Self-Regulation by Firms: A Familiar Argument Returns

 

As the Republican presidential primary season nears, many of the party’s leading lights are sharing energy regulation visions that are starkly different not only from the status quo, but also from the usual economic and efficiency-based critiques of environmental regulation. For example, Rick Perry embraces voluntary self-regulation, has engaged in a public (and largely unsuccessful) battle with the EPA over regulation of Texas’ energy facilities, and is harshly critical of the agency on the campaign stump. Yet, he is relatively moderate compared to some of his colleagues (Michele Bachmann, Newt Gingrich, and Ron Paul among them), who have called for the EPA's abolition entirely. Indeed, 15 Senate Republicans are co-sponsoring a bill to do just that.

While these critics oppose many environmental rules on their merits, most would acknowledge an environmental regulatory role for the states. Some, like Ron Paul, would rely upon private litigation to resolve environmental problems. All of this is perhaps not too surprising, since one of the central pillars of modern conservatism is opposition to post-New Deal rationale for federal government regulation. But it ignores the reasons why we abandoned private law remedies and state regulation in favor of national regulatory solutions in the first place.

It is absolutely true that environmental laws constrain the energy industry in myriad ways. The Clean Air Act limits the emission of fine particles, sulfur dioxide, and nitrogen oxides -- and soon, carbon dioxide -- from fossil fueled electric generating facilities and refineries. After litigation spanning more than a decade, the agency is about to regulate mercury emissions from coal-fired power plants, as well. Other federal laws restrict discharges of waste into waterways and onto land by energy facilities. This is all to say nothing of the lengthy environmental reviews that slow down the process of licensing and permitting energy facilities.

While compliance with these rules and restrictions is costly, the rules represent a public choice to balance development needs with environmental needs, and to force the owners of energy facilities to bear some of the environmental costs of energy production—costs that would have otherwise been shifted to society. We have chosen regulation because we know that, despite our best intentions, voluntary self-restraint does not work.

We may prefer to have clean air and clean water, but most voluntary collective efforts to reduce pollution or otherwise manage public resources sustainably are destined to fail. Why? Because in a competitive world, each of us can always get ahead (reduce our costs) by polluting more. This is the "tragedy of the commons," a kind of market failure well understood by economists for many decades.

Nor is state and local environmental regulation necessarily the answer. Because pollution does not respect political boundaries, politicians are continually tempted to try to shift pollution costs to others living downwind or downriver. At the same time, states may try to lower environmental standards in order to attract industry and jobs, creating a "race to the bottom" in which state environmental standards whither or disappear. The EPA’s “Cross State Air Pollution Rule,” which is the subject of Governor Perry’s latest fight with the EPA, is aimed squarely at this problem.

This is more than theory. Those of us who are old enough to remember what life was like before the passage of the major federal environmental laws in the 1970s can look to experience to support these claims. Congress began encouraging states to regulate to protect the environment shortly after World War II. Yet in the 1960s, American waterways were in a sorry state. The Cuyahoga River in Cleveland caught fire and burned for a week. Lake Erie was declared ecologically dead. Air quality in many cities was similarly poor. Despite their costs, pollution control laws have drastically improved the quality of air and water.

This is probably why environmental regulation remains popular with the general public. Most people understand that regulation does not necessarily imply less freedom, or a reduction in the quality of life. To the contrary, laws and regulations sometimes represent responses to market failure, and can improve the lives of even those who are the object of regulation. Presumably, neither businesses nor individuals would like to return to the days of the smog events known as "London fogs" or flammable rivers.

We can infer from the discussion of environmental issues in the Republican presidential contest that Republican primary voters may feel differently about federal environmental regulation. In today’s conservative parlance, EPA is a “job killer,” though one would be hard-pressed to argue that environmental regulation has driven the energy industry into the economic doldrums. Regulation makes some forms of energy more expensive, but it does so in order to address a kind of market failure—the failure to account for pollution costs that energy facilities shift to the rest of us.

Criticism of "big government" is attractive to many, conceptually and emotionally. It tends to become less attractive, however, the closer we look at specific regulations, because we are forced to confront the reasons why those same regulations were created in the first place. For that reason, look for a change in tone on environmental issues from the Republican nominee once the general election campaign begins in earnest, regardless of who that Republican nominee turns out to be.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.
 

About The Author

David Spence

Professor, Business, Government & Society,

Professor Spence's research and teaching focus on business-government relations with emphasis on energy and environmental regulation. He received his...

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