Federalism and interstate environmental externalities.

• Author: Revesz, Richard L.

Table of Contents

Introduction I. Interstate Externalities Under the Clean Air Act A. Overview of the Clean Air Act B. Impact of the Statute on Interstate Externalities

1. Ambient and Emissions Standards

2. Tall-Stack Provisions

3. Acid-Rain Provisions

4. Interstate Spillover Provisions C. Administrative and Judicial Interpretation of the Interstate Spillover Provisions

1. Threshold Issues

2. Substantive Standards II. Internalizing the Interstate Externalities A. Dealing with Violations of the Ambient Standard in the Downwind State

1. Selecting Desirable Levels of Emissions Where the Location and Stack Heights of Firms Are Fixed

2. Role of Stack Height

3. Role of Location B. Dealing with Instances in Which the Ambient Standard in the Downwind State Is Not Violated III. Interstate Externalities and the Dormant Commerce Clause A. Analog, to the Dormant Commerce Clause B. Standards Under the Dormant Commerce Clause

1. Protecting a Margin for Economic Growth

2. Protecting a Natural Resource

3. Enforcing More Stringent State Ambient Standards

4. Summary IV. The Promise of Marketable-Permit Schemes Conclusion

   INTRODUCTION

   The two justifications most prominently offered, both in the academic literature and the legislative arena, for vesting responsibility for environmental regulation at the federal level focus on the existence of a "race to the bottom" and of interstate externalities.(1) The "race-to-the-bottom" rationale for federal environmental regulation posits that states, in an effort to induce geographically mobile firms to locate within their jurisdictions, will offer them suboptimally lax environmental standards so as to benefit from additional jobs and tax revenues. The problem of interstate externalities arises because a state that sends pollution to another state obtains the labor and fiscal benefits of the economic activity that generates the pollution but does not suffer the full costs of the activity. Under these conditions, economic theory maintains that an undesirably large amount of pollution will cross state lines.

   Though they are sometimes conflated, the race to the bottom and the problem of interstate externalities are analytically distinct. The concern over interstate externalities can be addressed by limiting the amount of pollution that can cross interstate borders, thereby "showing" upwind states the costs that they impose on downwind states. As long as the externality is eliminated, it would not matter, from the perspective of controlling interstate externalities, that the upwind state chooses to have poor environmental quality--a central concern of race-to-the-bottom advocates. Conversely, one could imagine a situation in which the upwind state has chosen a high level of environmental quality but has encouraged the sources in the state to have tall stacks and to locate near the interstate border, so that their effects will be felt only in the downwind state. In that case, race-to-the-bottom advocates would have no concern, but there is an externality problem.(2)

   A few years ago, I challenged the accepted wisdom on the "race to the bottom," arguing that, contrary to the prevailing consensus, competition among states for industry should not be expected to lead to a race that decreases social welfare.(3) Moreover, I showed that even if there were such a race, federal environmental regulation would shift the competition among states to other regulatory arenas, or to the fiscal arena. Federal environmental regulation would then have undesirable effects on state interests in these arenas, and would not enhance social welfare. Race-to-the-bottom arguments in favor of federal environmental regulation are, in essence, a frontal challenge on federalism because the problems that they seek to correct can be addressed only by exclusive federal regulatory and fiscal powers.(4)

   This Article, in turn, criticizes the various approaches that federal environmental laws have taken to address the problem of interstate externalities. Part I shows that the Clean Air Act--the statute designed to deal with the pollution that gives rise to the most serious problems of interstate externalities--has been unsuccessful at forcing the internalization of interstate externalities. Its core provisions cannot be justified by the need to control interstate externalities, and may have exacerbated the problem. Similarly, the relatively minor provisions directed at controlling interstate externalities have been wholly ineffective, largely as a result of the failure of the Environmental Protection Agency ("EPA") and the federal courts to define a coherent and logical body of law. In fact, despite congressional preoccupation with the problem and the existence of statutory provisions expressly designed to correct it, the downwind states have always been unsuccessful at constraining upwind pollution.(5) A similar situation arises under the Clean Water Act.

   Part II examines how to design a desirable approach to controlling interstate externalities.(6) The inquiry reveals the extent to which the EPA and the courts have overlooked factors that are relevant to this task. For example, the current regime inquires only whether the emissions of a proposed source in an upwind state are excessive. But to achieve a socially desirable level of interstate spillovers, the regime should also determine whether the proposed stack height and location are motivated by an effort to externalize the effects of pollution.(7) Also, the current regime conducts this inquiry only when there is a violation of a federal ambient standard in the downwind state. But in order to properly allocate the downwind state's margin for growth, or to protect the legitimate interests of downwind states in enforcing more stringent state ambient standards, one must also assess the permissibility of upwind pollution when there is no violation of federal standards. Similarly, the current regime considers the problem statically, at one point in time. Instead, the system should undertake a dynamic analysis, which examines desirable allocations of the pollution-control burden between upwind and downwind sources in light of economic growth.

   Part III shows how the Dormant Commerce Clause supports stronger controls on interstate pollution externalities. This clause defines an understanding of federalism that ought to inform as a matter of policy, though not of constitutional law, federal regulatory schemes designed to address the problem of interstate externalities. Attention to the principles embodied in the Dormant Commerce Clause would lead to constraints on interstate externalities well beyond those currently enforced under the federal statutes.

   Finally, Part IV presents a scheme in which marketable permits would be traded in units of environmental degradation (as opposed to the more traditional market-based schemes that trade units of emissions). In this proposed market, both upwind and downwind sources would purchase permits to degrade ambient air-quality levels in the downwind state. The amount of emissions allowed by each permit would depend on the impact that emissions at each source have on ambient air-quality levels at the affected location, which is a function of factors such as the location of the source, the height of the stack, and the strength of prevailing winds. Using marketable-permit schemes to address the problem of interstate externalities solves an important problem of how to coordinate several states' plans for economic growth. Such coordination would be difficult to accomplish through non-market-based federal intervention. This argument for marketable-permit schemes is independent from and in addition to the standard claim that such schemes lead to the minimization of the costs of achieving a given environmental objective.

   The central purpose of this Article, particularly in light of my prior work,(8) is to refocus the attention of federal environmental regulation. Of the two most prominent reasons for vesting responsibility for environmental regulation at the federal level, the race-to-the-bottom rationale is analytically unsound, despite the fact that much of the legal regime is structured to redress this asserted evil.(9) In contrast, the rationale for federal regulation premised on the problem of interstate externalities is analytically unimpeachable but has not been effectively redressed in the current pollution- control scheme.(10) At a time when federal environmental regulation is under fierce political attack,(11) it is critical to define clearly what tasks can best be accomplished at the federal level and to ensure that the resulting regulatory scheme in fact accomplishes those tasks. This Article shows why a great deal more attention needs to be paid to fashioning an effective federal response to the problem of interstate externalities.

   1. INTERSTATE EXTERNALITIES UNDER THE CLEAN AIR ACT

   This Part reviews and critiques the treatment of interstate externalities under the Clean Air Act. Section A discusses the major provisions of the statute. Section B shows that these provisions are not well suited to control interstate externalities, and argues that the regulatory scheme adopted in 1970 may in fact have exacerbated the problem. This section also shows that the Act's tall-stack and acid-rain provisions provide, at best, limited relief. Section C evaluates sections 110(a)(2)(D) and 126(b)-the two provisions specifically designed to constrain interstate externalities.(12)

   1. Overview of the Clean Air Act

      Some background on the central provisions of the Clean Air Act is necessary to evaluate the Act's treatment of interstate spillovers. The National Ambient Air Quality Standards ("NAAQS"), set at the federal level by the EPA, are the statute's centerpiece. The NAAQS prescribe nationally uniform maximum concentrations for pollutants "which may reasonably be anticipated to endanger public health or welfare."(13) These ambient standards establish the...