Can Green Also Be Cheaper?

As global environmental concerns around climate change and natural resources increase, groups lobbying for stronger, greener legislation against environmental hazards will grow.  Already, the last ten years have seen a significant expansion in legislation, not only in richer countries but in poorer ones as well.  With the environment and global warming now taking the world stage on an annual basis through forums like Kyoto, Copenhagen and Rio (landmark events in the United Nations Framework Convention on Climate Change, or UNFCCC) and the surrounding international debates, we can expect this trend to continue.

Let’s assume for a moment that environmental legislation, on the balance, will be come more stringent over the next twenty years.  More pollution will be steadily regulated against, more processes and activities will need to be carried out in more efficient and greener ways.  It’s also reasonable to assume that as we learn more and agree on more around the root causes of climate change, more of this legislation will be common across international borders.  It’s commonly assumed that this process will come with heavy costs as markets invest to adapt their means of production, and leave consumers paying more.  But is this really the most likely scenario?

What does this mean for global industry, and in particular manufacturing?  Manufacturing has after all become a kind of science, in which supply chain and product engineers innovate solutions to the most subtle differences in national and regional tastes.  A size “Large” Levi’s t-shirt in Asia will be closest to a “Small” in the United States or a “Medium” in Europe.  Blues might need to be brighter in China and cooler in Argentina, and so forth.  Yet these differences are based only on customer preferences.  In heavily regulated industries such as vehicle manufacturing the complexity runs much deeper.  Emissions regulations alone account for massive differences in what car manufacturers will produce for a specific market, and in addition to those criteria manufacturers must adjust to varying safety standards, customer preferences, and much more.

The modern car manufacturer is thus required to master a bewildering array of specifications.  There are so many different requirements that fulfilling and respecting them becomes somewhat of a game, albeit one with significant development implications like the following example in southern Africa:  Zimbabwe and South Africa share a long land and river border, and South Africa is Zimbabwe’s largest trading partner by far.  South Africa likes to sell its wares to Zimbabwe.  But Zimbabwe is indisputably less developed; more like most of its neighbors in sub-Saharan Africa than the almost western level of development enjoyed in South Africa.  And its regulatory standards are also lower.  Part of the logic behind these differences between nations, where more developed nations tend to have more stringent regulations, is purchasing power.  Products that are manufactured to lower standards should cost less and be more accessible to poorer populations.  In practice however, what this means is chaos for Zimbabwe.  Vehicle manufacturers produce and sell cars that are specifically suited to Zimbabwe’s regulations.  South African standards are higher than Zimbabwe’s, so their cars can also be imported and sold there.  The same goes for perhaps thirty other countries around the world that use similar cars but have different but mostly higher standards.  Because of its lower standards, Zimbabwe accepts everything, and can shop around the globe for the lowest prices.

As anyone who has owned a car knows, the highest ownership costs over time come not from its purchase price, but from its operating costs.  Car parts suppliers, seeing a wild array of cars on Zimbabwean roads, simply cannot carry stock of all of the parts needed to repair all of the different models.  Importing the appropriate parts costs a fortune, and the net costs of transport can actually rise.  Here is an example where the lack of legislation complicates development and can increase the cost of basic services such as transport.

It is conceivable then that green legislation will actually help poorer countries have better access to goods at better prices in two ways.  First, the global pressure for better protection of the environment will lead to legislation that aligns more completely across countries.  For the automotive manufacturers, this would decrease the need for emissions and engine variation across markets.  Less manufacturing and supply chain complexity means less cost to the manufacturer, and at least some those savings could find their way to the customer.  Second, because less product range means less spare parts differentiation, repairing vehicles in smaller markets like Zimbabwe could be simpler and less expensive.  The conclusion is that environmental legislation need not be expensive all around, and that it could in fact yield quick, practical benefits to consumers in lesser-developed countries.

Standardized Products Should Be Easier to Keep Running

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