Jimmy Carter and the Archaeology of Market Environmentalism, Part II

So it turns out that Jimmy Carter was quite the market-warrior.  The step or stage between the dreams of RFF in the 1960s and the implementation of wetland and air markets in the 1980s is a bit of a missing link -- a kind of Australopithecus afarensis, to make an evolutionary analogy.  Like the development of bipedalism in modern humans, the turn to market-based policy did not develop overnight, but was something largely initiated and well underway by the time the Reagan Administration took power in 1981.  Let's look at the evidence.

As I said in the last post, there was a lot of academic interest in environmental markets going back well into the 1960s.  But by the mid 1970s, this talk seemed to have filtered into policymakers' discussions pretty regularly.   The concept of wetland banking was advanced as early as 1974 by Gosselink, Odum and Pope's pamphlet, slender but immensely influential among regulators,  The Value of the Tidal Marsh:

Setting up wetland "banks" where the owner is paid not to develop (as in "soil banks") is perhaps a feasible "delayed option" procedure in cases where outright purchase cannot be made at a particular time.

A bit later, the USFWS' Edward LaRoe mentioned at a 1977 conference that "We are examining the concept of 'mitigation banks.' where large restoration project could be used to mitigate a number of small projects."

And then of course there were the Ford Administration initiatives around compliance with the Clean Air Act's new source performance standards.  The first version of the "bubble" concept in late 1975, in which management of individual sources was left to the polluter as long as their net emissions met the standard.  This "no net gain/loss" principle reinforced the substitutability of different packets of pollution that has been at the root of market approaches to pollution ever since.  The principle of offsetting pollution was formalized in a December 1976 ruling, and the banking of these offsets was explicitly allowed in the 1977 amendments to the CAA.  The degree to which these efforts were outgrowths of the Nixon Administration's retreat from the strong regulatory approach, or were born from California's regional challenges to CAA compliance, is something I'm sure other scholars have covered.

But fiddling around on the margins of the CAA and CWA is one thing; setting general federal policy is another, and that began with Carter.

In 1977, two months after taking office, President Carter issued Executive Order 12044, directing "regulatory agencies to find ways to achieve their goals with reduced burden on the private sector."  This is ambiguous language in the sense that it doesn't say "go make markets", but it is unambiguous in its rejection of command-and-control policy and in light of the market-friendly recommendations that emerged from this directive.

In 1979 Carter told Doug Costle, his EPA Administrator, to convene the US Regulatory Council (think of it as the precursor to Reagan's Council on Regulatory Relief and Quayle's Domestic Policy Council) to report on ways to use "Alternative Regulatory Approaches".

The resulting Program on Alternative Regulatory Approaches (PARA) made its report to Carter in June of 1980 (although the results were not published until September 1981).  It comes in the form of an Overview paper, and issue papers on 5 different topics:

• Information Disclosure: On the theory that a fully-informed populace will be able to engage in Coasian bargaining on the issue of environmental pollution, one strategy has frequently been to simply inform people of the level and toxicity of contaminants, and allow the public to vote with their feet and dollars, rather than to impose regulatory limits.  An extreme example of this came to my attention recently in Kentucky's 2010 report on its 303(d) list of impaired waters, which, after noting the large number of rivers which were considered "impaired" for recreational usage, the author explained that this information might help Kentuckians choose among their recreational options.  Nothing about the demonstrated need to clean it up.
• Performance Standards: Rather than dictating precise procedural operations and equipment specifications, why shouldn't the government simply set the marks and let industry figure out how to hit them?  If industry can figure out a cheaper way to meet the NAAQS for lead or to stay under a TMDL for temperature, they should be allowed to do so rather than have their actual designs and practices dictated by outsiders.  The downside of the focus on standards rather than process is this: if the standard is, say, no net carbon increases, then a new gas-fired power plant is "equivalent" to a new solar array, even though one is dramatically different from the other in moving us past dependence on fossil fuels.  Gotta be careful in defining the goal.
• Marketable Rights: this is the old-tymie name for what we now call pollution credits markets, and the primary example was the already-extant experiment occuring under the Clean Air Act's bubble and offset policies.  Expansion to other areas such as water, EM bandwidth, and airport landing slots was considered desirable: any situation in which "distributing a limited number of rights to scarce resources that private parties can buy, sell, or trade as market needs dictate can remove the government from difficult, contentious, and lengthy decisions about who can 'best' use the limited resources."  Wouldn't want that kind of thing in the public square, no siree.
• Tiering: This is the regulatory expression of Jefferson's famous phrase: "there is nothing more unequal than the equal treatment of unequal people", or, more simply, a version of the 80/20 rule.  Different industries or polluters should be treated differently, according to the severity of their pollution and their scale.  This makes all kinds of sense from the perspective of a time-strapped agency: focus most effort on the few large (Tier 1) sources of pollution, and you will have dealt with most of the overall problem.  Lower-tier polluters can be held to different standards because it is an inefficient use of time for a regulator to focus on them.  This is not so much about markets as about the flexibility to recognize important differences in the regulated community and to allow regulation to fall more lightly or heavily on some members to achieve policy goals.
• Monetary Incentives: This would indicate the suite of Pigovian (from economist AC Pigou) excises and fees that could motivate compliance in lieu of regulatory enforcement.  If undesirable behavior is made more expensive, it will decrease.  If desirable behavior is made profitable, it will increase.  Unfortunately, the government is still generally setting the level of tax or fee that is appropriate, which was the entire point of Coase's argument against Pigovian taxes -- the fee would ideally be set by negotiation between parties to the issue at stake.

Carter's statement on the release of these documents, describing them as the direct result of his 1977 EO, is something that in retrospect we tend to call Reaganesque, but has actually been a fairly constant message from 1977 to the present:  

Alternatives that allow flexibility or use market forces can make regulation more cost-effective. Such approaches can cut cost and red tape without sacrificing legitimate regulatory goals. They can also promote innovation, putting private ingenuity to work finding better long-term solutions to regulatory problems.

The US Regulatory Council took up PARA's work and immediately held a conference on the topic of Innovative Regulatory Techniques in July 1980, putting out the following documents, which framed the entire issue as a turn toward "market-oriented" approaches.

• An Inventory of Innovative Techniques
• Innovative Techniques in Theory and Practice: Proceedings of a Regulatory Council Conference
• Regulating with Common Sense: A Progress Report on Innovative Regulatory Techniques

I mean, under what President would you expect to see the following said in the Introduction to a policy document?:

"Market-oriented approaches generally leave regulated entities more freedom to devise their own means of achieving regulatory goals.  This puts the ingenuity and relevant expertise of the regulated sector to work at solving public problems in the most cost-effective way, and imposes fewer indirect costs of governmental intervention in private sector affairs."

Markets, check.  Freedom, check.  Private-sector ingenuity, check.  Against costly government intervention, check.  Carter,... WAT?

In fact, it looks like the Carter Administration was working on this in a pretty focused way right up to the November 1980 election.  He lost, of course, but we know how this story unfolded, and we know that Carter's initiatives didn't end with Carter.  Flexibility in environmental regulation was a (smallish) part of a broader bipartisan, if not Democratic-leaning and frankly pro-environment, movement toward less-rigid governmental regulation, manifested in Congress as the 1980 Regulatory Flexibillity Act (debated starting in 1977 -- text here) authored by two progressive liberal senators, Iowa's John Culver and Wisconsin's Gaylord Nelson, the father of Earth Day.

It thus seems clear in retrospect why the Reagan Administration's initial stance toward EPA powers was to dismantle them rather than to make them more "flexible", but at the current historical remove we tend to associate these achievements with the Administration under which they bore fruit rather than the Administrations that planted them.  The PARA documents (perhaps being Carter-tainted) were not, themselves, referenced directly until Al Gore's Reinventing Government initiatives in 1993 -- but I'm sure they were not far from the minds of the Reagan Administration architects of wetland, air and water quality markets.  Together they read like an extraordinarily prescient future history of the next 30 years of environmental policy.

I've yet to really process them in full, but they were hard enough to locate that I thought turning them loose on the Internet would be a public service. Even Interlibrary Loan had failed me since I started looking for them in 2007.  All I knew is that they were held by the Administrative Council of the US, a federal advisory office that had been terminated in 1995 by the 104th Congress, and its archives dispersed.  Fortunately, ACUS was reinstated as an agency in 2009, and they've spent the past 4 years reconstituting their archives which held these documents among many, many others.  Thanks to their diligent work, these documents survived!

But if I had to say one thing about this set of documents, it would be this: Notice that the point is not markets.  The point is regulatory flexibility in pursuit of enhanced compliance, and the tool is sometimes markets.  Markets only come to the fore when they are hitched to an already-existing and defined state policy goal.  And tend to result in an increase and intensification of state involvement, rather than its withering-away.