Despite promising to be flexible, low-cost, and promote sustainability, Voluntary Environmental Agreements (VEAs) have proven to be ineffective unless accompanied by the threat of regulatory consequences.
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Negative externalities created by market economies require environmental regulations to limit the release of harmful pollutants and greenhouse gas emissions that degrade ecosystems and undermine social welfare.
Historically, regulatory efforts to safeguard ecosystems and promote public health have come in the form of government mandates and legally enforceable restrictions administered by state regulators. Laws such as the United States Clean Air Act of 1970, the 2021 European Union Climate Law, and amendments to China’s Environmental Protection Law in 2014 set prescriptive rules and standards referred to as command-and-control (CAC) policies. These laws compel pollution control and abatement to reduce the environmental impacts of industrialization and consumer culture.
However, shifting political realities in the developed world in the 1980s brought deregulation, privatization, and the belief that environmental laws were overly rigid, resource intensive, and reactive. Regulators became seen as barriers to economic growth, feeding acrimonious relationships with private companies and disincentivizing creative, market-based approaches to abatement.
In response came Voluntary Environmental Agreements (VEAs). Also known as self-regulation, such agreements vary in their structure and mechanisms but are intended to either go beyond what is already required by existing environmental law, or focus on pollutants not yet regulated in the hopes of preventing costly future government mandates. Voluntary agreements theoretically offer emitters the flexibility to pursue lower cost innovation in pollution abatement and sustainable practices, while partnering with regulators on setting targets and standards that are realistic and attainable.
And while there have been a few notable successes in voluntary partnerships between state regulators and industry, including the removal of lead from gasoline and the phase out of so-called “forever chemicals” from food packaging and paperboard, these agreements still nominally required regulators to ensure compliance.
As research on voluntary agreements accumulates, it is clear these arrangements are ineffective unless backstopped by the threat of penalty and mandated compliance. It is important to recognize the weaknesses of self-regulation in mitigating environmental degradation and climate change.
The Limits of Environmental Regulation
Reducing and eventually eliminating harmful pollutants and greenhouse gas emissions is the objective of environmental regulation. However, any policy that places restrictions on economic activity will inevitably be hindered by political circumstances, the demands of private industry, and active disinformation campaigns by interest groups trying to reduce the severity of the regulation – or stop it altogether.
In representative governments, policymakers are compelled to balance economic efficiency and cost effectiveness, or, rather, the trade-offs between the needs of their constituents and economic imperatives of industrial polluters. They write laws that seek to optimize social warfare (i.e., economic efficiency) and maximize the benefits of pollution reduction while maintaining abatement costs equal across polluters (i.e., cost effectiveness). There is also the possibility of distortionary effects. When new regulations conflict with existing law, trade agreements, subsidies, and tax structures, they can produce unintended consequences. This happened with US subsidies for ethanol fuel production – considered a renewable energy source – contributing to a substantial increase in food costs for lower income countries.
Strict CAC policies empower regulators to assign ownership to the source of pollution, set standards, monitor emitters, and ensure compliance through legal enforcement, but they also have several shortcomings. Of most importance is the fact that they are costly to maintain, though it is important to highlight that the benefits of a cleaner environment and preservation of biodiversity are difficult to price and likely far exceed taxpayer costs and the expense to business. In 2022, the EU spent €278 billion (US$302.7 billion) on environmental protection (2% of its GDP), and is expected to spend more in the coming years. The US Environmental Protection Agency’s (EPA) 2022 fiscal year budget was $9.6 billion.
Moreover, true to the critiques of deregulators, laws sometimes mandate antiquated technology or design standards that disincentivize creative approaches to abatement. Or they may focus on telling individual businesses what level of discharge is safe and legal, which fails to address aggregate pollution across all emitters. CAC policies are also jurisdictional and do not travel across borders, while pollution consistently does.
Market-oriented policies are theorized to overcome some of this inflexibility and expense, with economic incentives to push polluters into finding cost-effective abatement practices on their own. Emissions taxes, subsidies, and permit systems (e.g., carbon cap-and-trade) are common mechanisms in market-based approaches, alongside liability laws and public disclosures. These differ from voluntary agreements as they are written by policy makers, and regulators take an active role in compliance.
Indeed, it was a permit trading scheme set up by the EPA in the face of budget cuts that successfully reduced the prevalence of acid rain in Eastern US by capping sulphur dioxide emissions. The EPA started with the country’s largest coal-powered energy plants, allowing them to trade their permits, then expanded the program nationally. While less rigid than CAC, the scheme still came with constant monitoring and the prospect of penalties if the cap was exceeded.
The Appeal of Voluntary Agreements
VEAs can be set up by any entity – governments, standards organizations (e.g., ISO 14001), civic groups, non-governmental organizations (e.g., Sustainable Forestry Initiative), and trade groups (e.g., unilateral agreements for sustainability). These arrangements are entirely dependent on participants’ willingness to comply, as there are no consequences should they refuse or become noncommittal.
In many developed countries, voluntary agreements augment existing regulations rather than substituting them, encouraging polluters to go beyond what is already required by law. The proliferation of these agreements has been fed by the belief that prescriptive environmental regulation increases production costs, crowds out research investment, and reduces market competitiveness. This view has been bolstered by conjectures such as the ‘Porter Hypothesis,’ which insist that low levels of regulation will promote technological innovation in pollution control. Initiatives such as the 33/50 Program, set up in 1990 by the EPA, asked companies to voluntarily reduce usage, disposal, and discharge rates of 17 toxic chemicals by 33% of 1988 levels by 1992, and 50% of 1988 levels by 1995. It achieved its goal a year earlier with only a light regulatory touch.
In developing countries, voluntary agreements can help sidestep the challenges of enforcing CAC policies. With many of the planet’s most severe pollution challenges, developing countries often lack comprehensive legislation or regulatory agencies with appropriate funding, expertise, or staff. Essential infrastructure such as waste management processing and water treatment plants are limited or non-existent. Additionally, informal workers and enterprises can be difficult to monitor.
There is dedicated funding from aid agencies and the United Nations to engage companies with voluntary agreements, supporting alternative control and abatement strategies in unregulated spaces. These organizations heavily leverage public disclosure to try and shame polluters into action by releasing reports on their impact to local environments.
Flaws
It has become clear that for voluntary approaches to be effective, there needs to be accountability. The presence of a strong, formal regulatory framework to enact voluntary arrangements lets polluters know that regulation may not be far behind if they fail to change their behaviour.
Voluntary programs in developed countries that showed success – such as the aforementioned 33/50 Program – required engagement, partnership, and education from regulators to set measurable goals and monitor the results. It also came with the possibility of formal regulation if toxic discharges did not fall. The same can be seen in voluntary product certification initiatives that have gained public confidence, such as Energy Star for appliances and US Department of Agriculture (USDA) Organic labelling. These initiatives are backed by regulators with the resources to enforce standards and monitor for compliance.
In developing countries, the need for strong regulation holds particularly true. The informal economy – 60% of the world’s employed population – is less susceptible to public disclosures and often not incentivized to seek formal certification. For large companies and multinational corporations that do participate in agreements while operating in lower income jurisdictions, data on environmental performance can be unreliable, often being self-reported and unverifiable. Companies might also take advantage of communities where the free flow of information is constrained, obfuscating their pollution levels and abatement efforts. There is also the likelihood of selection bias for those firms that participate in voluntary agreements and are willing to self-report because they have already met unambitious standards.
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Local communities and authorities may even protect polluters if they provide employment in the area. Such was the case of a cluster of tanneries in León, Guanajuato, Mexico, where voluntary agreement signatories failed to alter their practices and continued to discharge their effluents into the surrounding waterways. The tanneries received significant political support and protection as key employers. Without enforcement authority, regulators had no recourse.
Critics also argue that the existence of voluntary agreements (and the funds dedicated to reporting) divert limited resources away from building functional regulatory institutions, offering “seemingly convenient but ultimately unrealistic solutions to the difficult challenges” of environmental protection.
High profile voluntary agreements do little to dispel this criticism. The CDP (formerly known as the Carbon Disclosure Project) is an international non-profit that oversees global standards for companies voluntarily disclosing their carbon dioxide (CO2) emissions and climate change strategies. While fostering transparency, the ultimate objective for CDP is reporting, not abatement. This provides multinational companies like Ford Motor Company a high rating for transparency despite their expanded production of fossil fuel vehicles.
At times, companies’ low-carbon strategy is to purchase offsets through the Voluntary Carbon Market (VCM), a voluntary program that allows entities to buy or sell carbon credits, which go on to fund global projects in reforestation or farming regeneration to create carbon stores. The VCM was valued at US$2 billion in 2022. The issue? It does not stop emissions but rather allows polluters to brand themselves carbon neutral (or even carbon negative) by purchasing credits while still discharging greenhouse gases, which continue to increase worldwide.
More on the topic: The Benefits of Voluntary Carbon Markets
Can Voluntary Agreements Work?
For any regulation to be effective – whether voluntary, market-oriented, or CAC – clear targets need to be set, monitoring and reporting must be reliable, and there needs to be a credible regulatory threat.
Public disclosure requires an aware and engaged public to become educated on how their communities are being harmed by pollutants. Even when regulators face budget constraints or diminishing returns on their efforts, they can leverage voluntary agreements, as Colombia did when setting wastewater emissions standards. They partnered with private industry to establish technical requirements and gain inhouse expertise to build regulatory capacity.
The limits of CAC policies will continue, as they are unable to directly regulate cross-border pollutants and climate change. Voluntary agreements have their place in setting global standards and expectations, promoting cross-border cooperation between state governments and international organizations that operate in areas without strong regulatory institutions. Resourced by organizations like the UN Environment Programme (UNEP) and supported by international frameworks like the UN’s Sustainable Goals.
But the regulation of pollutants and greenhouse gas emissions cannot fall to private enterprises and the market alone. Regulators must be empowered with the tools and policies they need to hold polluters accountable. Markets fail and create externalities, companies are built to prioritize profits over sustainable solutions, and the ideal role of every state government should be to step in and protect its populations from the harms of pollution and environmental degradation.
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