5.4. Alternatives to Command-and-Control Regulation


In the last quarter-century, the United States has made extraordinary progress in environmental protection as a result of substantial investments by governments and by industry and through effective public and political advocacy. We now have a system of regulatory controls and enforcement that has established a floor for environmental protection.

In some cases, OSHA may be an exception, we may have reached a point of diminishing returns, in that each incremental improvement in human health- and environmental-risk reduction comes only with a large increase in control costs, or benefits of additional regulation may be slight because so much has already been invested in environmental risk reduction. In still other cases, the cost of risk reduction is aggravated by the rigidity of the underlying command-and-control regulatory system. Rule-makings and permitting processes become de facto design standards sanctioning the use of specific technologies for pollution control. There may not be adequate flexibility for tailoring remedies to reflect the circumstances of individual sources and locations, including the relative advantages that different companies might have in choosing risk-reduction options. For some, especially small businesses, there may be a preference for design standards because resources for research and innovation are limited.

For progress to continue, we must look beyond command-and-control regulatory programs. The call for alternatives to command-and-control regulations was particularly strong in presentations received by the Commission outside of Washington, D.C. In addition, federal agencies emphasized their commitment and cited their projects aimed at finding effective alternatives to command-and-control regulation. This subsection discusses several analytic tools for identifying when environmental protection is improved and risk reduced, and endorses a number of alternatives to command-and-control regulation that should be considered when there is interest in going beyond current levels of protection and risk reduction.

FINDING 5.4: Risks to human health and the environment have been reduced over the last 25 years primarily through command-and-control regulations of existing and new sources of emissions and testing requirements for newly developed chemical products. However, serious problems in the regulatory system have developed in some situations: delays in human-health and environmental protection, litigation, and compliance costs that are often out of balance with their benefits. Executive Order 12866 stresses the use of performance goals for environmental protection to increase the flexibility industry has to pursue the most effective and efficient solutions.

RECOMMENDATION: Regulatory agencies and affected communities should aggressively consider alternatives to command-and-control regulation using the Commission's risk-management framework to improve the efficiency and effectiveness of protecting human health and the environment and to reduce compliance and litigation costs. A sense of experimentation and a commitment to evaluation are key elements.

RATIONALE

Government must set environmental protection standards, but there are important economic and environmental benefits in allowing companies and communities greater flexibility in determining how to meet those standards. Greater flexibility must be coupled with agency monitoring and enforcement, however, to ensure that the expected level of environmental protection is being achieved. In addition, the equity of who benefits and who pays the cost under alternative environmental-protection approaches should be compared with the equity of who benefits and who pays the cost under the status quo. Jonathan Howes, Secretary of the North Carolina Department of Environment, Health, and Natural Resource, in reporting to the Commission on the work of the National Academy of Public Administration, said they concluded that many businesses have found it in their interest to meet or exceed environmental standards, particularly if they can use their own strategies to achieve the pollution reduction targets that are established.

Environmental accounting, industrial ecology and life-cycle analysis, and environmental audits are emerging analytic tools that can assist in understanding the consequences of economic activity and environmental-protection efforts. Alternatives to command-and-control regulation that are being tested include market-based incentives, taxes and subsidies, right-to-know laws and other incentives to encourage pollution prevention, alternative compliance, and consensus, mediation and dialogue projects. Those tools are options to be used when and where they make sense in responding to additional risk reduction opportunites. As the alternatives are being tested, it is important to evaluate them for reliability in meeting or exceeding environmental goals, feasibility of implementation, and general effectiveness and efficiency.



Environmental Accounting. There is a movement from traditional accounting systems toward "environmental accounting" for both national and business accounts. In June 1995, EPA published An Introduction to Environmental Accounting as a Business Management Tool: Key Concepts and Terms; many private-sector and private-public partnership forums are addressing this topic.

In traditional accounting of revenue, expenses, and net income of businesses, energy costs are lumped in overhead, and effects on and uses of resources--such as air, rivers, soils, and other environmental components--are neglected altogether. The challenge is to incorporate all costs involved in design, production, use, disposal, and reuse so as to arrive at a life-cycle analysis of a product or process. Assigning values to various environmental assets used and to real or potential environmental effects that have varied probabilities is problematic, however. Those assigned values may well drive the results of the analysis. Nevertheless, the process of environmental accounting can link environmental costs with activities and products and provide information that results in win-win opportunities to increase operational efficiency, improve worker safety, enhance product quality, and meet environmental protection goals. Bankers and investment advisers have been slow to encourage up-front investments in those cost-saving initiatives. The President's Council on Sustainable Development (1996) recommended that national business associations provide technical assistance to companies interested in identifying environmental management costs and innovative ways to increase profits by reducing energy and materials use while better protecting public health and the environment.

Industrial Ecology and Life-Cycle Analysis. Proponents of industrial ecology envision a closed-loop system in which no resources are depleted; that is, all materials are perpetually reused, and no waste is produced or discarded. The loops might be closed within a factory, among industries in a region, and within national or global economies. Industrial ecology would integrate the producing and consuming segments of an economy to optimize the use and recycling of industrial materials and products. "Benign by design" chemistry, in which synthetic chemistry is designed to use and generate fewer hazardous substances, is a step toward achieving a closed-loop system. Quad Graphics, a Wisconsin based printing business, and Stonyfield Farm, a yogurt producer located in New Hampshire are trying to establish eco-industrial parks where companies with compatible production processes can use resources more efficiently and reduce waste. Life-cycle analysis is important to the implementation of industrial ecology, because it provides information that can be used to understand the consequences of choices among materials, product designs, and process designs and to understand the fate of products when they are finally discarded by consumers. Nevertheless, industry representatives emphasize that life-cycle analysis relies on many assumptions and needs further research and development before it can be a reliable tool.

Environmental Audits. Audits by industry and by third parties are a powerful tool for influencing corporate compliance with command-and-control regulations by easing penalties for self-disclosed violations. Audits also allow emitters to highlight voluntary reduction of pollutant emissions to the air, water, and land. Environmental audits have become controversial with the passage of recent state legislation providing blanket protection from penalties for self-disclosed violations.



Market-based Incentives. Market-based incentives rely on economic motivations to encourage environmental protection and cost effectiveness. A prominent example of market-based incentives to achieve environmental protection is the use of tradable sulfur dioxide emission allowances to reduce acid rain. This program, mandated under the 1990 Amendments to the Clean Air Act, permits electric utilities to reduce their emission of sulfur dioxide, the precursor to acid precipitation, below allowable levels and sell the unused emission allowances to companies whose cost of compliance is substantially greater. The program caps aggregate sulfur dioxide emissions well below historical levels while allowing emission reductions to be achieved more cost-effectively than by requiring every company to install the most-expensive sulfur dioxide control technology. The cost of a ton of sulphur dioxide emission allowances has fallen below projected costs, presumably reflecting technological advances. Similar programs are being developed to reduce regional nitrogen oxide emissions. The use of caps and tradable pollution allowances may not work well in some cases such as toxic air pollutants where sources create localized risks.

Right-to-Know and Other Incentives to Encourage Pollution Prevention. In addition to the use of direct economic-incentive policies, other positive incentives are available to encourage pollution prevention, some of which EPA has implemented. For example, some pesticides that require approval by EPA before they can be distributed, used, or sold could be given priority for approval if they were deemed safer for human health and the environment, and thereby reach the marketplace faster than other pesticides. If regulations control the labeling of a product, safer products could receive more favorable treatment, such as authority to use a special label, to give them greater prominence in the market. To encourage pollution prevention by manufacturing facilities, businesses might be given tax incentives to replace old facilities with new, cleaner processes that do not generate waste and pollution. Another example pertaining to Title V permits under the Clean Air Act is EPA's Pollution Prevention in Permitting Pilot Project (P4 Project) with Intel Corporation, the Oregon Department of Environmental Quality and the Northwest Pollution Prevention Research Center. The pilot is now being extended to five other companies in EPA regions 1, 4, 6, 9, and 10. The aim is to reduce production of air emissions, rather than control their release in ways that generate solid waste or waste water.

The Toxic Release Inventory and California Proposition 65 have proved effective pollution prevention incentives by requiring the disclosure of information about chemical releases to the environment and labeling of chemicals in products, respectively. Those right-to-know laws rely on the public's attitudes toward toxicants to encourage industry to reduce or eliminate their use or release. In the case of Proposition 65, the requirement to warn people about exposures to chemicals known to cause cancer, birth defects, or other reproductive harm has been an incentive to businesses to eliminate such chemicals or reduce exposures and associated risks below the bright lines for cancer and reproductive risks. Rather than relying on command and control, Proposition 65 uses disclosure of information and labeling requirements as risk-management tools. Proposition 65 places the burden of proof of safety on manufacturers rather than on government agencies, requiring businesses to present a risk-based analysis to avoid having to label their products and substances as cancer-causing or reproductive toxicants. David Roe of the Environmental Defense Fund informed the Commission that Proposition 65, once enacted and implemented, has had widespread support from environmental and business communities and has had few legal challenges. A key element was the decision by the state agency, accepted by environmentalists and business, to put the bright line for cancer risk at 10-5, rather than 10-4 or 10-6, as proposed by contending parties. He estimated that under this system, the state of California completed the necessary regulatory work for 282 chemicals at a cost of about one-tenth of what EPA was spending on risk assessment during the same years.

Taxes and Subsidies. Tax and subsidy programs that encourage and discourage economic activity can be powerful motivators, either encouraging or discouraging use of natural resources and production or reduction of pollution. For example, agricultural land-retirement programs have prevented excessive soil erosion and damage to waterbodies and wildlife habitat, and promoting agricultural production through implicit and explicit subsidies for inputs, such as pesticide and water use, can contribute to environmental damage. Elimination or amelioration of negative-tax and subsidy programs can have a positive impact on the protection of human health and the environment, as can carefully targeted increases in subsidies for the provision of some environmental benefits. Government purchasing practices can also encourage the development of markets for products that are environmentally more sound. Care is needed to avoid excessive acquisition costs for products with small markets and to avoid buying products with one attractive attribute but other unfavorable characteristics.

Alternative Compliance. Alternative compliance provides greater flexibility to industry by allowing choices of methods for achieving emission-reduction or risk-reduction specifications. It is designed to achieve higher levels of environmental protection at lower cost and to foster integration of local concerns in environmental risk-management decisions. Alternative compliance gives regulated entities the ability to choose among a broad range of management alternatives instead of being subject to prescriptive command-and-control requirements. This option can result in substantial savings for industry, communities, or any regulated entity that participates. For example, EPA's Project XL allows six companies (Intel Corporation, Anheuser Busch Companies, HADCO Corporation, Merck & Co., Inc, AT&T Microelectronics, and 3M Corporation) and two government agencies (California's South Coast Air Quality Management District and the Minnesota Pollution Control Agency) to experiment with different strategies for improving environmental protection. Government also can provide greater compliance flexibility for those attempting to use innovative pollution-reduction and-control technologies. Use of the concept of a bubble to encompass a facility or geographic area and seek the best way to reduce a pollutant or pollutants within the bubble has provided flexibility in compliance, also.

Consensus, Mediation, and Dialogue Projects. Negotiated rule-making and dialogue projects, such as EPA's Common Sense Initiative, offer opportunities for stakeholders to design new standards and solutions that protect human health and the environment more reliably and with greater cost effectiveness and public acceptance. With the Common Sense Initiative, begun in 1994, EPA has convened consensus-oriented teams of stakeholders to look for opportunities to turn complicated and inconsistent environmental regulations for six major industries--automobile manufacturing, computers and electronics, iron and steel, metal finishing, petroleum refining, and printing--into comprehensive sector-specific strategies for environmental protection. Several industrial sectors have launched their own initiatives such as Responsible Care by the Chemical Manufacturers Association.

The Commission joins with the President's Council on Sustainable Development (1996) in endorsing alternatives to command-and-control regulations. Wise use of a variety of alternatives might provide increased human-health and environmental protection with greater efficiency and lower cost to regulatory agencies, industry, the economy, and society, than command-and-control programs.




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