Abstract
This paper focuses on a type of voluntary pollution abatement agreement (VA) in which the regulator offers regulatory relief for the participating firm in exchange for environmental improvements. If the regulator does not have statutory authority to provide regulatory relief, the VA can leave the firm more vulnerable to legal challenges through citizen lawsuits. I use a model of negotiated VAs to examine the impact of citizen enforcement on the likelihood of an agreement and on the outcome of a VA. The findings indicate that both the probabilities of enforcement by the regulatory agency and of private enforcement through a citizen lawsuit affect the likelihood of a VA and the level of abatement when an agreement is reached. A VA can result in higher abatement and net social benefits than regulation if the probability of private enforcement and accompanying costs are high and the probability of agency enforcement is low.
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Notes
A third type of voluntary arrangements usually mentioned in this context is a unilateral commitment, in which a polluter develops initiatives without any regulatory involvement. Given their unilateral nature, it is not clear that they can be considered a voluntary “agreement.”
A recent review of trends in enforcement indicators suggests that EPA budgets and staffing levels have declined (in real terms) over time, and that only a fraction of regulated entities are subject to compliance monitoring or to penalties when noncompliant (Gray and Shimshack 2011).
The regulator may offer regulatory relief despite lacking the authority to do so because a private lawsuit is not certain and because the resulting abatement level may nevertheless yield a higher net benefit than what can be expected from imperfect enforcement.
This is generally not relevant for public voluntary programs to the extent that they are not legally binding and usually offer public recognition or technical assistance rather than regulatory relief, hence shielding the EPA and firms from legal action (Lyon and Maxwell 2004). However, citizen enforcement and the issues raised here for negotiated agreements would apply to public voluntary programs as well if they offered polluters a waiver from regulatory enforcement.
Although opportunities for involvement of private groups in environmental enforcement are increasing in Europe, citizen suit cases remain relatively infrequent because many national legal systems have traditionally restricted standing for environmental nongovernmental organizations (Kelemen 2006).
An agency decision not to prosecute, no matter how well founded, will not bar a citizen suit.
Note that the abatement level \(a\) is observable, and thus the regulator can verify whether the firm follows through on the negotiated agreement. The focus here is on the conditions that lead to a VA and on the resulting abatement levels. Hence I assume that the firm complies with the conditions of the agreement. This is consistent with the behavior of firms who enter this type of VAs in practice.
An alternative modeling approach would allow the private group to participate in the negotiation of the VA. All else equal, the abatement level resulting from the VA would be higher, since the private group would negotiate for more abatement. On the other hand, one can imagine that if there is an agreement and a VA is the equilibrium outcome of the negotiation between the regulator, the firm, and the environmental group, the threat of a lawsuit given a VA would disappear. Firms could only be sued in the absence of an agreement. Thus this is a different way of incorporating private group participation in a VA. Given that the focus here is on the threat of a suit when there is a VA, this alternative is left for further research.
To keep the contest model tractable, I have abstracted from the possibility that the private group may receive reimbursement for its legal expenditures if it wins the suit. See Baik and Shogren (1994) for a discussion of the efficiency properties of reimbursement rules.
Because civil penalties and litigation costs in citizen suits cases are generally high, I assume that \(F > ca_{S}\), that is, the cost from private enforcement exceed the compliance costs associated with agency enforcement.
I assume that \(a_{0} < a_{S}\), since it is reasonable to expect that the firm will choose less abatement than required by regulation.
The appendix is available at http://appliedecon.oregonstate.edu/langpapc.
It is straightforward to see that \({\partial a_V^{\min } }/{\partial p}={\left[ {NSB(a_S )-NSB(a_0 )} \right] }/{NS{{B}^{\prime }}(a_V^{\min })}>0\) since by construction \(NSB(\cdot )\) is increasing at \(a_V^{\min }\), and that \({\partial a_V^{\min } }/{\partial \gamma }=0.\)
It is easy to verify that if \(\pi (a) = 0\), which corresponds to the model without citizen suits, \(a_V^{\max } =a_S\) for \(p = 1\), so \(a_V^{\max } \ge a_V^{\min }\) for all \(p > 0\) and a VA is the equilibrium outcome for any positive enforcement probability (as in Segerson and Miceli 1998).
Note that a situation in which the regulator simply makes a take-it-or-leave-it offer to the firm, akin to a public voluntary program, corresponds to a special case in the model presented here in which the regulator has all the bargaining power, so that \(\alpha = 0\) (Segerson and Miceli 1998). In this case the regulator is essentially maximizing his payoff (NSB) subject to a participation constraint for the firm. Hence the outcome would be \(a_V =\min \{a_V^{\max } ,a^{*}\}.\)
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Langpap, C. Voluntary agreements and private enforcement of environmental regulation. J Regul Econ 47, 99–116 (2015). https://doi.org/10.1007/s11149-014-9265-8
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DOI: https://doi.org/10.1007/s11149-014-9265-8