Manufacturers navigate tighter environmental regulation

ARTICLE | January 10, 2024

Authored by RSM US LLP

Investment in domestic manufacturing expansion has accelerated recently as a result of federal industrial policy and tax incentives.

Manufacturers are jumping on the opportunity to take advantage of federal tax credits—but they may need to consider just how much they’re willing to invest, given that some environmental compliance rules are on track to become more stringent.

Along with tightening environmental regulation and associated permitting requirements, companies face additional upfront costs, including for equipment upgrades and installation, facility assessments by environmental engineers and consultants, emissions monitoring, data management systems and employee training.

Manufacturers will need to allocate significant resources to navigate this new environment and must invest in the appropriate technology to remain competitive. There are also significant implications on the labor front; manufacturers already have a tough time recruiting and retaining workers, and new manufacturing incentives will intensify the battle for talent.

Regulatory changes

Permitting delays are not new for manufacturers, but some proposed regulatory changes are set to make the process tougher. Take, for instance, potential changes to the Environmental Protection Agency’s air quality standard rules. These would reduce the acceptable level of particulate matter, and businesses would need to prove they will not contribute to exceeding that limit. This will likely be a particularly daunting task for the manufacturing sector, and a report from the National Association of Manufacturers found that California would be most exposed to this rule update, followed by Michigan and Illinois. As we await the EPA's decision, the manufacturing sector is on edge, anticipating a paradigm shift in the regulatory landscape.

This shift may pose a particular challenge for new manufacturing projects, especially considering the recent growth in this space. U.S. construction spending continues to climb, with a 16.5% year-over-year increase from August 2022 to August 2023, according to the U.S. Census Bureau. However, nonresidential construction starts were down through the first seven months of 2023, compared to the same time frame in 2022, according to Dodge Construction Network. This decline is attributable to two main factors: a shortage of specialty labor to design and create “hyperclean spaces” that differ from typical construction projects, and ever-tightening environmental standards for land development, air quality emissions and geotechnical assessments.

Several projects have been delayed due to failure to meet environmental requirements; such delays could place manufacturers at a competitive disadvantage. A large automotive company, for instance, recently paused preconstruction clearing on a $2 billion electric vehicle plant in South Carolina due to environmental permitting delays. South Carolina also has about half the number of available workers needed for the number of current job openings, according to U.S. Chamber of Commerce data—already not nearly enough people to do the work, even before a new plant is built.

Common regulatory issues and solutions

Throughout the process of expanding manufacturing operations or constructing a new facility, industrial companies have many opportunities to mitigate challenges associated with that growth. We explore a few of these below.

• Establish early communication with regulators: Address existing concerns with regulators before the formal permitting process for expansion begins. Seek pre-application meetings to discuss project plans and requirements.
• Engage local communities: Public opposition or community concerns about projects can lead to permitting delays. It’s important to have a clear communication strategy to engage with local communities and address concerns. Transparency and proactive outreach can help build support.
• Stay updated on shifting compliance requirements: Manufacturers should stay informed about regulatory changes by regularly monitoring updates from environmental agencies. Companies should adapt their plans accordingly and work closely with legal and environmental professionals to ensure ongoing compliance.
• Start the environmental impact assessment process early: Engage environmental experts to conduct thorough assessments. Addressing potential environmental concerns proactively can streamline the permitting process.
• Understand the importance of documentation: Maintain detailed records of all communications, compliance efforts and environmental monitoring data. This documentation can serve as evidence of regulatory compliance during the permitting process.

On a more general level, companies seeking to take advantage of tax credits and not be undone by their stringent environmental requirements can tackle the challenge of mitigating potential permitting delays by using sustainable building design principles, incorporating energy-efficient technologies into the design and installing advanced air pollution control technologies. Additionally, being transparent with stakeholders about any concerns related to the project can be invaluable in the long term.

Significant investment loss is on the line for manufacturers that do not invest in addressing environmental requirements. And though manufacturers may face additional upfront costs, attention to sustainability will save in the long term.