The Promise and Limits of Voluntary Management-Based Regulatory Reform: An Analysis of Epa's Strategic Goals Program

Abstract

This paper presents a case study of a voluntary environmental program initiated by the U.S. EPA in the late 1990's, the Strategic Goals Program (SGP). This program was intended to create incentives for job shop metal finishers, an industry of small and medium sized enterprises, to improve and even go beyond compliance with existing federal regulations by investing in pollution prevention. The SGP's incentives included direct technical assistance and limited financial assistance, but the primary carrot it offered participants was more flexible regulatory treatment by state and local regulators. Although SGP clearly helped some firms discover ways to both cut their pollution and improve profitability (so-called "green gold"), environmental performance of firms that participated in the SGP was not generally superior to that of non-participants. The paper explains the SGP's relative ineffectiveness to the fact that the incentives it offered were relatively weak, given the cost of pollution prevention. In particular, the economic value of regulatory flexibility - such as reduced sampling or reporting requirements - appears to have been small relative to the cost of pollution prevention. The lesson of EPA's metal finishing SGP is that without direct public financial aid, there is limited potential for small, marginally profitable firms facing intense foreign competition and costly regulation to continue to improve their environmental performance by investing in pollution prevention. Federal laws and regulations should either directly subsidize such investments, or use pollution allowance trading as a way to lessen the economic dislocation that results when the demand for increasingly costly improvements in environmental performance destroys the viability of such small and medium sized enterprises.

Keywords: Environmental Regulation, Economic Incentives, Voluntary Programs, Pollution Prevention

JEL Classification: D73, K23, L51, K32