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there are limitations on voluntary measures to tackle the environ-
mental challenges, including variability of practices between compa-
nies and the lack of environmental improvements by some
companies. We should not assume that regulation can effectively
address all of the environmental challenges; neither should we expect
that voluntary CSR can ˜fix™ all of the environmental problems.
However, there are strong arguments from a business perspective for
the need for government regulation in many instances.
Various studies in leading business journals provide evidence that
companies gain competitive advantages from environmental
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Box 4.2: The development of clean burning petrol by ARCO
In 1991, the US Atlantic Richfield Company (ARCO) announced that
it had developed a new, cleaner burning petrol using a formula called
EC-X. The company added that ARCO would produce this less pollut-
ing petrol only if the state of California introduced a law that all petrol
sold in the state be produced using the same formula.
The EC-X formula was not unique in the industry, since other oil
refiners had also developed cleaner burning petrol formulas. The crucial
difference was that the EC-X formula was ˜better suited to ARCO™s oil
refineries and crude oil supply than to ARCO™s competitors™ resources™.
As McWilliams et al. (2002) argued, ˜ARCO™s formula cannot be a
source of sustained competitive advantage unless these substitutes are
restricted.™
Therefore, legislation by the state of California would have had an
uneven impact on ARCO™s competitors because it would have raised
their costs of legal compliance and would have provided ARCO with a
commercial advantage.
Source: McWilliams et al. 2002.



competences as a result of government regulation, rather than vol-
untary environmental initiatives. A study by McWilliams et al.
(2002) found that companies may even lobby for environmental
regulations, if these regulations lead to an uneven impact on different
companies in the industry by disproportionately raising rivals™ costs
and thereby improving a firm™s overall competitive position. The
authors provided an illuminating example from the oil and gas indus-
try: the development of a new formula (EC-X) for cleaner burning
petrol by the US company ARCO (see Box 4.2). The study implies
that the development of an innovative environmental solution does
not guarantee a company superior commercial advantages by itself “ if
other companies in the same industry are able to develop similar
solutions. It is either the uniqueness of the innovation or legislative
restrictions that lead to the commercial profitability of the environ-
mental innovation.
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Indeed, management thinkers assert that environmental regulations
are absolutely essential for innovation, by creating the necessary con-
text for speeding innovation. Van der Linde argued that environmen-
tal regulations are vital to pressurise firms to begin the process of
environmental innovation, while sending signals to business leaders
that environmental issues will be more important in future. According
to this view, firms need to be pushed by government because they
perceive change and innovation as unsettling and may be reluctant to
pursue new environmental strategies on their own account (van der
Linde 1993). Michael Porter and Claas van der Linde doubt that
voluntary corporate action can replace government regulations:
The belief that companies will pick up on profitable opportunities
without a regulatory push makes a false assumption about competitive
reality namely, that all profitable opportunities for innovation have
already been discovered, that all managers have perfect information
about them and that organization incentives are aligned with
innovating. (Porter and van der Linde 1995, 127)

Porter and van der Linde set out six reasons why environmental
regulation is necessary: (1) to create pressure to motivate companies
to innovate; (2) to introduce environmental improvements in cases
where it is not possible to completely offset the costs of complying
with the law; (3) to alert and educate companies about the oppor-
tunities for better resource use and technological improvements; (4)
to raise the likelihood that product and process innovations in gen-
eral will be environmentally friendly; (5) to create a demand for
environmental improvements until the market is capable of perceiv-
ing and measuring the benefits from environmental improvements;
and (6) to level the playing field during the transitional period to
innovation-based environmental solutions, to ensure that a company
cannot gain a competitive advantage by avoiding environmental
improvements (Porter and van der Linde 1995, 128).
Various oil company executives interviewed by the author partic-
ularly stressed the last point made by Porter and van der Linde: the
The environmental challenge 91
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need for government intervention to ensure a level playing field.
One senior executive of a British oil firm pointed out that ˜at the
moment, there is a skewed playing field™, where Western firms may
spend more money on social and environmental improvements
than their non-Western counterparts, while they may be excluded
from certain profitable regions altogether such as the oilfields in
Sudan and Burma. Chinese oil companies were typically singled
out for criticism over their lack of environmental care and aggres-
sive tactics in entering new countries. While some of the corporate
views may be the result of unjustified fears or even prejudice, they
demonstrate the real concerns of executives that their companies
will incur additional spending while rival companies will gain from
not implementing social and environmental measures. Company
executives were not clear how a level playing field could be ensured
in practice, but there was a shared sense that companies should be
rewarded and not penalised for incurring costs for environmental
improvements.
There is evidence to support the argument that government action
creates pressure to motivate companies to innovate, even among the
most forward-thinking companies such as BP. The decision of BP to
pioneer the development of carbon trading schemes (see Box 4.1
above) was motivated at least in part by the expectation that govern-
ments would regulate greenhouse gas emissions in future. According
to the most extensive study on BP™s emissions trading system to date,
BP™s two main goals in introducing the system were (1) ˜to gain
experience with the policy instrument that was a likely mechanism
to be deployed in a future, economy-wide emissions limitation pro-
gram™; and (2) ˜that a successful demonstration of emissions trading
would forestall alternative, more costly policy responses such as an
emissions tax™ (Victor and House 2006). As one former BP manager
interviewed commented: ˜I can™t say what moved John Browne, but
we knew that Kyoto was inevitable sooner or later. Being the first
company to develop this [emissions trading system] would benefit us
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in more ways than one.™ In other words, BP decided to use the
instrument of carbon trading because it knew that regulation was
looming and because it wanted to stave off government regulation in
the form of government-set standards or a carbon tax.
Indeed, BP™s efforts helped towards staving off regulation. The
company™s experience in carbon trading earned it an advisory role in
developing both the UK™s emissions trading system and the European
Union™s Emission Trading Directive (Hoffman 2004). While BP™s
emission trading system did not lead directly to the development of
European trading systems and there were differences in these systems,
BP was able to influence the selection of emissions trading as the
preferred policy instrument for addressing emissions reductions within
Europe. The study by Victor and House (2006) commented:

BP™s experience helped to convince the UK government to deploy a
trading system. And BP™s European operations will be required to
comply with the emerging European emission trading system itself
built partly on the experience with the UK system. In this context, it is
unlikely that BP will pursue again its own internal trading system since
BUs [business units] must already contend with market signals from the
UK and EU systems. (Victor and House 2006, 2105)

Government intervention can also help to explain the most visible
environmental improvement by oil companies, namely the reduction
of oil spills caused by tankers since the 1970s, which we discussed
earlier. Oil companies and their industry associations typically explain
the reduction in oil spills as a result of voluntary measures ranging from
ship inspections to the introduction of oil tankers with a double hull. In
the words of one oil and gas publication, it was the voluntary actions of
companies and their industry associations that ˜designed and broadcast
numerous means to prevent spills and to enhance preparedness and
response to improve the ability to recover spilt oil and mitigate effects
from spills™ (IPIECA et al. 2002). However, such reconstructed histor-
ical accounts fail to acknowledge the enormous government pressures
that followed oil tanker accidents such as the Torrey Canyon oil spill
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in 1967 and the Prestige oil spill in 2002. Indeed, the voluntary oil
company initiatives for addressing marine pollution from the late
1960s onwards may not have happened without government pressures
(see Box 4.3).

Box 4.3: The development of the regime for addressing marine oil
pollution
Following the Torrey Canyon oil spill off the British coast in 1967, govern-
ments came under massive public pressure to regulate the sea trans-
portation of oil. Eight governments (including the UK Government)
approached the predecessor of the International Maritime Organization
(IMO) to re-examine the issue of compensation and liability for oil spills.
Shipping companies were keenly aware of the public pressure on govern-
ments to address marine pollution, and voluntary agreements offered them
the chance of influencing international rules before national governments
could impose unfavourable rules on them. The Assistant Secretary-
General of the IMO narrated the rationale for the new maritime regime:
There was general agreement on the need for a uniform interna-
tional regime on liability and compensation for pollution damage
resulting from tanker incidents. All the parties involved recognised
that the alternative to such an international regime would be a
system of unilateral national legislation under which ships, cargoes
and insurers might be subjected to different and uncoordinated
laws in different countries. This was clearly undesirable for an
industry as global as shipping. (Mensah 2004, 45 6)
In other words, voluntary initiatives such as TOVALOP and OPOL
(see above) were designed to stave off national regulation. In the process
of negotiations with the oil and shipping sectors, a series of specific
oil-related international treaties was established that complemented
the voluntary oil and gas industry initiatives, including the 1969
International Convention on Civil Liability for Oil Pollution Damage
and the 1971 International Convention on the Establishment of an
International Fund for Compensation for Oil Pollution Damage, which
provided for the liability of an owner of a ship for oil pollution and
established a compensation system, and general treaties with application
to the oil and gas industry such as the 1973 International Convention on
Marine Pollution, which covered oil pollution at sea.
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The voluntary measures by companies did not fully achieve the aims
of influencing public policy; for instance, companies were unable to
prevent the imposition of the principle of ˜strict liability™ for oil spills.
But one tangible consequence of the proactive stance of companies was
the international acceptance of a maximum amount of compensation for
oil spills irrespective of the actual damage caused, a principle opposed by
critics. The 1992 Civil Liability Convention and the 1992 Fund
Convention, which amended the earlier international conventions,
kept the provision of a maximum amount (the maximum amount of
compensation under the 1992 conventions was c. US$190 million). The
inadequacy of this provision was revealed in 2003, when the Oil
Pollution Compensation Fund admitted that this maximum amount
would cover only 15 per cent of the costs of the oil spill caused by the
oil tanker Prestige the previous year, which led to further calls for
regulation.
Sources: Encyclopedia Britannica 2004; International Oil Pollution
Compensation Funds 2004.


A crucial problem of relying on government intervention is that
some developing economies may not have the capacity to set and
enforce basic environmental standards. Indeed, the lack of environ-
mental regulation in developing economies may be the main argu-
ment for encouraging voluntary environmental programmes among
companies. The author of this book has encountered different exam-
ples of such voluntary measures, even when there was little govern-
ment pressure to do so, for instance, the replacement of old pipelines
in Nigeria and the introduction of the European standards of environ-
mental reporting in Egypt. However, while technical solutions of this
nature may yield many environmental benefits, managerial choices
on fundamental issues such as the level of environmental spending in
a joint venture with a state-owned company or the commercial use of
natural gas may be dependent on government action.
The example of gas flaring demonstrates the constraints of volun-
tary initiatives in developing economies. The World Bank calculated
The environmental challenge 95
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that the annual volume of flared and vented gas is about 110 billion
cubic metres, which would be sufficient to provide the combined
annual natural gas consumption of Germany and France. Voluntary
initiatives to reduce gas flaring can potentially lead to a win-win
outcome for companies and the environment: selling associated gas
can generate earnings for companies while reducing greenhouse
gas emissions. The World Bank has encouraged voluntary initiatives
and public“private partnerships in order to reduce gas flaring in the

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