innovative technologies for recy-cling or disposing of municipal solid waste. EPAalso conducts some R&D through CRADAs withindustry (see above).

EPA, along with other agencies, provide a totalof $15 million to Hazardous Substance ResearchCenters at universities, for basic research, tech-nology development, and technology transfer.49

While most of the centers concentrate on treat-ment and remediation, the Center for CleanIndustrial and Treatment Technologies at Michi-

~ Jok D. Moteff, The Current State Of Fe&ral R&D in Environmental Technologies, Op. Cit., fOOIIlOte 4, Pp. 4749.47 Gibbom, op. cit., fOOtnOte 9.

48 U.S. Environmental Protection Agency, “The Superfimcl Innovative Technology Evaluation (SITE) Program: An Evaluation of ProgramEffeetiveness” (Washington DC: EPA Sept. 1992), p. ES-1.

@ D~e w~, EPA Mce of Exploratory ReseacIL personal COIIllIluniUtiO14 Sept. 29, 1993.

Chapter 10-Research, Development, and Demonstration ! 307

gan Technological University partly addressespollution prevention.5o

EPA support for clean technology develop-ment is modest, but could grow as part of thepriority placed on pollution prevention by theAdministrator. EPA’s R&D program has focusedon developing tools for assisting pollution pre-vention implementation, such as opportunityassessment guides and life cycle analysis tech-niques, and has evaluated pollution preventiontechnologies. EPA’s Office of Pollution Preven-tion and Toxics manages a design for environ-ment program that has developed collaborativeeffort with specific small business sectors. (EPAalso has a series of ‘Green Programs’ focused onvoluntary adoption by industry of more efficientlighting, computers, appliances, etc.)

Although not an EPA R&D institution per se,the National Environmental Technology Applica-tions Corp. (NETAC), a nonprofit corporationaffiliated with the University of Pittsburgh Trust,was established by EPA to support environmentaltechnology commercialization. Starting with $9million of initial EPA funding but now financedthrough contracts with private, Federal, and Stateclients, NETAC provides independent technol-ogy evaluation services, and offers technical,marketing, and regulatory assistance to environ-mental technology innovators.

NATIONAL SCIENCE FOUNDATION (NSF)CRS identified $36.6 million of NSF support

for environmental technology in FY 1992.51

Through a partnership with the chemical indus-try’s Council for Chemical Research, NSF estab-lished the Environmentally Benign ChemicalSynthesis and Processing program to stimulateuniversity pollution prevention research.52 Theprogram allocates only about $2 million annually

in research grants. Industrial participation in theresearch is required.

In addition, some of NSF’s Industry/UniversityCooperative Research Centers (I/U Centers) andEngineering Research Centers (ERCs) investi-gate environmental technology. The I/U Centerfor Hazardous and Toxic Substances includesNJIT, Princeton University, Rutgers University,and the University of Medicine and Dentistry ofNew Jersey, and conducts research principally onwaste treatment and remediation. Rutgers alsohouses a plastics recycling I/U Center.53 OneERC based at the University of California at LosAngeles is dedicated to research on hazardousmaterials. The Advanced Combustion ERC atBrigham Young University is another centerdirectly relevant to environmental technology.

Some I/U Centers and ERCs, while not focusedexplicitly on environment, could contribute topollution prevention in areas such as improvedprocess monitoring, thin films, steelmaking, andautomation. For example, the Center for ProcessAnalytical Chemistry at University of Washing-ton studies problems of chemical process moni-toring and analysis. This area is important toimproved chemical process control and efficiencyand environmental performance.

OTHER AGENCIESSeveral other agencies fund R&D for environ-

mentally related technologies pertinent to thisassessment. They include the Department ofCommerce (including the activities of NISTdescribed above), NASA, and the Bureau ofMines. Within DOC, at least three of the sevenNIST Manufacturing Technology Centers (MTCs)provide technical assistance to help industryaddress environmental concerns, including pollu-tion prevention (see ch. 8).

W Some of tiese EPA Centers receive funds from other agmcies. For instance, the New Jessey Institute of T=hnolon ~~ is Pm of ~~an EPA center and a National Science Foundation Industry/University Cooperative Research Center for hazardous and toxic substances.

31 John D. Moteff, The Current State of Fe&ra[ R&D in Environmental Technologies, op. tit., foo~ote 4, pp. 3942.

52 Ivan Amato, “The Slow Birth of Green Chemistry,” Science, vol. 259, Mar. 12, 1993.53 The New JHWy commission on Science and Technology also funds these centers.


STATE AND LOCAL PROGRAMSMany States fund environmental technology

through broader technology programs designed tocommercialize new technologies and create jobs.Often these programs fund technologies for

energy conservation and renewable energy. For

example , the New Jersey Corp . for Advanced

Technology was recently established to support

development and commercialization of environ-

mental technologies. The Cal i fornia Environ-

mental Technology Partnership is another exam-

ple of a new State environmental t echno logyinitiative. In addition, a number of States have

coal development programs, some of w h i c h

concentrate on clean coal technology.

Some programs provide a small amount ofsupport to small business for clean technologyR&D. Cal i fornia , I l l inois , New Mexico , New

York, North Carolina, and Washington fund the

development of pollution prevention or industrial

waste recycling technologies. The programs con-centrate on areas such as metals recovery inplating, painting, and alternative cleaning. Cali-

fornia’s South Coast Air Quality Management

District provides $25 million a year for a w i d e

variety of technology projects, including technol-

ogies related to reduced mobile source pollution

(e.g. , electric cars, electrically heated catalytic

converters, natural gas vehicles) and pollution

prevention (e.g., low VOC coatings).

I U.S. Private Sector R&DIt is difficult to measure private-sector environ-

mental technology R&D, partly because of the

definitional issues already discussed. Pollution

abatement R&D is only a small share of totalindustrial R&D. According to the Commerce

Department’ s Bureau of Economic Analysis (BEA),private environmental R&D amounted to about

$2.4 billion in 1991 (and $2.2 billion in 1990). 5 4

To make these estimates, however, BEA assumed

that the same ratio existed between total industrial

R&D and pollution abatement R&D in 1991 as in

1978, the last year for which this data was broken

out by media (e.g., air, water). The ratio ofe n v i r o n m e n t a l R & D to total R & D p r o b a b l y

d e c l i n e d b e t w e e n 1 9 7 8 a n d 1 9 9 1 ,55 hence theshare of environment R&D in 1991 could be

less than the figures reported by BEA. According

to NSF, industry R&D for pol lut ion control

(including product and process R&D and exclud-

ing energy-related R&D) was $950 mill ion in1990, or approximately 1.28 percent of total R&Dexpenditures by industry.56 As discussed below,industry estimates of pollution control R&D(including product and process R&D and exclud-ing energy-related R&D) are higher, suggestingthat perhaps as much as 50 to 100 percent morethan the NSF estimate is being spent.

The NSF data shows wide variation amongsectors. In the electrical equipment industry (SIC36), which has relatively low environmentalcompliance costs, pollution control R&D is lessthan one-tenth of 1 percent of total R&D.However, in the petroleum industry, which hasrelatively high compliance costs, pollution con-trol R&D in 1992 ($72 million) accounted for 3.4percent of total R&D. In the pulp and paperindustry, which also has relatively high compli-ance costs, pollution control R&D ($18 million)accounted for 2.4 percent of total R&D. Datagenerated by industry associations indicate ahigher share of R&D arising from environmentalconsiderations. The American Petroleum Insti-

S4 Gw L, RUd~ge ~d ~ L. ~~d, 4 ‘pollution Abat~ent ~d Control ~wndi~s, 1987 -91,’ Survey Of Current Business, May1993, pp. 60-61. This compares with about $43 billion in 1991 total private sector environmental compliance costs, including R&D (table 7-l).

55 ~ lwge pm ~ my ~ due t. ~u~ ~Pn&~= (in com~t doll~s) by auto~ers on R&JJ [O reduce vehicle emissions. h 1978

(the last year data was separately available from NSF), automakers accounted for 55 percent of environmental R&D.56 NSF ~~ ~ @ ~pfi M ~~t~ t. &@@ pollution abat~ent products or p~duct CmCteriStiCS or to designing pollution

abatement features into processes. Presumably, this would include R&D performed by environmental goods and services f-, clean productR&D (e.g., reformulated gasoline), and cleaner process R&D performed by regulated industry (either end of pipe or pollution prevention),National Science FoundatioIL Survey of Industrial Research and Development (Washington, DC: NSF, various years),


tute reports that the petroleum industry spent$175 million on environmental R&D in 1990,including an estimated $50 million on reformu-lated gasoline. Nonproduct pollution control R&Damounted to about 6 percent of total R&D.57

Similarly, the pulp and paper industry reportsspending $32.3 million in 1990 on environmentalR&D (most nonproduct) or about 4.4 percent oftotal R&D.58

Finally, one source concluded that industryspends approximately 13 percent of R&D fundson environmental technology, or roughly $10billion; however, the conclusion apparently wasbased on inaccurate interpretation of a survey bythe Industrial Research Institute (IRI). Pollutioncontrol R&D is probably closer to the 1 to 2percent figure .59

The limited evidence that is available suggeststhat half or more than half of U.S. privateenvironmental R&D is conducted by regulatedindustry rather than by environmental fins. Itappears that environmental firms as a whole areless research-intensive than manufacturing as awhole, which spends approximately 3.3 percentof sales on R&D.60,61

Some estimates for environmental equipmentfirms show R&Din the range of 1 to 2 percent ofsales. Research-Cottrell, an air pollution equip-ment manufacturer, spent between $3 and $5million on R&D in 1992, or 1.1 to 1.9 percent ofsales. Members of the Manufacturers of EmissionControls Association (MECA) expect to performR&D on catalytic converters and diesel faltersamounting to about 1.8 percent of sales of thoseitems.62 Ionics, a maker of membranes and falters

and a designer and builder of water filtrationunits, spent 2.1 percent of sales on R&D. TheInstitute of Clean Air Companies, which includesboth equipment and service providers, estimatesR&D at 3.2 percent of sales, based on a survey ofhalf of its 50 members. (For turnkey systemsuppliers, the estimate was about 1 percent.)63

The 18 firms on the board of the Water andWastewater Equipment Manufacturers Associa-tion informally estimated that they spent about 4percent of sales on R&D.64 Allied-Signal’s Engi-neered Materials Division, which produces envi-ronmental catalysts for vehicles and fixed sites,spent $117 million or 4.8 percent of 1991 sales on

57 ~~ is ~~ti t. tie ~~ ~ tie ~ly 1980s, when nonpr~uct env~onmen~ R&D in tie petroleum ref~ and extraction indus~(SIC 13 and 29) accounted for approximately percent of total R&D. American Petroleum Institute, EnvironmentaZE~enditures of the UnitedStates Petroleum Industry, 1975-19&$ (Washington DC: API, 1985); API, Petroleum Industry Environmental Peflormance, 1992(Washington DC: API, 1992); National Science Foundation Survey of Industrial Research and Development, op. cit., footnote 56.

58 Natio~ Comcll of tie pa~r ~du~ for ~ ~d s~~ Improvemen~ kc., A s~~ey of pu/p and paper ]ndu.rtry Environmental

Protection Expenditures-1990 (New Yora NY: NCASI, October 1991).59 Bfin Rushto~ ‘‘HOW Hotechg the Environment Impacts R&D in the Unitd SWteS, ’ Research Technology Management, May-June

1993, p. 13. The IRI sumey asks 246 fm to list the 10 process-related R&D areas expected to be the most important over the next 5 years.Sixty-nine fms responded, listing an average of about 6 areas per fm. Of 416 total listings, 47 (1 1.4 percent) were in environmental areas.Firms were also asked to report what areas the government should fund, and 13 percent of the responses were for environmental technology.However, the responses do not allow inferences to be made about the relative importance of environmental R&D to fms or the amount spentin industry. Moreover, even if the 11.4 percent figure represents the share of funds, it is as a share of process R&D, not total R&D, and wouldtotal approximately $1.9 billiow not the $10 billion reported by Rushton.

60 uwubhsh~ ~~, Natjoti Science Foundation.

61 D~ me not av~~le on o~er ~tiom’ enviromen~ ~(j~~ R&D ~tens@. However, OEcll ~pofiti tht h 1981, the G~

pollution control industry was 33 percent more R&D-intensive than the rest of German indusby in terms of R&D spending per employee.“Clean Technologies: A Dilemma For Industry,” OECD Observer, November/December, 1987.

62 MECA metiers exwct to spend $200 million in R&D related to these products “in the 1990s, ” and expect domestic sales of these itemsto ‘approach $8 billion between now and the end of the decade, ” with foreign sales of $250 to $450 million a year. MECA press relwse titled“Clean Air Act Spurs Growth of U.S. Motor Vehicle Emission Control Industry,” April 1993.

63 Jeff Smi@ Ex~utive Director, Institute of Clean Air Companies, pmSOXKd COmmtiUttiOU J~Y 21, l~s.

64 Dam fistoff, Water and WasteWater Equipment ~n~acmmrs Associatio~ pasod comIllUUkatiOIl, Jdy 12, 1993.


R&D, a high percentage for U.S. manufactur-ing. 65 Instrument manufacturers probably spendmore on R&D than other environmental equip-ment manufactures. Thermo Instrument Systems,a subsidiary of Thermo Electron that manufactur-ers analytical and monitoring instrument widelyused in environmental applications, dedicatesnearly 7 percent of sales to R&D.66

Environmental service fins, including wastemanagement firms, appear to spend much lessthan manufacturers. For example, Waste Manage-ment of North America (the solid waste subdivi-sion of WMX Technologies) spent less than 0.25percent of its $4.3 billion in sales on R&D in1992. However, some other WMX divisions dospend more for R&D and may transfer technologyto Waste Management.67 Some environmentalcompanies do not conduct formal R&D, but workon product and service development with custom-ers and suppliers. For example, Safety Kleen hasbeen working with other companies in developingbetter chemical recovery and recycling processesand alternative solvents, although there is noformal R&D division in the company.

Small, R&D-intensive start-up firms mightspend more as a share of sales, although totalexpenditures are likely to be small. These firmsare a source of new technology for larger firmsthat often either acquire the firm or license thetechnologies. Because of this, formal R&D ex-penditures by large environmental firms mayunderstate their efforts in obtaining new technol-ogy.

Assuming that the U.S. pollution control equip-ment sector has annual sales of around $30 billionannually and that it spends 2.5 percent of sales onR&D, and that the service sector (excluding watersupply, resource recovery, and environmentalenergy sources) has sales of around $60 billion

and spends around 0.2 percent on R&D, then theenvironmental industry sector would be spendingon the order of $750 million to $870 billion peryear on R&D. While this figure is just a guess, itdoes suggest, together with the estimates above,that regulated industry, as opposed to environ-mental firms, may conduct half or more of theprivate environmental technology R&D in theUnited States.

JAPANWithin the Japanese Government, the Ministry

for International Trade and Industry (MITI) has alead role in supporting energy and environmentaltechnology R&D, although the Environment Agencyalso funds a small amount (see table 10-4). Mostof MITI’s effort is managed by the New Energyand Industrial Technology Development Organi-zation (NEDO), a quasi-government organizationthat funds industry R&D directly. The vastmajority of government support for environ-mental technology R&D is for energy technol-ogy, including renewable energy. MITI alsosupports R&D for more productive manufac-turing process technologies that also have relatedenvironmental benefits. With the exception ofwork to develop CO2 recovery technologies,relatively little is spent on technologies relateddirectly to pollution control and waste remedia-tion.

H Mill ProgramsMITI’s Agency for Industrial Science and

Technology and its Bureau of EnvironmentalProtection and Industrial Location manage atleast two pertinent R&D organizations: NEDO,and Research Institute of Innovative Technologyfor the Earth (RITE). MITI’s involvement in theseprograms could enhance potential commercial

65 step~n Lip- ‘‘U.S. lhv~n.men~ Companies’ Competitive Strate@s: Eleven Case Stu~” ccmtractor RPOrt - for tieOfIlce of Technology Assessment, April 1993.

a Ibid.67 For ~~ple, ~~l~~tor, a subsidi~ of WMX that develops and operates wastf3tm~, b PCdhN.ioxl CO-L ~ W@eWilter

treatment facilities, spent about 1.7 percent of 1992 sales on R&D.

Chapter 10--Research, Development, and Demonstration I 311

Table 10-4--Selected Japanese Environmental Technology R&D Programs

Ministry/program Funding ($ million)

Ministry for International Trade and IndustryNew Energy and Industrial Development Organization (1993)a

Clean coal 85Renewable energy 170Energy efficiency 265Environmental technologiesb 20

Research institute of Innovative Technology for the Earth (1993) 88

Agency for Industrial Science and TechnologyPollution control projects (1992) 10Direct steelmaking (1993) 50

Environment AgencyPollution control projectsc (1 990) 14

a ~~ *)o ~~ing dir- r~at~ to environmental or environmentally related energy was included. Industrial

technology funding, coal resources development and industry rationalization, and production of alcohol was notincluded.

b $~ miflim ~ ~et~ for 91WI environmental projects, but $60 million was in turn allocated to R~E.c ~ 1 ~.

NOTE: Exchange rate for 1993 is 110 yen_ $1; 1992120 yen_ $1, 1990145 yen_ $1. See table 10-1 for technologiesincluded in this table.

SOURCES: M310 and RITE, personal communication, October 1993; Agency of Industrial Sdence and Technology,“program brochure” 1993; Research and Development Corp. of Japan, “National Laboratones and Public ResearchOrganizations in Japan” (Tokyo: JRDC, 1992).

benefit, and after new technologies are devel-oped, MITI has the capacity to promote exports ofresulting goods and services. This can facilitatetechnology transfer to developing countriesthrough MITI's Green Aid Plan, which is separatefrom Japan’s general development assistanceprogram. 68

NEDONEDO, a quasi-government agency, government-

funded and under MITI’s supervision, was estab-lished in 1980 in response to the 1979 oil shockto promote the development of non-oil energytechnologies. As the central organization respon-sible for coordinating energy and some industrial-related technologies in Japan, NEDO administers,coordinates, and funds research, development,

demonstration, and testing of technologies relatedto its mission. Much of the work is carried out byindustry through contracting, although the na-tional laboratories play a small role. Governed bya board of industry representatives, one third ofNEDO’s employees are corporate employeesassigned to the agency for 2 to 3 years, duringwhich time their salaries are paid by the govern-ment.69

NEDO’s FY 1993 budget amounted to about$1.76 billion. Approximately $255 million wasfor clean coal and renewable energy technologies,including solar, wind, geothermal, ocean energy,alcohol, and biomass.70 A similar amount was forenergy conversion and storage technologies, in-cluding superconducting technology for electricpower, advanced batteries, ceramic gas turbines,

= s U.S. congess, Offii of Technology AS sessrnen~ Development Assistance, Export Promotion, and Enw”ronmental TechnologyBackgrou.nd Puper, OTA-BP-ITE-1CY7 (%kMngtou DC: U.S. Government Printing Office, August 1993).

69 -A. Moore and Alan S. MiIler, The Technology Clearinghouse, ‘‘Environmental Technologies and Policies of Japa~’ contractorreport prepared for the Offk of Technology Assessment, February 1992, p. 24.

m ~~ communication with NErx3 officiaL Octobex, 1993.


Tokyo Electric Power Company’s 11 megawattphosphoric acid fuel cell is the largest fuel cellinstallation in the world. Most of Japan’senvironmental R&D concentrates on improvingenergy technologies.

and fuel cells.71 Another $339 million was forindustrial technology, of which $77 million wasfor environmental technologies ($60 million ofthis went to RITE) .72

Because NEDO seeks to develop new energytechnologies to a level where private industriescan take over and commercialize them, it fundsboth development and demonstration projects.NEDO also supports several foreign energydemonstration projects, principally in the Asia-Pacific region, including fuel cells in Thailandand photovoltaics in Australia.

Fuel cells have been a particular focus ofNEDO’s R&D. Fuel cells, which convert fuel intoelectricity through chemical oxidation rather thancombustion, emit less pollution and are quieter,more compact, and more energy-efficient thancombustion engines. Thus, some believe that theywill become an important source of electricity inthe next century, both in central generatingstations and in smaller applications that use both

the electricity and the heat generated by the fuelcell. Vehicle applications are also possible.73

NEDO has funded many fuel cell demonstrationprojects, including a 4.5-megawatt generator builtfor Tokyo Electric Power Co. in the early 1980s,and an 1 l-megawatt unit-the world’s largest—put into operation in 1990.74

The industrial technology program is orientedtoward developing advanced technologies thatare of use to industry but ‘have high developmentrisks and require long lead times. ’ ’75 Most ofthese projects, such as new materials, precisionmaterial processing, biotechnology, manufactur-ing technology, and medical equipment, are inareas not directly related to the environment.However, because advanced industrial processtechnologies will become increasingly importantin pollution prevention, a number of the projectswill have environmental implications. For exam-ple, large scale advanced chemical processingtechnology for high purity separations processes,research on ion implantation of metals, and hightemperature materials for heat exchangers havepotential to lead to cleaner production processes.

Because of an increased concern for globalenvironmental problems, NEDO’s industrial tech-nology mission was expanded in 1990 to includetechnology that protects the global environment.To facilitate this work, RITE was established tofund and conduct research in this area, as afoundation more oriented to the private sectorthan NEDO (see below).

Many of NEDO’s energy and environmentprograms were grouped into the Sunshine Project(developing new and renewable energy sources),the Moonlight Project (energy conservation), andthe Global Environmental Technology Program;now, all three are rolled into the New Sunshine

71 ~0, Research um. il)evelopmertt Project Plansfor FY 1992 [1] ~kyo: ~~, 192).

72 me ~e~d~ ~m for ~on.env~omen~ly re~~ cod tec~ology d~elopm~t and NO s~arate NEDO missions, rationalization ofthe cmal industry and production of industrial alcohol.

73 me went ~inton atismation initiative to produce a clean car CX@MS* fiel w~s.

74 MS A. M~re and Alan s. ~~er, “Enviro~~~ TW~OIO@W and policies of Japan, ” op. Cit., fOOfIIOte 70.

75 NEDO, op. cit., footnote 71, p. 7.

Chapter 10--Research, Development, and Demonstration 313

Program, with a planned budget equivalent to$13.6 billion over 27 years, from 1993 to 2020 (anaverage of $500 million per year).76 This programaims in large part to reduce carbon dioxideemissions, and thus contributes to MITI’s NewEarth 21 Concept, a 100-year plan to reduce andstabilize carbon dioxide emissions.

RITERITE is a public foundation which is commis-

sioned by MITI, related prefectures, and theprivate sector to fund and conduct R&D, most ofit related to global warming.

77 With a budget of

$88 million in FY 1993 (about two-thirds pro-vided by NEDO) RITE funds environmentalprojects, the largest being carbon dioxide separa-tion, recovery, and fixation technologies, andCFC-substitutes, particularly non-CFC refriger-ants.78

RITE projects typically involve a large numberof corporate partners. For example, a project toincrease use of scrap in steelmaking involves nineof the largest Japanese steelmaker as well as theJapan R&D Center for Metals. Industry research-ers work on RITE projects for about 2 years; theyremain at their firms, which continue to pay theirsalaries, but are given the title of ‘‘RITE re-searcher and matching funds to support theresearch. RITE also makes matching grants forresearch by firms, universities, and other non-profit organizations ($12 million FY 1991).International participation in RITE projects isencouraged, although only one such project (withItalian collaborators) is underway.

OTHER MIT! GROUPSSome MITI institutes and laboratories conduct

a small amount of environmental technologyR&D.79 AIST administers the National Institutefor Resources and Environment (NIRE), partlydedicated to environmental technology. Otherlaboratories, including the National Institute ofMaterials and Chemical Research and the Gov-ernment Industrial Research Institute, conductsome work on environmental technology. In 1992AIST supported 40 pollution control projects atlaboratories, spending the equivalent of $9.4million .80 However, funding for these projects hasdeclined by approximately half (unadjusted forinflation) since its peak in the 1970s. AIST hashelped organize several private research consortiato work with its laboratories on environmentaltechnology, including biodegradable plastics andemission reduction methods. AIST is spending$425,000 in FY 1993 to develop an eco-factoryconcept, essentially industrial processes to facili-tate disassembly and recycling of manufacturedgoods. 81 Finally, AIST Spent approximately ’50

million in 1993 on a project to support develop-ment of direct ironmaking.

Another MITI agency, the Agency of NaturalResources and Energy (ANRE), funds relevantresearch, sometimes in coordination with AIST.For instance, both AIST and ANRE support cleancoal and advanced combustion R&D. The Elec-tric Power Development Corp., Center for CoalUtilization Japan, and the Central Research Insti-tute of Electric Power Industry (Japan’s equiva-

T6 person~ Cornmunlcation with NEDO official, October, 1993.

77 “RITE: Rese~ch Institute of Innovative Technology for the Earth, ” program pamphlet, ~dated.

78 sma~er projects include: biorea~tion ~roces~es (0 produce ch~c~s; ca~ys~ ~pable of reducing unwant~ byproducts k chemical

processing; biodegradable plastics; steelrnaking processes capable of using larger amounts of scrap with less energy consumed; and catalyticNOX removal from combustion. New Energy and Industrial Technology (lrganizatio~ The lnnovafi”on of New T’echnoZogy (Tokyo: NEDO,October 1992).

79 MITI, “AIST: Agency of Industrial Science and Technology, ” program brochure, 19%.

80 *’MST ~oz Indus~ial pollutlon R&D @tl~~,” as cited in Foreign Broadcast Information Semice, JPRS Report: EnvironmentalZssues, JPRS-TEN-93-025, Sept. 21, 1992.

81 Hisayoshi Sate, “Ecofactory--Concept R&D Themes, ” New Technology Japan, FY 1992, special issue published by the JapaneseExternal Trade Organization, 1992.

314 ! Industry,

lent to EPRI)supervision.

Technology, and the Environment: Competitive Challenges and Business Opportunities

are organizations under ANRE’s

AIST has also supported at least two large scaleresearch projects related to environmental tech-nology. 82 Between 1966 and 1971, AIST spent

approximately $55 million (1992 dollars) on thedesulfurization project, in large part focused ondevelopment of technology related to efficientremoval of SO2 contained in exhaust gases frompower plants and other large-scale combustionsources. As discussed in ch. 5, the Japanese arenow strong competitors in this technology. Morerecently, AIST spent approximately $70 millionbetween 1985 and 1990 on the Aqua Renaissanceproject to develop new technologies for treatmentof wastewater. Technologies included microor-ganisms and high-performance membranes. How-ever, technologically this project did not appearsuccessful and did not achieve its technicalobjectives.

83 However, interaction between Par-

ticipating companies was facilitated and some ofthe project teams generated commercially usefulequipment.

Environment Agency and Other Programs-Japan’s Environment Agency funds research innational research institutes and government min-istries. In FY 1990 the Environment Agencyfunded the equivalent of $13.8 million of R&D in45 research institutes and 13 ministries. Thisincluded work on traffic pollution by the NationalPolice Agency, SO2 and NOx sensors by theScience and Technology Agency, and nonpol-

luting ship hull painting by the Ministry ofTransport.

The Japan Sewage Works Agency supportsresearch and technology development ($5 millionin FY 1991) in sewage treatment technologies,including advanced wastewater treatment, sew-age sludge handling, and small-flow wastewatertechnologies. 84 Finally, the Clean Japan Center, aquasi-public organization, funds demonstrationof recycling and resource recovery technologies.

EUROPEAN PROGRAMSIn Western Europe, environmental technology

R&D is supported and encouraged at differentgovernmental levels. The European Commission(EC) supports and encourages cross-border R&Dcollaborations through the Framework program,while over 20 European countries, including theEC, are involved in the Eureka program. Bothprograms support environmental technology.85

Some countries, including the Netherlands andGermany, have substantial environmental tech-nology R&D programs. In all of these cases,environmental technology R&D is supported aspart of a broader competitiveness strategy.

1 International ProgramsEC PROGRAMS

The EC funds some R&D, primarily to increaseindustrial competitiveness.86 The R&D is interna-tional in character, either involving a central EC

82 The ~ge Scale ProgTam was develo~d by MrTl in 1966 to provide government support for l~ge teCbOIOgy prOJeCtS of pti~mnational importance. MI’r I’s 5th generation computer project is an example.

83 C. Judson King et. al., J’TEC Panel Report on Sepurafi”on Technology in Japan (Baltimore, MD: Japanese TeckoIogy Evaluation Cmter,Iayola College, March, 1993), p. 141.

84 Reseal-ch and Development Corporation of Jap~ “National Laboratories and Public Research Orgatitions in Japan’ (Tokyo: ~,1992).

85 For ~ more complete discussion of EC t~hnology and industrial policy see U.S. Congress, OfflCe of Techology Assessmen4 ComPetin8

Economies: America, Europe, and the Pacific Rim, OTA-ITE-498 (Washington, DC: U.S. Government Printing Office, October 1991), ch. 5,especially pp. 209-226.

13S See Commission of the European Communities, EC Research Funding (3d ed. 1992), pp. 3-8. EC-level support ~S increased from 2percent of the civil R&D budgets of EC member states in 1980 to 5 percent in 1990. Ibid., p. 10.

— ..-


Table 10-5-European Community R&D Programs SupportingEnvironmental Technologies

Estimated annual spending Estimated percenton environmental of funds cost-

technology ($ million) shared withYears industry or

covered total per yeara other partiesb

Framework programsNon-nuclear Energiesc 1991-1994 290d 85 86Environment 1991-1994 170 50 59Measurements and Testingf 1992-1994 20 6.5 36

Other programsThermie(energy technology demonstrationand dissemination projects) 1990-1994 NA 170 100

a Thermie figure is for 1993, For the other programs, the figure shown is the total figure in the previous column, divid~by the whole or fractional number of years the program is in effect. Two programs started mid-year: Non-nuclearEnergies (Sept. 9, 1991), and Environment (July 16, 1991).

b For the program as a~ole (not just the environmental technology part). For the Framework Pm9ramS! this ‘timateassumes that the revisions in Council Decision 93/167/Euratom, EEC, Mar. 15, 1993, printed in Officia/Journa/o ttheEuropean Communities, vol. L 69/45 (Mar. 20, 1993), which kept Framework’s total Joint Research Center fundingconstant, also kept the Joint Research Center funding constant for the specific programs listed. This estimate alsoassumes that 87 percent of the non-Joint Research Center funding for each program is for cost-shared research (87percent is the approximate Framework-wide average).

c This program’s predecessor Was JOULE.d Iwludes an estimated $37 million out of a $61 million sup@ement to Framework energy prOgl’SmS.e This program’s predecessor w= STEP/EPOCH.f ~is prqram)s predecessor was ‘CR.

NOTE: The figures for spending on environmental technology are rough estimates: OTA estimated the share of eachprogram devoted to the environmental technologies within the scope of this report, based on the EC’s programdescriptions containing limited or no budget breakdowns. The following shares were used: 95 percent of Non-nuclearEnergies, 30 percent of Environmental, 10 percent of Measurements and Testing, and 80 percent of Thermie. See table10-1 for technologies included in this table. An approximate exchange rate of 1 ECU -$1.22 is used. “NA” denotes notavailable.

SOURCE: Office of Technology Assessment. Estimates based on Commission of the European communities, ECResearch Funding (3d ad., January 1992); EC Council decision of Mar. 15, 1993, 93/167/Euratom, EEC, printed inOfficia/ Journal of the European Communities, vol. L 69/45 (Mar. 20, 1993) (increasing funding levels); EC Councildecisions establishing particular programs.

facility or collaborations involving entities from administered by all of the EC’s Directorate-at least two member states.87 (See table 10-5.) Generals, in practice Directorate-General XII

Much of the EC’s R&D is conducted through (Science and Technology) plays the lead role.its Third Framework program, an umbrella R&D Within Framework, the program for non-nuclearprogram with a total budget of $8 billion, energies provides the majority of funds forgenerally covering mid- to late 1991 through the environmental technology (an estimated $85end of 1994.88 While this program is jointly million annually). The program supports renew-

87 The EC seeks projects tit can be pfo~ed more efficiently at the EC level. Ibid., p. 7. To some extent, the EC considers cross-bordercollaboration as also a good in itself (independent of competitiveness effects), because it promotes the EC’S economic and social cohesion.

88 Fo~ally, the Third Framework Program covers 19W1994. However, mOSt Of tie Progams b eeame effective during the third quarterof 1991. See Commission of the European Communities, EC Research Funding, op. cit., pp. 69-100. The Third Framework Program overlappedwith the Seeond Framework Program during all of 1990 and 1991, and will overlap with the Fourth Framework Program during all of 1994.


able energies, including solar, biomass, andgeothermal; fuel cells; more efficient industrialprocesses; more efficient energy generation fromfossil fuels, including fluidized bed combustion;and CO2 recovery technologies. Much of theenvironmental technology program focuses onclimate monitoring, modeling, and environmentaland socioeconomic assessment, areas not consid-ered in this report. However, a share of theprogram concentrates on environmental technol-ogies directed at reducing pollution (estimated at$50 million annually). For example, the programsupports some research on technologies for treat-ing toxic wastes and cleaner production technolo-gies,

Some other Framework programs (not listed intable 10-5) incorporate environmental considera-tions into their goals. For example, the programfor industrial and materials technologies reportsthat ‘‘environment aspects of products and proc-esses’ are included as a ‘‘strategic element. . . inall parts of the program.”89 That program is, forexample, coordinating consortia to develop envi-ronmentally preferable polymers, e.g., biodegrad-able plastics.

Framework spending is heavily oriented tohelping fins, universities, and research insti-tutes. About 80 percent goes to cost-sharing R&Ddone by such entities.90 Projects must be in a“pre-competitive" stage (prior to industrial develop-ment).91

EC’s Thermie program, administered by Direc-torate-General XVII (Energy), funds energy tech-nology demonstration and dissemination projects(an estimated $170 million in FY 1992). Ther-

mie’s goals are to improve efficiency in energyproduction, distribution, and use; promote renew-able energy technologies; develop cleaner waysto use coal and other solid fuels; and developtechnologies for oil and gas exploration, trans-port, and storage. Thermie will fund up to 40percent of the costs of a first full-scale demonstra-tion, and up to 35 percent for further dissemina-tion of technology already demonstrated.92 Forexample, Thermie made an initial award of$183million toward a demonstration of IntegratedGasification Combined Cycle (IGCC) electricitycogeneration technology providing low emis-sions of SO2, NOx, and CO2. Six electricitycompanies (four from Spain, and one each fromPortugal and France) were to build a plant inSpain. The project called for a demonstrationperiod during which many types of coal would betested, after which the plant would operate onlocally available coal.93

EUREKALike the EC’s Framework Program, Eureka

aims to promote competitiveness through cross-border collaboration. Eureka is driven less bygovernment policymakers and more by partici-pating firms and universities, and projects do nothave to be precompetitive. Public funding forEureka projects comes from national govern-ments. However, in addition to funding, Eurekaprovides its research participants with access tofinancing sources and to national and interna-tional bodies that make standards or promulgateregulations that could affect a project’s commer-cial success.

89 Coucil Decision of Sept. 98, 1991, ‘‘adopting a s~ctilc Pmg amrne of research and technological development in the field of industrialand materials technologies (1990 to 1994), ” 91/506/EEC, pubLished in Oji”cia/ .lournal of the European Conununifies, No. L. 269/30, Sept.25, 1991. (See p. 269.)

90 Comission of the European Communities, EC Research Funding, op. cit., pp. 24-25. For firms, the EC normally pays 50 pmcent of thecost including overhead; for universities, the EC normally pays the entire additional costs related to the researc~ excluding overhead and mostsalaries.

91 Ibid., p. 41.

92 Commission of the Europ~n Communities, Directorate-General XVII-D, “Thermie” (brochure, not dated).

93 ~id. ne Commission is funding the development of an electricity generation technology which reduces C02 emissions by 20%. “PressRelease”, Dec. 5, 1991.

Chapter 10--Research, Development, and Demonstration 317

Table 10-6—German Federal Environmental Technology R&D Spending, 1992

Environmentaltechnology Total Percent of

portion BMFT funds BMFT funds(estimate) a as percent of cost-shared

Budget category ($ million) total funds with industry

Environmental technology excluding energy 230 68 36

Renewable energy and energy efficiency 250 100 31

Fossil fuels (includes clean coal) 47 100 39

a OTAIS estimated the Share of R&D spending on environmental technologies covered in this WpOd based on program

descriptions without budget breakdowns. The following percentages were used: 100 percent of renewable andenergy efficiency; 90 percent of environmental technologies; and 60 percent of fossil energy.

NOTE: Exchange rate used: $1 = 1.5617 DM. International Monetary Fund, International Financial Statisths, March1993, p. 236. See table 10-1 for technologies included in this table.

SOURCE: OTA, based on the German Federal Ministry for Research and Technology (BM~), BundesberichtForschung 1993 (Bonn: BMt7, July 1993), pp. 71-72 (table 11/5), pp. 74-75 (table n/6), pp. 97-98 (table 11/16), pp.172-177.

In 1992, Eureka had 562 ongoing projects, witha total value of $10.8 billion. Of these, 130projects, with a total value of $1.2 billion, wereclassified as environmental. Of these, 29 projectsare for cleaner production processes; other cate-gories include environmental monitoring andwaste water treatment. Some of the environ-mental projects are beyond the scope of environ-mental technologies treated in this report, such asrestoration of ancient monuments, and a $250million project in atmospheric science.94 A nadditional 23 projects, with a total value of $610million, were classified as energy technology. Ofthese, two were for more efficient power plants,eight for efficiency in energy use, and seven forrenewable energy (including five on photovoltaiccells). The rest were for fossil fuel exploration andtransportation applications, beyond the scope ofthis report.

I National ProgramsGERMANY

The German Federal Government spent anestimated $230 million for environmental tech-nologies, $250 million for renewable energy and

energy efficiency, and $47 million for clean coalin 1992 (see table 10-6). Virtually all of theenergy-related funding, and most of the rest, wentto the Ministry for Research and Technology(BMFT), whose central mission is promotingindustrial competitiveness .95

Germany attempts to link technology develop-ment to technology needs, based on regulatorytargets. Many of the energy and environmentaltechnology projects involve applied research anddevelopment, as opposed to more basic research.Roughly a third of BMFT’s funds go for cost-sharing industrial R&D. BMFT funds technolo-gies for prevention, control and cleanup. Areas ofprevention research include optimization of proc-esses, CFC-substitutes, no-chlorine pulp bleach-ing, and utilization of industrial wastes, includingreprocessing of waste acids, alkaline solutionsand salts. BMFT also funds air and water treat-ment technologies. In the past, BMFT supportedresearch directed at removing inorganic pollut-ants from exhaust gases, including flue-gas desul-phurization, denitrification, and fluidized bedcombustion. Increasingly, BMFT focuses ontechnologies for removal of organic contami-

94 Eureka 1992: Annual Progress Report 1992, pp. 4. ~ ~.

95 Germany’s ~der (s[ates) f~d some environment-rela[ed R&D, but figures are not readily available.


Table 10-7—Environmental Technology Budget for Selected Programsin the Netherlands, 1992 ($ million)

Research and development- Innovation-oriented Environmental Technology Research Programme $6- Program to promote environmental technology In industry 21- Scheme to Promote the Development of Environmental Technology 8- National Research Programme Into the Re-use of Waste Substances 4- Water pollution technology 6- Energy saving/substainable energy/NOVEM programmed 58- Cleaner exhaust gases 2

Subtotal 105

Dissemination- Environment & energy advisory scheme 2- General provision of information to environmental technology 1

Subtotal

Demonstration/Application- Hydrocarbons 2000- Accelerated depreciation for innovative environmental technology- CFC action programme- Grants scheme for clean and low noise lorries and buses- Various demonstration schemes to reduce nitrogen oxide emissions (NO,)- Tender for industrial energy saving- Scheme for an environmental premium for wind energy- Investment subsidy for wind- Subsidy scheme for demonstration projects- Investment subsidy energy saving techniques

3

647

4531218

118

3103

Subtotal 265

Total 373

NOTE: Exchange rate used: $1 -1.7 guilders. See table 10-1 for technologies included in this table.

SOURCE: Technology and Environment (The Hague, the Netherlands: Ministry of Economic Affairs, TechnologyPolicy Directorate, April 1991).

nants, including selective high performance ab-sorbents, catalytic systems, and biofilters.96

NETHERLANDSThe Netherlands relies heavily on incentives

and subsidies to industry to help them meetenvironmental requirements, Spending on tech-nology development is significant, given thesmall size of the country. In 1992, the governmentspent an estimated $375 million on environ-mental technologies covered in this report. Ifmultiplied on a per-capita basis, this would be

equivalent to over $6.7 billion in the UnitedStates97 (see table 10-7). Moreover, relative to theUnited States, a greater share of this spending isdevoted to environmental technologies, as op-posed to energy, and about half of funding onenvironmental technologies advances pollutionprevention.

The National Environmental Policy Plan (NEPP)and NEPP Plus, environmental strategic plans forthe Netherlands, have as objectives reducingemissions of pollutants to between 10 and 30percent of their 1985 levels by the year 2010. The

% Feder~ Ministry for Rese~chand Technology, Environmental Research and Technology, Programme 1989-1994 (Bonn: BMFL 1989).

W me Ne~erl~ds has a population of approximately 14 million people, about 1/18th of the size of the U.S. population. Totaf environmentaltechnology expenditures, including on environmentally sound agricultural technologies, exceeded $500 miUion.


Dutch Government believes that a key factor inmeeting that goal will be the development anddiffusion of environmental technologies. Towardthat end, the Economic and Environment Minis-tries developed a plan, Technology and Environ-ment, to lay out technology goals and objectives.

A key feature is close cooperation betweengovernment and industry sectors. The environ-ment ministry has appointed a liaison director foreach of several industrial sectors with significantimpact on the environment, such as steel, chemi-cals, paper, and agriculture. Representatives fromthe targeted industry sectors meet with represen-tatives from several government ministries. Themeetings are used to apportion responsibilities forcarrying out the plan, developing a schedule,working out government assistance, and estab-lishing organizational provisions for cooperationand management. A similar joint process is usedto develop a strategy to address specific prob-lems, such as waste stream reduction. Thesecollaborative processes help identify technologyneeds and opportunities. The Sustainable Tech-nology Development program, funded at $2.9million a year by five agencies, was developed topromote the integration of environmental goalsinto longer term technology development (dis-cussed above),

The plan also features programs to promotedevelopment, demonstration, and diffusion ofenvironmental technologies, including cleanerproduction technologies. A number of theseprograms are run by the Netherlands Agency forEnergy and the Environment (NOVEM), a quasi-public organization created in the early 1980s todevelop and promote energy conservation tech-nologies. Its mission was recently expanded toinclude environmental technology. NOVEM isgoverned by a board with representatives fromindustry, government, and academia and there-fore has close ties to industry. Government’s role

tends to be limited to policy, strategy, andfunding; industry tends to choose and structureindividual projects.

The environment ministry manages the Stimu-lation of the Development of EnvironmentalTechnology program, which provides $7.6 mil-lion per year to industry and research institutions.About half supports development of cleanertechnologies; the other half supports end-of-pipetechnology development. Roughly 80 percent ofthe Ministry of Economic Affairs’ environmentaltechnology grants ($20.6 million a year, averag-ing $750,000 per grant) goes to manufacturingfirms to develop technologies that solve environ-mental problems, including remediation, moni-toring, recycling, and packaging. Industry mustpay 60 percent of project costs. The Innovation-oriented Environmental Technology Researchprogram funds researchers at universities andinstitutes in the fields of environmental biotech-nology, recycling and pollution prevention.

The Dutch Government supports demonstra-tion of environmental technologies, with abouthalf of these funds committed to demonstration ofpollution prevention technologies.98 The Minis-try of Housing, Physical Planning, and Environ-ment supports demonstration projects for newenvironmental technology. In addition to initialdemonstrations, the government cofunds somesubsequent demonstrations as the costs decline.For example, the government picked up abouthalf the cost of the first flue gas desulfurizationproject in Holland (total cost was equal to $61million) .99 The second project cost $28 million,with government paying one-quarter. Subsequentprojects were much less (about $14 million) andhad no government support. Demonstration sub-sidies support other technologies, including windpower and solar power.

The Netherlands also provides accelerateddepreciation for environmental technologies that

98 Discussion with environment ministry official, December 1991.

5’9 The firm that did this, Esmil (part of the Hoogovenes Steel Works), licensed the technology from Japan and is now selling the tmhnologYin other countries, such as Spain. (Interview with environment minishy official.)


have been proven technologically sound but are sonic cleaning, and low-NOX boilers. For thenot yet widely used or required by regulation. technologies on the list, companies may write offThrough negotiations between the Environment the cost of purchases in 1 year rather than theMinistry and industry, about 120 technologies usual 10. When a technology is used in sufficienthave so far been chosen, including ultrafiltration volume to bring down the price, it is taken off themembranes, catalytic oxidation devices, ultra- list.

Appendix A: Effects ofEnvironmentalRegulations on

Economic Growth:A Review of Research

A ttempts to assess the impacts of environ-mental regulation on the economy-includ-

ing trade flows and foreign investment, GrossDomestic Product (GDP) growth, and pro-

ductivity—have been going on at least since the early

1970s, These studies differ in methodology, assump-

tions, and conclusions. This appendix reviews some ofthe studies.

I Effect onThe effect

economy and

GDP and Social Welfareof environmental regulation on thesocial welfare hinges principally on

whether the benefits of regulation outweigh the costs.

Unfortunately, few studies have included the benefits,primarily because while estimates of compliance costs

are readily available, estimates of benefits are not. 1

Several studies have attempted to evaluate theimpact of environmental regulation on GDP. Most

studies find that while environmental expendituresmay increase economic growth in the short term,particularly in recessionary periods when economic

stimuli are needed, this stimulus is out-weighed by thecosts in the medium and long term.2 Production costincreases lead GDP-producing activities to grow moreslowly because an increased share of economic activityis producing effects that GDP measures do not include(e.g., clean air). In part, as discussed below, thisreflects a failure of current national income accountingmeasures to adequately reflect national welfare.

The majority of studies find that environmentalregulations have had a negative, but relatively small,impact on GDP growth.3 For example, Denisen foundthat, in the absence of environmental regulation from1973 to 1982, annual U.S. Gross National Product(GNP) growth would have been 0,07 percent higher.4

Jorgenson and Wilcoxen used a more sophisticatedmodel and found that the impact on annual GNPgrowth to be 0.191 percentage points between 1973and 1985: real GNP in 1985 would have been 2.59percent (or about $150 billion) higher.5 They contendthat new regulations, particularly from the 1990 CleanAir Act Amendments, will slow annual GNP growth

1 If re&wlations precede a sound scientific foundation (as indeed, they sometimes must), the benefits may not be truly ascettaimble, eventhough the COS(S mtiy be.

z Gcr Kki;isscri and Andrics Ncntjcs, ‘ ‘Macroeconomic Impacts of an EEC Policy to Control Air Pollution, ” Journaf of Policy Modeling,VO1. 1 ~, hrO. 3, 1991, pp. 347-366.

s M~asurcs of ~mss natloxlal Pro(iuct (GNP) or gross domestic product (GDP) are not ve~ different. me some s~dies have used GNPas a measure, recently, government has adopted the convention of using GDP. GDP plus net receipts of facior income from the rest of the world(e.g., receipts and payments of dividends and interests of foreign affiliates of U.S. corporations and U.S. affiliates of foreign corporations)equals GNP.

d E.F. Dcn]son, Trends in Ameri( an Economic Grofith, 1929-1982 (Washington, DC: The Brookings Institution, 1985), p. 34.5 In other words, if GNP grew 2.5 percent a year with environmental regulations, it would grow 2.691 percent a year without them. Dale

W. Jorgenson and Peter J. Wilcoxcn, “Environmental Regulation and U.S. Economic Growth, ’ discussion paper, Harvard University, Energyand Environmental Policy Center, Novcmber 1989.

321


by another 0.04 percent by the year 2005 and 0.05percent by 2020.6

However, due to simplified assumptions made inmodeling the direct effects of environmental regula-tion on the economy, the results of econometric studieshave to be interpreted with caution, First, some studiesthat measure only compliance costs to business areunderreporting the true costs of regulation, since theyare not based on a full equilibrium model of how thecosts work their way through the economy in the longrun. Using these methods, costs are normally higherthan simple measurement of compliance costs.7 BothJorgenson and Wilcoxen and Hazilla and Kopp usesuch full equilibrium models to measure costs.

However, a second and more serious limitation of allthe studies is that while they include the costs ofenvironmental regulations, they do not include thebenefits, by definition assuring that their models willfind that regulation lowers GDP. There are a numberof benefits of regulation, both to the polluting firm andto the rest of society, that if measured might increaseGDP. The polluting firm may benefit from pollutioncontrol, particularly if it involves production processchanges that lead to increased productivity, lowerenergy and materials use, and increased workerwelfare. While the extent of the benefits to the industryis not clear (they are probably not large), not includingthem overestimates economic losses.

More sizable benefits occur outside the firm. Forexample, increased natural resource productivity fromlower levels of pollution (e.g., increased agriculturaland fisheries yield), reduced health care costs, mainte-nance costs, and capital expenditures on environ-

mental controls (e.g., public water treatment plants)would all increase GDP, in part through increasedproductivity. 8

Moreover, some benefits are nonmonetary and notincluded in GDP measures. For example, enjoyment ofnatural resources, reduced nuisance (e.g., odor) frompollution, and even species diversity might result froma cleaner environment but would not necessarily bemeasured in GDP. Also, there are important flaws inhow national wealth is calculated with respect tonatural resources. While depreciation of man-madecapital assets (plant, equipment, buildings) is sub-tracted from GNP to calculate net national product(NNP), depreciation of natural capita-l (soil, forests,fisheries, minerals), or human capital (illness due topollution) is not subtracted as these natural and humanresources are depleted.9 Thus, not all of the results ofdefensive activities that slow down the degradation ofnatural and human resources would be measured inGDP, even though they would raise societal welfare.

While it is important to include these benefits in anyassessment of the relationship between regulation andeconomic growth, accurate and comprehensive meas-ures of the benefits of environmental regulation havenot been fully developed.10 Some argue that the U.S.spends significant resources regulating some pollut-ants that cause little damage to health or environment,while spending little on abating other pollutants thatcause greater damage (e.g., indoor air pollution) andthat, as a result, regulation lowers GDP.ll In contrast,others argue that on net, the benefits of environmentalregulations outweigh the costs.12 It remains unclearwhether environmental regulations impose more costs

6 Dale W. Jorgenson and Peter J. Wilcoxe~ ‘‘The Impact of Environmental I@slation on U.S. Economic Grow@ investmen~ and CapitalCosts,’ U.S. Environmental Policy and Economic Growth: How Do We Fare? Monograph Series on Tax and Environmental Policies and U.S.Capital Costs (Washington DC: American Council for Capital Formation, 1992), pp. 1-39.

7 Michael Hazilla and Raymond J. Kopp, “The Social Cost of Environmental Quality Regulations: A General Equilibrium Analysis, ”Journal of Political Economy, vol. 98, No. 4, pp. 853-873.

6 For example, lower health care costs could lead to reduced work absences and would also allow revenues formerly going to health careto go to other economic activities. See Organkmion for Economic Co-operation and Development, Environmental Policy Benefits: MonetaryValuation (Paris: OECD, 1989).

g Robert Repetto, ‘‘Accounting for Environmental Assets, Scientij% American, vol. 266, No, 6, June 1992.10 Under tie 1990 Clean Air Act, EPA was required to prepare a report assessing the benefits of the Federal clean air ref@dOnS. me report

is scheduled for release in late 1993. Moreover, EPA is considering doing more detailed work to measure the benefits of regulations in all media.

II Paul R. Portney, ‘‘Policy Watch: Economics and the Clean Air Acq’ The Journal of Economic Perspectives, vol. 4, No. 4, fall 1990; also,Robert Crandall, “Why is the Cost of Environmental Regulation So High’ policy paper, Center for the Study of American Business,Washington University, St. Louis.

12 AIV~L. Am ‘Ccompctitivcness and Enviromen~l Quality,’ Environmental Science and Technology, vol. 25, No. 12, December, 1991,p. 1993.

Appendix A–Effects of Environmental Regulations on Economic Growth: A Review of Research! 323

Table A-l—Estimates of the Share of Total Factor Productivity y Decline FromEnvironmental Regulation

PercentStudy share Period Industry scope

than benefits, and until this question is answered, it isnot possible to accurately measure the impact ofregulations on productivity or GDP.

Finally, even if net benefits from regulations doexceed costs, those costs normally occur in the presentwhile the benefits often occur in the future. If othercountries choose to minimize short-term costs bylimiting regulation, they may gain a short-term com-petitive advantage that can also be translated into along-term advantage. Also costs may be concentrated,affecting certain industries, workers, and communi-ties, while the benefits may be diffuse.

Q Productivity and EnvironmentalRegulation

A number of studies were done to explain theslowdown in manufacturing productivity gains in the

1970s. Virtually all the studies found that environ-mental regulations contributed a small share to theslowdown in productivity.

13 Manufacturing productiv-

ity growth rates in the 1980s, however, regainedpre-1970 levels.14

There are several reasons why environmental regu-lations could lower productivity .15 First, becausepollution abatement inputs (e.g., capital, labor, energy)produces pollution reduction, which is not included asan output in conventional productivity measures, bydefinition compliance costs lower total factor produc-tivity. Conventional output indicators measure onlythe value of the saleable product and not the negativevalue of the environmental damage caused by thepollution. Therefore, studies find that environmentalcompliance expenditures reduce productivity becausetheir outputs (a cleaner environment than otherwise)are not included as part of the firms’ outputs.

1~ ~oductivity is generally m~suRd in wo ways, total factor (or multifactor) productivity, which relates o@~U (v~~e of ~ePmduc~ tie

plant or firm produces) to all inputs to the firm, including capital, labor, purchased inputs, energy and raw materials, and single factorproductivity (e.g., labor productivity), which relates outputs to the amount of a single factor (e.g., labor).

14 Wilham Gullickson, “Multifactor Productivity in Mmufacturing Industries,” Monthly Labor Ret’iew, October 1992, pp. 2G29.15 For CX~mIpIC, see Wayne Gray and Ronald J. Shadbegian, ‘‘Environmental Regulation and Manufacturing Productivity at the Plant Level, ”

Center for Economic Studies DiscussIon Paper (Washington, DC: U.S. Bureau of the Census, March 1993).


Gallop and Roberts found that almost half (44percent) of the productivity slowdown in the electricpower industry in the 1970s was attributable to

16 Repetto has developed aenvironmental regulations.measure to include pollution in productivity measuresfor the electric power industry,17 which includes bothelectricity and economic damages from pollutants(e.g., crop losses, morbidity) as outputs from utilities.Using this expanded measure, Repetto found thatbetween 1970 and 1985 environmental productivity(kilowatt hours per unit of emissions) increased morerapidly than labor, capital, or energy productivity y. 18 Asa result, while electric power productivity declined by0.38 percent a year between 1971 and 1985 whenmeasured in conventional terms, Repetto estimatesthat it increased by between 0.33 and 0.62 percent ayear when the benefits of a cleaner environment areincluded as outputs.

Second, environmental regulation could lower theproductivity of nonabatement resources in producingmeasured outputs, if it reduces the efficiency ofexisting inputs into production. For example, firms uselarge amounts of energy to run smokestack scrubbersand also must expend substantial effort to maintainthese devices.

Third, if firms change production practices inresponse to regulatory demands, these new practicesmay be less efficient than the old ones. For example,companies may switch from cleaning with solvents toless productive mechanical cleaning. In addition, toavoid liability and present an image as a cleancompany, larger firms may subcontract out some oftheir dirtier production processes to smaller firms,

even though it may be more efficient to producein-house. 19

Fourth, if firms divert funds from spending onproductive investments (e.g., new capital equipment)to pay for environmental expenditures, then productiv-ity growth may lag since less new equipment is bought.It is not clear the extent to which this crowding outtakes place; in fact, at least one study20 found thatamong pulp and paper mills, firms that spent more onproductive investments as a share of the plant capitalstock also spent more on environmental investments.21

Fifth, if regulations have a new-source bias, this maydiscourage investment in new, more efficient technol-ogies and encourage holding on to older facilities.Finally, regulations may divert management time andeffort away from issues of production toward issues ofcompliance and hence might reduce productivity.

However, there are some reasons why regulationsmight increase productivity. First, as discussed inchapter 8, new production practices developed tocomply with regulations might be more productivethan old. For example, Barbera and McConnell foundthat regulations may have resulted in lower productioncosts in the non-ferrous metals industry because of theintroduction of new lower polluting production prac-tices that were also more efficient.22 However, eventhough aggressive pollution prevention efforts canreduce compliance costs, particularly when comparedto the current end-of-pipe approach, in most cases theyare not cost effective in the absence of regulation.

Second, regulations could provide a shock tooutdated management practices and encourage man-agement to devote increased attention to productionprocesses and work practices. Finally, if regulation

16 Fr@ M. Gallop and NWk J. RobeIW, “Environmental Regulations and Productivity Growth: The Case of Fossil-fueled Electric PowerGeneration,” Journal of Political Economy, vol. 91, No, 4, August 1983, pp. 654-674.

17 Robert Repetto, “Environmental Productivity and Why It Is So Important,” Challenge, vol. 33, No. 5, September-October 1990, pp.33-38.

la EnvfionmenM productivity is defined as output per unit Of emissions.

19 F.A. Steward COmUltiK]g, ‘‘Environment and Competitiveness in the Metal Finishing Industry,” conmactor report prepared for the Offkeof Technology Assessment, February 1992.

20 WaPe Gray ad Ro~d J. s~dbegia~ $ ‘Envfi~en@ Regulation and ManUfaCtUfig ~OduCtivlty at tie plant ~v~l, ’ op. cit.

21 Many analysts assume mat this crowding out occurs on a one-to-one basis, that is, that for every dollar Spent on pOhtiOn conmol, f~sspend one dollar less on productive investments. While the empiricat evidence of this is slim it does seem to suggest that this is not the case,that instead, it crowds out only between 33 and 50 percent. Adam Rose, ‘‘Modeling the Macroeconomic Impact of Air Pollution AbatemenL”Journal of Regional Science, vol. 23, No. 4, 1983, p. 449.

~ Antiony J. Barbem and Virginia D. McConnelt, ‘‘The Impact of Environmental Regulations on Industry Productivity: Direct and IndirectEffects, ” Journal of Environmental Economics and Management, winter, 1990, pp. 50-65.

Appendix A–Effects of Environmental Regulations on Economic Growth: A Review of Research I 325

imposes substantial costs on some sectors and forcessome plants to close, it is likely that the plants thatclose will be those with the lowest productivity andprofits.

23 To the extent that the remaining productiontakes place in U.S. plants with higher productivity,then industrywide productivity will have increased.For example, OTA found that environmental regula-tions accelerated steel industry modernization.24

On balance though, environmental regulations ap-pear to have dampened productivity (narrowly definedto not include environmental outputs). Most studiessuggest that environmental regulation contributed toaround 10 to 15 percent of the productivity growthslowdown during the 1970s. Even among industriesbearing the highest pollution abatement costs, environ-mental regulation did not account for the majorityshare of the slowdown in productivity growth in the1970s. In other words, while spending on environmenthas been responsible for some of the deceleration inproductivity growth, other factors (such as technologychanges, investment, and training) were more impor-

tant. There is some consensus that the impacts ofregulation on productivity in the early 1980s weresomewhat less.25 In addition, productivity growth

rebounded somewhat in the 1980s.26 However, onestudy examining regulation from 1979 to 1985 foundthat among industries with the highest compliancecosts (pulp and paper mills, steel mills, and oilrefineries), environmental costs were associated withlower productivity. On average, environmental regula-tions in these high compliance cost sectors caused a 3to 7 percent decline in total factor productivity.27

It is not clear how future environmental regulationswill affect productivity. On the one hand, the expectedincrease in environmental compliance costs couldinhibit productivity. On the other hand, firms are muchmore experienced with implementation of environ-mental regulations than they were in the 1970s, andnew approaches (such as pollution prevention) couldreduce compliance costs and lower negative productiv-ity effects.

23 &~~ Hm-ig~ Srrategie~for Declining Businesses (Lexingtoq MA: I-mington BOOICS, 1980).

~ U.S. Congress, Office of Technology Assessment, Technology um.f Sreel Industry Cotnpefiriveness, OTA-M-122 (wMhinglom DC: Us.Government Printing Office, June 1980), p. 83.

2S U.S. Con=ess, Confessional Budget Office, Environmental Regulation and Economic Eficiency Washington, DC: CBO, March 1985).

26 William Gullickson, “Multifactor Productivity in Manufacturing Industries, ” Monthly Labor Review, October, 1992. pp. 20-29.27 For evew additio~ dollar in env~onmen[~ operatig costs, total factor productivity would drop by $3 to $4. Wayne B. Gray and Ron~d

J. Shadbegian, “Environmental Regulation and Manufacturing Productivity at the Plant Level, ” op. cit.

Appendix B:List of

ABCAFBCARPA

ASEAN

BATBEABMFT

BODBOTBCAAACCTPCERCLA

CFCsCMACODCORECT

CRADA

CTAC

DERP

DOC

—Advanced Battery Consortium—atmospheric fluidized bed combustion—Advanced Research Projects Agency

(formerly DARPA)—Association of Southeast Asian

Nations (members are: Brunei,Indonesia, Malaysia, Philippines,Singapore, and Thailand)

—best available technology—Bureau of Economic Analysis (DOC)—Federal Ministry for Research and

Technology (Germany)—biological oxygen demand—British Overseas Trade Board-Clean Air Act Amendments---Clean Coal Technology Program-Comprehensive Environmental

Response Compensation and LiabilityAct

-Chlorofluorocarbons--Chemical Manufacturers Association-chemical oxygen demand-Committee on Renewable Energy

Commerce and Trade-Cooperative Research and

Development Agreement--Customer Technology Applications

Center—Defense Environmental Restoration

Program—Department of Commerce

DODDOEDSMECEGSEOPEPAEPACTEPRIERCsESCOsEximbank

FBCFCCSET

FGDGAOGATTGDPGNPGRIHCICETT

IGCCJETROJICA

MACT

Acronyms

—Department of Defense—Department of Energy-demand side management—European Communityenvironmental goods and services-end-of-pipe—Environmental Protection Agency—Energy Policy Act of 1992—Electric Power Research Institute-engineering research centers-energy service companies—Export-Import Bank of the United

States—fluidized bed combustion—Federal Coordinating Council on

Science, Engineering and Technology—flue gas desulfurization—U.S. General Accounting Office-General Agreement on Tariffs and Trade—gross domestic product-gross national product--Gas Research Institute-harmonized code—International Center for Environmental

Technology Transfer (Japan)—integrated gasification combined cycle—Japan External Trade Organization—Japanese International Cooperation

Agency—maximum achievable control standards—Municipal Innovative Technology

Evaluation Program

327


MITI

MNCsMTCsNAFTANASA

NASDA

NCMs

NEDO

NEPA

NETAC

NGOsNICsMST

NOAA

NOX

NSFNTDBOECD

OIT

OPIC

OSHA

OSTP

PCBsPERF

PFBCPOTWPV

—Ministry of International Trade andIndustry (Japan)

—multinational corporations—Manufacturing Technology Centers—North American Free Trade Agreement—National Aeronautics and Space

Administration—National Association of State

Development Agencies—National Center for Manufacturing

Sciences—New Energy and Industrial

Development Organization (Japan)—National Environmental Policy Act of

1969—National Environmental Technology

Applications Corporation—non-governmental organizations—newly industrialized countries—National Institute for Standards and

Technology—National Oceanic and Atmospheric

Administration—nitrogen oxides—National Science Foundation—National Trade Data Bank-Organisation for Economic Co-

operation and Development-Office of Industrial Technologies (part

of DoE)-Overseas Private Investment

Corporation----Occupational Safety and Health

Administration-Office of Science and Technology

Policy—polychlorinated biphenyls—Petroleum Environmental Research

Forum—pressurized fluidized bed combustion—publicly-owned treatment works—photovoltaic cell

PVUSA —Photovaltaics for Utility ScaleApplications

RCRA —Resource Conservation and RecoveryAct

R&D —research and development—Research Institute of Innovative

Technologies for the Earth (Japan)SARA -Superfund Amendments and

Reauthorization ActSBA -Small Business AdministrationSCORE -Service Corps of Retired ExecutivesSCR —selective catalytic reductionSEMATECH --Semiconductor Manufacturing

SERDP

SICSITE

SMEsSNCRSO2

SRRPTCATDATPCC

TQM

UNCED

US-AEP

USAID

USCAR

USETI

US&FCSUSTRVOCs

Technology Consortium-Strategic Environmental Research and

Development Program—standardized industrial code--Superfund Innovative Technology

Evaluation Program—small and medium sized enterprises—selective non-catalytic reduction—sulfur dioxide-Source Reduction Review Project—total cost accounting—Trade and Development Agency—Trade Promotion Coordinating

Committee—total quality management—Toxic Release Inventory—United Nations Conference on

Environment and Development—United States - Asia Environmental

Partnership—U.S. Agency for International

Development—United States Council for Automotive

Research—United States Environmental Training

Institute—U.S. and Foreign Commercial Service—United States Trade Representative—volatile organic compounds

Index

ABC. See Advanced Battery ConsortiumAccelerated depreciation, 50,209-210Advanced Battery Consortium, 298Advanced Research Projects Agency, 297Advanced Technology Program, 296Advanced water and wastewater systems, 137-138AFBC. See Atmospheric fluidized bed combustionAgency of Industrial Science and Technology, 313-314Agency of Natural Resources and Energy, 310,313-314Aggressive policy strategy, 28,41-42Aid, Trade and Competitiveness Act of 1992,28,42Air emissions, 273-274, 275, 281-282Air pollution control

mobile source, 133-135national differences in standards, 226-227stationary source, 130-133U.S. production and export of equipment, 120

AIST. See Agency of Industrial Science andTechnology

American Institute of Chemical Engineers, 53, 300American Water Works Association, 299Amoco Yorktown study, 55,267,273ANRE. See Agency of Natural Resources and EnergyAQMD. See South Coast Air Quality Management

DistrictARPA. See Advanced Research Projects AgencyASEA Brown Boveri, 10ASEAN. See Association of South East Asian NationsAsian countries. See also individual countries

as environmental technology markets, 11, 90, 110-115

Association of South East Asian Nations, 113-114Atmospheric fluidized bed combustion, 144-145ATP. See Advanced Technology ProgramAutomotive manufacturers, 134, 195,238,298-299

pollution control and competitiveness, 204-205A~A. See American Water Works Association

Bank lending, 261BAT See Best available technologyBEA. See Bureau of Economic AffairsBenzene emissions, 273Best available technology, 33,57

effect on innovation, 123BFI. See Browning Ferris IndustriesBlackstone Project, 271BMW See Ministry for Research and TechnologyBOTB. See British Overseas Trade BoardBritish Overseas Trade Board, 166-167Browning Ferris Industries, 138-139Bubble policy, 279-280Bureau of Economic Affairs, 186-187, 188-189Bureau of Mines, 301,307Business education programs, 52-54

CAA. See Clean Air ActCAAA. See Clean Air Act ArnendxnentsCalifornia

effects of environmental regulation on hs Angeleseconomy, 218-219

International Energy Fund, 181vehicle emissions regulations, 100, 134

329


CAMP. See Cleveland Advanced ManufacturingProgram

Canada, environmental market, 101Catalytic converters, 133-135CCTP. See Clean Coal Technology ProgramCEM. See Continuous Emission MonitoringCensus Bureau, 69, 196-197

environmental compliance costs, 188-189survey data, 38

Center for Applied Technology, 22Center for Clean Industrial and Treatment Technolo-

gies, 306-307Center for Industrial Services, 22,253Center for Waste Reduction Technologies, 53,251,300Central Europe, environmental market, 105-108Centro Cerarnico, 22,256-257CERCLA. See Comprehensive Environmental Re-

sponse, Compensation, and Liability ActCFCS. See ChlorofluorocarbonsChemical industry

pollution prevention practices, 231process modification, 240-241

Chemical Manufacturers Association, 93,260China, environmental market, 112-113Chlorofluorocarbons, 75-76,96CIS. See Center for Industrial ServicesClean Ah Act, 33,57, 133Clean Air Act Amendments, 100,130,131,274,286,288Clean coal technologies, 169-170Clean Coal Technology Program, 131, 144,302Clean Water Act, 33,57, 100,288Cleaner energy technologies

coal combustion and conversion technologies, 144-145end-use energy efficiency, 148gas turbines, 143-144overview, 142-143renewable energy sources, 146-148research and development, 300-305,311-312,316, 317

Cleaner production technologies. See also pollutionprevention

competitiveness, 149and engineering services, 13estimates of market size, 8-9findings, 4leadership, 9-10and manufacturing, 229

Cleveland Advanced Manufacturing Program, 253Cluster team concept, 33,269

CMA, See Chemical Manufacturers AssociationCoal combustion technologies, 144-145COEECT See Committee on Energy Efficiency Com-

merce and TradeCombustion turbines, 143-144Committee on Energy Efficiency Commerce and

Trade, 155Committee on Renewable Energy Commerce and

Trade, 36,63, 155The Competitive Advantage of Nations, 83-84Competitiveness

conclusions, 149-150and the environment, 81-83and environmental design, 75-76environmental industry, 12-16, 117environmental trade, 117-121factors affecting, 121-128findings, 4-5impact of environmental regulation, 83-87,214-221manufacturing industry, 18-25, 183objectives, 13-14,40

Compliance costs. See also Pollution abatement andcontrol

comparing U.S. to other countries, 5, 197-207determining factors, 185-186differing measures, 188-189estimates for U. S., 14-15, 19manufacturing industries, 85overview, 185-186use of economic incentives, 6

Comprehensive Environmental Response, Compensa-tion, and Liability Act, 140, 261. See alsoSuperfund Act

Construction services, 128-130Contaminated site remediation, 140-142,300Continuous Emission Monitoring, 275Cooperative Research and Development Agreements,

41,296-297CORECT See Committee on Renewable Energy

Commerce and TradeCRADAS, See Cooperative Research and Develop-

ment AgreementsCustomer Technology Applications Center, 259CWA. See Clean Water Act

Data needs, 38, 68-69,93, 117Defense Environmental Restoration Program, 305

——_. .—

Index ! 331

Delisting, 123Demand side management, 124Dematerialization, 97Denmark, technical assistance program, 22DEP. See Department of Environmental ProtectionDepartment of Commerce, 161-164, 296Department of Defense, 44, 101, 141,258

environmental technology research and develop-ment, 301, 305-306

Department of Energy, 44,48, 101, 141environmental technology research and develop-

ment, 300-305Office of Industrial Technology, 29,303-305

Department of Environmental Protection, 271Deposit-refund approaches, 278-279DERP. See Defense Environmental Restoration

ProgramDesign services, 128-130Developing countries. See also individual countries

bilateral aid, 61-62environmental market, 115-116export promotion options, 35-36multilateral cooperation for technical assistance,

60-61pollution abatement and control costs, 20,203,205,

207,210-211technical assistance options, 34-35

Development assistance programsfeasibility studies, 174-176multilateral cooperation options, 34-35promoting exports, 173-174technology cooperation, 176-177

DOC. See Department of CommerceDOD. See Department of DefenseDOE. See Department of EnergyDow Chemical, 234DSM. See Demand side managementDutch Sustainable Technology Development

Program, 292

East Asian countries, See also individual countriesenvironmental market, 113-114

Eastern Europe, environmental market, 105-108Eastern Germany, environmental needs, 104EBC. See Environmental Business Council of the

United StatesEC. See European CommissionECD. See Energy Conversion Devices

Ecological and Toxicological Association of the Dye-stuffs Manufacturing Lndustry, 260

Economic activities, classi~ing, 75-79Economic incentives. See also Environmental regula-

tions; Regulatory reformadvantages, 283-286disadvantages, 284, 286-287impact on competitiveness, 124-125incentive-based regulations, 277-278lowering compliance costs, 6past experience, 279-283policy option, 30,49-50,54principal findings, 264-265reasons for limited use, 288-289types of incentive systems, 278-279

Economic policiesovemiew of issues, 39-40proposals for U.S. programs, 3

ECOTEC, 94ECRE. See Export Council for Renewable EnergyEGS, See Environmental goods and services industryEgypt, environmental market, 115Electric Power and Research Institute, 299Electric utilities, 258-259Electronic Bulletin Board, 165Employment

effects of environmental regulations, 87export related, 120-121findings, 4

End-of-pipe pollution control, 80-81, 244compared with prevention and recycling, 229fiiding alternatives to, 246-247

Energy Conversion Devices, 146Energy Efficiency program, 302-303Energy Policy Act of 1992,42,46, 62, 304Energy service companies, 107Energy use efficiency, 148-149

markets for, 98-99Engineering education programs, 52-54Engineering Research Centers, 307Environment Agency, 314Environmental Action Program, 142Environmental activity classification, 75-79Environmental and Energy Efficient Technology Trans-

fer Clearinghouse, 172Environmental Business Council of the United States,

159Environmental Business International, 98-99


Environmental compliance costs. See Compliancecosts

Environmental Export Assistance Officer, 172Environmental exports. See also Export promotion

programsawareness and support, 126estimates of, 118-120

Environmental goods and services industry. See also

Export promotion programsclassifying environmental activities, 75-79cleaner energy technologies, 142-143

vd combustion and conversion technologies, 144-145

contaminated site remediation, 140-142defining the industry, 2,75-82,93-97design and construction services, 128-130employment effects, 87end-use energy efficiency, 148-149environmental trade competitiveness, 117-121factors affecting competitiveness, 12-14, 121-128findings, 4-5framework of industry, 79-82gas turbine technologies, 143-144global markets, 97-116invisible EGS, 8market categories, 90-91market drivers, 91-93mobile source air pollution control, 133-135renewable energy, 146-148revenue estimate for U. S., 14-15size of market, 8-12, 89, 97-99. See also individual

countries and regionsstationary source air pollution control, 130-133summary of trends and characteristics, 116U.S. competitiveness, 12-17waste industry, 138-140water and wastewater treatment technologies, 135-

138Environmental impact costs. See Compliance costsEnvironmental industry. See Environmental goods

.]ncl services industryl~n~ ] ILlflillental issues

classifying environmental activities, 75-79concerns, 71-72

Environmental Protection Agency, 52, 81, 119,257bubble policy, 279-280diffusion of best practices and technologies, 31Environmental Technology Initiative, 295

integrated permits, 270-272integrated regulation, 268-269market-based environmental incentives, 279pollution abatement and control costs, 186-187,

188-189regulatory reform, 32-34research and development, 301, 306-307technical assistance programs, 252trading and banking system, 280,283

Environmental regulations. See aZso Economic incen-tives; Pollution abatement and control

advances in pollution prevention, 21, 23and competitiveness, 5-6, 83-87, 122-124, 183compliance costs for U.S. industry, 19, 186-207economic costs and benefits, 18, 83-87and employment, 87enforcement of regulations, 211and environmental markets, 92-93, 122-124environmental standards among countries, 210-211features of current regulatory system, 23-24foreign environmental requirements, 19-21, 197-

214future directions for other countries, 214government assistance for compliance, 20,207-210and gross domestic product, 321-323incentive-based, 277-289and industrial location, 220-221information disclosure among countries, 213-214innovative approaches, 25linkage between regulatory reform and economic

incentives, 265the Michael Porter hypothesis, 83-84new forms, 2-3and productivity, 323-325regulatory reform, 264, 265-277regulatory styles among countries, 211-213and social welfare, 321-323technical assistance for pollution prevention, 22and technological innovations, 123, 214-216and trade, 216-220

Environmental research and development. See Re-search and development

Environmental Restoration and Waste ManagementTechnology Development Program, 300

Environmental Services Program, 22,253Environmental taxes. See Taxes and feesEnvironmental technologies. See also Speczfic tech-

nologies, Research and development,

appropriate technologies, products and service,126-127

competitive position of U.S. firms, 4-5databases for potential customers, 172overall findings, 1-4policy issues and options, 26-34,42-58promotion of techniques and standards, 125-126research, development and demonstration, 127-128verification and demonstration, 173

Environmental Technology Export Council, 159Environmental Technology Initiative, 46,295Environmental trade, competitiveness, 117-121Environmental Trade Working Group, 158-159Environmental trends, 72-75Environmentally Benign Chemical Synthesis and Proc-

essing, 307EOP. See End-of-pipe pollution controlEPA. See Environmental Protection AgencyEPACT See Energy Policy Act of 1992EPRI. See Electric Power and Research InstituteERCS. See Engineering Research CentersESCOS. See Energy service companiesESP. See Environmental Services ProgramETEC. See Environmental Technology Export

CouncilEureka, 316-317European Community

Directorate-General XII, 16environmental technology research and develop-

ment, 314-317European countries. See also individual countries

environmental market, 101-108pollution abatement and control costs, 202-203,207

Eximbank. See Export-Import BankExport Council for Renewable Energy, 155Export Enhancement Act of 1992,62, 157, 172, 180Export-Import Bank, 37,63, 178-181Export promotion programs. See also Environmental

exportsareas of government policy, 153-154assistance for planning and marketing, 160-173bilateral assistance, 61-62developing U.S. strategy, 154-159exports as percentage of gross domestic product,

152financing, 177-181multilateral technical assistance, 60-61overview, 58-60, 151-154

Index 333

policy and strategy, 62-65summary of issues and options, 35-37, 58-64technology verification and demonstration, 173U.S. programs in international context, 159-160use of foreign aid, 173-177

Extension programs, 255-256External recycling, 242-244

Facility bubbles, 273-274Facility-wide Inspections to Reduce Sources of Toxics

Initiative, 271Farkas Berkowitz & Co., 94-95FBC. See Fluidized bed combustionFCCSET See Federal Coordinating Council on Sci-

ence, Engineering, and TechnologyFeasibility studies, development assistance, 174-176Federal Coordinating Council on Science, Engineer-

ing, and Technology, 46, 295Federal policies. See also Environmental regulations

data and information needs, 38,68-69development assistance, 34-36,58-60,61-62diffusion of best practices, 30-32,49-54effect on industries, 3export promotion, 35-37, 58-60, 61-65international trade and environment issues, 37-38,

65-68options summary, 27overview of options, 6-7regulatory reform, 32-34, 54-58research and development, 26, 28-30, 42-49strategies, 28, 41-42technical assistance, 34-35, 58-61trade and environment, 37-38, 65-68

Fees. See Taxes and feesFGD. See Flue gas desulfbizationFinancial Assistance, 207-210,261-262FIRST. See Facility-wide Inspections to Reduce Sources

of Toxics InitiativeFlue gas desulfurization, 130-131, 132Fluidized bed combustion, 144Foreign commercial service, 64

staffing, 171Foreign Commercial Service Officer, 172Forest products industry, 95Former Soviet Union, environmental market, 105-108Fossil fuels program, 302Framework programs, 315-316


France, pollution control costs, 203Furniture industry, 218-219

Gas Research Institute, 299Gas turbine technologies, 143-144GA~. See General Agreement on Tariffs and TradeGDP. See Gross domestic productGeneral Agreement on Tariffs and Trade, 65General Electric, 143-144Germany, see also Western Europe

amount of exported environmental products, 12development of cleaner production technologies,

9-1oenvironmental needs in eastern Germany, 104environmental technology research and develop-

ment, 317-318Ministry for Research and Technology, 16, 317pollution abatement and control costs, 199, 202,

206,209GLMTC. See Great Lakes Manufacturing Technology

CenterGlobal environmental market, See Environmental

goods and services industryGlobal environmental trends, 72-75Good housekeeping practices, 238Government policies. See Federal policiesGovernment procurement, 50, 258Great Lakes Manufacturing Technology Center, 22,

253Green Aid Plan, 132GRI. See Gas Research InstituteGross domestic product, and environmental regula-

tions, 321-323

Harmonized Code, 93Hazardous C)rganic NESHAP, 274Hazardous Substance Research Centers, 306Hazardous Substance Response Fund, 140. See also

Superfund ActHazardous waste

designation, 276industry, 138-140national differences in standards, 227-228

HC. See Harmonized CodeHoechst Celanese, 231,234HON. See Hazardous Organic NESHAPHouse Energy and Commerce Committee, 7House Foreign Affairs Committee, 7

‘W Centers. See Industry/University Cooperative Re-search Centers

ICETT. See International Center for EnvironmentalTechnology Transfer

IDBs, See Industrial Development Revenue BondsIGCC. See Integrated Gasification Combined CycleIllinois Hazardous Waste Research and Information

Center, 81IMIP. See Industrial Modernization Incentives

ProgramIncentive systems. See Economic incentivesJncome growth, 72-73Incremental policy strategy, 41India, environmental market, 112-113Industrial Development Revenue Bonds, 208Industrial location, and environmental regulation,

216-221Industrial Modernization Incentives Program, 305Industrial consortia, 29-30,4749,297-300Industrial trade associations, 260Industry Subsector Analyses, 165Industry/University Cooperative Research Centers,

307Innovative Technology Council, 306Institute for Environmental Cooperation, 58Integrated Environmental Management Program, 268-

269Integrated Gasification Combined Cycle, 145,316Integrated inspections, 271Integrated permits, 270-272International Center for Environmental Technology

Transfer, 177International trade issues, 37-38, 65-68ISAs. See Industry Subsector AnalysesItaly

Centro Ceramico, 22,256-257

Japanamount of exported environmental products, 12cleaner production technologies, 9environmental equipment production and export,

119environmental market, 105environmental requirements, 19-20, 226-228environmental training program, 177fiiancial assistance, 207-209pollution abatement and control costs, 200-205research and development, 292, 310-314

Index I 335

Japan External Trade Organization, 168, 170-171Japan Society of Industrial Machinery Manufacturers,

68Japanese International Cooperation Agency, 175, 177JETRO. See Japan External Trade OrganizationJICA. See Japanese International Cooperation AgencyJIT. See Just-in-time deliveryJust-in-time delivery, 236

LAER. See bwest achievable emission rateLatin America

environmental market, 11, 108-110as environmental technology market, 11

LDAR. See hak Detection and Repair programsLeak Detection and Repair programs, 240Lowest achievable emission rate, 204LUZ International, 147

MACT. See Maximum Achievable ControlTechnology

Mae Moh power project, 169-170Management Institute for Environment and Business,

54MANTECH, See Manufacturing Technology ProgramManufacturers of Emission Controls Association, 133Manufacturing industries

economic factors, 85environment and competitiveness, 81-87environmental design and competitiveness, 75-76impact of environmental regulation, 18-25link with environmental technology firms, 2-3national differences in pollution control standards,

226-228pollution abatement expenditures, 187, 190-194

Manufacturing Technology Centers, 307Manufacturing Technology Program, 305Market research assistance, 165-167Marketable permits, 25, 265, 278Massachusetts

Center for Applied Technology, 22integrated inspections, 271

Massachusetts Institute of Technology, 58Matchmaker Delegations, 167Maximum Achievable Control Technology, 269,274Metal Casting Competitiveness Research Program,

304Metal finishing indust~

costs of pollution prevention, 235

external recycling, 243pollution prevention practices, 231-232

Metal Initiative, 304Mexico

environmental market, 108-110relocation of furniture manufacturing, 218-219

Ministry for International Trade and Industry, 16, 132environmental technology research and develop-

ment, 310-311Ministry for Research and Technology, 16,317Minnesota Pollution Control Agency, 275MITE. See Municipal Innovative Technology

EvaluationMITI, See Ministry for International Trade and

IndustryMobile source air pollution, 133-135Monsanto, 234MPCA. See Minnesota Pollution Control AgencyMTCS. See Manufacturing Technology CentersMultilateral aid, 60-61Multimedia approach, 268-272Municipal Innovative Technology Evaluation, 52,306

NAFTA. See North American Free Trade AgreementNASDA. See National Association of State Develop-

ment AgenciesNational Association of Metal Finishers, 260National Association of State Development Agencies,

154National Center for Manufacturing Sciences, 297-298National Defense Authorization Act, 305National Defense Center for Environmental Excel-

lence, 305-306National Emission Standards for Hazardous Air Pol-

lutants, 273National Environmental Policy Plan, 318-319National Environmental Technology Act of 1993,

proposed, 45-46,52National Environmental Technology Applications Corp.,

52,307National Industrial Competitiveness Through Effi-

ciency: Energy, Environment and Economicsprogram, 304

National Institute for Resources and Environment, 313National Institute of Standards and Technology, 51,

253,296National Oceanographic and Atmospheric Adminis-

tration, 295


National Renewable Energy Research Laboratory, 302National Science Foundation, 32,48,53

environmental technology research and develop-ment, 307

National Trade Data Bank, 165NCMS. See National Center for Manufacturing

SciencesNDCEE. See National Defense Center for Environ-

mental ExcellenceNear East, environmental market, 114-115NEDO. See New Energy and Industrial Technology

Development OrganizationNegotiated rulemaking processes, 267NEPP. See National Environmental Policy PlanNESHAP. See National Emission Standards for Haz-

ardous Air PollutantsNETAC. See National Environmental Technology

Applications Corp.Netherlands

development of cleaner production technologies, 10environmental technology research and develop-

ment, 318-320pollution control expenditures, 199, 202-203,207technical assistance program, 22

Netherlands Agency for Energy and the Environment,319

Netherlands Environmental Policy Plan, 212, 318Netting, 279-280, 283New Energy and Industrial Technology Development

Organization, 16research and development, 292, 311-313

New Sunshine Program, 312-313Newly industrialized countries

compliance costs, 20pollution abatement and control costs, 203,205,207

NICES. See National Industrial CompetitivenessThrough Efficiency: Energy, Environment andEconomics program

NICS. See Newly industrialized countriesNIRE. See National Institute for Resources and

EnvironmentNIST. See National Institute of Standards and

TechnologyNitrogen oxides, 131-132, 281-282

national differences in control standards, 226NOAA. See National Oceanographic and Atmospheric

AdministrationNorth American Free Trade Agreement, 37, 66

NOVEM, See Netherlands Agency for Energy and theEnvironment

NSF. See National Science FoundationNTDB. See National Trade Data Bank

OECD. See Organization for Economic Cooperationand Development

Office of Environmental Education, 53Office of Industrial Technology, 46,48,303-304Office of Pollution Prevention and Toxics, 307Office of Science and Technology Policy, 295Ohio, environmental services, 253OIT. See Office of Industrial TechnologyOne-pipe-at-a-time approach, 267-268Organization for Economic Cooperation and Develop-

ment, 65, 74environmental markets estimate, 8, 10

OSTP. See Office of Science and Technology PolicyOverseas commercial service, 168, 170-172

PACE. See Pollution Abatement and ControlExpenditure

Per capita income, 72-73PERF. See Petroleum Environmental Research ForumPerformance standards, 272-274,275Petroleum Environmental Research Forum, 300PFBC. See Pressurized fluidized bed combustionPhotovoltaic cells, 146, 147-148,302Photovoltaics for Utility Scale Applications, 148, 302Policy options. See Federal policiesPolluter pays principle, 186,260Pollution abatement and control

accuracy of cost estimates, 196-197, 222-225future costs, 194-196government measures of costs, 188-189interaction with pollution prevention, 81mobile source, 130-133national differences in standards, 226-228overview, 183-186relationship between regulations and competitive-

ness, 214-221sources of underreporting of costs, 222-225stationary source, 130-133U.S. compliance costs compared with other nations,

197-214U.S. expenditures, 186-194

Pollution Abatement and Control Expenditure, 69,222-225

Index I 337

Pollution Control han program, 208

Pollution prevention

capital accounting, 248-249

in the chemical industry, 240-241

cost savings, 232-236

financial assistance, 260-261

financial incentives, 231

in-process changes among countries, 232

interaction with pollution control, 81, 82

investment practices, 248-250

limiting factors, 244-247

options, 6, 237-244

organizational and technological change, 236-237

overview, 229-230rate of adoption, 231-232

and recycling, 230, 242-244

regulatory barriers, 248

shift from control to prevention, 2

social benefits, 250

technical assistance, 22, 50-51, 251-260

technology development, 149, 230-231, 250-251

Pollution Prevention Act of 1990,229

Pollution Prevention Incentives for the States program,54, 252

Pollution Prevention Information Clearinghouse, 254

Pollution Prevention Pays program, 234

Population growth, 72-73

Porter, Michael, hypothesis, 83-84POTWS. see Publicly owned water treatment worksPPIS. See Pollution Prevention Incentives for the

States programPressurized fluidized bed combustion, 144-145Prevention of Significant Deterioration, 275Private Invest ment and Trade Opportunities Organiza-

tion, 172Process industries, compliance costs, 19Process modifications, 238-242Procurement policies, 50,258Product cycles, 77Product design, and competitiveness, 75-76Product reformulation, 238Productivity, and environmental regulation, 323-325PSD. See Prevention of Significant DeteriorationPublic Utility Regulatory Policy Act, 124Publicly owned water treatment works, 259Pulp and paper industry

costs of pollution prevention, 234-235pollution prevention practices, 232

process modifications, 239, 242PV Manufacturing Technology Program, 148, 302PVS. See Photovoltaic cellsPVUSA. See Photovoltaics for Utility Scale

Applications

Raw material substitution, 238RCRA. See Resource Conservation and Recovery ActR&D. See Research and developmentRECLAIM. See Regional Clean Air Incentives MarketRecycling, See also Pollution abatement and control;

Pollution preventioncost savings, 6, 232-236external recycling, 242-244and pollution prevention, 230rate of adoption, 231-232

Reg-neg. See Negotiated rulemaking processesRegional Clean Air Incentives Market, 281-282Regulations, See Environmental regulationsRegulatory reform, 32-34, 54-58. See also CEconomic

incentivesformulation of environmental regulations, 266-267integrated permitting and inspection, 270-272integrated regulation, 267-270linkage with economic incentives, 265overview, 265-266performance standards, 272-274,275policy options, 32-34, 54-58regulatory flexibility, 274, 276-277

Remedial pollution control, 80-81, 82Remediation, 140-142

Department of Energy programs, 300, 302Renewable energy, 146-148

Department of Energy programs, 302technology exports, 155

Research and developmentagency programs, 300-307coordination and funding, 4647direct funding of individual firms, 296European Community programs, 293, 314-317federal laboratory technology cooperation, 296-297in Germany, 293, 317-318goals for federal policy, 43-46government support of industry consortia, 297-300environmental industry competitiveness, 127-128international funding agencies, 16in Japan, 293, 310-314national government funding, 293


in the Netherlands, 318-320overview, 291-293partnerships with industry, 4749private sector, 29,223-224,308-310state and local programs, 308summary of federal policy options, 26, 28-30,43in the United States, 293-310

Research Institute of Innovative Technology for theEarth, 313

Resource Conservation and Recovery Act, 33,57,139,227,276

Resource management, 77-78Responsible Care program, 93Reverse trade missions, 172Risk Reduction Laboratory Pollution Prevention Re-

search Branch, 252RITE. See Research Institute of Innovative Technol-

ogy for the Earth

S.978, proposed National Environmental TechnologyAct of 1993,45-46, 52

Safe Drinking Water Act, 100Safety-Kleen, 139SARA, See Superfund Amendments and Reauthoriza-

tion ActSBA. See Small Business AdministrationScandinavian countries, pollution prevention, 10SCORE. See Service Corps of Retired ExecutivesSCR. See Selective catalytic reductionSelective catalytic reduction, 131-132SEMATECH, 297Semiconductor manufacturing technology, 297Senate Finance Committee, 7SERDP. See Strategic Environmental Research and

Development ProgramService Corps of Retired Executives, 164SITE. See Superfund Innovative Technology

EvaluationSmall and medium-sized enterprises, technical assist-

ance, 50-51Small Business Administration, 208-209

export financing, 180SMES. See Small and medium-sized enterprisesSocial welfare, and environmental regulation, 321-323Solar thermal systems, 147Solid waste industry, 138-140Source reduction, 244,269

lowering compliance costs, 6

Source Reduction Review Project, 269South Coast Air Quality Management District, 100,

281-282South Korea, environmental market, 110-112Southern California Edison, 259SRRP. See Source Reduction Review ProjectStandard Industrial Classification, 93State pollution prevention programs, 252Stationary source air pollution, 130-133Steel industry, process modifications, 239,242Strategic Environmental Research and Development

Program, 3-5Subcommittee on Environmental Technology, 46,295Sulfur dioxide, 130,281-282

national differences in control standards, 226Superfund Act, 92, 139, 140-141, 194,224Superfund Amendments and Reauthorization Act, 92Superfund Innovative Technology Evaluation, 52,306Supplier links, 259-260Sustainable development, 1

Taiwan, environmental market, 110-112Tax Reform Act, 208Taxes and fees, 25, 50,265,278Tax incentives, 207-210TCA. See Total Cost AccountingTDA. See Trade and Development AgencyTechnical assistance programs

comprehensive industrial service organizations, 255-256

encouraging other organizations to provide assist-ance, 258-260

federal procurement, 258government programs, 251-252integrating assistance into the permitting and in-

spection process, 257limitations of current efforts, 252-255multilateral cooperation, 34-35, 60-61sectoral and industrial network approaches, 256-257for small and medium-sized companies, 50-51

Technological innovations, 73-74and environmental regulations, 123, 214-216incentives for, 285-286process modifications, 239-242

Technology cooperation, 176-177Technology evaluation, 51-52Technology policies

coordination and funding, 4647

Index I 339

goals for federal policy, 4346needed advancements, 2partnerships with industry, 47-49summary of options, 26, 28-30, 43

Tennessee, Center for Industrial Services, 22, 253Thailand power project, 169-170Thermie program, 316Third Framework Program, 315-3163M

flexible permitting systems, 275pollution prevention program, 234

Tied aid credits, 181Tied feasibility studies, 174-175Tipping fees, 280-281Total Cost Accounting, 248-249Total quality management, 236-237Total suspended particulate, 226Toxic Release Inventory, 92-93, 213TPCC, See Trade Promotion Coordinating CommitteeTQM. See Total quality managementTradable permits, 25Trade agreements, 37-38,216-220Trade and Development Agency, 35-36,62, 130

feasibility studies, 175-176Trade and environment policy, 37-38,65-68Trade fairs, 167, 168Trade Information Center, 157-158Trade issues, 37-38, 65-68Trade missions, 167, 169-170Trade Promotion Coordinating Committee, 36, 62,

157-158Thailand power project, 169-170

Trading programs, 280, 283TRI. See Toxic Release InventoryTSP. See Total suspended particulate

UNCED. See United Nations Conference on Environ-ment and Development

United Nations Conference on Environment andDevelopment, 65

United Nations Environment Program, 23, 35,60United Solar Systems Corp., 146United States

environmental industry competitiveness, 4-5, 12-17environmental market, 99-101environmental technology research and develop-

ment, 294-310

environmental training program, 176-177exported environmental products, 12

United States & Foreign Commercial Service, 64, 160,168, 170-171

United States-ASEAN Council for Business andTechnology, 159

United States-Asia Environmental Partnership, 11,36,61, 154

United States Council for Automotive Research, 134,205,298-299

United States Environmental Training Institute, 36,61,154, 176

U.S. Agency for International Development, 107U.S. Technology for International Environmental So-

lutions, 306U.S. TIES, See U.S. Technology for International

Environmental SolutionsUS-AEP. See United States-Asia Environmental

PartnershipUSAID. See U.S. Agency for International

DevelopmentUSCAR, See United States Council for Automotive

ResearchUSETI, See United States Environmental Training

InstituteUSFCS. See United States & Foreign Commercial

ServiceUS&FCS. See United States & Foreign Commercial

Service

Vehicle emissions controls, 133-135Vendor Information System for Innovative Treatment

Technologies, 172VISITT’. See Vendor Information System for Innova-

tive Treatment TechnologiesVOCS. See Volatile organic compoundsVolatile organic compounds, 75-76,96,204-205

national differences in control standards, 226

War Chest, 37,63Waste and Release Reduction Program, 234Waste Management, Inc., 138Waste management programs, 300, 302Waste Minimization Assessment Centers, 54Waste minimization programs, 303-305Waste Reduction Always Pays program, 234Waste service industry, 138-140Wastewater treatment technologies, 135-138


Water and Wastewater Equipment Manufacturers As-sociation, 135-136

Water Environmental Federation, 299Water pollution, 227Water treatment technologies, 135-138WEF. See Water Environmental FederationWestern Europe, environmental market, 101-105Wind turbines, 146-147WMAC. See Waste Minimization Assessment Centers

WMX Technologies, 138-139Wood furniture industry, 218-219Wood @P industry, 235World Bank, 73World Environmental Center, 172WRAP. See Waste Reduction Always Pays programWWEMA. See Water and Wastewater Equipment

Manufacturers Association

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