Literature Review to Assess the Relevance of Outcome-Based Regulations to Innovation
Natural Resources Canada
CanmetMINING-Green Mining Initiative
Minerals and Metals Sector
Table of Contents
1.0 Executive Summary
3.1 Historical Context
3.2 Porter Hypothesis
3.3 Berlin II Guidelines for Mining and Sustainable Development
3.4 Advantages & Disadvantages
4.0 Use of Outcome-Based Regulations as a Means to Foster Mining Innovation
4.1 Building Regulations
4.2 U.S. 1970 Clean Air Act
4.3 Australian Mining Sector
4.4 British Columbia Forestry Regulations
4.5 Saskatchewan Environmental Code
5.0 Key Findings
6.0 Principles for Regulators
7.0 Works Cited
8.0 Works Referenced
Natural Resources Canada (NRCan) would like to thank all those who helped and provided input to this literature review of outcome-based regulations. In particular we would like to thank the members of the Green Mining Initiative Inter-governmental Working Group (GMI-IGWG). The following provinces and territories have representatives in the GMI-IGWG: British Columbia, Alberta, Manitoba, Ontario, Quebec, Yukon and Nunavut. We would also like to thank the Ministry of Environment of Saskatchewan for their help and support.
1.0 Executive Summary
This report reviews and summarizes the existing literature in an effort to assess the relevance of outcome-based regulations in encouraging innovation. The report is divided into four main sections. The first section presents the historical context, and the main theories related to outcome-based regulations. The second section summarizes a few case-studies and discusses the lessons learned. The third section summarizes the key findings. The report then concludes with some proposed principles for regulators that may help with future regulations.
Prescriptive regulations detail the design and process of how to comply with regulations. One of the advantages of prescriptive regulations is that compliance is easily identifiable. Arguably, prescriptive regulations are easier to monitor and enforce, but they provide very little flexibility. They have been thought to impede innovation; as companies are less inclined to invest in new technologies or materials for fear that they may not comply with regulations.
In contrast outcome-based regulations, also known as performance-based regulations or results-based regulations are thought to be more flexible and less costly. Performance objectives or results are clearly outlined but the industry is able to decide for itself how it will achieve these results. This may encourage innovation; particularly if existing technologies cannot meet the new requirements, and this may reduce their compliance costs. Companies also have an improved understanding of their regulatory obligations and can be held more accountable to the results they produce because of their active participation in the regulatory process.
One of the biggest challenges with outcome-based regulations is balancing how tight controls should be in promoting consistency and accountability versus how much discretion should be given to promote flexibility and innovation. Both prescriptive and outcome-based regulations can be stringent; however prescriptive regulations tend to be by nature more stringent. If a regulation is not stringent enough it will lead to a simple diffusion of current technologies with very little innovation. A balance needs to be struck between prescriptive and outcome-based regulations. Often times, the solution is to create a hybrid regulation; ensuring that regulations are stringent, clear and have measurable standards but are also flexible and open to accepting new innovative technologies and processes. The type of regulation used varies based on different criteria.
Based on the literature review, four principles for regulators were identified for an outcome-based framework to be appropriate successful in encouraging innovation. The first success factor is the rate of compliance; which is an industry or a company’s level of conformity to regulations. The second success factor is related to how well the regulatory objectives can be measured. If the objective is specific enough, measurable, and enforceable, outcome-based regulations will likely be more effective. The third success factor is appropriate timelines. Deadlines for implementing and meeting new regulation standards need to be appropriate to incentivize innovation. The last success factor relates to the level of risk associated with the activity. Case studies have shown that outcome-based regulations are generally appropriate for low to medium risk activities. In addition, the appropriate type of regulation depends both on the sector and goals to be achieved.
This report was developed under the umbrella of the Energy and Mines Ministers, which tasked officials in 2012 to assess the effectiveness of outcome-based regulations to foster innovation. This report will review and summarize the existing literature in an effort to assess the relevance of outcome-based regulations in encouraging innovation.
Prescriptive regulations detail the design and process of how to comply with regulations. For example a prescriptive regulation concerned with fire safety in a building would specify what materials should be used for the structural frame of the building. One of the advantages of prescriptive regulations is that it is clear to the industry what is considered to be compliant. Arguably, prescriptive regulations are easier to monitor and enforce, but they provide very little flexibility. However, they have been thought to impede innovation; as companies are less inclined to invest in new technologies or materials for fear that they may not comply with regulations. In contrast outcome-based regulations, also known as performance-based regulations or results-based regulations are thought to be more flexible and less costly. Performance objectives or results are clearly outlined but the industry is able to decide for itself how it will achieve these results. This may encourage innovation; particularly if existing technologies cannot meet the new requirements, and this may reduce their compliance costs.
A large body of literature exists on the advantages and disadvantages of the different types of regulations. However, the literature is fragmented and largely anecdotal on outcome-based regulations. Many industries and countries, such as the Netherlands and Australia, are making the shift to outcome-based regulations, including the Ministry of Environment of Saskatchewan. Although outcome-based regulations have been proven to work well and foster innovation in certain sectors and under specific conditions they are not a one-size fits all solution to all regulatory woes. Often times, the solution is to create a hybrid regulation; ensuring that regulations are stringent, clear and have measurable standards but are also flexible and open to accepting new innovative technologies and processes
The report is divided into four main sections. The first section will present the historical context, and some theories related to outcome-based regulations. The second section will summarize a few case-studies and discuss the lessons learned. The third section will summarize the key findings. The report will then conclude with some proposed principles for regulators with future regulations.
3.1 Historical Context
Prescriptive regulations have traditionally been the most popular form of regulation. An example of a prescriptive regulation is that a particular type of technology (e.g. converter) should be used to achieve a 90% reduction in tailpipe emissions over a five-year period. The regulation specifically states what a person is not to do and leaves no room for interpretation. These types of regulations continued to be popular until about the 1980s. However, there are earlier examples of outcome-based regulations, such as the 1970 Clean Air Act in the United States, which mandated a 90% reduction in tailpipe emissions over a four-to five-year period.Footnote 1 This regulation specifies the performance objective but not how to achieve it; leaving it up to the discretion of the industry of how to achieve compliance. This example will be discussed in further detail as a case-study.
Outcome-based regulations increased in popularity in the 1980s in the United States following a desire to relieve the regulatory burden on governments and to limit its intervention.Footnote 2 This shift in the design of regulations was driven by a need to lessen the rigidity of regulations and compliance burdens, while promoting innovation and lowering compliance costs. It was thought that by creating more flexible regulations companies would have the opportunity to discover better technologies or processes that were more cost effective and complied with regulations. This push towards outcome-based regulations continued in the United States.Footnote 3 Various forms of outcome-based regulations have since been adopted in the United States and a number of other countries for the regulation of air and water quality, building and fire safety, energy efficiency, food safety, forest practices, nuclear power plants, pipeline safety, and work safety.Footnote 4
The 1990s also saw a widespread introduction of outcome-based regulations in the building sector, as well as engineering analysis and design.Footnote 5 The reasons for this shift towards outcome-based regulations are specific to each country, but there are a few possible explanations. Similarly, to the United States situation in the 1980s it may have been driven by a desire to reduce regulatory burdens and reduce costs to both the government and consumers.Footnote 6 Another possible explanation is to facilitate innovation in building techniques and the use of new materials.Footnote 7 This was also a time of great advancement in computer technology so it may have been required to facilitate the use of computers, and new software. Case studies of outcome-based regulations in the building sector will be discussed later in this report.
Interestingly the World Trade Organization (WTO) is a proponent of outcome-based regulations. The WTO recognizes that prescriptive codes and standards are major non-tariff trade barriers that inhibit trade.Footnote 8 Clause 2.8 of the Agreement on Technical Barriers to Trade states that “[w]herever appropriate, Members shall specify technical regulations based on product requirements in terms of performance rather than design or descriptive characteristics.”Footnote 9 As a result, signatories to the General Agreement on Tariffs and Trade (GATT) are committed to the use of performance-based codes or requirements in evaluating a product and in accepting new innovative products in their market.Footnote 10 For example, if a country tries to export construction products (which conform to their codes) to a recipient country with prescriptive regulations it is difficult for the recipient country to understand what level of performance the product provides. Performance-based codes have the potential to provide greater flexibility and facilitate the use of new and innovative materials.
3.2 Porter Hypothesis
Although outcome-based regulations became popular in the 1980s as a regulatory approach; the idea behind outcome-based regulations leading to an increase in innovation can be attributed to the Porter Hypothesis. The Porter hypothesis was created by Michael Porter, a University professor at the Harvard Business School, nearly twenty years ago.Footnote 11 Porter states in his theory that strict environmental regulations can induce efficiency and innovations that improve commercial competitiveness.Footnote 12 In other words it is possible for a company to increase its competitive edge by creating an innovation that also meets environmental regulations. This creates a “win-win” situation where the environment is protected and businesses increase their profit margins.
Researchers have divided the Porter Hypothesis into three components in order to test the theory and evidence. The first component identified, which has become known as the “weak” version of the hypothesis, expresses that properly designed environmental regulations that focus on outcomes not processes will foster innovation.Footnote 13 It is called the “weak” version of the hypothesis because it does not clarify whether the resulting innovation is good or bad for companies.Footnote 14 The second part, which is considered the “strong” version, of the Porter Hypothesis states that innovations will offset any additional regulatory costs.Footnote 15 In other words environmental regulations will actually increase a company’s efficiency and profits. Finally, the “narrow” version of the hypothesis suggests that flexible regulatory polices give firms a greater incentive to innovate and thus are better than prescriptive forms of regulation.Footnote 16
These interpretations of the Porter Hypothesis can largely explain the shift towards outcome-based regulations. Porter, however, does not specify that the best type of regulations is outcome-based. Instead he stresses that properly formulated stringent environmental regulations (both outcome-based and prescriptive regulations can be stringent) will lead to innovation that both protect the environment and maintain or increase a company’s competitiveness in the market.
3.3 Berlin II Guidelines for Mining and Sustainable Development
More recently non-prescriptive regulations have been supported internationally by the United Nations. The UN expressed in the Berlin II Guidelines for Mining and Sustainable Development that a mixture of regulatory approaches are preferable in the mining sector. The Berlin II Guidelines were the result of the 1991 Berlin Round Table on Mining and the Environment. It was first published in 1994 and revised in 2002.Footnote 17 The guidelines address mining and sustainable development; regulatory framework; environmental management; voluntary undertakings (i.e. corporate social responsibility); and community consultation and development.Footnote 18 The Berlin II Guidelines provide fifteen fundamental principles for sound and sustainable management of mining projects. One of these fundamental principles state that the mining sector should avoid the use of environmental regulations that act as unnecessary burdens to trade and investment.Footnote 19
The chapter on regulations provides unique insights on mining regulations, as one of the only international documents addressing regulations in the sector. The remainder of the literature focuses on other sectors and are country specific. The chapter specifies that it is the national government’s responsibility to develop a well-designed legislative framework for the mining industry.Footnote 20 For the regulators it is important that the legislative framework is clear and enforceable. For the industry it is important to have a regulatory framework that is stable, transparent and appropriate to a country’s conditions.Footnote 21
The guidelines explain that prescriptive regulations can be costly to implement, as they require an appropriately trained enforcement team, extensive and regular monitoring of operations, analytical and data evaluation of support, and an effective judicial system to administer fines and penalties.Footnote 22 In addition, large mining operations lack the degree of standardization present in other sectors, such as manufacturing. As a result, the standardized requirements that are an integral part of prescriptive regulations may reduce efficiency in the mining sector, and result in under-protection at some sites and over-protection at others.Footnote 23 This results in mine operators concentrating all their efforts on complying with the set standards, rather than thinking of the process itself. “This promotes standardized technological solutions that do not necessarily deliver the optimum environmental or economic performance.”Footnote 24
In contrast, outcome-based regulations rely on the mine operator to identify the issues and commit to deal with them.Footnote 25 This provides greater flexibility to the industry as they can tailor their approach to their specific situation and integrate it into their overall management of a project.Footnote 26 However, this method of regulation can also provide the operator with too much flexibility and room for interpretation, which may result in minimal or no improvement.
The Berlin II Guidelines consider regulations based on outcomes or performance targets to be one of the many tools available to regulators. Environmental performance targets are based on the receiving environment and the most appropriate technology, and are expected to show a gradual but continuous improvement.Footnote 27 Regulators set the performance targets, but it is up to the mine operators to choose how to achieve compliance. According to the guidelines this approach assumes that an effective regulatory and enforcement framework already exists and that legal recourse, in the case of non-compliance, is possible.Footnote 28 It is suggested that if any of these elements are missing or lacking that independent monitors, which are trusted by both the government and operator, should be employed to monitor compliance.Footnote 29
3.4 Advantages & Disadvantages
The literature has assessed in detail the advantages and disadvantages of outcome-based regulations. The biggest advantage is the amount of flexibility it provides companies in the process of compliance. Performance objectives or results are clearly outlined but the industry is able to decide for itself how it will achieve these results. This may encourage innovation; particularly if existing technologies cannot meet the new requirements. These new innovations or technologies may reduce their compliance costs. Companies also have an improved understanding of their regulatory obligations and can be held more accountable to the results they produce because of their active participation in the regulatory process.Footnote 30
The aforementioned advantages will occur only if the regulatory objectives can effectively be measured.Footnote 31 In cases where non-compliant behaviour can be clearly identified by measurable outcomes, such as levels of pollutants measured in quantifiable units of production (for example, parts per million, percentage of mass in discharge stream or the amount of time lost to injuries), then the use of outcome-based regulations is straightforward.Footnote 32 However, where impacts are not as easily understood, the application of outcome-based regulations may not work as well. This is particularly the case with environmental impacts (i.e. disturbances to land, vegetation and natural features of the landscape) which are not easily quantifiable.Footnote 33 For example, a performance standard that codifies a broad societal objective, such as prevention of injuries from airplane crashes, will be a lot harder to measure and will give companies greater discretion. In contrast, a regulation that specifies a narrow goal, such as requiring that the aircraft have a sufficient engine power to reach cruising altitudes quickly, are easier to measure and give companies less discretion.Footnote 34
Although outcome-based regulations seek accountability for results, governments often do not invest in the necessary resources to train staff and third party certifiers to adequately review innovative processes or technologies.Footnote 35 Outcome-based regulations are less costly to develop as they do not require a detailed understanding of relevant technologies; however they can cost more to enforce because of the vagueness of performance standards and lack of expertise on the part of enforcers.Footnote 36
Improper or insufficient monitoring of performance may result in regulations being too open for interpretation, resulting in the regulation being led by the industry rather than the regulators. A lack of proper monitoring of results will also lead to inconsistent application of the rules.Footnote 37 Furthermore, without adequate controls, sector-wide education, and suitable feedback mechanisms it is possible for problems to go unnoticed and potentially to outpace solutions.Footnote 38 This was the cause of the “leaky building crisis” in New Zealand in the late nineties (section 4.1).
Outcome-based regulations also increase the level of uncertainty in the industry and regulatory process, because of the variety of technologies that may be used to meet regulation requirements. Prescriptive regulations, however, generally explicitly state what technologies to use. The uncertainty although a potential catalyst for innovation, may also discourage it.Footnote 39 Companies, mining companies in particular which are risk adverse, are not willing to invest in new technologies if the risks are high that it will not meet regulations for fear of paying a financial penalty.Footnote 40 Small and medium sized enterprises in particular prefer prescriptive regulations because they provide greater certainty.Footnote 41 Consequently, the impact that innovation will have is difficult to assess.
Additionally, outcome-based regulations may impose excessive costs on businesses, particularly small businesses, because of the need to invest in research and development (R&D) to discover new ways to meet regulatory standards.Footnote 42 Loosely specified, outcome-based standards also can create uncertainty for both regulators and the regulated industry with respect to enforcement and compliance issues; as each may interpret the standards differently making enforcement and compliance challenging.Footnote 43 Lastly, the impact a new innovative technology will have on the industry, community or environment is unknown and difficult to predict.Footnote 44 Although the technology may meet regulations, such as reducing emissions of carbon monoxide, it may have other unexpected consequences. For example a technology that enables a car to emit less carbon monoxide may emit a more noxious gas in its place.
One of the biggest challenges with outcome-based regulations is balancing how tight controls should be in promoting consistency and accountability versus how much discretion should be given to promote flexibility and innovation.Footnote 45 Excessive regulatory uncertainty may cause industry inaction and too much certainty will stimulate only minimum compliance technology.Footnote 46 Additionally, if a regulation is not sufficiently stringent there may be simply a diffusion of current technologies with very little new innovation taking place.Footnote 47 Both prescriptive and outcome-based regulations can be stringent; however prescriptive regulations tend to be by nature more stringent. A balance needs to be struck between prescriptive and outcome-based regulations. Often times, the solution is to create a hybrid regulation; ensuring that regulations are stringent, clear and have measurable standards but are also flexible and open to accepting new innovative technologies and processes. An example of a hybrid regulation is the one created by the forestry industry in British Columbia in the early 2000s, which will be discussed later in detail as a case study (section 4.4).
4.1 Building Regulations
Outcome-based regulations became very popular in building regulations in the 1990s in a number of countries.Footnote 48 Their impact on innovation and the industry have varied. Some have been very successful, such as the Dutch energy performance standards, while others have caused a great deal of damage. Prescriptive regulations in the building sector have had similar results to outcome-based regulations, indicating that neither type of regulation is preferable.
The Dutch Central Government, for example, successfully introduced stricter energy performance standards into building regulations while giving designers and builders freedom of choice of how to achieve them. These new stricter regulations contributed to incremental innovation that resulted in the universal adoption of more energy efficient boilers.Footnote 49 The building sector in the United Kingdom, however, continues to rely on prescriptive regulations. In spite of the type of regulation that exists innovation has still been achieved in the U.K. Since 1965, the prescriptive approach has forced companies to become more innovative, particularly at the component level in order to comply with more stringent standards.Footnote 50 However, the distribution of these technologies was very slow and gradual; entering the market quite some time after being developed.Footnote 51
In contrast, New Zealand has had very little success with its building regulations. The national outcome-based building regulations were introduced in 1992.Footnote 52 The regulations enabled new materials and innovative processes to be used in building construction. However, by the late nineties, a large number of newly constructed buildings were “leaking”. Moisture had penetrated into the buildings, sometimes around window openings that did not have adequate seals or weather stripping, which led to mould, mildew and rot.Footnote 53 A 2003 government inquiry found that thousands of dwellings were affected. A more recent investigation suggests that the total number is likely within the range of 22,000-89,000 affected homes.Footnote 54 The estimated remediation costs were $11.3 billion New Zealand dollars (in 2008 dollars).Footnote 55 The New Zealand building regulations appeared to lack supervision. Additionally, the building code requirements were generally qualitative and lacking specificity relying heavily on expert interpretation when evaluating compliance.Footnote 56 This makes evaluating and measuring compliance very difficult; consequently, making enforcement of the regulations very difficult as well. In short the New Zealand building regulation allowed for flexibility and innovation without proper supervision and accountability for results.
A similar problem occurred in Vancouver, Canada and parts of the south-east U.S.Footnote 57 The problem in some of these cases was caused by issues associated with fire-retardant plywood which did not perform well in damp environments.Footnote 58 Unlike New Zealand their regulations were prescriptive.Footnote 59 This illustrates that challenges exist in both types of systems. However, the literature suggests that these challenges may be amplified in outcome-based regulations systems because of a reliance on all parts of the system working as intended with less government oversight than in prescriptive systems.Footnote 60
4.2 U.S. 1970 Clean Air Act
The 1970 Clean Air Act U.S. required steep emissions reductions for new 1975 and 1976 automobiles.Footnote 61 The legislation mandated for a 90% reduction in tailpipe emissions over a four- to five-year period.Footnote 62 Efforts to control emissions and air quality in the United States began in California in the sixties. By the late sixties President Nixon proposed to set national air quality standards for automobile emissions regulations for 1975 vehicles, and vehicle emissions research targets for 1980 vehicles.Footnote 63 The objective was to reduce aggregate emissions of hydrocarbons (HC), carbon monoxide (CO), and nitrogen oxides (NOx).Footnote 64
Although the regulation was outcome-based the U.S. Environmental Protection Agency (EPA) targeted the catalyst converter, which limited the scope of emissions research.Footnote 65 The catalytic converter had existed for quite some time previously but was only used in factory machines, because the lead found in gasoline plugged it up making the technology useless in automobiles.Footnote 66 Research was being conducted as early as the late fifties to adapt the catalytic converter; the U.S. 1970 Clean Air Act accelerated this research.
General Motors and Ford actively pursued catalyst technologies; while Chrysler devoted little money to research and development of emissions control.Footnote 67 Ford and GM made substantial strides in developing the catalytic converter and reducing emissions in their cars, but by 1973 it was clear they would not meet the 1975 regulations. This resulted in a one-year extension of the hydrocarbons and carbon monoxide standard; interim standards were put in place that required a 50% reduction.Footnote 68 In the meantime little progress was made on reducing emissions of nitrogen oxides.Footnote 69
It was very difficult for the U.S. Environmental Protection Agency to enforce these regulations because with a fine of $10,000 USD per car that was not compliant the U.S. Environmental Protection Agency (EPA) could have shut down the American automobile industry.Footnote 70 Manufacturers, such as Chrysler, knew that the U.S. EPA would not do that because it would hurt the U.S economy; rendering their methods of enforcement ineffective. Consequently, the EPA was forced to delay the regulations to give companies more time to meet the standards.
There are a number of reasons why the U.S. 1970 Clean Air Act standards were not met. Firstly, it targeted a particular technology instead of allowing the industry to do its own R&D. Secondly, the implementation of the act was poorly timed. The auto industry lacked R&D funds because of increased competition from the sales of imported cars (particularly Japanese).Footnote 71 The seventies was also a period of instability with the oil embargo in the middle-east, which created poor macroeconomic conditions.Footnote 72 Thirdly, there was a lack of enforcement on the part of the U.S. EPA, who made a number of empty threats, such as charging fines for non-compliant cars. Lastly, the standards themselves may have been too ambitions. Although the catalytic converter technology was adapted for cars it was not sufficient to meet the standards, and there were no new technological breakthroughs in the auto industry during this period. Although outcome-based regulations encourage innovation they do not guarantee technological breakthroughs.
4.3 Australian Mining Sector
Australia has gradually made a shift towards performance-based regulations in the past decade. A major public inquiry was conducted by the Industry Commission in 1991. The inquiry found that the industry was significantly restrained by a plethora of regulations at all levels of government.Footnote 73 It was also found that the interaction between the mining sector and other relevant state/territory legislations was characterised by duplication and a lack of coordination.Footnote 74 In addition, the regulatory regime imposed substantial costs, uncertainty and delays while rarely achieving apparent objectives.Footnote 75
In Australia, regulations are largely the responsibility of State/Territory authorities. In 2007 the Council of Australian Governments (COAG) endorsed a move to performance based regulations; focusing on outcomes rather than inputs.Footnote 76 This resulted in a shift to performance-based regulations in the mining sector, with the exception of health and safety (including radiation protection) which are commonly more prescriptive.Footnote 77 The continued use of prescriptive regulations in health and safety indicates that the level of risk or associated consequences needs to factored in before choosing a type of regulation. Outcome-based regulations are usually more appropriate for low to medium risk activities, but not when a person’s health is at risk. Continual improvement in meeting performance standards is supported by Australian regulations.Footnote 78 Incentives for continual improvement include: increased chance of approval of a new mine or expansion of an existing mine; reduced regulatory, monitoring and reporting costs; improved safety; corporate image, industry leadership, and market-linked ‘green’ or International Organisation for Standardisation (ISO) accreditation.Footnote 79
The Department for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE), South Australia’s leading mining approvals & regulations agency, has adopted an outcome-based regulatory approach.Footnote 80 Outcome-based regulations are preferred because they are adaptable to individual mine sites, ensuring that they “fit” properly, and focus on outcomes, as there is no “one-size fits all” approach.Footnote 81 According to DMITRE, outcome-based regulations are fair, adaptable, practical, efficient and predictable for miners.Footnote 82 Mining companies are also able to choose the most cost effective method, as long as the outcomes are achieved.Footnote 83 The benefits of outcome-based regulations for the community are that they are inclusive, predictable, and transparent.Footnote 84 Clear outcomes are set with the help of stakeholder input and achievement can be demonstrated to stakeholders, which builds trust.Footnote 85 Outcome-based regulations also ensure that responsibility is with the mining company rather than the government, which limits government liability.Footnote 86 This also makes mining companies more accountable for their actions. It is also more efficient as it minimises the use of government resources.
Although, Australia has made the shift towards outcome-based regulations there is very little data or insights in the literature as to its success rate in the country. A study into safety regulations in the Australian black coal industry done in the late 1990s stated that despite a shift to performance-based regulations in other sectors the mining industry continued to adopt more prescriptive approaches.Footnote 87 It is unclear if this is still the case.
The Australian mining sector, however, illustrates the importance of properly assessing the situation before applying a regulation, and having a balanced regulatory framework. Although outcome-based regulations appear to work for most of the sector they chose to maintain prescriptive regulations in health and safety, most likely due to the associated risks. This case study also underlines the importance of properly incentivising the industry; as an incentives of some sort will likely effect change. Compliance was rewarded with increased chances of approval of expansion or opening of new mines, and an improved corporate image. The improved corporate image, however, is only a good incentive for large, well-known companies as they receive more pressure from the public/society than smaller companies.Footnote 88
4.4 British Columbia Forestry Regulations
The forestry industry in the province of British Columbia is very important to the province’s economy. Pressures from domestic environmental groups in the 1980s and early 1990s forced the province to enact a complex and demanding regulatory regime, the “Forest Practices Code”.Footnote 89> This code was very prescriptive and gave the forestry industry very little flexibility. The prescriptive, process-oriented “Forest Practices Code” in the 1990s proved to be excessively complex and economically costly; the province responded to these concerns by introducing the Forest and Range Practices Act (FRPA) in the early 2000s.Footnote 90
The Forest and Range Practices Act consists of one statute and twelve supporting regulations.Footnote 91 Although the FRPA framework is considered a “results-based” system, it is actually more of a complex mixture of regulatory tools. The original intent was to create a results-based regulation, but a key barrier to achieving a results-based regulation is the inherent challenge of identifying measurable objectives.Footnote 92 This is particularly difficult in the forestry industry where the process of achieving environmental values is so poorly understood.Footnote 93 Another design challenge is identifying performance standards that are specific enough to be meaningful and enforceable but not so specific that they eliminate any flexibility.Footnote 94 The B.C. forestry industry relied on a mix of quantitative and qualitative performance standards that varied in the flexibility they provided.
The FRPA includes mandatory requirements for the development of Forest Stewardship Plans and site level plans that are consistent with a management based approach to regulation.Footnote 95 Management-based regulations require the preparation of a management plan but do not specify any particular practices or results that must be achieved.Footnote 96 There are also some mandatory practice requirements, consistent with a practice-based regulatory approach; which provides little flexibility by specifying particular forest practices that must be used.Footnote 97
British Columbia’s revised forestry regulation relies on forestry professionals for decisions and advice.Footnote 98 In British Columbia anyone who works as a forester must be registered as a Professional Forester and belong to the Association of B.C. Forest Professionals.Footnote 99 These forestry professionals are held accountable for the decisions they make and advice they give.Footnote 100 This relieves the burden on the government and places accountability on the industry, which is more consistent with a results-based regulation. However, the code is more reliant on practice standards and the flexibility provided through mandatory planning requirements than a predominately results-based regulation.
The experience of the B.C. forest industry illustrates the importance of identifying clear and measurable performance standards. If it is not possible to identify measurable outcomes, then a results-based regulation is unlikely to be successful. However, it is very common to use a variety of different regulatory tools in order to provide the desired flexibility while also being able to properly monitor and enforce regulations.
4.5 Saskatchewan Environmental Code
The Saskatchewan Ministry of Environment has recently begun to implement a new environmental code that is based on a results-based framework. The ministry began to investigate alternatives to its existing prescriptive regulations around 2008.Footnote 101 The old regulations were a product of the environmental legislation movements of the 1970s and 1980s, and relied on the expertise of experienced public servants to ensure proper application of the legislation and protection of public interest.Footnote 102 Over-time the pace of technological change began to outpace the ability of regulators to remain well-informed of the use and effects of technology.Footnote 103 In addition the combination of an increased workload and loss of skill and expertise, and increasingly inadequate management systems led to delays in permitting and approvals.Footnote 104 A 2005 internal, provincial study estimated the revenue losses to the provincial government from missed opportunities due to regulatory delays to be at least twelve million annually.Footnote 105
This resulted in a review of the existing regulatory model. The ministry sought to mitigate delays and facilitate investment while maintaining and preferably enhancing the level of environmental protection. They contracted Clifton Associated Ltd. in 2008 to help the ministry review the existing regulations and provide recommendations of a new environmental model.Footnote 106 This resulted in the recommendation to shift to a results-based regulation framework. By 2009 the ministry had initiated the regulatory changes necessary to enable the move to results-based regulations.Footnote 107 Stakeholders were consulted during this process. The development of the new code was also done collaboratively with government, businesses, industry, academia/research groups, professional, non-governmental organizations, First Nations and Métis.Footnote 108 The development of a new environmental code began in January 2010.Footnote 109
The first version of the Saskatchewan Environmental code consists of nineteen chapters covering air quality management; forest management; greenhouse gas management and reduction; hydrostatic testing; industrial activities; and municipal matters; such as drinking water and sewage works.Footnote 110 Several of these chapters are also applicable to the mining sector. Each section of the code describes the desired outcomes to be achieved, and any accepted best practices, if they exist, that are considered to be an acceptable solution.Footnote 111 The revised code accommodates alternative means of achieving outcomes by allowing the submission of an alternative strategy that is supported by a qualified professional.Footnote 112 Qualified persons are expected to improve the quality of submission and improve the timeliness of reviews.Footnote 113 Alternative strategies are expected to demonstrate an equal or greater protection of the environment and provide options if the alternative solution does not meet expectations.Footnote 114
Saskatchewan has taken a similar stance as the forestry industry in British Columbia by making use of qualified experts to help evaluate and sign off on alternative mechanisms to meet regulations. This alleviates the burden on the government and potentially allows for more flexibility. According to the Saskatchewan Ministry of Environment qualified persons are either members of a class of persons set out in the code or an individual designated by the minister for one or more purposes that are governed by legislation that references the code.Footnote 115 These qualified experts can sign off on certification or provide advice about whether or not an activity conforms to regulations. However, for many low-risk activities, the environmental code allows operators to move forward without having to wait for Ministry approval. The Ministry is, however, notified which enables them to continue to track the activity and ensure that the operator is complying.Footnote 116 This enables the government to focus its resources on monitoring and compliance activities that pose a higher risk to the environment and to human health and safety.
Although the impact of the new Saskatchewan Environmental Code is unknown at this point, as the code is in the process of being finalized, it is clear that the Ministry of Environment has taken a number of precautions to ensure that their experience with results-based regulations is positive. Their use of qualified experts to assess new technologies and processes will act as a sort of checks-and-balance mechanism that will ensure operations are compliant with the code. There are also clear consequences for not being compliant, such as fines up to one million dollars and a possibility of jail time depending on the severity of the offence. It is important that the consequences are enforced, because if not they will become empty threats that will lead to a similar situation as the U.S. 1970 Clean Air Act where auto manufacturers were provided with little incentive to comply because there were no consequences for not meeting regulations.
5.0 Key Findings
To summarize, both outcome-based and prescriptive regulations work well under certain circumstances. Outcome-based regulations can provide greater flexibility and encourage technological innovation, particularly if existing technologies cannot meet the regulatory requirements. These new innovations or technologies may reduce a company’s compliance costs. Unlike prescriptive regulations, which detail the process, outcome-based regulations are focused on meeting performance or outcome objectives. Outcome-based regulations rely on companies to identify and commit to a solution. This provides greater flexibility to the industry as they can tailor their approach to specific situations and integrate it into their overall management. As a result companies have an improved understanding of their regulatory obligations and can be held more accountable to the results they produce because of their active participation in the regulatory process.
The flexibility that outcome-based regulations provide can be beneficial to innovation, but it can also leave regulations too open to interpretation, which may result in the regulation being led by the industry rather than the regulators. This is likely to happen where performance is not adequately monitored and enforced. Prescriptive regulations are easier to enforce and monitor, this is because they require appropriately trained enforcement team, extensive and regular monitoring of operations. Although outcome-based regulations could benefit from such an enforcement system, it is not always provided as it is not written in the regulations.
Prescriptive regulations provide more certainty, as they explicitly state what technologies are to be used. Outcome-based regulations do not provide the same level of certainty because of the variety of technologies that may be used to meet regulatory requirements. The uncertainty, although a potential catalyst for innovation, may also discourage it. Mining companies, in particular, are risk averse and not willing to invest in new technologies for fear of it not meeting compliance and being subject to financial penalties. Additionally, outcome-based regulations may impose excessive costs on businesses, particularly small businesses because of the need to invest in research. As a result the level risk associated with outcome-based regulations is higher than prescriptive regulations.
Due to the benefits and weaknesses of both regulatory frameworks, there are very few examples of pure outcome-based or prescriptive regulations; in general a hybrid regulatory approach is adopted to minimize some of the weaknesses of both systems. The challenge is to find a middle ground between the two so that the regulations are not too stringent or flexible, but are able to encourage innovation.
6.0 Principles for Regulators
Based on the literature review and case studies, four principles for regulators were identified. The first is compliance rates; which is an industry or company’s level of compliance with regulations. Where an industry can demonstrate that it has a high compliance culture it will be more efficient to use outcome-based regulations and focus on the company’s performance, rather than using more intervening strategies.
The second success factor is related to how well the regulatory objectives can be effectively measured. If the objective is specific enough, measurable, and enforceable, outcome-based regulations will likely be more effective. A performance standard that is not easily identified or measurable will make monitoring and reporting under an outcome-based regulatory framework nearly impossible. This was one of the weaknesses of the New Zealand building regulations.
The third success factor is appropriate timelines. Deadlines for implementing and meeting new regulation standards need to be appropriate. They need to give the industry adequate time to do research and development, in order to produce innovative technologies that will help them achieve the outcome in the regulations. However, the timelines should not be too flexible or long as this will result in minimal improvement and/or delay the benefits of regulation. The implementation of the regulations also has to be timed correctly, as it is very difficult to force technological change when there is a lack of funding.
The last success factor relates to the level of risk associated with the activity. Case studies have shown that outcome-based regulations are generally appropriate for low to medium risk activities. However, when the risk or consequences associated with an activity are high (i.e. health, radiation exposure) outcome-based regulations may not be appropriate; particularly if a suitable technology already exists.
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