How should firms respond to regulations and the prospect of future regulations?

In developing business strategy, a firm should pay attention to the potential benefits of being “environmentally-friendly”. One such benefit might derive from reputation effects. An often remarked phenomenon in the last couple of decades has been the development of a number of markets in which consumers appear to be willing to pay price premia for goods or services that are perceived to satisfy certain environmental criteria. The magnitudes and growth rates of these markets are rather uncertain, but it seems safe to forecast that they will develop relatively quickly, particularly in the high income economies. Such reputation effects may be valuable assets to acquire, particularly in resource-based industries such as oil refining and timber production, where the links with environmental degradation are most evident. As consumer awareness of environmental linkages develops, so the range of products increases for which value can be gained from environmentally responsible behaviour. Detergent manufacturers now routinely promote brands using assertions about the low impacts of their products, and some large food retailing chains are now committed to selling food grown without the use of inorganic fertilisers and pesticides.

First mover advantages may also accrue to those firms who most quickly identify and respond to emerging market opportunities. In the short to medium term, environmental controls will have their greatest impact on firms that can offer waste management and emission reduction technologies. Legislation is moving in the direction of creating product life-cycle liability for environmental damages, and this will add to value creation opportunities in these sectors. In some industries, it has been common for firms whose goods are positioned towards the top of the product ranges to incorporate environmentally-friendly materials into their goods (such as BMW and Mercedes in the car industry), but the trend appears for this to spread down the range through time.

It should be clear from earlier discussions that so-called ecological tax schemes will be an important component of any future environmental protection programme. An important recent report from the DIW economic research institute in Berlin has investigated the effects of a tax on energy derived form fossil fuels, to rise at 7 percent annually over a ten year period. Tax proceeds would be used to reduce taxes elsewhere, in the German case by financing cuts in employers contributions to health, unemployment and pension funds. Whilst the package would be neutral in its overall fiscal impact, very substantial relative price changes would occur. For example, after ten years iron and steel prices would rise by nearly 20 per cent, whilst government service prices would fall by 3 per cent. Relative price changes of these magnitudes are bound to have large impacts upon the relative size and profit opportunities of different sectors of the economy.

Finally, substantial cost advantages are likely to accrue to firms which anticipate controls

rather than respond to controls ex post. These come about for two reasons. First, anticipation allows adjustments to be planned carefully and implemented gradually. Slow adjustment is invariably less costly than rapid, enforced adjustment. Secondly, in the learning processes that accompany accommodation to stricter environmental regulations, innovation will take place. Those in a position to build organisational strengths that are suitable for exploiting and sustaining these emerging techniques will be in the best positions to benefit form controls.

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