AEI-Brookings Joint Center Policy Matters 00-08

The future of environmental policy is often portrayed as a transition from command and control regulations to economic instruments, and as a shift from remedial objectives such as pollution control and waste cleanup to forward-looking visions such as "sustainable development." Despite the important differences among these approaches, they all share a common conception of environmental policy: that it is the role of government to intervene to correct the environmental failures of markets and economic growth. Market failures do cause environmental harms, and government does have a crucial role in correcting these problems. But focusing solely on that side of environmental policy neglects an equally important insight: both in its regulatory and in its fiscal functions, government itself causes much environmental harm.

My advice for the future of environmental policy is thus to keep one eye on the environmental failures of government. Even as we seek to clarify and implement the notion of sustainable development, we should also be building a complementary framework for "sustainable governance."

It is obvious but often forgotten that government is not an exogenous solution to human problems; government is itself a human institution. Like markets, government is an endogenous and imperfect institution. This insight was clear to the drafters of the first major law of the modern environmental era, the National Environmental Policy Act (NEPA), which specifically aimed at the environmental harms of government actions; but the insight seems to have been gradually forgotten by environmentalism and environmental policy.

Government failure comes in several forms, some of excessive weakness and some of excessive strength. Failures of weak governance involve the inability of government to protect legal rights and to resist corruptive pressures. Failures of strong governance involve the use of unduly caustic measures to achieve well-intentioned policy goals. While there is some overlap between these types of government failure, this classification helps to illustrate that environmental policy, like health care, can be unsustainable if its medicine is too weak or too strong. Weak medicine won't cure the patient, but every medication also poses potentially harmful side effects. Thus, protecting public health and the environment is not just a matter of diagnosing market failure and prescribing government as the therapy. Given that there can be government failure as well as market failure, the challenge is to minimize the sum of both, and to design institutions and policy instruments that optimize governance across the diverse risks of both types of failure.

The environmental damages resulting from excessively weak governance are well known. They include the worldwide practice of government subsidies for economically inefficient and environmentally damaging activities, including excessive logging, grazing, farming, mining, energy use, water use, and dam construction. The environmental harms of government military activities (such as weapons manufacturing) arguably also fall in this category. Of course there are national and local benefits of all of these activities; but political distortions nudge government to provide too much of these activities with too few environmental safeguards. A government typically confers resource subsidies as a concession to powerful special and local interests that dominate politics and distort government activities to favor themselves over the interests of society at large. A government's lack of backbone in resisting special interest pressures invites pork barrel projects that are both costly to the public and damaging to the environment. Reducing these subsidies would benefit both the environment and the economy.

A second example of weak governance is the inability of government to protect the security of property rights. The lack of secure property rights to environmental resources encourages individuals and firms to race to exploit open-access resources such as fisheries, forests, and the atmosphere. This "tragedy of the commons" plays out most dramatically in the overfishing of the oceans by competing vessels and the clearing of rainforests by itinerant farmers who cannot claim their own land. Strengthening the rights of resource users to invest and to exclude non-owners would ease both the overuse of the resource and the overcapitalization of the extractive industry. To be sure, stronger property rights could impede environmental protection if they block welfare-enhancing government regulation of market failures. Optimal property rights are strong but not absolute. But in a sense this problem can also be seen as one of inadequate or incomplete property rights: the landowner asserts a right to exclude the state from regulating her land, but then treats the air or water or biodiversity as an open-access resource, ignoring the harms to others from overusing that resource. The solution here, too, is for the law to show backbone in protecting the property rights of neighbors and others against environmental harm, such as through nuisance law and incentive-based administrative regulation.

The environmental impacts of excessively strong governance are no less worrisome. Like any therapy for what ails us, well-intentioned protective policies can also produce undesirable side effects. Interventions to reduce one risk can create new risks. These "risk-risk tradeoffs" are ubiquitous in health, safety and environmental policy. Mandating powerful airbags in cars can protect adults but put children at risk. High-speed police pursuits can catch fleeing suspects but injure bystanders. Banning asbestos in automobile brake linings can prevent cancers, but increase highway accidents. Banning one pesticide may invite the use of another pesticide, potentially more toxic to consumers or workers than the first. Restricting carbon dioxide emissions alone can yield increased methane emissions, potentially causing a net increase in global warming. Hazardous waste cleanups can protect future generations but add risk for today's workers and neighbors. Outdoor air pollution rules can lead factories to seal pollution indoors. Posting worst-case scenarios of industrial facility accidents on the Internet can alert the public to seek safer facilities but also invite terrorists to use the information. Reducing urban ozone pollution can protect the lungs but allow more ultraviolet radiation to harm the skin. Building dams can produce electricity and inhibit floods but also harm fisheries and sometimes worsen floods. Suppressing all forest fires can deprive forests of key nutrients and leave dry timber ready to ignite; but "controlled burns" can unleash larger fires that burn out of control.

The solution to these risk-risk tradeoffs is not inaction -- it is action based on a considered judgment of the conflicting risks. As with excessive subsidies, one reason for excessive risk-risk tradeoffs is the political distortions that privilege the beneficiaries of reductions in target risks and neglect the interests of the victims of countervailing risks (be they disenfranchised minorities or the diffuse general public). In addition, even well-intentioned policymakers often confront organizational boundaries, decision-making cultures, and costs of analysis that lead them to overlook important side effects. Reforms to ease and encourage attention to risk-risk tradeoffs and careful weighing of the conflicting risks are essential. These reforms should also promote a persistent search for "risk-superior" solutions that reduce multiple risks in concert.

Given that government is needed to correct market failures, and that government failures involve both undue weakness and undue strength, what can be done to make government institutions more environmentally sustainable? First, much effort is needed to reform perverse subsidies and bolster the basic legal systems that prevent individuals from racing to exploit shared resources. Rights to forest land should not depend on clearing it; fisheries should be managed with transferable catch quotas instead of seasons or area limits; access to the atmosphere for pollutant disposal should be rationed through tradable allowances. Some of these moves are already being made, such as the transferable quota systems for Alaskan halibut and Atlantic clams, and the tradable allowance systems for reducing lead in gasoline and reducing acid rain. Meanwhile, environmental and taxpayer advocates, often at opposite ends of the political spectrum, should join forces to oppose perverse subsidies. Legislatures should phase out perverse subsidies; short of that, Congress should remove the exemption for appropriations bills that the courts have read into NEPA, so that environmental impact analyses would be required for federal resource subsidies. Creative legal strategies could apply the Public Trust Doctrine to block government sales of public resources below cost: selling federal timber or water or land below cost (at a loss), one would argue, defrauds the public for whom the government holds these resources in trust. And despite some environmental advocates' distrust of the World Trade Organization, the new WTO agreement on subsidies should be examined as a tool for reducing perverse subsidies worldwide.

Second, we should seek ways to ensure that government considers the full environmental harms of its actions - in economic terms, "internalizing the regulatory externality." One path is to impose financial liability on the regulatory state for the injuries it causes, much as the private sector is currently liable for torts (and as the state is currently liable for takings of property). This could involve waiving sovereign immunity, requiring agencies to post security bonds to insure against the errors in their NEPA environmental impact statements, and other measures. A caution, however, is that unlike business firms that earn profits for their products, government agencies do not earn financial profits for providing social benefits; hence liability for government's social harms could overdeter government and lead to less than the optimal production of regulatory protection. A less drastic step would be to apply NEPA (as it originally would have applied) to environmental regulatory actions by removing the exemptions that the courts (under the rubric of the "functional equivalence" doctrine) and Congress (in various statutes) have adopted over time. One might even consider reviving the substantive balancing test once seen in NEPA by Judge Skelly Wright, but since abandoned by the courts.

Third, a promising path for sustainable governance is to reintegrate the government's fragmented decision making structure. This would involve more vigorous supervision of agency decision making within the executive branch, such as by a "primary risk manager" at the White House with the power to identify and internalize regulatory externalities. In addition, regulatory agencies and congressional committees could be required to notify one another if one agency's action would have unintended side effects in the jurisdiction of another agency. EPA, for example, recently agreed to notify OSHA when new EPA air toxics rules might induce firms to seal pollutants inside the workplace. The same ought to apply to the different program offices within EPA, and across the government. More radically, mergers of splintered agencies might be worthwhile. It may be time, for example, to consider bringing the sprawling health, safety and environmental bureaucracy -- EPA, OSHA, NHTSA, FDA, FAA, and CPSC, and others - into an integrated department under the common supervision of a single official with the bottom-line responsibility for the joint impacts of these interrelated agencies. Similarly, the splintered congressional committees and subcommittees dealing with health and environmental issues, which generate the splintered statutes and agencies in the executive branch, could be linked or even combined into an integrative Committee on Risk in each house of Congress. At the least, Congress should require agencies -- or just give agencies the authority -- to consider the side effects of proposed regulations, notwithstanding pre-existing legislative edicts to the contrary.

Ultimately, the primary obstacle to further improvements in environmental quality is not economic growth, markets, capitalism, or government, but the deeper and more encompassing problem of flawed institutions. Human designs are imperfect. Among these flawed institutions we must count not only markets and firms, but also the numerous and diverse organs of governance, including the agencies and committees whose ostensible mission is environmental protection. The goal of environmental sustainability should be protecting the environment against the hazards of all imperfect institutions, rather than an alliance between environmentalism and government against markets and capitalism. The appearance of such an alliance is both an environmental and a public relations mistake, because it neglects the real environmental harms of government (and the environmental benefits of prosperity) and gives credence to the cynical view that environmentalism cares more about bureaucratic control of society than about real ecological consequences. The better path is for environmentalism to rediscover its loyalty to the environment and its skepticism about the activities of all institutions, and to remember that government, too, is an imperfect institution that can injure as well as nurture.

The problem of unsustainable governance is not as simple as too much government. Government failures stem from both weakness and strength, so less government can be as problematic as more. The real problem is dysfunctional government and the real goal is smarter government. Making governance more sustainable will yield environmental improvements such as reducing perverse subsidies, preventing overuse of scarce resources, internalizing regulatory externalities, and advancing risk-superior solutions. These improvements are the first steps toward "sustainable governance," reflecting a renewed understanding that both public and private institutions merit attention and reform.

Jonathan Wiener is Professor at the Duke Law School and the Nicholas School of the Environment at Duke. Email wiener@law.duke.edu, website www.law.duke.edu/fac/wiener.