Climate Change 2001: Mitigation

6.2.2.4 Voluntary Agreements

No international definition of a VA is universally accepted (CEC, 1996; EEA, 1997; OECD, 1998a). VA is used here to mean an agreement between a government authority and one or more private parties, as well as a unilateral commitment that is recognized by the public authority, to achieve environmental objectives or to improve environmental performance beyond compliance.⁴⁹

VAs may take a wide variety of different forms. The large-scale VAs in the field of GHG mitigation activities in Japan and the Netherlands are referred to in Boxes 6.3 and 6.4. For a description of the US “market transformation” type VA and the German VAs, see Mazurek (1998) and Storey et al. (1999), and Eichhammer and Jochem (1998), respectively. Sometimes these involve agreements between the government and a set of firms, but in other cases industry associations represent member firms. Sometimes the agreement only relates to general issues, such as R&D activities, reporting on emissions, or energy efficiency, but in other cases specific quantified targets, such as emissions targets, are agreed upon. A few VAs are legally binding once signed, but most are not.⁵⁰

Although VAs are a relatively new environmental policy instrument, they are gaining popularity as a tool to cope with environmental issues. That in 1996 in the EU alone there existed more than 300 VAs at least suggests this type of policy measure is administratively and politically feasible, especially if it is used in a policy mix or in new policy areas (OECD, 1998a, p. 102). VAs are political feasible simply because most of the industries seem to prefer VAs over other tools (Dijkstra, 1998; Svendsen, 1999). VAs may precede more formal arrangements; the vast majority of GHG emissions reductions in the USA called for in the US Climate Change Action Plan come, for instance, from voluntary initiatives to increase energy efficiency. However, VAs may not be a satisfactory substitute for mandatory efficiency standards (Krause, 1996).

Sometimes the “voluntary” aspect of a VA is questioned, as the main motivation for industries to join the VA was to avoid the implementation of a carbon and/or energy tax and/or other mandatory policy (Torvanger and Skodvin. 1999, p. 28). Segerson and Miceli (1997) found that the level of abatement under a VA is closely related to the probability of regulatory action in the absence of an agreement.

Proponents of voluntary approaches point to the low transaction costs, the merits of the consensus elements in the approach, and the advantages of leaving the choice of abatement measures to the participants. Although free riding is a concern with VAs, the risk can be addressed through the proper design of the VA. Free riding can take place if firms that do not comply or participate benefit from the agreement while bearing no cost. Governments may encourage participation in VA programmes and discourage free riders by providing incentives such as permits to use labels and other marketing claims. As for possible abuse, some or all of the participants may use their initiating role in the process to create an agreement that benefits them, and hence obstruct real abatement progress. It could also involve introducing measures that benefit some firms, and reinforces their market dominance.

To assess the environmental effectiveness, the trade-off between how ambitious the objectives are and how well they are attained should be recognized. There is a suspicion that if the goals are too ambitious, they will not be attained. As most VAs are non-binding they may not attain ambitious goals (EEA, 1997; OECD, 1998a). VA objectives may be less stringent if environmental groups are left out off the negotiation process. Since VAs are a relatively new policy instrument to cope with environmental issues, it is too early to determine their effectiveness (OECD, 1998a, pp. 78–83).

From a methodological perspective, it is rather complex to assess the effectiveness of VAs because it is difficult to establish a counterfactual.⁵¹

Box 6.3. Keidanren Voluntary Action Plan on the Environment (See http://www.keidanren.or.jp/)

Keidanren (Japan Federation of Economic Organizations), the largest private and non-profit economic organization in Japan, announced the “Keidanren Appeal on the Environment” in 1996, in which concrete courses of action for measures to cope with global warming were specified. Following the Appeal, 37 trade associations set forth the “Keidanren Voluntary Action Plan on the Environment” in June 1997. Although the above action plan is a unilateral commitment on the part of the industries, it should be considered an environmental agreement.⁵² In fact it constitutes a major component of the Japanese government’s “Basic Principles for the Promotion of Measures Dealing with Global Warming”; a follow-up survey is to be conducted every year and reported to the government councils, including the Industrial Structure Council of the Ministry of International Trade and Industry, for third party review.

This action plan, which contributes to meeting the Japanese commitment under the Kyoto Protocol, has as its goal “to endeavour to reduce CO₂ emissions from the 28 industrial and energy-conversion sectors to below the levels of 1990 by 2010.” Under a baseline (or business-as-usual) scenario these emissions are estimated to increase by 10%. The 28 sectors represent approximately 76% of CO₂ emissions generated by all industry and energy-conversion sectors in Japan, which in turn generated 42% of Japan’s total CO₂ emissions in 1990.

Each participating business sector made a social commitment by setting a numerical target (in terms of: size of CO₂ or energy consumption; emissions or index of CO₂ emissions; or energy input per unit output), which was compiled and published by Keidanren. For example, the Japanese Iron and Steel Federation set a target of reducing energy consumption in 2010 by 10% from the 1990 level (57.22kt crude oil).

The second survey, presented just before CoP5, showed that CO₂ emissions in fiscal year 1998 were 126MtC, or 2.4% less than 1990 and 6% less than 1997 levels. Keidanren stressed that to meet the emissions goal it would:

continue to make annual surveys of emissions by participating associations;
intensify co-operation between the government and other sectors, such as transportation, households, etc.;
promote the construction of new nuclear power plants; and
explore positively the utilization of the Kyoto mechanisms.

Voluntary provisions also may accompany mandatory policies. The Substitution Provision of the US Acid Rain (SO2 Emissions Trading) Program is the first example of a voluntary compliance provision within an emissions trading regime.⁵³ Voluntary compliance was characterized by adverse selection; units that “opted in” to the programme tended either to have low emissions below their permitted allocations, or to have low costs of abatement (Montero, 1999). While the VA kept aggregate costs low, the adverse selection increased aggregate emissions (Montero, 1999). This inevitable trade-off between adverse selection and cost-savings means that the design of voluntary programmes will influence their net emissions impact (Montero, 2000a).

The OECD (1998a) noted that no empirical evidence is available on the cost-effectiveness of VAs. CEC (1996), however, argues that the flexibility of VAs provides room for industries to find the most efficient way to achieve the targets, which could be a major advantage. EEA (1997) recently concluded, after analyzing six case studies of European VAs, that, while there was quantitative evidence for environmental improvement in most case studies, more sophisticated analysis would be necessary to distinguish between the effects of the VAs and those of other factors (EEA, 1997, pp. 84–85). In the same study it was recognized, however, that in five of the six cases the interviewed experts felt VAs incurred lower costs than alternative instruments.

OECD has indicated various conditions under which VAs can be implemented most effectively (EEA, 1997, p. 15; OECD, 1998a):

clear targets are set prior to the agreement;
the agreement specifies the baseline against which improvements will be measured;
the agreement specifies reliable and clear monitoring and reporting mechanisms;
technical solutions are available to reach the agreed target;
costs of complying with the VA are limited and are relatively similar for all members of the target group; and
third parties are involved in the design and application of VAs.

The EC, for instance, recommends prior consultation with interested parties, a binding form, quantified and staged objectives, the monitoring of results, and so on.

Box 6.4. Voluntary Agreements in the Netherlands

In the early 1990s, the Dutch government entered into agreements with all energy-intensive industries to improve energy efficiency. The purpose was both to improve competitiveness by cutting energy costs and to reduce CO₂ emissions. This win–win situation is favoured by the Ministry of Economic Affairs, which was primarily responsible for the execution of the long-term agreement (LTA) policy. Efficiency is usually defined as the ratio of relevant physical output to primary energy consumed. The target for most sectors is to improve energy efficiency by 20% in 2000, compared to 1989. Most sectors were audited before entering into an agreement, to ensure that the efficiency improvement was feasible. The coverage of industrial energy consumption is high, almost 90% when non-energy consumption is excluded. There is a similar agreement with the horticultural greenhouse sector, which is the second largest energy-consuming sector after the chemical industry. An intermediate organization co-ordinates the annual monitoring and runs programmes for technological support and R&D. The government publishes results annually. It is expected that, on average, the 2000 efficiency target will be reached.⁵⁴ Based on interviews and analysis, 30%–50% of the efficiency improvement identified is implemented because of LTA and related supporting policies (Glasbergen et al., 1997). The results for the LTA sectors in total manufacturing industry through 1996 are depicted in Figure 6.1, together with general statistics (Van Dril, 2000).

Figure 6.1: Aggregated results of manufacturing industry LTAs and statistics.

As a general observation, LTA results diverge from the actual average of the entire manufacturing sector. Both the energy and output indicators show significant deviations. The main explanations for the divergence are, first, that energy-intensive products such as primary materials have grown faster than average production value. In monitoring practice, there may be some bias towards adjusting for energy-intensive products, to avoid negative effects on efficiency results. A second explanation is that statistics on the chemical industries are unreliable and that no insight is provided by the entities responsible for monitoring. For example, no clear information is available on the share of non-energy consumption and its impact on CO₂ emissions.

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