Regulators and Environmental Groups: Better Together than Apart?
AbstractIn the last two decades, the relationship of environmental groups towards businesses has evolved, from
antagonistic to more constructive partnerships, commonly known as “green alliances.” They are regarded
as a good alternative to environmental policy since firms themselves design and implement the program.
But are they a substitute or complement of environmental regulation? In the first case, free-riding incentives
arise, implying that regulatory agencies set less stringent policies when green alliances are present. If freeriding
incentives are strong, environmental policy could be replaced by green alliances. If, in contrast, green
alliances are complementary to environmental policy, regulation becomes more effective at curbing
pollution when the EGs are present. Our paper seeks to answer this question, identifying in which contexts
green alliances and environmental regulation are substitutes or complements. We evaluate welfare gains
from EGs, and whether they are larger when environmental policy is present or absent.
We consider a sequential-move game where, first, the EG chooses a collaboration level, which reduces
abatement cost. Second, every firm responds selecting its abatement level. Third, the regulator sets an
emission fee, while firms compete in quantities. We show that environmental policy becomes less stringent
as aggregate investment in abatement increases. This gives rise to free-riding incentives in firms’ abatement
decisions, since every firm can benefit from the tax-saving effect. We find that a more generous
collaboration effort from the EG induces the regulator to set a less stringent emission fee. We nonetheless
identify synergies between the EG and regulator. First, when environmental policy is absent, the EG’s task
becomes ineffective. This suggests that green alliances cannot replace regulation since firms need tax
incentives to invest in abatement. We show that welfare from regulation becomes larger when the EG is
present. That is, regulation is effective when both EG and regulator are active.