Grantee Research Project Results
Final Report: Compliance and Beyond: Strategic Government-Industry Interactions in Environmental Policy and Performance
EPA Grant Number: R829690Title: Compliance and Beyond: Strategic Government-Industry Interactions in Environmental Policy and Performance
Investigators: Parson, Edward A.
Institution: Harvard University
EPA Project Officer: Hahn, Intaek
Project Period: July 1, 2002 through September 30, 2004
Project Amount: $157,672
RFA: Corporate Environmental Behavior: Examining the Effectiveness of Government Interventions and Voluntary Initiatives (2001) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
- To study strategic interactions between government regulatory agencies and firms and the consequences of these interactions for environmental policy and corporate environmental performance.
- To investigate how these interactions are influenced by uncertainty and asymmetric information about firms’ capabilities (technological and managerial) for environmental performance (present and future).
- To advance understanding of regulatory strategies and outcomes, in order to identify the regulatory strategies most likely to motivate firms to invest in and achieve high levels of environmental performance.
Research Methods
These objectives have been pursued through three related areas of research. All three research areas have stressed the bidirectional nature of the relationship between regulation and innovation. They have focused on the role of uncertainty about technological capabilities; the implications of asymmetric information regarding technologies, capabilities, and costs between regulators and the industries that are potential targets of regulation; and the interactions over time between debates over capabilities and appropriate responses, private-sector research and innovation, and periodic reassessment and adaptation of regulations and policies. The three areas of research pursued are as follows. Work on all of these areas is continuing.
- Case studies of parallel technical and policy histories of environmental and related issues in which contending claims about technical feasibility have played an important role. The empirical basis for these cases has been gathered through review of prior secondary literature, examination of archival and other primary written source materials, and interviews with key participants in each issue. The history of policy debates, decisions, and the positions and strategies of key actors has been constructed by accessing contemporary news accounts, policy-area newsletters, trade press, public statements by participants, and statements and discussion by key actors in regulatory proceedings, Congressional hearings, and technical and industry conferences. The history of the evolving status of technological issues has been constructed by accessing contemporary scientific and technical journals, presentations at technical conferences, and technical arguments and supporting documentation presented in regulatory proceedings and Congressional hearings and debates. This examination of technical source material has been used to construct a retrospective of the status of particular technical challenges and proposed solutions through time in order to support critical assessments of claims that proposed regulatory targets have been either feasible or infeasible given the state of knowledge and technical capacity at specific times. The resultant parallel histories of policy debates and technological progress have been juxtaposed to infer strategies employed by regulators to enact challenging standards and by firms and industry associations to either meet, resist, or benefit from these standards; as well as the measures employed by regulators to erode the normal information advantage enjoyed by firms, and by firms to sustain this advantage. The case studies have been informed by a model of boundedly rational decisionmaking with multiple desired criteria on both sides: regulators seek to advance the public interest by requiring levels of environmental performance that feasibly and cost-effectively reduce environmental burdens, among other objectives; firms and their industry associations seek to limit the costs they bear from such regulatory requirements and to resist intrusions on their autonomy, subject to various constraints on the longer-term risks they run by appearing obstructive. For all case studies, the factual record and inferences about historical technical feasibility, actors’ strategies and decisionmaking, explanations for observed behavior, and the consequences of joint regulator and industry strategies have been checked by extensive interviews with multiple participants using standard verification procedures such as seeking confirmation of contentious points from multiple sources, checking the accuracy of sources’ memories by checking for consistency with facts known from other sources, and consideration of sources’ interests giving particular credibility to declarations that are orthogonal or contrary to the sources’ expected material interest in the account.
- Game-theoretic studies to model interactions between firm and government behavior over imposition of regulations and investment in environmental performance-improving technological innovation. Drawing on principal-agent modeling approaches developed in the study of contracting and economic regulation, these studies posit firms that make both abatement and research and development (R&D) decisions at every time in which the cumulative stock of know-how (integrated past R&D) increases profitability and reduces the cost of abatement.
- Legal studies of how regulators’ attempts to compel improvements in environmental performance through requiring either technology diffusion or innovation have been treated by U.S. courts when challenged based on claims of infeasibility. These studies have been conducted through analysis of statutory and regulatory language and critical comparison of rulings in multiple cases making claims related to technological infeasibility under specific statutory sections (Clean Water Act National Pollutant Discharge Elimination System [NPDES], Clean Air Act mobile-source toxics regulations, and the Occupational Safety and Health Act).
Summary/Accomplishments (Outputs/Outcomes):
Area 1: Case Studies of Technical and Policy Histories of Environmental Issues
(with Jennie C. Stephens, Clark University and Kristi Olson, Harvard University)
Objectives and Questions.
- Examine linked histories of regulatory proposals and technological information and uncertainty in six prominent environment and related policy controversies: air pollution from automobiles, dioxin effluent from pulp mills, ozone-depleting chemicals, methyl bromide, vinyl chloride workplace exposures, and high-global warming potential (GWP) emissions from the aluminum industry.
- By comparing and contrasting strategies and outcomes, identify potentially generalizable regularities about regulatory behavior, firm and industry behavior, conditions influencing these, and resultant outcomes for the generation and exchange of information and capabilities and environmental policies and performance.
Findings and Conclusions: Air Pollution from Automobiles, 1950–2005.
- Disparities of interest between regulators and regulated firms, and therefore conflict over environmental regulations, are structural and persistent. Throughout the entire period considered, whenever proposals were advanced to require reduced emissions from automobiles, their manufacturers resisted these calls and made claims of infeasibility or excessive difficulty or cost as part of their resistance. Firms can rarely simply consent to proposed regulatory burdens. Only the extent and domain of conflict, the rationales offered, and the tactics employed can change.
- A large, concentrated, politically powerful industry can exercise substantial control over the pace of innovation, information about potential technological opportunities, and consequently the policy debate, particularly when there is a large, preexisting disparity in technological information between firms and advocates of regulation (whether officials or environmental groups). This control can extend to the ability to discipline small players and third-party innovators. Counterbalancing this power can require achieving rough technological parity between industry and regulators. This process may take many years, and may depend in part on recruiting and developing new players whose material interests partly counterbalance those of the primary target industry (e.g., foreign automakers, manufacturers of emissions-control equipment, fuel refiners, and independent experts). The position of third-party innovators is precarious, however, since they depend for their markets on regulators compelling their customers to meet environmental targets. They can consequently be vulnerable to reprisals from potential customers for optimistic statements about their capabilities.
- When an issue has not previously been regulated, political adoption of an ambitious target (as in the 1970 Act) may be necessary to motivate research, innovative effort, and disclosure of information about capabilities, even if the initial target cannot be supported by specific evidence of technical feasibility.
- Regulatory processes and institutions can be developed to elicit revelation of information about technical capabilities by drawing on more than one industry group (e.g., the early California assessment and certification process; the proposal to jointly regulate fuel and vehicles in the 1990s). Specific incentives must be considered in each case, and these processes can be subject to gaming.
- Cooperative industry R&D processes can be devices to coordinate resistance to regulations, stifle innovation, and suppress disclosure of information about technological capabilities. Other cases provide evidence that similar bodies can be powerful bodies to promote innovation and sharing of information about capabilities. The differences appear to depend on two factors: the nature of participants’ shared interests, which is partly determined by whether a sufficiently credible regulatory threat is present; and details of the mandate, participation, and process of the activity, in particular whether it includes participation from and shares control with actors outside the main participating industry.
- The incentive effects of regulations are partly determined by the threat they imply in case firms do not succeed at the proposed performance target, or do not even try. Effective threats must be of intermediate scale—big enough to get attention and motivate change (i.e., too big to just be integrated as a cost of doing business), but not so big that their enactment would be so economically or politically costly that they are not credible. This case demonstrates two types of regulatory threats that were highly effective (model recalls in response to inspection and maintenance (I&M) programs and adoption of California standards by other states) and one that was ineffective, because it was too severe to be credible (the 1970 Federal standards).
- Interactions between regulatory jurisdictions can promote revelation and evidence of capabilities that can advance regulatory requirements and performance.
- In addition to their advantages in reducing compliance costs, broad-based environmental targets that spread regulatory burdens over multiple products, operations, or businesses can also have the effect of forestalling resistance based on claims of technical infeasibility.
- Regulatory policies alone may be ineffective at promoting radical innovations, because of their incremental character and their tendency to be designed around multiple attributes of present capabilities and to carry short lead times.
Findings and Conclusions: Controlling Dioxin in Pulp Mill Effluent, 1985–2000.
- Proactive voluntary action by an industry under a regulatory threat can effectively forestall attempts to impose stronger regulatory requirements. Although such actions did not have the same effect in other cases considered, they appear to have worked here because of the discrete character of the alternative technological options being considered, the industry’s success at coordinating their advocacy and action around their preferred solution, and the availability of a strong, substantive argument that this level of control was preferable.
- Voluntary programs that seek to promote industry movement beyond compliance may lack sufficient incentives to motivate significant participation. If subsidies are excluded as an incentive, then the predominant incentives available are administrative flexibility and public recognition for reputation enhancement. But three factors of potential generality limited the effectiveness of these incentives in this case. First, the two incentives can be in opposition if a firm’s accepting extended compliance deadlines carries reputational risk. Second, when an industry is already working effectively to improve its environmental reputation, the additional reputational benefits available from participating in such a program may be limited. And third, the specific terms of participation in such programs may, as in this case, introduce rigidities or administrative costs that deter participation, particularly of the smaller firms for whom the reputational benefits also matter less. Such burdens may be inadvertently introduced by measures that seek to make the behavior being promoted credible and verifiable.
Findings and Conclusions: Chlorofluorocarbons (CFCs) and Other Ozone-Depleting Chemicals, 1974–2000.
- Control of authoritative information about alternatives, technologies, and costs is usually decisive in environmental policy debates. When those whose interests are threatened by proposed environmental regulations control information about alternatives, they can usually maintain an equilibrium in which negative views of prospects for alternatives obstruct policy, while deadlocked policy deters the research, development, and dissemination of information about alternatives that could challenge the prevailing negative view.
- As in the auto pollution case, a bold first political step can break such a deadlock by motivating pursuit of alternatives and sharing of information about them. Since the very existence of the prior low-confidence equilibrium implies that high-quality information on alternatives on which to base such a political decision is not available, the specific decision must usually be arbitrary.
- Technology assessment bodies can promote rapid progress to solve an environmental problem by mediating mutually reinforcing interactions between private innovation and adjustment of regulatory obligations. In this case, this interaction brought performance improvements far beyond what even the most enthusiastic proponents of cuts initially believed feasible. The conditions for achieving this appear to include: (1) providing sufficient private benefits to participating firms and individuals to motivate their continued participation; and (2) guarding against self-serving bias in technical judgments by balancing participation of multiple experts of similar stature and distinct material interests and including high-level government and independent participants. In this case, the private benefits conferred included: (1) necessary assistance in meeting a serious business challenge from a regulatory target already adopted; and (2) diffuse professional and commercial benefits such as enhanced reputations, access to information, relationships and networks, and opportunities to identify commercial or technical opportunities associated with the transition away from ozone-depleting chemicals.
Findings and Conclusions: Control of Methyl Bromide, 1990–2005.
- Methyl bromide remains in a low-confidence equilibrium, similar to that which characterized proposed CFC reductions prior to 1986, sustained by mutual reinforcement between pessimistic views of alternatives and regulatory deadlock.
- The sustained conflict on assessment panels, and their inability to facilitate the development, refinement, and promotion of alternatives, indicates the necessary role played by the prior adoption of the Montreal Protocol’s 1987 cuts in the subsequent success of its other assessment panels.
- The absence of a credible threat of serious methyl bromide cuts has discouraged the private investment needed to develop viable alternatives, because serious cuts would be required to make alternatives profitable. This mirrors the situation regarding CFC alternatives when they were initially explored in the late 1970s.
Findings and Conclusions: Workplace Exposures to Vinyl Chloride, 1973–1976.
- In contrast to the dioxin case, firms’ early voluntary cuts failed to forestall stronger regulatory demands. There are three salient differences between the two cases, which may partly account for the different outcomes. First, there were not discretely different technologies associated with various levels of reduction, so there were no clear stopping points in the push for further lowering of exposures. Second, because both firms and the regulatory agency had to react rapidly in a crisis, there was no credible technical analysis available to support firms' claims of acute difficulty in going further. And third, the industry lacked a coherent strategy delineating and distinguishing the level of performance they were committed to achieving from the higher level they were committed to resisting.
- The availability of respirators as an alternative way to lower exposures served to advance firms’ efforts to reduce exposures, even without the use of respirators, in two ways. First, although both workers and firms resisted the use of respirators, they clearly provided a feasible route to meet even the strictest proposed standards. Consequently, their availability provided a strong basis for rejecting any challenge to regulations based on claims of infeasibility. At the same time, respirators were sufficiently disliked that the threat of requiring them created incentives for firms to cut exposures low enough that they were not needed. In this respect, they acted as a small but highly credible threat against firms not succeeding at reducing exposures by other means that was nevertheless strong enough to motivate serious—and highly successful—continuing efforts to reduce exposures.
Findings and Conclusions: PFC Emissions from the Aluminum Industry, 1995–2005.
- The program was strongly promoted by Alcoa, the dominant firm in the U.S. aluminum industry with more than 60% of production, and it served Alcoa’s interests. Like all dominant firms, Alcoa has a strong interest in securing and defending the entire industry’s reputation for responsibility. Moreover, as the technological leader, Alcoa was positioned to make the technical changes more successfully and at a lower cost than other firms. The program consequently benefited Alcoa by engaging the U.S. Environmental Protection Agency (EPA) in coordinating industry actions that would reduce the reputational risk they bore and that may have provided some incremental competitive advantage. The engagement of EPA in the program provided the opportunity to improve a previously conflictual relationship by building cooperative relationships with officials.
- Voluntary industry partnerships are always at risk of merely formalizing undemanding changes that the industry wants to achieve for other reasons and is highly confident that it can. They may help build capacity in smaller or technically weaker firms that allows these firms to adopt environmental innovations otherwise only within the reach of large firms, but they are unlikely to motivate changes or efforts by dominant firms beyond what they want to do for their own purposes. Such programs also provide no role to engage or motivate potential third-party innovators. Of course, the modest benefits of such programs may be all that can be achieved when political support for more demanding requirements is weak so even a credible regulatory threat is difficult to mount.
Area 2. Game-Theoretic Modeling of Firm-Regulator Interactions Over Investment in Emission-Reducing Technological Innovation
(with Austin Nichols, Urban Institute and Katalin Bognar, University of Michigan Economics Department)
Objectives and Questions. This research seeks to draw on and adapt asymmetric-information models developed for the study of industrial organization and economic regulation to represent strategic interactions between firms and regulators over motivating investments in innovation that improve environmental performance.
Results. We have formulated a general representation of the firm’s dynamic optimization problem, identified one class of solutions, and formulated an initial representation of the regulators’ optimization problem. We have begun investigation of the resultant game solutions, initially in the deterministic case, and subsequently will introduce uncertainty and asymmetric information.
Area 3. Technical Feasibility and Technology-Forcing Regulation: Treatment by the U.S. Courts
(with Kristi Olson and Jaime Staples, Harvard University and Maggie Smith, University of Michigan)
Objectives and Questions. This project examines how U.S. courts have interpreted statutory requirements for feasibility (technical and/or economic) of proposed regulations when affected parties have challenged regulations on grounds that they are not feasible. What are technical and economic feasibility requirements interpreted to mean? What amount and quality of data and analysis must the agency provide to meet the applicable standard? What discretion does the agency have in dealing with industry-provided data, and what happens if the industry refuses to provide data? How does past industry behavior figure in the court’s treatment of new challenges to regulation?
Results. Courts are highly deferential to agency judgments that regulatory proposals meet the relevant statutory requirements for feasibility, provided certain procedural requirements are met and the agency’s decisions are not “arbitrary and capricious.” There is nevertheless some variation.
When the agency has limited or no access to industry-held data that would be necessary for a full analysis of feasibility, the agency may have even more latitude than usual, for example, to base regulations on inferior data or discount or modify industry data they judge (with reason) to be unreliable. The evidentiary standard for demonstrating feasibility may be higher when an agency seeks to use a regulation to compel technology diffusion than when it seeks to compel innovation, and higher when the regulation in question requires modest improvements in environmental performance in the near term than when it requires larger improvements with more time to achieve them. This distinction may bias agency rulemaking in favor of more remote and ambitious requirements over more incremental ones.
The industry’s past behavior on the dimension of environmental performance at issue can influence the court’s deference to the agency in several ways. Either evidence of past success in improving performance, especially if large and rapid, or an absence of past efforts to improve performance—that is, either small inputs or large outputs—can be taken as indications that further improvements are feasible, based on general theories of the determinants of innovation that do not depend on any specifics of the type of progress in question. So also, in particular, can evidence of progress that contradicted prior claims of infeasibility—that is, “crying wolf”—which has been used as a basis for viewing subsequent claims of infeasibility by the same firms or industries with skepticism.
Competitive relationships between leading and lagging firms in an industry also influence the resolution of conflicts over feasibility. Surprisingly, the courts have not been sympathetic to establishing regulatory standards based on the performance of industry technological leaders, despite both statutory language and theoretical considerations suggesting that this should be widespread. Indeed, courts’ unwillingness to uphold regulations that may be infeasible for lagging firms may amount to a penalty imposed on leading firms, at least in industries such as automobiles, where the lagging firms are sufficiently economically important. Even where there are large technological disparities within an industry, firms may have strong incentives to unite through prior negotiation to challenge the feasibility of regulations that some, but not all, could meet.
Journal Articles on this Report : 1 Displayed | Download in RIS Format
Other project views: | All 14 publications | 2 publications in selected types | All 1 journal articles |
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Coglianese C, Zeckhauser R, Parson E. Seeking truth for power: informational strategy and regulatory policymaking. Minnesota Law Review 2004;89(2):277-341. |
R829690 (Final) |
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Supplemental Keywords:
technological change, innovation, regulation, technology forcing, assessment, automobile pollution, ozone-depleting chemicals, methyl bromide, dioxin, vinyl chloride, high-GWP gases, PFCs,, RFA, Scientific Discipline, Sustainable Industry/Business, Corporate Performance, Economics and Business, Environmental Law, Social Science, environmental policy case studies, compliance assistance, corporate environmental policy, enforcement strategy, policy making, corporate compliance, government intervention, environmental compliance determinants, information dissemination, audit policies, government-industry interaction, enforcement impact, environmental behaviorRelevant Websites:
http://cgi2.www.law.umich.edu/_FacultyBioPage/facultybiopagenew.asp?ID=271 Exit
Progress 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.