Paper No 11 Nitin John, M Sc.

Economics

Summary Report No. 1

Voluntary Environmental Agreements: Good or Bad News for Environmental
Protection?
By Kathleen Segerson2 and Thomas J. Miceli

There has always been a debate on taking the optimal approach for pollution control regarding
whether or not it may result in maximizing social welfare which is the utmost concern of any policy
planner. Although since long policy planners have used instruments like taxes, command and
control or legislative or regulatory restrictions to curb pollution there has been a considerable
amount of interest that has been shown towards the use of voluntary agreements. One such e.g. of
voluntary agreement is of the U.S. Environmental Protection Agency’s (EPA) 33/50. program to
reduce voluntarily discharges of industrial toxic pollutants. which exempts firms from certain
mandatory requirements if they demonstrate that they can exceed environmental protection goals
through other means. The benefits of voluntary agreements as identified by the European
Commission are 1. That it encourages cooperative approach from the industry, such that it reduces
conflicts, also there is a greater flexibility to find cost-effective solutions that can be tailored to specific
conditions. And one can meet environmental targets more quickly due to decreased negotiation and
implementation lags. According to the author voluntary agreements can be of the type wherein that
induce participation by providing incentives or that induce participation by threatening a harsher
outcome e.g. a legal action. Previous studies of economic analysis done by Wu and Babcock cannot
be termed as conclusive according to the author as it is formulated under the assumption that both
result in the same amount of environmental protection thus not addressing the problem of which one
would lead to better environmental quality. Thus the author develops a simple model that talks about
the interaction between the regulator and the polluter and if voluntary agreement can be a likely
outcome of such an interaction or not and whether the resulting VA leads to efficient environmental
protection. The two possibilities arising out of the of the relative right to bargaining power of the two
parties has been incorporated in the model. Also it has been noted that the agreed upon level of
voluntary abatement is low if the legislative threat is weak. Thus the paper also considers possibilities
where the regulator needs to offer subsidies or carrots
Based on the above considerations this paper considers two models wherein the first model
considered here is the pure threat model, where the regulator negotiates with a single polluter firm, or
a single representative of an industry, while the other model is the combined subsidy threat model

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Paper No 11 Nitin John, M Sc. Economics

which evaluates the feasibility of a subsidy when the legislative threat is low as in such a case the VA
level would be low. Thus both the models together incorporate all the afore mentioned possibilities.
Now based o the outcomes of the two models the author has the following conclusions: that, given
the potential savings under a voluntary agreement, such an agreement will always be the equilibrium
outcome of the interaction between the regulator and the firm, even when the firm is not offered a
subsidy. Also when the regulator has all of the bargaining power, it is possible that the equilibrium
level of abatement under a VA will be that of super compliance, such that it even exceeds the level
that might have been imposed legislatively, and is even more strong when the legislative threat is
strong. In cases of a low legislative threat level VA may be low therefore a subsidy should be
provided in such cases in a way that balances social benefits and social costs, including the costs of
the subsidy. Thus we can conclude that, with a strong background threat or low-cost subsidies, VA’s
might protect the environment at least as well as the other legal alternatives and be cost effective.

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