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Your assumptions might be wrong

Environmental regulation does not make countries uncompetitive, says the OECD.

Conventional wisdom tells us that the tougher the environmental regulations applied, the less competitive industries become and the more likely to relocate production to more welcoming shores. Pernicious nonsense, says the OECD.

Scrutinising data across more and less pollution-intensive industries in 23 developed countries and six emerging economies since the 1990s, OECD experts find that countries with stringent environmental laws do not suffer from lower exports and competitiveness, at least not overall, compared to those with looser regulations.

So far the evidence supporting the old conventional wisdom has been fragmented and anecdotal. Given the availability of new value-added data, the OECD decided to put conventional wisdom to the test. Tomasz Koźluk, a senior economist at the organisation, led the new research but did not find the fears to be justified. Instead, he found that exports from energy-intensive sectors decline in a reaction to more stringent policies, but that this loss is compensated for by a corresponding increase in exports from less polluting industries.

Data beats wisdom

The study also casts light on the validity of the claim that large polluters are special cases that require special treatment.

There is an obvious temptation to trail on environmental policies or to cushion impacts on particularly polluting activities,” Koźluk says and warns that such policies can distort the level playing field and reduce incentives for adopting cleaner technologies.

Dirty activities are not doomed if they manage to innovate and clean themselves. The ones that manage to do so can gain an advantage as countries tighten policies globally. However, this requires incentives from environmental policies but also a much broader, structural policy package that incentivises competition, innovation and investment,” Koźluk points out and emphasises that governments have a key role to play in making sure that financing is accessible.

Another finding that might run counter to conventional wisdom, according to the OECD, is that more stringent environmental regulation will also increase innovation. The report finds that during the past two decades, Denmark has surpassed other industrialised countries and today has the most stringent environmental policies. Yet Denmark’s economy continues to thrive and its industrial base to grow. At the same time, the number of patents in green technologies has risen. In 1990, less than a tenth of Danish patents originated from green technologies. Today, the number is more than a quarter.

For Jeffrey Sachs, director of the Earth Institute of Columbia University, New York, this should not come as a surprise. From the point of view of a country like Denmark, the argument makes no sense at all. Denmark is obviously not competing on dirty heavy industry. They are competing on brainpower and technology.”

Denmark is in the lead on many green technologies and should be stressing this point to other countries, adds Sachs.

Denmark should be encouraging countries to implement the Paris agreement, and by the way, buy Vestas wind turbines, or turn to advanced cellulosic biofuels, or look at how we are doing it in advanced metering, or in district scale heating with advanced bioenergy.

Writing on the wall

Loose environmental policies might at first appear to be advantageous: companies do benefit from dirt cheap energy and fewer technology risks. By failing to tighten environmental policies, however, countries risk temporarily and artificially preserving the competitiveness of dirtier sectors, says the OECD. Its data demonstrate that as environmental policies are introduced, the global market for environmental goods is growing at a much faster rate than total trade, a trend likely to continue.

In Denmark, where exports of energy technology continue to play a larger role, the numbers support the OECD results. While total exports in goods rose by 0.6% in 2014, exports of energy technology rose by 10.7%, which followed an increase of 17.6% in 2013.

Policies that go against this trend are likely to imply high and possibly disruptive transition costs in the future. First of all, cheap energy prices cannot be guaranteed. Second and very importantly, at COP21 national leaders committed to a climate target that effectively means that countries will need to be carbon neutral by the end of the century. They cannot achieve this without innovation—inventing new ways of doing things and effectively deploying them. For this to happen, adequate signals from environmental policies are needed,” Koźluk says. He stresses that an industrial strategy based on free-riding can be short-sighted.

Presenting the study at the London School of Economics, OECD chief economist Catherine L. Mann put it more bluntly: Governments should stop working on the assumption that tighter regulations will hurt their export share and focus on the edge they can get from innovation.”

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Future employment

On the face of it, the OECDs logic would seem irrefutable. Indeed, several countries have accepted the truth of it and are implementing stringent environmental laws. For those who are losing their jobs as a result, however, a harsher truth is hitting home. Being told that their loss is somebody else’s gain is not going to ease their pain.

New jobs are being created. Latest data from the International Renewable Energy Agency (IRENA) demonstrate that global renewable energy employment increased by 5% in 2015, to 8.1 million jobs. IRENA estimates that doubling the share of renewables in the global energy mix will provide more than 24 million jobs worldwide by 2030.

Sachs says the downward trend in polluting heavy industry is likely to continue: I think all of these heavy industries are in some kind of decline right now. I don’t think anyone really wants to build economies on the steel industry any longer, or on heavy primary commodity use. Of course these industries will still exist, in specific regions for niche purposes, but over the years these sectors have become so productive that they employ relatively very few people.” •

TEXT Peter Bjerregaard / PHOTO Tine Sletting