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Changes in Pollution and the Implications for Policy David W. Rejeski and James Salzman Ask people to describe the archetypal pollution problems we face today and they may well recount a Dickensian vision a dirt-streaked factory shrouded in smoke, leaking effluent, churning out drums of waste. And for good reason. When the drafters of our pollution control statutes surveyed the landscape in the 1970s, their regulatory landscape was filled with smokestack industries. But what if this vision of environmental threats, still resonant today, has become largely irrelevant? What if we have transformed from a manufactur- ing-based to a service-based economy? What if manufacturing itself is being transformed radically, if we are entering a new industrial revolution? This is no idle speculation, for big changes are afoot in both the service and manufacturing sectors. In this chapter, we will begin to explore these changes and transformations and try to tease out their implications for environmental protection and policy. We begin with the transformation in services. The service sector now dominates America's economy, supplying more than three-quarters of our Gross Domestic Product (GDP) and four-fifths of our em- ployment (The Economist, 1994~. Over the past few decades, manufacturing's relative economic importance has dramatically declined (a phenomenon known as "deindustrialization"~. In 1970, roughly one in four workers was employed in manufacturing. By 2005, that number will drop to less than one in eight (Bureau of the Census, 1997; Rowthorn and Ramaswamy, 1997~. Over the same period, employment in services has increased correspondingly, and most often the new service jobs have been knowledge based, marking a shift from material-process- ing to information-processing activities (Stewart, 1993~. Just think of the trans- formation of Pittsburgh from dirty center of steel production to hub of clean high-tech services. As The Economist has asserted bluntly (The Economist, 17
8 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY 1994:91~: "It is still common to refer to [Organization for Economic Co-opera- tion and Development (OECD)] members as the 'industrialized economies.' Common, yet quite wrong.") It has become commonplace for commentators to speak of a fundamental transformation now shaping our economy. The labels vying to capture this era include the "service economy" and the "postindustrial society," but the most commonly used name is the "information revolution" hailed as the third great economic revolution of human history.2 The agricultural revolution generated wealth from plowed fields, the industrial revolution from the mechanized pro- duction of material goods. In the information revolution, its observers claim, wealth derives from the management, creation, and ownership of knowledge (Carnoy et al., 1993~. Famed management guru Drucker has succinctly described such an economy as one where "the basic economic source . . . is no longer capital, nor natural resources nor land. It is and will be knowledge (Drucker, 1994:8~.3 To be sure, the term "information revolution" is a trendy label, sug- gesting the increasingly central role of information in how we think of ourselves and our society, but it also describes very real transformations. For our purposes, regardless of the label, if the rise of services signals a fundamental change in means of production and patterns of consumption, then the law must adapt accordingly. Otherwise environmental law's focus on smokestack sources risks becoming a Maginot Line: "strong, powerful, bristling with legalistic weaponry, providing comfortable but illusory control and dominance and increasingly irrelevant" (Allenby, 1997:36~. What are the environmental implications of this transition? Does the rise of services pose important new challenges, or perhaps powerful opportunities, for environmental protection? Surprisingly, no one seems to know. More surpris- ingly, almost no consideration has been given to these questions. Although liter- ally thousands of books and articles have explored the implications of smoke- stack industries for environmental law and policy, a mere handful have considered the service sector. To begin to provide answers, we need to rethink our basic assumptions of pollution sources and, as a consequence, environmental protection strategies. This requires understanding better the current economic and environmental trends and their underlying causes. DEINDUSTRIALIZATION What is the evidence for this new economy? Most suggestive is the process of deindustrialization the dramatic decline of manufacturing's relative econom- ic importance. The unrelenting growth of the service sector and the apparently corresponding decline of the manufacturing sector has been taking place for decades in the United States, Europe, and Japan, engendering heated debate over the consequences. The service sector has expanded in all but one quarter over the past 50 years (Rejeski,1997~. Between 1955 and 1980, the U.S. economy added
DAVID W. REJESKI AND JAMES SALZMAN ~0 70 ~0 ~0 40 30 ~0 10 19 - - ~Manufacturing | ~ Pi Cow - ~- 1 1 T ~ ~ ~ ~ ,~ l a a Year FIGURE 2-1 Value added by sector as a share of U.S. Gross Domestic Product (GDP) at current prices. Source: Rowthorn and Ramaswamy (1997~. 40 million jobs, yet only 1 in 10 of these was in manufacturing (see Figures 2-1 and 2-2~. Over the same period, the health sector added more jobs than did all of manufacturing combined (Cohen and Zysman, 1987~. Most services, such as communications, wholesale trade, finance, insurance, and real estate, have grown steadily. In recent years, the health care and computer systems fields have been among the fastest growing sectors in the entire economy for both employment and revenue.4 In considering these impressive figures, one must keep some points in mind. First, note that Figure 2-2 shows employment data. Because of the way the Bureau of the Census defines manufacturing and service employment, the statis- tics tend to overstate service employment (Salzman, 1999:429~. Second, be- cause labor productivity has risen faster in the manufacturing sector than in services, employment has fallen while production has increased. Much of this increased productivity has been due to greater reliance on the services sector, which has not increased productivity at the same rate (Salzman, 1999:434~. Fi- nally, Figure 2-1 shows sectoral contribution to GDP as a percentage. During this period, though, GDP has been growing as well. As a result, a close analysis of economic indicators reveals two broad trends at work in the past few decades. First, there has been sustained growth in the service sector such that in relative terms it now dominates our nation's economic
20 90 ~0 70 ~0 ~0 30 20 - 10 - ~o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~o Year FIGURE 2-2 Employment as a percentage of total labor force. Source: Rowthorn and Ramaswamy (1997~. CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY Manufacturing, - _~ . ~ Services mi ning construction Manufacturing activity. Despite overestimates of its growth, the service economy is for real. Second, this rise of services has masked significant productivity gains and an absolute increase in manufacturing activity. It is not the case that services have grown while manufacturing has disappeared. Rather, the growth of services has outpaced manufacturing's growth, despite the fact that we are producing more than ever (Bureau of the Census, 1995:748, 759~. These results should not, on reflection, be surprising. The need for food did not go away at the end of the agricultural revolution nor has industrial activity dimmed in the brilliance of the information revolution's dawn. Even if the smokestack economy is still alive and well, albeit diminished in stature compared to services, one might still expect environmental benefits. The core thesis of Drucker's (1994) and others' writings on the information revolu- tion has claimed that knowledge is supplementing natural and human made cap- ital as factors of production. Intuitively, this makes sense. One would expect, for example, that increasing use of e-mail would reduce the environmental im- pact from overnight express and postal mail, that telecommuting and videocon- ferencing would reduce the transport impacts from traveling to work, and that bioengineered crops would reduce the need for pesticides and fertilizer. (von Weizsacker et al., 1997~. Such examples surely suggest that as the information revolution advances, there will be an "environmental bonus." But is this hap- pening? The best data to assess this question comes from a series of studies conducted by the World Resources Institute (WRI) that examined material flow
DAVID W. REJESKI AND JAMES SALZMAN 21 through the United States economy (Adriaanse et al., 1998~. WRI sought to quantify all the natural resources directly and indirectly consumed by economic activity in four major industrialized nations (the United States, the Netherlands, Germany, and Japan). Based on the industrial ecology principle of material flow accounting, the study tracked the consumption of natural resources in the econ- omy, from the extraction of raw materials through to their ultimate disposal. Importantly, the study sought to track the entire lifecycle, capturing material flows overseas as well as domestically. Figure 2-3 shows the results for U.S. material intensity, measuring Total Material Requirement (TMR) per unit Gross National Product (GNP).5 If the economic infrastructure is changing, moving toward more information process- ing than material processing, then this should be reflected in less material con- sumption per unit of economic activity. In mathematical terms, the measures of material intensity should show decreasing slopes. The study found that TMR material intensity has, in fact, decreased, as has the measure of direct material intensity (which included traditional material inputs such as oil, copper, or wa- ter, but not the hidden material flows captured in TMR). Less comprehensive studies have reached similar conclusions. These data therefore are consistent with the thesis that knowledge is replacing physical inputs as factors of produc- tion and, that services are replacing resource-intensive activities. These results can be explained by a number of other factors as well. The first of these is input substitution, the use of new materials as efficient replace- 150 - o ° 140 - x - o, 48 o u ILL n `~ 130 - 120 - 1 1 0 - 100 - 90 - 80 70 1 975 1 977 1 979 1 981 1 983 1 935 Year 1 937 1 989 1 99 1 1 993 FIGURE 2-3 Overall material intensity: Total Material Requirement/Gross Domestic Product (TMR/GDP) Index. Source: Adriaanse et al. (1998~. Reprinted with permission of World Resources Institute.
a: a: CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY meets for current materials. Fiber optics, for example, are replacing old copper wire communication lines, using less material and increasing the carrying capac- ity by 30 to 50 times (Cleveland, 1985~. Similarly, the amount of steel in a car has decreased by more than a third since the early 1970s, while plastics and composites have increased (Wernick et al., 1996~. A second factor is increased production efficiency that conserves materials. This can occur through redesign of the process, closed-loop recycling, and other pollution prevention techniques that contribute to improved manufacturing efficiency. Finally, product design has helped to reduce material consumption. Changes as simple as "light-weight- ing," or reducing the weight of a product, have led to dramatic differences in material consumption. Beverage cans, for example, have become much smaller and lighter, first moving from glass to steel to aluminum, and then reduced in weight an additional 25 percent. As in the case of pollution reductions, these types of changes also may be driven by command-and-control regulations, by market prices reflecting scarce resources, or by environmental regulations that implicitly or explicitly change relative prices. Focusing only on the material intensity slope misses the central point, how- ever, for there has been little improvement in the measure of material consump- tion per capita. In fact, in Japan, Germany, and the Netherlands, material con- sumption per capita has increased. Put another way, GNP has grown faster than population. Thus measures of material intensity will be more impressive than measures of per capita consumption. What matters for the environment, of course, is total consumption of physical units (Stern, 1997~. The important corollary is that because of population growth and increasing economic activity, absolute resource consumption has actually increased, despite reductions in ma- terial intensity. As the WRI study concluded, "meaningful dematerialization, in the sense of an absolute reduction in natural resource use, is not yet taking place" (Adriaanse et al., 1998:2~. These findings have been confirmed by other research in the field.6 If services are substituting for manufacturing, if knowledge is in certain in- stances replacing inputs of natural capital, we would expect to see improvements in material intensity, and we do. The observed improvements in material intensity, though, largely may be due to other factors such as increased production efficien- cies and input substitution. The data also suggest that rising absolute consumption is offsetting improvements in dematerialization and efficiencies. In fact, the data raise the possibility of a counterthesis that the information revolution and rise of services have a net negative environmental impact because they increase overall economic activity and thus overall resource consumption (Ehrlich et al., 1999~. This may occur in two related ways. First, as knowledge becomes a more impor- tant factor of production in some sectors, reductions in the cost of obtaining that knowledge stimulate economic growth, leading to increased environmental im- pacts through increased resource flow and conversion. Second, services may serve as complements to, rather than substitutes for, traditional production factors such
DAVID W. REJESKI AND JAMES SALZMAN 23 as labor and resources, simply increasing their efficiency, rather than replacing them. In both cases, technical advances decrease the cost of an activity and, as a result, increase the overall level of activity. Thus advances in telecommunications and data processing technologies, by making relevant information cheaper and transactions easier, have increased the total number of transactions. ENVIRONMENTAL PROTECTION AND THE SERVICE SECTOR Despite the relative growth of the service sector and decline of manufactur- ing, the data clearly show that these factors have not led to a decrease in resource consumption. Hence, although the service economy may not mark a clear path- way toward sustainable development, it surely merits explicit consideration in environmental policy both because services are important sources of pollution and because they pose different challenges than traditional smokestack sources. Overlooking the role of the service sector in environmental protection is myopic, for it produces environmental impacts in its own right. But we know remarkably little about either the environmental impacts of services or the appropriate policy tools. The few writings seriously examining the environmental impacts of ser- vices have identified important themes using anecdotes, but they have not set out a coherent framework for thinking about services' impacts and, depending on their severity, the appropriate governmental response. This is no easy task, for the service sector comprises a remarkably heteroge- neous grouping of economic activities as varied in their function as in their environmental impact. They include transportation and public utilities, whole- sale and retail trade, finance, insurance, real estate, business services, health services, legal services, and government services. To develop effective policy recommendations, we must first delineate services into categories meaningful for environmental protection. To do so requires distinguishing between services that cause high direct impact per facility and low (smokestack services), those that do not cause significant environmental harm at the level of individual oper- ation but collectively have large impact (cumulative services), and those that act as leverage points, influencing behavior both upstream and downstream (lever- age services). It is important to note that these categories of services are not mutually exclusive. A sector such as the electric utilities, for example, is both a strong smokestack service and a strong leverage service. The following sections briefly explain these categories and their policy implications. Smokestack Services As set out in Figure 2-4, smokestack services have high direct environmen- tal impact per facility. For environmental policy analysts, smokestack services are the most obvious of the three categories because their activities already are regulated. Sulfur dioxide emissions from power plants are heavily regulated, the
24 High . _ . _ ad Q Cal Q . _ Cal o . _ an as . _ Low FIGURE 2-4 Categories of service. CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY Smokestack Services Electric utilities Federal express Hospitals Airlines Business Services Cumulative Services Insurance Fast food chains Financial services Dry cleaners Retail sales Dentist offices Law firms Hotels · High Cumulative environmental impact subject of the entire trading program of the 1990 Clean Air Act amendments (U.S. Code, 1998a). Air pollution from the Federal Express fleet of delivery vans is subject to requirements under the mobile sources provision of the Clean Air Act (U.S. Code, 1998b). Biomedical waste from hospitals is regulated by the federal Resource Conservation and Recovery Act (RCRA) (U.S. Code, 1998c). If smokestack services do warrant further attention from environmental law- makers, it stems from the historical fact that many of the applicable laws were not drafted with service industries in mind. The net result can be inefficient governance, requiring the regulated entity to devote quite significant resources to compliance. Although this is, of course, a general problem of regulatory design, inefficient regulation of smokestack services can significantly impede innovative environmental protection measures. A recent study in the Harvard Business Review of productivity in the service sector made a similar point, con- cluding that regulation of services is very inefficient. One of the most important ways "government can help the service sector is not to overregulate it . . . The point is that regulation should be carried out in both spirit and practice to mini- mize the demands made on [service] businesses' attention and resources" (van Biema and Greenwald, 1997:87-88~. As an example, consider the situation of the telecommunications provider in the Northeast, BellAtlantic (now known as Verizon Corporation).
DAVID W. REJESKI AND JAMES SALZMAN 25 Although BellAtlantic does not produce large amounts of hazardous waste, its diffuse operations constitute innumerable small sources that must be individ- ually regulated. This includes wastes from maintaining a fleet of more than 18,000 vehicles, treating sediment from 113,000 manholes, and managing the use and disposal of more than 2.5 million utility poles treated with wood preser- vatives (of the 170 million poles in the country). The manhole sediment is typical of the mismatched regulatory burdens facing BellAtlantic. When repair- ing cables, BellAtlantic employees often work in manholes that contain water and sediment from the street. To get at the cables, it may be necessary to remove some of the water and sediment from the manhole. If they contain more than 5 parts per million (ppm) of lead, however, the water and sediment must be treated as RCRA hazardous waste. BellAtlantic tests have shown that the sediment is below 5 ppm about 55 percent of the time. Yet, in practice, BellAtlantic routinely treats the sediment as hazardous waste (complying with all the attendant RCRA Subtitle C requirements) in order to save time. This means the company must obtain a separate U.S. Environmental Protection Agency (EPA) hazardous waste identification number for every manhole treated. The ID system, required for waste manifests, was designed with smokestack sites in mind because it was assumed there would be one site, and therefore one source of hazardous waste generation. Perhaps not surprisingly, BellAtlantic has the largest number of waste ID numbers in the country. Similarly, when BellAtlantic designed a mobile treatment unit that would eliminate the toxicity characteristics of the sediment, it found itself prevented from improving environmental performance by a regulatory system that had not anticipated the application of regulation to this service industry. New Hamp- shire refused to permit the process, stating that mobile on-site treatment only was allowed for manufacturing companies. Because BellAtlantic's Standard Industrial Classification (SIC) code identified it as a service company, it could not apply for the permit. Another example is BellAtlantic's use of emergency standby generators. BellAtlantic has more than 1,800 emergency diesel genera- tors to provide power for the phone system in the event of a power failure. The generators run an average of 29 hours per year. The 1990 Clean Air Act amend- ment's "potential to emit" clause requires hundreds of permits or exceptions annually because it is assumed the generator runs constantly in a factory setting. In addition to the permits, there is considerable paperwork required for the com- pany to report the presence of and risk management plans for the lead acid batteries in every BellAtlantic building.7 The point in raising these brief examples is not to argue that the regulation of smokestack services is unnecessary but, rather, that such regulation warrants special attention because of the potential for poor fit. RCRA, for example, was not written with services in mind. BellAtlantic's operations simply do not fit the model situation the law was drafted to address. Indeed, smokestack services provide an excellent opportunity for innovative regulatory strategies. Large trans-
26 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY port services such as Federal Express, Hertz, and Allied Van Lines, for example, might be willing to reduce their overall emissions if they could "bubble" their vehicle fleet, treating it as one larger source of pollution, or obtain other forms of regulatory relief. One would think such possibilities should be attractive to the Common Sense Initiative and Project XL, the EPA's flagship reinvention initia- tives to develop smarter, more effective, and cheaper alternatives to traditional regulation. The Department of Energy's well-funded Industries of the Future initiative also would seem appropriate. These initiatives receive more than $100 million in support, but have ignored services. None of the implemented Project XL initiatives have focused on services, none of the Industries of the Future include a service, and only one of the six Common Sense Initiative sectors is considered a service industry. Cumulative Services This category contains the largest number of services and is in many re- spects the most difficult to address because it brings into play the problem of cumulative impacts. In describing the history of environmental protection ef- forts, Caldwell (1990) described two generations of environmental problems. The first generation consisted of traditional point source emissions of local or, at worst, regional pollutants. These were classic smokestack industry problems of air, water, and soil pollution. Their impacts were reduced by a series of 1970s statutes and what has become known as command-and-control regulation. The second generation introduced transboundary and global threats such as ozone depletion, trade in hazardous wastes and climate change, problems requiring coordination among nations and therefore problems that are poorly suited for first generation command-and-control policies and institutions focused on do- mestic concerns. The rise of the service sector may well coincide with the advent of a third generation of environmental problems, the challenge of atomized sources. These sources create, from a policy perspective, a "nonpoint" world where the cumulative impacts of small diffuse sources become significant and begin to resemble unmanageable runoff, potentially overwhelming traditional regulato- ry approaches. Many cumulative services may be viewed as simply concentrating everyday activities, such as those at a hotel or restaurant. The environmental impacts do not differ in kind from those of a household; they are simply magnified. Consid- er the little placards discreetly placed in hotel rooms asking whether you want your towel washed daily. The energy and wastewater impacts of washing the towel at a hotel are little different than if you did so at home. The impact from washing a thousand rooms' towels, however, differs greatly. Although the envi- ronmental impacts from a single McDonalds drivethrough are minor, the cumu- lative impacts of 22 million meals served daily are significant.
DAVID W. REJESKI AND JAMES SALZMAN 27 A similar concern arises from cumulative services with more direct causal links to specific environmental harms. The services' pollutant emissions indi- vidually are negligible, but cumulatively significant and identifiable. The contri- bution of dry cleaners' volatile organic compounds to smog formation provides one example. Perhaps surprisingly, dentist offices provide another. In the early l990s, the San Francisco Bay Regional Water Quality Control Board started detecting significant levels of the heavy metal silver in the water, in sediment, and in tissues of fish and marine mammals in the Bay (Rejeski, 1998~. But where was the silver coming from? No silver mines were anywhere near the Bay's watershed. A material flow analysis provided a surprising result, pointing a finger directly at dentist offices. Indeed, the 90,000 dentist offices in the United States account for roughly half of the more than 3,800 metric tons of silver consumed annually. The silver dissolves in fixer solutions used to develop x-rays and goes down tens of thousands of drains and eventually into bays and other watersheds. The small amount of fixer used at each office (less than 5 gallons per month at 80 percent of the sites) provides too little silver to offset the costs of recovery equipment, and RCRA presents serious regulatory burdens to on-site and off-site recovery efforts. Thus cumulative services pose significant administrative challenges to regu- lation. This plays out first as an informational challenge. Using the silver discharges by dentists as an example, it is no simple task to link such diffuse emissions with an identifiable harm. Assuming the link has been established, however, how much silver should each office be allowed to discharge? There is a significant difference between regulators allocating SO2 emissions among 3 smokestacks in an airshed and 1,200 dentist offices in a watershed. Determining equitable and efficient levels can be done, but at a high cost. Compliance and monitoring expenses may be even higher. For pollutants with clearly identifiable impacts of concern, such as dental offices, auto repair shops, and dry cleaners, the traditional regulatory response has been local com- mand-and-control regulation. Although the idea of a meaningful point source permit for every dentist office seems horribly resource intensive, it can work. Palo Alto's water district, one of the best funded and most sophisticated in the country, routinely regulates small services and inspects their premises. Its ordi- nance on photoprocessors and medical offices reduced silver levels in the Bay by more than 90 percent in 5 years (Palo Alto Regional Water Quality Control Plant, 1998~. In the face of such informational, compliance, and enforcement costs, however, a more common response to cumulative services has been no response at all. As the environmental manager for Palo Alto's treatment plant observes, "People [in wastewater treatment] look to industrial sources and aren't used to thinking about services or residential activities as the source of the prob- lem" (K. Moran, Manager, Palo Alto Pollution Prevention Program, personal communication, April 14, 1998~. Although cumulative services' concentration of activities provides a more accessible target for permit-based regulations, the
28 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY sheer number of sources overwhelms enforcement and compliance monitoring capacity. Beyond a command-and-control approach, two complementary policies therefore deserve close consideration: . . Economic instruments such as taxes are particularly well suited to the harms posed by cumulative services because they direct diffuse behavior throughout a complex system with little need for permitting oversight. This capacity for self-regulation in a decentralized setting greatly reduces administrative oversight costs. Put simply, if you get the prices right, services will look after themselves in an environmentally responsible manner. Because most cumulative services concentrate individuals' envi- ronmental impacts, there is no need for "service-specific" economic instruments. A second approach relies on information dissemination. Unlike smoke- stack sources, cumulative services by definition do not face significant environmental regulation and therefore expend few management resourc- es on the subject. That is not to say, however, that services have no interest in improving their environmental performance. In fact, there are a large number of voluntary initiatives in the service sector (Rejeski, 1997:31~. Government can play a key role in supplementing and foster- ing these information exchanges. This can take the form of informing cumulative services that their activities cause environmental impact and providing guidance on proven practices to reduce these impacts. Leverage Services To a large extent, services are interstices of the economy, acting as market mediators to provide the commercial link between primary production (mining, agriculture, fishing), manufacturing, and end-users. A class of these services, known as leverage services, acts as a funnel through which products must flow. These include retailers, utilities, financial services, and fast-food chains. In recent years a number of sectors have witnessed a shifting concentration of market share to a small number of companies. In the retail sector, this has resulted in a shift of commercial influence from producer to retailer. A small number of retailers such as Walmart, K-Mart, and Sears now account for roughly 10 percent of retail sales throughout the country (Guile and Cohon, 1997~.8 Toys-it-Us is twice the size of its two largest suppliers put together (Rejeski, 1997~. Other leverage services have long dominated their product chain. In the restaurant sector, for instance, serving 22 million meals daily, McDonalds funnels enormous amounts of products to the consumer, influencing agriculture, ranching, and pulp and paper manufacture. Similarly, between the many coal mining and oil com- panies and the millions of electricity customers stand a small number of utilities.
DAVID W. REJESKI AND JAMES SALZMAN 29 Before considering the merits of extending laws to govern the leverage ser- vices for environmental protection, it should be recognized that this extension of environmental stewardship already occurs daily in the marketplace with no gov- ernmental intervention at all. As an alternative to vertical integration strategies, a growing number of major corporations (both services and manufacturers) have taken control over their supply chain, exercising leverage upstream in their prod- uct or service lifecycle. This is occurring voluntarily in response to three market forces: anticipation of consumer demands, direct consumer pressure, and sec- ondary boycotts. Seeking competitive advantage by anticipating consumer demands, major corporations have established environmental purchasing requirements. Most of these are based on product content, with companies requiring suppliers to pro- vide recycled products such as paper or redefined oil. The U.S. government, the biggest service provider of all and the world's largest consumer, has followed suit in its "green" procurement standards. In 1993, for example, President Clin- ton issued an executive order requiring every executive agency to practice waste prevention and recycling as well as to promote the market for recovered materi- als through its procurement process (Executive Order No. 12,873, 1993~. Like- wise, a number of companies set requirements for suppliers' process and produc- tion methods. The major home improvement retailers in the United States and Britain, for example, have committed to sell only tropical timber products certi- fied from sustainably managed forests (The ENDS Report, 1998~. Kinkos pur- chases 36,000 tons of white paper annually. It has considerable influence over its supplier paper mills and requires that they exercise sustainable natural re- source management policies, including a commitment not to purchase wood or paper from old-growth forests (Kinkos, 2001~. Major manufacturers have launched similar initiatives, because their large raw material and component requirements give them considerable influence upstream over their suppliers. In response to direct consumer pressure, major corporations have interceded directly upstream to minimize adverse publicity. The most publicized examples have concerned labor practices. For example, charges of unsafe working condi- tions, child labor, and pitifully low wages have energized sneaker companies such as Reebok and Nike to improve the labor practices of their suppliers in Asia. Often these campaigns are directed at leverage services. The Campaign for Labor Rights' most recent campaign against Nike, for example, called for a boycott of the sport retailer Footlocker because "~1) Footlocker is Nike's largest retail outlet; (2) Nike is Footlocker' s largest supplier; and (3) Footlocker is owned by Woolworth Corporation, which is concurrently embroiled in another sweat- shop scandal involving the manufacturing facilities of its wholly-owned clothing subsidiaries in Canada." The action proposed by the Campaign for Labor Rights against Footlocker, known as a secondary boycott, presents another common means to exert pressure indirectly. The Rainforest Action Network has followed this type of strategy in
30 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY opposing Mitsubishi Corporation's tropical logging practices (Mitsubishi Motor Sales of America, 1997~. This nongovernmental organization has organized a boycott of Unionbancal, formerly the Bank of California and Union Bank but now 80 percent owned by Mitsubishi, hoping to pressure the multinational to change the practices of its logging subsidiary (Crockett, 1996~. Socially responsible in- vesting and e-mail campaigns also are being used to influence the company. What are the triggers for change in this group of services? Though the government does not have a large role to play, it can foster these voluntary developments. In particular, the EPA's voluntary programs for smokestack in- dustries, such as the 33/50 initiative and Design for the Environment, may be worth adapting to the service sector. Under the 33/50 initiative, in 1990 EPA Administrator Bill Reilly sent letters to 1,300 companies operating 6,000 facili- ties in the United States. Reilly listed 17 priority chemicals and challenged the companies to reduce their emissions of these chemicals 33 percent by 1993 and by 50 percent by 1995. Participation was high, and the EPA's 50-percent goal was achieved a year early. By the end of 1995, the EPA reported emission reductions of more than 750 million pounds.9 The Design for the Environment program provides funding to promote com- panies' integration of environmental considerations into the design and redesign of products, processes, and technical and management systems (U.S. EPA, 2000~. The EPA could direct a similar initiative to integrate environmental consider- ations into the practices of leverage services in reducing lifecycle impacts, wheth- er they involve retailers in their selection of goods, fast-food chains in their purchasing practices, or banks in their lending practices. The fusion of extended producer responsibility with reflexive law (i.e., laws that require generation, disclosure, and, hopefully, consideration of information) suggests a further intriguing potential development. Interviews with leverage service providers reveal equal parts interest and frustration. They understand their pivotal role in the lifecycle, but bemoan their lack of information and ex- pertise to make decisions. Home Depot, for example, spent a number of years trying to establish a corporate policy regarding the arsenate in pressure-treated wood and ultimately found it too difficult a problem. As the discussion on cumulative services explained, because most services do not confront significant environmental issues in their daily operations, their institutional competency is weak, often with neither the in-house capacity to make decisions on sourcing nor access to much of the information they would need. Reflexive law provides a means to overcome this barrier, relying on a dis- closure rather than sanctioning approach. Laws such as the National Environ- mental Policy Act, the European Union's Eco-Management and Audit Scheme, and the Toxics Release Inventory are intended to enhance the information con- tent of decisions. The goal of these statutes is not to constrain or dictate behav- ior, but rather to generate information and ensure its meaningful consideration. Building off the categories already described, Box 2-1 sets out the threshold ques-
DAVID W. REJESKI AND JAMES SALZMAN BOX 2-1 Regulating Services For each service activity, determine: Categories ~ What is the environmental problem? . · The direct impacts of the service itself? (smokestack services) · The cumulative impact of small actions? (cumulative services) Significant impacts upstream or downstream? (leverage services) Regulatory Action ~ Do the environmental impacts warrant governmental in- tervention? · If so, do current regulations address the problem? · If so, do they address it inefficiently, hindering additional improvements? Regulatory Targets ~ Whom should the intervention target? · Within the product's life cycle, which market actor is positioned to reduce the greatest environmental im- pact at least social cost? What are the equitable and legal constraints to plac- ing this responsibility on the least-cost provider? Policy Instruments ~ Which form of intervention is most appropriate? . . 31 Should the instrument be voluntary or regulatory? · If the service is administered inefficiently, should the action be deregulatory? Which instrument or combination of instruments is most efficient e.g., command-and-control standards, subsidies, education, liability, information collection and dissemination, and so on? tions to determine whether services should tee regulated and, if so, in what manner. We have reached a point today where our existing approaches to environmental pro- tection may not fit the dominant and growing service sector. But what if these same tools are becoming less applicable to the industrial sector they were origi- nally designed to address? What if manufacturing and services are becoming more similar, not less? MANUFACTURING AS A SERVICE Most people have never heard of Selectron, Celestica, Flextronics, or SCI Systems but these companies make a majority of personal computers and PC peripherals today. In fact, so-called contract manufacturers produce nearly 100
1^ Electronics equipment cost of goods sold Electronics manufacturing services market 1 998 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY 2003 FIGURE 2-5 The growth of outsourcing. Source: Clancy and Rejeski (2000~. Reprinted with permission of RAND. percent of all Hewlett Packard's personal computers and about 75 percent of their inkjet printers. These companies represent the emergence of manufactur- ing as a service, a service that is becoming increasingly globalized. Revenue growth in the contract electronics-manufacturing sector has been exceeding 30 percent per year consistently since 1992 (see Figure 2-5~. In the pharmaceutical industry, contract manufacturing of key chemical inputs accounted for 50 to 60 percent of production in 1998 and is projected to reach 60 to 70 percent by 2005 (Van Arnum, 2000~. If environmental policymakers are looking for emerging industrial sectors, contract manufacturing is one that will have increasing importance. It also serves as an indicator of larger changes in the manufacturing landscape. Some people have viewed this trend as the emergence of a new model of industry organization, one reliant on the development of turnkey production net- works (Sturgeon, 1997~. This is a large departure from early organizational mod- els where companies were concentrated in one geographical area, focused on one
DAVID W. REJESKI AND JAMES SALZMAN 33 piece of the value chain, and were vertically integrated (Cohen, 2000~. By using networked models, companies can now decouple production from innovation, thereby reducing manufacturing overhead and inventory/logistics costs, and fo- cus on core values around product design and marketing. What began with IBM's decision to outsource its microprocessors and operating system has changed our industrial landscape. Flexible, networked manufacturing will allow companies to effectively "de- construct" their value chains and reassemble them close to cheap labor, large markets, and key customers (Evans and Wurster, 2000~. Firms can shift to open- source models for manufacturing and postpone various aspects of the production process to the point of final assembly or use. This actually may transform the geography of production and shift new production away from traditional indus- trial corridors. For example, in 1980,50 percent of auto production employment in the United States was concentrated in 16 counties. By 1996, only a third of manufacturing was concentrated in these counties (Helper et al., 1997~. Much of this new manufacturing activity moved into new areas in the Southeast United States (see Figures 2-6a, 2-6b). In a highly networked and Reconstructed world, manufacturing does not look like manufacturing anymore; it begins to take on the characteristics of both mobile and nonpoint sources. Right now, it is possible to purchase or lease turnkey production miniplants that will fit into 20- or 40-foot containers, trans- port these plants to nearly anywhere in the world, and make everything from baked goods to roofing materials, medical equipment, or mufflers. Imagine this scenario. Two German-made robotic-manufacturing modules are air lifted to Mexico and produce cell phones, one for an American firm and one for a Japa- nese firm. After 6 months, they are moved to Ireland and reprogrammed to produce parts for personal digital assistants for two firms, one in England and one in Thailand. Who is responsible for the environmental performance and compliance of these systems and their products? The other possibility that has emerged is to completely decouple production codes from production. Design verification software now allows a three-person firm in California to design logic chips and ship the production code anywhere, such as to a silicon wafer fabrication plant in a jungle in Borneo (see Doler, 2000~. This scenario is likely to become more and more common, especially for low-weight/high-value items that can be moved rapidly from far-flung produc- tion facilities to markets via airfreight. Maybe the ultimate service will be the ability to manufacture at a personal level. Neil Gershenfeld at the Massachusetts Institute of Technology (MIT) Me- dia Lab makes the point that fabrication today is where computation was 20 years ago (Clancy and Rejeski, 2000~. It tends to occur in large, centralized facilities and it is only now finding its way out into the wider world (as the personal computer did) at smaller scales that allow customized production of short runs (lot-size-of-one). Take a look at what has happened to that workhorse
34 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY Rae i, >',[~41 ,~ 4. ~ a' ~=1 ; mu'' (a) Counties representing 50 percent of allied automobile employment in 1980 EN E) \ ,~ ~ ~~ . ~ ~.~ Eli ~J r r \~ 0~' (b) Counties representing 50 percent of allied automobile employment in 1996 FIGURE 2-6 Allied automobile employment. Reprinted with permission of RAND. Source: Clancy and Rejeski (2000~.
DAVID W. REJESKI AND JAMES SALZMAN 35 FIGURE 2-7 Computer-driven, powder metallurgy press (foreground) with traditional press behind. Reprinted with permission of Mii Technologies. Of the first industrial revolution, the press. New powder metallurgy presses can generate twice the pressure in a fraction of the space and can produce parts 50 percent faster than traditional presses (Kruger, 2000~. We now have a high- volume, computer-controlled production system that can almost fit on a desktop (see Figure 2-7~. But change often moves in two directions. Take the workhorse of the information revolution, the printer, and turn it into a production machine. There are a wide range of desktop systems that allow very complex objects to be printed using polymer-based powders (see Figure 2-8~. We can begin to see the outlines of a world where production can take place nearly anywhere (see "Manufacturing Anywhere," in Clancy and Rejeski, 2000~. In a recent book that explores manufacturing in the year 2020, the authors sug- gest that "steel manufacturing that could only be performed in Cleveland will be everywhere. Autos produced only in Detroit's mile-long factories will emerge from knockdown garage assembly shops in the Amazon and East Eighty-sixth Street in New York" (Moody and Morley, 1999~. It is not far fetched to imagine 10 to 20 years in the future, systems that store production codes on servers and allow the code to be downloaded to small-scale and personal fabrication devices, much in the way we download music today (we might describe this as an MP 3-D system). Another possibility is to upload production code directly from desktop computer-aided design and verification systems (see Figure 2-9~.
36 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY FIGURE 2-8 Object with seven articulating joints from a 3-D printer. Courtesy of the MIT Media Lab. / ~~ ......... . ~ ..'N MP 3-D server Production code 3-dimensional particle printer or small-scale powder press Computer-aided design/ Design verification systems FIGURE 2-9 Schematic diagram of a system for the deconsruction and personalization of production. From an environmental standpoint, the positive aspect is that we could pro- duce where needed, moving bits (production code) to atoms (production process), and avoiding a significant transportation and logistics penalty. On the other hand, production then could take place anywhere, in thousands of unregulated, and large- ly nonregulatable, environments. That means that environmental considerations
DAVID W. REJESKI AND JAMES SALZMAN 37 would have to be integrated into the production codes and operations of the fabn caters (we would also need a corresponding capacity to defabricate). In the more distant future, it may be possible to combine the capacity to self- fabricate with autonomous design based on evolutionary computation. Such production could be set in motion with the specification of a set of outcomes or characteristics we would desire from a yet-to-be designed or produced device. This process would result in one-of-a-kind products that have evolved to meet our specifications in Darwinian-like process (Lipson and Pollack, 2000~. Produc- tion truly begins to replicate nature. Environmental policy was not set up to handle highly dynamic and mobile production systems, systems that may become increasingly autonomous. The EPA has struggled for years to develop facility identification codes based on the premise that production stays put, or at least does not change faster than the phone book. The rules of the environmental protection game change if produc- tion begins to operate more like a service; if it can be moved, reprogrammed, and reconfigured; if it is organized using networks, not hierarchies. From a policy standpoint, it is important to understand that these emerging networks may re- quire very different strategies than those applied to the hierarchies or markets where most environmental policy traditionally has focused (Powell, 1990~. More than 30 years ago, the modern environmental movement began by focusing on the byproducts of production. More recently, policies have ad- vanced to consider the products of production (for instance, European take-back laws or the E.U. Integrated Product Policy). The challenge we now face is to focus on production itself, including the intimate relationship between produc- tion and services. An incredible opportunity is appearing on the horizon. Let us assume that the management gurus and industrial researchers are right in their assessments of a rapidly globalizing service sector, a second industrial revolution, the decon- struction of value chains, an explosion in contract manufacturing, the personal- ization of fabrication, and the emergence of a digital economy. It would be like creating an environmental protection agency in the late 1800s when the first industrial revolution was occurring, when we had an opportunity to proactively shape the system rather than simply react to its adverse impacts for the next 100 years. Maybe our existing system of regulations will work in this rapidly chang- ing world, but maybe not. Management guru Drucker has made the comment that the theory of business is no more than a hypothesis that must be examined and tested continually (Druck- er, 1999~. The same is true of environmental policy. Built into our regulatory system and environmental policy institutions must be ways to continually test our system of regulation and the models of business on which our regulations are based. In today's rapidly changing world, the greatest danger posed to effective environmental policy will be unchallenged assumptions about the nature and dynamics of business. We need to put every regulation, every policy, and every
38 CHANGES IN POLLUTION AND THE IMPLICATIONS FOR POLICY assumption about the causes and effects of environmental damage on trial for life. Otherwise, we will face a radically transformed future both ill informed and un- derequipped. NOTES 1 OECD is an international governmental organization dedicated to the promotion of policies that expand growth in market-based economies. Its 29 members include all of the major industrial- ized modern economies. 2 A December 1997 LEXIS/NEXIS database search found 125 separate newspaper and maga- zine stories contrasting the information and industrial revolutions. The following passage from Foreign Affairs is embellished, but typical of these references (Wriston, 1997: 172): We are now living in the midst of the third great revolution in history. When the princi- ple of the lever was applied to make a plow, the agricultural revolution was born, and the power of nomadic tribal chiefs declined. When centuries later, men substituted the power of water, steam, and electricity for animal muscle, the Industrial Revolution was born. Both of these massive changes took centuries to unfold. Each caused a shift in the power structure. Today, the marriage of computers and telecommunications has ushered in the Information Age, which is as different from the Industrial Age as that period was from the Agricultural Age. Information technology has demolished time and distance. 3 Consider the central role of information in the following descriptions: [I]n the changed world economy, the sources of higher productivity are increasingly dependent on knowledge and information applied to production, and this knowledge and information is increasingly science-based. Production in the advanced capitalist societ- ies shifts from material goods to information processing activities that focus on symbol manipulation in the organization of production and in the enhancement of productivity (Carnoy et al., 1993:5). With rare exceptions, the economic and producing power of a modern corporation or nation lies more in its intellectual and systems capabilities than in its hard assets of raw materials, land, plant, and equipment (Quinn et al., 1997:20). A pre-industrial society is primarily extractive, its economy based on agriculture, mining, fishing, timber and other resources such as natural gas or oil. An industrial sector is primarily fabricating, using energy and machine technology, for the manufacture of goods. A post-industrial sector is one of processing in which telecommunications and computers are strategic for the exchange of information and knowledge (Bell, 1976:xi-xiii). 4 An additional 44 million jobs were added between 1980 and 1999 (Bureau of the Census, 2000). The Statistical Abstract lists the fastest growing occupations as home health aides, computer engineers and analysts, physical therapists, systems analysts, and correction officers (Bureau of the Census, 1995). 5 WRI researchers developed a new measurement unit of Total Material Requirements. This quantifies both the direct and indirect use of natural resources flowing through an economy. Direct material requirements include feedstock resources in the production process such as grain, copper, coal, and gas. Indirect material requirements include "hidden flows." These are natural resources that are not sold as commodities and never enter the economy, such as overburden and waste from
DAVID W. REJESKI AND JAMES SALZMAN 39 extractive activities, biomass from crop harvesting and logging, soil erosion from agriculture, and earth moved during construction. 6 A study at Rockefeller University concluded (Wernick, 1996:5): [A]n assessment of consumption per unit of economic activity shows a dematerialization in physical materials of about one-third since 1970 . . . [I]ndividual items in the Ameri- can economy may be getting lighter but the economy as a whole is physically expanding . . . We see no significant signs of net dematerialization at the level of the consumer or saturation of individual material wants. Since 1950, per capita consumption of copper, steel, energy, timber, and meat has doubled; consumption of plastic has increased fivefold and aluminum sevenfold. Although America has the highest per capita consumption levels in the world, the resource consumption in Western Europe and Japan is only slightly less (Durning 1992:29, 38). A 1997 study examined the consumption of a range of metals, minerals, agricultural chemi- cals, and pertroleum products in 32 countries over 21 years. They concluded that a general reduction in resource consumption was not evident in the most developed countries (Janicke et al., 1997:467). The most exhaustive literature survey (Cleveland and Ruth, 1998:45) on the subject similarly con- cluded that "[d]espite claims to the contrary, there is no compelling macroeconomic evidence that the U.S. economy is decoupled from material inputs." OECD studied the global material intensity for steel and wood from 1970 through 1992. Throughout this period, although the material intensities of wood and steel showed a negative slope, the "total world materials consumption rose by 38%" (Organization for Economic Co-operation and Development, 1998:64-65). The linkage of economic growth and resource consumption also was confirmed by a recent government study (Interagency Working Group on Industrial Ecology, 1998). Analyses of energy consumption and waste generation show similar results. Ausubel (1996:4) notes, "Although the soaring number of products and objects, accelerated by economic growth, raised municipal waste in the United States annually by about 1.6% per person in the last couple of decades, trash per unit of GDP dematerialized slightly." 7 The information about BellAtlantic is drawn from a consultant's report written for NYNEX (a corporate predecessor to BellAtlantic) (MacDonald, 1999), and personal communication with Roy Deitchmann (former environmental manager at NYNEX) on March 5, 1999. 8 Prior to becoming a law professor, the author served as the environmental manager for a major consumer products company. The company had a special sales office in a small town in Arkansas for the simple reason that Walmart's purchasing office was located there. If, for whatever reason, Walmart requested a change in product formulation or packaging, there was an immediate and compliant response. This represents a sharp break from the earlier balance of power in the consumer goods market. The retail trade traditionally has been highly fragmented. As a result, companies such as Procter & Gamble or Coca Cola, because of the importance of their products to consumers, generally hold the upper hand in negotiating with retailers. 9 Reviews of the 33/50 program have been mixed. Contrast Mazurek (this volume, Chapter 13) and Harrison (this volume, Chapter 16) with Karkkainen (2001). REFERENCES Adriaanse, A., S. Bringezu, A. Hammond, V. Moriguchi, E. Rodenburg, D. Rogich, and H. Schultz 1998 Resource Flows: The Material Basis of Industrial Economies. Washington, DC: World Resources Institute. Allenby, B. 1997 Clueless. Environmental Forum (September):36.
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