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28 ELR 10202 | Environmental Law Reporter | copyright © 1998 | All rights reserved Barriers to Environmental Technology Innovation and UseByron SwiftEditors' Summary: Through an analysis of six case studies of specific industries, this Dialogue identifies barriers to the development of new environmental technologies. After providing background information on the environmental technology industry, the author discusses barriers to technology innovation that are specific to the environmental regulatory system. He then identifies the barriers to innovation that arise from economic and business conditions, including industry conservatism and risk aversion, inadequate funding, and a lack of research and development. In a final section, the author offers possible solutions to the problem, including moving from end-of-pipe rate standards in our laws toward overall performance standards like emissions caps, eliminating provisions in RCRA and state utility codes that restrict technological innovation, and developing policy solutions to the economic barriers involved. These approaches, together with cost and demand drivers, can transform our adequate environmental compliance system into an excellent one. Byron Swift is a Senior Attorney and Director of the Technology Center of the Environmental Law Institute. His work addresses issues of technology innovation and regulatory policies to achieve least-cost pollution abatement through development of performance standards and mechanisms oriented toward pollution prevention. The author would like to thank Dallas Burtraw, Barry Elman, Grant Ferrier, John Henry, Walter Howes, Suellen Keiner, Elissa Parker, Dave Rejeski, Bob Sachs, and Donn Viviani for their opinions and advice on the subjects treated in this Dialogue. Technology innovation is critical to achieving higher environmental standards and cost-effective solutions to environmental problems. Yet, innovative environmental technologies are not being developed at the same rate as technologies in similar industries, and those that have been developed are not being used, resulting in lower environmental quality for the public and higher costs to industry. This Dialogue examines barriers to technology innovation by analyzing six detailed case studies of specific industries.1 These industries were chosen to reflect a mix of small and large manufacturing sectors for which available data allowed a close examination of the barriers to innovation. For each industry, the Dialogue examines the major pollution problem faced by the sector. Through analysis of these case studies and other research on the issue, this Dialogue attempts to distinguish between normal barriers to innovation and barriers specific to environmental technologies. This analysis shows that innovative environmental technologies do face significantly higher barriers than technologies in other fields. This difference is manifested in the decline of private venture capital for environmental technologies to virtually zero over the past decade, in an era of copious venture funding for technology in other fields. The barriers specific to innovation in environmental technologies stem principally from the way our environmental laws are designed and enforced, which in turn affects business decisionmaking. Fundamental reform of our regulatory system and its rate-based standards is needed in order to remove the many barriers they create to innovation. In addition, however, the case studies show that typical business conditions, such as industry's aversion to risk, the lack of financing, and lack of capital turnover, also create major barriers to innovative environmental technologies. However, these barriers appear to be unrelated to the environmental nature of the technologies studied, and therefore do not explain why innovative technologies are not being used in the environmental field to the same extent that they are used in other fields. The Dialogue concludes by offering possible solutions to the barriers to innovative environmental technologies. To achieve the best results, policy tools must address both regulatory and business barriers and create an environment that places continuous pressure on businesses to perform better, through such devices as economic mechanisms or information-based programs. Only then can environmental quality become integrated with business decisionmaking, and we can move from an adequate environmental regulatory system to an excellent one. The Failure to Use Innovative Environmental Technologies There is a widespread perception that innovative environmental technologies are not being adequately implemented [28 ELR 10203] and used to control pollution, resulting in lower environmental quality for the public and higher costs to industry. Federal activity to investigate this issue has been organized under the National Advisory Council for Environmental Policy and Technology (NACEPT), a public committee advising the Administrator and staff of the U.S. Environmental Protection Agency (EPA). The NACEPT created the Technology Innovation and Economics (TIE) Committee specifically to address this issue. The TIE Committee convened many multistakeholder meetings and issued three reports addressing the question of innovation. Its first report concluded that the disincentives to developing innovative environmental technologies create a "market dysfunction symbolized by the lagging rate of investment in environmental technology."2 It describes how a number of policies, including government policies, can hinder technology innovation by making it difficult for companies to try something new. The report concluded that "permitting and compliance systems, as they function today, discourage all stakeholder groups from taking the risks necessary to develop innovative technologies"3 and that "changes to the environmental regulatory system will be needed to create incentives encouraging the environmental technology innovation process."4 The TIE Committee made a series of findings on why innovative environmental technologies were not being implemented and used. It concluded that fundamental changes would need to be made to the environmental regulatory system and offered a series of recommendations. These stressed the need to modify permitting and enforcement systems, to provide incentives and flexibility for innovative technologies, to improve testing and demonstration capacity, to develop cross-media coordination, to identify and remove regulatory barriers, and to develop EPA leadership.5 The TIE Committee noted that, while environmental regulations create the market, they can also obstruct and slow innovation: "Regulatory and statutory requirements often limit the potential to introduce flexibility into implementing policies."6 It further concluded that "the emphasis in the environmental management system on singlemedium pollution control strategies is rapidly reaching both technological and cost limits" and that "existing permitting and compliance authorities at all levels of government lack flexibility necessary to encourage technology innovation for environmental purposes."7 The committee noted that these hurdles facing industry can take many forms. For example, most environmental standards now in place were developed around a particular technology and can have the practical effect of "locking in" that technology's use. The permitting process can also discourage innovation by making the approval process for new technologies lengthier, more cumbersome, and less certain than for conventional approaches. Even when companies are allowed to use an innovative technology, they may be unwilling to risk noncompliance as they receive no reward for exceeding the minimum regulatory requirements and no protection against failure. Therefore, the same old technologies may be used year after year, freezing out newer and more effective alternatives.8 Restrictions on innovation have become more severe under our present system as pollution standards have become more stringent. The reason is that while there may be many technology options to achieve a 50 percent reduction in a pollutant, fewer technology options are available as a standard is raised to higher and higher levels, making it increasingly important to design a regulatory system to allow innovation. The raising of environmental standards over the past decades has, therefore, led to increased attention to this problem. The Decline in Venture Capital for Environmental An independent way to verify the health of the environmental technology industry is to review the rate of financing available for new ideas. The TIE Committee of NACEPT concluded in 1990 "that for at least the past decade the rate of investment in environmental technology development and commercialization has lagged."9 Since this statement, the level of venture capital financing for environmental innovation has gone from bad to worse, dropping from $ 200 million in 1990 to only $ 30 million in 1996 in an era of unprecedented funding for technology in general. Table 1 Venture Capital Available for Investment in Environmental Technologies Compared to Industry Size
These data show that financing for environmental technologies is at an all-time low. This crisis severely constrains the development of innovative technologies. The lack of venture capital is especially problematic because venture capital would normally be expected to fuel innovation by independent technology development companies. The decline in venture capital financing for environmental technologies reflects a similar trend in other private and public financing for environmental technology development. Between 1993 and 1996, environmental mutual funds shrunk [28 ELR 10204] tween 1993 and 1996, environmental mutual funds shrunk from $ 240 million to $ 80 million. The budget of the Office of Technology Development in the U.S. Department of Energy shrunk from $ 400 million to $ 290 million, and the budget for the U.S. Department of Defense shrunk from $ 180 to $ 150 million.10 Interviews with technology financiers reveal two key reasons that they no longer fund environmental technologies. First, even if a technology works and is commercially acceptable, it faces additional hurdles in the permitting process that may create time delays, a lack of acceptance, or other problems that prevent commercialization.11 This "double acceptance" barrier means fewer environmental technologies gain acceptance, and therefore fewer can be commercialized and become profitable. The second reason concerns market size and is also related to the environmental regulatory system. The lack of a national permitting process means that the environmental market is fractioned into 50 state markets and hundreds of smaller ones, each one representing a permitting jurisdiction. Approval in one state or jurisdiction is no guarantee of approval in another, creating a balkanized market that presents a formidable barrier to entry of new environmental technologies. As a result, private capital has virtually left the environmental field, as shown in Table 1 above. A summary of each case study follows. In interpreting the case studies, attention should be paid not only to the performance of technologies in relation to the specific pollutant at issue, but also to concepts of pollution prevention and industrial ecology.12 In this context, innovation is necessary not only to allow technologies to achieve greater control of a particular pollutant, but also to encourage technologies that consume fewer resources and less energy, create less waste, and prevent pollution through cleaner processes rather than end-of-pipe treatment. Large bakers in urban areas are required to install reasonably available control technology (RACT)13 to control their emissions of ethanol, a volatile organic compound (VOC). EPA has defined RACT to require emission reductions of 80 to 95 percent and has determined that catalytic oxidation is the only reasonably available technology that can achieve this level of reduction.14 There are some innovative technologies that can achieve slightly lower levels of VOC control than the oxidizer and are cheaper, employ fewer resources and less energy, and do not use toxic metals; but they have been unable to receive permits under the RACT emissions rate standard.15 Such a standard creates several barriers to the use of innovative technologies: technologies not already "available" cannot be permitted; those that are close to but not achieving the 80 percent level cannot obtain the commercial testing, demonstration, and refinement needed to improve their performance and become commercialized; and trading between sources cannot be allowed (absent special state programs), even though it would allow use of innovative technologies while achieving greater VOC reductions from other sources. In addition, EPA test methods for VOCs,16 which perform poorly in water-laden airstreams like those from bakery ovens, also create barriers to certain innovative VOC technologies that condense ethanol into a water medium. All these barriers are magnified by the permitting process, which requires vendors of innovative technology to overcome these barriers in every state. These barriers combine to provide a monopoly position for the catalytic oxidation technology. Perchloroethylene (PERC), the main solvent used by the dry cleaning industry, is a hazardous air pollutant.17 As regulation of PERC has tightened, four generations of dry cleaning machines have added control technologies that have greatly reduced, but not eliminated, PERC emissions.18 Several innovative technologies would do away altogether with the need for PERC. Technologies using water, liquid carbon dioxide (CO [2]), and ultrasound have all been shown to be as effective as PERC. Barriers to the use of these technologies arise from the small, fragmented nature of the industry, which is made up of 30,000 independent small businesses,19 and from a consequent lack of funds for research, experimentation, and risk-taking. External sources of funds, such as private venture capital or government funding, do not exist in amounts sufficient to fill this need. Another major barrier to acceptance of the water technologies is the "dry clean only" consumer labeling standard that was developed long before current technologies and imposes a risk of liability on cleaners using innovative water technologies. Electric Utilities Recent changes to regulatory standards to control sulfur dioxide (SO [2]) emissions from electric utilities allow for a retrospective analysis of the effects of different regulatory approaches on technology use and innovation. Emission rate limits for SO [2] imposed in 1971 and 1977 prevented many utilities from adopting technologies and practices that could have effectively reduced SO [2] emissions. The end-of-pipe limit created by the 1977 new source standard mandated the use of scrubbers,20 a resource- and-energy-intensive technology that produces high levels of waste. Subsequently, the emissions cap and allowance trading system created by the Acid Rain Program of the 1990 Clean Air Act (CAA) Amendments21 imposed an overall performance standard that now allows greater innovation and has resulted in a major shift toward cleaner process technologies. However, due in part to restrictive state utility laws, barriers to trading in the utility sector remain. Economic estimates indicate that the costs of achieving equivalent SO [2] reductions are halved in moving from a prescription for a particular technology, such as scrubbers, to a rate-based or end-of-pipe emissions standard and are halved again in moving from that standard to a performance standard such as the 1990 emissions cap and allowance trading system.22 Discharges of "pickle liquor" or spent sulfuric, hydrochloric, or mixed acids used to treat formed steel are a major pollution problem of the iron and steel industry. The most immediate barrier to lowering these discharges is the definition of solid waste in EPA's Resource Conservation and Recovery Act (RCRA)23 regulations, which requires that spent pickle liquor be treated as a RCRA waste if it is reclaimed and recycled.24 This requirement increases the difficulty and the cost of recycling so much that it becomes more economical for most firms to dispose of the liquor in landfills or to inject the waste underground.25 RCRA in effect creates waste from material that would otherwise be reclaimed and reused. Other economic barriers to recycling include fluctuating economic variables, such as the prices paid for reclaimed ferric chloride, transport, and other costs. Low prices for landfilling and underground injection also factor into decisions not to recycle. An integrated solution to this problem would be to remove the regulatory barriers to recycling while making it more expensive to dispose of these wastes through landfilling or underground injection. In addition, increasing customer acceptance of unfinished steel in certain applications could reduce pickle liquor creation. In the long term, the principle barrier to eliminating the use of pickling acids altogether is the lack of funding for industry efforts to research and develop nontoxic alternatives to pickle liquor.26 Innovative technologies in the bleaching stage of papermaking can greatly reduce discharges of persistent organic chlorides, a major pollution problem. After a multiyear process, EPA recently adopted a pulp and paper cluster rule27 that imposes significant new limits on water effluent discharges. Although the cluster rule sets numeric limits at a point that will force the adoption of clean chlorine dioxide technologies, it does not force the adoption of even cleaner technologies, and it stops well short of requiring totally chlorine-free technology. Although cleaner technologies are competitive with older ones when building a new mill, the cost of retrofitting newer technologies in the 300 existing mills is perhaps the major barrier to their use. Wastewater Treatment by Publicly Owned Treatment Works Innovation in wastewater treatment technology faces a mixture of economic and regulatory barriers, many of which may be unique to publicly owned utilities. Economic barriers include diminishing government funding for publicly owned treatment works, the conservative approach of municipal administrators, and the lack of privatization or alternative financing mechanisms.28 Regulatory barriers to innovation include restrictive and outdated state and local codes that may establish standards based on traditional treatment methods, state procurement regulations that discriminate against new technologies, and inconsistent state standards [28 ELR 10206] that make it more difficult for new technologies to enter the market. Although regulation was a driving force to improve the quality of surface water and to develop treatment plants in the early decades of the Federal Water Pollution Control Act (FWPCA), technology vendors now view many regulations as out of date and as having changed from technology drivers to technology barriers.29 Barriers Stemming From the Regulatory System The case studies reveal both the strengths and weaknesses of our current environmental laws and policies. They show that the most fundamental regulatory barriers stem from the underlying nature of our major environmental laws, many of which are oriented toward permitting "control and dispose" technologies that are unfriendly to innovation. While our current environmental system has served us well, it has created significant barriers to innovation and has experienced difficulty in moving toward more integrated concepts of pollution prevention and industrial ecology. This section of the Dialogue first addresses barriers to technology innovation arising from standards that impose end-of-pipe rate limits based upon available control technologies. It then analyzes the role of state laws and RCRA, which imposes a cradle-to-grave system that may force disposal instead of recycling. The section finally discusses barriers that arise from restrictions in EPA test methods, the one-dimensional nature of most pollution standards, and the federalized nature of our permitting system. Emission Limits and Discharge Standards Create Barriers to Innovation Technology-based emission limits and discharge standards that establish end-of-pipe rate standards are a major barrier to the creation and use of innovative environmental technology. As stated in the NACEPT report, "to a significant degree, these [fundamental] problems derive from the way the central approach to regulation in the United States — 'best available technology'-based regulations — is frequently used today. Reliance on 'best available technology'-based regulations impedes the development and introduction of innovative technologies."30 The committee made the following recommendation: Policy makers should reconsider the way "bestavailable technology"-based regulations are now developed and applied. Such regulations use agency established technology-based limits and use a technology to demonstrate that the limits are achievable. Even though these are performance-based requirements, they have a strong tendency to lock in the technology that is used to demonstrate achievability. To some extent, reliance on "best available technology"-based regulations impede the development and introduction of innovative technologies.31 The case studies described in this Dialogue reveal several barriers to innovation that are caused by emission and discharge rate standards, deriving both from their inherent design and from the way they interrelate with our current environmental permitting system. Taken together, they indicate how this system is becoming dysfunctional as rate-based limits are raised to higher and higher levels. [] Emission and Discharge Rate Standards Restrict Technology Choices. End-of-pipe emission limits and discharge rates create a major barrier to innovation when they establish a permissible pollution standard that is so strict that only one available technology exists that can meet it. This creates very high barriers to the development of any other technology because any new technology cannot be permitted commercially until it meets this standard. This requirement thus precludes the normal development and refinement process required for most new technologies to achieve their best performance because it precludes the typical testing and demonstration process that technologies need in order to be commercialized.32 Of the four case studies analyzing industries that involve emission or discharge rate limits for specific pollutants, the problem of a single acceptable technology was found in two, the baking industry case study and the utility industry case study before the change to an SO [2] cap and trade system in 1990. Several technologies can still reduce discharges of chlorinated compounds in the pulp and paper industry, and in the dry cleaning industry there has been little attempt to move beyond the use of PERC solvents. Therefore, based on the case studies and the literature, the problem of technological "lock-in" under an emissions limit or discharge standard is common and has serious implications for innovation. There are three reasons that emission and discharge rate limits may create high barriers to innovation. First, many statutes literally require the adoption of a single best technology by setting standards such as "lowest achievable emission rate" (LAER),33 best available control technology (BACT),34 or best available technology economically achievable (BAT).35 However, as shown in the baking industry study, even under a RACT36 standard, an emissions limit can lead to a situation where EPA has approved only one technology — catalytic oxidation in this case — that can meet the standard. This demonstrates how an emissions limit actually becomes a technology standard if it is set at a level that only one technology can achieve. This problem has grown as standards have become stricter over the past decades, because the stricter the standard, the greater the probability that only one existing technology can achieve it. Second, emissions limits and discharge rates tend to dictate a single technology because they preclude the normal development and refinement process that most new technologies require in order to achieve their greatest performance. As shown in the baking industry case study, an emissions limit may prevent the typical testing and commercial demonstration process that technologies need in order to be [28 ELR 10207] commercialized. Most technologies are developed, not invented, and they require a period of research, bench-scale demonstration, commercial demonstration, and scale-up before they can be fully commercialized. Setting a standard that only one existing technology can meet precludes this development process and may freeze innovation. Third, emission and discharge rate limits may be poor performance standards because they measure achievement only by end-of-pipe concentrations. There are many technologies that reduce total pollutant loads through process changes, but that may not reduce end-of-pipe concentrations. These technologies cannot be permitted under current emissions limits and discharge rates, even though they may achieve equivalent or better pollution abatement through cleaner production. This effect was demonstrated in the electric utility case study where many additional approaches to reducing SO [2] were implemented once the emissions limit was changed from an end-of pipe standard — a rate limit — to an overall performance standard — an emissions cap. The electric utility case study provides an unusual retrospective view that allows for a comparison of actual performance under both rate-based emissions limits and an emissions cap approach to curb SO [2] emissions. The study shows that the former standard precluded the use of key technologies, and that it was innovation in and use of those new technologies that has resulted in both cleaner production and major cost savings. Table 2 Acid Rain Regulation Technologies Permitted and Estimated Compliance Cost by Regulatory Method
The problem with emissions and discharge rate limits originates in the fundamental approach embodied in many environmental laws, which is that of end-of-pipe pollution control, instead of pollution prevention. The pollution standards in many statutes actually use the term "control technology" and establish specific end-of-pipe emissions or discharge rate limits. As the TIE Committee commented, "the current system of single-medium permitting has achieved significant environmental gains primarily by stimulating a pollution control response, rather than by encouraging pollution prevention."38 Nevertheless, the unintended effect of regulating through end-of-pipe emissions and discharge rates has been to preclude pollution prevention and to lock in existing control technologies. Because emissions limits and discharge rates restrict technology choices and preclude innovation, such standards only make sense when the objective is specifically to reduce pollutant concentrations in the immediate vicinity of a pollution source. This was one of the original goals of environmental regulation in the 1970s and may be a reason that many of our environmental laws were structured this way. Indeed, there is still a need for the end-of-pipe concentration limit for SO [2] applicable to utilities, which dates from the original Clean Air Act,39 but this has been superseded by the need to achieve much greater reductions in SO [2] on a regional or national airshed level for ecosystem and human health.40 Increasingly stringent rate-based standards make little sense as a way to address these problems because of their cost, their tendency to lock in technologies that may consume large amounts of resources, and their discouraging effect on innovation. An overall performance standard, such as an emissions cap, makes much more sense when pollution needs to be regulated at a regional level. Such an approach should be used to address the major regional pollution problems of SO [2], urban smog, particulate concentrations, and, potentially, greenhouse gases. [] Emissions and Discharge Rate Standards Limit the Incentive to Improve. In addition to limiting technology choices [28 ELR 10208] and innovation, emissions and discharge rate limits also fail to create incentives to reduce pollution below the required standard. "The way the regulatory system now operates, the incentive to innovate exists primarily with respect to the costs of performance and there is little, if any, incentive or opportunity to innovate for the better performance the nation will need."41 The only way to create broader incentives is to create regulatory systems with continuous drivers, which may include economic drivers through pollutant charges, disposal charges, emissions caps on emissions trading, or information-based drivers through programs like the Toxics Release Inventory. There are also subtler reasons why technology-based rate standards discourage innovation. Compliance with technology-based standards produces a "stutter-step" approach to research and development because new technologies are only needed at the infrequent intervals when a regulatory authority decides to tighten standards. Once the new standard is promulgated, firms must rapidly find and use a technology that meets the requisite standard. This approach does not encourage the culture of continuous research, development, and improvement that is needed to foster innovation, and in particular, it does not create any incentives for long-term, basic research into completely new approaches.42 Without a continuing demand for better performance, there is also no steady support for technology development firms dedicated to researching and finding better ways to solve environmental problems. Research in the environmental field is at a very low level — 3 percent of revenues for most firms that develop and sell environmental technologies — and is oriented almost exclusively to applied research with short-term time horizons.43 This lack of research is evident in many of the case studies and is particularly evident in the dry cleaning, iron and steel, and wastewater treatment case studies. Finally, the electric utility case study reveals another interesting aspect of rate-based regulations that discourages innovation — the monopoly state that can be created by rate standards. Under the former SO [2] end-of-pipe emission rate limit, scrubbers occupied a monopoly position for more than a decade, yet they improved very little. However, significant improvements in scrubbers developed soon after the emissions cap approach of the 1990 amendments exposed them to competition from low-sulfur coal.44 Present Permitting Systems Create Additional Barriers to Innovation. Another set of barriers to innovative environmental technologies is derived from the way the current permitting system operates to implement technology-based emissions and discharge rate limits. These permitting barriers are reviewed in the TIE reports and are illustrated in several of the case studies in this Dialogue. They include the added delays inherent in the permitting system when it involves a review of technological choices; the permit writers' lack of time, expertise, and experience in reviewing innovative technologies; the lack of rewards for implementing innovative technologies; and the cautious approach inherent in a government bureaucracy. An essential problem under technology-based standards is that innovative environmental technologies face two approval hurdles, in contrast to the single private-sector approval process faced by technologies in most other fields. Environmental technologies must be approved by the regulatory authority as well as by potential users. This double approval process makes the use of innovative environmental technologies more difficult and drives financing away from environmental technologies because it is easier for technologies in other fields to be commercialized. The essential problem is that the traditional permitting system requires a permit writer to review a firm's technology choices under standards such as BACT, RACT, LAER, and BAT, and it takes considerable effort and time to gain permit approval for an innovative technology. In the baking industry study, due to the conservative nature of permitting agencies and to the regulatory restrictions on acceptable technologies and test methods, it took more time to convince the permitting authority of the merit of a viable new technology than to convince the using business. Then, having surmounted these barriers at great effort in one state, the innovator faced them again in each new permitting jurisdiction.45 The time delays inherent in the permitting process also create barriers to innovative technologies. In the wastewater case study, the GAO notes that the time limits imposed by the state procurement process discourage innovation: "When EPA (or a state) directs a community to build a treatment facility within a tight time frame, the community and the consulting engineer may select a conventional system to avoid the additional time that may be required to design and receive approval for an alternative system."46 The added permitting time especially may discourage the use of innovative technologies in the many industries with rapid time-to-market needs. Setting standards in reference to a benchmark "best" technology also has the effect of locking in, or freezing, technology. In some situations, by definition, only one technology can achieve the required emission or discharge rate limit, and in others, guidelines and publications like EPA Alternative Control Technology Documents can dictate acceptance of a preferred technology.47 Subsequent technology developments then face high barriers to obtaining approval because of constraints on permit writers' time and knowledge and because of the bias against approving a technology that has not been authorized before. This barrier is apparent in the case studies on the baking industry and electric utilities, where the development and use of new technologies has been restricted. Permitting systems that implement an overall performance standard are able to avoid these problems. The Acid Rain Program shows how a permitting system can be designed to enforce compliance, but not review a firm's choice of technology. This underlies the importance of changing our end-of-pipe standards to overall performance standards. Other Regulatory Systems Create Significant Barriers In several of the case studies, other kinds of regulatory barriers play important roles in precluding the application of innovative technologies. In both the electric utility and the wastewater treatment studies, state laws discourage innovation, and in the iron and steel industry case study, RCRA poses a significant barrier to reclamation and recycling. [] State Laws. In the wastewater technology sector, restrictive state and local codes and regulations create significant barriers to innovation. State procurement codes based on the federal procurement rules used during the federal construction grants period, place narrow and strict procurement requirements on bidding processes. These requirements can restrict the level of technology to traditional mechanical and chemical treatment processes. In addition, state procurement laws that require competition may discourage innovation by precluding bidding unless two or more firms propose similar innovative technologies.48 State and local wastewater codes and standards can also restrict, or actually prohibit, the use of innovative technologies because many codes contain specifications that apply only to conventional technologies. These standards are engineering design specifications that are based on conventional technologies to meet secondary wastewater treatment standards, and they may include parameters such as sizes of aeration tanks, retention times in flocculation basins, amounts of chlorine for disinfection, and other requirements. These standards are periodically updated, but for conventional treatment only; innovative technologies are rarely included.49 In addition, in the wastewater arena, water quality standards vary from locale to locale. Because of this, developers and vendors of new technologies will always have to conduct many pilot tests inseparate jurisdictions in order to demonstrate that their products can achieve the different water quality standards. This process, which is costly, can restrict new entrants. The electric utility study demonstrates that state laws constrain trading of SO [2] allowances, which can preclude the innovation, and reduce the cost savings, normally associated with this regulatory method. Many state public utility commissions lack rules governing allowance transactions, which creates uncertainty and presents a significant barrier to risk-averse utilities. In addition, in most states the standard rules governing the allowed rate of return, the depreciation rate, and the risk that expenses, such as allowance purchases, may not be recoverable in electricity rates are all less favorable to allowance transactions. Furthermore, prohibitions against shareholder earnings on capital gains (but not capital losses) impose one-sided risks on utilities that purchase allowances.50 An additional problem has been explicit attempts by legislatures to prohibit trades that might undermine local economic activity, such as the production of coal.51 All of these factors have discouraged utilities' willingness to purchase allowances. [] Resource Conservation and Recovery Act (RCRA).52 RCRA implements a "cradle-to-grave" approach to waste regulation that also embodies a "control and dispose" perspective. This approach is unfriendly to industrial ecology and to pollution prevention. As shown in the iron and steel case study, RCRA's definition of waste precludes legitimate acid reclamation activities. As a result, hundreds of millions of gallons of waste acids, which could be recycled, are injected underground or treated and disposed of in landfills. The recycling of spent pickle liquor has considerable pollution prevention potential, although only an estimated 2 percent of pickle liquor waste is currently recycled in the United States.53 A principal barrier to recycling is the definition of solid waste in RCRA, which requires RCRA treatment if wastes are reclaimed during the recycling process. Anecdotal evidence from several steel mills suggests that this problem is widespread because the application of RCRA makes recycling costs prohibitive.54 Other barriers to recycling include fluctuating economic variables, such as the price paid for reclaimed ferric chloride and transport. The impact of recycling on worker safety and the possibility of transport accidents are other issues that need to be considered in making a decision about recycling pickling acids. A thorough assessment of the data on pickle liquor recycling and its potential contribution to pollution prevention could lead to a recommendation to revise the RCRA definition of waste in order to facilitate reclamation and recycling both on-site and off-site. One-Dimensional Environmental Standards Are Inconsistent With Pollution Prevention Approaches The six case studies examined in this Dialogue reveal another tendency of our traditional environmental laws — to be one-dimensional in their application. By demanding technologies with the highest rate of control for one specific pollutant in one medium from one source category, our laws may dictate technology choices that have high overall material and energy costs or that create other significant wastes, in a way that is inconsistent with current notions of pollution prevention. In these situations, business' desires to find less costly treatments are often more in alignment with overall or multidimensional [28 ELR 10210] environmental solutions and technology answers. This is because an approach that costs less, typically, although not always, uses fewer materials and other resources. Barriers to innovation become particularly evident when business drivers to develop cheaper and cleaner technologies are frustrated by one-dimensional standards. In five of the six case studies, current environmental standards favor or require technologies that consume high levels of materials and energy, or produce high levels of wastes that must be treated or landfilled, rather than favoring innovative technologies with lower levels of materials demand that might otherwise be used in these sectors. In the baking industry and electric utility case studies, this situation was created by traditional emissions rate limits. In the baking industry study, the current RACT standard creates a monopoly for catalytic oxidation, which achieves 96 percent control of VOCs, but uses relatively high levels of energy and materials, and requires periodic replacement of the platinum catalyst, a toxic heavy metal. In the electric utility case study, the pre-1990 SO [2] emissions rate standards either encouraged or forced the use of scrubbers, also a materials-intensive technology. Scrubbers consume large quantities of lime as well as 2 percent of the power plant's energy, and scrubbers create large amounts of sludge to be landfilled. In both industries, alternative technologies are much cleaner. In the baking industry study, alternative technologies achieve slightly lower VOC control, but they require lower capital costs and much lower operating costs. They also use less energy, and they do not use toxics. One technology even returns energy to the facility, and another does a superior job of cleaning up other wastes.55 In the electric utility case, the switch to an emissions cap and allowance trading system for SO [2] in 1990 prompted an industry shift to cleaner coal and to other processing methods that avoid both the high energy consumption and the need to dispose of sludge created by scrubbing. In the iron and steel industry study, the high level of materials use arises from RCRA's definition of waste, which places restrictions on spent pickle liquor that would otherwise be reclaimed and recycled. RCRA defines material as a waste if it is reclaimed in a recycling process, imposing costs that cause most firms to discard the spent pickle liquor and purchase virgin materials. The tendency for our laws to grandfather existing technologies that demand high levels of materials is also evident in the wastewater treatment and dry cleaning industry case studies. In the former, state codes set prescriptive standards based upon traditional methods that are oriented toward mechanical and chemical treatment, whereas modern technologies use ozone and ultraviolet radiation and other less material-intensive methods. Likewise, the regulation of the dry cleaning industry for many years has focused on requiring improved machinery and better disposal of toxic PERC wastes, whereas innovative technologies attempt to do away with PERC altogether. The pulp and paper industry is the only one in which the innovative technologies are not significantly less materialintensive than the more traditional technologies. Both the chlorine dioxide technology now required by EPA's cluster rule and more innovative chlorine-free technologies significantly reduce emissions of the target pollutants, but both also use large quantities of chemicals and energy to do so.56 This review indicates that innovation is an important need even in situations where an existing technology achieves a high rate of pollution control. In these cases, technologies that achieve a similar result by consuming fewer resources and less energy and by producing smaller amounts of waste may be needed. Regulations that restrict technology choices by requiring a single best technology with reference only to reductions in the particular target pollutant may preclude development of such cleaner technology options. In this regard, cost can become an important driver of clean production because lower costs tend to reflect decreased material and energy usage or lower disposal costs. Business' motives to find less costly technologies become a driver for achieving more integrated resource reduction. Environmental regulations should therefore be designed to allow maximum flexibility for businesses to find cheaper technologies that are consistent with the need to reduce discharges of target pollutants. This means moving, where feasible, away from technology-based or rate standards toward overall performance standards, which allow greater experimentation. Two of the case studies show progress in this regard. The barriers to innovation posed by the SO [2] emissions limits in the electric utility case study have been successfully addressed by the 1990 Acid Rain Program,57 which created an overall performance standard through an SO [2] emissions cap. Also, the recently announced pulp and paper cluster rule creates a Voluntary Advanced Technology Incentive Program, which provides 5, 10, or 15 additional years for companies to comply with the standard if advanced and cleaner technologies are to be used.58 EPA Test Methods Can Discourage Innovation Good monitoring and good testing methods are critical to making our environmental laws work. However, present EPA standard test methods can create significant barriers to the implementation of innovative technologies. In the baking industry there is no specific EPA-approved test method for ethanol, and the approved test method for organic gases, EPA's Method 25A,59 performs poorly in moisture-laden emissions streams, such as those from bakery ovens. Method 25A is also not designed for technologies, such as the innovative heat exchanger or the wet scrubber, that convert ethanol to a water medium. Because this standard method creates a positive bias when testing ethanol emissions with a high water vapor content, vendors of innovative technology have had to convince states to use another accurate test method so that they can prove that their technology can meet emissions standards. Since acceptance of an alternative testing method involves an exercise of discretion by the state regulatory authority, vendors of innovative technology face an expensive and [28 ELR 10211] time-consuming battle in each state. In these situations there are three, not two, barriers that must be overcome by the innovative technology — approval of the new testing method as well as approval for the technology from the industry and from the state permitting authority. EPA should recognize that testing methods can significantly restrict innovation in the underlying technologies and increase efforts to address this barrier. This may require greater resources or a better process for approving new test methods when justified, and more attention to updating test methods in light of new technologies. The Federalized Permitting System Adds Hurdles Many barriers to innovative technologies are reinforced by the need to achieve independent permit approval in each of the 50 states and more than 100 other permitting jurisdictions in the United States. While our federalized permitting system is fundamental to preserving state autonomy and allowing for more stringent state or local standards, it does create additional barriers to the use of innovative technologies. These barriers are best illustrated in the baking industry case study where a lengthy effort to install the technology in Maryland bakeries simply laid the groundwork for repeated efforts in other states. The need to overcome repeatedly the same barriers restricts the ability to commercialize innovative technologies successfully and reduces the interest of private capital markets in investing in environmental technologies. In addition, our federalized permitting system may create differing standards in many jurisdictions, and these variations disproportionally affect start-up and innovative technology companies that are typically cash-poor. In the wastewater case study, a GAO study noted the barrier to innovation was caused by water quality parameters that vary between jurisdictions.60 Because of this, developers and vendors of new technologies will have to conduct many pilot tests in separate jurisdictions in order to demonstrate their products, a costly procedure that restricts new entrants. There are other, more political, barriers to innovation that are created by the permitting system as well. In the electric utility study, for instance, several states enacted laws to mandate SO [2] control technologies that might preserve instate coal mining jobs. Although these laws have been overturned as unconstitutional,61 other subtler ways could also be used to favor local interests and prevent cleaner technologies, such as the adoption of rules favoring investment in scrubbers. Finally, there is also variation in the way states have chosen to develop programs that attempt to lower the barriers to innovation created by the present regulatory system. In the iron and steel case study, some states are more aggressive than others in using the RCRA waiver provision which, although of limited usefulness, helps to redress the barrier created by RCRA's definition of waste. A variety of other state programs are discussed in the next section. While our federal system is part of our governmental fabric, greater consistency and joint action between states would address these barriers. Innovative Technology Waivers and Verification Programs Have Limited Usefulness One response to the barriers to innovation caused by the regulatory system has been to incorporate innovation waiver provisions into pollution control statutes. At the federal level, this has been done in the CAA,62 the FWPCA,63 and RCRA.64 These provisions allow for extended deadlines, or other special procedures for innovative technologies, and are intended to encourage industries to develop new control or disposal technologies.65 In practice, they have not achieved their intended effect.66 A study of the CAA waiver provision found that high transaction costs, delays, and uncertainty in gaining an exemption have greatly limited the provision's usefulness. The study showed that, of the few companies that applied for a waiver, only one received approval in the initial three years, and companies that had applied in the past were reluctant to do so again.67 A similar result has been found for the FWPCA waiver provision.68 Generally, these waiver provisions suffer from the same defects as the regulations they are meant to redress. They are administratively complex, are in some ways ambiguous in their definition of innovation, and depend on timely consideration and approval by the same permitting body that administers permits for conventional technologies. Many of the same barriers apply, such as time delays, overburdened permit writers, and a lack of appropriate expertise. As a result, this system can do little to solve the permitting barriers already identified. Technology verification programs may have a greater potential for overcoming these barriers than technology waivers, but they are also subject to many technical constraints. These programs verify that a given technology passes a performance protocol administered and judged by an independent private party or by the government. Although a popular idea with technology vendors and regulators, verification programs have not been implemented quickly, and those that have been developed suffer from many of the same constraints as the regulatory programs that they were designed to address. Major problems with verification include the additional time delays and costs that the programs require. Also, even after verification, in many cases the findings may not be specific enough to a user's particular processes and facilities to be of great benefit. User firms emphasize that regardless of the verification program, they usually need to conduct [28 ELR 10212] their own tests anyway to ensure that the technology is compatible with their particular processes and equipment. Some firms also perceive that unless it is sufficiently rapid and effective, a verification process can itself become another barrier to commercializing an innovative technology.69 In addition to permit waiver provisions, states have adopted a number of innovative technology programs that promote, fund, or facilitate innovative technologies.70 The best programs are those like the Texas Innovative Technology Program, which directly addresses the barriers created by the regulatory and permitting system by creating a core group to speed the process and shift the burden from the individual permit writer to the department.71 In doing so, it addresses the key delay issue and the lack of incentives for individual permit writers to accept innovation. In some instances, these programs provide flexibility for regulatory standards under state implementation plans for ozone attainment and similar provisions, but they cannot be more lenient than the federal standards. As shown in the baking industry case study, this limits the scope of these programs to only less costly technologies that meet or exceed regulatory standards in reference to the specific pollutant and the specific point source. As a result they leave out many technological options and do not address many of the fundamental barriers previously discussed. Several of the case studies analyzed in this Dialogue demonstrate that normal economic and business conditions also create significant barriers to innovation in environmental technologies. These conditions include the conservative nature of businesses in sectors like the utility industry, the lack of capital turnover especially for large facilities, and the small size of businesses in sectors like dry cleaning. Although they create major barriers to innovation, these conditions are not unique to the environmental field and do not explain why innovative technologies are not being used in this field to the same extent as in other fields. Industry Conservatism and Risk Aversion Many vendors of innovative technologies identify institutional aversion to risk on the part of their client industries as a barrier to acceptance of innovative technologies. "Firms want to be first to be second," and "pioneers get arrows in their backs" are typical comments. However, there are many legitimate business reasons for firms to be cautious about accepting new technologies. An accurate business assessment of potential costs and benefits may dictate a cautious approach. For the sectors studied in this Dialogue, industry's conservatism is mostly due to legitimate business appraisals of the risks and benefits of accepting new technologies, which must shoulder a burden of proof that they will work in the specific context of an individual firm. The pulp and paper case study reveals how certain factors can create very real reasons for caution. These include the individual and complex nature of facilities as well as the expense and the days of production lost if a technology fails. In many industries, legitimate business risk aversion appears to be part of the burden of introducing any innovative technology and is not specific to the environmental industry. In three of the case studies, however, the industries exhibit a genuine institutional aversion to risk-taking that appears to be greater than legitimate business caution and any regulatory barriers. In the dry cleaning industry, the lack of innovation appears to be due to the small, retail-oriented nature of firms that constitute the industry, which lack the financial capacity to experiment with new technological processes. The other industries that exhibited undue risk aversion are the electric utility and wastewater sectors. Both are heavily regulated by state laws that are slow to change, and both tend to be dominated by publicly owned entities that have enjoyed virtual monopolies through most of their history. All these factors contribute to an inability to act swiftly to embrace new technologies. While such undue conservatism in these industries is a barrier to change that must be addressed in crafting public policy, it does not affect environmental technologies more than it would other technologies. To the extent that industry's aversion to risk is greater for environmental technologies, this difference appears to be due primarily to the environmental permitting system that creates barriers to innovation that are absent in other technology fields. As noted above, innovative technologies must be accepted not only by user firms but also by permit writers, and the expense and effort required to provide the necessary demonstrations and tests are high barriers to marketing or using innovative technologies. A business may be unwilling to install an innovative environmental technology because, even if it is effective in reducing pollution, the permitting process may be longer and more costly than that of a conventional technology. These fears thus reinforce a firm's inherent reluctance to use innovative technologies. Funding for Innovative Environmental Technologies Is Lacking The lack of financing plays a major role as a barrier to the use of innovative environmental technologies. The financing of environmental technologies is a complex issue, however, and its behavior as a barrier can be manifested in several different ways. Of primary concern in the environmental policy arena is the general lack of private financing available for environmental technology innovation, as shown in Table 1. Interviews with leading venture capital investors who have attempted to fund environmental technologies over the past decade make it clear that there are two fundamental problems, both relating to the operation of the regulatory system. The first is that the permitting process creates a second layer [28 ELR 10213] of review for any new application. This added layer not only adds time and costs to the process, but often results in the rejection of viable technologies for reasons internal to the permitting system, such as the lack of time or expertise by government permit writers combined with their reluctance to take risks. The second concern is that, while the overall U.S. market for environmental technologies is over $ 180 billion according to Environmental Business International,72 in reality this market is divided into hundreds of smaller markets defined by each permitting jurisdiction. In each one, innovative technologies must surmount anew the barriers to both permitting approval and industry acceptance. A helpful contrast can be drawn between this situation in the environmental industry and innovation in the field of medicine. While it requires more than $ 100 million over 10 years to obtain U.S. Food and Drug Administration certification of a new pharmaceutical drug, once certified, a new drug obtains immediate and open access to 80 percent of the global market.73 As a consequence, huge amounts of private capital are being invested to discover new pharmaceutical products. In comparison, the small market size in the environmental field drastically escalates the likelihood and costs of successful commercialization, and discourages innovation. Absent changes to our federal system, the most practical way for environmental technologies to overcome this barrier is to move away from technology-based standards and toward overall performance standards like pollution taxes or emissions caps. This shift would eliminate the case-by-case and state-by-state review of innovative technologies under our technology-based standards that creates such a barrier to financing. If this change were accomplished, arguably hundreds of millions of dollars in private capital would become available for investment in innovative environmental technologies. A third financing issue, which is evident in the case studies, is the lack of internal capital within industries to be used to finance research and innovation. This is an economic barrier and is not restricted to environmental technologies. The dry cleaning case study shows that the small size of firms in an industry may create a near-total lack of financing for research and development. However, a lack of capital for research was also found in the iron and steel sector, although large firms predominate, in this case due to increasing competitive pressures in this sector. The general lack of venture capital for environmental technologies becomes all the more important in situations where there is no internal capital available for technology research and development. A fourth economic barrier relates to capital flows and the expense of capital plant renewal and is evident in the pulp and paper and wastewater case studies. Here, major capital costs are required in order to install innovative technologies, which are easier to absorb when building a new plant. The slowness of capital turnover in these industries, therefore, can be considered a barrier to innovation. For example, in the pulp and paper industry, an innovative technology would be cost-competitive with more traditional technologies if it were installed at a new facility. However, because almost no new mills have been built in the United States this decade, innovative technologies need to be retrofitted in order to be used, at a cost of $ 10 to $ 20 million.74 Therefore, although innovative technologies have been developed that pollute less and are not more costly than traditional technologies, they are not being fully used due to a lack of capital turnover in the industry. The only driver in this situation would be new regulatory requirements to achieve lower pollution levels. The lack of capital for new treatment plants is also considered to be a barrier in the wastewater industry, where traditional federal funding sources are declining. Although new wastewater treatment facilities are being built, EPA estimates that investment is only half of what is required. Again, innovative technologies are much more cost-competitive when they are installed in new facilities than when they are retrofitted. As a result, this lower level of investment activity means a lower rate of investment in innovative water treatment technologies. However, because some new plants are being built, barriers in this industry may also have to do with other issues, such as institutional reluctance to change. Research Into New Technologies Is Lacking The lack of research and development (R&D) for new technologies is an evident barrier to innovation in the case studies on dry cleaning, iron and steel, and wastewater treatment. As discussed above, there are virtually no funds available in the dry cleaning industry for R&D due to the small size of firms, and the most significant initiative is being developed by a technology firm outside the industry. In the iron and steel industry, while firms are large, their R&D departments have been slashed over the past 20 years as the industry has reduced costs to meet foreign competition. Today, there is relatively little capital within the industry for R&D. Wastewater treatment plants have traditionally relied on government funding for capital plants and research, both of which are in steady decline and have not been replaced by alternative funding sources. The decline in research and development in manufacturing industries is a national trend that is broader than the environmental arena.75 However, it affects the environmental area significantly because so many technology improvements are required to meet our society's demand for increased environmental quality. In addition to what is happening in the manufacturing sector, research shows that most firms in the environmental technology vendor community are also devoting few funds (3 percent of revenues) to R&D, and they spend virtually no funds on basic R&D.76 The need for improved strategies to fund research and development in environmental technologies is evident. Potential solutions to the barriers for innovative environmental technologies described above must take place on [28 ELR 10214] two levels. The first fundamental reform is to change our basic environmental laws, where possible, away from technology-based standards that focus on end-of-pipe results and toward overall performance standards. Mechanisms for achieving these standards include pollution taxes and emissions caps that focus on reducing pollution at the plant level or regional level, where feasible. This first level of reform will have the effect of removing the need for the review of compliance technologies by permitting authorities, which is the root of so many of the barriers to innovation in the traditional environmental regulatory arena. It should also allow businesses the flexibility to find least-cost solutions within a regulatory context, harnessing cost savings as a driver to promote pollution prevention through lower material use, energy use, and waste creation. It is also likely to remove the barriers that keep hundreds of millions of dollars in private capital from investing in environmental technologies. However, more is needed. A second tier of improvement can only come by changing the fundamental nature of the supply and demand drivers that businesses face. On the supply side, the costs of resources, energy, and waste disposal must be increased to reflect their true social cost. If they were, then costs could become a truly integrated driver for pollution prevention and complement the driver created by environmental regulations that focus on specific pollutants. Demand drivers also need to change so that increased demand for cleaner production creates the incentives for businesses to invest in the research and use of improved technologies. These solutions would lead us toward the more integrated solutions required for industrial ecology and pollution prevention. Well-Designed Environmental Regulations Can Drive Innovation The role of environmental regulations as drivers of innovation is complex and easily misunderstood. Any environmental regulation, indeed any regulation, will create some change in behavior and, hence, some innovation in the technologies applied. However, the extent, quality, and duration of innovation can vary greatly depending on the kind of regulation that is adopted. The case studies here show that environmental regulations can be significant drivers of innovation, as in the dry cleaning industry, or they can do the opposite and freeze technologies, as they did for decades in the electric utilities industry. Their tendency to do the latter has led some commentators to label the environmental technology industry an "old technology" industry, where only existing technologies are readily permitted.77 The issue is not whether regulations drive innovation, but understanding the extent and quality of innovation that is prompted and understanding whether the regulations exert any pressure for continual improvement. The case studies analyzed in this Dialogue show that our traditional environmental laws and policies have usually avoided the pitfalls of mandating technology prescriptions, but have instead often imposed emission and discharge rate limits that have a similar practical effect. These end-of-pipe standards are not as effective as overall performance standards and can significantly discourage innovation. Such discharge and emission rate limits on point sources of pollution can force only certain limited kinds of innovation. In addition, our current permitting and compliance system, which has developed around their use, has the effect of freezing the technologies at this level. The more environmental requirements that can move away from end-of-pipe standards and toward overall performance standards, and away from regulating point sources and toward plantwide or even industrywide caps, the greater the number of technologies that may be used and the greater the potential for innovation. A review of the case studies here sheds some light on the factors at work in determining the effect of regulations on promoting innovation. The dry cleaning case study is a particularly interesting example of innovation-forcing regulation because this industry has lacked innovation for decades. Until environmental regulations began to restrict the use of PERC, the last significant change in the industry was in the 1960s when fire regulations required a shift from petroleum solvents to PERC. These past decades have also corresponded to a decline in the garment cleaning industry as a whole, with a switch to home washing. Only with the pressure of environmental regulation have a few people started to examine ways to provide environmentally friendly cleaning services that are more cost and energy efficient and that may appeal to a wider market. To date, however, regulation of this industry has simply tightened discharge and emission rate limits, leading the industry to respond only by modifying its equipment to provide greater end-of-pipe control and treatment of PERC emissions.78 A lack of financing, and perhaps of vision, in this small-business industry has generally precluded significant or well-funded investigation of alternative processes that avoid pollution altogether. However, an assortment of ad hoc efforts, springing largely from individual initiatives, but also with government involvement, has encouraged experimentation with innovative technologies such as wet cleaning, ultrasound, and liquid CO [2]. The last effort is significant because it is the only integrated effort to launch a new product, and it has originated outside of the industry in a large technology company. It may soon cause another revolutionary change in dry cleaning technology. Another case study where regulations have driven innovation is the pulp and paper industry, where regulation of hazardous effluents has driven a search for low- or nochlorine bleaching processes. The recent cluster rule, passed in 1997, continues this process by essentially requiring the industry to shift from elemental chlorine bleaching to less polluting chlorine dioxide bleaching. However, this regulatory approach does not push the industry to seek further improvements, and a number of viable innovative technologies with lower pollution levels are consequently not in demand. The above examples show how regulations can force technological changes, although the response is restricted, primarily to improved end-of-pipe technologies in one case and to limited process changes in the other. Balancing these examples are others such as the baking and utility SO [2] studies where environmental regulation has significantly restricted [28 ELR 10215] technology innovations. In particular, these studies show how emissions rate limits appear to exert particularly strong effects in freezing technology. These rate limits are designed so that only a single current technology can qualify and, given the great difficulty in obtaining approval of an alternative or innovative technology, this benchmark technology then becomes the only one able to be permitted. In the regular course of events, this technology would become obsolete and replaced by others, but the regulatory process "freezes" the process so that the necessary testing, demonstration, and improvement of alternative technologies are not undertaken. The electric utility case study presents an especially vivid example of the failure of emissions rate limitations to drive significant process technology innovations. Because the SO [2] emissions limit imposed in 1977 could only be met by end-of-pipe treatment with scrubbers, innovation in superior process change technologies was stalled until the law was amended in 1990. In retrospect, one can see how any source-specific emissions rate limit could not possibly have allowed for all the innovative technologies that became available after the SO [2] emissions cap and allowance trading system was adopted in 1990. While each of these examples shows how new regulations drive some kind of new behavior, the regulatory design greatly affects the outcomes and implications for technology innovation and improvement. As shown in Table 2, many different kinds of regulations can achieve the same level of environmental control, but have widely varying effects on cost and innovation. While each kind may have its appropriate applications, regulations that set performance goals that have the greatest flexibility in compliance options succeed the best in terms of reducing costs and promoting technological innovation. Emissions Trading Can Foster Innovative Technologies In two of the case studies, emissions trading could promote the use of innovative technologies. In the electric utility case study, the use of process technologies like low-sulfur coal was enabled by a combined SO [2] emissions cap and allowance trading program. Table 2 shows that certain approaches, including power shifting and trading between utilities, were enabled specifically by the emissions trading provisions of this program. In the baking industry study, VOC emission trading through an open market system such as that proposed by EPA in 199579 and at work in a few states80 could have assisted commercialization of the innovative heat exchanger technology, a leading competitor to the traditional and more expensive catalytic oxidizer. This technology initially could not be shown through traditional test methods to achieve the RACT standard requiring 80 percent reductions, falling short by a few percent. The bakers were willing to make up the difference, and more, through emissions reductions in their own vehicle fleets. However, they were unable to obtain permits because the RACT standard does not allow this, and emissions trading is not allowed in most jurisdictions. Trading opens the door to innovative technology in two ways. In the utility case study, the "closed market" method using an emissions cap with allowance trading can be shown to allow significantly more technologies to be applied to solving the acid rain problem. EPA's Acid Rain Program did this by fundamentally changing the regulatory system from an end-of-pipe standard to an overall performance standard. The baking study shows how "open market" trading, even without changing the regulatory system, can help firms to commercialize either technologies that fail to achieve a standard by a small amount but are much cheaper, or technologies that can overachieve a standard but are more expensive. Neither has a commercial life without a trading system. This is especially important for technologies that are in the beginning stages of development because allowing some initial uses through trading can lead to improvements that will enable them to compete directly with traditional technologies. Increased Funding for Research and Development (R&D) Is Needed Increasing the resources available for technology research and development is an important element of fostering innovation. However, as discussed in the background section of this Dialogue, most significant sources of funding for environmental R&D are in decline. Private venture capital for innovation in environmental technologies has declined precipitously and government funds, never plentiful, have also been shrinking. Furthermore, internal allocations for R&D by many businesses are also falling. Of particular concern is the finding that investment by firms that develop and market environmental technologies is also at the low level of 3 percent of revenues.81 Commentators have pointed out that another failure of our traditional regulatory approach is that it lacks economic drivers for continuous environmental improvement.82 Instead, businesses periodically must invest to meet a new regulatory standard, which then remains unchanged for a number of years. The failure of our regulatory approach to create a culture of continuous improvement is seen as a severe disincentive for research and development in technologies that improve environmental performance, and, indeed, very little research is being carried out by private technology firms in the environmental area.83 This concern is especially important for environmental technologies, due to the considerable social benefits from improved environmental performance. Fundamental solutions to this problem are needed, such as increased government funding, tax policies favoring technology investments, or innovative approaches like Paul Samuelson's suggestion to require every mutual fund to devote a small portion of assets to basic R&D. The Fundamentals of Supply and Demand Need to Change [] Cost and Supply Drivers. Allowing firms greater flexibility in complying with enforceable environmental standards could not only drive innovation and reduce costs, but could also produce other beneficial environmental results. Perhaps the most important beneficial aspect of cost minimization is reducing resource consumption, energy use, and waste treatment and disposal, since technology that costs less tends to be less materials-intensive and generates fewer overall wastes. A second benefit of reducing the costs of environmental protection is that reduced costs can lead to greater demand for environmental quality, in the same way that reduced prices lead to greater consumption of other goods. This process in environmental law, however, is slow and imperfect because it typically depends on the legislative process to achieve the more stringent standards. Occasionally, however, this process is discernable. The greatly reduced costs of SO [2] control created by the Acid Rain Program in the electric utility case study has, after only three years of implementation, resulted in a number of bills in Congress calling for significantly more stringent SO [2] standards.84 Similarly, the current debate over greenhouse gas controls has centered on how much emissions reductions our society can "afford."85 These examples reinforce the theory that regulatory systems that allow businesses to find least-cost solutions will trigger increased demand for improved environmental quality. To maximize these benefits, society must harness this cost driver so that prices more accurately reflect the full social costs of goods and services. If the prices and costs of inputs are made to reflect full social costs and benefits, then businesses' economic motivation to reduce costs would become an integrated driver of overall pollution prevention.86 [] Demand Drivers. A focus on emissions and manufacturing behavior should not allow us to lose sight of the most fundamental driver of all — consumer demand. In almost all of the case studies examined, changes in consumer demand and behavior could result in significant environmental improvements and consequently enhanced use of innovative technologies. This is perhaps most evident in the dry cleaning and the pulp and paper industry case studies. Dry cleaning is a retail industry, and consumer acceptance is critical to the adoption of innovative technology alternatives to traditional dry cleaning. This is particularly true of water-based technologies, which are not "dry" cleaning, and, therefore, face consumer resistance, as well as barriers from consumer labeling regulations that impose liability if clothes are not "dry"-cleaned. Changes in consumer demand could rapidly and dramatically increase the use of innovative technologies in this industry. In the pulp and paper industry, consumer demand for bright paper underlies industry's use of chlorine-based technologies in the bleaching process, and the consequent discharges of adsorbable organic halogens (AOX) and other pollutants. Environmental technology in this country has been largely driven by regulations, with firms installing only the minimum technology needed to meet regulatory standards. Only a few firms have installed chlorine-free technologies to appeal to a greener market, and they have suffered when price premiums have disappeared due to a lack of consumer demand for chlorinefree products. Although consumer demand does not have as great a role in the other case studies, even with these it plays some role. In the iron and steel sector, the use of acid pickling technologies is driven by the demand for blemishless, finished steel products. Unfinished steel is used today only for car underparts and other hidden applications. Consumer acceptance of unfinished or partly finished steel in other applications would directly reduce the need for pickling acids. In the utility sector as well, enhanced consumer demand for "green" power from renewable sources could play a significant role in reducing SO [2] emissions, which come mostly from coalfired plants. The case studies analyzed in this Dialogue reveal many types of both regulatory and business barriers to innovation. Key business barriers include the lack of capital turnover and the lack of private funding for research, especially basic research on innovation, and need to be overcome through creative policy mechanisms. We also need to address fundamental issues, like the nature of supply drivers, through tools such as pollution taxes and other incentives as well as by redirecting consumer demand and eliminating inappropriate subsidies. Key regulatory barriers appear to stem from the fundamental precepts embedded in our pollution laws that are oriented toward pollution control and disposal. Some laws explicitly require control technologies through standards such as BACT and RACT, and RCRA's "cradle-to-grave" system may preclude "cradle-to-cradle" recycling. Other regulatory barriers not specific to environmental laws include state procurement and utility regulations and consumer labeling laws. While the current regulatory system has served us well over the past decade in taking our environmental regulatory system from a nonexistent level to an adequate level, it can not take it from an adequate to an excellent one. A key reason is that it creates barriers to innovation and to the more integrated approaches that implement pollution prevention concepts and promote industrial ecology. Perhaps our regulatory system should emulate the only complex system that has endured over time, which is our ecosystem. In nature all energy is renewable, and complex and elegant systems of recycling blur the distinction between wastes and inputs. This difference may indicate that our environmental regulatory system is neither paying adequate attention to the fundamental nature of energy sources nor placing adequate emphasis on recycling and reuse. Taken together, these changes can elevate our environmental policy system to an excellent one. 1. See ENVIRONMENTAL LAW INST., BARRIERS TO ENVIRONMENTAL TECHNOLOGY INNOVATION AND USE (1998). 2. U.S. EPA. PERMITTING AND COMPLIANCE POLICY: BARRIERS TO U.S. ENVIRONMENTAL TECHNOLOGY INNOVATION 4 (1991). 3. Id. at 7. 4. Id. at 15. 5. Id. at 26-40. 6. U.S. EPA, REMOVING BARRIERS AND PROVIDING INCENTIVES TO FOSTER TECHNOLOGY INNOVATION, ECONOMIC PRODUCTIVITY AND ENVIRONMENTAL PROTECTION, iv (1993). 7. Id. at iv, viii. 8. See supra note 2, at 26-40. 9. Id. at 4. 10. Memorandum from Environmental Business International (July 31, 1997) (on file with author). 11. See supra note 2, at 26-40. 12. See generally T.E. GRAEDEL & B.R. ALLENBY, INDUSTRIAL ECOLOGY (1995) (discussing the concepts of industrial ecology, which include closed-loop processes and materials reduction). 13. 42 U.S.C. § 7502(c)(1), ELR STAT. CAA § 172(c)(1); see 40 C.F.R. § 51.100(o) (1996). The RACT standard has been interpreted to require the consideration of the social, environmental, and economic impact of the proposed controls and any alternative means of providing for attainment; see also Michigan v. Thomas, 805 F.2d 176, 180, 17 ELR 20235, 20236 (6th Cir. 1986) (interpreting the RACT standard). To meet the RACT standard, a technology must therefore be both "available" or demonstrated, and achieve the desired environmental results at reasonable cost; see State Implementation Plans; General Preamble for Proposed Rulemaking on Approval for Plan Revisions for Nonattainment Areas — Supplement (on Control Technique Guidelines), 44 Fed. Reg. 53762 (Sept. 17, 1979) (stating that "EPA has defined RACT as: The lowest emission limitation that a particular source is capable of meeting by the application of control technology that is reasonably available considering technological and economic feasibility."). 14. U.S. EPA, ALTERNATIVE CONTROL TECHNOLOGY DOCUMENT FOR BAKERY OVEN EMISSIONS (1992). 15. See supra note 1. 16. Appendix A — Method 25A — Determination of Total Gaseous Organic Concentration Using a Flame Ionization Analyzer, 40 C.F.R. § 60 (1995). 17. National Emission Standards for Hazardous Air Pollutants for Source Categories — PCE Dry Cleaning Facilities, Final Rule, 58 Fed. Reg. 49354 (Sept. 22, 1993) (to be codified at 40 C.F.R. pts. 9, 63). 18. U.S. EPA, FINAL ECONOMIC ANALYSIS OF REGULATORY CONTROLS IN THE DRY CLEANING INDUSTRY (1993). 19. U.S. EPA, PROFILE OF THE DRY CLEANING INDUSTRY 12 (1995). 20. 42 U.S.C. § 7411, ELR STAT. CAA § 111; see Sierra Club v. Costle, 657 F.2d 298, 11 ELR 20455 (D.C. Cir. 1981) (noting that it was undisputed that scrubbing was the only available technology that could achieve such stack reductions). 21. 42 U.S.C. § 7651, ELR STAT. CAA § 401. Total national emissions of SO [2] from electric utility power plants are capped at 8.95 million tons, approximately 10 million tons less than the amount emitted by such facilities in 1980. 22. U.S. GENERAL ACCOUNTING OFFICE, AIR POLLUTION: ALLOWANCE TRADING OFFERS AN OPPORTUNITY TO REDUCE EMISSIONS AT LESS COST (1994). 23. 42 U.S.C. § 6901, ELR STAT. RCRA § 1001. 24. EPA's regulations state that "materials are solid wastes if they are recycled — or accumulated, stored, or treated before recycling …." 40 C.F.R. § 261.2(c) (1996) (emphasis in original). There is an exemption for recycled material that is returned to an industrial process, but it does not apply when the material is reclaimed during this process. Id. § 261.2(e). Spent materials, such as pickle liquor, are specifically identified as solid wastes when reclaimed. Id. § 261.2(c)(3). 25. U.S. EPA, CAPSULE REPORT: RECOVERY OF SPENT SULFURIC ACID FROM STEEL PICKLING OPERATIONS (n.d.). 26. See ENVIRONMENTAL LAW INST., PROCEEDINGS OF THE WORKSHOP ON SPENT PICKLE LIQUOR (1997) [hereinafter PROCEEDINGS OF THE WORKSHOP]. 27. U.S. EPA, National Emission Standards for Hazardous Air Pollutants for Source Category: Pulp and Paper Production; Effluent Limitation Guidelines, Pretreatment Standards, and New Source Performance Standards: Pulp, Paper and Paperboard Category (visited Nov. 14, 1997) http://www.epa.gov/OST/pulppaper/index.html.EPA's Cluster Rule is the first to address simultaneously air and water emissions from paper mills in order to prevent them from transferring pollution from one medium to another. The cluster rule sets numerical effluent limitations, guidelines, and standards regulating the concentrations of toxic pollutants, including amounts of adsorbable organic halogens (AOX) and chemical oxygen demand (COD) in the wastewater. AOX is an index that gives a quick indication of the total chlorinated organic matter in the wastewater, and COD measures the amount of oxygen consumed by organic and inorganic matter in water or wastewater. Effluent Limitations Guidelines, Pretreatment Standards, and New Source Performance Standards: Pulp, Paper, and Paperboard Category; National Emission Standards for Hazardous Air Pollutants for Source Category: Pulp and Paper Production; Availability, 61 Fed. Reg. 36835 (July 15, 1996). 28. U.S. GENERAL ACCOUNTING OFFICE, INFORMATION ON THE USE OF ALTERNATIVE WASTEWATER TREATMENT SYSTEMS (1994). 29. See generally Environmental Business International, Rapid Changes in the Water Industry, 10 ENVTL. BUS. J. 4, 4-5 (1997). 30. See supra note 2, at 15. 31. Id. at 39. 32. See Nicholas Ashford, Understanding Technological Responses of Industrial Firms to Environmental Problems: Implications for Government Policy, in ENVIRONMENTAL STRATEGIES FOR INDUSTRY: INTERNATIONAL PERSPECTIVES ON RESEARCH NEEDS AND POLICY IMPLICATIONS 277 (K. Kirchert & J. Schot eds., 1993). 33. 42 U.S.C. § 7503(a)(2), ELR STAT. CAA § 173(a)(2) (applies to new stationary sources in nonattainment areas). 34. Id. § 7475(a)(4), ELR STAT. CAA § 165(a)(4) (applies to major new sources in areas subject to prevention of significant deterioration). 35. Id. § 1311(b)(2)(A), ELR STAT. FWPCA § 301(b)(2)(A). 36. See supra note 13 (applies to existing sources in nonattainment areas). 37. See supra note 22, at 74; see also A. DANNY ELLERMAN ET AL., EMISSIONS TRADING UNDER THE U.S. ACID RAIN PROGRAM (1997). Costs for the technology prescription are found in the economic analysis of a bill introduced by Rep. Henry Waxman (D-Cal.) and Rep. Gerald Sikorski (DFL-Minn.), which would have mandated scrubbers at the 50 largest utility emitters. See Paul Portney, Economics and the Clean Air Act, J. ECON, PERSP., Fall 1990, at 173. 38. See supra note 6, at vii. 39. 40 C.F.R. §§ 50.4, .5 (1997). 40. See Dallas Burtraw & Byron Swift, A New Standard of Performance: An Analysis of the Clean Air Act's Acid Rain Program, 26 ELR 10411, 10419 (Aug. 1996). 41. See supra note 6, at 17. 42. Id. at 33. 43. ENVIRONMENTAL LAW INST., RESEARCH AND DEVELOPMENT PRACTICES IN THE ENVIRONMENTAL TECHNOLOGY INDUSTRY (1997). The Environmental Law Institute studied the research and development practices of the firms developing and selling environmental technology and discovered that the great majority of the industry, those concerned with air and water control technology, invest only 3 percent of their revenues in research. In addition most report that 90 to 100 percent of all research is applied research with less than atwo-year time horizon. 44. See supra note 22, at 28. 45. See supra note 1, at 37-49. 46. See supra note 28. 47. U.S. EPA, ALTERNATIVE CONTROL TECHNOLOGY DOCUMENT FOR BAKERY OVEN EMISSIONS (1992) (concluding that only combustion technologies can achieve these levels, with 96 percent control, and that only catalytic oxidation is available at reasonable cost). 48. See supra note 1, at 131-133; see also supra note 28. 49. Id. 50. Douglas R. Bohi & Dallas Burtraw, Utility Investment Behavior and the Emission Trading Market, 14 RESOURCES AND ENERGY 129 (1992); see also Barry D. Solomon, SO [2] Allowance Trading: What Rules Apply?, PUB. UTIL. FORT., Sept. 15, 1994, at 22; but see ELLERMAN ET AL., supra note 37, at 34-37. 51. Douglas R. Bohi, Utilities and State Regulators Are Failing to Take Advantage of Emission Allowance Trading, ELEC. J., Mar. 1994, at 20. 52. 42 U.S.C. § 6901, ELR STAT. RCRA § 1001. 53. See supra note 25. See also Paul Borst, K062 Recycling & Hazardous Waste Regulations, in PROCEEDINGS OF THE WORKSHOP, supra note 26, at pt. 6 (citing 1993 EPA data that 7.2 million short tons of pickle liquor were generated, and between 114,000 and 193,000 short tons were recycled, 59 percent on-site and 41 percent off-site). 54. See PROCEEDINGS OF THE WORKSHOP, supra note 26. 55. See supra note 1, at xx. 56. U.S. EPA, POLLUTION PREVENTION TECHNOLOGIES FOR THE BLEACHED KRAFT SEGMENT OF THE U.S. PULP AND PAPER INDUSTRY (1993). 57. See supra note 21. 58. See supra note 27; see also Pulp-Paper Cluster Rule Seeks Cuts in Dioxin, Hazardous Air Pollutants, 28 Env't Rep. (BNA) 1406 (Nov. 21, 1997). 59. See supra note 16. 60. See supra note 28. 61. Seventh Circuit Rejects Illinois' Attempt to Favor Use of In-State Coal By Utilities, [25 Current Developments] Env't Rep. (BNA) 1794 (Jan. 20, 1995). Indiana Coal-Use Law Unconstitutional, Violates Commerce Clause, Appeals Court Says, [26 Current Developments] Env't Rep. (BNA) 1612 (Jan. 12, 1996). 62. 42 U.S.C. §§ 7411(j), 7413(d)(4), ELR STAT. CAA §§ 111(j), 113(d)(4). 63. 33 U.S.C. § 1311(k), ELR STAT. FWPCA § 301(k). 64. 42 U.S.C. § 6925(g), ELR STAT. RCRA § 3005(g). 65. Nicholas Ashford et al., Using Regulations to Change the Market for Innovation, 9 HARV. ENVTL. L. REV. 419, 444 (1985). 66. Id. 67. Evan, Opportunities for Innovation: Administration of Sections 111(j) and 113(d)(4) of the Clean Air Act and Industry's Development of Innovative Control Technology, in 3 EXPERIMENTAL TECHNOLOGY INCENTIVES PROGRAM (ETIP) POLICY RESEARCH SERIES 7.15 (1980). 68. Ashford et al., supra note 65, at 452-59. 69. ENVIRONMENTAL LAW INST., ENVIRONMENTAL TECHNOLOGY VERIFICATION — A STUDY OF STAKEHOLDER ATTITUDES (1995). 70. The Environmental Law Institute has compiled a summary of the state programs and concluded that the most effective are those such as the Texas Innovative Technology Program, which directly address the internal barriers to innovation, such as risk aversion, within the permitting agency. ENVIRONMENTAL LAW INST., INFORMAL REVIEWS OF SELECTED VERIFICATION PROGRAMS: ADDENDUM TO ENVIRONMENTAL TECHNOLOGY VERIFICATION — A STUDY OF STAKEHOLDER ATTITUDES (1995). See also ENVIRONMENTAL LAW INST., ENVIRONMENTAL TECHNOLOGY VERIFICATION — A STUDY OF STAKEHOLDER ATTITUDES, at 39-40 (1995). 71. TEXAS NATURAL RESOURCE CONSERVATION COMM'N, INNOVATIVE TECHNOLOGY PROGRAM (1995). 72. Environmental Bus. Int'l, The Challenge of Reinvention, ENVTL. BUS. J., Apr. 1997, at 1. 73. Interview with Frank Pope, Partner, Technology Funding, Inc. in San Mateo, Cal. (1997). 74. ENVIRONMENTAL LAW INST., supra note 1, at 81-101. 75. NATIONAL ACADEMY OF SCIENCES, ALLOCATING FEDERAL FUNDS FOR SCIENCE AND TECHNOLOGY (1995). 76. ENVIRONMENTAL LAW INST., supra note 43. Although the 3 percent figure covers 88 percent of the environmental technology vendor industry, a higher percentage of revenues is spent on R&D by the monitoring instrument (8 percent) and process prevention (25 percent) sectors that comprise the remaining portion of the industry. 77. Interview with Grant Ferrier, Editor, Environmental Business International, San Diego, Cal. (1997). 78. See supra note 17. 79. Open Market Trading Rule for Ozone Smog Precursors, 60 Fed. Reg. 39668 (Aug. 3, 1995) (proposed policy statement and model rule). 80. See, e.g., New Jersey Emission Offset Trading Program, N.J. ADMIN, CODE tit. 7, § 27-18 (effective June 30, 1979); Massachusetts Discrete Emissions Reduction (DER) Program, MASS. REGS. CODE tit. 310, § 7.00 (1996); Michigan DER Program, MICH. ADMIN. CODE r. 336.2200 (1996). 81. ENVIRONMENTAL LAW INST., supra note 43. 82. See supra note 72. 83. The bulk of the environmental technology industry only invests 3 percent in research and development activities, and 90 percent of this is applied research. ENVIRONMENTAL LAW INST., supra note 43. 84. Utility Emissions Will Be Limited Further if Federal Restructuring Bill Gains Approval, 28 Env't Rep. (BNA) 1366 (Nov. 14, 1997) (noting that emissions cap on SO [2] are to be reduced to 4.5 million tons, half of the goal of the current Acid Rain Program). 85. Robert Repetto & Duncan Austin, THE COSTS OF CLIMATE PROTECTION: A GUIDE FOR THE PERPLEXED (World Resources Inst. 1997). 86. See generally Marian R. Chertow & Daniel C. Esty, Environmental Policy: The Next Generation, ISSUES, Fall 1997, at 73. 28 ELR 10202 | Environmental Law Reporter | copyright © 1998 | All rights reserved |