What Improves Environmental Compliance? Evidence from Mexican Industry

Abstract

This paper uses new survey evidence to analyze the effects of regulation, plant-level management policies, and other factors on the environmental compliance of Mexican manufacturers. In Mexico and other developing countries, many plants avoid complying with regulations because monitoring and enforcement are sporadic. On the other hand, some plants overcomply because their abatement decisions are strongly affected by extra legal factors. We attempt to capture both possibilities in a model of decision making under uncertainty: A plant minimizes expected pollution-related costs by setting emissions intensity (emissions/output) at the point where marginal abatement cost is equal to the expected marginal penalty for polluting. Compliance status is determined by the positive or negative gap between the regulatory standard and the plant's cost-minimizing emissions intensity. Among determinants of the latter, we focus particularly on environmental management policies: the degree of effort to reduce emissions, and the type of management strategy which is adopted. Recognizing that these policies and emissions are simultaneously determined, we use two-stage least squares for econometric estimation. Our results suggest that environmental management has a strong, independent effect on compliance, even after we control for simultaneity and take many other determinants of emissions intensity into account. We conclude that in developing countries with weak regulation, the carrot of subsidized environmental management training may provide a useful complement to the uncertain stick of conventional enforcement.