Policy as Practice: The Implementation and Impact of Industrial Environmental Regulation
(Theme 1: European Regulation and the Science Base)

Andrew Gouldson
Joseph Murphy

Executive Summary

This research contends that the performance of environmental policy, whether judged economically or environmentally, is defined by the level and the nature of the innovation that it stimulates. This paper seeks to examine the validity of this contention both conceptually and empirically.

The research takes as its baseline the economic and environmental performance of those end-of-pipe technologies that historically have been the predominant reponse to industrial environmental regulation. Against this baseline, it considers the potential for regulation to stimulate the development and application of particular innovations that establish at least a less negative and possibly a positive relationship between environmental protection and industrial competitiveness. Throughout the discussion, innovation is taken to include the research, development and diffusion of new technologies and techniques while competitiveness is taken to include both price and non-price variables.

Rather than assessing the generic merits of various policy instruments, the research considers the influence that a range of factors in the implementation and impact phases of the policy process have on the performance of industrial environmental regulation. The two central issues to be addressed therefore relate to:

  • firstly, the impact that different structures and styles of implementation have on the level and the nature of innovation

  • secondly, the economic and environmental performance of different forms of innovation

In analysing the impact that different regulatory structures and styles have on the level and nature of innovation, other than providing essential background information the research does not assess in any depth the historical origins of particular regulatory structures and styles. Instead, it seeks to analyse the functional merits of contrasting regulatory structures and styles. In this respect, drawing on a range of factors identified in previous studies (Blowers, Ogus, Vogel, Rees, McLeod, Hood), the research suggests that two main combinations of characteristics are apparent in practice that allow a distinction to be drawn between two contrasting modes of implementation. Thus, the research considers the functional merits of rigid, extensive and arms-length regulatory structures and styles which enforce goal-oriented emissions limits in a largely reactive and commonly litigious way with more flexible, intensive and hands-on structures and styles which are process-oriented and seek to change operating conditions in a more anticipatory and commonly cooperative way.

In analysing the environmental and economic implications of different forms of innovation, the research draws a distinction between end-of-pipe and integrated technologies, between technological and organisational change and between operational and strategic decision making. The research hypothesises that companies that combine integrated technologies with organisational change and which incorporate environment into strategic decision making are able to secure an improved relationship between environmental protection and industrial competitiveness relative to that which would be realised through investments in end-of-pipe technologies alone. However, the research also contends that barriers to innovation are commonly encountered which restrict the ability of companies to secure the relative and in some cases absolute environmental and economic benefits associated with the more desirable forms of innovation. Consequently, it is suggested that these barriers to innovation establish a clear rationale for certain forms of policy intervention. The research therefore considers the evolving nature of environmental policy and its ability to stimulate particular forms of innovation.

This conceptual argument is examined empirically in the UK and the Netherlands through an assessment of the implementation and impact of two interacting forms of EU environmental policy: firstly, mandatory environmental regulation in the form of the forthcoming Integrated Pollution Prevention and Control Directive (or its likely national equivalents); and secondly, voluntary environmental regulation in the form of the EU Eco-Management and Audit Scheme Regulation.

The results of this empirical analysis indicate that the relationship between environmental policy and industrial competitiveness depends particularly on the nature of, and interaction between, four inter-related variables:

  • firstly, the framework of targets and standards for environmental performance

  • secondly, the structures and styles of policy implementation

  • thirdly, the conditions for innovation within regulated companies

  • fourthly, the inter-relations between mandatory and voluntary modes of regulation

In relation to the framework of targets for environmental performance, the research suggests that environmental policy will best stimulate the desired forms of industrial innovation where it is delivered within a clear framework of quantified Environmental Quality Objectives (EQOs). Such a framework should establish EQOs for receptor environments at different levels and introduce targets for environmental improvement that regulatory agencies and regulated companies should be required to work towards in the medium to long term. This system of targets would help to introduce a strategic orientation both to the implementation of policy and to the innovations which are developed to respond to it. However, these quantitative targets should be applied flexibly in the short-term to allow regulated companies to develop innovative responses once conditions which are conduceive to innovation have been established, in part through a process of inter-active learning with the regulator. The impact of the framework for environmental targets therefore depends upon the nature of the regulatory structures and styles that are used to work towards the targets and on the conditions for innovation in those regulated companies that are affected by the targets.

In relation to the structures and styles of policy implementation, the research suggests that economically and environmentally desirable modes of mandatory policy will be found where regulators fine-tune the implementation of policy to reflect the specific conditions of regulated companies. These local conditions are determined by a range of cultural, temporal, spatial, sectoral and scale-related factors that influence the response of industry to environmental policy. It is suggested that if regulators are to fine-tune regulations to take account of the variability of conditions in regulated companies, they must be allowed to exercise an amount of flexibility and discretion in the way that they deliver regulations. Further, as a consequence of the variability of conditions in regulated companies, and of various barriers to innovation, it is contended that intensive and hands-on regulatory styles which allow interactive learning between the regulator and the regulated are required if the environmental and economic potential of policy is to be fully realised. However, the need for highly skilled regulators who can exercise discretion in an appropriate way through an intensive and hands-on relationship with regulated companies may mean that the costs of regulation are concentrated on an expensive regulatory agency while the benefits are diffused throughout regulated companies. In response, it is suggested that an appropriate system of regulatory charges could at least partially address this issue whilst also going some way towards the implementation of the polluter pays principle.

While the exercise of discretion in the implementation phase may allow the performance of policy to be enhanced, it may also involve public interest decisions being taken by non-elected civil servants in negotiation with industry in a process of negotiation which is not open to external scrutiny. Thus, it is suggested that although in some respects it may be beneficial, the exercise of discretion in policy implementation may be associated with a significant democratic deficit and with possible regulatory capture.In response, this research suggests that while it may not be possible to ensure that such an interactive and intensive decision-making process is itself transparent, a system of performance monitoring should be adopted in order to increase the level of accountability in the regulatory process. This system should relate to the framework of targets for environmental performance discussed above. It may also be linked to some institutional reorganisation which removes the responsibility for monitoring industrial performance and for comparing outcomes against targets from the body charged with delivering policy through interaction with regulated companies. Thus, the research suggests that the task of delivering regulation should be separated from the task of monitoring regulatory performance. It is suggested that such organisational change would add considerably to the credibility of the system while retaining the benefits of an intensive, hands-on and interactive regulatory style.

In relation to the conditions for innovation in regulated companies, the research indicates that there are commonly a range of barriers which prevent regulated companies from exploring the economic and environmental potential associated with particular forms of innovation. These barriers include limited information, shortages of managerial capacity and/or financial capital, risk aversity and path dependencies, all of which restrict the extent to which new technologies and techniques are developed and/or adopted. The research suggests that properly implemented regulations can play a critical role in helping companies to overcome these barriers. This is particularly the case where regulators stimulate flows of information and galvanise commitment to environmental improvement within regulated companies through intense and co-operative regulatory styles. Where these conditions can be established, then coupled with the proposals for a framework of environmental targets and the application of particular regulatory structures and styles, it is suggested that policy can promote the development and application of clean as well as control technologies, of organisational as well as technological responses and of strategic as well as operational change.

With respect to the inter-relations between mandatory and voluntary modes of regulation, the research indicates that certain forms of voluntary environmental policy can alter the economic and environmental performance of mandatory environmental policy. For example, it is recognised that the presence of a voluntarily adopted environmental management system can help to establish conditions within regulated firms that are conducive to the development and application of economically and environmentally beneficial forms of innovation. In this respect, the research suggests that the presence of an effective environmental management system better allows companies to move beyond end-of-pipe technologies in order to develop integrated, organisational and strategic approaches to environmental protection. Therefore, measures which seek to encourage the adoption of effective environmental management systems are proposed in order to improve the relationship between mandatory environmental policy and industrial competitiveness.

The policy implications of these proposals are then examined both in relation to environmental policy and to policies that seek to influence the conditions for and character of industrial innovation. The paper concludes with a reassessment of the relationship between environmental policy and industrial competitiveness.

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