How to stimulate environmental innovation
After years of procrastination, ministers appear to be waking up to economic opportunities in the environmental sector.Two reports have set out the sector’s predicament, calling for forward-looking public procurement and regulatory strategies to stimulate investment in innovation.
Paying lip service to the environmental business sector’s potential is easy – for many years ministers have peppered speeches with observations about the sector’s global scale and reach.
However, news that the government is creating a new task force on environmental markets shows that ministers are taking the industry more seriously. The task force will report in spring 2007, offering recommendations to ministers on how to stimulate the sector’s growth, productivity and employment.
Importantly, the task force will look at barriers to growth, and investigate the kinds of environmental policy, regulation and other measures that could drive innovation. The process offers the possibility that government policies on innovation and environmental protection might at last start to join up. The task force’s work has not come out of the blue, however. Indeed, it is remarkable how long the government’s thinking has been in the making.
Landing on the task force’s desk are two reports, published in November 2006, which offer the strongest package of recommendations so far. One of these reports was drawn up by the Environmental Innovations Advisory Group set up by the Department of Trade and Industry in 2003.
In turn, the EIAG’s work builds on an earlier report by an DTI “innovation and growth” team set up in 2001 which led to the creation of a new environmental unit reporting to both the DTI and Environment Department (DEFRA) (ENDS Report 335, pp 3-4). So the new task force’s gestation period amounts to at least five years.
In its report,1 the EIAG hits out at the government’s failure to craft policies and regulation to build a stronger environmental sector. It highlights a number of measures with the potential to drive growth and encourage innovation.
In his foreword, Jack Frost, chairman of the advisory group and director of Johnson Matthey Fuel Cells, says: “The degree of unanimity within EIAG on key issues has been startling… given the level of agreement on the nature of the problems, it is perhaps surprising they have not been solved years ago.” The conclusions could reshape environmental policy, public procurement and the government’s approach to supporting R&D and innovation.
The EIAG paints a picture of a fragmented, diverse sector encompassing companies active in a wide range of fields – many of which would not define themselves as ‘environmental’ companies (see chart, p 27). However, it is a sector with increasing importance to the UK economy, not just in terms of size and growth, but also because its success has important ramifications for all UK businesses as environmental regulation becomes ever tighter.
The industry’s cross-sectoral, SME-dominated nature means environmental technology and service providers lack visibility, and have failed to influence government policy in their favour. But the sector can no longer be ignored, given opportunities posed by EU expansion, access to emerging economies such as China and India, and the challenge of climate change.
The sector already faces stiff competition from the US, Japan and other European countries, particularly Germany. The report points out that countries such as India – which is producing huge numbers of skilled engineering and other graduates – are also nipping at the UK’s heels.
However, all is not lost. While the UK may have lost ground in the past few years, the EIAG believes that dealing with a few problematic barriers to bringing new technologies to market, combined with a new approach to financial support and public procurement, could drive the sector to success.
The UK is “good at research but poor at innovation”, the report says, pointing out that most government support is focused on early R&D rather than the more risky demonstration and scale-up stages. And while EU state aid rules make this kind of support difficult – shown by the demise of the successful Energy Saving Trust green vehicle grant schemes – a new approach to public sector procurement could give companies developing innovative environmental technologies the confidence that commercial sales will be forthcoming if they bring new products to market.
Launched alongside the EIAG report was a separate study2 by the UK Centre for Economic and Environmental Development (UKCEED), which puts the sector’s UK turnover at £25 billion in 2005, spread across 17,000 companies employing 400,000 people. The sector is roughly equivalent in size to the UK pharmaceutical and aerospace sectors, but projected to grow by 42% by 2010 at a time when much of the UK’s manufacturing capability is moving offshore.
UKCEED also emphasises the role of public procurement in developing the environmental sector: “Central and local government and government agencies procure goods, services, works and utilities to a value of approximately £150 billion per annum or 13% of GDP. Spending of that magnitude directed towards environmentally better products and services would be a very powerful driver for the sector.
“Where a cleaner alternative to existing products doesn’t yet exist or is prohibitively expensive, it is unlikely that private enterprise will demand it, and equally unlikely that innovators will undertake the investment necessary to bring it to commercial production. In these cases, public procurement can supply the certainty of a large enough market.”
UKCEED is scathing of current government performance: “Government can stimulate cleaner technology development by specifying energy, water and material resource efficiency levels. In practice, three quarters of government departments have failed to assess water wastage in non-office properties and 11 departments still haven’t met 2004 water efficiency targets; less than half have increased building energy efficiency; only seven departments had adequate data on waste production and recovery.”
The private finance initiative (PFI) comes in for particular criticism: “With over £26 billion of public building to be financed through PFI schemes over the next five years, it is important that procurement policies carry over into this channel. In fact, however, the industry has found that in the vast majority of PFI contracts, sustainability considerations – indeed any attempts at whole-life costing – are put aside in favour of low capital costs.”
The EIAG’s solution is for the government to look to the private sector for inspiration – particularly the automotive industry, which is famed for the effectiveness of its supply chain. “Private sector companies actively manage their supply chains by clearly articulating their future needs and providing a credible promise of future sales to provide the security their suppliers need in order to make investments in new products,” the EIAG states.
To this end, the EIAG has developed a Forward Commitment procurement model and is working to show how it can be replicated across the public sector.
The concept is a simple one: a public sector body offers to buy in the future a product or service that delivers specified performance levels – including environmental benefits – at a defined volume and at a cost it can afford. This promise would unlock private sector investment in delivering such products, and once they have entered the market, normal market conditions will determine competition and price.
Ministers have said that public procurement is a powerful tool for driving improvements in government departments’ environmental performance, but there has been little sign of such commitments transforming procurement policy.
The EIAG is working with organisations ranging from HM Prison Service to the Environment Agency and local authorities to demonstrate Forward Commitment in practice, but inertia, risk aversion, lack of awareness and other barriers may prove difficult to overcome.
The report also discusses the way environmental regulation can drive innovation: “Government policy and regulations create the market for environmental goods and services, and as such government can shape that market to get the outcomes it wants,” the EIAG says.
It recommends policies to give businesses incentives to look for and invest in innovative solutions:
- Progressive regulations with targets set beyond current best available technologies.
- Long lead times – particularly for EU legislation – backed by the certainty of enforcement.
- A clear focus on outcomes rather than prescriptive approaches
The UKCEED report points out the advantages Austria gained by setting up an industry agreement for take-back of cars before the end of life vehicles Directive was even proposed. “As a result, Austrian companies have a sizeable proportion of the UK vehicle depollution equipment market,” it says.
However, more regulation – even more intelligent regulation – is not a cure all. As the UKCEED report says: “Early implementation of directives may be seen more generally within industry as impacting on the competitiveness of UK plc. Implementation of UK regulation which goes beyond the letter of a directive, often termed ‘gold plating’ is similarly criticised.”
Definition of waste
Not all regulation is good regulation, and EIAG uses the current problems around the definition of waste as an example – although conveniently not one for which the UK government is responsible. However, the situation shows how even regulation drafted with the best of intentions can create barriers to progress.
“The upshot is a ‘dead hand’ on environmental innovation involving ‘waste materials’,” the report says. “If purchasers have a choice between a regulated and non-regulated option, they will choose the non-regulated option.”
The report uses the analogy of a shopper choosing between an ‘eco-friendly’ brand of milk and an ordinary product. Drawn to the environmentally friendly option, the shopper finds that, to consume the milk, he or she will need to first pay a fee and apply for a licence, which will take several months to obtain.
The shopper would have to attend a course to establish their technical competence to use the milk and their home would be regularly inspected. If the buyer wanted to stop using the milk, another fee would have to be paid, and new application made.
The report says: “This example may sound far-fetched, but it parallels the regulatory barrier that many innovative businesses face in trying to market products that are made from waste materials, even if they pose no more risk than conventional approaches.”
The issue of obtaining rapid certification for new technologies has also proved “intractable”, the EIAG says, describing testing and certification as one of the most significant barriers environmental innovators face.
While its investigations showed companies often failed to integrate technical assessments into business plans and consequently failed to penetrate crucial markets or wasted time and resources overcoming avoidable challenges, the EIAG believes the industry is far from wholly to blame.
“The testing and certification regime is far from userfriendly,” the report states. “It is technically challenging, complex, esoteric and overflowing with jargon.” A twopronged approach is suggested – awareness raising and better guidance, alongside changes to the system to make it more user friendly and the development of a fit-for-purpose, low cost, rapid assessment for new environmental technologies.
Formal environmental certification schemes such as those in operation in the US, Canada, Japan and Australia could also play a part, along with “pre-assessments” to provide performance data to potential end-users.
Access to finance is another crucial element of bringing innovative products to market. The EIAG refers to a “widely held assumption that there is a shortage of finance for environmental technology businesses, that the sector is a ‘special case’ and therefore deserves special treatment from government”.
However, its research found this is not the case. The sector has seen a surge of interest in the past few years, highlighted by UKCEED’s Envirodaq index of environmental goods and services companies growing from 42 to 76 companies between January and August 2006 year alone. According to UKCEED, the index grew by 40% between June 2005 and May 2006.
The EIAG found that young environmental companies tend to lack the business skills needed to bring innovations to market, but this is unlikely to be unique to the sector. Restrictions on government assistance due to state aid rules was identified as a key issue. The report recommends the government lobby for changes to the guidelines, along with a block exemption on demonstration projects and market incentives to encourage take-up of new technologies.
Both reports give a coherent overview of the current state of the sector and its potential for growth and paths government can take to overcome them. They bring a wide range of diagnoses into one place:
- A government failure to act effectively on green public procurement.
- The low-cost first nature of PFI contracts.
- The problems created by several government departments being involved in areas such as renewables and the confusion and contradictions brought about by their differing priorities.
- The need for challenging and workable environmental laws.
- The need for effective legislation enforcement.
But the UK is far from the only player on the field, and if the government continues to fail to provide the conditions and support necessary for innovative environmental solutions to come to market, Britain will fall further behind its competitors.
The government set up the EIAG, and it is government alone that can take forward the recommendations. Doing so will require swift action if the high ground is not to be lost.
- Environmental innovation: bridging the gap between environmental necessity and economic opportunity
- Emerging markets in the environmental sector
Both reports available at www.dti.gov.uk/sectors/environmental/index.html