IDEAS home Printed from https://ideas.repec.org/p/wil/wileco/2019-11.html
   My bibliography  Save this paper

Discretionary Exemptions from Environmental Regulation: Flexibility for Good or for Ill

Author

Abstract

We develop a model of firm and regulator behavior to examine theoretically the use and consequences of discretionary exemptions (also known as variances, waivers, or exceptions) in environmental regulation. Many environmental protection laws, such as the Clean Water Act, impose limits on harmful activities yet include "safety valve" provisions giving the regulator discretion to grant full or partial exemptions that provide permanent or temporary relief from these limits. This discretion begets flexibility over the stringency of environmental protection laws. Our model places a profit-maximizing discharger of pollution under the purview of a fully informed regulator who may seek to maximize social welfare by imposing limits. We show that when a regulation does not otherwise allow flexibility, an exemption that relaxes the limit for firms with high abatement costs can improve social welfare by reducing the costs of achieving the given level of environmental quality. We further demonstrate that if the effectiveness of abatement technology improves over time, a temporary exemption can increase social welfare by adjusting allowable pollution in response to these dynamic conditions. We also show that if the labor market is sticky, exemptions can benefit workers. Driven by an unequally weighted social welfare function, the regulator may use exemptions to meet redistributive ends. However, these beneficial impacts of exemptions rely on a fully informed and benevolent regulator; otherwise, the discretionary nature of exemptions leaves them open to abuse. A regulator who is captured by industry, focused only on her own jurisdiction or answerable only to a set of elites, can abuse exemptions in ways that reduce social welfare, such as allowing inefficiently high pollution or inducing a cost-ineffective pattern of abatement.

Suggested Citation

  • Dietrich Earnhart & Sarah Jacobson & Yusuke Kuwayama & Richard T. Woodward, 2019. "Discretionary Exemptions from Environmental Regulation: Flexibility for Good or for Ill," Department of Economics Working Papers 2019-11, Department of Economics, Williams College.
  • Handle: RePEc:wil:wileco:2019-11
    Note: Also issued as RFF Working Paper 19-20
    as

    Download full text from publisher

    File URL: https://web.williams.edu/Economics/wp/WP_19-20_Kuwayama_et_al.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Tracy R. Lewis, 1996. "Protecting the Environment When Costs and Benefits Are Privately Known," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 819-847, Winter.
    2. Berman, Eli & Bui, Linda T. M., 2001. "Environmental regulation and labor demand: evidence from the South Coast Air Basin," Journal of Public Economics, Elsevier, vol. 79(2), pages 265-295, February.
    3. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    4. Johnston, Jason Scott, 1995. "Bargaining under Rules versus Standards," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 256-281, October.
    5. Or Levkovich & Jan Rouwendal & Lars Brugman, 2018. "Spatial Planning and Segmentation of the Land Market: The Case of the Netherlands," Land Economics, University of Wisconsin Press, vol. 94(1), pages 137-154.
    6. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
    7. Parry, Ian W H & Pizer, William A & Fischer, Carolyn, 2003. "How Large Are the Welfare Gains from Technological Innovation Induced by Environmental Policies?," Journal of Regulatory Economics, Springer, vol. 23(3), pages 237-255, May.
    8. Hafstead, Marc A.C. & Williams, Roberton C., 2018. "Unemployment and environmental regulation in general equilibrium," Journal of Public Economics, Elsevier, vol. 160(C), pages 50-65.
    9. Joshua C. Hall & Christopher Shultz & E. Frank Stephenson, 2018. "The political economy of local fracking bans," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 397-408, April.
    10. Deily, Mary E. & Gray, Wayne B., 1991. "Enforcement of pollution regulations in a declining industry," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 260-274, November.
    11. Hahn, Robert W., 2000. "The Impact of Economics on Environmental Policy," Journal of Environmental Economics and Management, Elsevier, vol. 39(3), pages 375-399, May.
    12. Earnhart, Dietrich, 2007. "Effects of permitted effluent limits on environmental compliance levels," Ecological Economics, Elsevier, vol. 61(1), pages 178-193, February.
    13. Twinam, Tate, 2018. "The long-run impact of zoning: Institutional hysteresis and durable capital in Seattle, 1920–2015," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 155-169.
    14. David S. Bullock, 1993. "Welfare Implications of Equilibrium Supply and Demand Curves in an Open Economy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(1), pages 52-58.
    15. Nolte, Christoph & Gobbi, Beatriz & le Polain de Waroux, Yann & Piquer-Rodríguez, María & Butsic, Van & Lambin, Eric F., 2017. "Decentralized Land Use Zoning Reduces Large-scale Deforestation in a Major Agricultural Frontier," Ecological Economics, Elsevier, vol. 136(C), pages 30-40.
    16. Carmen Arguedas & Dietrich Earnhart & Sandra Rousseau, 2017. "Non-uniform implementation of uniform standards," Journal of Regulatory Economics, Springer, vol. 51(2), pages 159-183, April.
    17. Antelo, Manel & Loureiro, Maria L., 2009. "Asymmetric information, signaling and environmental taxes in oligopoly," Ecological Economics, Elsevier, vol. 68(5), pages 1430-1440, March.
    18. Shertzer, Allison & Twinam, Tate & Walsh, Randall P., 2018. "Zoning and the economic geography of cities," Journal of Urban Economics, Elsevier, vol. 105(C), pages 20-39.
    19. Lawrence H. Goulder & Ian W. H. Parry, 2008. "Instrument Choice in Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 152-174, Summer.
    20. Karam Kang & Bernardo S. Silveira, 2021. "Understanding Disparities in Punishment: Regulator Preferences and Expertise," Journal of Political Economy, University of Chicago Press, vol. 129(10), pages 2947-2992.
    21. Maloney, Michael T & McCormick, Robert E, 1982. "A Positive Theory of Environmental Quality Regulation," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 99-123, April.
    22. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
    23. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    24. Isaac Ehrlich & Richard A. Posner, 1974. "An Economic Analysis of Legal Rulemaking," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 257-286, January.
    25. Partha Dasgupta & Peter Hammond & Eric Maskin, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Oxford University Press, vol. 47(5), pages 857-860.
    26. Beavis, Brian & Walker, Martin, 1983. "Achieving environmental standards with stochastic discharges," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 103-111, June.
    27. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.
    28. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
    29. Evan Kwerel, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 595-601.
    30. Louis Kaplow, 2017. "Optimal Regulation with Exemptions," NBER Working Papers 23887, National Bureau of Economic Research, Inc.
    31. Dietrich Earnhart, 2004. "The Effects of Community Characteristics on Polluter Compliance Levels," Land Economics, University of Wisconsin Press, vol. 80(3), pages 408-432.
    32. Boleslavsky, Raphael & Kelly, David L., 2014. "Dynamic regulation design without payments: The importance of timing," Journal of Public Economics, Elsevier, vol. 120(C), pages 169-180.
    33. Banzhaf, H. Spencer & Chupp, B. Andrew, 2012. "Fiscal federalism and interjurisdictional externalities: New results and an application to US Air pollution," Journal of Public Economics, Elsevier, vol. 96(5), pages 449-464.
    34. Ezra Friedman & Abraham L. Wickelgren, 2014. "A New Angle on Rules versus Standards," American Law and Economics Review, Oxford University Press, vol. 16(2), pages 499-549.
    35. Marc Fleurbaey & Rossi Abi-Rafeh, 2016. "The Use of Distributional Weights in Benefit–Cost Analysis: Insights from Welfare Economics," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 286-307.
    36. Wendong Zhang & Douglas H. Wrenn & Elena G. Irwin, 2017. "Spatial Heterogeneity, Accessibility, and Zoning: An Empirical Investigation of Leapfrog Development," Journal of Economic Geography, Oxford University Press, vol. 17(3), pages 547-570.
    37. Dietrich Earnhart, 2004. "Panel Data Analysis of Regulatory Factors Shaping Environmental Performance," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 391-401, February.
    38. Beavis, Brian & Walker, Martin, 1983. "Random wastes, imperfect monitoring and environmental quality standards," Journal of Public Economics, Elsevier, vol. 21(3), pages 377-387, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eric Langlais & Maxime Charreire, 2020. "Should environment be a concern for competition policy when firms face environmental liability ?," EconomiX Working Papers 2020-25, University of Paris Nanterre, EconomiX.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antoine Dechezleprêtre & Misato Sato, 2017. "The Impacts of Environmental Regulations on Competitiveness," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(2), pages 183-206.
    2. Arguedas, Carmen & van Soest, Daan P., 2009. "On reducing the windfall profits in environmental subsidy programs," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 192-205, September.
    3. Dietrich Earnhart & Dylan G. Rassier, 2016. "“Effective regulatory stringency” and firms’ profitability: the effects of effluent limits and government monitoring," Journal of Regulatory Economics, Springer, vol. 50(2), pages 111-145, October.
    4. Revesz, Richard & Stavins, Robert, 2004. "Environmental Law and Policy," Working Paper Series rwp04-023, Harvard University, John F. Kennedy School of Government.
    5. Marcelo Caffera & Juan Dubra, 2005. "Getting Polluters to Tell the Truth," Microeconomics 0504008, University Library of Munich, Germany.
    6. Weber, Thomas A. & Neuhoff, Karsten, 2010. "Carbon markets and technological innovation," Journal of Environmental Economics and Management, Elsevier, vol. 60(2), pages 115-132, September.
    7. Caffera, Marcelo & Dubra, Juan & Figueroa, Nicolás, 2018. "Mechanism design when players’ preferences and information coincide," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 56-61.
    8. Runa Sarkar, 2008. "Public policy and corporate environmental behaviour: a broader view," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 15(5), pages 281-297, September.
    9. Hattori, Keisuke, 2011. "Optimal Environmental Policy under Monopolistic Provision of Clean Technologies," MPRA Paper 28837, University Library of Munich, Germany.
    10. Cameron Hepburn & Jacquelyn Pless & David Popp, 2018. "Policy Brief—Encouraging Innovation that Protects Environmental Systems: Five Policy Proposals," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 154-169.
    11. Krysiak, Frank C., 2011. "Environmental regulation, technological diversity, and the dynamics of technological change," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 528-544, April.
    12. Ambec, Stefan & Coria, Jessica, 2021. "The informational value of environmental taxes," Journal of Public Economics, Elsevier, vol. 199(C).
    13. Huennemeyer, Anne-Juliane & Rollins, Kimberly S., 2001. "Private Resource Management And Public Trust: Optimal Resource Conservation Contracts Under Asymmetric Information," Working Papers 34141, University of Guelph, Department of Food, Agricultural and Resource Economics.
    14. Bartsch, Elga, 1997. "Environmental liability, imperfect information, and multidimensional pollution control," International Review of Law and Economics, Elsevier, vol. 17(1), pages 139-146, March.
    15. Bouwe R. Dijkstra & Anuj J. Mathew, 2009. "Liberalizing Trade in Environmental Goods," Faculty Working Papers 16/09, School of Economics and Business Administration, University of Navarra.
    16. Dagmar Nelissen & Till Requate, 2007. "Pollution-reducing and resource-saving technological progress," International Journal of Agricultural Resources, Governance and Ecology, Inderscience Enterprises Ltd, vol. 6(1), pages 5-44.
    17. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
    18. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W. H. Parry & William A. Pizer, 2010. "Designing Climate Mitigation Policy," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 903-934, December.
    19. Juan-Pablo Montero, 2005. "Pollution Markets with Imperfectly Observed Emissions," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 645-660, Autumn.
    20. Hattori, Keisuke, 2017. "Optimal combination of innovation and environmental policies under technology licensing," Economic Modelling, Elsevier, vol. 64(C), pages 601-609.

    More about this item

    Keywords

    variance; exemption; regulation; flexibility; discretion; welfare;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wil:wileco:2019-11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/edwilus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Stephen Sheppard (email available below). General contact details of provider: https://edirc.repec.org/data/edwilus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.