Framing Environmental Policy Instrument Choice

RICHARDS_FINAL_POSTPP.DOC 03/13/01 10:57 AM Duke Environmental Law & Policy Forum Volume X Spring 2000 Number 2 FRAMING ENVIRONMENTAL POLICY INSTRUMENT CHOICE KENNETH R. RICHARDS* TABLE OF CONTENTS I. Introduction.......................................................................................................222 II. Evaluation Criteria...........................................................................................226 A. Standard Treatment....................................................................................226 B. Expansion and Reformulation of the Evaluation Criteria ..........................227 III. Taxonomy of Environmental Policy Instruments...........................................230 A. Standard Treatment....................................................................................230 B. Reformulation of the Taxonomy..................................................................232 1. Principles of a Taxonomy............................................................232 2. Dimension 1: Fundamental Role of Government—Entitlement Assigner vs. Regulator......................................................................232 3. Instruments for Implementing Environmental Goals: The Regulator Role ..................................................................................................236 a. Dimension 2: Locus of Discretion ......................................................237 b. Dimension 3: Distribution of Abatement and Environmental Damage Costs.........................................................................................................237 * Assistant Professor, School of Public & Environmental Affairs, Indiana University, Bloomington, Indiana. J.D., University of Pennsylvania Law School; Ph.D., The Wharton School, University of Pennsylvania; M.S.C.E. & B.S.C.E., Technological Institute, Northwestern University; B.A., Duke University. The author would like to thank Elizabeth Bailey, Robert Hahn, Kerry Krutilla, Elizabeth Malone, Thomas McGartland, Steve Rayner, Barry Solomon, and Dennis Yao for providing helpful comments on earlier drafts of this article. Michael Armstrong and Swati Sheladia provided valuable research assistance. All views expressed here, and any errors, are the author’s responsibility alone. Please direct questions or comments to . This article is also available at <http://www.law.duke.edu/journals/10DELPFRichards>. RICHARDS_FINAL_POSTPP.DOC 222 03/13/01 10:57 AM DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 10:221 c. A Preliminary Taxonomy ....................................................................237 d. Dimension 4: Prices vs. Quantities.....................................................244 e. Dimension 5: Inputs vs. Outputs and the Degree of Correlation ........247 f. Dimension 6: Locus of Discretion—Intertemporal Flexibility ...........248 g. Dimension 0: Information versus Abatement.....................................249 h. Special Cases.......................................................................................251 Voluntary Programs .........................................................................251 Hybrid Systems .................................................................................253 IV. The Constrained Cost-Minimization Problem ..............................................254 A. Abatement Production Costs: Lessons from Environmental Economics...255 B. Implementation Costs: Lessons from New Institutional Economics ..........256 1. Measurement Costs......................................................................257 2. Governance Costs ........................................................................258 3. Intermediate Instruments .............................................................265 C. Revenue-Raising Costs: Lessons from Public Economics .........................267 D. Legal Constraints .......................................................................................272 1. Regulatory Takings......................................................................272 2. Federal versus State Regulation of Land Use ..............................275 3. The Rule Against Legislative Entrenchment ...............................276 V. Heuristic Principles for Environmental Applications.....................................278 VI. Conclusions....................................................................................................281 I. INTRODUCTION The student of environmental policy is exposed to a myriad of policy instruments the government can employ: emissions taxes, abatement subsidies, marketable allowances, regulation based on performance standards or technology, property rights, deposit-refund schemes, information programs, liability rules, and a number of related policy tools. When Congress crafts environmental legislation or administrative agencies promulgate rules to implement environmental policy goals, they must choose from among these policy tools. In an ideal world, they would employ those instruments that will allow the government to meet its goals at the lowest possible cost subject to external constraints. One consistent message from the environmental economics literature is that incentive-based instruments are a more cost-effective means to achieve environmental goals than alternative policy instru1 ments such as technology-based standards. In practice, however, this 1. See, e.g., ROBERT N. STAVINS ET AL., PROJECT 88—ROUND II: INCENTIVES FOR ACTION: DESIGNING MARKET-BASED ENVIRONMENTAL STRATEGIES 92 (1991) [hereinafter PROJECT 88]. RICHARDS_FINAL_POSTPP.DOC Spring 2000] 03/13/01 10:57 AM FRAMING ENVIRONMENTAL POLICY INSTRUMENT CHOICE 223 2 counsel has only rarely been heeded. In the United States, environmental protection schemes have evinced more diversity than uniformity with respect to key characteristics. Perhaps this diversity should not be surprising. Consider the wide variety of activities that policy instruments are designed to promote: nonpoint source water pollution control, protection of wetlands, reduction of sulfur dioxide emissions, clean-up of hazardous waste sites, and protection of endangered species. Given this tremendous variation among environmental goals and the means of achieving those goals, is there any reason to expect that when it comes to implementation we can exercise a one-size-fits-all approach to instrument choice? In fact, what we observe is a plurality of instruments and combinations thereof that have steadfastly defied economists’ and policy 3 analysts’ prescriptions. Part of this deviation between normative prescription and actual practice can be attributed to political considerations,4 and part to legal constraints. However, there may also be normative justifications for choosing instruments outside the increasingly standard incentive-based dyad of taxes and marketable allowances. While those instruments may minimize the direct (...truncated)