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Positioning yourself for EC regulations.

A guide to understanding the changing European environmental regulatory landscape.

The rapidly changing environmental regulations in the European Community (EC) will have an impact on U.S. companies' European operations. Companies are advised to educate themselves about these changes, to take steps to incorporate environmental issues into their corporate strategy, and to consider investing in countries that are in the forefront of environmental regulations and enforcement.

So far, more than 200 directives dealing with the environment have been passed by the EC. Despite progress toward constructing the Single Market, some variation in environmental regulations exists among the 12 EC Member States. Although in many areas EC-wide regulations are not yet as stringent as they are in the U.S., the regulations of some countries, in certain areas, have become more so. As EC-wide regulations catch up to the laws of some of its more progressive northern Member States, such as the Netherlands, Denmark, and Germany, EC regulations also may become stricter than regulations in the U.S. These environmental regulations and the rigor with which they are enforced will have an impact on U.S. companies investing in Europe. Whether their impact is positive or negative depends on companies' foresight and preparedness.

The EC's approach to protecting the environment continues to evolve. On March 18, 1992, the EC published The 5th Community Environmental Program. Titled "Towards Sustainability," the Program presents the EC's goals and plans vis-a-vis environmental policy, and states that its ultimate aim is to transform the patterns of growth in the Community.

The Program calls for environmental planning to be an integral part of economic development, both before and after the Single Market is constructed. It also expects a greater degree of cooperation and shared responsibility among business, government, and consumers than in the U.S. In the words of the European Commission, the EC's approach to protecting the environment combines commitments from all social and economic partners. As the regulations by which businesses must abide continue to develop, the Commission envisions a social commitment taking place on the level of each consumer, whose way of living, and buying, will grow to reflect both economic and environmental priorities.

The European Community first agreed to incorporate environmental objectives into planning of national and Community policies in the 1987 Single European Act. The December 1991 summit in Maastricht, the Netherlands, took the issue a step further. The Maastricht Treaty of Union calls for environmental protection to be integrated into the definition and implementation of other Community policies. It also calls for the Commission to add international dimensions to its objectives. The Commission will represent the Community in environmental negotiations with international organizations and non-EC countries.

The treaty also increases the power of the European Parliament to review and amend EC environmental legislation, and also calls for qualified majority voting in the Council in almost all environmental areas. In addition, a new Cohesion Fund, administered by the Commission's Environment Directorate, was created at Maastricht to assit poorer EC states, such as Spain, Portugal, Ireland, and Greece, to make improvements in environmental protection and infrastructure.

Trade and the Environment

EC leaders recognized that if they wanted to create a Single Market, they could not separate the issues of trade and environmental protection. With the air and water of Europe transcending national borders, regulations in one nation would have a bearing on the others. They did not want EC countries to offer incentives to boost economic growth that compromised environmental policy, nor did they want countries to impose trade barriers

] masked as stringent environmental regulations. In order to avoid these problems, and instead develop a symbiotic relationship between economic growth and environmental protection, the EC is working to strengthen and harmonize the environmental legislation of its Member States.

As reported in "Towards Sustainability," the Commission has identified the manufacturing, transportation, energy, agriculture, and tourism industries as having particular responsibility for environmental problems. In general, past directives dealing with such areas as factory emissions, hazardous material labeling, landfill registration, chlorofluorocarbons, energy efficiency, protection of endangered species and recycling have emphasized pollution prevention.

These directives, which are first approved by the European Commission, then have to be adopted by Member States in national legislation. While the Commission has drafted many environmental directives, some EC countries have been slow to implement legislation on the national level. In rare instances in which an EC country can argue that local environmental conditions warrant stricter policies, however, Member States may add to EC requirements in order to reinforce directives.

A Central Clearinghouse

The European Environment Agency, which the Commission authorized in 1990, will serve as a central clearinghouse for environmental information and may evolve eventually into an enforcement agency similar to the U.S. Environmental Protection Agency. But for now, enforcement of Member State and EC-wide regulations remains at the national level.

Some EC countries have not been aggressive in implementing and enforcing EC directives. But this is no reason for companies to be lax, because nongovernmental groups also take corporations to task. "Public interest groups are a powerful force in Europe," says Michelle Keene, European Program Manager at the U.S. Environmental Protection Agency. "They can be quite effective. So, if a company wants to be accepted in a country, it better play by the rules."

When nations do clamp down on environmental offenders, the courts are less sympathetic to corporate challenges of the regulations. Although Europe has not experienced a "litigation explosion" like the U.S., that may change. Therefore, U.S. businesses and their directors and officers must understand how they can be held accountable for pollution, take actions to prevent pollution from occurring, and consider obtaining protection against liability.

Of course, synchronizing environmental regulation across the EC has not been all smooth sailing. Some nations wish to move faster than others. Some of the heavily industrialized northern European countries have been more willing to advance progressive environmental legislation than some of the poorer Member States, which worry that environmental protection could be incompatible with economic growth. The new Cohesion Fund was created specifically to address this problem.

In addition, many environmental regulatory issues are still in the discussion stage, and the ways in which regulations will be interpreted have yet to be worked out. A debate is currently underway in Europe over whether conflicting laws can remain in the EC after the official advent of a Single European Market on January 1, 1993. The European Commission prefers for the European Court of Justice to overrule national laws that have not been harmonized with EC directives. But this interpretation is opposed by some nations, including Britain and Denmark.

As illustrated by The 5th Community Environmental Program, environmental regulations in the EC -- governing noise, protection of endangered species, energy efficiency, recycling, and the quality of air, land, and water -- will have an impact on the entire life cycle of products, from manufacturing to distribution, packaging, sales, and disposal.

Because EC environmental directives are being based on changing patterns of consumer behavior -- in other words, in anticipation of greater numbers of "educated" consumers who make environmentally friendly choices -- companies are likely to find that complying with environmental regulations will help them to produce and market products in ways that are acceptable and attractive to customers. While complying is important, companies should not overstate their environmental achievements, since environmental groups closely examine claims. Overblown environmental claims could be a potential source of great embarrassment.

The changing environmental regulatory landscape in Europe also offers opportunities for exporters. Exporters of environmental technology, such as smokestack scrubbers and catalytic converters, and innovative, environmentally sensitive products are likely to find interested customers in Europe. The demand for environmental technology is expected to increase at a 50% compounded rate per year for the next decade, according to Robin Bidwell, managing director of Environmental Resources Limited (ERL), the London subsidiary of the Environmental Resources Management (ERM) Group, an environmental consulting firm based in Exton, Pa.

Awarding of Eco-Labels

In January 1992, the EC passed legislation introducing an EC-wide "eco-label" as a means of both providing consumers with a way of identifying environmentally friendly products and encouraging companies to produce goods in an environmentally sensitive manner. The goal of the eco-label is to create one, easily identifiable logo for the Single Market. The label, which will be awarded to all consumer products except foods, beverages, and pharmaceuticals, will be based on the environmental impact of products' manufacture, distribution, life and disposal.

Germany already awards its own eco-label, the "Blue Angel," the Netherlands will introduce its label this summer, and other countries are considering offering national eco-labels. as well. Although each EC country must honor the eco-label of fellow EC nations, eco-labels from stricter EC countries may be beneficial from a marketing perspective. Because the approval and award processes have not been ironed out yet, there is some concern among foreign companies over whether they will be eligible for the eco-labels and how they will obtain them.

Packaging Imperatives

The EC is preparing a draft directive on packaging regulations, which, in an effort to reduce the amount of packaging in the EC by the year 2000, would impose progressively stricter requirements for recycling packaging waste. The plan, as this article goes to press, would require 90% of all packaging waste to be recovered (recycled or incinerated) within five years of the implementation of the directive. In addition, five years after the directive is implemented, all packaging must be recycled or reusable.

The EC draft directive is loosely based on the recently passed German "green dot" packaging law, which is currently the most stringent in Europe, Germany's three-step packaging law permits consumers to leave all superfluous packaging at retailers, who will send it back to the manufacturers. As of April 1992, all secondary packaging, such as six-pack containers and plastic blister packaging, must be collected by retailers; after 1993, all sales packaging, such as beverage cans and yogurt containers, will have to be collected.

Manufacturers who participate in the green dot program, however, will not have to take back their packaging. Instead, products with a green dot will be collected separately for recycling through a special, industry-sponsored system administered by the Duales System Deutschland (DSD), an industry-sponsored recycling concern with shareholders from 400 companies.

Because it will be easier for retailers to sell and dispose of products that carry a green dot, they will tend not to stock their shops with other products, thus encouraging holdouts to take part in the green dot system. Germany is also working on laws that mandate the recycling of electronic equipment and automobiles.

Like Germany, the Netherlands is also at the forefront of the environmental movement. But in place of government-mandated changes, voluntary agreements are worked out between the Dutch government and businesses. One example of this is the Netherlands' Packaging Covenant which is geared to limiting the amount of packaging waste to the 1986 level by the year 2000. Manufacturers who voluntarily sign the Covenant agree only to buy and sell products that are packaged according to Covenant rules. The Covenant stipulates that participating companies take back 90% of their packaging by the end of the century. The Dutch government aims to phase out landfills and, in place of dumping, increase the amount of waste incinerated from 25% to 40% and raise the amount of waste recycled from 25% to 60%. The Netherlands also is working with the auto industry to bring about recycling of car parts, such as tires, batteries, and plastics. The tire industry has agreed to recycle 70% of tires by the end of the century.

Michaela Platzer, Director of Europe 1992 at the U.S. Chamber of Commerce, said smart companies are planning their production modifications now and modifying their packaging to get rid of excess. Some companies have decided to design their products to meet the requirements of the strictest EC countries, so they will not have to spend money to redesign later. Not only is this behavior environmentally sensitive but it makes good business sense to adjust sooner rather than later.

Companies and governments have generally been more successful in Europe than in the U.S. in building amicable relationships and devising efficient recycling systems. Companies, even rivals, are working with one another in Europe to achieve economies of scale in recycling. The European Recovery and Recycling Association (ERRA) is one example of this. ERRA, an organization formed by two dozen big packaging companies, run recycling projects similar to the German DSD program, but ERRA's demonstration projects are operating in several European countries.

Proposal for Eco-Audits

The EC is considering a plan for companies to perform voluntary "eco-audits" of their environmental performance. These eco-audits, done either in-house or by registered independent environmental auditors, evaluate companies according to the waste management techniques, materials, and energy they use in the manufacturing process. Eco-audit results are released to the public. Companies with favorable eco-audits may place an eco-audit symbol on their stationery.

The voluntary audits may become mandatory over time. Like eco-labels, this proposal depends on environmentally friendly consumers preferring to buy products from environmentally friendly companies. Insurers may require companies to have positive eco-audits and products with eco-labels before they write environmental impairment liability insurance policies.

An Energy Tax

One of the most controversial proposals before the Commission is an energy tax based on energy usage and carbon dioxide ([CO.sup.2]) emissions. The Commission set the goal in 1990 to limit the Community's [CO.sup.2] output to 1990 levels by the year 2000. The energy tax proposal aims to lower [CO.sup.2] emissions by limiting use of non-reusable fuels. To do this, the Commission is considering phasing in a tax of $10 per barrel of crude oil over this decade. All other fossil fuels and nuclear energy will be taxed at an equal rate. It is estimated that the tax would increase the price to industry by 58%, and natural gas by 34%. Supporting initiatives would provide tax relief, however, if environmentally sensitive biofuels, like ethanol.

EC environmental and energy ministers have given the proposed energy tax their support, but some EC countries, especially in the poorer South, have objected to the energy proposals, saying that they simply cannot afford it. In addition, EC industry argues that the energy plan would increase the price of doing business and thus hinder it in its competition with the U.S. and Japan.

Differences Among Countries

EC standars have not yet caught up to the stricter environmental laws imposed by some EC countries, such as the Netherlands, Denmark, and Germany. The Netherlands leads the pack in long-range environmental planning, according to Robin Bidwell, managing director of the ERL Group. The Netherlands has always taken great stock in protecting its environment while at the same time being pro-business. The Netherlands drafted a National Environmental Policy in 1988 and a revised version, National Environmental Policy Plus, in 1989. The Dutch environmental policy examines all sources of pollution and its consequences and outlines contributors to "sustainable development" expected of all sectors of society. The Dutch government views preventing pollution as a cooperative effort, and it works closely with business leaders to make certain that regulations will be both technologically and economically viable.

In order to smooth the process for foreign companies investing in Holland, the Netherlands has established a system of "one-stop shopping" for all permits, and the Dutch discuss development plans with companies before they make formal applications. It would appear today that because of Holland's strict environmental regulations, industry there is well-protected against increased regulatory pressure. Companies investing in Holland are much less likel to have to retrofit their factories to bring them up to EC environmental standards, because much legislation in the Netherlands meets or exceeds the requirements of EC directives.

The foresight and involvement by the Dutch government has been well received. "Above all, the Dutch are trying to get the system right," says Dave Gilbert, manager of international regulatory affairs for ERL Group. "Although some companies may need a little extra time to get all the permits, the residual value can be enormous: They are walking onto a landscape of stable laws and regulations that they have had intput in forming."

Platzer of the U.S. Chamber of Commerce agrees. "There is an advantage of setting up shop in a country with strict environmental regulations, like the Netherlands, Denmark and Germany," she says. "By doing this, you will meet most of the environmental regulations of other Member States, If you set up operations in one of the southern countries with lax implementation and enforcement, you may be able to manufacture less expensively for a time, but as EC-level enforcement grows, or if you want to sell to other nations in the Single Market, you may find yourself hitting a brick wall, then you may have to undergo expensive changes."

Reap Benefits Now

Catherine Vial, international trade analyst in the U.S. Commerce Department's Office of European Community Affairs, points out that companies that decide to be "over-green" may be at a financial disadvantage. She adds, however, that companies that are not overly concerned about competition from similar businesses in environmentally lax countries can reap marketing benefits now and prevent possible regulatory compliance costs later by investing in those Member States with tougher environmental rules.

Because U.S. businesses have had to deal with stricter environmental regulations for a longer time than many of their European competitors, well-informed and progressive U.S. companies should be able to meet the challenges of Europe's changing environmental regulations without too much trouble. U.S. companies, however, must keep informed about environmental regulatory changes in Europe and countries' enforcement of these regulations and take steps to incorporate environmental planning into their corporate strategy to compete successfully in the newly integrated Europe.

EC Information Resources

Those U.S. business leaders establishing European headquarters, manufacturing sites, research and development operations, distribution networks, or sales and marketing offices in the EC must work hard to understand the European environmental regulatory landscape. According to Michelle Keene of the U.S. Environmental Protection Agency, this is not a simple task. She says that although the C is moving toward a Single Market, and rules are being harmonized, "It is important to understand those differences in regulations among the EC countries and between the EC and the U.S. Regulations are changing, measurements are different, and so are standards. It is all very complicated."

To unravel a bit of the complexity, U.S. business leaders can turn to a number of resources for additional information about European environmental regulations. In addition to the information available through publications, private consultants, trade associations, the Chamber of Commerce, the EPA, and the Commerce Department, investment agencies, like my own, can also be of help. Here are several points of contact:

Ms. Catherine Vial

International Trade Analyst

European Community Affairs

U.S. Department of Commerce

Room 3036

14th and Pennsylvania Ave., N.W.

Washington, D.C. 20230

Tel: (202) 377-5823

Fax: (202) 377-2155

Mr. C.A.P. Vermeulen

Executive Director

The Netherlands Foreign Investment


One Rockefeller Plaza

New York, N.Y. 10020

Tel: (212) 246-1434

Fax: (212) 246-9769

Ms. Michelle Keene

European Program Manager

U.S. Environmental Protection Agency

Headquarters, A 106

401 M. Street, S.W.

Washington, D.C. 20460

Tel: (202) 260-4892

Fax: (202) 260-8512

Mr. Jack Newell

ERM Group

855 Springdale Drive

Exton, Pa. 19341

Tel: (215) 524-3783

Fax: (215) 524-3718

Ms. Michaela Platzer

Director, Europe 1992

U.S. Chamber of Commerce

1615 H. Street, N.W.

Washington, D.C. 20062

Tel: (202) 463-5460

Fax: (202) 463-3114

A particularly useful book on the changing environmental regulations in Europe and how U.S. business should cope with them is Managing the Environment: The Greening of European Business, published by New York-based Business International, part of The Economist Group. The Book, published in 1990, asserts that one of the key challenges for companies in this decade is to incorporate environmental planning into corporate practice.

To meet that challenge, it says, corporations must devise new ways of managing, based on the recognition that environmental protection is a key strategic issue. The book calls for companies to perform environmental audits, develop more cooperative relationships with environmental groups and other external interests, appoint environmental coordinators at each plant or operating unit, and assign a board member to be in charge of planning and monitoring the company's environmental performance.

Forward-looking companies should take this sage advice to heart and incorporate the environment into their strategic plans now.

C.A.P. Vermeulen is Executive Director of the Netherlands Foreign Investment Agency (NFIA), a division of the Dutch Ministry of Economic Affairs, which is dedicated to assisting foreign companies establish or expand their business investment in Europe via the Netherlands. The NFIA counsels business executives on foreign investment, organizes fact-finding trips to the Netherlands, and provides background information and site selection assistance.
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Title Annotation:Meeting the Environmental Challenge; European Community
Author:Vermeulen, C.A.P.
Publication:Directors & Boards
Date:Jun 22, 1992
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