State Success with Market-Based Strategies

by Delaney King

 

Some of the earliest environmental policies in the U.S. began at the state level. However, the most notable policies were implemented at the federal level—well-known policies including the Clean Water and Clean Air acts of the 1970s. But these policies marked a shift from state-based strategies to federal efforts in protecting the environment, beginning jurisdictional problems that exist today.[1] The overlap between state and federal spheres raises constant questions about who should have the right to design, implement, and regulate policies attempting to internalize the negative externalities that harm the environment. The environmental federalism conflict is reminiscent of debates dating back to the Constitutional Conflict of whether state or federal power should be stronger. However, the arrival of market-based strategies concerning the environment may have lessened the tension between federal and state government in favor of state autonomy by incentivizing two main phases of policy: design and regulation. In the design stage, policymakers determine the specific details and functions of a policy, whereas the in the regulation stage, authoritative entities monitor enacted policies and hold the necessary parties accountable.

 

Federal policies regarding the environment have historically been command-and-control, meaning they establish a set of rules to which all states and private entities must adhere and must face punishment if they violate these rules.[2] Nationwide blanket regulations such as these are problematic because they do not respect the nuances among states in the United States, which differ considerably when it comes to environmental, economic, and human resources. States are different sizes, have contrasting ecological features, and have varying capabilities to adhere to regulations such as emissions caps and pollution management.[3] The same problem holds true even as the federal government has swapped command-and-control in favor of market-based strategies, which offer economic incentives to employ environmentally friendly habits, such as tradable permits allowing a certain level of pollution that can be sold by low-polluting entities and bought by high-polluting ones to reduce emissions without disproportionately affecting polluting sources. With such tradable permits, the sources themselves can determine the amount they can afford to pollute and can pursue options to earn money should they fall below their allotted amount.

 

The same logic applies to state-level market-based strategies when it comes to policy design. States are better able to gauge their specific environmental characteristics and develop a market-based strategy that will best suit their region.[4] A state’s environmental characteristics—for example, level of rainfall or type and quantity of profitable natural resources—will differ from one state to another and play a significant role in the design stage of policies. States have little incentive to design command-and-control regulation, because there is little revenue generation and high levels of government involvement necessary in maintaining the effectiveness of the policies. With market-based strategies—such as quantity-based cap-and-trade agreements described earlier—state governments need only design the policies and allow market competition to implement the desired result of environmental improvement.[5] Honoring the different environmental and economic characteristics of each state reduces the contestation from states who must adhere to uneven federal regulations disproportionately affecting their state, and pursuing a market-based strategy allows free market competition to promote environmental health with low cost to the government. It is important to note that market-based strategies are not always the most appropriate outcome in every single environmental case. Some market-based strategies occasion equity concerns where the cheapest option disproportionately shifts the costs to members of society who are not necessarily reaping all of the benefits. Federal regulation may be preferable in this instances—perhaps in conjunction with a market-based strategy—to resolve these and other environmental justice issues.

 

On the regulation side of policy, the federal government has historically exerted considerable influence to ensure state adherence to environmental regulations. Here again, the switch to market-based strategies as the environmental policy norm has allowed for greater state autonomy. These new strategies hold greater incentives for state regulation. When the policy comes top-down from the federal government, states have to pay the entire cost of the standard, whereas flexible strategies utilizing market competition make responsible bodies bear the majority of the cost, leaving only a portion to the state.[6] This reduces the overlap between federal and state jurisdiction and allows states to devise individual policies instead of attempting to adhere to one-size-fits-all centralized policies at the federal level.

 

Nonetheless, the federal government still plays a valuable role in developing and regulating environmental policies. For one, the federal government is likely to have more resources to research the best possible option. Secondly, environmental issues do not conform to state borders, and the spillover effect by which pollution and other emissions cross into neighboring states and are subject to different treatment can cause problems among regions of state in the country.[7] Because of this, the overlap in environmental policy will never disappear completely, but with the growing presence of market-based strategies, a shift to allow state governments a greater degree of autonomy could reduce inefficiencies in policy design and regulation and create better incentives to resolve environmental issues.

Comments:

Jonathan

I agree with your statement regarding the inefficiencies of command and control regulations. Each state does have its own unique environment and needs; California should not have the same water regulations as North Carolina, etc. However, I am also hesitant about giving states more autonomy with regard to environmental cleanup. The tale of caution, I suppose, regards North Carolina’s reliance on ‘solar bees’. The General Assembly approved funding to implement these craft, which supposedly stir up and kill algae blooms, in Jordan Lake in 2013. The Republican controlled Committee on the Environment lauded these machines as a cheap alternative to purchasing easements on land that bordered the lake’s feeder streams. The project has not been a success; some machines have gotten loose, others have been lost, and the effects on water quality have been insignificant. Yet the state approved an additional $1.5 million on solar bees in the 2015 budget. Giving states greater autonomy means that, especially when the state has a more conservative legislature, they can produce solutions that satisfy the requirements on paper, but, perhaps purposefully, do little to effectively counter the problem. I believe the solution is to make federal requirements for each state more specific, not putting more power into the hands of the states.

Grace

Your blog entry highlights a few of the principles and projected effects of interstate cap-and-trade policies that allow states capable of improving their emissions beyond what may be required to sell off their extra credits, and for states incapable of sufficiently reducing emissions to buy the remaining credits needed from states with credits to spare. Additionally, your blog addresses interesting tie-ins with the overall issue of adopting cap-and-trade systems; for example, you emphasize that although states currently do not have sufficient flexibility and/or control over the extent to which they lower their emissions, it is important to not overlook the importance of federal power in regulating state emissions, especially since pollutants do not adhere to state boundaries. I also agree with your point that the federal government may be required to intervene on matters of environmental justice, since the appeal of short-term solutions that either delay or shift, but do not permanently eliminate, the consequences of pollution has not worn off completely to the public.

However, I found an interesting article that highlights some scientists’ reservations regarding a cap-and-trade strategy from 2009 (link here: http://www.cmu.edu/gdi/docs/cap-and-trade.pdf); their concerns are echoed in some more recent articles (for example, here: http://www.nytimes.com/2014/05/30/science/a-price-tag-on-carbon-as-a-climate-rescue-plan.html?_r=0). Specifically, those who doubted the effectiveness of cap-and-trade point to the unlikelihood of carbon prices rising to a point that stimulates significant innovations combatting emissions. Several bills proposing a cap-and-trade system also included price ceilings for carbon dioxide, or some other method to prevent the price of carbon dioxide from rising too quickly above a few tens of dollars per ton. According to the 2009 article, analyses of two proposed bills showed that the low price increase allowances would allow no more than 20% of the nation’s 2030 emissions goals to be reached by sectors other than the electricity sector; and in the electricity sector, accounting for several variables in favor of price increase, the average net present value (a measure of calculating the cost of a product/decision as opposed to its benefit) is $9/ton of carbon dioxide, which is far too low to stimulate investment in serious, long-term solutions to emission. I have not found follow-ups to this study, but those who doubt the effectiveness of cap-and-trade today speak more generally of their lack of faith in the ability of cap-and-trade to stimulate enough change in however little time we have left to slow emissions before the consequences become “disastrous.” The fastest and most effective, but ultimately most seemingly-impossible solution to the issue of decreasing emissions, is to inspire a change of mentality and a sense of urgency throughout the entire nation, and to overcome ideological boundaries that are currently preventing members of our nation from coming together in the face of this issue.

Riley

I think this blog post brings up some very important considerations for policymakers when constructing policies. For many issues, not just environmental, state based policy works best. I agree that federal level command and control regulations are problematic since they often lead to inefficiencies and inequities. As you stated, I think that federal based policies for environmental regulation are often best when they are imposed as a minimum standard that each state must reach. This is seen with other policies like k-12 education – from there, the states are each able to go beyond those minimum standards if they choose to, or at the very least, reach the standard via their own methods.

Where state based regulation becomes problematic though, is when politics is allowed to decide whether or not a state will participate in environmental legislation. State based environmental legislation is great for a state like California, where liberal leaders deem environmental issues very important and go above and beyond what the federal government mandates. For very conservative states though, relying on state based legislation and regulations may be an issue. This is especially true with the environment, since many of the externalities associated with pollution, CO2 emissions, etc. cannot be contained within each state. You mention that market based approaches are often used to provide federal regulations that allow for state autonomy and perhaps more profit. I think that this is the way that environmental policy is going to have to go to get more positive changes for the environment. This way, the policy will work through via our country’s capitalist market to incentivize innovation and competition.

 

Rachel

I found your argument for state jurisdiction over environmental policy extremely interesting, as it has been one I have been considering for a while. I completely agree with your assertion that it is inefficient for the federal government to create overarching standards for the entire nation– whether those standards be in the form of command-and-control regulations or market-based strategies. Either way, we live in a vast, expansive, and diverse nation that possesses different climates, cultures, resources, economies, and types of capital. Different states and regions’ economies rely on different elements; their diverse geological features determine how they respond and adapt to different types of policy. As states and regions are so various, one standardized policy is futile– our nation is not a “one size fits all” type of entity.

In order to be more socially and economically efficient, states should definitely have more jurisdiction over policy. Your argument states that this would allow state governments to better cater to their own territory’s geographical and cultural needs, and I absolutely agree with this. The economic term “Equimarginal Principle” applies here– this principle states that in order for environmental policy to be socially optimal, it should equate the marginal cost for all bodies involved, NOT the amount of pollution abatement. In other words, certain states may have higher marginal costs of abatement for pollution, due to say, an economic reliance on oil. In order for policy to be efficient, these states with higher marginal costs of abatement should not have to abate as much as states with lower marginal costs of abatement. There should be no uniform standard of abatement, rather there should be a uniform standard of cost that all states must endure.

Only with this kind of personalized policy that caters to the different needs of our diverse nation can we truly create the most efficient and effective type of environmental policy, and giving more power to the states to accomplish this feat is exactly how our nation should go about doing that.

[1] Stewart, Richard B. (1977). “Pyramids of Sacrifice? Problems of Federalism in Mandating State Implementation of National Environmental Policy.” Yale Law Journal Company Inc., 86 (6), 1197. http://www.jstor.org/stable/795705.

[2] Williams III, Roberton C. (2012). “Growing state-federal conflicts in environmental policy: the role of market-based regulation.” Journal of Public Economics, 96, 1092.

[3] Oates, Wallace E. (2001). “A Reconsideration of Environmental Federalism.” Resources for the Future, 15.

[4] Ibid., 19.

[5] Goulder, Lawrence H. and Robert N. Stavins. (2011). “Challenges from State-Federal Interactions in US Climate Change Policy.” American Economic Review: Papers and Proceedings, 101 (3), 257.

[6] Williams, “Growing state-federal conflicts in environmental policy,” 1092.

[7] Oates, “A Reconsideration of Environmental Federalism,” 24-25.

 

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