THE LINKS BETWEEN THE ENVIRONMENT AND

COMPETITIVENESS
Executive Summary

Project ENV.G.1/ETU/2007/0041
Part A: Water Policies and Competitiveness
Part B: Resource Productivity and Competitiveness

The contents of the present report only reflect the view of the consortium of research organisations
and consultants who carried out the study funded by the European Commission, and cannot be
attributed to the Commission.

Carried out by:

IEFE Universit Bocconi (co-ordinator)
Wuppertal Institute
Adelphi Consult
FFU Berlin
IEEP London

KEY MESSAGES
This study asks if and to what extent existing theories on the links between the environment and
competitiveness are correct in practice. It does so by looking at: firstly, a particular policy area
(water policies), to better understand the relationship between the implementation of water policy
instruments and the dynamics by which they can influence the industry economic and competitive
performance. Secondly, the evidence on resource productivity both nationally and for different
sectors was reviewed.
Drawing on both a water-specific analysis and a wider analysis of resources more generally, the key
messages of the study are:

Concepts of competitiveness differ. This is important because what is good for the
competitiveness of a firm or sector might easily be bad for the competitiveness of a
different firm or sector in the same country.

There is a positive correlation between competitiveness of countries and their resource

productivity (direct material productivity). There is some evidence that higher levels of
resource productivity usually goes hand in hand with competitiveness for the firm or
sector and country. This holds both in the water specific analysis and more generally.

Resource productivity varies considerably. This applies both overall and in the case of
water productivity more specifically. While best-performing countries have been able
to increase their resource productivity by almost 3 % p.a. since 1980, other countries
performance is more flat and a few countries resource productivity has actually been
deteriorating. In total, resource productivity improves at a slower rate than labour
productivity. Not neglecting factor endowments and structural differences between
countries, this suggest strong potential for improvements.

Resources are often not so expensive that firms have a strong incentive to improve
productivity; this is clearly seen at times for water, less so for many other resources. A
more expensive resource tends to be used more efficiently, as high resource costs can
affect a firm's competitiveness.

Policy can provide incentives for increased productivity. This is most clearly seen in
practice where prices by themselves do not currently provide a significant incentive, as
in the water sector. Policies that increase resource costs can be bad for some firms'
competitiveness, but may well be good for the national competitiveness. Accessible and
transparent information on life-cycle cost of resources is a key to improving resource
productivity.

A. ANALYSIS OF THE WATER SECTOR

A1. The links between environment and competitiveness: main findings from the literature
review
A literature review provided the theoretical underpinning for the study, as well as some preliminary
conclusions from other case studies on the effects of environmental policies and instruments on the
competitiveness of industries. The main results are:
a) The concept of competitiveness can be defined and analysed in different ways or at different
levels. Some of those different ways are: a.1) the level of the entities (single firm/plant;
cluster of firms, i.e. an industry, a sector, local productive system etc.; territorial context, i.e.
a country or a region); a.2) the dimension of competitiveness: international, national and
local competitiveness; a.3) according to the key variables affecting competitiveness as well
as the ways to measure them: macro level (territorial: international/national); meso level
(cluster: sectoral/industry/district) and micro level (plant/firm). Competitiveness is a
concept that has no single meaning implying the need for the use of different indicators
depending on the concept chosen.
b) The impact of a policy on competitiveness will usually differ between these different
levels/dimensions. As examples, a policy can be good for the competitiveness of some
firms but bad for the competiveness of others, or bad for a sector but good for the
nation as a whole.
c) Overall, the relationship between environmental policies, environmental performance and
competitiveness varies depending on: c.1) the level at which the analysis is conducted; c.2)
the definitions of regulation and competitiveness being used; c.3) the source of regulation,
its form and the environmental assets it is seeking to protect.
d) Water policy instruments differ in their specific design and implementation between
countries. Comparisons can therefore only be made considering these specific differences.

A2. Case studies

The case studies provide detailed analysis, based on regional comparisons and detailing to what
extent water policies affect selected industries in: East Anglia (UK), Rhine-Main-Neckar Region in
Hessen (Germany), Wisconsin (USA), Ontario (as part of the Great Lakes Basin, Canada), Texas
(USA), the Po Basin (Italy), Andaluca (Spain), and Shanghai (China). The case studies followed a
common structure, including: water resources (hydrological, geographical, climatic, ecological
situation), socio-economic aspects (including main industrial/agricultural activities), water policy
framework and description of policy instruments (focus on water pricing, regulation of point
sources, water abstraction, best environmental practices), qualitative (and where possible
quantitative) assessment of effects on competitiveness.
There are common themes but also big differences due to the local situation (such as degree of
water scarcity). This means there are differences in if and to what extent current policies affect
industries in the different regions.

A3. Benchmarking exercise

The benchmarking exercise aimed at assessing the different kinds of water policy measures in terms
of their effects on competitiveness. The exercise encompassed both a comparative evaluation of the
water policies applied in the regions analysed, and a quantitative comparison, based on a set of
indicators. It should be stressed that data availability was severely limited, and its comparability
was poor.
The main findings of the quantitative benchmarking exercise are:

There are considerable differences in water productivity 1 , often influenced to some

degree by water policies such as regulations that provide an incentive for water re-use and
water saving.
For the clear majority of analysed sectors the price of water is too low to affect
competitiveness of the sector, as the cost of water makes up a negligible percentage of total
production costs.
Only in a few countries (e.g.: Eastern Europe) have water prices been high enough to
have a significant effect on water productivity and the competitiveness of individual
firms. It was not possible to assess the impact on the competitiveness on other firms
indirectly, or on national competitiveness, though this may well be positive.

Key findings of the qualitative comparison of the results of the case studies are:
Comparisons of Regions:
a) For all regions analyzed, a clear result emerged: National and regional legislation has
introduced a public-law based legal structure 2 , which is the basis of the management of
the water resources in each region. Private water rights have lost importance, even in regions
historically marked by the prior appropriation right. In order to address the needs of
different users, it is generally accepted that water is a public good and that its use should be
restricted. How water rights and water uses are administered and organized varies
considerably though in the different regions.
b) All regions have established regulation and standards for qualitative and quantitative
aspects of the water uses. The application of the Best Available Techniques (BAT) is
practiced in all regions 3 and voluntary instruments are in place in most.
c) All regions have faced and are still facing considerable environmental problems. While
in Ontario, Wisconsin, Texas, East Anglia, Po basin and Hessen, pollution from industrial
sources has declined over time, pollution from agricultural sources remains a major problem
in all regions.

The term water productivity refers to the water abstracted compared to the valued added created by a sector (or its
opposite ratio: the value-added created per unit of water abstracted).
2
I.e. a water resource legal structure owned and managed by a central/local governmental authority or by a local utility
company controlled by a governmental authority.
3
In Shanghai, the application of BAT has been limited mainly to international industrial investments in the Shanghai
region in the new industrial parks around Shanghai.

Comparisons of Sectors:
d) Agriculture sectors It is difficult to assess the effects of water policies on the
competitiveness of agriculture, as the influence of other policies (agricultural policies, trade
policies, energy policies etc) dominates. This is partly due to the fact that in many cases the
price of water is too low to affect cost-based competition. For example, support for bio fuels led
to the extension of water intensive crops like corn in order to produce bio-fuel. In recent years,
even shortages of corn could be observed, resulting in considerable raises of prices for basic
nutrients (corn, wheat). What can be evaluated is if water policies have led to a considerable
change in production patterns and methods. For example, even though water prices in Texas for
irrigation increased, it did not necessarily lead to a change in production patterns, as water
intensive crops like cotton and corn generated the highest incomes for farmers due to subsidies.
This suggests that different policies can work against each other rather than being
complementary. Policies can also lead to reallocation of water within the sector, the implication
being that, by improving the allocation of a scarce resource, you improve competitiveness of the
sector as a whole.
e) Chemical sectors There is evidenxe to suggest that chemical production has been
decoupled from water use. Thanks to efficency increases, less water was used in the industry at
the same time as production rose. Clearly a higher production level does not necessarily result in
higher water use and pollution, as the Hessen example prooves. Ontario is an example where
relatively weaker environmental regulations have not led, as might be expected, to an increase
in competitiveness of the sector, i.e.: this is in line with the Porter hypothesis (tighter
environmental regulation can improve competitiveness, laxer regulation can worsen it or leave it
unchanged). Environmental policy can be a driver of innovation in the chemical sector. Support
for research and development to strengthen innovation capacity of the sector also influence the
competitiveness of the sector.
f) Pulp and Paper sectors The pulp and paper sector demonstrates the Porter hypothesis
in practice as environmental policies and water policy are clearly a driving force for innovation
and increased competition. On the other hand, Ontario and Wisconsin have seen their
competitiveness decline as the pulp and paper sector in those regions has been reluctant to
introduce modern technologies and to shift towards a Totally Chlorine Free (TCF) production.
Even though environmental standards are much higher in the Nordic European countries, the
performance of the pulp and paper industry in Europe compared to Northern America is better.

A4. Water Policy conclusions

The experience relating to the application of water policies in the EU and in the rest of the world
shows that different kinds of measures can be envisaged to mitigate the negative impacts and
enhance the positive impacts of the policies on competitiveness.
There is some evidence that water pricing can be a good tool to get industry and agriculture to
improve their water productivity. The main conclusion is that the current impact of water policy on
competitiveness at a sectoral level is in general low, with a few exceptions, and that pricing can
have an impact on behaviour but need not have a very negative impact on for competitiveness. For
example, the impact can be accommodated by allowing sufficient lead-up time to implementation.

B.
THE
RELATION
COMPETITIVENESS

BETWEEN

RESOURCE

PRODUCTIVITY

AND

The EU is home to a variety of manufacturing industries, the use of materials in industries as well
as the potential quality improvements matter. Can companies spur their competitiveness and can the
EU as a whole enhance its competitiveness through improving material efficiency and through
developing new products and services that lower the overall resource intensity?
The policy-oriented aim of the current report thus is to align the economic interest in cutting
material purchasing costs and innovation with the environmental issue of reducing environmental
pressure. The focus on resource productivity can be seen as advantageous in that regard, since
resources are used in all industries and productivity is a key concept for economic development.
B1. Empirical results Are the EU and other economies on track towards decoupling?
The resource productivity in the EU15 countries is higher than in the Eastern European countries.
But even within the EU15 countries there are remarkable differences in their respective resource
productivity performance. Almost all analysed countries could improve their resource productivity
over time.
In most countries, resource productivity is increasing slower than GDP. Therefore, only a relative
decoupling of resource use and economic growth can be witnessed. An absolute decoupling or
dematerialisation, i.e. economic growth along with a decrease of resource use, occurred only in
Germany so far. The annual average growth rates of resource productivity (2,5 %/a for EU-25 and
2,9 %/a for EU-15) fall behind the aims of the EUs resource strategy. Thus, the EU is not yet on
track towards decoupling resource use from GDP.
The analysis demonstrate that in general there is a positive relation between competitiveness of
economies and their resource productivity (Fig. 1). Based on the data available, there is empirical
evidence that resource productivity correlates positively with competitiveness as measured in the
World Economic Forums Global Competitiveness Index.

Fig. 1: The relationship between the score of Global Competitiveness Index (GCI) published by the WEF
and resource productivity (GDP in PPP US$ per kg DMC)

Source:DMC: EU15: 1970-2001: Eurostat/IFF (2004), 2002-2004: New Cronos; new member states plus Turkey (ACC):
EEA (2003): Kiew Report Annex C; USA: WRI Database; GDP: Groningen Growth and Development Centre and
the Conference Board, Total Economy Database, http://www.ggdc.ne, RP: own calculation, GCI: WEF (2002)

B2. Driving forces of resource use and resource productivity

The study selects 68 variables for drivers and undertakes a regression analysis for various panels of
different countries and periods of time for both the DMC (Direct Material Consumption) per capita
as well as for resource intensity measured as DMC in kilograms per 1000 U.S. $ in purchasing
power parity (PPP). The following are the policy-relevant conclusions:

Energy use is closely linked to resource use per capita as well as resource productivity. This
indicates potential synergies between climate policies and resource policies.
Mobility variables are of critical importance for resource use and resource
productivity, especially when hidden flows and ecological rucksacks of metals are
accounted for. Although only one of the mobility variables (length of networks) turned out
to be part of the best-fit-models in this study, an analysis of driving factors of the
consumption of construction minerals shows also a high relevance of the car possession as a
driving factor.

B3. Case studies of sectors' resource use

The analysis shows that a sectoral approach is important for three reasons: the relevance of key
industries, sectoral innovation patterns, and synergies with climate policy. Case studies were
therefore carried out for three industries:

Automotive industry - There are significant potentials to improve resource productivity in

the automobile sector. Within the industry the share of material cost as part of the total costs
is very high so that less material and resource input will in principle have a positive effect
on the cost structure.

Cement industry - In the long run however there seems to be limited possibilities and
potential to improve its resource productivity if efforts are not aligned with sustainable
construction initiatives. Though, taking the importance of the industry for the European
long-term climate targets into account, it is very important to exhaust this potential and to
get clarity on the long-term perspectives.

Steel industry - Europe has a very innovative and diversified steel production. Developing
solutions that minimize material and energy input is to a large extent part of the economic
interest.