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OECD Conference on Economic Aspects of Environmental Compliance Assurance:
Incentive Framework For Firms To Comply With Regulations
Dirk Hazell, BIAC Environment Committee
(Chief Executive, Environmental Services Association)
Paris, 2-3 December 2004
Thank you for the opportunity to offer a business perspective at this important Conference.
In the UK, ESA represents a sector which exists only because of environmental regulation. Driven by EU law, our sector will invest up to US$20 billion in new infrastructure over the next decade.
As much as anyone else, we want good environmental regulation to help the UK to invest in the best infrastructure to align economic and environmental sustainability.
In Sustainability through the Market: seven keys to success, Holliday and Pepper prioritise a smart hierarchy of public policy tools: they most favour voluntary initiatives, followed by negotiated agreements, then economic instruments and finally command and control regulation.
Most of my comment will be on economic instruments. At this stage I make just two points on this hierarchy which arise from next generation environmental work in structures like the OECD and European Union:-
first, this works must increase the relative weighting of the alternatives to command and control; and
second, the future character of environmental regulation will be more numerate. Compared to the present time, it will need to give more weight to monitoring companies’ compliance systems than to site inspections. In sectors such as the one ESA represents, this will involve more use of IT and real-time reporting of data to regulators as has for many years been the case with financial services regulation.
This slide shows how a voluntary negotiated agreement has secured dramatic increase in use of recycled fibres in newspapers in the UK.
The next slide is from Walking the Talk, published by the World Business Council for Sustainable Development for the Johannesburg World Summit. It lists desirable qualities of environmental regulatory instruments: environmental effectiveness, economic efficiency, fiscal neutrality and simplicity seem particularly apt and achieving this will involve a radical modernisation of environmental regulation to align economic and environmental sustainability.
I fundamentally disagree with the proposition in the helpful preparatory paper for this Conference that business compares the costs of compliance and non-compliance with environmental regulation and then chooses the least costly alternative. This is simply not how legitimate regulated business behaves. Yes mistakes can be made, but legitimate regulated business plans on the basis of compliance with the law.
To help legitimate business to plan to comply with the law, obviously regulators should help to minimise compliance costs for example by using companies’ own management systems for environmental protection. Particularly if environmental regulation is not to become an excuse for protectionism, environmental outcomes must be secured without depressing rates of return on capital. This points to risk based and outcome focussed environmental parameters, where smart regulation works with the grain of markets as in cap and trade mechanisms.
I offer the thought that the x=pF proposition in the preparatory paper is more relevant to criminals than to legitimate regulated business. ESA has been a strong advocate in the UK of increasing “p”, the chance of detecting environmental offences by criminals. Our regulated industry sometimes makes mistakes but its purpose and plan is to protect the environment and human health. Criminals like flytippers deliberately damage the environment and health: they also, effectively, steal from those who invest in legitimate regulated treatment infrastructure.
One question raised today is about SMEs. I know of no evidence that SMEs are inherently more dishonest. On the contrary, they are often subject to intense local community pressures on their conduct. However, multi-tasking is typically intense for the leadership of an SME. This does mean authorities have a particular duty to inform SMEs of their legal duties where these duties are not obvious. For example, in the UK, 75% of legitimate businesses (in other words most of the Country’s SMEs) simply do not know about their own legal duties as producers of waste.
Again, the market will increasingly be a more apt tool of environmental regulation than command and control. Market tools give business more flexibility on choosing whether to buy a permit to comply or whether to invest in abatement and innovation.
Market instruments, as in Colorado, can be used to achieve a specific environmental outcome.
I also note, in the slide, a comparison between the British and German packaging regime. Yes, Germany recovers more packaging than the UK but does anyone know whether this provides an environmental benefit justifying a cost 25 times higher than the UK’s trading scheme for packaging?
In some sectors, market forces will drive higher environmental standards. In half a century, the real cost of insuring against extreme weather has rising 1000%. Even so, environmental regulation has a role is dealing with different timescales such as the need to spend relatively little now to avoid major environmental damage later in the Century. To cap and trade global warming emissions is the obvious solution.
Work by the EU and OECD on topics such as life cycle analysis resource efficiency and producer responsibility will radically change the character of environmental regulation. Producer responsibility, which is of course not universally popular with producers, illustrates the radical shift from regulating industrial process to more focus on overall impact including the use and post use phases. If all producers are required to design sustainability into relevant products, no producers can escape and the EU’s model for waste electrical and electronic goods should additionally ensure that the consumer carries environmental costs associated with relevant products.
Biffa, the waste management subsidiary of the British utility company Severn Trent, has produced a table showing the impact on the retail price of various goods if their prices reflect the cost of environmentally neutral end of life treatment. The extra cost is very low for cars (0.5%) and surprisingly low for brown goods (2.5%) but is 44% for fluorescent lights, an amount equivalent to the factory gate price. Set against the expensive end of life treatment for fluorescent lights is their relatively moderate global warming impact in their use phase. Getting overall price signals right is going to be more the future of environmental regulation than prescriptive regulation of process.
Community, reputational and other pressures and social norms are obviously key drivers of legitimate corporate conduct. Perhaps the single most salient characteristic of the Johannesburg World summit was the advocacy of CSR, including a strong environmental component, by global business leaders, particularly the leadership of the two largest groups-Suez and Severn Trent-in ESA’s membership.
As you can see from the slide, Thames Water is open about its approach to CSR. Similarly, SITA’s reports to Suez Environment feature only three aspects: financial performance, health and safety and environmental compliance. This, not x=pF, is how such companies think.
The next slide illustrates growing awareness in the financial services sector to environmental compliance. Overwhelmingly, companies subject to environmental regulation will also be subject to additional regulatory regimes such as those of stock exchanges.
In a number of sectors, commitment to an environmental agenda is increasingly part of the basis of competing for good quality employees.
I offer just one quick thought in the time available. Environmental regulation must not become an excuse for protectionism so confidence in a level playing field cannot be confined to one Country. In our Manifesto for this year’s European elections, ESA recommended that the European Environment Agency be given the power to audit EU Member States’ compliance with EU environmental law. We believe this could be as helpful as IMPEL’s work on operational aspects of environmental regulation in Europe to level up environmental standards across Europe and to do so in a way that is affordable.
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