Improving Audit Mechanisms for Environmental Information Disclosure Programs

A. Marcel Oestreich
Department of Economics and Finance, University of Guelph

Supervised by Professor J. Livernois and R. Kirkegaard
Department of Economics and Finance, University of Guelph

Studies founded both in economic theory and empirical research have shown that when firms self-report their pollution, their environmental performance improves. However, the success of this approach depends upon compliance by firms, and budgetary constraints for enforcement provisions of environmental information disclosure programs may limit their effectiveness in promoting environmentally beneficial outcomes. A fine-based enforcement system can usually deter non-compliance, but requires (especially when fines are capped) sufficiently high audit probabilities to do so. These probabilities can be costly for regulators to achieve.

An important conclusion of this research is that the most commonly applied inspection strategy, the random audit mechanism, is not the optimal auditing approach for underfunded environmental enforcement agencies. Given the mismatch between regulatory mandates and budgets, the random mechanism does not create the best possible incentive for firms to report and abate emissions. Instead, regulators should investigate the appropriateness of two alternative strategies, the dynamic audit mechanism and the competitive audit mechanism, to improve environmental outcomes through a more efficient use of scarce resources.

Related Materials:

  • Research Note
  • Published paper on the Journal of Environmental and Resource Economics website

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    About the Project

    The goal of this project is to shed light on the relationship between economic activity and the environment by exploring the linkages between changes in our natural capital and our measures of productivity generally, and through the construction of an environmentally adjusted measure of productivity specifically.

    While it is now commonly accepted that economic activity and the state of our environment are linked, many economic measures still fail to incorporate the environment – both the things we draw from it and the pollution we release into it. By developing and calculating measures of productivity that include natural capital, Canada may be able to better understand these linkages. This, in turn, may lead to the identification of strategies that can help Canada become more efficient and innovative in the use and protection of natural capital, and thus more productive and more prosperous.

    Using the forestry sector as a case study, this project aims to construct an environmentally adjusted measure of multifactor productivity. In doing so, we aim to add another layer of understanding to the environmental and economic performance of this sector. The proposed measure will have relevance to the Canadian economy as a whole.