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Do Voluntary Approaches WorkDo Voluntary Approaches Workfor Environmental Protection?

Prepared for the 2010 Energy and Environmental Summit of the States

Bren School, UC Santa BarbaraMarch 5, 2010

Prof. Charles D. KolstadDepartment of Economics &

Bren School of Environmental Science & Management

University of California, Santa Barbara

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The Issues

Conventional regulation: state passes rules that polluters must follow or face penforcement action

Economic incentives: state rewards andEconomic incentives: state rewards and punishes behavior but does not prohibit (e.g., cap and trade or emission tax)cap and trade or emission tax)

Voluntary actions: firms voluntarily agree to be good citizens (individually or in groups)

Bren SchoolUC Santa Barbara

be good citizens (individually or in groups)2

1. Dupont’s Decision to Stop P d i CFC (F )Producing CFCs (Freons)

CFCs invented in 1920s by GM & DupontSafe alternative to refrigerants then in use

Use expanded over the decades

In 1970s discovery that CFCs were depleting the stratospheric (high) ozone layer

Initially, Dupont vigorously resisted restrictions CFCon CFCs

In 1988 Dupont announced it was phasing out CFC d ti


CFC production3

Dupont: Why did Dupontl t il t d i CFC ?voluntarily stop producing CFCs?

Explanation #1: Good citizen

Explanation #2: Good business (if so how?)Explanation #2: Good business (if so, how?)


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Dupont: Why did Dupontl t il t d i CFC ?voluntarily stop producing CFCs?

Explanation #1: Good citizenOfficers and employees are people too

E l i #2 G d b iExplanation #2: Good businessPatents had expired on CFCs

Production had become competitive – a commodity – with low profit margins

Dupont felt that it was particularly good at innovation

Dupont welcomed returning to patent‐protected productionDupont welcomed returning to patent protected production

A legal ban on CFCs would protect Dupont’s foray into CFC substitutes.


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2. Sustainable Forest Products C tifi tiCertification

Forest Stewardship Council emerged from 1992Forest Stewardship Council emerged from 1992 Rio Earth Summit (UN Conference)

FSC offers verification and a label to affix to woodFSC offers verification and a label to affix to wood from “sustainable forests”

Home Depot (and others) offer FSC certifiedHome Depot (and others) offer FSC certified wood products (and non‐certified wood)

Why would firms adopt third‐party certification y p p yrather than do it themselves, more cheaply?

Lots of costs associated with credibly certifying –


better to centralize those costs6

3. Green Stock Portfolios

Many “Green” Mutual Funds AvailablePortfolio 21

Green Cent r F ndsGreen Century Funds

Winslow Green Mutual Funds

Vanguard FTSE Social index Fund

WilderHill Clean Energy Index

Do these funds do better than the market (or as well)?

Or is there a sacrifice in performance for greenness?Or is there a sacrifice in performance for greenness?


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Why invest in green firms?T tiTwo questions:

What is the record of performance?

Why might green be good for investors?Why might green be good for investors?


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Why invest in green firms?y g

What is the record of performance?Domini Social (DS) index vs S&P, 1990‐2004( ) ,

DS 400: 1.1%/yr return; S&P 500: 1.0%/yr return

However, statistically indistinguishable

Why might green be good for investors?May lower the cost of capitalMay lower the cost of capital

Attract better employees (eg, Dow)

Signal well managed company


Signal well managed company

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4. EPA’s 33/50 Program/ g

Voluntary toxics program from early 1990s

Firms free to joinFirms free to joinAgree to reduce emissions of toxics by 33% by 1992 and by 50% by 19951992 and by 50% by 1995

Firm benefits: PR and some regulatory relief

C d i i j i did d liCovered emissions among joiners did decline over the 1990‐95 time period


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Was 33/50 program effective?/ p g

If only “good” firms join, then all the program does is signal who is “good”p g g g

Madhu Khanna studied the two decisionsWhether to participateWhether to participate

Whether to reduce emissions after joining

C l iConclusionProgram did not reduce emissions beyond hat o ld ha e occ rred itho t it


what would have occurred without it11

5. Responsible Care and the Ch i l M f t ’ AChemical Manufacturer’s Assn.

Bhopal and other accidents generated negative public image of chemical industryg p g y

Growing public sentiment that further regulation of industry was neededregulation of industry was needed

In 1989 CMA set up Responsible Care Pgm.

D i d f 10 l i i lDesigned as a set of 10 general principles to which all CMA members agree


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What did Responsible Care accomplish?p p

For public: achieved improved performance by industry p p p y y(probably)

For firms: staved off mandatory and perhaps onerous l tiregulations

Is public better off with voluntary approach than mandatory approach?pp

Maybe/Maybe NotIndustry‐designed rules may have lower cost for same env quality

Mandatory regs might be difficult to implement and not very strict

Bottom line: voluntary approach achieves something but not necessarily enough


necessarily enough

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Two Basic Questions for todayQ y

How do voluntary environmental actions work?

How can I (a legislator) effectively use voluntary actions to improve thevoluntary actions to improve the environmental quality in my state?


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Types of Voluntary Actionsyp y

Purely by firmsPurely by firmsFor competitive advantage

Driven by consumer demandDriven by consumer demand

Driven by investor and/or employees

G t i t ti ith fiGovernment interacting with firmsGovernments may set up programs with l t ti i tivoluntary participation

Firms (or associations) may institute voluntary actions to stave off mandatory regulations


actions to stave off mandatory regulations15

What Options for Legislation?p g

Labelling programs facilitate green consuming

Disclosure programs provide some pressure on poorest performing firms

Voluntary government programs (ie, firms may join) must be accompanied by real rewards for joining or penalties for not joining

Industry‐sponsored voluntary actions must be scrutinized and compared to mandatory actions.


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Labeling Programs Facilitate G C iGreen Consuming

Energy Star (US)

Clear organic standards (Cal)Clear organic standards (Cal)

Appliance energy efficiency labels (US)

A bil f l l b l (US)Automobile fuel economy labels (US)

Possible: develop green star program


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Disclosure programs pressure t f i fipoorest performing firms

Toxic release inventory

Greenhouse registriesGreenhouse registries

Possible: develop programs for firms to label goods according to embodied carbonlabel goods according to embodied carbon


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Voluntary Government P ith R l R dPrograms with Real Rewards

Top Runner Program in Japan

EPA programs IF they were accompaniedEPA programs IF they were accompanied by real rewards and penalties

Possible: develop voluntary greenhousePossible: develop voluntary greenhouse registry accompanied by rewards to firms that join and reduce emissionsthat join and reduce emissions


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Industry‐sponsored voluntary tiactions

Welcome such actions

Compare to what would be accomplishedCompare to what would be accomplished with mandatory regulations

For environmentFor environment

For consumers

For firmsFor firms


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Additional Readingg

Symposium on “Corporate Social Responsibility and the Environment” in p yReview of Environmental Economics & Policy, Summer 2008. [Authors: Reinhardt, y, [ ,Stavins, Vietor, Lyon, Maxwell and Portney]

Chapter 17 in Kolstad: EnvironmentalChapter 17 in Kolstad: Environmental Economics (2nd Edition, 2010), Oxford


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