Chapter 8. Statewide Economic Impact
Part of the Institute's mandate was to assess potential effects on the employment level and the economic competitiveness of the Commonwealth associated with adopting alternative chemicals or technologies. Cost considerations specific to individual chemicals and alternatives are discussed in the earlier chapters of this report, but this information is not evenly available and the cost for a material or chemical may depend on variable energy costs or material availability. Assessing economic effects also requires information on materials, labor, production, market and other data that may change over time. In addition, the employment and competitiveness implications of adopting an alternative are tied to the policy environment in which the alternatives adoption occurs.
Voluntary adoption of alternatives, technical assistance programs, mandatory chemical phase-outs, or grant or loan programs designed to ease the transition to safer alternatives may all produce different market outcomes.
In order to make the best possible use of limited time and resources, the Institute did not attempt to draw firm conclusions about the employment and competitiveness implications of adopting the alternatives that are explored in this report. Instead, the Institute sought to identify major factors that influence the economic outcomes of adopting safer alternatives. The Institute briefly reviewed the experiences of the TURA program and the literature on the economics of environmental regulation and alternatives assessment, and held a day-long discussion session with selected economists and other experts in innovation and technology diffusion. A brief look at the five chemical assessments yielded additional insights. In this section the Institute offers a framework as guidance for users of this report on critical factors to consider when assessing the economic impacts of alternatives adoption. Appendix E contains more detailed discussion topics from the day-long session, as well as case materials, which serve to ground this topic with specific examples.
The charge for this section of the alternatives assessment study was to: "Conduct an analysis of potential impacts on employment level and economic competitiveness of the Commonwealth from adopting and implementing any alternative chemical or technology as substitutes."
The economic impacts of toxics use reduction in Massachusetts are explored in the 1997 program evaluation report of the Toxics Use Reduction Act (TURA) (Toxics Use Reduction Institute (TURI) 1997). This benefit-cost analysis found that economic benefits outweighed costs, even without accounting for increased revenue from capital investments in improved processes, benefits to non- TURA firms in Massachusetts from TURA program resources, or human health and ecological benefits. For the period from 1990 through 1997, the direct monetized benefits were found to be $90.5 million in 1995 dollars. The costs were found to be $76.6 million ($49.4 million in compliance costs, and $27.1 million for capital investments), so the net benefit was $13.9 million. Specific examples of cost savings are discussed in case studies that have been developed by the Institute and the Office of Technical Assistance for a number of companies, detailing the types of production changes that were undertaken and the yearly savings that were achieved as a result.42 Some of these companies achieved toxics use reduction by improving efficiency of chemical use, while others adopted alternative chemicals or processes.
The TURA program requires large quantity toxics users to make a toxics use reduction plan that documents a mass balance of materials, considers safer options, and includes total cost accounting methods. Implementation of these plans is voluntary. The program evaluation found that TURA regulated firms have discovered opportunities that were both financially and environmentally beneficial and that might not have been discovered without the requirement to look for such opportunities. In addition, industry made use of and valued the training, informational support and technical assistance provided by government entities under the TURA program. Finally, TURA regulated firms have become leaders in efficient production, corporate environmental reporting, and management systems methods that make them more competitive.
There is a substantial literature on the economic implications of pollution prevention, including many case studies of specific firms' experiences in adopting safer substitutes. This literature has been summarized elsewhere and is not reviewed here. As a context for the experts' discussion of the economic implications of alternatives adoption, the Institute briefly reviewed the literature on economic implications of environmental regulation.
Economist Michael Porter developed the hypothesis that strict government environmental regulation can promote efficiency and catalyze innovation, thus improving industrial competitiveness. This idea has been extensively debated since its publication in the 1990s (Ashford, 1999, Porter, van der Linde, Claas 1995). Many questions remain about the relationship between environmental regulations and economic competitiveness, as well as between the environment and economy more generally. This section summarizes some of the key parameters of the issue as developed by others.
The literature generally shows that costs for environmental performance improvement are overestimated, although there is some disagreement (Harrington, Morgenstern & et al. 2000, Hodges 1997, McGarity, Ruttenberg 2002, Office of Technology Assessment (OTA) 1995). Reasons for overestimation include lack of information, reliance on estimates from the affected industries, and a static approach to analysis that ignores learning effects and economies of scale (Ackerman 2006), as well as the potential for innovation. The process of estimating costs of any change in a facility is difficult and there are many unknowns. Also, there is no guarantee that innovation efforts will be successful (Lazonick). Many argue that the design of a particular regulation is an important determinant of its economic impact and/or effectiveness, and argue for technical flexibility regardless of whether strict or loose regulations are advocated (Ashford 2002, Majumdar 2000, Porter, van der Linde, Claas 1995).
Many studies have found that the overall state or national economic effect of environmental regulations is neutral (Ackerman 2006, Goodstein 1999, Meyer 1995). Among the reasons cited are (1) "regulation does not remove money from the economy, so much as cause it to be spent in different sectors," ( 2) environmental regulatory costs are comparatively small in the context of other business cost factors, and (3) macroeconomic drivers such as Federal Reserve policy have an overriding impact. In addition, little evidence has been found to support the "pollution haven" hypothesis that firms move to areas of lesser environmental regulations (Ackerman 2006, Goodstein 1999). Factors such as wage rates, market access, and availability of skills and natural resources appear to dominate location decisions. However, even if neutral overall, there may very well be transitional difficulties caused by regulatory action, and impacts on individual firms may differ substantially from overall economic impact.
With environmental efforts, as in all other aspects of the economy, there will be gains and losses. Some companies will face reduced costs through environmentally beneficial process changes such as waste prevention and increased efficiency of chemical use, (Lenox, King 2002) and may gain competitive advantage through innovative and proactive responses to regulation or environmental issues (Clarkson, Li & Richardson 2004, Porter, van de Linde, Claas 1995). Other companies may be hampered by regulatory costs and become less competitive under changing regulatory and market environments (Clarkson, Li & Richardson 2004, Joshi, Krishnan & Lave 2001). Some regulations may have a disproportionate effect on small businesses (Crain, Hopkins 2000, Dean 2000). Radical innovation may benefit the economy as a whole, but put existing dominant industries at a competitive disadvantage (Ashford 1999).
Another important area of literature deals with the economic costs associated with preventable illnesses that result from toxic exposures. Although these are very difficult to quantify, studies at the national and the state level have estimated the costs of environmentally attributable illnesses. In addition to the direct costs of treating preventable illnesses, these figures include the costs to employers of workers' compensation and work days missed, the costs to families of institutional or home care for individuals who are ill or disabled, the costs to state and local budgets of special education services, and the costs of productivity losses over the lifetime of affected individuals (Davies 2005, Fahs, Markowitz 1989, Landrigan, Schechter 2000, Massey, Ackerman 2003, Salkever , Trasande, Landrigan 2005, Waitzman et al. 1995, Waitzman, Romano & et al. 1994).
The Institute convened a group of experts to discuss the economic factors involved in determining the possible economic impacts of adoption of safer alternatives and the variety and scope of possible impacts. Participants were chosen for their economic and development expertise relating to industry, labor, innovation, and environmental economics, and included:
- Stephen J. Adams, Small Business Administration
- James Goldstein, Tellus Institute
- William Lazonick, University of Massachusetts Lowell
- Teresa Lynch, Economic Development Research Group
- Edward March, University of Massachusetts Lowell
- Andre Mayer, Associated Industries of Massachusetts
- Deborah Savage, Environmental Management Accounting Research & Information Center
Three others were not able to attend the meeting but were asked for their perspectives, and their comments were incorporated into this report. These were:
- Frank Ackerman, Global Development and Environment Institute, Tufts University
- Michael Goodman, Donahue Institute, University of Massachusetts Boston
- Christopher Tilly, University of Massachusetts Lowell
Case material (Appendix F) helped to ground the discussion with examples for the following sectors: formaldehyde in building materials, lead in electronics, and perchloroethylene in dry cleaning. These sectors were selected as useful, representative, and well-documented examples that represent three different scenarios for Massachusetts; i.e., a product that is manufactured elsewhere and imported into the state (building materials), a product that is manufactured in the state and exported elsewhere (electronics), and a local business conducted entirely within the state (dry cleaning). These were characterized as import, export, or local industries to describe the supply chain perspective and other market dynamics. Table 8.1 describes the three cases in terms of the significant factors identified by the panel.
The economic experts' discussion yielded a broad framework for conducting an economic analysis of alternatives adoption. Future projects could be designed to provide much of the specific information needed for an analysis of this kind. This framework is presented in Figure 8.2.
The following sections provide more detail about the major headings found in Figure 8.3.
Scope of the Proposed Substitution
What are chemical use trends?
Chemical use trends can be described and listed as uses, geographic locations, and impacts and quantified as volumes and substitution rates.
What is driving these trends?
There may be a number of existing drivers for substitution, including better quality or less expensive alternatives and changes in regulation or consumer preference. Detailed information may include
- Costs - e.g., the cost of disposal of toxic waste, chemical prices or use taxes
- Market changes -- e.g., export market requirements, local consumer demand, company brand image protection, or customer programs in Environmentally Preferable Purchasing
- Innovation - e.g., the obsolescence of existing equipment
- Regulation - e.g., the European Union WEEE and RoHS Directives
- Financing/Insurance - e.g., service providers requiring risk reduction
Are there feasible alternatives?
Technical, financial, and EH&S considerations for each alternative must be researched, including market and supply.
What are characteristics of the industry sector?
Characteristics to consider include size (number of employees or annual sales), ownership, the education and skill levels of workers as well as their salary ranges, some measure of innovativeness, profit margins and investment practices.
Availability of capital is part of a broader picture of facility investment in an alternative, including the timing of such a transition, the value and remaining lifetime of any existing investments, and the hurdle rate used to make investment decisions.
What are characteristics of the supply chain?
Are products containing substances of concern imported or exported, or are the products primarily local to Massachusetts? Who are suppliers and customers, and where and how large are they? Are trading partners large enough to influence the industry sector? The location of Massachusetts in the supply chain will affect the degree and nature of Massachusetts influence on the market in a given chemical or alternative. It is also important to identify the actors that have most influence on the industry. These may include suppliers that provide information, banks that provide financing, or customers who demand a product change. The charts below illustrate supply chain characteristics for two of the case studies as developed by one of the expert reviewers. The first chart, Figure 8.3A, provides a general schematic to help in visualizing supply chain dynamics, and the subsequent figures provide examples.
In the case of PCE use for dry cleaning services, Figure 8.3B, Massachusetts is an importer of dry cleaning machines, but dry cleaning is a local process. As an importer, Massachusetts may not have sufficient market size to drive development of non-PCE machines on its own. However, given that California regulation and technical assistance programs are already driving commercialization of alternatives, Massachusetts action could speed the process of adopting these alternatives. In the electronics sector, Figure 8.3C, Massachusetts manufactures components, assembles hightech equipment, and consumes components and equipment. In the first two cases Massachusetts is an exporter, and must respond to international market drivers in order to remain competitive.
Component manufacturers must be aware of demand for lead-free components, as well as supply costs, the extent of EU demand, and location decisions.
What are characteristics of the market and the competition?
A shift to alternatives may raise or lower costs of producing a product or providing a service. Market characteristics will determine the extent and form of resulting economic impacts. Factors to consider in assessing the influence of competition and markets include the following:
- Is the market local, regional, national or international?
- What is the size of the Massachusetts market vs. other locations?
- Does Massachusetts compete based on location, price, and product quality?
- How much does a change in price affect demand?
- How important are non-price characteristics, such as brand image and quality?
- Are there market niches that would respond differently to changes?
- What existing regulations influence the industry?
- How frequently does the market require a new or improved product?
In some cases there may be product niches that can be capitalized for developing greener alternatives, while in other cases the market structure may prevent charging a premium for green innovations. Market divisions may respond differently to changes. For the building materials case (formaldehyde), experts suggest that residential, commercial, restorative, and institutional building markets have different characteristics. Green building practices are being adopted more quickly in institutional and commercial buildings. These customers have better access to information about alternatives than residential customers. Markets with rapid product turnover are more likely to be able to respond quickly to changing requirements.
Factors important to a firm's ability to adapt to changes are summarized in Table 8.3.
Understanding the availability of alternatives and the agility of industry gives an indication of the existing economic conditions for alternatives adoption. In some situations substitution may already be rewarding, cost effective, market driven, and proceeding on its own. In other situations, barriers exist to implementing substitutions, and use of old alternatives continues.
The third phase of this economic assessment involves consideration of existing barriers, as well as the policies which can address these barriers and facilitate adoption of alternatives. Technical Barriers: Alternatives not readily available As this study demonstrates, for some chemicals and some uses alternatives are well understood and readily available. In other cases, fully-developed alternatives may be unavailable at the outset. In other instances, alternatives may be well developed from the perspective of researchers and a few leading companies, but there remain technical, reliability, cost, and risk concerns for most companies.
In cases in which alternatives are not well developed it is helpful to understand (a) the relevant timeframe for transforming costs into benefits, (b) whose interests will be served by a focus on innovation in this area, and (c) if public funds are used for research, the institutional mechanisms for ensuring that public investment results in public benefits when the innovation is successful.43 Information Barriers: Inadequate information flows among consumers, industry, and researchers
Lack of information can be a barrier to change. The TURA Program has demonstrated the effectiveness of providing training and information on alternatives to businesses. Information can also be provided to consumers through labeling, product guides, advertising, and certification for contractors and products.
Uncertainty about demand or a lack of demand for alternatives can hinder a firm from moving forward into new technologies. Other industry characteristics that can hinder alternatives adoption include low profit margins or a volatile price environment, lack of necessary expertise among workers, or an industry culture resistant to change.
Financial Barriers: Inadequate financing structure
In cases in which alternatives adoption requires a significant capital investment, lack of adequate financing can be a barrier. Studies suggest that environment-related investment costs and savings are not often considered adequately in firms' investment analyses. Some approaches to book-keeping may hide the costs of using toxic chemicals, or may consider these costs in a separate department.
Mayers (2005) suggests that more time be "spent re-engineering business accounting systems to accurately track environment-related costs (and returns) and determine where substantial costsavings can truly be found." Other potential financial barriers may include lack of familiarity with alternative technologies among finance providers.
Regulatory Barriers: Conflicting requirements, regulatory uncertainty, unregulated competitors
Sometimes adoption of alternatives is delayed because it is unclear whether a regulation will hold. Some companies will delay action if they view pending future regulation as changing the playing field in an unpredictable way. Conflicting regulatory requirements may hinder industry action. For example, the use of drawer sanitizers in salons is required by regulation in Massachusetts.
The interactions among policies may be mutually reinforcing, redundant, or conflicting. Policies that influence economic impact can include:
- Technical assistance and training
- Information provided on technology and methods issues, alternatives, leading companies, products, tools, and legislation for Massachusetts companies and for consumers. Particularly helpful is advance information about trends and pending science and policy.44
- Incentives or financial assistance for research and development, equipment purchase, etc.
- Market support through Environmentally Preferred Purchasing programs in government, advertising campaigns, and volume purchasing commitments
- Tax policies
- Restrictions or requirements for use of targeted materials or products
- Coordinated actions with other states
There is a substantial body of literature about environmental policy options, including writings about market-based vs. traditional regulatory approaches. The policy options included here are ones that were discussed by the panel and described in the text where appropriate; it is not a comprehensive listing.
The TURA experience, research and the panel discussion yielded important themes that are relevant to the Legislature's charge.
- Protecting human health: Economic benefits of public health improvement resulting from safer alternatives may be overlooked because they are difficult to quantify, but they are very significant. The impact of a reduction in these costs was not extensively discussed by the panel, though many stated that they wanted to see this addressed.
- Identifying economic opportunities: There may be economic opportunities in environmental improvement.
- The Commonwealth as convener: The Commonwealth can play a useful role in facilitating industry problem-solving. There is substantial evidence supporting strategies that bring industry and universities and trade associations together, and help industry problem-solvers make the case for change.
- Economic outcomes are uneven: Not all companies benefit from business opportunities created by new technology, regulations, incentives, or other conditions. Regardless of whether the overall state-level impact of a change is found to be positive, negative, or neutral, there will be economic winners and losers. For example, a trend toward capital-intensive CO2 dry cleaning would favor larger dry cleaners, whereas a trend toward labor-intensive wet-cleaning would favor small businesses, regardless of whether the shift from perchloroethylene dry cleaning was regulatory or market driven.
- Supporting small businesses: Small businesses were recognized as important to innovation, employment and entry into business ownership. They also may be disproportionately affected by environmental regulation (as well as other factors for which economies of scale are important). At the same time, if small businesses are not ready for upcoming transitions (such as international regulations like the European Union Restriction on certain Hazardous Substances Directive, "RoHS") they may lose business. If businesses in the state are ahead of these transitions and able to meet requirements or new market demands more quickly or cheaply, companies may gain business.
- Maintaining a range of job types: Research and development spending, manufacturing facilities, and regulation may or may not create and maintain good jobs in the state. Research support may not directly address employment for less educated workers, although through a multiplier effect it can lead to greater demand for less skill-demanding jobs such as waitstaff or other support to professional and technical workers. Manufacturing facilities that currently provide middle-class wages for lower-education jobs in Massachusetts today are vulnerable, and workers may benefit from advanced training to earn middle-class wages in manufacturing in Massachusetts. Business consolidation (e.g. larger dry cleaners) may cause the loss of small immigrant-owned entrepreneurial businesses.
- Flexible options: Technical assistance programs are helpful in supporting positive economic outcomes from substitution, as are preferred purchasing programs, information dissemination, capital financing assistance, government assisted research, and labeling programs like Energy Star. However, voluntary options may leave behind more marginal companies and concentrate negative impacts on the economically disadvantaged.
- Influence of Regulatory Policy: Regulatory action may influence the economic impact of alternatives adoption under different circumstances. Many areas of disagreement remained among panel members concerning the significance of these circumstances, which can be organized as follows from the perspective of supply chain and availability of alternatives.
In cases where Massachusetts is an importer of goods, the issue is the extent to which companies will need to cater to unique demands from the relatively small Massachusetts market in the following situations:
- If alternatives exist but are not available, the Massachusetts market alone is likely to be large enough to provide a market incentive for companies to improve distribution of these alternatives
- If no alternatives exist and Massachusetts is an importer of goods, the Massachusetts market alone is unlikely to be large enough to provide a strong market incentive for companies to develop new alternatives. There was discussion about whether California was large enough, and agreement that the European Union definitely was, as evidenced by the Restrictions on certain Hazardous Substances Directive "RoHS" and the Waste Electrical and Electronic Equipment Directive "WEEE". It was agreed that states working together, e.g., New England and New York, could make a bigger market that could influence alternatives. The possibility was discussed of creating a market niche that ultimately substitutes a locally developed product for what was previously an import product, thus creating a new export industry.
In cases where Massachusetts is an exporter of goods, the issue is the competitive position of Massachusetts manufacturers in national or global markets. There is significant disagreement over whether unique Massachusetts requirements for manufacturing processes and products put Massachusetts companies at a competitive advantage or disadvantage. The different viewpoints include:
- Massachusetts-specific requirements where there are existing global requirements could add expense rather than help companies meet challenges.
- Added costs for reducing or eliminating certain toxics that the global market does not require could reduce competitiveness.
- Whether Massachusetts policy appears to industry to be relatively restrictive or inviting might influence company location, expansion, or investment decisions.
- Massachusetts requirements could help Massachusetts companies meet global challenges such as RoHS and forthcoming requirements elsewhere.
- Costs of regulations are often less than anticipated, and thus do not, in actuality, reduce competitiveness.
- There is no or little evidence to support the claim that regulatory climate is a key determinant of companies' decision-making around locating and/or investing in facilities.
In service-industry cases, for example dry cleaning, auto-body, or hair salons, and certain other industries, such as cement, the market is local. Out of state purchases of the service or product are rare other than in border towns.
While there is agreement that larger markets have more influence than smaller ones, there are some disagreements on the implications of that fact for Massachusetts. Many of the reviewers agreed that an approach of collaboration with other states, such as in past efforts to reduce mercury, or ongoing efforts to reduce greenhouse gases, would help reduce costs. However there were disagreements over effects where Massachusetts sets policy ahead of other state and national initiatives, and there was some concern whether other states and countries would follow such initiatives. Whether or not other states would follow a leading state-level policy is an area of analysis for which there is extensive literature and debate but no consensus.
- The role of innovation is an issue. Massachusetts currently has an innovation advantage driven by major private research universities and high technology industries such as biotech, polymers, defense, and electronics. However, the degree to which the Commonwealth has a significant influential role in developing or maintaining industrial competitive advantage is less clear.
There is evidence that Massachusetts companies could be helped to be innovative environmental leaders that use advanced technology to increase competitiveness while simultaneously meeting more stringent environmental standards. There is capacity here: the Commonwealth's existing knowledge base in both universities and companies offers unique high-tech capabilities with which to take advantage of emerging market opportunities for safer technologies. Public policy is needed to help build and maintain an advantage as, according to one expert, "state subsidy is in virtually all places and at virtually all times integral to the innovation process." (Lazonick ) However, it is possible that responding to market conditions rather than to government mandates is more economically attractive. State funded studies to identify emerging opportunities and ensure the high quality of the regional educational system in environmental technologies may have the best chance to increase competitiveness. Research on the innovative process is discussed further in Appendix E.
Financial considerations and available information have been presented earlier in the course of each chemical-specific alternatives assessment. The information presented for each case varies according to context. For example, the price of materials is an important parameter for some cases, while operation, maintenance, or disposal costs may be salient for other cases. The Institute intentionally selected chemical uses for which some viable alternatives were expected to be available, and for which a detailed assessment of the technical, financial, and environmental health and safety characteristics of those alternatives was expected to be useful. In every case, the assessment showed that at least one alternative was commercially available, was likely to meet the technical requirements of many users, and was likely to be preferable from a human health and environmental perspective.
Based on the Institute's experience with the uses discussed in this report, some broad patterns can be identified.
- Some alternatives can be adopted without any adverse effect on Massachusetts employment or competitiveness. The formaldehyde alternatives assessment, for example, shows that elimination of formaldehyde dry sterilant from use in Massachusetts hair salons would produce savings and still achieve the desired level of sanitation. Similarly, Massachusetts schools could adopt alternatives to formaldehyde-fixed dissection specimens without increasing costs. The DEHP alternatives assessment notes that nearly all vinyl wall covering sold in the US today is manufactured in China and Southeast Asia. Many of the alternative wall covering materials are produced in the U.S.; thus, increasing demand for these alternatives could benefit domestic producers. Where Massachusetts firms have capacity for innovation, this is an opportunity.
- Massachusetts manufacturers could gain market share through adoption of some alternatives. For example, some Massachusetts firms are working to produce DEHP-free medical devices. With growing demand for such devices, Massachusetts firms have the opportunity to develop this market niche. Another example is the potential competitive advantage of those wire and cable firms that have eliminated lead in their products, and now stand ready for markets in Europe and Japan that restrict this chemical.
- Some alternatives require capital investment at the outset. For some technologies, this investment will pay for itself over time in reduced operating costs. For example, many of the alternatives to chromium plating offer technical production advantages that can yield significant savings for firms in the medium term. Many existing case studies of pollution prevention efforts by firms in Massachusetts and elsewhere document the savings that can be achieved through adoption of safer technologies. In contrast, some investments in safer alternatives may not be feasible for small businesses in the absence of targeted grant or loan programs. For example, a small dry cleaner that has recently purchased equipment for cleaning with PCE may not be able to convert to a safer alternative without assistance.
This chapter supplements the specific cost discussions in previous chapters with a broader consideration of economic patterns. It was not possible for the Institute to draw conclusions about the general employment or competitiveness impacts of alternatives adoption, but several broad lessons emerge.
First, there is strong evidence that adoption of safer alternatives can produce economic benefits, especially for those supported by the current market. This is a lesson from the experience of the TURA program, the literature on this topic, and some of the sectors considered in this report.
Second, there are some cases in which substituting chemicals or processes may have negative effects on some firms, even if there is a positive or neutral effect on the state economy more generally.
Third, there are many opportunities for government to support a positive economic outcome and to mitigate any negative effects for individual firms. In some instances, targeted assistance to industry can facilitate adoption of safer alternatives that will yield employment and competitiveness benefits over time. Government can have a role to play in facilitating adoption of alternatives that require an initial capital investment. Loan or grant programs may be particularly useful for small and medium sized enterprises. For example, California has demonstrated the viability of grant programs in facilitating the transition to safer alternatives for small dry cleaning facilities. Partnerships in research and skills development can also enhance knowledge of emerging safer technologies.
Finally, the framework presented in this chapter can be used to analyze likely economic impacts from alternatives adoption by clarifying the situational characteristics and factors that determine the outcome.
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