The Cost Efficiency of Voluntary Agreements for Regulating Industrial Pollution: A Coasean Approach

Abstract

Voluntary agreements (VAs) are increasingly considered as a potentially useful environmental policy tool by practitioners. Even though VAs are very diverse, the type which is the most frequently encountered in reality is a collective agreement between a public authority and an industrial sector focusing on one particular industrial pollution concern and including a collective quantified pollution target to be met by the firms of the industry. Regarding these target-based VAs, the policy debate about their efficiency focuses on three main points: (i) Is the collective target set in the agreement socially satisfying? More precisely, it is questioned whether business participation into target setting results in too low environmental objectives. In some cases, it has been argued that targets are even lower than those that would have been reached in ‘business as usual’ conditions (Kolhaas et al., 1995). (ii) In many cases, VAs do not have any legal status. No formal sanctions are thus available in case of non compliance. It leads to enforcement concerns about these agreements which are weakened by potential free-riding behaviours of firms. (iii) Finally, the question of their cost-efficiency, especially in comparison with other policy options (economic instruments and direct regulation) is also under scrutiny.