Incentives for Pollution Control: Regulation or Information?

Jérôme Foulon Paul Lanoie Benoît Laplante Journal of Environmental Economics and Management, 2002

Key Contribution „ Present empirical evidence that the public

disclosure of environmental performance does create additional and strong incentives for pollution control.

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New contribution „ When analyzing environmental performance of firms, previous

empirical analysis focused exclusively on either: „ Impact of traditional monitoring and enforcement or Impact of public disclosure programs

This paper contains results from empirical analysis of the impact of both traditional enforcement and information strategies. Consistent with previous findings that information matters in the provision of public goods as demonstrated in experimental economics.

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Hypothesis „ Once a regulatory agency pursues court

actions, fines, and penalties against a firm for noncompliance of emission standards, is there still a role for public disclosure? „ Can public disclosure create further

incentives for pollution control?

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Current Literature „ Inspections reduce emissions by pulp and

paper plants [Magat 1990, Laplante 1996], and steel industry [Gray 1996] and industrial environmental performance in China [Dasgupta 2001]. „ Disclosure reduces emissions. [Hamilton

1995,Konar 1996, Joshi and Sidique 2004]

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Method „ Two enforcement strategies

Traditional (inspections, fines, penalties) „ Emerging (information and public disclosure) „

„

Using generalized least-squares (GLS) procedures, this paper provides insight on the relative importance of the two strategies.

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Context „ Canada produces one-third

of the world’s pulp and paper. „ 23 pulp and paper plants located in British Columbia account for 30% of Canadian production. „ Pollution attributed to emissions of biological oxygen demand (BOD) and total suspended solids (TSS) „ In 1990 Government of British Columbia required discharge permits requiring plants to use secondary wastewater treatment. 7

BOD Effluent Standards (kg/ton) Location of Plant

Time Period

Coastal

Before 1991 30

As of 1991 7.5

All others

7.5

7.5

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New Regulatory Action „ In 1990, the Ministry of the Environment

(MOE) released list of pulp and paper plants not in compliance with emission standards. „ Maximum fine increased from $50,000 to $3 million. „ MOE publicizes twice a year a list of plants by name that are not in compliance.

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Model to explain pollution „ Pollution = f( Regulation, Enforcement, Public Disclosure, X)

where X is a vector of plant control variables.

„ Data Set „ „ „ „ „

15 pulp and paper plants Time period 1987 – 1996, 10 years Cross-sectional and time series – panel data Table III lists definition, means, standard deviations of variables (see handout) I will focus remaining presentation on the analysis of the dependent variable: absolute level of BOD. 10

Explaining BOD emission reduction

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BOD emissions (kg/ton) Year

BOD Percent reduction

BOD Limit Difference between (Standard) emission and limit

1987

24

16*

8

1991

12.5 50%

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-3.5

1996

2

7.5

-5.5

84%

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Selected coefficients Variable

Coefficient T-statistic

Interpretation

(coefficient / standard error)

-2.149**

For each additional listing average BOD loadings reduce by 1241 kg/ton.

-5.138**

Difference in average BOD loadings with new regulation and without regulation, all else constant.

-44

-0.484

For each additional prosecution a firm faces Average BOD decline 44 kg/t

-1608

-1.877*

Difference in average BOD loadings when a fine is imposed and without a fine, all else constant.

Listing as out of -1241 compliance (count)

New Regulation -4419 (dummy)

Prosecution (count)

Fine (dummy)

**statistically significant at 10%, *statistically significant at 5% Mean BOD loadings is 1048 kg/ton. Definition of variables see Table III in handouts. Full set of regression results see Table IV in handouts. 13

Relative importance „ Listing (public disclosure) and fine (traditional

strategy) both are statistically determinants of the level of pollution. Both coefficients have the expected negative sign. „ “the coefficients on the FINE variable are

larger than those of the out of compliance, but not significantly as indicated in Table IV.”

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Conclusion „ The presence of clear and strong standards

with credible penalties send appropriate signals to regulated community. „ Public disclosure of environmental

performance creates additional and strong incentives for pollution control.

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Application to AEC 923 and future research „ Information matters „ Disclosure of contribution to a public good „ Compliance of environmental standards „ Investigate if the explanatory variables used in this

model are subject to nonstationary trends. Clive Granger demonstrated that the statistical methods used for stationary time series could yield wholly misleading results when applied to the analysis of nonstationary data.

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