Environmental federalism: a survey of the empirical literature.

• Author: Millimet, Daniel L.
• Position: Introduction through II. Environmental Federalism in Practice C. Interjurisdictional Externalities 1. Resource Externalities, p. 1669-1713

ABSTRACT

Generally, the debate over environmental federalism strongly focuses on anecdotal evidence and intuition. Empirical facts have not been the focus of arguments concerning the optimal allocation of environmental authority. For example, the Tiebout model, which highlights the positive side of decentralization as jurisdictions efficiently compete for mobile residents, relies on seven assumptions. Additionally, the group of models relying on the interjurisdictional competition framework, which have highlighted both the positive and negative outcomes of decentralized environmental authority, also rely on a number of assumptions. This Article assesses the empirical validity of many of these assumptions, concluding that the data may necessitate a rethinking of these assumptions.

CONTENTS INTRODUCTION I. ENVIRONMENTAL FEDERALISM IN THEORY II. ENVIRONMENTAL FEDERALISM IN PRACTICE A. Resource Mobility 1. Population Mobility 2. Capital Mobility B. Preference Heterogeneity C. Interjursidictional Externalities 1. Resource Externalities 2. Pecuniary Externalities 3. Fiscal Externalities D. Political Economy 1. Leviathan 2. Lobbying and Corruption 3. Political Participation 4. Knowledge E. Policy Instruments 1. Laboratory Federalism 2. Bottom-Up Federalism CONCLUSION INTRODUCTION

Professor Bednar defines federalism as a "system of government characterized by semiautonomous states in a regime with a common central government" where "governmental authority is allocated between levels of government." (1) Professor Gordon notes that within a federal system "each unit of government decides independently how much of each type of public good to provide, and what types of taxes, and which tax rates, to use in funding the public goods." (2) While many countries contain a federal political system, the "optimal" allocation of authority across levels of government is the subject of constant research and debate. (3) While much of this research and debate focuses on fiscal policy (taxation and expenditures), the allocation of authority over environmental decision making within a federal political system has also been discussed, deliberated, and agonized over for decades. (4) The puzzle concerning the optimal allocation of environmental authority across levels of government is commonly referred to as environmental federalism.

Although the issue of environmental federalism receives widespread attention across the globe, there is no resolution in sight. (5) Even some of the most prominent researchers in this area have a diverse set of beliefs. Professor Gordon concludes:

Competition among communities should lead to greater efficiency and innovation. However, this paper has shown the many ways in which decentralized decision-making can lead to inefficiencies, since a local government will ignore the effects of its decisions on the utility levels of nonresidents.... In light of these costs arising from lack of coordination, it may be preferable to have the central government take responsibility for particular activities, in spite of the lost diversity. (6) Professor Oates states: "My own sense is that where environmental quality is basically a local public good, the case for the setting of environmental standards at an appropriately decentralized level of government is quite compelling. At the same time, one can envision an essential informational and guidance role for the central authority." (7) Professor Wilson concludes:

As such, competition among governments has both good and bad aspects, the importance of which vary across the attributes of the goods and services that the governments provide. This assessment suggests a role for intervention by a central authority, but both political considerations and information problems should be carefully addressed. (8) Professor Adler states: "In sum, there is a strong case for a general presumption in favor of decentralization--a presumption that can be overcome in any specific policy context by demonstrating the need for federal intervention." (9) Professor Levinson writes: "The conclusion must be that under most practical circumstances, local environmental authority will lead to inefficient regulations." (10)

The diversity of views concerning the appropriate allocation of environmental authority also plays out in practice as different federations have "resolved" the issue differently. For example, the well-known Principle of Subsidiarity emanating from the Maastricht Treaty of 1992 constitutionalizes the delegation of environmental authority by dictating that centralized action is only allowed in situations where policy objectives cannot be sufficiently achieved through decentralized action. (11) This is consistent with the so-called Decentralization Theorem put forth by Professor Oates:

[I]n the absence of cost-savings from the centralized provision of a [local public] good and of interjurisdictional external effects, the level of welfare will always be at least as high (and typically higher) if Pareto-efficient levels of consumption of the good are provided in each jurisdiction than if any single, uniform level of consumption is maintained across all jurisdictions. (12) In contrast, the delegation of authority is not constitutionalized in the United States except insofar as decentralized policymaking is not allowed to interfere with interstate commerce. (13) As a result, environmental authority in the United States has oscillated between periods of relatively greater centralized and decentralized control. (14)

Given this backdrop, the objectives of this article are twofold. The first objective is to provide a very brief summary of the main theoretical models put forth in the literature. The reason for doing so is to illuminate the issues that play a fundamental role in conclusions regarding the optimal allocation of environmental authority. The second objective is to then provide a comprehensive survey of the relevant empirical literatures for the first time in the legal literature. By doing so, the goal is to limit the scope of the debate over environmental federalism moving forward, as well as make clear where the gaps in empirical knowledge exist.

1. ENVIRONMENTAL FEDERALISM IN THEORY

   The two primary theoretical frameworks used to explore the effects of the decentralization of policy decisions such as taxes, expenditures, environmental standards, etc. derive from Professor Tiebout and the literature on interjurisdictional competition. (15)

   The Tiebout model highlights the positive side of decentralization as jurisdictions compete for mobile residents in such a way that yields outcomes that are efficient. (16) As laid out by Professor Revesz, the model relies on "seven important assumptions." (17) First, individuals are perfectly mobile across jurisdictions and have heterogeneous preferences over jurisdictional attributes. Second, individuals have perfect knowledge concerning the attributes of all jurisdictions, which include the "head tax" levied on residents and the level of public goods and services provided. Third, there exist a large number of jurisdictions. Fourth, employment does not affect individual residential choice as income is derived via dividends. Fifth, there are no inter jurisdictional externalities. Sixth, every jurisdiction has a (known) optimal size where the average cost of services provided is minimized. Seventh, jurisdictions below their optimal size seek to attract new residents. (18)

   Professor Brueckner provides a concise summary of the model:

   Tiebout argued that, in attempting to attract residents, fiscally autonomous subnational governments will tailor public spending to suit individual preferences, leading consumers to sort across jurisdictions according to their demand for public goods. With each individual able to exactly fulfill his or her demand in some jurisdiction, the economy achieves a market-like outcome in the provision of public goods. (19) Thus, under the assumptions of the model, this market-like outcome is efficient.

   In contrast, the interjurisdictional competition framework nests both the positive and negative sides of decentralization as jurisdictions compete for mobile resources, typically taken as capital. Dating back at least to Oates's 1972 model, the framework has led to a variety of theoretical models. (20) The 1988 model of Professors Oates and Schwab provides a useful starting point in the literature. (21)

   Oates and Schwab find that it is possible for decentralized environmental authority to be efficient even with interjurisdictional competition for capital. (22) However, this result requires numerous assumptions. (23) First, individuals are homogeneous and immobile across jurisdictions. Second, capital is perfectly mobile across jurisdictions, seeking to maximize after-tax returns, and all production profits are earned locally. Third, capital has perfect knowledge concerning the attributes of all jurisdictions, which includes the tax rate on capital and level of public goods and services provided. Fourth, there exist a large number of jurisdictions that take the after-tax return on capital as given. Fifth, there are no interjurisdictional externalities. Sixth, governments maximize the (known) social welfare of their jurisdiction. Oates summarizes this model, stating that "the invisible hand works in much the same way as in the private sector to channel policy decisions in individual jurisdictions into an efficient outcome from a national perspective." (24) In sum, the Tiebout and interjurisdictional competition frameworks provide a definitive answer to the environmental federalism debate under certain assumptions. Failure of these assumptions, however, may reverse this conclusion. For example, Oates stresses the limitations of his earlier work, stating: "The problem is that these models make some strong assumptions.... [Violations of any of these conditions can lead to distorted outcomes." (25) Indeed, many theoretical...