Cutting through the smokescreen around environmental regulation

Cutting through the smokescreen around environmental regulation
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In a recent EPA press release, Administrator Scott PruittEdward (Scott) Scott PruittInterior chief Zinke to leave administration EPA to pursue final 'science transparency' rule in 2019 Trump administration to unveil strategy for fighting lead exposure MORE said, “American ingenuity and technological breakthroughs, not top-down government mandates, have made the U.S. the world leader in achieving energy dominance while reducing emissions.”

Setting aside for the moment the fact that a premier breakthrough in energy technology, hydraulic fracturing with horizontal drilling, was the culmination of over a decade of federally sponsored R&D, this statement reflects such a profound misunderstanding of innovation it should send chills through anyone concerned about U.S. competitiveness in global markets.

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If this blinkered ideology had governed over the last few decades we never would have seen such leaps forward as airbags and catalytic converters, kids would still breathe toxic lead from car emissions, we would still suffer from acid rain, Denver would still be hidden within a brown cloud, and rivers would still catch fire. All of these failures of markets were solved by technologies, developed and produced by companies employing thousands of people, that simply would not have existed if governments had not mandated their costs and benefits be recognized by the marketplace.

 

Imagine Jack and Jill both have oil change shops. They follow tradition and dump the waste oil down the city sewer (this seems ridiculous today, but it was common practice within my lifetime).

Jenny introduces them to new technology to purify used oil so they can reuse it for their customers and avoid dumping in the sewer, but it will cost $1 more per quart until she can scale up her production. Jill adopts the new technology and feels validated, but only until Jack drives her out of business through a profit advantage on every single oil change. 

He will always be able to undercut Jill on price, and her customers have no reason to pay more for what seems like essentially the same service. It’s not selfishness on their part; it’s just unclear to them that the benefits to them are worth the additional costs.

We see altruism every day, but no one will rely on it as a business strategy. In the end, the generosity of strangers will never be enough to overcome Jack’s advantage of being able pass off his disposal cost on society. Jack will shrug that “people aren’t willing to pay for a cleaner environment.” Jill’s business will fail, as will Jenny’s technology.    

The customers aren’t selfish and Jack’s not evil, they are just responding to the incentives the market gives them. While the market in this example acted with ruthless efficiency to keep costs for oil changes low, the costs to society (invisible to both the company and the consumer) were massive, a pattern we see repeatedly. Just as it’s more expensive to rebuild a burned down house than it is to protect it with a sprinkler system, we find it’s much cheaper to avoid pollution (or foodbourne illness, a disease outbreak, or a financial system collapse) than to repair the damage later.

Yet, we implicitly opt into this expensive choice every day we let the market continue to ignore the social costs of burning fossil fuels.

As libertarian Alex Tabarrok accidentally found, regulations don’t constrain an economy; plenty of players will step up to deliver benefits once the market recognizes them. Far from letting markets work, the deregulatory agenda freezes markets in time to protect incumbents against innovators who can build a better mousetrap. So, whenever you hear someone say governments “should not pick winners and losers,” know that the speaker usually just wants to protect those currently on top from new competitors. 

It goes beyond arguing that regulations to clean the air and water create benefits that far outweigh their costs — it’s that once the social benefits are given a value by the marketplace, innovators step up to create new jobs and industries. It’s a win-win, just not always for the incumbent industry.

In our Jack and Jill example, we could charge a disposal fee for oil, pay Jill to use recycled oil, or ban the dumping of used oil — each would have different specific effects, but would undo the implicit subsidy of socializing damages. Each method has been used in different circumstances in the past, but pretending away the costs as Pruitt suggests does nothing but prop up dying industries while our global competitors employ every tool to dominate the future.

It’s time to clear the air of this ideological smokescreen and reckon clearly with what’s happening here — powerful fossil fuel incumbents are stifling innovation and racking up costs on our children’s credit card.

Mike Carr is the executive director of New Energy America, an organization that promotes clean energy jobs in rural America. Previously, he served as principal deputy assistant secretary in the Office of Energy Efficiency and Renewable Energy at the Department of Energy.