The efficiency costs of voluntary agreements in environmental policy*

With respect to environmental protection, governments in many OECD countries are increasingly reluctant to impose fiscal or regulatory measures on firms because they fear adverse effects on production and employment. As an alternative strategy of improving environmental quality, voluntary agreements (VA) between industries and government are becoming more common. Past and current examples of VA in OECD countries include commitments for energy efficiency improvements in industrial sectors or cooperative agreements to increase fuel efficiency of motor vehicles (IEA 1997). ¹ In the context of global warming, VA campaigns meanwhile have led to the suspension of CO₂ tax initiatives and other regulatory measures in several OECD countries. The embracement of VA by environmental policy makers has two major reasons. First, VA constitute a cooperative solution and appear more acceptable to industry as compared to administrative measures. Second, VA are perceived as cost-efficient, achieving energy or emission reduction ‘at lower costs than regulatory and economic instruments’ (IEA 1997: 11).