Debates about environmental regulation most often revolve around its economic consequences, particularly its effects on economic growth. Recently, this debate has become sharper. In addition to the "traditional" view that environmental regulation impedes economic growth (most often espoused by those in the business community), an opposing school of thought has developed. According to its proponents, not only can environmental regulation provide health and ecosystem protection, but it can stimulate the economy and enhance U.S. competitiveness at the same time.
Because this debate has extraordinarily important policy consequences, Resources for the Future sought a way to air—and clarify—the issues bound up in it. Accordingly, RFF Vice President Paul R. Portney and David Gardiner, assistant administrator of the U.S. Environmental Protection Agency's Office of Policy, Planning, and Evaluation, discussed them on December 1, 1993, at one of RFF's regular Wednesday seminars. The two articles that follow adhere faithfully to their opening remarks.
Although Gardiner is a proponent of the new view, while Portney is more sympathetic to the traditional one, both agree that the relationship between the economy and the environment is a complicated one. Moreover, both agree that the debate so far quite often has been exaggerated and misleading. This presentation is intended to help shed light on a most important subject.
David Gardiner
Conventional economic wisdom tends to focus on trade-offs as the basis for exploring the relationship between the environment and the economy. It suggests that environmental policy conflicts with economic progress. The U.S. Environmental Protection Agency (EPA) is trying to dispel this false dichotomy by leading discussion away from the somewhat reactive focus on trade-offs and toward a more proactive focus on ways to achieve environmental protection and economic progress at the same time.
Conventional model of the economy-environment relationship
The conventional approach to exploring the relationship between the environment and the economy is to pit one against the other—as if the real trade-off were between environmental protection and economic progress. By economic progress I mean quantitative and qualitative progress in the context of clean and equitable improvements to socioeconomic systems. Quantitative improvements enable us to meet the essential needs of the present generation without compromising the ability of future generations to meet their own needs. Qualitative improvements reflect our capacity to convert physical resource use into improved services for satisfying human wants.
In general, the conventional approach ignores changes in technology and changes in consumer preferences, and it assumes that everyone out there in the marketplace is fully informed. It also treats expenditures on environmental protection as expenses, rather than investments, and affords no intrinsic or economic value whatsoever to natural resources, such as clean air and clean water.
In reality, none of these assumptions holds true. This is why less-than-optimal outcomes result for both the economy and the environment when decision makers adopt an either/or model of the economy-environment interaction.
One such outcome resulted when U.S. manufacturers in the automobile coatings segment of the paints and coatings industry failed to anticipate public demand for stronger environmental regulations or opportunities for cost-effective, safe, and clean technological advances. As a result, the manufacture of all water-borne basecoats used in the United States relies substantially on technology developed by European suppliers.
Another example of a less-than-optimal outcome comes from the agriculture sector, where either/or assumptions and market imperfections have left the potential for realizing economic and environmental benefits substantially unmet. A recent cooperative study undertaken by EPA and the University of Missouri indicates that, when compared to conventional systems of farming, cropping systems that incorporate reduced tillage, greater cropping diversity, and more efficient management of commercial pesticides and fertilizers can improve resource conservation, reduce environmental risks, reduce costs of production, and increase short-run profits.
When decision makers adopt an either/or model of the economy-environment interaction, less-than-optimal outcomes result for both the economy and the environment.
To obviate the false assumptions that lead to less-than-optimal decision making, we must change the very nature of the debate over the relationship between the economy and the environment. This can be achieved, at least in part, by shifting discussions about that relationship away from the either/or model.
Environmental and economic interdependence is strongly linked to the development and diffusion of technology. As noted above, false assumptions about technology, tastes, and environmental investments form the basis of the view that increased pollution reduction can only be achieved at the expense of economic progress or vice versa, that greater economic activity inevitably hurts the environment. In reality, the myriad relationships between the economy and the environment are continually changing.
New perspective
The key question, then, is not "Does environmental policy conflict with economic progress?" but rather, "How can we get environmental protection and economic progress at the same time?" Clean technologies and management practices have a particularly important role to play in answering this question, as do price and institutional reforms that encourage reductions in all polluting emissions per unit of industrial output. And because the demand for environmental goods and services, or for a clean environment, increases at a slightly greater rate than income in most cases, we know that the demand for a clean environment is going to increase domestically and internationally.
We want to help give direction to that demand on an international level, so that when the market forms we can meet that demand with U.S. technology. Moreover, we want to provide incentives to industry to target its new capital investments in manufacturing practices and processes that are sustainable over the long term. In this way, we can realize environmental and economic benefits from the ongoing process of technology turnover in all industries.
The development and diffusion of environmentally sound technologies can change the way in which goods and services are produced and also generate benefits that can increase human welfare. The most promising areas for realizing the gains of environmental technology today relate to energy use and the development of alternative fuels, to biotechnology and the development of agricultural practices that use fewer inputs and harmful pesticides, and to industrial production processes that reduce or prevent pollution.
When the market forms for environmental goods and services, we would like to meet that demand with U.S. technology. We want to provide incentives to industry to target its new capital investments in manufacturing practices and processes that are sustainable over the long term.
It's worth noting that industry's focus on environmental concerns results not only from the need to comply with environmental regulations; firms are also recognizing new business opportunities and realizing economic gains. Indeed, U.S. industry is racing to capture the world market for new and emerging technologies, which the Organization for Economic Co-operation and Development estimates to be worth $200–300 billion and forecasts to see sustained growth over the next decade. In addition, "environmentally friendly" has become a powerful marketing tool across all sectors, industries, and services, a tool that recognizes consumer preferences for products that have less harmful impacts on the environment.
Examples abound that let us "brag" about the economic and environmental benefits that result when the interdependence of economic and environmental goals are recognized, understood, and strategically advanced. Inform Inc., a New York–based, non-profit, environmental research organization, reports that in many cases initiatives to reduce pollution at its source have decreased waste streams by 90 percent or more and resulted in significant savings. The savings, tallied for 62 projects, came to $21 million annually.
In one case cited by Inform, a medium-sized resin and adhesives facility in California made operational changes that slashed by 93 percent its major phenol-laden waste stream, which for years had been discharged first to the local sewer and then to an onsite pond. This reduction has saved the company more than $150,000 per year in waste disposal and potential legal costs. In another case, a reagent chemicals plant in New Jersey computerized its materials tracking system, identified twenty-one source reduction initiatives, and cut more than 600,000 pounds of waste to achieve annual savings exceeding half a million dollars.
State governments also have documented some good examples. Minnesota estimates that six manufacturers using recyclable materials have created around 1,700 jobs, $39 million in new wages, and an increase of $100 million in Gross State Product. Maine reports that recycling added nearly $300 million in wages, profits, savings, and secondary impacts, as well as more than 2,000 jobs to its economy in 1992. There are many more examples, and we want to continue to add to them.
New approaches
One of EPA's driving principles under Administrator Browner is an uncompromising commitment to environmental goals, while allowing flexibility as to how those goals are met. This combination of uncompromising commitment and flexibility is designed to yield innovation and jobs, as well as better environmental results.
The agency recently announced a major initiative to work closely with industry, states, and environmental groups to explore—on an industry-by-industry basis—coordinated rulemaking, permit streamlining, multi-media compliance and enforcement opportunities, and pollution prevention and environmental technology opportunities that offer "cleaner, cheaper" environmental results. Through initiatives such as these, we can expose the false premises that undermine constructive dialogue on the environment and the economy. Moreover, by demonstrating the interdependence of environmental and economic goals, we can create a new model of thinking that encourages decision makers to leverage the positive relationship between environmental protection and economic progress.
Paul R. Portney
I welcome this opportunity to react to David Gardiner's views on environmental regulation and its connection to economic growth. Because of the importance of this connection, and the key role that Gardiner's Office of Policy, Planning, and Evaluation plays in EPA's analyses of such issues, his willingness to exchange views is encouraging.
On several key points, I find myself in substantial agreement with him. For instance, the debate over environmental regulation has often made it seem that we must choose—in an either/or fashion—between economic growth and environmental quality. In fact, the two can coexist.
For example, between 1970 and 1990, per capita real disposable personal income in the United States (the best measure of what the average person has available to spend) increased by 42 percent. Meanwhile, concentrations of airborne lead, perhaps the most harmful of all the common air pollutants, fell by 90 percent between 1983 and 1990 alone. In addition, the period 1970–1990 saw significant reductions in ambient concentrations of sulfur dioxide, particulate matter, and carbon monoxide in almost every major metropolitan area of the United States, as well as significant—though much less uniform—improvements in water quality. Strictly speaking, then, we do not face an "either/or" choice when thinking about economic growth and environmental quality, and it is wrong to suggest otherwise.
I also agree with Gardiner that new environmental regulations do not inevitably lead to plant closures and unemployment. In fact, as he points out, a substantial number of people are now employed in what might loosely be referred to as the "environmental industry." (Total U.S. employment in this industry is about one million people.) This positive side of the "jobs" issue is routinely ignored by critics of regulatory programs.
Finally, I agree wholeheartedly with the emphasis Gardiner places on the importance of concocting cheaper ways of meeting the goals of U.S. environmental policy. Twenty years of careful research have demonstrated that we can meet our present environmental goals for a fraction (perhaps as little as 50 percent) of the $130 billion we now spend each year to comply with federal environmental regulation. Even if the annual savings were as little as 10 percent, or $13 billion, this would be roughly equivalent to all federal income assistance to poor families and nearly three times the amount of federal assistance to schools for disadvantaged children. We have to take advantage of opportunities like this.
Despite these points of agreement, however, I take issue with some of what Gardiner has to say. And I disagree fundamentally with a message I believe is implicit in his remarks: we can avoid painful choices when setting environmental goals and instead "have it all." That's simply not true, and we had better recognize this admittedly unpleasant reality if we are to fashion wise economic and environmental policies.
Keeping score with jobs
Gardiner refers several times to favorable job impacts from environmental measures. But we need to keep three things in mind when thinking about jobs and regulation. First, despite much rhetoric from both sides, environmental regulation will never have much of an impact on the aggregate level of employment in the United States. Rather, total employment is determined by much broader forces—such as domestic and international fiscal and monetary policy, attitudes toward saving and investment, and the quality of our labor force. True, regulation can "create" or "destroy" jobs in the short run, but only temporarily; in the long run, the opportunities for productive employment depend on the factors identified above.
Given the choice between world dominance in the environmental industry or a comparably strong position in, say, automobile manufacturing, chemical production, or agriculture, we would be foolish not to choose any of the latter.
Second, the environmental industry is now and probably always will be relatively small in the grand scheme of things. (The one million jobs in the environmental industry represent about eight-tenths of one percent of total civilian employment in the United States.) As economist Richard Schmalensee has pointed out, the year-to-year fluctuation in total U.S. employment is sometimes only slightly smaller than the whole of the environmental industry. This is emphatically not to disparage that industry—indeed, the United States enjoys a favorable balance of trade in environmental goods and services, one I hope grows larger still. But if given the choice between world dominance in the environmental industry or, say, a comparably strong position in automobile manufacturing, chemical production, or agriculture, we would be foolish not to choose any of the latter.
Third, even if environmental regulation could affect the overall level of employment in the long term, counting jobs created or destroyed is simply a poor way to evaluate environmental policies. Consider a regulation that resulted in the closure of a large factory employing hundreds of workers. While surely lamentable, this might be a very good policy from an overall social standpoint if the factory simply could not operate without discharging substances very harmful to human health and the environment. Conversely, one could envision a regulatory program that, in the short term, "created" jobs for hundreds or even thousands of workers. Yet if this program did little or nothing to improve environmental quality, it would be foolish to implement it despite its employment effects—the environmental pork barrel is no more benign than that from which other kinds of make-work projects are often plucked.
Separating wheat from chaff
How then do we distinguish wise from unwise policy proposals? The answer is at once very simple and very complicated. In my view, desirable regulations are those that promise to produce positive effects (improved human health, ecosystem protection, aesthetic amenities) that, when considered qualitatively yet carefully by our elected and appointed officials, more than offset the negative consequences that will result (higher prices to consumers, possible plant closures, reduced productivity). In other words, wise regulations are those that pass a kind of commonsense benefit-cost test.
Three quick points are in order. First, and obviously, this type of evaluation is more easily described than done. Determining when the pros swamp the cons is often terribly difficult for any one of us to figure out; throw in the fact that we all have a different system of weights and measures, and you have the makings of environmental policy quagmires and donnybrooks.
Second, note my emphasis on a qualitative weighing of benefits and costs. While this may make me persona non grata among my fellow economists, I do not believe that a full-blown benefit-cost analysis—one in which all favorable and unfavorable effects must be expressed in dollar terms—should ever be the basis for a regulatory decision. In my view, uncertainties about valuation, the choice of a discount rate (and sometimes even whether to discount future effects at all), the appropriate handling of distributional concerns, and perhaps other problems as well, will always militate against policymaking by reliance on quantitative benefit-cost alone.
How do we distinguish wise from unwise policy proposals? The answer is at once very simple and very complicated: Wise regulations pass a kind of commonsense benefit-cost test.
Third, these first two observations should not—repeat not—be taken to suggest that quantitative benefit-cost analysis has no useful role to play in environmental policymaking. Not only can this type of analysis help put on an equal footing many effects that seem incommensurable at first blush, but it can also reveal starkly the implicit values we hold that we often are understandably reluctant to express in dollars and cents. Better to make such trade-offs openly and explicitly, where all can see them, than to fuzz them over by pretending that they do not exist.
Moreover, contrary to some assertions, benefit-cost analysis is perfectly capable of supporting stringent environmental regulation. Among other policies, benefit-cost analyses have supported the Clean Air Act Amendments of 1970, the removal of lead from gasoline, and the phase-out of chlorofluorocarbons (CFCs) because of their role in stratospheric ozone depletion. To be sure, benefit-cost analyses have also cast serious doubt on the wisdom of certain other environmental proposals. Sauce for the goose is sauce for the gander, after all. One thing I think we can be sure of is this: environmental statutes that prohibit even the qualitative weighing of benefits and costs in standard-setting ensure uninformed policymaking.
Cost-free regulation?
Note my insistence that there will be costs to any regulation. Gardiner provides examples that suggest environmental regulation often jogs firms into discovering money-making opportunities about which they were previously ignorant. In these cases, he implies, citizens get the benefits of a cleaner environment while the regulated firm makes out well, too. In such cases, do we not escape the unpleasantness of trade-offs?
I think not. First, while there surely will be cases where complying with a regulation causes a firm to recognize a money-making opportunity it had been overlooking, I think it unlikely that such instances abound or that the associated profits will be very large. While corporations are hardly the paragons of efficiency that economics textbooks sometimes suggest, a kind of Darwinian, market discipline does exist that forces firms to search out and take advantage of profitable opportunities.
More importantly, suppose a firm does realize profits rather than incur out-of-pocket costs when complying with an environmental regulation. In this case, surely, the regulation is costless, right? Wrong. While much more subtle, there is a cost here, too—an opportunity cost that takes the form of the returns the firm would have earned had it invested its expenditures on environmental compliance in other areas—say, on expanding its plant, retraining its work force, or intensifying its research and development efforts. In the same vein, incidentally, there is an opportunity cost associated with a firm's investment in any of the latter activities, even if that investment pays off handsomely. This cost is measured by what the firm could have earned had it put the funds to another use.
While opportunity costs are much less obvious than out-of-pocket expenditures for air or water pollution control equipment, cleaner fuels, or waste cleanup, they are no less real. Moreover, since it will never be possible to spend the same dollars on two things at once, a cost will always be associated with each environmental regulatory program. In some cases, it may take the form of out-of-pocket expenditures; but even when regulatory compliance helps a firm make money, we must be sophisticated enough to ask how well the firm would have done if it had put that same money to a different use.
In this regard, then, we can never have our cake and eat it too. Spending money in pursuit of environmental goals has been and can be a very wise use of society's scarce resources. But there will always be a cost to environmental regulatory programs, and environmental "paradigms" that promise otherwise are misleading and destined to disappoint.
A version of this article appeared in print in the May 1994 issue of Resources magazine.
A version of this article appeared in print in the May 1994 issue of Resources magazine.
