Self-policing in a targeted enforcement regime

Southern Economic Journal, April, 2008 by Sarah L. Stafford

1. Introduction

There is an on-going debate in both the theoretical and empirical literature about the effectiveness of self-policing policies such as the Environmental Protection Agency's (EPA) Audit Policy. The EPA consistently publicizes the Audit Policy as a successful, innovative approach to compliance. For example, the introduction to EPA's 2002 Enforcement and Compliance Assurance Report, "Environmental Results through Smart Enforcement," includes the 26% increase in companies that self-disclose violations as one of the year's highlights (U.S. EPA 2003, p. 4). However, Pfaff and Sanchirico's (2004) finding that the typical self-disclosed violation is relatively insignificant leads them to question whether the Audit Policy is as effective as the EPA claims. Similarly, Stafford (2005) examines compliance with hazardous waste regulations before and after the establishment of the federal Audit Policy and does not find any significant evidence that the federal Audit Policy has affected overall compliance. (1)

The theoretical literature on self-policing is also mixed. While many theoretical models of self-policing show that it can increase environmental protection (e.g., Kaplow and Shavell 1994; Innes 1999a), other models demonstrate how self-policing can have significant negative effects (e.g., Heyes 1996; Friesen 2006). This paper adds to the debate over the ability of self-policing to increase environmental protection by considering one aspect of self-policing that has been ignored in previous models--that self-policing may influence future enforcement activity.

EPA's Audit Policy provides incentives for regulated facilities to conduct environmental audits and voluntarily self-police by offering significant penalty reductions for any disclosed violations that meet certain eligibility criteria. Additionally, the EPA's website for environmental auditing notes that when regulated facilities self-police, it can render "formal EPA investigations and enforcement actions unnecessary." (2) Although the EPA website implies that self-policing can affect future enforcement activity and Stafford (2007) finds that self-disclosures do decrease the probability of future inspections, to date all theoretical models of self-policing are essentially static models.

This paper adds to the existing theoretical literature on self-policing by incorporating self-policing into Harrington's (1988) dynamic targeted enforcement model. The paper then investigates the effect of self-policing on facility behavior and examines the circumstances under which self-policing can increase environmental protection and the circumstances under which it can be detrimental. The remainder of the paper is organized as follows: Section 2 provides a brief description of EPA's self-policing policy; section 3 reviews the theoretical literature on self-policing; section 4 presents a theoretical model of self-policing in a targeted enforcement regime; section 5 discusses the implications of self-policing for environmental performance under this model; and section 6 concludes.

2. EPA's Self-Policing Policy

In December of 1995 EPA issued "Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations," which encouraged facilities to voluntarily undertake environmental audits and provided incentives for facilities to voluntarily disclose and correct any violations of environmental regulations discovered by the audit. (3) Because this policy evolved from an EPA effort to encourage environmental auditing, the self-policing policy is more commonly referred to as the Audit Policy. Under the Audit Policy, any facility that voluntarily identifies, discloses, and corrects violations of environmental regulations is eligible for a reduction in the penalties associated with those violations. To be eligible for a complete waiver of punitive penalties, the self-disclosure must meet nine conditions:

i. Systematic discovery: Discovery must either take place during an environmental audit or during a self-evaluation that is part of a due diligence program.

ii. Voluntary discovery: The process through which the violation is discovered cannot be required by federal, state, or local authorities and cannot be required by statutes, regulations, permits, or consent agreements.

iii. Prompt disclosure: Violations must be disclosed within 21 days of discovery.

iv. Independent discovery and disclosure: The disclosure cannot be made after an inspection or investigation has been announced or notice of a suit has been given.

v. Correction and remediation: Any harm from the violation must be remediated and the violation must be corrected within 60 days of the date of discovery unless technological issues are a factor.

vi. No recurrence: The facility must identify why the violation occurred and take steps to ensure that it won't recur.

vii. No repeat violations: The same or a closely related violation cannot have occurred within the past three years at the facility or within the past five years at other facilities owned by the same parent organization.