STATE ADOPTION OF ENVIRONMENTAL AUDIT INITIATIVES

An environmental audit is a voluntary internal review of all of a facility's operations and practices that relate to its environmental performance. Environmental audits can be designed to verify compliance with environmental regulations, evaluate the effectiveness of environmental management systems, and assess environmental risks at a facility. Given the potential for such audits to improve environmental performance, the U.S. Environmental Protection Agency (EPA) has developed an audit policy to encourage their use. The policy eliminates or reduces civil penalties for violations that are disclosed as a result of an environmental audit. However, the policy has been criticized by many in the regulated community for not going far enough to provide incentives for facilities to conduct environmental audits. (1) More specifically, the federal policy does not grant explicit privilege to audit reports or provide immunity from civil penalties for violations disclosed as the result of an environmental audit. Although the EPA is "firmly opposed to statutory and regulatory audit privileges and immunity," a number of states have passed their own environmental audit privilege or immunity legislation (U.S. EPA 2000, section I.F). Moreover, supporters of these state laws claim that they have had a positive effect on the use of environmental audits as well as on environmental performance. If audit legislation does have a positive impact, it is important to understand why some states have enacted it and others have not. Additionally, an understanding of the factors that drive state adoption will allow for a more rigorous assessment of the effectiveness of state audit legislation. In particular, if the factors, that determine whether a state adopts audit privilege also affect the measures used to evaluate the effect of audit privilege, one must control for such a relationship or the results of the analysis will be biased. Finally, given the direct opposition of the EPA to state audit legislation, this case provides an interesting opportunity to examine how linkages between federal and state programs affect state policy development. The remainder of the article is organized as follows. Section I provides a brief background on federal and state environmental auditing initiatives, and section II presents some evidence on the results of these initiatives. Section III discusses the theoretical framework for this analysis and identifies potential factors that might drive state adoption of environmental audit initiatives; section IV describes the empirical framework and results; and section V concludes. I. BACKGROUND ON ENVIRONMENTAL AUDITING INITIATIVES According to a 1995 General Accounting Office (GAO) report, the potential benefits of environmental auditing to regulated entities include the detection of compliance problems before the problems can pose serious liabilities, cost savings through operating efficiencies, and reduced risks from environmental hazards. Proponents of environmental audits also argue that most voluntarily disclosed violations would not be detected by regulators and that encouraging the use of environmental audits can increase the number of violations that are detected and remediated, thus increasing environmental protection without increasing enforcement costs. Moreover, a number of theoretical studies have shown that an audit immunity or self-policing policy can actually reduce enforcement costs without decreasing environmental protection by allowing regulators to redirect their enforcement efforts (see, e.g., Innes 2001; Kaplow and Shavell 1994). However, many environmental interest groups are opposed to audit or self-policing policing policies because they believe that, regardless of the theoretical benefits of such policies, in practice they are likely to have a detrimental effect on the environment because they lower the expected financial penalty associated with violations, and thus facilities have less incentive to comply. …