Anthony Heyes

Implementing Environmental Regulation: Enforcement and Compliance

The last three decades have seen the emergence of environmental regulation as a major activity of governments in the United States and elsewhere. As the stringency of those regulations has increased so too has the incentive for non-compliance and the need to enforce. It is obvious that enforcement issues matter in designing and appraising any regulatory regime. Cost-benefit evaluation of a particular piece of regulation which implicitly assumes full compliance is likely to be misleading if ‘slippage’ generically occurs during implementation particularly if that slippage is substantial. Of course true compliance rates with regulatory requirements are often, by their nature, difficult to know with any certainty. Published government statistics need to be interpreted with care. ‘Compliant’ is almost always the default categorization such that a polluting source being deemed compliant means only that the agency has failed to demonstrate non-compliance. (This can be a very different thing a 1979 report

Regulatory dealing - revisiting the Harrington paradox

Abstract Despite the fact that (i) when the EPA observes regulatory violations it rarely pursues the violator and, (ii) the expected penalty faced by a violator who is pursued is small compared to the cost of compliance, it is still the case that, (iii), firms comply a significant portion of the time. Winston Harrington (Harrington, W., 1988. Enforcement leverage when penalties are restricted. Journal of Public Economics 37, 29–53) provides a dynamic model consistent with this apparent paradox. We offer an alternative rationalisation in a model of “regulatory dealing” in which the agency uses tolerance in some contexts to induce increased compliance in others. The observed tolerance of the EPA to non-compliance may be a strategic response by the agency to a difficult enforcement environment rather than evidence that it has “gone soft” on pollution or been captured by industry interests. We use the model to consider the impact of the growing trend towards citizen suits and NGO enforcement of regulation, arriving at some unconventional conclusions. We argue that the model is consistent with existing empirical analyses.

Environmental Regulation by Private Contest

Abstract It is widely expected that the recent trend (in the US, EU and elsewhere) towards an increased role for private agents and agencies in the formulation and enforcement of environmental regulation will continue. If environmental regulation is to be “privatised” in this way it is natural to ask how far the activities of environmental groups, on whose shoulders much of the responsibility for defending the environment is likely to fall, should be subsidised or taxed. In this paper we identify the trade-offs involved and characterise the optimal subsidy/tax. The analysis is argued to have significant implications for how governments should think about the way in which fiscal law treats environmental NGOs.

The law and economics of the environment

This outstanding book focuses on how economics can contribute to the design, implementation and appraisal of legal systems that create the ‘right’ incentives for environmental protection. The sixteen original and specially commissioned contributions – written by some of the leading names in their field – span many of the important areas of contemporary interest and employ case study material combined with theoretical, empirical and experimental research.

Expert Advice and Regulatory Complexity

Ex-regulators often enjoy lucrative periods either working for, or selling advice to, the industry they previously policed. Conventional wisdom is that such jobs are rewards for earlier favors and indicate capture of the regulator by the industry. In the model here, successive generations of regulators maintain an excessively opaque “regulatory interface”. The opacity underpins their post-regulatory employability and has, we will argue, a self-sustaining character. The analysis points to a causal link between the phenomenon of the revolving door, the oft-alleged over-complexity of regulatory practices and procedures, and resistance to their reform. The industry can be said to have been “captured” by the regulator. Cooling-off periods may or may not be useful in mitigation.

Corporate Lobbying, Regulatory Conduct and the Porter Hypothesis

Michael Porter, the influential Harvard management guru, has promoted the idea that compliance with stricter environmental regulations can afford ‘secondary’ benefits to firms through improved product design, innovation, corporate morale and in other ways. Once these secondary benefits are factored, the net cost of compliance is argued to be lower than conventionally thought and may even be negative. Whilst environmental economists have rejected the ‘Porter Hypothesis’ as being based on excessively optimistic expectations of the likely size of such secondary benefits the underlying ideas do enjoy significant credence in the business community. In the context of a lobbying model of regulatory policy-making we argue that the EPA should change the way it conducts regulatory policy to take account of Porters views – even if it knows those views to be misguided. The model serves to illustrate the more general point that ‘fashions’ in management thinking can be expected to impact the optimal conduct of regulatory policy.

Social Labeling by Competing NGOs: A Model with Multiple Issues and Entry

In many settings firms rely on nongovernmental organizations (NGOs) to certify prosocial attributes embodied in their products. We provide a model of competition between NGOs in the provision of labeling services. Competition between a fixed number of NGOs features a “race to the top” in labeling standards, but entry of NGOs offering new labels pushes standards down. In a wide range of settings NGO entry and competition results in too many labels being adopted, with each label being too stringent. Compared to a setting in which firms can credibly communicate the social attributes of their products, labels demand greater prosocial behavior than is desired by firms, although with proliferation of the number of labels this discrepancy disappears. In contrast to existing models, firms may engage in excessive corporate social responsibility when they rely on an NGO as a certifying intermediary. This paper was accepted by Bruno Cassiman, business strategy.

Capping Environmental Liability: The Case of North American Nuclear Power

The liability of operators of nuclear power stations for off-site damage done by accidents is capped by the Price-Anderson Act in the U.S. and the Nuclear Liability Act in Canada. Such capping constitutes a subsidy to nuclear vis-á-vis other sources of energy. We report the results of analyses aimed to estimate the size of that implicit subsidy.

Towards an efficiency interpretation of regulatory implementation lags

Regulatory agencies are often legally obliged to use a cost-benefit rule in revising environmental standards to reflect improvements in pollution-control techniques, but have considerable discretion over the timing of such revision. How should the agency use this discretion? Longer lags tend to encourage more intense R&D effort by the regulated industry itself whilst discouraging parallel effort by external developers. Optimal implementation lags are characterized. The analysis calls into question the conventional view that “footdragging” by agencies is necessarily evidence of incompetence or regulatory capture. More generally, whether or not subject to conscious manipulation by regulatory agencies, the delays routinely observed in implementation may enhance welfare.

Optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage

In many industries firms affect the environment in two distinct types of ways. Firstly they emit routine, anticipated volumes of “flow pollutants”, secondly they can potentially inflict catastrophic environmental damage, liability for which may be overhanging or limited by the law. Operaters of chemical plants, nuclear power stations and oil tankers are three examples. If an emissions tax or charge is to be levied on the flow pollutants in these cases how should it be set? We use simple dynamic-programming techniques to characterise second-best optimality. We identify contexts in which the tax should be raised above its Pigovian level to take account of the catastrophic potential, and others where it should be set below that level. The analysis has significant implications for how policymakers should go about calibrating “ecological taxes” in a number of high profile industries.