COMMERCIAL EFFECT OF ENVIRONMENTAL LEGISLATION

Author Ciska Terblanche Company Mondi GTS Keywords environment, legislation, EIA, costs

Introduction

Environmental legislation and regulation around the world is not only developing fast but also becoming increasingly complex. The focus has moved rapidly from locally driven, single media controls to international conventions and framework legislation that touches on every aspect of the growing, production and trading phases.

The objective of the presentation is to outline the development of environmental legislation and assess the relationships between environmental legislation and impact on the pulp and paper business. The presentation summarises the financial implications and opportunities arising from the pulp and paper industry's needs to manage its business within environmental legislation constraints.

The environmental policy debate

The political debate over environmental policy has never been as contentious as it is today. It is general knowledge that many past and current economic practices and developments put pressure on the natural environment, both as a source of natural resources and as a sink for waste materials (1). Our modern economic system was developed at a time when nature seemed so abundant that it was believed that our societies' activities would be sustained indefinitely. As a result, use of the environment was assigned no economic cost, leading to many acknowledged instances of exploitation.

Today, it is understood that industrial economies are pushing the limits of environmental integrity and also that environmental sustainability is essential for economic health. As a result, numerous international environmental policies designed to elicit a change in behaviour have evolved, leading the way for local legislation to amend accordingly. From industry's perspective such policies have the potential to impact significantly on competitiveness. Indeed, depending on design and implementation, environmental policies with associated legislation have the capacity to drive companies out of business, or, more desirably, lead to the redesign of production processes, leading to increased revenues and market share. It is accepted that environmental legislation can no longer be seen in isolation. It must be looked at in the context of trade, intellectual property issues and the broader picture of sustainable development and consumption.

The appeal from NGO's to criminalise environmental pollution and other environmental offences, is also growing. This sends a clear message to the business community. Simple compliance with existing legislation is no longer enough. The industry leaders will have to monitor and analyse trends and be prepared to adapt fast to the new environmental trends, if they do not want to be constantly on the defensive both in court and in the market place.

Economics

Over the short term regulations implemented to protect the environment can impose significant financial costs (2). It is hardly surprising, therefore, that in recent years environmental concerns have become economic concerns.

Typical impacts associated with environmental policy, directives and regulation

• The current drive in energy policy to move from cross-subsidies to cost-reflective prices and costs associated with this policy
• The policy of internalising environmental costs will shift the costs otherwise carried by external parties to the industry producing the product
• Costs including the time and resources that it takes to conduct Environmental Impact Assessments
• Costs and time required to obtain regulatory permits for industrial activities
• Additional liability posed by regulations in terms of monitoring
• Expected increase in capital expenditures in response to the requirements of new legislation

The main difference in the regulatory requirements in various countries, is the amount of focus on regulation rather than industry's success or failure. The challenge for industry is to collaborate with regulators to ensure that the focus is on helping industry succeed while being environmentally focused. Ideally, we should be in a position where government is proactive in trying to help solve emission problems from industry rather than focusing almost solely on enforcing regulation. Also industry needs to ensure that the legislation and other measures put in place are appropriate to the risks. By participating in these processes, and working to influence them in positive ways the pulp and paper community can benefit in many ways, not least through improved relationships with regulators and other stakeholders and in ensuring long term sustainability of the industry.

The Question

The underlying question therefore is whether environmental regulations and other mechanisms meant to ensure the protection of the environment have a positive or negative impact on business competitiveness. In an increasingly global marketplace where the elasticity between price and cost is diminishing, regulatory costs become a factor in the profit and continuous success of a company.  There is a general fear that the costs of national regulations will place South African companies at a global disadvantage.

International Trade and Environmental Legislation

A 'trade and environment debate' is currently taking place in a number of inter-governmental organisations, as well as among non-governmental organisations, in industry and academic institutions. The debate seeks to find a balance between trade liberalisation and environmental protection objectives (3).

It is widely considered that differences between environmental regulations in different countries can have effects on the international competitiveness of products whose production of sale is affected by those regulations. It has also been argued that in some cases the competitive impacts of different environmental standards may be so great that they cause businesses to relocate to countries with lower environmental standards. Competitiveness effects can provide an incentive for countries to keep out imports of products produced in accordance with low environmental standards. This poses problems for international trade rules that are opposed to protectionism (that is, protecting the competitiveness of an industry for economic reasons by means of regulations).

Key aspects of legislation for the pulp and paper industry in South Africa

The key aspects in the forest industry that are likely to be affected by national legislation include:

• Air emissions
• Fresh Water consumption
• Waste water quality
• Groundwater quality and solid waste disposal
• Energy
• Soil quality
• Environmental Impact assessment for upgrades, expansions and establishing new operations

Environmental Impact Assessment

One of the principal techniques for facilitating the integration of environmental and economic considerations in decision-making by state agencies is environmental impact assessment. In South Africa the EIA process is being reviewed and indication is that the cost of EIA's are likely to increase as the scope of projects and developments included in the regulations broaden.

Also interesting to note, is that a number of proposals have recently been made for the WTO to implement environmental impact assessment of trade liberalisation policies – a kind of strategic environmental assessment at a global level.

Conclusions drawn from the Empirical Literature and Data

1. Environmental regulations do not appear to negatively affect industries' competitiveness (4).

2. However, there is also little evidence to indicate that environmental policies stimulate innovation and propel competitiveness.

3. Still, tough environmental standards are associated with high national income and growth potential. To date, the causality of this relationship has not been established.

4. The relative magnitude and scope of environmental regulatory costs are comparatively small when examined in the context of other business cost factors (5).

5. Cleaner production programmes have indicated that 20% reductions in pollution can be achieved with low- or no-cost measures in most industries (6).

Opportunities for industry

Some opportunities and benefits for industry include:

• Financial benefit to the company of falling under indexes for socially responsible companies e.g. FTSE4Good
• Reputation benefits should be utilised, marketing strategies should include environmental policy and compliance strategies
• Environmental spending is a factor in competitiveness and should be analysed accordingly. Costs associated with energy, water consumption and other variables should be anticipated and planning done accordingly.
• Donor funding for projects relating to improvement of energy and environmental management could be applied for.
• Innovation focusing on changing processes rather than introducing end-of-pipe control
• Environmental audits will measure the extent of compliance with legislation and identify potential environmental risks that could be addressed pro-actively

Conclusions

Environmental legislation can no longer be seen in isolation. It must be looked at in the context of trade, intellectual property issues and the broader picture of sustainable development and consumption. The response from the pulp and paper industry to the dynamic transformation in environmental (and other) legislation must be fast and efficient if industry is to stay competitive. The challenge for industry is to manage the impacts of regulatory requirements, become even more efficient in resource and waste management to ensure sustainable growth.

References:

1. Tietenberg, T. "Environmental and Natural Resource Ecomonics 5^th Edition" (Addison Wesley Longman)

2. Sands, Philippe (2000) "Principles of international environmental law" (Manchester University Press)

3. Sands, Philippe (2000) "Principles of international environmental law" (Manchester University Press)

4. Meyer, Stephen M. "The Economic Impact of Environmental Regulation" (Internet: Research Papers on-line)

5. Hanley, N. et al. "Environmental Economics" (Oxford University Press)

6. Business Imperatives, "Small and medium-sized enterprises and the environment" (Greenleaf Publishing 2000)

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