Environmental Law and Policy

This chapter for the Handbook of Law and Economics provides an economic perspective of environmental law and policy. We examine the ends of environmental policy, that is, the setting of goals and targets, beginning with normative issues, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. We examine this analytical method in detail, including its theoretical foundations and empirical methods of estimation of compliance costs and environmental benefits. We review critiques of benefit-cost analysis, and examine alternative approaches to analyzing the goals of environmental policies. We examine the means of environmental policy, that is, the choice of specific policy instruments, beginning with an examination of potential criteria for assessing alternative instruments, with particular focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional, command-and-control mechanisms, market-based instruments, and liability rules. Three cross-cutting issues receive attention: uncertainty; technological change; and distributional considerations. We identify normative lessons in regard to design, implementation, and the identification of new applications, and we examine positive issues: the historical dominance of command-and-control; the prevalence in new proposals of tradeable permits allocated without charge; and the relatively recent increase in attention given to market-based instruments. We also examine the question of how environmental responsibility is and should be allocated among the various levels of government. We provide a positive review of the responsibilities of Federal, state, and local levels of government in the environmental realm, plus a normative assessment of this allocation of regulatory responsibility. We focus on three arguments that have been made for Federal environmental regulation: competition among political jurisdictions and the race to the bottom; transboundary environmental problems; and public choice and systematic bias.

Centralized Oversight of the Regulatory State

Born out of a Reagan-era desire to minimize regulatory costs, and not fundamentally reconsidered since its inception, the centralized review of agency rulemakings has arguably become the most important institutional feature of the regulatory state. Yet it is a puzzling feature: although centralized review is sometimes justified on the ground it could harmonize the uncoordinated sprawl of the federal bureaucracy, the agency tasked with regulatory review, the Office of Management and Budget (OMB), has never embraced that role. It has instead doggedly clung to its original cost-reduction mission, justifying its function as a check on the federal bureaucracy with reference to the pervasive belief that agencies will systematically over-regulate. This article shows why this belief is wrong. The claim that agencies are systematically biased in favor of regulation finds little support in public choice theory, the political science literature, or elsewhere. In any event, theories predicting rampant over-regulation are no more plausible than alternative theories suggesting that agencies will routinely under regulate. Even if zealous agencies captured by powerful interest groups did characterize the regulatory state, OMB review is a curious and poorly designed counterweight. There is no reason to believe that OMB's location in the Executive Office of the President will inoculate OMB from the pathologies that afflict other agencies, and some reason to think that it will exacerbate them. As a response to these problems, we urge a reconsideration of the foundational role that centralized review should play in our regulatory state, and a revival and re-conceptualization of the neglected principles of harmonization that once ostensibly animated it.

Environmental Law and Policy

This chapter provides an economic perspective of environmental law and policy with regard to both normative and positive dimensions. It begins with an examination of the central problem in environmental regulation: the tendency of pollution generators in an unconstrained market economy to externalize some of the costs of their production, leading to an inefficiently large amount of pollution. We examine the ends of environmental policy, that is, the setting of goals and targets, beginning with normative issues, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. We examine this analytical method in detail, including its theoretical foundations and empirical methods of estimation of compliance costs and environmental benefits. We include a review of critiques of benefit-cost analysis, briefly examine alternative approaches to analyzing the goals of environmental policies, and survey the efforts of the Federal governmental to employ these analytical methods. The chapter also examines in detail the means of environmental policy, that is, the choice of specific policy instruments, beginning with an examination of potential criteria for assessing alternative instruments, with particular focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional, command-and-control mechanisms, economic incentive or market-based instruments, and liability rules. In the economic-incentive category, we consider pollution charges, tradeable permit systems, market friction reductions, and government subsidy reductions. Three cross-cutting issues receive attention: implications of uncertainty for instrument choice; effects of instrument choice on technological change; and distributional considerations. We identify a set of normative lessons in regard to design, implementation, and the identification of new applications, and we examine positive issues, including three phenomena: the historical dominance of command-and-control; the prevalence in new proposals of tradeable permits allocated without charge; and the relatively recent increase in attention given to market-based instruments. Finally, the chapter turns to the question of how environmental responsibility is and should be allocated among the various levels of government. We provide a positive review of the responsibilities of Federal, state, and local levels of government in the environmental realm, plus a normative assessment of this allocation of regulatory responsibility. We focus on three arguments that have been made for Federal environmental regulation: competition among political jurisdictions and the race to the bottom; transboundary environmental problems; and public choice and systematic bias.

Fallacies in the Design of Climate Change Policies: A Response to Richard Epstein

This Essay criticizes Professor Richard Epstein’s approach to climate change regulation, which he characterizes as one involving taking modest steps at first, observing the results of these steps, and then using the lessons learned to inform the next steps. Epstein’s approach depends critically on a particular class of damage function determining how greenhouse gas emissions cause harm—specifically, damage functions that lack discontinuities. And it also depends on the ability to observe in real time how the function occurs. Neither of these conditions are met with respect to climate change. The Essay also shows that Epstein’s approach is further undermined by the structure of energy markets, in which investments are large and lumpy as opposed to small and continuous. For example, Epstein’s “small steps” approach might lead to significant current investments in natural gas facilities, like natural gas pipelines, instead of a bolder move to renewables. These lumpy investments cannot be easily undone when it then turns out that our approach to climate change regulation was too cautious, both for economic and public choice reasons