Thursday, February 08, 2007

Environmental Regulations: Is the gap between developed and less developed countries growing or shrinking?

A stylised fact that underlies a large swathe of the "globalisation and the environment" literature is the premise that environmental regulations differ across countries (or indeed regions within a country). An often used assumption in empirical papers is that there is a strong correlation between income and regulatory stringency (including some element of regulation enforcement).

This assumption then allows researchers to see whether firms are relocating from high to low regulation countries - a fairly intuitive hypothesis even if evidence is somewhat harder to come by.

This recent FT article talks about the regulatory regime is Europe. If regulations in the West increase but remain the same (or are at least still as poorly enforced) in LDCs then one might expect to see more pollution haven consistent behaviour of firms.

What is interesting is just how poorly enforced regulations have been in the West. No wonder governments in LDCs find it tough especially given the relatively high levels of corruption.

Goal is a level and clean playing field
Environmental regulation has been tightening in many regions of Europe as concerns grow over pollution and climate change.

Tighter UK regulations mean companies face much heavier fines than in the past. Company directors can be held personally liable for pollution and face jail terms or anti-social behaviour orders if they breach environmental regulations. Individuals can be fined up to £5,000 for failing to dispose of waste correctly.

Changes were brought in partly because companies were ignoring the previous system of fines. There were cases of companies taking payment for disposing of waste, then dumping it in fields because the fines were so small they could pay them and still make profits.

Now, the UK has a "pretty tough regime", said Brian Hall, head of the environmental group at Clifford Chance, the law firm..

As some environmental crimes can cross borders, the European Union has been trying since 1999 to find ways of plugging loopholes between the national legal systems. But, national sovereignty in this area is a sensitive topic. While the European Commission tabled a proposal in 2001, it was ignored when justice ministers adopted their own plan in 2003. The Commission went to court to prove it should have been involved and won at the European Court of Justice last year.

Whether governments agree, by majority voting, to accept its new directive depends on how close it is to their original proposal. It prescribes minimum penalties for the most serious crimes, those in which those liable were negligent and caused death or acted as part of a gang. They extend up to 10 years in prison.

Fines for companies or other institutions should be between €750,000 ($971,000, £493,000) and €1.5m. Only those governments that wish to recognise the criminal liability of people acting for a company need do so, however. Other penalties include winding companies up, excluding them from aid and forcing them to clean up.

"Criminal sanctions are not in force in all member states for all serious environmental offences even though only criminal penalties will have a sufficiently dissuasive effect," the directive says. Spain and Greece apply civil law only to the illegal shipping of waste.

Elsewhere in the world, there is a mixed picture on enforcement. The dumping of waste, ranging from toxic to radioactive material, in developing nations is an increasing problem. China has been cracking down on some polluters - for in-stance, PetroChina was handed its biggest fine last month, according to the Xinhua news agency - but critics complain that the law is too weak.

India claims to have good environmental laws but campaigners raised an international controversy over conditions in shipbreaking yards there, when France tried to send the Clemenceau to India for disposal

Getting a world wide agreement on regulations is next to impossible. Europe would be a start.


Keith R said...

Hi Rob. An interesting, thought-provoking post (as usual!).

You are correct by saying researchers "assume" lower regulations in developing countries -- too often when dealing with my favorite region, Latin America and the Caribbean (LAC), in my view. It is true that it's hard to find complete, up-to-date regulations in countries such as Guyana, Grenada, Guatemala or Haiti. But in a growing number of LAC nations -- certainly Argentina, Brazil, Chile, Mexico, Colombia, Peru and even the Dominican Republic -- they have an extensive body of law and regulation, usually based on US and/or European standards, often lifting technical specifications directly (even by name!) from an EPA, ASTM, OECD, EU or ISO standard. That's less a problem than how they are applied and enforced -- too often not at all, or when enforced, done so weakly, sporadically, inconsistently or unevenly. Many factors playing into that, including lack of resources (manpower, budgetary, tools, etc), lack of back-up technical infrastructure (know how difficult is to get sophisticated chemical testing done with any degree of confidence within some of these countries?), too small a pool of trained and/or experienced personnel, etc.

I have an upcoming piece in the Temas Blog queue in my "The Basics" series that will look at this in the LAC context which I call "The Paper It's Written On." The title comes from a quote from a LAC businessman friend: "No Keith, we have laws, beautiful laws that often read word-for-word from the US or EU texts! But are they worth the paper they're written on? Many people, including businessmen, don't even know they exist, much less what they specify. And when enforcement is rare and there is no regulatory guidance about how to comply with these rules, how many are going to bother?"

Rob Elliott said...

Very interesting comment Keith. We have been worried about the enforcement issue for a while. We have written a previous academic paper using Mexican and Brazilian data and we are just finishing a paper using Argentinean data. Your post sheds some light on something that we have been concerned about - the perception on the surface that environmental regulation differences between developed and less developed countries do not appear to be that great. This is something I would like to work on as an economist - the difficulty is how to measure the effectiveness of regulations i.e. construct an index of regulatory stringency and an index of regulatory enforcement for LAC for example and to see whether that influences the location of dirty foreign direct investment or the production of dirty products. The answer may be to use existing surveys of businessmen in LAC countries that ask how they perceive the stringency of environmental regulations. Another method might be to get a measure of the number of government staff per 100,000 of the population working in ER enforcement. We have a PhD student doing something similar for China. I will keep an eye out for your paper when you post it on Temas blog. What I was not aware of was the use of EU and US legislation word for word. An excellent idea for a government wanting to appear tough on pollution. Interesting.