# Presentation: 114746

## Voluntary Policies to Reduce Greenhouse Gases:  A Preliminary Review of the Evidence

- Eric W. Welch
- Public Administration
-   University of Illinois at Chicago

## Slide 2

## Motivation

- High Profile / Popularity of Voluntary Polices
- Questions That Drive Research:
- Under what circumstances do governments choose to use voluntary policies to control pollution?
- What factors determine the willingness of private sector organizations to volunteer to reduce pollution?
- What determines the effectiveness of voluntary policies?
- Greenhouse Gases

## Outline

- Types and Characteristics of Voluntary Policies
- Literature
- Framework for organizing and describing voluntary policies
- Special Characteristics of GHGs
- Comparative perspective, 5 Cases
- Conclusions, Lessons

## Characteristics

- Government Initiatives
- Private Sector Initiatives
- Voluntary Agreements

## Characteristics

## Literature

- Governance
- Legal Perspective, Non-statutory basis
- Flexible tailoring, flexible method of compliance
- Problems of enforceability, potential for ratcheting down
- Closed negotiation
- Accountability and capture questions
- Policy Choice – voluntary program appropriate when:
- Deregulation & cost reduction demands high
- Speed required
- Policy conflict
- Markets value environmental decisions
- Ecological modernization
- Effectiveness depends on context

## Literature

- Firm Behavior
- Regulatory Theory (Maxwell, et al., 1998; 1999; Segersen & Miceli, 1999)
- Simultaneous Environment Economic Efficiency Gains
- Market Response Theory (Williams; Arora & Cason; Arora & Gangopadhyay; Hamilton; Khanna & Damon)
- Cooperation Theory (Andreoni; Palfrey and Prisbrey)

## Literature

## Framework

- Regulatory Background Threat
- Distribution of Non-regulatory Bargaining Power
- When regulatory background threat is high and government holds a strong non-regulatory bargaining position, voluntary policies will be more demanding and compliance will be higher.

## Framework

- Weaker

**Regulatory Bargaining Power**

- Stronger

**Distribution of Non-Regulatory Bargaining Power**

- Government

- Industry

- I

- II

- III

- IV

## Framework

- Weaker

**Regulatory Bargaining Power**

- Stronger

**Distribution of Non-Regulatory Bargaining Power**

- Government

- Industry

- II

- III

- IV

- Dutch Voluntary Agreements

## Framework

- Weaker

**Regulatory Bargaining Power**

- Stronger

**Distribution of Non-Regulatory Bargaining Power**

- Government

- Industry

- I

- III

- ISO 14001, US

- IV

## Framework

- Weaker

**Regulatory Bargaining Power**

- Stronger

**Distribution of Non-Regulatory Bargaining Power**

- Government

- Industry

- I

- II

- IV

- US Farm Bill

## Framework

- Weaker

**Regulatory Bargaining Power**

- Stronger

**Distribution of Non-Regulatory Bargaining Power**

- Government

- Industry

- I

- II

- III

- Watershed Agric. Program
- EPA 33/50

## Voluntary GHG Policy

- How do voluntary GHG policies fit into this framework?
- Special factors of GHGs
- Local effects difficult to define and perceive, long term low immediacy
- Science complex
- Diffuse sources, costs unclear
- Electricity production / Industrial energy efficiency targets
- Global institutions new, untested
- Variation in citizen and political interest / pressure
- Examples

## Case 1: Sweden

- National Commitment – stabilize CO2 emissions at 1990 level by 2000
- Eko-energi
- Supporting Energy Efficiency Measures
- CO2 Tax, subsidies to R&D and procurement programs, labeling, testing and information dissemination, government support for energy audits and marketing.
- Target Group – Proactive, innovative firms with ability to improve energy efficiency (30 firms, 1.5% of industrial energy consumption)
- Type of Targets in Agreements
- Implementation of an EMS (correspond to EMAS and ISO 14001)

## Case 1: Sweden

- Sanctions
- None
- Effectiveness
- All firms have EMS in place.
- No analysis of effect on CO2 reduction.
- Program stopped in 1999, currently under review. (Kagstrom, Astrand, and Helby, 2000)

## Case 2:  Denmark

- National Commitment – 20% reduction (1988-2005, no agreement target at firm level.
- Supporting Energy Efficiency Measures
- CO2 Tax, free electricity audits, information, subsidies for energy efficient investments, energy management and accounting
- Target Group – Highly energy intensive firms (145 firms, 45% of industrial energy consumption)
- Type of Targets in Agreements
**Special Investigations** -  A priori energy analyses and audits
- Special investments (up to 4 year payback)
- Introduction of EMS

## Case 2: Denmark

- Sanctions
- Direct – payback of CO2 rebate
- Indirect – auditors could lose licenses
- Effectiveness
- Specific investments and special investigations are usually carried out (VAIE, 2000)
- Implementation of EMS slow and less effective
- Focus on technical, rather than managerial solutions
- Isolated effects of the agreements estimated as 6% reduction in CO2 emissions in 2005 from volunteers.  Total of 0.4% reduction of total CO2 emissions in Denmark (Pedersen, 1998; Johannsen and Larsen, 2000).

## Case 3: Japan

- National Commitment – Stabilize emissions at 1990 level by 2000.
- Keidanren Voluntary Action Plan
- Objective – Stabilize emissions at below 1990 levels by 2010
- Industry plans, annual reports by Keidanren
- Target Group – all industries (37 industries, 75% of CO2 emissions from industries).
- Targets mostly quantitative CO2 emission reductions and energy efficiency improvements
- Self review, self reporting to industry association, aggregated public disclosure, no sanctions
- Effectiveness Unknown, no studies, high variation among sectors

## Case 3: Japan

- Local Voluntary Environmental Agreements
- National regulation slow and weak
- Dramatic local problems, public pressure, ability of local government to develop ordinances stricter than national laws.
- Facility based agreements, multiple pollutants, typically stricter than national regulations, not enforceable
- Monitoring
- Spot inspections, fuel and emissions, public disclosure of agreement but not of emissions
- Sanctions
- Operation / expansion / construction permits, shut down, liability
- Inducements
- Land, infrastructure, site selection

## Case 3: Japan

- Other Attributes
- Reciprocity (market conforming, industrial guidance)
- Pre-regulation
- Conflict resolution
- Regulate large local point sources
- Regulate pollutants not backed by science
- Effectiveness
- High variation among agreements, no comprehensive study
- Suggestive evidence (Welch and Hibiki, 2002; Tsutsumi, 2001)
- Application to CO2

## VEAs and Pollution Levels 

- Source: Survey of Environmental Protection Measures by Local Governments, 1999

## Case 4: The Netherlands

- National Commitment – Stabilize emissions at 1989 level by 1995 and 3-5% reduction by 2000.
- Supporting Energy Efficiency Measures
- Information and Consultancy, energy management, investment subsidies, demonstration, other Novem programs.  (not specific to volunteers)
- Target Group – All industrial branches with energy consumption of more than 1 PJ per branch (1250 firms, 90% of industrial energy consumption)
- Type of Targets in Agreements
- Energy efficiency improvement of 20% (some exceptions) compared with 1989.

## Case 4: The Netherlands

- Sanctions
- Environmental Permit Required
- Noncompliance results in being expelled from the agreement and possible imposition of stricter requirements.
- Effectiveness
- In 1998, average energy-efficiency improvement in 29 participating sectors was 17.9% (117 PJ, 6.6 Mtons of CO2 emissions per year) (VAIE, 2000)
- Average annual energy efficiency improvement of 2.1% (1989-1997)
- Variation among sectors.

## Case 5:  United States

- National Commitment – Unclear
- Climate Challenge Program
- Target Group – joint, voluntary effort of the U.S. Department of Energy and the electric utility industry to reduce, avoid or sequester greenhouse gas emissions (123  utilities, 73% of industrial energy consumption).
- Targets – determined by utility
- Reporting – depends upon defined target, EIA 1605
- Inducements / Sanctions / Policy Linkages

## Case 5: United States

- Research Questions
- Why to electric utilities adopt the Climate Challenge program? What drives higher or lower voluntary reduction commitments?
- How does voluntarism contribute to Carbon Dioxide reduction?

## Case 5: United States

- Model
- Yit = X1itβ1 + αDit + ε1it    i = 1, ..., I; t = 1, ..., T
- X is a vector of exogenous firm-specific variables
- D represents voluntarism
- ΔYit = ΔX1itβ1 + αΔDit + ε1it    i = 1, ..., I; t = 1, ..., T
- Dit = X2itβ1 + ε2it

## Case 5: United States

- Hypotheses (1)
- Firms will be more likely to volunteer in regions exhibiting higher levels of pressure from external stakeholder groups.
- Firms experiencing higher levels of direct pressure by regulatory agencies will be more likely to adopt volunteer programs (and volunteer to reduce higher levels)
- Firms with higher levels of environmental effort will be more likely to adopt a voluntary program.

## Case 5: United States

- Hypotheses (2)
- Larger companies will be more likely to adopt a voluntary reduction program.
- Dirtier firms will be more likely to adopt a voluntary reduction program.
- Firms that adopt voluntary agreements will reduce emissions more than non-volunteers.
- Higher levels of voluntary reduction commitments will lead to greater emission reductions.

## Case 5: United States

- Data and Methods
- D = ƒ (B0, B1, B2, B3, B4, B5, ε1),
- Where B1 = SIZE, B2 = EFFORT, B3 = PRESSURE, B4 = REGULATION, B5 = DIRTINESS and D represents either a one / zero, adopt / nonadopt discrete variable or the level of voluntary commitment.  (logit, tobit)
- Y = ƒ (V0, V1, V2, V3, D, ε2),
- Where D = PREDICTED, V1 = FUEL SHIFT, V2 = GENERATION CHANGE, V3 = TECHNOLOGY. (OLS)
- Top 50 Utilities East of Rocky Mountains

## Case 5: United States

- Data / Methods (Stage 1)
- SIZE
- Total net energy generated in 1995 (FERC)
- EFFORT
- Ratio of environmental expenditures to total expenditures
- PRESSURE (alpha = 0.80)
- Environmental membership levels (Wilke, 1995)
- Aggregated public environmental survey data from the General Social Survey (Mazur and Welch, 1998)
- Environmental voting records of the House and Senate members (League of Conservation Voters, 1998)
- The total out of 50 possible environmental policy initiatives at the state level (Hall and Kerr)

## Case 5: United States 

- Data / Methods (Stage 2)
- REGULATION
- Sum of federal and state environmental regulatory expenses paid by the utility in 1995 (FERC)
- DIRTINESS (alpha = 0.95)
- Carbon Dioxide Emission Rate (NRDC)
- Percent of total electricity that is generated from combustible fuels – oil, coal, natural gas – relative to total generation in 1995 (NRDC)
- PROGRAM ADOPTION
- One if the utility volunteers to participate in the Climate Challenge Program, zero if it does not.
- PLEDGED REDUCTION LEVEL
- Total pledged reductions of CO2 in the year 2000 agreed to by utilities in 1995 (stated in the Climate Challenge contracts between each volunteering utility and the Department of Energy).

## Case 5: United States

- Data / Methods (Stage 2)
- PREDICTED VOLUNTARISM
- Predicted values obtained from the first stage model
- ACTUAL EMISSION CHANGES
- EPA’s Acid Rain Database
- FUEL SHIFT
- (Fossil Generated Electricity 1995 / Total Generation 1995) – (Fossil Generated Electricity 1997 / Total Generation 1997) (FERC)
- GENERATION CHANGE
- Electricity generated in 1997 minus that generated in 1995 (FERC)
- TECHNOLOGY
- Depreciation of environmental capital divided by total depreciation (FERC)

## Decision to Volunteer and Extent of Voluntarism: Logit and Tobit Models

## Effect of Voluntarism on Pollutant Reduction of Utilities

## Case 5: United States 

- Conclusions
- Larger, dirtier firms under regulatory pressure are more likely to volunteer more reductions.
- Higher levels of voluntarism lead to lower reduction levels.
- Barriers to CO2 reduction from voluntarism:
- Regulatory influence theory: background threat low, companies hold most of the bargaining power.  Weak regulatory regime, low beyond compliance action.
- Deregulation – Electricity price competition, higher levels of coal consumed, higher CO2 emissions.

## Conclusions: Framework Application

- Weaker

**Regulatory Bargaining Power**

- Stronger

**Distribution of Non-Regulatory Bargaining Power**

- Government

- Industry

- US, Sweden, Japan (Keidanren)

- Denmark

- Netherlands

- Japanese Local VAs

## Conclusions 

- Voluntary agreements most effective when regulatory threat is strong and/or non-regulatory bargaining power favors government.
- Other Factors
- Linkage with other policies
- Analysis and preparation critical for ambitious targets
- Complexity of driving forces must be recognized
- Individual commitments should be part of a collective scheme (national, industry)
- Audited reporting
- Institutional capacities