A positive political economic theory of environmental federalization.

• Author: Johnston, Jason Scott
• Position: Introduction through II. Setting the Stage: American Development and the Demand for Environmental Improvement, Circa 1970, p. 1549-1584

ABSTRACT

This Article sets out a positive theory that explains the late twentieth-century federalization of American environmental law. On this theory, federalization occurred not because states had failed to regulate to reduce air and water pollution, but because older and heavily developed states moving toward such regulation gained a relative competitive advantage by imposing minimum standards on less developed and less polluted states (in the case of air), and by receiving subsidies from such regions (for water pollution reduction). The failure of federalization in the case of climate change is directly explained by this theory: the majority of states would be certain short and medium term net losers from such legislation.

CONTENTS INTRODUCTION I. THE APPROACH FROM NORMATIVE PUBLIC FINANCE A. The Simple Economic Optimality of Decentralized Environmental Regulation. B. Complicating the Story, and Justifying Regulatory Centralization. 1. Failure to Internalize the Full Benefits of Pollution Reduction (Interstate Externalities). 2. Inter-jurisdictional Competition. 3. Scale Economies and the Possibility of Non-Uniform Centralized Regulation C. The (Inevitable) Failure of Normative Public Finance to Offer a Positive Theory of Environmental Federalization. II. SETTING THE STAGE: AMERICAN DEVELOPMENT AND THE DEMAND FOR ENVIRONMENTAL IMPROVEMENT, CIRCA 1970. A. American Regional Economic Development, and Environmental Regulation, Circa 1970. 1. The Undeveloped, Unpolluted and Accessible South and West 2. The Environmental Kuznets Curve Confirmed: Development and the Demand for Local Environmental Protection in Older America. B. Air Pollution Circa 1970: Effective State and Local Regulation. 1. Effective Local Regulation to Curb the Black Carbon (Coal Smoke) Problem. 2. State and Local Responses to Sulfur Dioxide and Smog Pollution C. How Development Created Local Demand for Pollution Reduction The Postwar Water Pollution Story. 1. Subsidies and the Demand for Clean Water: The Maine Example. 2. Effective State Action for Clean Water in the Rust Belt III. EXPLAINING FEDERALIZATION: CENTRALIZED ENVIRONMENTAL REGULATION AS REGIONAL ECONOMIC PROTECTIONISM AND POLITICAL PORK A. The Clean Water Act: Succeeding Through Subsidies. 1. Water Pollution Control Federalization 2. Cooperative Federalism Under the Clean Water Act: Federal Subsidies, Local Standards. B. The Clean Air Act: Federal Minimum Standards as Regional Protectionism and Local Counter-Majoritarianism. 1. The 1970 Clean Air Act 2. Explaining the Clean Air Act: The Simple Economics of (Locally) Counter-Majoritarian Federal Minimum Environmental Standards 3. From PSD to the Rise of Technology-Based Standards Under the Clean Air Act a. The PSD Standards and the Passage of the CAA. b. Did the PSD Standards Work? The Limitations of Existing Empirical Evidence c. The Continuing Rise of Technology-Based Standards in the Clean Air Act of 1990 IV. THE FAILURE OF FEDERALIZATION: CLIMATE CHANGE AS A CASE STUDY. INTRODUCTION

This Article sets out a positive theory that helps to explain the federalization of environmental law and applies that theory to selected episodes in the recent history of federal environmental law in the United States. On my theory, federalization occurs not because the activities of one State spillover and cause harm in other States. Nor does federalization occur because States are failing to regulate to curb harm from pollution because they fear losing industry. Instead, federalization occurs when a large number of localities have reached a stage of development where their citizens have a level of affluence and leisure time that they demand a cleaner environment and reduced pollution. Such citizens would support local pollution reduction regulations, but federal pollution legislation can make them strictly better off in two ways.

One kind of federal environmental law that dominates local controls, illustrated by the federal Clean Air Act, (1) imposes uniform emission reduction standards on all localities within the federation. (2) As there is local demand within developed states and localities for pollution control, federal environmental standards are supported by local environmentalists and recreationists in such places. But, crucially, as such laws provide economic protection against competition for industry from lesser developed, less polluted states and localities, the laws also are supported by local industry and labor in the heavily polluted states and localities. There thus emerges a coalition defined by both region and interest that successfully supports the imposition of uniform federal environmental standards.

The second kind of federal law that can make citizens who demand local pollution reduction strictly better off relative to local regulation is one that directly subsidizes pollution reduction in highly industrialized or rapidly industrializing locations. This type of law, illustrated by the federal Clean Water Act, (3) enjoys even broader support, as it promises a subsidy both to places that are already industrialized with a pollution problem and those that anticipate rapid industrialization in the future. (4) In the most straightforward way, the law is paid for by people who reside in less industrialized and polluted areas.

This theory explains a number of important facts about the history of the Clean Air Act. It explains, directly, the imposition of technology-based, facility-specific pollution control standards in less developed, cleaner regions of the country (the Prevention of Significant Deterioration or PSD program). Less directly, it can explain the pattern of implementation of ostensibly uniform national standards. The theory recasts the apparent failure of the Clean Air Act to actually generate national uniformity in air quality not as a problem, but as precisely what Congress intended in passing the law: older and more heavily polluted areas were, on my theory, never intended to be forced to incur the enormous costs achieving unpolluted air. (5) Finally, the theory explains the gradual but inevitable loss of state authority under the Clean Air Act. Whatever discretion might seem to have been given to the States by the Clean Air Act's regime of "cooperative federalism" to fine tune their environmental regulations in light of local costs and benefits of pollution control is inconsistent with both the regional protectionist and national preservationist objectives, both of which necessitate a drastic curtailment of local regulatory authority to balance costs and benefits.

The first Part of this Article reviews the theory of environmental federalization taken from the field of economics known as public finance. This branch of economics has generated a normative theory that shows how, under certain assumptions, regulatory decentralization generates regulatory outcomes that make everyone in a federation better off than under a system of uniform federal regulation. The most important impact of this theory on public law has been not in this result, however, but in the demonstration that when various assumptions are violated, the case for regulatory decentralization disappears or is greatly weakened. In this way, legal scholars in particular have come to think of normative public finance theory as generating not only a justification for the late twentieth century federalization of American environmental law, but also a positive theory that explains why federalization occurred.

By reviewing the stylized facts of late twentieth-century American regional economic development and state and local air pollution regulation, the second Part of this Article shows that as a positive matter, federal environmental law did not arise because States were failing to deal with the air pollution problem, but because wherever there was a problem, the States were regulating. Together with the historical fact that many regions of the country were very little developed as of 1970, with no perception of an air pollution problem, the history of effective state and local regulation suggests that an alternative positive theory is required. The third Part of this Article supplies such a theory with recent economic work showing how federal minimum standards can arise as an equilibrium under majority rule in a federal legislature. In such an equilibrium, the federal minimum does not bind in the majority of jurisdictions (who are free to regulate more stringently), but does bind in a minority of jurisdictions. At the state level, federalization is counter-majoritarian, in that it imposes the preferences of minority pro-environmental voters in states whose median voter opposes the federal minimum standard.

This model explains federal environmental law as arising from a coalition among anti-development environmentalist advocates in relatively undeveloped, unpolluted states and a broad-based set of voters including both industry and labor in heavily developed, polluted States. The final Part of this Article extends this same model to explain an important failure to federalize: Congressional inaction on federal climate change legislation. Unlike water and air pollution circa 1970, there are no widely perceived short-term local environmental benefits from a circa 2014 federal law that would impose costs on or otherwise limit carbon dioxide emissions.

Environmental benefits, if any, would be realized in the far distant future, and would be primarily non-local. The demand for such legislation is driven by Congressional representatives who are not just environmentally liberal ideologically and Democrat by party affiliation but, equally importantly, come from the minority of states that are singular in that they rely exceptionally heavily on sources of power, hydro and nuclear, that would be unaffected by a federal law imposing costs on carbon dioxide emissions. Such federal legislation would confer a potentially large relative competitive advantage...