Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 14 Managing Environmental Quality 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.

The Commerce Railyards Opening Case  The city of Commerce, near Los Angeles, is a vibrant jumble of factories, businesses, and residential neighborhoods.  The city has four railyards and they saturate Commerce with diesel exhaust.  The people in the neighborhoods near the railyards have an estimated cancer risk elevation of up to 800 chances in a million.  The EPA and California regulators have sought emission- reduction measures.  The people of Commerce think that progress in emission- reduction is too slow. The case of diesel exhaust emission in Commerce is an example of how regulators attempt to assess pollution risks and manage environmental quality.

Regulating Environmental Risk  The majority of the benefits and costs produced by Federal regulation are derived from environmental rules.  For every dollar spent on environmental regulation the nation gets between $2.15 and $10.52 in benefits.  Environmental expenditures need to be focused on the highest risks to human health and the natural environment.

Elements of Risk Assessment and Risk Management and Their Sequence

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.

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.

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.

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  The EPA makes the precautionary assumption that risk estimates should be based on the linear curve.  Industry favors the use of sublinear and threshold models that support less regulation.

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.

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 scientific calculations of toxicity, potency, and exposure.  The precision of risk characterizations are limited.

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.  Economic and social factors  Risk decisions cannot always be based solely on scientific findings.

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  Potential job losses and inflation  Reduced productivity such as lowered crop yields or the costs of substitution for a banned substance

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

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.

Criticisms of Cost-Benefit Analysis  Fixing price values of costs and benefits is difficult and controversial.  Contingent valuation is one method of measuring the monetary value of ecosystem goods.  A second method is the value of a statistical life, the willingness to pay for reducing risk of premature death in a population exposed to a pollution hazard.  Cost-benefit approaches compromise ecosystems deserving absolute, not conditional, protection.  Benefits and costs of a program often fall to separate parties.

The Spectrum of Regulatory Options

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.

Market Incentive Regulation  Gives polluters financial motives to control pollution while giving them flexibility in how reductions are achieved.  Environmental taxes  Emission trading (cap and trade)  Carbon offsets  Some environmentalists ridicule carbon offsets  Information disclosure

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:  Companies believe more regulation is imminent and want to prepare control strategies now.  Nonregulatory pressures for companies to be environmentally responsible.

Managing Environmental Quality  Environmental management systems (EMS) have been adopted by many firms.  The leading international model for EMSs is ISO  Actions to reduce environmental impacts  Precautionary action  Pollution prevention  Product analysis  Environmental marketing  Environmental metrics Environmental management system (EMS) A set of methods and procedures for aligning corporate strategies, policies, and operations with principles that protect ecosystems.

Concluding Observations  This chapter looked more deeply into the methods of regulations.  New, more flexible, market-based approaches can be used to achieve environment-preserving goals.  Much progress has been made in protecting both ecosystems and human health.  The sum of regulatory activity and voluntary business action has been inadequate to avert climate change.