Market Based Mechanisms for Regulating the Environment: How Effective Have They Been?

Trustees Of Boston University, Boston

Investigators

Abstract

Economists' professional preference for markets has been instrumental in the move to adopt market-based solutions to the regulation of environmental externalities. But the ex ante promise of efficiency compared to command and control approaches does not translate automatically into actual gains. As the costs of compliance with environmental regulations continue to grow, and we increasingly resort to market-based solutions for environmental problems, the realized effectiveness of such measures deserves careful study. This project examines a market-based environmental regulation called the Toxics Release Inventory (TRI). The TRI has been referred to as "...one of the great unintended successes in the recent history of American public policy"' and is based on the informal, "information" regulation of manufacturing plants through the mandatory public disclosure of their toxic releases. There are no formal regulations for toxic releases in this country and since the first year of TRI reporting in 1987, TRI reported releases nation wide have fallen by more than 40%. The apparent success of the TRI has led to its popularity both amongst policymakers and environmentalists. Several states have either adopted or are currently considering the adoption of state level community right-to-know laws that would expand the level of reporting required by TRI facilities. Environmental groups are pressuring Congress to do the same at the federal level. This is a somewhat troubling trend as there are several unanswered questions about the TRI. For example, nothing is well known about how the TRI actually works, or how it affects firm behavior. Given that TRI data are self-reported, and published "as is" with users having virtually no ability to verify the accuracy of the reports, having a better understanding of the effects of TRI regulation on firms is crucial for policy makers to make an informed decision regarding the effectiveness of the TRI as a policy tool. To answer some of these questions, this project uses data provided by the TRI and links this data to the Pollution Abatement Control Expenditure Survey (PACE), the Annual Survey of Manufactures (ASM), and the Census of Manufactures (CM). This will be the first full linking of these data sets. Variation in state level community right-to-know requirements are used to try to separate TRI induced responses by firms from other trends. Attention is focused initially on petroleum refineries -one of the most heavily regulated industries in the country which showed some of the largest reductions in reported TRI releases before expanding the study to include other industries. An events-study methodology is used to look at stock market reactions to TRI announcements to determine whether the regulation actually provided new information to stockholders. This provides evidence as to whether investors believed that the unexpected information on TRI releases could have an effect on firm profitability that could influence firm behavior. Then, the investigator looks more closely at plant-level responses to the TRI and estimates (1) the relationship between reported TRI reductions and pollution abatement expenditures to estimate whether reported reductions are related to abatement activities of regulated pollutants, and (2) the relationship between reported TRI releases and plant level productivity.