Panel Paper: The Institutional Design of Voluntary Environmental Programs: A Comparative Analysis

Friday, November 7, 2014 : 10:15 AM
Enchantment Ballroom D (Hyatt)

*Names in bold indicate Presenter

Nicole Darnall, Arizona State University, Hyunjung Ji, University of Alabama and Matthew Potoski, University of California, Santa Barbara
In an era where government policies are increasingly difficult to enact, many policy makers have turned to voluntary environmental programs (VEPs) as a way to address mounting global environmental problems. In exchange for increases in environmental goods production, VEPs provide participating firms an excludable good they would not otherwise receive. Most often this takes the form of a certification that signals to consumers and other stakeholders the superior environmental performance of their production activities or products. Some of these VEPs also provide consumers specific benefits associated with purchasing an environmentally friendly product. Effective VEPs can thus solve environmental problems by facilitating exchanges in which firms increase their production of environmentally friendly goods in return for financial and nonfinancial rewards from their stakeholders. Empirical studies suggest VEPs do not always live up to this lofty promise. Unfortunately, there has been little comparative analyses of the institutional design of these programs – especially for VEPs that seek to influence consumers’ purchasing behavior – despite considerable theoretical analyses that describe the hazards of VEPs’ shortcomings. In this paper we draw on club theory to evaluate the design rules of more than 400 VEPs worldwide that are sponsored by government, industry and nonprofit organizations. The findings reveal considerable variability across VEPs, with some having significantly more effective program rules than others.  Weak monitoring and enforcement rules allow participating firms to shirk their VEP obligations even when standards are strong. Weak standards allow VEPs to misleadingly claim that they are improving participants’ environmental performance as much as other programs. Unfortunately, detecting these differences is challenging for firms’ stakeholders, and particularly consumers who wish to purchase environmentally friendly products. Unless some means of distinguishing among program types is implemented, these issues can threaten the long term viability of VEPs as a tool for environmental protection and the credibility market mechanisms more broadly.