Final Report: Tracking Deterrent Messages in Environmental Enforcement

EPA Grant Number: R828827
Title: Tracking Deterrent Messages in Environmental Enforcement
Investigators: Kagan, Robert A. , Gunningham, Neil , Thornton, Dorothy
Institution: University of California - Berkeley , Australian National University
EPA Project Officer: Lee, Sonja
Project Period: June 6, 2001 through May 31, 2003
Project Amount: $349,981
RFA: Corporate Environmental Performance and the Effectiveness of Government Interventions (2000) RFA Text |  Recipients Lists
Research Category: Economics and Decision Sciences

Objective:

The objective of this research project was to answer the following questions:

(1) When severe legal penalties are imposed against a violator of environmental laws in the contemporary United States, do other companies in the same industry actually learn about such “signal cases”?

(2) Does knowing about “signal cases” or other “general deterrence messages” change firms’ compliance-related behavior?

(3) How important is the threat raised by general deterrence, compared with other factors, in inducing legal compliance?

Regulatory enforcement officials and scholars generally assume that “general deterrence” is crucial to achieving compliance with environmental legal requirements. The assumption is that the imposition of large legal penalties sends a “deterrence signal” that reverberates through the community of regulated firms, increasing the perceived cost of noncompliance and inducing commensurate investments in compliance.

Summary/Accomplishments (Outputs/Outcomes):

First, we identified a population of “penalty cases”, based on press releases (n =112) issued by the U.S. Environmental Protection Agency (EPA), between January 2000 and June 2001. Second, we selected a stratified random sample of 40 such press releases and searched news media databases to determine the breadth of coverage the media accorded these cases. Third, for 8 of those 40 signal cases (see Table 1), we identified a random sample of firms in the same industry and state as the company penalized. For each of the firms in the random sample, we telephoned the “person responsible for environmental compliance.” Officials in 233 facilities agreed to be interviewed, a response rate of 80 percent. The interviews sought to determine whether respondents could identify the recent “signal case” in their state and industry and also explored their knowledge of other environmental enforcement actions. In addition, we asked managers whether hearing about a fine or prison sentence involving another company in their industry had ever induced them to improve their facility’s environmental performance and, if so, in what ways.

Further research involved longer indepth interviews with officials in two of the eight industries—17 chemical manufacturing facilities and 17 electroplating facilities in the States of Washington and Ohio. These interviews explored how salient general deterrence messages were—as compared with specific deterrence, social pressures, and normative beliefs—in shaping facilities’ environmental behavior.

Media Coverage of the Signal Case

Despite their seriousness, the 40 “signal cases” we selected from EPA press releases generally did not get widespread publicity in the news media. Only 10 of the press releases received “wide” media coverage (16-145 stories) and 14 cases received “low” media coverage (0-6 stories). The apparent threshold for obtaining wide media attention was an unusually large fine (in excess of $4 million) or an unusually long jail sentence (e.g., 17 years), which occurred in only one case.

How Loud the Deterrent Message? Firms’ Knowledge of Legal Penalties Against Other Firms

When a vignette modeled on a specific “signal case” was described to representatives of other firms in the same industry, only 42 percent of 233 respondents recognized and remembered the case.

General deterrence does have a cumulative effect, however, on the consciousness of regulated companies; 89 percent of our respondents remembered at least one instance of some company having been penalized for an environmental violation in the past 1 or 2 years, and 71 percent could describe at least one particular example of a person or business being penalized for an environmental offense.

Nevertheless, respondents’ knowledge of such penalty cases was limited. Respondents report having heard of far fewer fines than actually occur and tended to remember only those with unusually large financial penalties and/or cases where someone was sentenced to jail. Moreover, when the signal cases were presented as hypotheticals, respondents overwhelmingly underestimated the actual penalties. A significant minority could not recall any particular instance of a penalty against an individual. Thus, although respondents generally were conscious of the possibility of a significant penalty, they did not make special efforts to obtain timely and accurate information in that regard.

Perception of Legal Risk

Most respondents did believe that serious infractions, such as those described in the signal case, would be detected; the median estimate of likelihood of detection was 70 percent. Moreover, respondents generally felt that if a serious infraction resembling the signal case was detected, the offending company would be penalized. A majority of respondents, however, did not think an individual owner or operator would be fined personally, and 53 percent of respondents believed that the chance that an owner or operator would be incarcerated for a serious environmental infraction was 10 percent or less.

When given a hypothetical scenario modeled on the signal case, many respondents (68/223) could offer no estimate of the magnitude of the likely company fine. For those that guessed, 68 percent of respondents underestimated the fine actually imposedby an order of magnitude, while 4 percent overestimated the fine by an order of magnitude. After being told the actual penalty in the signal case, however, 85 percent of respondents felt that the punishment in the case was reasonable. Among the other 15 percent, 60 percent felt that the punishments were too lenient. These findings suggest considerable support for tough legal sanctions against firms that have committed serious violations.

Interestingly, there was no strong statistical association between greater recollection of enforcement actions against other firms and respondents’ perceptions of the risk of detection and punishment.

Compliance-Related Behavior

A majority of companies (65%) reported increased compliance-related activity in some way after hearing about a fine or prison sentence at another company. The most commonly reported responsive action (57% of respondents) was to review existing environmental control programs. Twenty-three percent, however, changed their employee training, and 32 percent reported having changed equipment, suggesting that a substantial fraction of facilities respond in potentially expensive ways to environmental enforcement actions taken against other firms.

What distinguishes firms that report environmental actions in response to deterrence messages from firms that do not? Our logistic regression analysis indicated that firms that did take action tended to be larger. Respondents who could describe more particular examples of enforcement actions against other firms were more likely to report having taken an environmental action in response to deterrence signals. On the other hand, remembering the signal case, or remembering a larger number of instances of enforcement actions, was not significantly associated with taking environmental actions. Firms that thought the risk of detection and the magnitude of legal penalties were great were, on average, no more likely to take responsive environmental action than firms with lower estimates of legal risk.

Therefore, we found only a weak association between increased information about other penalty cases and perception of legal risk, which firms with higher perceived exposure to detection or fine were not significantly more likely to have taken an environmental action. Moreover, contrary to the assumptions of general deterrence theory, firms did not obtain or retain accurate information about the frequency or magnitude of fines and other penalty information. One interpretation of these findings is that general deterrence signals often do not enhance fear of sanctions per se. Rather, they remind reasonably “good apples”—firms already committed to compliance as a general business strategy—that noncompliance can occur as a result slippage in their company’s own self-regulatory systems. This would explain the finding that the most common response to news of sanctions against other firms is to review one’s own compliance program. On occasion, a deterrence signal will inform a good apple of noncompliance (or risk of noncompliance) in their own facility (e.g., from employee error or deviance, or with respect to a regulation they were unaware of or had interpreted incorrectly); hence the signal will spur them into more than simple confirmation routines. Thus, general deterrence information could affect the firm’s behavior without increasing the firm’s perceived risk of legal sanction.

Similarly, the examples of noncompliance cited by respondents often were couched in judgmental tones, critical of the behavior of the company punished. This supports the notion that explicit general deterrence messages serve a “reassurance function,” informing already compliant firms that they are not foolish for doing so because their competitors who “cheat’ are getting caught and punished.

What The Indepth Two-Industry Survey Adds

The two-industry survey—longer, indepth interviews of 34 firms in two of the eight industries (chemicals and electroplating)—further illuminated how regulated firms think about and respond to general deterrence messages, while also pointing out significant differences in that regard between smaller and larger firms.

Specific Deterrence . Specific deterrence—generated by a previous sanction against a company or by a prior inspection—was reported to have a significant impact on a substantial minority of companies in our two-industry sample, particularly smaller firms. Twenty-four percent (4/17) of electroplaters and 11 percent (1/9)of chemical small-or-medium-sized enterprises (SMEs) said that a legal penalty against their company in the past had influenced its subsequent environmental actions. Electroplaters reported that previous inspections also had prompted them to undertake whatever action was required of them in the belief that further enforcement action, with potentially profound consequences, would have followed from continuing noncompliance. Inspections also were said to have an important “reminder function” for SMEs that were already inclined to comply because they said it was the “right thing to do.”

On the other hand, the large chemical companies in our sample, which reported having only minor violations over the last decade, had experienced no significant enforcement action. Most stated that because they were already substantially beyond compliance in many respects, inspections held no fear for them.

Explicit General Deterrence. Knowledge about legal sanctions against other companies, in contrast, played only a very modest role in the case of electroplaters and an even smaller one for chemical companies. Only 12 percent (2/17) of chemical companies said a fine or prison sentence at another company had influenced specific environmental actions (less than the average of our eight-industry survey). Large chemical companies reported that they had not been influenced at all by such considerations.

Why was the perceived impact of explicit general deterrence messages so small? Company officials reported that they typically did not identify with the company that had been penalized. The very large majority of respondents claimed to be in compliance or even “beyond compliance.” Hence, hearing about legal sanctions against blatant regulatory evaders did not resonate with their own circumstances and triggered little fear. Some respondents suggested that it was only hearing about someone in similar circumstances going to prison, rather than merely being fined, that would influence them.

As in the eight-industry survey, however, explicit general deterrence messages were reported to have a significant reminder function for both electroplaters and chemical companies -- prompting them to review their own operations and think about environmental risks that otherwise might not have gained their immediate attention (although few reported making any significant changes as a result of such a reassessment). Explicit general deterrence also fulfilled a reassurance function. Many respondents conceded that without effective enforcement, the overall performance of the industry would decline over time, as compliant firms would lose confidence that there was a “level playing field” in terms of environmental standards. Indeed, respondents’ complaints about enforcement commonly focused on the injustice of others not being punished, or not being punished heavily enough.

Implicit General Deterrence. For respondents in the two-industry survey, “implicit general deterrence,” the threat of legal sanctions implied by the mere promulgation or history of enforcement of laws and regulations in the contemporary United States, was much more salient than either specific deterrence or explicit general deterrence. Although many of our respondents acted for instrumental reasons, they did not seem to engage in any careful weighing of the benefits of noncompliance versus the probability of being discovered and punished, as predicted by traditional deterrence theory. On the contrary, almost all of our respondents gave us the impression that there was no point in even debating whether to comply or not. Compliance was regarded as mandatory. Electroplators and chemical SMEs saw legal punishment of serious violations as virtually inevitable. Thus, it was the regulations themselves (rather than hearing about enforcement actions against other firms) that had the most direct impact on behavior.

Our interviews indicate that “implicit general deterrence” arises from the general history of a particular regulatory regime (in this case targeted enforcement over the previous decade). In these industries, inspection and enforcement activity have generated a “culture of compliance,” such that it becomes almost unthinkable for regulatees to calculatedly (as opposed to inadvertently) break the law. Most of our respondents took a similar view to EWs-7: “It’s ludicrous to let things go and imagine you won’t get into trouble. We are subject to inspection and to fines, huge fines, for not doing it. You can’t fight that. You either comply or get out of the business.”

Yet deterrence in any form was of far greater concern to SMEs than it was to large enterprises. For major reputation-sensitive firms in the closely watched chemical industry, regulation commonly was described as only “the baseline,” implying that it was a taken-for-granted minimum standard. In the minds of these respondents, they complied not because of the perceived inevitability of sanctions (that is, implicit general deterrence), but because they felt a failure to comply would send very undesirable signals to important stakeholders, triggering a variety of informal sanctions. Because the law was seen as a salient standard in the minds of their investors, employees, customers, and local governments, they had to attend closely to legal requirements, usually exceeding them to provide a margin of error.

Such instrumental considerations were not the only considerations that weighed upon our respondents. Almost one-half of our respondents provided a range of normative explanations for why they complied. In essence, many of them perceived themselves as “good guys”, complying with environmental regulations because it was the right thing to do. They struggled, however, to disentangle normative from instrumental motivations and wrestled with the temptation to backslide when environmental improvements proved expensive. In the absence of regulation and implicit general deterrence, it is questionable whether their good intentions would have translated into practice.

Table 1. Signal Cases


Industry

Infraction

Penalty

Company Fine

Jail Sentence

Individual Fine

Electroplating, CO.

The VP of a Denver plater, who, despite 56 warnings over 10 years, allowed Zn, Cd, Cu, Cr, and Ni to be continually discharged into Denver municipal sewers.

$250,000

12 months +

100 hours community service.

Waste Water Treatment, CA.

The district manager of a Rodeo, CA, treatment plant who admitted to allowing wastewater to bypass a chlorine contact chamber and tampering with monitoring methods on 473 days between 1995 and 1997.

5 months prison + 5 months home confinement + 1 year probation.

$3,000

Chemical Manufacturing or Blending, KY.

In 1995, a plant in KY stored fuming sulfuric acid in a tank that had cast iron piping instead of steel piping. The iron corroded and the company did not inspect the piping. This resulted in about 24,000 gallons of sulfuric acid solution being released into the air in a 4-hour period, creating a chemical cloud. One thousand nearby residents had to be evacuated and several were treated for burns of their eyes, nasal passages, and lungs.

$850,000 penalty +

$650,000 on an emergency notification system.

Aluminum Fabrication, Southern States.

An aluminum fabricator in Port Allen, LA, who discharged wastewater contaminated with hexanol and with a COD of 1,737 ppm (13x their permit limit) into an intercoastal waterway.

$1.1 million +

5 years probation.

100 hours of community service.

$2,000 to $5,000

Waste Water Treatment, FL.

South Bay Utilities of Sarasota county, who discharged an estimated 290 gallons of inadequately treated wastewater, along with additional periodic discharges, amounting to 1.5 tons of nitrogen in a 2-year period, into Dryman Bay.

$1.3 million

$445,000 (president of the company).

Steel Fabrication, IN.

A corporation that settled allegations that it failed to control the pollution at eight steel minimills, resulting in thousands of tons of illegal air emissions of NOx, and mismanaged discharges of K061 dust in the soil and groundwater. The company contends that it had not violated any environmental law.

Civil penalty of $9 million.

$4 million on environmental projects +

$85 million on new control tech.

Asbestos Abatement Services, NY.

While carrying out an asbestos abatement project, between December 1997 and March 1998, the company failed to notify the EPA. The company knowingly sent workers into an asbestos “hot zone” for more than 12 weeks, without providing them with protective gear or even informing them of the presence of asbestos. The company; failed to have a certified contractor perform the work, to properly wet and bag the asbestos, to properly label the containers filled with asbestos, or to dispose of the asbestos at a landfill approved for that purpose.

41 months

$59,700 restitution.

Chemical Manufacturing, LA.

A chemical company in Westlake, LA, was charged with releasing chlorofluorocarbons into the air in excess of the 35 percent limit and then repeatedly failing to locate and repair leaks.

$4.5 million penalty and must

fund an “environmental justice” project in Westlake, LA.

Conclusions:

Our research provides only weak support, at best, for the classical “general deterrence” hypothesis (which we would now label “explicit general deterrence”). Many EPA-imposed legal penalties, especially the less severe ones, do not get substantial coverage in the news media. Less than one-half (42%) of the 229 respondents in our eight-industry survey recognized and remembered the specific signal case. On the other hand, general deterrence seems to have a cumulative effect on the consciousness of regulated companies; most respondents thought the risk of detection of violations was high, and for many in our indepth study, virtually inevitable. Sixty-three percent reported having taken some environmental protection measures after learning about penalties against other companies.

Yet many relationships predicted by the classical deterrence model did not appear in our data. Respondents who recognized the signal case or recalled a larger number of other cases were not more likely to report having taken environmental action in response. Officials who saw the risk of formal detection and punishment as high were not, on average, more likely to report taking environmental measures in response to general deterrence messages. Company managers were not closely attentive to the penalties assessed against violators, generally underestimating them. This suggests that penalties against other firms—at least in the United States near the beginning of the 21st Century—play a somewhat different role from the one embedded in the classical general deterrence theory, which assumes that the imminent threat of legal punishment is the primary driver of compliance efforts.

Our eight-industry survey and the indepth interview evidence suggest that for most firms, general deterrence primarily serves as a reminder and as a reassurance function. For the “good apples”—firms that generally are committed to compliance for a variety of normative and reputational reasons—learning about penalties against other firms reinforces their perception of the need to continue compliance activities and of the potential disaster of noncompliance. Sometimes, a deterrence signal prods them to check and take further action. Deterrence signals both reassure “good apples” that free-riders will be punished and remind them to make sure that they are responsible corporate citizens with no need to fear the social and economic costs that can be triggered by serious violations.

It must be remembered, however, that this research was conducted in the United States in the early 21st Century, more than a quarter century after American states and the Federal Government started serious enforcement of environmental laws. Hence, the “implicit general deterrence” mechanism has matured so that the enforcement and normative legitimacy of environmental regulations is taken for granted by many firms. Social and political support for environmental norms also has given many companies a substantial economic stake in avoiding a reputation for being bad environmental citizens. Thus, our research has little to say about the importance of explicit general deterrence messages at earlier stages in regulatory programs, when their value added may well be greater, or for firms (or industrial subsectors) that are deliberate evaders or chronically at the edge of or out of compliance.


Journal Articles on this Report : 2 Displayed | Download in RIS Format

Other project views: All 10 publications 2 publications in selected types All 2 journal articles
Type Citation Project Document Sources
Journal Article Gunningham N, Thornton D, Kagan RA. Motivating management: corporate compliance in environmental protection. Law and Policy 2005;27(2):289-316. R828827 (Final)
  • Full-text: U of California
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  • Abstract: Wiley Interscience
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  • Journal Article Thornton D, Gunningham NA, Kagan RA. General deterrence and corporate environmental behavior. Law and Policy 2005;27(2):262-288. R828827 (Final)
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  • Abstract: Wiley Interscience
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  • Supplemental Keywords:

    deterrence, general deterrence, specific deterrence, legal penalties, legal sanctions, compliance, business attitudes, corporate environmental management, corporate environmental behavior, compliance motivations, dissemination of information, perceived risk of detection, perceived risk of punishment, public policy, surveys, communications, mass media, environmental compliance, deterrence messages, noncompliance, small-or-medium-sized enterprises, large chemical companies, explicit general deterrence,, RFA, Scientific Discipline, Economic, Social, & Behavioral Science Research Program, Sustainable Industry/Business, Corporate Performance, Economics and Business, Social Science, community involvement, enforcement strategy, legal pnealties, incentives, survey, environmental compliance determinants, information dissemination, environmental law, regulations, corporate environmental behavior

    Relevant Websites:

    http://repositories.cdlib.org/csls/fwp/24 Exit

    http://repositories.cdlib.org/csls/fwp/22 Exit

    Progress and Final Reports:

    Original Abstract
  • 2001 Progress Report