We hear a lot of talk, especially during the elections, on the effect of regulations on businesses and the economy and just about everything else. While I cannot really address regulations in every business context, I can talk a little about environmental regulations because, that is what I do, and it’s a topic on which I have written a bit about and have researched for graduate school. Bottom line is that, at least as far as environmental regulations go, the cost of regulation is never as high as people seem to think it is. (Just a note here: I am going to make some statements about research I did while working on my Masters’ Thesis, but I am not going to give you all the long citations to the material, and I don’t have the electronic cites, for most of it to imbed it here, so if you really have your juices flowing and you want to see the stuff I cite, just email me, and I will send you the citations so you can track them down). In fact, the studies show that additional costs associated with environmental regulation have an insignificant impact on jobs and in fact, is just as likely to create more jobs.
From my perspective, the air, water and land are all cleaner due to the implementation of environmental laws and regulations. In addition, regulations are here to stay for a while because, according to Gallop, the public supports the environment. In fact, one might say there is a pretty significant concern because the public is either concerned a “great deal” or a “fair amount” about pollution of water ways (81%), air (74%), land (77%), and drinking water (80%). They are also concerned a “great deal” or a “fair amount” on issues relating to the loss of rain forests (67%), global warming (64%), extinction of plants and animals (68%), urban sprawl (54%), maintenance of potable water supplies (75%), ozone depletion (68%), and loss of natural habitats for animals (78%). This is also interesting that the general public prefers environmental protection (57%) over economic development 37%. So there appears a dichotomy between the position of the general public and businesses.
Generally speaking, there are two kinds of regulations: Command and Control and Market Based. The former approach to regulations affecting the environment allows no flexibility in reducing emissions and makes smaller contributors take on as much burden for complying as the big guy. Market-based however, sets standards and then gives the regulated sources the flexibility to achieve them in the most efficient way, while leaving the regulator out of it. Supports of this premise believe that companies can innovate and decide how best to reduce its emissions most cost effectively.
While it is undeniable that there are costs attributable to compliance with federal and state environmental regulations, surveys of manufacturers indicates that those costs are minimal. For example, in 2006, the Census Bureau collected 2005 pollution abatement expenditure information pursuant to a survey developed by the United States Environmental Protection Agency. The survey included approximately twenty-thousand (20,000) manufacturing facilities, with twenty (20) or more employees, across virtually all manufacturing sectors were surveyed.
The results of the survey shows that at approximately 83% of the facilities, pollution abatement expenditures amounted to only 1% or less of the overall value of product shipments. Twelve percent, had expenditures of 1-2% and 3% had expenditures of 2-3% of the overall value of product shipments. Of the remaining facilities, only 1.004% had expenditures of between 3-5% of the overall value of product shipments. Thus, the overall cost of pollution abatement is minimal with approximately 95% of the manufacturing sectors spending less than 2% of the overall value of the products produced on pollution abatement.
This seems to confirm other studies I found which stated that although Environmental Regulations have been found to displace some jobs, they also creates jobs resulting in a net positive effect on employment and those jobs are concentrated in manufacturing and professional information, scientific, and technical services; you know, the kind of jobs the states would like to have.
So what about those market based regulations? Now, I am moving way outside my area of expertise, but market-based regulations are more efficient, than the alternative, so let’s look a little closer at what kinds of regulations there are. But the evidence seems to demonstrate that they are pretty darned effective in addressing environmental issues more efficiently.
The way the program worked with the Clean Air Act Amendments of 1990, was to reward a company that quickly reduces its emissions because it can sell its credits to sources which cannot reduce its emissions as quickly. Thus, companies which are slower to innovate or reduce its emissions are punished because they must purchase the emission credits (see here). This was the first cap and trade program, supported by President George H. Bush and a Democratic Congress. The legislation put in lots of incentives to improve the air quality and prevent acid rain. In fact, the program was so successful that it is regarded as the most successful regulatory program in the history of environmental regulation in the United States. If you don’t believe me, when was the last time you read about acid rain?
The findings of studies with respect to the economic efficiency of the cap and trade program seem to be confirmed by other studies that the projected costs of compliance with respect to regulatory programs is often overstated by “at least 30 percent and generally by more that 100 percent” and that “rarely, if ever, have actual compliance costs risen to the levels estimated by the regulating agency – and never to the levels estimated by private sector industry.” And, it is important to remember that the data upon which the agency promulgating the regulations relies on in order to do its cost benefit analysis is supplied by industry, which probably isn’t excited about having a regulation with which it must comply.
Such programs also work elsewhere. My friend, David Goldstein has written extensively on the issue of environmental efficiency and how a market based approach works. You might want to check out this blog. Don’t reject it just because it’s on the NRDC site. There is a lot of good information imbedded there.
The purpose of this blog is not to take a stand one way or another on whether regulations are good or bad for business. I remember though rivers burning, releases of toxic substances, air so dirty you couldn’t see skylines, so, regulations have certainly helped, and most people still like their clean air and water and land. Rather, I propose that continuing a discussion on how best to achieve the benefits of a clean environment while minimizing the impact on businesses should involve a discussion which includes market-based regulations is likely more attractive to business as the alternative of returning to more command and control. The research seems to indicate that the status quo finds significant amounts of innovation already exists and that the cost of regulation is incremental at best. However, the perception remains that businesses are adversely affected in the marketplace by regulatory burdens not present in other locations. So, how do we best address the concerns of both the public and business?