April 21, 2021
Even before the COVID-19 pandemic, shifting to a more "agile" regulatory system – one that is stringent but also flexible and predictable – was increasingly understood as necessary for accelerating the transition to a competitive, low-carbon economy.i In fact, two out of six of the federal government’s 2017 Economic Strategy Tables recommended a shift towards more agile regulations. In a COVID-19 world, such a shift takes on additional urgency to achieve the combined objective of minimizing economic recovery while also transiting to a cleaner growth economy, which represents a US$26 trillion opportunity over the next 12 yearsii.
Although it may seem counterintuitive — constraints drive creativity and innovation.
In the context of regulation, the magnitude of constraints is called ‘stringency’. In the agile regulation context, stringency refers to “the degree to which regulation requires compliance innovation” and, as a result, how much change a given policy or regulation can be expected to generate.iii When policies are more stringent - or strict - firms have a greater incentive to devise innovative low-cost paths to reaching their regulatory objective.
Stringent regulations in and of themselves will not automatically drive efficiency increases and encourage innovation. In fact, if not well designed and implemented, strict regulations can limit options to innovate, thereby reducing incentives to move beyond current environmental or performance standards, increasing risks to firms, industries or markets and reducing competitiveness. The key is to design regulations in ways that minimize compliance costs by maximizing the incentive and potential to innovate. This is why ensuring a sufficient level of flexibility, the subject of our last blog post, is integrated into regulations.
In practice, striking this balance is not an easy task. That being said, there have been many successful efforts, both in Canada and abroad, from which to draw upon for best practices. For example, in Canada, Nova Scotia’s bold waste diversion targets have helped the province beat all others to achieve the lowest amount of annual waste generated per capita.iv These stringent targets have also fostered the emergence of new firms like Sustane Technologies that aims to convert waste into clean-burning fuels and recyclable materials, with a demonstration plant currently under construction. As an international cleantech example, Japan’s Top Runner program targets continuous improvement in the energy efficiency of manufactured products.v The program sets ambitious product-specific energy performance requirements through iterative target revisions in consultation with stakeholders, setting the next energy efficiency standard based on the current best-in-class performer and potential future technological advances.
Critically, setting the optimum level of stringency requires regulators that are well-informed, which itself requires internal capacity but also collaboration with industry and other relevant stakeholders. The California Air Resource Board’s development and implementation of the state’s first Low Emission Vehicle regulations throughout the 1990s exemplifies the importance of this regulatory capacityvi; iterative, good-faith collaboration with industry around revising stringency levels and timelines allowed these pioneering regulations to be successful in practice.
Because there is often a level of uncertainty involved in predicting future advancements, an iterative approach is necessary to gauge the level of stringency over time. Environmental policies that chart a predictable path for increasing levels of stringency can significantly reduce the policy risk that chills investment in clean innovation. This characteristic, which we call ‘dynamic predictability,’ will be explored in the next in SP’s agile regulation blog series.
i Government of Canada. Economic Strategy Tables, last modified December 2019, https://www.ic.gc.ca/eic/site/098.nsf/eng/home
ii Brownlee, Michelle, Stewart Elgie, and William Scott. Canada’s Next Edge: Why Clean Innovation Is Critical to Canada’s Economy and How We Get It Right, Smart Prosperity Institute, 2018. https://institute.smartprosperity.ca/sites/default/files/cleaninnovationinstitutereport-final.pdf.
iii Committee on Patient Safety and Health Information Technology; Institute of Medicine. Health IT and Patient Safety: Building Safer Systems for Better Care. Washington (DC): National Academies Press (US); 2011 Nov 10. Appendix D, Abstract of “The Impact of Regulation on Innovation in the United States: A Cross-Industry Literature Review”. Available from: https://www.ncbi.nlm.nih.gov/books/NBK189657/
iv Statistics Canada. Table 38-10-0032-01 Disposal of waste, by source
DOI: https://doi.org/10.25318/3810003201-eng; Government of Nova Scotia. Recycling and Waste: Nova Scotia’s Strategy, 2017, https://novascotia.ca/nse/waste/strategy.asp; Sustane. “Imagine a Future Without Landfills,” 2019, https://sustanetech.com/.
v Kimura, Osamu. "The Role of Standards: The Japanese Top Runner Programme for End-Use Efficiency." In Energy Technology Innovation: Learning from Historical Successes and Failures, edited by Arnulf Grubler and Charlie Wilson, 231-43. (Cambridge: Cambridge University Press, 2013), doi:10.1017/CBO9781139150880.023.; Nordqvist, Joakim. Evaluation of Japan’s Top Runner Programme within the Framework of the AID-EE Project, Energy Intelligence for Europe programme, 2006. https://pdfs.semanticscholar.org/7570/9d74059b30a0660cd48ec7e029acf1b7186b.pdf.
vi Carlson, Ann E. "Regulatory capacity and state environmental leadership: California's climate policy." Fordham Envtl. L. Rev. 24 (2012): 63.