Grantee Research Project Results
2001 Progress Report: Over-compliance in Point Source Water Pollution
EPA Grant Number: R827972Title: Over-compliance in Point Source Water Pollution
Investigators: Horowitz, John K.
Institution: University of Maryland - College Park
EPA Project Officer: Chung, Serena
Project Period: December 15, 1999 through December 15, 2000 (Extended to December 15, 2002)
Project Period Covered by this Report: December 15, 2000 through December 15, 2001
Project Amount: $59,316
RFA: Decision-Making and Valuation for Environmental Policy (1999) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objective of this research project is to investigate the factors that affect discharges from point sources in the United States. There appears to be widespread overcompliance with the permits; in other words, discharges are cleaner than they need to be. This research project examines the nature of this overcompliance and tries to distinguish among the possible reasons. The implications for water pollution policy are discussed.
Progress Summary:
This research examines point-source water pollution in the United States. All dischargers that report to the National Pollutant Discharge Elimination System (NPDES) were examined, although most of the data were from wastewater treatment plants. Monthly average biological oxygen demand (BOD) concentrations in wastewater were examined, on a plant-by-plant basis, over an 8-year period from 1992 to 1999.
There appears to be substantial overcompliance with the NPDES permits. Each plant faces a limit (usually 30 mg/L) on the monthly average concentration of its discharges. In NPDES data, average concentrations are far below this limit, often in the range of 6 mg/L. Let c be the ratio of the discharge concentration to the limit; this is called the "compliance ratio." Thus, in this example, c = 6/30, or 0.2. Whenever c < 1, the plant was overcomplying in that month. When c > 1, the plant is in violation.
In the main research, a plant's median compliance ratio was examined where the median is taken over all months of data.
Regulators and plant managers claim that such low discharge levels are warranted by discharge randomness: plants are believed to pollute below their permitted level, on average, to compensate for the possibility of an unexpectedly large discharge. This view is widely shared but has received little empirical attention. The lack of confirming evidence leaves open the possibility that plans are over- or under-compensating for randomness, or perhaps responding to additional factors besides randomness. Thus, the main thrust of this research has focused on the role of discharge randomness.
Previous understanding of overcompliance has been quite limited. A seminal work in this area (Harrington) used a theoretical model to explain why plants might be in compliance even when penalties for violation were low. However, his model did not include randomness in discharges, and did not allow plants to overcomply; plants could do no better than c = 1. Randomness in Harrington's model entered through the probability that a pollution violation would be detected.
Only a few economic studies have examined discharge randomness empirically. In the paper closest to this study, Brannlund and Lofgren demonstrated that water pollution regulations were binding for Swedish pulp and paper plants even though average discharges were below the permitted levels. They demonstrated this by showing that average discharges were affected by the level of the regulation. (This project estimated this relationship for U.S. plants). Their analysis was motivated by an appeal to the randomness of discharges. However, they did not measure the randomness and therefore, were limited in the questions they could address.
Findings. The fundamental uncontrollability of discharges is necessary to understand this project's research findings. The research has focused on the role of randomness. This role is more important and more interesting than originally believed.
Permit-Compliance System (PCS) data were used to construct plant-level measures of discharge randomness (i.e., plant-level variances). A measure of randomness for each plant in the data set was constructed, and the investigator was careful to separate true randomness (uncontrollability) from other controllable factors that might be affecting discharges. Data are available for as many as 108 months from each plant; in the analysis, all plants with at least 15 months of data were included. These data were not necessarily consecutive. In the regressions, observations were weighted by the number of months of data used in constructing the randomness measure.
Some variability in plant discharges is not random and must be removed to measure the true random component. A Stewhart Cumulative Sum (CUSUM) test was used to identify plants whose discharges underwent a statistically significant structural change. Such structural changes could be due to capital changes in the plant or changes in plant management. This is not the kind of variability whose role this project seeks to understand. The set of 764 plants for which there was no structural change were analyzed. The hypothesis that plants with higher variability pollute less on average was tested and accepted. The size of this effect is large.
The investigator concludes, however, that randomness is not the sole reason for the low discharge levels. The evidence points to the likelihood that plants truly are overcomplying with their permits, not simply compensating for randomness. This project's analysis predicts that in the absence of discharge randomness, plants will pollute at about 60 percent of their permitted level.
Overcompliance appears to be primarily due to community pressure and, perhaps, a difficulty for managers/operators in gauging the "true" compliance when discharges are so variable. A high degree of randomness and its variability across plants imply that plants' polluting behavior cannot fully be understood based only on an analysis of average (or total) discharges. Therefore, a plant-specific compliance measure was constructed by dividing median compliance by its standard deviation, which can be converted into a predicted violation rate. This measure is shown to be quite close to observed violation rates. For each plant, the median compliance rate and the standard deviation were used to construct the predicted probability of a violation, using the assumption that discharges are distributed log normal. These predicted probabilities are quite low. The median probability of violation is less than 1 percent.
The effect of plant and community characteristics on the probability of a violation were examined. Community characteristics have large effects on plant behavior, although the effects are measured imprecisely. Small plants in poorer communities tend to have higher probabilities of violation.
The study results indicated that: (1) there is no statistical difference in the probability of violation between U.S. Environmental Protection Agency (EPA)- and state-regulated plants; (2) manufacturing plants have a significantly lower probability of violation than wastewater treatment plants; (3) large plants have a significantly lower probability of violation than small plants; and (4) community variables, including income and minority composition, have large effects on the probability of violation, but these effects are imprecisely measured. These results are conditional on the plant being in the sample (i.e., on not having undertaken a significant plant change during 1992-1999).
Policy Implications. There are implications for three regulatory issues: (1) current regulations, (2) tradeable permits, and (3) informal regulation.
Current Regulation. Because of randomness and community pressure, together and possibly separately, plants no longer exhibit a one-to-one relationship between discharges and permitted levels. This feature must be considered when predicting the effect of any change in the regulation. A move to make the regulations more stringent by reducing the permitted concentrations would not necessarily lead to an equal reduction in discharges.
Randomness also enhances the role of EPA's enforcement policy. A move to enforce standards over a shorter time (the daily limits) would likely reduce discharges further; a move to enforce standards over a longer time (annual average concentration or total annual quantity) would likely raise discharges. These predictions arise because of differences in the degree of randomness of these measures.
Tradeable Permits. Tradeable permits, a commonly proposed direction for pollution regulations, would likely, in the case of random water pollution discharges, raise overall pollution levels substantially. Currently, plants pollute well below their permitted levels on average, at least in part because of the risk of a random violation. If a fully tradeable, nonbankable pollution permit system were in place, plants could, in principle, pollute exactly at their permitted level. Whenever low discharges occurred, they would sell the excess permits; when high discharges occurred, they would buy permits from other plants. As long as randomness was uncorrelated across plants, they could pollute exactly at their permitted level on average and incur no net penalty. The difference between this and the current levels of discharges shows the consequence of tradeability.
Informal Regulation. The large role that I find for community pressure may lead policymakers to wonder whether the formal legal system of regulation could be modified or somehow "relaxed." There are two answers to this question. First, between 10 and 25 percent of the plants in the sample are not overcomplying, and some of them are rather seriously out of compliance. Community pressure is a feature primarily of well-to-do communities. This project's evidence, although preliminary, does not suggest that community pressure would be a successful regulatory tool in poorer or minority communities.
Second, the interaction between community pressure and formal regulation is unknown. Do plant managers, in trying to convince the community that they are doing a good job, point to their permitted levels as a benchmark against which their success can be measured? If so, are there alternative nonregulatory benchmarks that could play this role? Answers to these questions would seem to be required before greater reliance on "informal" regulation is prescribed. It is worth noting that community pressure's effects on local plants' pollution decisions under tradeable permits systems also are unknown.
Randomness creates an agency problem for engineers and plant managers; it makes it more difficult for them to show that they are doing a good job in properly balancing treatment costs with the penalty costs of violations. Excessively low probabilities of violation may be their optimal response in this situation. For regulators and the public, randomness means they must judge, from the highly variable discharge pattern, the abatement efforts being made by plants. Indeed, it seems possible that managers may not realize they are overcomplying to the degree that they are; their "true" compliance is masked by randomness, which makes inference difficult. The policy implications of this problem have not yet been fully explored.
Future Activities:
The main body of the research has been completed. There remain many interesting issues to be pursued. However, the goals of the original research project have largely been met. The final report for this grant will be prepared and submitted during the next reporting period.
Journal Articles:
No journal articles submitted with this report: View all 8 publications for this projectSupplemental Keywords:
water, chemicals, toxics, discharge, public policy, cost benefit, business, industry, clean technologies, environmentally conscious manufacturing, effluent., RFA, Economic, Social, & Behavioral Science Research Program, decision-making, Economics & Decision Making, emission levels, decision analysis, economic benefits, Clean Water Act, cost benefit, economic incentives, environmental values, non-regulatory benefits, cost/benefit analysis, environmental policy, effluent, compliance costs, legal and policy choices, public policy, regulations, cost effectiveness, over-compliance, point source waterProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.