Competitive Implications of Environmental Regulation A Study of Six lndustries The Management Institute for Environment and Business 1101 17th Street, NW, Suite 502 Washington, DC 20036 (202) 833-6556 with the U.S. Environmental Protection Agency Printed on processed chlorine free recycled paper: This paper is manufactured without the use of chlorine or chlorine derivatives. It contains 20% post-consumer waste. CONTENTS Competitive Implications of Environmental Regulations Executive Summary ............................................ .i The Pulp and Paper Industry ...................................... .7 The Computer and Electronic Component Industry ....................... 119 The Paint and Coatings Industry ................................... 189 The Refrigerator Industry ....................................... 251 The Dry Cell Battery Industry .................................... 317 The Printing Ink Industry. ....................................... 357 DISCLAIMER Although prepared with EPA funding, this report has neither been reviewed nor approved by the U.S. Environmental Protection Agency for publication as an EPA report. The contents do not necessarily reflect the views or policies of the U.S. Environmental Protection Agency. nor does mention of trade names or commercial products constitute endorsement or recommendation for use. Executive Summary EXECUTIVE SUMMARY Competitive Implications of Environmental Regulation The following industry studies were conducted in 1993 and 1994 to examine the role that environmental regulations play in determining competitive advantage. The six industries -- paint and coatings, pulp and paper, computers and electronic components, refrigerators, batteries, and printing inks -- have three common characteristics. They are global industries, they face significant environmental challenges, and the U.S. is a leading producer. In aggregate, these industries comprise world sales of $160 billion per year. This project was a collaboration between the Management Institute for Environment and Business, Hochschule St. Gallen, and three offices of the U.S. Environmental Protection Agency -- the Office of Policy Planning and Evaluation, the Office of Air and Radiation, and the Office of Cooperative Environmental Management. Main Conclusion Environmental pressures can create opportunities for companies to gain competitive advantage in domestic and international markets. One of the great strengths of the private sector is its ability to develop innovative solutions to both new and old problems. The challenge for environmental policy-makers is to engage the creativity of the private sector in protecting the environment. Hence, environmental policy which stimulates and rewards innovation will result in the best solutions for the environment and for the companies that develop them. In all of the industries in this study, environmental investments created some change in the competitive structure of the industry. Often, the greatest competition occurred among the suppliers to regulated industry, as these companies generated better and better solutions to the environmental challenges of their customers. Each of the six case studies yields examples of companies gaining advantage in process efficiency and product quality through innovations spurred by environmental pressures. These innovations include: material substitutions, change or elimination of process steps, and changes in product formulations. They can result in: cost reductions, yield improvements, market share increases, and export expansion. Environmental pressures in these industries emanate predominantly from regulation, but also result from consumers and professional advocacy campaigns. These pressures are focused on the release of certain substances in the production process or on the use of a wide variety of Executive Summary product categories. They induce companies to change in one of two general directions. Those companies that see opportunity in the environmental pressure will innovate by developing an alternative means of making the product, using different materials or adapting the production process. Those companies that do not see opportunity in the environmental pressure, for instance in strict command and control regulatory situations, will adopt a control technology to limit emissions at the end of a pipe, smokestack or waste bin. It is the subject of this study to determine why some environmental pressures stimulate innovation, and others stimulate dissemination of existing technology. The importance of this question cannot be overemphasized. In the cases where innovation occurs, environmental pressures are catalysts of productivity, of creativity, and of positive social and economic progress. In the cases where companies do not innovate, environmental pressures are only a cost. Although these costs may be justifiable, in most cases there are ways of getting the same or better environmental result at much less cost, or even at a profit. For example: Pulp bleaching: Due to concerns over the release of dioxin into the environment, the pulp and paper industry has sought to reduce chlorine use in the pulping process. Two Scandinavian companies, Sunds and Kamyr, dominate the market for chlorine-free pulp bleaching technology, a technology which is more and more widely adopted because of regulation and public pressure. Sales of bleaching technology are approximately one billion dollars per year. Automotive paint - In the automotive industry, companies have been required to reduce the emissions of volatile organic compounds when painting vehicles. A great deal of innovation has occurred in the industries which supply coatings to the auto manufacturers, mostly centered on new paint formulations which contain fewer VOCs: water-based coatings, powder coatings, high solids coatings, etc. In determining how to meet the new standards, manufacturers evaluate the relative costs of new coatings -- in price as well as possible performance degradation -- against the costs of the control technology, a ventilation hood which captures VOCs for incineration. In the race to develop coatings which meet environmental standards without compromising performance at the least possible cost, two European companies have been clear winners. BASF from Germany and ICI from the U.K. have both marketed water-borne automotive coatings to the U.S. auto, industry. In the process, they have gained market share at the expense of U. S coatings manufacturers. The economic impact is significant, as the automotive coatings market had 1990 annual sales of $1.2 billion in the U.S. alone. Solvents for cleaning electronic components - The Montreal Protocol has required countries to phase out the use of chlorofluorocarbons (CFCs). In the $300 million market for CFC-based solvents, substitutes afforded as high as 80% cost reductions and increases in product quality. The reduction of chlorinated solvents from cleaning operations reduces raw material costs of the solvents, and often improves productivity from the elimination of the cleaning process steps. These benefits were widely dispersed among large users of solvents. Refrigerators - In the German refrigerator market, dkk Scharfenstein introduced a CFC-free butane/propane refrigerator well ahead of the market. The so-called ‘Greenfreeze’ commanded a 25% price premium and in the first year dkk could not meet demand for the product. All ii Executive Summary other German manufacturers subsequently introduced similar products, as have Whirlpool and General Electric. Printing Inks - FFC International of Lancaster, Pennsylvania developed a lithographic printing solution with zero VOC content to replace isopropyl alcohol. Although the new solution cost 5 - 10% more than the old method, it afforded cost savings of up to 50% overall, because so much less of the product was required in the process. Dry Cell Batteries - Varta, the leading German battery maker, gained first mover advantage by developing a mercury-free ‘green’ battery in the U.K., anticipating moves by the European Union to regulate the level of mercury and other noxious materials in dry cell batteries. Other competitors rapidly jumped onto the ‘green’ bandwagon. Each of the six case studies also yields examples of companies, and entire industries, which have been handicapped by environmental regulation. Many regulations require companies to make large fixed investments in treatment facilities. Within a country, smaller companies suffer from such requirements, because they have less sales volume to cover the costs. Hence, their environmental expenditures will be higher as a percentage of sales than their large competitors. The most obvious example of this effect is in the printed wiring board (PWB) industry, where companies were required to build wastewater treatment systems. This requirement increased environmental capital spending in small companies to 9.6% of total capital, whereas in large companies only 5.9% of capital was devoted to the environment. The ultimate effect over the decade of the 1980s was a consolidation in the industry, from 2,000 to 900 competitors. At a national level, the requirement for an industry to make large fixed investments can place one country’s industry at a disadvantage to another. This happened in the PWB example, as U.S. firms’ share of the world market fell from about 40% to 29 % in the same period during which the consolidation occurred. In the U.S. pulp and paper industry, firms were required to build large secondary treatment