The environment, like politics and religion, is a hot-button issue for many people. But most everyone¾ be it public interest groups, the government or private enterprises¾ agrees that the current system of environmental regulation is not working well enough, at least in the United States. Existing environmental statutes and regulations are elaborate and complex, making a speedy and efficient resolution of environmental problems all but impossible. Environmentalists, on one hand, are unhappy with the current system’s lack of environmental protection and its failure to achieve significant progress in key areas. Businesses, meanwhile, are exasperated by the inflexibility of the traditional command-and-control model of environmental regulation and argue that the current system stymies innovation and costs them too much money. The Environmental Protection Agency (EPA) is caught in the middle¾ unable to please either group¾ because satisfying one group is often achieved at the expense of the other.

A Wharton Environmental Impact Conference held at the University of Pennsylvania Law School on September 24-25 addressed the current system’s shortcomings and outlined some alternative approaches. The Conference, also sponsored by the University of Leuven, brought together academics, policymakers, attorneys and economists from all over the United States and also Europe, where management of environmental issues has evolved more rapidly. Of particular interest to conference participants were environmental contracts, a collaborative approach that has been used successfully in several European countries.

According to Eric W. Orts, an associate professor of legal studies at Wharton and the director of Wharton’s Environmental Management Program, environmental contracts provide a means to regulate environmental problems through negotiation and collaboration rather than by strong-arming industry. “Unlike regulatory methods that focus primarily on the traditional mechanisms of representative government¾ namely, statutes and administrative agencies¾ environmental contracts aim to include the various interested parties directly in the regulatory process and to make agreements reached through this process mutually enforceable,” says Orts. In so doing, the process becomes less adversarial and less coercive.

The potential advantages to this approach are obvious to proponents such as David Grimeaud and Michael Faure of the University of Maastricht. Grimeaud, who attended the Wharton conference, outlined the traditional arguments for using environmental contracts. First, environmental contracting promotes consensus-based decision-making and therefore a more proactive approach by industry. Second, this approach produces a shift in favor of collaboration and cooperation among all interested participants¾ business, public interest groups and the EPA. Third, it is more likely to result in a speedy and efficient implementation of environmental objectives. Finally, the contracting approach affords the regulatory flexibility to explore more economical ways of achieving environmental protection goals.

Orts also points out that with a contract, unlike with regulations and statutes, parties are able to periodically renegotiate their agreements in response to additional experience, scientific knowledge, and changing technology. Optimistically, he argues that this alternative may even lead to a broader understanding and incorporation of environmental values in policymaking.

Positives notwithstanding, environmental contracts are not without problems or dangers. A chief concern of environmentalists and the EPA is whether environmental protection standards will decline, with industry avoiding more stringent regulations¾ a phenomenon known as regulatory capture. A second concern is how to preserve the transparency presumably achieved by the current regulatory system and ensure that citizens still have access to information. Mechanisms will also need to be created to deal with corporations known as “freeriders” who choose not to participate in the process, but who benefit from the lack of regulations. Finally, parties must also consider that transaction costs of negotiating environmental contracts may, in certain cases, be too high to make economic sense.

Although the concept of environmental contracts has long been popular among academics, the United States has only experimented with this approach since the early 1990’s and only with limited success. Perhaps the United States can learn from some of its European counterparts¾ namely, the Flemish, the Dutch and the German¾ who have been using environmental contracts for much longer. After establishing an elaborate legal framework to govern the use of environmental contracts, many European nations can boast significant success. In Flanders, for example, the central government and industry have recently negotiated a number of environmental agreements relating to the transportation and disposal of different kinds of waste. Still, cautions remain. Kurt Deketelaere, a professor of law and director of the Institute for Environmental and Energy Law at the University of Leuven, notes that parties must have clearly defined and enforceable environmental goals as well as a mechanism to deal with freeriders. The Flemish approach, for instance, uses a combination of basic legal framework and environmental agreements as a legislative fallback “so freeriders that don’t participate in the agreement are still confronted with legislation with which they must comply,” says Deketelaere. Furthermore, to ensure preservation of environmental standards, the environmental agreements cannot depart from the existing body of law.

The bottom-line? Collaborative efforts by all interested parties will bring about greater progress in environmental management in many circumstances. A new regulatory approach that allows flexibility to experiment and cooperation will often lead to better results, more innovative solutions and greater efficiency.