Regulation has become an important topic for public debate in the UK once again. Business leaders regard it as a key factor influencing their investment decisions and the main political parties are setting out their stalls to cut red tape. Better regulation is also likely to be a UK priority when it takes over the EU presidency later this year.

The focus on environmental regulation in particular should be of no surprise. Out of over 700 EU directives, more than 250 relate to the environment. In the UK, DEFRA has 75 individual measures in the pipeline, not to mention measures such as the DTI’s producer responsibility initiatives.

This helps explain why businesses identify environment, health and safety as their second most significant area of regulatory concern after employment legislation. Its impact on firms’ ability to do business is seen as important in an increasingly global marketplace, particularly at a time when business profitability in the UK is low by historic standards.

The creation in 2003 by DEFRA of its Regulation Task Force and the Environment Agency’s commitment to be a “smart” regulator are in part a welcome recognition of business concerns – and of the scope to improve the approach taken towards environmental regulation in the UK.

Cost and bureaucracy
Firms which are the focus of policies in this field express strong concerns about the unnecessary cost and bureaucracy – as well as perverse consequences – associated with some aspects of environmental regulation. But the business view on how this affects competitiveness is not the one-dimensional caricature that is sometimes reported.

Where concerns exist, for example, they are often about how government interventions are designed or implemented, not about whether there should be intervention. Responsible businesses readily recognise that regulation (applied properly) can create a level playing field, stimulate innovation and deliver the environmental benefits valued by society as a whole at reasonable cost. They also recognise that other forms of intervention – such as market-based instruments or taxes – may be both economically and environmentally preferable to classic forms of regulation.

For those businesses where regulation entails a significant cost of compliance, there are of course strong commercial reasons why minimising cost is desirable. Five sectors (including chemicals and food and drink) account for nearly 60% of annual UK business spending on environmental protection. Where companies operate in internationally traded sectors, there is particular interest in how their costs compare with those incurred by overseas competitors.

Favourable track record

The UK’s track record to date on this issue actually compares favourably with some of our key economic rivals. OECD figures show that business spending on environmental protection in the UK (currently some £4 billion annually) represented a smaller share of national wealth during the 1990s than that spent in France, Germany and the Netherlands. At the same time, the UK’s overall performance against a range of environmental impacts improved, taking it into the mid-range of developed nations.

Furthermore, regulated industries’ expenditure on compliance in turn provides commercial opportunities for businesses able to meet the demand for relevant equipment and expertise. The UK environmental consultancy market has developed in recent years into a £1 billion business, while globally the market for environmental goods and services exceeds $500 billion and continues to grow.

Notes of concern

But these upbeat points mask many notes of concern. The extent to which UK firms could claim a competitive advantage in spending a lower share of GDP on environmental protection than overseas rivals appears under challenge. All the major economies mentioned were closing the gap on the UK in the second half of the 1990s. And of course there are many challenges still to tackle.

A further issue for businesses is the cumulative impact of regulation – the obligations and costs generated by one or more new initiatives in addition to requirements under existing legislation. This can occur as a result of a package of measures tackling a single environmental issue (such as the current basket of UK measures to address climate change); or through measures aimed at tackling different issues (such as the various challenges facing the chemicals industry).

The concern is strengthened by belief that regulatory impact assessment in the UK – while it has improved and is respected abroad – classically tends to focus on the effect of individual proposals, with little sense of the existing or developing wider context of government intervention such as other regulation or economic instruments.

With many of these initiatives originating at EU level, how far any competitive disadvantage arises for businesses operating in the UK will depend on the ways in which different states implement and enforce regulations. Experience suggests that there is plenty of scope for government and the Environment Agency to do better by business – while still remaining committed to progress.

While some major EU environmental initiatives have had their origins in UK lobbying – like the REACH proposals for chemicals, IPPC and emissions trading – the concern is that the detail of what started as good for UK businesses does not always end up shaped in our best interests.

British businesses question why the changes to permitting required under IPPC, for example, could not have more closely followed the French model of amending existing regulations, rather than the more significant exercises which they are going through. They also note that while there is a growing trend in the UK for the Environment Agency to recover enforcement costs through charges and fees, while in the Netherlands the decision was taken to end payment by businesses for enforcement of IPPC.

The process in the UK of transposing rules governing treatment and disposal of hazardous waste under the Landfill Directive has also proved tortuous, with missed deadlines for key decisions and unclear boundaries of responsibility between DEFRA and the Agency – creating unnecessary uncertainty for waste producers and managers alike.

Finally, notwithstanding the leading status of some UK players in the global market for environmental goods and services, we do not appear to be maximising the commercial opportunities in this growing sector. The UK has less than 5% of this market – about half the share one would expect given the performance of Germany and France in this area.

Action is being taken by government with business to address some of these issues. The Environment Agency, for example, has set up strategic sector groups to deal with issues surrounding permitting. Among the issues being examined by DTI-supported sector initiatives in areas such as chemicals and vehicle manufacture are the cumulative impacts of regulation. DEFRA is taking forward the recommendations of its Regulation Task Force. And some of the RDA economic strategies have sought to promote environmental goods and services clusters.

Efficient regulation

But there is scope to do more. The current round of DEFRA-led reviews – for example, on sustainable development, climate change and waste – is a major opportunity to address regulatory shortcomings at a strategic level, such as the overlap between different policy instruments, while still focusing on delivering environmental improvement.

At the end of the day, regulation has played its part in delivering environmental improvement to date. Businesses recognise that it is an important part of the mix of policies used by government to achieve environmental goals – though no doubt its role will continue to evolve.

But business in the UK will also continue to want to see that regulation fulfils its role efficiently. Ideally, it should do this more efficiently – compared both with the past and with other major economies. That should remain as important a goal for policy makers and enforcers as our common goal of securing a better environment.

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