Profiting from Pollution

Abstract

This Article presents original results from a large-scale study of environmental violations. I use the universe of civil Clean Air Act environmental violations by stationary emitters of pollution to test the effectiveness of EPA enforcement. Using conservative assumptions, I find that in 36% of cases, it is profitable for firms to violate the Clean Air Act, even after paying fines. Importantly, the profitability of noncompliance is increasing in the size of the violation, such that almost every large violation of the Clean Air Act is profitable. In aggregate, I estimate that penalties imposed by the EPA would have to be four times greater than those imposed to achieve the EPA’s stated policy goal of removing the economic benefits of noncompliance. In every case of profitable noncompliance, the EPA had statutory authority to impose a larger penalty, and official EPA policies called for a larger penalty. I further find that the most profitable violations are also the most harmful to the environment in terms of net emissions. My study suggests that some firms have little financial incentive to comply with the Clean Air Act and suggests that if the EPA were to comply with its own policies, this effect would be mitigated.

Keywords: Corporate misconduct, Regulation, Deterrence, Environmental Law, Corporate Governance