Tuesday, April 22, 2014

Earth Day: A Baptists and Bootleggers Story

Earth Day was first celebrated on April 22, 1970. It is now observed in 192 countries, and is coordinated by the Earth Day Network. Bruce Yandle offers a hard-eyed look at how the original Earth Day affected U.S. environmental legislation in "How Earth Day Triggered Environmental Rent Seeking," which appeared in the Summer 2013 issue of the Independent Review.

One of Yandle's signature insights is the idea of a "Baptists-and-bootleggers" coalition. Who favored prohibition of alcohol sales? Baptists, on moral grounds, and bootleggers, because government prohibition would limit competition and boost their profits. He makes a strong argument that Earth Day led to a similar environmentalists-and-industrialists coalition, in which environmentalists pushed for laws to reduce pollution, and industrialists pushed for anti-pollution laws that would hinder their competition.

Before the passage of the Clean Air Act and Clean Water Act in 1970, pollution was often restricted by common law cases brought through the courts. From the point of view of incumbent business, these court cases were an unpleasant way to deal with environmental problems. Court decisions could be inconsistent, and sometimes harshly punitive. But in addition, common law court decisions offered no way to inhibit competition by raising the costs of new entrants and rival producers. Thus, many large companies saw opportunities to limit competition in the idea of federal environmental laws.

In some ways, the use of anti-pollution laws to limit competition was pretty obvious. For example, the new environmental laws commonly grandfathered in existing plants, but required new plants to meet much stricter standards.

In other ways, the methods of restricting competition were less obvious. Consider that there are essentially three ways to set environmental standards. One is to use economic incentives like pollution taxes and tradeable pollution permits. A second is to set performance standards for how much pollution can be emitted, but to leave firms the flexibility to decide how to meet the standards in the most cost-effective way. The third way is a technological standard which requires that every firm use the same method for reducing pollution. When a technological standard is required, then firms which could have reduced pollution more cheaply are not allowed to gain a competitive advantage from doing so--because all must follow the prescribed standard.

For several decades after 1970s, one could at least argue that most environmental indicators were moving in the right direction. But after a review of the more limited progress against air and water pollution in the last couple of decades, Yandle argues, "These data strongly suggest we have hit the cleanup limits of a top-down, command-and-control, technology-based pollution-control system. We know we can do better, and so do EPA managers."

Thus, the environmental authorities have been pushing away from technology-based standards, and toward offering flexibility in meeting environmental goals. In the case of water pollution, Yandle reports: "In 1991, the EPA began to push hard to develop watershed-based nutrient trading communities where publicly owned treatment works and other dischargers are allowed to exchange discharge offsets. In some cases, farmers and land developers are included in the larger trading communities. When trades take place, the incremental cost of reducing pollution falls dramatically."

In the case of air pollution, flexible pollution permit trading arrangements were used to reduce lead emissions in the 1980s, and sulfur dioxide emissions since the 1990s. Yandle writes: "For
the nation, as of 2011 there are 242 nonattainment counties for ozone, 121 for PM2.5. But get this, there are just 9 nonattainment counties, which are those that have not achieved EPA National Ambient Air Quality Standards, for sulfur dioxide, the only criteria pollutant managed by markets. Indeed, since 1990, sulfur dioxide emissions have been reduced 65 percent at an EPA estimated cost of from
$1.17 to $2 billion. If command-and-control had been used instead of markets, the estimated cost would have ranged from $7.5 to$11.5 billion ..."

For those interested in learning more about these flexible systems for reducing pollution with tradeable permits, the Winter 2013 of the Journal of Economic Perspectives had a symposium on the subject. It starts with an overview paper by Lawrence H. Goulder, "Markets for Pollution Allowances: What Are the (New) Lessons?" There are then three papers on specific applications. Richard Schmalensee and Robert N. Stavins discuss "The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment"; Richard G. Newell, William A. Pizer and Daniel Raimi tackle "Carbon Markets 15 Years after Kyoto: Lessons Learned, New Challenges"; and Karen Fisher-Vanden and Sheila Olmstead explore "Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis."
As always, all papers in the JEP back to the first issue in 1987 are freely available, courtesy of the American Economic Association. (Full disclosure: I've been Managing Editor of JEP since 1987, too.)

Is there some reason that the environmentalists and the industrialists will be willing to move away from the technology-based and performance-based environmental rules standards and embrace a more flexible incentive-based approach? Yandle offers the following argument: "At some point, the environmental Baptists will see that they are losing ground. The system they have supported no longer delivers the goods they desire. As we have seen, major elements of environmental progress are dead in the water. And the bootleggers? At some point, global competition becomes so severe that regulatory rent seeking no longer pays. For durable regulation to survive, bootleggers and Baptists must be singing off the same page. For now, the music has stopped."