Voluntary Environmental Regulation in Developing Countries: Mexico’s Clean Industry Program

Abstract

Because conventional command-and-control environmental regulation often performs poorly in developing countries, policymakers are increasingly experimenting with alternatives, including voluntary regulatory programs. Research in industrialized countries suggests that such programs are sometimes ineffective because they mainly attract relatively clean participants free-riding on unrelated pollution control investments. We use plant-level data on more than 100,000 facilities to analyze the Clean Industry Program, Mexico’s flagship voluntary regulatory initiative. We seek to identify the drivers of participation and to determine whether the program improves participants’ environmental performance. Using data from the program’s first decade, we find that plants recently fined by environmental regulators were more likely to participate, but that after graduating from the program, participants were not fined at a substantially lower rate than nonparticipants. These results suggest that although the Clean Industry Program attracted dirty plants under pressure from regulators, it did not have a large, lasting impact on their environmental performance.

Keywords: Voluntary Environmental Regulation, Duration Analysis, Propensity Score Matching, Mexico

JEL Classification: Q56, Q58, O13, O54, C41