“There’s Money in the Air: the CFC Ban and DuPont’s Regulatory Strategy”, 1997-11 ():
DuPont, the world’s dominant CFC producer, played a key role in the development of the Montreal Protocol on Ozone Depleting Substances.
We argue that DuPont’s pursuit of its economic interests, along with the political impact of the discovery of an ozone hole and the threat of domestic regulation, shaped the international regulatory regime for ozone-depleting substances.
International regulation offered DuPont and a few other producers the possibility of new and more profitable chemical markets at a time when CFC production was losing its profitability and promising alternative chemicals had already been identified.
DuPont’s organization and strategy were key to the successful leveraging of the Montreal process. For example, the Freon Division had close interaction with public officials and external groups, and benefited from the input of DuPont’s external affairs department. This positioned DuPont to exploit the situation when regulatory discussions were stepped up.
From a public policy perspective, the Montreal process offers a valuable example of harnessing diversity in industry: some producers stood to gain more from the envisioned regulations than others. Such industry heterogeneity provides frequent opportunities for coalitions of ‘the green and the greedy’, such as that between DuPont and environmental interests.Methods to encourage potential industry winners into supporting environmental initiatives deserve further attention.
…Using models and assumptions similar to those employed in a 1985 report by the World Meteorological Organization, they concluded that the growth in CFC production would cause important reductions in ozone. This would occur under almost all the scenarios tested. At the same time, EPA officials were publicly claiming that the only way to stop chlorine accumulation in the atmosphere was an immediate 85% reduction in CFC production. Aware of the changing political climate, Steed and Kevin Fay, the director of the Alliance for Responsible CFC policy, believed that strict domestic regulation was inevitable unless industry took decisive action to prevent it.
The internal DuPont assessment concluded that future production levels should be limited to their existing levels. Senior management concurred with the assessment (1989). Observers from outside the industry might have considered the proposed cutbacks as a method of shoring up prices for a poorly performing product. Nevertheless, DuPont and other producers realized that a global freeze was a first step in a transition to alternative chemicals. Customers in growing markets would not remain loyal to products if the supply was potentially unavailable. For DuPont and other producers, an international regulatory regime that capped production implied an eventual phaseout of ozone-depleting chemicals and an orderly transition to alternatives. DuPont’s decision to support international regulation was the critical moment in the more than decade long ozone depletion controversy. Underlying this decision, DuPont officials had understood the commercial implications of phasing out CFCs and shifting to alternatives. Since the late 1970s, CFC 11 & CFC 12 had not been highly profitable; DuPont had been forced to offer substantial volume discounts to large customers. In contrast, the substitutes would demand higher prices as they were inherently more expensive to produce. The development of each of the substitutes required sophisticated chemical engineering processes and capital investments of hundreds of millions of dollars. They would be marketed as specialty rather than commodity chemicals where the leading international firms could foresee substantial competitive advantages. Like other specialty chemical products, they would be characterized by low volume and high prices and profit margins would be higher because of less competition.
DuPont’s decision to support a CFC ban was based on the belief that it could obtain a large competitive advantage through the sales of new chemical substitutes because of its proven research and development capabilities to develop chemicals, its (limited) progress already made in developing substitutes, and the potential for higher profits in selling new specialty chemicals. Although some observers have speculated on the relevance of patent expiration to the decision to support a CFC ban, DuPont officials reported no such influence. The new chemical substitutes were projected to sell for 5–10× the costs of CFC 11 & CFC 12.