MARGINAL DETERRENCE THROUGH AMBIENT ENVIRONMENTAL INSPECTIONS

We consider the enforcement of an environmental standard if the probabilities of inspection are determined by an inspection agency who permanently monitors ambient pollution. This monitoring creates strategic interactions between polluters, which imply that the probability of inspection is increasing in the transgression level. These interactions also imply that marginal deterrence is possible, even with penalties that are not increasing in the transgression levels.     

Incomplete Enforcement of Pollution Regulation: Bargaining Power of Chinese Factories

Only a limited number of papers haveempirically examined the determinants of themonitoring and enforcement activities performedby the environmental regulator. Moreover, mostof these studies have taken place in thecontext of developed countries. In this paper,we empirically examine the determinants of theenforcement of pollution charges in China.More precisely, we seek to identify thecharacteristics which may give firms more orless bargaining power with local environmentalauthorities pertaining to the enforcement(collection) of pollution charges. Firms fromthe private sector appear to have lessbargaining power than state-owned enterprises.Firms facing an adverse financial situationalso appear to have more bargaining power.Finally, we also show that the higher thesocial impact of a firm's emissions (asmeasured by the presence of complaints), thesmaller the bargaining power of the firms withlocal environmental authorities.     

Does a stricter enforcement policy protect the environment? A political economy perspective

The conventional wisdom suggests that a stricter enforcement policy can reduce pollution emissions. Nevertheless, this present paper argues that this assertion does not necessarily hold if the stringency of environmental regulation is subject to the influence of lobbying. A stricter enforcement policy increases the polluters’ expected financial burden, and induces them to exert greater political pressure on reducing the stringency of environmental regulation, thereby resulting in a larger amount of pollution emissions. We also show that tightening the enforcement policy can reduce efficiency. We highlight the possibility of policymaking being misguided due to overlooking the political effect of enforcement policy.     

Environmental Enforcement with Endogenous Ambient Monitoring

We consider an inspection game between n polluting firms and an environmental enforcement agency. If the cost of monitoring ambient pollution is low enough, the optimal inspection policy consists in imposing the maximal possible fine, and mixing between observing ambient pollution and not conducting any inspection at all. However, with stringent upper limits on the fine, the agency mixes between observing ambient pollution and inspecting all firms. The observation of ambient pollution is always followed by sequentially rational firm inspections. Comparisons with Franckx (2002a, Journal of Environmental Economics and Management 43, 71–92, 2002b, Topics in Economic Analysis Policy 2(1), Article 1) show that commitment power has a very strong impact on the value of prior information.     

Do stock markets penalize environment-unfriendly behaviour? Evidence from India

A growing body of research points to the fact that capital markets react to environmental news and thus create incentives for pollution control in both developed and emerging market economies. In this paper, we conduct an event study to examine the impact of environmental rating of large pulp and paper, auto, and chlor alkali firms on their stock prices. We find that the market generally penalizes environmentally unfriendly behaviour in that announcement of weak environmental performance by firms leads to negative abnormal returns of up to 30%. A positive correlation is found between abnormal returns to a firm's stock and the level of its environmental performance. These findings should be viewed as further evidence of the important role that capital markets could play in environmental management, particularly in developing countries where environmental monitoring and enforcement are weak.     

An investment contest to influence environmental policy

In an investment contest for environmental policy, polluters and victims of pollution invest in an increase of their marginal benefits of pollution and environmental quality, respectively. These investments influence time-consistent environmental policy. Investments will exceed their optimal level. The more victims there are, the lower aggregate investment, the lower payoffs for the victims and the higher payoffs for the polluters. The more polluters there are, the higher aggregate investment and the lower payoffs for polluters and victims. Asymmetries between polluter and victim result in less overinvestment and bias environmental policy in favour of the less productive side.     

The effects of air quality regulations on the location decisions of pollution-intensive manufacturing plants

This research examines the effects of the 1977 Clean Air Act Amendments (CAAA) on the location decisions of pollution-intensive manufacturing plants. We develop a panel data set to analyze plant births of polluting manufacturers over time as a function county-level attainment status of the federal standard for ozone pollution. We find that more stringent county-level environmental regulations impact pollution-intensive capital flows through deterring new plant births. We also find that the impact of stricter regulations varies by pollution-intensity of manufacturers, with results suggesting that federal guidelines have a greater impact on high pollution intensive manufacturers than more moderate polluters.      

The geographic distribution of environmental inspections

Models of the enforcement of environmental regulations regarding point source pollution suppose that the probability of inspection or audit is independent across facilities. However, there are a number of reasons why regulators may choose to inspect many sites in a particular geographic area at one time. If the probability a site is inspected also depends on its compliance behavior, the expected payoff from choosing to violate will depend upon the compliance decisions of neighboring sites, creating a game of strategic interdependence between firms. In this paper, we use a dataset of inspections at petroleum storage sites in Manitoba between 1981 and 1998 to consider to what extent inspections are spatially correlated and whether inspection probabilities are a function of the inspection and violation history of the site and its neighbors. Further, we examine to what extent firms take into account whether their neighbors have been previously found in violation in determining compliance.     

The effect of EPA enforcement funding on private-sector pollution-control investment

The paper estimates the effects of the US Environmental Protection Agency (EPA) enforcement budget upon the demand for pollution-control equipment in the private sector. There are two possible effects. A direct effect occurs when the enforcement budget is used for inspections that result in enforced compliance requiring additional pollution control equipment. A second effect is anticipatory, and arises from the private sector's objective of minimizing expected costs due to fines imposed by the EPA for infractions of pollution-control requirements. This component of demand depends, in part, on the EPA enforcement budget. We find that increases in the EPA budget increase the demand for pollution-abatement equipment. This in turn implies that increases in the EPA enforcement budget have been effective in mitigating pollution.     

Airing Your Dirty Laundry: A Quick Marketable Pollution Permits Game for the Classroom

In this article, the authors describe a simple classroom game that demonstrates the advantage of tradable emissions permits in regulating environmental pollution. Students take on the role of polluters who must consider the costs of complying with a uniform reduction and a tradable permits program. The class is divided into high-cost polluters and low-cost polluters so students can observe the gains from trade as high-cost students purchase pollution rights from the low-cost students in the tradable permits scenario. A major advantage of the game is that it can be conducted within as little as 20 minutes and does not require that students have prior knowledge of economics or regulatory policies. This makes the game appropriate for economics and noneconomics courses alike.     

“Cleansing the air at the expense of waterways?” Empirical evidence from the toxic releases of coal-fired power plants in the United States

Environmental policies in the United States have primarily taken the form of media-specific regulations that emphasize end-of-pipe pollution control. This can lead to the shifting of pollution across environmental media, thereby having the potential to solve one environmental problem by creating a new problem. This study uses data from 228 coal-fired power plants that report to the Toxics Release Inventory to conduct an empirical examination of the extent to which media-specific regulation has caused power plants to shift their toxic air releases to waterways, land, or transfers for offsite recycling facilities. Controlling for plant-level fixed effects, scale of production, and environmental inspections and enforcement under air regulation, this study finds that adopting tougher air pollution regulation that designates counties as being in nonattainment status with the National Ambient Air Quality Standards significantly increased toxic releases to waterways and land.     

Impact of government-sponsored pollution prevention practices on environmental compliance and enforcement: evidence from a sample of US manufacturing facilities

A two-way fixed effects Poisson model is used to investigate the impact of 43 EPA-sponsored pollution prevention (P2) practices on compliance and enforcement for a sample of facilities in the US manufacturing sector. I find that P2 adoption reduces environmental violations in three industries while increasing violations in two others. P2 adoption also spurs fewer enforcement actions in three industries. I further partition the P2 practices into three categories based on their approach to improve environmental performance. In doing so, I find that practices that involve changes in operating procedures—about a third of adopted P2 practices—such as instituting a self-inspection and monitoring program to discover spills or leak sources, improving maintenance scheduling and/or labeling procedures, are effective in reducing violations while practices that involve equipment or material changes are not. I also find that adopters of practices that require changes in either procedures or manufacturing equipment—about half of adopted practices—are rewarded with a more cooperative treatment of environmental infractions with fewer enforcement actions.     

Hybrid Carbon Incentive Mechanisms and Political Acceptability

This paper analyses how hybrid systems of carbon taxes and tradeable permits optimize some conflicting dimensions of political acceptability related to the design of these instruments. Pure systems like taxes without exemptions or auctioned tradeable permits cause problems for political acceptability in open economies due to high overall costs (abatement cost plus payments on the tax or auctions) for current polluters. Unfortunately, pure systems based on grandfathering of emission rights across the board do not provide a feasible alternative because of monitoring and enforcement problems. In contrast, consciously designed hybrid systems employ grandfathering of emission rights together with either carbon taxes or auctioned carbon permits in order to overcome acceptability problems of pure systems, while leaving incentives to reduce emissions at the margin untouched. Moreover, monitoring and enforcement costs of the hybrid systems are less due to the lower number of participating agents compared with the pure systems, while opportunities for cost- or burden-sharing exist as well.     

Assessing the Impact of Formal and Informal Regulations on Environmental and Economic Performance of Brazilian Manufacturing Firms

This study investigates the impact of formal and informal regulations on environmental and economic performance of Brazilian manufacturing firms. We adopt a dual approach where production technology is represented by a cost function, approximated by a translog form. Pollution is considered as a negative by-product that can be modified trough using either formal regulation (inspections or sanctions) or informal regulation (community pressure). A simultaneous equation model is estimated by three-stage least squares on a sample of 404 industrial establishments located in the state of S?o Paulo, Brazil. We show that pollution abatement costs for the Brazilian manufacturing sector are different from zero which suggests that pollution emissions are affected by environmental regulation. We also demonstrate that environmental performance of firms is jointly affected by formal and informal regulation. Lastly, formal regulation is largely influenced by informal regulation and more specifically by community pressure.     

Externalities in a spatial context: The case of air pollution

In this paper air pollution externalities are analyzed in an explicit spatial setting that recognizes the spatial interdependence of polluters and their victims. Optimal environmental policies are shown to consist not only of Pigouvian taxes but of two other policies. First, regulations controlling the allocation of land between polluters and victims are needed. Secondly, if pollution taxes are imposed by local governments, in general it will be necessary for the federal government to take some of the tax proceeds and redistribute them amongst localities. For example, some of the proceeds in heavily taxed and polluted communities may have to be redistributed to lightly taxed and polluted communities.     

Community-Based Tradable Permits for Localized Pollution

This paper considers the assignment of tradable permits—representing property rights of an environmental good—to community members who are harmed by pollution generated by firms. These community members can in turn sell permits to polluters according to their personal preferences. For a special case with a sole household, market transactions between the household and polluters achieve an efficient pollution level. However, for a group of households, the decentralized market solution fails to yield social efficiency because of competitive consumption of the environmental goods. We design a revenue-sharing mechanism akin to unitization, under which market transactions also achieve efficient resource allocation. Importantly, in some cases, efficiency can be achieved even when regulators are ignorant of the private valuation of the environmental good.     

Learning about compliance under asymmetric information

Over time, inspection agencies gather information about firms’ pollution levels and this information may allow agencies to differentiate their monitoring strategies in the future. If a firm is less successful than its peers in reducing emissions, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high-abatement cost firms to mimic low-abatement cost firms by choosing lower emission levels, while the latter might try to avoid being mimicked. We explain firms’ compliance decisions and the inspection agency's monitoring strategy by means of a signaling game which incorporates dynamic enforcement and learning. Interestingly, we show that the ongoing signaling game between firm types might lead to firms over-complying with the emission standard.     

Stock externalities and the diffusion of less polluting capital: an option approach

In this paper, the diffusion of less polluting capital in response to a stock externality is investigated. An economy is considered with identical polluted agents and a continuum of polluters who have the ability to invest in less polluting capital units. The option approach of investment decisions is used to justify environmental policies based on pollution thresholds and emission standards. The dynamics of optimal diffusion is first examined. The design of a suitable emission tax is then considered and some cases of tax inefficiency are detailed in the context of a game between symmetric polluters. The model is finally applied to greenhouse gas accumulation.     

Pollution abatement with limited enforcement power and citizen suits

Federal environmental laws in the U.S. can be enforced by government agencies or by private parties through citizen suits against polluters. Here, I extend the standard enforcement model to examine the role played by citizen suits. The main results from the paper suggest that in a model with limited enforcement power and citizen suits the regulator fully exercises his enforcement power when the expected penalty from a citizen suit is low, but increases his reliance on citizen suits as the expected penalty rises. Whether an enforcement regime that allows private enforcement is efficient depends not only on the relative costs of private and agency enforcement, but also on the changes in inspection costs that may be caused by private enforcement and the expected penalty from losing a citizen suit. These results suggest that in practice private enforcement may lower social costs as long as relatively inexpensive agency enforcement options, such as administrative proceedings, do not preclude citizen suits.      

Lessons from Environmental Regulation for the Nonprofit Sector

As the third sector's economic and social impact grows worldwide, efforts by governments to regulate the sector have focused on increasing compliance in tax–exempt organizations. This article turns to the environmental sector for guidance, summarizing key characteristics of environmental regulation and noting what strategies are likely to prove useful for application to regulation of nonprofit organizations. The article finds some value in promotion of market–based enforcement schemes, but little value in promulgation of laws specifying governance structures and performance standards by a central authority. The most promising opportunity for improvement of the nonprofit regulatory process involves incorporation of financial incentives into monitoring schemes.