Carrots over sticks: the case for environmental self-audits.

• Author: Volokh, Alexander

When people think of environmental battles, spotted owls, old-growth forests, and Pacific salmon typically come to mind. Beer probably doesn't. But that's what touched off one of today's most heated environmental debates: What sort of protection should companies be granted in exchange for conducting voluntary environmental audits?

Air pollution agencies used to think beer brewers were clean people. An Environmental Protection Agency document published in September 1985 found that volatile organic compound (VOC) emissions from beer fermentation were negligible. Likewise, a 1983 report by the California Air Resources Board concluded that the state's breweries produced 20.7 million barrels of beer each year and in the process released only 42.3 tons of VOCs.

But all that changed in 1992 when the Colorado-based Coors Brewing Company became the first major brewery in the United States to complete a comprehensive, voluntary investigation of its VOC emissions. (Brewery scientists had long suspected that EPA figures underestimated company emissions.) The investigation found that when beer is spilled during the making, packaging, and disposal process, large quantities of VOCs are released into the air. As the producer of about 20 million barrels of beer per year, Coors alone was releasing 650 to 750 tons of VOCs -- about 17 times more than originally thought.

Environmentalists, regulators, and industry alike love the idea of audits. But after sharing the results of its review with public authorities, Coors discovered a significant downside to self-auditing. In July 1993, the Colorado Department of Health -- allegedly under pressure from the federal EPA -- issued Coors a compliance order containing a $1.05 million civil penalty for violations of state air pollution laws. The fine was also to include a to-be-determined-later "economic benefit payment" to the state for money the company had saved by not complying with the laws. The 23-page order listed 189 violations: 100 air pollution emission notification violations, 56 permit violations, and 33 VOC violations. All but the VOC violations were essentially claims that Coors had not submitted the proper paperwork to the state health department -- for emissions sources that Coors (and the health department) had no knowledge of until the audit.

This was the largest fine ever imposed by the state for an air pollution violation. Coors argued that it was being unfairly punished for voluntarily revealing problems that both regulators and major brewers had missed, and warned that such fines would go a long way to discourage other companies from conducting self-audits. (Coors had already spent 18 months and $1.5 million conducting the study.)

In February 1994, the fine was reduced. Coors agreed to pay a $100,000 fine and a $137,000 economic benefit payment, relinquish 70 tons of pollution allowances it held for the release of VOCs, and reduce its annual VOC, sulfur dioxide, and nitrogen oxide emissions. The agreement also included a schedule to bring all of Coors's emissions sources into compliance with state regulations within two years.

Carrots vs. Sticks

The Coors episode was the catalyst for Colorado's adopting an "audit privilege" law, based on the premise that it's wrong to punish someone for...