Today:

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• Today
• Why do governments regulate for environmental,
  health and safety protection?
• How do governments regulate for environmental,
  health and safety protection?
• IMC/Atlantic Circuits scenario
• Different approaches to regulation

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Why Regulate? Do you support laws that regulate
private activity to protect the environment? Why?

• because pollution is morally wrong?
• because pollution harms people directly?
• because pollution harms people indirectly?
• because pollution harms other living things?

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• ENVIRONMENTAL ECONOMICS
• KEY IDEAS
• Externalities
• Public Goods
• Characteristics of public goods
• Tragedy of the Commons
• Free rider problem
• Prisoners Dilemma

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    PRISONER'S DILEMMA 4best 1worst     CO
LUMN   Cooperate Defect   ROW Cooperate
3, 3 1, 4     Defect
4, 1 2, 2 
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Is the PD a good metaphor for the problem of
environmental protection, in your view?

• Rule against communication
• Repeat play issue
• Civil society vs. state of nature
• The Leviathan solution

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Who Regulates? Federalism National Government
? why national standards? Local Government
Uniformity/efficiency Transboundary
pollution Sophistication/ capacity race to the
bottom local administration ? proximity to
costs and benefits of pollution and its regulation
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HYPOTHETICAL International Manufacturing Corp.
(IMC) wishes to purchase Atlantic Circuits, a
circuit board manufacturer with plants in Mexico,
the U.S., and Germany. IMC believes that it can
operate the plants more profitably by expanding
production and streamlining costs. What sorts of
pollution control and permitting requirements
must IMC worry about?
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• Alternative Regulatory Approaches to Pollution
  Problems
• Command and Control Regulation
• Ex ante proscriptive and prescriptive rules
• Enforcement ? deterrence
• 2. Incentives-based Regulation performance
  standards
• Ends prescribed means left to firms
• Marketable permits and taxes (EU carbon tax US
  acid rain program Kyoto and CO2)
• 3. Liability-based approaches (polluter pays)
• 4. Information Disclosure
• 5. Voluntary Codes

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Command and Control Model Pollution
Permitting Standards prescribe how much pollution
may be emitted, and under what circumstances, via
a permit Air pollution (e.g., US Clean Air Act,
or CAA) Water pollution (e.g., German water
law) Integrated (air, water, land) pollution
(e.g., EU IPPC Directive)
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• Pollution Permitting What kind of standards?
• Technology-based What amount of pollution
  control is possible? Feasible? Economical?
• Fixed rule-based standards
• Relative case-by-case standards
• Why use rules? Case-by-case standards?
• Environmental Quality-based How much
  pollution can the receiving environment take?
  How much should it take?
• Which approach tends to be more stringent, do you
  think?

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CLEAN AIR ACT A Mix of Quality- and
Technology-based Standards
CONVENTIONAL POLLUTANTS Particulates SO2 NOx CO Oz
one Lead
National Ambient Air Quality Standards (NAAQS)
established by EPA Polluters must get permit.
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CLEAN AIR ACT Conventional Pollutants
New and Modified Sources Only
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• What about water pollution from the IMC/Atlantic
  plant?
• TSS
• BOD, COD
• Metals
• Other toxics organic solvents

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• German Federal Water Act (just like the U.S.
  Clean Water Act)
• a permit for wastewater discharge may not be
  granted unless such discharge satisfies certain
  minimum requirements best available technology
  which are to be met everywhere in Germany
  irrespective of the quality of the waters
  (uniform emission standards differentiated
  according to sectors of industry).
• More stringent requirements, and even bans on
  discharges, can in individual cases be imposed by
  water authorities in the light of immission
  considerations in order to safeguard the water
  quality envisaged for specific water uses.

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UNEP (2000) In 1997, Brazil approved a
National Law of Hydraulic Resources assigns
management to Watershed Committees and Water
Agencies which are required to execute integrated
policies with public participation.
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• Holistic or integrated approaches
• The EU IPPC Directive
• Cross-media approach
• Mandates national regulation
• Permitting
• BAT limit values
• environmental quality planning and EQ-based limit
  values, where necessary

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The IPPC Directive Article 4 Member States
shall take the necessary measures to ensure that
no new installation is operated without a
permit Article 9 The permit shall include
emission limit values for pollutants, in
particular, those listed in in Annex III, likely
to be emitted from the installation concerned in
significant quantities, having regard to their
nature and their potential to transfer pollution
from one medium to another (water, air and land).
the emission limit values shall be based on
the best available techniques, without
prescribing the use of any technique or specific
technology, but taking into account the technical
characteristics of the installation concerned,
its geographical location and the local
environmental conditions.
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The IPPC Directive Article 2, Section 11. 'best
available techniques shall mean the most
effective and advanced stage in the development
of activities and their methods of operation -
'available techniques shall mean those developed
on a scale which allows implementation in the
relevant industrial sector, under economically
and technically viable conditions, taking into
consideration the costs and advantages,- 'best
shall mean most effective in achieving a high
general level of protection of the environment as
a whole.
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National standards, applied locally, through
individual permits
U.S. state environmental agencies
German lander environmental agencies
BAT/EQ-based air and water pollution standards
IMC/Atlantic Circuits
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Global Warming Hypothesized Relationship
FUTURE EFFECTS
GLOBAL ? WARMING
GHG ? EMISSIONS
Is the climate changing?
If so, are GHGs the principal cause?
Will the costs of global warming exceed the
benefits?
Will the benefits of stopping or slowing global
warming exceed the costs?
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Most recent IPCC temperature data
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Recent IPCC data on emissions
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Most recent IPCC analysis of human impacts
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IPCC summary of temperature increase projections
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• Kyoto Agreement
• schedule of cuts in GHG emissions
• Many developing nations not obligated to reduce
  emissions
• Europe vs. U.S. response
• Costs for coal

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Enforcement
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• Enforcement
• Civil Enforcement
• courts
• administrative fines
• Criminal Enforcement
• Should environmental violations be punished as
  crimes?
• When should government use criminal enforcement
  in response to environmental violations?

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UNEP (2000) Latin American laws intended to
regulate the use of natural resources often
include provisions to punish non-compliance.
However, the rules and regulations often include
no criminal or administrative sanctions. An
exception is the Brazilian Environmental Crimes
Law, passed on March 1998, perhaps the most
modern legal text focusing on environmental
crime. Rules and regulations are hard to enforce
because many institutions cannot monitor
compliance and systematic enforcement can have
negative economic effects.
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Enforcement What do you think of the Brazilian
environmental crimes law? Is this an appropriate
response to environmental violations in Brazil?
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• Brazilian Environmental Crimes Law criminalizes
  conduct which causes or may cause damage to the
  environment, including
• to  kill, hunt, capture or use any animal species
  
• to inhibit the reproduction of animal species
• to conduct painful or cruel experiments using
  animals
• to cut trees in forest reserves, to cause damage
  to such reserves, and to cause forest fires
• to extract minerals from public forests without a
  license. 
• to damage or destroy Brazils cultural heritage 

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Problem lack of enforcement and monitoring
resources ? no credible threat of penalty ?
undermines deterrence Response high profile
enforcement cases, to make an example of
violators. NGO enforcement?
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• U.S. v. Wilson
• What did Wilson do wrong? How did he violate the
  law? What was his guilty act?
• Did he have a guilty mind?
• Do you worry about criminalizing behavior like
  Wilsons?
• What if Wilson did not know that he was violating
  the law?

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Hypothetical How should the managers of Atlantic
work to minimize the companys liability for
pollution violations?

• Uniform worldwide company environmental standards
  (via company policies)?
• Worker training and continuing education (about
  company policies and legal requirements)?
• Compliance auditing?
• Environmental management systems?

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Alternatives to Command-and-Control Regulation
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• Economists and the Critique of Command and
  Control Environmental Regulation
• Social Efficiency vs. Cost Minimization
• How to maximize social net benefit?
• 2. How to achieve a given environmental goal in a
  least-cost manner?

How much pollution to allow? CBA Risk
Analysis Marketable Permits take set total
pollution. Taxes
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To reduce pollution emissions, why prefer
marketable permits to the traditional CAA
approach?
TRADITIONAL APPROACH Regulators want 30TPY
emissions reduction Co. A Co. B Co.
C 10tpy 10tpy 10tpy _at_4/ton _at_3/ton
_at_1/ton pollution reduction cost TOTAL COST
40 30 10 80/yr.
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MARKETABLE PERMITS Regulators want 30TPY
emissions reduction Co. A Co. B Co.
C _at_4/ton _at_3/ton _at_1/ton If each company is
allocated pollution rights (permits) equalling
last years emissions minus 10 tons. They can
either spend money to pollute less or buy or sell
their existing rights to pollute. C overcomplies
(i.e., reduces its pollution by 30 tons) and
sells to B and A the excess rights to pollute.
How much will they pay?
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MARKETABLE PERMITS Regulators want 30TPY
emissions reduction Co. A Co. B Co.
C _at_4/ton _at_3/ton _at_1/ton B will be willing to
pay up to 30, and Co. A up to 40, for C to
shoulder its reduction burden. Co. C, in turn
will be willing to do so for less than those
amounts (but more than 20 total). Costs
incurred 30 (plus transfers A/B?C). This is
the approach used to implement greenhouse gas
emissions reductions (under the Kyoto Agreement)
in Europe, and in the U.S. acid rain program.
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Should IMC/Atlantic expect to be involved in
emissions trading? Will it have to pay
environmental taxes?

• GHG trading (Europe vs. elsewhere)
• Fossil fuel combustion
• GHGs covered
• carbon equivalents vs. GWEs
• Kyoto and the CDM

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U.S. Acid Rain Program
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• Environmental Taxes taxes force firms to
  internalize pollution externalities
• Carbon or btu taxes
• Volumetric wastewater taxes
• UNEP (2000)
• In 1997, Brazil approved a National Law of
  Hydraulic Resources which includes water charges
  .

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Environmental Taxes German Wastewater Charges
Act The Wastewater Charges Act of 1976 (last
amended in 1994) provides that a charge shall be
payable when wastewater is discharged directly
into a body of water. The charge is the first
eco-tax levied at the federal level as a steering
instrument. It ensures that the polluter-pays
principle is applied in practice, since it
requires direct discharges to bear at least some
of the costs that their use of the environmental
medium water involves.
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• Polluter Pays Liability
• What does it mean to make the polluter pay?
• Who should pay?
• one who violated the law by releasing hazardous
  material to the environment?
• What if polluter acted legally?
• one who acted carelessly?
• What if polluter was careful?

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• Polluter Pays Liability
• What does it mean to make the polluter pay?
• Who should pay?
• one who benefited by shifting pollution costs to
  the environment/society?
• Does company who generated wastes always benefit
  from improper disposal?
• One who benefits from cleanup?
• Landowner? Does it depend?

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• EU White Paper on Polluter Pays Liability
• The White Paper concludes that the most
  appropriate option would be a framework directive
  providing for strict liability for damage caused
  by EC regulated dangerous activities, with
  defences, covering both traditional and
  environmental damage, and fault-based liability
  for damage to biodiversity caused by
  non-dangerous activities.
• No retroactivity.
• Who is liable?
• What defenses?

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EU White Paper on Polluter Pays Liability Who
is liable?

• The person (or persons) who exercise control of
  an activity (covered by the definition ofthe
  scope) by which the damage is caused (namely the
  operator) should be the liable party under an EC
  environmental liability regime. Where the
  activity is carried out by a company in the form
  of a legal person, liability will rest on the
  legal person and not on the managers (decision
  makers) or other employees who may have been
  involved in the activity. Lenders not exercising
  operational control should not be liable.

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EU White Paper on Polluter Pays Liability What
defenses?

• Commonly accepted defences should be allowed,
  such as Act of God (force majeure), contribution
  to the damage or consent by the plaintiff, and
  intervention by a third party (an example of the
  latter defence is the case that an operator
  caused damage by an activity that he conducted
  following a compulsory order given by a public
  authority).

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• Polluter Pays US Superfund
• Liable parties
• Nature of liability
• Defenses to liability

1-current owner 2-owner at time of
disposal 3-waste generator
4-transporter who selected disposal site
Strict, retroactive, and joint and several
Innocent purchaser
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Hypothetical Could IMC be purchasing polluter
pays liability when it purchases
Atlantic? Before IMC acquires Atlantic, what
sorts of investigations should it do to avoid or
minimize that sort of liability?
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• What if during its pre-acquisition
  investigations, IMC finds that
• Atlantic had leaking underground hazardous waste
  storage tanks, which have since been removed
• Atlantic hired an inexpensive contractor to
  dispose of its hazardous waste, but the waste was
  dumped illegally (without Atlantics knowledge)
• Drums of toxic chemicals with Atlantic labels on
  them were found buried under a childrens
  playground

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International Trade and the Environment

• NAFTA Preamble
• pledges free trade consistent with environmental
  protection ... and sustainable development
• pledges to strengthen the development and
  enforcement of environmental laws and
  regulations.

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• Free Trade
• Short term Race to the bottom?
• Longer term Race to the top?
• NAFTA, WTO and the extraterritorial application
  of law
• product characteristics
• product production process
• Who brings complaints under WTO/GATT?

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• Venezuela v. U.S.
• What disparate treatment is alleged? Is this
  discrimination in your view?
• Is this exempted by Article XX? Why or why not?

Gasoline rule individual refinery baselines vs.
statutory baseline Did the rule treat foreign
gasoline differently? Exceptions XX(b)
(necessary to protect environment) and XX(g)
(conservation of exhaustible resources)
Panel No. Appellate Body Yes, but not the
chapeau
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International Trade and the Environment What does
NAFTA have to say about domestic environmental
rules? Does it take the same approach as
GATT/WTO?

• The environmental side agreement (a/k/a the
  North American Agreement on Environmental
  Cooperation, or NAAEC)
• created the Commission on Environmental
  Cooperation, or CEC to resolve environmental
  disputes

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International Trade and the Environment The BC
Hydro case
Sierra Club and other NGOs sued to get the CEC to
order Canada to enforce its Fisheries Act against
BC Hydro. Section 35(1) of the Fisheries Act
provides that No person shall carry on any work
or undertaking that results in the harmful
alteration, disruption or destruction of fish
habitat. BC Hydros operations allegedly damage
habitat.
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BC Hydro Case How does BC Hydro damage fish
habitat?

• Operation of dams (not run-of-river) damages and
  disrupts habitats through flow fluctuations and
  entrainment.
• Existence of dams damages anadromous fish
  populations.
• Is this a violation of NAFTA or the side
  agreement?

No. Failure to enforce the law is a violation.
Is this a failure to enforce, then?
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BC Hydro Case Canada a range of compliance
activities, from voluntary compliance and
compliance agreements to legal and judicial
sanctions, are the most productive in terms of
providing for the long-term protection of the
environment with respect to fish and fish
habitat. In other words, we should have
discretion to decide what combination of carrot
and sticks will most effectively enforce the
Act. Do you agree?
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BC Hydro Case Canada Furthermore, the Act
contemplates that the government will sometimes
permit certain kinds of habitat
destruction. Therefore, permitting this harm is
not a failure of enforcement. Do you agree?
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BC Hydro Case Is this the proper forum for this
sort of claim in your view? Should the CEC be
determining what the Fisheries Act means or how
it ought to be enforced? Why is the CEC
considering this claim?
Under Article 14 of the environmental side
agreement, the CEC is empowered to consider a
submission from any non-governmental organization
or person alleging that one of the three NAFTA
governments is failing to effectively enforce its
environmental law. Why would NAFTA allow this?
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• Environmental Auditing and Management
• What is environmental auditing? Why might firms
  spend resources on this task?
• What is environmental management? Why would
  firms want to use these techniques?
• What, if anything, should regulators do to
  encourage firms to use these techniques?

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ENVIRONMENTAL LAW Voluntary Codes International
Codes Voluntary Industry Codes ISO
14000 Responsible Care/CMA EMAS National
Voluntary Codes E.g., Netherlands How and why
do voluntary codes arise?
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• Environmental Management Systems
• What do you think of programs like Performance
  Track that offer less stringent enforcement
  incentives in return for instituting env.
  management programs and tangible environmental
  improvements?
• Should regulators use the carrot more than the
  stick for some companies? Why or why not?
• Should EPA and states do more to encourage
  environmental management programs like ISO 14000
  and EMAS?