Environmental Regulation in the Pulp and Paper Industry: Impacts and Challenges

Patrik Söderholm; Ann-Kristin Bergquist; Kristina Söderholm

doi:10.1007/s40725-019-00097-0

Environmental Regulation in the Pulp and Paper Industry: Impacts and Challenges

Söderholm, Patrik; Bergquist, Ann-Kristin; Söderholm, Kristina 2019-11-01 00:00:00 Purpose of Review In this article, we review existing research addressing how environmental regulations have influenced the pulp and paper industry. These regulations appear in different forms and designs and address air and water pollution as well as climate change. The paper devotes particular attention to how various regulations have affected sustainable technological change and the prospects for inducing deep emission reductions without jeopardizing industrial competitiveness and future investments. Recent Findings Experiences from key pulp and paper regions, not least the Nordic countries, suggest that gradually tightening performance standards have contributed to radical reductions in emissions, e.g., chlorine compounds and biological oxygen demanding agents, and without imposing excessive compliance costs. This outcome can largely be attributed to how the regulations have been designed—and implemented—in practice, as well as to the presence of efficient and legitimate institutions. Long-term emission reduction targets, in combination with extended compliance periods and trustful firm-regulator relationships, contributed to radical technological innovation and permitted radical emission reductions without excessive compliance costs. The development of alternative bleaching technologies is an apt example. In contrast, the impact of carbon pricing schemes, including the EU emissions trading scheme, on carbon dioxide emissions reductions and related technological change in the pulp and paper industry has however been modest. Self-regulation, certification, and community pressure have exerted relatively modest influences on the environmental performance of the industry. Summary Important avenues for future research are identified. These include the following: (a) comparative research on how policy mixes in various countries have influenced environmental compliance and innovation; processes; (b) future studies of environmental regulations, their design and implementation, in emerging pulp and paper producing countries, not least China; and (c) research on how environmental regulations can affect ongoing restructurings in the industry towards a broader palette of products in biorefineries. . . . . . Keywords Environmental regulation Pulp and paper industry Competitiveness Innovation Pollution Climate change Introduction serious. This resource- and capital-intensive industry contributes to many existing environmental problems, including global The environmental impacts of the pulp and paper industry have warming, human toxicity, ecotoxicity, photochemical oxidation, been significant throughout the twentieth century and are still acidification, nutrification, and the generation of solid wastes [1, 2]. Increased concerns over such environmental issues, not least This article is part of the Topical Collection on Forest Policy, Economics, air and water pollution and climate change, have led to the intro- and Social Research duction of new as well as more stringent environmental policies. These policies include both regulations in the form of per- * Patrik Söderholm formance standards (emission limit values) [3], technology patrik.soderholm@ltu.se requirements [4, 5], as well as various incentive-based instru- ments such as taxes/charges and tradable emission allowances Economics Unit, Luleå University of Technology, SE-971 [6, 7]. In addition to these, it is also important to consider the 87 Lulea, Sweden role of voluntary approaches [8�� ] and self-regulation [9], Unit of Economic History, Centre for Environmental and Resource which often forms part of corporate sustainability strategies. Economics (CERE), Umeå University, SE-907 87 Umea, Sweden Occasionally, market demand, community pressure, and/or History Unit, Luleå University of Technology, SE-971 the threat of imposing stringent regulations in the future could 87 Lulea, Sweden 186 Curr Forestry Rep (2019) 5:185 –198 be central drivers for efforts to improve environmental perfor- regulating emissions into air, e.g., sulfur dioxide and nitrogen mance at the company level. oxides. Although the emphasis is on local environmental pol- Environmental regulations influence the current practices lution, we also include references to the regulation of carbon and the future opportunities of the pulp and paper industry, not dioxide emissions, including the European Union Emissions least since the industry is highly export-dependent and com- Trading Scheme (EU ETS). However, we do not discuss re- petes in global markets. In fact, while regulations are neces- cent research explicitly addressing policies aiming at im- sary for reducing the environmental impacts of current opera- proved energy efficiency in the pulp and paper industry, e.g., tions, lengthy permitting processes and inflexible standards energy taxes, information programs, and voluntary agree- could also lead to increased uncertainty about the future busi- ments (e.g., [16, 17]). In addition, we do not discuss the im- ness opportunities, and even hamper the incentives to pursue pact of environmental enforcement and monitoring activities more radical, sustainable technological change [10�� ]. on compliance behaviour; a few empirical applications to the Notably, for the industry and transport sectors, the transition pulp and paper industry do exist (e.g., [18]). to a bio-based economy largely hinges on the development of Finally, geographically, there is a strong focus in the article so-called advanced biorefineries, which based on flexible in- on the pulp and paper industries in the developed world, in take of various bio-based materials permit the production of particular the Nordic and the North American countries. large quantities of bulk products along with various high- Occasionally, however, some contrasting cases from, for in- value products, such as specialty chemicals and materials stance, other EU Member States and China are also included. [11, 12]. This development is particularly relevant for the in- This focus largely reflects the availability of relevant studies, cumbent industry, which, instead of using the forest raw ma- not least in the light of our emphasis of ex post regulatory terial exclusively for the production of pulp and paper prod- experiences. The environmental regulation of the Swedish ucts, also could produce low-carbon transportation fuels (e.g., and Finnish has gained significant research interest, also biodiesel), green chemicals (e.g., organic acids), and various among several non-Nordic scholars. Other EU Member substances used in the construction industry (e.g., lignin- States are not well-researched, in part because the pulp and concrete mixes) [13�� ]. This suggests, thus, that stringent en- paper industry has been less dominant in these countries com- vironmental regulations can pose both opportunities as well as pared to the forest-rich Nordic countries. threats for achieving future environmental improvements. The article proceeds as follows. In the next section, we The purpose of this article is to synthesize the existing outline some key conceptual points of departure for the re- research addressing how environmental regulations have in- view. The remainder of the article then discusses the empirical fluenced the pulp and paper industry so far. We devote partic- evidence on the roles of self-regulation and community pres- ular attention to how such regulations have affected sustain- sure, the effectiveness of various types of environmental reg- able technological change as well as the prospects for achiev- ulations and policy instruments, and the impact of environ- ing deep emissions reductions without jeopardizing industrial mental regulations on industrial competitiveness and techno- competitiveness and future investments. Indeed, the pulp and logical change and innovation. The article ends with a discus- paper industry is an interesting case in this respect. sion of key implications and some important avenues for fu- Experiences from developed countries, not least the Nordics, ture research. suggest that such green transitions have been possible while at the same time avoiding excessive compliance costs and per- mitting increased production [e.g., 3, 14�� ]. This outcome, the Conceptual Points of Departure present article illustrates, can largely be attributed to how reg- ulations have been designed—and implemented—in practice, The environmental regulation of natural resource-based indus- as well as to the existence of efficient and legitimate institu- tries, such as the pulp and paper sector, involves difficult tions, including trustful relationships between regulatory au- trade-offs. While most pollution taxes and standards often will thorities and industry representatives. induce the adoption of incremental emission reductions, gov- In the article, we highlight research on environmental pol- ernment regulators increasingly face the challenge of impos- icies that currently regulate—or have regulated—emissions ing emission reduction targets for the future that cannot be met into air and water in the pulp and paper industry. This not only by employing currently existing (“off-the-shelf”)technologies permits an emphasis on key policy design and implementation [19, 20]. In the latter setting, profound process changes are issues but also implies that we do not address studies that ex needed, and the chosen regulatory approach has to maintain ante assess the impacts of hypothetical policy changes, e.g., strong, continuous incentives for emission reductions while at [15]. As shown below, the empirical research reviewed in this the same time taking into account the risk of excessive com- paper has often had a strong focus on discharges into water of pliance costs for industry. In the short- to medium-term, there biological oxygen demanding (BOD) agents, phosphorous, exists therefore a trade-off between stringent environmental and chlorine compounds. Some studies also address policies policies on the one hand and competitiveness on the other Curr Forestry Rep (2019) 5:185–198 187 [10 , 21]. This is a particular concern in the pulp and paper Self-regulation, Certification, and Community industry (and other sectors) that competes in global markets. Pressure Indeed, even though the global forest industries are likely to play an important role in the transition to a zero-carbon econ- In the 1980s, self-regulation, based on codes of environmental omy, climate policies (and other environmental regulations) management practice, emerged as an alternative to traditional are often perceived as a threat to industrial competitiveness. government regulations [28, 29]. Through private or other For instance, in the beginning of the 2000s, the European pulp non-governmental schemes, companies voluntarily commit and paper industry lobbied against the introduction of the EU to improve environmental management practices beyond reg- ETS [10�� ]. ulatory compliance. In the global forest industries, such agree- The relationship between environmental regulation and in- ments have included, for instance, the U.S. Sustainable dustrial competitiveness has been the subject of considerable Forestry Standard Initiative (SFI), the international environ- debate in the academic literature over the past two decades. mental management standard ISO 14001, and the Forest Much of this discussion has centered on the so-called Porter Sustainable Council Standard (FSC), among others [30]. hypothesis [22]. This hypothesis states that properly designed The empirical evidence about the effectiveness of self- environmental regulations will (a) stimulate environmental regulation on industrial environmental performance is howev- innovation and technological change (the weak version of er overall mixed [9, 31]. Some scholars have found that co- the hypothesis) and (b) increase not only the environmental regulation systems that include both voluntary private initia- performance but also the economic performance in terms of tives as well as mandatory state measures may hold particular profits, productivity, etc., of industries (the strong version) benefits both to state and industry actors [32, 33]. Still, many [23]. For our purposes, it should be noted that empirical ap- scholars have been skeptical about the effectiveness of indus- plications to the pulp and paper industry have gained a prom- try codes of conduct, and about whether these could be used as inent place in this debate, and previous studies have investi- protection against more stringent standards [34]. gated both the strong and the weak version of the Porter hy- The dominating stream of research has rather focused on pothesis (see further below). examining why firms adopt voluntary standards and diffusion Over the long run, a move towards sustainable indus- patterns [35, 36] rather than scrutinizing the impacts on envi- trial transformation requires that new and more environ- ronmental performance. For instance, Lennox and Nash [29] mentally benign technologies are developed and widely analyze self-regulatory programs in four different US indus- adopted. For this reason, regulatory approaches that stim- trial sectors and address the potential problem of adverse se- ulate technological change and that permit flexibility over lection, i.e., that the more polluting companies tend to join time in identifying, developing, and demonstrating new voluntary programs. However, for the US pulp and paper in- technology will be of central interest in the transition to- dustry, the results suggested the opposite; companies that had wards deep emission reductions (e.g., [3, 24]). However, joined the (SFI) program in 1994 polluted less in 1996 com- there appears to be meager evidence of one type of policy pared to companies that had chosen not to participate. instrument being superior to others in terms of promoting A number of studies have investigated the impacts of the sustainable technology choice and innovation. Specific pol- adoption of international ISO 14001 standards on environ- icy designs, various implementation strategies, and institu- mental performance in industry (e.g., [30, 36]). However, al- tional contexts, which typically have evolved over several though there exist several studies that investigate the role of decades, may matter just as much [25, 26]. In fact, the self-regulation and the adoption of certification schemes in entire setup and organization of the regulatory systems, forestry [37–39], applications to the pulp and paper industry e.g., negotiation and time strategies and trust, have proved are surprisingly scarce. Gunningham and Sinclair [40]exam- to be decisive for the effectiveness of environmental reg- ine the adoption of ISO 14001 standards in the Australian pulp ulations [e.g., 4, 27]. and paper industry and suggest that such a regulatory ap- In the remainder of this article, we first briefly address the proach could impose unnecessary costs on businesses; it role of self-regulation and then cover environmental regula- may even result in less, and not more, favorable environmen- tions in three contexts: (a) their effectiveness in terms of en- tal outcomes. Barla [41] investigates the adoption of the ISO couraging emission reductions; (b) their impacts on competi- 14001 standard in the pulp and paper industry of Quebec. By tiveness and technological change; as well as (c) the impor- using monthly data for 37 plants over the period 1997–2004, tance of well-functioning institutions. This thematic structure he shows that this certification had modest impacts on envi- of the paper implies that the same regulations may be ronmental performance. In a recent study, Bergquist and discussed multiple times (but in different contexts). The paper Keskitalo [8�� ] compare the development of regulatory re- identifies and discusses a number of prerequisites for an effi- gimes in the Swedish forestry sector and the country’spulp cient and legitimate transition towards deep emission cuts in and paper industry. The authors conclude that while the for- the pulp and paper industry. estry sector was deregulated in the 1990s, and with preference �� 188 Curr Forestry Rep (2019) 5:185 –198 given to self-regulation, the emissions from the pulp and paper an environmental risk premium to the cost of debt capital for industry continued to be regulated. Even though close to the average firm in the US pulp and paper industry. As noted 100% of the industry’s output has been manufactured under below, though, government regulations have typically had ISO 14001 and/or the European so-called EMAS scheme, more significant impacts on environmental performance than CEOs in the Swedish pulp and paper industry perceived gov- the capital market. ernment regulation as the more significant driver for reduced emissions. Finally, while previous research suggests that certification The Effectiveness of Environmental schemes have played a modest role for emission reductions in Regulations the pulp and paper industry, there are studies that emphasize the role of consumer demand and community pressure. Since the advent of modern environmental policy, standard- Indeed, in Sweden, conflicts over pulp mills’ emissions into based regulations have dominated over market-based instru- air and water can be traced more than 100 years back in time ments such as taxes and tradable emissions allowance [42]. The most prominent example, it is often argued, is the schemes. In some instances, such as in the regulation of the introduction of alternative bleaching technologies in northern North American pulp and paper industries, the standards have Europe during the 1980s and 1990s. This process gained mo- relatively often been technology- rather than performance- mentum in the mid-1980s after the U.S. Environmental based [4, 5, 43, 51]. By design, the technology-based stan- Protection Agency detected dioxins downstream from pulp dards provide no leeway to undertake other (low-cost) mea- mills producing bleached pulp [43]. sures and could even force the adoption of suboptimal tech- A number of studies argue that community pressure and nologies. Instead, performance standards do provide such green consumerism were key drivers in the transition to flexibility, which is essential due to the presence of firm- chlorine-free pulp production [44–47]. Popp et al. [44]con- regulator information asymmetries where mills typically clude that in particular, the Nordic pulp and paper mills know better than the regulator what it will cost to reduce responded by launching the necessary development and mod- emissions using various abatement measures (and/or a mix ification processes well before any regulations were in place. of several ones) [3]. This section begins with a discussion of Reinstaller [46] argues that the increase in green consumer the role of performance standards in regulating water and air demand in Europe was in turn related to the ability of various pollution. We then devote specific attention to the heteroge- policy entrepreneurs, not the least Greenpeace, to link the pulp neous development of alternative bleaching technologies in bleaching issue to already perceived environmental threats. In the USA and the Nordic countries, respectively. In this transi- fact, other research suggests that the diffusion of alternative tion, the distinction between performance and technology bleaching technologies in the South Asian and Australian pulp standards was essential along with other important regulatory industries during the 1990s also benefitted from the actions of design issues. We end with a discussion of the impacts of these non-governmental actors [48]. Nevertheless, the transfer regulations of carbon dioxide emissions. of technology to South Asia was much helped by the presence of Nordic pulp technology firms in the region [48, 49]. In Performance Standards and Water and Air Pollution other words, environmental regulation, the argument goes, lagged behind, but was eventually encouraged by both public The use of performance standards has been the dominating pressure and the availability of alternative bleaching technol- regulatory approach for the Nordic pulp and paper industries. ogies. Still, as noted in the next section, this conclusion has Empirical studies that have addressed the impact of such stan- been challenged in more recent research, which instead em- dards on emissions reductions tend to focus on water dis- phasizes the importance of environmental regulation in charges, and they adopt both quantitative and qualitative accomplishing lower emissions of chlorinated organic com- methods. While the former approach can detect general pat- pounds as well as stimulating innovation in alternative tech- terns, the latter permits studies of the dynamics of regulatory nologies, such as oxygen delignification and advanced batch implementation and industry responses at a greater depth. cooking. Quantitative studies in both Finland and Sweden confirm that Pressures to improve environmental performance may also performance standards have indeed affected discharges of come from the capital market. In a study of the US pulp and BOD agents and phosphorous and chlorine compounds [52, paper industry, the author provides empirical support for the 53]. Even though the actual discharges often have been well notion that the debt capital market view pollution-intensive below the standards, the emission limit values nevertheless industries to be high-risk investments since firms with poor imposed binding constraints on the regulated emissions. One environmental performance (in terms of the amount of toxic reason for this is that mills may be unable to perfectly monitor chemicals released to land, air and water) may face major emissions and will therefore pollute below the standard in liabilities in the future [50]. For this reason, the market applies order to avoid the risk of non-compliance and any penalties Curr Forestry Rep (2019) 5:185–198 189 that would follow from this. Brännlund and Löfgren [54]il- in terms of their knowledge and ability to pursue changes in lustrate such rational behaviour in the empirical context of the the production processes. Moreover, it also shows that the Swedish pulp and paper industry (see also [55] for a related more stringent and transparent regulations in the Nordic coun- analysis using data for the US pulp and paper industry). tries compared to the USA did lead to significant environmen- Furthermore, there is typically also a gradual tightening of tal improvements already during the end of the 1980s. these standards, and anticipation of more stringent regulatory Even though research on environmental regulation in pulp conditions in the future. This result is confirmed in a number and paper industries outside North America and the EU of case studies [3, 14�� , 24, 26, 56–59]. The Swedish case Member States is quite scarce, it is worth noting that an in- studies in particular emphasize the important role of flexibility creasing number of, in particular, Chinese studies have in compliance strategies. Even if the key regulatory authority emerged during the last few decades [65, 66, 67� ]. A study in Sweden, the so-called Licensing Board of Environmental of the Chinese pulp and paper industry during the country’s Protection, often advocated a particular abatement technology, period of economic reform (1980s–1990s) has highlighted the its members emphasized that this should not be stipulated in small size of Chinese mills (e.g., [65]), which made it difficult the final regulatory conditions [3]. The pulp and paper mill to implement modern pollution control technologies devel- had the possibility to use other methods if any shortcomings oped in Europe or North America. Still, China now has the could be proved with the suggested technology and more ef- world’s largest production of pulp and paper with modern fective methods could be developed. In this way, the Board technology. Some of the more recent research on China uses maintained the regulatory strategy to permit flexibility in com- indices of eco-efficiency and investigates how these indices pliance strategies, while at the same time requiring emission have developed with the introduction of stricter environmental levels to comply with the performance of best available tech- regulations [66, 67� ]. Overall, the findings confirm that such nology (BAT). The Swedish case studies also illustrate the regulations have induced significant environmental improve- importance of using extended compliance periods [14�� , ments, except for the case of carbon dioxide emission reduc- 60 ]. By allowing such intertemporal flexibility, thus reduc- tions where less progress has been made so far. These studies, ing investment uncertainty and permitting companies to test though, devote very limited attention to the design and imple- various R&D and demonstration routes, the affected mills mentation of the relevant regulations. could accept the increased uncertainty associated with a more While previous research confirms that performance stan- ambitious performance standard in the future. Moreover, long dards have contributed to the adoption of new environmental compliance periods also made it possible for companies to technologies, the most significant influence has typically been coordinate environmental and productive investments. reported with respect to end-of-pipe technologies, such as the The conclusion that government regulations have consti- activated sludge treatment. One reason for this could be that tuted an important determinant of environmental performance companies will typically find it difficult to anticipate upcom- in the pulp and paper industry gains supports also in North ing regulatory decisions, thus making it difficult to plan for— American studies. In one study using technology choice data and pursue—process-internal options (see Similä [56] for ev- for 686 paper mills in the USA [61], the authors find that more idence of this in the Finnish pulp and paper industry). stringent air and water regulations had a positive impact on the Nevertheless, process-internal technology has a greater poten- adoption of abatement technologies. They also report that tial for combining cost savings and emissions reduction, e.g., abatement and productive investment tend to be concentrated by avoiding the add-on cost of operating the end-of-pipe tech- in the same years, thus implying that regulations permitting nology and offering opportunities for material and energy ef- flexibility in terms of the timing of compliance ought to facil- ficiency savings. In this respect, the development of alterna- itate the process of environmental compliance. In another tive bleaching technologies represents a particularly interest- study, interviews with Canadian managers of pulp and paper ing case study, which is discussed in the next sub-section. In companies confirm that government regulations have had a far fact, an important reason for the research interest in this par- more profound influence on environmental compliance than ticular development has been that it represents process- consumer demand and the financial markets [62]. internal technology; previous research on regulation-induced Furthermore, previous studies emphasize that the engage- green technological development has otherwise had a signifi- ment of the top-level management and the environmental ed- cant bias towards the study of end-of-pipe technologies [68]. ucation of employees and other in-house resources (e.g., R&D capabilities) are key drivers of efficient responses to environ- The Transition Towards Chlorine-Free Pulp mental regulations. These factors are discussed in two Production Canadian studies [62, 63] and in one recent, comparative study of pulp and paper firms in Finland, Germany, Sweden, While pressures from consumers and the public played a role and the USA [64� ]. The latter study concludes that there ap- in the pulp and paper industry’s transition to chlorine-free pulp pear to be important differences across firms in these countries production, recent research shows that this role has often been �� 190 Curr Forestry Rep (2019) 5:185 –198 overrated in previous literature. As noted above, the consumer The Regulation of Carbon Dioxide Emissions market for chlorine-free paper products emerged in the late 1980s following the news that dioxins would be formed also While the above investigations have had a strong focus on in the manufacturing of bleached chemical pulp [44]. performance standards regulating the emissions of local pol- Bergquist and Söderholm [51] show, though, that at this point lutants, it is important to recognize that climate policies now in time, long-term collaborative R&D activities in the play an increasingly important role for the pulp and paper Swedish pulp and paper industry, largely induced by earlier industry. These policies are generally of a relatively recent regulations and perceived cost savings, had already resulted in date, e.g., the EU ETS was launched in 2005, but the global important technological advances in alternative bleaching pulp and paper industry achieved quite substantial carbon di- technologies. These technological solutions could then consti- oxide emission reductions already during the 1980s following tute the basis for new regulatory conditions. In fact, only a few the oil crises in the 1970s. These reductions were achieved months after the dioxin alarm broke in 1986, negotiations through the substitution of electricity and biomass for oil as were underway for the introduction of new, technology- well as through improved energy efficiency [71]. forcing standards on Swedish pulp and paper mills [14�� ]. In Climate policies come in many forms, such as support other words, these regulations preceded rather than trailed the schemes for renewable energy sources, which have benefitted increase in consumer demand for chlorine-free paper prod- investments in biomass-based electric power generation in the ucts. As pointed out below, the more stringent performance Nordic pulp and paper industries (e.g., [6]). The most direct standards induced not only technology adoption but also in- way of regulating carbon dioxide emissions, however, has novation in alternative bleaching technologies and particularly been the use of taxes or tradable emissions allowance so in Sweden. schemes. For instance, prior to the introduction of EU ETS, Existing literature shows that the alternative bleaching Sweden introduced a tax on carbon dioxide emissions, and technologies diffused earlier and more rapidly in the this has contributed to carbon dioxide reductions in the Nordic countries, especially in Sweden, compared to country’s pulp and paper industry [72, 73]. Interestingly, car- North America (e.g., [46]). Bergquist and Söderholm bon intensity performance responded both to changes in the [51] contrast the transition to chlorine-free pulp production carbon tax and the fossil fuel price but was more sensitive to in the Swedish and the US pulp and paper industries and the tax, thus suggesting the presence of a signaling effect from conclude that the tradition of technology-based standards the tax. in the USA resulted in a situation where the country’s When introduced in 2005, the EU ETS was the first EU- pulp mills were locked-in to end-of-pipe abatement tech- wide regulation of carbon dioxide emissions from the pulp nologies (see also [4]). Other studies have also pointed out and paper (and other energy-intensive) industries in the that even though performance standards could be used in Member States. Still, the effectiveness of this scheme in terms the US system, they typically did not involve long-term of providing incentives for significant emission reductions has targets [43]. In contrast, the capacity of the Swedish pulp overall been low, much due to low allowance prices during and paper mills to respond effectively to the dioxin alarm extended periods. Evidence of this has been reported for, for was underpinned by the country’s regulatory strategy to instance, the pulp and paper industries in Germany, Norway, facilitate process-internal changes in the industry. This and Sweden [7, 74� , 75]. In fact, the most profound impact of was achieved through the combination of gradually tight- EU ETS on the industry has been in terms of increased whole- ening standards, long-term targets, and extended compli- sale electricity prices [6]. So far, however, the European pulp ance periods [3, 14�� ]. and paper industries have primarily focused on incremental Finally, recent research also puts in doubt the bun- improvements in operations rather than on more radical, dling of the Nordic countries in the chlorine transition long-term zero-carbon solutions (see also [76]). process. The pulp and paper industries in both Sweden Finally, stringent regulations of carbon dioxide emissions and Finland have constituted cornerstones in the respec- in the US pulp and paper industry essentially do not exist. In tive economies [69], and both countries have earned an the USA, proposals for a national emissions trading scheme in international reputation when it comes to taking the lead carbon dioxide (e.g., the so-called Waxman-Markey bill) in reducing environmentally harmful industrial emissions failed to gain support in the Congress, and instead, the U.S. into air and water. Still, Finland moved more slowly than Environmental Protection Agency (EPA) has made efforts to Sweden with respect to the reduction of chlorine com- implement (tradable) performance standards for carbon diox- pounds [14�� ]. Such substances were not even mentioned ide within the realms of the existing regulatory regime, the in Finnish licensing conditions before 1989, at the time Clean Air Act [77]. However, this approach has now resulted when targets for AOX emissions already had been set in in a legal battle in which the US industry and trade associa- Sweden [70]. In Finland, more stringent standards were tions argue that the U.S. EPA lacks the authority for pursuing introduced first in 1993. this regulation. Curr Forestry Rep (2019) 5:185–198 191 Environmental Regulation, Competiveness, indicates a rejection of the strong version of the Porter hypoth- and Technological Change esis. This result has overall been confirmed in several more recent studies on the North American and the Nordic pulp and The strong and the weak versions of the Porter hypothesis paper industries, both concerning the regulation of local pol- have constituted an important point of departure for previous lutants and the pricing of carbon dioxide emissions [86–90]. research on the relationship between environmental regulation One reason for this is that environmental regulations do not and competitiveness in the pulp and paper industry. In this only incur costs in terms of pollution abatement equipment; section, we review this research in the context of pulp and the compliance process also involves significant transaction paper production, focusing on the impact of regulations on costs that divert time and energy away from productive activ- the following: (a) productivity and profits (the strong version) ities (see [91] for a discussion of such costs in the US pulp and and (b) technological innovation (the weak version). paper industry). Still, there are exceptions to the findings that reject the Environmental Regulation and Productivity strong Porter hypothesis. For instance, in a recent study, the authors employ a distance function approach to the German Empirical studies of the strong version of the Porter hypothe- manufacturing industry and conclude that the EU ETS in- sis have primarily used quantitative data, e.g., at mill-, com- creased the economic performance (in their case efficiency) pany-, or industry-level, to investigate the relationship be- of regulated firms in the paper industry [92]. tween the stringency of various environmental regulation and productivity, profits, and/or efficiency (e.g., [21, 23]). Environmental Regulation and Technological Regulatory stringency is operationalized in different ways, Innovation such as using data on emission limit values or estimates of pollution abatement costs. For instance, in a study on the US Even though there is meager empirical evidence in support of pulp and paper industry [78], the authors report negative con- the strong Porter hypothesis in the pulp and paper industry, sequences of environmental regulation—in this case mea- there is also little suggesting that environmental regulations sured as pollution abatement costs—on total factor productiv- have (so far) had profound adverse effects on industrial com- ity (TFP). Related empirical applications, using plant-level petitiveness; this result holds true also for other industrial sec- data, exist also for the Nordic countries [79, 80, 81� ], some tors [93� ]. There are likely several reasons for this. One is focusing on TFP development and others on changes in prof- simply that the existing regulations have not been stringent itability. Another strand of research has employed aggregate enough to generate very negative impacts on productivity data at the industry level for EU Member States [82, 83]. The and/or employment. For instance, the so-called Cluster Rule results are overall mixed, some suggesting that there is nega- in the USA, i.e., the country’s first integrated multimedia (air tive relationship between existing regulations and and water) regulation aiming at toxic releases from pulp and productivity/profits (e.g., [79, 82]) while others report a cor- paper mills, has only had modest impacts on labor demand in responding positive (or non-significant) relationship [81, 83]. the industry [e.g., 94]. Another reason is that regulations have The state-of-the art research typically adopts a so-called influenced not only the adoption of existing pollution abate- parametric distance function approach, which assumes that ment technologies but also the innovation and the develop- pulp and paper mills are multi-output units, thus generating ment of new and improved green technologies, in turn lower- both “goods” (pulp and paper) and “bads” (emissions). This ing the total costs of complying with existing and future reg- approach permits the estimation of the “shadow price” of pol- ulations. This signifies the weak version of the Porter hypoth- lution, i.e., the change in revenues due to constraints associat- esis for which there is plenty of support in the empirical con- ed with, for instance, emission limit values [21]. A negative text of the pulp and paper industry (see [14�� , 24, 26, 60�� ]and shadow price indicates increased costs associated with a more below). stringent environmental regulation (and vice versa). Another The fact that the empirical evidence typically rejects the advantage of this approach is that companies are allowed to be strong version of the Porter hypothesis, when at the same time inefficient in their use of productive resources, implying that indicating plenty of support for the weak version, should not one can also study the correlation between efficiency and en- come as a big surprise. In an industry, there are likely to exist vironmental regulations. several—not yet identified—productivity-enhancing mea- Two early studies apply the distance function approach in sures that could be undertaken if the companies allocated the empirical contexts of the Finnish and Swedish pulp and enough resources (e.g., staff hours, pilot plant tests) to search paper industries, respectively [84, 85]. These both focus on for these. The weak version builds on the far from controver- the regulation of the emissions of BOD agents in water bodies sial notion that such search efforts, guided by the environmen- and conclude that the resulting emissions reductions were as- tal regulations, will generate new ideas and solutions. The sociated with net costs for the affected companies. Hence, this strong version, though, rests on the notion that these same 192 Curr Forestry Rep (2019) 5:185 –198 search efforts will generally lead to larger total productivity Finnish pulp and paper industry, in part due to a more diver- improvements compared to the corresponding search efforts sified and value-added product mix [14�� ]. The Swedish in- that companies would have pursued in the absence of the same dustry has instead been more homogenous with large-scale regulations. production of low value-added products such as sulfate pulp. Over the past 45 decades, several important technological For this reason, the Swedish pulp and paper mills faced similar developments resulting in environmental improvements have problems and the same regulatory pressure; it therefore made emerged, e.g., increasing the dry content of black liquor, bio- sense to share the risks and costs involved in the greening of logical and tertiary wastewater treatment (such as activated their production processes [97]. Herbert-Copley [63]argues sludge treatment), and chlorine-free bleaching [24]. In fact, that collaborative R&D was important for the adoption of since the 1980s, the industry has witnessed the growing im- alternative bleaching technologies also in the Canadian pulp portance of environmental issues as one of the dominant fac- and paper industry. tors stimulating technological innovation [95]. Overall, pro- Finally, while the above illustrates that environmental reg- cess innovation has been more important than product inno- ulation has had profound impacts on green innovations in the vation [26]. pulp and paper industry, we see much more limited evidence Several of the Finnish case studies address the innovation of policy-induced innovation in the climate field, e.g., as a impacts of the regulation of the pulp and paper industry. This result of EU ETS. A few industry case studies addressing research shows that the country’s performance standards dur- the innovation impacts of the EU ETS exist, including empir- ing the 1990s contributed to the development of and improve- ical research on the pulp and paper industries in Germany ments in clean technologies, e.g., the activated sludge technol- [75], Italy [100], and Sweden [101� ]. In Sweden, both the ogy [24]. Kivimaa [26] notes that a prerequisite for this devel- domestic carbon dioxide tax and, thereafter, the EU ETS only opment, in Finland as well as in the Nordics as a whole, was imposed low carbon prices, thus resulting in modest innova- the introduction of gradually tightening and predictable stan- tion impacts. The German study uses survey data and con- dards that spurred the exploration of new technological devel- cludes that innovation activities in the pulp and paper industry opments. Still, the innovation impacts were generally more have mainly been influenced by market developments; the EU significant with respect to end-of-pipe technology compared ETS (and other climate policies) only had modest innovation to process-internal technology [56]. One reason for this is that impacts [75]. These impacts were also lower for the technol- the (long-term) targets were not always stringent enough to ogy providers than for the pulp and paper producers. encourage the development of process-internal solutions [57]. Nevertheless, the majority of the German pulp and paper com- The existence of regulation-induced environmental innova- panies expected the stringency of the regulatory climate policy tion has been even stronger in the Swedish pulp and paper framework on innovation to increase by 2020 and onwards. industry. This is reflected in two recent quantitative studies Gulbrandsen and Stenqvist [74� ]discuss these results andar- [60 , 96]; both reports support for the weak Porter hypothesis gue that the reliance of survey data may miss critical aspects of and relate this to the flexible Swedish regulatory approach corporate responses to the EU ETS. involving a mix of flexible, long-term standards and the use This section has illustrated how the same type of policy of extended compliance and probation periods. Qualitative instrument, i.e., performance standards, will interact with oth- country case studies confirm this result [2, 58, 97], and these er policies (e.g., R&D support), as well as be embedded in emphasize that the involvement of Swedish government au- various complex institutional and organizational arrangements thorities and publicly funded research institutes in industry- that often have evolved over long time periods. This will in wide R&D projects and facilitated the development of turn generate different outcomes in terms of the adoption and process-internal abatement technology. In particular, development of green technology. This conclusion gains sup- Swedish pulp producers pioneered the development of several port in a Dutch review of previous research addressing the core process technologies for chlorine bleaching during the relationship between environmental policy instruments and 1970s and 1980s, including oxygen delignification, advanced innovation in the pulp and paper industry [102]. It is also batch cooking, and ozone bleaching [4, 98]. worth mentioning that while the existing theoretical literature The development of a green innovation system in the typically concludes that pollution taxes and tradable emission Swedish pulp and paper industry stands out in an international allowance schemes are superior in terms of promoting inno- comparison [14�� , 27, 51]. For instance, Smith [99] notes that vation [103], the empirical evidence is in fact mixed. The during the 1990s, shared and centralized research in the US experiences from the pulp and paper industry instead suggest pulp and paper industry was limited, as was joint government- that ambitious performance standards and extended compli- industry research projects. This, Smith argues, handicapped ance periods could provide profound incentives for technolog- environmental innovation activities in US industry. A similar ical change and innovation, while at the same time avoiding observation can be made in relation to Finland. Compared to excessive compliance costs for competitive industrial sectors Sweden, joint green R&D projects have been fewer in the in the short-term. In fact, economic policy instruments, such �� Curr Forestry Rep (2019) 5:185–198 193 as carbon pricing, have so far been less successful from this One key illustration of this is the sharing of information perspective. among actors (e.g., about best available technology), in turn implying that new knowledge was advanced jointly and incre- mentally in close interaction between the pulp and paper in- The Institutional Context for Decision-Making dustry, the environmental authorities, and the research institu- tions before the final performance standards were determined It should be clear that regulatory approaches to industrial pol- [27]. The Swedish approach also rested on high regulatory lution go beyond just identifying individual policy instru- competence (e.g., participation of industrial engineers in the ments, e.g., taxes or performance standards. As illustrated licensing committee’s), in turn implying that the extent of above, these approaches also concern the design of instru- firm-regulator information asymmetries was relatively limited ments, such as flexibility in terms of technological choice [3]. As a result, increasingly stringent regulations could be and time of compliance, as well as the existence of introduced gradually without jeopardizing the long-run com- complementing instruments, such as public funding of green petitiveness of the industry. The importance of high regulatory R&D projects and demonstration plants. The latter will be competence is addressed also in a case study of the Norwegian particularly important for achieving radical emission reduc- pulp and paper industry [59]; this author concludes that a tions through knowledge accumulation and transfer. In this common understanding between the regulatory authority and section, we review research that has provided evidence of the affected firms—not least about the environmental prob- the importance of the entire set up of the regulatory system, lems and its possible solutions—is aprerequisite for asuc- such as emphasizing the role of informal norms, forms of cessful green industrial transition. relationship between regulators and industry, and social trust. As noted above, environmental regulations developed ear- Previous research confirms that countries tend to have dif- lier and more consistently in Sweden compared to Finland, ferent regulatory styles and cultures in the environment field e.g., as illustrated in the countries’ responses to the dioxin [104]. Distinct national institutions, including historically alarm in the end of the 1980s [14�� ]. This heterogeneity across shaped firm-government relations, will contribute to specific the two countries can in part be traced to political culture and contexts for implementation of environmental regulations. power relations. In Finland, the pulp and paper industry This is particularly important given that such regulations, in- gained significant political power during the twentieth centu- cluding performance standards, normally are the outcome of ry; its interests became more or less synonymous with the case-by-case licensing procedures, thus involving direct nego- general national interest [105]. Environmental pollution issues tiations between the regulator and the industrial polluter. became rather politicized, in part due the political divide be- Empirical studies show that such institutional factors have tween rural-based and urban-based interests [106], and this delayed the introduction of a central administrative body that influenced how the pulp and paper industries in various coun- tries have responded to environmental regulations. In one could address environmental regulation of the industry. In study of the environmental performance of a number of pulp Sweden, though, the cooperative approach led to a more prag- and paper mills in Australia, Canada, New Zealand, and the matic political solution on how to address the industrial pol- USA, the authors attempt to link the outcomes to various lution problems by developing the existing industry structures observable factors, including corporate management and the through a combination of efficient environmental regulations stringency of regulations [5]. Still, they conclude that differ- and public funding of environmental R&D [14�� ]. The role of ences in these factors across the mills could only provide a power and influence in understanding the impacts of environ- partial explanation to the environmental outcomes; many un- mental regulation is also addressed in a study of the Canadian observed factors, such as regulatory styles and the form of pulp and paper industry over a 20-year period [107]. firm-regulator negotiations, could be just as important. Both Reinstaller [46] and Bergquist and Söderholm [51] Several studies investigating the Swedish pulp and paper argue that the relative efficiency of the flexibility in the industry have argued that its specific contextual and histori- Swedish regulatory approach relied on a high level of trust cally shaped conditions in many ways facilitated the transition between the regulator and the polluting firms. The issue of to deep emissions reductions [3, 14�� , 46]. In the previous trust in business-government relations is also raised by section, we emphasized how this transition relied on, for in- Bouvier [108], who examines the regulation and environmen- stance, the involvement of government in industry-wide R&D tal performance among eight pulp and paper mills in the state projects, long-term emissions reduction targets, and the use of of Maine, USA. She concludes that the regulations, even if extended compliance periods. However, this regulatory ap- well-crafted, were partially undermined by the historically proach would not have been possible, it is argued, without very powerful position of the pulp and paper industry in the the consensual and expert-dominant regulatory style dominat- region. Improving the relationship and trust between the reg- ing in Sweden, in particular during the 1970s and the 1980s ulatory agency’s officers and the environmental managers can [27]. bring about a better understanding of the intent of the legal 194 Curr Forestry Rep (2019) 5:185 –198 requirements, help find least-cost ways to achieve compliance, and third-generation biofuels for transportation purposes but and reduce the sometimes antagonistic and confrontational also green chemicals and new materials from forest raw ma- atmosphere between these actors. terials (replacing fossil fuel–based products) [13]. This development implies new types of challenges, includ- ing the establishment of new business models and value Discussion and Implications chains [12]. Even though these challenges have not been di- rectly addressed in this article, our review of existing research In this article, we have synthesized lessons from previous carries at least two important lessons for the ongoing research on the role of environmental regulation in (a) provid- bioeconomy development. First, the more radical greening ing incentives for emissions reductions in the pulp and paper of industrial processes for the production of a wider set of final industry, (b) permitting environmental compliance without products will be characterized by long development periods jeopardizing long-run competitiveness, and (c) inducing tech- during which new technology-specific systemic structures, nological change and innovation that help reduce the costs of e.g., actor networks and institutions, need to be established. complying with increasingly stringent regulations. We have illustrated that the pulp and paper industry’sefficient At a general level, our review of existing empirical re- response to the environmental concerns emanating from the search, involving qualitative as well as quantitative studies, emissions of chlorine compounds was possible in part because illustrates the complex economic and institutional mecha- the necessary green innovation system had already been put in nisms through which environmental compliance and innova- place [27, 51]. The development of forest-based biorefineries tion tend to develop. The debate about the role of environmen- will also require a mix of traditional regulations (and/or taxes) tal regulation in the greening of industry therefore needs to combined with deliberate public efforts to support R&D and abstain from simplified normative notions about policy instru- various pilot and demonstration projects [113, 114]. ment choices (e.g., performance standards versus taxes) re- Second, the implementation of stricter environmental reg- gardless of context. Regulatory designs, implementation strat- ulations, such as the relatively recent EU directive on sulfur egies, and various institutional preconditions (e.g., social emissions, is likely to shape the future of the pulp and paper trust) will matter just as much. For instance, even though the industries in all parts of the world. As noted in the introduction existing economic-theoretical literature argues that pollution to this article, such tightening regulations may pose both an taxes and tradable emission allowances are superior to perfor- opportunity and a threat to future sustainability transitions in mance standards in promoting innovation, the experiences the industry. For this reason, it is important to identify regula- from the (Nordic) pulp and paper show evidence of perfor- tions that can facilitate future sustainability transitions (e.g., mance standards promoting technological innovation. deep emission reductions, novel green value chains) without at the same time jeopardizing the competitiveness of the in- In addition, in the case of environmental requirements that emerge from case-by-case licensing procedures, there is nor- dustry. Our review has shown that such green transitions have mally no simple, one-directional (stimulus-response) link be- taken place without imposing excessive compliance costs and tween the regulator and the affected industry. Firms’ compli- even permitting increased production. The environmental reg- ance and technology adoption strategies will also be affected ulations that have made this possible typically possess a num- by multiple policies. The Swedish case studies illustrate the ber of key characteristics. These include firm flexibility in above points. The cooperative approach of sharing informa- terms of compliance measures, industry-wide R&D coopera- tion implied that new knowledge was advanced jointly in tion, knowledge transfer between public R&D support and close interaction between industry, environmental authorities, technology adoption choices at the firm level, the use of ex- and research institutes before the final license was issued. tended compliance periods to permit experimentation, and Joint public-private R&D efforts were encouraged to develop high regulatory competence. In addition, in order to gain mar- and improve abatement technologies. ket benefits from the greening of the forest raw material sup- While this article primarily has discussed the experiences ply chain, further attention should also be devoted to the com- from past green transitions in the industry, it is important to plementary roles of traditional regulations on the one hand and recognize that today the global pulp and paper industry faces voluntary initiatives on the other [10�� ]. new challenges. These are related to the transition to a biobased economy [e.g., 109–111], in which biological re- sources could contribute to carbon dioxide mitigation, circu- larity of resources, as well as offer new and better functions Conclusions (e.g., higher stability, longer lifetimes, less toxicity). For in- stance, the European Union’s so-called Bioeconomy Strategy Following the above, it should be clear that there is plenty of endorses the development of novel biorefinery concepts [112]. scope for additional conceptual and empirical research on the These value chains involve not only the production of second- role of environmental regulations, including climate policies, Curr Forestry Rep (2019) 5:185–198 195 in the global pulp and paper industry. We emphasize three regulations that are poorly designed and lack a recognition important avenues for future research. of the institutional context may instead pose threats. First, as shown above, the impacts of these regulations are Acknowledgments Research funding from the Swedish Energy Agency highly dependent on the institutional context. Still, there is a and the Swedish Research Council Formas is gratefully acknowledged as need for comparative research addressing how the policy is valuable support from the journal’s managing editor. Any remaining mixes of various countries have influenced the processes of errors reside solely with the authors. environmental compliance and innovation in the industry. In fact, industry will often have to confront both emissions stan- Funding Information Open access funding provided by Lulea University of Technology. dards and taxes (or emission allowance schemes) at the same time. Furthermore, while it is virtually impossible to present a Compliance with Ethical Standards unanimous ranking of various types of regulations, e.g., per- formance standards versus technology standards (and pollu- Conflict of Interest Patrik Söderholm, Ann-Kristin Bergquist, and tion taxes), with respect to their innovation-stimulating ef- Kristina Söderholm declare that they have no conflict of interest. fects, comparative research is needed to shed additional light on the importance of various regulatory designs and imple- Human and Animal Rights This article does not contain any studies mentation strategies. In-depth historical studies are typically with human or animal subjects performed by any of the authors. particularly well-suited in filling these research gaps by de- Open Access This article is distributed under the terms of the Creative tecting the complexities within which environmental regula- Commons Attribution 4.0 International License (http:// tion and related contextual factors have been translated into creativecommons.org/licenses/by/4.0/), which permits unrestricted use, variations of firm-level strategies, both among incumbents distribution, and reproduction in any medium, provided you give appro- priate credit to the original author(s) and the source, provide a link to the and new actors. 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It concludes that there is plenty of evidence for the sustainability transition of the pulp and paper industry in Sweden. weak version of the Porter hypothesis but less support for the J Clean Prod. 2018;183:1216–27. strong version. Still, impacts are small relative to general trends. 94. Gray WB, Shadbegian RJ, Wang C, Meral M. Do EPA regulations affect labor demand? Evidence from the pulp and paper industry. J Publisher’sNote Springer Nature remains neutral with regard to jurisdic- Environ Econ Manag. 2014;68(1):188–202. tional claims in published maps and institutional affiliations. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Current Forestry Reports Springer Journals http://www.deepdyve.com/lp/springer-journals/environmental-regulation-in-the-pulp-and-paper-industry-impacts-and-yf3UMRwYgB

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Publisher: Springer Journals
Copyright: Copyright © 2019 by The Author(s)
Subject: Environment; Sustainable Development; Environmental Management; Nature Conservation; Forestry; Forestry Management; Ecology
eISSN: 2198-6436
DOI: 10.1007/s40725-019-00097-0
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Abstract

Purpose of Review In this article, we review existing research addressing how environmental regulations have influenced the pulp and paper industry. These regulations appear in different forms and designs and address air and water pollution as well as climate change. The paper devotes particular attention to how various regulations have affected sustainable technological change and the prospects for inducing deep emission reductions without jeopardizing industrial competitiveness and future investments. Recent Findings Experiences from key pulp and paper regions, not least the Nordic countries, suggest that gradually tightening performance standards have contributed to radical reductions in emissions, e.g., chlorine compounds and biological oxygen demanding agents, and without imposing excessive compliance costs. This outcome can largely be attributed to how the regulations have been designed—and implemented—in practice, as well as to the presence of efficient and legitimate institutions. Long-term emission reduction targets, in combination with extended compliance periods and trustful firm-regulator relationships, contributed to radical technological innovation and permitted radical emission reductions without excessive compliance costs. The development of alternative bleaching technologies is an apt example. In contrast, the impact of carbon pricing schemes, including the EU emissions trading scheme, on carbon dioxide emissions reductions and related technological change in the pulp and paper industry has however been modest. Self-regulation, certification, and community pressure have exerted relatively modest influences on the environmental performance of the industry. Summary Important avenues for future research are identified. These include the following: (a) comparative research on how policy mixes in various countries have influenced environmental compliance and innovation; processes; (b) future studies of environmental regulations, their design and implementation, in emerging pulp and paper producing countries, not least China; and (c) research on how environmental regulations can affect ongoing restructurings in the industry towards a broader palette of products in biorefineries. . . . . . Keywords Environmental regulation Pulp and paper industry Competitiveness Innovation Pollution Climate change Introduction serious. This resource- and capital-intensive industry contributes to many existing environmental problems, including global The environmental impacts of the pulp and paper industry have warming, human toxicity, ecotoxicity, photochemical oxidation, been significant throughout the twentieth century and are still acidification, nutrification, and the generation of solid wastes [1, 2]. Increased concerns over such environmental issues, not least This article is part of the Topical Collection on Forest Policy, Economics, air and water pollution and climate change, have led to the intro- and Social Research duction of new as well as more stringent environmental policies. These policies include both regulations in the form of per- * Patrik Söderholm formance standards (emission limit values) [3], technology patrik.soderholm@ltu.se requirements [4, 5], as well as various incentive-based instru- ments such as taxes/charges and tradable emission allowances Economics Unit, Luleå University of Technology, SE-971 [6, 7]. In addition to these, it is also important to consider the 87 Lulea, Sweden role of voluntary approaches [8�� ] and self-regulation [9], Unit of Economic History, Centre for Environmental and Resource which often forms part of corporate sustainability strategies. Economics (CERE), Umeå University, SE-907 87 Umea, Sweden Occasionally, market demand, community pressure, and/or History Unit, Luleå University of Technology, SE-971 the threat of imposing stringent regulations in the future could 87 Lulea, Sweden 186 Curr Forestry Rep (2019) 5:185 –198 be central drivers for efforts to improve environmental perfor- regulating emissions into air, e.g., sulfur dioxide and nitrogen mance at the company level. oxides. Although the emphasis is on local environmental pol- Environmental regulations influence the current practices lution, we also include references to the regulation of carbon and the future opportunities of the pulp and paper industry, not dioxide emissions, including the European Union Emissions least since the industry is highly export-dependent and com- Trading Scheme (EU ETS). However, we do not discuss re- petes in global markets. In fact, while regulations are neces- cent research explicitly addressing policies aiming at im- sary for reducing the environmental impacts of current opera- proved energy efficiency in the pulp and paper industry, e.g., tions, lengthy permitting processes and inflexible standards energy taxes, information programs, and voluntary agree- could also lead to increased uncertainty about the future busi- ments (e.g., [16, 17]). In addition, we do not discuss the im- ness opportunities, and even hamper the incentives to pursue pact of environmental enforcement and monitoring activities more radical, sustainable technological change [10�� ]. on compliance behaviour; a few empirical applications to the Notably, for the industry and transport sectors, the transition pulp and paper industry do exist (e.g., [18]). to a bio-based economy largely hinges on the development of Finally, geographically, there is a strong focus in the article so-called advanced biorefineries, which based on flexible in- on the pulp and paper industries in the developed world, in take of various bio-based materials permit the production of particular the Nordic and the North American countries. large quantities of bulk products along with various high- Occasionally, however, some contrasting cases from, for in- value products, such as specialty chemicals and materials stance, other EU Member States and China are also included. [11, 12]. This development is particularly relevant for the in- This focus largely reflects the availability of relevant studies, cumbent industry, which, instead of using the forest raw ma- not least in the light of our emphasis of ex post regulatory terial exclusively for the production of pulp and paper prod- experiences. The environmental regulation of the Swedish ucts, also could produce low-carbon transportation fuels (e.g., and Finnish has gained significant research interest, also biodiesel), green chemicals (e.g., organic acids), and various among several non-Nordic scholars. Other EU Member substances used in the construction industry (e.g., lignin- States are not well-researched, in part because the pulp and concrete mixes) [13�� ]. This suggests, thus, that stringent en- paper industry has been less dominant in these countries com- vironmental regulations can pose both opportunities as well as pared to the forest-rich Nordic countries. threats for achieving future environmental improvements. The article proceeds as follows. In the next section, we The purpose of this article is to synthesize the existing outline some key conceptual points of departure for the re- research addressing how environmental regulations have in- view. The remainder of the article then discusses the empirical fluenced the pulp and paper industry so far. We devote partic- evidence on the roles of self-regulation and community pres- ular attention to how such regulations have affected sustain- sure, the effectiveness of various types of environmental reg- able technological change as well as the prospects for achiev- ulations and policy instruments, and the impact of environ- ing deep emissions reductions without jeopardizing industrial mental regulations on industrial competitiveness and techno- competitiveness and future investments. Indeed, the pulp and logical change and innovation. The article ends with a discus- paper industry is an interesting case in this respect. sion of key implications and some important avenues for fu- Experiences from developed countries, not least the Nordics, ture research. suggest that such green transitions have been possible while at the same time avoiding excessive compliance costs and per- mitting increased production [e.g., 3, 14�� ]. This outcome, the Conceptual Points of Departure present article illustrates, can largely be attributed to how reg- ulations have been designed—and implemented—in practice, The environmental regulation of natural resource-based indus- as well as to the existence of efficient and legitimate institu- tries, such as the pulp and paper sector, involves difficult tions, including trustful relationships between regulatory au- trade-offs. While most pollution taxes and standards often will thorities and industry representatives. induce the adoption of incremental emission reductions, gov- In the article, we highlight research on environmental pol- ernment regulators increasingly face the challenge of impos- icies that currently regulate—or have regulated—emissions ing emission reduction targets for the future that cannot be met into air and water in the pulp and paper industry. This not only by employing currently existing (“off-the-shelf”)technologies permits an emphasis on key policy design and implementation [19, 20]. In the latter setting, profound process changes are issues but also implies that we do not address studies that ex needed, and the chosen regulatory approach has to maintain ante assess the impacts of hypothetical policy changes, e.g., strong, continuous incentives for emission reductions while at [15]. As shown below, the empirical research reviewed in this the same time taking into account the risk of excessive com- paper has often had a strong focus on discharges into water of pliance costs for industry. In the short- to medium-term, there biological oxygen demanding (BOD) agents, phosphorous, exists therefore a trade-off between stringent environmental and chlorine compounds. Some studies also address policies policies on the one hand and competitiveness on the other Curr Forestry Rep (2019) 5:185–198 187 [10 , 21]. This is a particular concern in the pulp and paper Self-regulation, Certification, and Community industry (and other sectors) that competes in global markets. Pressure Indeed, even though the global forest industries are likely to play an important role in the transition to a zero-carbon econ- In the 1980s, self-regulation, based on codes of environmental omy, climate policies (and other environmental regulations) management practice, emerged as an alternative to traditional are often perceived as a threat to industrial competitiveness. government regulations [28, 29]. Through private or other For instance, in the beginning of the 2000s, the European pulp non-governmental schemes, companies voluntarily commit and paper industry lobbied against the introduction of the EU to improve environmental management practices beyond reg- ETS [10�� ]. ulatory compliance. In the global forest industries, such agree- The relationship between environmental regulation and in- ments have included, for instance, the U.S. Sustainable dustrial competitiveness has been the subject of considerable Forestry Standard Initiative (SFI), the international environ- debate in the academic literature over the past two decades. mental management standard ISO 14001, and the Forest Much of this discussion has centered on the so-called Porter Sustainable Council Standard (FSC), among others [30]. hypothesis [22]. This hypothesis states that properly designed The empirical evidence about the effectiveness of self- environmental regulations will (a) stimulate environmental regulation on industrial environmental performance is howev- innovation and technological change (the weak version of er overall mixed [9, 31]. Some scholars have found that co- the hypothesis) and (b) increase not only the environmental regulation systems that include both voluntary private initia- performance but also the economic performance in terms of tives as well as mandatory state measures may hold particular profits, productivity, etc., of industries (the strong version) benefits both to state and industry actors [32, 33]. Still, many [23]. For our purposes, it should be noted that empirical ap- scholars have been skeptical about the effectiveness of indus- plications to the pulp and paper industry have gained a prom- try codes of conduct, and about whether these could be used as inent place in this debate, and previous studies have investi- protection against more stringent standards [34]. gated both the strong and the weak version of the Porter hy- The dominating stream of research has rather focused on pothesis (see further below). examining why firms adopt voluntary standards and diffusion Over the long run, a move towards sustainable indus- patterns [35, 36] rather than scrutinizing the impacts on envi- trial transformation requires that new and more environ- ronmental performance. For instance, Lennox and Nash [29] mentally benign technologies are developed and widely analyze self-regulatory programs in four different US indus- adopted. For this reason, regulatory approaches that stim- trial sectors and address the potential problem of adverse se- ulate technological change and that permit flexibility over lection, i.e., that the more polluting companies tend to join time in identifying, developing, and demonstrating new voluntary programs. However, for the US pulp and paper in- technology will be of central interest in the transition to- dustry, the results suggested the opposite; companies that had wards deep emission reductions (e.g., [3, 24]). However, joined the (SFI) program in 1994 polluted less in 1996 com- there appears to be meager evidence of one type of policy pared to companies that had chosen not to participate. instrument being superior to others in terms of promoting A number of studies have investigated the impacts of the sustainable technology choice and innovation. Specific pol- adoption of international ISO 14001 standards on environ- icy designs, various implementation strategies, and institu- mental performance in industry (e.g., [30, 36]). However, al- tional contexts, which typically have evolved over several though there exist several studies that investigate the role of decades, may matter just as much [25, 26]. In fact, the self-regulation and the adoption of certification schemes in entire setup and organization of the regulatory systems, forestry [37–39], applications to the pulp and paper industry e.g., negotiation and time strategies and trust, have proved are surprisingly scarce. Gunningham and Sinclair [40]exam- to be decisive for the effectiveness of environmental reg- ine the adoption of ISO 14001 standards in the Australian pulp ulations [e.g., 4, 27]. and paper industry and suggest that such a regulatory ap- In the remainder of this article, we first briefly address the proach could impose unnecessary costs on businesses; it role of self-regulation and then cover environmental regula- may even result in less, and not more, favorable environmen- tions in three contexts: (a) their effectiveness in terms of en- tal outcomes. Barla [41] investigates the adoption of the ISO couraging emission reductions; (b) their impacts on competi- 14001 standard in the pulp and paper industry of Quebec. By tiveness and technological change; as well as (c) the impor- using monthly data for 37 plants over the period 1997–2004, tance of well-functioning institutions. This thematic structure he shows that this certification had modest impacts on envi- of the paper implies that the same regulations may be ronmental performance. In a recent study, Bergquist and discussed multiple times (but in different contexts). The paper Keskitalo [8�� ] compare the development of regulatory re- identifies and discusses a number of prerequisites for an effi- gimes in the Swedish forestry sector and the country’spulp cient and legitimate transition towards deep emission cuts in and paper industry. The authors conclude that while the for- the pulp and paper industry. estry sector was deregulated in the 1990s, and with preference �� 188 Curr Forestry Rep (2019) 5:185 –198 given to self-regulation, the emissions from the pulp and paper an environmental risk premium to the cost of debt capital for industry continued to be regulated. Even though close to the average firm in the US pulp and paper industry. As noted 100% of the industry’s output has been manufactured under below, though, government regulations have typically had ISO 14001 and/or the European so-called EMAS scheme, more significant impacts on environmental performance than CEOs in the Swedish pulp and paper industry perceived gov- the capital market. ernment regulation as the more significant driver for reduced emissions. Finally, while previous research suggests that certification The Effectiveness of Environmental schemes have played a modest role for emission reductions in Regulations the pulp and paper industry, there are studies that emphasize the role of consumer demand and community pressure. Since the advent of modern environmental policy, standard- Indeed, in Sweden, conflicts over pulp mills’ emissions into based regulations have dominated over market-based instru- air and water can be traced more than 100 years back in time ments such as taxes and tradable emissions allowance [42]. The most prominent example, it is often argued, is the schemes. In some instances, such as in the regulation of the introduction of alternative bleaching technologies in northern North American pulp and paper industries, the standards have Europe during the 1980s and 1990s. This process gained mo- relatively often been technology- rather than performance- mentum in the mid-1980s after the U.S. Environmental based [4, 5, 43, 51]. By design, the technology-based stan- Protection Agency detected dioxins downstream from pulp dards provide no leeway to undertake other (low-cost) mea- mills producing bleached pulp [43]. sures and could even force the adoption of suboptimal tech- A number of studies argue that community pressure and nologies. Instead, performance standards do provide such green consumerism were key drivers in the transition to flexibility, which is essential due to the presence of firm- chlorine-free pulp production [44–47]. Popp et al. [44]con- regulator information asymmetries where mills typically clude that in particular, the Nordic pulp and paper mills know better than the regulator what it will cost to reduce responded by launching the necessary development and mod- emissions using various abatement measures (and/or a mix ification processes well before any regulations were in place. of several ones) [3]. This section begins with a discussion of Reinstaller [46] argues that the increase in green consumer the role of performance standards in regulating water and air demand in Europe was in turn related to the ability of various pollution. We then devote specific attention to the heteroge- policy entrepreneurs, not the least Greenpeace, to link the pulp neous development of alternative bleaching technologies in bleaching issue to already perceived environmental threats. In the USA and the Nordic countries, respectively. In this transi- fact, other research suggests that the diffusion of alternative tion, the distinction between performance and technology bleaching technologies in the South Asian and Australian pulp standards was essential along with other important regulatory industries during the 1990s also benefitted from the actions of design issues. We end with a discussion of the impacts of these non-governmental actors [48]. Nevertheless, the transfer regulations of carbon dioxide emissions. of technology to South Asia was much helped by the presence of Nordic pulp technology firms in the region [48, 49]. In Performance Standards and Water and Air Pollution other words, environmental regulation, the argument goes, lagged behind, but was eventually encouraged by both public The use of performance standards has been the dominating pressure and the availability of alternative bleaching technol- regulatory approach for the Nordic pulp and paper industries. ogies. Still, as noted in the next section, this conclusion has Empirical studies that have addressed the impact of such stan- been challenged in more recent research, which instead em- dards on emissions reductions tend to focus on water dis- phasizes the importance of environmental regulation in charges, and they adopt both quantitative and qualitative accomplishing lower emissions of chlorinated organic com- methods. While the former approach can detect general pat- pounds as well as stimulating innovation in alternative tech- terns, the latter permits studies of the dynamics of regulatory nologies, such as oxygen delignification and advanced batch implementation and industry responses at a greater depth. cooking. Quantitative studies in both Finland and Sweden confirm that Pressures to improve environmental performance may also performance standards have indeed affected discharges of come from the capital market. In a study of the US pulp and BOD agents and phosphorous and chlorine compounds [52, paper industry, the author provides empirical support for the 53]. Even though the actual discharges often have been well notion that the debt capital market view pollution-intensive below the standards, the emission limit values nevertheless industries to be high-risk investments since firms with poor imposed binding constraints on the regulated emissions. One environmental performance (in terms of the amount of toxic reason for this is that mills may be unable to perfectly monitor chemicals released to land, air and water) may face major emissions and will therefore pollute below the standard in liabilities in the future [50]. For this reason, the market applies order to avoid the risk of non-compliance and any penalties Curr Forestry Rep (2019) 5:185–198 189 that would follow from this. Brännlund and Löfgren [54]il- in terms of their knowledge and ability to pursue changes in lustrate such rational behaviour in the empirical context of the the production processes. Moreover, it also shows that the Swedish pulp and paper industry (see also [55] for a related more stringent and transparent regulations in the Nordic coun- analysis using data for the US pulp and paper industry). tries compared to the USA did lead to significant environmen- Furthermore, there is typically also a gradual tightening of tal improvements already during the end of the 1980s. these standards, and anticipation of more stringent regulatory Even though research on environmental regulation in pulp conditions in the future. This result is confirmed in a number and paper industries outside North America and the EU of case studies [3, 14�� , 24, 26, 56–59]. The Swedish case Member States is quite scarce, it is worth noting that an in- studies in particular emphasize the important role of flexibility creasing number of, in particular, Chinese studies have in compliance strategies. Even if the key regulatory authority emerged during the last few decades [65, 66, 67� ]. A study in Sweden, the so-called Licensing Board of Environmental of the Chinese pulp and paper industry during the country’s Protection, often advocated a particular abatement technology, period of economic reform (1980s–1990s) has highlighted the its members emphasized that this should not be stipulated in small size of Chinese mills (e.g., [65]), which made it difficult the final regulatory conditions [3]. The pulp and paper mill to implement modern pollution control technologies devel- had the possibility to use other methods if any shortcomings oped in Europe or North America. Still, China now has the could be proved with the suggested technology and more ef- world’s largest production of pulp and paper with modern fective methods could be developed. In this way, the Board technology. Some of the more recent research on China uses maintained the regulatory strategy to permit flexibility in com- indices of eco-efficiency and investigates how these indices pliance strategies, while at the same time requiring emission have developed with the introduction of stricter environmental levels to comply with the performance of best available tech- regulations [66, 67� ]. Overall, the findings confirm that such nology (BAT). The Swedish case studies also illustrate the regulations have induced significant environmental improve- importance of using extended compliance periods [14�� , ments, except for the case of carbon dioxide emission reduc- 60 ]. By allowing such intertemporal flexibility, thus reduc- tions where less progress has been made so far. These studies, ing investment uncertainty and permitting companies to test though, devote very limited attention to the design and imple- various R&D and demonstration routes, the affected mills mentation of the relevant regulations. could accept the increased uncertainty associated with a more While previous research confirms that performance stan- ambitious performance standard in the future. Moreover, long dards have contributed to the adoption of new environmental compliance periods also made it possible for companies to technologies, the most significant influence has typically been coordinate environmental and productive investments. reported with respect to end-of-pipe technologies, such as the The conclusion that government regulations have consti- activated sludge treatment. One reason for this could be that tuted an important determinant of environmental performance companies will typically find it difficult to anticipate upcom- in the pulp and paper industry gains supports also in North ing regulatory decisions, thus making it difficult to plan for— American studies. In one study using technology choice data and pursue—process-internal options (see Similä [56] for ev- for 686 paper mills in the USA [61], the authors find that more idence of this in the Finnish pulp and paper industry). stringent air and water regulations had a positive impact on the Nevertheless, process-internal technology has a greater poten- adoption of abatement technologies. They also report that tial for combining cost savings and emissions reduction, e.g., abatement and productive investment tend to be concentrated by avoiding the add-on cost of operating the end-of-pipe tech- in the same years, thus implying that regulations permitting nology and offering opportunities for material and energy ef- flexibility in terms of the timing of compliance ought to facil- ficiency savings. In this respect, the development of alterna- itate the process of environmental compliance. In another tive bleaching technologies represents a particularly interest- study, interviews with Canadian managers of pulp and paper ing case study, which is discussed in the next sub-section. In companies confirm that government regulations have had a far fact, an important reason for the research interest in this par- more profound influence on environmental compliance than ticular development has been that it represents process- consumer demand and the financial markets [62]. internal technology; previous research on regulation-induced Furthermore, previous studies emphasize that the engage- green technological development has otherwise had a signifi- ment of the top-level management and the environmental ed- cant bias towards the study of end-of-pipe technologies [68]. ucation of employees and other in-house resources (e.g., R&D capabilities) are key drivers of efficient responses to environ- The Transition Towards Chlorine-Free Pulp mental regulations. These factors are discussed in two Production Canadian studies [62, 63] and in one recent, comparative study of pulp and paper firms in Finland, Germany, Sweden, While pressures from consumers and the public played a role and the USA [64� ]. The latter study concludes that there ap- in the pulp and paper industry’s transition to chlorine-free pulp pear to be important differences across firms in these countries production, recent research shows that this role has often been �� 190 Curr Forestry Rep (2019) 5:185 –198 overrated in previous literature. As noted above, the consumer The Regulation of Carbon Dioxide Emissions market for chlorine-free paper products emerged in the late 1980s following the news that dioxins would be formed also While the above investigations have had a strong focus on in the manufacturing of bleached chemical pulp [44]. performance standards regulating the emissions of local pol- Bergquist and Söderholm [51] show, though, that at this point lutants, it is important to recognize that climate policies now in time, long-term collaborative R&D activities in the play an increasingly important role for the pulp and paper Swedish pulp and paper industry, largely induced by earlier industry. These policies are generally of a relatively recent regulations and perceived cost savings, had already resulted in date, e.g., the EU ETS was launched in 2005, but the global important technological advances in alternative bleaching pulp and paper industry achieved quite substantial carbon di- technologies. These technological solutions could then consti- oxide emission reductions already during the 1980s following tute the basis for new regulatory conditions. In fact, only a few the oil crises in the 1970s. These reductions were achieved months after the dioxin alarm broke in 1986, negotiations through the substitution of electricity and biomass for oil as were underway for the introduction of new, technology- well as through improved energy efficiency [71]. forcing standards on Swedish pulp and paper mills [14�� ]. In Climate policies come in many forms, such as support other words, these regulations preceded rather than trailed the schemes for renewable energy sources, which have benefitted increase in consumer demand for chlorine-free paper prod- investments in biomass-based electric power generation in the ucts. As pointed out below, the more stringent performance Nordic pulp and paper industries (e.g., [6]). The most direct standards induced not only technology adoption but also in- way of regulating carbon dioxide emissions, however, has novation in alternative bleaching technologies and particularly been the use of taxes or tradable emissions allowance so in Sweden. schemes. For instance, prior to the introduction of EU ETS, Existing literature shows that the alternative bleaching Sweden introduced a tax on carbon dioxide emissions, and technologies diffused earlier and more rapidly in the this has contributed to carbon dioxide reductions in the Nordic countries, especially in Sweden, compared to country’s pulp and paper industry [72, 73]. Interestingly, car- North America (e.g., [46]). Bergquist and Söderholm bon intensity performance responded both to changes in the [51] contrast the transition to chlorine-free pulp production carbon tax and the fossil fuel price but was more sensitive to in the Swedish and the US pulp and paper industries and the tax, thus suggesting the presence of a signaling effect from conclude that the tradition of technology-based standards the tax. in the USA resulted in a situation where the country’s When introduced in 2005, the EU ETS was the first EU- pulp mills were locked-in to end-of-pipe abatement tech- wide regulation of carbon dioxide emissions from the pulp nologies (see also [4]). Other studies have also pointed out and paper (and other energy-intensive) industries in the that even though performance standards could be used in Member States. Still, the effectiveness of this scheme in terms the US system, they typically did not involve long-term of providing incentives for significant emission reductions has targets [43]. In contrast, the capacity of the Swedish pulp overall been low, much due to low allowance prices during and paper mills to respond effectively to the dioxin alarm extended periods. Evidence of this has been reported for, for was underpinned by the country’s regulatory strategy to instance, the pulp and paper industries in Germany, Norway, facilitate process-internal changes in the industry. This and Sweden [7, 74� , 75]. In fact, the most profound impact of was achieved through the combination of gradually tight- EU ETS on the industry has been in terms of increased whole- ening standards, long-term targets, and extended compli- sale electricity prices [6]. So far, however, the European pulp ance periods [3, 14�� ]. and paper industries have primarily focused on incremental Finally, recent research also puts in doubt the bun- improvements in operations rather than on more radical, dling of the Nordic countries in the chlorine transition long-term zero-carbon solutions (see also [76]). process. The pulp and paper industries in both Sweden Finally, stringent regulations of carbon dioxide emissions and Finland have constituted cornerstones in the respec- in the US pulp and paper industry essentially do not exist. In tive economies [69], and both countries have earned an the USA, proposals for a national emissions trading scheme in international reputation when it comes to taking the lead carbon dioxide (e.g., the so-called Waxman-Markey bill) in reducing environmentally harmful industrial emissions failed to gain support in the Congress, and instead, the U.S. into air and water. Still, Finland moved more slowly than Environmental Protection Agency (EPA) has made efforts to Sweden with respect to the reduction of chlorine com- implement (tradable) performance standards for carbon diox- pounds [14�� ]. Such substances were not even mentioned ide within the realms of the existing regulatory regime, the in Finnish licensing conditions before 1989, at the time Clean Air Act [77]. However, this approach has now resulted when targets for AOX emissions already had been set in in a legal battle in which the US industry and trade associa- Sweden [70]. In Finland, more stringent standards were tions argue that the U.S. EPA lacks the authority for pursuing introduced first in 1993. this regulation. Curr Forestry Rep (2019) 5:185–198 191 Environmental Regulation, Competiveness, indicates a rejection of the strong version of the Porter hypoth- and Technological Change esis. This result has overall been confirmed in several more recent studies on the North American and the Nordic pulp and The strong and the weak versions of the Porter hypothesis paper industries, both concerning the regulation of local pol- have constituted an important point of departure for previous lutants and the pricing of carbon dioxide emissions [86–90]. research on the relationship between environmental regulation One reason for this is that environmental regulations do not and competitiveness in the pulp and paper industry. In this only incur costs in terms of pollution abatement equipment; section, we review this research in the context of pulp and the compliance process also involves significant transaction paper production, focusing on the impact of regulations on costs that divert time and energy away from productive activ- the following: (a) productivity and profits (the strong version) ities (see [91] for a discussion of such costs in the US pulp and and (b) technological innovation (the weak version). paper industry). Still, there are exceptions to the findings that reject the Environmental Regulation and Productivity strong Porter hypothesis. For instance, in a recent study, the authors employ a distance function approach to the German Empirical studies of the strong version of the Porter hypothe- manufacturing industry and conclude that the EU ETS in- sis have primarily used quantitative data, e.g., at mill-, com- creased the economic performance (in their case efficiency) pany-, or industry-level, to investigate the relationship be- of regulated firms in the paper industry [92]. tween the stringency of various environmental regulation and productivity, profits, and/or efficiency (e.g., [21, 23]). Environmental Regulation and Technological Regulatory stringency is operationalized in different ways, Innovation such as using data on emission limit values or estimates of pollution abatement costs. For instance, in a study on the US Even though there is meager empirical evidence in support of pulp and paper industry [78], the authors report negative con- the strong Porter hypothesis in the pulp and paper industry, sequences of environmental regulation—in this case mea- there is also little suggesting that environmental regulations sured as pollution abatement costs—on total factor productiv- have (so far) had profound adverse effects on industrial com- ity (TFP). Related empirical applications, using plant-level petitiveness; this result holds true also for other industrial sec- data, exist also for the Nordic countries [79, 80, 81� ], some tors [93� ]. There are likely several reasons for this. One is focusing on TFP development and others on changes in prof- simply that the existing regulations have not been stringent itability. Another strand of research has employed aggregate enough to generate very negative impacts on productivity data at the industry level for EU Member States [82, 83]. The and/or employment. For instance, the so-called Cluster Rule results are overall mixed, some suggesting that there is nega- in the USA, i.e., the country’s first integrated multimedia (air tive relationship between existing regulations and and water) regulation aiming at toxic releases from pulp and productivity/profits (e.g., [79, 82]) while others report a cor- paper mills, has only had modest impacts on labor demand in responding positive (or non-significant) relationship [81, 83]. the industry [e.g., 94]. Another reason is that regulations have The state-of-the art research typically adopts a so-called influenced not only the adoption of existing pollution abate- parametric distance function approach, which assumes that ment technologies but also the innovation and the develop- pulp and paper mills are multi-output units, thus generating ment of new and improved green technologies, in turn lower- both “goods” (pulp and paper) and “bads” (emissions). This ing the total costs of complying with existing and future reg- approach permits the estimation of the “shadow price” of pol- ulations. This signifies the weak version of the Porter hypoth- lution, i.e., the change in revenues due to constraints associat- esis for which there is plenty of support in the empirical con- ed with, for instance, emission limit values [21]. A negative text of the pulp and paper industry (see [14�� , 24, 26, 60�� ]and shadow price indicates increased costs associated with a more below). stringent environmental regulation (and vice versa). Another The fact that the empirical evidence typically rejects the advantage of this approach is that companies are allowed to be strong version of the Porter hypothesis, when at the same time inefficient in their use of productive resources, implying that indicating plenty of support for the weak version, should not one can also study the correlation between efficiency and en- come as a big surprise. In an industry, there are likely to exist vironmental regulations. several—not yet identified—productivity-enhancing mea- Two early studies apply the distance function approach in sures that could be undertaken if the companies allocated the empirical contexts of the Finnish and Swedish pulp and enough resources (e.g., staff hours, pilot plant tests) to search paper industries, respectively [84, 85]. These both focus on for these. The weak version builds on the far from controver- the regulation of the emissions of BOD agents in water bodies sial notion that such search efforts, guided by the environmen- and conclude that the resulting emissions reductions were as- tal regulations, will generate new ideas and solutions. The sociated with net costs for the affected companies. Hence, this strong version, though, rests on the notion that these same 192 Curr Forestry Rep (2019) 5:185 –198 search efforts will generally lead to larger total productivity Finnish pulp and paper industry, in part due to a more diver- improvements compared to the corresponding search efforts sified and value-added product mix [14�� ]. The Swedish in- that companies would have pursued in the absence of the same dustry has instead been more homogenous with large-scale regulations. production of low value-added products such as sulfate pulp. Over the past 45 decades, several important technological For this reason, the Swedish pulp and paper mills faced similar developments resulting in environmental improvements have problems and the same regulatory pressure; it therefore made emerged, e.g., increasing the dry content of black liquor, bio- sense to share the risks and costs involved in the greening of logical and tertiary wastewater treatment (such as activated their production processes [97]. Herbert-Copley [63]argues sludge treatment), and chlorine-free bleaching [24]. In fact, that collaborative R&D was important for the adoption of since the 1980s, the industry has witnessed the growing im- alternative bleaching technologies also in the Canadian pulp portance of environmental issues as one of the dominant fac- and paper industry. tors stimulating technological innovation [95]. Overall, pro- Finally, while the above illustrates that environmental reg- cess innovation has been more important than product inno- ulation has had profound impacts on green innovations in the vation [26]. pulp and paper industry, we see much more limited evidence Several of the Finnish case studies address the innovation of policy-induced innovation in the climate field, e.g., as a impacts of the regulation of the pulp and paper industry. This result of EU ETS. A few industry case studies addressing research shows that the country’s performance standards dur- the innovation impacts of the EU ETS exist, including empir- ing the 1990s contributed to the development of and improve- ical research on the pulp and paper industries in Germany ments in clean technologies, e.g., the activated sludge technol- [75], Italy [100], and Sweden [101� ]. In Sweden, both the ogy [24]. Kivimaa [26] notes that a prerequisite for this devel- domestic carbon dioxide tax and, thereafter, the EU ETS only opment, in Finland as well as in the Nordics as a whole, was imposed low carbon prices, thus resulting in modest innova- the introduction of gradually tightening and predictable stan- tion impacts. The German study uses survey data and con- dards that spurred the exploration of new technological devel- cludes that innovation activities in the pulp and paper industry opments. Still, the innovation impacts were generally more have mainly been influenced by market developments; the EU significant with respect to end-of-pipe technology compared ETS (and other climate policies) only had modest innovation to process-internal technology [56]. One reason for this is that impacts [75]. These impacts were also lower for the technol- the (long-term) targets were not always stringent enough to ogy providers than for the pulp and paper producers. encourage the development of process-internal solutions [57]. Nevertheless, the majority of the German pulp and paper com- The existence of regulation-induced environmental innova- panies expected the stringency of the regulatory climate policy tion has been even stronger in the Swedish pulp and paper framework on innovation to increase by 2020 and onwards. industry. This is reflected in two recent quantitative studies Gulbrandsen and Stenqvist [74� ]discuss these results andar- [60 , 96]; both reports support for the weak Porter hypothesis gue that the reliance of survey data may miss critical aspects of and relate this to the flexible Swedish regulatory approach corporate responses to the EU ETS. involving a mix of flexible, long-term standards and the use This section has illustrated how the same type of policy of extended compliance and probation periods. Qualitative instrument, i.e., performance standards, will interact with oth- country case studies confirm this result [2, 58, 97], and these er policies (e.g., R&D support), as well as be embedded in emphasize that the involvement of Swedish government au- various complex institutional and organizational arrangements thorities and publicly funded research institutes in industry- that often have evolved over long time periods. This will in wide R&D projects and facilitated the development of turn generate different outcomes in terms of the adoption and process-internal abatement technology. In particular, development of green technology. This conclusion gains sup- Swedish pulp producers pioneered the development of several port in a Dutch review of previous research addressing the core process technologies for chlorine bleaching during the relationship between environmental policy instruments and 1970s and 1980s, including oxygen delignification, advanced innovation in the pulp and paper industry [102]. It is also batch cooking, and ozone bleaching [4, 98]. worth mentioning that while the existing theoretical literature The development of a green innovation system in the typically concludes that pollution taxes and tradable emission Swedish pulp and paper industry stands out in an international allowance schemes are superior in terms of promoting inno- comparison [14�� , 27, 51]. For instance, Smith [99] notes that vation [103], the empirical evidence is in fact mixed. The during the 1990s, shared and centralized research in the US experiences from the pulp and paper industry instead suggest pulp and paper industry was limited, as was joint government- that ambitious performance standards and extended compli- industry research projects. This, Smith argues, handicapped ance periods could provide profound incentives for technolog- environmental innovation activities in US industry. A similar ical change and innovation, while at the same time avoiding observation can be made in relation to Finland. Compared to excessive compliance costs for competitive industrial sectors Sweden, joint green R&D projects have been fewer in the in the short-term. In fact, economic policy instruments, such �� Curr Forestry Rep (2019) 5:185–198 193 as carbon pricing, have so far been less successful from this One key illustration of this is the sharing of information perspective. among actors (e.g., about best available technology), in turn implying that new knowledge was advanced jointly and incre- mentally in close interaction between the pulp and paper in- The Institutional Context for Decision-Making dustry, the environmental authorities, and the research institu- tions before the final performance standards were determined It should be clear that regulatory approaches to industrial pol- [27]. The Swedish approach also rested on high regulatory lution go beyond just identifying individual policy instru- competence (e.g., participation of industrial engineers in the ments, e.g., taxes or performance standards. As illustrated licensing committee’s), in turn implying that the extent of above, these approaches also concern the design of instru- firm-regulator information asymmetries was relatively limited ments, such as flexibility in terms of technological choice [3]. As a result, increasingly stringent regulations could be and time of compliance, as well as the existence of introduced gradually without jeopardizing the long-run com- complementing instruments, such as public funding of green petitiveness of the industry. The importance of high regulatory R&D projects and demonstration plants. The latter will be competence is addressed also in a case study of the Norwegian particularly important for achieving radical emission reduc- pulp and paper industry [59]; this author concludes that a tions through knowledge accumulation and transfer. In this common understanding between the regulatory authority and section, we review research that has provided evidence of the affected firms—not least about the environmental prob- the importance of the entire set up of the regulatory system, lems and its possible solutions—is aprerequisite for asuc- such as emphasizing the role of informal norms, forms of cessful green industrial transition. relationship between regulators and industry, and social trust. As noted above, environmental regulations developed ear- Previous research confirms that countries tend to have dif- lier and more consistently in Sweden compared to Finland, ferent regulatory styles and cultures in the environment field e.g., as illustrated in the countries’ responses to the dioxin [104]. Distinct national institutions, including historically alarm in the end of the 1980s [14�� ]. This heterogeneity across shaped firm-government relations, will contribute to specific the two countries can in part be traced to political culture and contexts for implementation of environmental regulations. power relations. In Finland, the pulp and paper industry This is particularly important given that such regulations, in- gained significant political power during the twentieth centu- cluding performance standards, normally are the outcome of ry; its interests became more or less synonymous with the case-by-case licensing procedures, thus involving direct nego- general national interest [105]. Environmental pollution issues tiations between the regulator and the industrial polluter. became rather politicized, in part due the political divide be- Empirical studies show that such institutional factors have tween rural-based and urban-based interests [106], and this delayed the introduction of a central administrative body that influenced how the pulp and paper industries in various coun- tries have responded to environmental regulations. In one could address environmental regulation of the industry. In study of the environmental performance of a number of pulp Sweden, though, the cooperative approach led to a more prag- and paper mills in Australia, Canada, New Zealand, and the matic political solution on how to address the industrial pol- USA, the authors attempt to link the outcomes to various lution problems by developing the existing industry structures observable factors, including corporate management and the through a combination of efficient environmental regulations stringency of regulations [5]. Still, they conclude that differ- and public funding of environmental R&D [14�� ]. The role of ences in these factors across the mills could only provide a power and influence in understanding the impacts of environ- partial explanation to the environmental outcomes; many un- mental regulation is also addressed in a study of the Canadian observed factors, such as regulatory styles and the form of pulp and paper industry over a 20-year period [107]. firm-regulator negotiations, could be just as important. Both Reinstaller [46] and Bergquist and Söderholm [51] Several studies investigating the Swedish pulp and paper argue that the relative efficiency of the flexibility in the industry have argued that its specific contextual and histori- Swedish regulatory approach relied on a high level of trust cally shaped conditions in many ways facilitated the transition between the regulator and the polluting firms. The issue of to deep emissions reductions [3, 14�� , 46]. In the previous trust in business-government relations is also raised by section, we emphasized how this transition relied on, for in- Bouvier [108], who examines the regulation and environmen- stance, the involvement of government in industry-wide R&D tal performance among eight pulp and paper mills in the state projects, long-term emissions reduction targets, and the use of of Maine, USA. She concludes that the regulations, even if extended compliance periods. However, this regulatory ap- well-crafted, were partially undermined by the historically proach would not have been possible, it is argued, without very powerful position of the pulp and paper industry in the the consensual and expert-dominant regulatory style dominat- region. Improving the relationship and trust between the reg- ing in Sweden, in particular during the 1970s and the 1980s ulatory agency’s officers and the environmental managers can [27]. bring about a better understanding of the intent of the legal 194 Curr Forestry Rep (2019) 5:185 –198 requirements, help find least-cost ways to achieve compliance, and third-generation biofuels for transportation purposes but and reduce the sometimes antagonistic and confrontational also green chemicals and new materials from forest raw ma- atmosphere between these actors. terials (replacing fossil fuel–based products) [13]. This development implies new types of challenges, includ- ing the establishment of new business models and value Discussion and Implications chains [12]. Even though these challenges have not been di- rectly addressed in this article, our review of existing research In this article, we have synthesized lessons from previous carries at least two important lessons for the ongoing research on the role of environmental regulation in (a) provid- bioeconomy development. First, the more radical greening ing incentives for emissions reductions in the pulp and paper of industrial processes for the production of a wider set of final industry, (b) permitting environmental compliance without products will be characterized by long development periods jeopardizing long-run competitiveness, and (c) inducing tech- during which new technology-specific systemic structures, nological change and innovation that help reduce the costs of e.g., actor networks and institutions, need to be established. complying with increasingly stringent regulations. We have illustrated that the pulp and paper industry’sefficient At a general level, our review of existing empirical re- response to the environmental concerns emanating from the search, involving qualitative as well as quantitative studies, emissions of chlorine compounds was possible in part because illustrates the complex economic and institutional mecha- the necessary green innovation system had already been put in nisms through which environmental compliance and innova- place [27, 51]. The development of forest-based biorefineries tion tend to develop. The debate about the role of environmen- will also require a mix of traditional regulations (and/or taxes) tal regulation in the greening of industry therefore needs to combined with deliberate public efforts to support R&D and abstain from simplified normative notions about policy instru- various pilot and demonstration projects [113, 114]. ment choices (e.g., performance standards versus taxes) re- Second, the implementation of stricter environmental reg- gardless of context. Regulatory designs, implementation strat- ulations, such as the relatively recent EU directive on sulfur egies, and various institutional preconditions (e.g., social emissions, is likely to shape the future of the pulp and paper trust) will matter just as much. For instance, even though the industries in all parts of the world. As noted in the introduction existing economic-theoretical literature argues that pollution to this article, such tightening regulations may pose both an taxes and tradable emission allowances are superior to perfor- opportunity and a threat to future sustainability transitions in mance standards in promoting innovation, the experiences the industry. For this reason, it is important to identify regula- from the (Nordic) pulp and paper show evidence of perfor- tions that can facilitate future sustainability transitions (e.g., mance standards promoting technological innovation. deep emission reductions, novel green value chains) without at the same time jeopardizing the competitiveness of the in- In addition, in the case of environmental requirements that emerge from case-by-case licensing procedures, there is nor- dustry. Our review has shown that such green transitions have mally no simple, one-directional (stimulus-response) link be- taken place without imposing excessive compliance costs and tween the regulator and the affected industry. Firms’ compli- even permitting increased production. The environmental reg- ance and technology adoption strategies will also be affected ulations that have made this possible typically possess a num- by multiple policies. The Swedish case studies illustrate the ber of key characteristics. These include firm flexibility in above points. The cooperative approach of sharing informa- terms of compliance measures, industry-wide R&D coopera- tion implied that new knowledge was advanced jointly in tion, knowledge transfer between public R&D support and close interaction between industry, environmental authorities, technology adoption choices at the firm level, the use of ex- and research institutes before the final license was issued. tended compliance periods to permit experimentation, and Joint public-private R&D efforts were encouraged to develop high regulatory competence. In addition, in order to gain mar- and improve abatement technologies. ket benefits from the greening of the forest raw material sup- While this article primarily has discussed the experiences ply chain, further attention should also be devoted to the com- from past green transitions in the industry, it is important to plementary roles of traditional regulations on the one hand and recognize that today the global pulp and paper industry faces voluntary initiatives on the other [10�� ]. new challenges. These are related to the transition to a biobased economy [e.g., 109–111], in which biological re- sources could contribute to carbon dioxide mitigation, circu- larity of resources, as well as offer new and better functions Conclusions (e.g., higher stability, longer lifetimes, less toxicity). For in- stance, the European Union’s so-called Bioeconomy Strategy Following the above, it should be clear that there is plenty of endorses the development of novel biorefinery concepts [112]. scope for additional conceptual and empirical research on the These value chains involve not only the production of second- role of environmental regulations, including climate policies, Curr Forestry Rep (2019) 5:185–198 195 in the global pulp and paper industry. We emphasize three regulations that are poorly designed and lack a recognition important avenues for future research. of the institutional context may instead pose threats. First, as shown above, the impacts of these regulations are Acknowledgments Research funding from the Swedish Energy Agency highly dependent on the institutional context. Still, there is a and the Swedish Research Council Formas is gratefully acknowledged as need for comparative research addressing how the policy is valuable support from the journal’s managing editor. Any remaining mixes of various countries have influenced the processes of errors reside solely with the authors. environmental compliance and innovation in the industry. In fact, industry will often have to confront both emissions stan- Funding Information Open access funding provided by Lulea University of Technology. dards and taxes (or emission allowance schemes) at the same time. Furthermore, while it is virtually impossible to present a Compliance with Ethical Standards unanimous ranking of various types of regulations, e.g., per- formance standards versus technology standards (and pollu- Conflict of Interest Patrik Söderholm, Ann-Kristin Bergquist, and tion taxes), with respect to their innovation-stimulating ef- Kristina Söderholm declare that they have no conflict of interest. fects, comparative research is needed to shed additional light on the importance of various regulatory designs and imple- Human and Animal Rights This article does not contain any studies mentation strategies. In-depth historical studies are typically with human or animal subjects performed by any of the authors. particularly well-suited in filling these research gaps by de- Open Access This article is distributed under the terms of the Creative tecting the complexities within which environmental regula- Commons Attribution 4.0 International License (http:// tion and related contextual factors have been translated into creativecommons.org/licenses/by/4.0/), which permits unrestricted use, variations of firm-level strategies, both among incumbents distribution, and reproduction in any medium, provided you give appro- priate credit to the original author(s) and the source, provide a link to the and new actors. 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It concludes that there is plenty of evidence for the sustainability transition of the pulp and paper industry in Sweden. weak version of the Porter hypothesis but less support for the J Clean Prod. 2018;183:1216–27. strong version. Still, impacts are small relative to general trends. 94. Gray WB, Shadbegian RJ, Wang C, Meral M. Do EPA regulations affect labor demand? Evidence from the pulp and paper industry. J Publisher’sNote Springer Nature remains neutral with regard to jurisdic- Environ Econ Manag. 2014;68(1):188–202. tional claims in published maps and institutional affiliations.

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Environmental Regulation in the Pulp and Paper Industry: Impacts and Challenges

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Environmental Regulation in the Pulp and Paper Industry: Impacts and Challenges

Environmental Regulation in the Pulp and Paper Industry: Impacts and Challenges

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