Market Analysis

Europe’s Unintended Brown Thumb

With ever-increasing global competition, environmental targets that are too expensive and difficult to achieve could drive more of Europe's manufacturing base to browner pastures—creating economic and ecological net losses in the process.

If water is good for a plant, then more water must be better, right? As many I'm sure can attest, such ill-fated logic often leads to the untimely demise of perfectly good houseplants. You would think environmentalists would know that! But the philosophy of "more is better" persists when it comes to European environmental regulation.

While environmental topics are still climbing their way up the political pecking order in the US, green platforms have been making headlines for years across Europe. You may relate with the 85% of Spaniards who are concerned about global warming, or the 32% of Brits who aren't, but the basic questions of whether global warming is a problem and if it is caused by humans are no longer relevant in Europe. The EU made its decision long ago that global warming is real. What's more relevant (particularly from a market perspective) are burgeoning political agendas likely to impact Europe's economic future.

The EU is introducing a new energy policy designed to reduce carbon emissions by 20% and a target to derive 20% of all EU energy from renewable energy sources by 2020. Many European countries have also introduced carbon credit trading platforms and adopted the well-publicized Kyoto protocols.

The EU's greener intentions are generally viewed by its citizens as a step in the right direction. But for many, the ambitions do not address the problems (real or perceived) aggressively enough. Such debates are fertile soil for politicians to sew new regulations, and a war to prove who is greener has commenced.

David Cameron, leader of the conservative opposition in the UK, provides a great example of the "I'm greener than you" approach to winning votes with his outspoken support for an additional tax on air travel as a means to alter Europeans' carbon habits. Granted, politicians have a knack for reneging campaign promises, but the more politically useful green topics become, the more rigid the regulations (actual or proposed) could end up being.

Perhaps European environmentalists and politicians should not be so eager to push the targets and associated costs too far too fast if they intend to avoid creating an even greater headwind for their global environmental aspirations.

With ever-increasing global competition, environmental targets that are too expensive to achieve or too difficult to obtain could drive more of Europe's manufacturing base to browner pastures—where few or no regulations apply.

There is little reliable data available to illuminate the true reasons behind manufacturing plant relocations, but undoubtedly a large motivation for moving facilities to countries like China, Indonesia and Vietnam isn't always labor costs. Cheap labor makes the headlines and is a more palatable, useful explanation for CEOs when plants are relocated. In truth, the absence of environmental clean-up costs can also provide a powerful incentive to relocate. Take India and China for example. Both countries have similarly low labor costs compared to the developed world, but China attracts far more manufacturing than India largely because of its lesser environmental controls—thereby making it cheaper to do business there.

Although developing nations may at times appear willing to improve their environmental standards, they know that one of the keys to their continued rapid economic advancement is keeping the operating costs for companies low. As a result, companies may be reluctant to quickly implement environmental controls. Their reticence could also be driven by an underlying belief that since the West was able to grow for over 100 years without being bound by environmental constraints, developing countries should also have the same opportunity.

If environmentalists and politicians in the EU want to make green progress globally, they must make their targets reachable, incremental and not financially burdensome lest they risk driving companies to places like China, where environmental controls are lax and inexpensive. Maybe the mobility of manufacturing is why Mr. Cameron supports taxing air travel—airlines can't exactly move their operations elsewhere!

Environmental targets that are incrementally implemented may not be appealing to those who seek more immediate, seismic changes, but would allow companies to achieve adherence without significantly impacting profitability. Conversely, should the targets become too financially or administratively onerous, companies may choose to seek bottom-line improvements by relocating their manufacturing. The competitive pressure to retain and improve profit could create a cascade of manufacturing defections—which could effectively negate the net global environmental gains the EU sought in the first place.

Whether the goal is to nurture one houseplant or revive the entire global environment, the same principle should be applied…do so incrementally.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.