|
This program is no longer run or housed at CID |
ESD Overview | Research | People | Events | Publications
Environment & Sustainable Development
Urban & Industrial Management
Projects | People | Publications
Enhancing Competitiveness While Protecting the Environment
Part of the Andean Competitiveness Project (ACP)
Sponsor: Corporacion Andino de Fomento
Countries: Colombia, Ecuador, Peru
Collaborators: Universidad de los Andes in Bogota, Colombia;
Escuela
Superior Politécnica del Litoral (ESPOL) in Guayaquil, Ecuador; and
Universidad del Pacífico in Lima, Peru
Project Conclusions and Summary
The costs of environmental degradation in the Andean region include impacts on human health, degradation of natural ecosystems, and productivity loss in sectors that rely on natural resources as inputs or final products. Environmental health and the integrity of the environmental protection regime play a potentially important though poorly studied role in promoting investment and national competitiveness. The toll of air and water pollution on human health, and hence productivity, is the singularly most important and best-documented impact.
Every country that has undergone substantial industrialization has also experienced an initial period of excessive pollution. Most societies respond by requiring cleaner production, and in doing so, shift some of the burden associated with the negative aspects of economic activity to the private sector: moving a portion of the environmental cost of doing business from environmental degradation to pollution mitigation. The Andean countries have begun this process. In Colombia, considerable public and private resources have been committed to the reduction of pollution, resulting in particular success in improving water quality. The level of effort and degree of success in Ecuador and Peru has been much less, though it varies significantly by sector in Peru and by region in Ecuador.
Balancing the allocation of costs between society and business, and between environmental degradation and pollution reduction, is an important economic and political decision for each of these countries, none of which can afford to waste scarce resources on inefficient public-private interactions. Of central concern to the private sector is the impact of environmental regulations on profitability and competitiveness. The overall cost to the private sector of abating pollution can be reduced by implementing regulatory strategies that are more effective and more efficient. Improving environmental regulation to achieve this mandate is the central objective of this project. Yet minimizing overall costs requires an understanding of the relative costs to industry and society, as well as a creative regulatory approach that relies on applying incentives and overcoming political obstacles. In the case of Ecuador and Peru, this must be done in the context of weak and under-funded institutions.
In this project, we have studied the factors that induce private firms to engage in pollution reduction activities, which type of activities they carry out, and the influence of these actions on competitiveness. The conclusions reached here reflect the results of a comprehensive survey of several hundred firms across the three countries. Drawing on the industrial survey and other sources, we also conducted a review of the legal framework supporting environmental regulation and an analysis of the institutions charged with environmental protection for each country. We have identified what we believe to be the best steps to improve industrial environmental performance in each country, considering both political and budgetary constraints, and communicated these findings to policy makers.
The results of the survey shed light on the relative impact of the three primary factors that induce companies to improve their environmental performance: markets, regulators and communities. [1]
In the absence of any regulatory framework, we still observe efforts to mitigate pollution stemming from community and market forces. The situation in the industrial sectors in Peru and parts of Ecuador is dangerously close to this extreme. While we know from international experience that communities can act to induce better environmental performance, serving as important checks and complements to a regulatory system, there is scant evidence to support this idea in Colombia, Ecuador or Peru. In the Andean region, community action appears to be a poor substitute for more aggressive government action.
Firms exporting to the environmentally friendly markets of Europe and the United States do make considerable efforts to pursue a green image. In fact, this appears to be the primary factor propelling a majority of the firms that have introduced pollution reduction measures in Peru and Ecuador. While market pressure appears to be quite effective, with little or no government action required, its scope is severely limited, influencing primarily those firms that rely on export sales. This understanding demonstrates that scarce resources are better devoted to securing pollution reduction in sectors that are not subject to these market forces.
In Columbia, by far the country with the strongest and best-developed environmental regulatory institutions, the direct role of communities is rarely a significant factor. The results of regression analysis and qualitative responses from firms confirm that government regulatory pressure is the most important influence on firm behavior. However, market pressures, primarily export markets, persist as a significant determinant of environmental behavior, despite the strong role of the state. In this sense, trade is good for the environment. Moreover, those firms with a greater participation in export markets rely more on innovative solutions to pollution reduction rather than end-of-the-pipe technologies, which treat pollution at the end of the production process.
In looking at the fisheries sector of Peru, we have found that institutional weakness has prevented the application of consistent regulatory pressure on the firms. The government has resorted to threatening to shut plants down if environmental standards are not improved. In a context of stronger institutions, we would consider such an instrument as excessively blunt and inefficient. However, in this context, it is a fairly effective strategy. Similar strategies are observed in Ecuador.
The scope and magnitude of the impact of government regulations on private sector competitiveness is an important aspect of a well-balanced regulatory regime. Where regulatory measures invoke substantial costs to the private sector, they must be carefully balanced against the environmental benefits that result. If these private costs of reducing pollution are small, pollution reduction can and should be more aggressively pursued. To understand and assess these costs, there is critical distinction between two types of investments and activities carried out by private firms in pursuit of better environmental performance. End-of-the-pipe technologies, which treat pollution at the end of the production process, unquestionably increase production costs. Pollution reduction activities that involve changes in production or input use, however, may increase the profitability of the firm as greater efficiencies in production are exploited. A wealth of anecdotal evidence from around the world supports this notion, despite the compelling logic of the theoretical objections voiced by economists, who say that additional constraints on production should hamper profitability. In this light, it follows that a regulatory framework that fosters investments in end-of-the-pipe technologies will be more costly and harmful to competitiveness than one that induces changes in production practices.
In Colombia, well over half of the firms that engaged in pollution reduction activities did so with some kind of change in the production process. As expected, water pollution reduction entailed more end-of-the-pipe technology and air pollution was more frequently accomplished through change in processes. Perhaps most notably, almost 2 out 3 firms that reduced water pollution improved their long-term competitiveness in doing so. For air, the prospects are even more positive, with 4 out of 5 firms improving their long-term profitability.
The study carried out in Peru lends further support to prospects for reducing pollution in a manner that is consistent with increasing competitiveness. In a case study of firms faced with imminent closing by regulators due to the high levels of pollution, the firms coordinated their action to find ways to reduce pollution. The result was a transformation of the production process that increased the profitability of the enterprises involved, rapidly paying back the initial investment. The results from the survey in Ecuador also support the notion that environmental improvements are not necessarily an impediment to competitiveness: most of the firms who responded to the survey did not suffer any negative consequences from environmental investments, despite the fact that almost all of these investments were in the form of end-of-the-pipe technologies.
While Colombia works to build greater improvements into a well-developed environmental regulatory regime, Peru and Ecuador must look for innovative approaches to circumvent budgetary and institutional limitations. One approach is to amplify the influence of communities and markets by collecting and disseminating information. The results of the study in Colombia confirm the effectiveness of using information as a tool for promoting pollution abatement. The simple act of granting the public access to pollution monitoring information of industrial firms proved to be a significant factor in encouraging environmental activities. This is a low cost and easily replicated strategy that the other countries in the region should follow.
Pursuing cost-effective regulatory strategies is critical. In a study for the municipality of Guayaquil, we estimate that the private sector can save a total of approximately $300,000 per year with a system of pollution charges compared to a system of uniform emission standards, which achieves the same environmental quality. Colombia’s successful application of pollution charge systems provides a useful model for introducing such systems. Surprisingly, the regions of Colombia where these systems are in place do not demonstrate a higher percentage of firms choosing to change their production processes instead of employing end-of-the-pipe solutions. This unexpected result might be explained by the continued existence of overlapping regulations, requiring both the payment of charges and the reduction of a predetermined amount of pollution. This is a topic for further research.
We recommend that the Andean countries avoid the temptation to subsidize environmental investments. This strategy favors capital-intensive solutions to problems that might be better addressed in more innovative ways; furthermore, the results of this study suggest that the burden of reducing pollution is not as onerous as is commonly believed. Nevertheless, facilities for providing loans at market rates for environmental investments might provide a useful strategy for assisting where investments are required. In general, public resources will be best spent on disseminating information, both on the incidence of pollution and on techniques for reducing pollution.
[1] While we do not wish to discount the influence of self-motivated corporate responsibility.
Towards a More Efficient Environmental Management
Sponsor: AVINA Group, Consejo Empresarial Venezolano
para el Desarrollo sostenible (CEVEDES)
Countries: Brazil, Venezuela
Collaborators: Instituto de Estudios Superiores de Administración (IESA) in
Caracas, University of Santa Ursula (USU) in Rio de Janeiro
Objective:
In their quest to reduce their dependence, diversify their economy and achieve sustainable development, transitional countries need to improve their competitiveness, attract more foreign investment in non-extractive sectors and protect their environment effectively. This calls for more cost-effective environmental policy. One approach to lowering the environmental cost of doing business and improving the effectiveness of environmental policy is to empower local communities by improving information flows and access to demand and by obtaining better environmental performance from firms.
Firms choose widely varying levels of pollution abatement and environmental responsibility, even when they face the same set of environmental regulations, thus suggesting that firms are taking into account other considerations or pressures which are not captured by analyses of the enforcement of nominal environmental standards. This research effort is intended to shed light on the abatement investment decision and, in so doing, to increase the effectiveness of market-based regulatory instruments as well as traditional regulation. In identifying extra-regulatory pressures that firms face the project intended to provide governments with additional tools to use in environmental management.
Methodology:
This research attempted to answer two related questions:
To answer these questions, CID prepared and administered a survey to 1,000 large and medium-size firms in two urban centers in Latin America, Caracas and Sao Paolo. The data from this survey wias combined with firm level information on sector, sales and revenue, size, market and ownership structure, as well as with information on firms’ location and local community characteristics. Econometric analysis was used for hypothesis testing.
Projects | People | Publications
Faculty
Theodore Panayotou
Researchers
Robert Faris
Alix Peterson Zwane
Projects | People | Publications
Otero, Isabella, Alix P. Zwane, and Theodore Panayotou. "How Do Firms Make Environmental Investment Decisions? Evidence from Venezuela." 2002.
Ferraz, Claudio, Alix P. Zwane, Ronaldo S. da Motta, and Theodore Panayotou. "How Do Firms Make Environmental Investment Decisions? Evidence from Brazil." 2002.
Prepared for the Andean Competitiveness Project:
Uribe, Eduardo, Guillermo Cruz, Harold Coronado, Jorge Garcia, Theodore Panayotou, and Robert Faris. "La Gestión Ambiental y Competitividad de la Industria Colombiana." (2002)
ESPOL Ecuador. "Determinantes del Desempeño Ambiental del Sector Industrial Ecuatoriano, Reporte Final." (2002)
Galarza, Elsa. "El Costo Ambiental de Hacer Negocios en Perú, Reporte Final." (2002)
Projects |
People |
Publications
Return to Environment & Sustainable Development Home
Direct site comments or questions to CID's Webmaster.
Copyright
© 2007 by the President and Fellows of Harvard College.
Last revised 10/31/2007