Environmental federalism and environmental liability

Environmental federalism considers what level of government should optimally regulate pollution. This paper addresses this question for accidental pollution, which government regulates through the ex post liability regimes of either negligence or strict liability. We find that decentralizing the choice between these regimes does not, in general, induce the socially optimal outcome. When firms can pay all damages, all regions may choose negligence and impose an overly strict standard of due care. When firms may be bankrupted by damages, all regions may choose strict liability, which induces too little care. In addition, asymmetric equilibria are possible in which some regions choose negligence, others strict liability. Combining negligence with a Pigovian tax, or strict liability with a bonding requirement can align regional authorities' incentives with those of a central government.     

Incentives to diffuse advanced abatement technology under environmental liability law

Polluting firms with advanced abatement technology at their disposal have incentives or disincentives to share this technology with other polluting firms. The ‘direction’ and extent of those incentives depends on the liability rule applicable and the way technical change impacts marginal abatement costs. We establish that incentives for diffusion are socially optimal under strict liability and socially suboptimal under negligence if technical change lowers marginal abatement costs for all levels of abatement. Negligence may, however, induce better diffusion incentives than strict liability if technical change decreases (increases) marginal abatement costs for low (high) levels of abatement.     

Pollution and Capital Markets in Developing Countries

It is said that firms in developing countries do not have incentives to invest in pollution control because of weak implementation of environmental regulations. This argument assumes that the regulator is the only agent that can create incentives for pollution control, and ignores that capital markets, if properly informed, may provide the appropriate financial and reputational incentives. We show that capital markets in Argentina, Chile, Mexico, and the Philippines do react to announcements of environmental events, such as those of superior environmental performance or citizens' complaints. A policy implication is that environmental regulators in developing countries may explicitly harness those market forces by introducing structured programs of information release pertaining to firms' environmental performance: public disclosure mechanisms in developing countries may be a useful model to consider given limited government enforcement resources.     

Multiple receptor ambient monitoring and firm compliance with environmental taxes under budget and target driven regulatory missions

We analyze the potential for an environmental monitoring agency under different regulatory missions to use multiple measures of ambient pollution levels to induce firm compliance via endogenously determined probabilistic firm-level inspections of polluting activities. Departing from previous analyses, we consider a framework where the regulator has multiple, rather than a single, measures of ambient pollution in a setting where many firms are subject to a self-reported emissions tax that is not perfectly enforceable. Under a budget-driven mission, we show that a regulator can fruitfully utilize the added information from multiple ambient monitoring receptors to induce improved environmental compliance through the creation of strategic interactions among firms. Additionally, our results provide new evidence on the relative efficiency of budget- vs. target-driven environmental enforcement missions.     

Stochastic pollution, costly sanctions, and optimality of emission permit banking

This paper identifies a new economic motive for pollution regulations that allow polluting firms to bank and borrow emission permits over time. When aggregate pollution is stochastic, an intertemporal permit trading regime can provide firms with efficient incentives for pollution abatement without the need for costly government enforcement actions that would otherwise be required.     

Pollution havens and industrial agglomeration

This paper examines the pollution haven hypothesis using a spatial-economy model of two countries and two sectors. The manufacturing sector generates cross-border pollution which reduces cross-sectoral productivity of agricultural goods, and lowers local income. We derive a demand-reducing effect that discourages firms to move to the country with laxer environmental regulations, in the absence of any comparative advantage. Our analysis also demonstrates that manufacturing agglomeration forces can alleviate the pollution-haven effect: a pollution haven may not arise if environmental regulation is slightly more stringent in the larger country.     

Pollution Haven and Corruption Paradise

In this paper, we present a simple theoretical extension from the Economic Geography literature to characterize the main features of pollution havens (lax environmental regulation, good market access to high-income countries and corruption opportunities). Using structural and reduced-form estimations, we find that pollution havens are not a “popular myth” for European firms, laxer environmental standards significantly explain the location choice of polluting affiliates. We analyze in depth the role of trade costs (using various bilateral and multilateral measures), a 1% increase in access to the European market from a pollution haven fosters relocation there by 0.1%. We also find that corruption lowers environmental standards, which strongly attract polluting firms: a 1% increase of corruption fuels relocation by 0.28%. We test the economic significance of these empirical findings via simulations. The protection of the European market (e.g., a carbon tax on imports) to stop relocations to pollution havens must be high (a decrease of the European market for Morocco and Tunisia equivalent to 13%) not to say prohibitive (31% for China).     

Prevention and cleanup of dynamic harm under environmental liability

This paper explores incentives for accident prevention and cleanup when firms are subject to environmental liability. In our two-period setup, the level of environmental harm in the second period depends on first-period harm when cleanup was incomplete. Under strict liability, in the first period, firms with a positive probability of going out of business before the second period have inadequate prevention and cleanup incentives. The fundamental disconnect between private incentives and social optimality cannot be remedied by using a multiple of harm as the level of compensation. Under negligence with a causation requirement, incentive problems remain; however, under negligence without such a requirement, first-best incentives may emerge, and using a multiple of harm as the level of compensation can ensure the efficient solution.     

Competitive investment in clean technology and uninformed green consumers

In a market where consumers and the regulatory authorities are not fully informed about the actual production technology or environmental performance of firms that engage in strategic competition, I study the effect of environmental consciousness of consumers on firms׳ incentive to invest in cleaner technology. Firms compete in prices and may signal their environmental performance to uninformed consumers through prices. I also analyze the effect of an expected liability on firms in this setting. Compared to full information, incomplete information generates higher strategic incentive to invest in cleaner technology particularly when consciousness and/or expected liability are not too high. Requiring mandatory disclosure of technology or environmental performance may discourage such investment. Even though consumers and the regulator are uninformed, competition has a positive effect (relative to monopoly) on the incentive to invest.     

Improving the prevention of environmental risks with convertible bonds

This paper considers a limited liability firm that needs external funds in order to invest in an activity that presents an environmental risk for the Society. When the firm's risk-reducing activities cannot be observed by the lenders, we show that the issue of convertible bonds can create incentives to improve prevention. Convertible bonds allow the holder to exchange his bonds for a fixed number of the firm's shares. The use of such hybrid securities could either complement or be an alternative to the American CERCLA legislation about lender extended liability. We define an optimal convertible bond contract that induces unchanged economic profits for the bank, more prevention and higher expected net revenues for the firm and a higher expected social welfare than with standard debt. Our results hold true both with and without extended liability.     

Risk Premiums for Environmental Liability: Does Superfund Increase the Cost of Capital?

Superfund liability may impose financial risk on investors and thereby increase firms' costs of capital. We analyze monthly stock returns for 73 chemical companies using several measures of Superfund exposure. Additional exposure appears to increase costs of capital for larger firms, but perhaps not for smaller firms. From 1988 to 1992, we estimate an average increase in cost of capital for 23 larger firms of between 0.25 to 0.40 percentage points per year. The social cost of Superfund-related financial risk in the chemical industry may be as high as $800 million annually or enough to clean up about 20 sites.     

The effect of competition on toxic pollution releases

We examine how competition affects toxic industrial releases, using five years of data from thousands of facilities across hundreds of industries. Our main result indicates that competition reduces toxic releases at the facility level. On average, each percentage-point reduction in the Herfindahl Index (HHI) results in a nearly two-percent reduction in a facility׳s toxic releases. At the same time, we find no evidence that competition increases aggregate pollution. Further analysis sheds some light on the mechanisms through which firms reduce pollution releases due to increased competition. In particular, we find suggestive evidence that this relationship is due to both reduced output and increases in abatement. We find no evidence that our result is driven by: consumer aversion to pollution, regulations changing with competition, or technologies introduced by new firms. Taken together, our results indicate that competition may be good, at least for public health in areas near polluting facilities, and fail to provide support for the hypothesis that competition leads to more socially undesirable behavior.     

Corporate governance and green innovation

We study the relationship between corporate governance and firms׳ environmental innovation. Exploiting changes in antitakeover legislation in the US, we show that worse governed firms generate fewer green patents relative to all their innovations. This negative effect is greater for firms with a smaller share of institutional ownership, with a smaller stock of green patents, and with more binding financial constraints. Investigating regulatory and industry variations, we also find more pronounced effects for firms operating in states with lower pollution abatement costs, and in sectors less dependent on energy inputs. Overall, our results suggest that ineffective corporate governance may constitute a major obstacle to environmental efficiency.     

春秋季长江口及其邻近海域营养盐污染研究

依据东海环境监测中心两个航次的资料和美国国家海洋大气管理局(NOAA)相关资料,开发Matlab计算机数值分析和图形显示技术,对长江口及其邻近海域的营养盐污染状况进行分析和探讨。结果表明:海域总体营养盐超标严重;氮、磷污染物的来源主要为径流携带入海,磷还受外海流系高质量浓度磷输入的影响;营养盐污染特征显示,表、底层营养盐均自入海口向外围、由近岸向远岸迅速递减,秋季冲淡水将污染物向外海携带,污染区也相应向外海推移;营养盐结构显示,该区w(N)/w(P)比值最高达到了405,无机氮异常丰富,海域浮游植物生长的限制因子存在时空变化。分析得到营养盐污染特征与长江河口锋位置及冲淡水流向的关系密切,可以考虑由长江河口锋位置及冲淡水流向来确定污染物的聚集位置和扩展方向。     

Budget-Balancing Incentive Mechanisms

A. P. Xepapadeas [J. Environ. Econom. Management20, 113-26, 1991] developed a pollution abatement incentive mechanism that both reduces the information requirements of a regulator and is "budget-balancing," drawing only on the social gains from pollution abatement to encourage firm compliance. This paper demonstrates that, contrary to Xepapadeas, the budget-balancing system of random penalties cannot be used to induce compliance with the regulator′s objectives if firms are risk neutral. However, the mechanism can be successfully applied if firms are sufficiently risk averse [E. Rasmusen, RAND J. Econom.18, 428-435, 1987].     

Locational pricing of an environmental input

This paper models the joint production of outputs and heterogeneous effluents for firms exogenously located along a river. We derive location-specific water quality standards that reflect the nonsymmetric impact of upstream discharge relative to that same discharge further downstream. Depending on the type of sequential firm interdependence, a water control agency may or may not be able to insure efficient input choices by decentralizing these choices to the firms. Under certain conditions we can derive site-specific price aggregates to reflect the social imputed value of a particular type effluent released at a given site. If each firm is assigned responsibility for cumulative water quality just below its drain pipe, then water quality control may be modeled as an application of nonsymmetric recursive decision making.     

Assessment of non-point source pollution using a spatial multicriteria analysis approach

Eutrophication caused by the enrichment of nutrients from diffusing sources is degrading surface water quality throughout the world. Assessing the potential contributions of different land areas in diffuse nutrient export has become an important task in non-point source (NPS) pollution control. Existing methods were often limited by the availability of local data and the complexity of model formulation. This study developed a spatial multicriteria method to evaluate the nitrogen loss potential at the basin level. Four criteria were formulated to characterize the source capacity of nitrogen export, the flow path to water body, the efficiency of runoff generation and the climatic driving force. The proposed method is a low-effort approach since the required data is either already available in a global context or easily produced with limited inputs. Being implemented in GIS environment, this method generates maps that can be easily interpreted to provide decision support. The method was applied to the Huai River Basin, China. The results were validated based on the correlation between the nitrogen loss potential of sub-basin and the water quality class of river. The maps of nitrogen loss potential were helpful for examining the regional pattern of diffuse nitrogen loss, and could facilitate the decisions of NPS pollution management at the provincial or basin level.     

Further Results on Permit Markets with Market Power and Cheating

This paper examines a market for pollution permits in which one firm has market power and one or more firms is noncompliant. I show that the firm with market power may choose to hold more permits than it needs, effectively retiring permits from the market. I also show that some noncompliance may be socially desirable because it can mitigate the distortion caused by market power. Similarly, some degree of market power may be socially desirable because it can, in turn, mitigate the distortion caused by noncompliance.     

Non-compliance and the quota price in an ITQ fishery

This paper examines the effects of non-compliance on quota demands and the equilibrium quota price in an ITQ fishery. I show that whereas lower quota prices are implied unambiguously by expected penalties which are a function of the absolute violation size, the expectation of penalties based upon relative violations of quota demands can, under certain conditions, produce higher quota prices than in a compliant quota market. If there are both compliant and non-compliant firms in the fishery, the result would then be a shift in quota demand from compliant to non-compliant firms, rather than the reverse. The findings are generally applicable to quota markets in other industries, including pollution permit markets.     

Two-goal regional environmental policy: The case of the Santa Ana river basin

In determining public policy measures, the value of information about the functional relationships between targets and instruments can hardly be understated. In the present paper these macrorelations are obtained for a competitive industry by way of aggregation over many individual firms following simple behavioristic patterns. With the exact knowledge of the macrorelations, obtaining the numerical values of the instruments becomes a simple mathematical programming problem. These principles are applied in examination of the water pollution problems generated by the dairy industry in the Santa Ana River Basin where local governments face the problem of controlling environmental quality with minimum opportunity costs in terms of output.