Table of Contents

  • This is an assessment of the economic impact of the proposed new chemicals legislation in the European Community, the Registration, evaluation and authorization of chemicals (the REACH proposal).

  • REACH, the European Union's proposed chemicals policy, is the subject of ongoing controversy -- focusing in particular on its potential costs. This study provides a bottom- up recalculation of the expected costs of the current (October 2003) version of REACH, estimating an 11-year total direct cost of €3.5 billion. A proposed variant, “REACH Plus,” would restore some features of a previous version of REACH, while increasing the total direct cost only to €4.0 billion. The annual cost is around 0.06% of the chemical industry's sales revenue. Two standard economic models imply that total (direct plus indirect) costs should be no more than 1.5 – 2.3 times the direct costs. Economic analysis confirms that costs of this magnitude are unlikely to harm European industry, while several studies have suggested that the health and environmental benefits of REACH will be substantial.

  • REACH, the European Union’s proposed new chemicals policy, is an important new development in environmental protection. Rather than waiting for government or independent researchers to determine that chemicals are hazardous, REACH will make manufacturers, importers, and professional users responsible for providing evidence that chemicals are being used safely.

  • REACH is not being proposed in a regulatory vacuum. Europe already has an extensive system of chemical regulations; REACH will replace many regulations that are currently in force. The costs attributable to REACH, therefore, consist of the increase in regulatory costs when REACH takes effect, not the total costs of all European regulations related to chemicals. In this section, we compare the baseline of regulations currently in force, the October 2003 draft of REACH, and a new "REACH Plus" proposal, which would strengthen some key regulatory provisions.

  • Government agencies, independent consultants, and industry sources have developed estimates of the likely magnitude of direct costs resulting from REACH. We review these estimates briefly below, and then explain our own calculations. In each approach, there is broad agreement that the total estimated direct costs are a tiny fraction of annual sales revenues in the chemicals industry. As we will discuss in later sections, the large differences between government- and industry-sponsored studies of the total costs of REACH result not from their minor differences in estimates of direct costs, but rather from enormous differences in their analyses of indirect costs.

  • What will be the economic impacts of the increased cost for registration and testing of chemical substances under REACH or REACH Plus? On the one hand, prices of chemicals will increase and sales of chemicals will presumably decrease. This section examines the conventional economic effects of a price increase. On the other hand, many other pathways have been suggested whereby REACH might also cause economic harm, beyond the ordinary effects of price changes. Those other effects are discussed in the next section.

  • Estimates of the costs of REACH fall into two groups. Studies sponsored by industry groups have frequently found that the costs will be enormous, potentially devastating the European economy. Other studies have frequently found that the costs will be quite small, similar to the estimates presented in the previous section. This section considers the economic arguments presented in the industry studies, exploring the causal pathways that are said to lead to enormous costs. Although the industry studies raise important issues that deserve discussion, they ultimately fail to make the case that immense economic damage will result from REACH.

  • Although the costs of REACH will be much lower than many critics have suggested, there still will be costs. These costs are incurred in order to achieve the benefits of REACH, including both direct health and environmental benefits and indirect economic benefits. A full assessment of the benefits of REACH is beyond the scope of this report; here we briefly mention two analyses that conclude that the benefits far exceed the costs, and draw on US experience to suggest that there are important benefits for downstream users.

  • To find the total costs to industry of complying with REACH and REACH Plus, we estimate a cost per substance for testing and registration in each volume tier, and multiply this by the total number of chemical substances expected to be affected. Here we describe the details of our calculations and the judgements we have made in developing them. We focus first on the costs of complying with REACH; the calculation of costs for REACH Plus requires just a few additional adjustments.

  • This model, as discussed in Section 4 of the text, assumes that the chemical industry represents a single market; we analyze the response of that market to a cost increase that shifts the supply curve upward, following standard microeconomic theory. As shown in Figure 4.1 in the text, the equilibrium price and quantity before the cost increase are P0 and Q0 respectively, while the new equilibrium price and quantity after the increase are P1 and Q1. The industry’s total sales revenue is P0Q0 before the increase, and P1Q1 after the cost increase is in effect.

  • At 205 pages, the original Arthur D. Little (ADL) study for BDI is by far the most extensive industry-oriented critique of REACH, and offers the most detailed case for huge cost estimates. Later ADL studies use the same methodology without repeating its explanation. Mercer’s similar-sounding studies for French industry may have used the same methodology, although it is impossible to tell from the Powerpoint summaries, which are all that Mercer has released to date. Thus in understanding the methodology of the industry-sponsored studies that yield huge cost estimates, there is almost nowhere else to turn. The discussion here focuses on the intermediate or ”Storm” scenario, the most widely discussed set of results from the ADL model.