Simulating the Impact of the New EU Chemicals Regulation

(REACH) on the Innovativeness of the European Chemical Industry

David HofmannUniversity of KasselDepartment of EconomicsEinvironmental and Innovation Economics

EM

AE

E C

onfe

renc

e, M

anch

este

r, M

ay 1

7-19

200

7

Overview

• Goal of the presentation Analysis of the impact of REACH on the evolution of an industry

(and especially on innovations and industry structure)

• Contents– What is REACH?

– Critical aspects of the new EU chemicals regulation

– The modelling approach

– Model structure

– Simulation results

– Some concluding remarks

What is REACH?

• New chemicals regulation of the EU (from June 2007)

• REACH = Registration, Evaluation, Authorisation and Restrictions on Chemicals

• Goal: improvement of health and environmental protection and of the competitiveness of the EU chemical industry

• Reaction to the current dual system of chemicals regulation in the EU– New and existing substances

• Shift of responsibility and potentially new responsibilities for manufacturers/dealers/importers and users of chemicals regarding the provision of information

Critical aspects of the new EU chemicals regulation

• Market access– Will a substance/process be allowed on the Common Market after the

introduction of REACH?

• Cost effects– Information requirements, testing, bureaucratic costs– Depend on number of chemicals, quantity, toxicity, knowledge, inter-firm

co-operations

• Time effects– Time delays due to additional testing, time delays due to bureaucracy

• Imitation effects– Due to publication of substance information on websites/databases

• Substance rationalisation– Due to decisions of other agents/firms about registration– Depends on costs, portfolio decisions, potential compatibility of

substances currently used with the new regulation

The modelling approach

• Assumptions– Different levels influence innovation behaviour: competitive

environment, firm and individual factors– Regulation influences these different levels

• Nelson-Winter framework as a starting point– Nelson/Winter (1982), Andersen (1994)

• Some modifications of the original framework– Budget formation– REACH impacts: market access, time effects, imitation effects, cost

effects

• Basic idea:– Illustrate the evolution of an industry in which firms compete in a

market for chemicals (=industry model). Firms can improve their position by introducing process innovations.

State of firms in in t Cost of innovative search

Cost of imitative search

Innovation lottery and results

Imitation lottery and results

Technology and product choiceof firms

Output of firms

Price of products

Profits of firms

Financial restrictions

Desired investments

Currentinvestments

State of firms in t+1

Aspiration level

Aspiration discrepancy

Search expenses in t+1

Costs

Time

Publication

Restrictions

Revenues of firms

Model structure

Source: Andersen 1994, p 104 (modified)

Results (I): Market structure

Results (II): Maximum productivity

Some concluding remarks

• Impacts of REACH Costs and strictness of the regulation seem to be the most important

impacts

Costs do not necessarily slow innovation dynamics down

Strictness might lead to a more concentrated market structure

• Problems No empirical validation Other shortcomings

No product innovations Model structure, especially the conceptualisation of the search

space Other aspects of REACH (substance rationalisation, international

competition)