'Voluntary' Approaches to Environmental Regulation: A Survey

Abstract

This article reviews the economic literature on voluntary approaches to environmental regulation. In the last few years there has been a rapid growth in the use of voluntary actions and programs to address environmental concerns. These approaches can be placed into three general categories: (1) Unilateral commitments by industrial firms, sometimes referred to as business-led corporate environmental programs, (2) Public voluntary schemes, in which participating firms agree to standards that have been developed by public bodies such as environmental agencies, and (3) Negotiated agreements created out of a dialogue between government authorities and industry, typically containing a target and a timetable for reaching that target. Negotiated agreements may take on the status of legally binding contracts if legislation empowers executive branches of government to sign them.

Why do firms voluntarily commit to costly improvements in their environmental performance? Reviewing the small but growing literature on voluntary approaches to environmental problems, we identify three types of motivation: improving corporate productivity, appealing to "green" consumers, and optimizing corporate regulatory strategy. We find that while some existing theoretical work supports the so-called "win-win" stories of voluntary environmental behavior (increasing both profits and social welfare) that are prominent in the popular press, other theories point to potential welfare-reducing voluntary actions. By comparing the assumptions of the various models, we identify a set of conditions under which welfare-reducing voluntary actions are likely to occur.

Turning from theory to empirics, we review the existing empirical studies of voluntary approaches to environmental problems. Since these voluntary approaches are relatively new, the number of existing studies is small. Still, these studies provide some useful insight into the factors which motivate corporations, regulators, and legislators to pursue the voluntary option. We identify eight key findings of the existing empirical studies, and discuss cases in which existing empirical results are at odds with one another. Finally, we caution that these findings should be regarded as preliminary given the current paucity of corroborative empirical work. The concluding section examines the most urgent gaps in both the theoretical and empirical work in the area, and contains suggestions for future research.

JEL Classification: Q2, L1, L2, L5