THE LINKS BETWEEN THE ENVIRONMENT AND

COMPETITIVENESS
Executive Summary

Project ENV.G.1/ETU/2007/0041
Part A: Water Policies and Competitiveness
Part B: Resource Productivity and Competitiveness

The contents of the present report only reflect the view of the consortium of research organisations
and consultants who carried out the study funded by the European Commission, and cannot be
attributed to the Commission.

Carried out by:
IEFE – Università Bocconi (co-ordinator)
Wuppertal Institute
Adelphi Consult
FFU Berlin
IEEP London

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other countries’ performance is more flat and a few countries’ resource productivity has actually been deteriorating. A more expensive resource tends to be used more efficiently. There is some evidence that higher levels of resource productivity usually goes hand in hand with competitiveness for the firm or sector and country. Drawing on both a water-specific analysis and a wider analysis of resources more generally. 2 .a. a particular policy area (water policies). ƒ Resource productivity varies considerably. the evidence on resource productivity both nationally and for different sectors was reviewed. Not neglecting factor endowments and structural differences between countries. this suggest strong potential for improvements. but may well be good for the national competitiveness. ƒ Policy can provide incentives for increased productivity. ƒ There is a positive correlation between competitiveness of countries and their resource productivity (direct material productivity). this is clearly seen at times for water. This is important because what is good for the competitiveness of a firm or sector might easily be bad for the competitiveness of a different firm or sector in the same country. While best-performing countries have been able to increase their resource productivity by almost 3 % p. Secondly. ƒ Resources are often not so expensive that firms have a strong incentive to improve productivity. resource productivity improves at a slower rate than labour productivity.KEY MESSAGES This study asks ‘if’ and ‘to what extent’ existing theories on the links between the environment and competitiveness are correct in practice. In total. It does so by looking at: firstly. the key messages of the study are: ƒ Concepts of competitiveness differ. Policies that increase resource costs can be bad for some firms' competitiveness. This is most clearly seen in practice where prices by themselves do not currently provide a significant incentive. less so for many other resources. as in the water sector. as high resource costs can affect a firm's competitiveness. to better understand the relationship between the implementation of water policy instruments and the dynamics by which they can influence the industry economic and competitive performance. This holds both in the water specific analysis and more generally. Accessible and transparent information on life-cycle cost of resources is a key to improving resource productivity. This applies both overall and in the case of water productivity more specifically. since 1980.

a country or a region). an industry. Texas (USA). This means there are differences in ‘if’ and ‘to what extent’ current policies affect industries in the different regions. 3 . As examples. d) Water policy instruments differ in their specific design and implementation between countries.e. best environmental practices). water policy framework and description of policy instruments (focus on water pricing. Wisconsin (USA). a sector. Comparisons can therefore only be made considering these specific differences.2) the definitions of regulation and competitiveness being used. Canada). meso level (cluster: sectoral/industry/district) and micro level (plant/firm). and Shanghai (China). Competitiveness is a concept that has no single meaning implying the need for the use of different indicators depending on the concept chosen. regulation of point sources. Ontario (as part of the Great Lakes Basin. i. ecological situation). a. climatic.. geographical. c. The case studies followed a common structure. b) The impact of a policy on competitiveness will usually differ between these different levels/dimensions. territorial context. Some of those different ways are: a. national and local competitiveness. the Po Basin (Italy).A. environmental performance and competitiveness varies depending on: c.1) the level at which the analysis is conducted. c. its form and the environmental assets it is seeking to protect. as well as some preliminary conclusions from other case studies on the effects of environmental policies and instruments on the competitiveness of industries. water abstraction. local productive system etc. There are common themes but also big differences due to the local situation (such as degree of water scarcity). i. qualitative (and where possible quantitative) assessment of effects on competitiveness. c) Overall. The main results are: a) The concept of competitiveness can be defined and analysed in different ways or at different levels. a policy can be good for the competitiveness of some firms but bad for the competiveness of others. or bad for a sector but good for the nation as a whole. The links between environment and competitiveness: main findings from the literature review A literature review provided the theoretical underpinning for the study.3) according to the key variables affecting competitiveness as well as the ways to measure them: macro level (territorial: international/national). a. socio-economic aspects (including main industrial/agricultural activities). including: water resources (hydrological. A2.3) the source of regulation. Case studies The case studies provide detailed analysis.e. Rhine-Main-Neckar Region in Hessen (Germany). ANALYSIS OF THE WATER SECTOR A1.1) the level of the ‘entities’ (single firm/plant.2) the “dimension” of competitiveness: international. based on regional comparisons and detailing to what extent water policies affect selected industries in: East Anglia (UK). Andalucía (Spain). the relationship between environmental policies. cluster of firms.

often influenced to some degree by water policies such as regulations that provide an incentive for water re-use and water saving.A3. even in regions historically marked by the prior appropriation right. pollution from industrial sources has declined over time. as the cost of water makes up a negligible percentage of total production costs. It was not possible to assess the impact on the competitiveness on other firms indirectly. it is generally accepted that water is a public good and that its use should be restricted. and its comparability was poor. The application of the Best Available Techniques (BAT) is practiced in all regions 3 and voluntary instruments are in place in most. 4 . 3 In Shanghai. though this may well be positive. which is the basis of the management of the water resources in each region. a clear result emerged: National and regional legislation has introduced a ‘public-law based’ legal structure 2 .g. While in Ontario. It should be stressed that data availability was severely limited. Only in a few countries (e. Private water rights have lost importance. The exercise encompassed both a comparative evaluation of the water policies applied in the regions analysed. and a quantitative comparison. Po basin and Hessen.e. or on national competitiveness. How water rights and water uses are administered and organized varies considerably though in the different regions. For the clear majority of analysed sectors the price of water is too low to affect competitiveness of the sector. pollution from agricultural sources remains a major problem in all regions. Key findings of the qualitative comparison of the results of the case studies are: Comparisons of Regions: a) For all regions analyzed. Texas. c) All regions have faced and are still facing considerable environmental problems. the application of BAT has been limited mainly to international industrial investments in the Shanghai region in the new industrial parks around Shanghai. The main findings of the quantitative benchmarking exercise are: • • • There are considerable differences in “water productivity 1 ”. based on a set of indicators. Benchmarking exercise The benchmarking exercise aimed at assessing the different kinds of water policy measures in terms of their effects on competitiveness. East Anglia. b) All regions have established regulation and standards for qualitative and quantitative aspects of the water uses.: Eastern Europe) have water prices been high enough to have a significant effect on water productivity and the competitiveness of individual firms. Wisconsin. In order to address the needs of different users. a water resource legal structure owned and managed by a central/local governmental authority or by a local utility company controlled by a governmental authority. 1 The term “water productivity” refers to the water abstracted compared to the valued added created by a sector (or its opposite ratio: the value-added created per unit of water abstracted). 2 I.

the impact can be accommodated by allowing sufficient lead-up time to implementation. energy policies etc) dominates. Environmental policy can be a driver of innovation in the chemical sector. as water intensive crops like cotton and corn generated the highest incomes for farmers due to subsidies. This suggests that different policies can work against each other rather than being complementary. For example. Even though environmental standards are much higher in the Nordic European countries. by improving the allocation of a scarce resource. Clearly a higher production level does not necessarily result in higher water use and pollution. even shortages of corn could be observed. it did not necessarily lead to a change in production patterns. Policies can also lead to reallocation of water within the sector. less water was used in the industry at the same time as production rose. Ontario is an example where relatively weaker environmental regulations have not led. as the Hessen example prooves. This is partly due to the fact that in many cases the price of water is too low to affect cost-based competition. f) Pulp and Paper sectors – The pulp and paper sector demonstrates the Porter hypothesis in practice as environmental policies and water policy are clearly a driving force for innovation and increased competition. What can be evaluated is if water policies have led to a considerable change in production patterns and methods. as the influence of other policies (agricultural policies. with a few exceptions. Thanks to efficency increases. wheat). Ontario and Wisconsin have seen their competitiveness decline as the pulp and paper sector in those regions has been reluctant to introduce modern technologies and to shift towards a Totally Chlorine Free (TCF) production. to an increase in competitiveness of the sector. you improve competitiveness of the sector as a whole. A4. 5 . On the other hand. e) Chemical sectors – There is evidenxe to suggest that chemical production has been decoupled from water use. as might be expected. even though water prices in Texas for irrigation increased.Comparisons of Sectors: d) Agriculture sectors – It is difficult to assess the effects of water policies on the competitiveness of agriculture. Water Policy conclusions The experience relating to the application of water policies in the EU and in the rest of the world shows that different kinds of measures can be envisaged to mitigate the negative impacts and enhance the positive impacts of the policies on competitiveness. laxer regulation can worsen it or leave it unchanged). There is some evidence that water pricing can be a good tool to get industry and agriculture to improve their water productivity. Support for research and development to strengthen innovation capacity of the sector also influence the competitiveness of the sector. the performance of the pulp and paper industry in Europe compared to Northern America is better. resulting in considerable raises of prices for basic nutrients (corn. In recent years. For example. i. The main conclusion is that the current impact of water policy on competitiveness at a sectoral level is in general low. For example. support for bio fuels led to the extension of water intensive crops like corn in order to produce bio-fuel.e. and that pricing can have an impact on behaviour but need not have a very negative impact on for competitiveness. trade policies. the implication being that.: this is in line with the Porter hypothesis (tighter environmental regulation can improve competitiveness.

occurred only in Germany so far. only a relative decoupling of resource use and economic growth can be witnessed.5 %/a for EU-25 and 2. there is empirical evidence that resource productivity correlates positively with competitiveness as measured in the World Economic Forum’s Global Competitiveness Index. 1). B1. 6 . since resources are used in all industries and productivity is a key concept for economic development.9 %/a for EU-15) fall behind the aims of the EU’s resource strategy. Therefore. i.B. THE RELATION COMPETITIVENESS BETWEEN RESOURCE PRODUCTIVITY AND The EU is home to a variety of manufacturing industries. Based on the data available. Thus. Almost all analysed countries could improve their resource productivity over time.e. An absolute decoupling or “dematerialisation”. economic growth along with a decrease of resource use. But even within the EU15 countries there are remarkable differences in their respective resource productivity performance. The annual average growth rates of resource productivity (2. the EU is not yet on track towards decoupling resource use from GDP. The focus on resource productivity can be seen as advantageous in that regard. In most countries. resource productivity is increasing slower than GDP. Can companies spur their competitiveness and can the EU as a whole enhance its competitiveness through improving material efficiency and through developing new products and services that lower the overall resource intensity? The policy-oriented aim of the current report thus is to align the economic interest in cutting material purchasing costs and innovation with the environmental issue of reducing environmental pressure. The analysis demonstrate that in general there is a positive relation between competitiveness of economies and their resource productivity (Fig. Empirical results – Are the EU and other economies on track towards decoupling? The resource productivity in the EU15 countries is higher than in the Eastern European countries. the use of materials in industries as well as the potential quality improvements matter.

2002-2004: New Cronos. Driving forces of resource use and resource productivity The study selects 68 variables for drivers and undertakes a regression analysis for various panels of different countries and periods of time for both the DMC (Direct Material Consumption) per capita as well as for resource intensity measured as DMC in kilograms per 1000 U. The following are the policy-relevant conclusions: • • Energy use is closely linked to resource use per capita as well as resource productivity. Total Economy Database. GDP: Groningen Growth and Development Centre and the Conference Board. USA: WRI Database. an analysis of driving factors of the consumption of construction minerals shows also a high relevance of the car possession as a driving factor.ggdc.S. http://www. Although only one of the mobility variables (length of networks) turned out to be part of the best-fit-models in this study.ne. GCI: WEF (2002) B2. 1: The relationship between the score of Global Competitiveness Index (GCI) published by the WEF and resource productivity (GDP in PPP US$ per kg DMC) Source:DMC: EU15: 1970-2001: Eurostat/IFF (2004). Mobility variables are of critical importance for resource use and resource productivity. 7 . RP: own calculation. This indicates potential synergies between climate policies and resource policies.Fig. especially when ‘hidden flows’ and ‘ecological rucksacks’ of metals are accounted for. new member states plus Turkey (ACC): EEA (2003): Kiew Report Annex C. $ in purchasing power parity (PPP).

Europe has a very innovative and diversified steel production. Within the industry the share of material cost as part of the total costs is very high so that less material and resource input will in principle have a positive effect on the cost structure. sectoral innovation patterns.B3. • Steel industry . Developing solutions that minimize material and energy input is to a large extent part of the economic interest. taking the importance of the industry for the European long-term climate targets into account. it is very important to exhaust this potential and to get clarity on the long-term perspectives.There are significant potentials to improve resource productivity in the automobile sector. Case studies of sectors' resource use The analysis shows that a sectoral approach is important for three reasons: the relevance of key industries. and synergies with climate policy. 8 .In the long run however there seems to be limited possibilities and potential to improve its resource productivity if efforts are not aligned with sustainable construction initiatives. Though. Case studies were therefore carried out for three industries: • Automotive industry . • Cement industry .