Voluntary Environmental Agreements when Regulatory Capacity is Weak
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Voluntary Environmental Agreements when Regulatory Capacity is Weak1 ALLEN BLACKMAN1, THOMAS P LYON2 & NICHOLAS SISTO3 1
Resources for the Future, 1616 P Street, N.W., Washington, DC 20036, USA. E-mail: [email protected] 2 Stephen M. Ross School of Business, University of Michigan, 701 Tappan St., Ann Arbor, MI 48109, USA. E-mail: [email protected] 3 Department of Economics, Instituto Tecnolo´gico y de Estudios Superiores de Monterrey, Ave. E. Garza Sada 2501 Sur C.P. 64849, Monterrey, NL, Mexico. E-mail: [email protected] Voluntary agreements (VAs) negotiated between environmental regulators and industry are increasingly popular. However, little is known about whether they are likely to be effective in developing and transition countries where local and federal environmental regulatory capacity is typically weak. We develop a dynamic theoretical model to examine the effect of VAs on investment in regulatory infrastructure and pollution abatement in such countries. We find that under certain conditions, VAs can improve welfare by generating more private-sector investment in pollution control and more public-sector investment in regulatory capacity than the status quo. Comparative Economic Studies (2006) 48, 682–702. doi:10.1057/palgrave.ces.8100189
Keywords: voluntary environmental regulation, developing country JEL Classifications: p26, Q2
INTRODUCTION The conventional approach to industrial pollution control is to establish laws requiring firms to cut emissions. Voluntary regulation, by contrast, provides incentives – but not mandates – for pollution control. In industrialised countries, such regulation has become quite popular over the past two decades (OECD, 1999, 2003). Environmental authorities in developing 1 Senior authorship is shared equally between the first two authors. We thank the editor and two reviewers for their helpful comments and suggestions.
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countries, particularly those in Latin America, have also embraced voluntary regulation and are rapidly putting new programmes in place. For example, in Colombia, over 50 voluntary agreements (VAs) between environmental authorities and industrial associations were signed between 1995 and 2003 (Lara, 2003). And in Mexico, ten such agreements involving over 600 firms were signed during the 1990s (Hanks, 2002). Although voluntary environmental programmes in industrialised countries and those in developing countries share many features, their objectives are generally different. In industrialised countries, regulators typically use voluntary programmes to encourage firms to overcomply with mandatory regulations, or to cut emissions of pollutants for which mandatory regulations do not exist. In developing countries, by contrast, regulators generally use them to help remedy rampant non-compliance with mandatory regulation (Blackman and Sisto, in press). The broad reason for widespread non-compliance with mandatory regulation in developing countries is well known: infrastructure
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