The Political Economy of Environmental Regulation

Introduction  Two main obstacles that stand in the way of effective government action to control pollution Imperfect information The opportunity for political influence

The Process of Environmental Regulation Step 1: US congress passes bill Step 2: EPA drafts regulations Step 3: State governments implement and enforce regulations

Major Points of the Legal Process US Regulatory model: “Judicial”. Regulations can be challenged in court. Regulatory process can be influenced at dozens of points prior to legal challenge

The E.P.A.  Founded in 1970 as and independent agency within the executive branch  Employs more than 16,000 people in 10 offices and Washington DC  Annual budget of more than $6 billion  Required to develop, implement, and enforce regulations under dozens of different laws

1. Imperfect Information  The EPA is provided limited resources; thus, the agency has to determine priorities  The EPA sponsors limited research of its own, so it must turn to industry, environmental groups, or universities for data about costs and benfits  How good is this information?

Regulation with Imperfect Information

Responses to the Reporting Bias Problem Improve the in-house analytic capability of the agency Rely on “incentive-compatible” regulation, see Appendix 12.0

2. Bureaucratic Discretion and Political Influence  Bureaucrats will retain substantial discretion in regulatory decision making because of imperfect information: ambiguous and often contradictory goals provided by Congress uncertainty in scientific and economic analyses  Because regulatory decisions impose substantial costs on industries, firms will devote resources to influencing this process

Bureaucratic Interests  Bureaucrats are likely to use their positions to satisfy three types of goals: Agency building External career building ○ Revolving Door. Many people working in environmental agencies often go on to work for firms in the industries they regulate. Job satisfaction

Revolving Doors at EPA

Job Satisfaction Ideology: Environmental or free-market? Exercise of power and authority The desire for “a quiet life”

Who Wins the Influence Game?  Votes Environmentalists  Dollars Industry

The Power of Dollars  Dollars can be used to buy a number of things useful for influencing the regulatory debate Technical studies Lobbying staff The promise of future jobs Access to legislators and regulators Votes (through advertising)

Balance of Power  Environmentalists sometimes have an edge in the legislative arena  Businesses dominate in the regulatory sphere  Environmentalists, anticipating that laws will be weakened upon implementation, try to push through Congress very stringent goals  Industry, galvanized by this threat, pours more resources into mitigating the regulatory impact

Zero-Sum Game of Political Influence  In a zero-sum game, the gains of one party can only come at the expense of another  This leads parties to overinvest resources in unproductive competition

A Zero-Sum Lobbying Competition

Corporatist Model of Regulation  Is cooperation, rather than competition, in everyone’s best interest?  A “corporatist” model of regulation (common in Europe) Regulations decided in a bargaining context between representatives of “corporate” groups--the EPA, private firms, and environmental organizations

Problems With Corporatist Regulation  Reduces general public access to decision makers; often perceived as a restriction of democracy  The US does not have a strong labor or social-democratic party to counterbalance business  Environmental groups or the EPA may not represent the public’s general interest

Reducing Influence in the Political Process  Eliminate the status that lobbying now holds as a tax-deductible business expense  Campaign finance reform could reduce efforts by all sides to gain advantage  Environmental federalism: moving more responsibility for regulation to the state level?

Lessons From Communism  Governments can create environmental disasters that rival, if not exceed, those generated by private economic actors (Many of the worst hazardous waste sites in the US resulted from US military programs)  However, in capitalist countries, government is not the primary source of environmental problems

Lessons from Communism  Needed: an effective government process forcing economic actors to internalize the externalities they impose on others.  A demand for environmental protection can expressed most effectively through democratic pressure on government

Information needed for Successful Environmental Policy  The power of information: The Toxics Release Inventory: requires companies to publicly report on their releases of 450 chemicals suspected or known to be toxic. Mere requirement of publication of data has lead to significant reported declines in emissions.