2. Managing Environmental Quality Chapter 15 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. This chapter: Explains how pollution risks are assessed to determine which are most important to regulate. Discusses alternative approaches to regulation with emphasis on new, more flexible initiatives. Illustrates how many companies are now managed differently so they can move beyond simple legal compliance.

3. Louisiana-Pacific Corporation Opening Case In 1984 LPs eastern Colorado plant begins emitting pollution. 1985 Colorado regulators mandate pollution controls. For the next two years the plant repeatedly violates its permit. In 1993 the EPA fines LP $11 million and forces it to install $70 million in new pollution control equipment. In 1995 the EPA brings a criminal indictment against LP and two employees. Since its indictment it reports that notices of violation from regulatory agencies have steadily declined from almost 80 in 1995 to only 3 in 2004. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-3 Command-and-control enforcement is critical in environmental regulation. Yet, broad progress toward nonpolluting, sustainable manufacturing requires corporations to go beyond compliance.

4. Regulating Environmental Risk The cost to the nation of complying with environmental regulations is greater than the cost of complying with all other forms of social and economic regulation combined. For every dollar spent on environmental regulation the nation gets between $1 and $4 in benefits. Environmental expenditures need to be focused on the highest risks to human health and the natural environment. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-4

5. Elements of Risk Assessment and Risk Management and Their Sequence McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-5

6. Risk Assessment In theory, risk assessment is a scientific process leading to an objective, quantitative measure of the risks posed by any substance. The EPA and other agencies make a series of precautionary assumptions based on the fear that scientific data might understate risks to human health. Risks are often overstated to ensure that public health is protected with a margin of safety. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-6

7. Hazard Assessment Hazard assessment establishes a link between a substance and human disease. Animal testing is one method, with problems: Scientists rely heavily on strains of rats and mice genetically disposed to high rates of tumor production. In animals exposed to large amounts of a chemical, tumors can arise from tissue irritation rather than carcinogenesis. Animal physiology can be so different from humans that disease processes are unique. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-7

8. Hazard Assessment (continued) A second method of identifying hazards is epidemiological study. Epidemiological studies have the advantage of measuring real human illness, but also have problems. Low statistical power riddled with uncertainties. Cancer latency periods so these studies may not detect harm done by recent exposures. Data from one population may not predict risk for another population. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-8

9. Dose-Response Assessment A dose-response assessment is a quantitative estimate of how toxic a substance is to humans or animals at increasing levels of exposures. For most chemicals, regulators use extrapolation from high doses to predict the effects on human populations at much lower doses. Linear-dose response rate McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-9

10. Exposure Assessment Exposure assessment is the study of how much of a substance humans absorb through inhalation, ingestion, or skin absorption. To make exposure assessments, researchers measure activities that bring individuals in contact with toxic substances. Regulators present their estimates as a distribution of individual exposures. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-10

11. Risk Characterization Risk characterization is an overall conclusion about the dangers of a substance. It is a detailed, written narrative describing the scientific evidence, including areas of ambiguity. Risk characterizations are built on a series of calculations about toxicity, potency, and exposure that are made using scientific method. Risk characterizations may not be accurate. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-11

12. Risk Management Control options These are alternative methods for reducing most risks. Legal considerations Many environmental laws are specific about risk reduction required and methods of achieving it. Other economic and social factors Risk decisions cannot always be based solely on scientific findings. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-12

13. Cost-Benefit Analysis Cost-benefit analysis is the systematic calculation and comparison of the costs and benefits of a proposed action. Cost calculations typically include such factors as: Enforcement costs Capital and compliance costs to industry Foregone net benefits such as lowered crop yields or the costs of substitution for a banned substance Potential job losses and inflation McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-13

14. Cost-Benefit Analysis (continued) Benefits can include: Lives saved Reduced absenteeism from work Lower health care expenditures Rising property values Increase tourism Heightened aesthetic appeal McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-14

15. Advantages of Cost-Benefit Analysis Forces methodical consideration of each economic impact a policy will have on society. Injects rational calculation into emotional arguments. Cost-benefit analysis that reveals marginal abatement costs can help regulators find the most efficient levels of regulation. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-15

16. Criticisms of Cost-Benefit Analysis Fixing price values of costs and benefits is difficult and controversial. Methods of calculating the value of human life are controversial because they clash with public values of fairness and equity. Environmentalists dislike cost-benefit approaches because they invite trade-off of environmental quality. Benefits and costs of a program often fall to separate parties. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-16

17. The Spectrum of Regulatory Options McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-17

18. Command-and-Control Regulation One cause of high pollution-abatement costs is heavy reliance on command-and-control regulation. Advantages It enforces predictable and uniform standards. There is great equity in applying the same rules to all firms in an industry. It produces abatements and it comforts the public to know that the EPA is watching and regulating. However, this approach can be inefficient and increase costs without commensurate increases in benefits. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-18

19. Market Incentive Regulation Taxes and fees Deposit and refund laws Emission trading programs Information disclosure McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-19

20. Voluntary Regulation Another way that regulation is made more flexible is the voluntary program. When a company signs up for a voluntary program, there are often reporting requirements, but no enforcement actions are taken for failure to meet goals. Company motives for participating: Regulatory relief and cost savings Competitive advantage McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-20

21. Managing Environmental Quality In the 1970s corporations left an era of freedom in which they were subject to few environmental restraints and entered an era of strict rules and limits. Consequently, many companies have adopted environmental management systems. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-21 Environmental management system A set of methods and procedures for aligning corporate strategies, policies, and operations with principles that protect ecosystems.

22. Capitalism Evolving Companies must be more productive with resources and more conserving of energy and material. There must be a shift to biologically inspired production models. Strategy must move to new business models emphasizing services rather than the sale of goods. Business must find ways to create value from maintenance and restoration of ecosystems. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-22

23. Reducing Adverse Environmental Impacts Precautionary action Pollution prevention Product analysis Environmental metrics McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-23

24. Concluding Observations Global economic growth carries with it many threats to the thin, fragile biosphere in which human life exists. As such threats are recognized, societies adopt regulations to control the danger. Regulation that only commands is inadequate to the ultimate task, which is the creation of industrial activity that harmonizes with natural cycles. The trend is clearly toward less-polluting, less- resource-intensive economic activity. Leading corporations are more environmentally proactive, but sustainability is still a remote ideal. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 15-24