Business and the Environment11

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Business and the Environment 11

We have examined the internal

actions that a firm can take to addressenvironmental concerns.

We now turn to some external actions.

The business/government policyinteraction.

Objective: understanding the role ofbusiness in policy development.


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Business and the Environment

Government environmental naturalresource policies are the result of interestgroup politics. Why? Public goods issues.General population is unlikely to take

action. Mobilize action among stakeholders. Provide information. Lobby politicians

Special interestsfinancial interestunions, business groups, consumergroups; identify with the problemenvironmental NGOs.


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Legislation.

Politicians as vote maximizers.

Bureaucratic implementation.

Bureaucratic incentives.

Legislative oversight.

Interest group pressures. Court challenges.

Internal motivation. Budgets. Personalidentification, education of staff.

How would you test an interest group model ofpolicy development? (Legislative histories, votes incongress, identify the constituencies involved bylegislative district).


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Business

Preempt regulation.

Mold regulation. Impact its implementation.

Negotiated agreements;

Public voluntary agreements

Lobby the bureaucracy. Court challenges. Align with public, other stakeholders,

NGOs.


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Tax

Regulation

Property rights


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Tax policydesign taxes to offsetthe difference between private andsocial costsclose the externality.

Formidable information challenges.How big should the tax be?

Differences in cost across firms.

Political opposition in the US. Fear of differential taxes across

competitors, foreign and domestic.


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Regulation to restrict output to thesocially optimal level.

Formidable information requirements iffirms have different production costs.

Generally, uniform standards used.

Most common option. Lower cost, less

political resistance. More certainty forfirms.


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Property rights.

Other arrangements (Taxes and regulation)are not incentive compatible. What does that

mean? Firms have incentives to cheat (under comply).

Enforcement issues.

Without property rights, there are no optionsfor bargaining among parties to achieve

environmental and resource objectives.


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For example, a high cost firm cannot bargainwith a low cost firm for it to cut emissionsmore to meet overall objectives. Could be thelow cost solution.

Fishers cannot bargain to change harvestpractices under regulation or open access.

There are no owners.

Little information about opportunity costs of

levels of abatement are generated fromregulation or tax policies.


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Because of high cost and dissatisfactionwith many environmental and naturalresource policies, property rights

(rights-based tools) are being adopted: ITQs (individual transferable quotas) in

fisheries

Tradable emission permits (SOs , Lead

phase out, GHG). Conservation credits.

Water rights.


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Government sets the allowable (catch,emissions, development area) andallocates % of that allowable to firms.

Total can be changed. Allocation via auctions, grandfathering,

uniform distribution.

Allow for achieving targets at lower cost

(low cost complying firm over complies byselling its allowances to high costcomplying firm).


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Provides incentives to innovate, conserve,because there are financial gains fromdoing socan sell excess allowances.

Trade generates information aboutopportunity costs (cost of emissions,catch, water)what is not emitted,caught, diverted, can be sold.

Self enforcement. Arrangements can bemore incentive compatible.


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For these reasons rights-basedinstruments are being adopted.

Remain controversialallocation,ethical objections.

Slow their adoption and mold them.May make them less effective if

restrictions on trade, allocation, etc.

Will return to GHG trading.


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Regulation policy. Self regulation. Can be welfare enhancing if

lower cost and more information available thanused by central regulators.

Disputes over self regulation. Is it as completeas central regulation? Different constituencies.Federal versus state.

Threat of regulation leads firms to self regulateto reduce uncertainty and to reduce cost.

Coordination may conflict with antitrust laws. Fishery example

Strategic use to build competitive advantage.


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Strategic use of Government Regulation to advancecompetitive advantage.

Requirements.

Heterogeneity in compliance costs:technology, age, production process, size.Competitive Advantage in response to thenew regulatory regime.

Able to convince regulators, customers

that the regulation/proposed substituteswill work.


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Broad jurisdiction over key rivals.

Willingness of government toregulatecrisis. Benefits of action.

Clarity of the sciencedelay.Focused benefits and spread costs.

Less transparency.

Corn-based ethanol. Very high

subsidies, tariffs on Brazilian ethanol.Appeals for further subsidies.


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Example: Quality leadership by some firmsadvocates for tighter government standards.

High quality firm prefers a low minimumquality standard (MQS) so that it can still

differentiate itself from its competitors. A highMQS would force all firms to look more like itand then the firms would engage in pricecompetition and profits would be lost.

There is a lag between regulation andimplementation that allows firms to influence

standards. Signaling--High quality firm prefers a high

MQS to raise rivals costs. DuPont.


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Du Pont and CFCs and the MontrealProtocol.

1974 ozone hole by Molina andRowland.

Same time, DuPont patents areexpiring for CFCs. Has 50% of US and25% of world market. But low margins.

Initially opposed regulation.


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Developed new, more expensivetechnologies. Could not competeagainst CFCs. Joined in gaining US

support for phaseout. Montreal Protocol 1987. Developed

countries to phaseout. But problem ofdeveloping countries and former Soviet

countries. CFC production continues.Weakens gains to complying firms likeDuPont.


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Reformulated Gasoline. RFG in California. Air pollution problems. Clean Air Act mandates,

California Air Resources Board. ARCO, Chevron, Shell, and EXXON introduce RFG

in 1989-90. Requires refinery changes. Costly.Smaller independents harmed. 1996 RFG statewide. Spike in prices. Collusion?

Higher costs? Environmental benefits. Loss of competition. MTBE basis.

Groundwater problems, carcinogen. Ethanol opening.


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Ethanol and the Problem of Informationin Regulation

When scientific issues and claims are made

regarding regulation or subsidy or taxing ofproducts with environmental consequences,voters have little ability to assess thoseclaims.

They therefore have less ability to lobbytheir political representatives aboutenvironmental regulation.

Interest groups play a much larger role.


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Ethanol is a subsidy to corn growers. It haslittle environmental or energy independencebenefits. Yet it receives massive subsidiesand is protected from foreign imports bytariffs.

Prior to 2003 it was held in check by MTBEproducers and lobbyists. With the demise ofMTBE there was no competitor.

Example of interest group competition andinformation issues in regulation.


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Current efforts by large firms in concentratedindustries to mold GHG regulation.

Overwhelming majority of supply chain companiesbelieve regulation of greenhouse gas (GHG)emissions is a potential risk to business,according to a Carbon Disclosure Project survey.http://www.greenbiz.com/news/2008/05/01/suppliers-climate-change-regulation-risk

Business Roundtable: Largest firms.http://www.businessroundtable.org/about

Take away: Policy is made through legislation andbureaucratic implementationbusiness managersinvolved in the process.

Business and the Environment11

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