12.0 Introduction

In 1970, the U.S. Congress passed the Clean Air Act, declaring it the law of the land that the air breathed by Americans should provide “an adequate margin of safety…requisite to protect the public health.” Yet, early in the twenty-first century, some tens of millions of people in the United States are still exposed on occasion to ground-level ozone (smog) concentrations considered dangerous; air toxic emissions at some industrial facilities still remained high enough to impose cancer risks greater than 1 in 1,000 to surrounding residents.

Is this evidence of government failure? Some would turn these figures around, saying instead, “look how far we have come.” Many cities now meet the ozone standard that didn’t in 1970; more significantly, consider how many would be failing today if we had not taken the measures we have. In the next few chapters, we will look in more detail at the overall impact of regulation, which can be viewed as a glass half-empty or half-full. However, many would still argue that 45 plus years is a long time to wait for a law to be enforced.

What lies behind this slow progress? Scientific uncertainty as to an “adequate margin of safety?” High compliance costs? Other priority areas for the Environmental Protection Agency (EPA)? Insufficient funds allocated to the EPA by Congress? Industry influence over legislators and regulators? All of these factors have played a role. The point here, however, is simply to illustrate that passing a law is only the first step in the long process of changing market behavior.

Economists have identified two main obstacles that stand in the way of effective government action to control pollution. The first is the highly imperfect information that regulators possess. To begin with, regulators are never given a clear-cut goal. For most pollutants, it is difficult, if not impossible, to define “safe” emission levels in purely scientific terms. Thus, a political definition of safety, based on technical information, must be worked out. More generally, the available risk assessments give only rough, if any, indications of health risks, and cost estimates can be equally unreliable. Moreover, regulators must often turn for information to the very sources they seek to regulate. Thus, as we shall see, many economists have focused on improving regulators’ access to information as a crucial strategy for improving regulation.

However, ultimate uncertainty about the “facts” means that any decision to promote safety or efficiency, while informed by the technical merits of the case, will also leave substantial room for bureaucratic discretion. With the opportunity for discretion comes the opportunity for political influence. Government officials clearly have motivations other than fulfilling the letter of the law: these include career building or satisfying ideological preferences, for example. Given the existence of bureaucratic discretion, industry and environmental groups deploy substantial resources to affect elections, government legislation, and regulatory decisions.

This chapter begins by detailing the generic process of environmental regulation and then goes on to explore, in some detail, the obstacles presented by poor information and political influence. Finally, we briefly consider what lessons the disastrous environmental policies followed by the former Soviet Union hold for Western market-oriented democracies. Chapter 13 then provides a more detailed overview of the major environmental laws now in effect.

12.1 The Process of Environmental Regulation

Today, the level of ozone concentration in the air (known as the ambient pollution level) officially designated by the government as providing an “adequate margin of safety” is 0.08 parts per million (ppm). Where did this particular environmental regulation, and thousands of others similar to it, come from? The history of a regulation such as ozone control is a three-step process.

12.2 Regulation under Imperfect Information

The EPA was founded in 1970 as an independent agency within the executive branch of government. It now employs more than 17,000 people in 10 regional offices and Washington, DC, and has an annual budget of more than $7 billion. The agency is required to develop, implement, and enforce regulations under dozens of different laws. The EPA has many ongoing projects and responsibilities, including the regulation of tens of thousands of water pollution sources and hazardous waste dumps, hundreds of thousands of stationary air pollution sources, millions of automobiles, and hundreds of new chemicals and pesticides introduced each year.

To accomplish these tasks, the EPA is obviously provided only limited resources. Thus, the agency has to determine priorities—not all of its regulatory functions can be adequately performed without spreading personnel too thin. As a result, in virtually all of its decisions, the agency gathers or generates less than full information about the problem before acting.

The extent of this information gap was revealed by a joint EPA–Amoco study of benzene air pollution at an Amoco oil refinery in Virginia. The agency had issued regulations to control benzene emissions from wastewater ponds at refineries. These regulations, based on research done in 1959, proved dramatically far off base. When the joint study project was completed, ponds were discovered to be polluting at a level 20 times lower than that predicted. The real benzene pollution problem arose on the loading docks, where fuel was pumped into barges.

Amoco eventually constructed a $41 million treatment system to deal with pollution from the ponds. Meanwhile, much more extensive pollution from the loading docks, which could have been controlled for $6 million, went unregulated and unabated.³ How could such a situation develop? In general, before writing a regulation, the EPA has neither the staff nor the legal right to conduct the kind of intensive examination of an industrial facility that it eventually did in the Amoco case. Usually, the agency can sponsor only limited research of its own; as a result, it must turn to industry, environmental groups, or university researchers for much of its data.

In addition to relying on outdated or poor information, the EPA must contend with a reporting bias when it turns to industry for information about compliance costs. To illustrate the problem, suppose the EPA seeks to regulate a pesticide thought to contaminate groundwater. The agency is considering a ban on the use of a pesticide in high-risk counties. As discussed in the next chapter, pesticides are regulated under an efficiency standard—Congress has directed the EPA to weigh benefits against costs in this case. Figure 12.1 illustrates our efficiency standard diagram.

The true marginal benefits and costs of the ban are reflected by the curves labeled MB and MC. If the EPA had access to this information, efficiency would require a ban applying to $A^{*}$ acres. However, suppose the EPA must rely on agrichemical company sources for information about how much it will cost farmers to switch over to alternative pest-control methods. Industry has a clear incentive to lie and overstate the cost $\left({\text{MC}}^{\prime }\right)$. If the industry does so, and the EPA uses the industry estimates, the agency will ban $A^{\prime }$ acres, an inefficiently low number.

There are two responses to reporting bias. The first is to improve the in-house analytic capability of the agency. While the EPA will never have the resources to fund all the research it needs, concentrating on training and retaining technical personnel is a basic aspect of improved regulation. However, political developments can work against this goal. For example, following the general trend toward privatization of services, much of the EPA’s technical work has been contracted out to private consulting firms. The ostensible motive was to save money (a goal that, in fact, has often proved elusive), but the net result was to reduce the agency’s technical capabilities. Reliance on contractors reached the point, according to some critics, that the agency could not even evaluate whether contract work was being performed well. Moreover, many of the consulting firms also depend for their livelihoods on contracts from industries regulated by the EPA. Reducing outside contracting would help build up the EPA’s technical expertise and reduce conflicts of interest.

The second approach to the information problem is to rely on the so-called incentive-compatible regulation. Regulation designed to elicit truthful information is called incentive-compatible because the incentive for the regulated party is compatible with the regulatory goal. Using the mix of tools at their command, regulators can, in fact, do better than is illustrated in Figure 12.1. As we discuss more fully in Appendix 15B, it turns out that if regulators were to control pesticide use by taxing rather than banning it, then firms would have an incentive to understate rather than overstate their control costs. In Appendix 15B, we also find that an appropriate mix of taxes and marketable permit systems (discussed more fully in Chapters 15 and 16) can help provide just the right incentives for truth telling.

12.3 Bureaucratic Discretion and Political Influence

Regardless of the degree to which the EPA is able to hone its information-gathering and evaluation abilities, regulatory issues will never be resolved in a clear-cut manner. The ambiguous and often contradictory goals provided by Congress, as well as the underlying uncertainty in scientific and economic analyses, ensure that bureaucrats will retain substantial discretion in regulatory decision-making. Because regulatory decisions impose costs on affected industries, businesses will devote resources to influence the discretion that regulators exercise (in ethical, questionably ethical, and unethical manners) just as they devote resources to minimizing labor or energy costs.

In addition, simply because a business lobbies for regulatory relief does not mean that the relief is unjustified. It remains true that industry has the best knowledge about the likely impact of regulation and that bureaucrats have the power to arbitrarily impose substantial burdens on firms for reasons that are not obvious. Thus, the ability of industry (and environmental groups) to lobby regulators is not necessarily a bad thing. The problem is that legitimate access can become transformed into undue influence. This section considers factors that motivate bureaucrats to stray from “doing their job.”

Environmental regulators are expected by the public to pursue their congressionally mandated goals of efficiency or safety in pollution control. However, similarly to all other people, they have personal interests to consider. To the extent of their ability, bureaucrats are likely to use their positions to satisfy three types of goals: agency building, external career building, and job satisfaction.

Many observers of bureaucracy (both governmental and corporate) have argued that a primary goal of managers is agency growth. Protecting and enlarging the agency budget, of course, can make the agency more effective in doing its primary job, but it also provides more perquisites (new computers, travel, opportunities for promotion, etc.) and prestige for agency personnel. A bias toward unwarranted growth may lead to “overregulation” (especially from an efficiency point of view) as the agency personnel engage in new activities to justify greater funding. On the other hand, it may just lead to wasted money.

The second factor that regulators keep in mind is external career building. I (Eban) once interviewed for a job in the Antitrust Division of the U.S. Justice Department. The typical career track, I was told, involved working at Justice for 5 years, at which point one’s salary topped out. Most people then went on to work for law firms or economic consulting firms that defended companies from antitrust suits. This so-called revolving door between industry and its regulators is widespread. EPA employees need to keep in mind future career options when making tough regulatory decisions.

Although there are some jobs in environmental organizations or academic institutions, most private-sector jobs for people with experience in the EPA, and virtually all the high-paying ones, are in private industry. Thus, the potential for conflict of interest clearly exists. More significantly, in the struggle to define exactly what the public interest really is, top policymakers are often clearly aware of the industry position as they are on intimate terms with many from that side of the aisle. They may be less aware of what it is like to live next to a hazardous waste dump.

This leads us to the third bureaucratic motivation that might influence regulatory policy: job satisfaction. Are bureaucrats likely to use their discretion to draft and enforce aggressive or meek laws? Three factors come to play here: ideology, power, and the quiet life. First, regulators with either an environmental or a free-market ideological bent may satisfy their own personal preferences for more or less regulation. Second, regulators may impose harsh restrictions on industry because it provides them with power and authority. Conservatives have often charged that the EPA is staffed by power-hungry environmental zealots. And on the face of it, it seems more likely that persons attracted to a job in the EPA would be sympathetic to environmental concerns.

Yet, the political appointees who run the EPA are more likely to come through the revolving door from industry and to share a deregulatory philosophy, especially if appointed by a conservative president. Probably, the most jaw-dropping example of bureaucratic discretion was the decision during the George W. Bush years to allow the widespread practice of “mountaintop removal” to mine coal in Appalachia. In this practice, companies literally blow the tops off of mountains to get at the underlying coal. They then dump the debris in the surrounding areas, including on top of streams. Over the last two decades, close to a thousand miles of streams in Appalachia have been buried by mine waste.

Mountaintop removal clearly runs counter to a regulatory mandate in 1983 that required mining companies to avoid mining activities within 100 feet of a stream, and it also appears to be a clear violation of Clean Water Act statutes that require protecting surface-water quality. But, exercising their bureaucratic discretion, both the Office of Surface Mining and the Army Corps of Engineers regularly provided permits for the dumping of mine waste, especially from 2000 to 2008. For much of this time, the permitting process was overseen by a former coal-industry lobbyist who had been appointed to the job by President Bush.⁴

One final factor that probably helped this process along is the desire on the part of agency personnel for “a quiet life.” The road to advancement within a bureaucracy is often to avoid antagonizing outside interests and to proceed with caution when doing so. The outcome is an emphasis on procedure over substance. This generates a substantial bias toward the status quo. One former EPA employee maintains that EPA officials are more interested in keeping their heads low than in sticking their necks out. Because industry is highly concerned with the process of drafting the details of regulations, mid-level bureaucrats often find themselves in day-to-day contact with industry officials. Here, “in addition to real and hinted at job opportunities,” EPA officials become aware that “people who cooperate with the lobbyists find that the lobbyist will lobby for their advancement with upper management. Those who don’t cooperate will find the lobbyists lobbying for their heads.”⁵

This section has identified three potential goals beyond their legislative mandate that bureaucrats might pursue: agency growth, external career building, and job satisfaction. Growth suggests, if anything, a tendency toward overregulation; career building would lead to underregulation; and job satisfaction might generate either. As a result, it is not possible to identify an a priori bureaucratic bias. However, it is worth keeping in mind that bureaucrats are people too. Similarly to anyone else, they take pride in a job well done—serving the public interest as they see it.

12.4 Who Wins the Influence Game?

The answer to this question, of course, depends on whom you ask. Environmentalists would point to almost 50 years of delay in enforcing the Clean Air Act; industry would respond that the laws themselves make unrealistic demands. Rather than answer this question outright, we can identify the resources available to the two sides and the arenas in which the parties tend to prevail.

The two types of resources in the political world are votes and dollars. In general, environmentalists are better at martialing voting support, while industry has greater monetary resources at its command. Tough environmental laws command broad public support in the polls, even when the opportunity cost of higher prices is explicitly factored in. Thus, environmentalists have a large natural political constituency. Moreover, among the public, environmentalists are a more trusted source of information about environmental issues compared to either industry or government officials.

This advantage is translated into influence in the crafting of national environmental protection legislation. Ten major national environmental organizations (Sierra Club, National Wildlife Federation, National Audobon Society, Environmental Defense Fund, Natural Resources Defense Council, Wilderness Society, Nature Conservancy, Greenpeace, Ducks Unlimited, and World Wildlife Fund) represent over 10 million members. These groups hire experts to analyze the benefits and costs of new policies, lobbyists to spread this information and promote environmental legislation, and lawyers to sue government agencies. The combined annual policy analysis, lobbying, and legal budgets of these groups runs into tens of millions of dollars—a substantial sum, but much less than the resources that industry can bring to bear. However, environmental dollars often have greater leverage among many legislators due to the votes they represent as well as to a higher perceived level of credibility.

It is fair to say that in the past, environmentalists won substantial gains in drafting and passing national environmental protection laws. This was reflected in the general tendency of environmental law to set safety rather than efficiency standards for pollution control as well as in the passage of substantial environmental legislation under conservative Presidents Bush (senior) and Reagan.

Due to their ability to mobilize voters, grassroots environmental movements have also done well at the local level, particularly in blocking the siting of new facilities (power plants, landfills, incinerators) and, in some cases, promoting alternatives such as recycling. Environmentalists have also had some success leveraging their voting power at the state level (California, New York) but have faced severe challenges in the states traditionally dominated by particular industries (Louisiana, oil, gas, and chemicals; and Kentucky, coal).

This has been evident in fights over climate legislation. In early 2009, the fossil-fuel industry was outspending environmental lobbyists by 10 to 1. On advertising, the ratio was 3 to 1: industry spent $76 million on ads in the first 4 months of the year, and environmental groups, including Al Gore’s Alliance for Climate Protection, the Environmental Defense Fund, and the Sierra Club, countered with $28 million in the same period. At the same time, seven key Democratic lawmakers on the House committee deciding the initial shape of the legislation each received more than $100,000 from oil and gas, coal, and electricity companies during the 2008 election cycle.⁶

Besides the fossil-fuel industry, a few of the dozens of other major industry trade groups with a strong lobbying presence in Washington include the Chemical Manufacturers Association, the Fertilizer Institute, the American Paper Institute, and the Chlorine Institute. In addition, most of the large chemical, petroleum, and manufacturing firms maintain their own Washington staffs and/or hire DC law firms to lobby on their behalf.

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, and votes (through advertising).

As we have stressed, control over information is a crucial aspect of regulation. Thus, the ability to hire “experts” to conduct technical studies of benefits and costs is an important channel of influence. A good example was the “full court press” launched by industry against the EPA’s proposed technological standard for injection of hazardous wastes into deep wells. The Chemical Manufacturers Association, along with many of its members—Monsanto, CYRO Industries, Dow, DuPont, BP Chemicals, Celanese, Cynamid, and ARCO—met repeatedly with mid-level EPA officials, providing them with data about the cost of the new proposals as well as warnings of plant shutdowns. Some of the lobbyists threatened political repercussions if the agency did not respond. According to one EPA official, “We were attacked on a technical basis—the kind of case they felt they could make in a lawsuit if we didn’t yield. Industry argued there would be huge costs if we went forward with the proposed rule. Depending on who you listened to, it was the end of the world.”

The EPA’s final rule was ultimately watered down substantially. The point here is not whether the company’s claims were correct, which they may have been. Rather, in the information war surrounding the impact of the regulation, environmentalists did not have the resources to bring much expert testimony to bear. Moreover, even if they had access to information about costs, environmental groups did not have the staff capacity of the chemical companies. Dozens of industry lobbyists repeatedly delivered the same message to mid-level EPA officials, as well as to presidential staff. In this particular case, there is evidence that pressure from a close presidential adviser influenced the final EPA decision.⁷

Money buys information, lobbying and legal staff, and access to politicians and regulators. Out-and-out bribery—I’ll contribute $5,000 to your campaign if you vote against bill X—is not common in the United States, though it is not unknown. Instead, the more money one contributes to a political campaign (or party), the more often one gets to meet with the politician or his or her appointees at the EPA to make one’s case known. In an information war, where all sides can make a “reasonable” case on the surface, access is easily translated into influence. Industry has not been able to translate its dollar advantage into many clear-cut victories at the legislative level. Tough environmental laws remain on the books. However, industry is much more effective in using its resources to dilute the impact of these laws. Through the revolving door of domination of information generation and delivery, large legal staffs, and superior access to politicians and political appointees, industry probably wins more often than it loses in all of the steps subsequent to the passage of laws. From the public-comment phase in the drafting of regulations by the EPA, through the implementation and enforcement of these laws by state officials, through the budgeting of resources to these agencies, through the opportunity for court challenges, and through bargaining over and compliance, industry has many opportunities to influence how the ultimate regulatory process will work.

Washington lawyer Lloyd Cutler, whose firm has represented many corporate clients, put it this way: “It would be wrong to think that corporations are on top or ahead. They feel very put upon or defeated. It’s true that they manage to survive and deal and push things off—they feel the added costs of regulation exceed the benefits (editor’s note: an efficiency perspective!)—but they would say the notion that they now control or dominate the health and safety agencies is just crazy.” Still, Cutler explained, “It’s harder to pass a law than to stop one. On the whole, I would say the professional lobbyists and lawyers prefer to live in this world where there are so many buttons to push, so many other places to go if you lose your fight.”⁸

There are many potential solutions to the problem of bureaucratic discretion and political influence; several are explored later in this book. At this point, we focus on the potential for political reform of the regulatory process itself.

12.5 Political Reform of Regulation

Efforts at gaining political influence are often a form of the positional competition discussed in the previous chapter. In such a zero-sum, or negative-sum, game, the gains of one party can come only at the expense of another. Under these circumstances, a natural tendency is to overinvest resources in unproductive competition. This situation can be analyzed through the prisoner’s dilemma model, last seen in our Chapter 11 discussion of the rat race. Figure 12.2 illustrates the situation in a hypothetical regulatory decision about an emissions standard.

Each side must decide how many lobbyists to deploy. If neither group lobbies, then a standard of 4˜ppm will be set. Note that an identical result will occur if both sides send a lobbyist—the extra efforts cancel one another out. If environmentalists don’t lobby and industry does, then a loose standard of 6 ppm will result. If, on the other hand, industry doesn’t lobby and environmentalists do, a strict standard of 2 ppm will emerge.

What is the likely outcome of this kind of setup? If there is no agreement to restrict lobbying, environmentalists must assume that industry will lobby (and vice versa for industry). Thus, each side will choose a lobbying strategy for defensive purposes, even though the same outcome could be achieved at lower cost. Moreover, the process is likely to escalate into a full-blown “lobby race” as each side tries to forestall the other from gaining an advantage.

An agreement to limit lobbying seems in the interests of both parties. If cheating on such an agreement were easily observable, the agreement would be self-enforcing: If industry observed environmentalists cheating, it could simply retaliate by sending in its own lobbyist. However, if cheating is not easily detectable, as is the case in lobbying, the agreement will break down as each side cheats to protect itself from the possibility that the other will cheat!

The prisoner’s dilemma model implies that cooperation rather than competition might be in everyone’s best interest. How might this insight actually be applied in the regulatory arena? One approach is to adopt a corporatist model of regulation. Here, regulations would be explicitly decided in a bargaining context between representatives of “corporate” groups—the EPA, private firms, and environmental organizations. In exchange for being included at the table, all the groups would have to agree to abide by and support the final outcome. The EPA would thus be given much more flexibility in determining policy and be insulated from subsequent lawsuits. In essence, the corporatist model accepts that “a few big interests” determine the details of government environmental policy and provides a more efficient forum for them to do so.

European countries have adopted a more corporatist approach to regulation compared to that we have in the United States. The fruits of corporatism can be seen in efforts by the Netherlands; since 1989, the Dutch government has instituted a series of “environmental covenants” with different industries. These covenants are voluntary agreements among government regulators and industry to reduce specific pollutants by specified amounts, and once signed, they have the force of a contract under civil law.⁹

However, it is not clear how well corporatist regulation really works, nor whether it can be successfully translated to the United States. Corporatism requires trimming back general public access to decision-makers and is often perceived as a restriction of democracy. Who, for example, gets a seat at the table? Indeed, some believe that the environmental movement has already been split between the “conservative” DC-based national groups and more “radical” grassroots organizations and that the latter have accused the former of selling out to industrial interests. Moreover, the national groups have few members from working-class or minority communities, which have their own environmental interests.

Unlike European countries (and Canada), the United States does not have a strong labor or social-democratic political party to counterbalance the political influence of business. Partly for this reason, Americans have been much more distrustful than Europeans of placing discretionary decision-making power in the hands of government bureaucrats. In the United States, it is not clear that the national environmental groups, which are unaccountable to the voters—or indeed, the EPA, have the power to represent and enforce the public’s general interest in environmental protection. Thus, many people would oppose trading in the restrictions imposed on bureaucratic discretion under the current judicial regulatory model for a more goal-oriented, but less open, corporatist model.

If excess resources are indeed being devoted to influencing the political process, a straightforward economic response would be to raise the cost by eliminating the status that lobbying now holds as a tax-deductible business expense. More generally, campaign finance reform could serve to reduce the efforts by all sides to gain advantage. Unfortunately, given the benefits to incumbent politicians of the existing system, genuine campaign finance reform has proven quite difficult to achieve. Finally, moving more responsibility for regulation to the state level, a policy known as environmental federalism, would both bring issues closer to those affected and reduce the influence of Washington-based interests. The case against such environmental federalism is that competition between states for business will lead to lower overall levels of environmental protection. The seriousness of this latter problem remains unclear.¹⁰

Political reform of the regulatory process might occur through a move away from a judicial to a corporatist model, by reducing the role of money in politics by raising the cost of lobbying or campaign finance reform or through decentralization. However, while potentially helpful, none of these reforms would fundamentally challenge the underlying problems of imperfect information and political influence in the regulatory process. Indeed, these two issues have led some to despair over government’s ability to stem the process of environmental decline. As an extreme example of government failure, we briefly turn to the experience in the former Communist nations.

12.6 Better Information, More Democracy

The environmental consequences of limited information and lack of political accountability were made clear after the fall of the Berlin Wall in 1989, when the frightening conditions in the former Communist regimes became public. Driven to industrialize at all costs and despite official laws mandating strict environmental protection, officials in the state-owned industries proceeded to raise the level of poison in the land, water, and air to fatal degrees. Commenting on the widespread use of highly toxic pesticides such as DDT; the contamination and exhaustion of agricultural water resources; urban centers with air pollutants typically five times above legal levels; rivers and seas filled with untreated agricultural, industrial, and human waste; and death and disease from the Chernobyl nuclear accident and military nuclear wastes, one set of authors concluded: “When historians finally conduct an autopsy on the Soviet Union and Soviet Communism, they may reach the verdict of death by ecocide.”¹¹

What lessons can we learn from this story? Traditional conservatives have argued that the lesson is a simple one: “free-market economics, good; government involvement in the economy, bad.” Yet, with the Soviet model of a centrally planned economy discredited, the environmental problems the globe faces are now generated primarily by market economies and market-driven growth. Thus, the traditional conservative lesson provides us with only limited guidance. Clearly, governments can create environmental disasters that rival, if not exceed, those generated by private economic actors. Yet, in capitalist countries, government is not the primary source of environmental problems.

Instead, as both world population and economic activity continue to grow, the Soviet story is best viewed as a cautionary tale: without an effective governmental process forcing economic actors to pay for the externalities they impose on others, ecocide is a future that may await many countries, if not the entire globe.

Most economic comparisons between communism and capitalism have focused on the market versus private ownership distinction. Yet, in capitalist countries, environmental degradation is the result of factors external to market transactions. A demand for environmental protection can often be expressed only through government action. Thus, the key issue is the responsiveness of the political system to this kind of demand.

Given this, the political distinction between Western countries and the former USSR—democracy versus totalitarianism—is probably more relevant to environmental concerns than the market versus state ownership distinction. When scientists or environmentalists in the Soviet Union attempted to bring information forward, they did so only at personal risk and generally found themselves cut off from any effective means of communication. Whenever economic decision-makers can insulate themselves from those exposed to pollution—through either control over information or suppression of dissent—externalities are unlikely to be accounted for by the political system.

For example, one need not look to the Soviet Union to find governmental abuses of the environment. Many of the worst hazardous waste sites in our country resulted from U.S. military programs, shrouded in Cold War secrecy. At the Hanford nuclear site in eastern Washington, for example, the U.S. Department of Energy has created a gargantuan waste problem, the extent of which is only now becoming clear after 50 years of tight information control. The cleanup at Hanford, if indeed it goes through, is expected to cost at least $60 billion—more than the entire Superfund program directed at civilian dumps. In the United States, however, the potential for this kind of environmental abuse by the government has been largely reigned in by mandated public scrutiny of major decisions: the environmental impact statement process described in Chapter 9.

Consider another example. Agricultural workers in many poor, market-oriented countries employ the same environmentally destructive agricultural techniques so decried in the Soviet Union. These include the widespread use of pesticides, such as DDT, that have been banned in developed countries. Farmworkers and their families who bear the brunt of the environmental costs in these countries have neither access to information about alternatives nor sufficient political power to challenge the marketing efforts of the firms that profit from the sale of these chemicals. (Indeed, farmworkers in our own country have much less influence over environmental policy than suburban professionals who provide the core support for major environmental groups.)

Both access to information and the practice of effective and widespread democracy are thus necessary ingredients for successful environmental policy. Without them, citizens cannot translate their demand for environmental protection into a reality. Absent substantial pressure from those affected, government will have neither the power nor the inclination to force economic decision-makers—whether state bureaucrats, managers of private corporations, or ordinary citizens—to internalize the external environmental costs generated by their actions.

Part IV of this book explores how this prescription of knowledge and power might be applied in poor countries to address problems ranging from population growth to conservation. Here, in the United States, a general trend toward accountability has been embodied in environmental law, ranging from the EIS to requirements for public hearings in the regulatory process to innovations such as the Toxics Release Inventory. In 1986, after a chemical factory in Bhopal, India, exploded, killing and maiming thousands, the U.S. Congress passed the Emergency Planning and Community Right-to-Know Act. The act required companies to publicly report on their releases of 450 chemicals suspected or known to be toxic, with many of them unregulated.

The Toxics Release Inventory provides self-reported data on chemical releases on a plant-by-plant basis across the country. This information is now on the Web at www.epa.gov/tri; you can go there and check out emissions from a plant in your neighborhood! The TRI has a variety of goals, but an important one has been to make industry decision-makers more accountable to the communities in which they operate. The TRI has spawned a variety of community-based, nonregulatory efforts to reduce chemical emissions. It provides a good example of how expanded information and effective democracy can serve to internalize externalities associated with economic production.¹² (For more on the TRI, see Chapters 13 and 14.)

What, then, are the environmental lessons from communism? Given that government action is needed to force market actors to account for external costs, the experience of the former USSR teaches that “unaccountable government intervention is bad.” When government uses its authority to silence its critics or distort and control information flows, or when those on the receiving end of environmental externalities have little real power, government’s failure in the environmental arena is likely. Strict environmental laws, without a vigilant, informed citizenry, are hollow laws.

12.7 Summary

This chapter has provided an introduction to the political economy of regulation. The regulatory process begins with national legislation. The EPA then translates the law into specific regulations. Finally, state governments implement and enforce the guidelines developed by the EPA. The United States has adopted a judicial model of regulation in which the EPA is required to go through a formal and elaborate process of information gathering and public hearings and must establish a quasi-legal basis for its major regulatory actions. The judicial model is designed to limit abuse of authority by regulatory bureaucrats but can be easily exploited to generate regulatory gridlock.

From an economic point of view, the primary obstacle to effective regulation is imperfect information. Regulators have only limited resources with which to gather information on the costs and benefits of a proposed rule and so must often turn to the very sources they regulate for information about the problem. This sets up a reporting bias problem: how can regulators be sure that the information they receive is correct? One way is to train and retain qualified technical personnel within the regulatory agency. Another way is to design regulatory policy to minimize incentives for distortion.

Regardless of how much good information the agency collects, however, bureaucrats are still left with substantial discretion in interpreting how environmental laws are to be implemented. Considerations of bureaucratic interests—agency building, personal career building, and job satisfaction—reveal no necessary bias toward over- or underregulation. Yet, discretion raises the problem of political influence.

Who wins and who loses in the influence game? Due to their superior ability to mobilize votes, environmentalists sometimes make substantial gains in the legislative arena, while given their monetary advantage, industry tends to come out ahead in the regulatory process. The big loser from this adversarial structure is public faith in the rule of law. Public disenchantment with the EPA is a serious problem as an effective and respected regulatory agency is the principal tool we now have for controlling market externalities.

The prisoner’s dilemma model suggests that competition between environmentalists and industry to influence bureaucrats leads to an inefficiently high level of lobbying and lawsuits. One suggested response to this problem has been to replace the judicial model of regulation, which imposes many legal restrictions on the EPA’s behavior, with a corporatist model that gives the EPA much more discretion. Corporatism could potentially foster a more cooperative spirit between industry and environmentalists and is more widespread in Europe. Critics of corporatism argue, however, that in the U.S. context, where the government bureaucracy is relatively weak, corporatism amounts to a sellout to industry interests.

More straightforward ways of reducing lobbying include eliminating its tax-exempt status and instituting campaign finance reform. Environmental federalism would also help reduce the influence of Washington, DC–based interests but might lead to interstate competition to weaken the standards.

Many have argued that the collapse of the Soviet Union demonstrates the ecological superiority of market-based economic systems over centrally planned systems. Environmental disaster in the former USSR certainly confirms that state socialism is not the answer to environmental problems. But, the problem remains: market-based economic systems have the potential to ultimately generate ecocide on a level comparable to that of communism.

The relevant lesson from the former USSR is that a lack of effective democracy will doom well-meaning government environmental initiatives to failure. Economic decision-makers—whether state planners or private managers—will take external environmental costs into account (internalize them) only if those who bear the costs have the political power to force internalization. Nurturing effective democracy, in turn, requires both empowering citizens and providing access to information. The Toxics Release Inventory is a good example of this in the United States.

This chapter has focused on the obstacles that the information-intensive regulatory process has encountered in attempts to achieve its legislative target—efficiency, safety, or sustainability in pollution control. The potential solutions discussed here have focused on procedural or political reforms such as better information gathering, a move to corporatism, campaign finance reform, and right-to-know laws.

By contrast, Part III of this book focuses on economic reforms of the pollution control process. Chapters 15 and 16 explore one option: a system of regulation that relies on economic incentives, requiring less information and fewer bureaucratic decisions. A second possibility is discussed in Chapters 17 through 19. Rather than reform the regulatory process itself, instead refocus government pollution-control policy on the promotion of clean technology, which reduces pollution in the first place. A final, and more optimistic, view is that, despite the many problems with the regulatory process, overall, it has worked surprisingly well. We will take up this line of argument in the next two chapters.

1. 12.0 This chapter discusses two primary obstacles to effective government regulation of pollution: imperfect information and the opportunity for political influence.
2. 12.1 The “generic” regulatory process has three steps: (1) passage of a law by Congress and the president, (2) drafting of regulations by the EPA, and (3) implementation and enforcement by state officials. The United States currently relies on a judicial model of regulation, which reduces bureaucratic discretion and also can lead to regulatory gridlock.
3. 12.2 The first obstacle facing regulators is highly imperfect information. Because the agency has so many tasks, it often drafts rules based on inadequate or poor data. In addition, the agency must deal with a reporting bias when it turns to outside groups for information. Two ways to address this problem are to improve in-house analysis and rely on incentive-compatible regulation.
4. 12.3 Imperfect information gives rise to bureaucratic discretion in drafting and enforcing regulations. Bureaucratic motivations include agency building, external career building (influenced by the revolving door), and job satisfaction. Job satisfaction, in turn, can depend on ideology, the exercise of power, and the maintenance of a quiet life.
5. 12.4 Where there is bureaucratic discretion, there is the opportunity for political influence. Political resources wielded by environmental groups and industry include votes and dollars. Dollars are useful for buying (1) technical studies, (2) lobbying staff, (3) access to decision-makers, and (4) votes. This book argues that environmentalists win more often at the legislative stage of the regulatory process while industry wins more often at all subsequent stages.
6. 12.5 The prisoner’s dilemma model suggests that competition for political influence is a zero-sum game leading to an overinvestment in lobbying. Political reforms that might reduce this wasted effort include adopting a corporatist model of regulation, moving toward more environmental federalism and campaign finance reform, and eliminating the tax-deductible status of lobbying. The first two policies, however, are not without costs; the latter two have proven politically quite difficult.
7. 12.6 The Communist experience illustrates the potential for massive government failure in the regulatory process. Such failure is most likely when citizens are unable to express their political demand for environmental regulation. Doing so requires both access to information and effective and widespread democracy. The Toxics Release Inventory is a good example of government action to encourage such trends in the United States.

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