In Regulating the Polluters, Alexander Ovodenko analyzes why and how local governments have relied on international rules and institutions to mitigate environmental problems. One of his main findings is that, in order to improve the environment, regulators should pay special attention to oligopolistic markets. In other words, regulating oligopolies results in better outcomes for the environment than regulating competitive markets. Although this argument may sound counterintuitive, Ovodenko provides a thorough empirical analysis of environmental policies around the world supporting his hypothesis.
Because of their market power, oligopolies generally have a high influence on political decisions. One may thus think that regulators would have problems holding industries to environmental rules and would rather focus on regulating competitive markets. Yet, in various sectors, providing the right incentives to oligopolies has helped governments achieve their goals. It is thus preferable to focus on the regulation of oligopolistic markets rather than competitive ones. The positive effects of regulating oligopolistic markets comes from the flexibility that oligopolies have to adjust their behavior, including their production processes. For instance, they have more resources to invest in research and development to adopt cleaner technologies. On the one hand, oligopolies generate large amounts of pollution, but on the other hand, their characteristics make them more able to comply with integrated, standardized, and legally binding agreements.
Regulating the Polluters contributes to the growing and ever more relevant literature that evaluates different approaches to environmental regulation. It highlights the importance of studying the regulation of oligopolistic markets, which has been left aside by the vast studies on environmental regulation of competitive industries. Ovedenko provides moderate (in the case of the legally binding agreements) to strong empirical evidence of the positive effects that regulating oligopolies has had on improving the environment. To this end, he carefully analyzes institutional responses to pollution in oligopolistic industries, and compares them to those in competitive industries. The oligopolies are classified as oligopolistic discrete markets (producers with considerable capital resources that sell to consumers with low price-sensitiveness and few substitutes) and oligopolistic mass markets (a combination of oligopolistic and competitive markets; that is, few firms with abundant capital resources, and consumers with high price-sensitiveness and more substitutes). Competitive markets are referred to as competitive mass markets. To analyze oligopolistic discrete markets, he examines commercial shipping and industrial chemicals and products. For oligopolistic mass markets, he looks at civil aviation and agricultural pesticides. Finally, for the study of competitive mass markets, he considers farming (food), energy, and gold mining.
Regulating the Polluters is an important contribution comparing the effects of environmental regulation across different market structures. The empirical analysis is deep and exhaustive, providing policy makers with an in-depth analysis full of tools and arguments to design and implement effective environmental policies. Although the book provides cases of successful regulation of oligopolies, its counterpart for competitive industries is missing. A natural question to ask is whether this evidence from particular industries is enough to obtain general conclusions. It is important to analyze whether there are cases where competition has resulted in smoother and better (from the environmental authority perspective) implementation of regulations, and whether oligopolies have made this task harder. Even though the empirical evidence provides moderate to strong support to the book’s hypotheses, theoretical models (with mathematical foundations) that also support them would be an important addition to the analysis.
Also, the regulator should take into account harmful secondary effects that may arise by regulating oligopolies. As suggested by many authors (see Heyes 2009 for a survey), environmental regulation may result in less competitive markets. The reason is that entry becomes harder for potential competitors. First, environmental regulations naturally impose additional costs to entry, in monetary and speed terms (for instance, if the firms need to acquire a cleaner technology, or pay/wait for a license or certification). In addition, since large firms have better resources to comply with regulation, it may be in their interest to intentionally discourage entry (which Ovodenko discusses briefly). Environmental policies may trigger predatory behaviors by the incumbents that increase market concentration, with its corresponding negative effects on social welfare. It is also important to keep in mind that stringent regulations may deter innovation instead of incentivizing it (for instance, see Perino and Requate 2012), which would be self-defeating. The environmental authority should thus take into account the potential consequences of policies.
Overall, the book offers important guidelines for environmental authorities. An essential lesson from it is that such authorities should carefully observe the market that will be regulated. Regulating the Polluters raises important questions that establish new research directions to complement its analysis and provide a more comprehensive guide to governments.