EPA's Voluntary 33/50 Program: Impact on Toxic Releases and Economic Performance of Firms

A recent shift in the U.S. strategy for environmental protection is the use of voluntary programs and self- regulation for pollution control rather than mandated command- and-control approaches. If voluntary approaches are successful in reducing pollution, they also have the potential to be more cost?effective than existing command? and?control regulations because they allow firms flexibility to choose the most appropriate pollution control strategy, lower information costs and reduce the administrative burden on environmental agencies. Current analytical research concerning voluntary programs has examined their welfare impacts and the cost-effectiveness of using voluntary programs together with mandatory regulations. Recent empirical studies have been limited to examining firms' motivations to participate in voluntary programs. From an environmental policy perspective it is also important to investigate whether voluntary programs are more effective at reducing pollution than traditional approaches. It is necessary to explore the relative roles of mandatory regulations and voluntary programs and if they are complements or substitutes in pollution control. It is also vital to examine the consequences of participation on a firm's economic performance. If the government does not provide any financial incentive for participation in voluntary programs, their long-term feasibility as policy tools depends on their impact on a firm's profitability. These issues are examined in the context of firms in the U.S. chemical industry and their participation in EPA's 33/50 Program. Panel data for the years 1988-1993 are used. We evaluate the impact of the Program by developing a two-stage generalized least squares model that corrects for self-selection bias and controls for the effect of firm-specific factors on a firm's level of pollution and its economic performance. The empirical analysis shows that firms decided to participate in the 33/50 Program because of rational economic self-interest. Incentives for participation include expected gains due to public recognition and technical assistance and expected reductions in future liabilities and compliance costs under mandatory environmental regulations. This suggests that participation in voluntary programs depends on a framework of mandatory regulation that provide a credible threat of penalties if firms do not voluntarily self-regulate their emissions. We demonstrate that the Program led to a statistically significant decline in the release of toxic chemicals after controlling for sample-selection bias, the impact of mandatory regulations and firm-specific characteristics. We also find that the program had a negative and statistically significant impact on the net income of firms in the short run, but that future profitability of firms improved significantly as a result of the program.