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Environmental Policy and International Competitiveness

Environmental Economics Seminar Series
Department of the Environment, Sport and Territories, 1996
ISBN 0 642 24879 6


Foreword

In 1994 the Department of the Environment, Sport and Territories, through its Environmental Economics Unit, commissioned the Centre for Continuing Education at the Australian National University to conduct a series of seminars for invited speakers and participants on four newly developing environmental economic issues: Consumption and the Environment; Taxation and the Environment; Equity and the Environment; and Environmental Policy and International Competitiveness. The seminars were held in Sydney, Canberra (two) and Melbourne between November 1994 and June 1995. This report is one of the four reports on those seminars. The views expressed at the seminars are not necessarily the views of the Department.

Introduction

One usually starts meetings like this by saying that it is a very important subject. In a way it is, but in another way the question also is: is it important in substance, as distinct from being an important subject? Some papers suggest that, by and large, environmental policy is unlikely to be significant in terms of international competitiveness, with the one exception of the still somewhat unknown magnitude of impacts of greenhouse. For the rest, a lot of estimates that I have done suggest that, in general, it is relatively small. I guess that is something that we will explore today.

In reading Mick Common's background paper, I noted that he started with a proposition to the effect that there was some doubt as to whether trade and sustainability were compatible. Quite a long time ago I wrote - and partly because of my influence I was incorporated in an intersectoral report on ecologically sustainable development as one of only three authors - that free trade and sustainability were mutually reinforcing. We were sufficiently persuasive to get that endorsed by the Greens. But I think the argument is a broader one than the one that Mick cites from Kym Anderson. The main reason we thought that free trade and sustainability were mutually reinforcing was the more general principle that trade enabled a particular level of real income to be maintained with a lower level of resource inputs. Since environmental waste pollution is related to the volume of resources used, it meant that the level of environmental pollution and degradation that came from higher levels of income would be less with free trade. That does not mean that that solves all the problems about how one relates either to trade or to national policies on the environment.

The other thing that came out of this - a bit incidental in a way - was that to some extent the efficiency of environmental policies was probably as important as the actual level of impacts of regulations. Therefore, we also got accepted in the ESD process by all groups, including the Greens, that the use of economic mechanisms was probably as effective a way of influencing international competitiveness in the environmental field as the regulations themselves. Those are just a few broad comments.

Two or three very important matters came out of my reading of Mick's paper. One was that although Mick talks about the dynamics, he tends to see these as not very important. I would argue that dynamic analysis is very important. Time does make a lot of difference to the costs of environmental policy. The time by which changed technologies can be introduced into the equipment being used and the costs of environmental regulations or policies diminishes very greatly and the evidence for that is substantial. So you can build clean and efficient technologies into capital equipment over a period of years and that significantly reduces the cost of environmental policy.

Although I think the Porter arguments do not necessarily apply generally, and the kinds of things that enable the US, the Swedes, the Danes, the Japanese and the Germans to gain competitive advantage in the development of environmental technologies do not figure as widely in Australia, the evidence is pretty good that in terms of waste management, water pollution and similar areas, the development of technologies under the pressure of environmental regulations has been quite significant and internationally very successfully competitive for Australia.

It is useful to keep in mind that at the time the health and phyto sanitary regulations were being introduced into Australian agriculture, enormous complaints were made about the effect on the competitiveness of Australian exports. That situation has changed and those regulations now give us a very strong competitive edge in international markets against those countries which are unable to match the standards that we have applied. Also, as part of the dynamics, the rest of the world is raising its standards too, so it is worth keeping in mind that although we may be imposing some further cost, other countries are probably doing that as well.

There is a degree to which looking at issues in a static, partial way tends to bias the argument against environmental policies. The comparative advantage can and will shift, but it seems to me that you have to go further than that, otherwise it will not be very persuasive to people who are likely to be affected. You do need to argue in some detail what the consequences are likely to be. At the same time, one also has to accept that environmental policies, leading to environmental equipment, do affect the economy's overall productivity and competitiveness in a positive way.

One only has to think, for example, of the kinds of public health concerns that have affected industrial productivity - asbestosis and, more particularly, the ozone hole. If we had taken no action on that we would have had increased public health concerns and worker productivity concerns in a number of industries.

There is a more general issue which arises out of the fallacy of government policy - and to some extent this is still government policy - which says that for international competitiveness and export success we need to increase the productivity of our export industries. That is basically fallacious economics. We need to increase the productivity of the economy as a whole before our export industries become more productive. To the extent that environmental policies increase economy-wide productivity, they also have an impact on the productivity of export industries and our international competitiveness.

There is a lot of evidence - less so in Australia than overseas of the gains from improved health and productivity of the work force, the avoidance of the costs of community ill-health and increased economic productivity at the industry or factory level. Some of the impacts of the changes that have been made in the US and Germany, for example, in terms of avoiding water pollution and air pollution have led to significant reductions in the costs of maintenance of the equipment that was using that water in any case. In some cases that has been sufficiently strong a gain that the actual costs of environmental regulation and policy instruments have been negative rather than positive. A lot of filtering of water has been unnecessary and there has been a lot less machinery damage, including machinery damage from acid rain.

My final point is to suggest that the useful categorisation in Mick Common's paper could be supplemented in terms of the relationship to the international system, and particularly the GATT, which is where the reality of much of this competitiveness or otherwise will be institutionalised, by distinguishing between product and process. At present the international rules deal with environmental issues, particularly Type II, which go over the border and leave the consequences in the country that is importing the product. So far the rules have been followed very effectively in the GATT. It has handled very effectively products that have environmental spin-offs or disadvantages for the country receiving them whether it be the bottles that contain the mineral water or the waste that comes out of the use of the product, even the ash that comes out of the use of Australian coal. But it cannot handle the question of a process which is involved in the production and use of a product, so that the environmental question is not distinctly linked to the product as it goes over the border.

These issues need to be dealt with in a global, organisational way. For example, the use in the process of particular ozone-depleting chemicals cannot be dealt with by GATT, but must be dealt with by international organisations and to some extent those organisations are running on different rules than those in the GATT, such as the Montreal Protocol, CITES or whatever. That is where there is a gap, and that is very important in looking at what you do about international policies that affect international competitiveness.

My own view is that it is still important to distinguish between different kinds of environmental policies, whether they be about wastes, preservation of natural species, amenity policies or the question of exhaustion of resources. With that, I will leave that matter until later, and at this stage ask our first speaker to address the conference.

Stuart Harris
Research School of Pacific and Asian Studies
Australian National University
Chair of the seminar


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