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Book
Review Cost-effectiveness and Constitutionality: What Can Economics and Lawyers Learn from Each Other?
Economists generally evaluate environmental policy using three main criteria. First, they ask whether a policy is allocatively efficient, that is, whether the policy maximizes the benefits of pollution reduction net of costs. Second, they assess a policy’s cost-effectiveness. A standard that sets a limit on sulfur dioxide, for example, is cost-effective if utilities can choose whether to abate or buy a pollution permit, and if they opt to abate, can choose how to do so. Third, economists consider the distributional impact of the policy, how it affects poor versus rich, public versus private sectors, or current versus future generations. Now, to be perfectly fair to my fellow economists, I cannot entirely neglect other bases upon which they evaluate environmental policy. Economists investigate policies’ information requirements, ease and costs of implementation and administration, compliance costs, ethical implications, incentives for research and development, and political feasibility. But the big three criteria dominate the current research agenda. Even if economists want to adhere strictly to efficiency and cost-effectiveness criteria, they still must consider the regulatory and legal context in which environmental policy is implemented. Economists understand that new environmental policies rarely replace old ones, but rather complement, and sometimes even depend upon pre-existing policies. For example, since newer cars are cleaner than older ones, some economists recommend policies that accelerate the retirement of old “gross emitters.” This policy’s effectiveness depends on the fact that previous regulation has guaranteed that newer cars are cleaner than older ones. To understand this and other preexisting laws and regulations, each year I order the current issue of California Air Pollution Control Laws. Each year, I struggle to grasp the legal framework in which policies come to life. Each year, I wish for a concise, clear treatment of environmental regulation and law that I, a non-lawyer, can understand. Energy, Economics, and the Environment, at 1318 pages, seems an unlikely source of neat and tidy information on environmental policy. Law Professors Fred Bosselman, Jim Rossi, and Jacqueline Lang Weaver, however, have obviously placed a high premium on clarity and conciseness in their book. The book is long because it is a casebook, meant to complement textbooks on environmental and energy law. As indicated by the title, the book focuses on energy. It is organized on a chronological basis according to the period in history when energy sources were first exploited, and when new uses for energy arose. The first three of eighteen chapters provide an overview of energy policy, introduce the science of energy, and define the concept of a public utility. Chapters four through fourteen explore law and regulation related to water power, coal, natural gas, electricity generation, and nuclear energy. The final four chapters consider transportation, international oil markets and exploration, climate change, and the future of economic regulation. Economic analyses, environmental assessments, and scientific evidence are integrated into each chapter. The authors supplement their own summaries with short contributions from economists, government sources, scientists, and other lawyers. Reading sections of this book peaked my interdisciplinary curiosity. First, I wondered how the authors treat economics. How do lawyers present market failure, externalities, and public goods, concepts that form the foundation of environmental economics? That is, what have lawyers learned from economists? Second, I wondered what economists can learn from lawyers. Would real-world analysis of energy regulation force economists to reconsider economic theory and the policy recommendations implied by theory? Last, I wanted to know whether I might be able to use some of this material in an undergraduate economics course. I found discussion of market failure, externalities, and public goods in a subsection on solar energy in chapter two, “Energy in Nature.” The sun provides both light and heat energy, and activities that block the sun can impose negative externalities on others. The authors illustrate such a negative externality by examining the case of Tenn v. 889 Associated, Ltd. The plaintiff, Sylvia Tenn, owns a six-story office building in Manchester, New Hampshire. Ms. Tenn’s neighbors plan to demolish their existing building and replace it with a new, taller building, a plan that would block light from the Tenn building, and require the removal of several air conditioners. The question is whether the plaintiff had the right to the light and air that would be blocked if the neighbors were to replace their building. This case perfectly illustrates the concept of an externality. The neighbor evaluates the private costs and benefits of replacing a building, and opts to rebuild. But the neighbor did not take into consideration the external costs imposed on those in the Tenn building. In the Tenn case, the court applies the “law of nuisance,” to the plaintiff’s claim for the protection of light and air. This law of nuisance “protects the use and enjoyment of a property when a threatened harm to the plaintiff owner can be said to outweigh the utility of the defendant owner’s conduct to himself and to the community” (p. 39). The court occupies the role of the economist’s “social planner,” and determines whether the external costs of new building outweigh the benefits granted by the building to the neighbor. A general discussion of externalities, public goods, and property rights follows the Tenn case. The authors define these concepts clearly and accurately: An externality “is a social cost or benefit that has not been internalized or incurred by the private owner of the resource” (p. 41), and a public good “is a good for which the market itself fails to provide adequate mechanisms to ensure dominion and control, exclusivity, and transferability” (p. 42). Other than explaining how the Tenn case contains an example of a negative externality, however, they do not connect these definitions and examples with analysis of the law. How did the law of nuisance come into existence? Have judges used economic definitions of externalities to inform their interpretations of these laws? Because the authors do not directly address questions such as these, they leave readers to draw their own interdisciplinary connections. Lawyers, therefore, can use this book to learn fundamental economic concepts, but should look elsewhere for analysis of the way in which economics has affected the interpretation of law. What can economists learn from lawyers? Chapter 5 deals with coal, one of the dirtiest energy sources, and provides an excellent example of the disconnect between economic theory and real-world policy implementation. A section on the externalities from coal combustion begins with a description of the Clean Air Act and its 1990 amendments, including the groundbreaking Acid Rain Program, which allows utilities to trade allowances for sulfur dioxide emissions. The authors include an article written by Dallas Burtraw and Byron Swift, representatives of two organizations that played a prominent role in designing and promoting the program. Burtraw and Swift review the program’s two main cost saving innovations. First, under the program, coal-powered utilities with high abatement costs can buy pollution allowances instead of reducing emissions. Utilities with low abatement costs, on the other hand, will find it cheaper to reduce emissions than to buy allowances, and will opt to abate. In this way, abatement is undertaken by the utilities for whom it is least costly. Second, utilities that opt to abate can choose how to reduce emissions. They can install scrubbers on their smokestacks, switch or mix fuels, or reduce output. Since only the utilities for whom it is least costly will abate, and since the abating utilities will choose the least costly abatement method, the tradable allowance program attains sulfur dioxide reductions at least cost. Economists adore the idea of this program. In theory, tradable allowances are cost-effective. Because firms can always buy fewer allowances, or even sell them if they abate by enough, they always face an incentive to find cleaner technologies. And, economists figure that since allowances involve no transfers from the private to the public sector, they might be a more politically feasible market-based incentive than a tax. What could possibly taint such a program? The case Alliance for Clean Coal v. Miller provides an example. The plaintiff is a trade association whose members include miners and distributors of cleaner low-sulfur coal. The defendants are the chair and six commissioners of the Illinois Commerce Commission. Illinois coal has high sulfur content. The plaintiff claims that the Illinois Commerce Commission violated the Constitution by enforcing the Illinois Public Utilities Acts and Coal Act. These Acts require the commissioners to take into account the effect on the local coal industry of utilities’ Clean Air Act compliance plans, and that some plants install scrubbers so that they can continue to use Illinois coal. Obviously, to require that some plants use a particular abatement method undermines the cost-effectiveness of the tradable allowance program. This is especially so in this case, since switching to low-sulfur coal is much less costly than installing scrubbers. An economist, enforcing a constitution of cost-effectiveness, would rule in favor of the plaintiff. As it turns out, the court did indeed rule in favor of the plaintiff, but not because of violations in cost-effectiveness. Instead, the court rules that the Illinois Acts violate the dormant commerce clause of the Constitution, which forbids states from regulating interstate commerce. Economists can learn much from these examples. Such cases show how federal plans that are cost-effective in theory can be jeopardized by regulatory action taken by states or localities. They clarify the criteria that courts use to evaluate the constitutionality of regulations. When faced with these realities, economists are challenged to consider the unintended consequences of their policies, and to design policies that fit more neatly into the current regulatory and legal context. Could undergraduate economics students benefit from this book? This book is more appropriately used as a reference rather than as a text, and so I would not recommend that students be asked to buy it. However, professors that teach environmental economics can use this book as a source of many real-world examples, concise scientific explanations, and especially for material to be used to guard against the idealistic appraisal of economic theory. Since the book is heavy on regulation of energy markets, professors that teach economic regulation, industrial organization, or natural resource economics should also find this book to be a useful reference. Sarah West |
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