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Will Clinton give industry a green edge?

If President Clinton is to fulfill his campaign promises to foster a strong economy and a healthy environment, he will have to merge the two ... and pursue a "green" industrial strategy that encourages business to clean up its act.

As Bill Clinton prepares to take office, the United States is on the verge of a dramatic shift in the way government deals with business. If stacks of speeches and campaign papers are to be believed, the centerpiece of Clinton's presidency will be a grand effort to rebuild U.S. leadership in technology and industry. Unlike his predecessor, the president-elect believes this worthy goal requires a close partnership between business and the federal government.

Clinton's victory reflects a growing consensus that in the wake of the Cold War, the country's next great challenge is the global contest for economic competitiveness. He and his economic gurus - most notably, Harvard political economist Robert Reich - have sketched out a game plan: an industrial policy for the United States. Their prescription is to use government policies to foster a better-educated and more flexible American work force and promote development of high-tech, highly lucrative industries.

Largely missing from this economic plan, however - and from most of the literature that inspired it - is the world's most pressing concern: development of an environmentally sustainable global economy. The omission is a grave one, for while governments are responsible for setting environmental rules, it is industry that plays a major role in damaging the environment - or, ultimately, in sustaining it. While environmental policies have always been scrutinized for their economic implications, industrial strategies are rarely formulated with environmental concerns in mind.

The United States can ill afford to rebuild its industrial system without regard for the environment, however. In the world economy of the 1990s and beyond, ecological pressures will increasingly influence economic decisions. Global efforts to address pervasive environmental problems - such as ozone depletion, climate change, habitat destruction, and loss of plant and animal species - will affect virtually every industry.

The changes needed to make the global economy sustainable are likely to render some industries obsolete, while creating myriad new investment opportunities. The economic challenge is clear: national governments need to develop industrial strategies that specifically address environmental concerns. Countries that ignore this challenge are likely to lose out economically as well as environmentally.

Clinton need not look far for ways to integrate global environmental concerns with his economic plans. A green industrial strategy would be a logical union of the new president's economic philosophy and the strong environmental principles laid out in Vice President Gore's 1991 book Earth in the Balance.

Green Competition

Over the past two decades, the struggle for environmental improvement in the United States has often involved a contest between government and industry. While some firms are now cooperating with federal efforts to improve the environment, many companies are still in "attack mode" - lobbying against new environmental legislation and telling the public that these laws will cost jobs. Top auto executives, for example, devote more effort to fighting new fuel economy standards than to developing vehicles that are more fuel-efficient.

These attitudes slow the evolution of public policy and poison the corporate atmosphere - giving employees the notion that environmental improvement is something to be feared rather than invested in.

The administrations of Presidents Ronald Reagan and George Bush reinforced such misconceptions, promoting the idea that environmental standards weaken the economy. Under Reagan, Vice President Bush chaired a White House task force on "regulatory reform" that was dedicated to overturning government regulations that industries found objectionable. When Bush became president, the effort was passed on to then-Vice President Dan Quayle and renamed the Council on Competitiveness.

While such arguments are politically convenient, they fly in the face of new economic realities. There is now a competitive advantage to be gained by being cleaner: the world faces a growing array of ecological limits and many governments are responding by tightening environmental rules. Environmental protection, for instance, is already big business - with even higher stakes for the future. The Organization for Economic Cooperation and Development estimates that the worldwide market for environmental goods and services in 1990 was some $200 billion - nearly equivalent to the gross national product of Belgium.

This market is projected to grow 50 percent by the year 2000, making it one of the world's fastest growing industries. Some 80 to 90 percent of this burgeoning sector, which includes an estimated 9,000 Japanese, 20,000 European, and 30,000 U.S. firms, is in industrial nations, though it is growing rapidly in the Third World as well.

But these figures are narrowly defined, only counting such things as the market for sewage treatment equipment and the cost of cleaning up toxic wastes - so-called "tailpipe" solutions. Environmental protection is also creating huge new markets for products and technologies in many other areas, from traditional "dirty" industries, such as chemical manufacturing and metals processing, to high-tech and service industries, such as computer manufacturing and fast food. The much larger demands of redesigning basic industrial equipment or creating new industries will be measured in the trillions of dollars.

Once seen as a distraction to the real business of business, environmental protection is becoming an engine of the next industrial revolution. A hallmark of the greener systems and products now being developed is their more efficient use of energy and raw materials, whose extraction ranks among the most destructive of human activities.

And while environmental improvement often requires a lot of money, the investment can be more than offset by the gains that come from developing new markets and using more efficient production processes. Harvard economist Michael Porter has gone so far as to suggest that those countries with the tightest environmental standards are likely to be the most economically competitive. Indeed, some of the leaders in global economic competition, such as Japan and Germany, have some of the most restrictive environmental rules.

The demands of a sustainable economy are likely to reshape the character of private business. Firms are likely to prosper in the future less by selling massive quantities of identical products - the traditional route to economic success - than by meeting human needs as efficiently as possible. Water conservation services will replace dam building, low-impact pest-control methods will overtake pesticide sales, electronic communications will replace commuting, and solar power plants will be built in place of today's oil and coal burning facilities.

Clinton will have the chance to implement national policies that could help clean up the environment and at the same time push U.S. industries to compete more effectively for the emerging green technology markets. Among the most obvious options available to him: enforcing and strengthening existing environmental rules; putting in place new, market-oriented measures, such as "green" taxes and removing subsidies for environmentally damaging industrial activities; funding cooperative research and development (R&D) programs for green technologies; and improving public reporting of corporate pollution and the energy and materials used by industry.

A New Partnership

As the green industrial revolution unfolds, international competition is inevitable. While well-run companies will pursue many profitable environmental investments, broad progress in any country is unlikely without strong government policies and an effective partnership between business and government. Forging such a partnership is one of the key challenges facing President Clinton.

Since the 1960s, the U.S. government has been addressing industry mainly in an adversarial fashion: setting standards that make pollution and other forms of environmental degradation more costly. Hundreds of environmental laws have been enacted in the past three decades. Most consist of prescriptive regulations - mandating, for example, that coal-burning power plants add pollution-trapping devices to their smokestacks.

Often, environmental agencies are overburdened with rules and starved for funds, leaving the laws inadequately enforced. The U.S. General Accounting Office found in 1989 that at least 41 percent of firms disposing of toxic wastes in sewer systems violated discharge permits. Even when violators are caught, penalties are rarely commensurate with the crime. To be effective, regulations need to be strengthened, monitoring stepped up, and violators held responsible - through criminal penalties if necessary.

As the complexity of environmental ills has grown, however, one-problem-at-a-time regulatory tools have proved blunt and at times ineffective. Such laws often only exchange one problem for another; the ash removed from smokestacks, for instance, contains toxic materials that are hard to dispose of. In addition, prescriptive rules rarely stretch the limits of technology. If a company is required to cut a pollutant by 50 percent, there is no incentive for it to go the extra mile if it discovers a way to achieve a reduction of 90 percent.

No matter how well designed and enforced, prescriptive regulations are unlikely to bring about the breadth of changes needed to make today's economy sustainable. For example, U.S. automobile emissions restrictions - the tightest in the world - have failed to achieve lasting improvements in air quality in many cities, in part because there are now many more vehicles on the road. Broader changes are likely to occur only if the Clinton administration works with industry on new policy initiatives - moving beyond the contentious relationships that have prevailed so far.

Making the Polluter Pay

One of the most efficient ways to improve the environment is to reform government fiscal policies so that industries win pay directly for the environmental costs of their products and manufacturing processes. This means eliminating subsidies and levying environmental taxes and charges so that businesses are given direct economic incentives to clean up their acts - an approach endorsed by Bill Clinton on the campaign trail last year.

Reducing the subsidies for environmentally damaging activities such as mining, logging, and excessive water use is the most obvious market tool available to spur environmental improvement. Another is to levy a range of environmental taxes ensuring that ecological costs are incorporated into the price of products we buy.

The United States, which led the way into the era of environmental regulation in the 1970s, has fallen behind on the fiscal front. In Europe, environmental taxes are becoming common. In France, for example, the air emissions of 870 industrial plants are taxed, as is the discharge of industrial waste into sewage systems. And in Germany, environmental taxes include federal charges on toxic waste disposal, state charges for cutting trees from certain forests, and municipal fees on the use of packaging.

The United States has enacted a few environmental taxes in the past decade. A tax on bulk chemicals provided most of the money for the Superfund hazardous-waste cleanup program, for instance, while a hefty tax on ozone-depleting CFCs has helped to cut U.S. production of these chemicals by 42 percent since 1986.

Environmental taxes are sure to be on the Washington agenda during the next couple of years, both for environmental reasons and because of the need to find politically palatable ways to reduce the federal budget deficit. A carbon tax - a levy on fossil fuels based on their carbon content - is the big-ticket environmental tax that the Clinton administration will at some point need to wrestle with. Imposing such a tax would encourage a gradual shift away from the use of oil and coal and toward greater energy efficiency.

The European Commission has already proposed a carbon tax on fossil fuels to meet its pledge to stabilize European emissions of carbon. Although the tax faces strong opposition from energy-intensive industries that want Japan and the United States to match it, four European countries have already adopted modest carbon taxes.

A commitment to carbon taxes would likely drive business to invest in such technologies as efficient electric motors, solar power plants, and wind energy generators. Wrapping carbon taxes in with a broader campaign to rationalize tax codes - reducing taxes on desirable items, such as personal income and capital investment, and increasing them on environmentally destructive activities - would improve their political fortunes. A 1991 study by the Congressional Budget Office shows that if implemented gradually and offset by reductions in other taxes, a carbon tax could spur an increase in jobs and capital.

The Clinton administration can put market forces to work in other ways, such as mixing regulations and price signals. The Clean Air Act amendments of 1990 set a national cap on sulfur dioxide emissions, but also established a market for tradable emission permits. Companies that reduce pollution below a predetermined level can sell their rights to firms that find it more difficult to reduce their pollution, thus creating incentives for companies to accomplish cheap emissions reductions quickly.

Several well-publicized trades of emissions permits took place last year, at roughly half the price that the buyer would have had to pay to install pollution controls. While companies can still choose to simply add scrubbers, many win be motivated to find innovative ways of meeting pollution targets. For example, a utility might encourage the use of efficient light bulbs among its customers, or use wind turbines to eliminate the need for coal-fired power stations, instead of installing additional pollution controls on existing plants.

A growing number of business executives are embracing market mechanisms as a better way to achieve environmental goals. For example, last October, Frank Popoff, chairman and CEO of the Dow Chemical Company, suggested that the pricing system for chemicals should be changed so that individual products directly reflect their environmental costs. Ideally, this would reduce the market for the most hazardous chemicals and motivate companies to redesign their products to make them environmentally friendly.

But to make such a pricing system fair and consistent, all companies in an affected industry would have to implement the program simultaneously. Taxation - perhaps in the form of an environmental levy on chemical products - would be the most obvious way to make prices reflect environmental costs. It remains, unclear, however, whether many executives are willing to support such measures yet.

New Era, New Approaches

Beyond getting the price right, there are a wide range of innovative, cooperative approaches that the Clinton administration could use to reshape industrial trends. For one thing, the government can close the economic loop by making companies responsible for the fate of the items they sell, and working with industry to make the new system tenable.

Germany, for example, now requires that retailers and manufacturers collect and recycle packaging for a variety of products they sell. By 1995, firms will be required to recycle 80 percent of what they collect - creating a powerful incentive to reduce packaging and use recycled materials. In response, some 600 German companies have formed the German Dual System, a private consortium that works with local governments and recyclers to collect and recycle materials. A similar system is in the works in France.

Also, German auto manufacturers have agreed, under pressure from the federal government, to redesign cars so they are easier to dismantle and recycle. Car makers have responded by reducing the variety of materials and the number of parts in their vehicles. The government is helping to organize a network of licensed recyclers that take old cars, break them down, and return the materials to the steel, plastics, and glass industries. The logic of this approach has caught on in business circles. We must adopt the cyclical processes on which the whole of nature is based," says Volkswagen Chairman Carl Hahn.

The U.S. government is also beginning to work with industry to address environmental needs. The Environmental Protection Agency created the "Green Lights" program in 1991 to encourage private companies to invest in efficient lighting. By November 1992, more than 300 companies had enrolled, with each expected to reduce its electricity bill for lighting by at least 60 percent within five years or less - more than enough to cover the cost of the new light fixtures. The program will prevent pollution and improve the market for efficient lighting.

Impressed with Green Lights' success, the EPA has initiated several other voluntary programs for business. "Golden Carrot" guarantees a $30-million market to the company that designs the most efficient CFC-free refrigerator. "Energy Star" encourages U.S. computer makers to cut the energy requirements of their desktop models by more than 50 percent. "33/50" encouraged chemical makers to reduce their emissions of 17 highly toxic chemicals by one-third by the end of 1992 and one-half by the end of 1995.

The Clinton administration can strengthen existing voluntary efforts and stimulate new ones. For example, the administration could not only impose tighter fuel economy standards on auto makers, but also give them a push by initiating joint R&D programs for radically cleaner and more efficient cars. As with the EPA's Golden Carrot program, the government could guarantee large markets for new products.

The White House can also draw on pressure from environmentally conscious consumers. Demand for environmentally sound consumer products has already sent a shock wave through European industry, according to John Elkington, coauthor of The Green Consumer Guide, which rose to the top of the British best-seller lists in 1988. Shoppers have pushed stores to demand "green" products - from organic produce to toilet paper made from recycled fiber - of their distributors, who have in turn pressured manufacturers to produce such goods.

Several nations, including Germany, Japan, and Canada, have instituted "eco-labeling" programs. While the United States now has "Green Seal," a private labeling system, the program would benefit from the recognition and support of the Clinton administration. Manufacturers of greener products - from recycled paper to water-efficient bathroom fixtures - would get a boost if they were to receive preferred status in the federal government's purchasing process.

Environmental Auditing

Adopting "environmental auditing" systems is one of the keys to corporate environmental success. Until recently, companies rarely collected the comprehensive information needed for this kind of evaluation, but many companies are beginning to track their emissions, a trend that the Clinton administration could encourage.

The information uncovered by environmental auditing often spurs companies to make changes that go beyond legal requirements. British Petroleum now audits its compliance with regulations, its record at individual plant sites, and its overall corporate performance. However, such audits are usually done by company personnel, and often for management's eyes only, with even the board of directors denied access in some cases.

To be more effective, third-party environmental audits will have to become routine, with the results made available to shareholders and the public. Standardized public audits would provide real accountability, and could lead to far-reaching changes in corporate behavior.

Several European countries are moving toward requiring regular, comprehensive environmental audits. The British Standards Institute, for example, which certifies corporate management practices, is developing a new set of environmental management standards. Certification will involve some degree of environmental auditing, and the results are likely to be scrutinized both by corporate executives and by investors, insurers, and financiers. The European Community is considering a similar program, and in the United States, California now certifies environmental auditors who can then hire themselves out to companies to confirm compliance with state environmental disclosure rules.

Today's emissions reporting systems are a good place to begin. The U.S. government, for example, already has established the world's most advanced pollution reporting system, the Toxics Release Inventory (TRI). Now in its seventh year, the TRI collects information on toxic chemical releases from about 24,000 industrial facilities. The TRI has provided a powerful stimulus for companies to reduce their emissions. In the past three years, environmental groups have used TRI data to compile more than 150 reports on local, state, and national emissions that they have then used to put pressure on big polluters.

Industry leaders - who at first assailed the inventory as a paperwork nightmare - have found the exercise of tracking their emissions educational. For instance, Monsanto CEO Richard J. Mahoney "reacted with shock" when presented with his firm's first report to the TRI, according to a company case history. Mahoney then set an ambitious goal for cutting emissions.

Bill Clinton, who expressed support for a more thorough toxics reporting program while campaigning, could improve TRI by expanding the chemicals and industries covered, and also by making it mandatory for companies to report on their use of toxic materials (as Massachusetts has already done). This would encourage companies to look for cleaner production alternatives.

A Test of Leadership

When the world's political leaders gathered at the Earth Summit in Rio de Janeiro last June, they were joined by many business executives. Among this blue-suited group were crowds of European, Japanese, and Canadian industrialists who openly declared the dawn of a new era for business.

With a few exceptions, American business leaders were conspicuously absent from the summit. Perhaps following the lead of President Bush - who practically had to be dragged to Rio - many U.S. industrialists viewed the Earth Summit as a threat that was best ignored.

While President Clinton missed by one year the opportunity to lead an environmentally revitalized United States to the Earth Summit, he still has the chance to turn American business in a greener and more profitable direction.

Beyond the array of new fiscal and regulatory measures suggested earlier, the Clinton administration will have to think more boldly about how to accelerate the evolution of entirely new industries. The industrial strategy needed to achieve an environmentally sustainable economy will require a new partnership between business and government aimed at developing new technologies, speeding their commercialization, and channelling investment into new areas.

Other countries are already much further along in hammering out basic industrial policy. Japan's Ministry of International Trade and Industry (MITI) has worked closely with business in developing national economic strategies throughout the postwar period. Some West European nations are similarly involved in retooling and nurturing their economies, particularly Germany and France.

Next, countries need to fully integrate environmental concerns into industrial policy. Again, Japan is the furthest along. It has drafted a 100-year blueprint for ecological sustainability called New Earth 21, and has created a government research institute to focus specifically on environmental technologies. The Federation of Japanese Industries, Keidanren, has worked with MITI in developing this plan and has published an environmental charter calling for major changes in Japanese corporate practices.

The United States is lagging badly in this area. A key challenge for Bill Clinton and his team of economic advisers will be to move beyond "jobs versus owls" debates to a comprehensive strategy for green economic development.

One example of how the government can advance green technology is the $10 million it allocated to Sematech, a government-industry semiconductor consortium, in 1993 for development of clean computer-chip production technology. Similar efforts could be made across a broad range of government R&D programs. Giving preference to environmentally sound ventures in Clinton's investment tax credit scheme is another priority.

A critical challenge in developing a green industrial strategy is to find ways to support the efforts of small firms, which historically have been responsible for a disproportionate share of industrial innovation. Since smaller firms have less access to capital than large corporations do, government assistance can provide much-needed help. In Germany, for example, the government helps small companies develop new technologies and assemble existing ones into marketable products.

As the Clinton administration focuses renewed emphasis on worker training, environmental industries deserve a special emphasis.

The transition to an environmentally sound economy is as great an economic challenge as the U.S. has ever faced. In the coming decades, countries that do not learn how to provide for their economic needs in an ecologically sound way may find themselves at the bottom of the global economy.

In the future, those political leaders that try to force a false choice between jobs and the environment - as George Bush did - may find it is their own jobs that are at stake. In the end, the health of the American economy - and the success of the Clinton administration - will depend on the health of the environmental base on which it stands.

Christopher Flavin is vice president for research, and John E. Young is a research associate with Worldwatch Institute. They are the authors of "Shaping the Next Industrial Revolution," in the institute's forthcoming State of the World, 1993.
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Title Annotation:Pres Bill Clinton
Author:Young, John E.
Publication:World Watch
Date:Jan 1, 1993
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Next Article:With the party over, green groups look ahead.

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