Study: tightening vehicle emissions standards resulted in higher rates of automaker non-compliance; unintended effects of threshold-based regulations
A new study focused on the auto industry finds that tightening emissions standards not only fails to curtail on-road emissions, but actually increases the likelihood of non-compliance by automakers.
In a paper published in the journal Production and Operations Management, researchers confirmed the relationship between increased threshold-based regulations and non-compliance in the auto industry. The study also found higher non-compliance rates in automakers facing greater substitution pressure from competitors, as well as those with less advanced emissions control technology.
Based on a 15-year on-road vehicle emissions dataset covering 148,837 vehicles from 42 automakers in the EU, we use regression discontinuity to identify the causal impact of standards tightening on non-compliance by controlling other confounding factors. Our results suggest that in the absence of effective monitoring, tightening standards directly drives up automakers’ non-compliance. Furthermore, we find that automakers facing more intense substitution pressure from competitors or with less advanced emissions control technology have a higher non-compliance rate.—Hu et al.
The study, co-authored by Kejia Hu from Vanderbilt Owen Graduate School of Management, Sunil Chopra from Northwestern University’s Kellogg School of Management, and Yuche Chen from University of South Carolina, uses on-road data collected from the European Union between 2000-2014, a period in which regulators tightened restrictions on NOx 3 separate times.
The main issue here is that the EU is using a straightforward cutoff standard. You have to hit the score to make it. Anything like that is easily going to trigger unethical conduct.—Kejia Hu
This phenomenon isn’t limited to the auto industry. The paper mentions several instances of high-profile, threshold-based non-compliance, from dairy providers to accounting firms and financial institutions.
According to the researchers, the non-compliance stems from conflicting interests and external forces that impact automakers’ strategic approach.
Economically, automakers have little financial incentive to abide by the tight emissions standards. The most common ways to meet emissions thresholds are to install expensive catalytic converters or reduce the weight or horsepower of the vehicle. Price and safety are at the top of a car buyer’s consideration list.
“Emissions performance” is either at the bottom or hard to evaluate for a regular buyer. Non-compliant automakers are left with an unappealing set of options: increase the sticker price (or take a hit on profitability); reduce the perceived safety; exit the market; or cheat.
Moreover, other potential factors do not dissuade automakers from skirting the emissions requirements. Social pressure can be a powerful influencer—but has not been in this particular arena. Regulatory oversight, as exhibited by the study’s findings, has not been effective enough to compel compliance.
The co-authors recommend several options to address the study’s findings: accompany tighter standards with stricter monitoring; regulate on technology instead of performance; or offer credit-borrowing for automakers.
Hu noted that a switch from thresholds to guidelines or alternative requirements give companies more room to operate ethically.
The authors urge policymakers and managers across industries to take note of their study.
When setting limit-based performance goals in situations with conflicting interests and imperfect monitoring, they should anticipate non-compliance from the regulated parties.—Hu et al.
Hu, K. et al. (2021) “The Effect of Tightening Standards on Automakers’ Non-compliance.” Production and Operations Management doi: 10.1111/poms.13419