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à A policymaker faces two basic options when coming to a policy for a cleaner

3 to use Ú  
  ¬ ¬   
  ë or induce firms to
participate in ͚M

à Úhere are three broad types of voluntary agreement that occur:

3 m  ÚÚ Ú where firms take action without prompting by regulatorsë
G  Ú  ^  Chemistry Industry Associations in the US UK Canada established
͚w      programmes after a chemical leak in India

3 6   Ú where a firm and regulator negotiate the terms of a

voluntary agreementë
G  Ú  è ¬   ¬¬   that by 2002 0% of
car parts could be reused recycled and recovered

3 ?
  Ú where a regulator creates the conditions of an
agreement and attempts to recruit firmsë
G  Ú  m     ¬  ¬   !  
where listed chemicals were to be reduced by 33% in ^ 2 and 50% in ^ 5

à 9     M  Ú  


à Úhe most common benefit is that V As are far more flexible especially
under Unilateral and Negotiated agreementsë which allow the firm to
take the least cost method of abatement

3         "       
 ¬   for example regulation rather than Ús 
the more flexible the regulatory instrument the lower the cost savings

3 Indeed Ús/igouvian taxes satisfy the 

Ú      where
the marginal abatement cost is minimised across all firmsë voluntary
agreements due to their nonmandatory nature may not satisfy it

à Also there are gains from reduced confrontation

3 M    "  ¬ ¬     and there is

less spending on lobby groups

3 Also information flows are richer 

Ú   about abatement technologies and therefore 
Ú Ú   

à |    provided a       ¬  the

theoretical framework under which all Legislative response p ë should be
three forms of voluntary agreement endogenous
could be modelled see next slide
à Let the key be as follows:
à It can be seen as a game between three
actors  the regulator the firm and the 3 Cv the cost of abatement under a
legislator V A Cm the cost under legislation
  Ú     
3 A Unilateral agreement occurs if the M
regulator  #  
        3 ü^ is the profit under environmental
    but the firm still regulation ü0 is the profit without
implemented a voluntary üü   Ú
agreement Ú       

3 A Negotiated agreement or a ublic 3  is the indirect benefit from a V A

Voluntary agreement occurs    ¬ë S is the subsidy
       under an incentivebased V A
    and the firm accepts
the offer/plan 3  is the probability of legislation if
offer is made and rejected  is the
à ? Ú  6  ¬  "   probability of legislation if offer is
 no strategic behaviour of the not made


 ü !
X  $  ë  ü! Ú

  ü! "#
wegulator   ë 

 ü  !
w & ¬ Legislator
%$     Firm
  ë  ü! Ú

ü! "|"#

à Úhe firm faces a choice between a $6 outcome if they take a V Aë and an
?  outcome if they reject/do not start a V Aë

à Úherefore a V A will occur   ë        

¬  ¬       '       :

 ]    ·à ]  à ] ·  Ú ]     PÚ ]    ] P Ú 
à It is possible to see that even if no offer is made and there is no threat % ë a
V A may still arise due to the premium associated with marketing green goods
and the indirect benefits  a V A is more likely to arise under no threat % ë if
an offer is made however as a subsidy increases the payoff for the firm
Ú ]Ú    Ú  Ú   B S JCv
à Ëowever  
p==^ where a V A will ALWAYS be taken:


à 9  Ú      M 


à Environmental Stewardship:

3 ë   #  ¬      ¬   '
More likely when concerned with individuals rather than large firms

à Market Incentives:

3 ͚„ 
Ú may pay a premium for environmentallyfriendly produce as
shown in the previous model Linked to the   ()   where
higher income consumers become more environmentally aware ut green
consumer argument may not extend to intermediate/primary industries

3   Ú     Ú  Ú   which  ¬  
¬¬  ¬ ¬    ¬$¬

3 ?     a firm may be in a "*"  where it can reduce pollution
through innovation and     ¬ ¬ ¬¬      
¬     Ëowever if such technology was available then it suggests that
the firm systematically overlooks it prior to the threat of regulation

à If there are no strong $  incentives then use „Ú$  :

à Úhe Government can use ͚    negative incentivesë or    positive incentivesë:

3 Carrots take the form of subsidies S in the modelë which increase the likelihood of
participating if =0 and/or there is no premium from green consumers
G Úhe problem with carrots is that they        firms may enter the industry in
order to receive the subsidies Also

 Ú Úhe regulator may therefore find it too socially costly to generate the

3 Sticks are the threat of regulation p and  in the modelë

G In order to be effective    Ú
   Sticks and carrots can be used to complement
one another as also shown in the model

à Incentives should also take into account the possibility of       *
"     *  ¬¬ An incentive would work better if it was exempting a firm
from already existing regulation

à Incentives should also consider Ú   ÚÚ  &    
 Ú Under
imperfect information regarding abatement costs:

3 Carraro and Siniscalo ^ ë create an adverse selection model where the regulator offers a
  ¬ ¬ to firms aimed at inducing firms to reveal their costs Ëowever this gives
rise to Ú   and a    Ú  for some firms which impact on
the welfare effects of a V A

à Any of the V A types could appear due      " $M  
to   Ú Ú     or that Legislators
attempting to shape regulatory delegate too much power to
decisionsë: regulators

à ?!Ú  

  : à 9    Ú  

3 If the   '     3 If legislators announce regulation

     but delay outlining specifics such as

     the    ë the firm

    &    If it may undertake a level of abatement
is low then the firm will act to to prevent harsh standards being
͚headoff the regulator imposed

3 Úhe Segerson + Li model shows this à 

Ú   :
also  ¬M 6   
     ¬   3 y investing the firm may convince
# ¬     the regulator that it is less likely to
renege on commitments Ëowever
3 Welfare reductions could occur if:    *   ¬
Corporate Lobbying expenditures " 
reduce the efficacy of
environmental lobbying à $
  Ú  Ú 
expenditures      * 
 Ú no real evidenceë
  & ¬ 

à 9   M      Ú

à ne of the main criticisms of V As is that they are $   ¬    

à Úhe probability of regulation or the magnitude of subsidies determine the     
   ڏin which it does not voluntarily abateë       
     " $

3 Úherefore  Ú      

costë  Ú     

  Ú Ú 


à Under a negotiated agreement the abatement level reflects two factors:

3 Úhe baseline payoffs for both the firm and regulator

3 Úhe relative bargaining power of the two parties If the background threat is high for
example already in placeë then the regulator has high bargaining power and abatement
is likely to be high  the flipside for low background threat

à A V A scheme also works better if it    Ú Ú   


à A CEC ^ ë study shows that M        

m with most states having under 20 examples Ëowever  
6    „Ú   (  Ú  M
3 Úhe Netherlands use 6      as the key
environmental policy since the ^ 0 National Environmental
olicy lan NEEë

3 Most negotiated agreements have been    

  chemical energy metalsë

à Úherefore there is still potential for increasing the use of

voluntary agreements in the EU following a Netherlandsstyle

à Úhe next slides document some empirical findings regarding the

efficacy and implementation of V As

à  ) & * * make a number of stylised facts about V As:

3    Ú  Ú  


3 è Ú &   "    are more likely to undertake V As

3 è Ú &   Ú  are more likely to undertake V As

3 è Ú !     

  M which is surprising as it is
something ë for no marginal costë

3     M           Ú 


3 $       ! Ú  and firms are rewarded for good
environmental results Firms respond to this investor pressure SEE  IL SILL

à Alberni and Segerson 2002ë note that the evidence is largely mixed however due to
differences in methodologies and definitions

à Úhey note the success of D) ?

 ? ?  +,ë scheme aimed at reducing
waste and improving efficiency It has reduced total emissions by around 50% between
^ 5^ 0 and to date it has saved nearly $^  billion

à Also the prevalence of      tuna and the

| Ú  for fastfood burgers as evidence for green consumerism

à Ñ   Ú study the ? DD ,   ÚÚ:

3 Úhey find that listed chemical emissions fell by 2% under the target but a significant
improvement on the reductions of nonlisted chemicals 22%ë

3 Úherefore 
Ú &   
       M argal
and Wheeler ^ ë show ë          " 

à    |  * * study the ,   „Ú $


3 Úhe agreement was to 

 *Ú  * relative to ^  levels by 2005

3 Úhe agreement included Œ!+     ¬ ,,+ ¬  
 ¬  however +
 Ú& &


3 Although the target would be met it wouldve been met anyway due to the restructuring of
industry postreunification As this abatement was ͚baseline the cost was likely to be low

3 Úherefore 
 Ëowever it did
play a longerterm role in establishing a dialogue between industry and Government