Can you teach an old (and talented?) dog new tricks? Audit frequency and audit quality for improving water quality
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1 Can you teach an old (and talented?) dog new tricks? Audit frequency and audit quality for improving water quality Donna Ramirez Harrington* (U. Vermont) and Dietrich Earnhart (U.Kansas) Heartland Environmental and Resource Economics Workshop 2015
2 Audits and Environmental Policy Environmental audits a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements (USEPA) Environmental auditing is part of EPA strategic plan for improving compliance with environmental regulations April : Audit Policy Incentives for (voluntary) Self- Policing, Discovery, Disclosure, Correction and Prevention of Violations
3 Audits and Environmental Performance Audit adoption (Delmas and Toffel 2008; Evans et al 2011, Khanna and Widyawati 2011; Pfaff and Sanchirico 2000, Sinclair-Disgagne and Gabel 1997) Self-audits and inspection decisions (Stafford 2007, Short and Toffel 2008) Impact of audit on environmental performance Intent to audit under an audit policy RCRA (Evans et al 2011) Auditing and compliance with CAA (Khanna and Widyawati 2011) Frequency of audits and TSS and BOD (Earnhart and Harrington 2014)
4 This Study: Self-audits environmental performance 1. Environmental performance: Extent of compliance - TSS Discharge ratio : Actual discharge / effluent limit collected monthly; aggregated to annual 2. Audit count - not limited to those connected to discovery and disclosure of a violation or a specific audit policy 3. Audit quality Audit findings classification protocol: 4 categories Audit team composition: 3: categories 5. Other factors may affect efficacy of audits Age of facilities Presence/absence of treatment technology
5 Audit Quality audclass: Audit Findings Classification Protocol Class 0 = no audits Class 1 = only non-compliance findings are noted Class 2 = only two categories used: non-compliance findings and other Class 3 = findings placed into priority categories of vulnerability for non-compliance Class 4 = findings ranked (e.g., serially) by degree of vulnerability for non-compliance Collapse categories: Class1-2 (1 and 2) Class 3-4 (3 and 4) audteam: Audit Team Composition Team 0 = no internal audits conducted Team 1 = visiting corporate and/or consultants only Team 2 = teams of various facility employees Team 3 = teams of facility employees and visiting corporate staff and/or consultants
6 Sample and Data U.S. chemical manufacturing sector during the years 1999 to 2001 Dependent variable tss EPA Permit Compliance System (PCS) database Monthly discharge ratio data aggregated to annual by identifying the year-specific median ratio among the 12 monthly ratios. Key Explanatory variables: audit, audclass, audteam Survey administered to a sample of U.S. chemical manufacturing facilities whose wastewater discharges were regulated by effluent limits imposed within permits issued as part of the National Pollutant Discharge Elimination System (NPDES) in 2001 Explanatory variables PCS (controls) and survey (age and treatment technology)
7 Model
8 Econometric Issues Pooled vs RE vs FE RE Audit variables potentially endogenous in TSS equation Instrumental Variables: Influence audit behavior but not tss discharge ratio Audit adoption of peer facilities in the same region 3 state audit policies: immunity, privilege, immunity and privilege Relevant (F-test) and Valid (Sargan test) Audit and audit quality exogenous
9 TSS Discharge Ratio (tss)
10 Audit Count (audit) Frequency Table (n=221) 52>=Audit>12 12>=Audit>4 4>=Audit>1 Audit=1 Audit =
11 tss vs audit No Audits Mean TSS Discharge Ratio vs Audit Count Audit=1 (Yearly) 4>=Audit>1 (More than Yearly to Quarterly) 12>=Audit>4 (More than Quarterly to Monthly) 52>=Audit>12 (More than Monthly to Weekly)
12 audit vs audclass Mean Count of Audits by Audit Findings Classification Protocol (audclass) Class 4: Findings ranked (e.g., serially) by degree of vulnerability for non- Class 3: Findings placed into priority categories of vulnerability for non- Class 2: Only two categories used: noncompliance findings and other Class 1: Only non-compliance findings are noted
13 tss vs audclass Mean TSS Discharge Ratio by Audit Classification Protocol (audclass) Class 4: Findings ranked (e.g., serially) by degree of vulnerability for non-compliance Class 3: Findings placed into priority categories of vulnerability for non-compliance Class 2: Only two categories used: noncompliance findings and other Class 1: Only non-compliance findings are noted Class 0: No internal audits conducted
14 Regression Results MODEL 1 QUALITY AND AGE MODEL 2 QUALITY AND TECH MODEL 3 QUALITY, AGE AND TECH audit count audit count*auditclass3/4 audit count*age audit count*treatment technology (0.35) (0.01) (1.78)* (1.11) (2.52)** (0.16) (0.25) (0.81) (0.90) (-1.6) (2.26)** (2.52)** (1.38) (1.76)* age yes yes yes yes yes treatment technology no yes yes yes yes controls yes yes yes yes yes year dummies yes yes yes yes yes region dummies yes yes yes yes yes
15 Summary of Marginal Effects More frequent audits --> lower TSS discharge ratio Effectiveness of audits in reducing TSS discharge ratio Stronger with higher quality audits Weaker with older plants Weaker when adopting a TSS treatment technology
16 Marginal Effects of Audit Count on TSS Discharge Ratio Model 1
17 Marginal Effects of Audit Count on TSS Discharge Ratio Model 2
18 Marginal Effects of Audit Count on TSS Discharge Ratio Model 3
19 Implications More frequent audits --> lower TSS discharge ratio Quality of auditing matters as long as plants are not too old; Critical age of plant depends on presence of treatment technology Audit policy on audit quality? Other policies for older plants? Audit vs treatment technology?
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