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Clean Technologies and Environmental Policy

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01.04.2015 | Original Paper

Prescriptive measures for environmental performance: emission standards, overcompliance, and monitoring

verfasst von: Linus Nyiwul, Ekundayo Shittu, Kanwalroop K. Dhanda

Erschienen in: Clean Technologies and Environmental Policy | Ausgabe 4/2015

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Abstract

This paper studies optimal regulation when a regulator can exploit two levers: traditional enforcement and certification. The objective is to demonstrate how regulation can be adapted by combining theory and empirical regularities in the existing literature. The key result is that a regulatory scheme that allows the regulator to exploit overcompliance certification as well as traditional enforcement can achieve substantively greater environmental performance: a firm now has clear incentives to overcomply, and the others have to improve environmental performance through more stringent optimal standards.

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Violations of standards often result in lawsuits, whose settlement and/or subsequent investments in abatement invoke a negative reaction from investors (Muoghalu et al. 1990; Badrinath and Bolster 1996). Violations often lead to penalties and, like lawsuits, regulatory penalties cause a fall in a firm’s value (Hughes 2000). Challenging the lawsuits or contesting regulatory penalties further erodes the value of a firm (Bosch et al. 1998).

See Appendix 3 for supporting derivations.

See Appendix 4 for derivations

Dating back to Becker (1968) and Stigler (1970), we have thought of the choice problem for a rational agent considering a violation as: Violate if \(E(B) > P \times F\), and no violation otherwise. E(B) are the expected benefits of violation, P is probability of detection, and F is the fine conditional on detected violation. If we slightly generalize this to include two types of penalties—market penalty, \(F_{\rm M}\) and regulator penalty, \(F_{\rm R}\), then the decision problem is violate if \(E(B) > P \times (F_{\rm M} + F_{\rm R} )\). This implies that the mere existence of market penalty, \(F_{\rm M} > 0\), will (1) improve environmental performance, (2) achieve the same or better environmental performance with reduced regulator monitoring effort.

Note that the regular standard here does not have an overbar as in the last section. We remove it when denoting the regular standard when there is also an overcompliance standard.

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Titel: Prescriptive measures for environmental performance: emission standards, overcompliance, and monitoring
verfasst von: Linus Nyiwul
Ekundayo Shittu
Kanwalroop K. Dhanda
Publikationsdatum: 01.04.2015
Verlag: Springer Berlin Heidelberg
Erschienen in: Clean Technologies and Environmental Policy / Ausgabe 4/2015
Print ISSN: 1618-954X
Elektronische ISSN: 1618-9558
DOI: https://doi.org/10.1007/s10098-014-0863-z

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