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Why firms participate in environmental voluntary initiatives : case studies in Japan and Canada Takahashi, Takuya 2001

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WHY FIRMS PARTICIPATE IN ENVIRONMENTAL VOLUNTARY INITIATIVES: CASE STUDIES IN JAPAN AND CANADA by T A K U Y A T A K A H A S H I Bachelor of Agriculture, Kyoto University, Japan, 1987 Master of Management, Northwestern University, 1995 A THESIS SUBMITTED IN PARTIAL F U L F I L L M E N T OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE F A C U L T Y OF G R A D U A T E STUDIES 1 (Resource Management and Environmental Studies) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH C O L U M B I A March 2001 © Takuya Takahashi, 2001 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Popartmcnt. of 1<eft?'*lT& Mft^ptyeM' ft i d |SKVI i^n^eK-t The University of British Columbia Vancouver, Canada DE-6 (2/88) Abstract Voluntary initiatives such as eco-certification and challenge programs are new policy tools that attempt to ameliorate environmental and sustainable development problems by relying on firms' voluntary efforts. Whi le more traditional policy tools such as command-and-control regulations and market-based instruments have attracted the attention of social scientists, voluntary initiatives have received much less attention from researchers and still require further empirical investigation and theoretical grounding. A s a first step to understanding voluntary initiatives, this dissertation empirically investigates the mechanisms behind firms' decisions to participate in voluntary initiatives. First, the dissertation investigates the antecedents for manufacturing firms' seeking ISO 14001 environmental management systems certification in Japan, a country with the largest number o f ISO 14001-certified sites in the world. The results show that the decisions o f Japanese firms to seek ISO 14001 certification are significantly affected by the firm size, average age o f employees, export ratios and debt ratios. Other studies also underscore the importance of international trade to Japanese manufacturers in seeking ISO 14001 certification. Secondly, the dissertation looks into the antecedents for forest products companies' seeking forest certification in Canada, one of the major forest products producers in the world. Specifically, three major forest certification schemes are considered: (1) ISO 14001, (2) the Canadian Standards Association Sustainable Forest Management certification, and (3) the Forest Stewardship Council certification. The estimation o f empirical models shows that the decisions o f Canadian forest firms to seek forest certification are, in general, affected by export intensity; in the case o f ISO 14001, they are also affected by reliance on secure tenure holdings. Thirdly, the dissertation examines the antecedents for Canadian industrial firms' participation in the Voluntary Challenge and Registry ( V C R ) Program, Canada's voluntary challenge program aimed at reducing greenhouse gas emissions to mitigate climate change. The results show that larger firms and those in the energy-intensive sector are more committed to climate change mitigation. In this case, anticipation o f future government policies seems to play a major role in firms' participation in the challenge program. Table of Contents Abstract i i Table of Contents i i i List of Tables v List of Figures vi Acknowledgements vii Chapter 1. Voluntary Initiatives 1 1.1. Introduction 1 1.2. Voluntary Initiatives as New Policy Instruments 2 1.3. Why Firms Participate in Voluntary Initiatives 5 1.4. Motivational Models 6 1.4.1. Market Economic Model 8 1.4.2. Production Economic Model 10 1.4.3. Social Model 11 1.4.4. Moral Model 14 1.4.5. Utility Maximization Model: Political Economic Organization Model 14 1.5. Overview of This Dissertation 17 Chapter 2. ISO 14001 Certification in the Japanese Industry 18 2.1. Introduction 18 2.2. Background 18 2.2.1. Brief History of Environmental Behavior of Japanese Industries 18 2.2.2. ISO 14001 Environmental Management Systems Certification 21 2.3. Models 22 2.3.1. Literature 22 2.3.2. Two Models and Variables 24 2.3.3. Data 28 2.4. Results 32 2.4.1. Economic Organization (EO) Models 35 2.4.2. Political Economic Organization (PEO) Models 35 2.4.3. Comparison of PEO and EO Models 38 2.5. Synthesis of Literature 38 2.5.1. Direct Questioning 38 2.5.2. International Panel Study 42 2.6. Conclusions ; 43 Chapter 3. Forest Certification in Canada 45 3.1. Introduction 45 3.2. Background 45 3.2.1. Brief History of Forest Certification 45 3.2.2. Characteristics of Major Schemes 49 3.3. Models 57 3.3.1. Conceptual Models 57 3.3.2. Econometric Modeling 60 3.4. Data 64 - i i i -3.5. Results of Probit Regressions 70 3.5.1. Models 70 3.5.2. Results 70 3.6. * Perceptions of Each Certification Scheme 74 3.6.1. Best Certification Scheme 75 \ 3.6.2. Assessment of Advantages 75 3.6.3. Synthesis with Regression Analyses 78 3.7. Synthesis of Literature 79 3.8. Conclusions 84 Chapter 4. Canadian Industry's Response to Climate Change: A Role of the Voluntary Challenge and Registry Program 87 4.1. Introduction 87 4.2. Background 87 4.3. Models 91 4.3.1. Modeling Participation in the V C R Program and Determination of Reduction Targets 91 4.3.2. Explanatory Variables 93 4.4. Data 95 4.5. Probit Model Estimation Results 99 4.6. Conclusions and Policy Implications 103 4.6.1. Conclusions 103 4.6.2. Policy Implications 104 Chapter 5. Conclusion 107 References 109 Appendix 2-A Descriptive Statistics (Chapter 2) 120 Appendix 2-B Survey Questionnaire (Chapter 2) 121 Appendix 2-C Results of Factor Analyses (Chapter 2) 125 Appendix 3-A Survey Questionnaire (Chapter 3) 128 Appendix 4-A Survey Questionnaire (Chapter 4) 138 - iv -List of Tables Table 2.1: Determinants of ISO 14001 Certification: Probit Regressions 33 Table 2.2: Determinants ofthe Time for ISO Certification: Cox Proportional Hazard Model 34 Table 2.3: Survey by the National Institute for Environmental Studies (1998) 40 Table 2.4: Survey by the Tokyo Chamber of Commerce and Industry (1999) 41 Table 3.1: List of Explanatory Variables 66 Table 3.2: Summary Data: Explanatory Variables 68 Table 3.3: Stages of Certification for Companies Participating or Considering Participation in a Certificatinon Scheme 69 Table 3.4: Probit Regression Results (Sequential-Response Models) 71 Table 3.5: Probit Regression Results (Bivariate Models) 72 Table 3.6: Certification Scheme Best Matching a Firm's Needs 75 Table 3.7: Advantages of Forest Certification Schemes 77 Table 3.8: Comparison of This Study and Other Three Studies 80 Table 4.1: Description of Model Variables 96 Table 4.2: Involvement in the V C R Program 97 Table 4.3: Model Estimations: Probit Regressions and Ordered Probit Regressions 100 - v -List of Figures Figure 1: Four Motivational Models for Participation in Voluntary Initiatives - vi -Acknowledgements I would like to extend my thanks to my co-supervisors: Dr. Gerrit C. van Kooten (Forestry; Agricultural Sciences) and Dr. Ilan Vertinsky (Institute for Resources & Environment; Commerce & Business Administration), who have supported my study and research at the University of British Columbia with patience, intellectual stimulation, and humor. I also appreciate the support given by other members of my supervising committee: Dr. Les Lavkulich (Institute for Resources & Environment) and Dr. Masao Nakamura (Commerce & Business Administration). Their guidance was indispensable in completing this dissertation. I was also very fortunate to have serious and joyful graduate students at the Forest Economics and Policy Analysis Research Unit and the Resource Management and Environmental Studies Program as my colleagues. As well, I owe a lot to many respondents in Japan and Canada, who spent their valuable time completing the questionnaires, the data from which were analyzed in this dissertation. Finally, I would like to express my gratitude to my family, Ritsuko and Tomoyuki, who provided all kinds of support during my years in the Ph.D. program. - vn -Chapter 1. Voluntary Initiatives 1.1. Introduction Businesses in the world are facing a challenge, "sustainable development" — a concept popularized by the Brundtland Commission Report in 1987 (World Commission on Environment and Development, 1987) and later legitimized by the Earth Summit in 1992. The Brundtland Commission Report defined "sustainable development" as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs" (World Commission on Environment and Development, 1987, p. 8). This is a challenge for businesses because "[i]n the next century, as human population doubles and the resources available per person drop by one-half to three-fourths, a remarkable transformation of industry and commerce" (Hawken, Lovins & Lovins, 1999, p. 2) should occur. This necessary transformation of businesses may amount to "the next industrial revolution" as Hawken et al. put it. Confronted by such a huge challenge, businesses are now doing more than obeying environmental regulations; they have started behaving proactively (Reinhardt, 1999). Concurrently, public policies concerning businesses' environmental behavior have also been shifting towards new approaches (Commoner, 1990; Labatt & Maclaren, 1998; Landy, Roberts & Thomas, 1990; Lee, 1993; Shrivastava, 1995a; Tietenberg, 1998). One of the characteristic trends of such new approaches is the introduction or encouragement of voluntary initiatives such as eco-certification schemes and challenge programs. With their growing importance as policy tools, voluntary initiatives positively deserve further empirical investigation and theoretical grounding. In this chapter, I first describe the advent of voluntary initiatives, which followed experiments with, and implementation of, command-and-control regulations and market-based instruments. Then, I present the research question in this dissertation, "why firms participate in voluntary initiatives," and provide some conceptual models to explain firms' participation in voluntary initiatives. At the end of this chapter, I give an overview ofthe subsequent chapters. 1.2. Voluntary Initiatives as New Policy Instruments In textbooks on environmental and resource economics, one can find many kinds of policy tools designed to protect the environment and natural resources (Field & Olewiler, 1994; Kahn, 1998; Pearce & Turner, 1990; Tietenberg, 2000; van Kooten, 1993). Almost al l o f these policy tools can be divided into two broad categories: (1) command-and-control regulations, and (2) market-based instruments. Command-and-control regulations include emission standards for pollution problems in industry; product standards, mainly for post-consumer pollution; practice codes for resource management; and zoning for land-use related problems. Such traditional regulation measures are often criticized for their excessive costs to the regulated parties (Tietenberg, 1985; 1995; Stanbury & Vertinsky, 1998). In addition, command-and-control regulations, when designed or implemented, require the central regulator (usually a government) to collect the local and detailed information about the regulated parties and their specific conditions (Karp & Gaul ding, 1995; Stanbury & Vertinsky, 1998). This is often difficult for the regulator, and failure to design and implement appropriate regulations tends to result in inefficiency. Consequently, market-based instruments have gained popularity as alternatives to command-and-control regulations. The family o f market-based instruments includes a wide variety o f policy tools such as tradable permits; emission charges and performance bonds for pollution prevention; deposit-refunds for post-consumer pollution; and recreational user fees or individual transferable quotas for resource management. Pol icy makers and academics are currently trying out these instruments and learning about them in practical detail (e.g. Stavins, 2000). Since market-based instruments mimic the workings of markets, these tools are, at least theoretically, supposed to achieve intended goals more efficiently than command-and-control regulations would do. In addition, by delegating a large part o f the decision-making to the regulated parties, market-based instruments may lower the need and costs of information processing and communication (Stanbury & Vertinsky, 1998). However, due to the decentralization o f decision-making, whether intended goals w i l l be achieved - 2 -within a certain time frame becomes more uncertain than in the case o f command-and-control regulations. Some call these two types of policy tools, i.e. command-and-control regulations and market-based instruments, "first-wave policy tools" and "second-wave policy tools" respectively, according to the timing of their appearance (Tietenberg, 1998). Fol lowing those two waves, the third wave of tools, voluntary initiatives, is now appearing in a variety of contexts. These new policy tools include eco-certification, challenge programs, government-industry negotiated agreements, green design partnerships, industrial ecoparks, environmental accounting, environmental auditing, industry-community agreements, sectoral initiatives, supplier challenges, and company-specific pollution prevention (or energy reduction) plans (Moffet & Bregha, 1999). In this dissertation, eco-certification and challenge programs are mainly dealt with. Eco-certification is given to organizations that meet environmental and other standards for their production processes or products. The most salient certifications are eco-labels, which are attached to products, assuring consumers that the products satisfy certain environmental standards. Eco-labeling systems are operated by governments in various countries and regions, e.g. "Environmental Choice" in Canada, "Blue Flower" in the European Union, "Blue Angel" in Germany, "Stiching Milieukeur" in the Netherlands, " N F Environment" in France, "Nordic Swan" in the Nordic countries, "Eco Mark" in Japan, "Eco Mark" in South Korea, "Green Label" in Singapore, "Eco Mark" in India, "Environmental Choice" in Australia, and "Environmental Choice" in N e w Zealand (Morris & Scarlet, 1996). In the United States, non-governmental organizations run eco-labeling systems such as "Green Seal" and "Green Cross." The first eco-labeling system, "Blue Angel ," was started in Germany in 1978, while other countries implemented eco-labeling in the late 1980s and early 1990s. A t least 25 countries now have some kinds of eco-labeling systems. In the mid-1990s, two new breeds of eco-certification were launched and have attracted much attention: ISO 14001 environmental management systems certification and a number of forest certification schemes.1 In contrast to eco-labeling systems operating largely on a domestic basis, these two kinds of eco-certification processes were mainly planned as part o f an effort to establish global standards; therefore, these processes can often go beyond national or local governments' control. W i t h the trend towards globalization of economies, ISO 14001 and forest certification have become important factors to take into account for both business leaders and policy makers. Challenge programs are government initiatives that challenge firms impacting the environment "to improve their performance beyond regulatory requirements and to report their efforts publicly" (Moffet & Bregha, 1999, p. 16). In some instances, challenge programs were implemented to curb the emissions o f toxic chemicals. The U S E P A launched the 33/50 program in 1991, and the Canadian government started the Accelerated Reduction and Elimination o f Toxics ( A R E T ) Challenge in 1994 (Khanna & Damon, 1999; VanNijnatten, 1999a, 1999b). Even though criticism surrounds these programs, there is evidence that shows at least one of these programs (i.e. 33/50) brought about actual improvements (Khanna & Damon, 1999). In Canada, the challenge program approach is also being applied to the efforts to mitigate climate change. The Climate Change Voluntary Challenge and Registry ( V C R ) Program is one of the main policy instruments implemented by the Canadian federal government for the mitigation of climate change. A s a group o f policy tools, voluntary initiatives can be placed at the highest end of a scale that measures the degree o f voluntarism. On the other hand, command-and-control regulations leave firms little discretion; firms are told what to do or not to do. Compared to command-and-control regulations, market-based instruments allow firms more alternatives. For example, under the system of emission permits, firms can reduce emissions of pollutants on their own or purchase permits from other firms. However, market-based instruments restrict firms' alternatives by changing the market prices that the firms have to face. Compared to both command-and-control regulations and market-based instruments, 1 It should be noted that ISO 14001 is generic certification, unlike forest certification concerning only forest operations. - 4 -voluntary initiatives give firms a greater degree o f latitude in responding to problems; firms can choose whether or not to participate in such initiatives. 2 In some cases, firms, industry associations or non-governmental organizations can create and manage voluntary initiatives, without direct intervention by governments. This has been the case with ISO 14001 environmental management systems certification and most o f the forest certification schemes discussed in this dissertation. 1.3. Why Firms Participate in Voluntary Initiatives Voluntary initiatives present a conundrum to social scientists: why firms participate in voluntary initiatives to provide public goods when they apparently do not receive any direct benefits in return. Such public goods include reduced levels o f negative environmental impacts in the case of ISO 14001, higher levels o f forest stewardship in the case o f forest certification, and reduced levels o f greenhouse gas emissions in the case of the V C R Program. This conundrum, "why firms participate in voluntary initiatives," is the research question addressed in this dissertation. It is not only an interesting theoretical question but also a practical matter. For the success of voluntary initiatives, no matter how it is defined, participation o f more than a certain number of firms is essential. This means that to design and implement voluntary initiatives successfully, one needs to understand why firms choose to participate in voluntary initiatives and apply that understanding to the design and implementation of such initiatives. To set up this research question in an operational manner, I present the following more specific question in relation to each case examined in this dissertation: what kinds o f firms, i.e. "who," participate in voluntary initiatives. This reformulation of the "why" question into the "who" question allows the use of observational research methods. B y interpreting the answers to this "who" question, answering the fundamental "why" question is attempted in relation to each case. 2 There are some circumstances, however, where market access requires certification o f a certain type and such certification may leave almost no latitude to firms in making certain decisions. -5 -Pn this dissertation, three cases o f firms' participation in voluntary initiatives are investigated: (1) ISO 14001 environmental management systems certification among Japanese manufacturers (Chapter 2); (2) forest certification in the Canadian forest products industry (Chapter 3); and (3) Canadian industrial firms' participation in the V C R Program (Chapter 4). Cases (1) and (2) are very significant in their respective categories. In 1997, Japan's total economic output measured by its gross national product amounted to 14.9% ofthe world total (World Bank, 1999). In 1996, Canada's softwood harvest constituted 14.4 % of the world harvest (Council of Forest Industries, 1998). Therefore, by examining these two cases, one can observe substantial portions of two kinds of global certification processes. Besides, ISO 14001 and forest certification represent interesting examples o f certification processes that take place without direct governmental intervention. W i t h respect to Case (3), although Canada's share of greenhouse gas emissions is not very large in global terms, the country's high per capita emissions wel l deserve investigation. In addition, since this challenge program is government-sponsored, this case provides a perspective different form those in the previous two cases. 1.4. Motivational Models To answer the question "why firms participate in voluntary initiatives," one needs to postulate, as a framework for analyses, how managers o f firms make business decisions. In this dissertation, it is assumed that they make decisions so as to maximize their utility levels, as follows: M a x U [7i, s, v] where U [.] : utility levels ofthe C E O of firm i 7t : firm i's profits s : firm i's social approval v : the CEO's moral satisfaction The alternative assumption, profit-maximization, is more widely accepted especially among economists and has strong arguments for it (Becker, 1962). For example, firms in competitive markets are forced to maximize their profits just to survive; otherwise, due to the force of competition, the profits o f non-profit-maximizing firms w i l l drop below the competitive level of the relevant sector, and investors w i l l withdraw funds from such firms. Or, before investors lose confidence in such companies, they may just remove the managers who do not maximize their firms' profits. The assumption of competitive markets, however, may not be tenable in general, particularly in the cases discussed in this dissertation. If this assumption does not apply, firm managers can have a certain degree o f latitude in pursuing objectives other than profit-maximization, or, in other words, managers can maximize their utility levels. The firms discussed in each chapter do not seem to be operating under the conditions of competitive markets. First, they have considerable market powers (i.e., they can influence the levels of input- or output-prices). The manufacturers discussed in Chapter 2 represent top firms in Japan, and are l ikely to have a certain degree of monopolistic powers in the input- and output-markets. The Canadian forest products firms discussed in Chapter 3 may be able to keep the prices o f raw materials low because the governments providing forest resources to the industry may respond to the requirements o f the industry. Secondly, firms with weak profitability are tolerated to a certain degree because investors cannot obtain perfect information about respective firms. In fact, investors cannot monitor managers' behavior wel l enough to identify and penalize small or even large deviations o f managers' decisions from profit-maximization rules. Uncertainties surrounding managerial decisions, transaction costs, managers' superior knowledge about the business — all make investors' monitoring and controlling difficult. In such agency-principal relationships, managers may deviate from profit-maximization objectives (Donaldson, 1984; Jensen & Meckl ing , 1976; M i l g r o m & Roberts, 1992; Wil l iamson, 1985 & 1986), and this type o f behavior is l ikely to be found among the managers of the firms discussed in this dissertation. For the reasons discussed above, in this dissertation, it is assumed that firm managers make business decisions to maximize their utility levels. On this assumption, I consider potential motives for participating in voluntary initiatives, which include motives related to the profits o f firms and those related to the utility o f managers. Such potential motives are described in terms o f four models, which constitute a modification of Pfeffer's (1997, pp. 42-80) classification scheme. Each of these models has its own distinctive strengths and weaknesses. Figure 1 below provides a schematic representation of the four models. Figure 1: Four Motivational Models for Participation in Voluntary Initiatives" «3 8 Non-economic / Economic Social Mode l (Political M o d e l ) Mora l Mode l Market Economic M o d e l Production Economic M o d e l Based on Pfeffer (1997) 1.4.1. Market Economic Model In the economic model, firms participate in voluntary initiatives because o f economic motives generated in product or financial markets. This model first explains how product markets generate motivation. Theoretical models describing such a motive developed in the 1980s and 1990s, as economics became more adept at handling informational problems within its disciplinary framework (Varian, 1992). Specifically, many economists analyzed the consequences o f dropping the perfect information assumption, which had been the basic assumption of neoclassical economics. Aker lo f (1970) first pointed out the possibility of the demise o f a market due to information problems when he analyzed the used-car "lemon" market. Aker lo f claimed that, i f a potential buyer of used cars is not sure about their quality, then she accordingly lowers her expectations. This, in turn, leads to the exit o f sellers of relatively high quality cars from the market, leading to even lower expectations about the quality o f cars on the part o f potential buyers. Repetition of this process could continue until al l the sellers o f used cars exit the market, and, as a result, no trade takes place. Since informational problems are part o f the real world, while, at the same time, markets usually function wel l , one expects the existence of certain built-in mechanisms that resolve such problems. Ake r lo f presented 1) guarantees, 2) brand names, and 3) licensing as some real-world solutions. Spence (1973) suggested signaling could be such a mechanism. Spence chose the job market as an example in which a buyer (employer) has little information on the quality of a product (the productivity o f a potential employee), and theoretically proved that the education level of the potential employee can signal her own productivity to that employer. Spence's signaling appears to be identical to A k e r l o f s licensing. The difference is that signaling information is created outside the market, while licensing creates information inside the market. Voluntary initiatives can be seen as a licensing mechanism by which firms assure customers that firms' production processes or products are environmentally appropriate. Applications of economics o f information to the analysis of voluntary initiatives, especially to eco-certification, are rare. A s for eco-certification's rationale in product markets, Church (1994) points out that the economics of information can explain why eco-certification processes resolve the problem of consumer mistrust of "green" claims made by firms. A formal model explaining such a mechanism was proposed by Vertinsky and Zhou (1996). Through the analysis o f theoretical economic models, they demonstrated that voluntary eco-certification can enhance consumers' welfare in some instances. In sum, this approach sees eco-certification as a kind of licensing, which solves information problems in product markets. A s wel l as product markets, financial markets, on which firms rely for their capital supply, can also be a source of motive for participating in voluntary initiatives. It is often claimed that firms with good environmental performance also perform wel l financially, even though the causal relationship in this case is much disputed: Does good environmental performance cause good financial performance, or does good financial performance make good environmental management possible? Other factors (e.g., good management in general) might also cause good financial and environmental performance (Reed, 1998). If a relationship between good environmental performance and good financial performance holds, financial investors could use participation in voluntary initiatives as a signal for good financial performance. That is, investors could invest more in companies participating in voluntary initiatives in expectation o f better financial returns, and consequently participant companies could raise capital at lower costs (at a lower interest rate). Apart from investor motivation provided by such a signaling mechanism, participant companies may also attract "conscience funds," which are set up specifically to invest in socially responsible endeavors. Indeed, in 1999 socially responsible investment in the U . S . amounted to $ 2.16 tril l ion, and constituted some 13% of the $16.3 trill ion under professional management in the U . S . (Social Investment Forum News, 1999). One o f the strengths of the market economic model is its compatibility with the formal objectives of corporations. That is, formal corporate objectives are designed to serve, firstly, shareholders and then customers; this model fits in with these objectives. Another strength of this model is that the key variables in the model are observable in markets as prices and volumes. One of its weaknesses is that it often presupposes consumer or investor preferences for good environmental performance, thus treating such preferences as given variables. This means that the fundamental drivers of certification are external to the model and not fully explained. 1.4.2. Production Economic Model In the production economic model, firms participate in voluntary initiatives because of economic motives to achieve efficiency improvements in production of a firm's products or services. - 10 -Some scholars and practitioners who are active in the field o f business strategy claim that resource productivity or resource efficiency can be raised by instituting environment management systems or bringing about innovations in firms' processes or products (Porter and van der Linde, 1995; Schmindheiny & Timberlake, 1992). They further argue that improvement in resource productivity or resource efficiency leads to better financial performance o f a firm. In the production economic model, participation in voluntary initiatives is a means to achieve this goal. Through efforts to meet the requirements o f a voluntary initiative, a company can improve its resource efficiency or gain the capability to improve it. In contrast to the market economic model, the production economic model does not presuppose green consumers or green investors. One of the strengths of this model is that, like the market economic model discussed above, this model is compatible with a formal corporate objective: namely, serving the interests of shareholders. Another qualified strength is that the variables in this model are observable, but not to as great an extent as those in the market economic model, because data access in this case may be somewhat limited due to its internal nature. On the other hand, a weakness is that it assumes inefficiencies exist prior to the introduction o f environmental management systems or innovative processes/products. This may not be the case. In fact, discussing the effects o f regulation, Palmer, Oates and Portney (1995) question the pervasiveness of inefficiencies assumed by Porter and van der Linde (1995). The extensive use of the efficiency concept in neoclassical economics seems to keep many economists from accepting the proposition that environmentally good corporate behavior can, in general, lead to additional, internally-generated profits. 1.4.3. Social Model In the social model, firms participate in voluntary initiatives because of social exchanges between their organizations and stakeholders. Social exchange is defined as "[v]oluntary actions of individuals [or organizations] that are motivated by the [social] returns they are expected to bring and typically do in fact bring from others" (Blau, 1964, p. 91). A s indicated by the word "voluntary", social exchange does not include direct coercion. "Social returns" include social approval, social acceptance and respect/prestige. This definition o f social exchange is drawn from the tradition of exchange theory in sociology. In general, the concept o f social exchange covers, in the area o f personal relationships, things such as friendship, mutual affection, social gatherings, and doing favors for neighbors; in the area of organizational relationships, it covers organized competition, coalition formation and dominance of one organization over others. Fol lowing this definition, B l au (1964) explains an important distinction between social exchange and strictly economic exchange: social exchange "entails unspecified obligations" (Blau, 1964, p. 93). When social exchange takes place, on many occasions, some parties obtain power. Power is "the ability o f persons or groups to impose their w i l l on others despite resistance through deterrence either in the form of withholding regularly supplied rewards or in the form of punishment" (Blau, 1964, p. 117). A s expressed in the phrase "despite resistance," social exchange involving power is different from general social exchange, in which parties may behave more voluntarily, without being coerced or forced. In addition, the mechanism through which power functions (i.e., "through deterrence either in the form of withholding regularly supplied rewards or in the form of punishment") is another criterion that sets power apart from other similar forms of influence (incentives, moral suasion, moral leadership, etc.). One may question whether corporations with the formal mission o f profit-making are actually influenced by such forms o f non-economic power, but evidence does suggest that influence of this kind does in fact exist. For example, Pargal and Wheeler (1996) found local communities in Indonesia exerted pressure on polluting firms to change their behavior, without any help from the government. Wide ly publicized environmental incidents, such as Exxon Valdez and Bhopal , have changed the environmental behavior o f many firms through a drastic change in public opinion. Researchers of corporate social responsibility or stakeholder management are studying how wel l firms can deal with such pressure (Alkhafaji, 1989; Hussain, 1999; Freeman, 1984). In more general terms, it seems to be difficult to explain philanthropy or donations by corporations based on economic motives alone. - 12 -The political model can be identified as a special case ofthe social model. In this model, a firm participates in voluntary initiatives in an attempt to influence public policy. For example, within the framework o f a voluntary initiative, a firm may reduce levels of pollution more than required by command-and-control regulation in order to keep the government from raising standards. This type of behavior is sometimes called regulatory pre-emption. In this case, voluntary initiatives are needed because voluntary initiatives can (1) coordinate the behavior o f a group o f firms so as to reduce the possibility of free-riding, or (2) increase the visibil i ty of the firms' pollution reduction effort so as to influence the opinion o f stakeholders, which in turn influence government policies. The strength of the social model is in its focus on "pressures," which seem to be important in corporate responses to environmental issues. The weakness is that most o f the variables (power, rewards, punishments) are subjective constructs, with the information needed to construct such variables not readily available to researchers outside the firm. Even i f a researcher can collect data on these variables by means of a questionnaire, interviewing or participant-observation, the measurement of these variables is, by definition, difficult and problematic. Among other social theories, I employ social exchange theory because this mode of explanation fits wel l into the economic models presented above. Social exchange theory can be classified as one major type of social theory, i.e. theories o f rational choice; others include functionalism, conflict theory, symbolic interactionism, phenomenology (Wallace & Wolf , 1991). Because economic explanation is a theory of rational choice, the combination o f social exchange theory and economic motivational models is more consistent than are combinations o f other social theories and economic motivational models. In fact, Pargal and Wheeler (1996) implici t ly use a social exchange concept by assuming a supply schedule of environmental services by local communities. Further, because exchange processes are ubiquitous, participation in voluntary initiatives is l ikely to be successfully conceptualized in terms of processes o f social exchange (Cook, O'Brien & Kol lock , 1990). - 13 -1.4.4. Moral Model In the moral model, firms participate in voluntary initiatives because they think that it is the right thing to do. One often dismisses the idea that a C E O , the primary decision-maker of a firm, pays heed to her sense o f personal morality or conscience in decisions regarding the business. According to Winn ' s (1995) analysis, however, individuals often play significant roles in the development of corporate environmentalism. If one acknowledges the significance of the role played by individuals, it is clear that the values held by these individuals are l ikely to have an impact on the development of corporate environmentalism. In fact, organization scientists and psychologists theoretically or empirically are examining how the values or beliefs of individuals influence their environmental behavior (Gladwin, Kennely & Krause, 1995; Grob, 1995; Shrivastava, 1994, 1995a, b). In the case of participation in voluntary initiatives, the moral model means that firms choose to participate because of the intrinsic ethical benefits involved in the better environmental performance achieved by meeting the requirements o f such initiatives. The strength of this model is its compatibility with the individual and personal nature of C E O s ' decision-making. The weakness is that the strengths o f moral motives often may not be strong enough to overcome other motives and hence may not be worth investigating. 1.4.5. Utility Maximization Model: Political Economic Organization Model To consider all the four models above, I assume firms' motives for participating in a voluntary initiative reflect a mixture o f all the four models: namely, market economic, production economic, social, and moral aspects. Specifically, I assume that a C E O maximizes her utility function, including: 1) present and future profits (motives in the market and production economic models), 2) social approval for the firm (motive in the social model), and 3) satisfaction o f her conscience (motive in the moral model). The utility function ofthe C E O of a firm / can be written as: - 14 -17,= Max [« ,{^(^ 1.),5 (y i ) ,v(Z 1 . )} ,«°{^(Z 1 . ) , j (r i ) ,v(Z 1 . )}] Let u ' and u° be the CEO's utility levels, respectively, in the case firm i participate in a voluntary initiative and in the case firm i does not participate in it n(.) be firm i's profits, given the firm-specific variables X j s(.) be firm i's social approval, given the firm's stakeholder-specific variables Y j v(.) be the CEO' s moral satisfaction, given the person (or respondent to the survey)-specific variable Z\ I assume that all managerial decisions other than the one concerning participation in a voluntary initiative are not affected by the participation decision, and that before the C E O considers participation in a voluntary initiative, she has made all other managerial decisions so as to maximize the utility function under the constraints of the company's budget, which can be seen as fixed in the short-run. The CEO' s decision rule concerning participation in a voluntary initiative is: Max u i Vol , U , = u [vol , \ X ', Y ' , Z ,* ] where vol : the decision variable indicating whether to participate in a voluntary initiative (vol = 1) or not (vol = 0) X * , Y * , Z * : firm characteristics, with which the manager decided to operate. Note that these variables are assumed to be exogenous for participation decisions. Specifically, If u[vol=l] > u[vol=0], then participate If u[vol=l] < u[vol=0], then do not participate In incorporating non-economic (i.e. social and moral) motives into the economic analysis, this approach follows the method used by Becker (1974). Becker analyzes the individual. A n individual's utility function is assumed to include, as an argument, the basic want, "desire for distinction" (Becker, 1974, p. 151). A s possible other basic wants, Becker refers to Bentham's list, which includes "the - 15 -pleasures . . . of being on good terms with h im or them," "the pleasures o f a good name," "the pleasures resulting from the view of any pleasures supposed to be possessed by the beings who may be the object o f benevolence," and "the pleasures resulting from the view of any pain supposed to be suffered by the beings who may become the object of malevolence". In the model used here, the CEO's basic wants are instead assumed to consist of: 1) profits, 2) social approval and 3) moral satisfaction. This model differs from traditional neoclassical economic models in that it includes arguments representing wants such as social approval and moral satisfaction. Fol lowing Soderbaum's (1999; 2000) proposal, let us call this model the Political Economic Organization (PEO) model, in contrast to the traditional profit-maximizing firm model, which Soderbaum calls Economic Organization (EO) model. In the area o f environmental economics, an attempt to incorporate social interactions into economic models was, most notably, initiated by economists in the W o r l d Bank (2000), under the banner of N e w Ideas for Pollution Prevention. The Wor ld Bank (2000) considers three sources of influence, namely, governments, markets and communities. In the P E O model, I reclassified these sources into market economic, production economic and social motives. In addition, I expand the scope of analysis by also including the moral satisfaction o f C E O s . The purpose of formality is to avoid the ad hoc addition of explanatory variables without being aware o f what such variables represent and to evaluate each motive evenhandedly. The utility maximization assumption may invite some criticism. First, one may question whether C E O s are really following such a utility maximizing rule in their decision-making. Are C E O s calculating their utility functions whenever they make decisions? Contrary to its appearance, the assumption of utility maximization just means that the decision-maker is rational, and is not behaving in incomprehensible ways; that is, "he makes his decisions consistently in pursuit o f his own objectives" (Myerson, 1991, p. 2). In this model, such objectives include, not only profit motives, but also pursuit o f social approval and moral satisfaction. Nonetheless, the assumption of rationality may still be too strong, because irrationality may constitute a major factor in decision-making. In fact, in this model the remaining irrational portion of decisions is supposed to be included as a random error - 16 -term, which is introduced in the model estimation. In this way, both rational and irrational motives are taken into account in the P E O model. 1.5. Overview of This Dissertation This dissertation consists of three case studies o f businesses' responses to voluntary initiatives, with a special focus on eco-certification and a challenge program. In Chapter 2, the dissertation investigates the antecedents for industrial firms' seeking ISO 14001 environmental management systems certification in Japan, a country with the largest number of ISO 14001-certified sites in the world as of September 1999. The results show that the decisions of Japanese firms to seek ISO 14001 certification are significantly affected by the firm size, average age of employees, export ratios and debt ratios. In Chapter 3, the dissertation looks into the antecedents for forest products companies' seeking forest certification in Canada, one of the major forest products producers in the world. During the 1990s, forest certification in Canada experienced an enormous growth from an obscure idea to a reality, and has become one o f the central concerns to Canadian forest managers. Specifically, three major forest certification schemes are considered: (1) ISO 14001, (2) the Canadian Standards Association Sustainable Forest Management certification, and (3) the Forest Stewardship Counci l certification. The estimation of empirical models shows that the decisions of Canadian forest firms to seek forest certification are, in general, affected by export intensity; in the case of ISO 14001, they are also affected by reliance on secure tenure holdings. In Chapter 4, the dissertation examines the antecedents for Canadian industrial firms' participation in the Voluntary Challenge and Registry ( V C R ) Program, Canada's voluntary challenge program aimed at reducing greenhouse gas emissions to mitigate climate change. The results show that larger firms and those in the energy-intensive sector are more committed to climate change mitigation. Attitudinal variables and stakeholder preferences have a limited and complex impact on firms' participation decisions. - 17-Chapter 2. ISO 14001 Certification in the Japanese Industry3 2.1. Introduction In this chapter, we investigate Japanese manufacturing firms' motives for seeking ISO 14001 certification. We mainly search for statistical relationship between a firm's decision to seek certification and the variables that characterize the firm, thereby inferring the firm's motives for seeking certification. The chapter proceeds as follows. First, a brief history o f the Japanese industry's environmental behavior is presented. This is followed by descriptions of the models and variables used in our econometric estimation. The subsequent section provides empirical results, followed by discussions of such results. Findings in the relevant literature are then compared to those o f this study. Finally, there is a brief conclusion. 2.2. Background 2.2.1. Brief History of Environmental Behavior of Japanese Industries It is wel l known that during the rapid economic growth of the 1950s and 1960s Japan's private and public sectors both invested heavily without proper consideration for protecting the environment. Pollution levels increased, resulting in irreversible damage to the natural environment. In addition serious health problems arose from the pollution, such as the Minamata disease (mercury poisoning) and severe asthma due to polluted air in the cities o f Kawasaki and Yokka ich i . These pollution-caused health problems attracted increasing public attention in the late 1960s. In response to such environmental degradation and damage, and the resulting public outcry, the Japanese government 3 This chapter is based on research by Nakamura, Takahashi and Vertinsky (in press). - 18-introduced the Basic L a w for Environmental Pollution Control (1967) and the A i r Pollution Control L a w (1968), both of which turned out to be ineffective in controlling environmental damage. Significant improvement in the environment began only in the early 1970s when a series of amendments to these Pollution Control Laws and the enactment of some additional laws, including the Cost Allocat ion of Public Pollution Control Works and the Punishment o f Environmental Pollution Crimes Relating to Human Health, were enacted. A s M a n i and Wheeler (1998) suggest, stricter regulations in this period seem to have led to considerable abatement of pollution and displacement of heavily polluting industries to overseas. Another important factor, which contributed to the abatement o f Japan's environmental damage, was the significant o i l price increases due to the first and second o i l shocks in the 1970s. Japanese government policy to promote global competitiveness of the Japanese industry in the midst of rising energy costs resulted in a massive effort, financial and otherwise, to encourage Japanese firms to shift their investment to less energy-consuming areas and also to deploy rapidly energy-saving production equipment. Such energy-saving equipment was often found to be less polluting. For example, the Japanese pulp industry was mainly responsible for most o f the organic pollution of the Inland Sea, which was on the verge o f an irrecoverable decline in 1970 (Nishimura, 1995). The pulp industry was forced by law to reduce the amount ofthe waste discharged as effluent to one fifth ofthe previous level within 2 years and to one twentieth within 7 years. Their response was to replace the sulfite pulp (SP) production process used up to then with a new Kraft pulp (KP) process. The K P process is not only environmentally cleaner but also more energy-saving since it can utilize the organic wastes from pulping as an energy source. Japanese industry's investment in pollution control and energy-saving devices increased from a few per cent of total investment in plant and equipment in the late 1960s to its peak o f 20 per cent in 1975, and then gradually declined to a few per cent in the mid-1980s, with an average o f above 10% for the 1970s. The corresponding figures for the U .S . , the Netherlands, Germany and Sweden in 1974 are considerably smaller at 3.4%, 2.7%, 2.3% and 1.2%, respectively (Nishimura, 1995). This led to - 1 9 -the general agreement that the Japanese industry was successful in at least partially "decoupling" of environmental degradation and economic growth, proving that "environmental policies and economic growth policies can be not only compatible but indeed mutually supportive" ( O E C D , 1994, pp. 95-96). In fact in the 1970s through 1980s, Japan achieved the highest economic growth rate among the G7 countries, while reducing S 0 2 and N O x emissions to a greater degree than any other O E C D member countries ( O E C D , 1994). In response to the energy crises of the 1970s and early 1980s, Japanese firms were highly successful in turning energy/environmental challenges into opportunities for profit making. Given their past success in responding to market-generated threats and opportunities, it is thus o f considerable interest to analyze Japanese firms' organizational responses to contemporary environmental demands being imposed by Japanese as wel l as foreign governments, non-governmental and c iv i l organizations and citizens' groups. In addition to meeting some minimum standards of environmental protection, these new demands include increased commitment to constant improvement o f environmental performance levels through such activities as environmental monitoring, formal reporting and validation of environmental performance by independent agencies. Some scholars suggest that contemporary Japanese firms may be merely reacting to the greening trend in some of their export markets while North American and European firms are following pro-active green strategies. Roht-Arriaza (1997), for example, suggests that Japanese firms' primary interest in obtaining ISO 14001 certification was to penetrate E U trade barriers. Indeed, a 1992 survey o f firms reports that no Japanese firm in the survey associates publication of environmental reports with enhancing firms' competitive advantage, compared to 6 % and 18 % of North American and European firms, respectively (Deloitte Touche Tohmatsu International, International Institute for Sustainable Development & SustainAbility, 1993). There is, however, anecdotal evidence that some Japanese firms have placed environmental protection high in their priorities. For example, Sony set up their corporate Environmental Council in - 2 0 -1976, chaired by the C E O , and actively sought to improve its corporate environmental performance globally. Sony obtained its first ISO14001 certification in M a y 1995 for one of its subsidiaries. The number o f Sony plants and subsidiaries that have acquired ISO 14001 certification exceeded 30 by February 1997 and exceeded 90 by September 1998. A section chief in the Environment Department of Sony, which obtains about 70 % of its sales revenues from outside Japan, believes that it has successfully institutionalized its investment process in the environment within its business planning system, and hence that Sony's environmental activities are sustainable (Tada, 1998). Many other Japanese firms are pursuing ISO 14001 certification. 2.2.2. ISO 14001 Environmental Management Systems Certification ISO 14001 is an international, voluntary standard for environmental management systems, published by the International Organization for Standardization (ISO), an international standard-setting body (Starkey, 1998). In 1990, the ISO and the Business Counci l for Sustainable Development, comprised of business leaders from around the world, had discussions about standardization related to environmental management. A s a result of those discussions, in the next year, the ISO established a Strategic Advisory Group for the Environment ( S A G E ) . Discussions in the S A G E resulted in the start-up in 1993 o f an ISO Technical Committee (TC207), whose task is "standardization in the field of environmental management tools and systems." In 1996, the ISO accepted ISO 14001, "Environmental management systems - specification with guidance for use", as its formal international standard.4 This standard specifies the requirements o f an environmental management system for organizations in any industry or field, such as manufacturing, service, non-profit, and governmental organizations. A l so ISO 14001 can be applied to any part, or al l , o f an operation. Those requirements include five steps in an environmental management system: 1) environmental policy, 2) planning, 3) implementation and 4 It should be noted that ISO 14001 was based on the Bri t ish Standard (BS 7750) in its development process. -21 -operation, 4) checking and corrective action, and 5) management review. Those steps must be formalized and recorded properly. A n organization can self-declare that it is ISO 14001-compliant. But this study only deals with ISO 14001 certifications certified by third parties. A caveat is in order. The ISO 14001 is a standard o f an environmental management system, not o f environmental performance. Therefore, the ISO 14001 should not be interpreted as an indicator of "good" environmental performance, such as low pollutant emissions or energy efficiency. 2.3. Models 2.3.1. Literature Studies concerning ISO 14001 certification, let alone formal and empirical investigations, are relatively rare. In one such study, Corbett and Ki r sch (2000) conduct a regression analysis, taking the number o f ISO 14001 certifications granted in a country as a dependent variable and the variables representing the characteristics of the country as independent variables. Based on the results ofthe analysis, they propose the following country-level hypotheses: (1) ISO 9000 certification processes encourage ISO 14001 certification processes; (2) exports encourage ISO 14001 certification processes; (3) the environmental awareness of a nation encourages ISO 14001 certification processes in that nation; (4) economic development has no effect on ISO 14001 certification processes; and (5) the sectoral composition o f a nation's economy has no effect on ISO 14001 certification processes. Apart from ISO 14001 certification, the voluntary environmental behaviors of firms have also been investigated by many researchers. There are several studies that have analyzed the determinants o f U . S . firms' decisions on environmental issues. DeCanio and Watkins (1998), for example, estimate the determinants of over 9,000 U . S . firms' decisions to participate in the Green Lights program, one o f several voluntary -22 -pollution prevention programs initiated by the U . S . Environmental Protection Agency ( E P A ) ; they find that firm-specific variables such as firm size, earnings and insider shareholding are significant determinants of U . S . firms' voluntary participation in these programs. DeCanio (1994) also analyzed the role of firm performance in participation decisions, using different methodologies, and drew similar conclusions. 5 In two studies, one o f approximately 300 and the other of approximately 6,000 U . S . firms, Arora and Cason (1995; 1996) investigate firms' participation decisions in the 33/50 program. The 33/50 program is an E P A program that encourages firms to reduce voluntarily releases and transfers of 17 toxic chemicals. Whi le the goal of the program is to reduce releases and transfer of the chemicals by 33% in 1992, and 50% in 1995, relative to 1988 levels, the program did not legally force each participating firm to achieve such quantitative targets. Arora and Cason find that firm size and industry effects are particularly important determinants of firms' participation decisions. One important difference between the Green Lights and 33/50 programs is that these programs deal with different types of technological equipment. DeCanio and Watkins (1998) note that firms' decisions to invest in energy-efficiency technologies covered by Green Lights are less firm- and industry-specific than those relating to pollution-reduction technologies associated with the toxic chemicals specified by 33/50. In Canada, Henriques and Sardorsky (1996) studied the determinants o f a firm's formulation of an environmental plan. Their empirical results show that pressures from customers, shareholders, government regulatory agencies and community groups positively influenced the formulation of environmental plans. Negative influences included lobby group pressures and firms' sales-to-asset ratios. The perceived importance o f environmental issues was also associated with increased probability o f developing a plan. Firms in the natural resources sector were more l ikely to have a plan than those in the manufacturing and services sectors. 5 Other voluntary programs include 33/50 and Energy Star programs. Firms joining these voluntary programs do not get any break in the degree of environmental regulations imposed by E P A , but they are able to take advantage of EP A ' s technical expertise, among other benefits. -23 -Researchers affiliated with the Wor ld Bank, working mainly in less developed countries, have investigated the determinants of firms' environmental behaviors using econometric methods (Aden, A h n & Rock, 1999; Blackman & Bannister, 1998; Dasgupta & Wheeler, 1996; Hatman, Huq & Wheeler, 1997; Pargal, Hettige, Singh & Wheeler, 1997; W o r l d Bank, 2000). These studies focused particularly on the influence o f community pressure on firms' behavior. 2.3.2. Two Models and Variables We postulated two classes of models to explain ISO 14001 certification decisions. One class of models is based on simple profit maximization and thus involves variables that affect the costs and benefits o f certification (Economic Organization models). These models consider only economic motives. The second class of models recognizes non-economic motives and thus incorporates variables that may affect the utility o f managers and their behavior, in addition to variables reflecting profit maximization (Political Economic Organization models). This study considered two kinds of dependent variables that describe managers' decisions about ISO 14001 certification. One is a dummy variable representing whether or not a firm has obtained ISO 14001 certification. Another represents the timing o f certification. Because there are two models associated with each o f the two dependent variables, in total four types o f models are estimated. In the Economic Organization models postulated, the independent variables that explain certification decisions include: firm size, profitability, liability, export ratios, advertising expenditures, R & D expenditures, keiretsu (Japanese corporate group) membership, main bank ownership, foreign ownership, investment in plant and average age of employees. The Poli t ical Economic Organization models include all the variables related to profit maximization as wel l as variables which reflect basic environmental values o f managers, the degree o f pressures experienced by managers from c iv i l society - 2 4 -and government 6, control beliefs, perceived principles o f environmental governance and role definition. The definition and derivation o f these variables is described in detail in the next section. F i rm size may determine the capacity o f the organization to take action in the presence of economies of scale (Mintzberg, 1979; Northcraft & Neale, 1994). Certification involves some significant fixed costs. These costs are less significant for larger organizations than smaller ones. The impact of size upon the institutionalization of environmental objectives may involve two contradicting forces. On the one hand, larger organizations may find it more difficult to reach a consensus about certification, while, on the other hand, the larger organization may already possess specialized skills that can facilitate the application for certification. The net direction of impact, however, is left as an empirical question in these models. Profitability and debt ratio influence the costs o f capital and financial flexibility. Profitable organizations are more l ikely to pursue environmental objectives. We also postulate that firms with lower short-term debt have more flexibility to finance new programs, such as eco-certification; however, such a proposition is less certain since the debt ratio may reflect rational responses to tax laws or other variables that affect capital structure. The greater a firm's export ratio, the higher the benefits that may accrue from highly visible actions taken to protect the environment, such as eco-certification. Since foreign customers may have less chance to monitor the performance of a company or have knowledge about its actions and intentions, they may demand more visible signs o f commitment o f environmental protection. We expect companies with high export ratios to be more inclined to validate their environmental protection policies by obtaining certification that is internationally recognized. It is generally thought that the relative sizes o f intangible assets, such as goodwill from advertising, knowledge capital from R & D and other management capabilities, are highly correlated 6 C i v i l society's pressure affects firms' environmental behavior in various ways. For example, local communities in Indonesia can exert pressures on polluting firms to change their behavior without any help from the government (Pargal & Wheeler, 1996). -25 -with firms' capacity and incentives to cope successfully with contemporary environmental issues that many manufacturers face (Ghemawat, 1986; Rugman & Verbeke, 1998). Firms with significant advertising expenditures are l ikely to have stronger contact with final consumers and other external stakeholders, and hence are more l ikely to benefit from eco-certification in the form of enhanced customer goodwill . Firms with high R & D expenditures are more l ikely to be able to find technological solutions to their environmental problems. Such firms are also l ikely to be more innovative and less resistant to change. One special characteristic of Japanese firms is the presence o f various types of corporate groups (keiretsu) and other interfirm relationships, which do not exist in the U . S . (See, e.g., A o k i , 1988; M o r c k & Nakamura, 1999; Nakamura & Vertinksy, 1994). The models include two types of Japanese inter-firm relationships. First, we include dummies representing whether or not a sample firm belongs to the President Club of one of the six major bank-based keiretsu groups. 7 It is possible that being a member o f such a keiretsu group has systematic effects on firms' approach toward environmental issues. Another business group variable we use is the equity share owned by a sample firm's largest bank lender called "main bank". Whi le the member firms o f each of the above six major bank-based keiretsu groups all have one o f these keiretsu banks as their main bank, there are also many other firms that are not members o f these Presidents' Clubs and yet use one o f these six major banks as their main bank. W e include the percentage of equity held by the main bank of each firm in the models to see the impact of such main bank-client firm relationships on certification decisions. If these keiretsu relations serve interfirm information exchange purposes, as is often argued (Aoki , 1988), still the possible contribution of keiretsu relations to the pursuit of environmental protection cannot be known a priori. On the positive side, keiretsu firms' environmental skills can be strengthened by mutual interfirm technology transfers. On the other hand, it is possible for keiretsu firms to discuss and develop successful legal means and know-how, in order to cope with government 7 These banks are Mitsubishi (now Tokyo-Mitsubishi), Sakura (formerly Mitsui ) , Sumitomo, Fuji , Sanwa and Daiichi-Kangyo Banks. - 2 6 -and c iv i l society pressures, and that this relieves them from the need to increase their commitment to environmental protection. It is also possible to interpret Japanese keiretsu relations as representing a form of insider shareholding. If this is the case, it is possible that the impact of keiretsu relations on environmental responses is negative for Japanese firms, as was found by DeCanio and Watkins (1998) for U . S . firms regarding insider shareholding. We have also included in the model a foreign ownership variable. Foreign owners may, on the one hand, be less wi l l ing to contribute to the social welfare ofthe country and thus less inclined to invest in environmental protection above that required by law. On the other hand, it is possible that foreign owners must secure goodwill from regulatory authorities in host countries to prevent discrimination and do so by obtaining certification. The level o f investment in plant facilities represents opportunities for environmental improvement embodied in new machinery and equipment. Higher investment levels in plants may improve environmental performance and reduce external pressures for any deeper organizational commitment. Lower average employee age may reflect a higher learning capacity of an organization's members, since younger employees are generally more trainable, adaptive and less resistant to change. Consequently, companies with younger employees may accrue lower costs seeking certification. We also incorporated as a variable firms' participation in ISO 9000 series certification of quality management systems. Participation in ISO 9000 is l ikely to reduce the information search and learning costs involved in implementation of ISO 14001 because both systems are based on similar processes and ideas of system improvement and certification. In deriving the Polit ical Economic Organization (utility maximization) models we postulate that, in addition to pursuing profit maximization, managers of the firm are l ikely to seek certification 1) i f they personally place high value on the environment and its protection (e.g., feeling that human interference with nature can produce disastrous consequences and that people must seek harmony with nature; 2) i f they are pressured by c iv i l society or the government to do so in the form of criticisms, -27 -threats of loss of legitimacy and other sanctions; 3) i f they feel that their firms are in control o f the situation and can solve their environmental protection problems; 4) i f they accept the legitimacy of corporate environmental responsibilities (e.g., agreeing with the "polluter-pays" principle and accepting that a responsibility for environmental damage should be extended to those who use natural resources even i f they do not directly damage the environment); 5) i f they accept their own and their firms' responsibly to protect the environment. 2.3.3. Data We used several sources of published data for the financial, economic and non-economic variables. These included the Japanese Minis t ry of International Trade and Industry web site (Ministry o f International Trade and Industry, 1998) and the Japan Accreditation Body for Conformity Assessment's web site (Japan Accreditation Body for Conformity Assessment, 1999) for ISO 14001 and ISO 9000 series membership, respectively. Financial and economic firm-specific data were collected from various Japanese corporation data books (Toyo Ke iza i , 1994-1997; Toyo Keiza i , 1998) and also from the Japan Development Bank financial database. To obtain information about attitudes and perceptions o f managers, a survey was conducted using a structured questionnaire. One manager from each firm was asked to f i l l out the questionnaire. Specifically, the questionnaire was designed to obtain information about 1) managers' attitudes towards the relationship between mankind and the natural environment; 2) institutional and social pressures; 3) managers' confidence in their personal and their firms' ability to manage environmental issues; 4) the principles used in management of firms' environmental affairs; and 5) managers' attitudes towards their personal and firms' responsibilities for protecting the environment. The survey used a Likert-like five-point scale (from l="strongly disagree" to 5="strongly agree").8 The questionnaires were sent in May , 1997 to 600 Japanese manufacturing firms that were randomly selected from all manufacturing firms listed in the First Section o f the Tokyo Stock - 2 8 -Exchange. 9 B y the end of August 1997, we had received usable responses from 193 firms (response rate = 32%). These responses were then matched to firm- and industry-specific information on financial, economic and environmental characteristics. The definition and derivation o f all variables are provided in the following section, while Appendix 2 - A provides the descriptive statistics for these variables. Dependent variables—Financial, economic and environmental variables We use two environment-related behavioral variables as dependent variables. The first identifies whether or not a particular firm has at least one o f its plants certified for ISO 14001 as of M a y 1998. 1 0 This binary variable, I S O D U M M Y , is used in the probit models. The second variable, T I M E _ T O _ I S O , is the duration in months that had passed between the first Japanese ISO 14001 certification and the first certification for the sample firm. The duration for the firms in the sample that have no ISO14001 certified plants is right-censored. We use this variable in the duration (survival time) analysis. Independent variables—Economic variables For each o f the sample firms, the following firm-specific economic and other variables are calculated as mean values for fiscal years 1994, 1995 and 1996. F I R M S I Z E is the number of employees the firm has. P R O F I T A B I L I T Y is calculated as the ratio between a firm's current before-tax profits and sales revenue. 1 1 D E B T _ R A T I O is calculated as Original items are found in Appendix 2-B. 9 This survey was conducted in cooperation with Professor Kanj i Yoshioka and his research group at the K e i o Economic Observatory of K e i o University. 1 0 Some o f the sample firms received B S 7750 certifications, which were similar to ISO14001 certifications. B S 7750 certifications were subsequently converted to ISO 14001. A l l certifications of the sample firms, including those "converted" ones, were given for their "sites" inside Japan. Therefore, we can conclude that the certifications of the sample firms were not directly motivated by regulations in the E U . 1 1 It is known that accounting profits are not equal to economic profits (Fisher, M c G o w a n & Greenwood, 1983). In analyses not shown in this chapter, we replaced the accounting profit rates with market returns, and found that the replacement does not change the results significantly. - 2 9 -the ratio between a firm's current debts and total assets. E X P O R T _ R A T I O represents the percentage of export in total sales value. Relative size of customer goodwill is represented by a proxy, A D V E R T I S I N G , calculated by firms' advertising expenditures divided by firms' sales revenues. 1 2 Relative size o f knowledge capital is represented by a proxy, R & D , calculated as firms' R & D expenditures divided by firms' sales revenues. To control for sectoral impact upon the firm's relative sizes o f advertising and knowledge capital industry dummies are used. These dummies are defined in Appendix 2-A. K E I R E T S U _ D U M M Y indicates whether a firm belongs to the President Club of one of the six major bank-based Keiretsu groups or not. M A I N _ B A N K _ O W N E R S H I P is calculated as the percentage o f shares owned by a firm's main bank. F O R E I G N _ O W N E R S H I P is calculated as the percentage o f shares owned by foreign shareholders. E S f V E S T M E N T _ I N _ P L A N T is derived as the ratio between a firm's annual investment in facility and total fixed assets. E M P L O Y E E _ A G E represents the mean age of a firm's employees. Participation in ISO 9000 series certification (ISO9000) is included as a dummy variable of whether the firm obtained ISO 9000 series quality management system certification. 1 3 Independent variables—Non-economic variables Since responses to survey questions are subjective and idiosyncratic, reflecting the respondent's interpretation of each question, we have used factor analysis to derive indicators representing attitudinal and perceptual variables in the models. Factor analysis simplifies a set of correlated variables by finding a smaller number of appropriate linear combinations of the variables so that those linear combinations would represent wel l the variations of the original variables (Harman, 1 2 These variables (R&D and ADVERTISING) reflect many aspects o f the firm and the industry sector other than the aspects of knowledge capital and goodwill . In fact, industry structure may influence both variables. Even though we tried to eliminate potential spurious relationships by including control variables such as industry dummies, we cannot completely deny the possibility o f identifying such relationships. - 3 0 -1967; Johnston, 1984). Combining responses to different questions reduces idiosyncratic errors and redundancy in survey responses. Using factor analysis with Varimax rotation the following factors were derived. 1 4 (Appendix 2-C shows the results of factor analyses.) First we focused on managers' perceptions of the relationship between the natural environment and mankind. Two factors were derived. E A R T H S P A C E S H I P measures the degree o f vulnerability that the respondent attributes to our planet as a consequence of human impacts on the environment. H A R M O N I O U S C O E X I S T E N C E measures the degree o f the respondent's belief that humans must live with nature in an harmonious way. The second group deals with the pressures that government and non-governmental organizations and groups are perceived to place upon firms to improve their environmental performance. Two factors were derived. C I V l L S O C I E T Y P R E S S U R E and G O V E R N M E N T _ P R E S S U R E ; these measure, respectively, the pressures the firm faces from c iv i l society (e.g., pressures from environmental groups, the mass media and the pressures the firm faces from the government and the general public.) The third group explores the degree to which the firm is perceived by its managers as able to control its impact on the environment. One factor was derived— C O N T R O L L A B I L I T Y . The fourth group explores perceptions of general principles that should govern environmental management in society. Two factors were derived. P O L L U T E R _ P A Y and E N E R G Y _ E F F I C I E N C Y ; these measure, respectively, acceptance of the principle of responsibility of polluters to pay the full cost of any environmental damages they cause and the acceptance of the principle o f penalizing firms that use energy-inefficient equipment. 1 3 The diffusion o f ISO 9000 series certification precedes the launch o f ISO 14001. Therefore, we treat the variable representing ISO 9000 series certification as an exogenous variable. Indeed, exclusion of the ISO9000 variable does not change the results significantly. 1 4 The factor scores obtained from the factor analysis are used in the probit regressions, and survival analyses that follow. We extracted factors whose eigenvalues were larger than one. We used Varimax normalization as the axis rotation method when more than one factor was obtained. Miss ing values that resulted from no responses or responses corresponding to "Don't know" were replaced with the sample mean values. The resulting factors are interpreted according to their factor loadings with respect to each question. The factor scores for al l 193 firms were calculated using the factor loadings. -31 -The fifth group focuses on perceptions o f the executives' o f their personal and their firm's responsibility to protect the environment. One scale was d e r i v e d — R E S P O N S I B I L I T Y . 2.4. Results The results o f probit regressions in which the dependent variable is set to one i f a firm has at least one plant which is ISO 14001-certified and zero otherwise are provided in Table 2.1. Both the Economic Organization (EO) and Polit ical Economic Organization (PEO) models provide accurate predictions for the majority of cases in each cell with overall accuracy ranging from 85 % for the profit maximization (EO) models and 88 % for the utility maximization (PEO) models. A l l models (1-1, 1-2 and 1-3) were significant at a 0.5% level. A likelihood ratio test rejected the hypothesis that the coefficients were all zero in each model. Likel ihood ratio tests also rejected the hypotheses that the coefficients o f industry dummies are zero at a 5% level. A naive prediction rule which always predicts the probit dependent variable to be zero (since there are more zeros than ones) provides correct predictions 68.4% of the time. The probit models (1-1), (1-2) and (1-3) provided more correct predictions, 85.0 %, 87.6 % and 85.0 %, respectively, than the naive prediction rule. The results of the Cox proportional hazard models are given Table 2.2. The dependent variable was the time elapsed (in months) between the first ISO 14001 certification for the sample o f firms and the certification o f the particular firm. Models (2-1) and (2-2) were both significant at a 0.5% level. A likelihood ratio test rejected the hypothesis that the duration analysis coefficients in each o f these models were zero. Equations (2-1) and (2-2) include dummies for high polluting and low polluting industries instead o f the individual industry dummies. The original 15 industries were classified into heavily, intermediate and low polluting industry groups based on each industry's pollution and energy intensities. Pollution and energy intensities for each industry were calculated as the ratios between the emissions for carbon dioxide, sulfur and S O x and energy consumption and value added. - 3 2 -Table 2.1: Determinants of ISO 14001 Certification: Probit Regressions Economic Organization Political Economic Political Economic Model Organization Model Organization Model (1-1) (1-2) (1-3) ISO 14001 certification ISO14001 certification ISO14001 certification granted granted granted With Industry dummies With industry dummies Without industry dummies FIRMJIZE 0.1939*** b 0.2387*** 0.1993*** 3.7415 3.4673 3.8618 PROFITABILITY 0.0276 0.0679 -0.0177 0.5693 1.1111 -0.4980 DEBT_RATIO -0.0226* -0.0342** -0.0381*** -1.8041 -2.3980 -3.0718 EXPORT RATIO 0.0065 -0.0015 0.0146* 0.7177 -0.1424 1.8027 ADVERTISING 0.0442 0.0630* 0.0244 1.5290 1.8316 1.0080 R&D -0.0195 -0.1222 -0.1081* -0.2712 -1.3434 -1.8957 MAIN_BANK_0 WNERSHIP 0.0200 0.0083 0.0159 0.2320 0.0825 0.1892 KEIRETSU_D UMMY 0.0702 -0.1336 -0.2758 0.1846 -0.2739 -0.7693 FOREIGN^OWNERSHIP -0.0104 0.0012 0.0004 -0.5408 0.0516 0.0247 INVESTMENT_IN_PLANT -0.0352 -0.0414 -0.0091 -1.1186 -1.1275 -0.3451 EMPLOYEEjiGE -0.1271** -0.1260* -0.0972** -2.1516 -1.8204 -1.9870 EARTH SPACESHIP ___ -0.1500 -0.0788 -0.8012 -0.4824 HARMONIOUS_COEXISTENCE . . . 0.1709 -0.0743 0.8711 -0.5388 CIVIL_SOCIETY_PRESSURE — 0.2858 0.2467* 1.5935 1.7557 GO VERNMENT_PRESSURE — -0.1761 -0.2796** -1.0006 -1.9928 CONTROLLABILITY — 0.0437 -0.0068 0.2218 -0.0424 POLLUTERPAY — 0.0962 0.0342 0.5283 0.2577 ENERGY^EFFICIENCY . . . 0.0310 -0.0186 0.1727 -0.1260 RESPONSIBILITY . . . 0.6749*** 0.5940*** 2.7101 2.9729 ISO9000 0.8043** 1.0623*** 1.1050*** 2.4903 2.6844 3.5995 Constant 4.1895* 4.4807** 3.3389 1.7579 1.5990 1.6371 Log-likelihood -65.836 -55.846 -68.808 No. classified correctly (Dep. var.= =0) 123/132 123/132 124/132 No. classified correctly (Dep. var.= =1) 41/61 46/61 40/61 No. of observations 193 193 193 a. Missing independent variables are replaced with means. b. Numbers under coefficients are t-statistics. *,** and *** denote, respectively, statistical significance at 10%, 5% and 1% levels. -33 -Table 2.2: Determinants of the Time for ISO Certification: Cox Proportional Hazard Models Economic Organization Model (2-1) Time to ISO certification Political Economic Organization Model (2-2) Time to ISO certification FIRM_SIZE 0.0916*** 3 0.1049*** 5.5510 5.7894 PROFITABILITY -0.0530 -0.0523 -1.1695 -1.0729 DEBT RATIO -0.0221** -0.0344*** -2.0731 -2.9223 EXPORT RATIO 0.0215*** 0.0197** 2.5881 2.3553 ADVERTISING 0.0188 0.0370 0.7958 1.4914 R&D -0.0062 -0.0041 -0.0920 -0.0577 MA IN_BA NK_0 WNERSHIP 0.0376 0.0399 0.3888 0.3780 KEIRETSU'_DUMMY 0.1078 0.0383 0.3266 0.1039 FOREIGN J) WNERSHIP 0.0042 0.0032 0.2587 0.2093 INVESTMENT_IN_PLANT -0.0150 -0.0049 -0.4859 -0.1575 EMPLOYEE_AGE -0.1466*** -0.0964* -2.6988 -1.6543 HEA VILY_POLLUTING_INDUSTRJES 0.4553 0.2327 1.1891 0.5750 LOW_POLLUTING_INDUSTRlES 0.4637 0.2934 1.0602 0.6282 EARTH SPACESHIP -0.1645 -0.8689 HARMONIOUS_COEXISTENCE — -0.1861 1 1 Q8S CIVIL_SOCIETY_PRESSURE -1.1 yoo 0.1977 1.4390 GO VERNMENT_PRESSURE ... -0.1029 -0.6600 CONTROLLABILITY — 0.0902 0.4634 POLLUTER _PAY — 0.0428 0.2939 ENERGY ^EFFICIENT — 0.0140 0.0820 RESPONSIBILITY — 0.6741*** 3.2480 ISO9000 1.2626*** 1.3435*** 2.9652 3.0215 Log-likelihood -258.739 -249.636 No. of observations 193 193 Missing independent variables are replaced with means. Numbers under coefficients are t-statistics. *,** and *** denote, respectively, statistical significance at 10%, 5% and 1% levels. - 3 4 -2.4.1. Economic Organization Models ISO 14001 certification (Model (1-1) in Table 2.1) was, as expected, significantly positively correlated with F I R M _ S I Z E and negatively correlated with D E B T _ R A T I O . There are economies of scale in certification processes and thus larger organizations accrue relatively lower costs compared to their general outlays. E M P L O Y E E _ A G E and ISO9000 certification, reflecting learning capacity and accumulated knowledge of certification processes, respectively, were also as expected significantly correlated with ISO 14001 certification. The leaders in certification (Model (2-1) in Table 2.2) were exporters, not domestically oriented firms. This may reflect the fact that environmental values have been internalized earlier by customers and consumers in foreign markets (e.g., Europe) than by Japanese customers and consumers. Furthermore, the impact of these values is far more pronounced in European markets. Whi le E X P O R T _ R A T I O was significantly positively related to shorter time to certification, no significant association was found between time to certification and A D V E R T I S I N G . (Note that a positive coefficient means a higher probability of certification and thus a shorter time to certification.) Lower relative costs o f certification associated with F I R M _ S I Z E , E M P L O Y E E A G E and ISO9000 certification also explain earlier certification. D E B T _ R A T I O was significantly negatively associated with shorter elapsed time to certification. 2.4.2. Political Economic Organization Models In these models, in addition to independent variables representing costs and benefits of ISO 14001 certification, variables that represent values, attitudes and perceptions o f executives (non-economic factors) were introduced to explain certification decisions. Since we used executives' ratings in the models to represent their perception of their firms, we estimated all models using the individual characteristics o f the respondent (e.g. age, role in the organization) as additional independent variables. -35 -These variables had no significant impact on the results; hence, we report the results without including the personal attributes. A s expected, the probability of ISO 14001 certification (Model (1-2)) was associated positively with F I R M S I Z E , A D V E R T I S I N G and ISO9000 certification and negatively with the E M P L O Y E E _ A G E and D E B T R A T I O when sectoral factors were controlled. Although our interpretation o f the sign of firm size is that larger firms are more endowed with resources to seek ISO certifications and that they enjoy economies of scale in implementing certification, we can not exclude the possibility that the positive sign of firm size merely reflects a larger number o f plants in larger firms, compared to smaller firms. (We did not control the number of each firm's plants in the regressions since the data is not available.) The positive effect of advertising intensity on the probability of an ISO certification is consistent with the findings o f Arora and Cason (1996) that advertising affects positively the probability o f participating in a voluntary 33/50 program. E X P O R T R A T I O was not significant when industry dummies were included in Mode l (1-2), but, when industry dummies were excluded, export ratio became positive and significant (Model (1-3)). This means that industry dummies absorb the positive impacts o f exporting on ISO certification, implying that export-oriented industries as a whole are more oriented to ISO certification. This is consistent with the generally accepted observation that Japanese exporters seek ISO certification for the purpose o f remaining in the E U market. This does not exclude, however, alternative interpretations for the positive role exports play in ISO certification. For example, export-oriented industries, such as electronics, automotive and machinery industries include more progressive and globally more competitive firms with pro-environment policies than firms in the relatively non-competitive, locally based firms in the chemicals, paper and pulp and energy sectors. 1 5 Another important finding in the probit regressions is that firms' high debt ratios deter their effort to obtain ISO certification (Models (1-2) and (1-3)). Final ly, the importance o f firm-specific 1 5 This is despite the serious voluntary effort by Keidanren (Japanese Federation of Economic Organizations) to promote environmentally responsible behavior among Japanese manufacturing industries (Keidanren, 1996 & 1997). - 3 6 -variables in the probit estimation is consistent with DeCanio and Watkins (1998) who estimated logit models for firms' decisions whether to participate in E P A ' s voluntary Green Lights program. One puzzling finding is that in both models (Models (1-2) and (1-3)) R & D variables have negative coefficients. On the surface this result appears to contradict the idea that modern innovative firms are more l ikely to be greener. Further examination of the data, however, revealed a significant positive (negative) relationship between R & D intensity and membership in the low (high) polluting industries. 1 6 Clean industries do not have the same pressures to demonstrate their greenness and justify their legitimacy as those considered to be in heavily polluting sectors. Personal responsibility felt by executives to ensure that their organizations protected the environment ( R E S P O N S I B I L I T Y ) was the most significant attitudinal variable explaining certification (Models (1-2) and (1-3)). Perceived pressures from c iv i l society ( C I V I L _ S O C I E T Y P R E S S U R E ) also increase the probability of certification. In contrast, government pressure to improve environmental performance ( G O V E R N M E N T ^ P R E S S U R E ) was negatively related to certification, perhaps reflecting the fact that such pressure is higher on companies that need to make significant investment in environmental protection. The pressure to satisfy the government may divert efforts from voluntary actions including environmental certification. F I R M _ S I Z E and E X P O R T _ R A T I O were significantly positively associated with shorter time to ISO certification (Model (2-2)). Larger firms have more resources to implement the new environmental management systems required for ISO 14001 certification and thus can obtain certification earlier. The costs o f maintaining such systems as a share o f corporate budgets are also smaller for the larger firms, so they are less likely to defer certification. Exporting firms lead domestic firms in obtaining certification. The significant positive coefficient o f E X P O R T J R A T I O reflects in part the benefits from certification that exporters have perceived in terms o f maintaining market access to Europe. They may also reflect earlier exposure to shifting public values in Europe and North 1 6 The simple correlations between R & D intensity and the low polluting and heavily polluting industry dummies, respectively, are 0.60 and -0.17. - 3 7 -America, where the general public places higher priority on protecting the environment. The average age of firm employees and the firm's high debt ratios, on the other hand, are significantly negative reflecting the slower path of learning in older companies, a lower ability to innovate and the lower priority placed on non-financial objectives o f firms with higher short-term debt. A s expected, firms with executives who take personal responsibility to ensure that they protect the environment tend to lead in the certification process. 2.4.3. Comparison of PEO and EO Models W e tested a null-hypothesis that all variables that are related only to managers' utilities (non-economic motives), but not to firms' profits, are insignificant. The l ikelihood ratio test was used. In both groups of models that explain both whether or not firms have ISO 14001 certification and the timing o f certification, the null-hypothesis was rejected at a 5% level. This means that one cannot ignore the influence o f non-economic motives in explaining certification decisions made by Japanese industrial firms. 2.5. Synthesis of Literature This section combines the findings of this study with insights from other relevant studies. First, the results o f two questionnaire surveys that investigated ISO 14001 certification in Japan w i l l be presented and discussed. Next, the results of an empirical study o f ISO 14001 certification that relied on country-by-country panel data w i l l also be presented and compared with the results of this thesis. 2.5.1. Direct Questioning In the late 1990s, Japan saw a drastic increase in the number o f ISO 14001 certifications granted. Because of greater public concern about the impact o f business on the environment during the - 3 8 -same period, the rapid diffusion o f ISO 14001 certification has attracted the interest of several Japanese researchers. Among their work, we choose to analyze two questionnaire surveys, in which researchers asked companies with ISO 14001 certification the advantages of, or reasons for, obtaining the certification. In September 1997, researchers of the National Institute for Environmental Studies, Otoma, Sakai, Terazono and M o r i (1998) conducted a survey targeting firms that had ISO 14001 certification as of July 1997. They obtained 157 usable responses. They asked the question: "What are the advantages resulting from obtaining ISO 14001 certification? Please choose al l that apply to your company". The responses to this question are summarized in Table 2.3. The percentages next to each of the advantages indicate the share o f firms that chose that advantage. The advantages related to relationships with the general public, consumers, and local communities scored high. For example, "Enhanced corporate image (No. 1)," and "Maintenance of good relationships with consumers and communities (No. 12)" were seen as advantages by 94.9% and 71.3%o of respondents, respectively. A l so economic benefits derived from gains in efficiency were chosen by the majority of companies (No. 2 — 68.8%; N o . 7 — 66.9%; N o . 8 — 81.5%). Other economic benefits in terms o f expanded customer bases were chosen by a minority of respondents (No. 3 — 29.3%; N o . 4 — 26.8%). Understandably, the official purpose of eco-certification, "Reduction in environmental impact (No. 5 )" also scored high (80.9%). - 3 9 -Table 2.3: Survey by the National Institute for Environmental Studies (1998) Question: What are the advantages resulting from obtaining ISO 14001 certification? Please choose all that apply to your company. No . Items %(n=157) 1 Enhanced corporate image 94 .9 a 2 Enhanced management by the means of documentation 68.8 3 Expanded foreign-customer base 29.3 4 Expanded domestic-customer base 26.8 5 Reduction in environmental impact 80.9 6 Improvement in products / services 33.8 7 Avoidance of accident risks 66.9 8 Enhancement o f employee morale 81.5 9 Reduction in costs 42.0 10 Improved access to loans and capital markets 0.6 11 Preferential treatment from governments 5.1 12 Maintenance o f good relationships with consumers and communities 71.3 13 Other 8.9 14 N o Answer 0.6 a The percentage represents the percentage of respondents who chose that advantage among all respondents. Mult iple choices were allowed. One year after this survey by the National Institute for Environmental Studies, the Tokyo Chamber o f Commerce and Industry (1999) conducted a questionnaire survey concerning ISO 14001, targeting certified companies. They conducted the survey from October 1998 through November 1998, and obtained 522 usable responses. Their questionnaire asked about reasons for obtaining ISO 14001 certification. The summary of responses is provided in Table 2.4. Again , the official purpose of eco-certification, "Establishment o f environmental improvement activities (No . l ) " , scored high (64%). "Enhancement o f corporate image (No. 12 )" also appears to be important (47%). One item, which did not have an equivalent in the above study, "Policy ofthe corporate group (No. 8 )", was chosen by many respondents (59%). Requests from overseas or domestic customers were not among the reasons for certification for the majority of companies (No. 5 — 10%; N o . 6 — 7 % ) . These two surveys give us some insight into ISO 14001 certification processes in Japan from perspectives different from the analysis in this thesis. The results of both studies emphasize the - 4 0 -importance o f concern with corporate image in certification decisions. This finding is consistent with the findings in this thesis—namely, the importance of both the perceived responsibility o f managers and the perceived pressure from c iv i l society in certification decisions. Concerns with corporate image are difficult to conceptualize. These concerns can be interpreted in terms o f motives described in the social model, such as pursuit of social approval or avoidance o f stigmatization. A s wel l , they can be seen as concerns relating to customer goodwill or potential regulation in the future, i.e. the motives described in the market economic model or in the political model. Table 2.4: Survey by the Tokyo Chamber of Commerce and Industry (1999) Q. Reasons for obtaining ISO 14001 certification. N o . Items % (n=522) 1 Establishment of environmental improvement activities 64 a 2 Objective evaluation 18 3 Compliance with laws and regulations 11 4 Compliance with international rules 19 5 Requested by overseas customers 10 6 Requested by domestic customers 7 7 Competitive advantage 9 8 Pol icy of the corporate group 59 9 Avoidance o f environmental risks 9 10 Reduction in costs 12 11 Management reform 13 12 Enhancement of corporate image 47 13 Other 3 a The percentage represents the percentage of respondents who chose that reason among all respondents. Mul t ip le choices were allowed. These two surveys did not find concerns with domestic- or overseas-product markets to be important as reasons of, or advantages for, certification for the majority o f companies. This appears to contradict a finding in this thesis: the important role that was played by export markets. However, this may not be such a contradiction after al l . These two surveys asked companies that have already been certified concerning the advantages of, or reasons for, certification, while this thesis analyzed the actual decisions that had been made. Let us assume that, as a result, these two studies incorporated posterior evaluations o f advantages or reasons. On the other hand, the analysis in this thesis reflects only prior -41 -evaluations. That is, when firms made certification decisions, their expectations o f market benefits encouraged those decisions. Later, they learned that the actual market benefits were not as large as they had expected. The survey done by the Tokyo Chamber of Commerce and Industry ( T C C I survey) found "Policy of the corporate group" to be a reason for certification for more than half o f the companies. The analysis in this thesis, however, did not identify a strong positive relationship between corporate-group membership and certification decisions. This may be because the definition o f corporate groups may differ between these two studies. The "corporate groups" in this thesis include only bank-based corporate groups (financial keiretsu), which form a group of (usually) listed companies across sectors. 1 7 On the other hand, the "corporate groups" in the T C C I survey are also l ikely to include production-based corporate groups (capital keiretsu), each o f which consist of a major manufacturer and its supplier subcontractors. Therefore, the synthesis o f this thesis and the T C C I survey gives us the insight that financial keiretsu may not strongly influence certification decisions, while capital keiretsu are likely to affect certification decisions to a large extent. 2.5.2. International Panel Study Corbett and Ki r sch (2000) tested regression models explaining the variation among countries in terms ofthe numbers o f ISO 14001 certifications granted relative to G D P . This study tested regression models explaining the variation among Japanese firms. Therefore, the levels o f the two studies differ. However, there are several correspondences between the findings in these studies: In both studies, export propensities were found to be positively related to dependent variables. Corbett and Ki r sch found that a country's higher level of environmental awareness, which was measured by the number of international environmental treaties the country had ratified, was also positively related to the number of ISO 14001 certifications per G D P . They also found that a country's number o f ISO 9000 quality 1 7 Nakamura and Vertinsky (1994, pp. 34-40) discuss these two types of corporate group. - 4 2 -management system standards relative to G D P is positively correlated with the number of ISO 14001 certifications in that country. These correspondences may provide a micro-level (firm-level) explanation o f the macro-level variations in the international diffusion of ISO 14001 certification. For example, Corbett andKi r sch said that "the mechanism underlying the l ink between [environmental awareness] and [the number of ISO 14001 granted] is not obvious" (p. 13); after some detective work, they concluded that "[t]he statistical l ink between ISO 14001 and [environmental awareness] is therefore more l ikely to reflect the value firms expect to obtain from certification through improved image with authority, communities or customers" (p. 14). This study supports most o f their conclusions, disagreeing with them only in finding that the relationship to authority seems to be relatively unimportant in Japanese manufacturing industries. In addition, as indicated by the significance o f the variable representing perceived responsibilities, the managers' internalized moral values may be another channel through which a country's high environmental awareness is related to a high number o f ISO 14001 certifications in that country. 2.6. Conclusions Firms' responses to environmental issues are an important ingredient o f global environmental management. Significant empirical research has been done on the behavior o f firms in the U S A and less developed countries. Despite the importance o f environmental issues in the global market, there has been little empirical research that analyzes Japanese manufacturers' responses to environmental issues. In this chapter, we have presented empirical estimates o f the determinants of certification decisions o f Japanese manufacturing. The analysis suggests that, while the costs and benefits o f eco-certification are significant determinants o f environmental commitments, so are the environmental values, beliefs and attitudes of key managers. The comparison of the Economic Organization and Poli t ical Economic Organization models shows that recognizing social pressure and personal beliefs and values o f managers by -43 -incorporating such variables into traditional models based on profit maximization helps us to understand certification decisions more thoroughly. The decisions o f Japanese firms to seek ISO 14001 certification were found to be significantly affected by firm size, the average age o f firm employees, export ratios and debt ratios. Japanese bank-based corporate group (financial keiretsu) related variables were not significant in al l models. However, the results o f a questionnaire survey considered suggest a positive influence o f production-based corporate groups (capital keiretsu). The main objectives o f this study were to identify the determinants o f Japanese firms' certification decisions. H o w environmental firm performance is affected by adoption of ISO 14001 environmental management systems is an important subject for future research. Indeed, Boira l and Sala (1998) raise a question about whether or not ISO 14001 really represents an effective tool to improve firms' environmental performance rather than just another "management gadget". Considering the amount of resources poured into ISO 14001 certifications in Japan as wel l as the rest o f the world, this question is too important to be left unanswered. W i t h respect to Japan, data that allow researchers to undertake such a study are still lacking. This situation may be changing as a result o f a recent b i l l passed by the Japanese diet ("The Ac t on Pollutant," 1999; Tsunoda, 1999; Urano; 1999). This b i l l would set up a system of pollutant release and transfer registries. Such a system with its associated databases would allow researchers to collect more accurate data on firms' responses and environmental performance. - 4 4 -Chapter 3. Forest Certification in Canada 3.1. Introduction In this chapter, we investigate why Canadian forest products companies seek forest certification. Forest certification has attracted the attention o f industry, N G O s , pol icy makers and academics in Canada, as wel l as in the rest of the world. This study is unique with its focus on the actual motives o f forest companies for seeking forest certification. Regression analysis is employed to detect these motives. The chapter proceeds as follows. Section 3.2 provides a brief history o f the development of major forest certification schemes in Canada and describes their characteristics. Section 3.3 presents potential motives to seek certification and econometric models explaining firms' commitment to certification. Section 3.4 explains how the data were collected. In Section 3.5, the results of analysis are presented and discussed. Section 3.6 investigates why firms seek certification, by analyzing managers' perception of each forest certification scheme. Section 3.7 relates the findings o f this study to the literature regarding forest certification. Lastly, Section 3.8 suggests policy implications and possible future research projects. 3.2. Background 3.2.1. Brief History of Forest Certification In Canada, as of November 2000, the total area of forests certified under three different certification schemes (ISO, C S A and F S C ) was 22.5 mi l l ion ha, or 6% of Canada's total forestland of 404 mil l ion ha (Canadian Sustainable Forestry Certification Coali t ion ( C S F C C ) , 2000; U N D P , U N E P , This chapter is based on research by Takahashi, van Kooten and Vertinsky (2001). -45 -World Bank & Wor ld Resources Institute, 2000). 1 9 The annual allowable cut from these forests, 34 mi l l ion m 3 , makes up 19% of Canada's annual harvest of 180 mi l l ion m 3 ( C S F C C , 2000). Given that forest certification was an obscure concept even for foresters only a decade ago (1990), these numbers are rather impressive. What, then, is forest certification? We present a brief description ofthe development o f forest certification focusing on events relevant to Canada. The development o f forest certification in Canada was deeply influenced by international environmental politics. Strong responses by the Canadian industry to such influence have also shaped certification development. In fact, today's forest certification processes were originally devised as an effort to protect tropical forests, none of which is under Canada's jurisdiction. Throughout the 1980s, many concerns about the deforestation o f tropical forests were raised and environmental groups campaigned to boycott the purchase of tropical timber (Vogt, Larson, Gordon & Vogt, 1999b). However, such boycotts seemed to be ineffective in reducing the rate o f deforestation in the tropics. Further, the environmental groups started recognizing the potentially negative effects o f such boycotts (Brockmann, Hemmelskamp & Hohmeyer, 1996). Tropical timber boycotts may devalue the targeted forests and, consequently, encourage the conversion of those forests to other land uses such as livestock production and agriculture. A s well , tropical countries exporting timber condemned the boycotts as unfair barriers to international trade, specifically as a violation of G A T T rules. In response to such problems with tropical timber boycotts, the concept of forest certification materialized. In 1990, the first forest certification was granted by the Smart W o o d program to a teak plantation in Indonesia (Viana, Ervin , Donovan, El l io t & Gholz, 1996). The Smart Wood program is run by the Rainforest All iance, which is "an international nonprofit organization dedicated to the conservation o f tropical forests for the benefit of the global community" (Upton & Bass, 1995; About the Rainforest Alliance, 2000). The Smart W o o d program later joined the Forest Stewardship Counci l (FSC), and the certification processes under its auspices are one of the major subjects o f this study. 1 9 To date, most of certified areas are under the ISO 14001 scheme. - 4 6 -The F S C is an international non-governmental organization that accredits certifiers, who then grant FSC-approved certification to forest management or forest products according to certain standards. Before the launch o f the F S C , environmental groups such as Friends o f the Earth, Worldwide Fund for Nature ( W W F ) , and Greenpeace requested the International Tropical Timber Organization (ITTO) to implement an international labeling scheme for tropical timber, but ITTO finally did not implement this idea (Kiekens, 1999). Fol lowing this unsuccessful attempt, in 1993 W W F , together with other environmental groups and a few retail companies, launched the F S C . Clearly, international environmental groups took the lead in the formation of the F S C initiative. Parallel to the international discussion over the deforestation of tropical forests, more general discussions about global environmental problems had reached a milestone event: the 1992 United Nations Conference on Environment and Development—the Earth Summit. The Conference's Agenda 21 incorporates the concept of sustainable development as a guiding principle for international policies. During the preparation phase of the Earth Summit the International Organization for Standardization (ISO), an industry standards setting body, initiated a consultative process in 1991 called the Strategic Advisory Group on the Environment ( S A G E ) , one task of which was to "to promote worldwide application o f the key elements embodied in the concept o f sustainable industrial development" (Krut & Gleckman, 1998, p. 49). It should be noted that the Business Counci l for Sustainable Development, a group of business executives having strong interests in environmental issues, recommended that the ISO take this move. S A G E was mainly comprised of "corporate environmental officials, officials from national standard-setting bodies and environmental consulting firms" (Krut & Gleckman, 1998, p. 50). Among other things, S A G E recommended that the ISO set an international standard concerning environmental management systems. In 1996, after three years of discussion, the ISO released the standard, ISO 14001: Environmental Management Systems—Specification with Guidance for Use. A s stated in its Introduction, ISO 14001 "has been written to be applicable to all types [...] of organizations" (Japan Standards Association, 1996) and is thus not a standard specifically designed for forest management. - 4 7 -In 1995, the Canadian forest product industries offered to adopt the ISO 14001 standard for forest management (Vogt et al., 1999b). In the face o f opposition from environmentalists and some ISO member countries, the Canadian representative withdrew the proposal. In the meantime, Canada's forest products industry had already started drafting its own standards for forest management. W h y did Canada (exactly, the Canadian standards setting body) make this move? Since the 1980s, Canada's forest industry had been under pressure to show that its forest management practices were acceptable to the general public, both internationally and domestically (Clancy, 1998). Bri t ish Columbia, in particular, has been the target o f environmentalists who denounced its harvesting practices; as wel l , the forest industry in the whole country was similarly criticized (Stanbury & Vertinsky, 1997). In response to such criticism, in 1992 the industry published a policy statement, Sustainable Forests: A Canadian Commitment, which indicated a direction for realizing the next phase of forest management (Clancy, 1998). Fol lowing this, in 1993, the industry established a Sustainable Forest Certification Task Force, relying on support from the Canadian Pulp and Paper Association (Clancy, 1998). In 1994, national and provincial industry associations formed a coalition and requested the Canadian Standards Association ( C S A ) to establish a technical committee to develop standards for sustainable forest management (Nordin, 1996; Rotherham, 1996). The stated reason the coalition chose the C S A was that it is an arm's length, credible standards development organization. The technical committee was intended to include a cross-section o f interested parties: (1) producer interests; (2) professionals, academics and practitioners; (3) environmental and general interests; and (4) government and regulatory authorities. In 1995, after the launch o f the technical committee, environmental groups such as W W F International, Sierra Club and Taiga Rescue Network withdrew from the committee, claiming the standards being developed were too lax. Despite this, in 1996 the C S A finally approved the draft documents submitted by the committee, and the standards, CAN/CSA-Z808-96 A Sustainable Forest Management System: Guidance Document and CAN/CSA-Z809-96 A Sustainable Forest Management System: Specifications Document, became official C S A standards. - 4 8 -After withdrawing from the C S A standard-setting process, the above-mentioned environmental groups then gave their support to a nascent F S C movement in Canada. The F S C , an international umbrella organization, does not set standards for certification itself; it only provides general principles and rules. Each region is expected to develop its own regional standards. In the absence of regional standards, an accredited certifier can apply its own standards and certify forest operations. A s of June 2000, in Canada three regional standards are being developed — in the Marit ime region, the Great Lakes-St. Lawrence region, Bri t ish Columbia, and the Boreal region o f Ontario. In Alberta, the Alberta Forest Products Association, a forest industry association representing 95% of Alberta's annual allowable cut, developed the FORESTCARE program (Alberta Forest Products Association, 1999; Carpenter & Kessler, 1999). The program was initiated in 1991, and the FORESTCARE Audi t Program was ratified by the Association's board in 1994. It may be dangerous to attempt to determine the characteristics o f each o f these schemes just based on observations concerning who took the initiative in each case, because a certification scheme may also incorporate the opinions o f others. However, it may be useful to label each o f the above certification schemes according to their respective origins, while keeping such dangers in mind. • FSC—environmentalist-initiated certification • CSA—nat ional industry-initiated certification • ISO 14001—international industry-initiated certification • FOKESTCARE—provincial (Albertan) industry-initiated certification The next section discusses the contents o f each of these certification schemes. 3.2.2. Characteristics of Major Schemes Many writers have compared major certification schemes, based on their governing structures (i.e., H o w rules are set? Who makes administrative decisions?), or their standards' contents (European Forest Institute, 1998; Bals i l l ie , 2000; Bass, 1998; Cashore, 1999; Crossley & Points, 1998; The Society of American Foresters, 1999). This section focuses on the requirements o f each scheme, - 4 9 -because potential applicants are primarily interested in certification requirements, and those requirements ultimately determine the on-the-ground impact of certification. Forest Stewardship Council (FSC) certification F S C certification requires forest management to meet regional standards or a certifier's standards. These standards specify on-the-ground level requirements for an applicant, such as methods of harvesting and road building. A regional standard is developed through a voluntary multi-stakeholder process, which involves environmental interests, social interests (e.g., N G O s focusing on social issues) and economic interests (e.g., forest products companies and retail stores). The FSC's role is to make sure that these regional standards and certifiers' standards are compliant with the following ten principles and criteria set out by the F S C : 1. compliance with laws and F S C principles (6) 2. tenure and use rights and responsibilities (3) 3. indigenous peoples' rights (4) 4. community relations and worker's rights (5) 5. benefits from the forests (6) 6. environmental impacts (10) 7. management plan (4) 8. monitoring and assessment (5) 9. maintenance o f high conservation value forests (4) 10. plantations (9) (FSC Principles and Criteria, 1999) Each principle has several criteria; the number in the parentheses beside each principle indicates its associated number of criteria. In total, there are 56 criteria. Note that there are three principles (2, 3 and 4) that are intended to achieve political or social objectives. F S C standards are said to be performance-based certification standards. A s an example, a consideration ofthe Marit ime regional draft standard, Principle Six, may be helpful in illustrating this point (See accompanying box). - 5 0 -PRINCIPLE #6: ENVIRONMENTAL IMPACT Forest management shall conserve biological diversity and its associated values, water resources, soils, and unique and fragile ecosystems and landscapes, and, by so doing, maintain the ecological functions and the integrity of the forest. The full value and importance to the forest of any one organism or structure is too complex to be evaluated fully. The least-risk approach to maintaining forest ecosystems while deriving economic value from the forest is to preserve the full range o f structures, organisms and elements that are/were present in the natural forest and, in our management activities, to closely imitate the dynamic processes and cycles that influence its development. Whatever remnants of the original old-growth forest that are left today must be preserved as irreplaceable sources o f methodological guidance and inspiration. In addition, protection should be extended to areas that (a) are especially sensitive to human activities, (b) are essential to the achievement of ecological goals, or (c) represent an ecotype, land form or habitat that otherwise would not be adequately represented in a network o f reserve areas. Such protected areas are an absolute prerequisite to ecologically sound restoration and harvest practices. 6.1 Assessment of environmental impact shall be completed ~ appropriate to the scale, intensity o f forest management and the uniqueness o f the affected resources ~ and adequately integrated into management systems. Assessments shall include landscape level considerations as wel l as the impacts of on-site processing facilities. Environmental impacts shall be assessed prior to commencement of site-disturbing operations. 6.2 Safeguards shall exist which protect rare, threatened, and endangered species and their habitats (e.g. nesting and feeding areas). Conservation zones and protection areas, appropriate to the scale and intensity of forest management and the uniqueness of the affected resources, shall be established. Inappropriate hunting, fishing, trapping and collecting shall be controlled. 6.3 Ecological functions and values shall be maintained intact, enhanced or restored, including: a) Forest regeneration and succession; b) Genetic, species and ecosystem diversity; c) Natural cycles that affect the productivity of the forest ecosystem. (Continued to the next naee) -51 -(Continued from the previous page) 6.4 Representative samples o f existing ecosystems within the landscape shall be protected in their natural state and recorded on maps, appropriate to the scale and intensity of operations and the uniqueness o f the affected resources. 6.5 Written guidelines shall be prepared and implemented to control erosion; minimize forest damage during harvesting, road construction and all other mechanical disturbances; and protect water resources. 6.6 Management systems shall promote the development and adoption o f environmentally friendly non-chemical methods of pest management and strive to avoid the use o f chemical pesticides. W o r l d Health Organization Type 1A and I B and chlorinated hydrocarbon pesticides; pesticides that are persistent, toxic or whose derivatives remain biologically active and accumulate in the food chain beyond their intended use; as wel l as any pesticides banned by international agreement, shall be prohibited. If chemicals are used, proper equipment and training shall be provided to minimize health and environmental risks. 6.7 Chemical, containers, l iquid and solid non-organic wastes including fuel and o i l shall be disposed of in an environmentally appropriate manner at off-site locations. 6.8 Use o f biological control agents shall be documented, minimized, monitored, and strictly controlled in accordance with national laws and internationally accepted scientific protocols. Use o f genetically modified organisms shall be prohibited. 6.9 The use o f exotic species shall be carefully controlled and actively monitored to avoid adverse ecological impacts. 6.10 Forest conversion to plantations or non-forest land uses shall not occur, except in circumstances where conversion: a) entails a very limited portion ofthe forest management unit; and b) does not occur on high conservation value forest areas; and c) w i l l enable clear, substantial, additional, secure, long-term, conservation benefits across the forest management unit. (Canadian Marit ime Regional Initiative ofthe Canadian F S C Working Group, 2000) - 5 2 -Notice that that some o f these criteria have sub-criteria specific to the region. For example, criterion 6.2, regarding threatened and endangered species, contains three sub-criteria. One of them deals with old growth forests: 6.2.2 O l d growth stands must not be harvested. The indicators for this sub-criterion are: • Inventories are carried out to identify old growth stands (appropriate to the scale and intensity o f the operation) • O l d growth stands are identified on management plan maps • N o evidence of harvesting old growth stands exists. • Management and forest workers are aware of the characteristics of old growth stands. (Canadian Marit ime Regional Initiative o f the Canadian F S C Working Group, 2000) These indicators work as a checklist when a certifier audits a forest operation in this region. A n d , i f these indicators are satisfied to a specified degree, FSC-approved certification is granted. A l l in al l , principle #6 contains 89 indicators. A review of this standard reveals the following points (Vogt, et al. 1999b, pp. 157-160): • One o f its main objectives is the restoration of the "naturally occurring forest type" (Canadian Marit ime Regional Initiative o f the Canadian F S C Working Group, 2000, Introduction). • Indicators are detailed, thorough and specific. • Some indicators are objective, and some are subjective. Among the four major certification schemes, only FSC-approved certification leads to labeling of products. In order for eco-labels to be attached to products, chain-of-custody certification for them must be granted to the distribution and manufacturing parties from certified forest management. Such chain-of-custody certification certifies that the flow of materials can be traced to certified forest management. On the demand side, Europe and the U S A have groups o f building material retailers who have committed themselves to purchasing FSC-certified or equivalent forest products. -53 -Canadian Standards Association (CSA) Sustainable Forest Management (SFM) certification The C S A S F M standards consist of two parts, namely, a performance part and a systems part (Lapointe, 1998; Nordin, 1996; Vogt, 1999b). The performance part specifies the framework by which an applicant can identify the local S F M values, goals and indicators. This part is based on a national set o f Criteria and Indicators for S F M , developed by the Canadian Counci l o f Forest Ministers. These are: 1. Conservation o f Biological Diversity (3) 2. Maintenance and Enhancement of Forest Ecosystem Condition and Productivity (3) 3. Conservation o f Soi l and Water Resources (2) 4. Forest Ecosystem Contributions to Global Ecological Cycles (5) 5. Mult iple Benefits to Society (4) 6. Accepting Society's Responsibility for Sustainable Development (5) Each criterion has several elements; the number in parentheses beside each criterion indicates the associated number o f elements. In total, there are 22 elements. Each element has one to nine indicators. A l l in al l , the six criteria contain 83 indicators. This set of criteria, elements and indicators is designed to measure the sustainability of forest management at a national level. Therefore, an applicant for C S A certification must derive its own indicators through a public participation process, consulting this set o f criteria, elements and indicators. For example, from Criterion 1, "Conservation of Biological Diversity", an applicant can set the following goals and indicators: 2 0 Goals: • Maintain ecosystem diversity at quantitative and qualitative levels to support viable populations o f existing species. • Maintain the diversity of tree species and age classes distributed across scales from landscape-level to stand-level. Indicator: • Percentage of forest area that is greater than 60 years o f age. Objective: • A minimum of 40% [of the percentage o f forest area that is greater than 60 years of age.] • Acceptable variance: 40% or greater This is taken from an actual application for C S A S F M certification. The numbers were modified. - 5 4 -In order to achieve these objectives, the systems part should also be set up by the applicant. The systems part includes the following four steps: 1. Commitment: commit to establishing an S F M system and work to apply the system over a defined forest area. 2. Public Participation: establish a public consultation process for local people directly affected by the management o f the defined forest area. 3. Implement an ISO-based management system: establish an S F M system that includes plans to achieve specified local objectives related to the critical elements and other identified values using the public participation process. 4. Implement a strategy for continual improvement of the sustainable forest-management system. (Vogt, etal . , 1999b, p. 127) A n overall review indicates the following points regarding C S A S F M standards (Vogt et al., 1999b, pp. 160-163). • The standards require a significant amount of public consultation. • The standards require a significant amount o f data. • The standards are suitable for large operations operating on public lands. This certification does not lead to labeling of products. ISO 14001 environmental management system certification The previous chapter has already discussed this standard. In comparison to F S C and C S A certification, the following points are notable: • The requirement o f the standard is to "establish and maintain an environmental management system" (Japan Standards Association, 1996, 4.1 General Requirement): "these standards [...] are not intended [...] to increase or change an organization's legal obligation" (Japan Standards Association, 1996, Introduction). • It is at an applicant's discretion to set its own principles, criteria and indicators for its environmental management system. -55 -• The environmental policy must commit to "continual improvement and prevention o f pollution" (4.2 b) and "[compliance] with relevant environmental legislation and regulations" (4.2 c). • ISO 14001 is a generic standard applicable to any activities, but ISO 14061 provides a guideline for forest operators who want to apply ISO 14001 to forestry. In sum, this is a standard for systems, not for performance. This certification does not lead to labeling of products. FORESTCARE program Members o f Alberta Forest Products Association ( A F P A ) are encouraged to participate in the F O R E S T C ^ A E ' program (1998 FORESTCARE Annual Report, 1998; Carpenter & Kessler, 1999). FORESTG4.ft£"s Guiding Principles are: 1. Member companies w i l l ensure that harvest levels do not exceed the capacity o f the forest, that all harvested areas are reforested, and that harvest and reforestation methods foster a healthy new forest, supporting a diversity o f species. 2. Member companies w i l l manage their activities on forest lands for multiple uses and values, including timber growth and harvest, watershed protection, wildlife and aquatic habitat and recreational and aesthetic benefits. 3. Member companies w i l l manage their forest and manufacturing operations in a manner that protects the environment, placing special emphasis on the quality of air, water, soil and habitat. 4. Member companies w i l l operate in a manner that protects the health and safety o f employees, contractors and the general public. 5. Member companies w i l l be open and responsive to community views and questions regarding the industry. 6. Member companies w i l l conduct operations to ensure that the renewable forest resource provides economic activity and employment now and in the future, while conserving other forest values. ( F O R E R S T C l R £ Codes o f Practice, 2000) The Codes o f Practice are divided into three sections, namely, care for the forest, care for the environment, and care for the community. The following description focuses on forest operation. The "care for the forest" section contains five sub-sections: land use, forest management planning, harvesting, reforestation, and forest protection. The harvesting section states: Member companies w i l l prepare detailed harvest plans, including maps and documentation, and for each harvest site w i l l : - 5 6 -• select a harvest system that w i l l encourage quick and effective reforestation; • identify the reforestation strategy to be used; • identify and protect any unique, localized values; • maintain site productivity; • protect juvenile understorey, where it is healthy, and w i l l grow in response to the removal of the mature canopy; • sustain wildlife habitat; • protect watershed quality and aquatic habitat; • respect scenic values. (FORERSTCARE Codes of Practice, 2000) Auditors inside each company perform annual self-audits, while, every three years, A F P A -appointed auditors conduct formal audits. The overall scores determine companies' standing as follows: • Alberta State of the Art—performance that is exemplary in Alberta (requires a score >95%) • FORESTCARE—meets or exceeds the industry's elevated standard (requires a score >75%) • Currently Accepted Practice—meets or exceeds industry's minimum standard (requires a score >50%) • Unsatisfactory—performance below the industry's standard for acceptable practice. (Carpenter & Kessler, 1999) Overall, this program can be characterized as a bench-marking program, in which each company is evaluated against the industry's norms, not against a certain pre-specified standard. 3.3. Models This section, first, presents conceptual models explaining how firms make decision regarding forest certification, and, next, develop econometric models to be estimated. 3.3.1. Conceptual Models Economic motives aiming at products markets or efficiency gain Forest certification aims to address market failure resulting from asymmetric information in product markets, and thus to create incentives for forest operators to seek certification. Consumers -57 -may have a preference for wood products from forests that are "properly" and "sustainably" managed, but without certification they cannot know whether the forest products they consume come from such forests. Forest certification reveals unobservable characteristics o f forest products, thereby generating new market segments and creating the potential for price premiums for certified products. Church (1994) points out that eco-certification resolves problems o f information asymmetry and consumer mistrust o f firms' "green" claims (Akerlof, 1970; Spence, 1973). Matoo and Singh (1994) present a basic theoretical model explaining the price- and quantity-determination o f certified and uncertified products in a competitive market (but they assume no substitutability between traditional and environmentally-friendly technologies), while Sedjo and Swallow (1999) examine whether a price premium for a certified product w i l l be generated in a competitive market. From a public policy perspective, Vertinsky and Zhou (1996) use a duopolistic-competition model to demonstrate that voluntary eco-certification may enhance social welfare, while Haener and Luckert (1998) point out that welfare could potentially decline as a result o f forest certification. Certification may also result in increased efficiency apart from the actions of consumers or investors. Forest operators may seek certification because they feel it w i l l lead to lower production costs. Some scholars and practitioners in the field of business strategy claim that resource productivity can be raised (efficiency enhanced) by instituting environmental management systems or bringing about innovations in firms' production processes (Porter and van der Linde, 1995; Schmindheiny and Timberlake, 1992). They further argue that improvements in resource productivity lead to better financial performance of the firm. Forest certification may become a means to achieve this goal, as a company can improve efficiency, or gain the capability to improve it, by striving to meet certification standards. In contrast to market incentives, the efficiency argument does not presuppose green consumers. - 5 8 -Community pressure Because forest management may have a direct and immediate impact on local communities, these communities may attempt to influence forest management in their region. In the area o f pollution control, for example, Pargal and Wheeler (1996) found that community pressure may work as an informal regulation in the form of negotiation between a firm and local communities. Pargal, Hettige, Singh and Wheeler (1997) base their interpretation of the community-pressure motive to control pollution on an argument made by Coase (1960), who claimed that externality problems could be resolved by direct negotiations between affected parties, in contrast to government intervention in the form of command-and-control-regulation or market-based instruments. Pargal et al. (1997) see a firm's response to community pressure as the price for using environmental services that are implicit ly "owned" by the community. Indeed, Coasian negotiation between the community and a firm results in an equilibrium between the supply of and demand for particular environmental services. To the extent that a local community can impose "penalties" on a firm, the firm w i l l choose a level of pollution (or certification scheme) that equates the marginal costs imposed by the community to the marginal costs o f abatement (certification), even in the absence of formal regulation. A s for the costs that a community may impose, Pargal et al. (1997) list such measures as demands for compensation by community groups, social ostracism of the firm's employees, the threat o f physical violence, boycotting of the firm's products, and monitoring and publicizing the firm's "bad" behavior. Through forest certification a firm may be able to "buy" the approval o f a local community, and this could be a motive for seeking certification. Costs of forest certification Certification accrues costs. The total costs of forest certification can be broadly divided into direct and indirect costs (Simula, 1996). Direct costs are those due to the actual certification process, including fee payments to certifying organizations, consulting fees and royalties, i f any. Indirect costs - 5 9 -are those associated with the changes in practice that come about because the firm is certified, and include the opportunity costs of restrictions on forest operations. 3.3.2. Econometric Modeling We assume that a forest company's commitment to forest certification is determined by the manager, who maximizes utility as a function of profit and community pressure. To predict a certain type of commitment to forest certification, we assume that manager k has the following utility function: (1) Uk = uk [n(Xh crt^, s(Yk, crtk)\ where n refers to firm A:'s profits; Xfc is a vector of firm-specific attributes; s is an index o f pressure from the local community, given a vector of community specific parameters Yfc and crt^- (= 1 or 0) is the decision as to whether or not to certify (respectively). We assume that managerial decisions other than those concerning forest certification are unaffected by the decision variable, crtk, and that, before the C E O considers forest certification, she has made all other managerial decisions so as to maximize utility given the constraints faced by the company. The indirect utility function can then be written as: (2) Uk = v(7t*b sk) = v(crtk | X f o 7k), where 7i*kindicates that the firm has chosen Xk in a way that maximizes the manager's utility. The choice as to whether to certify (or proceed towards possible future certification) depends on whether the expected utility with certification exceeds that without. Let Eu° be the expected utility of a manager without certification and E u ' the expected utility with certification. Since forest certification is a new practice, how profits and a local community's pressure affect the decision to certify is not wel l understood. Hence, we adopt the standard assumption that utility is stochastic. - 6 0 -Expected utility is assumed to be a linear function o f observable firm-specific attributes and community specific parameters Yfc. Dropping subscript k we have E u 0 = (30X + Y 0 Y + 80 (3) E u 1 = p ' X + y ' Y + £' where P and y represent parameters to be estimated and e' are additive random error terms that are independently and identically distributed (iid). The probability that a firm chooses to certify its forest operations (or intends to do so in the future) is given by: (4) ?r(crt=l) = Pr[E u '> E u°] = Pr[p 'X + y ' Y + e'> p°X + y°Y + 8°] = P r [ s 1-8 0 > ( P ° - p 1 ) X + ( y 0 - y 1 ) Y ] = 1 - P r [ e 1 - s 0 < ( p 0 - p , ) X + ( y ° - y 1 ) Y ] . The error term, 8 = 8'- s°, is assumed to be normally distributed with standard deviation <J; 8 is assumed to be identically and independently distributed. B y normalizing both sides of the inequality, (5) Pr(crt=l) = <D(pdX + y d Y ) where 0 ( . ) is the distribution function of a standard normal random variable, pd= (p1 - P°)/a, y d = (y 1 -y 0 ) / ° - Therefore, a probit regression model is used to explain certification. Two types of commitment to forest certification are examined: (1) the intention to seek certification and (2) actual contact with a certifier. 2 1 Logical ly , actual contact with a certifier can occur only after the C E O intends to seek certification. To analyze this process of sequential decision-making, we estimate a sequential-response model (Maddala, 1983, p. 49-51). That is, probit regressions regarding the second decision (actual contact with a certifier) are conducted using only those respondents who can make such a decision— i.e., firms that intend to seek certification—and firms that do not intend to seek certification are excluded. Probit regressions regarding the first decision are conducted using the entire sample. 2 1 Admittedly, the level o f commitment to forest certification may be only loosely related to actual future certification. However, we choose to use these surrogate variables because the number of forest operations that are actually certified is still small. -61 -Despite the simplicity in estimating sequential-response models, they presuppose that random factors influencing the two sequential decisions are independent. To consider the potential correlation between such random factors, we also estimate bivariate-censored probit models with partial observability (Meng and Schmidt, 1985). y i * = P iX + Y]Y + , intention to seek certification y, = sign (yi *) (6) y 2 * = p 2 X + y 2 Y + 8 2, contact with a certifier y 2 = sign (y 2 *) "Contact with a certifier" ( y 2 ) can be observed only when the firm expresses its "intention to seek certification" ( y i ). This model can be estimated using maximum likelihood estimation, with the log likelihood function expressed as: (7) ln L ( P , , p 2 , p) = I { Y i l y i 2 ln F(p ,X„ p 2 X , ; p) + yi, (1 - y i 2 ) In [0(P ,Xi) - FCP.Xi, p 2 X ; p)] + (1 - y i l ) l n O ( - P A ) } , where p is the correlation coefficient between the random terms 81 and e2, and F(.) and O (.) are the bivariate and univariate standard normal distribution functions, respectively. Explanatory Variables (Economic motive-related variables) : Xk Four groups of variables are presumably related to a manager's market and efficiency motives in deciding to seek certification. The first group includes variables that determine the firm's resource base, specifically the composition of forest tenure holdings. In Canada, where 92% of forests are owned by the provincial and the federal governments (Drushka, 1993), the form of forest tenure that a firm holds determines to a large degree the quality of its forest management practices and its propensity to invest in the forest (Wilson, van Kooten, Vertinsky & Arthur, 1998). For instance, Zhang and Pearse (1996) found that, in Bri t ish Columbia, tenure holders invest more in silviculture for forests under more secure, long-term and area-based tenures. Because seeking forest certification involves immediate costs and potential future returns, forest certification may be seen as an investment in forest management, even though this investment is supposed to add value to processes or management - 6 2 -systems rather than to physical assets. If this view is valid, it is l ikely that firms with more secure forest tenures are more apt to seek forest certification. One can suppose that the degree of security o f tenure declines progressively from private ownership to long-term tenure, to medium-term tenure, to short-term tenure, and, finally, to simple log purchases (i.e., no tenure). Further, a difficulty involved in meeting certain standards may intensify the relationship between the security o f the tenure held and a firm's willingness to be certified. Some standards require forest managers to have long-term plans. For example, the F S C ' s Principle #7 stipulates that: " A management plan - appropriate to the scale and intensity of the operations - shall be written, implemented, and kept up to date. The long-term objectives of management, and the means of achieving them, shall be clearly stated" (FSC, 1999). It is difficult for forest companies with medium-or short-term tenures to meet these requirements. The second set of variables is related to factors affecting the revenues of the firm, such as the market destination of forest products and their composition. European countries and the U S A have many active buyers' groups, and these countries are therefore l ikely to have the greatest demand for certified products (Kiekens, 2000; U N / E C E Timber Committee, 1998). Demand for certification may also vary by product type, reflecting targeting strategies by E N G O s or traceability o f raw material sources. The third group o f variables related to economic motives represents company size. Size influences a firm's commitment to forest certification i f positive or negative economies o f scale characterize the costs and benefits o f forest management or certification. For example, i f a significant portion of costs incurred for forest certification is fixed, a large operation w i l l have lower average costs (Simula, 1996; Vogt et al., 1999b). In contrast, it is also possible that a large firm may have coordination problems, incurring higher costs to obtain certification. The fourth group of variables concerns forest productivity, which affects the rent from forestlands (van Kooten & Bulte 2000, pp. 69-86). The specific characteristics o f forest ecosystems are critical factors that affect the financial returns from forests, even though other factors, including the -63 -choice o f forest management schemes, also affect returns. For instance, higher temperatures and rainfall may favor the growth o f forests as do certain soil conditions, while location determines the transportation costs o f bringing logs to mil ls . Non-economic variables (Community characteristics): Yk Because forest management, first o f all , affects the local population, local communities are likely to be interested in how the forests close to their communities are managed. In response to expectations from communities, forest product companies may seek forest certification as a means of meeting such expectations. Variables indicating the characteristics o f communities are l ikely to be related to the levels of pressure produced by them. Higher education levels, for example, may be related to higher levels of community pressure. If a firm responds to such pressure, the firm' behavior is l ikely to be correlated with community characteristics. In fact, a study found that in Indonesia the characteristics o f communities, such as the shares o f plants' local employment, community income levels, education levels and population densities, were related to firms' environmental behavior measured by pollution intensity (Pargal & Wheeler, 1996). In the U S A , another study also found that community income levels were related to firms' environmental behavior measured by pollution intensity (Pargal, Hettige, Singh & Wheeler, 1997). 3.4. Data A structured questionnaire on forest certification was sent to 475 executives at forest product companies in Canada during 1999. 2 2 The survey population was obtained from two industry directories, the Pulp & Paper Canada Annual Directory (1999) and Random Lengths' Big Book (1998). Companies with facilities in Canada producing lumber, plywood, veneer, OSB-waferboard, shingles & The questionnaire used is found in Appendix 3-A. - 6 4 -shakes, and pulp & paper were included in the survey. In each company, executives who, according to their titles, seemed most l ikely to be familiar with issues o f forest management and fibre supply were selected. A questionnaire was sent to each major operating facility of each company included in the sample. Follow-up telephone calls were made after the mail-out. There were 142 responses for a 30% response rate. Because of multiple responses from several firms, the number o f firms participating in the survey was reduced to 114, which constitutes our sample size. The survey focused on four forest certification schemes: 1) ISO 14001 certification of environmental management systems (ISO 14001) 2 4; 2) the Canadian Standards Association ( C S A ) scheme; 3) the Forest Stewardship Council (FSC) scheme; and 4) F O R E S T C 4 . & E certification. The questionnaire solicited information about intentions to certify and preliminary contacts made with various certifiers. Information was obtained about company characteristics, such as firms' resource base and market composition (by destinations). We also asked respondents to evaluate certification schemes in terms of their potential advantages. For each firm, additional information about firm characteristics was collected. A list of the explanatory variables used in the model, and expected signs, is provided in Table 3.1, while descriptive statistics are provided in Table 3.2. The number o f companies at each stage of certification is indicated in Table 3.3. More companies were found to have progressed further toward certification ("Preparing for audit" and "Certified") in the ISO 14001 and F S C certification schemes than in the C S A scheme. However, the large majority o f companies are still at the stage o f assessing their certification needs as wel l as the various certification options. Excluded from the sample are pulp & paper manufacturing companies that use only recycled materials. 2 4 In our questions, we specifically limit ISO 14001 certification only to the area of forestry. Therefore, the survey does not consider ISO 14001 in other areas, such as processing and transportation. -65 -Table 3.1: List of Explanatory Variables Variable Name Variable Description Expected . b sign Data Source + (1) Firm's resource base Fibre supply from Supply o f raw materials from the forest product company's own private forests as a percentage of total supply. This portion represents the most secure form of tenure holding. Supply of raw materials from the forest products company's long-term (20 years or more) tenure forests as a percentage of total supply. This portion represents the second most secure form of tenure holding, next to private freehold ownership. Supply of raw materials from medium-term (5 to 19 years) tenure holdings as a percentage o f total supply. 3 private land Public land, long term Public land, medium-term Public land, short-term Reliance on log purchases Other supply Supply o f raw materials from short-term (less than 5 years) tenure holdings as a percentage o f total supply. Supply of raw materials from log purchases as a percentage o f total supply. This portion is related to the most insecure form of timber sources. Other supply sources as a percentage o f total supply. B B (2) Market composition (Destinations) Export intensity Sales directed to foreign countries as a percentage of the total sales of a company. Domestic markets Sales directed to domestic Canadian markets as a percentage o f the total sales of a company. B + B Survey response Survey response Survey response Survey response Survey response Survey response Survey response Survey response (Continued to the next page) - 6 6 -Table 3.1: Lis t o f Explanatory variables (Continued from the previous page) Variable Name Variable Description Expected . b sign Data Source (2) Market composition (Items) Lumber Board Pulp Paper (3) Size Total output Production volume o f lumber in raw-log equivalent terms as a percentage o f the total production o f a company. 3 Production volume of boards (oriented strand board, medium density fiberboard, veneer and plywood) in raw-log equivalent terms as a percentage o f the total production o f a company. a Production volume o f pulp in raw-log equivalent terms as a percentage o f the total production of a company. a Production volume of paper in raw-log equivalent terms as a percentage o f the total production of a company. a Sum of production volumes of lumber, boards, pulp and paper in raw-log equivalent terms (in mi l l ion m 3 ); measures economies of scale. 3 (4) Forest production within a Province B C dummy Dummy variable for Bri t ish Columbia. Quebec dummy Dummy variable for Quebec. Dummies for Dummy variable for other provinces, other provinces (5) Community characteristics Population density Population density in persons per square kilometer. For this variable, it is assumed that, the denser a community's population, the more intense pressure it w i l l apply to forest operations neighboring it. University education Percentage of university-educated persons among the total population of the community. It is assumed that, i f a community has more people with higher levels of education, the community applies more intense pressure to forest operations neighboring it. B B B B + + Industry directories c Industry directories' Industry directories' Industry directories' Industry directories' Industry directories c Industry directories c Industry directories 0 Statistics Canada(2000) Statistics Canada(2000) 3 Using conversion factors from Jacques (1996). b B : Baseline and not included in regressions. ? indicates no a priori expectation about sign. c The "industry directories" include Pulp & Paper Canada Annual Directory (1999), Random Length's Big Book (1998), and company web sites. - 6 7 -Table 3.2: Summary Data: Explanatory Variables Variable Description N o . of obs Mean Std. Dev. M i n . M a x . (1) F i rm's resource base Fibre supply from private land 102 12.80 24.40 0 00 100.00 Public land, long-term 102 48.55 36.71 0 00 100.00 Public land, medium-term 102 4.45 14.20 0 00 70.00 Public land, short-term 102 4.63 16.55 0 00 100.00 Reliance on log purchases 102 23.81 30.89 0 00 100.00 Other supply 102 4.78 15.69 0 00 100.00 (2) Market composition (Destinations) Export intensity 103 62.53 30.26 0 00 100.00 Domestic markets 103 37.87 30.26 0 00 100.00 (2) Market composition (Items) Lumber 100 61.16 45.64 0 00 100.00 Board 100 11.55 29.14 0 00 100.00 Pulp 100 15.03 33.37 0 00 100.00 Paper 100 12.27 30.28 0 00 100.00 (3) Size Total output 98 1.37 3.28 0 00 24.39 (4) Forest production within a Province B C dummy 114 (n= 47) Alberta dummy 114 (n= •18) Quebec dummy 114 (n= =20) Atlantic provinces dummy 114 (n= =19) Central Canada dummy 114 (n= =21) (5) Community characteristics Population density 111 890.24 1411.5 0 08 6729.1 University education 111 10.27 6.28 0 00 27.78 - 6 8 -Table 3.3: Stages of Certification for Companies Participating or Considering Participation in a Certification Scheme Information Preliminary Preparing for Certified N . A . Total: gathering contacts with audit Companies the certifier that intend to seek certification # % # % # % # % # % # % ISO 14001 35 56% 9 14% 11 17% 6 10% 2 3% 63 100 % 100 % 100 % 100 % 100 % CSA 35 78% 6 13% 3 7% 0 0% 1 2% 45 FSC 18 64% 2 7% 4 14% 3 11% 1 4% 28 FORESTCARE 3 14% 0 0% 4 18% 13 59% 2 9% 22 Others 1 14% 3 43% 2 29% 0 0% 1 14% 7 - 6 9 -3.5. Results of Probit Regressions 3.5.1. Models In the following model estimations, it is assumed that the manager o f a forest product firm makes a decision on forest certification so as to maximize his utility. The following empirical analysis examines the strengths of each o f his economic and non-economic motives by testing, through regressions explaining certification decisions, the statistical significance o f the independent variables that are presumably related to each of his motives. In the survey, the information about the four certification schemes (ISO, C S A , F S C and FOKESTCARE) was collected. Only a small number of companies were found to get involved in F O R E S T C ^ R / i because it is a provincial scheme covering only Alberta. Hence, FOKESTCARE is not analyzed using probit regressions, but other three schemes are analyzed. 3.5.2. Results The results of the probit regressions are presented in Table 3.4 (sequential-response models) and Table 3.5 (bivariate models). A l l the sequential-response models explaining both intentions to seek certification and actual contact with ISO, C S A or F S C certifiers are statistically significant at the 5% level. Likewise, the estimation results of the bivariate-censored probit models are statistically significant, but at the 1% level. - 7 0 -Table 3.4: Probit Regression Results (Sequential-Response Models) ISO 14001 CSA FSC Intention Contact Intention Contact Intention Contact Item" Model Model Model Model Model Model Fibre supply from -0.0030b 0.0522*** -0.0011 0.1589 0.0062 -0.0122 private land (-0.4051) (2.6016) (-0.1327) (1.3204) (0.8224) (-0.1182) Public land, long-term 0.0073 0.0295* 0.0053 0.1071 0.0007 0.0216 tenure (1.4128) (1.9068) (0.9603) (0.9972) (0.1224) (0.3195) Reliance on log -0.0125* 0.0305 -0.0160** 0.1402 -0.0118 0.1254 purchases (-1.8627) (1.5336) (-1.9864) (1.2006) (-1.5077) (1.3735) Export intensity 0.0094* -0.0386*** 0.0178*** -0.0736** 0.0111* 0.1396 (1.8018) (-2.8026) (3.0270) (-2.1023) (1.8385) (0.8471) BC dummy -0.0030 -0.7311 0.1035 2.0864 0.8386** -8.6422 (-0.0092) (-1.3511) (0.3213) (1.3780) (2.4657) (-1.0600) Quebec dummy -0.4082 -0.2212 -1.2554** 2.5534 -0.4944 . . . (-0.9676) (-0.3085) (-2.3523) (1.4015) (-0.9544) Lumber -0.0057 -0.0068 0.0015 -0.0123 -0.0021 0.1284 (-1.5560) (-1.2656) (0.4209) (-0.9533) (-0.5815) (0.9299) Total output 0.1416 0.2682** 0.0714 0.1421 -0.0039 1.7306 (1.0112) (2.4507) (0.9209) (1.3340) (-0.0815) (1.0252) Population density 0.0000 0.0007** 0.0000 -0.0001 -0.0001 0.0071 (0.0116) (2.4767) (0.2122) (-0.1796) (-0.8775) (1.0204) University education 0.0372 -0.1131 0.0363 0.1149 0.0422 -0.8575 (1.0459) (-1.4995) (0.9643) (0.6122) (1.1313) (-1.0787) Constant -0.5438 0.2039 -1.8121*** -9.3786 -1.8183** -19.5773 (-0.8763) (0.1337) (-2.6146) (-0.8098) (-2.5224) (-1.1034) Log-likelihood Function -58.7057 -26.6146 -56.7868 -9.1977 -53.2600 -5.3354 Log-likelihood (0) -78.3860 -42.7030 -76.4735 -22.5181 -63.5510 -17.5824 Likelihood ratio test 39.3606 32.1768 39.3733 26.6407 20.5824 24.4940 Degree of freedom 10 10 10 10 10 9 X2 test (p- value) 0.0000 0.0004 0.0000 0.0030 0.0242 0.0036 Observations 114 63 114 45 114 28 No. intending to certify or contacting 63 26 45 9 28 9 No. classified correctly (Dep.var.=0) 35/51 31/37 54/69 34/36 78/86 17/19 No. classified correctly (Dep.var.=l) 51/63 17/26 28/45 8/9 5/28 8/9 Percentage correctly predicted 75 76 72 93 73 89 Percentage point improvement0 20 18 11 13 -3 21 a. Missing observations are replaced with means. b. Numbers under coefficients are asymptotic t-statistics. *, ** and *** denote, respectively, statistical significance at 10%, 5% and 1% levels. c. Improvement in correct predictions from use of probit rather than naive prediction rule. For example, according to the naive prediction rule, the predicted value for the ISO intentions model would be always 1, because there are more Is than 0s (63 vs. 51) in the actual observations, thus correctly predicting 55% of the 114 observations (63/114). The probit model correctly predicts 75%, so it achieves a 20% improvement over the naive rule. -71 -Table 3.5: Probit Regression Results (Bivariate Models)3 ISO 14001 CSA FSC Intention Contact Intention Contact Intention Contact Item Model Model Model Model Model Model Fibre supply from -0.0032 0.0451 -0.0012 0.1044 0.0057 -0.0362 private land (-0.3834) (1.5697) (-0.1110) (0.4091) (0.6053) (-0.0001) Public land, long- 0.0062 0.0305 0.0056 0.0705 0.0008 0.0043 Term (1.2309) (1.3734) (1.0033) (0.3313) (0.1203) (0.0000) Reliance on log -0.0129* 0.0240 -0.0166 0.0926 -0.0118 0.0850 purchases (-1.7338) (0.8569) (-1.5127) (0.4313) (-1.1288) (0.0003) Export intensity 0.0105* -0.0286 0.0173** -0.0454 0.0117 0.1427 (1.8370) (-1.6409) (2.3925) (-0.8473) (1.2749) (0.0002) BC dummy -0.1203 -0.5096 0.2614 1.3147 0.8414* -8.6383 (-0.3278) (-0.8616) (0.7451) (0.4415) (1.7719) (-0.0001) Quebec dummy -0.3631 -0.4434 -1.2897 1.0189 -0.4996 (-0.8061) (-0.6114) (-1.3577) (0.1967) (-0.5748) — Lumber -0.0047 -0.0087 0.0006 -0.0071 -0.0012 0.1310 (-1.0701) (-1.4543) (0.1505) (-0.2294) (-0.2500) (0.0001) Total output 0.1843 0.2665** 0.0588 0.1360 -0.0107 1.7332 (0.6562) (2.1448) (0.5667) (0.5037) (-0.1875) (0.0001) Population density 0.0000 0.0006 0.0000 -0.0001 -0.0001 0.0073 (0.1085) (1.5958) (-0.1058) (-0.1141) (-0.5478) (0.0001) University education 0.0277 -0.0719 0.0437 0.1237 0.0345 -0.8589 (0.7589) (-0.7345) (1.1553) (0.3887) (0.6713) (-0.0001) Constant -0.5280 -1.0250 -1.8268** -7.4670 -1.8184* -19.5783 (-0.8140) (-0.5917) (-2.3864) (-0.3154) (-1.6975) (-0.0002) P 0.9977 1.0000 1.0000 (1.0182) (0.0001) (0.0211) Log-likelihood Function 85.4025 65.2777 -58.8071 Log-likelihood (0) -121.0890 98.9916 -8 .1334 Likelihood ratio test 71.3731 67.4277 44.6526 Degree of freedom 20 20 19 %2 test (p- value) 0.0000 0.0000 0.0012 No. intending to certify or contacting 63 26 45 9 28 9 No. classified correctly (Dep.var.=0) 36/51 30/37 55/69 21/36 79/86 3/19 No. classified correctly (Dep.var.= l) 50/63 19/26 28/45 5/9 4/28 0/9 Percentage correctly predicted 75 78 73 58 73 11 Percentage point improvement 20 19 12 -22 -3 -57 a. Notes are identical to those in Table 5. - 7 2 -When the random factors in the intentions model and the contact model are correlated, bivariate models w i l l generally be asymptotically more efficient than sequential-response models, but this is not necessarily so for smaller samples (Boyes, Hoffman & L o w , 1989). Comparisons between Tables 3.4 and 3.5 show that asymptotic standard deviations of bivariate models are larger (less efficient) than corresponding standard deviations of the sequential-response model for 57 out of 58 coefficients. In addition, estimates ofthe correlation coefficients (p) are not statistically different from zero at the 10% level in each ofthe models explaining ISO, C S A and F S C certification. This suggests that potential benefits o f bivariate models do not occur in estimations using our sample o f 114 observations. Hence, we discuss primarily the results o f the sequential-response models (Table 3.4). The proportion of correct predictions is also a means for evaluating the fit o f a model. For ISO certification, the intentions and contact models correctly predicted 75% and 76% of observations, respectively; for C S A certification, they correctly predict 72% and 93% of observations; and, for F S C certification, they correctly predict 73% and 89% of observations. 2 5 The probability that a firm intends to pursue ISO certification is negatively correlated with a firm's reliance on log purchases (least secure tenure) and positively correlated to a firm's export intensity. The likelihood that a firm contacts an ISO certifier is positively correlated with the extent to which the firm's fibre comes from private lands or long-term tenures. But it is also correlated with the size of the firm's operation and the population density of the community in which the survey respondent's office is located. Unexpectedly, the probability o f a firm's contacting a certifier is negatively correlated with export intensity. A s expected, lack of intention to seek C S A certification is correlated with a firm's reliance on log purchases (least secure tenure). A l so as expected, intention to seek C S A certification is explained by a firm's export intensity. A s was the case with ISO certification, export intensity was negatively 2 5 One needs to compare these predictions with a naive prediction rule (Greene, 1990). The naive prediction rule states that, i f there are more 1 s than Os in the actual observations, then always predict Is; i f there are more Os than Is, then always predict Os. The results o f such comparison are presented in the bottom row of Table 3.4 (and Table 3.5). -73 -correlated to the probability of the firm's contacting a certifier. The fact that export intensity is negatively correlated with actual contact with ISO or C S A certifiers may suggest that these certification schemes do not fulfil l the requirements o f foreign customers. Indeed, it is possible that these certification schemes are perceived mainly as instruments for achieving domestic legitimization or as means for deflecting government regulation. The model also suggests that firms operating in the Province o f Quebec are less l ikely to seek C S A certification, perhaps because of their reluctance to jo in a national organization. Finally, for F S C certification, the intention model has two significant explanatory variables: export intensity and a Bri t ish Columbian location. Since B C forest practices and B C companies have been the target of criticism by international E N G O s (Stanbury and Vertinsky, 1997), it is understandable that firms in B C are more interested in F S C certification as it has received the support of major E N G O s and buyers' groups. The model explaining a firm's contact with an F S C certifier has no significant explanatory variables. 3.6. Perceptions of Each Certification Scheme The most straightforward way to investigate why companies pursue certification would be to ask them the question: "Why do you seek certification?" and let the respondents describe their own motives. A potential problem with this approach is that respondents may not be able to express all their motives as they may be unaware of some that are important. Further, such an approach does not give a researcher any means to compare and summarize the strength o f several motives for each respondent, or to make comparisons among respondents. Therefore, this study presented respondents with items of potential advantage resulting from obtaining the kind of certification that they considered to be ideal for their operations, and asked them to rate them. 2 6 The negative correlation between export intensity and the probabilities o f contacting ISO or C S A certifiers is not l ikely to be spurious. In fact, all correlation coefficients between export intensity and other explanatory variables are less than 0.30 in absolute values, except for one case (with the Lumber variable in the C S A contact model, -0.34). - 7 4 -3.6.1. Best Certification Scheme Respondents chose one or more certification schemes that "best" matched their firm's needs (Table 3.6). In this regard, ISO 14001 led all other schemes with 48% of respondents considering it the best form of certification for their firm, while C S A tallied 17%, FORESTC/LR£ 11%, and F S C 6%. Other schemes (not in our list) that respondents chose as best matching their companies' needs included the Sustainable Forestry Initiative of the American Forest and Paper Association, the Ontario Forest Industry Association Code of Forest Practices, and the Pan European Forest Certification program. Two respondents felt that no certification scheme met their company's needs. Table 3.6: Certification Scheme Best Matching a Firm's Needs" Certification Scheme Responses Number Percentage ISO 14001 68 48% C S A 23 17% FORESTCARE 15 11% F S C 8 6% Others 5 4% Do Not K n o w 19 14% Total 140 100% " Responses, "None", are not included in this table. 3.6.2. Assessment of Advantages Respondents assessed the perceived advantages of the scheme that they thought best suited their company (Table 3.7). A list o f potential advantages that may be derived from forest certification was constructed using information from earlier studies (Haener & Luckert, 1998; Hayward & Vertinsky, 1999). Respondents were asked to rate each advantage in the list on a seven-point interval scale ( l = W i l l not work to 7=Wil l work very well). Mean values ofthe ratings for al l respondents were calculated. Mean values for each group of respondents that chose a particular certification scheme as the best scheme suited to their firm's needs were also calculated. When we added the ranking of all respondents, advantages related to firms' responses to societal pressures ranked the highest. For example, "Securing general public confidence in my -75 -company's forest management," and "Responding better to pressures from environmental groups," were the two top-ranked advantages. "Securing markets for our products" ranked third. Other concrete business advantages (e.g., "Enabling my company to obtain a price premium") were ranked in the bottom part o f the list. Ecological or environmental benefits, such as "Improving the recreational and landscape features of the forest" ranked in the middle. This general pattern holds across the responses o f those who chose ISO 14001 and C S A as the schemes most suitable for their firms. Those who selected F S C and FORESTCARE ranked ecological or environmental benefits higher. Those who selected FORESTC4.RZ? on average rated "Securing markets for our products" lower (8 t h among the listed benefits). Apparently, because the scheme was not wel l known outside Alberta, companies did not expect the F O R E S S T C 4 . & E program to meet the certification demands for shipments to outside Alberta. - 7 6 -Table 3.7: Advantages of Forest Certification Schemes All Votes ISO 14001 CSA FSC Mean Rank Mean Rank Mean Rank Mean Rank Securing general public confidence in my company's forest management 5.50 1 5.58 1 5.70 1 6.13 2 Responding better to pressures from environmental groups 5.27 2 5.33 2 5.23 3 6.25 1 Securing markets for our products 4.93 3 5.08 3 5.35 2 5.25 3 Improving shareholder satisfaction 4.72 4 4.83 4 4.68 4 4.25 7 Improving staff morale 4.00 5 4.06 5 4.00 6 4.19 8 Improving the recreational and landscape features of the forest 3.99 6 3.91 6 3.86 8 5.00 4 Providing a better habitat for wildlife 3.97 7 3.88 7 3.77 9 4.63 5 Ensuring the biodiversity of the forest 3.93 8 3.82 8 3.91 7 4.57 6 Improving access to financial capital 3.71 9 3.80 9 4.24 5 3.25 10 Enhancing the timber productivity of our forests in the future 3.10 10 3.03 10 2.95 11 3.43 9 Enabling my company to obtain a price premium 2.65 11 2.33 12 3.14 10 2.29 11 Reducing operating costs 2.63 12 2.87 11 2.52 12 2.00 12 FOREST-CARE Others Mean Rank Mean Ran Securing general public confidence in my company's forest management 5.33 1 4.96 1 Responding better to pressures from environmental groups 5.27 2 4.76 2 Securing markets for our products 3.93 8 4.61 3 Improving shareholder satisfaction 4.86 3 4.48 4 Improving staff morale 4.21 6 3.64 8 Improving the recreational and landscape features of the forest 4.47 4 3.70 7 Providing a better habitat for wildlife 4.47 4 3.88 5 Ensuring the biodiversity of the forest 4.20 7 3.87 6 Improving access to financial capital 3.21 10 3.43 9 Enhancing the timber productivity of our forests in the future 3.53 9 3.05 10 Enabling my company to obtain a price premium 2.93 11 3.00 11 Reducing operating costs 2.80 12 2.17 12 a Respondents used the scale,, " W i l l not work = 1 — W i l l work very wel l =7". - 7 7 -The respondents' stated expectations with regard to forest certification show what kinds of potential benefits of forest certification they value more or less. In general, coping with social pressure seems to be the most important expected benefit of forest certification. The following items seem to belong to this category o f benefits (overall ranking in parentheses): • Securing general public confidence in my company's forest management (1) • Responding better to pressures from environmental groups (2) • Improving shareholder satisfaction (4) In contrast, except for "Securing markets for our products" (3), economic motives seem to have relatively little importance. Intrinsic benefits of forest certification, such as ecological benefits, seem to have average importance. 3.6.3. Synthesis with Regression Analyses First of a l l , it is apparent that the economic motive regarding market access is a major driving force for certification. Both o f the two methods employed in this study confirmed this conclusion. A s shown in the regressions (inferred motives), export intensity and the pattern o f tenure holdings (variables related to economic motives) also influence the company's certification decisions. The results of direct questions (stated motives) indicate that social pressure from the general public and environmental groups also plays major roles. The direct questioning method also suggests a secondary, but not negligible, influence of moral motives regarding the ecological or environmental benefits o f forest certification. Several motives that are suggested in the literature were found to be insignificant in this study. Pursuit of potential preferential treatment in financial markets seems to be unimportant. Productivity enhancement or cost reduction motives also are not important rationales for seeking forest certification. Price premiums are also not expected to materialize. - 7 8 -3.7. Synthesis of Literature Because forest certification is a new phenomenon, there are only a few empirical studies concerning its implementation. 2 7 Some of these studies take a case-study approach, in which researchers obtain detailed information from a relatively small number o f cases and describe or explain them. Rather than considering such case-studies, this section discusses three studies that investigated a relatively large number of forest operations; the findings of this study w i l l be compared to their findings (Table 3.10 is the summary o f the comparison). In particular, attention w i l l be paid to the findings related to motives for forest certification. 2 7 Several studies investigated potential demands for certified forest products. Because this study is mainly concerned with the motives o f forest operations (supply side), this section does not deal with such studies. - 7 9 -Table 3.8: Comparison of This Study and Other Three Studies This Study Rametsteiner, et a l , 1998 Hayward & Vertinsky, 1999 Vogt, et a l , 1999a Time of data collection 1999 1997 1997 1998 Geographical coverage Canada U K , Finland and Germany U S A W o r l d Certification scheme F S C , C S A , ISO and FORESTCARE In general (no specific scheme) F S C F S C Dependent variables Evaluation of potential advantages Early stages of certification (intention & contact with a certifier) Evaluation of potential advantages and disadvantages Certification granted Evaluation o f potential advantages and disadvantages Evaluation o f realized advantages and disadvantages Certification granted Independent variables Economic & non-economic factors Countries Types o f operation Sizes o f operation Types o f forest Methods o f data collection Questionnaire survey & public database Questionnaire survey Interviews Data published by the F S C Methods o f analysis Mean values & Probit regressions Mean values Number counts & Qualitative evaluation Aggregation - 8 0 -In 1997, Rametsteiner et al. (1998) conducted questionnaire surveys in Finland, the U K and Germany, targeting forest owners or forestry experts as survey participants. They summarized the general attitudes o f Bri t ish and Finnish forest owners (n=263 and 593, respectively) towards forest certification as follows: Forest owners in Finland and Britain generally felt that there would be few benefits from the certification o f their forests. Most of them felt that certification would only be profitable for them i f there was a rise in timber prices. [....] The majority o f respondents felt that certification would neither increase the demand for their timber, nor that a premium would exist for certified timber. (Rametsteiner, et al., 1998, p. 14) Regarding potential reasons for certification, [t]he principal reasons for Finnish and Brit ish owners to certify their forests are economic. The more directly the reason related to sales, the more important they were. The ecological reasons for certification were the least important aspects, though they were still important to the majority o f owners. (Rametsteiner, et al., 1998, p. 14) Their survey covering forest experts in Germany (n=288) drew somewhat similar conclusions: 80% o f German forest experts believe there w i l l be no price premium for certified forest products and there w i l l only be a small demand for certified wood products. [....] German forest experts generally do not think there w i l l be any benefits from certification either for the management o f forests or to the forest ecosystems. (Rametsteiner, et al., 1998, p. 16) In 1997, Hayward and Vertinsky (1999) conducted structured interviews o f 20 FSC-certified operations in the U S A . These operations constituted 99% of forests certified under the F S C scheme in the U S A as o f December 1997. The interview covered: (l)"[p]rivate forest companies producing timber on an industrial scale", (2)"[p]ublic lands managed for multiple resource values, including production of timber", (3)"[n]on industrial private forests (NIPF), generally small properties managed by the owner", and (4)"[r]esource managers, professional foresters managing portfolios of forestlands belonging to several owners." Their findings relevant to this study are the following (Hayward & Vertinsky, 1999, p. 14-16): • "Three of the four professional resource managers interviewed stated that expected price increases were their prime motive for certification." • "Protecting or gaining market access through certification was expected by 55 percent of the respondents. This expectation was shared by a significantly larger proportion of managers of industrial private operations (71 percent) than all the other respondents." -81 -• " A significant number of these operators [(i.e. industrial private operations)] (43 percent) sought-to reduce the impacts o f environmental groups' actions on their sales." • "Many o f the private companies (43 percent) believed certification would boost their stature and credibility." • "Forty-three percent o f private industrial companies said that satisfying the concerns of owners or shareholders was a factor in the decision to certify." • "Only 43 percent of the private industrial operations [...] expected to improve their forest management through certification." They conclude: "Industrial private and public lands managers tend to seek certification to satisfy extrinsic demands, such as improving profits, defending market share and market access, and seeking, through external validation, to maintain their 'public license' to operate" (Hayward & Vertinsky, 1999, p. 17). Vogt, Fanzeres, Estey and Heintz (1999) analyzed the data of FSC-certified forestlands in the world as of 1998. They aggregated the numbers or areas of certified forests and pointed out that larger tracts o f forestland tend to be certified under the F S C scheme, but not smaller ones: • Most (87-88%) of the certified natural forests with industrial or non-industrial potentials had land areas that individually were greater than 100,000 ha in size. • Most o f the certified plantations had land areas that individually were greater than 10,000 ha in size (Vogt, et al. 1999, p. 48) Wi th respect to the types of forest certified, they concluded that "no single type o f forest use or owner category predominated": • 24.4% were in natural forest not managed for industrial purposes. • 28.6% were in plantations • 24.4% were in communal or group certifications • 10.7% were in government owned lands (Vogt, e ta l . 1999a, p. 52) The study concerning forest certification processes in this thesis differs from these three studies in several respects. These differences are presented in Table 3.8. Therefore, a synthesis ofthe results of these studies requires a consideration of such differences. This study and the ones by Rametsteiner et al. and Hayward and Vertinsky agree that market pressure plays a critical role in certification decisions. However, this study showed that the price premium benefits o f certification were o f little importance, while the other two (Ramesteiner et a l , - 8 2 -1998; Hayward &Vert insky, 1999) suggested otherwise. This also may be because, in the last few years, the industry as a whole has learned about forest certification, and, as a result, has found that forest certification is not l ikely to generate price premiums. Each study differs in terms of the respondents' progress in certification stages and in the timing o f data collection, and this may have led to these apparent differences. These three studies concur, however, in the secondary importance to certification decisions o f ecological or environmental benefits. This study and the Hayward & Vertinsky study suggest that social benefits o f certification, such as winning the public's confidence and dealing with environmental groups, were also thought to be important. In the stated-motive part o f this study, furthermore, respondents saw such social benefits as more important than market access benefits, contrary to the Hayward & Vertinsky study. The difference in the pattern of forestland ownership between Canada and the U S A may have led to these differences in results. That is, the main portion (92%) of Canada's forestlands are owned by government, while in the U S A , 72% is privately owned. In both studies, forest operations viewed the consideration o f financial markets as unimportant to certification decisions. The Vogt, et al. study found evidence of the importance of economies o f scale in F S C -certification processes. W i t h regard to these F S C processes, however, this thesis did not confirm such a tendency within Canada. A l l in al l , the correspondence between this study in Canada and the Hayward & Vertinsky study in the U S A is notable, because the two studies differ in many respects (Table 3.8). This study dealt with the three different certification schemes, while Hayward & Vertinsky investigated the F S C scheme alone. This suggests the commonalties among certification processes in Canada and the U S A , as wel l as among different certification schemes. The contributions to the study of forest certification are summarized as follows: • This study investigated the current state o f forest certification in Canada, a jurisdiction that is important globally in terms o f its global share o f forests and forest industries. -83 -• This study employed two methods (regression analysis and direct questioning) to evaluate the strength o f motives for certification. • This study took as dependent variables the intermediate stages o f certification (intention and contact with a certifier), instead o f certification granted. • This study empirically investigated the significance of several factors, such as community pressure; these factors had not previously been given much attention. 3.8. Conclusions Environmental certification is a generic instrument perceived to be a vehicle for obtaining international legitimacy. Not surprisingly, export intensity was the only variable that universally explained intention to certify irrespective of the certification scheme considered. Once firms obtain information about the different schemes, their differences in terms o f their degree o f social acceptance become clearer to them. Our analysis implies that, once more information is gathered about the different systems, firms reassess their positions. Firms' behavior indicates that ISO and C S A certifications are not perceived to be adequate means to gain legitimacy internationally. They may be perceived, however, as a means to obtain legitimacy in the domestic market. Thus, the positive correlation of export intensity and intention to certify turns into a negative correlation once firms reach the stage of actually making a commitment and contacting a certifer. Certification schemes vary also in the costs they impose on firms. A n important difference between the systems is the degree to which a firm yields control over its practices to external organizations. Whi le the ISO system allows firms to seek their own way in investing in improved stewardship ofthe forest, the C S A and, to a larger degree, the F S C systems involve ceding control of the path to improved stewardship to outsiders. The cost of ceding control to outsiders is l ikely to be higher for those with more secure and extensive tenure. The results o f this study demonstrate the importance o f this facet in the choice o f a certification system. - 8 4 -We hypothesized, as Zhang and Pearse (1996) suggested, that greater tenure security w i l l be reflected in higher propensity to invest in forest stewardship and therefore higher probability of committing to certification. The results confirm that this was the case when ISO certification was considered, but not when C S A and F S C certifications were involved. Firms with more secure property rights were l ikely to commit to the ISO process. The decisions of firms with regard to C S A and F S C certifications are more complex. Firms had to consider not only the costs and benefits o f investing in stewardship but also the loss of control involved in their participation in the C S A and F S C schemes and the threats that such participation poses to their control. Clearly, the more secure and extensive their property rights, the higher the perceived costs of firms' participation in the C S A and F S C certification processes. So while firms with more secure tenures were perhaps more inclined to invest in stewardship, they also faced higher costs in terms o f loss of control and threat to their property rights. The two opposing influences may have cancelled each other, resulting in no positive correlation between tenure and commitment to certification. Our analysis did not reveal significant effects o f community characteristics on the commitment to certify. The only significant relationship was the one found between population density and the probability o f contacting ISO certifiers. This may reflect more the nature o f the plants located in urban locations than the role of community preferences. Undoubtedly, important explanatory factors are missing from the analysis, and this might especially account for the poor explanatory performance of the F S C intentions model, in particular. For example, managers' values or attitudes in relation to the environment or corporate responsibilities may be important factors. Responses to our survey underscore this speculation. Survey respondents who decided that F S C certification is best for their firm ranked the recreational/landscape, wildlife habitat and biodiversity features of forest ecosystems higher than those who considered ISO 14001 or C S A certification as the preferred options (see Table 3.7). This study can be replicated in the future, in other jurisdictions or within Canada. Replication studies in other jurisdictions can serve two purposes: (1) to identify unique patterns found in differing -85 -jurisdictions; and (2) to find globally common patterns. Similarly, future replication studies in Canada can serve two purposes: (1) to identify changes in the development of forest certification; and (2) to corroborate or refute the findings of this study. Both kinds of replication study may benefit from the on-going development of forest certification, specifically the existence o f a significant number of actually certified operations. Due to the lack of a sufficient number o f certified companies, this study used intentions to seek certification and contact with a certifier as dependent variables for regressions. B y using actual certification as a dependent variable in future replication studies, one may obtain more validity. In future replication studies, improvements can also be achieved with respect to the following points: More important independent variables for regressions may be found. Some variables suppressed in this study, such as variables reflecting personal values or internalized norms—what may be called a land ethic—may turn out to be important. Broad simplified variables such as forest characteristics, i f properly represented, may also have significant explanatory power. In any case, future replication studies should search for and use such potentially important variables. A s wel l , the list o f future studies should include an empirical investigation of the effects of forest certification on forest product markets, as wel l as forest management. Again , due to the nascent nature o f forest certification, the investigation of this area is largely theoretical, or not empirical. Imaginative solutions are obviously needed, in order to overcome the difficulties involved in analyzing evolving phenomena such as forest certification. - 8 6 -Chapter 4. Canadian Industry's Response to Climate Change: A Role of the Voluntary Challenge and Registry Program 4.1. Introduction In this chapter, we investigate the determinants o f Canadian industrial firms' participation in the Voluntary Challenge and Registry ( V C R ) Program. Also the determinants of firms' reduction targets o f their C 0 2 emissions are considered. 2 9 The V C R Program is one of Canada's challenge programs, in which the federal government 3 0 challenges firms to reduce their C 0 2 emissions voluntarily as an effort to mitigate climate change. The chapter proceeds as follow. First, the background of Canada's policy concerning climate change is presented. Next, we model firms' participation in the V C R Program and their voluntary C02-emissions reduction; then we discuss the data collected through a questionnaire survey that we conducted for this study, and present some descriptive statistics gained from that survey. After presenting the results of model estimation, we discuss the conclusion and policy implications in the last section. 4.2. Background On December 11, 1997, the third Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change ( U N F C C C ) adopted the Kyoto Protocol. On average, industrialized (or Annex I) countries agreed to reduce C 0 2 emissions by 5.2% of the 1990 level by the commitment period 2008-2012, although most countries, and importantly the United States, still need This chapter is based on research by Takahashi, Nakamura, van Kooten, & Vertinsky (in press). 2 9 In this study, the terms C 0 2 , C0 2-equivalents, and greenhouse gas ( G H G ) are used interchangeably, as often in the discourse among business people. A l l refer to C0 2 -equivalent G H G . 3 0 Originally launched as a government program in 1994, the V C R Program became an independent, entity, V C R Inc., for which the private sector, as wel l as the federal and provincial governments, provide funds ( V C R Inc., 1999). - 8 7 -to ratify the Protocol. Canada committed to reduce C0 2 -equivalent greenhouse gas ( G H G ) emissions by 6% of its 1990 emissions. Poli t ical debate continues as to whether Canada's commitment is reasonable or not. Financial analyst Diane Francis (1999), for example, refers to the Kyoto commitment as an excessive pledge; " in order to meet the emission cuts by 2010, one-third of our economy would have to be shut down or, alternatively, all our thermal power plants would have to be converted to nuclear plants at enormous cost." She argues that scientific evidence concerning global warming is not sufficient to warrant taking such drastic measures. On the other hand, Chris Rolfe (1998), an environmental activist, praises the Kyoto Protocol as "a step ahead", but warns that additional measures are needed to reduce significantly the rate o f climate change. He claims that the Kyoto accord w i l l not have a significant effect on the size of the Canadian economy or its growth. Canada's Kyoto commitment is a political decision, the latest in a line o f commitments and targets regarding C 0 2 emissions (House of Commons, 1997). In 1988, at the W o r l d Conference on the Changing Atmosphere in Toronto, Canada made a commitment to reduce its G H G emissions by 20% of their 1988 level by 2005. In 1990, Canada's Green Plan stated, "Canada's goal is to stabilize national emissions of C 0 2 and other greenhouse gases at the 1990 level by the year 2000." Again, in 1992, at the Earth Summit in R i o de Janeiro, Canada, along with other countries, made a voluntary commitment to reduce greenhouse gas emissions to the 1990 level by 2000. To date, none of these commitments have been met. Already in 1995, the first C O P to the U N F C C C concluded that the R i o commitments were insufficient. A process, known as the Ber l in Mandate, was started that would lead to a strengthened international accord with legal instruments. The Kyoto Accord reached at the third C O P was a result of that process. Just one month before the Kyoto conference, a joint meeting ofthe Ministers of Energy and Environment was held in Regina. W i t h the exception o f the Minister from Quebec, the ministers agreed that "it is reasonable to seek to reduce aggregate greenhouse gas emissions in Canada back to 1990 levels by approximately 2010" (House o f Commons, 1997, p.5). Subsequently, in response to international pressure, the federal government announced that Canada's position at Kyoto would be to reduce C 0 2 emissions by 3% below the 1990 level by 2010, followed by a further reduction to 5% below the 1990 level by 2015. A t Kyoto , however, Canada settled upon a 6% reduction. The different positions that Canada has taken over time reflect the consequences of a political process (internal and external) rather than careful assessment of the economic and social costs and benefits, and full analysis o f the scientific aspects of the choice. Setting a target for C0 2 -emiss ion reductions requires consideration of the entire range of options for mitigation, and the costs, benefits and risks related to these options relative to other response options, such as adaptation and research. In 1990, Canada produced 601 megatonnes (Mt) of CO2-equivalent G H G emissions (Natural Resources Canada, 1999). B y 1997, after a period o f economic expansion, Canada's greenhouse gas emissions had increased by 13% to 682 M t . In 1998, the industrial sector and o i l and gas production together contributed 33% of total G H G emissions (Government o f Canada, 2000). 3 1 To estimate the trend of G H G emissions to the year 2020, the Federal Government formulated an economic model based on assumptions regarding population growth, G D P growth, o i l prices, et cetera, and later updated it (Environment Canada, 1997; Natural Resources Canada, 1999). Simulations with this model indicate that, under current policies (policy-as-usual), the level of C 0 2 emissions w i l l increase by 15% of the 1990 level by 2000, 27% by 2010 and 4 1 % by 2020. One of the government reports concludes that, "[although the policy response, to date, has had an impact, a considerably greater effort would seem to be required, within a very short time frame, to achieve the [original F C C C ] stabilization objective" (Environment Canada, 1997, p. 52). After the Kyoto Conference, in A p r i l 1998, the federal, provincial and territorial Ministers of Energy and Environment began a process to develop a national implementation strategy for Canada's Kyoto commitment (Environment Canada, 1998). This led to the creation o f sixteen Issue Tables dealing with analysis and modeling, transportation, electricity, Kyoto mechanisms, technology, carbon 3 1 Industry accounts for 15% of G H G emissions, o i l and gas for 18%, transportation for 25%, electricity generation for 17%, agriculture and forestry for 10% and buildings for 10%. sinks, credits for early action, public education and outreach, agriculture and agri-food, the forest sector, buildings, industry, enhanced voluntary action, municipalities, science and adaptation and tradable permits. These Issue Tables are forums where multi-stakeholder processes take place and their outputs, in the form of Options Papers, are meant to aid Ministers of Energy and Environment in formulating an implementation strategy. The outcome of this process is Action Plan 2000 (Government o f Canada, 2000), which builds on the 1995 National Act ion Program on Climate Change ( N A P C C ) . L ike N A P C C , Action Plan 2000 avoids the use o f more drastic measures such as carbon taxes. M a i n components ofthe Act ion Plan strategy include: • the Voluntary Challenge and Registry Program; • a national communication (education) program that encourages voluntary action by individuals, industry and non-profit organizations; • mission-oriented, government-sponsored research into energy efficiency, alternative fuels, and C 0 2 capture and storage; • international action through the Clean Development Mechanism (Canadian-funded projects that reduce G H G emissions in developing countries) and Joint Implementation (joint projects in developed countries); and • reliance on terrestrial carbon sinks. Action Plan 2000 relies on these measures to reduce C0 2 -equivalent G H G emissions by an amount equal to a third o f the difference between the policy-as-usual emission level (27% increase) and the Kyoto commitment level (6% reduction) by 2008-2012. The remaining two-thirds ofthe difference is left to future policy measures. Specifically, Action Plan 2000 anticipates that industry w i l l account for 15% of the total targeted reduction in the Plan, while the entire energy sector (oil and gas plus electricity) is expected to account for 20% of targeted reductions. Because of the importance of terrestrial carbon sinks, agriculture and forestry are expected to contribute 20% and international projects 25% of targeted emissions reductions by 2008-2012 (Government o f Canada, 2000, p.4). - 9 0 -4.3. Models 4.3.1. Modeling Participation in the VCR Program and Determination of Reduction Targets Participation in the V C R program involves the following three steps: the first is knowledge of the existence of the V C R program, which we designate as "familiarity" with the program; next is submission of a Letter of Intent, which confirms commitment to limit or reduce G H G emissions; third is submission of an Action Plan (not to be confused with the Government's Action Plan 2000), which defines the specific ways in which the commitment w i l l be met (Enhanced Voluntary Act ion Issue Table, 1998). We use the results of an industry survey to derive four models that explain the degree of involvement of a company in the V C R program and the G H G emission-reduction goals a firm perceives to be realistic. Familiarity with the program and involvement in each o f the V C R stages (participation and submission of an action plan) are analyzed using probit regression models (with binary dependent variables). In a fourth model, ordered probit regression is used to model those firm characteristics that might explain the emission-reduction targets that firms believe they can realize. Modeling Participation in Voluntary Emission Reduction Schemes Assume that the manager of a firm maximizes utility as a function o f the firm's profits, its characteristics and her own intrinsic values. Profits and firm characteristics might be thought of as "hard" variables, while the manager's values are "soft" variables. To predict whether a firm or manager knows about the existence of the V C R program (Model 1), we employ a simple probit regression model. Smaller firms are probably less l ikely to know about the V C R program, while managers who are not attuned to environmental and climate change concerns are also less l ikely to have heard about the program. We try to predict familiarity using hard and soft variables as independent variables o f a probit model. The probit model is given as: (Model 1) Prob (Firm k is familiar with the VCR program) = 0 [ (P , ) 'X k ], where O is the cumulative distribution function for the standard normal distribution. -91 -Once a manager knows that the V C R program exists, she may take action to become involved in the program, but only i f the (perhaps political and goodwill) benefits o f participating exceed the perceived costs of doing so. Assume that the manager o f firm k has the following utility function: U ( X k ) + r] k , where U ( X k ) is the net utility the manager gets from becoming involved in the V C R , X k are the characteristics of firm k and its manager (the hard and soft variables), and n, k are unobservable factors assumed to be normally distributed with mean zero and unit variance. The utility maximizing decision rule for firm k is based on the net utility of its manager: (1) U ( X k ) + r | k > 0 => firm k gets involved (letter of intent, action plan) in the V C R . (2) U ( X k ) + n, k < 0 => firm k does not get involved (letter of intent, action plan) in the V C R . Assume that utility is a linear function: (3) U ( X k ) = ft' X k , where X k is a column vector o f firm and manager characteristics and Pj (j=2,3 as discussed below) is a column vector o f coefficients to be estimated. From (1) and (3), the firm gets involved in the V C R i f and only i f n,k>-Pj' X k . Models 2 and 3 differ only with respect to the extent that a firm gets involved in the V C R program. Some firms perceive that they have achieved the political and goodwill benefits that they desire (marginal benefits are at least as great as marginal costs) simply by filing a letter of intent; for other firms, perceived benefits continue to exceed costs at least up to the point where they submit an action plan for their firm. Thus, (Model 2) Prob (Firm kparticipates in the VCR) = <J>(p2'Xk). (Model 3) Prob (Firm k has submitted VCR action plan) = <3>(p3'Xk). Modeling Perceived Reduction Potential In the survey, we asked firms about their perceived ability to reduce G H G emissions by 2008-2012; categorical responses were requested. Assume the manager of firm k chooses an emission-reduction target (G k ) based on the costs to the firm of reducing emissions, and her perceptions - 9 2 -regarding the political and goodwill benefits, as wel l as the personal benefits to the manager. B y choosing a particular level o f G k , the manager maxmizes utility, i7(G k , Xk), where Xk consists o f the hard and soft variables characterizing the firm and its manager. 3 2 Upon maximizing U and solving, the following reduced-form equation for G k is obtained, to which an error term is added: (4) G k = h(Xk) + 8k with e k ~ N(0, 1). Assume that h(Xk) is linear and, since the dependent variable G k is observed as a categorical variable corresponding to ranges of emission-reduction goals, an ordered probit model is used (Maddala, 1983): (Model 4) G k = pY X k + ek. The dependent variable, G k , is the underlying response variable and takes on ranges from G 1 to G 6 : G 1 indicates that a survey respondent felt that the firm could do no better than permitting C 0 2 emissions to increase by more than 10% from 1990 to 2010; G2 indicates a projected increase of less than 10% between 1990 and 2010; G 3 indicates no change from the 1990 level; G4 indicates a projected reduction in emissions of less than 5%; G 5 indicates a projected reduction of more than 5% but less than 7%; and G 6 a projected reduction in emissions exceeding 7%. 4.3.2. Explanatory Variables Both hard and soft variables l ikely have an impact on a frim's degree o f involvement in voluntary climate change mitigation. In this study, we use (1) firm size, (2) sector, (3) location (region in Canada), (4) attitudinal variables that measure corporate culture and personal beliefs with respect to the environment, and (5) perceptions of societal pressures from stakeholders. The first three variables are hard, while the latter two categories of variables are for the most part soft. W e hypothesize that firm size determines, to a large extent, the capability o f the organization to address G H G emissions, in terms o f budgets, human resources and specialized organizational skills. Larger firms may also enjoy economies of scale in implementing projects such as energy-saving investments. Therefore, larger 3 2 U is assumed to be continuously differentiable in all variables and concave in G k . -93 -firms are more l ikely to be involved in the V C R program and perceive higher emission-reduction goals as realistic. Arora and Cason (1995, 1996), and DeCanio and Watkins (1998), found a positive correlation between firm size (number o f employees) and participation in the U S E P A ' s 33/50 program and Green Lights program, respectively. 3 3 Energy intensities o f various industrial sectors may also affect the benefits and costs o f reducing carbon (C) emissions, and firms' consequent decision to get involved in the V C R program. For instance, firms in energy-intensive sectors may have more opportunities for energy saving investments, and may thus be more wi l l ing to participate in the V C R and more l ikely to perceive higher emission-reduction goals as realistic. Similarly, firms in energy-intensive sectors are more l ikely to be targeted through regulations on C emissions in the future, and thus may be more wi l l ing to take meaningful voluntary initiatives to preempt regulation. In the U S , Arora and Cason (1995, 1996) identified a significant and positive correlation between the intensities o f toxic releases and transfers (in absolute and relative terms) of a firm and the firm's participation in the 33/50 program. Regional effects are especially important in Canada because energy and natural resources fall under provincial jurisdiction. For this reason, Canadian firms experience different regulatory environments, tax regimes and attitudes towards business because o f the differing policies of the different political parties that form governments in the various regions. DeCanio and Watkins (1998) found regional effects to be important in explaining the probability of firms' participation in the Green Lights program in the U.S . , for example. Respondent's attitudes towards environmental issues, which reflect her firm's corporate culture, may also influence her decision about whether to get involved in voluntary environmental protection initiatives and the goals firms choose (Winn, 1995). For example, perceived responsibility within the firm for climate change may positively affect commitment to a voluntary emissions control program. Eco-centric attitudes o f a manager, or pessimistic views about the efficacy o f technological solutions in 3 3 The 33/50 program is a voluntary E P A program that encourages firms to voluntarily reduce releases and transfers o f 17 toxic chemicals. The Green Lights program is another voluntary E P A program aimed at encouraging firms to use energy-conserving lighting in buildings. - 9 4 -preventing or adapting to climate change, are l ikely to lead to voluntary emission reduction initiatives. Managers are also affected by their perception of costs and benefits o f climate change mitigation. Thus, i f managers think that emission reduction does not harm competitiveness, they are more likely to involve their firms in climate change initiatives. Similarly i f respondents view C emission reductions beneficial to the firm, they are more l ikely to jo in such programs. Social pressure on private firms, particularly large ones, comes from environmental groups, the media, local communities, industry associations, governments, financial institutions, shareholders, boards o f directors, customers and employees. Pressure may be positively or negatively correlated with the probability that a firm voluntarily participates in the climate change mitigation process. For example, Henriques and Sadorsky (1996) found that the formulation of an environmental plan is positively correlated with perceived pressures from customers, shareholders, government regulators and local communities, but negatively correlated with other lobbying groups' pressures. 4.4. Data We surveyed a weighted random sample of 1,000 managers o f Canadian companies from a list prepared by Dun & Bradstreet, which is a leading provider o f international business information. The sampling criteria were to include companies with more than 100 employees, the principal activities of which were transportation, manufacturing or resource extraction; and C E O s or vice presidents responsible for the environment were to be targeted to the largest extent possible. 3 4 The total number o f usable responses was 147 for an overall response rate o f 15%. The response rate for firms with more than 1,000 employees was 36% and 22% for companies with more than 200 employees. A s expected, the response rate among the smaller companies was low (9%). Summary statistics for all variables used in the model are provided in Table 4.1, while response rates according to firm size, sector and region are provided in Table 4.2. 3 4 Questionnaires were mailed out in M a y and June 1998, and responses were received from June 1998 to September 1998. A copy ofthe survey instrument is found in Appendix 4 - A . -95 -Table 4.1: Description of Model Variables Variable and Description Obs. Mean Std. Dev. Dependent Variables Knowledge about V C R ; i f Yes = 1; 0 otherwise 147 0.35 0.48 V C R Letter o f intent; i f Yes = 1; 0 otherwise 147 0.22 0.42 V C R Act ion plan submitted; i f Yes = 1; 0 otherwise 147 0.14 0.34 Stated G H G reduction goals (ranges coded from G 1 for least to G 6 134 — — for highest ability to control emissions)" Independent Variables Fi rm size measured by number of employees 147 560 b 510 Sector variables Energy-intensive firm = 1; 0 otherwise 0 147 0.39 0.49 F i rm in transportation sector = 1; 0 otherwise 147 0.04 0.20 Regional variables (Maritimes included in intercept)*1 Central Canada = 1; 0 otherwise 147 0.09 0.28 Prairies = 1; 0 otherwise 147 0.09 0.28 West =1; 0 otherwise 147 0.32 0.47 Attitudinal variables (codedfrom l=lo to 5=high) 147 0.32 0.47 Degree to which a manager accepts the firm's responsibility for 147 3.83 1.31 climate change mitigation efforts Degree to which a manager accepts personal responsibility for 143 3.65 1.15 climate change mitigation efforts Strength of opposition to modification o f the natural environment 144 3.15 1.31 Degree to which the respondent was pessimistic about the prospect 131 3.06 1.21 of technological solution to climate change Perceived beneficial impacts o f climate change mitigation on 136 2.26 1.05 firm's competitiveness Perceived benefits o f goodwill generated from green behavior 132 3.48 0.96 Pressure (degree of influence) variables (coded from l=not at all to 5=total) Perceived influence o f environmental groups 134 1.74 0.87 Perceived influence o f the media or local communities 136 2.56 0.98 Perceived influence o f industry associations 136 2.88 1.04 Perceived influence of governments 137 3.08 1.02 Perceived influence of financial institutions 128 1.96 1.14 Perceived influence of shareholders or board of directors 131 3.22 1.34 Perceived influence o f customers 138 2.91 1.17 Perceived influence o f employees 138 3.07 1.05 a G ' = >10% increase in emissions, 1990 to 2010 (11 responses); G 2 = 1-10% increase (13); G 3 = no change (42); G 4 = <5% reduction (32); G 5 = 5-7% reduction (22); G 6 = >7% reduction in emissions (14). b Range mid-points were 150 employees, 175, 225, 375, 625, 875, 1250 and 1500 employees. c Firms in these sectors are coded as energy intensive: metal mining, oil & gas extraction, chemicals & allied products, paper & allied products, petroleum & coal products, metal and stone & clay. d Maritimes includes Newfoundland, Nova Scotia, New Brunswick & Prince Edward Island; Central Canada includes Ontario & Quebec; Prairies includes Manitoba & Saskatchewan; West refers to Alberta & British Columbia. - 9 6 -Table 4.2: Involvement in the VCR Program Category Survey Response Know-ledge About 3 Letter o f Intent b Action Plan 6 Indicating >5% Reduction Sent Returned Rate All firms 1000 147 15% 35 % 65% 61 % 2 6 % Size Small 573 52 9% 14 % 57% 5 0 % 2 0 % (< 200 employees) Medium 339 63 19% 38 % 42% 5 6 % 21 % (201-1000 employees) Large 88 32 36% 63 % 95% 7 4 % 4 7 % (>1000 employees) Sector Energy-intensive 153 57 37% 53 % 77% 65 % 3 0 % N o n energy-intensive 745 84 11% 23 % 53% 5 0 % 25 % Transportation 102 6 6% 33 % 0% 0 % 0% Region M a r i times 41 7 17% 29 % 50% 0 % 5 0 % Central Canada 694 80 12% 25 % 80% 63 % 23 % Prairies 52 13 25% 69 % 56% 6 0 % 1 7 % West 213 47 22% 43 % 55% 6 4 % 31 % a Percentages of firms familiar with the V C R out of sample firms. b Percentages o f firms participating in the V C R out o f firms familiar with the V C R . c Percentages o f firms that have submitted action plans out of firms participating in the V C R . The survey consists of three parts. The first includes statements designed to measure the attitudes of managers towards the environment in general and climate change mitigation in particular. Respondents were asked to rate each statement on a 5-point Likert scale. The second part asked respondents to identify realistic C emission-reduction goals that could be achieved by 2010 (% reduction compared to 1990). This section also inquired about knowledge concerning and (level of) participation in the V C R . Respondents were also asked about the degree to which the stakeholder groups identified above influenced their company's actual or potential response to climate change initiatives. They were asked to provide a list o f specific measures a firm could take to control C 0 2 emissions and indicate the ones taken by their firm. The final section asked details about firm size (sales and number of employees) and their sector. - 9 7 -The Voluntary Challenge and Registry (VCR) Program Participation in the V C R program is used as an indication o f a firm's propensity to undertake voluntary climate change efforts. A s mentioned above, the V C R program is government-sponsored and encourages businesses and non-profit organizations to take actions to reduce C 0 2 emissions. The total number o f participants in this program, including companies and public institutions, increased from 465 in 1995 to 708 in 1998. In 1998, 17% of participants had submitted action plans ( V C R , Inc , 1999). In our sample, 35% of firms (51) indicated that they know about the V C R , 65% of those firms (33) actually participate in the V C R , and 61% of the participating firms (20) have submitted an action plan. Information about the relationship between the characteristics o f firms and knowledge about the V C R program is provided in Table 4.2. Knowledge about the V C R was higher for energy-intensive firms and larger firms, as it was for firms outside central Canada (Ontario and Quebec). The latter is surprising as central Canada is the industrial heartland of the country. Perceived Potential for Meeting the Kyoto Target Respondents were also asked what they consider to be a realistic target for C 0 2 emissions reduction by 2010. The results do not inspire confidence that Canadian industry w i l l be able to meet the Kyoto target. Less than 30% ofthe firms surveyed felt that they would be able to reduce emissions by 5% or more below the 1990 level by 2010 (Table 4.2, last column). Only one in four firms responded that emission-reduction targets greater than 5% were realistic. The simple average among respondents' targets was a reduction in emissions o f about 1% from 1990 levels by 2010. 3 5 Larger firms seem better able to comply with Kyoto-type requirements than small and medium size firms. If the number of firm employees is used to weight responses, a 1.7% reduction is feasible. This should be interpreted as an upper bound on emissions reduction under a policy-as-usual scenario, since it is 3 5 We asked respondents to answer their realistic goals by indicating a range out o f six alternatives (>10% increase; 1-10% increase; no change; <5% reduction; 5-7% reduction; >7% reduction). To derive a mean value for the 134 companies that responded to this question, we assigned "mid-point" values of+10.0% (for >10% increase), +5.0% (<10% increase), 0% (no change), -2.5% (<5% reduction), -6.0% (5 to 7% reduction), and -7.0% (>7% reduction). - 9 8 -reasonable to assume that firms that did not respond to our survey are probably less interested in climate change mitigation and are therefore more l ikely to resist emission-reduction programs. Further, non-responding firms may, on average, be smaller and less able to reduce emissions. Energy-intensive firms appear better able to meet the Kyoto target than other firms, although the proportion able to meet the target remains low. If one examines responses on a regional basis, firms in the Maritimes (Newfoundland, N e w Brunswick, Nova Scotia and Prince Edward Island) and the West (Alberta and B C ) feel they are more likely to attain the Kyoto target than firms in central Canada and the Prairies (Manitoba and Saskatchewan). Aga in firms in central Canada indicated that they were less able to comply with the Kyoto requirements than firms located in the Maritimes and West. This does not bode wel l for current Canadian policy as the majority o f industrial firms are located in Ontario and Quebec. 4.5. Probit Model Estimation Results The probit model regression results (using maximum likelihood estimation) are provided in Table 4.3. For knowledge about and participation in the V C R program (Models 1, 2 and 3), the dependent variables are binary, while the dependent variable is categorical for Mode l 4 (see also Table 4.1). The explanatory variables are common to al l four models and are defined in Table 4.1. The binary probit models correctly predict 81%, 87% and 89% of the observations, respectively. For all four models, the hypothesis that all coefficients are jointly equal to zero is rejected at the 1% level o f significance by the likelihood-ratio tests. We estimate al l models by: (1) including only economic variables (firm size; sector; location), (2) including all variables (the above sets of variables and attitudinal variables and perceptions of societal pressures). (1) and (2) represent, respectively, the Economic Organization (EO) and the Polit ical Economic Organization(PEO) models discussed in Chapter 1. The results o f these two models are similar, and we report here only the results of P E O model estimations. - 9 9 -Table 4.3: Model Estimations: Probit Regressions and Ordered Probit Regressions3 Model 1 Model 2 Model 3 Model 4 Explanatory Variable Knowledge Submission of Letter Submission of Potential for about the V C R of Intent Action Plan Emission Reduction Firm size (employees) 1.00*** 1.72*** 2.54*** 0.46* (3.84) (5.08) (4.02) (1.74) Regional & sector dummy variables Energy-intensive firm 0.57** 1.00*** 0.89** -0.29 (2.05) (2.91) (1.97) (-1.31) Transportation sector firm -0.24 -6.08 -6.41 d (-0.31) (-0.07) (-0.04) — Central Canada -0.03 0.24 5.10 -1.10 (-0.06) (0.32) (0.04) (-1.44) Prairies 1.49** 1.03 6.63 -0.99 (1.97) (1.19) (0.05) (-1.20) West 0.57 0.37 5.60 -0.89 (0.91) (0.48) (0.04) (-1.15) Attitudinal variables Corporate responsibility 0.21 0.15 -0.03 0.06 (1.62) (1.01) (-0.14) (0.59) Personal responsibility 0.02 -0.01 -0.31 -0.32** (0.16) (-0.04) (-1.39) (-2.46) Opposition to modifying environment -0.11 -0.05 0.18 -0.06 (-1.05) (-0.40) (0.97) (-0.66) Pessimism about technological 0.10 0.19 -0.09 0.17* change (0.80) (1.37) (-0.51) (1.77) Competitiveness enhanced by 0.26* 0.03 -0.06 0.27*** mitigation efforts (1.72) (0.15) (-0.25) (2.68) Green benefit to mitigation efforts 0.30 0.36 0.58* 0.11 (1.58) (1.45) (1.74) (0.73) Pressure from environmental groups -0.24 0.07 -0.42 0.25 (-1.18) (0.32) (-1.08) (1.64) Pressure from media/communities -0 39*** -0.38* -0.26 0.28** (-2.17) (-1.75) (-0.88) (2.06) Pressure from industry association 0.26 0.17 -0.10 -0.08 (1.57) (0.88) (-0.35) (-0.56) Pressure from government -0.03 -0.22 -0.54** 0.00 (-0.15) (-1.12) (-2.01) (0.02) Pressure from financial institutions 0.12 -0.02 0.37 0.18 (0.80) (-0.11) (1.62) (1.45) Pressure from shareholders/board 0.11 0.15 0.60* -0.03 (0.75) (0.78) (1.81) (-0.17) Pressure from customers 0.06 0.34 0.26 0.01 (0.34) (1.45) (0.85) (0.04) Pressure from employees -0.06 -0.38 -0.25 0.08 (-0.28) (-1.49) (-0.77) (0.35) Constant -3 98*** -4 39*** -9.76 0.65 (-3.25) (-2.86) (-0.07) (0.66) Log-likelihood Function -62.20 -44.34 -27.06 -201.00 Log-likelihood (0) -94.89 -78.28 -58.47 -223.75 No. classified correctly (Dep.var.=0) 84/96 108/114 122/127 N.A . No. classified correctly (Dep.var.=l) 35/51 20/33 9/20 N . A . R-square (Maddala) 0.36 0.37 0.35 N.A . R-square (Cragg-Uhler) 0.50 0.56 0.63 N.A . Significance level (Chi-squared) 0.00 0.00 0.00 0.00 Observations 147 147 147 134 a Missing explanatory variables are replaced with means. Asymptotic t-statistics are provided in parentheses: *, ** an denote, respectively, statistical significance at 10%, 5% and 1% levels. - 100-M o d e l 1 seeks to explain why some firms are more l ikely to know about the V C R than others, while models 2 and 3 represent increasing degrees of commitment to voluntary action (letter of intent and filing o f an action plan), h i contrast, Mode l 4 seeks to explain the stated ability o f firms to achieve emissions reduction, perhaps reflecting the combined effects o f technological and economic possibilities and incentives for emissions reduction. F i rm size positively affects the probability that a firm knows about the V C R program (Model 1), the probability it has submitted a letter of intent (Model 2), and the probability that it has submitted an action plan (Model 3). Size is also positively correlated with higher goals for emissions reduction (Models 4). Similar size effects have also been identified in the literature on corporate environmentalism (Frankel, 1998, Chapter 4; Windatt, 1999), and are confirmed again by this study. Energy-intensive firms tend to be more knowledgeable about and l ikely to participate in the V C R program (Models 1, 2 and 3), but the (dummy) variable representing energy-intensive firms is not significant in explaining the potential level of emissions reduction (Model 4). This indicates that firms in the energy-intensive sector may not perceive higher opportunities for emissions control than other firms, or that they are unwill ing at this time to act upon such opportunities. Energy-intensive firms may simply be involved with the V C R because they want to be seen as good corporate citizens (e.g., they may be concerned about maintaining their public image, in order to pre-empt possible future tightening of regulations). W i t h the exception of the dummy variable for the prairies in M o d e l 1, a firm's location does not seem to affect the likelihood that the firm participates in the V C R program or its ability to reduce G H G emissions. Attitudinal variables related to the degree of acceptance o f corporate and personal responsibility for climate change mitigation have limited explanatory power, with no significant coefficients explaining firms' knowledge about or participation in the V C R program. Unexpectedly, personal responsibility for mitigation was (statistically) negatively related to the potential for emissions reduction (Model 4). This result is puzzling. Our tentative explanation is that companies with - 101 -executives who feel less responsible for mitigation efforts are more l ikely to give optimistic answers to the question about their firm's ability to reduce C 0 2 emissions over the next decade, because they have not seriously considered the costs o f doing so. Alternatively, managers who are intimately familiar with their responsibility for mitigation efforts tend to understand the real challenges involved and therefore are more realistic about emissions reduction. A n attitudinal variable related to respondents' view concerning the relationship between humans and nature (opposition to modifying environment) also had limited explanatory power. The variable indicating a pessimistic attitude toward technological solutions to global warming has a significant and positive coefficient only in the model regarding the emissions reduction target (Model 4), as expected. The fact that environmental attitudes do not seem to explain propensity for taking action may reflect the complexities involved with climate change and the high degree of perceived uncertainty surrounding the issue. The only significant variable (pessimism about technological solutions) represents the urgency that managers may feel to reduce G H G emissions today since they do not expect advances in technology to solve eventually problems o f global warming. In contrast, the two variables representing the respondent's positive view concerning the relationship between mitigation efforts and business performance (the enhancing of competitiveness and the green benefit variables) had, in general, statistically significant positive signs in all four models, reflecting the growing recognition among managers of the potentially high economic impact of the Kyoto commitment. That is, variables representing the perception that doing something about climate change is good for business play a more important role in explaining participation in voluntary programs and the stated ability of a firm to reduce G H G emissions than variables related to a respondent's attitudes toward the environment. Perceptions about pressure from environmental groups appear to have a positive effect on the potential for emissions reduction (Model 4), but no effect in explaining firms' knowledge about or involvement in the V C R program. Pressure from the media or the community had a significant negative impact on firms' stated knowledge about and participation in the V C R program (Models 1 and - 102 -2), but a significantly positive impact on the potential for emissions reduction (Model 4). This is consistent with work by Henriques and Sadorsky (1999), who, based on a survey o f large corporations in Canada, concluded that "reactive firms view the media as important and proactive firms do not, [because] i f an environmental crisis were to occur, reactive firms would not (and proactive firms would) be able to demonstrate due diligence" (p. 95). A s expected, pressure from an industry association has a positive effect on the probability that a firm is familiar with the V C R program (Model 1). Government pressure has a significantly negative relationship with the likelihood of a firm's submission o f an action plan (Model 3) and no effect on perceived reduction potentials. Therefore, it is possible that the current reliance on education and moral suasion by government to achieve voluntary emissions reduction is not a very effective means of increasing industry efforts. Pressures from business stakeholders, such as financial institutions, shareholders and the board of directors, are positively correlated with a firm's submission o f an action plan. Pressures from customers and employees are not statistically significant in any ofthe four models. 4.6. Conclusions and Policy Implications 4.6.1. Conclusions W h y do Canadian industrial firms participate in the V C R Program? The above regression results (especially, Models 2 and 3) help one to speculate about possible explanations. Because attitudinal variables regarding the respondents' views on the environment are not significant, their degree of environmental consciousness does not seem to contribute to firms' participation in this program. Almost all the variables representing pressure from each of the classes o f stakeholders are not significantly positive (except for "Pressure from shareholders/board" in M o d e l 3). This suggests that firms do not engage in publicizing their efforts as an attempt to respond to requirements from such stakeholders. A l so , there is no statistically significant impact of the V C R program on levels of C 0 2 - 103 -emissions reduction. This indicates that participating firms do not expect that V C R participation w i l l substantially help them to reduce emissions, for example through the program's provision o f useful information. In contrast, profit motives related to future regulation seem to be important in explaining firms' participation in the V C R Program. Larger firms and those in the energy-intensive sector are more l ikely to participate in the program, while firms in the energy-intensive sector do not have higher reduction targets. Such firms are likely to become the targets o f regulation due to their size and visibili ty; therefore, participant firms are, in general, trying to anticipate future government policies and influence such policies by demonstrating that their firms are making significant emissions reduction efforts. In fact, pressure from shareholders/boards seems to play a significant role in firms' submission of action plans, possibly reflecting these stakeholders' long-term concern about the impact o f future regulation and firms' sensitivity to this concern. 4.6.2. Policy Implications To what extent is Canadian industry prepared to control its C 0 2 emissions? Whi le Canada's industrial and fossil fuel production sectors are projected to increase C0 2 -equivalent emissions by 31% by 2010 (Natural Resources Canada, 1999) 3 7, the firms in this study indicated that they could probably reduce emissions by some 1-2% on average. W h y then are the sector's emissions projected to rise i f potential action by firms responding to our survey is taken into account in the projections? Clearly, this survey covers only existing firms, and, more particularly, larger firms (>100 employees). It thus fails to count emissions from new or growing firms. Further, due to potential sampling biases (firms who have thought about climate change or are familiar with V C R are more l ikely to have responded to our 3 6 We re-estimated M o d e l 4, adding the dummy variable for V C R participation (letter of intent) first as an exogenous and then endogenous variable, using O L S regression (see Heckman, 1979; Greene, 1981). In both cases (results not shown here), the V C R participation dummy was not significant at a 10 % level. - 104-survey), this value (a 1-2% reduction) appears to be an optimistic estimate reflecting only the intentions o f an advanced segment of firms in terms of projected G H G emissions reduction. On the other hand, because these figures were obtained under current conditions, in the absence of strong regulations or economic policy instruments, these figures may be possibly interpreted as realistic goals under the assumption that firms would invest or operate on a policy-as-usual basis. In addition, since there is a wide variance in the level of reduction these firms regard as realistically achievable at this moment, market-based instruments such as emissions trading may create opportunities to reduce industrial costs of controlling C 0 2 emissions through the equalization o f marginal mitigation costs. If so, given effective economic instruments and for our sample of firms, the goal of at least some reduction in C 0 2 emissions by 2008-2012 may be a realistic one. One o f Canada's existing policy tools, the V C R program, has been the object of some criticism. Most notably, the Pembina Institute (1995a; 1995b; 1996) argues that the voluntary actions reported in this program do not go beyond business-as-usual and policy-as-usual practices of participating firms. The findings o f this study support the Pembina Institute's contention that, at present, the V C R does not contribute to efforts to meet the Kyoto commitment. Specifically, participation in the V C R did not have an impact on the stated realistic C 0 2 emissions reduction potentials o f firms. H o w can the performance o f the V C R Program be improved? One possibility is to encourage firms to make deeper commitments by applying pressure via appropriate stakeholders. For example, financial institutions, shareholders and board of directors may be able to exert significant influence on firms' behavior by pressuring managers to consider ways to go beyond their current assessment of what can be accomplished realistically. Designing incentives that lead these stakeholders to exert more influence on firms' climate change policy than now may not be easy, however. Whi le Canada's total emissions are expected to increase by 27% above the 1990 level by 2010, emissions from the industrial and fossil fuel sectors are projected to increase by 10% and 66%, respectively, or 31% together. - 105 -In the final analysis, the results of this study suggest that, to meet the Kyoto target, Canada needs to implement more stringent policy measures, such as meaningful standards for energy efficiency, a carbon tax or an emission trading system. The V C R Program may be useful in supporting or leading to such measures, but cannot substitute for them. Canadian policy makers must recognize the limitations of the voluntary program, and devise a better policy mix which may include voluntary initiatives as a complementary component. - 106-Chapter 5. Conclusion In Chapter 1, as a framework of firms' motives to participate in voluntary initiatives, I postulated four models that potentially explain why firms participate in voluntary initiatives: namely, the market economic, production economic, social, and moral models. In each of three case studies, I tried to find a correlation between participation decisions and firms' characteristics, including managers' views and attitudes, and attributed any identified correlation to firms' mot ives . 3 8 In addition, in some cases, I took into consideration the data describing firms' stated motives for participation or managers' perceptions about the voluntary initiatives considered. The results of this research did not equivocally distinguish among the various firms' or managers' motives. Aspects o f the four motivational models for participation in voluntary initiatives were supported by each of the three case studies discussed in this dissertation, but the four were not supported, as distinct models. The results suggested considerable overlap among the conceptual models and little support for the production economic and moral models. In the case o f ISO 14001 certification in Japan, the market economic and social models appear to explain a large part of a firm's motivation for certification. Export market or domestic market pressures encourage firms to seek certification, while managers' perceived pressure from c iv i l society positively affects certification decisions. Also , the level o f responsibility that managers feel towards the natural environment —i.e . their internalized social expectations—is positively related to certification decisions. In the case o f forest certification in Canada, the market economic and social models also appear to explain motivation for certification to a large extent. Export market pressure provokes firms to at least consider seeking forest certification. Winning general public confidence in their forest Even though care was taken, there is always a possibility that identified correlations may be attributed to wrong motives or causes. - 107 -operations and dealing with the demand of environmental groups were also found to be the major motives for certification. Lastly, in the case ofthe Voluntary Challenge and Registry Program in Canada, the political model, which I classified as a sub-category of the social model, seems to explain firms' participation. B y demonstrating their efforts, participating firms appear to attempt to influence potential future regulations concerning climate change mitigation. These three case studies do not support the production economic and moral models, both of which explain motives originating within a firm. This may indicate that, when firms participate in voluntary initiatives, they are just responding to external pressures. There is the possibility that the research design employed in this dissertation—which largely relied on questionnaire surveys—did not capture subtle variables such as managers' moral values or the characteristics o f firms' production processes. If this is the case, other research methods, such as qualitative case studies, may prove to be useful in identifying their internal motives. In two cases (ISO 14001 and the V C R Program), I estimated both models based on the Economic Organization (EO) model, which includes only economic explanatory variables, and the Polit ical Economic Organization (PEO) model, which also includes non-economic explanatory variables. 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Forest Science, 42(4), 1-8. - 119-Appendix 2-A Descriptive Statistics (Chapter 2) mean Dependent variables I S O _ D U M M Y 0.316 T I M E T O J S O (in months) 34.891 Explanatory variables FIRM_SIZE (no. of workers in 1000s) 5.092 PROFITABILITY (%) 4.243 D E B T R A T I O (%) 38.823 E X P O R T R A T I O (%) 15.468 A D V E R T I S I N G (%) 3.027 R & D (%) 4.455 F O R E I G N O WNERSHIP (%) 8.806 I N V E S T M E N T _ I N _ P L A N T (%) 9.521 E M P L O Y E E A G E 38.816 standard deviation minimum maximum sample 0.000 1.000 193 8.249 0.000 39.000 193 9.513 0.320 74.821 192 4.282 -4.382 27.629 192 13.225 8.550 84.650 - 191 17.209 0.000 83.667 192 4.903 0.000 37.018 189 3.366 0.000 16.186 183 9.517 0.300 62.200 192 5.063 1.124 25.735 191 2.757 31.000 47.000 192 Industry dummies Food 0.052 Textiles 0.015 Pulp&Paper 0.057 Chemicals 0.161 Pharmaceutical 0.078 Petroleum 0.031 Rubber 0.031 Glass 0.031 Steel 0.015 Non-ferrous metals 0.036 Metals 0.026 General machinery 0.083 Electric machinery 0.207 Transportation machinery 0.072 Precision instruments 0.047 Heavily_Polluting_Industries 0.295 Low_Polluting_Industries 0.332 Intermediate_Polluting_Industries 0.373 Keiretsu variables M A I N _ B A N K _ 0 W N E R S H I P (%) 3.519 K E I R E T S U D U M M Y 0.275 Attitudinal and perceptual variables (factor scores) E A R T H S P A C E S H I P 0.000 HARMONIOUS_COEXISTENCE 0.000 C I V I L S O C I E T Y P R E S S U R E 0.000 G O V E R N M E N T P R E S S U R E 0.000 C O N T R O L L A B I L I T Y 0.000 P O L L U T E R P A Y 0.000 E N E R G Y E F F I C I E N C Y 0.000 RESPONSIBILITY 0.000 ISO9000 (ISO 9000 series certification) 0.6425 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 0.000 1.000 193 — 0.000 1.000 193 — 0.000 1.000 193 1.671 0.000 5.267 192 " 0.000 1.000 193 1.000 -5.993 1.953 193 1.000 -3.161 1.784 193 1.000 -2.930 2.878 193 1.000 -3.799 1.920 193 1.000 -3.851 2.096 193 1.000 -4.120 2.418 193 1.000 -2.827 2.593 193 1.000 -3.345 2.124 193 . . . 0.000 1.000 193 - 120-Appendix 2-B Survey Questionnaire (Chapter 2) Personal information (Please mark the appropriate items. A l l information w i l l be kept confidential.) 1. Age ( ) 20-29 ( ) 30-39 ( ) 40-49 ( ) 50-59 ( ) equal to or more than 60 2. Have you participated in lectures or training courses regarding the environment? ( ) One-shot seminar ( ) Seminar ( times) ( ) Course ( ) Degree program 3. Education ( ) Junior high school ( ) H igh school ( ) College ( ) University ( ) Masters degree ( ) PhD degree Your position in the company Thank you for your cooperation. General information regarding your company (Please mark the appropriate items.) 1. What is your company's main line of business? ( ) Chemical ( ) Steel ( ) Bui ld ing materials ( ) Textile ( ) Other manufacturing ( ) Electronics ( ) Energy ( ) Transportation ( ) Others 2. H o w many employees does your company have? ( ) equal to or less than 300 ( ) 300-499 ( ) 500-999 ( ) 1000-1999 ( ) 2000-4999 ( ) equal to or more than 5000 3. Annual sales o f your company (in 100 mi l l ion Yens) ( ) less than 100 ( ) 100-499 ( ) 500-999 ( ) 1000-2999 ( ) 3000-4999 ( ) 5000-9999 ( ) equal to or more than 10,000 4. Total assets of your company (in 100 mi l l ion Yens) ( ) less than 100 ( ) 100-499 ( ) 500-999 ( ) 1000-2999 ( ) 3000-4999 ( ) 5000-9999 ( ) equal to or more than 10,000 Thank you for your cooperation. - 121 -Survey of Environmental Management in Industrial Organizations Please indicate whether you strongly disagree (1), disagree (2), are neutral (3), agree (4), or strongly agree (5), with each ofthe following statements by circling the appropriate number. If you do not know, circle zero (0). L E N V L R O N M E T N A L M A N A G E M E N T P R I N C I P L E S 1) Polluters should pay fully for the damage they cause, and be responsible for cleaning up their pollution. 2) Those who use natural resources should pay the full cost o f using them even though the resources are public. 3) A n activity should only proceed i f the risk to the environment from the activity can be fully evaluated and controlled. 4) In a developing country, risk-taking is necessary to achieve economic growth, even i f there are environmental risks. 5) Those firms which use energy inefficiently are as responsible for the environmental damage as those firms which directly pollute their immediate environment. 6) Users o f goods produced using energy intensive processes should pay for the environmental damage caused by their production. 7) We should be wi l l ing to accept more water and air pollution to ensure a more plentiful supply of energy. 8) A certain amount of environmental damage is tolerated i f there is to be economic growth. IL E N V I R O N M E T N A L M A N A G E M E N T I N Y O U R O R G A N I Z A T I O N 1) M y firm has detailed written policies concerned with protecting the environment. 2) Environmental protection is an explicit component o f my firm's strategic (long-term) plan. 3) Most people in my firm are very aware ofthe need to protect the environment and are wel l -informed about our environmental policy. 4) The people in charge of environmental protection in my firm have sufficient authority. 5) Economic growth objectives must assume a higher priority in my organization than environmental protection objectives for the time being. 6) Complying with regulations and preventing environmental incidents are all that is required from a business enterprise like us. 7) Many top managers in my firm are personally and actively involved in developing environmental protection policies and monitoring their implementation. 8) The record o f my company on environmental protection is significantly better than companies in our industrial sector. 9) M y company has a written environmental policy that states goals for improving our environmental performances. 10) Clear and strong signals have been sent from our top managers that better environmental management is a requirement in our firm, not a choice. 11) The environmental protection department o f my enterprise is headed by a senior executive. 12) Environmental managers or those chiefly responsible for environmental management in my firm have adequate authority to get involved in and have a say in decision making on the investment plans o f my enterprise. 13) M y firm has a long term plan to lower our pollution control costs in order to be more competitive in the market. 14) Environmental concerns have been integrated into the decision-making o f my organization's senior management. - 122-15) Environmental protection is an integral part of my company's culture. 16) In my firm we are constantly looking for advances in technology to reduce our pollution levels. 17) The people in charge of environmental protection in my firm have the authority to stop operations i f they perceive a significant risk o f environmental degradation. 18) Ideas on pollution management are shared freely among lower, middle and upper levels within my firm. 19) There is no consensus in my firm about the desirable level for environmental protection. ILL O T H E R F A C T O R S I N E N V I R Q N M E T N A L M A N A G E M E N T 1) Government has set some pollution / production standards, so we have to make sure that we do not violate them. 2) Newspapers and T V have created a lot of concern about environmental issues, and this has put pressure on our company to improve our environmental performance. 3) M y company's labor union has influenced our environmental practices. 4) A pollution incident, i f reported by the public media, could ruin our corporate image and market, so we must pay full attention to such issues before they become a public concern. 5) M y company is subject to a lot of governmental regulation regarding environmental matters. 6) In the past, my company has been involved in a pollution incident which caused significant governmental or public concern. 7) M y company's environmental practices have been influenced by what other industrial organizations have done. T__ G E N E R A L A T T I T U D E T O W A R D T H E E N V I R O N M E N T 1) When humans interfere with nature it often produces disastrous consequences. 2) Mankind should live in harmony with nature rather than modify it for its own needs. 3) The earth is like a spaceship with only limited room and resources. 4) Humans have the right to modify the natural environment to suit their needs. Y_ P E R S O N A L B E L I E F S A B O U T E N V I R O N M E N T A L M A N A G E M E N T 1) A i r pollution does not pose a serious risk to health. 2) Advances in technology w i l l eventually solve the problem of environmental degradation. 3) Population control w i l l solve the major problems of environmental degradation. 4) M y firm's contribution to environmental pollution is small and hardly makes a difference. 5) It is the role of government, not the enterprise, to protect the environment. 6) It is the role of each individual, no matter what is his or her position, to see to it that the environment is protected. 7) Government regulation is effective in protecting the environment. 8) I feel it is my personal responsibility to ensure that my organization improves its environmental performance. 9) I have insufficient knowledge to influence the environmental practices o f my firm. 10) I have insufficient authority to influence the environmental practices o f my firm. 11) M y firm cannot act on its own to improve the environment because we have insufficient resources. 12) M y firm cannot act on its own to improve the environment because we must remain competitive. - 123 -V L K N O W L E D G E O F E N V I R O N M E N T A L P R O B L E M S 1) The effect of greenhouse gas emissions and the threat of climate change are solely a concern for the agricultural sector. 2) Burning natural gas does not contribute to the climate change phenomenon. Thank you very much. Please send this back using the enclosed envelope. - 124-Appendix 2-C Results of Factor Analyses (Chapter 2) Group 1: personal beliefs about the relationship between the natural environment and mankind (Independent variables) Cumulative variance explained by the two factors = 57.1 % Statements Factor 1 loadings Factor 2 loadings When humans interfere with nature it often produces disastrous consequences -0.830 0.061 Mankind should live in harmony with nature rather than modify it for its own needs -0.176 0.800 The earth is like a spaceship with only limited room and resources -0.753 0.099 Humans have the right to modify the natural environment to suit their needs 0.089 -0.844 Advances in technology will eventually solve the problem of environmental degradation 0.421 -0.136 Explained variance 1.471 1.385 Proportion to total variance 0.294 0.277 Factor names EARTH_ SPACESHIP1' HARMONIOUS_ COEXISTENCE b. Factor scores were multiplied by -1. Group 2: institutional and social pressures (Independent variables) Cumulative variance explained by the two factors = 51.0 % Statements Factor 1 loadings Factor 2 loadings Government has set some pollution / production standards, so we have to make sure that we do not violate them -0.074 0.706 Newspapers and TV have created a lot of concern about environmental issues, and this has put pressure on our company to improve our environmental performance 0.688 0.127 My company's labor union has influenced our environmental practices 0.736 -0.078 A pollution incident, if reported by the public media, could ruin our corporate image and market, so we must pay full attention to such issues before they become a public concern 0.070 0.710 My company is subject to a lot of governmental regulation regarding environmental matters 0.406 0.567 My company's environmental practices have been influenced by what other industrial organizations have done 0.712 0.116 Explained variance 1.697 1.360 Proportion to total variance 0.283 0.227 Factor names CIVIL SOCIETY PRESSURE GOVERNMENT PRESSURE - 125 -Group 3: confidence in their and their firm's ability to control its impact on the environment (Independent variables) Cumulative variance explained by the factor = 53.3 % Statements Factor 1 loadings My firm's contribution to environmental pollution is small and hardly makes a difference 0.494 I have insufficient knowledge to influence the environmental practices of my firm 0.758 I have insufficient authority to influence the environmental practices of my firm 0.846 My firm cannot act on its own to improve the environment because we have insufficient resources 0.803 My firm cannot act on its own to improve the environment because we must remain competitive 0.698 Explained variance 2.667 Proportion to total variance 0.533 Factor names CONTROLLABILITY0 c. Factor scores were multiplied by -1. Group 4: accepted environmental governance principles (Independent variables) Cumulative variance explained by the two factors = 51.4 % Statements Factor 1 loadings Factor 2 loadings Polluters should pay fully for the damage they cause, and be responsible for cleaning up their pollution 0.800 -0.014 Those who use natural resources should pay the full cost of using them even though the resources are public 0.674 0.208 An activity should only proceed if the risk to the environment from the activity can be fully evaluated and controlled 0.673 0.026 Those firms which use energy inefficiently are as responsible for the environmental damage as those firms which directly pollute their immediate environment -0.089 0.793 Users of goods produced using energy intensive processes should pay for the environmental damage caused by their production 0.104 0.769 A certain amount of environmental damage is tolerated if there is to be economic growth -0.287 -0.414 Explained variance 1.649 1.436 Proportion to total variance 0.275 0.239 Factor names POLL UTER_PA Y ENERGY EFFICIENCY - 126-Group 5: perceived personal and firms' responsibilities for the environment (Independent variables) Cumulative variance explained by the factor - 35.1 % Statements Factor 1 loadings Complying with regulations and preventing environmental incidents are all that is required from a business enterprise like us -0.293 It is the role of government, not the enterprise, to protect the environment -0.477 It is the role of each individual, no matter what is his or her position, to see to it that the environment is protected 0.763 Government regulation is effective in protecting the environment 0.567 I feel it is my personal responsibility to ensure that my organization improves its environmental performance 0.732 Explained variance 1.754 Proportion to total variance 0.351 Factor names RESPONSIBILITY - 127-Appendix 3-A Survey Questionnaire (Chapter 3) JV of Forest Certification in Canada F E P A Research Unit Phone: (604) 822-5539 Forest Sciences Centre Fax: (604) 822-6970 2045 - 2424 Main M a l l , U B C Vancouver, B . C . V6T 1Z4 Section I. Questions on Forest Certification and Sustainable Forest Management There are several certification schemes concerning sustainable forest management or environmental management systems*. Among them, prominent schemes are 1) forest certification accredited by the Forest Stewardship Counci l (FSC); 2) forest certification by the Canadian Standards Association ( C S A ) ; 3) ISO 14001 certification of environmental management systems (ISO 14001) instituted by the International Organization for Standardization; and 4) Forest Care certification by Forest Products Associations. Q l . (Involvement in Forest Certification) H o w familiar are you with these certification schemes? Please indicate by circling the appropriate number along the scale. N o Knowledge=l < > Extremely Familiar=7 F S C 1 2 3 4 5 6 7 C S A 1 2 3 4 5 6 7 ISO 14001 1 2 3 4 5 6 7 F O R E S T CARE 1 2 3 4 5 6 7 Others (Please specify) IF you chose No Knowledge (1) on all (FSC, C S A , ISO 14001, F O R E S T CARE and Others) in the above, please proceed to Q6 on page 8. "Environmental management system" means: The part of the overall management system that includes organizational structure, planning activities, responsibilities, practices, procedures, processes and resources for developing, implementing, achieving, reviewing and maintaining the environmental policy. Y o u can see it as an environmental equivalent of an accounting (+budgeting+auditing) system, which deals with economic aspects o f an organization. - 128-Many Canadian forest products companies have several mills operating at separate locations each with a unique type of forest and unique operating and regulatory conditions. If this describes your company, please feel free to respond to the following questions from the perspective o f your company as a whole O R from the perspective of a certain division. If your would like to answer them from the perspective of a certain division, please indicate this by checking the following statement and answer the questions accordingly. Yes . I w i l l answer the following questions within the range of: (Please specify, < e.g. B . C . Interior>: ) Otherwise, please answer the questions considering your company as a whole. (Ql.) Part A. FSC-accredited certification Are you participating or considering participating in FSC-accredited certification? Please check (•/) Yes or N o . Yes [Please answer the following questions] N o [Please go to Q l . Part B] A t what stage is your company now in the FSC-accredited certification process? Please check (•/) all that apply and indicate the timing of each action. 1 Information gathering (Started: M o . Yr .19 ) Preliminary contacts with the certifying organization (Started: M o . Yr .19 ) 3 Preparing for audit (Started: M o . Yr .19 ) 4 Certified (Certified in: M o . Y r . 19 ) O R I do not have sufficient information to answer this question. (If so, please check.) Part B . CSA certification Are you participating or considering participating in CSA certification? Please check (•/) Yes or No . Yes [Please answer the following question] N o [Please go to Q l . Part C] A t what stage is your company now in the CSA certification process? Please check (•/) al l that apply and indicate the timing o f each action. 1 Information gathering (Started: M o . Yr .19 ) Preliminary contacts with the certifying organization (Started: M o . Yr .19 ) 3 Preparing for audit (Started: M o . Yr .19 ) 4 Certified (Certified in: M o . Yr .19 ) O R I do not have sufficient information to answer this question. (If so, please check.) - 129-(Ql.) Part C. ISO 14001 certification Are you participating or considering participating in ISO 14001 certification in the area of forest management? Please check (•/) Yes or N o . D O N O T report the certification process in areas other than forest operations. Yes [Please answer the following question] N o [Please go to Q l . Part D] A t what stage is your company now in the ISO 14001 certification process in the area of forest management? Do N O T report the certification process in areas other than forest operations. Please check (•/) al l that apply and indicate the timing o f each action. 1 Information gathering (Started: M o . Yr .19 ) 9 Preliminary contacts with the certifying organization (Started: M o . Yr .19 ) 3 Preparing for audit (Started: M o . Yr .19 ) 4 Certified (Certified in: M o . Yr .19 ) O R I do not have sufficient information to answer this question. (If so, please check.) Part D. Forest Care certification Are you participating or considering participating in Forest Care certification? Please check (•/) Yes or N o . Yes [Please answer the following question] N o [Please go to Q l . Part E on the next page] A t what stage is your company now in the Forest Care certification process? Please check (•/) all that apply and indicate the timing o f each action. 1 Information gathering (Started: M o . Yr .19 ) Preliminary contacts with the certifying organization (Started: M o . Yr .19 ) 3 Preparing for audit (Started: M o . Yr .19 ) 4 Certified (Certified in: M o . Yr .19 ) O R I do not have sufficient information to answer this question. (If so, please check.) - 130-(Ql.) Part E . Others (Please specify:_ Are you participating or considering participating in check (•/) Yes or N o . Yes [Please answer the following question] N o [Please go to Q2.] certification? Please A t what stage is your company now in the ( / ) all that apply and indicate the timing of each action. certification process? Please check 1 2 3 4 Information gathering (Started: M o . Yr .19 ) Preliminary contacts with the certifying organization (Started: M o . Yr .19 ) Preparing for audit (Started: M o . Yr .19 ) Certified (Certified in: M o . Yr .19 ) O R I do not have sufficient information to answer this question. (If so, please check.) Q2. (Assessment of Forest Certification Schemes) Part A . Best Certification Scheme Please choose the forest certification scheme which best matches your company's needs based on your knowledge now. Please check (^ ) your choice. F S C C S A ISO 14001 Forest Care Do Not K n o w Others (Please specify:__ ) - 131 -Part B. Assessment of Advantages Once certification is fully implemented, how likely is it that the following advantages w i l l be realized? On the basis o f your knowledge now (even i f incomplete), please indicate your expectations for the forest certification scheme you chose in the above (Part A) for each o f the advantages by circling the appropriate number along the scale. If you chose "Do Not K n o w " in Part A, please evaluate forest certification schemes in general. W i l l the certification work as expected? (Will Not Work=l) <- > Very Well=7) (Do Not Know=0) 2-1 Enhancing the timber productivity of our forests in the future 1 2 3 4 5 6 7 0 2-2 Securing markets for our products 1 2 3 4 5 6 7 0 2-3 Improving shareholder satisfaction 1 2 3 4 5 6 7 0 2-4 Enabling my company to obtain a price 1 1 -i A <: 7 0 premium 1 z j *+ J D / 2-5 Ensuring the biodiversity of the forest 1 2 3 4 5 6 7 0 2-6 Improving access to financial capital 1 2 3 4 5 6 7 0 2-7 Providing a better habitat for wildlife 1 2 3 4 5 6 7 0 2-8 Improving the recreational and landscape features o f the forest 1 2 3 4 5 6 7 0 2-9 Securing general public confidence in my company's forest management 1 2 3 4 5 6 7 0 2-10 Reducing operating costs 1 2 3 4 5 6 7 0 2-11 Improving staff morale 1 2 3 4 5 6 7 0 2-12 Responding better to pressures from environmental groups 1 2 3 4 5 6 7 0 2-13 Other advantages (Please specify: ) 1 2 3 4 5 6 7 0 Other advantages (Please specify: ) 1 2 3 4 5 6 7 0 - 132-(Q.2) Part C. Assessment of Disadvantages Once certification is fully implemented, how likely is it that the following disadvantages w i l l be realized? On the basis of your knowledge now (even i f incomplete), please indicate your expectations for the forest certification scheme you chose in the previous page (Part A) for each of the disadvantages by circling the appropriate number along the scale. If you chose "Do Not K n o w " in Part A, please evaluate forest certification schemes in general. W i l l the disadvantage be a serious problem? (No Problem at all=l) -> (VerySerious problem=7) (Do Not Know=0) 2-14 Increased administrative workload (paperwork) in the future 1 2 3 4 5 6 7 0 2-15 Increased restrictions on operations (e.g. potential restrictions on harvest volume) 1 2 3 4 5 6 7 0 2-16 Direct expense o f certification (payments to certifying organizations and cost of staff for audit) 1 2 3 4 5 6 7 0 2-17 Small market for "green" products 1 2 3 4 5 6 7 0 2-18 Unavailabili ty o f accredited certifiers 1 2 3 4 5 6 7 0 2-19 Insufficient price premium for certified products 1 2 3 4 5 6 7 0 2-20 Loss o f autonomy and control due to certification (e.g. stakeholder consultation) 1 2 3 4 5 6 7 0 2-21 L o w credibility of certification schemes with customers 1 2 3 4 5 6 7 0 2-22 Little control over forest management since other companies do such jobs 1 2 3 4 5 6 7 0 2-23 Conflict with government's regulations or requirements 1 2 3 4 5 6 7 0 2-24 Other disadvantages (Please specify: ) 1 2 3 4 5 6 7 0 Other disadvantages (Please specify: ) 1 2 3 4 5 6 7 0 - 133 -Q3. (Initiative in Certification) Which stakeholders or departments o f your organization have taken the lead in terms of undertaking forest certification? If multiple parties are involved, please check (•/) al l o f them. 3-1 Top management 3-2 Board o f directors 3-3 Shareholders 3-4 Forestry division 3-5 Public relations division 3-6 Marketing division 3-7 Labor unions 3-8 Others (Please specify: ) 3-9 N o specific stakeholder or department Q4. (Opinion on Certification) Please evaluate the attitude toward forest certification that the following stakeholders and departments in your company have at present. Please indicate your observation by circl ing the appropriate number along the scale. (Very (Neutral=4) (Very (Do Not Reluctant=l) Favorable=7) " Know=0) 4-1 Top management 1 2 3 4 5 6 7 0 4-2 Board o f directors 1 2 3 4 5 6 7 0 4-3 Shareholders 1 2 3 4 5 6 7 0 4-4 Forestry division 1 2 3 4 5 6 7 0 4-5 Public relations division 1 2 3 4 5 6 7 0 4-6 Marketing division 1 2 3 4 5 6 7 0 4-7 Labor unions 1 2 3 4 5 6 7 0 4-8 Others (Please specify: ) 1 2 3 4 5 6 7 0 - 134-Q5. (Information Sources) H o w important are the following as sources of information about certification? Please indicate the importance by circling the appropriate number along the scale. (Not important (Very (Do Not at all=l) * \ Important=7) Know=0) 5-1 Trade association 1 2 3 4 5 6 7 0 5-2 Trade journal 1 2 3 4 5 6 7 0 5-3 News media 1 2 3 4 5 6 7 0 5-4 Internet (e.g. Web page) (Please specify: 1 2 ) 3 4 5 6 7 0 5-5 Competitor(s) 1 2 3 4 5 6 7 0 5-6 Customer(s) 1 2 3 4 5 6 7 0 5-7 Others (Please specify: 1 2 ) 3 4 5 6 7 0 Others 1 2 3 4 5 6 7 0 (Please specify: ) Section II. Questions on Your Company A s we mentioned in Section I, many Canadian forest products companies have several mills operating at separate locations each with a unique type o f forest and unique operating and regulatory conditions. If this describes your company, please feel free to respond to the following questions from the perspective o f your company as a whole O R from the perspective o f a certain division. If your would like to answer them from the perspective o f a certain division, please indicate this by checking the following statement and answer the questions accordingly. Yes. I w i l l answer the following questions within the range of: (Please specify, <e.g. B.C.Interior>: ) Otherwise, please answer the questions considering your company as a whole. Q6. (Timber Source: Ownership) Please indicate your sources of timber in terms of ownership (approximate % by volume). 1 ( %) Private land 2 ( %) Public land (Long-term tenure: 20 years or more) (Area-based) 3 ( %) Public land (Long-term tenure: 20 years or more) (Volume-based) 4 ( %) Public land (Medium-term tenure: 5 to 19 years) 5 ( %) Public land (Short-term permits: less than 5 years) 6 ( %) L o g Purchase 7 ( %) Others (Please specify: ) ( 100 %) T O T A L O R I do not have sufficient information to answer this question. (If so, please check.) - 135 -Q7. (Markets) Please indicate the destinations of your products by approximate percentages in terms o f sales value. • Domestic ( %: A ) • Foreign ( %: B) A+B=100% [If any, please indicate the foreign destinations of your products by regions (approximate % by sales value). C+D+E=100%] • • U . S . A . ( %: C) • Europe ( %: D) [Please circle one or some principal customer country(-ies) in the following list.] U . K . Germany France Others (Please specify: ) • A s i a ( %: E) [Please circle one or some principal customer country(-ies) in the following list.] Japan Korea Taiwan China Others (Please specify: ) O R I do not have sufficient information to answer this question. (If so, please check.) - 136-Section III. Free Description Q8. (General Comments) Please give us your general comments about forest certification. Thank you very much for your cooperation. Please indicate whether you would like to receive our complementary summary report of this survey. • Yes. Send me the summary report. - 137-Appendix 4-A (Chapter 4) |==3 THE UNIVERSITY OF BRITISH COLUMBIA U B C FEPA Research Unit Phone: (604) 822-2983 Room 468, Library Processing Center Fax: (604) 822-6970 2206 East Mall Vancouver, B.C. V6T 1Z3 SURVEY ON BUSINESS RESPONSE TO CLIMATE CHANGE Governments met in Kyoto, Japan, in December 1997 to set new limits on emissions of the greenhouse gases that trap the sun's heat and are believed to be gradually warming the planet. Canada committed to reducing its emissions of C 0 2 to 6% below 1990 levels by the year 2010. In order to achieve its commitment, the government is likely to introduce initiatives, such as taxes and/or regulations. This questionnaire is designed to address a variety of issues related to business and climate change. Y O U R C O O P E R A T I O N IN C O M P L E T I N G THIS S U R V E Y IS G R E A T L Y APPRECIATED Please do NOT identify your company anywhere on the survey. While we have numbered surveys for follow-up purposes and to keep track of responses as surveys are returned, the code key will be destroyed shortly after results have been tabulated. A N S W E R S P R O V I D E D W I L L B E K E P T L N S T R I C T C O N F I D E N C E Section I. Opinion Questions. Please indicate your opinion regarding the following the statements by circling the appropriate choice. Use the following scale: 1 = strongly agree 2= agree 3=neutral 4= disagree 5= strongly disagree 0=don't know/no opinion 1. It is the role o f government, and not corporations, to protect 1 2 3 4 5 0 the environment 2. It is my personal responsibility to ensure that my company 1 2 3 4 5 0 improves its climate change mitigation efforts 3. Humans have the right to modify natural environments to 1 2 3 4 5 0 suit their needs 4. Advances in technology w i l l eventually solve problems of 1 2 3 4 5 0 global warming - 138-5. If companies in other countries are not forced to meet the same or higher demands to reduce C 0 2 emissions, our competitiveness wi l l erode significantly 6. B y reducing C 0 2 and other greenhouse gas emissions, our company wi l l become more competitive 7. A n activity should proceed only i f the risk to the environment can be fully evaluated and controlled 8. Scientists have established a definite relation between human activities and global warming 9. Our company has sufficient resources to act on its own to reduce C 0 2 emissions 10. Contributing to climate change mitigation is an explicit component of my organization's long-term plan 11. Our firm cannot act on its own in matters of climate change because we must remain competitive 12. People in my organization are very aware of the need to reduce greenhouse gas emissions 13. M y company's impact on global warming is small and our activities make no overall difference 14. Reducing C 0 2 emissions wi l l be very costly for our firm compared to others in our industry in Canada 15. M y company prefers a system of tradable C 0 2 emission permits to regulation 16. M y company views actions that we take to mitigate climate change as a benefit to us (e.g., goodwill from "green" behaviour) 17. In dealing with climate change, it is best to use technologies developed by others 18. There are already sufficient resources committed to reducing C 0 2 in our firm to meet the Kyoto objective 19. There is noticeable resistance in our firm to action on greenhouse gases 20. Our firm wi l l consider lobbying the government for concessions on when or how we meet C 0 2 emission targets 21. M y company supports reforestation or afforestation projects that sequester carbon in Canada or abroad to offset our emissions 22. M y company believes that forest carbon offsets should be an important component of a domestic C 0 2 emissions trading program 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 2 3 4 5 0 - 139-Section II: Climate Change and Your Company's Response 1. With regard to C 0 2 emission reductions, what would you consider a realistic goal for your company to achieve? Please • / the appropriate category, where the category represents the reduction to be achieved by 2010 compared to 1990 levels. > 10% increase over 1990 1-10% increase over 1990 no change from 1990 < 5% reduction from 1990 5-7% reduction from 1990 > 7% reduction 2. The Climate Change Voluntary Challenge and Registry Program is a national initiative that calls on Canadian organizations to voluntarily take actions to limit or reduce net greenhouse gas emissions. It is a joint venture between the federal and provincial/territorial levels of government and is recommended and supported by Canadian businesses. Are you familiar with this Program? (Circle) Y E S N O - If yes, does your organization participate? (Circle) Y E S N O - If yes, has your organization submitted an Action Plan? (Circle) Y E S N O 3. Please indicate the extent to which your company's response to global warming is influenced by each of the following. Please circle appropriate choice using the following scale: 1 = Not at all 2= somewhat 3=a fair amount 4=a great deal 5=totally 0=don't know/no opinion 1. environmental groups (e.g, Greenpeace) 1 2 3 4 5 0 2. the media/communities in which you operate 1 2 3 4 5 0 3. our industry/trade association 1 2 3 4 5 0 4. government moral suasion or its regulations 1 2 3 4 5 0 5. financial institutions 1 2 3 4 5 0 6. shareholders/board of directors 1 2 3 4 5 0 7. customers or consumers 1 2 3 4 5 0 8. employees and/or firm's leaders 1 2 3 4 5 0 - 140-4. Are you aware of ISO 14 000? (Please circle) Y E S N O - If yes, does your firm participate in ISO 14 000? (Circle) Y E S N O - Is your organization seeking certification under ISO 14 000? (Circle) Y E S N O 5. The Kyoto Protocol requires countries to reduce C 0 2 and other greenhouse gas emissions, but it also allows credit for carbon sequestration from reforestation (planting trees on denuded forestlands) and afforestation (planting trees on agricultural land) activities since 1990. This implies that one can substitute biomass fuels for fossil fuels. What actions is your organization t a k i n g , p l a n n i n g to take or invest iga t ing should emission reductions become a reality? Please •/the appropriate category (more than one category can be selected). Limit or reduce emissions from our own regular, overall operations Enter into partnership with another company(ies), relying on improvements in that company to meet the commitments of both Increase use of biomass fuels (that replace fossil fuels) to meet our energy requirements Increase use of co-generation to meet our energy requirements Rely on offsets not related to regular activities (Please S the possibilities) Purchase carbon sequestration (storage in trees/plants) offsets in Canada Purchase carbon sequestration (storage in trees/plants) offsets abroad Other (Explain) Do not know at this time - If your firm plans to use biomass fuels, by how much do you think you wi l l replace current reliance on fossil fuels? (Please •/) < 5% 5%-10% 10%-25% > 25% - If your firm plans to use co-generation, by how much do you think you wi l l replace current reliance on fossil fuels? (Please / ) <5% 5%-10% 10%-25% >25% - 141 -6. Suppose there is a proposal to set up an independent think tank to investigate issues dealing with the science and the policy of global warming. The think tank wi l l be funded primarily by business. - Would your company be interested in the research results and policy recommendations of such a think tank? (Circle) Y E S N O - Would your company be willing to support a truly independent think tank on global change i f it had a voice on its board? (Circle) Y E S N O - If yes, how much do you think your company would be willing to contribute annually to the operation of such an organization? (Please •/appropriate amount) < $10,000 $10,000-525,000 $25,001-$50,000 $50,001-$75,000 $75,001-$100,000 > $100,000 Section III: General Information about Your Company 1. What is the main industry sector of your company? (Please •/) metal mining oi l & gas extraction food & kindred products chemicals & allied products _ apparel & related products paper & allied products _ lumber & wood products petroleum & coal products machinery except electrical fabricated metal products other (explain) furniture & fixtures transportation services printing & publishing electrical equipment _ truck & warehousing 2. What are the annual sales or gross revenue of your company? (Please •/) < $ 1 . 0 m i l l i o n $1.0 - $5.0 mi l l ion $5.0 - $10.0 mil l ion $20.0 - 50.0 mil l ion > $500 mi l l ion $10.0 -$15.0 mi l l ion $50 - $100 mi l l ion $15.0-$20.0 mi l l ion $100-$500 mi l l ion - 142-3. How many employees are there in your company (measured in approximate full time equivalent years)? (Please < 150 151 - 2 0 0 201 - 2 5 0 251 - 5 0 0 501 - 7 5 0 751 - 1,000 1,001 - 1,500 > 1,500 4. Your position in your organization? (Specify) T H A N K Y O U F O R Y O U R T I M E A N D C O O P E R A T I O N - 143 -

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