Regulation and Environmentalism: The Importance of Regulation

This blog post was written in response to the current tenor in the United States over environmental regulation. While much needs to be improved, it is important to not regress on progress made during the last 50-60 years.

Over the last 50 years, the focuses of government regulation have changed dramatically. Major changes have mirrored public sentiment and organizational actions about why regulation is important. The history of environmental regulation is well documented in various sources.

Environmental laws and regulations protect, restore, and preserve natural capital working throughout the atmosphere, hydrosphere (i.e., oceans, seas, lakes, ponds, rivers, and streams), and lithosphere (the outer, solid part of the earth, including the crust and uppermost mantle). The world has interrelated cycles involving resources such as water, carbon, oxygen, nitrogen, phosphorous, and sulfur. Any system disturbance can disrupt other parts of the cycle. This fact is the core of all environmental law.

Environmental protection laws have two primary goals: (1) the prevention of irreparable environmental damage and (2) forcing consideration of environmental values into private and commercial activities. These foci became important in the United States around 60 years ago when large groups of people began recognizing that environmental protection was imperative to preserving social values, cultural values, and the planet’s natural resources. The National Environmental Policy Act of 1969 was established to provide “all Americans safe, healthful, productive, and aesthetically and culturally pleasing surroundings.” This act resulted in additional legislation (e.g., the Clean Air Act and the Clean Water Act).

Regulators have several structural options to achieve the two primary goals for environmental protection. Prescriptive regulation or CAC focuses on regulating the behavior of individual facilities and plants rather than providing incentives. One characteristic of this approach is that it requires firms to use pollution abatement technologies. For example, the Clean Air Act Amendments of 1990 required new electric power plants to install large scrubbers to remove sulfur dioxide from the flue gases. Another prescriptive characteristic is to impose performance standards (e.g., a ceiling on a firm’s emissions) that limit how much pollution can be emitted from a plant. Regulators combine these approaches to get the best available regulatory outcomes by considering various factors such as the costs of monitoring and enforcing standards.

Other methods of regulation include market-based or incentive-based instruments. These instruments are more contemporary, incorporate market principles into government policies, and are more decentralized than CAC mechanisms. These instruments focus on aggregate or market-level outcomes. Allowable trading is a characteristic of market-based regulation and is sometimes referred to as cap and trade. The usual process of cap and trade is that the government establishes a total allowable quantity of pollution (the cap) for a group of firms. It then allocates allowances to regulated firms, each with an allowance corresponding to a unit of pollution. At the end of a given period, a firm must retire one allowance for each unit of pollution they have emitted during the designated time frame. Firms that cannot meet their allowance limits can buy allowances from other firms to reduce their pollution at a lower cost. The total amount of pollution allowed is a fixed amount; however, allocation of that pollution among firms is left to the market.

Cap and trade has many variations in how allowances are initially allocated, distributed, and priced. Programs vary as to whether firms can save their excess allowances and what industries are included and not included in the regulation.

An increased effort in educating the consumer with information has gained popularity in the last 15 to 20 years. This effort not only helps firms better comply with regulations but also addresses one of the market failures discussed earlier. Right-to-know laws require the information provision by private firms (e.g., the E.P.A. has recently required firms to release information on carbon dioxide [CO2] emissions)Eco-labeling and certification programs fall under this effort to inform consumers on how various products were manufactured and the environmental characteristics of certain assets (e.g., the building where a firm operates). Many programs providing certifications are run by NGOs and tend to be voluntary rather than mandatory. Regardless, firms adopting this approach are beginning to address information gaps in the marketplace.

Enforcement behind various types of CAC or market-based regulation can be either governmental organizations or NGOs. Both exert pressure on companies to obtain a certain level of environmental stewardship. In the United States, the E.P.A. is the most prominent government agency for environmental regulation. The agency continues to administer nine major environmental statutes that were passed by Congress between 1969 and 1980.

The concern of most companies is that new political administrations, public sentiment, and global impacts tend to make environmental legislation a hard-to-hit target. This lack of clarity causes companies hesitation about investing in environmental improvements. For example,  the 2013 and 2014 E.P.A. regulations were unclear about how companies should comply with the reporting of CO2 emissions, delaying firms’ investments in new technologies such as carbon capture.

The relationship between government regulation and companies is strained even after 50 years of policymaking and regulation. This conflict is rooted in endless debate over whether the responsibility to protect the environment should be left up to capitalistic companies or governments. The current administration is actively engaged in dismantling many years of progress in environmental regulation. While the government will clearly remain a key player in protecting the environment, both corporations and political entities must determine how to analyze costs and benefits in order to create effective policies to protect the environment.

An effective measurement of costs and benefits can lead to informed policy decisions. In theory, decision making is relatively simple once we understand the costs and benefits. In reality, policy work is much more complicated. Cost-benefit analysis omits important political and moral considerations. What if we consider guaranteeing every person’s basic human rights at any cost? Or, will a region  be disadvantaged when locating polluting industries? Then, we have a different analysis versus a cost-benefit analysis. If we discount benefits that will occur in the future, current generations are privileged over future ones. Even the valuation of an ecosystem tends to devalue the resources in the region (e.g., putting a price on water, which cannot be replaced). Finally, the emphasis on efficiency does not account for distributional equity since there will be winners and losers. So, while the cost-benefit analysis yields clarity, other equity considerations must be considered before a government decides on a policy. One author phrased these equity and choice issues by stating, “ultimately humanity’s course will be determined less by iron laws of nature or by unbounded market powers…neither biology nor economics can substitute for the deeper ethical question, what kind of world do we want to live in?”

Even the judicial systems can impact companies by ruling on common law. These aspects of actions are not discussed here, but interested readers can find quality information from other sources.

Is regulation effective? 

In 2011–2012, the E.P.A. moved aggressively on its regulatory agenda to control GHG emissions and hazardous pollutants from utilities, power plants, and other sources. The E.P.A. implemented the GHG-tailoring rule, which required permits and the best available control technology to reduce GHG emissions from large sources. Business leaders and legislators have questioned the effectiveness of these actions, which have influenced other environmental legislative areas. Several news articles stated this move represented an unconstitutional power grab that would kill millions of jobs. These same leaders are trying to overturn the E.P.A.’s proposed GHG regulations. The House of Representatives Committee on Oversight and Government Reform asked trade associations and businesses to disclose the proposed or existing regulations that bothered them the most. The organizations had a litany of complaints; however, they cited the E.P.A. most frequently. Among the most-cited complaints was the E.P.A.’s role in regulating GHGs, emissions from industrial boilers, pollutants in Chesapeake Bay, coal ash, ground-level ozone, and nutrients in Florida water. Despite these allegations, when the same people were asked about specific regulatory initiatives, most were supportive of the regulations.

Another study shows, among other outcomes, that regulatory benefits exceed regulatory costs by 7 to 1 for significant regulation. For example, the regulatory benefit of the Clean Air Act exceeds its costs by 25 to 1; other studies show this ratio at 22 to 1. Many retrospective evaluations of regulations by the E.P.A. and Occupational Safety and Health Administration (OSHA) have found that regulations remain necessary; regulatory agencies have reduced fatalities, injuries, illnesses, and environmental damages in the 40 years since Congress enacted health, safety, and environmental protection. Studies also find that they do not produce significant job losses or adverse economic impacts on regulated industries.

One study shows that high regulatory costs are not responsible for slowing economic recovery and job growth. The study explains how claims by opponents of regulation fail in three ways: (1) the claims focus mostly on costs rather than balancing benefits, (2) the money spent on regulation spurs economic activity in the form of goods purchased and services rendered, and (3) many claims are based on unreliable data.

Several recent studies have found the economic effects of environmental policies depend on how strict those policies are. Policy strictness is a difficult concept to measure. One set of studies calculated an index based on “the explicit or implicit price of green policies.” If the prices are explicit, such as traded permits, the researchers assumed the most stringent measures are in place. They calculated stringency scores for 24 OECD countries for 1990 to 2012. They found that the strictest policies are in Nordic countries, whereas the more lenient policies are found in Greece; the USA falls in the middle. Ultimately, the study found that an increase in stringency of environmental policies as measured by their index does not harm productivity.

One could explain these results in one of two ways: (1) the damage from environmental regulation is not powerful enough to change the needle of overall productivity, and (2) the policies influenced firms to invest in innovation and therefore one could argue that policies do more good at the firm level than to the economy.

At the least, we need to maintain regulatory involvement or we may lose many of the positive environmental gains of the last century. We have to create environmental regulations that have positive environmental outcomes and do not destroy economic outcomes. Rhetoric against regulations cannot slow down the impacts of climate change or increase our resiliency to act.  Instead of dismantling the E.P.A., for example, ask them to engage in continued research about agency effectiveness.


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