European Environmental Policy Lecture 2 The EU Single ... - UCL

EEP_singlemarket_slides.doc
European Environmental Policy
Lecture 2
The EU Single Market and environmental protection
1. The Single Market programme: reasons and
requirements
2. Product standards and the single market. "Mutual
recognition" and its implications
3. Cases of conflict between rules of the Single Market
and national environmental policies.
4. Institutional competition, "environmental dumping"
and efficiency

The EU Single Market
The European Economic Community (EEC)
• 1957 Treaty of Rome established EEC with six member
countries (France, Germany, Italy and BENELUX)
• UK, Ireland, Denmark joined in 1973
• Now 15 members, and further enlargement soon
Central policy was customs union among member states
• Customs Union = free trade area between member states,
with common external trade policy
• Tariffs (taxes on imports) eliminated over first 10 years
• Economic integration (intra-EEC trade as percentage of
sales in member state markets) grew rapidly during 1960s
and 1970s
Objectives of free trade area
Efficiency
• the most efficient producers supply EU market, not
protected national firms
• allocation of production according to comparative
advantage
Scale economies
• larger market allows rationalisation of production into
lager-scale firms - reducing cost per unit of production
Competition
• larger market has more firms than protected national
markets, and hence more vigorous competition
Variety
• consumers have access to a wider range of goods and
services
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The Single Market ("1992") programme
By the early 1980s:
• a growing awareness that abolition of tariffs had not
eliminated all obstacles to trade between member states
• growth in integration had slowed.
EC market remained segmented into separate national
markets:
• considerable price differences between member states
• national producers dominated national markets
• EC market remained much less integrated than US market
• failure to reap full economic gains from trade integration
1985 Commission White Paper "Completing the Internal
Market" ("Cockfield" White Paper)
• drew attention to role of national governments in
segmenting EC market
• highlighted role of various non-tariff barriers
• proposed programme of measures ("1992 programme") to
eliminate these non-tariff barriers
1986 Single European Act
• amendment to Treaty of Rome
• required White Paper programme of measures to be
implemented by end-1992
• abolition of internal frontier controls
• "mutual recognition" of national product standards instead
of negotiated harmonisation
• range of other measures: abolition of exchange controls,
tax "approximation", liberalisation of capital markets,
financial services, etc
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Product standards and the 1992 programme
Reasons for inclusion in "1992" programme
1. Multiple standards involve costs of duplication
eg multiple certification for medicines
2. Multiple standards segment European Market
• the costs of meeting different national standards
discourages some firms from EU-wide trading
• less-intensive competition, foregone economies of scale
3. Danger of strategic use of product standards
• national standards policy can be used as a form of
protection
• countries can design standards to protect national firms
and exercise market power by setting standards to suit
national producers
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Why do we have product standards anyway?
1. Consumer safety
• regulation may sometimes be preferable to
alternatives:
(i) provision of information
(ii) ex post legal liability for harm
2. Enforcement of minimum quality
• if consumers cannot easily observe quality before
buying the product
3. To limit product variety
• consumers may be confused by complex products
- eg insurance contracts
4. "Rule-of-the-Road" choices
• where a decision is more important than which decision
- (eg compatibility issues)
5. Technology choice
• market can be slow and costly way of determining best
technology
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Ex ante Harmonisation (EAH)
versus
Mutual Recognition (MR)
• EAH may be slow as countries hold out for deal most
favourable to national firms
• MR allows immediate access, and sidesteps inefficient
barriers to access
- eg Cassis de Dijon case - too much alcohol
• MR may undermine effectiveness of standards
- (where these enforce minimum quality)
- introduces "lemons" problem between national
standards
• MR may undermine safety standards
- excluded in 1992 programme
• incentive to "downward competition" in regulation?
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National environmental policies and competition in the
EU market
Two examples where national environmental policies have come into
conflict with EU rules on market access;
• Dutch "clean car" legislation
• Danish deposit-refund scheme for bottles
In both cases, the issue was whether a policy introduced for
environmental reasons had the side-effect of protecting national
producers from import competition.
National product standards with a significant fixed cost of compliance
can protect domestic firms if these have the largest market share.
Designing motor vehicles specifically to meet the Dutch "clean car"
requirements would only be worthwhile for producers intending to sell
large volumes in the Dutch market. Often these would be domestic
firms (but nb little car manufacture in NL!), and hence advantage to
domestic firms.
In the Danish bottles case, the arrangements to collect and re-use
bottles returned to retailers would have a substantial fixed cost,
unrelated to the volume of bottles sold and collected. For an importer
with small market share this would be a higher cost per unit than for
an incumbent national firm with a higher volume of sales.
Other areas of national environmental policy might raise similar
problems (eg other provisions for Extended Producer Responsibility).
These issues also arise in international trade more generally. Hence
the growing importance of WTO rules, regulating conduct of
international trade, in constraining national environmental policies
eg WTO forbids policies which discriminate between products on the
basis of their production process. This prevents import restrictions on
products produced by "dirty" firms abroad, but also limits countries'
ability to enforce rules on trade in ecologically-damaging products
(tuna, etc)
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Institutional Competition
Horst Siebert (1991) "The New Economic Landscape in
Europe" emphasises the potential benefits of institutional
competition:
• citizens may have different preferences for regulation, and
decentralised policy allows countries to make different
choices in the tradeoff between economic activity (and
hence incomes) and regulatory protection
• some regulations contribute to a more efficient business
environment - countries that offer an attractive package of
regulations will be a more attractive location for production
than those that offer a package of "red tape"
• geographical and other features of countries imply different
"needs" for regulation. Countries which have an
environment that can assimilate more emissions without
adverse damage have a natural advantage (cf. amount of
sunshine) that should not be offset by requiring equal
regulatory stringency in all locations.
In summary:
• Environmental externalities between countries may
justify policy coordination or harmonisation.
• Economic spillovers arising through institutional
competition do not. (Siebert argues that these are
"pecuniary" externalities)
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The "Environmental Dumping" debate
The central idea is that countries with lower standards of
environmental protection achieve an "unfair" competitive
advantage in international trade. Firms in these countries bear
lower burden of regulation (lower costs of pollution abatement),
and can hence undercut prices of firms located in countries
requiring more environmental protection.
Does this justify trade protection, or import taxes to offset the price
advantage enjoyed by firms in low-regulation countries?
Industries affected by such competition often argue that it does.
But is this just "special pleading"?
A country imposing tariffs on imports harms itself (by foregoing the
opportunity to purchase imported goods more cheaply than the
cost of domestic production).
Where national environmental policies affect the national
environment only (ie excluding cases such as acid rain and global
warming), a counntry that is willing or able to accept polluting
industries performs a service to countries that wish to have a
cleaner environment. Abatement through relocation may be
cheapest abatement option.
Larry Summers' World Bank memo drew attention to the fact that
developing countries might have greater priority to "income" over
"environment", and relocation of polluting industries is thus
mutually beneficial.
The argument is controversial, especially where:
• the relocation arises because polluting firms in LDCs evade or
disregard local environmental laws
• international trade reduces the ability of all countries to monitor
and control hazardous pollution problems
• some countries are not governed in the interests of their people
• the environmental policies concern problems where there are
spillovers between countries
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Competition in environmental standards: economic
theory and empirical evidence
Empirical evidence that environmental policies in the
industrialised countries may have affected the international
pattern of economic activity.
Hettige, Lucas and Wheeler (1992)
• output of pollution-intensive activities grew faster in LDCs
than OECD countries over previous two decades
• possibly reflects relocation of pollluting industries to LDCs
in response to tighter environmental standards in
developed countries.
Key issue is not whether relocation has occurred, but
whether, in response to relocation or the threat of relocation,
policy-makers have been induced to set environmental
standards which do not reflect the true willingness-to-pay of
their residents for environmental quality.
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