David Hofmann University of Kassel Department of Economics Einvironmental and Innovation Economics

1. EMAEE Conference, Manchester, May 17-19 2007 Simulating the Impact of the New EU Chemicals Regulation (REACH) on the Innovativeness of the European Chemical Industry David Hofmann University of Kassel Department of Economics Einvironmental and Innovation Economics

2. 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

3. 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

4. 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

5. 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.

6. Model structure Cost of innovative search Cost of imitative search State of firms in in t Output of firms Imitation lottery and results Innovation lottery and results Price of products Publication Technology and product choice of firms Profits of firms Revenues of firms Costs Financial restrictions Desired investments Aspiration level Aspiration discrepancy Time Current investments Search expenses in t+1 Restrictions State of firms in t+1 Source: Andersen 1994, p 104 (modified)

7. Results (I): Market structure

8. Results (II): Maximum productivity

9. 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)