Free Market Environmental Protection

Futuristic Artwork by Tim Cantor
image – Tim Cantor


When the twenty-fifth anniversary of the first Earth Day arrived this past spring, there was much to feel good about. Significant strides have been made in protecting the earth’s biological envelope, and environmental awareness has surely been heightened. But there was also a sense of foreboding. In news comments on the occasion, came expressions of concern that pending legislative reforms such as compensation for regulatory takings, the imposition of limited cost-benefit and risk analyses, and revisions of the Clean Water Act world roll back 25 years of progress. Some even suggested that were it not for federal laws, there would be no environmental protection at all, implying that communities nationwide would stand idly by as their home territories became open sewers.

Though unreasonably costly and at times misguided, the threatened federal regulation has nonetheless provided a massive mechanism for protecting environmental quality. Yes, the air is cleaner than it was 25 years ago, more miles of rivers are swimmable, and lots of contaminated soil has been hauled from Superfund sites. But change is in the works. Even EPA has admitted that the priorities for action forced on the agency do not match the real needs for reducing environmental risks and improving air and water quality. Meanwhile memberships in national environmental groups seem to be peaking. By contrast, grass roots activities are burgeoning.

Surely there is room for improvement. We know that no other industrialized country has a Superfund program as costly and ineffective as ours. No other advanced economy relies as heavily on centralized command and control regulation, and practically every other industrialized nation is light years ahead in organizing river basin associations and similar decentralized organizations for managing water quality.

Today, the U.S. alone seems trapped in a regulatory pit that emphasizes uniform command-and-control regulation, penalties and confrontation, while paying scant attention to outcomes. In short, we rely on an antiquated, inflexible, top-down regulatory structure that was designed for a 1970 smokestack economy. Our command-and-control system was once justified by its ability to assemble and apply costly and scarce information. Yet we live in a new global age where microchips, low-cost information transmission and decentralized decision making rule the day.

Think of the changes that have transpired worldwide in the last quarter century while the basic regulatory blueprints hardly changed at all. When our basic environmental statutes were being designed, there were no FAX machines. There were no personal computers. There was no Internet for E-mail for giving instant information on polluter behavior. There was no CNN to inform the world of environmental calamities. Indeed, there was no way to monitor stack emissions, so that one could write emission trading contracts. There was no low-cost technology for reading tailpipe emissions from automobiles or for scanning the multiple dimensions of water quality. Smog was a mystery. And the notion of continuous monitoring of environmental use by satellites was just a gleam in some scientist´ s eye. In the early 1970s there was no International Standards Organization responding to marketplace demands for a higher quality workplace and giving private sector certification of environmental control. Today, all this and more is as routine as self-rising flour in grocery stores.

Now consider some of what we have learned about environmental hazards from 25 years experience in dealing with pollution. We now know that industrial discharge is not the source of most carcinogens and other environmental hazards. Indeed, we know that industry today ranks well below government operations and nonpoint sources as the major source of pollution. We have learned that the threat of acid rain is not critically associated with sulfur dioxide emissions, that life expectancies are increasing and that forests are flourishing.

Over the course of the last two decades, we have learned that the demand for environmental quality that comes with rising incomes is a powerful force for delivering environmental improvements, one that will not be denied. Factories, farms, municipal treatment plants, and federal government facilities cannot get by with haphazard treatment of the environment. CNN, Internet, E-mail and desk-top publishers will tell. And ordinary people, the ones we see each day in the market, will bring actions to protect their environment. In other words, there is no danger of seeing an unconstrained “race to bottom.” Now is the time, I believe, to replace costly smokestack regulation with the beneficial forces of the market.


Just what are these beneficial market forces? And what steps can we take to build strong linkages between environmental protection and the actions of millions of uncoordinated people? Is it possible for people to do the right thing without even thinking about environmental quality.? First off, the market process reflects social norms and rules of just conduct embodied in law and custom. Market action is driven by prices that emerge when some people own things that others want. For example, when investors have to give up something they value to obtain a site for building a factory, they are suddenly struck with a conservation ethic. Because they must pay, they carefully consider just how much land they really need. They shop. They search. They become creative. Markets and prices provide incentives. And if factory builders must pay the holders of environmental rights before building or polluting, or suffer the consequences, the investors will work even harder to avoid environmental harms. When environmental rights are protected, environmental protection becomes consistent with profit maximization.

Property rights´ definition and protection form the keystone to the market process. If factories and municipal treatment plants are told that they can pollute within certain limits if they have an EPA permit, then each time we get another certified plant we will get more polluted air and rivers. And if regulators tell industry official s how to design plants and they give their stamp of approval only when the specified technology is in place, then industry has no incentive to search for lower cost technologies and less damaging sites. If owners of downstream property lose their right to sue and stop polluters who damage their property, as our statutes do in some cases, industry incentives are blunted even further.

If cities and states are able to use political powers to locate incinerators and landfills without compensating neighboring property owners for damages, then environmental justice becomes an issue. If in the pursuit of protecting endangered species or sensitive wetlands, government can take property rights without paying, then property owners will have incentives to destroy endangered species and to plow under wetlands before they are observed. On the other hand, if property owners are paid for harboring endangered species and for converting land to public use, then wetlands and endangered species will be more secure. The incentives generated by markets, prices, and property rights can replace a large number of environmental policemen.


How might we apply these market principals to the existing statutory framework? First, we might attempt to modify the rules. With few exceptions, the legislative blueprints for regulating air and water pollution require command-and-control regulation that results in end-of-pipe, technology-based standards. Generally speaking, regulations focus on inputs, not outcomes. There is a fixation on point-sources — individual machines and in-plant processes. Hardly any attention is directed toward ecological systems, like river basins, complete aquifers and watersheds. The rules leave little room for innovation and can actually penalize firms that devote attention to unidentified but important sources of pollution while overlooking smaller but specified sources that are listed in the rules.

Put in the simplest terms, air and water pollution control from stationary sources is based on national or large geographic area standards that call for uniform approaches to be taken by broad categories of polluters. There are new-source/old-source standards that penalize expansion of plants and protect existing firms from competitive entry. There are stricter standards for particular regions. And there is little focus on overall outcomes. Indeed, after 25 years, we are just now becoming serious about the provision of extensive monitoring data that inform us about relative improvement.

How might we modify the existing blueprint? Allow me to offer a few suggestions.

1) Ditch command-and-control regulation in favor of performance standards. Identify specific goals to be achieved and allow managers to figure it out from there. Let flexibility and the desire to minimize cost become the guiding principals. Let the regulators focus on outcomes.

2) Eliminate new-source/old-source biases. Let competition work at all margins.

3) Establish a complete national emissions monitoring system and, by statute, provide a detailed annual report card that gives reliable data on the environment, by pollutant, river, major lake and stream.

4) Expand emissions and effluent trading to encompass all criteria pollutants. To facilitate emission trading between and among facilities with diverse ownership, provide baseline data and systems analysis so that all contracts can be written and enforced.

5) Require experiments with river and air-shed management systems where all rules for plants and other individual sources are relaxed and the river or air shed is given a measurable environmental goal to be achieved. Include point and nonpoint sources of pollution in the basinwide approach.

For hazardous waste, better known as superfund:

1) Make Superfund a public works project with, for example, a 75/25 percent local/federal sharing of cost, with the proportion based on the expected share of benefits.

2) Eliminate strict joint and several liability as basis for recovery of costs. Replace with joint and several liability only for polluters who violated laws at the time waste was created at a site.

3) Involve states and communities in establishing a triage system that based on intended use identifies sites that should be cleaned, those that should be paved or fenced and guarded, and those that should be monitored for potential cleanup.

4) Eliminate drinking water as the standard to be met from a cleaned Superfund site. Replace with ambient standards accepted by a population for their rivers and lakes.


So much for tinkering at the margins of smokestack regulation. Starting with a clean slate calls for careful examination of the fundamental role of government. We must ask 1) what is the purpose of government in the context? and 2) what level of government? Under a market approach, government has the responsibility of protecting citizens from the harm of others, protecting property rights, and reducing transaction costs among parties who seek to solve environmental problems. These duties relate to governing at all levels — the community, the state, the nation, and with regard to issues involving national boundaries. As to the level of government, we should consider the dimensions of the environmental problem being addressed, which is to say the extent of the harm that might be generated by a polluter or group of polluters.

A classification of environmental problems — activities that impose harm on other people, their property or things they prize — will surely yield a matching of some problems with each level of government. For example, a hazardous waste site that does not pose a risk to an aquifer is surely a local problem. One that contaminates a multistate aquifer will require another level of government. Air pollution that imposes costs within a state´ s boundaries is one thing; pollution that imposes costs across a region or across a national boundary is something else. Making such a list will carry us some distance in identifying the appropriate level of government for protecting property and reducing transaction costs among parties who seek to resolve pollution problems.

Decentralizing the problem breaks the national monopoly, generates a multitude of experiments, and allows citizens to vote with their feet. All evidence suggests that the costs of environmental improvements will fall, that those who have the greatest incentive to address environmental concerns will have a larger voice in determining outcomes, and that those who reap the benefits will bear the costs.

But what about the mechanisms that might be used? A review of the nation´ s history and consideration of the experience of other countries inform us of alternatives. For several hundred years, environmental rights were protected by the common law of nuisance and trespass. Cases involving water, air, odor and hazardous waste pollution were adjudicated in common law courts. Where many receivers of pollution were involved, citizens turned to public prosecutors and the public nuisance law. Where pollution crossed state lines, a state attorney general brought suit in behalf of citizens. Just prior to enactment of federal statutes, federal common law was emerging for protecting environmental rights among the states. To a large extent, that fertile field of control was snuffed out by legislation.

We cannot know how common law would have evolved in the absence of monopolized regulation. Perhaps specialized courts would have developed with special masters dealing with highly technical issues. Yet, like statute law, common law did not work perfectly, but the remedies were tough — injunction and damages. Of special importance, only those who could demonstrate harm or potential harm could bring action. A passerby had no standing to bring suit against a polluter whose activities were legitimate in the eyes of the courts and community members.

The common law process has something else to recommend it. It is impossible for a special interest to lobby all common law judges and obtain uniform rulings across the entire country. Put differently, it is very costly to seek rents through the courtroom.

But does common law really work? Today, practically all of the freshwater fish in the United Kingdom are owned by private parties, and have been for generations. The property of the angling clubs is protected by common law. If a polluter, be it a city, and industry or government enterprise, damages a fishery, the angling clubs brought suit. In the last 20 years, some 2,000 suits have been brought. Five have been lost. The result: The rivers of England are clean, in some cases cleaner than drinking water standards require. Market forces can protect water quality.

Prior to the formation of EPA, multistate compacts and commissions were at work dealing with water and air pollution. Ordinary people with good sense recognized that dimensions of environmental problems did not necessarily coincide with the dimensions of existing political bodies. The Ohio river basin commission, which included the states of New York, Pennsylvania, West Virginia and Ohio, was one of the better known operating systems. Through the joint effort of several states, the Ohio river was cleaned, continuously monitored and managed. At the time of EPA´ s founding, there were discussions underway to expand the Ohio river system to include states that bordered the Tennessee River. Quite possibly, river basin associations and multistate compacts would have eventually encompassed all major rivers. Federal legislation ended all that.

Today, in France every major river, their tributaries and coastal zones are managed as six systems with independent governing bodies that work to manage discharges to and withdrawals from all bodies of water. Major rivers in Germany, Scotland and Australia are similarly managed. Efforts are underway in Mexico, Ecuador, Brazil and Canada to develop similar approaches. There is no command-and-control. Water users are given performance standards to meet. In some cases, discharge and withdrawal fees are imposed. In Australia, pollution rights are traded to minimize the cost of controlling salt infusion.

One such experiment is now operating in the U.S., just one. It encompasses North Carolina´ s Tar River where point and nonpoint dischargers are working together in a river basin association. EPA´ s command-and-control regulations are relaxed. As a result, the Pamlico Sound, the receiver of waters from the Tar, is recovering. Costs are reduced dramatically by members of the association.

A review of history and current experience suggests the following:

1) Levels of governmental control and assistance should match the dimensions of the environmental problem being addressed. In some cases, new governing bodies will need to be developed. Regional compacts will be needed. Enabling legislation that forms river basin associations may be required. The national government should focus its attention on environmental problems that are truly national in scope. In all such cases, the national government should focus only on setting performance standards, enforcing those standards, and reporting on progress. There should be no command-and-control regulation for stationary pollution sources.

2) States should be empowered to manage environmental quality within their boundaries with the means and instruments not specified. Multistate participation and river basin associations should be assisted by the national government. States should be left free to invigorate common law remedies or any other control instrument they desire. The emphasis should be on outcomes, not inputs.

3) When the federal government regulates, as in the case of air pollution that affects several states or in the case of mobile sources, the regulatory agency should be required to justify all actions on the basis of scientifically based risk assessment and cost effectiveness. The regulatory agency should be required to report annually on the status of each action taken, its justification, and measured effects.

4) The national government should strengthen its research and development activities and make its expertise available to other governing bodies on a fee basis. The national government should strengthen its role in monitoring environmental quality and regularly provide scientific evidence on the condition of the environment.

There is a role for government in protecting environmental rights and in protecting people from environmental harm. As mentioned here, it is a role that supports property rights, markets and competition. Until now, too much attention has been focused on procedures, process, inputs and on criminalizing the innocent behavior of citizens. As a people, we have chosen a high cost, low result route, and we have learned a lot. Indeed, we should know more about environmental regulation than any other people on the face of the earth. Now is the time to rethink what we are doing. to learn from our own experience and that of others, and to make the 21st century a time when we can truly take the environment seriously.

Email the Editor about this Article
EcoWorld - Nature and Technology in Harmony

Leave a Reply

You must be logged in to post a comment.