HOW TO COMPLY WITH ENVIRONMENTAL REGULATIONS? THE ROLE OF INFORMATION ANABELA BOTELHO, LI´GIA M. COSTA PINTO, and ISABEL RODRIGUES*
The effectiveness of environmental regulation can be viewed as conditioned by the action of two main agents: regulated firms and public agency. Using a questionnaire on the pulp and paper industry in Portugal, this article finds that firms’ decision to comply with environmental regulations is strongly influenced by firms’ information on its legal obligations; this effect is stronger for smaller firms. Moreover larger/younger firms are less likely to comply with environmental regulations than smaller/older firms. Regarding the public agency’s behavior, the authors find that greater monitoring efforts are directed toward larger/younger firms and toward those firms most likely to cause higher pollution levels. (JEL K32, Q28)
I. INTRODUCTION
which they must comply. Winter and May (2001) found that firms’ awareness of environmental regulations plays a crucial role on their environmental compliance. Social motivations for compliance may also be present. Specifically, public disclosure of information on the degree of compliance with the environmental standards by firms may put additional pressure on firms to comply with environmental regulations. Afsah et al. (2000) found that public disclosure of information in Indonesia has induced a decrease in polluting emissions, namely because it increases managers’ information about their own plant’s pollution and abatement opportunities. However, this effect is stronger if public disclosure programs are implemented in conjunction with external effects, such as effects on certification and on stock prices. In sum, two issues related to information are essential for environmental compliance. On one hand, firms must be well informed about the environmental regulations with which they must comply, and, on the other hand, public disclosure of information about firms’ environmental performance may raise their perceived social duty to comply.1
Compliance with environmental regulations is a major issue in most countries because imposing a limit on firms’ emissions does not guarantee that effective emissions will meet the limit imposed. For the objective of the environmental policy agency to be accomplished, it is necessary that firms’ behavior be monitored and the legal limits enforced. In addition, firms must be informed about the limits they are required to meet and must be able to comply with those limits. Winter and May (2001) identified five sets of determinants for firms’ decision to comply with environmental regulations: calculated motivations, normative motivations, social motivations, awareness of rules, and capacity to comply. The determinants depend on the firms, the community, and the public agency responsible for creating the regulations, monitoring firms’ performance, and enforcing the regulations. One precondition for firms’ compliance with environmental regulations is their knowledge of the environmental regulations with *The authors appreciate the helpful comments of the editor and anonymous reviewers for this journal, and those of James West and participants of the WEA International Meetings in Seattle, Washington, 2002. Botelho: University of Minho and NIMA, 4710-057 Braga, Portugal. Phone 351-253-604538, Fax 351253-676375, E-mail
[email protected] Pinto: University of Minho and NIMA, 4710-057 Braga, Portugal. Phone 351-253-604586, Fax 351-253676375, E-mail
[email protected] Rodrigues: University of Minho and NIMA, 4710-057 Braga, Portugal. Phone 351-253-604584, Fax 351253-676375, E-mail
[email protected]
1. This motivation for compliance is also designated as normative commitment by Burby and Paterson (1993).
ABBREVIATION EIS: Environmental Impact Study
568 Contemporary Economic Policy (ISSN 1074-3529) Vol. 23, No. 4, October 2005, 568–577 Advance Access publication August 18, 2005
doi:10.1093/cep/byi045 Western Economic Association International 2005 No Claim to Original U.S. Government Works
BOTELHO, PINTO, & RODRIGUES: ENVIRONMENTAL REGULATIONS
Firms’ decision to comply with environmental regulation also depends on the behavior of the public agency that monitors and inspects firms’ compliance. In other words, the decision to comply is also influenced by the enforcement and monitoring strategy of public agencies. These strategies influence the expected costs and benefits of compliance.2 In particular, firms’ expected costs and benefits of compliance are influenced by the likelihood of detection, the likelihood and amount of the fine, and the cost of compliance. Winter and May (2001) found that the higher the probability of detection, the higher the degree of compliance by firms; compliance is also greater if regulated firms think there is a stronger likelihood of a fine being imposed for a given violation. With respect to the public agency’s behavior, Dion et al. (1997) found that monitoring is not random. Using plant-level data from the pulp and paper industry in Quebec, Dion et al. (1997) found that larger firms and firms whose activity may cause higher environmental damages have a higher probability of being inspected. The latter result lends support to the theoretical work on monitoring issues, which in general predicts that monitoring activities occur more frequently at major sources of pollution and at firms where the public agency believes that environmental requirements are being violated.3 Empirical research into these issues is, however, relatively sparse mainly due to data limitations. The objective of this article is to analyze the environmental agencies’ behavior with respect to the monitoring of environmental requirements and the firms’ decision to comply with those requirements. Using data collected by a national survey of Portuguese firms in the pulp and paper industry, the authors first investigate the determinants of the environmental agency’s decision to monitor and inspect polluting firms. They then evaluate the extent of compliance by Portu2. Winter and May (2001) designate the decision to comply by comparison of expected costs and benefits of compliance as ‘‘calculated motivation’’ for compliance. 3. Russel et al. (1986) and Cohen (1999) provide excellent surveys of the literature on monitoring issues. One common feature of this literature is the assumption that the probability of inspection depends on the relation between the firms’ effective pollution and allowed pollution. More recently, formal game theoretic work on these issues has focused on providing a rationale for this assumption by explicitly modeling the strategic incentives of the parties (firms and inspection agencies) involved in such settings (see, for example, Franckx 2001a, b).
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guese firms in the pulp and paper industry with current air legislation and analyze the determinants of firms’ compliance behavior with a particular emphasis on firms’ information about their legal obligations. The article is organized as follows. Section II provides a summary of Portuguese legislation on air pollution with special emphasis on the issues relating to the paper and pulp industry. Section III presents the survey instrument elaborated to investigate the information firms have on the environmental regulations applicable to them, the degree of compliance with those regulations, and the agency’s behavior with respect to inspections. Section IV contains the characterization of compliant versus noncompliant firms and informed versus noninformed firms and tests for the role of information on firms’ decision to comply with regulations. Section IV also contains the analysis of the determinants of agency’s behavior regarding its decision to inspect firms. Concluding remarks are offered in section V.
II. INSTITUTIONAL BACKGROUND
Portuguese environmental regulation’s fundamental text was published in April 1987. Under article 8, all activities that release harmful emissions to the environment are subject to special regulation. In particular, polluting activities are subject to a licensing process, and their emissions are subject to limits established in specific legislation. Moreover, if the legal limits on emissions are not met, state agencies may apply fines and sanctions. One possible sanction is to cease the activity, and in some cases judicial actions may also be taken. The control of polluting emissions from fixed sources is defined in a separate legal text (Dec. Lei 352/90, November 1990). Plants that generate emissions subject to legal limits must self-control their emissions.4 The control is either continuous or periodic,5 and the state agency may perform monitoring activities 4. The classification of the activities subject to limits on the release of polluting emissions and the limits for each type of pollutant is established in Portaria 286/93, 12 March. The pollutants controlled by this text are sulfur dioxide, lead, particles, ozone, and carbon monoxide. 5. The definition of the type of control of emissions that plants must perform is set according to criteria defined by European Union regulations; if these do not exist, it should be defined by the state agency at the time of the licensing process.
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whenever it deems them necessary.6 The legal limits are set according to three criteria:7 existence of adequate control technology, economic effects on the plants, the well-being of the population and of the environment. Noncompliance with the obligations and limits set in the present legal text are subject to fines.8 The law also establishes that all negligent behavior is punishable. Finally, article 30 of the legal text (Dec. Lei 352/90) creates an environmental tax on pollutants. The objective of the tax consists in raising revenues for air pollution control initiatives and is a function of the amount of emissions in the previous year.9
III. THE SURVEY
The paper and pulp industry is an important source of air pollution from fixed sources. It is also a sector composed of plants of different sizes located in several districts. As such, this sector constitutes a good case study that might enable the authors to make important inferences for other polluting sectors as well. The survey is composed of two parts.10 The first part consists of questions regarding a general characterization of the firm. Some questions are on the date of birth, location, subsector of activity,11 sales revenues, number of workers, percentage of foreign capital, and so on. The second part is on the evaluation of the degree of information firms have about the 6. The state agency must install control stations of air quality in areas where pollution is expected to be high and that are representative of the local conditions. If the information on emissions reveals concentration levels above the limit concentration level of pollutants, the state agency may declare the area as exceptional, which implies the definition of a plan to reduce emissions and its information to local plants and general population accompanied by a financial plan to help cope with the new levels. This specific legal text confirms the bias of environmental state agencies toward the control of polluting emissions in areas where environmental damage is expected to be high. This bias was also found in enforcement activities by Dion et al. (1998). 7. The limits may be revised at least every five years, except if the European Union regulations change. 8. The limits of the fines are set in the general legislation. 9. The tax may be used to finance plants’ investments in pollution abatement. 10. The survey is available on request. 11. The paper and pulp industry is divided into four subsectors: pulp mills (21110); paper and paperboard mills, except corrugated (21120); paper and paperboard mills, including boxes (21211); other paper and paperboard boxes (21212).
legislation that covers their activity. Some of the questions under evaluation are the licensing process, the environmental impact study, the knowledge of the level of risk that was attributed to the firm as a function of the activity developed, and the risk that the activity implies to humans and the natural environment.12 The authors also question firms on their agreement/disagreement with some pieces of environmental legislation. Finally, questions on specific aspects of the legislation are included. These aspects are emissions’ limits, measurement of emissions, and means of emissions release (chimneys). The survey was mailed to all firms in the paper and pulp industry in Portugal excluding firms with fewer than five paid workers, and answers where also received by mail.13
IV. RESULTS
A brief characterization of the firms in the sample is depicted in Figure 1.14 Firms are distributed by nine districts with a higher concentration in Aveiro, Lisbon, and Leiria. Half of the firms are in subsectors 21211 and 21212. 12. The survey specifically asks firms to point out which risk category was attributed by the state agency to the firm. These categories correspond to different risk levels and are determined by the state agency according to the type of pollutant and quantity released. These in turn are detailed in the legislation (Decreto-Regulamentar 25/93, 17 August; Portaria 744-B/93, 18 August) and vary according to the subsectors of activity. 13. The survey was first sent out in June 1999. Given a low response rate, the authors resent the survey in April 2004 and contacted the firms by phone to personally explain the objectives and procedures of the research, primarily to make clear anonymity conditions. As the deadline for receiving the responses approached, the authors again called each firm as a reminder for completion of the survey. They obtained 46 responses out of 173 surveys set out, corresponding to a response rate of about 27%. 14. Concerns about the representativeness of the sample led the authors to perform some statistical tests (binomial, and zM tests; see, for example, Conover 1980) because only 45 of the 173 surveys mailed were returned complete. The authors tested the representativeness of the sample with respect to four variables on which information was available for the sample and the population. The variables were: district of location, subsector of activity, number of workers, and sales revenue. The authors concluded that the sample was representative with respect to district of location, number of workers, and sales revenue. This analysis is available on request. Although the results indicate that the sample is representative, there is also the question about whether the firms that returned the survey are in some other aspects different from the ones that did not respond, but the authors have no means to evaluate this hypothesis.
BOTELHO, PINTO, & RODRIGUES: ENVIRONMENTAL REGULATIONS
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FIGURE 1 Sample Characteristics
A. Date of Birth
B. Average Sales Revenue (b)
14
16
12
14
10
12 10
8
8
6
6
4
4
2
2 0
0 1981-90
1990
C. Average number of workers
>100
lo
l
ste
ba tú
Ca
Se
na
oa
a
rto Po
sb Li
a
ia
51-100
V
26-50
iri
ve A
0
Le
0
2
a
2
4
or
4
6
Év
6
8
a
8
10
br
10
12
im
14
iro
12
11-25
>5000
D. District of location
16
