Toward a new system of environmental regulation: the case for an industry sector approach.

• Author: Fiorino, Daniel J.

1. Introduction

   To say that the 1990s are a time of change for environmental policy in the United States is an understatement. After two decades of nearly steady growth in terms of legal authority, political support, and financial and technical capabilities, environmental policy at the national level appears to be at a crossroads. Critics of environmental programs argue that they are too stringent, too expensive, and interfere too much in private initiative.(1) Even the defenders of environmental programs concede their many inefficiencies and unintended consequences.(2) Nearly anyone with experience in environmental regulation would agree on the need for some kind of change in our regulatory system.

   There are at least two directions in which policy could move. One is represented by the regulatory reform bill that passed the House of Representatives in early 1995.(3) Taking what The Economist calls a wholesale, approach to reform,(4) the bill would impose strict, across-the-board analytical and evidentiary requirements on regulators, in the form of mandatory, quantitative risk assessment,(5) cost-benefit analysis,(6) and extensive peer review of the technical analyses that underlie regulatory decisions.(7) Cost-benefit determinations would supersede existing statutory provisions; agency analyses and conclusions based on them would be open to legal challenge and judicial review.(8)

   Another possible direction for environmental policy to take would be toward a "retail" approach to regulatory reform.(9) This direction may not be as desirable politically for our elected officials, who, at least rhetorically, champion rapid, sweeping change. However, the retail approach is more likely to lead to a sensible national environmental policy in the long run,a policy that is both more effective and efficient for American society. A retail version of regulatory reform would deal with the problems in each environmental statute, focusing on such issues as the lack of flexibility, the medium-specific focus, the ambiguity regarding risk and economic analysis, and the other problems that have fueled the debate over regulatory reform. A retail approach would also build upon current thinking about alternative ways to organize and manage environmental programs.

   Although America's environmental laws can be credited with many accomplishments and it is hard to disagree with Gregg Easterbrook's assertion that the environment should be seen as one of the postwar successes of American public policy, there are weaknesses as well as strengths in U.S. environmental laws and programs. These weaknesses become more apparent as we learn more about previously unsuspected environmental problems and as the costs of making further progress along traditional lines continue to mount.(11)

   One way to conceive of U.S. environmental regulation at this stage is to think of it as a novel whose first draft has much to commend it, but which on second or third reading has revealed its flaws. Its authors have many good ideas, but those ideas are not integrated into a coherent story line. It may be time for a second draft that, given what we have learned so far, will improve upon the first.

   This Article argues for a retail version of regulatory reform, based on an industry sector approach to environmental regulation. Part H discusses specific drawbacks of the current structure of American environmental policy, which is under attack on several fronts due to three major structural defects: fragmentation by medium, statutory overregulation, and agency confrontation. Part III describes the development of a consensus among federal officials that the one size fits all, rationale of current environmental regulation is too Procrustean a bed. Officials of several government agencies, industry, and nongovernmental organizations agree that an industry sector approach integrated across all environmental media would better serve both private and public needs. Part IV details the advantages and drawbacks, and chances for success, of four recent initiatives that attempt to implement the industry sector approach. Part V discusses structural and institutional barriers to regulatory reform. These barriers include not only increasing wariness among lawmakers, public interest groups, and industry about the efficacy of regulatory solutions, but also the increasing frustration in the regulatory agencies themselves as their discretion is constrained by more precise statutes to produce what are unjust and often nonsensical results. Part VI contemplates two other models for regulatory reform. enforced self-regulation subject to government audits and the Dutch system of negotiated covenants between industry and government. Finally, Part VII suggests that while change will undoubtedly come, it is unlikely to come in one sweeping revolutionary stroke. Although there are problems with the narrative, the basic plot line behind the environmental regulation story is still sound@ a relatively modest change to a retail regulatory system will improve the story without disappointing the fans of the first edition.

2. The First Draft: Characteristics of the

   Existing Regulatory System

   To understand the need for change, it is important to have a sense of the institutional and legal structure of American environmental policy.(12) The current edition of U.S. environmental policy includes several problem plot points, three of the most important are detailed below.

   1. U.S. Environmental Policy is Highly Fragmented and Organized by

      Specific Environmental Media

      Usually when people solve complex problems, they find it necessary to break the problems into smaller parts to make them more manageable. This allows them to develop the specialized knowledge needed to deal with intricate problems. A primary reason for the emergence of bureaucratic organizations in this century was a need to respond to complex problems through a division of labor and specialization.(13)

      Environmental programs are a perfect illustration of this bureaucratic response to complexity. Air, water, and waste issues are managed nationally and in most states as separate programs, even within the programs, there is a high degree of specialization and fragmentation.(14) In addition, the incremental nature of public policy making in this country means that responses to problems usually emerge piecemeal. As issues arose on the policy agenda and coalitions formed to support legislative change, the major environmental laws were enacted one by one. Although national air and water pollution laws were passed as early as the 1940s and 1950s, the ambitious regulatory programs that exist today were shaped by the legislation of the 1970s and 1980s. Beginning with air(16) and water quality,(17) and followed later by endangered species,(18) drinking water,(19) solid and hazardous wastes,(20) toxic substances,(21) and hazardous waste cleanup,(22) environmental legislation flowed from Congress in a steady stream. Each statute deals with a small piece of the overall picture. However, the United States lacks an organic statute that addresses environmental problems comprehensively.(23)

      Critics have pointed to this fragmentation by environmental medium as a major weakness in the current system. Responses to problems in one medium often create new problems in others. Treatment of air pollution or sewage, for example, creates sludge as a by-product that becomes a solid waste that must be disposed of.(25)

      A single-medium focus also means that pollution controls are more costly than they need to be. Controlling emissions of a chemical released into the air may cost many times more than controlling discharges of the same chemical into water. Because one may create greater risk than the other, relative risks should be weighed. However, the medium-specific focus means that those comparisons may never be made; and even if they are made, they may never be acted upon.

      As an example of the problems associated with a medium-specific approach, consider the findings from a project that the U.S. Environmental Protection Agency (EPA) and Amoco conducted at a petroleum refinery in Yorktown, Virginia in the early 1990s.(26) Participants in the project identified all the sources of environmental releases from the refinery, determined what the best outcome (in economic and environmental terms) would have been for reducing those releases, then compared that outcome to what was required under the existing, medium-specific regulatory frainework.(27) They found that, under the existing rules, Amoco reduced airborne hydrocarbon and listed waste emissions by about 7300 tons per yea,r at a cost of SHOO per ton. However, if Amoco had been granted more flexibility than allowed under the existing rules, the project participants found that Amoco could have reduced its hydrocarbon emissions by about the same amount at a cost of only $500 per ton.(29) Because of the specific requirements in its statutes, however, EPA could not allow Amoco to implement the more cost-effective approach. The National Academy of Public Administration concluded that part of the problem was that "agency analyses of the risks, benefits and costs of managing residual pollutants are still focused on individual media."(30)

      This fragmentation by environmental medium is a two-edged sword. It is a strength, because it has allowed policy makers to tackle problems in manageable parts, technical experts to focus their expertise, and regulatory agencies to define enforceable rules for specific kinds of releases and pollutants. However, this fragmentation is also a weakness, because it prevents government and industry from achieving the best overall environmental and economic results for each facility or industrial sector.

   2. U. S. Environmental Policy Relies Heavily on

      Command-and-Control Regulation

      Political scientist James Q. Wilson has observed that the United States relies on rules to control the exercise of...