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Detecting Corporate Environmental Cheating

Mar 10, 2021

Seema Kakade and Matt Haber

Volume 47 (2020) - Issue 3

As evidenced by the Volkswagen diesel emissions scandal, corporations cheat on environmental regulations. Such scandals have created a surge in the academic literature in a wide range of areas, including corporate law, administrative law, and deterrence theory. This Article furthers that literature by focusing on one particular area of corporate cheating—the ability to learn of the cheating in the first place. Detecting corporate cheating requires significant information about corporate behavior, activity, and output. Indeed, most agencies have broad statutory authority to collect such information from corporations, through targeted records requests and inspection. However, authority is different from ability. The corporate world moves quickly, the number of regulated entities are many, and agencies often face legal and resource challenges to information collection processes that can impede detection of cheating. As a result, this Article advocates for a shift in focus to mandatory self-monitoring and reporting mechanisms that place the initial burden of detection on the regulated corporate entity instead of the agency. This Article uses, as a case study, sulfur dioxide air pollution standards in the shipping industry to demonstrate that such a shift can improve the likelihood of detecting cheating. International standards for the harmful pollutant sulfur dioxide became more stringent in January 2020, and the price difference between compliance and noncompliance is high. Therefore, there is a significant incentive for shipping companies to cheat. Failure of agencies to catch the cheaters not only undermines the anticipated public benefits of the regulations but also creates an uneven playing field for those regulated entities that spend the money to comply. However, agencies alone simply cannot be expected to detect all corporate cheating. They need help from those that have the requisite information, specifically the regulated entities themselves.