Looking Back to Look Ahead: A Voluntary Approach to Environmental Regulations

Introduction

Environmental thinking has come a long way in the past 25 years. Vast strides have been made in increased awareness combined with increased knowledge and acknowledgment about environmental issues such as climate change. This has been at the level of NGOs, communities, and governments as they frame policies to protect the environment. This is not to say that there have not been dramatic and costly reversals in policy in the name of politics and economics such as the current US policy with respect to climate change. Nevertheless, great progress has been made. Perhaps, the greatest strides have been made by consumers as they buy organic products, sustainably designed clothing, electric cars, as well as resort to renewables where possible for their energy needs to minimize their carbon footprint. Increasingly, companies have made huge commitments to incorporate environmental values into their products. Many large companies have dedicated Corporate Responsibility Programs that incorporate these values into their product lines. This is now the norm rather than the exception. Though there are many advances to be made, the world looks a lot better in terms of action in 2017.

This section revisits some of the regulatory developments that facilitated this change in thinking and action. In 1988, the chief issue was toxic emissions that were spewing unchecked from industrial facilities and impacting the health of communities. The Bhopal tragedy in India resulted from a chemical disaster in a Union Carbide facility. This was one of the worst industrial accidents affecting and maiming several thousands from harmful chemicals. While there was momentum building to pass laws against the recurrence of such events at the State level in the United States, the events in Bhopal catalyzed and culminated in the passing of the federal US Emergency Planning and Community Right-to-Know Act in 1988. This act required all manufacturing facilities in the United States to make public their releases of over 320 chemicals into the air, land, and water. This meant that for the first time, companies could be tallied against each other in terms of emissions. After the first release of the Toxics Release inventory data in 1990, an environmental NGO ran a full page advertisement in the New York Times identifying the top ten polluters of toxic emissions. This alarmed the CEOs who now scrambled for what they should do next. They approached the USEPA administrator, William Reilly, on how they could make amends. In some cases, the CEOs said they were unaware that they were polluting so much, in other cases they wanted to amend their actions. This led to the birth of the first voluntary partnership of the regulator with the industry. The 33/50 program was born whereby companies volunteered to reduce their emissions of 17 high-priority toxics by 33% by the end of 1992 and 50% by the end of 1995.

Economics of pollution

During this time, conventional economics suggested that firms would do the minimum when it came to meeting environmental standards since environmental quality was a public good. Economists had scoffed at the idea that companies would go beyond the law when it came to environmental standards. As Alan Blinder wrote, “…if the law allows a company to emit 500 pounds, the company has no incentive to reduce it to 499 pounds.” However, some anecdotal evidence was coming from industry which claimed the contrary. Companies and industry groups were claiming to reduce pollution and emissions beyond what was warranted by law. While this evidence was sketchy, it came from within the industry—3M’s Pollution Prevention Pays, Chevron’s Save Money and Reduce Toxics, and others.

As information on environmental behavior was becoming more public and accessible, companies were beginning to go beyond the law and claiming they were doing so. It is with this backdrop and context that the Arora and Gangopadhyay (1995) paper was written. The paper set to use traditional economics to explain why firms might want to go beyond mere compliance. For this, we modeled environmental preferences as preferences for quality. Firms participate in a two- stage duopoly game: in the first stage, they choose the level of cleaning technology. In the next stage, they engage in price competition. All consumers prefer a cleaner environment (higher quality of the environment) but differ in their marginal utilities of income. In the first stage, firms decide on the emission technology, and in the second stage they compete on price. Product positioning is then achieved through this two stage game. In equilibrium, the market is segmented with the richer consumers buying the environmentally cleaner product.

The paper established that there are incentives to over-comply with regulations in a framework where there are minimum binding standards, and consumers differ in their marginal utilities of income. Even with minimum standards, the companies have an incentive to differentiate their products and capture the richer consumers who can better afford a clean environment. We postulated that where consumers are well informed, companies differentiate their products by environmental branding to capture market segments with richer customers buying more environmentally friendly products. We made the leap of faith that environmentally friendly products would and could command a premium in the market. For example, electric vehicles could command a premium in the market, because it was a cleaner product and richer consumers would be willing to pay a higher price for this product. Tesla was born in 2003 with the mission of accelerating the world’s sustainability in transportation.

Arora and Cason (1995, 1996) examined and evaluated USEPA’s first voluntary partnership with industry. This led to important work examining how these incentives actually worked in the context of design of regulations and how voluntary actions can be induced from larger and more polluting players. This research helped evaluate the basis of the design characteristics that formed a new approach to regulation. The two papers examined how incentives to over-comply with regulation can be harnessed. The results of this evaluation were used to design a suite of voluntary programs that were sweeping in their coverage—including the now ubiquitous Energy Star Program, the Green Lights program and finally the Green dry-cleaning program.

Participation in the program was a proxy for over-compliance. Large polluting firms were most likely to participate in the program. Industries with greater interface with consumers, were also likely to participate, as were companies with greater R&D. We also looked at how these companies performed with respect to mandatory regulations under, for example, the Clean Air Act to see if these companies were going beyond the law in the meeting of environmental standards.

Conclusion

The lessons of the work summarized here are as important for the current impasse on climate change as they are for toxics. We are now faced with a similar situation of lax or scaled back mandatory standards, though awareness has increased and the majority recognizes the perils of climate change. The scaling back of regulations in the US is by no means a desirable state. In fact, it has pushed back the effort of companies. Having said that, there might be hope in the form of voluntary over- compliance as the lessons of over-compliance with toxics may be relevant for the current fight against climate change. There may be a light at the end of the tunnel if firms can strengthen their commitment and resolve to tackle climate change whether there is regulation or not. Information-based regulations can further help encourage voluntary over-compliance creating a competition in the creation of environmental quality. There is already a strong commitment from former New York mayor Bloomberg and California governor Jerry Brown to continue the fight against climate change by using voluntary pledge reductions.

References

Arora, S., and S. Gangopadhyay. 1995. Toward a Theoretical Model of Voluntary Overcompliance. Journal of Economic Behavior and Organization, 28(3): 289–309.

Arora, S., and T.N. Cason. 1996. Why do Firms Volunteer to Exceed Environmental Regulations? Land Economics. Selected for publication in Corporate Strategies for Managing Environmental Risk (Bernard Sinclair-Desgagné, editor) 2004. Citations: 619.

Arora, S., and T.N. Cason. 1995. An Experiment in Voluntary Environmental Regulation: Participation in EPA’s 33/50 Program. Journal of Environmental Economics and Management. Selected for re-publication in The International Library of Critical Writings in Economics: Recent Developments in Environmental Economics (2004).

Blinder, A.S. 1987. Hard heads, soft hearts. Addison Wesley Publishing Company, Inc.

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