The choice of environmental regulatory enforcement by lobby groups

Abstract

Across countries and regions, we observe wide variations in the level of enforcement instruments (fines and inspections) that are used to reach compliance with environmental regulations. In this paper, we study whether the differences in enforcement policies can be justified from an efficiency perspective, and if not, whether they favour the interests of certain lobby groups. We develop a theoretical model to derive the preferred enforcement policy, which is characterised from a global efficiency point of view and also from the point of view of different interest groups. Also, we explicitly allow for a non-linear deterrence effect of fines. We find that, despite the regulatory costs, green interest groups generally favour more stringent enforcement strategies with high fines and high inspection frequencies, while brown interest groups prefer laxer enforcement strategies.

Keywords:

• enforcement policy
• environmental standard
• lobby groups

JEL classification:

• D78
• H23
• K42
• Q58

Acknowledgements

We are grateful to Paolo Casini, Amihai Glazer, Guido Pepermans, Ronnie Belmans and an anonymous referee for their comments on earlier versions of the paper.

Notes

1. Assuming firms are led by individuals and are in the hands of shareholders, we can state that marginal deterrence also applies to firms, more generally.

2. Furthermore, wealth could also provide a decrease in deterrence of punishment, though only for monetary sanctions. When an individual or firm knows it cannot pay the fine, deterrence has no effect and the deterrence function becomes flat.

3. The data are somewhat outdated; however, as there is so little information available on inspections, fine levels and lobbying in Europe, it gives the most adequate indication possible.

4. For those member states only all the four indicators could be defined.

5. The divergence in the level of the fine and the inspection rate between the EU member states is present in many environmental regulations, but as water pollution fits our theoretical model best (cf. infra), we focus on that type of pollution.

6. In a working paper of 2007, the European Commission reports on the implementation of a Recommendation (2001/331/EC) providing for minimum criteria for environmental inspections (EC 2007).

7. A part of these variations are actual differences in monitoring practices, but part can also be attributed to differences in definitions. For the full-time equivalents of inspectors, only the time spent on inspection activities should be counted. It is, however, not clear from all country reports whether the numbers given represented the full-time equivalent or whether instead the total staff of inspecting authorities was counted (including the staff working on other issues).

8. The indicator for the green lobby strength should be multiplied by 0.0001 in order to get to the actual number, for all four member states.

9. The fine represents the monetary equivalent of all imposed sanctions, including non-monetary sanctions such as prison sentences or license withdrawal.

10. As we do not model output explicitly, we define the pollution level of the firms and the standard level of pollution per unit of output.

11. Risk aversion in this context has already been studied intensively (see, for instance Polinsky and Shavell [1979]). Furthermore, we want to introduce non-linear deterrence and focus on the effects of this type of deterrence on enforcement. Adding risk aversion would only unnecessarily complicate the analysis.

12. In reality, the inspection rate for environmental violations typically depends on the compliance behaviour of a firm (cf. Harrington 1988 or Rousseau 2007).

13. We define the firms’ values instead of profits, as the deterrence effect introduced in the firms’ objective functions is a subjective concept, not reconcilable with the objective concept of profits. As individuals both lead and own the firms, we can rely on this more subjective concept instead of pure monetary profit maximisation.

14. The standard is set at a level that balances the average of marginal abatement costs of all firms in the considered countries and the marginal damage for households. We assume that the supranational government perfectly knows the (marginal) harm function and can make an estimation (an average) of the abatement costs of the firms.

15. This model assumption is based on Aidt (1998) who makes a distinction between lobby groups with multiple goals and functionally specialised lobby groups.

16. This means that the political contribution schedule of a lobby group always reflects the true preferences of the lobby group.

17. It would not make any sense to have an environmental interest group only caring about their own harm from pollution.

18. What the households gain in lower fines (profit effect via shares in the firms) they lose in lower head transfers (budget constraint becomes more stringent).

19. As the analytics are too complex to deliver clear-cut insights, we resort to a comparison of scenarios based on the first-order conditions, which gives us an idea about the direction of the effects. For the actual size of the effects, we could resort to a numerical exercise, but that goes beyond the scope of the paper.

20. The other parameter values are exogenously set at .

21. Same as with inspection rate.