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Determinants of Environmental Compliance: Plant, Firm, and Enforcement Factors

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Objectives/Hypothesis:
This study examines the determinants of environmental compliance with air and water pollution regulation for three industries: pulp and paper mills, petroleum refineries, and steel mills. The analysis uses data on the plant, its owning firm, and regulatory activity. We address four related questions: (1) What makes plants differ in their compliance and their sensitivity to enforcement activity? (2) How are compliance and emissions performance related, and how is compliance related across pollution media? (3) Does enforcement's effectiveness differ across states, or between state and federal regulators? (4) Do different statistical models give different results, comparing the determinants of compliance status, changes in compliance status, and duration of non-compliance?

Approach:
The project begins with a sizable data collection effort, extending and updating an existing database. We use industry directories to generate a list of plants and to identify plant characteristics (location, capacity, production technology). The Compustat database provides data at the firm-level (employment, sales, profitability). Census Bureau datasets provide plant-level economic data (output, investment, productivity, and pollution abatement costs). Environmental compliance status and enforcement activity come from EPA regulatory datasets, and data on OSHA compliance is added for a cross-agency comparison.
Basic models allow the compliance decision to differ across plants and firms and to be influenced by enforcement. We consider more complete models which allow sensitivity to enforcement to vary across plants and across types of enforcement, and allow interactions in compliance across regulations. Several econometric techniques (logit, duration and transition models) are employed. We discuss the results with industry and regulatory people to check their plausibility and to develop further hypotheses for examination.

Expected Results:
We extend existing environmental compliance research: (1) by comparing results across industries and pollution media; (2) by explaining differences in economic and environmental performance and in sensitivity to enforcement using plant-level and firm-level data; and (3) by testing different statistical models to check robustness of results. The unique plant-level databases we create will also be useful for future researchers. Our results will help state (and federal) regulators allocate their limited enforcement resources more efficiently. Which plants are most likely to respond to enforcement? Which types of enforcement are most effective in encouraging compliance? Can compliance on one medium predict compliance on other media? Which definitions of compliance are most closely associated with improved environmental performance (lower emissions)? Answers to these questions should help regulators raise compliance levels and protect the environment.
Supplemental Key Words: Stationary sources, deterrence, social science

Metadata

EPA/NSF ID:
R828824
Principal Investigators:
Gray, Wayne B.
Shadbegian, Ronald J.
Technical Liaison:
Research Organization:
Clark University
Funding Agency/Program:
EPA/ORD/Corporate Performance
Grant Year:
2000
Project Period:
May 1, 2001 – April 30, 2004
Cost to Funding Agency:
$276,883
Project Status Reports:
For the Year 2001

Objective:
The objective of this research project is to examine the determinants of environmental compliance with air and water pollution regulation for three industries: pulp and paper mills, oil refineries, and steel mills. The analysis incorporates data on the plant, the firm that owns the plant, and regulatory activity. We address four related questions: (1) What makes plants differ in their compliance and sensitivity to enforcement activity? (2) How are compliance and emissions performance related, and how is compliance related across pollution media? (3) Does enforcement's effectiveness differ across states, or between state and federal regulators? and (4) Do different statistical models give different results, comparing the determinants of compliance status, changes in compliance status, and duration of non-compliance?

Progress Summary:

As anticipated, most of Year 1 was spent organizing an extensive database of plant-level information for paper, oil, and steel. We used various directories to help identify plants in each industry, as well as to gather data on each plant. These directories identified the products produced by the plant, the plant's overall production capacity, and some of the production technology in use at each plant. The directories also contained information on the ownership of plants; combining this data from directories over several different years enables us to identify changes in ownership.

We developed linkages from these data to a number of additional databases that provided further information. We linked our plant list to several U.S. Environmental Protection Agency (EPA) databases, which provided sources of data on water pollution (Permit Compliance System [PCS]), air pollution (Aerometric Information Retrieval System [AIRS]), and toxic waste (Toxic Release Inventory [TRI]). If the owning company is publicly traded, we linked it to the Compustat database. We also prepared links from our plant database to the Census Bureau's plant-level Longitudinal Research Database (that work is being done at the Census Bureau's Boston Research Data Center, due to the confidential restrictions on working with the plant-level Census data). Geographic identifiers (latitude and longitude) are being gathered for each plant in the database to assist with linking the plants with characteristics of the surrounding population.

We have visited companies in the paper industry to gather further information about the determinants of their environmental behavior, both in terms of their regulatory compliance and pollution emission levels. These visits underscored the importance of corporate culture in determining the amount of control a company has over its operating plants, and thus how centralized the commitment to compliance likely is to be (though not necessarily determining how well the individual plants will perform).

We already have done some work on the determinants of compliance, continuing preliminary work we had done earlier using data for the paper industry, and presented the results at a conference (When is Enforcement Effective-or Even Necessary?). So far, the results suggest that plant characteristics are more important than firm characteristics for determining compliance, that plants in compliance with one set of regulations complies with others, and that enforcement does influence plants to comply with regulations.

We also have prepared a paper on a closely related topic ("Optimal" Pollution Abatement-Whose Benefits Matter, and How Much?). We tested whether differences in air and water pollution emission levels and regulatory activity across pulp and paper mills are related to the benefits from air and water pollution abatement at those mills. We also tested whether those who are receiving benefits is a factor when measuring the impact of benefits (i.e., poor people, nonwhite people, or people living in another state or country). Our results suggest that benefits matter; plants with higher benefits from pollution abatement are doing less polluting. The distribution of benefits also matters for the determinants of pollution levels, with less weight given to poor and out-of-state people, but (surprisingly) more weight given to nonwhites.

Future Activities:

In Year 2, we will finish organizing the plant-level database. This includes both the data taken from industry directories and the data from EPA's regulatory databases on enforcement, compliance, and pollution. We also will complete the links from our database to the Census Bureau's Longitudinal Research Database (working at the Boston Research Data Center).

We then will extend our preliminary work on compliance in the paper industry to the oil and steel industries. We will make contact with firms and plants in the oil and steel industries, as we have done in the past with the paper industry. This will enable us to better understand and interpret any differences in the results we get for those industries, as we extend our analysis beyond the paper industry.

We also will begin work on two additional research papers. The first will examine the relationship across different measures of a plant's environmental performance, including both compliance and emission levels, while considering the relationship across different pollution media. The second will examine different types of enforcement actions to see which are more effective for encouraging compliance, and which allow for differences in impact across different regulatory agencies (state and federal).

Presentations:

Gray WB, Shadbegian WG. "Optimal" pollution abatement-whose benefits matter, and how much? Presented at the National Bureau of Economic Research Pre-Conference on Advances in Empirical Environmental Economics. November 2001.

Gray WB, Shadbegian WG. "Optimal" pollution abatement-whose benefits matter, and how much? Presented at the U.S. Environmental Protection Agency National Center for Environmental Economics, February 2002.

Gray WB, Shadbegian WG. "Optimal" pollution abatement-whose benefits matter, and how much? Presented at the Public Choice Meetings, March 2002.

Gray WB, Shadbegian WG. When is enforcement effective-or even necessary? Presented at the International Atlantic Economic Meetings, October 2001.

Supplemental Keywords: regulatory impact, productivity, benefits analysis, pulp industry, paper industry, SIC Code 2611, SIC Code 2621, SIC Code 2911, SIC Code 3312, public policy.

Project Reports:

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