The Voluntary Environmentalists: Green Clubs, ISO 14001, and Voluntary Environmental Regulations

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Can businesses voluntarily adopt progressive environmental policies? Most environmental regulations are based on the assumption that the pursuit of profit leads firms to pollute the environment, and therefore governments must impose mandatory regulations. However, new instruments such as voluntary programs are increasingly important. Drawing on the economic theory of club goods, this book offers a theoretical account of voluntary environmental programs by identifying the institutional features that influence conditions under which programs can be effective. By linking program efficacy to club design, it focuses attention on collective action challenges faced by green clubs. Several analytic techniques are used to investigate the adoption and efficacy of ISO 14001, the most widely recognized voluntary environmental program in the world. These analyses show that, while the value of ISO 14001's brand reputation varies across policy and economic contexts, on average ISO 14001 members pollute less and comply better with governmental regulations.

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Editorial Reviews

From the Publisher
"This excellent and well-researched study provides a valuable resource for scholars and practitioners in determining how to adjust our regulatory and other strategies to the demands of a new and more challenging era of environmental problem-solving."
Daniel J. Fiorino, American University

"When do firms choose to follow voluntary environmental standards? Why do they apparently seek less freedom to pollute? Using the theory of green clubs and evidence from ISO 14001, Prakash and Potoski help resolve these policy mysteries. The Voluntary Environmentalists should interest readers concerned with finding innovative ways to improve environmental performance."
James T. Hamilton, Duke University

"Highly recommended." - Choice

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Product Details

  • ISBN-13: 9780521860413
  • Publisher: Cambridge University Press
  • Publication date: 6/30/2006
  • Edition description: First Edition
  • Pages: 226
  • Product dimensions: 5.98 (w) x 8.98 (h) x 0.63 (d)

Meet the Author

Aseem Prakash is Professor of Political Science and the Walker Family Professor for the College of Arts and Sciences at the University of Washington. He is the founding, General Editor of the Cambridge University Press Series on Business and Public Policy and the co-editor of the Journal of Policy Analysis and Management. Professor Prakash's research examines core issues in the study of governance: how do institutions emerge, how they diffuse and get adopted, and how they impact outcomes. In doing so, he studies the complex relationship of businesses with governments and non-governmental organizations. His recent work focuses on the emergence, recruitment/diffusion, and efficacy of voluntary programs in the for-profit as well as the non-profit sectors. He is also examining issues pertaining to (1) NGO advocacy, (2) Corporate Responsibility, and (3) the influence of trade and FDI networks on the cross-country diffusion of rules, standards, and norms in areas such as the environment, human rights, labor rights, property rights and women's rights. Aseem Prakash is co-editor of Advocacy Organizations and Collective Action (Cambridge University Press, 2010), Voluntary Regulations of NGOs and Nonprofits: An Accountability Club Framework (Cambridge University Press, 2010), Voluntary Programs: A Club Theory Perspective (2009), Coping with Globalization (2000), Responding to Globalization (2000) and Globalization and Governance (1999). He received a joint Ph.D. from the Department of Political Science and the School of Public and Environmental Affairs (SPEA), Indiana University, Bloomington. His dissertation won the Academy of Management's 1998 Organization and the Natural Environment best dissertation award. Prior to gaining his Ph.D., he received an MBA from the Indian Institute of Management, Ahmedabad, and worked for Procter and Gamble, India. From 1997 to 2002, he served as Assistant Professor of Strategic Management and Public Policy at the School of Business, George W

Matthew Potoski is an Associate Professor in the Department of Political Science, Iowa State University.

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The Voluntary Environmentalists
Cambridge University Press
0521860415 - The Voluntary Environmentalists - Green Clubs, ISO 14001, and Voluntary Regulations - by Aseem Prakash and Matthew Potoski

1  Introduction

This book studies collective action via non-governmental institutions to address environmental problems. Individually rational behavior can sometimes produce outcomes that are harmful to society as a whole. While people can seek to design institutions to structure collective action in more desirable ways, there is no guarantee that these institutions will always succeed in harmonizing individual goals with social outcomes. This challenge is particularly severe in the environmental policy area. Looking to increase profits, a firm may emit toxic pollutants into the atmosphere, causing harm to its neighbors. While the firm's profits may increase, from a broader perspective, the harm to the society caused by its emissions all too often outweighs the higher profits the firm enjoys. How can the firm be persuaded to take into account the costs it has imposed on others and reduce its pollution emissions? During the twentieth century, governments have sought to mitigate pollution's harms through command and control regulations that set standards for firms' environmental performance, prescribe pollution-control technologies firms must adopt, monitor whether firms are adhering to governmental prescriptions, and sanction those that do not. The assumption is that without detailed orders from the government, backed by coercive enforcement, firms are likely to sacrifice a cleanerenvironment for their own profits.

Many question whether such government regulation is a panacea for solving pollution problems (Coase, 1960; Ostrom, 1990). After all, governments themselves are sometimes apt to fail (Wolf, 1979), clearing the way for unscrupulous firms to pollute at the public's expense. There is no assurance that politicians or bureaucrats will craft the perfect law that serves a broader social good. And there is the question of whether governments have the resources to enforce complicated and detailed laws. For those who see government regulation as an imperfect solution to ameliorate environmental problems, voluntary programs are a way to encourage firms to serve broader public interests in ways that counter government regulation's weaknesses. By and large, voluntary programs are most often viewed as complements to public regulation, building on the foundation of government standards and laws, a perspective we adopt here. In some ways, voluntary regulatory programs have become a political desideratum of our times, a centrist, “Third Way” formula for achieving the goals of the left (promoting the general welfare by encouraging firms to produce public goods) through the means of the right (using mechanisms that harness private interests for public ends).

While voluntary regulatory systems for businesses and industry have existed for several centuries (Webb, 2004), over the last twenty years or so, governments, industry associations and even environmental groups have launched a wide array of voluntary environmental programs. By joining a voluntary environmental program, a firm pledges to take progressive environmental action beyond what its government regulations mandate. Such programs challenge the assumption that if left to their own devices, firms always choose higher pollution over more socially responsible environmental stewardship. But voluntary programs vary in their effectiveness; some have even been shown to be mere public relations exercises that do little to improve their members' environmental behavior. Recent accounting scandals pose serious questions about whether businesses can voluntarily regulate themselves.

In this book, we submit voluntary environmental programs to theoretical and empirical scrutiny. Our theoretical inquiry analyzes voluntary programs as clubs, in an economic sense of the term (Buchanan, 1965). A club provides members with a shared group benefit from which non-members are excluded. Effective voluntary programs, or “green clubs” as we refer to them, are like clubs in that they offer an excludable benefit to their members in the form of goodwill that firms receive from stakeholders because the firms have taken the progressive environmental action codified in the club's membership rules. In other words, in return for taking on the costs of joining the club and thereby producing public goods such as a cleaner environment, members enjoy the rewards of affiliating with the club's brand reputation. Firms decide whether or not to join the club based on their perceptions of the club's benefits and costs. Firms' perceptions are likely to be contingent on the economic and policy contexts in which they operate, as well as their firm-level characteristics. Once they join a program, firms also decide whether to adhere to club rules or shirk their membership responsibilities. This decision is likely to be influenced by whether the club has a monitoring and enforcement program in place.

To empirically test our theoretical ideas about voluntary programs, we examine ISO 14001, the most widely adopted voluntary environmental program in the world today. Although launched only in 1996, nearly 50,000 facilities in 118 countries have joined this green club. Our analyses focus on two questions:What factors shape firms' perceptions about ISO 14001's reputational value, and therefore their decisions about joining the program?

Do ISO 14001's members improve their environmental and regulatory performance beyond what they would have achieved had they not joined the program?

To investigate these questions, we employ several techniques, including cross-national case studies, large-sample analyses of ISO 14001 adoption rates across countries, a large-sample facility-level study of US industrial facilities, and analytical interviews with US government regulators and facility environmental managers. Our results show that the value of ISO 14001's reputation varies across policy and economic contexts (local, national, and international) and is an important factor in inducing firms to join the program. Our analyses also indicate that, at least in the US, joining ISO 14001 reduces the amount of time members spend out of compliance with government regulations and reduces the amount of toxic pollutants they release into the atmosphere. While this does not mean that every ISO 14001 certified facility improved its environmental and regulatory performance, our analyses suggest that, on average, ISO 14001 improves the alignment of firms' private motives with societal benefits. Furthermore, the appeal of ISO 14001 (the reputational value of joining this club) is highest for firms that, have mid-range environmental and regulatory performance. Neither the environmental leaders nor the environmental laggards are as excited about joining ISO 14001 as mid-range firms, which typically constitute the largest proportion of a population. As a result, ISO 14001 is potentially a policy tool with a wide appeal rather than appealing only to a small niche.

These empirical inquiries, coupled with our theoretical analysis, suggest conditions under which voluntary programs can serve as effective policy tools. First, clubs must require behavior from their members that, at least in the eyes of members' stakeholders (such as their regulators, suppliers, and customers), leads to desirable environmental outcomes. Only then will stakeholders offer the goodwill benefits that serve as the reward members receive for joining a club. The size and scope of these rewards are likely to vary with the credibility of the sponsoring organization, the stringency of the requirements the club imposes on its members, the level of stakeholders' involvement in developing the club standards, and the firms' location in policy and economic contexts. Second, clubs need credible monitoring and enforcement mechanisms to ensure that members do not shirk and instead adhere to club standards after they join the program. These mechanisms might include third-party auditing, mandatory information disclosures of audit findings, and sanctioning of those who shirk. By mitigating shirking, effective monitoring and enforcement leads to improved environmental performance and strengthens the club's brand reputation among firms' stakeholders. In the 10William Rongaus at the time . . . The “Donora Death Fog,” as it became known, spawned numerous angry lawsuits and the first calls for national legislation to protect the public from industrial air pollution.>

A PHS report released in 1949 reported that “no single substance” was responsible for the Donora deaths and laid major blame for the tragedy on the temperature inversion. But according to industry consultant Philip Sadtler, in an interview taped shortly before his 1996 death, that report was a whitewash. “It was murder,” said Sadtler about Donora. “The directors of US Steel should have gone to jail for killing people.” . . . For giant fluoride emitters such as US Steel and the Aluminum Company of America (Alcoa), the cost of a national fluoride clean-up “would certainly have been in the billions,” said Sadtler. So concealing the true cause of the Donora accident was vital. “It would have complicated things enormously for them if the public had been alerted to [the dangers of] fluoride. (Bryson, 1998)

The “Donora Death Fog” became a rallying cry for members of the fledgling US environmental movement in the 1950s. In 1962, Rachel Carson (1962), a former marine biologist with the US Fish and Wildlife Service, published her book Silent Spring, further exposing the hazards of the pesticide DDT.1 In the face of such drastic examples of corporate environmental malfeasance, strong government regulation seemed to be the only way to prevent businesses from causing large-scale environmental harm and human suffering. Public concern for the environment mounted through the 1960s, leading President Nixon in 1970 to sign the National Environmental Policy Act, establish the Environmental Protection Agency, and thereby lay the foundation for federal government's approach to environmental regulation that continues today. The wave of 1970s environmental laws that followed – the Clean Air Act,2 the Clean Water Act and the Resources Conservation and Recovery Act – targeted the largest and most visible pollution problems, the “big fish” of industrial pollution. These laws codified the command and control regulatory approach: comprehensive government regulations to govern firms' environmental practices and pollution releases, strict government-run monitoring programs to detect firms' violations, and sufficiently severe penalties for non-compliance to compel firms' compliance with regulatory standards.3 Underlying the command and control approach was the assumption that businesses would protect the environment only when laws compelled them to do so.

Command and control was a strong initial policy response to the big environmental problems of the 1970s. It successfully harvested the low-hanging fruit – the large, concentrated and visible pollution problems that were relatively easy to identify and ameliorate, if not clean up. Detailed regulations governing pollution-control technologies and emissions made explicit what businesses were required to do. Expansive state and federal monitoring and enforcement programs were established to ensure firms complied with all the new environmental standards. All in all, few would contest that command and control laws have dramatically reduced industrial pollution and improved the quality of the natural environment (Cole and Grossman, 1999). The environment is generally, although perhaps unevenly, cleaner, thanks in large part to command and control regulations. In the US, for example, states with stronger command and control regulatory regimes saw greater pollution reductions between 1973–1975 and 1985–1987 (Ringquist, 1993). Indeed, “Cleveland's Cuyahoga river, which once caught fire, now features cruise boats” (Kettl, 2002: vii).

Yet by the 1980s and 1990s, command and control regulation had started to come under critical scrutiny in the US and abroad. Businesses complained that the requirements of command and control, such as obtaining complex permits and maintaining paper-trails to document their environmental operations, created high compliance costs that hurt productivity and profits (Jaffe et al., 1995; Walley and Whitehead, 1994). Because different agencies administer different permit programs, a large US facility might need 100 different government permits to comply with different federal and state regulatory statutes (Rabe, 2002). According to the US Office of Management and Budget (2002), complying with environmental regulations cost US businesses $144 billion in 1997 (in 1996 dollars). By prescribing the technology firms must use to control pollution during production, command and control constrains firms' operational flexibility and thereby undermines efficiency, creating both static and dynamic inefficiencies in terms of impeding industry innovation (Jaffe et al., 1995; Kettl, 2002; Eisner, 2004).4 Command and control also focuses attention on end-of-pipe pollution reductions rather than on preventing pollution in the first place. In addition, some have argued that command and control regulations are particularly prone to policy “capture.” Complex environmental regulations may become eligibility standards that protect incumbent firms from new competitors (Zywicki, 1999).5 Finally, command and control's media-focused laws may encourage firms to substitute pollutants across media (GAO, 1994).

Command and control's limitations are also apparent to government regulators (Fiorino, 1999). Because command and control regulations are enforcement-intensive, declining agency budgets (especially in the US) relative to regulatory mandates have undermined enforcement frequency and efficacy.6 The EPA's enforcement staff fell 13 per cent from 2001 to 2002 and was projected to fall an additional 6 per cent in 2003 (Baltimore, 2002).7 Even three decades after the enactment of the Clean Water Act, regulators have been able to assess water quality for only 4 per cent of the ocean shorelines and 23 per cent of river miles (Metzenbaum, 2002). Between 1996 and 1998, less than 1 per cent of the 122,226 large regulated facilities in the US were inspected for air, water and hazardous waste pollution (Hale, 1998).8

Finally, command and control has been criticized for contributing to the costly adversarial regulatory culture among business, regulators, and citizens (Vogel, 1986; Kagan, 1991; Kollman and Prakash, 2001). Command and control pits regulators and firms in a contentious stance, resulting in more lawsuits and larger societal costs (Reilly, 1999; but see Coglianese, 1996).9 Rigidly enforcing regulations and “going by the book” (Bardach and Kagan, 1982) increases firms' compliance costs, and creates incentives for firms to evade regulations. In a vicious cycle, regulators may respond with more monitoring, stricter enforcement, and harsher penalties.10 More promising is an enforcement approach where firms voluntarily improve their environmental performance and governments redirect enforcement resources to more valuable tasks (Majumdar and Marcus, 2001). Some even blame command and control laws (though incorrectly in all likelihood) for the job losses in the manufacturing sector in the 1980s and the 1990s (Palmer et al., 1995; for a recent review of the trade–environment debate, see Frankel, 2003).

With command and control having focused on the large, concentrated and stationary pollution sources (Gunningham and Sinclair, 2002), the next generation of environmental problem centers on the dispersed and often invisible sources that add up to large problems (Fiorino, 1999). Such problems exacerbate command and control's weaknesses: writing regulations finely nuanced for pollution problems that are highly variable, technical and diffuse is quite burdensome and monitoring and inspecting these dispersed sources is yet more expensive and onerous. Command and control regulations alone may be ill-equipped to take the steps to address the next generation of environmental challenges.

On a more general level the diminishing returns to command and control regulations are indicative of “government failures” (Wolf, 1979). Solving environmental problems would be simpler if government officials had perfect information, there were no “agency conflicts” (Berle and Means, 1932), and there were no transaction costs associated with developing, monitoring, and enforcing policy decisions. Unfortunately, real-world policy complexities and uncertainties in social interaction exceed the government's ability to perfectly predict future events, specify policies for all circumstances, and devise low-cost mechanisms to ensure that the policy outcomes match specified objectives. Like any organization, governments and policy-makers are “boundedly rational” (Simon, 1957; Jones, 2001) and constrained by limited resources such as time, information, expertise, and finances. Governments, especially in developing countries, often lack information and expertise to correctly design policies. Monitoring and enforcement is expensive and more complex regulations carry higher monitoring and enforcement costs. Governments can be “captured” by the very industries they were designed to regulate (Stigler, 1971) and bureaucratic infighting might impede policy development (Allison, 1971).

By highlighting the governmental failures that can plague command and control regulation we are not advocating dismantling government and rolling back command and control regulations. Our intention is to show that every policy approach has vulnerabilities, including voluntary regulations. Both scholars and analysts should be aware of the costs and benefits of different policy approaches and look for ways to balance one's weaknesses against others' strengths. Like command and control, voluntary governance approaches are neither a curse nor a panacea. Our approach is to view command and control as a baseline and think of new approaches that would complement command and control in ways that enhance its positives and ameliorate its deficiencies.

New tools for environmental governance

While command and control regulation is more effective than no regulation,11 its high costs and limitations suggest the opportunity for a new breed of regulatory tools.12 Through the 1980s and 1990s, environmental scholars, analysts and regulators began to propose several new approaches to addressing environmental problems. These approaches promise to safeguard better the natural environment by complementing command and control and addressing its weaknesses. The assumption underlying these tools is that, contrary to the command and control's assumed hostility, businesses, governments and perhaps moderate environmental groups can work cooperatively to improve environmental conditions. Some commentators (somewhat skeptically) term this policy shift as “weak ecological modernization” (Hajer, 1995; Mol and Sonnenfeld, 2000) where economic growth and environmental sustainability are viewed as mutually supportive.

© Cambridge University Press
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Table of Contents

Tables; Figures; List of appendices; Preface; 1. Introduction; 2. Green clubs: an institutionalist perspective; 3. ISO 14001 and voluntary programs; 4. Adopting ISO 14001; 5. ISO 14001 and firms' performance; 6. Conclusions and future directions; References; Index.

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