Abstract
A regulator’s ability to incentivize environmental improvement among firms is a vital lever in achieving long-term sustainability. However, firms can and do respond to environmental regulation in a variety of ways: complying with its intent; avoiding the regulation by offshoring or by abandoning the market; or ignoring the regulation by continuing with entrenched business practices. The path a profit-maximizing firm will choose depends, in part, on the expected cost of noncompliance, which is a product of the regulator’s stated penalty, the likelihood that noncompliant practices are detected, and the likelihood that detected violations are punished. The form of regulatory regime and three important cost thresholds also drive firm response. In this chapter, through examples of regulatory failures and successes, we develop a framework for understanding how these thresholds interact with the type of regulatory regime being considered and the expected cost of noncompliance to determine whether profit-maximizing firms ignore, avoid, or embrace environmental regulation.
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Notes
- 1.
- 2.
Penalties can result from administrative, civil, or criminal actions (Stafford 2002).
- 3.
While multiple companies are being held liable for the accident and spill to different degrees, the burden is mostly BP’s. Federal judge Carl Barbier recently ruled that BP is 67 % responsible, Transocean 30 %, and Halliburton 3 % (United States of America v. BP Exploration & Production, Inc., et al. 2014).
- 4.
Based on the authors’ personal experience and the Ground Water Quality Bureau’s organizational chart (New Mexico Environment Department, Ground Water Quality Bureau 2014).
- 5.
The US ambient air standards for lead became even more restrictive in 2008, which to led a surge in lead battery exports (Lloyd 2012).
- 6.
If a reduction of SO2 emissions does not arise when the cap is lowered, then the allowance price increases through standard demand and supply economics. As the cap is reduced further, this results in a cost trade-off that eventually favors improved abatement effort.
- 7.
This section draws from logic developed in Drake (2015).
25 per ton of CO2, roughly in line with Point Carbon’s projected average cost of References
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Drake, D.F., Just, R.L. (2016). Ignore, Avoid, Abandon, and Embrace: What Drives Firm Responses to Environmental Regulation?. In: Atasu, A. (eds) Environmentally Responsible Supply Chains. Springer Series in Supply Chain Management, vol 3. Springer, Cham. https://doi.org/10.1007/978-3-319-30094-8_12
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