The EU has the power to switch on innovation

This post first appeared on Business Green.

Think of innovation and what comes to mind? Blue skies, blank sheets of paper, keeping your thoughts showering and definitely outside of any boxes? These might be helpful for great leaps forward, but most technological development occurs through a series of small shuffles: a one per cent efficiency gain here, a five per cent weight reduction there. This is the kind of optimisation that delivers a competitive advantage rather than creates a whole new market, and a long term study by McKinsey has shown that focusing on a few key objectives is a vital part of successfully innovating to deliver incremental improvements.

Policy and standards drive innovation 
Policy can provide this focus, and the policy package currently being developed by the European Union to support the circular economy represents a big opportunity. An opportunity not just to deliver innovation in design to reduce environmental impacts and lower costs to product users, but also in systems and business models that deliver the most financially and environmentally valuable loops within a circular economy.

Not everyone shares this view however. Evidence from commission officials to a Danish Government enquiry confirms that some manufacturers are lobbying against product standards, apparently on the grounds that design standards are anti-innovation. This might reflect beliefs as much as facts, given the evidence that companies that say that regulation stifles innovation are actually more innovative.

Environmental regulation can cut costs for users
Moreover, in the specific context of environmental regulation and product standards, there’s a good story to tell. Research shows that environmental regulation does lead to innovation in green technologies and, by increasing energy efficiency, can lower costs to product users. Further analysis by the OECD suggests the key to this success is regulation that specifies outcomes rather than trying to predict the means.

Cars are a good example, with government interventions driving improvements in exhaust emissions, fuel efficiency and design for reuse and recycling. This started with reducing the toxicity of exhaust gasses back in the 1970s, when US regulatory standards, requiring a 90 per cent cut in noxious emissions, led to the development and widespread adoption of catalytic converter technologies. In the 1990s, Japan introduced laws first to promote the use of recycled materials in car manufacturing and then to demand that 85 per cent of a car should be recycled, rising to 95 per cent in 2015. Very similar requirements were adopted in the EU, via the End of Life Vehicles directive, which has driven innovation in both how cars are designed and the technologies used to recycle them. Finally the US, EU and Japan have long had fuel efficiency standards, but Japan’s more stringent standards in the 1990s meant Japanese cars were 3.5 to 4.5 per cent more efficient than their US counterparts, thanks to faster technological development.

European policy makers now have the opportunity to drive similar improvements across a much wider range of products. Developing standards to increase the durability and repairability of white goods would help to protect customers from washing machines that leave you in a pool of dirty water the day after the guarantee expires. Similar standards for smartphones should let you easily replace a worn-out battery or smashed screen. For buildings, the challenge is to design in flexibility, to be able to reuse components like steel girders, and change what they are used for without having to tear the whole building down.

The same level of service with less impact
These developments would enable us to enjoy the same level of product services while reducing environmental impact. But more than that, product innovation can lead to unexpected innovations in systems and business models.

When the End of Life Vehicle directive was introduced, there were concerns that it would increase disposal costs and so raise levels of vehicle abandonment. A House of Commons Select Committee report on the issue predicted an increase in abandoned vehicles from 150,000 to 500,000. What actually happened was that changes brought about by the regulation, combined with rising scrap values, transformed the market so that instead of having to pay a disposal cost, car owners got paid for their old vehicle. The result was that fewer than 45,000 cars were abandoned five years after the legislation was introduced.

In the same way, design standards that shift the economics around maintaining and repairing appliances and devices could be the key to turn us from product owners, consumers and discarders to product users, renters and repairers, in a more profitable, resource efficient circular economy.

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