The Economics and Policies of Environmental Standards (SpringerBriefs in Economics) 3030718603, 9783030718602

Table of contents :
Preface
Acknowledgements
Contents
1 Introduction
1.1 Environmental Standards and Their Importance
1.2 Structure of the Book
2 The Political Economy of Environmental Standards
2.1 Introduction
2.2 The Rise of the Global Environmental Movement
2.3 The Formulation of Global Environmental Law
2.4 Resistance to (and Support of) Environmental Standards
2.5 An Environmental Standard in Practice: The Case of the ISPM15
2.6 Conclusions
References
3 The Benefits of Environmental Standards
3.1 Introduction
3.2 Cost–Benefit Analysis for Environmental Standards: A Critical Review
3.3 Health-Related Benefits
3.4 Firm Innovation and Performance
3.5 The Value of Ecosystem Services
3.6 Effects on Labour Demand
3.7 Benefits of the ISPM15 Phytosanitary Standard
3.8 Conclusions
References
4 The Costs of Environmental Standards
4.1 Introduction
4.2 Direct and Hidden Costs
4.3 Firm Performance and Its Competitiveness
4.4 Changes in Comparative Advantage
4.5 Pollution Havens and the Spatial Relocation of Industries
4.6 Implementation of Environmental Standards in Developing Countries
4.7 Costs of Implementing the ISPM15
4.8 Concluding Remarks
References
5 Environmental Standards and Justice
5.1 Introduction
5.2 Distribution of Compliance Costs
5.3 Distribution of Benefits
5.4 Ancillary Benefits
5.5 The Gender Dimension
5.6 The Comparative Advantage of Wealthier Nations
5.7 Consumers and Environmental Standards
5.8 Implementation of the ISPM15 Standard and Justice
References
6 Environmental Standards and Trade
6.1 Introduction
6.2 Environmental Standards as a Trade Boost
6.3 Environmental Standards as a Trade Barrier
6.4 Environmental Standards and Trade: What Is the Empirical Evidence?
6.5 Environmental Standards and the World Trade Organization
6.6 Implementation of the ISPM15 Standard and Trade
References
7 Conclusion

Citation preview

SPRINGER BRIEFS IN ECONOMICS

Elissaios Papyrakis Luca Tasciotti

The Economics and Policies of Environmental Standards 123

SpringerBriefs in Economics

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Elissaios Papyrakis · Luca Tasciotti

The Economics and Policies of Environmental Standards

Elissaios Papyrakis International Institute of Social Studies (ISS) Erasmus University Rotterdam The Hague, The Netherlands

Luca Tasciotti Faculty of Economics and Business University of Greenwich London, UK

ISSN 2191-5504 ISSN 2191-5512 (electronic) SpringerBriefs in Economics ISBN 978-3-030-71860-2 ISBN 978-3-030-71858-9 (eBook) https://doi.org/10.1007/978-3-030-71858-9 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

Many scientists refer to our current geological epoch as the Anthropocene, a period of unprecedented human impact on the planet’s climate stability and ecosystems. The number of plant and animal species under threat of extinction has been unparalleled. Since the industrial revolution, reckless human activity has generated enormous pressure on our local and global natural environments. Consumerism and globalisation have both been important driving forces behind accelerated rates of environmental degradation and pollution. There has been more than tenfold increase in the average (per capita) levels of consumption since the beginning of the nineteenth century— globally we are using 1.7 times the amount of natural capital that would be considered as sustainable (in other words, we are currently running a massive ecological deficit, with imminent consequences arising from such an accumulated environmental debt). Globalisation, as a result of advances in transportation and communication technologies, has further intensified environmental pressures. While the Covid19 pandemic caused a temporary pause in global interactions, it has never been easier to reach remote parts of the world for short-term holidays with the help of carbon-intensive aeroplanes or indulge in online shopping from sellers found thousands of kilometres away. Fortunately, there has been an increasing interest in local and global environmental problems and their solutions. Environmental standards have been promoted as a policy guideline that can effectively regulate the effect of human activity on the environment. In an ever-interconnected world, environmental standards have multiple effects that influence trade patterns, environmental protection, poverty and employment across several sectors. There is also much controversy surrounding environmental standards, with many viewing them as non-tariff trade barriers. This is a book that links environmental standards with several issues that receive a lot of attention recently: environmental protection and conservation, trade, poverty, international development and environmental ethics. To our knowledge, there is no other book that discusses the role of environmental standards in such depth—and this, despite the fact that the topic has gained importance in the last years as documented by the number of Google Scholar returns which have doubled over the last decade. We

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wrote this book having in mind the interested but not necessarily specialist reader— we analyse key issues in a simple and comprehensive manner, without resorting to technical language or assuming prior knowledge of the field. The book relies on material that we have used for our teaching in several universities at the undergraduate and postgraduate levels (Erasmus University Rotterdam, University of Greenwich, SOAS, University of East Anglia, VU University). Several of the courses that we have been teaching over the last few years have a twofold focus on environmental and international development issues—this is also reflected in the current approach adopted throughout the book (i.e. we always emphasise the differences between developed and developing countries when discussing issues associated with environmental standard adoption). We hope and anticipate that the book will be particularly helpful for undergraduate students in environmental sciences, law, economics, international relations, geography and development, who wish to have a simple introduction to the current debate on environmental standards. In addition, we expect that the book will be a valuable asset to researchers and advanced students, who wish to understand the economics and policies associated with environmental standards in an interdisciplinary way, which draws insights from multiple academic fields. The Hague, The Netherlands London, UK

Elissaios Papyrakis Luca Tasciotti

Acknowledgements

We are grateful to many of our colleagues and friends, who generously provided their feedback and ideas (and helped us shape the book in its current form). We are especially thankful to Roshan Khan (STDF) and Brent Larson (FAO) for their continuous guidance, especially given their invaluable experience with standard implementation in the developing world. They helped us think out of the box (and our academic comfort area). We are also much grateful to several representatives of National Plant Protection Organizations (NPPOs)—i.e. members of the national agencies entrusted with the domestic implementation of phytosanitary standards. Akosembe Mandevu and Hendrick Modiakgotla (Botswana NPPO), Alice Ndikontar and Edouard Nya (Cameroon NPPO), Hellen Mwarey, Faith Ndunge and Zilpa Kagwiria (Kenya NPPO) and Marcos Antonio Come (Mozambique NPPO) all provided invaluable comments during a workshop on the International Standard For Phytosanitary Measures No. 15 (ISPM15), which was hosted by Kephis in Nairobi on 20–21 July 2017. Any errors, oversights or omissions are ours alone. We have been very fortunate in having Springer’s generous support (and patience) towards this research endeavour—we are especially grateful to Ambrose Berkumans, Margaret Deignan and Fritz Schmuhl for their continuous guidance and feedback across various stages of the process. We are also much indebted to our family and friends, who were the first ones to read parts of the book and provide their honest opinion on the covered material. We are particularly grateful to our husbands, Andries and Brent, who patiently listened to our ideas and preoccupations while the book was in the making, and to our family (Giovanni, Stefania, Ennio, Maria Chiara, Michalis and Virginia) and friends (Geoffrey, Linas, Hugo, Kostas, Lorenzo, René and Tony) for their support.

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Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Environmental Standards and Their Importance . . . . . . . . . . . . . . . . . . 1.2 Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2

2 The Political Economy of Environmental Standards . . . . . . . . . . . . . . . . 5 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 The Rise of the Global Environmental Movement . . . . . . . . . . . . . . . . 5 2.3 The Formulation of Global Environmental Law . . . . . . . . . . . . . . . . . . 8 2.4 Resistance to (and Support of) Environmental Standards . . . . . . . . . . 9 2.5 An Environmental Standard in Practice: The Case of the ISPM15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3 The Benefits of Environmental Standards . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Cost–Benefit Analysis for Environmental Standards: A Critical Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Health-Related Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Firm Innovation and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 The Value of Ecosystem Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Effects on Labour Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Benefits of the ISPM15 Phytosanitary Standard . . . . . . . . . . . . . . . . . . 3.8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4 The Costs of Environmental Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Direct and Hidden Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Firm Performance and Its Competitiveness . . . . . . . . . . . . . . . . . . . . . . 4.4 Changes in Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Pollution Havens and the Spatial Relocation of Industries . . . . . . . . .

33 33 34 37 39 41

19 22 23 24 25 26 28 28

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4.6 Implementation of Environmental Standards in Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Costs of Implementing the ISPM15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43 44 46 47

5 Environmental Standards and Justice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Distribution of Compliance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Distribution of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Ancillary Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 The Gender Dimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 The Comparative Advantage of Wealthier Nations . . . . . . . . . . . . . . . . 5.7 Consumers and Environmental Standards . . . . . . . . . . . . . . . . . . . . . . . 5.8 Implementation of the ISPM15 Standard and Justice . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51 51 52 52 54 55 56 57 58 59

6 Environmental Standards and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Environmental Standards as a Trade Boost . . . . . . . . . . . . . . . . . . . . . . 6.3 Environmental Standards as a Trade Barrier . . . . . . . . . . . . . . . . . . . . . 6.4 Environmental Standards and Trade: What Is the Empirical Evidence? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Environmental Standards and the World Trade Organization . . . . . . . 6.6 Implementation of the ISPM15 Standard and Trade . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63 63 64 65 66 67 68 71

7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Chapter 1

Introduction

1.1 Environmental Standards and Their Importance We live in a world that changes rapidly. While one may claim that such changes always took place since the beginning of human civilization, it is equally true that the rate of environmental change attributed to human interferences is unparalleled. As a result of decades of rising consumerism and globalisation, most of us have adopted unsustainable lifestyles that contribute to multiple global environmental challenges (global warming, deforestation, extinction of species, water scarcity). In other fronts, society has been more successful in addressing global challenges—as a result of international cooperation and targeted social spending, we have collectively made tremendous progress towards eradicating extreme poverty, ensuring universal primary education, reducing child mortality and empowering women. For decades, policymakers and voters were much more preoccupied with economic issues rather than environmental problems (and even less so, for those with no immediate repercussions for one’s human health). In recent years, environmental standards have been promoted as a policy tool that can effectively regulate the effect of human activity upon the environment. They are, in effect, regulations that prescribe targets, limits or requirements in several environmental domains (aiming at environmental protection from unfettered commercial activity). For instance, they can regulate the amount and type of exhaust emissions for vehicles, the types of nets allowed for fishing activities, limitations in the use of ozone-depleting substances for refrigerators and air-conditioners, the acceptable amounts of toxins and contaminants in food. It is also becoming increasingly evident that the complexity of (often interlinked) environmental problems requires international coordination and simultaneous action. In an ever-interconnected world, environmental standards have multiple effects that influence trade patterns, environmental protection, poverty and employment across several sectors. At the time that we were finalising the book, the UK and the EU were engaging in some very difficult negotiations for a new post-Brexit trade partnership—many of the sticking points of the withdrawal negotiations related to environmental and labour standards. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_1

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The European Commission feared that a level-playing field (of fair competition) could be easily compromised in the future if the UK would unilaterally adopt less strict standards in comparison to its EU trade partners; similarly, there were intense negotiations (and bitter disagreements) on how deviations in standards would be monitored and whether they could justify trade retaliatory measures. There is currently a flood of information about environmental standards on the internet, both from the side of supporters and critics. As with most policy interventions, environmental standards generate both winners and losers (especially in the absence of parallel redistributive policies that aim at compensating those negatively affected by their adoption). A wealthy individual in Amsterdam or London is more likely to be sympathetic towards a new environmental standard, despite a possibly increase in the cost of an associated consumer good. For a poor farmer in Africa or Asia, whose income (and possibly survival) is largely dependent on the rural economy, any disruption to his/her earnings as a result of a new environmental standard can be devastating in the short run. We wrote this book in order to outline these complexities that characterise environmental standard adoption and implementation. We wanted to write a book that introduces the interested reader to complex issues related to the economics and policies of environmental standards in an accessible way without assuming any prior knowledge. Attention is given to several interrelated themes that touch on the implementation of both domestic and international environmental standards. In the chapters that follow we ask a number of questions and seek to provide answers: What are the direct and indirect costs and benefits of these standards? What is the political economy structure that governs their implementation? Do environmental standards affect individuals and economic sectors in different ways; who benefits and who loses? How do environmental standards interact with trade patterns in an ever-globalised world?

1.2 Structure of the Book Chapter 2 provides an overview on the historical and political economy perspectives that explain the increasing popularity of environmental standards as a policy instrument. It sets the background for the analysis that will follow in the rest of the book. It discusses how the rising of the global environmental movement set the institutional foundations for the widespread adoption of environmental standards and probes into the role of several stakeholders (governments, international organisations, NGOs) into the process. The chapter examines the institutional aspects related to the implementation of environmental standards and scrutinizes how these have played out in different contexts regarding the actors involved and their interactions. It looks at the formulation of global environmental legislation and how this is driven by the necessity of international coordinated action. It also examines how policies on environmental standards might conflict with other environmental/non-environmental initiatives and ways to tackle such clashes.

1.2 Structure of the Book

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Chapters 3 and 4 proceed to discuss the broad range of socioeconomic and environmental benefits and costs associated with environmental standards. The arguments presented here also explain why there are passionate supporters and polemics both in favour and against the implementation of environmental standards (depending on how one’s interests are being affected). Chapter 3 first discusses the direct and indirect benefits of environmental standards. It probes into the intended environmental benefits, as well as the positive effects the standards may have on particular sectors and segments of the population. Chapter 4 then proceeds to examine the direct and indirect costs of environmental standards. Together with Chap. 3, this allows the reader to contrast these costs against the corresponding anticipated benefits. Some of the costs of environmental standards may relate to the direct costs of implementation (e.g. monitoring, infrastructure, training) but several indirect effects may also arise (e.g. changes in production costs across sectors, employment patterns, impacts on poverty levels, changes in land use patterns etc.). In many cases, the magnitude of costs is directly associated with the stringency of environmental regulation and complementarities with other existing policies/initiatives. The two chapters together introduce the idea of a CBA in the context of environmental standards. Special attention is given to methods employed to quantify the costs and benefits of such standards (especially for effects that are not directly priced in domestic/international markets), as well as the corresponding uncertainty that often relates to such estimations. Chapter 5 goes a step further and probes into the distribution of the costs and benefits of environmental standards (that were discussed in Chaps. 3 and 4). It encourages the reader to reflect on whether current environmental standards are fair, both with respect to the distribution of costs and benefits, as well as regarding the extent of participation in their design and implementation. These two concepts of justice are commonly referred to as distributive and procedural justice in the literature. It may be the case, for instance, that compliance costs burden disproportionately more certain segments of the population (e.g. small producers, vulnerable sectors, disadvantaged regions and ethnic groups). The same groups may also have little say in how environmental standards are designed and implemented. Similarly, the benefits of standard adoption may accrue to only few individuals, who may have better access to credit and information. There is also substantial evidence of an important gender dimension, with women being disadvantaged when it comes to environmental standard adoption. Poorer countries (and individuals) also find it harder to comply with environmental standards. This chapter, hence, touches upon issues of justice by examining whether certain groups of countries or individuals are more likely to lose out every time an environmental standard is being put forward. Chapter 6 has a focus on the trade interlinkages with environmental standards. It explores how environmental standards can alter trade patterns via changing the cost of production in compliant countries or restricting access to markets for noncompliant ones. The chapter both presents theoretical mechanisms linking trade with environmental standards (for example by making reference to the pollution haven hypothesis, the Porter hypothesis etc.), as well as empirical evidence. We discuss whether some sectorial exports tend to be more sensitive to environmental standards than others and why. We elaborate on how environmental standards may influence

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the comparative advantage for specific commodities and whether they can result in a change of trade partners for implementing countries. The analysis presented in all chapters has been motivated by a project we undertook between 2015–7 in Botswana, Cameroon, Kenya and Mozambique (which was financially supported by the Standard and Trade Development Facility under contract number STDF/PG/460).1 Our research project focused on the implementation of the International Standard for Phytosanitary Measures No.15 (ISPM15) in these four case study countries (an international phytosanitary measure that enforces the treatment of wood material destined for export markets, either with methyl bromide or through heat treatment, to prevent the international transport and spread of pests). Our fieldwork involved a series of in-depth interviews with several key stakeholders (pallet manufacturers, government/customs officials, representatives from several industries, etc.). In addition, the project presented a macroeconomic analysis which looked at the effect the ISPM15 has had on the magnitude of the exports and imports of the 4 countries and a microeconomic analysis which aimed at looking at effects the environmental standard has had on businesses operating in those countries. In all chapters we include a dedicated subsection to the ISPM15 to provide a more applied perspective of the concepts and discussions that precede. In Chap. 6, in particular, we dedicate a substantial part of our analysis to empirical findings based on the project (where a series of gravity models linked the adoption of the standard with changes in sector-specific exports).

1 For

more information on the nature and deliverables of the project, refer to the following website https://www.standardsfacility.org/PG-460, last accessed the 11/01/2021.

Chapter 2

The Political Economy of Environmental Standards

2.1 Introduction Hardly anyone advocates anymore that laissez-faire economics (absent of government interventions and regulations) can coincide with sufficient environmental protection. Nowadays almost all economic activities that potentially generate negative environmental externalities are regulated to some extent. There are water quality standards that regulate wastewater discharges and identify quality parameters for potable water. Similarly, there are air quality standards that regulate emissions from several sectors (e.g. transportation, industrial production) and often define upper ceilings for a number of pollutants. While economic incentives (e.g. carrot and stick measures in the form of taxes/fines and financial rewards/subsidies) can support desired (environmental) outcomes, command-and-control regulation in the form of environmental standards are often preferred when prompt action is necessary. The process of designing, implementing and monitoring such environmental standards is rather complex and requires input from multiple scientific fields (economics, law, natural and health sciences, psychology etc.). The purpose of this chapter is to set the stage for subsequent chapters of the book and provide the reader with information on how the environmental movement coincided with debates on the necessity for environmental regulation and standards (as well as with resistance from industries, firms and individuals negatively affected).

2.2 The Rise of the Global Environmental Movement The environment and its gradual human-induced deterioration has been at the centre of national and international debate especially since 1970, the year in which the first Earth Day was celebrated. The event mobilized millions of Americans; 20 million citizens (i.e. about 10% of the American population) took to the streets, college campuses and hundreds of cities to protest environmental ignorance and demand a © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_2

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new way forward to protect our planet. The first Earth Day is credited with launching the modern environmental movement, which is now recognized as the planet’s largest civic movement.1 These developments were preceded by the considerable environmental activism of the late 1960s, a number of influential popular books with an environmental focus (e.g. Rachel Carson’s 1962 book Silent Spring (Carson 2009) and Paul Ehrlich’s 1968 book The Population Bomb (Ehrlich et al. 1971)) and by a series of environmental disasters (the Great Smog of London in 1952, the Minamata Disease in the early 50s, the Vajont resevoir disaster in 1963, just to cite few of them). All these events played a major role in mobilizing governments across the world to act. The first Australian legislation on environmental protection—the Victorian Environment Protection Act- was enacted in 1970 and constituted one of the first global legal frameworks to deal with the environment in a systematic and integrated way.2 This was followed by the Canadian Artic Waters Pollution Prevention Act and the Water Act, which regulated all shipping in zones up to 100 nautical miles off Canada’s Arctic coasts (in order to minimize marine pollution and protect local ecosystems, Bilder 1970). Although British pollution control legislation can claim a longer history (the use of coal was prohibited in London already in mid thirteenth century as considered prejudicial to health), the 1970s is recognised as being the first decade of substantial legislative action. Fifty years later, environmental law has gradually expanded its scope and it nowadays focuses on a broad array of environmental issues, ranging from biodiversity protection and restoration, use of alternative forms of low-emission energy and crops-rotating practices in agriculture (Burke 2019). The current focus is not only on protecting what we already have, but—more importantly—on restoring previous environmental conditions. The dominant policy approach has been to promulgate legislation that prohibits or restricts environmentally harmful activities (in particularly the generation of pollution); a common approach has been to identify an environmental target—such as a limit on emissions of an air or water pollutant- and either directly or indirectly regulate economic activity so that the target is met (Harrington 1988). Environmental standards have been such an example of direct regulation by typically imposing uniform requirements. The underlying aim is to reduce environmental harm to a socially acceptable level. Pollution permits and licences become distributed to allow firms to continue emitting pollutants, but only at levels that do not contradict the relevant standards (Khaqqi et al. 2018). Policies, standards and regulation aimed at safeguarding the environment have become ever more necessary as new global challenges manifest themselves and old ones became increasingly pressing. It would be a long exercise to discuss all the multiple causes of environmental degradation; here we limit ourselves to some of the most important new and old drivers behind environmental degradation. 1 For

more details about the Earth Day and its history, refer to https://www.earthday.org/history/? gclid=CjwKCAjw74b7BRA_EiwAF8yHFCIJuVXbDi8krORSvwfuxQWDOCHz6k47aENzSA3bt4fn7CUXii5TBoC-JwQAvD_BwE, last accessed on 16/09/2020. 2 For more details about the Environment Protection Act 1970, refer to https://www.epa.vic.gov.au/ about-epa/laws/acts, last accessed on 16/09/2020.

2.2 The Rise of the Global Environmental Movement

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Population pressure is such an important driver. While the pace of population growth has slowed down since the 1960s, the United Nations predicts that the global population will rise above 9 billion by 2050, from around 6 billion today (Berners-Lee et al. 2018). Most of the population growth will occur in developing countries, which follow a similar demographic transition to the one developed economies experienced in earlier decades.3 The population explosion of the past few decades has been a consequence of a rise in life expectancy (in part due to modern medicine, better hygienic conditions and a general increase in the standards of living). Overpopulation naturally generates enormous environmental pressure and accelerates the depletion of finite resources; finding an environmentally sustainable manner to feed the extra 3 billion people is likely to be a challenge of immense proportions. Increasing urbanization poses another threat to the environment. The historical movement from rural to urban centres in rich countries is now being observed also in developing countries, but on a much bigger scale (Asongu et al. 2020). The United Nations expects that, between 1990 and 2025, the number of people living in urban areas will double to more than 5 billion, and that 90% of that growth will be in developing countries (United Nations 2018). More than half of the population living in Africa and Asia still lives in the countryside, compared with only a fifth in Europe and North America. Rural households in developing countries are moving to cities for the same reasons that drove urbanisation in Europe in the nineteenth century: citizens are pushed away from rural areas by the scarcity of farm jobs and are being pulled towards urban areas in anticipation of better jobs and improved living conditions. Governments in several developing countries have accelerated this process by pursuing economic policies that do not help the growth of the agricultural sector (e.g. by suppressing food prices at artificially low levels, often for the benefit of local urban elites and at the expense of rural farmers, Porteous 2020). Rapid urbanization, when ill planned, is likely to harm the local environment and generate poverty-trap conditions, in situations where urban dwellers live in densely crowded conditions and compete for scarce resources. Industrialization, too, is an obvious cause of environmental problems (Vithayasrichareon et al. 2012). Developed economies typically followed a path of structural transformation, where gradually employment and production moved away from agricultural activities towards first manufacturing (which is typically responsible for pollution and resource depletion) and then the service sector. Many developing countries are now undergoing the same transition (i.e. a shift from a prevalent agricultural sector towards a heavily polluting industrial sector); this transition, together with the less stringent environmental regulations in place for the vast majority of developing countries (see Chaps. 3 and 6 on the issue of relocation of heavy industry to pollution havens), generates a lot of environmental damage in the Global South. Industrialization, urbanization and population growth all jointly contribute to the developing world’s growing environmental problems; as food, land and resources become increasingly scarcer and environmental quality deteriorates, there is a need 3 For more details about the trend of the population growth, refer to https://www.un.org/development/

desa/en/news/population/world-population-prospects-2017.html, last accessed on 16/09/2020.

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for prompt policy reaction and interventions. However, institutional inertia often prevents local governments to adopt forward thinking policies that prevent rapid structural transformation or demographic changes that come at the expense of the environment. Cooperation at the national, regional and international level is hence required in both the public and private sphere to ensure a path of green growth (one that simultaneously allows for poverty alleviation, improved income opportunities, ecological stability and sustainable use of resources).

2.3 The Formulation of Global Environmental Law Environmental problems often spill over national borders (and affect interconnected ecosystems and populations). It is for this reason that safeguarding the environment typically requires a joint coordinated effort rather than multiple ‘solo’ interventions, where each country adopts different and often conflicting policies. On the one hand, the increasing pace of globalization facilitates the spread of cross-border diseases and intensifies global pollution (as in the case of carbon emissions and climate change); on the other hand, it comes along with enhanced international coordination in tackling common and global environmental challenges (rather than relying exclusively on national policies and domestic interventions). Along these lines, the development of more effective environmental international standards has become critical to directing economic development and growth onto a path of environmental sustainability. Collaborations among countries in terms of transplanting national law are becoming increasingly common, even when countries have different legal and cultural traditions (Yang 2012). Increased collaboration across governments, firms and non-governmental organizations (NGOs), as well as the growth of transnational environmental networks, have also significantly contributed to the development of common environmental legislation and regulations. The result of this coordinated effort has been the emergence of the so-called ‘global environmental law’—a field of law that is international, national, and transnational in character all at once. As Yang and Percival put it, the global environmental law ‘is the set of legal principles developed by national, international, and transnational environmental regulatory systems to protect the environment and manage natural resources … The global environmental law is made up of a distinct set of principles and procedural methods which are uniquely designed for the governance of the environment across the world’ (Yang and Percival 2009). Wiener has used the idea of global environmental law to describe the evolution of environmental law from a distinctly national enterprise to a set of international frameworks (Wiener 2001). Naturally, a key feature of global environmental legislation is its focus on environmental challenges as a problem of global dimensions; in that respect, national, subnational and local problems are often seen and addressed as part of a bigger global environmental agenda. In many cases, global environmental legislation adopts the ‘polluter pays’ principles, where polluting firms or countries are held responsible for the environmental damage and monetary costs imposed on others. Along these

2.3 The Formulation of Global Environmental Law

9

lines, global environmental standards are being developed to help countries and their national implementing bodies to harmonise their environmental policies and interventions (and maximise environmental protection at a global level). The international coordination and adoption of environmental standards requires deliberate efforts of ‘transplantation, convergence, integration and harmonization’. Transplantation refers to the willingness to copy and adapt parts of statutes and laws by one country to another. Legal transplants can be seen as a way to assist countries with less developed legal systems ‘catch-up’ with more sophisticated ones. Convergence refers to how disparate legal systems can evolve to become more similar as a response to analogous external pressures (as in the case of comparable environmental challenges). Last, integration and harmonization refer to efforts across countries to cooperate and standardize legal approaches. Such multi-country cooperation often becomes embodied in formal international treaties and regulated by intergovernmental institutions, such as the WTO.4 Legal transplantation, convergence, integration and harmonization can gradually increase the level of coordinated concerted environmental action, when nations and politicians display strong commitment towards bridging initial differences in environmental legislation and policy (which can be especially challenging, since there are substantial cross-country differences not only with respect to their legal systems and the stringency of environmental standards, but also in relation to worker rights and labour standards, infrastructural and human capital development and cultural aspects). When differences persist, they often creates opportunities for economic exploitation; as an example, several manufacturing activities have been relocated to developing countries in order to exploit their weaker environmental standards and ineffective and corrupt regulatory systems. In the case of inadequate levels of cross-national legal transplantation, convergence, integration and harmonization in the context of environmental standards, it is not unusual to observe an externalization of production chains (see Chap. 4 on the relocation of businesses to so-called pollution havens).

2.4 Resistance to (and Support of) Environmental Standards The extent to which environmental problems and their proposed solutions may affect the real economy (and several of its macroeconomic indicators) has been and still constitutes the subject of considerable theoretical and empirical debate. This recent discussion on the environment and its protection has motivated many scholars to research the benefits and costs of environmental standard adoption (both at the national and international level), their implications in terms of fairness and 4 An example of how this works in practice is given at the end of the chapter, where we discuss how

the International Standard for Phytosanitary Measures number 15 (ISPM15) is applied world-wide. Chapter 6 also provides an in-depth discussion of the synergies and conflicts between environmental and trade interests in the case of standards.

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social justice, and the differentiated long-term impacts such standards may have on developed and developing economies (these aspects are discussed in more detail in Chaps. 3 and 4). In an interconnected world, it is imperative to have a clear understanding of how environmental standards may impact the circulation of goods among countries; any alteration in the volume and types of traded commodities may generate income and employment effects that disadvantage (or benefit) specific sectors of the economy or segments of the population (and the labour force). In addition, the adoption of environmental standards may induce the relocation of businesses to countries with looser environmental regulations. Despite the fact that environmental regulations can generate a dichotomy of losers and winners, there has been a steady increase in their adoption globally. Although it would be cumbersome to count all the environmental standards which have been approved nationally and internationally, Brandi et al. (2020) suggest that the number of environmental provisions in trade agreements has been increasing sharply since the end of the 1990s (with the greatest part adopted in the twenty-first century). This is testament to an increased willingness of countries to collaborate and set up global initiatives and interventions for the sake of environmental protection. However, even in cases where there is broad public support in favour of environmental standards, their adoption can generate uncertainty and unease for certain (and often influential) social interest groups and sectors. As a response to the introduction of standards, governments are likely to experience considerable pressure from affected industries to either reverse decisions or reduce the economic burden of compliance. Although the costs of compliance can be modest, sector-specific lobby groups have argued (and often persuasively) that environmental regulation can put their industries at a competitive disadvantage. In an era of globalisation where capital easily moves towards economies with lower production costs and looser environmental regulations, governments tend to succumb to external pressures and accommodate sector-specific demands. Thus, the confluence of economic pressures and political ideology sometimes constrains the introduction of more stringent environmental regulation. Resistance to environmental standards does not only come from sector-specific lobbies. Developing countries are especially vulnerable to environmental degradation and pollution (and especially so, given the high dependence of their populations on rural livelihoods), yet, they lack resources that allow them to comply with environmental standards. This is the result of a mix of multiple limitations— budget constraints, lack of infrastructure and human capital, minimal redistributive efforts towards affected sectors and individuals. Industries in developing countries are further disadvantaged by the fact that compliance towards regulation often requires up-front investment (often beyond what credit-constrained firms can possibly afford) and any government support is often largely inadequate. At the same time, the urgency of environmental regulation and intervention becomes increasingly evident in developing countries; there is a rapid pace of environmental deterioration with visible and tangible consequences (Sapkota and Bastola 2017). Fast expanding populations (often in arid environments with already fragile

2.4 Resistance to (and Support of) Environmental Standards

11

ecosystem settings) add to existing water, land and food scarcities (and resourcerelated poverty traps). About a billion people still have no regular access to clean water (which is often contaminated by pollutants as a result of poor environmental practices, Schwarzenbach et al. 2010). Throughout Latin America, Asia and Africa, forests are rapidly disappearing, causing not just long-term concerns about climate change but also immediate economic damages and livelihood losses. Recent research suggests that pollution in developing countries is far more than a minor irritation, as it also imposes a heavy economic cost. A World Bank study computes the cost of air and water pollution in China at $54 billion a year, equivalent to 8% of the country’s overall GDP (Ebenstein 2012). Another study estimates that the health costs associated with damages caused by air pollution in Jakarta and Bangkok in the early 2000s were close to 10% of these cities’ income (Hirota 2010). These are crude estimates that, however, reveal the relative importance of environmental damage when presented in monetary terms. The increasing awareness of environmental issues has been matched by a rise in local anxiety, sensitisation and proactive behaviour. In recent years, several environmental lobby groups have sprung up in Latin America and Asia. Some of these are offshoots of organisations originally founded in developed economies (e.g. Greenpeace, WWF, Conservation International etc.), which set up subsidiary offices in several developing countries. However, many local organisations and groups develop organically within the boundaries and local pressures of individual countries as a response to specific ecological threats and challenges (and largely draw support locally from communities that are closely dependent on surrounding ecosystems and their associated services). In recent years, in Bolivia, Brazil, Colombia, Ecuador and Mexico, green activists assumed government positions. Naturally, these are only first (and not easy) steps towards solving long-established environmental problems; Latin America is the world’s deadliest region for environmental and land rights activists. According to Global Witness, a non-profit organisation that ‘protects human rights and the environment by fearlessly confronting corruption and challenging the systems that enable it’, more than two-thirds of the murders involving environmental activists occurred in the region.5 Colombia was ranked the most dangerous country for environmental activists with 64 killings in 2019, followed closely by Brazil, Mexico, Honduras and Guatemala. At the same time, while governments in the developing world are passing increasingly tough environmental regulations (many of them modelled on green standards in Europe and North America), these often end up being empty gestures (with government bodies being either unwilling or unable to enforce such green regulations). A good example of this is the case of Brazilian legislation passed in 1999 against “environmental crimes”, to complement earlier statute prohibiting Amazon landowners from deforesting more than 20% of their land (Börner et al. 2010). This had still, however, little preventive power with the rate of deforestation in the Amazon region accelerating in recent years. 5 For more information about Global Witness, refer to https://www.globalwitness.org/en/about-us/, last accessed on 21/09/2020.

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There are several environmental lessons to be learnt from the past experience of developed countries, even though blindly ‘copy-pasting’ policies and regulations are likely to reduce their effectiveness (as these will need to be adapted to the specific context of each developing nation). For most OECD countries, emissions of carbon diooxide and sulphur dioxide have been falling steadily since the early 1980s (OECD 2016; Vestreng et al. 2007). Similarly, investment in waste water treatment has helped to clean up rivers and lakes (Barraqué 2020). In 2009 the OECD started (ongoing) initiatives to simultaneously stimulate the economy and promote employment in green sectors, as well as help tackle some of the most serious environmental challenges (i.e. as part of a green fiscal stimulus agenda, see OECD 2012). Several of these efforts became curtailed as a result of the European debt crisis that immediately followed and external pressures to balance public budgets (e.g. by international credit rating agencies). What is, though, of utmost importance is to emphasise how the faith of developed and developing countries is interlinked. Developed countries need to be assisted by the transfer of know-how, technologies and financial resources by wealthier nations, so that they can improve environmental protection and effective implementation of environmental standards. Developed nations have a moral responsibility to provide such assistance, due to their larger historical ecological footprint and increased ability to assist nations of much lower income levels. Inaction will otherwise result in degradation of global environmental goods that will affect interconnected ecosystems all around the world.

2.5 An Environmental Standard in Practice: The Case of the ISPM15 Plant pests which do not belong to a given area -also often referred to as invasive alien species- have been recognized to be among the greatest threats to biodiversity and ecosystem stability. They are considered responsible for substantial losses in agricultural yields, which bring about serious economic and social costs not just for affected farmers but for the economy as a whole. The introduction of the International Standards for Phytosanitary Measures (ISPM) constitutes an attempt by the International Plant Protection Convention (IPPC) and its member states to set out basic rules for the safety of food, animals and plants (Clarke 2004). The International Standard for Phytosanitary Measures number 15 (ISPM156 ) falls into this category of environmental standards and it was developed with the purpose of eliminating the circulation of plant pest travelling with wood pallet materials (WPMs; i.e. pallets, crates, and dunnage). WPMs constitute some of the most commonly used (and reused) products for exporting goods and has

6 For more details about the ISPM15, refer to https://www.ippc.int/static/media/files/publication/ en/2018/06/ISPM_15_2018_En_WoodPackaging_2018-05-16_PostCPM13_Rev_Annex1and2_g UhtMXs.pdf, last accessed on 17/09/2020.

2.5 An Environmental Standard in Practice: The Case of the ISPM15

13

Fig. 2.1 Examples of WPM which has been treated and marked according to the ISPM15. Source Papyrakis and Tasciotti (2018)

been recognized to be one of the primary pathways by which bark and wood-boring pests move across borders. There are currently three authorised treatments for compliance to the ISPM15 standard: two types of heat treatment—the standard heat treatment and the dielectric heating—and a fumigation treatment using methyl bromide. Exporters which wish to trade goods by using WPM have to make sure that their WPM has been treated accordingly (Papyrakis and Tasciotti 2019) and a mark applied to the WPM (Fig. 2.1). The standard was adopted worldwide remarkably quickly as a result of a number of much damaging outbreaks of invasive species. Recurrent outbreaks of the Emerald Ash Borer (a green beetle native to north-eastern Asia) since the late 90s in the US has destroyed more than 40 million ash trees in Michigan state alone (USDA 2007). Similar devastating damage has been caused by the Asian long-horned beetle— anoplophora glabripennis—since it was discovered in 1996 in New York State, and by the Pine shoot beetle, believed to have come from Europe. These invasive pest outbreaks have resulted in millions of USD worth of damage and eradication efforts (Bradshaw et al. 2016; Skrzycki 2004). Unfortunately, however, not all countries have been prompt in recognising the threats from plant pests (to their ecosystems and economies). There is often ambiguity about the estimated value (and extent) of damage attributed to pest outbreaks and in many cases a lack of adequate policies that help reduce or eliminate the entry (as well as export and domestic transport) of pests. Increasingly, though, countries recognise the necessity to “prevent the introduction of harmful alien organisms and eliminate or reduce their adverse effects to acceptable levels” by “determining priorities for allocating resources for the control of harmful alien organisms based on their impact on native biodiversity and economic resources, and implementing effective control or, where possible, eradication measures” (Papyrakis and Tasciotti 2018). In light of this, the ISPM15 constitutes an applied example of how an environmental standard becomes part of global environmental legislation. The vast majority of countries have agreed to comply with the standard; more developed countries have transplanted their legal frameworks to less developed ones in an attempt to help them develop effective and enforceable regulations. In other words, both developed and developing nations have taken coordinated actions in order to increase the rate of

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adoption of the standard globally (and hence adopt a unified approach as to minimise the disruption of their ecosystems by invasive alien species). In the following chapters we will examine the range and magnitude of costs and benefits associated with the implementation and compliance to the ISPM15 and other standards, as well as how these are distributed across countries, sectors and segments of the population.

2.6 Conclusions As it has become clear, multiple complexities can arise in the case of setting up environmental standards. This is especially the case when coordinated worldwide action is necessary in order to protect interlinked ecosystems and ensure their uninterrupted service provision. These complexities are elaborated upon in the chapters that follow. These discuss the direct and indirect costs of adoption and implementation, especially for low-income individuals and countries who have limited access to credit, information and other resources. The unequal distribution of both costs and benefits can often generate justifiable and strong resistance by large segments of the populations (who work in the affected sectors). Proactive governments can take corrective actions and compensate those who lose out as a result of environmental standards.

References Asongu SA, Agboola MO, Alola AA, Bekun FV (2020) The criticality of growth, urbanization, electricity and fossil fuel consumption to environment sustainability in Africa. Sci Total Environ 712:136376 Barraqué B (2020) Full cost recovery of water services and the 3 T’s of OECD. Util Policy 62:100981 Berners-Lee M, Kennelly C, Watson R, Hewitt CN (2018) Current global food production is sufficient to meet human nutritional needs in 2050 provided there is radical societal adaptation Elem Sci Anth 6(1) Bilder RB (1970) Canadian arctic waters pollution prevention act: new stresses on the law of the sea. The Mich L Rev 69:1 Börner J, Wunder S, Wertz-Kanounnikoff S, Tito MR, Pereira L, Nascimento N (2010) Direct conservation payments in the Brazilian Amazon: scope and equity implications. Ecol Econ 69(6):1272–1282 Bradshaw CJA, Leroy B, Bellard C, Roiz D, Albert C, Fournier A, Barbet-Massin M, Salles JM, Simard F, Courchamp F (2016) Massive yet grossly underestimated global costs of invasive insects. Nat Commun 7:12986 Brandi C, Schwab J, Berger A, Morin JF (2020) Do environmental provisions in trade agreements make exports from developing countries greener? World Dev 129:104899 Burke IC (2019) A better planet: forty big ideas for a sustainable future. Yale University Press. Carson R (2009) Silent spring 1962 Clarke M (2004) Phytosanitary measures: preventing the introduction of exotic pests and pathogens occurring from the global trade of wood products. In: Horne HP, Tonnes S, Koskela T (eds) Proceedings of the conference on policy instruments for safeguarding forest biodiversity-legal

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and economic viewpoints. In: The fifth international BIOECON conference 15th–16th January 2004, House of Estates, Finnish Forest Research Institute Ebenstein A (2012) The consequences of industrialization: evidence from water pollution and digestive cancers in China. Rev Econ Stat 94(1):186–201 Ehrlich PR, Parnell DR, Silbowitz A (1971) The population bomb. Ballantine books, New York Harrington W (1988) Enforcement leverage when penalties are restricted. J Public Econ 37(1):29–53 Hirota K (2010) Comparative studies on vehicle related policies for air pollution reduction in ten Asian countries. Sustainability 2(1):145–162 Khaqqi KN, Sikorski JJ, Hadinoto K, Kraft M (2018) Incorporating seller/buyer reputation-based system in blockchain-enabled emission trading application. Appl Energy 209:8–19 OECD (2012) Green growth and developing countries OECD (2016) Energy and air pollution: world energy outlook special report 2016 Papyrakis E, Tasciotti L (2018) Final regional report: implementation of the international standard on phytosanitary measures, ISPM15 (Regulation of wood packaging material in international trade): an empirical analysis of how the regulation affects the economy of a group of countries in Africa. Project: STDF/PG/460. https://www.standardsfacility.org/sites/default/files/ STDF_PG_460_Regional_report.pdf . Papyrakis E, Tasciotti L (2019) A policy study on the implementation challenges of phytosanitary standards: the case of ISPM15 in Botswana, Cameroon, Kenya, and Mozambique. The J Environ Dev 28(2):142–172 Porteous O (2020) Trade and agricultural technology adoption: evidence from Africa. J Dev Econ 144:102440 Sapkota P, Bastola U (2017) Foreign direct investment, income, and environmental pollution in developing countries: panel data analysis of Latin America. Energy Econ 64:206–212 Schwarzenbach RP, Egli T, Hofstetter TB, Von Gunten U, Wehrli B (2010) Global water pollution and human health. Annu Rev Environ Resour 35:109–136 Skrzycki C (2004) USDA rule on pallets and pests leaves some fuming. Washington Post, 12 October 2004, at E01. https://www.washingtonpost.com/wpdyn/articles/A25720-20040ct11.html. United Nations (2018) Revision of world urbanization prospects USDA (2007) Animal & plant health inspection service. Plant health: Pine shoot beetle, background. https://www.aphis.usda.gov/planthealth/plantpestinfo/psb/index.shtml. Vestreng V, Myhre G, Fagerli H, Reis S, Tarrasón L (2007) Twenty-five years of continuous sulphur dioxide emission reduction in Europe Vithayasrichareon P, MacGill IF, Nakawiro T (2012) Assessing the sustainability challenges for electricity industries in ASEAN newly industrialising countries. Renew Sustain Energy Rev 16(4):2217–2233 Wiener JB (2001) Something borrowed for something blue: legal transplants and the evolution of global environmental law. Ecology 27:1309–1312 Yang T, Percival RV (2009) The emergence of global environmental law. Ecol Law Quart 36(3) 615–664 Yang T (2012) The emerging practice of global environmental law. TEL 1:53

Chapter 3

The Benefits of Environmental Standards

3.1 Introduction During the past six decades, policies aiming at safeguarding the environment have gained significant prominence in the political agenda; the exponential increase in the number of environmental standards (at both the national and international level) bears testament to the heightened importance attached to them. The first major wave of public concern for the environment (mostly during the 1960s) revolved around problems of industrial pollution in industrialised countries. In the decades that followed, concerns extended to how the rise in globalization and trade would (negatively) affect environmental quality (Jayadevappa and Chhatre 2000). More recently, contemporary environmental policy and law (e.g. in the domain of biodiversity protection) focuses not only on protecting existing environmental assets but also on restoring previous conditions (Burke 2019). As the number of environmental concerns and initiatives grew over time (Brandi et al. 2020), so did the need to systematically assess the broad range of impacts (social and economic, both at the national and local levels) that environmental standards may cause. This chapter looks at the benefits environmental standards can generate; the costs stemming out from environmental standards are discussed in our subsequent Chap. 4. Environmental standards did not just increase in number over time but also enlarged their sphere of influence and grew in complexity (Ramanathan et al. 2017). Environmental standards cover a very broad spectrum of environmental problems and vary across countries with respect to the stringency of their implementation and technical characteristics. As a result of this, a proper understanding of the associated costs and benefits becomes a much more challenging exercise. It is quite common for environmental standards to incorporate a component that aims at disincentivising polluting behaviour through the provision of financial penalties. Taxes and fines on pollution or activities which are malevolent for the environment increase the price of associated goods or services produced or services on offer. These taxes/fines can be applied to specific consumption items (as in the case of charges for the use of plastic bags) or they can be based on some defined © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_3

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environmental parameters (as in the case of charges proportional to the carbon intensity production). In some cases, environmental regulations allow for tradeable permits, where those with superior environmental performance (in relation to what is permitted) can transfer pollution allotments/credits to actors struggling to meet environmental targets and comply with rules (several such schemes exist, for instance, in the case of carbon emissions). Similarly, environmental instruments may reward certain types of environmentally-friendly activities by subsidising production/consumption or providing fiscal incentives to businesses and households; this often happens, for example, in the case of firms or households using energy-saving or renewable energy technologies (e.g. electricity generated by solar panels, wind turbines or geothermal sources). Such subsidies/fiscal incentives aim at accelerating the pace of green investment and make a sustainable transition more affordable to the average firm and consumer. The size of the benefits and costs stemming from a given environmental standard depends on the stringency of the associated environmental regulation. In the case of a rather rigid standard (e.g. in situations where firms must use specific technologies to reduce pollution emissions below an acceptable level), companies are implicitly forced into purchasing appropriate equipment and invest in infrastructure that allows them to meet the environmental targets (that the standard prescribes). This was the case, for instance, for air and water pollution regulations introduced in the US prior to 1990 (Majumdar and Marcus 2001). More recent regulations, such as the European Union greenhouse gas Emissions Trading Scheme (EU-ETS),1 introduced in 2003, can be classified as more flexible; the EU-ETS sets an overall maximum (cap) on the permissible levels of emissions and allows involved firms to trade pollution allowances (Zheng and Shi 2017). In this case, firms may use this flexibility to decide what is more efficient for them, i.e. to invest in end-of-pipe technologies that allow them to meet environmental targets or alternatively continue with their existing production modes and purchase pollution allowances from environmental market frontrunners. Inflexible regulations often stifle creativity and reduce cost efficiency; flexible regulations, instead, specify only the desired outcome and then leave it to the market and involved parties to decide ‘how’ to achieve this, allowing hence more room for creative solutions. Countries around the world vary regarding the stringency of environmental regulation adopted (and for this reason, any cost–benefit analysis of environmental standards often becomes a country-specific exercise). The accuracy of the cost– benefit calculations is further hindered by the fact that countries vary across multiple dimensions (and not only in relation to environmental standard adoption); the exact same environmental standard may generate differentiated macroeconomic impacts, for example, based on the structure of the economy (i.e. relative importance of sectors), extent of compliance and monitoring, preparedness of government to intervene, maturity of the financial system etc. In many cases, analysis on the economic 1 For

more details about the EU-ETS and its history, refer to https://ec.europa.eu/clima/policies/ ets_en, last accessed on 25/10/2020.

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impacts of environmental regulations distinguishes between developing and developed economies (Low and Yeats 1992; Leonard 1988); developed economies often adopt more stringent environmental regulation (having the largest historical responsibility for global pollution), although they often demand similar action also from poorer nations (for which, equivalent environmental standards can generate more economic disruption across multiple sectors). There is also considerable controversy regarding the characterisation of specific effects as costs or benefits—some impacts associated with environmental standards are likely to be widely perceived as costs for some countries, sectors or stakeholders, while as benefits for others. In the case of non-coordination, countries may take advantage of their own laxer environmental regulation to generate economic benefits at the expense of other nations and stakeholders. For example, firms may decide to transfer production out of their own country in the case of stringent regulations (as to lower production costs by avoiding the implementation of an environmental standard); on the other hand, competing countries may purposively maintain laxer regulations to generate a “pull” factor that attracts investment and business activity from abroad. The rest of the chapter is organised as follows; the next section presents the overall design of a cost–benefit analysis and explains how it helps policy makers taking decision about the desirability of a given program/standard/policy. The section illustrates some of the flaws cost–benefit analysis may present. Sections 3.3, 3.4, 3.5 and 3.6 discuss the different benefits of implementing environmental standards: health related benefits, innovation gains at the firm level, improvements in ecosystem service provision and benefits related to labour demand. Section 3.7 looks at the benefits of a specific international phytosanitary standard (ISPM 15); Sect. 3.8 concludes.

3.2 Cost–Benefit Analysis for Environmental Standards: A Critical Review The growing number of regulations and standards aimed at limiting the effects of human action on the environment has led social scientists to develop new tools to better understand the impacts these regulations may have (Arrow et al. 1996). From a theoretical standpoint, the effectiveness of a given standard (i.e. the extent to which the desired outcome is achieved) is the key criterion to look at when selecting and designing any policy instruments. In reality, however, policymakers and governments face multiple constraints when deciding the appropriate policy-mix in response to an environmental issue; as a result of this, multiple criteria are normally applied simultaneously. For this reason, efficiency is another important criterion often considered when deciding the optimal policy instrument to tackle environmental problems, as it measures how well resources, investments and funds have been used to achieve a specific environmental objective. The cost–benefit analysis (CBA) is, in effect, such an efficiency assessment and is now commonly used for evaluating how desirable impacts (benefits) of a given policy would juxtapose to undesirable impacts (costs).

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For environmental standards, it is common to define the main benefits in terms of the intrinsic value of having a cleaner environment (although multiple ancillary benefits in other domains are also considered, e.g. health, employment etc.). The use of CBA can be dated back to the work of Jules Dupuit, a French engineer and economist who lived in the mid-nineteenth century. He established the foundations of what we nowadays refer to in economics as ‘marginal analysis’, defined as the measurement of the change (impact) in a given variable when a marginal—i.e. minimal-change is introduced into the system (Pearce 1998). While the theoretical foundations of marginal analysis were expanded and developed in the late nineteenth century (especially in the field of microeconomics with the introduction of ‘marginalism’, see Hanley and Spash 1996), there was little progress in putting them into practice. In 1936, however, the United States Flood Control Act2 explicitly stated that water projects in the country should only proceed ‘if the benefits to whosoever they accrue are in excess of the estimated costs’ (Pearce 1998); this was one of the first attempts to put the principles of cost–benefit analysis to use by demanding that all gains and losses should be considered in calculations before a decision on the viability of the project is taken. One may erroneously assume that the costs of a policy may be easier to monetise within a CBA framework, given that there is often easily accessible and accurate information on what governments and firms had to pay to comply with a regulatory standard. However, this can be deceiving (and artificially suppress cost estimates), given that the costs of compliance need to include all negative effects and expenses associated with implementation (rather than solely the direct costs of adoption). Many of these costs also need to be quantified in monetary terms, when there are no readily available market values for one’s perusal. In some cases, it may even be unclear whether a certain impact has been generated as a consequence of the specific standard (and, hence, can be attributed to it within CBA) or whether it would have materialised anyway.3 There are other potential pitfalls embedded in the use of the CBA tool, which are worth mentioning. Justifying projects or policies on the basis of benefits exceeding costs ignores the distributional aspects of these impacts (which are discussed in more detail in Chap. 5). The Kaldor-Hicks criterion (Stringham 2001) is used to justify projects and policies if those gaining can theoretically compensate those losing out, in such a way that losers would be no worse off than before the project was implemented, while gainers would still maintain a net benefit. This implies that (provided that the compensation indeed takes place) no involved party is worse off compared to before, ensuring what economists commonly refer to as a Pareto improvement. It is important to remember that decisions on viability are based on the (theoretical) possibility of

2 For

more details about the Act, see Arnold.

3 Alternative decision-aiding methodologies, such as weighting and scoring schemes, environmental

impact assessment, participatory methods, multicriteria analysis, and cost-effectiveness analysis have been put forward by many authors as preferable in some sense to CBA but they have not been used as much as the CBA in practical case studies (Arrow et al. 1996).

3.2 Cost–Benefit Analysis for Environmental Standards …

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such redistribution (which may not occur in practice due to interest group politics or government inaction). CBA decisions can be especially unfair in the absence of redistribution, when already vulnerable groups are primarily suffering from the costs linked to a new environmental standard (e.g. small firms, low-income segments of the population, marginalised communities and ethnic groups, poorer regions within the same country etc.). Small firms may be unintentionally excluded from the implementation of a new standard because of budget constraints (often due to initial transaction costs), or simply as a result of informational barriers. There is evidence pointing to a lower participation rate of small firms in many new environmental initiatives, often as a result of limited access to capital and skills or due to higher transaction costs compared to their revenues. Small firms may also find less convenient to comply to a new standard, when this adjustment entails uncertain financial returns given their high discount rates and relatively high-risk aversion. Much literature also points to multiple barriers that mostly women face, when they attempt to engage in new businesses or adjust production methods (Brindley 2005; Pehrsson 2009). While the increased costs of implementation can be, in principle, passed to final consumers (so that the cost does not fall on producers alone), in practice most firms attempt to absorb the additional costs; this is out of fear of losing a market share of consumers as a result of higher prices and lower demand (and potentially lower profits if the price elasticity of demand is very elastic). Typically disadvantaged groups are also often excluded from discussions on the design of a standard (which limits the procedural fairness of a new policy, see Chap. 5 for a more in-depth discussion). Political economy analysis has increasingly paid attention to these distributional aspects of benefits and costs in more recent years, rather than just look at the relative size of the two (Atkinson 2009). The other intrinsic problem related to the use of CBA for evaluating environmental standards has to do with the discounting of future monetary flows. Given that costs (e.g. expenses associated with implementation and infrastructural development) typically occur earlier than benefits (e.g. the ecological gains of restoring ecosystems), any positive discounting will inflate the cost values in relation to monetised benefits. This does not only suggest that current generations may be disadvantaged in relation to future ones (given that the costs will largely burden the current generation, while the benefits will accrue to future ones), but that it is also likely to generate unfavourable assessments of environmental projects (e.g. with cost–benefit ratios much larger than unity) when positive (market-based) discount rates are used for calculations (Barbier et al. 1990). The process of complying with international standards tends to be particularly expensive in the case of developing countries due to limited public and private (financial and human) resources available to support implementation. Compliance is further hindered by the fact that most firms are small-scale and face severe budget constraints (and limited access to credit markets, see Harrison and Hanson 1999). Local firms operating in developing countries often face the risk of being ‘cannibalised’ by foreign corporations, as increased costs of production reduce their earlier initial competitive advantage.

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3.3 Health-Related Benefits Environmental standards largely aim at restricting the use of pollutants, limiting exposure to linked chemicals and preventing adverse health outcomes (i.e. increases in cancer rates, cardiovascular diseases, birth defects and neurodevelopmental effects among others). Given the absence of market prices, these adverse health impacts are often difficult to quantify in monetary terms. The challenge of monetising health benefits (as well as the preventive service of an associated environmental standard) is further complicated by difficulties in isolating the effects of a reduced exposure to contaminants; health indicators are (directly and indirectly) affected by a large number of variables, with exposure to pollutants being only one of them (Viscusi 1998). Environmental economists have developed techniques to generate proxy values for environmental services (and regulations) and their health-related benefits (see Ackerman and Heinzerling 2002 for a discussion and critique). One way to approximate such values is by understanding what people would be willing to pay to preserve environmental assets and their uninterrupted services. This method (commonly referred to as contingent valuation) relies on consumers’ responses on their willingness to pay for a specific product or service (which is not traded and priced in markets). Empirical studies abound (e.g. see Liebe 2014 for a discussion on how the literature has evolved over time); a study of Loomis and White (1996), for example, points out how, on average, American households were willing to pay up to $257 to prevent the extinction of bald eagles and $80 to protect grey wolves (with the total value attached to the preservation of bald eagles being equal to $25 billion). An alternative method of estimation consists of inferring values from individual responses on willingness to accept (WTA) compensation for environmental degradation and any associated health damage. For example, one can proxy the monetary value to human life and health through the extra wage (i.e. the wage premium) which workers require to receive in exchange for riskier jobs (i.e. for activities which may pose a threat to their life or health). Estimates of the value of human life vary across studies but they tend to be between $2–10 million for developed economies (Andersson and Treich 2011; Broome 1978; Hultkrantz 2012). While there is an extensive critique on the ethics of monetising human life loss (see Ackerman and Heinzerling 2004), the counterargument is that, without such an exercise (flawed as it might be), any health benefits associated with environmental protection and regulations will largely be ignored within policymaker circles (who rely on such estimates for cost–benefit comparisons prior to taking decisions). Naturally, there are large methodological challenges in eliciting reliable WTP and WTA estimates. Both valuation techniques assume that people are knowledgeable about the issues at stakes, risks and probable health damages; in many cases, respondents are unfamiliar with the issues at stake. Evidence suggests that when survey respondents become more informed about the benefits of a clean environment, their WTP tends to increase; similarly, their response is influenced by their expectations

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on whether the estimated costs will ultimately be borne directly by themselves or by others (MacMillan et al. 2006; Shortle et al. 1999). Naturally, given that WTP/WTA estimates relate to perceptions, values tend to be higher for high risks associated with severe health effects (as in the case of cancer, cardiovascular diseases and chronic health effects for children, McGartland et al. 2017). One’s willingness to pay to reduce exposure to a chemical, with only a suggestive relationship to serious health problems, may be higher in comparison to a chemical where the causal health effect is better researched and empirically proven but of minor (perceived) importance. It may, therefore, be misleading to take account of the latter but not of the former (National Research Council 2014). For this reason, it is important that cost–benefit analysis also includes valuation of those less-certain effects in a complete risk assessment (National Research Council 2014). Ideally, a thorough cost–benefit analysis should incorporate a wide range of health effects associated with varying levels of environmental contaminant exposure and then quantify changes in multiple health indicators due to exposure reduction. The nexus between exposure and a health outcome could then be categorised in accordance with the level of confidence in a causal link.

3.4 Firm Innovation and Performance Porter stated in 1991 that “[…] reducing pollution is often coincident with improving productivity with which resources are used” (Porter 1991). The hypothesis challenged an incorrect perception of a static relationship between economic expansion and environmental performance (i.e. one where industrial inputs, technologies, produced goods and processes are all fixed). Porter suggested that “properly designed environmental regulation can trigger innovation that may partially or more than fully offset the costs of complying with them” (Porter and van der Linde 1995a). Porter’s original analysis (as well as the empirical evidence that followed) stressed the fact that environmental regulations can indeed trigger industrial innovation. Porter and van der Linde (1995b) present a number of general principles, to which environmental standards should adhere in order to foster innovation and productivity. First, environmental standards must allow flexibility (and, hence, create the maximum possible opportunity for innovation) by leaving the decision on which technology to use in order to comply to the standard to the industry itself (rather than impose it directly through top-down decisions). Second, environmental regulations should be set in a way that supports continuous innovative improvement (based on state-of-theart technologies and know-how) rather than locking in any particular technologies and production methods. Third, the regulatory process should try to minimise uncertainty at every stage, which generally stifles innovation and creativity. Porter and van der Linde (1995b) continue by arguing that market-based flexible instruments (as in the case of emissions taxes, tradeable allowances or performance standards) are more conducive to innovation than technological standards, as they leave more freedom to firms to find suitable technological solutions at the lowest possible compliance cost.

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The Porter hypothesis and its variants will be discussed in greater detail in Chap. 4, where we reflect on the impacts of environmental standards on firm performance.

3.5 The Value of Ecosystem Services Healthy ecosystems provide a variety of critical services; they are created by the interaction of living organisms and the environment they live in and they provide both the conditions and processes that sustain human life (purifying air and water, detoxifying and decomposing waste, renewing soil fertility, regulating climate, mitigating droughts and floods, controlling pests, and pollinating plants; see Millennium Ecosystem Assessment 2005). Although implicit awareness of ecosystem services dates back to Plato, ecologists, economists, and other social scientists have only recently begun to examine the impacts these services have on everyday life. Recent evidence points out at the extremely high costs to replace many of these services if they were to cease (Sagoff 2011). Despite their importance for our well-being, ecosystem services have largely been ignored in environmental law and policy. Provision of ecosystem services is rarely considered in cost–benefit analyses with few markets indirectly capitalising on their potential commercial value (e.g. as in the case of charging fees for visiting national parks). Since ecosystem services have no precise market value (as they are not directly traded), economists need to resort to the same valuation techniques described in Sect. 3.3 (for the case of associated health benefits) to generate proxy values for scarce environmental public goods. Environmental standards are often adopted as a means to protect ecosystem services. In both developed and developing countries, such policy initiatives typically involve a range of stakeholders (government agencies, NGOs, and private enterprises) both at the local and national level (Bai et al. 2016). With the current rate of urbanisation and industrialisation (especially in the so-called emerging economies), as well as the growing demand for food, international environmental standards offer solutions to mitigate the negative environmental externalities associated with resource security, urban development, flood risks and international pest movements (Dan et al. 2014; Li et al. 2014; Zhong et al. 2013). In many cases, national environmental regulation tried to fill the void of international inaction and set up rules/policies to safeguard ecosystem services. China, for example, has proposed a new ecological redline policy (ERP) which defines the ecological principles needed to provide ecosystem services and to guarantee and maintain ecological safety. Since 2014, ERP is part of the Chinese environment protection law and is implemented in all Chinese provinces (Xu et al. 2015). Another example comes from Madagascar, where government decisions to establish the 2,300 km2 Masoala National Park were based not only on a national policy to promote biodiversity conservation, but also on the anticipated capture of local ecosystem service benefits including sustainable forestry, production of non-timber forest products, and ecotourism (Kremen et al. 1999). In the Ha Tinh Province of

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Vietnam, changes in community-level institutions have produced significant incentives for ecosystem service-based conservation. One village, Ky Thuong, has voluntarily established a reserve for the protection of biodiversity and supply of local ecosystem services (Salzman et al. 2001). India, as well, is putting in place measures to safeguard biodiversity by promoting changes in farming practices that combine protection of valuable plant species, food security and carbon sequestration. (Walker 1999).

3.6 Effects on Labour Demand Tradeoffs between employment and environmental protection/regulation have been debated extensively since the 1970s, and even more intensively in recent years when environmental policies became more stringent (Belova et al. 2013). Environmental measures have been largely welcomed by environmentalists, who maintain that there is not a positive causal relationship between such initiatives and high rates of unemployment; on the contrary, some national governments and industry representatives view such measures as possible threats to production and employment. The nexus between environmental standards and labour demand became an issue of interest also for the United Nations, which, in 1983, set up a commission to understand the link between environmental regulation and several macroeconomic indicators. The World Commission on Environment and Development (1987) concluded that sustainable industrial development (with the support of environmental legislation) is not incompatible with employment creation (World Commission on Environment and Development 1987). Despite this intense and prolonged debate on these issues, the available quantitative evidence on the impacts of environmental standards on the labour market is far from conclusive (Jaffe et al. 1995). Environmental standards can generate opposing effects on the labour market (Chen et al. 2018). On the one hand, activities put in place by industries to implement a given environmental standard generally increase overall production costs and potentially decrease labour demand through reduction in sales; on the other hand, activities related to abatement and environmental protection can stimulate employment creation, assuming that these are indeed labour-intensive (Berman and Bui 2001). In many cases, the implementation of an environmental standard requires the adoption of new technologies, which at least in the short run requires investment in new skills and personnel (Golombek and Raknerud 1997). Some firms, though, may struggle to finance such a transition and may need to either reduce their use of unskilled labour to reduce expenses and maintain profitability (and in the worst case scenario, they may shut down production if they cannot maintain competitiveness, with immediate repercussions for their employees). Given earlier inconclusive empirical evidence, impact evaluation analysis can shed some more light into this complex relationship; this can be done by gathering detailed micro data on local air

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pollution regulations in a specific region of the country and construct relevant treatment and comparison groups (assuming that some production facilities have been subject to pollution regulation, and others not). A new stream of research has investigated corruption and its manifestations (i.e. bribery and rent-seeking behaviour) and probed into how this mediates the effects of environmental regulation (Damania et al. 2003). The link between the intensity of the environmental regulation and the employment level in manufacturing enterprises has been researched in China, where corruption has been endemic (Guo 2008). Sheng et al. (2019), for example, use data from the 2003 World Bank’s Investment Climate Survey from 18 China’s cities to measure the impact that different stringency levels of environmental regulation have on the employment rate in manufacturing enterprises and explore how the nexus is conditioned by the extent of corruption (Sheng et al. 2019). In general, more stringent environmental regulation can have a negative impact on the employment rate via both an output channel (with less output being produced as a result of larger operating costs) and a substitution effect (by substituting labour with other forms of capital to meet standard regulations). They find that corruption, in general, enhances these negative effects on employment by making it easier for firms to offload workers with limited resistance and compensation.

3.7 Benefits of the ISPM15 Phytosanitary Standard The International Standard for Phytosanitary Measures No. 15 (ISPM15) requires treatment of wood packaging material (either with methyl bromide or through heat treatment) to prevent the international transport and spread of pests. While compliance to the ISPM15 standard comes with substantial costs (discussed in Chap. 4), it brings about several benefits to implementing countries. The immediate benefit of compliance to the standard is the avoided disruption to exports in the case of non-adoption (at least for exports to importing countries that have already adopted the standard). Implementing firms maintain access to international markets with the use of treated (ISPM-15 compliant) wood pallet material (which are then certified to be free of pests). In this regard, ISPM15 allows compliant firms to preserve their international market share (or even enlarge it) and maintain any comparative advantage gained over time. In Chap. 6, we touch upon issues related to environmental standards and trade in more depth—we then explore how the ISPM15 standard influenced the sign and size of trade flows across trade partners and for specific sectors. The potential benefits of implementing ISPM15 extend to

3.7 Benefits of the ISPM15 Phytosanitary Standard

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simplifying (lengthy and expensive) bureaucratic procedures, which often involve substantial transaction and paperwork costs (as it harmonises export procedures to markets with initially divergent SPS measures, see Henson et al. 2000). The benefits of implementing the standard do not only accrue to exporting businesses but to trading countries as a whole; the ultimate objective of the standard is to reduce—if not eliminate—the introduction of alien pests that are likely to cause severe damages to local ecosystems and pose a threat to agricultural yields. While these benefits may be difficult to accurately value in monetary terms, they do play an important part when weighting the benefits against the costs of the ISPM15 standard. Due to limited data availability on ISPM15 implementation, especially across developing countries, it is extremely challenging to perform rigorous economic analysis (that captures sectorial trade or labour impacts). Furthermore, it is important to keep in mind that most of the existing economic analyses (aimed at quantifying the monetary consequences of introduced foreign pests) have focused on single species (Leung et al. 2012) and are, hence, not necessarily representative of the costs other countries may face when other species enter their territories and infest forest or farm land. Although most non-native species cause low or intermediate impacts when entering a new host country, the combination of such costs can be rather high. Available economic studies have focused on linking the introduction and spread of pests with the reduction in the value and volume of forest products, as a consequence of tree death or a reduction in timber quality (Krcmar-Nozic et al. 2000). While a pest may initially only infest a circumscribed area, it often expands its range to neighbouring zones and its eradication can involve substantial effort and costs. Soliman et al. (2012) estimated that the cumulative value of lost forest cover over a period of 22 years (from 2008 to 2030)—assuming no regulatory preventive measures in place—would amount to approximately $26 billion. Along the same lines, a study conducted by Mumford (2002) showed that roughly 4,500 new pests were introduced into US territory between 1900 and 1991, with cumulative damages estimated to be at least $103 billion (Windle 1997) as a result of associated disruption caused primarily to agricultural and industrial sectors. It was precisely the need of enhancing prevention of such pests (as in the case of pinewood nematode, the Asian long-horned beetle, bark beetles and weevils) that provided the motivation and justification behind the inception of the ISPM15 standard. There are a couple of studies worth mentioning by Pimentel et al. (2001) and Pimentel et al. (2005), initially conducted in Australia, Brazil, India, South Africa and the United Kingdom in 2001 and then replicated in 2005. Their analysis indicates that alien pest invasion cost these countries approximately $256 per capita per year. The authors suggest that (assuming similar costs apply worldwide) total damage from pest invasion would amount to about $1.4 trillion per year (or about 5% percent of global GDP). The socio-economic impact is expected to extend well beyond the time horizon of the analysis and long after the spread of a pest comes under control (Colautti et al. 2006). Human well-being may also be indirectly affected by some pests, as there are species that can negatively affect human health either because they are vectors of diseases or by causing allergies. In addition to that, there has been a significant

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increase in the mortality rate due to cardiovascular diseases in areas infested with the Emerald ash borer (although there are difficulties in establishing causality with absolute certainty, see Pimentel et al. 2005).

3.8 Conclusions The chapter explains in detail the importance of conducting a CBA when evaluating the impacts environmental standards generate. CBA constitutes an important tool helping decide whether an environmental standard generates benefits that outweigh costs. It is vital to stress the fact that decisions whether to adopt (or not) a given policy/standard cannot rely exclusively on the results of the CBA (and the mere comparison of associated benefits and costs), as there are other additional factors to take into account. For instance, the distribution of costs and benefits among stakeholders, across developing and developed countries, and across small and bigger enterprises, are equally important elements of such an assessment. Despite its limitations, cost–benefit analysis can help policy-makers better understand the implications of their decisions by identifying and, where appropriate, quantifying the favourable and unfavourable consequences of a proposed initiative. The importance of the CBA as a tool to evaluate policies/standards/programmes is stressed by the recent creation of the Impact Assessment guidelines by the European Commission (CEC 2005). The guidelines offer a comprehensive approach to bring together the economic, environmental and social impacts of a policy, including how these impacts are spread across different groups within society. This chapter discusses the main benefits of implementing and complying with environmental standards. A recurring issue discussed throughout the chapter is the difficult in monetising the benefits (and costs) of environmental policy and regulation, either regarding health or environmental impacts. As previously mentioned, dividing the benefits from the costs also represents a challenge in itself; an economic/environmental/social impact can be interpreted as a benefit for a group of stakeholders or as a cost for another one. For this reason, this chapter on benefits should be read in combination with the next one, which deals with costs.

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Chapter 4

The Costs of Environmental Standards

4.1 Introduction Compliance to environmental standards potentially entails a number of substantial costs. It can happen that firms operating in a country with stricter environmental regulations can lose their comparative advantage in international markets. This may lead to the relocation of dirtier industries to destination countries of a looser environmental regulatory framework. And, are there also hidden indirect costs which should also be taken into consideration? Are environmental standards always detrimental to the competitiveness of firms? Here, we will try to seek answers to all these (and other) questions by looking at economic theories underpinning environmental standards, as well as by making reference to results coming from case studies and quantitative analyses. As the analysis proceeds, it will become obvious that disaggregating all the costs (and benefits) is a complicated and demanding task, as there is a long list of direct and indirect components of costs (and benefits) to consider. First, we will discuss the direct and indirect/hidden costs of environmental standards (Sect. 3.2), and then we will move to reflect on how such costs may impact a firm’s economic performance and profitability (Sect. 3.3) and its comparative advantage (which is often the outcome of long accumulated efforts, Sect. 3.4). Section 3.5 will look at the threat of pollution-intensive industries relocating to countries with less stringent environmental regulation (with associated loss of income and employment). In Sect. 3.6 will explicitly focus on the difficulties developing countries often encounter when implementing environmental standards. Section 3.7 will look at a specific phytosanitary standard (the ISPM15) and examine in detail its cost components.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_4

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4.2 Direct and Hidden Costs One of the step of the CBA consists of measuring the direct costs that the implementation of and compliance to the environmental standard entail (the other step -the measurement of the benefits- has been discussed in the previous Chap. 3); ideally those costs and benefits should be assessed by comparing them with the costs and benefits of the alternative business-as-usual scenario prior to the introduction of the standard (Harrington et al. 2000). By such a comparison, one can proxy the part of costs (and benefits) that one can attribute to the intervention (in our case, to the introduction and adoption of the environmental standard). Implementing and complying with an environmental standard (and more stringent environmental regulation more generally) can significantly affect the overall production costs of firms (Joshi et al. 2001). This additional burden can take place in multiple ways (White et al. 1995). The total costs of environmental regulations are the sum of direct costs (which the accounting system easily identifies and tracks) and hidden/indirect costs (which often remain unaccounted for). For example, direct costs, such as the ones relating to the installation and maintenance of pollutioncontrol equipment and end-of-pipe emission treatment costs, are easily measured and hence become part of a company’s accounting records. There can also be, however, substantial indirect/hidden costs that limit the potential profitability of a firm and can impose additional constraints on its production technology (and, inadvertently, such costs may not be immediately recognised as being associated with the adoption and implementation of an environmental standard). Firms, for example, may incur additional indirect labour costs to monitor and report levels of pollutants and maintain pollution control equipment. Environmental regulations may also increase administrative costs (for example, legal specialists may be involved in regulatory activities for obtaining permits and licenses). Firms often do not report such costs as environment related costs and instead include them in general and administrative overheads (Epstein 1996). Epstein (1996)—in an attempt to document best practices for identifying, measuring, and assessing environmental costs- studied the accounting system of more than 100 firms across the world. His study concludes that most companies lack adequate systems for accurately measuring and managing environmental costs; they do not separately record environmental costs and most of the environmentrelated costs are not properly recorded in accounting systems as such. Similarly, in a Price Waterhouse’s survey of 445 companies, about half of the directors responded that their cost accounting systems is not suited to identify all costs -both direct and indirect- of environmental compliance (Price Waterhouse LLP 1994). In 1993, the World Resource Institute conducted case studies exploring how firms account for environmental costs (Ditz et al. 1995). These studies rely on a review of costs associated with environmental standards, gathered via on-site interviews of corporate and plant-level personnel. The authors analyse cost data for specific product lines in each firm to illustrate any environmental components of traditional product cost categories. For example, they separate the maintenance of pollution abatement equipment from (other) maintenance costs. The results indicate that total

4.2 Direct and Hidden Costs

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environmental costs are not negligible and range from 2.5% of net sales to 22% of operating costs. Despite all the difficulties in correctly measuring the components of costs induced by environmental regulation, there have been several studies which try to accurately assess the size of environment-related costs (see Dechezleprêtre and Sato 2017, for a review). Studies typically find that the magnitude of environment-related costs depend on the type of environmental regulation. Pasurka (2008), for instance, finds evidence supporting that the size of costs related to pollution abatement largely depend on how stringent environmental regulation is. Across nine countries in Europe, North America, and Asia, the share of manufacturing capital expenditure assigned to pollution abatement in 2000 ranged from the lowest 1% in Taiwan to the highest 5% percent in Canada. He also finds that larger environmental costs for specific industries bear important consequences for subsequent firm performance and competitiveness (which we discuss in more detail in Sect. 3.3). There are striking differences across industrial sectors, with abatement costs considered to be typically much higher for pollution-intensive industries (such as pulp and paper, steel, and those refining oil). In the US, for example, in 2005 each of these sectors spent approximately 1% of their turnover towards compliance with environmental regulations, while the average for all manufacturing plants was slightly lower, at about 0.4% (Ferris and McGartland 2014). Iraldo et al. (2011) stress that differences in the size of these environmental costs may arise as a consequence of the nature of the business and not only from the stringency of environmental regulations (see also Goulder and Parry 2008). Environmental policies cause changes to a firm’s production costs and may trigger a whole different set of responses, which can alter decisions on pricing, output, or investment. For example, in the case of pricing, firms may decide to absorb the increase in production costs or pass it through to consumers (in Sect. 3.8 we present an applied example of how compliance costs are transferred from the firm to consumers). As mentioned above, some obvious direct costs of implementation (e.g. acquiring pollution-abatement equipment to comply with the standard) are straightforward to calculate in monetary terms. However, environmental standards often involve multiple other, less direct, transaction costs that would also need to be taken into consideration (for a complete CBA). These include: i.

ii.

iii.

Information costs. These relate to the process of acquiring information that is required to effectively implement the standard. Those costs relate to campaigns aimed at sensitising the public or firms regarding the necessity of the standard and its anticipated environmental benefits. Administrative costs. These can be substantial costs (both for the government and for firms) when the standard entails detailed bureaucratic procedures. These costs relate to processing and evaluating forms and procedures, as well as the cost of stakeholder planning and consultations. Monitoring and enforcement costs. These costs depend on the complexity of the requirements and the efforts involved in verifying that the implementation of the standard has been successful (and hence that the firm is complying with the

36

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4 The Costs of Environmental Standards

standard). Corruption may be a key constraining factor, especially for countries characterised by weak governance systems and poor law enforcement. Judicial procedures. These costs relate to legislative amendments or new laws which are necessary to support the implementation of the standard; such procedures may be time consuming and, depending on how responsive the legislative system is, delay implementation.

In addition to these costs, other context-specific considerations may play a role in terms of determining the costs of environmental regulations: i.

ii.

iii.

iv.

The scale and nature of associated environmental benefits. It is likely that the legitimacy and social acceptance of a standard will be higher, and its related costs lower, when the public understands the importance of the standard’s implementation and of its intended environmental benefits. The number of actors involved. The larger the number of actors being involved in the standard implementation, the higher the associated transaction costs described above are likely to be. The spatial distribution of the actors plays a role too; costs are likely to increase if the actors involved in the implementation of the standards–e.g. legislators, inspectors–are situated in multiple locations. The financial constraints of the local government or institutions. This is particularly relevant in the case of developing countries, where the successful implementation of the standard might be hindered by the unavailability of financial resources or lack of knowledge of procedures. Even when these resources become available, they might come at the expense of the provision of other public goods. Social and cultural conditions. The customs, habits and traditions of every given society affect the acceptance of a specific standard. Information campaigns are often necessary when there is strong cultural resistance towards new regulations (which may require drastic behavioural changes). This is likely to happen when a new standard is at odds with established social norms and common practices (which will limit its public acceptance and hamper its enforceability, Brunel and Levinson 2016). As a consequence of that, low social acceptance will lead to an infringement of the standard which will—in turn—lead to reduced effectiveness of the standard and higher enforcement costs.

The only way of accurately measuring the magnitude of the costs associated to the implementation of environmental standard would be to compare ex ante with actual ex post costs, and assume the ceteribus paribus assumption. Harrington reviews more than two dozen ex ante/ex post aggregate values of costs and suggests that ‘in numerous case studies, actual compliance costs are lower than predicted because of unanticipated use of new technology’ (Harrington et al. 2000). This raises, hence, the question of whether firms’ attitude towards innovation and ability to react flexibly may play a role in lowering compliance costs. These features will be discussed in the next section.

4.3 Firm Performance and Its Competitiveness

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4.3 Firm Performance and Its Competitiveness Environmental standards can influence firm performance in several ways. The overall production costs for the firm are likely be affected (with the the sign and magnitude of the change depending on several factors, as we discussed in the previous section). Even if the accuracy of cost estimates can be questionable (especially, given the poor accounting practices in several parts of the world), there is a general agreement that changes in production costs depend on the type of firm, the sector within which it operates and the stringency of environmental regulations. As a consequence of the changes in the costs the firm is facing, its performance and competitiveness (both at the national and international levels) may be impacted as well. Environmental standards will likely affect the competitiveness of whole sectors of the economy, to the extent that domestic adoption is rather universal. Economic theory predicts that a country which imposes more stringent regulations on its businesses (i.e. compared to other competing countries) is expected to experience a deterioration (or even loss) of its comparative advantages and a gradual worsening of its trade balance (van Beers and van Den Bergh 1997). This is especially the case for those sectors and firms which tend to be more pollution-intensive (for these firms, compliance with stricter environmental standards is likely to entail a substantial rise in production costs and a consequent loss of competitiveness in international markets). It is also for the same reason (and to avoid such compliance costs) that such firms often decide to migrate to other regions, where environmental policies are less stringent or largely absent (the migration of businesses to such pollution havens will be discussed in Sect. 3.6). This neoclassical view—albeit very generalised in its picturisation- suggests that regulations are damaging for businesses, even when considered desirable for the local environment and communities (i.e. from a social perspective). More recent analysis, however, seems to contradict the neoclassical tenets and suggest that firms can benefit too from the presence of environmental regulations (i.e. if regulations are properly designed, Ramanathan et al. 2017). The ability of a firm to meet regulatory requirements and at the same time improve its overall performance is sometimes referred to as a ‘win–win’ situation and is captured by the so-called Porter hypothesis (Porter 1991). The Porter hypothesis posits that environmental regulation can, in principle, simultaneously benefit environmental public goods (via a reduction in overall pollution) and increase the profitability of private firms. There has been a buoyant academic debate on the Porter hypothesis in the last thirty years with several papers claiming that well-designed environmental regulations can stimulate innovation (which positively affect firm productivity and revenues; Porter 1991; Porter and van der Linde 1995). In this way, environmental regulations not only provide advantages for the society as a whole (by raising protection of environmental public goods), but also benefit the private enterprises subject to them. Different versions of the hypothesis have been elaborated and empirically tested (Xie et al. 2017). Jaffe and Palmer (1997) present three distinct variations of the original proposition. The “weak”

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4 The Costs of Environmental Standards

version states that environmental regulation always stimulates environmental innovation. The “narrow” version of the hypothesis posits that more flexible environmental regulation provides greater incentive to innovate compared to stringent regulation. Last, the “strong” version asserts that properly designed regulation induces costsaving innovation that more than compensates for the cost of implementing and complying to the standard. Empirical tests have shown mixed results and there is still much ongoing empirical research assessing the nexus between environmental regulation on one side and innovation, profitability and revenues for private firms on the other (Ramanathan et al. 2017). While case study evidence suggests that there are often new technologies developed in response to environmental regulations (which help lowering costs), there are also several econometric studies providing limited support to an environmental regulation induced effect on innovation (Jaffe and Palmer 1997). Some studies suggest that the key ingredient to have a win–win situation is a proper design of regulations, one that takes into account not only the environmental objectives but also the economic situation of a given country and its industrial sector (Costa and Ferrao 2010; Costa et al. 2010). ‘Flexible regulations’ (often referred to as ‘innovation friendly’ and ‘smart’ regulations) are considered to be the driver for generating such win–win scenarios (Majumdar and Marcus 2001; Partzsch 2009). Others studies emphasise that what matters the most is not the nature of adopted regulations, but instead the managerial attitude of a firm and its ability to innovate (Christmann 2000); business performance can be positively affected by environmental regulation if managers are able to act quickly and innovate (adjust production methods, invest in new technologies, hire personnel with new skills) irrespective of how stringent the new regulations may be (Iraldo et al. 2009; Lopez-Gamero et al. 2010). Ramanathan reaches very similar conclusions (Ramanathan et al. 2017); the analysis by Ramanathan shows that firms with a more dynamic approach (regarding a more proactive management towards improving environmental performance) are generally in a better position to reap the benefits of new environmental regulations and sustainable initiatives (e.g. by reducing the consumption of energy and raw materials and hence lessen their waste/pollution impacts). Other quantitative analyses seem to suggest that environmental regulations cause losses in productivity and sectorial comparative advantage. Barbera and McConnell (1990) focus on the most heavily polluting US industries and find the effect of costs following new environmental standards on overall productivity to be negative; the range of productivity decline lies between 10 and 30%, depending on the size and pollution-intensity of affected firms. A related study by Boyd and McClelland in the late 90 s concludes that investments in pollution abatement crowd out other types of productive investment; this is proved to be particularly true for the US paper industry, where stringent environmental regulations were associated with a 9% reduction in production levels (Boyd and McClelland 1999). This result is also confirmed by a follow-up study on a different industry. Gray and Shadbegian (2003) measured a 10% decrease in the productivity of US mill industries, shortly after the introduction of environmental regulation for the sector.

4.3 Firm Performance and Its Competitiveness

39

A larger study conducted by Rubashkina et al. (2015) (utilising firm-level data across 17 European countries) finds no evidence in favour of the strong Porter hypothesis—i.e. regulation costs exceed in general any benefits accruing from cost-saving innovations. Rexhäuser and Rammer (2014) also conclude that the strong Porter hypothesis does not generally hold, but also claim that the impacts of regulations on competitiveness tend to be rather heterogeneous and depend on several factors (e.g. on the type of environmental innovation, type of industry etc.); in other words, any a-priori generalisation of the relationship between regulations and innovations will be inaccurate (at least without looking at context-specific parameters). Another key factor that may help us understand the sign of the effect is time; Lanoie et al. (2008) and Peuckert (2014) claim that there is a negative relationship between regulations and innovation in the short term, which, though, becomes positive in the long-run. The heterogeneity in these findings suggests that the sign of the effect largely depends on individual firm behaviour and response to environmental regulations. If regulations appear to be flexible enough, firms have the opportunity to adapt to new circumstances and regulations in the most efficient way (i.e. in the least disruptive way in relation to earlier production processes); in principle, this gives a company the extra space to redesign its production processes, adopt environmentally friendly practices (e.g. energy conservation and waste management) and even position itself as a frontrunner in environmental protection and innovation (Wu et al. 2012).

4.4 Changes in Comparative Advantage The change in a firm’s economic performance and competitiveness (as a result of the introduction of new environmental regulation) can also modify its comparative advantage (in relation to alternative international competitors). Differences or asymmetries in the stringency of environmental regulation across countries affect the relative competitiveness of businesses competing within the same market (Anderson 1996). For instance, some businesses may undergo major changes in their production processes as a consequence of the implementation of an environmental standard; however, other competing firms, located in countries with looser environmental standards, will not need to face any similar economically-painful adjustments (and incur the additional costs as a result of it). Such asymmetries (regarding the adoption of mandatory standards) can also affect competing sectors within the same country (that may produce substitutable goods). If competing firms are facing identical regulation, then the relative competitiveness of firms should be little affected (unless of course, some firms find it harder to adjust their production processes); if the environmental regulation firms have to implement is asymmetrical, however, then their comparative advantage may be altered as a result of this (Dechezleprêtr and Sato 2017). The standard theory of comparative advantage (the Heckscher–Ohlin model) can be modified to incorporate the role of environmental standards and the effect these may have on the comparative advantage of firms and sectors (Leamer 1995).

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4 The Costs of Environmental Standards

Differences in environmental regulations can affect the production costs of firms and their ability to compete with other market players (Gong et al. 2020). Pasurka (2008) measures differences in pollution abatement costs across nine countries in Europe, North America and Asia. The percentage of manufacturing capital expenditure spent for pollution abatement in 2000 was about 1 and 5% for firms in Taiwan and Canada respectively. The economic sector to which these companies belong is also of importance; as we mentioned earlier, the abatement costs tend to be higher for pollution-intensive industries. In the US, firms operating in the pulp, paper, steel and oil refining sectors spent in 2005 on average 1% of their turnover towards compliance with environmental standards, while other firms operating in the manufacturing sector spent considerably less (i.e. about 0.4%, Ferris and McGartland 2014). As the number of environmental standards has considerably grown (and global economic integration deepened at the same time), the impact of environmental regulations on a country’s comparative advantage has attracted increasing attention among economists and social scientists (Cherniwchan et al. 2017). Some studies point out that environmental regulations are not only a crucial factor affecting a country’s comparative advantage (Copeland and Taylor 1994; Li et al. 2012), but also a policy tool for governments to solve market failures associated with environmental problems (Tong et al. 2016). Increasing the intensity of environmental regulations can potentially not only remove environmental externalities, but also promote a more sustainable industrial transformation and greener innovation (Zhang et al. 2020). In many cases, however, environmental standards hamper exports of implementing firms and countries. In countries with limited environmental assimilative capacity (i.e. constrained ability of the local environment to absorb pollution, possibly as a result of prior environmental pressure), there will be a greater appetite for stringent environmental regulation. In such cases, firms will find it more expensive to produce pollution-intensive goods. Any further introduction of environmental regulations will impose additional production costs and will shirt comparative advantage away from pollution-intensive sectors. As more environmental standards become adopted (or existing ones become more stringent), an increasing number of ‘dirtier’ firms and sectors will become less competitive in international markets. New specialisation patterns will emerge; countries with stricter regulations will specialise in greener products, while competing trade partners with looser regulatory frameworks will specialize in pollution-intensive goods (since they can produce these at a lower cost). There have been several recent quantitative studies looking at the effect of newly introduced standards on comparative advantage both at the firm and country level. Cole et al. (2010) conducted an empirical study using data from 41 industries in Japan and found that environmental regulations would negatively affect Japan’s comparative advantage (although, they find that the impact on exports appears to be relatively short-term). Millimet and Roy (2016) examined the relationship between environmental efficiency and export trends and concluded that environmental regulations do constitute a significant determinant of differences in competitive advantage across industrial exporters. Ollivier (2016) found that asymmetric environmental regulation (i.e. when countries adopt regulation of different stringency) may provide some countries with a comparative advantage in pollution-intensive industries and increase local

4.4 Changes in Comparative Advantage

41

pollution. Along similar lines, Du and Li (2020) posited that environmental regulation may reduce the comparative advantage of China’s trade industries and restrain the export performance of Chinese enterprises. Other scholars, however, reach different conclusions and claim that the enhancement of environmental regulation are not likely to have any substantial impact on a country’s comparative advantage. Gong et al. (2020) indicate that, while a change in comparative advantage may occur, this will be of a rather short nature (with any effect dissipating in the long term). Lu (2009) analysed data from a sample of 95 countries and concluded that it is not advisable to reduce environmental regulations in order to favour pollution-intensive products. This study builds on evidence suggesting that the comparative advantage of Chinese exporting industries in foreign markets is not due to less stringent environmental regulation but rather thanks to abundant labour factor endowments (Li et al. 2012).

4.5 Pollution Havens and the Spatial Relocation of Industries Changes in production costs, firm profitability and comparative advantage are likely to negatively influence export performance and incentivise some polluting-intensive industries to relocate their production (Siebert 1992). The question here is whether differences in environmental regulations across countries may influence the migration of dirty industries from countries with more stringent environmental policy to countries with a less stringent regulatory framework. It is very likely that several developing countries decide to have a laxer environmental regulation in order to attract foreign direct investment and end up attracting primarily polluting industries (Dowell et al. 2000). Environmental regulation and its enforcement vary amongst countries and even within regions of the same country. Researchers have proposed the Pollution Haven Hypothesis (PHH) to describe the impacts that differences in environmental regulation may have on the relocation patterns of pollution-intensive industries. It postulates that polluting-intensive industries often seek lower production costs in countries with lower environmental standards, which then progressively turn into ‘’pollution havens’ (Shen et al. 2019). According to the PHH, formulated first by Copeland and Taylor (1994), the removal of barriers for trade and foreign investment can lead to a relocation of environmentally harmful production from countries with more stringent environmental regulations to economies with a looser regulatory framework; in practice, this often translates into a relocation of pollution from high-income industralised nations to developing ones. The empirical evidence on the PHH remains ambiguous (Levinson and Taylor 2008), as there are many other factors that simultaneously influence comparative advantage and competitiveness. However, the formulation of the PHH has made policymakers increasingly concerned about the effects of environmental

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policies on the locational preferences of competing industries (especially regarding multinational corporations, which have also in the past relocated production units to benefit from lower production costs). Low and Yeats (1992) used a revealed comparative advantage technique to determine the role of location pull factors for dirty industries. They showed that developing countries have a stronger tendency to develop a comparative advantage in polluting sectors (and attract international firms from these sectors), as opposed to more developed economies. The PHH was also confirmed by the results of the analysis conducted by Rock and Angel (2007); their work on the typologies of industries present in China suggested that the country seems to follow the developmental model of “growth first, cleaning up later”; lax environmental regulation initially attracted pollution-intensive industries (as a growth stimulant), which were later on substituted by more environmentally friendly firms and productive processes (as environmental concerns grew and demand for environmental protection steadily increased). Liu et al. (2018) observed that there was also a relocation of Chinese pollutionintensive activity, although this relocation did not take place across national borders but domestically (at the regional and inter-regional level). Cross-provincial differences in environmental regulation hence led to a Chinese regional pollution-haven effect. The implementation of the US Clean Air Act Amendments1 in the 1970s triggered an increased academic interest on the nexus between the stringency of environmental regulation and the spatial distribution of polluting plants. Most of these studies provided support to an inverse relationship between the locational presence of pollution-intensive plants and air quality regulatory stringency (Becker and Henderson 2000). Naturally, not all firms decide to relocate to sites with looser environmental regulations; the study by Hanna (2010) indicates that several US based firms never considered moving their productive units abroad following the Clean Air Act Amendments and instead chose to modify their production technologies to comply with new regulations. Several other studies cast doubt on how sizeable the pollution-haven effect is. Ederington et al. (2005) and Manderson and Kneller (2012) find that many polluting industries appear to be relatively immobile and less sensitive to changes in environmental regulation and associated costs. Along similar lines, Cole and Elliott (2005) indicated that many industries are reluctant to move abroad; this is because many polluting firms are more sensitive to the presence of (and proximity to) physical and human capital rather than to the stringency of domestic environmental regulation is in their country of operation. According to them, the location driver is more closely linked to the geographical availability of appropriate know-how and infrastructure, rather than incentives to cut costs in sites of looser environmental regulation. Manderson and Kneller (2012) look at production sites located in the United Kingdom and find that free-trade policies and a supporting enabling environment is more important (even for pollution-intensive) firms than lax environmental 1 For

more details about the act, refer to https://www.epa.gov/clean-air-act-overview/evolutionclean-air-act, last accessed on 25/10/2020.

4.5 Pollution Havens and the Spatial Relocation of Industries

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regulation. In general, the geographic concentration of environmentally-friendly or pollution-intensive firms cannot be explained only by looking at the stringency of environmental standards alone; other intrinsic characteristics of the industry (its historical background and reputation, average firm size, economies of scale as a result of clustering of firms, government infrastructure etc.) also play a major role in determining the location of an industry (Cole and Elliott, 2005; Ederington et al. 2005).

4.6 Implementation of Environmental Standards in Developing Countries For most developing countries, persistently low levels of investment in pollution control and environmental management suggests that environmental policies and regulations are likely to generate large benefits for every dollar spent for such purposes. A study found across a range of Asian countries (including Thailand, Indonesia and China) finds that the cost of several environmental measures (such as phasing out lead in petrol and investing in clean water supplies) is by far smaller compared to the value of accrued benefits to human health (Yang and Percival 2009). The difficulty in computing the whole range of direct and indirect effects, as well as the quantification of all the costs and the benefits related to the implementation of environmental standards, is partly related to the lack of accurate data. At the same time, most developing countries had limited environmental regulation in place until recently (and often not out of own initiative). As the number of adopted environmental standards has been increasing over time, the academic interest and number of publications on the topic has also been on the rise. There is also an increasing recognition of the urgency for accurate data collection and comprehensive impact evaluation studies for developing countries. We increasingly come to realise that the costs of implementation, compliance and enforcement of environmental standards represent a substantial financial burden for most developing countries. The size of costs related to the environmental regulation will naturally be context and country specific. Several factors are at play, such as the efficiency, professionalism and accountability of government officials and inspectors, the ability of and speed at which firms adjust to new measures and required changes and the alignment of the supply chain to the new legislation. In some cases, necessary investment costs have been estimated to even exceed the value of total annual food exports of the implementing country, as in the case of Mozambique (Shafaeddin 2007); this raises concerns on how efficient environmental regulation can be especially for developing countries, given that other pressing issues affecting the population (e.g. poverty alleviation, health, economic growth) are often placed higher in the policy agenda.

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The governments of developing countries are largely apprehensive about the substantial costs of environmental standard adoption (as well as the overall opportunities, and challenges of a greener economic development path). Standard implementation often requires expensive infrastructure and technologies, to which most developing countries lack access; in addition, the fact that environmental objectives are often not a spending priority in national development plans complicates things further. This is especially so when environmental objectives and standards are not seen as producing synergies (e.g. in the form of simultaneous environmental protection and poverty reduction or enhanced economic growth). The accrued benefits of environmental protection are often either of a long-term nature or not immediately apparent to large parts of the population; instead, the high initial costs of standard implementation (and compliance) often generate immediate disruption (and hence resistance towards them). The international community should therefore play an important role in providing resources (both through transfers of technologies and know-how, as well as financial support) to facilitate poorer economies in the transition towards a greener growth paradigm (Liu et al. 2020). Given the high level of dependence of developing economies on their primary sectors and natural resources, an alternative development model that sacrifices environmental quality is likely to generate only short-term benefits.

4.7 Costs of Implementing the ISPM15 The precise assessment of the direct and indirect costs related to the implementation of and compliance to the ISPM15 phytosanitary standard is no easy task. The direct costs comprise of those expenses which are directly related to the implementation of the ISPM15. These are, for instance, the firm costs related to treating the wood packaging materials used for exporting goods or the costs associated with changing national legislation and setting border inspections to monitor and enforce regulations. The magnitude of these costs varies from country to country; naturally, one expects these to be higher for countries with limited experience in environmental management and inadequate infrastructure and human capital to support new environmental initiatives. The analysis of the costs should also consider those spillover costs, which are likely to be generated indirectly by the standard implementation. Table 4.1 provides a summary of both the direct and indirect components of costs. For the specific case of the ISPM15, anecdotal evidence suggests that most of the costs related to the standard implementation are incurred by the exporting firms. Exporting companies have to pay for the direct costs of compliance to the standard through the increased purchase price of treated (compliant) WPMs used for exports. Typical costs of WPM treatment include expenses for purchasing a heat chamber or the necessary equipment to apply MB. Regarding the price at which treated WPMs are sold for, estimates have shown that compliant pallets are sold at a premium of about $0.60 apiece (Hassler et al. 2010). Any CBA should also look at variable costs

4.7 Costs of Implementing the ISPM15

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Table 4.1 Costs and benefits related to ISPM15 implementation Costs of ISPM15 implementation Direct costs

Indirect costs

Fixed costs for WPM treatment facilities (equipment, license)

Firm’s economic performance: it will deteriorate if host country decides not to implement the standard

Inspections/audits costs for WPM treatment facilities

Firm’s competitiveness: the standard implementation is not expected to generate large costs for exporting firms. In many cases, these exports are absorbed by the firms directly or are partly passed to their final consumers

Legislative changes Hiring of inspectors and inspections

Lack of access to international markets: Exporting firms will be unable to exports to several markets if their host countries fail to adopt the international standard

Training inspectors Other administrative costs Source Authors’ elaboration

(e.g. costs related to hiring workers with the necessary technical expertise for the treatment). However, there are additional expenses; there are the costs, for example, incurred by government agencies (most of the time the National Plant Protection Organisation or NPPO, typically a subsidiary of the Ministry of Agriculture) to ensure that the standard is correctly implemented. Regular monitoring and inspection has to make sure that all WPMs leaving or entering the country have been previously treated and that the treatment is complying with the ISPM15 international standard in full. One may query on whether the overall costs of compliance may be prohibitively high for many developing countries, given the credit constraints of their firms and the institutional/infrastructural deficiencies of their public administrations. However, while compliance cost may appear to be high, the economic costs in the case of non-compliance are likely to be much larger (and especially so for relatively open economies). If a given country decides not to implement the standard, this means that its domestic firms will not be able to export goods to those foreign countries which have adopted the standard (i.e. they will face restricted access to international markets). It is in the interest of each country, hence, to adopt the standard and preserve uninterrupted access to global markets for its exporting firms. Non-implementing countries or firms will become replaced by compliant firms located in countries that adopted the standard (at least within those markets that require ISPM15 compliance). For larger firms, the small increase in the cost of WPM should be expected to minimally affect their competitiveness. Similarly, this would not provide a strong incentive for firms to relocate their productive units to countries with less stringent environmental regulations (unless, of course, the government of their host country decides not to adopt the standard, in which case relocation to a new country is a matter of necessity if firms wish to maintain access to international markets). Most

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of them are able to absorb the additional cost of treating WPM or pass part of it to their final consumers. In the latter case, the costs are distributed across a larger number of individuals, and are, hence, less likely to be noticed or generate discomfort.

4.8 Concluding Remarks This chapter discussed the nature and magnitude of both direct and indirect costs associated with the implementation of environmental standards. A correct measurement of all individual cost components is an essential element for any meaningful CBA that accurately evaluates the desirability of a given environmental regulation. At the same time, this is a rather complex task that involves numerous steps. There are conceptual issues that need to be resolved, such as compiling a complete list of all direct and indirect costs (and benefits) that one attributes to the environmental standard or any other policy intervention. Some issues are of a more technical nature— for instance, these involve generating reliable estimates of all costs, which can be particularly challenging for cost types that are only indirectly related to/caused by environmental regulation (especially when one needs to decide whether these costs should be fully attributed to the regulation amongst many other possible drivers). Similarly, the monetisation of some (typically indirect) costs may be particularly difficult when there are not directly related to market prices (as it is often the case for environmental and health impacts). In addition, the firm should ideally compare any new components of costs with the costs of the alternative scenario in the absence of environmental regulation (standard). There are several indirect costs which have to be taken into account when assessing the impact of regulation. An increase in overall production costs may decrease the degree of competitiveness of firms, which can consecutively affect their comparative advantage and export performance in international markets. Asymmetries in the way countries implement standards may bear consequences for the spatial choice of firms’ productive units; some polluting-intensive industries may decide to relocate to pollution havens, where environmental standards are implemented in a looser way (if at all). Evidence though seems to be inconclusive and not necessarily in favour of a pollution-haven effect induced by environmental regulation. Environmental regulation has, in several occasions, stimulated innovation and efficiency improvements, benefitting hence firm profitability. In addition, the comparative advantage is jointly determined by multiple interconnected socio-economic factors (reputation, past firm experiences, local infrastructure, government institutions etc.); it is for this reason, that environmental regulation and associated costs are not sufficient alone in explaining firm preferences as to where to locate their productive facilities. Consequences of environmental standards are not irreversible and may not last long. Evidence on the PHH shows that environmental regulations -if flexible- induce innovation in cleaner technologies among firms rather than imposing polluting industries to migrate where polluting is still an option.

4.8 Concluding Remarks

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The use of CBA, however, can also be perceived as a controversial tool for evaluation, given that it looks at the aggregate value of costs and benefits, without always probing into their distribution across sectors, firms or individuals (which is the focus of Chap. 5 that touches upon issues of justice and fairness). In the presence of such assymetries, governments should design supplementary compensation (and redistributive) measures in support of those who lose out the most. Despite these challenges, the advantages of CBA in evaluating environmental regulation are still considerable. While one may always argue about possible omissions or inaccuracies regarding cost estimates, it provides policy makers with invaluable insights on the costs and benefits they need to consider as to justify the adoption of a given regulation. Even in the case of inaccuracies, one may still argue that this is still better than an alternative of no cost estimates (that prevent any comparative or cost-effectiveness analysis).

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Ederington J, Levinson A, Minier J (2005) Footloose and pollution-free. Rev Econ Stat 87:92–99 Epstein M (1996) Measuring corporate environmental performance. Institute of Management Accountants, Montvale, NJ Ferris AE, McGartland A (2014) A research agenda for improving the treatment of employment impacts in regulatory impact analysis. In: Coglianese C, Finkel AM, Carrigan C (eds) Does Regulation Kill Jobs?, Chap. 9. University of Pennsylvania Press, Philadelphia Gong M, You Z, Wang L, Cheng J (2020) Environmental regulation, trade comparative advantage, and the manufacturing industry’s green transformation and upgrading. Int J Environ Res Public Health 17(8):2823 Goulder LH, Parry IWH (2008) Instrument choice in environmental policy. Rev Environ Econ Policy 2(2):152–174 Gray WB, Shadbegian RJ (2003) Plant vintage, technology, and environmental regulation. J Environ Econ Manag 46(3):384–402 Hassler CC, Grushecky S, Slahor JJ, Turk P (2010) An assessment of the impacts of a domestic phytosanitary treatment regulation for wood packaging material manufacturers. For Prod J 60(4):309–314 Hanna R (2010) US environmental regulation and FDI: evidence from a panel of US-based multinational firms. Am Econ J: Appl Econ 2(3):158–189 Harrington W, Morgenstern RD, Nelson P (2000) On the accuracy of regulatory cost estimates. J Policy Anal Manag: J Assoc Public Policy Anal Manag 19(2):297–322 Iraldo F, Testa F, Frey M (2009) Is an environmental management system able to influence environmental and competitive performance? the case of the ecomanagement and audit scheme (EMAS) in the European Union. J Clean Prod 17, 1444e1452 Iraldo F, Testa F, Melis M, Frey M (2011) A literature review on the links between environmental regulation and competitiveness. Environ Policy Governance 21(3):210–222 Jaffe AB, Palmer K (1997) Environmental regulation and innovation: a panel data study. Rev Econ Stat 79(4):610–619 Jayadevappa R, Chhatre S (2000) International trade and environmental quality: a survey. Ecol Econ 32(2):175–194 Joshi S, Krishnan R, Lave L (2001) Estimating the hidden costs of environmental regulation. Account Rev 76(2):171–198 Lanoie P, Patry M, Lajeunesse R (2008) Environmental regulation and productivity: testing the Porter Hypothesis. J Prod Anal 30:121–128 Leamer EE (1995) The Heckscher-Ohlin model in theory and practice Levinson A, Taylor SM (2008) Unmasking the pollution haven effect. Int Econ Rev 49:223–254 Li X, Lu X, Tao X (2012) Does the intensity of environmental regulation affect the trade comparative advantage of China’s industrial industry. J World Econ 35:62–78 Liu J, Yuan C, Hafeez M, Li X (2020) ISO 14001 certification in developing countries: motivations from trade and environment. J Environ Planning Manage 63(7):1241–1265 Liu QQ, Wang SJ, Zhang WZ, Zhan D, S., Li, J.M., (2018) Does foreign direct investment affect environmental pollution in China’s cities? a spatial econometric perspective. Sci Total Environ 613–614:521–529 Lopez-Gamero MD, Molina-Azorin JF, Claver-Cortes E (2010) The potential of environmental regulation to change managerial perception, environmental management, competitiveness and financial performance. J Clean Prod 18(10/11):963e974 Low P, Yeats A (1992) Do “dirty” industries migrate?. World Bank Discussion Papers [WORLD BANK DISCUSSION PAPER] Lu Y (2009) Does environmental regulation affect the trade comparative advantage in pollutionintensive production? Econ Res J 44:28–40 Majumdar SK, Marcus AA (2001) Rules versus discretion: the productivity consequences of flexible regulation. Acad Manag J 44(1):170–179 Manderson E, Kneller R (2012) Environmental regulations, outward FDI and heterogeneous firms: are countries used as pollution havens? Environ Resour Econ 51:317–352

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Millimet DL, Roy J (2016) Empirical tests of the pollution haven hypothesis when environmental regulation is endogenous. J Appl Econom 31:652–677 Ollivier H (2016) North–south trade and heterogeneous damages from local and global pollution. Environ Res Econ 65:337–355 Partzsch L (2009) Smart regulation for water innovation: the case of decentralized rainwater technology. J Clean Prod 17(11):985e991 Pasurka C (2008) Perspectives on pollution abatement and competitiveness: theory, data, and analyses. Rev Environ Econ Policy 2(2):194–218 Pearce D (1998) Cost benefit analysis and environmental policy. Oxf Rev Econ Policy 14(4):84–100 Pegels A, Altenburg T (2020) Latecomer development in a “greening” world: Introduction to the special issue. World Dev 135:105084 Peuckert J (2014) What shapes the impact of environmental regulation on competitiveness? evidence from executive opinion surveys. Environ Innov Soc Trans 10:77–94 Porter ME (1991) Towards a dynamic theory of strategy. Strateg Manag J 12(S2):95–117 Porter ME, Van der Linde C (1995) Toward a new conception of the environment-competitiveness relationship. J Econ Perspect 9(4):97–118 Price Waterhouse LLP (1994) Progress on the environmental challenge: a survey of corporate America’ s environmental accounting and management Ramanathan R, He Q, Black A, Ghobadian A, Gallear D (2017) Environmental regulations, innovation and firm performance: a revisit of the Porter hypothesis. J Clean Prod 155:79–92 Rexhäuser S, Rammer C (2014) Environmental innovations and firm profitability: unmasking the porter hypothesis. Environ Resour Econ 57(1):145–167 Rock MT, Angel DP (2007) Grow first, clean up later?: industrial transformation in East Asia. Environ: Sci Policy Sustain Dev 49(4):8–19 Rubashkina Y, Galeotti M, Verdolini E (2015) Environmental regulation and competitiveness: empirical evidence on the porter hypothesis from European manufacturing sectors. Energ Policy 83:288–300 Shafaeddin M (2007) Who does bear the costs of compliance with sanitary and phytosanitary measures in poor countries? MPRA paper 6646. University Library of Munich, Germany. https:// mpra.ub.unimuenchen.de/6646/MPRA Shen J, Wang S, Liu W, Chu J (2019) Does migration of pollution-intensive industries impact environmental efficiency? evidence supporting “Pollution Haven Hypothesis.” J Environ Manage 242:142–152 Siebert H (1992) Economics of the environment. Springer, New York Tong J, Liu W, Xue J (2016) Environmental regulation, factor input structure and industrial transformation and upgrading. Econ Res J 51:43–57 van Beers C, van Den Bergh JC (1997) An empirical multi-country analysis of the impact of environmental regulations on foreign trade flows. Kyklos 50(1):29–46 White AL, Savage DE, Brody J, Cavander D, Lach L (1995) Environmental cost accounting for capital budgeting: a benchmark survey of management accountants. U.S. environmental protection agency, Report no. EPA742-R-95-005 Wu Q, He Q, Duan Y, O’Regan N (2012) Implementing dynamic capabilities for corporate strategic change towards sustainability. Strateg Change 21 (5/6):231e247 Xie RH, Yuan YJ, Huang JJ (2017) Different types of environmental regulations and heterogeneous influence on “green” productivity: evidence from China. Ecol Econ 132:104–112 Yang J, Guo H, Liu B, Shi R, Zhang B, Ye W (2018) Environmental regulation and the pollution haven hypothesis: do environmental regulation measures matter? J Clean Prod 202:993–1000 Yang T, Percival RV (2009) The emergence of global environmental law. Ecology LQ 36:615 Zhang M, Sun X, Wang W (2020) Study on the effect of environmental regulations and industrial structure on haze pollution in China from the dual perspective of independence and linkage. J Clean Prod 256, 120748

Chapter 5

Environmental Standards and Justice

5.1 Introduction The effectiveness of environmental standards depends critically on the ability to achieve high rates of adoption. In cases where environmental standards are mandatory, companies might decide to cease production if compliance proves to be too costly; in cases where standards are voluntary, participation in the corresponding schemes will depend, to a larger extent, on the discretion of individuals. Certain groups of individuals and companies may be unintentionally excluded from participation in schemes (and adoption of standards) because of budget constraints due to initial transaction costs, or simply through informational barriers (Pannell and Wilkinson 2009; Pascual et al. 2010). Female, older and small-scale producers may, for instance, experience such barriers that limit their participation (e.g. see Grieg-Gran et al. 2005; Karbasioun et al. 2008). While willingness to adopt environmental standards is, hence, likely to be influenced by the amount of financial rewards on offer and their opportunity costs, other socio-cultural factors might also have an important role to play. For example, there is evidence that the perceived fairness of conservation schemes (even when these are accompanied with monetary rewards) can be instrumental in increasing participation (Paloniemi and Vainio 2011, see also Korsgaard et al. 1995, for a broader discussion on the role of perceived fairness in increasing commitment to certain behavioural changes). The expected distributional impacts and their equity are intrinsically linked to the institutional set-up of environmental standards. This is in line with social psychology concepts that link fairness perceptions to both the process, as well as final outcomes (Folger and Konovsky 1989; Hunt and Haider 2001). Environmental standards are often designed with an emphasis on the attainment of certain environmental targets, with little consideration given to how certain groups (e.g. low income groups, women, indigenous people) may be disadvantaged (or proportionately less favoured) in the process.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_5

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5.2 Distribution of Compliance Costs Adherence to environmental standards entails a number of costs which often burden disproportionately more certain groups. In many cases, compliance necessitates a change in production methods or adoption of new technologies. At the same time, more indirect costs (e.g. in the form of training existing personnel, crowding-out other types of investment, carrying out relevant paperwork) further inflate the total amount of expenses associated with environmental standards. As one would expect, small-scale producers find it much harder to adopt environmental standards and adjust to more stringent environmental rules. There is a lot of evidence pointing to a lower participation of small-scale producers in environmental initiatives often as a result of limited access to capital and skills, as well as higher transaction costs in relation to the limited income they earn (Aragon-Correa et al. 2008; Grieg-Gran et al. 2005; Kosoy et al. 2008). In developing countries, in particular, small producers tend to lack formal land-tenure titles and ownership rights, which tends to further limit their participation in environmental initiatives (Bosselmann and Lund 2013; Grieg-Gran et al. 2005). In many cases, absence of ownership titles and poverty go hand in hand; legal fees and costs of registration prevent poorer households to certify their titles and, hence, participate in environmental programmes (see Bosselmann and Lund 2013, for the case of PES in Costa Rica).

5.3 Distribution of Benefits There is ample evidence showing that initiatives and policies that aim at environmental protection often fail to produce monetary benefits for the most vulnerable communities. While one may argue that, in the long term, environmental protection will produce almost universal monetary benefits (e.g. by ensuring sustainable yields of agricultural produce, timber harvest etc.), in the short run, certain groups (with those with limited income capacity, education, access to information) may find it difficult to reap the benefits of initiated environmental interventions. In the case of ecological fiscal transfers, for example, some municipalities with protected areas can become worse off when compensation is not sufficient to match the loss of tax revenues and accrued income (see Grieg-Gran 2000 for evidence in Minas Gerais in Brazil). In Costa Rica, Payments for Environmental Services (PES) were often taken by medium to large farms (those owning more than 30 ha; see Porras 2010). The designers of payments for ecosystem services (PES) schemes are often aware that such proposals do not benefit everyone equally. It is for this reason that many PES schemes address distributional issues explicitly and target or favour the economically worse off land-owners (Porras 2010; Narloch et al. 2013). As mentioned earlier, what matters is not only whether benefits materialise and how these are distributed, but also when these are expected to take place. For small

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firms with income constraints, time is a very important factor to consider when making decisions. We know, for instance, that small landholders are less willing to participate into new environmental protection schemes with uncertain financial returns, given their high discount rates and relatively high risk aversion (Wunder 2008; Nielsen et al. 2013). In other words, when environmental standards are not universally adopted (by being mandatory), smaller firms and poorer individuals are less likely to express interest in them; this is because people place much more emphasis on what happens in the present rather than in the future, especially when the immediate costs of adhering to a standard is easily measurable, while the future benefits more difficult to calculate (see van den Bergh 2008, for a discussion on how consumers, for instance, exhibit such a behaviour when deciding on whether to invest in more expensive, energy-efficient appliances). Naturally, perceived benefits (and costs) extend beyond the monetary rewards (and expenses) associated with adoption of an environmental standard. Of course, in many cases, environmental benefits are coupled with monetary rewards (at least in the medium to long-term). But, by no means, does this imply that monetary benefits is the sole driving factor behind decisions to comply with a specific environmental standard. In the area of conservation contracting, for instance, there is extensive evidence suggesting that individual land-owners place considerable value on the environmental benefits alone accruing from such practices (Pannell and Wilkinson 2009; Juutinen and Ollikainen 2010). Similarly, food consumers are willing to pay a higher price to purchase commodities that are certified as compliant to a specific environmental standard or practice; for example, del Giudice et al. 2018, find that seafood consumers are willing to pay between e0.22 and e1.79 more per 100gr of canned tuna in Italy, when this complies with an environmental scheme, as in the case of “Dolphin safe” and “Friend of the sea” programmes (with younger individuals more sensitised to these environmental issues). The evaluation of environmental standards should hence pay attention to the entire range of costs and benefits that all involved stakeholders perceive as important, as well as how these are distributed across different segments of the population. This is intrinsically linked to the notion of distributive justice, which relates to perceived fairness of a specific distribution. Naturally, there are no strict criteria to assess whether distributive justice is realised or not and it largely depends on norms and behavioural expectations of groups of individuals. What is clear, however, based on evidence from the literature, is that individuals are less inclined to participate in an environmental scheme or standard when they feel that the corresponding distribution of costs and benefit is likely to be unfair (Paloniemi and Vainio 2011). For example, a recent survey based on respondents in Mainz, Germany, showed that those deeming the current distribution of aircraft noise pollution as unfair are more likely to actively oppose plans for an airport expansion and sign petitions against such plans (Liebe et al. 2020). Another type of fairness that has attracted a lot of attention in the literature evaluating environmental schemes is the one of procedural justice. Certain factors can preclude individuals or even whole groups from participating in an environmental

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scheme or standard. As discussed earlier, this might have to do with the involved transaction costs and the inability of low-income entrepreneurs or consumers to bear them. Often the same individuals and firms become discriminated in multiple dimensions. Budget constraints simply enhance the exclusionary effect of informational barriers, lack of institutional support and absence of in-house know-how (KouplevatskayaYunusova and Buttoud 2006; Okumah et al. 2018; Primmer and Kyllönen 2006; Reed 2008; Newig and Fritsch 2009). Once again, perceptions regarding the inclusivity of participation in an environmental scheme or standard can become instrumental in how successful such initiatives end up being. Examples from the field of conservation contracting show, for instance that the legitimacy of such schemes and rate of corresponding participation depend on the way individuals are approached and how actively they become engaged in the process (Hearld et al. 2013; Paloniemi and Tikka 2008; Paloniemi and Varho 2009). Individuals also seem to care about the details, i.e. about their involvement during the entire process, from the initial stage of inception and design of an environmental standard or scheme, to how information is communicated, to how participation and adoption is incentivised and supported, and how implementation is monitored (Corbera et al. 2007; Fromond et al. 2009; Ishizaka and Tanaka 2003; Mees et al. 2016; Primmer et al. 2013).

5.4 Ancillary Benefits In many cases, environmental standards generate additional benefits beyond the immediate ones they directly aim to achieve. This double dividend argument suggests that public acceptance for environmental standards is likely to become higher once these additional positive externalities are recognised and communicated. There are many such examples. For instance, in the case of forest conservation and related certification schemes, the direct benefits relate to preserving forest cover, achieving sustainable timber harvest, maintaining wildlife habitat and recreational space. However, additional benefits extend to water and air purification, carbon storage, erosion control etc. (García-Nieto et al. 2013). Regarding urban planning, the Leadership in Energy and Environmental Design (LEED) has been a global green building certification scheme since the mid-90s. The scheme is used to evaluate individual buildings, as well as communities/neighbourhoods, regarding their resource efficiency, minimal environmental impacts and sustainable construction materials (MacNaughton et al. 2018). This form of green (public and private) investment in environmentally-friendly buildings can also, however, assist in reducing income inequality and employment creation (given the labour-intensive nature of the industry); many economists also see them as an opportunity to stimulate the economy in periods of economic downturn (also as a form of recovery programme in relation to the Covid-19 economic crisis, see Barbier 2010a; Steffen et al. 2020). To a large extent, these ancillary benefits also have a poverty-alleviating and inequality-reducing effect (van Beukering et al. 2013). The additional benefits in

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the form of improved health conditions, sustainable rural livelihoods and labourintensive investment are all likely to benefit low-income individuals (who often lack the means to swiftly transition across different types of employment or seek insurance and protection against negative economic shocks; Barbier 2010b). Global-scale benefits, as in the case of carbon sequestration and reduced climatic change, are also more likely to benefit developing economies and particularly the poorest segments of their populations (Hallegatte and Rozenberg 2017).

5.5 The Gender Dimension There is a large literature pointing to multiple barriers (financial, informational, discrimination) that women often disproportionately face when they attempt to participate in the formal economy. Women generally participate less in farmer associations and groups (Karbasioun et al. 2008; Lin et al. 2012) as well as in trade unions (Chen et al. 2011), they find it harder to access credit and set up their own companies (Chaudhuri et al. 2020; Galli and Rossi 2016), they tend to be more risk-averse than men and, hence more reluctant to change their status quo situation (Borghans et al. 2009). While there has been a gradual improvement in closing the gender gap over time, the female labour force participation rate is still much lower than the male one (with corresponding figures close to 60 vs 80% for the global economy, although the gap widens for most developing countries, see Klasen 2019); in addition, during periods of economic crises and hardship (as in the case of the global financial crisis that commenced in 2007–8), female employment is hit harder (Karamessini and Rubery 2014). Given that compliance with an environmental standard (either as producer or consumer) entails substantial costs, women are likely to find it harder to be part of the process. As one would expect, gender inequality in the distribution of assets, labour force participation and educational attainments are not the sole obstacles behind this. Discrimination plays an important role in explaining why women have more limited access to income, credit and opportunities that would facilitate participation in environmental schemes. There is much evidence suggesting, for instance, that female purchasing power is restricted by discrimination in the labour market (either as a result of hiring practices or reduced pay for similar work (Mih˘ail˘a 2016; Sin et al. 2017). Weak property rights for women also disincentivise participation in environmental programmes and standards (because of uncertainty in reaping future returns or exclusionary policies for those without formal titles); in Burkina Faso, for example, women tend to refuse ‘assistance’ by husbands (e.g. credit, agricultural inputs) fearing they may try to appropriate their land at a later stage (Udry 1996). Another important dimension of gender inequality relates to political representation; globally, less than a quarter of parliamentary seats are held by female representatives (World Bank 2020). It is for this precise reason that several countries have adopted quotas for female representation in several policy-making positions—in many cases, these help address cultural biases and alter perceptions regarding gender

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roles (even when seats lose their reserved status, see Beaman et al. 2012). This is important since there is much research claiming that female politicians, on the whole, take a much more proactive stance on environmental issues (see Fredriksson and Wang 2011 for the US; Sundström and McCright 2014 for Sweden; Mavisakalyan and Tarverdi 2019 for a cross-country comparison on climate change policies). Similar evidence also extends to how firms prioritise environmental issues and how this can be influenced by female representation in their corporate boards (Glass et al. 2015; Post et al. 2015; see also Nadeem et al. 2020 on how gender balanced diversity within corporate boards encourages environmental innovation at the firm level). Similarly, Tauringana et al. (2017) use firm data from the UK to find that the presence of women on corporate boards reduces the probability of a firm committing environmental offences (by about a third). Overall, this suggests that promoting female leadership in the political and corporate domains could also improve support for environmental schemes and compliance with associated environmental standards.

5.6 The Comparative Advantage of Wealthier Nations There is a vast literature discussing the financial and institutional obstacles that developing countries face when they have to adhere to specific environmental practices and standards. Henson and Loader (2001) provide a detailed overview of the challenges developing economies face in meeting sanitary and phytosanitary (SPS) measures and how this can impact their ability to compete in international markets and export processed and non-processed agricultural commodities to the rest of the world (and although their paper is almost two decades old, the issues they identify are as relevant as then; see also Tene et al. 2018). To a large extent, this echoes the same issues raised above about the limited involvement of low-income small-scale producers in the process of designing, setting up and implementing environmental standards. Environmental standards are largely developed by experts from developed economies (and/or international organisations located in the developed world, e.g. FAO, the European Environment Agency etc.), often with little input from stakeholders from the Global South (Krut and Gleckman 1998; Raines 2003). In 1998, the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (the “SPS Agreement”) came into force in order to regulate and harmonize member states’ policies on food and animal/plant health standards. The purpose of the agreement was to ensure that countries avoid using such measures to create protectionary trade barriers. Given that developing countries often face difficulties in meeting stringent standards set by developed economies, the agreement recognises the special needs of the developing world (de Battisti et al. 2009). Without technical assistance, developing nations find it difficult to comply with the standards and, hence, access the markets of richer countries with stricter environmental regulations. The obstacles that developing countries face are both individual and country related. Low income levels (especially for small producers) limit access to credit and financial resources needed to adjust production modes; in addition, an adverse

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macroeconomic environment (e.g. in the form of a poorly developed financial system or of prohibitively high interest rates for loans) further hinders the ability of producers in developing nations to comply with new environmental standards (Fenger et al. 2017). The very fact that developed countries also vary with respect to the environmental/health standards they adopt further complicates the ability of local producers to target multiple export markets (e.g. one can think of the different regulatory regimes in the US and EU in relation to approving genetically-modified products). The institutional set-up in many developing countries is also not very supportive. Limited awareness campaigns of standards and their requirements, inadequate preparedness of public institutions and officials, excessive bureaucracy and restricted access to information and insufficient provision of human capital and technical knowhow jointly contribute to a business environment that hinders compliance with new environmental standards. For example, indicators capturing the quality of political governance (and transparency of public administrations) are positively associated with the extent of forest certification (i.e. the Forest Stewardship Council certification scheme that examines whether timber originates from sustainably managed forests, see Marx and Cuypers 2010). For several developing economies, environmental regulation even creates additional bureaucracy and generates opportunities for corruption (in the form of bribes or other favours) for public officials; for instance, Oliva (2015) finds that approximately 10% of car owners in Mexico city pay a bribe close to US$20 to avoid vehicle emission regulations.

5.7 Consumers and Environmental Standards Another important element associated with transparency relates to consumer awareness. Given that several environmental standards are adopted with the explicit intention to improve the quality of consumer products (especially in the food industry), an important question that arises is whether consumers are sufficiently informed about the value chains of the products they purchase and the protective role of environmental standards. The green consumerism movement has become stronger in recent decades with dedicated consumers who demand products that involve certain environmentally-friendly processes (Lin and Hsu 2013). Several standards have been introduced across sectors to help green (and ethical) consumers make informed choices, such as in the case of the FSC (Forest Stewardship Council) certified timber, MSC (Marine Stewardship Council) certified seafood, the Rainforest Alliance certification schemes for several agricultural products as well as hotel and lodging services, the Global Organic Textile Standard in the textile and fashion industries etc. (Castka and Corbett 2016). Naturally, these labelling/certification schemes also need to be accompanied with additional measures to ensure that a large number of consumers embrace them and gradually demand their universal adoption. In several occasions, a proliferation of standards and labels, together with little effort to enlighten consumers about the way to recognise them and interpret them, results in information overload, confusion and

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mistrust (Moon et al. 2017); in addition, a UK-based survey of 1200 consumers recently revealed that consumers tend to be more wary about the motives of private corporations to adopt a specific environmental standard (as this can be motivated to a large extent by attempts to attract customers rather than environmental concerns) and welcome the involvement of governmental agencies and NGOs in verifying their proper use (Darnall et al. 2018). Furthermore, to the extent that compliance with the standard involves supplementary costs (as it is often the case), passing these to consumers can create unfair market conditions; i.e. low-income households and individuals will find this more difficult to purchase more expensive commodities that comply with a standard, without a subsidy or other form of financial support (Aertsens et al. 2009; Cochrane 2018).

5.8 Implementation of the ISPM15 Standard and Justice Our fieldwork on the implementation of the International Standard for Phytosanitary Measures No. 15 (ISPM15) in Botswana, Cameroon, Kenya and Mozambique has also generated interesting insights regarding issues of justice and fairness. Most firms that treat wood material (either with methyl bromide or through heat treatment to prevent the international transport and spread of pests) are relatively small, with an average size as low as 3 employees in Botswana and 35 in Kenya. Given that the standard has been set by FAO’s International Plant Protection Convention (IPPC), developing countries have little involvement in the design of the standard and receive little external help for its implementation. Reflecting on issues of procedural justice, the National Plant Protection Organizations of developing countries are entrusted to oversee the implementation of the standard but often will little capacity and technical knowledge on how to do this. In several cases, the NPPOs provide confusing and misleading information—for example, the Cameroonian NPPO and Ministry of Agriculture and Rural Development permit the use of PH3 (phosphine) fumigation as an alternative treatment method contrary to what ISPM15 officially stipulates. Similarly, In Cameroon and in Kenya, the NPPOs fail to keep an up-to-date list of authorised ISPM15 treatment facilities, hindering hence a transparent assessment of implementation of the standard. Another common critique relates to NPPOs’ concern that the standard is often superimposed on them with little external help (in the form of appropriate training and capacity building) from FAO or IAPSC (the Inter-African Phytosanitary Council). Given the small size of treatment facilities, one can imagine that compliance costs can be substantial (and with limited if any external financial support provided by (inter)nation agencies). In both Cameroon and Kenya, the vast majority of treatment companies mentioned the high initial investment cost (e.g. in the form of building heat chambers for treatment) as a significant negative repercussion of ISPM15 adoption. These costs are then passed to exporting firms that often internalize them rather than attempting to pass them to consumers in foreign markets (out of fear of losing out in competiveness and reducing their market share). The high initial costs also discourage

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other small-scale firms to adopt the standard given that benefits materialise with a substantial time lag (it takes between 7 and 18 months for firms to become fully operational and ISPM15-compliant). In Kenya, for example, the estimated annual cost for setting up an ISPM-15 compliant facility are above $12,000 (including equipment and specialised personnel); such costs can be prohibitively high for small firms with little capital or collateral.

References Aertsens J, Verbeke W, Mondelaers K, van Huylenbroeck G (2009) Personal determinants of organic food consumption: a review. Br Food J 111(10):1140–1167 Aragon-Correa JA, Hurtado-Torres N, Sharma S, Garcia-Morales VJ (2008) Environmental strategy and performance in SMEs: a resource-based perspective. J Environ Manag 86(1):88–103 Barbier EB (2010a) A global green new deal. Cambridge University Press, Cambridge Barbier EB (2010b) Poverty, development, and environment. Environ Dev Econ 15(6):635–660 Beaman L, Duflo E, Pande R, Topalova P (2012) Female leadership raises aspirations and educational attainment for girls: a policy experiment in India. Science 335(6068):582–586 Borghans L, Heckman JJ, Golsteyn BHH, Meijers H (2009) Gender differences in risk aversion and ambiguity aversion. J Eur Econ Assoc 7(2–3):649–658 Bosselmann AS, Lund JF (2013) Do intermediary institutions promote inclusiveness in PES programs? The case of Costa Rica. Geoforum 49(1):50–60 Castka P, Corbett C (2016) Adoption and diffusion of environmental and social standards: the effect of stringency, governance, and media coverage. Int J Oper Prod Manag 36(11):1504–1529 Chaudhuri K, Sasidharan S, Raj RSN (2020) Gender, small firm ownership and credit access: some insights from India. Small Bus Econ 54(1):1165–1181 Chen HJ, Kacperczyk M, Ortiz-Molina H (2011) Labor unions, operating flexibility, and the cost of equity. J Financ Quant Anal 46(1):25–58 Cochrane KL (2018) Eco-labelling and eco-certification of fisheries: benefits, challenges and the future. In: Seijo JC, Sutinen JG (eds) Advances in fisheries bioeconomics: theory and policy. Routledge, London, pp 114–136 Corbera E, Brown K, Adger NW (2007) The equity and legitimacy of markets for ecosystem services. Dev Change 38(4):587–613 Darnall N, Ji H, Vázquez-Brust DA (2018) Third-party certification, sponsorship, and consumers’ ecolabel use. J Bus Ethics 150(4):953–969 de Battisti AB, Mcgregor J, Graffham A (2009) Standard bearers: horticultural exports and private standards in Africa. International Institute for Environment & Development, London del Giudice T, Stranieri S, Caracciolo di Torchiarolo F, Ricci EC, Cembalo L, Banterle A, Cicia G (2018) Corporate social responsibility certifications influence consumer preferences and the seafood market price. J Clean Prod 178:526–533 Fenger NA, Bosselmann AS, Asare R, de Neergaard A (2017) The impact of certification on the natural and financial capitals of Ghanaian cocoa farmers. Agroecol Sustain Food Syst 41(2):143– 166 Folger R, Konovsky MA (1989) Effects of procedural and distributive justice on reactions to pay raise decisions. Acad Manag J 32(1):115–130 Fredriksson PG, Wang L (2011) Sex and environmental policy in the U.S. house of representatives. Econ Lett 113(3):228–230 Fromond L, Similä J, Suvantola L (2009) Regulatory innovations for biodiversity protection in private forests: towards flexibility. J Environ Law 21(1):1–31

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Galli E, Rossi SP (2016) Bank credit access and gender discrimination: some stylized facts. In: Rossi SP, Malavasi R (eds) Financial crisis, bank behaviour and credit crunch. Springer, Berlin, pp 111–123 García-Nieto AP, Garcia-Llorente M, Iniesta-Arandia I, Martin-Lopez B (2013) Mapping forest ecosystem services: from providing units to beneficiaries. Ecosyst Serv126–113 Glass C, Cook A, Ingersoll AR (2015) Do women leaders promote sustainability? Analyzing the effect of corporate governance composition on environmental performance. Bus Strateg Environ 25(7):495–511 Grieg-Gran M (2000) Fiscal incentives for biodiversity conservation: the ICMS Ecológico in Brazil. IIED, WWF and the Darwin Initiative, London Grieg-Gran M, Porras I, Wunder S (2005) How can market mechanisms for forest environmental services help the poor? Preliminary lessons from Latin America. World Dev 33(9):1511–1527 Hallegatte S, Rozenberg J (2017) Climate change through a poverty lens. Nat Clim Change 7(4):250– 256 Hearld LR, Alexander JA, Bodenschatz L, Louis CJ, O’Hora J (2013) Decision making fairness and consensus building in multisector community health alliances: a mixed-methods analysis decision-making fairness and consensus building. Nonprofit Manag Leadersh 24(2):139–161 Henson S, Loader R (2001) Barriers to agricultural exports from developing countries. World Dev 29(1):85–102 Hunt L, Haider W (2001) Fair and effective decision making in forest management planning. Soc Nat Resour 14(10):873–887 Ishizaka K, Tanaka M (2003) Resolving public conflict in site selection process—risk communication approach. Waste Manag 23(5):385–396 Juutinen A, Ollikainen M (2010) Conservation contracts for forest biodiversity: theory and experience from Finland. For Sci 56(2):201–211 Karamessini M, Rubery J (2014) Women and austerity: the economic crisis and the future for gender equality. Routlegde, New York Karbasioun M, Biemans H, Mulder M (2008) Farmers’ learning strategies in the province of Esfahan. J Agric Educ Ext 14(4):307–318 Klasen S (2019) What explains uneven female labor force participation levels and trends in developing countries? World Bank Res Obs 34(2):161–197 Korsgaard M, Schweiger D, Sapienza H (1995) Building commitment, attachment, and trust in strategic decision-making teams: the role of procedural justice. Acad Manag J 38(1):60–84 Kosoy N, Corbera E, Brown K (2008) Participation in payments for ecosystem services: case studies from the Lacandon rainforest, Mexico. Geoforum 39(6):2073–2083 Kouplevatskaya-Yunusova I, Buttoud G (2006) Assessment of an iterative process: the double spiral of re-designing participation. For Policy Econ 8(5):529–541 Krut R, Gleckman H (1998) ISO 14001: a missed opportunity for sustainable global industrial development. Earthscan, London Liebe U, Preisendörfer P, Bruderer Enzler H (2020) The social acceptance of airport expansion scenarios: a factorial survey experiment. Transp Res Part D Transp Environ 2020(84):102363 Lin HY, Hsu MH (2013) Using social cognitive theory to investigate green consumer behavior. Bus Strateg Environ 24(5):326–343 Lin J-C, Wu C-S, Liu W-Y, Lee C-C (2012) Behavioral intentions toward afforestation and carbon reduction by the Taiwanese public. For Policy Econ 14(1):119–126 MacNaughton P, Cao X, Buonocore J, Cedeno-Laurent J, Spengler J, Bernstein A, Allen J (2018) Energy savings, emission reductions, and health co-benefits of the green building movement. J Eposure Sci Environ Epidemiol 28(4):307–318 Marx A, Cuypers D (2010) Forest certification as a global environmental governance tool: what is the macro-effectiveness of the forest stewardship council? Regul Gov 4(4):408–434 Mavisakalyan A, Tarverdi Y (2019) Gender and climate change: do female parliamentarians make a difference? Eur J Polit Econ 56(1):151–164

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Mees H, Tempels B, Crabbé A, Boelens L (2016) Shifting public-private responsibilities in Flemish flood risk management. Towards a co-evolutionary approach. Land Use Policy 57:23–33 Mih˘ail˘a R (2016) Female labor force participation and gender wage discrimination. J Res Gender Stud 6:262–268 Moon S-J, Costello JP, Koo D-M (2017) The impact of consumer confusion from eco-labels on negative WOM, distrust, and dissatisfaction. Int J Advert 36(2):246–271 Nadeem M, Bahadar S, Gull AA, Iqbal U (2020) Are women eco-friendly? Board gender diversity and environmental innovation. Bus Strategy Environ (forthcoming) Narloch U, Pascual U, Drucker A (2013) How to achieve fairness in payments for ecosystem services? Insights from agrobiodiversity conservation auctions. Land Use Policy 35(2):107–118 Newig J, Fritsch O (2009) Environmental governance: participatory, multi-level—and effective? Environ Policy Gov 19(3):197–214 Nielsen T, Keil A, Zeller M (2013) Assessing farmers’ risk preferences and their determinants in a marginal upland area of Vietnam: a comparison of multiple elicitation techniques. Agric Econ 44(3):255–273 Okumah M, Martin-Ortega J, Novo P (2018) Effects of awareness on farmers’ compliance with diffuse pollution mitigation measures: a conditional process modelling. Land Use Policy 76:36–45 Oliva P (2015) Environmental regulations and corruption: automobile emissions in Mexico City. J Polit Econ 123(3):68–79 Paloniemi R, Vainio A (2011) Legitimacy and empowerment: combining two conceptual approaches for explaining forest owners’ willingness to cooperate in nature conservation. J Integr Environ Sci 8(2):123–138 Paloniemi R, Tikka PM (2008) Ecological and social aspects of biodiversity conservation on private lands. Environ Sci Policy 11(4):336–346 Paloniemi R, Varho V (2009) Changing ecological and cultural states and preferences of nature conservation policy: the case of nature values trade in South-Western Finland. J Rural Stud 25(1):87–97 Pannell DJ, Wilkinson R (2009) Policy mechanism choice for environmental management by noncommercial “lifestyle” rural landholders. Ecol Econ 68(1):2679–2687 Pascual U, Muradian R, Rodríguez LC, Duraiappah A (2010) Exploring the links between equity and efficiency in payments for environmental services: a conceptual approach. Ecol Econ 69(6):1237– 1244 Porras I (2010) Green and fair? The social impacts of payments for environmental services in Costa Rica. International Institute for Environment and Development, London Post C, Rahman N, McQuillen C (2015) From board composition to corporate environmental performance through sustainability-themed alliances. J Bus Ethics 130(2):423–435 Primmer E, Kyllönen S (2006) Goals for public participation implied by sustainable development, and the preparatory process of the Finnish National Forest Programme. For Policy Econ 8(8):838– 853 Primmer E, Paloniemi R, Similä J, Barton D (2013) Evolution in Finland’s forest biodiversity conservation payments and the institutional constraints on establishing new policy. Soc Nat Resour 26(10):1137–1154 Raines SS (2003) Perceptions of legitimacy and efficacy in international environmental management standards: The impact of the participation gap. Glob Environ Polit 3(3):47–73 Reed MS (2008) Stakeholder participation for environmental management: a literature review. Biol Cons 141:2417–2431 Sundström A, McCright AM (2014) Gender differences in environmental concern among Swedish citizens and politicians. Environ Polit 23(6):1–14 Sin I, Stillman S, Fabling R (2017) What drives the gender wage gap? Examining the roles of sorting, productivity differences, and discrimination. IZA Discussion Papers 10975, Institute for the Study of Labor (IZA) Steffen B, Egli F, Pahle M, Schmidt TS (2020) Navigating the clean energy transition in the COVID19 crisis. Joule 4(6):1137–1141

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Tauringana V, Radicic D, Kirkpatrick A, Konadu R (2017) Corporate boards and environmental offence conviction: evidence from the United Kingdom. Corp Gov 17(2):341–362 Tene CT, Yuriev A, Boiral O (2018) Adopting ISO management standards in Africa: barriers and cultural challenges. In: Heras-Saizarbitoria I (ed) ISO 9001, ISO 14001, and new management standards. Springer, Berlin World Bank (2020) World development indicators. World Bank, Washington DC. www.data.wor ldbank.org. Accessed 15 Oct 2020 Wunder S (2008) Payments for environmental services and the poor: concepts and preliminary evidence. Environ Dev Econ 13(1):279–297 Udry C (1996) Gender, agricultural production, and the theory of the household. J Polit Econ 104(5):1010–1046 Van Beukering P, Papyrakis E, Bouma J, Brouwer R (2013) Nature’s wealth: the economics of ecosystem services and poverty. Cambridge University Press, Cambridge Van den Bergh JCJM (2008) Environmental regulation of households: an empirical review of economic and psychological factors. Ecol Econ 66(3):559–574

Chapter 6

Environmental Standards and Trade

6.1 Introduction In many cases environmental standards apply to commodities that are destined for export markets (for the sake of environmental protection, minimizing health risks and enhancing consumer protection, see De Schutter 2015; Wilson et al. 2002); given that not all exporters find it possible to comply with them (for reasons related to costs, access to technologies, information, know-how etc.), these standards in effect can become what is commonly referred to as ‘non-tariff or non-market barriers to trade’. As discussed earlier in Chap. 5, it is often certain groups (e.g. poorer and small-scale exporters, women, members of indigenous communities etc.) that struggle switching to new (compliant) production modes. In the case of substantial costs of compliance, producers and exporters can either decide to bear the costs directly (and hence reduce their profit margins) or alternatively pass the additional to the final consumers (abroad or domestically) by charging a higher price. In general, several scenarios can arise (see Iraldo et al. 2011; Bastiaens and Postnikov 2017). Some producers can benefit by grabbing a larger share of the market (assuming that competitors find this more difficult or costly to comply with the new regulations). In other cases, they may lose competitiveness, especially in international markets, and hence cease exporting abroad. If compliance translates into higher prices, it also depends on how importers and foreign consumers react to these changes (i.e. on the price elasticity of demand). In some cases, the change in demand may be minimal (especially when one still remains competitive in relation to other exports/producers). In other cases, even a marginal increase in prices can generate a drastic switch in demand towards competing exporting firms (possibly from other exporting countries). In this chapter, we will explore how environmental standards can alter trade patterns via changing the cost of production for compliant producers/countries or restricting access to markets for non-compliant ones. We will also provide evidence based on our own empirical analysis (as part of a research project conducted during 2014–2017) on the impact of the International Standard

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_6

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for Phytosanitary Measures No. 15 (ISPM15) on bilateral annual trade flows for Botswana, Cameroon, Kenya and Mozambique.

6.2 Environmental Standards as a Trade Boost Several scholars and policymakers perceive environmental standards and an opportunity to increase bilateral trade (as well as protect environmental quality and ecosystem services). This can happen for several reasons. Countries or exporters that adhere to an environmental standard may gain access to markets with stricter environmental regulations and possibly displace earlier competitors who fail to follow suit (Nishitani and Itoh 2016; Shrivastana 1995). The standard can act as a differentiation label or quality indicator and, hence, increase demand of the associated product by attracting environmentally conscious consumers; in effect, this can compensate for any initial profit loss associated with increased compliance costs (Schumacher 2010). Frontrunners in the adoption of environmental standards can hence build a reputational advantage and set an example that will be followed by competitors (especially in the case of strong environmental movements and environmentally conscious consumers)—this is sometimes referred to as the California effect given the stricter automobile emission standards that California has adopted already since the early 70s (see Vogel 1995; Perkins and Neumayer 2012). Peiró-Signes et al. (2014), for instance, examine the impact of environmental certification on hotel guest ratings in Spain; based on a large sample of almost 7,000 hotels, they confirm that hotels with an ISO 14001 certification (signalling efforts to minimise environmental impacts and comply with environmental regulations) receive more favourable customer ratings, after controlling for other accommodation features. Similarly, Lim et al. (2018) conduct a choice experiment (across 1032 US seafood consumers) to evaluate differences in willingness-to-pay estimates across different types of canned tuna; they find that consumers are willing to pay a premium of approximately $0.50– 0.70 per can for MSC-certified tuna (i.e. for tuna that bears the Marine Stewardship Council ecolabel for sustainably harvested seafood). The Porter hypothesis is a premise that has attracted a lot of attention in the field since the mid-90s. It is based on a series of papers by Michael Porter in 1995 (Porter 1991; Porter and van der Linde 1995) that stress how stricter environmental can gradually induce efficiency gains (often as a result of learning-by-doing), enhance competitiveness and foster innovation. These medium to long term efficiency gains can more than compensate any initial investment costs in innovation and new technologies (although, again, this may not be the case for firms in the developing world, that often face prohibitively high interest and discount rates when making investment decisions, e.g. see Dutta and Narayanan 2011). In many cases, there is a first over advantage; firms that adhere to stricter environmental standards and regulations first, can capture much faster a larger share of the market (i.e. of the export market where stricter rules apply), build reputation amongst competitors and advance on the learning curve (Rennings 2014; Simpson and Bradford 1996).

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6.3 Environmental Standards as a Trade Barrier Competing arguments present a less rosy picture and suggest that environmental standards can act as a trade barrier (and especially so for countries and companies with limited resources for adjusting production methods). Compliance costs are often substantial and raise the overall cost of production (of the exported commodities); even a small change in prices (and given the often fierce competition in international markets) can be sufficient to reduce competitiveness and lead to a significant drop in demand (Sengupta 2010). Certainly, many will welcome this as an opportunity to internalise a negative externality (given that environmental standards try to correct market failures and reduce environmental damages that often do not get monetized or compensated for; see Long et al. 2012). At the same time, though, this additional environmental protection can come at the expense of local employment and income especially for small-scale local firms that struggle to adjust their production processes and remain competitive (Asche et al. 2016). Alternatively, and in the case of voluntary environmental standards, firms may decide to seek price advantages by avoiding compliance (which can gradually lead to a race-to-the-bottom effect regarding adoption of environmental standards and regulations; e.g. see Weil 2014). The overall trade impact will also depend on how importing countries interpret environmental regulations. Some importing economies may have strict environmental standards that apply equally both for domestically produced goods as well as imported ones (which hence prevent non-compliant commodities entering their domestic markets). In other cases, importing economies may impose stricter rules for domestic production but turn a blind eye for imported goods. This has led many scholars to believe that in many cases a pollution haven hypothesis may hold (Cole 2004; Erdogan 2014). This posits that, stricter environmental standards in one part of the world may fail to address environmental problems by encouraging a shift of environmentally unsound production elsewhere (i.e. to economies with laxer regulations). Many papers have specifically looked at the role of multinational firms, that often relocate activities based on decisions to cut costs (often at the expense of environmental or labour standards, see D’Agostino 2015). For example, in the case of climate change, scholars have criticised that international environmental treaties (as in the case of the Kyoto protocol) allow countries and large corporations to meet domestic carbon-reduction targets by shifting carbon-intensive production to countries with laxer (or no) emission constraints (Kuik and Hofkes 2010); this so-called carbon leakage effect can take place because domestic emissions are calculated based on domestic production rather than consumption (Aichele and Felbermayr 2015; FitzRoy and Papyrakis 2017). Divergence in adopted environmental standards can also create a clustering of trade partners. Countries that fail to adhere to strict environmental standards may find it easier and less costly to direct their exports to countries with similar regulations (with a similar clustering pattern for importing/exporting nations with more stringent requirements; Batrakova 2011; Horner 2016). Often, this is a trade pattern that evolves gradually; For example, there is evidence suggesting that developing countries that

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traditionally export more to markets with stricter environmental standards (e.g. to the European Union and the United States) tend to improve their environmental performance over time (Gamso 2017).

6.4 Environmental Standards and Trade: What Is the Empirical Evidence? As we discussed earlier on, there are competing theoretical arguments on whether environmental stricter standard can benefit or disadvantage trade and compliant exporting companies. To a certain extent, both theoretical arguments may hold and the net effect will depend on which of the opposing effects dominates. Naturally, the sign and magnitude of effect may vary across countries or even across sectors within the same country. Not surprisingly, empirical evidence is also mixed, with some studies pointing to positive effects and others to negative ones (depending on the focus). An early econometric study by Swann et al. (1996) focusing on UK exports and imports to and from the rest of the world provides support to a positive link between trade and overall production standards (for instance a 145% increase in national standards in a sector is associated with a 34 and 48% rise in corresponding imports and exports, i.e. in an overall increase in trade volumes). Blind and Jungmittag (2001) focus on bilateral trade between Germany and the UK and find differences between national vs international standards (i.e. international standards tend to augment trade volumes, while national standards act more as a trade barrier). Similar results (especially regarding the trade-impending effect of national standards) appear in a follow-up paper by the same authors on the German–French bilateral trade flows (Blind and Jungmittag 2002). The analysis by Moenius (2006a, b) looks at trade in agriculture and electronics more specifically and argues that common standards can be supportive of trade. Other scholars have explicitly focused their attention on environmental standards and regulations. Wilson et al. (2002) for example found that stricter environmental standards coincide with reduced exports from dirtier sectors. Chen et al. (2006) argue that standards in both the agricultural and manufacturing sectors force exporting companies to diversify less their export activities to few markets. Rennings et al. (2006) explore the effect of the EU EMAS in Germany (the voluntary Eco-Management and Audit Scheme that assesses the environmental performance of European firms) and find a positive links with learning-by-doing and exports. However, more recent analysis by Distelhorst and Locke (2018) presents a rosier picture; they find that retail importers (based on data from 36 countries and approximately 2,000 firms) exhibit a strong preference towards compliant foreign exporters (with an average annual increase by 4% of imported purchases). Good overviews of the empirical literature on these topics can be found in Iraldo et al. (2011), Rezza (2014) and Distelhorst and Locke (2018).

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6.5 Environmental Standards and the World Trade Organization There is a lot of discussion within academic and policy circles on how compatible environmental standards can be with the rules of free trade promoted by the World Trade Organization (WTO). The WTO was formed in early 1995 (replacing prior trade frameworks, as the General Agreement on Tariffs and Trade, commonly referred to as GATT) to facilitate trade flows (and avoid discriminatory rules) amongst its participant members (for an overview of WTO’s purpose, historical evolution and structure, see Hoekman and Mavroidis 2007). Currently, the vast majority of economies participate in the organisation and abide to its rules (with the exception of few African, Asian and Eastern European economies).1 While the key objective of the WTO is to facilitate trade by ensuring a level-playing field, the organization also acknowledges the importance of environmental protection and regulation as part of the multilateral trading system. While economic and environmental interests may at times clash, the WTO allows its members to adopt environmental standards that define what is allowed to be exported and imported (Wijkström and McDaniels 2013; Karttunen 2020). For example, WTO’s Agreement on the Application of Sanitary and Phytosanitary Measures (or SPS) imposes trade constraints that aim at protecting food safety, ecosystem service provision and animal, plant and human health. Similarly, WTO’s Agreement on Technical Barriers to Trade (or TBT) looks at technical aspects of production (standards, regulations) to ensure that trading partners adhere to similar measures for the sake of environmental and consumer health protection (rather than these being used arbitrarily for trade advantages). Given that environmental standards can also act as trade barriers, the WTO has a dedicated body that arbitrates in case of disputes. The organization lists the cases brought to its attention on its website (that relate to asbestos containing imports, gasoline standards etc.).2 To a large extent, development countries see environmental standards (covered by WTO provisions) as potentially damaging trade obstacles. While the WTO can provide technical assistance to developing countries to help them comply with environmental standards, poorer nations remain more suspicious of these provisions given the time that it takes to achieve compliance (and the associated temporary lack of access to markets; Banerjee 2006; Kang and Ramizo 2017). In most cases, disputes are resolved at the initial consultation phase without a further need for WTO to arbitrate (an excellent overview of related issues is provided by Negi 2020).

1A

full list of full members and observer countries can be found at: www.wto.org/english/thewto_ e/countries_e/org6_map_e.htm. 2 See: https://www.wto.org/english/tratop_e/envir_e/edis00_e.htm#:~:text=Under%20the%20G ATT%20(1948%E2%80%9394,(i.e.%20XX)%20were%20completed.&text=In%201995%2C% 20the%20WTO’s%20dispute%20settlement%20procedure%20took%20over%20from%20GATT.

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6.6 Implementation of the ISPM15 Standard and Trade Our research project on the implementation of the International Standard for Phytosanitary Measures No. 15 (ISPM15) in Botswana, Cameroon, Kenya and Mozambique has also generated interesting insights regarding associated trade implications. As part of this research endeavour, we carried out a detailed macroeconomic analysis that aimed at assessing changes in trade patterns (both import and export volumes) across a wide range of economic sectors. The focus was on comparing the pre and post ISPM15 implementation periods and associated changes in trade activity for our four case study countries. The motivation behind this macroeconomic analysis has been the theoretical intuitions presented in our earlier Sects. 6.2, 6.3 and 6.4, as well as the earlier empirical literature of Sect. 6.5. The ISPM15 is an international phytosanitary measure that enforces the treatment of wood material (either with methyl bromide or through heat treatment) destined for export markets. Although naturally the environmental aspects are more prominent (the standard is meant as a preventive measure against the spread of pests and diseases across trading countries), the trade implications can also be substantial. To a large extent, the standard regulates the treatment of wood packaging material (e.g. pallets or crates) used for exporting commodities. Participant exporting countries need to ensure that all exported wood packaging has been treated according to the standard and bears the ISPM15 stamp; similarly, importing economies need to carry out random and regular checks at points of entry (airports, seaports, international border crossings). The vast majority of economies have now adopted the standard. Botswana, Cameroon and Kenya already adopted the standard in 2006, while Mozambique followed suit 3 years later. A detailed discussion on the implementation challenges these four Sub-Saharan economies faced in the implementation of the standard can be found in Papyrakis and Tasciotti (2019). Compliance costs can be considerable, especially for small-scale treatment facilities (and exporting companies) in developing countries that often have little outside institutional or financial support. To put things into perspective (and as a rough estimate), the ISPM-15 compliant treatment of a wooden pallet increases its cost by about $0.60 (which is a substantial increase, given that the average cost of a pallet is between $5–10 apiece—naturally estimates vary across countries depending on the type of adopted technology and treatment technique, see Hassler et al. 2010). While this may not look as a substantial cost increase at first sight, the relative cost burden is much larger for exporting firms facing a low value-to-weight ratio (e.g. as in the case of agricultural vs manufactured commodities), which is typical for most developing economies (Clark 2010; Faye et al. 2004). In addition, even a marginal increase in export costs can lead to a considerable loss of competitiveness and drop in export volumes in an international environment of fierce competition (especially so for products that rely on marginal differences in prices rather than quality differentiation in order to generate competitive advantages). Along these lines, this can

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gradually lead to a high degree of import concentration, where importing countries become increasingly dependent on flows from only a small number of ISPM15 certified trade partners. Additional factors further complicate compliance with the ISPM15 standard and access to foreign markets. High initial set-up costs for treatment facilities (e.g. in the form of building heat chambers for treatment), especially for small-scale firms, discourage widespread adoption (van der Meer 2007). Bureaucracy is an additional burden; it often takes between 7 and 18 months for a facility to receive certification of compliance and start treating pallets according to the standard. This does not only create a temporary bottleneck for exporting firms, but also suggests that small-scale treatment facilities need to wait for a substantial amount of time to see their initial investment pay off. In countries with low population density, treated wooden pallets need to travel long distances to reach the exporting firms, adding hence to overall costs (as in the case of Botswana, where there is only one official supplier of ISPM15 certified pallets). However, the future does not need to be bleak for ISPM15 compliant facilities and exporting firms. Compliance can also generate new important opportunities for trade and generate increased (and privileged) access to markets with stricter environmental standards. ISPM15 compliant exporters can hence sideline earlier competitors who fail to follow suit. When this happens, the benefits of compliance will gradually surpass any initial costs (and naturally the comparison between costs and benefits will be country and sector specific). In order to evaluate how ISPM15 adoption could influence sector-specific trade flows, we estimated a series of econometric models using trade sectorial data (for 86 commodity types) for Botswana, Cameroon, Kenya and Mozambique. These type of macroeconomic models are typically referred to as gravity models in the literature (e.g. see Clougherty and Grajek 2014; Kabir et al. 2017). They predict that trade flows between countries depend positively on the size of the involved economies and are inversely related to the distance between them (as a result of higher transportation costs). Richer model specifications allow one to incorporate additional factors that are likely to influence bilateral trade. In our case, a variable capturing the timing of ISPM15 adoption (for both the exporting and importing economies) was of particular interest. In some specifications we included variables measuring the extent of corruption, given earlier empirical evidence suggesting that countries prefer to trade with more transparent economies (see Anderson and Marcouiller 2002; Dutt and Traca 2010). Some additional factors included in specifications were the following: the presence of common borders, a common language and historical links between colonies and colonial powers (which can all facilitate trade amongst involved parties; see also Egger and Lassmann 2012; Gómez-Herrera 2012). Several estimations were conducted for comparison purposes (some incorporating ‘random effects’ that permit the estimation of effects of time invariant variables, as in the case of distance, and others ‘fixed effects’ that control for all time-constant and often unobservable country characteristics). A detailed description of methodology and of the full analysis can be found in Papyrakis and Tasciotti (2017).

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Data come from multiple sources. Bilateral trade flows (for the years 1992– 2013 for Kenya, 1994–2013 for Mozambique, 1995–2013 for Cameroon, and 2000– 2013 for Botswana) have been compiled from the UN International Trade Statistics Database (also known as the Comtrade dataset). Data on real Gross Domestic Product (GDP) in 2010 constant prices are from the World Bank’s World Development Indicators. Data on corruption have been retrieved from the Worldwide Governance Indicators dataset. Data on distances, colonial ties and common language come from Melitz (2008) and Anderson (2014). Figure 6.1 depicts the (largest) changes in Kenyan export volumes per sector following the adoption of the ISPM15 standard (i.e. after controlling also for other factors that can drive trade flows, as well as fixed effects). We only present results for those sectors with a statistically-significant (at the 10% level) change. Changes appear in descending order (and about half of all sectors appear to export more after the ISPM15 adoption. As can be seen, the sectors experiencing the largest increases are explosives and pyrotechnics (+221%) and dairy products (+165%), while the ones with the largest contraction are salt and sulphur products (−202%) and impregnated, coated or laminated textiles (−156%). The analysis was replicated also for Botswana, Cameroon and Mozambique. In the case of Botswana, the majority of sectors expanded in the post ISPM15 period (with the largest increases in the case of dairy products (+349%) and synthetic filaments (+287%)). On the other hand, there were declines for export volumes in the case of copper articles (−469%) and fertilizers (−366%). Similarly in Cameroon, the majority of sectors achieved a rise in exports in the post-ISPM15 period (with

Explosives and pyrotechnics Dairy products Zinc articles Inorganic chemicals Plastics Tobacco products Tanning and dyeing products Machinery Aluminium articles Books and newspapers Coffee, tea and spices Processed leather products Raw hides (unprocessed leather) Extracts, yeast and sauces Rubber articles Feathers and wigs Wadding and felt Bamboo and plaiting materials Knitted or crocheted fabrics Impregnated, coated or laminated textiles Salt and sulphur products -2

-1

0 1 ISPM15 effect

2

Fig. 6.1 Distribution of ISPM15 effects across all exporting sectors (Kenya). Source Papyrakis and Tasciotti (2017)

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man-made filaments (+356%) and basketware and wickerwork (+347%) leading); vegetable textiles and fibres (−439%) and lace and embroidery (−333%), on the other hand, experienced the largest declines. The overall tendency of exporting sectors to benefit after the adoption of ISPM15 also holds in the case of Mozambique. Bamboo and planting materials (+561%) and footwear (+444%) were the sectors with the largest increases in exports, while the largest decreases took place in chemical products (−399%) and photographic/cinematographic goods (−347%). Overall, the results suggest a broad heterogeneity of effects (both in terms of sign and magnitude across sectors and countries). In some cases, the adoption of a new standard can create new opportunities for increased access to foreign markets, while, in other cases, exporters may find it harder to maintain earlier competitiveness. Governments need to design appropriate policy interventions to compensate those affected (e.g. those with reduced access to foreign markets) or provide incentives that facilitate the widespread adoption of the standard. As seen by the diverse findings across the four Sub-Saharan case studies, one-size-fits-all solutions are likely to fail—the trade effects of an environmental standard are likely to be both country and sector specific.

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Chapter 7

Conclusion

The concluding chapter draws on our earlier discussions throughout the book to provide a summary of the key issues regarding environmental standard adoption and acceptance. It also aims at providing policy recommendations for involved stakeholders (governments, NGOs, local firms) that can facilitate standard adoption and minimise negative impacts to certain groups and sectors. Naturally, no book (and analysis) can offer one-size-fits-all solutions; any policy advice needs to be adjusted to the context-specific realities of specific countries, regions or sectors. The current economic crisis (as a result of the Covid19 pandemic) has deflected attention away from some very urgent environmental problems (such as climate change, deforestation, biodiversity loss). A clear example of change in priorities is how global policy has been adapted in relation to plastic pollution. Prior to the Covid19 outbreak, many governments around the world initiated a number of initiatives to reduce plastic debris (ranging from charges on plastic bags to ban of single-use plastics). The current emphasis on Covid-19 preventive measures comes at the expense of global plastic pollution, as a result of a substantial increase in single-use plastic items (as in the case of gloves and masks). Interestingly, history repeats some of the very same mistakes we made during the 2008–9 global financial crisis (when, again, there was an important shift in policy priorities, away from environmental protection and more towards cutting budget deficits, reducing public debts and improving credit ratings). One of the key messages of our analysis is that environmental regulation and standards do not need to be at the expense of economic growth (or generate income loss for certain groups and/or individuals, as long as distributive corrective measures are in place). When there is sufficient preparedness and readiness to redistribute costs and benefits, they can be seen as part of a green growth agenda that simultaneously supports sustainability and economic development. Environmental regulation can harm certain sectors but also help others expand (and the overall effect can be a beneficial one, when those sectors that benefit tend to be more labour intensive)—for example, energy certification for buildings can incentivize labour-intensive renovations in the form of internal and external insulation, replacement of windows etc. It © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 E. Papyrakis and L. Tasciotti, The Economics and Policies of Environmental Standards, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-71858-9_7

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is equally important to realise that inaction or postponement of much needed environmental policy may make little sense in the context of a long-term cost–benefit comparison. While environmental standards and regulations can be seen as costly in the short term (as a result of set-up costs and the inconvenience of adapting production methods), the long-term costs associated with their absence are often much higher (especially when they result in irreversible damage, as in the case of biodiversity loss or climate change). The acceptance of environmental standards can be enhanced if governments fulfil their institutional role in supporting standard adoption and implementation. This involves multiple tasks and responsibilities. They need to remove informational barriers that either limit understanding of the purposes (and necessity) of environmental standards or constrain the ability of informed parties to seek compliance (e.g. by not detailing all steps of relevant procedures). They also need to ensure sufficient training opportunities and set aside funds (or low-interest credit) for firms that lack own resources to adjust production methods and/or purchase new equipment. Similarly, governments need to minimise free-riding opportunities, where non-compliant firms face no penalties or restrictions in accessing markets. In many cases, governments have limited oversight on the extent of compliance (and widespread corruption often prevents adequate monitoring and enforcement). They also need to be proactive in reaching out to affected firms and also seek funds and expertise from international organisations (such as FAO or UNDP) that are involved in the design of international standards. Naturally, one cannot expect that governments alone can ensure a smooth and broad adoption of a new environmental standard. Other stakeholders also need to accept their own responsibility in the process. NGOs and civil society organisations can facilitate communication and participation by raising public awareness on the schemes and organise activities that support standard implementation. In addition, many of these civil society organisations have better connections with local communities (and knowledge of local environments), at least in relation to government officials who are often viewed with mistrust by the local populations. Similarly, firms and their trade unions should also take initiative to remain adequately informed about any new regulations and join forces in collectively raising any concerns about adoption and implementation. In many cases, the interests of whole sectors may be negatively affected when governments fail to predict how a new international environmental standard can disadvantage exporting firms; domestic firms should collectively raise their concerns and demand government support. Joining forces also implies that firms can collectively raise capital for the purposes of purchasing equipment or adapting production processes (that can help facilitate compliance with new stringent environmental regulations). Last, but not least, consumers can play a very important role in supporting environmental standard adoption. Ultimately, they are the ones who purchase commodities and services produced worldwide and can influence firm decisions, especially in the case of voluntary standards. Their revealed demand preferences also signal whether they are prepared to accept any price increases as a result of protective environmental regulation (or whether they will seek substitute products that are both cheaper and

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less environmentally-friendly). In most cases, they are also the same people who demand, from their governments, action through their voting behaviour (and the increased voter support in favour of green parties in many parts of the world, especially among younger voters, indicates a significant change in preferences towards parties that prioritise environmental policies).