On Regulatory Reform

One reason that firms have chosen to establish supply chains abroad is that attempting to expand domestically could get them sued, stalled, and saddled with extraordinary burdens—all in the name of an approach to “environmental protection” that is decades out of date. Since 1970, when the Environmental Protection Agency (EPA) was created and the National Environmental Policy Act (NEPA) and Clean Air Act were both enacted, the United States has inadvertently erected a byzantine system of permitting processes for infrastructure and industry that seems designed to frustrate investment. Proposals are subject to years-long reviews from multiple agencies, after which the litigation begins. Final approval is contingent on adherence to costly requirements of unparalleled stringency. Alternatively, you can go elsewhere, comply with far laxer rules, and sell back to American businesses and consumers just the same.

The domestic obstacles are salient and the costs measurable. A Department of Commerce survey of manufacturers in 2017 found that EPA regulations occupied the top nine spots on a list of the twenty “most frequently cited regulatory and permitting issues that impact manufacturing.”¹“Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing,” U.S. Department of Commerce (October 6, 2017). Already in the 1990s, the stricter standards imposed on regions with air quality below the EPA’s standard were depressing new plant construction by 26–45%, with the greatest impacts on the largest plants and firms.²Randy Becker and Vernon Henderson, “Effects of Air Quality Regulations on Polluting Industries,” Journal of Political Economy 108, no. 2 (2000). Compliance with air-quality regulations were costing the industry 9% of profits,³Michael Greenstone et al., “The Effects of Environmental Regulation on the Competitiveness of U.S. Manufacturing,” MIT Center for Energy and Environmental Policy Research (CEPR) (2012). comparable to the median state tax burden on a manufacturer.⁴Jared Walczak, “Location Matters: Effective Tax Rates on Manufacturers by State,” Tax Foundation (September 1, 2015).

Matters have only gotten worse. A 2018 study in the American Economic Review reports that “the implicit pollution tax that manufacturers face doubled between 1990 and 2008.”⁵Joseph S. Shapiro and Reed Walker, “Why Is Pollution from US Manufacturing Declining? The Roles of Environmental Regulation, Productivity, and Trade,” American Economic Review 108, no. 12 (2018). The Obama administration pushed the envelope further, tightening ozone standards in a way that some national parks could not meet,⁶“Ozone Standard Exceedances in National Parks,” National Park Service (November 28, 2017). let alone cities like Atlanta, Baltimore, Cincinnati, Columbus, and Cleveland.⁷“8-Hour Ozone (2008) Designated Area/State Information with Design Values,” U.S. Environmental Protection Agency(as of May 31, 2020). Environmentalists were outraged that the Obama EPA did not go further;⁸Coral Davenport, “New Limit for Smog-Causing Emissions Isn’t as Strict as Many Had Expected,” New York Times(October 1, 2015). “the goal for policymakers worldwide,” reports Science, “should be to push down levels as far as possible.”⁹Emily Underwood, “The Polluted Brain: Evidence Builds That Dirty Air Causes Alzheimer’s, Dementia,” Science(January 26, 2017).

This is irrational. Of course, environmental quality is important, and clean air and water have real value that policymakers should pursue. But industrial activity offers enormous benefits to the nation alongside the environmental costs that it might impose. The more important that activity becomes, the greater the environmental tradeoffs we should be prepared to accept. Otherwise, the claimed commitment to reshoring is mere lip service. Major reforms responsive to present conditions and priorities could ensure that America maintains its environmental achievements to date while also unleashing a wave of domestic investment.

Outdated Environmentalism

At the time of their passage, the Clean Air Act and NEPA corrected an imbalanced regime that had granted industry carte blanche and left the nation’s air, water, and ecosystems in woeful condition. Fifty years later, the pendulum has swung to the opposite extreme, as restrictions ratchet ever-tighter with little regard for the tradeoffs involved. In the 1970s, the average “Environmental Impact Statement” (EIS) mandated by NEPA for a federal highway project was 22 pages long and the process took two years to complete; by 2011 the typical highway EIS could run more than 1,000 pages and the process required more than 8 years.¹⁰“Getting Infrastructure Going: Expediting the Environmental Review Process,” Regional Plan Association (2012). Over that same period, air-quality standards were tightened repeatedly, to the point where Brussels—the capital of the purportedly enviro-friendly European Union—would be the single dirtiest city in America.¹¹Oren Cass, “Will EPA Cuts Harm America’s Air Quality?” Manhattan Institute for Policy Research (2017).

The Clean Air Act, sometimes called “the most powerful environmental law in the world,”¹²Coral Davenport, “Obama Build Environmental Legacy With 1970 Law,” New York Times (November 26, 2014). provides a particularly compelling case study and the best opportunity for immediate reform.¹³This discussion is adapted from Oren Cass, The Once and Future Worker: A Vision for the Renewal of Work in America(Encounter Books, 2018). The Act establishes the types of pollution-control technology that emitters must employ, based on two factors. First, it directs the EPA to set National Ambient Air Quality Standards (NAAQS) that define the thresholds for acceptable pollution concentrations in the air. A region whose air quality fails to meet this standard is declared a nonattainment zone (NAZ). Second, it creates a “new source review” process for any new facility that will emit pollutants. Existing facilities must also install pollution controls if their region becomes designated a NAZ, but the most demanding standards are reserved for newly built sources of emissions.

To build in a nonattainment zone, a new facility must install the best possible pollution controls, while also finding other facilities in the region that can make offsetting pollution reductions to compensate for any new emissions. Even if built in a region that already met all air quality standards, a new facility must install state-of-the-art pollution controls, a requirement more stringent than what preexisting facilities have to meet. As new source standards tighten, existing facilities are “grandfathered”—asked only to meet the existing-source standards. But, significantly, major modifications to existing facilities cause them to be treated as “new” sources of pollution. The idea is that over time, as new facilities get built and old ones are renovated, all will be constantly required to use better controls than before.

The Act’s structure is understandable given the goals at the time of its passage to improve environmental quality rapidly and regardless of cost, without overburdening already-operating facilities. On those terms, it has been quite effective. Between 1980 and 2018, lead levels in the air fell 99%, carbon monoxide fell 83%, sulfur dioxide fell 91%, nitrogen dioxide fell 61%, and ozone fell 31%.¹⁴“Air Quality – National Summary,” U.S. Environmental Protection Agency. These are significant achievements, and environmentalists are justifiably proud of the enormous public health benefits that have followed.

But no matter how clean the air gets, the rules demand ever more. Consider a hypothetical manufacturer seeking to return production capacity to the United States. The firm cannot build a plant comparable to one already in operation, because as a “new source” it must do better. If seeking to build in an area already meeting air quality standards, it must install pollution controls although existing operators need not. If it is located in a nonattainment zone, it must install the best possible pollution controls and pay to offset its pollution. If it hopes to expand at some point in the future, it will have to go through this whole process again. An otherwise-attractive investment might not go forward at all.

The discrimination against new facilities amplifies other economic costs as well, and, over time, it has even interfered with environmental goals. Large businesses benefit from barriers to entry that keep newer and smaller firms out, giving them an incentive to advocate regulation that hurts them but hurts potential competitors more. Older, dirtier facilities continue to operate as they have rather than investing in upgrades that might improve their productivity while reducing their environmental impact. In some cases, shutting out new construction has led to pollution levels that are higher than they would have been if there had been no regulation at all. “This approach,” writes Robert Stavins, director of Harvard University’s Environmental Economics Program, “has been both excessively costly and environmentally counterproductive.”¹⁵Robert Stavins, “Moving beyond Vintage-Differentiated Regulation,” Huffington Post (May 25, 2011).

Removing the Dam

Although the EPA earns well-deserved criticism for its implementation, it is merely the messenger of a long-ago Congress’s broader choices. The ever-tightening ratchet is exactly what the Act—duly passed by overwhelming bipartisan majorities in 1970 and further strengthened by overwhelming bipartisan majorities in 1990—calls for. Showing disregard for massive costs is exactly how the U.S. Supreme Court, in a unanimous opinion authored in 2001 by none other than conservative justice Antonin Scalia, has held that the Act requires the EPA to proceed.¹⁶Whitman v. American Trucking Assns., Inc., 531 U.S. 457 (2001), Justia.

A federal statute is not a pendulum that will swing back of its own accord; it requires substantive reform. A new balance, appropriate to America’s current challenges, would secure the widespread gains in environmental quality to date while prioritizing efforts to establish and restore domestic production capacity over further environmental improvement. It would accept the additional pollution that naturally follows from the return of domestic production that both political parties say is their explicit policy objective.

The key reform to shift the Act’s fulcrum and strike a new balance would be to eliminate new source review, ending the discriminatory treatment of new facilities. Removing heightened new source requirements would allow industrial and energy-producing facilities to expand and would also allow new facilities to be built under the same rules that older plants must follow. The EPA would continue to set air-quality targets as it saw fit, but progress toward those targets would proceed more slowly. If a hypothetical factory wanted to double its size, it would be able to do so without inviting new burdens. If another firm wanted to build a competing factory with similar technology, it also would be able to do that. States would retain the authority they have today to impose tighter regulations if their circumstances or policy preferences warranted such a course.

This reform would be the economic equivalent of removing a dam. The current discrimination against new investments holds back a reservoir of capital that would surge forward were it not for the costs and restrictions now imposed. American industry sits downstream, happy to expand employment but restricted in its ability to do so. Under current law, every time environmentalists succeed in tightening an air-quality standard yet further, the dam wall gets that much higher.

Eliminate the impositions on new investments and, as quickly as analysts could revise their models, a host of construction projects previously considered infeasible would become attractive. Upgrades to existing plants, shelved for fear of triggering new requirements for the plant, would go back on the drawing board. New plants, rejected because they could not operate profitably, would suddenly find willing investors. Entirely new businesses, deemed unlikely to succeed while established businesses and foreign competitors enjoyed a sizable cost advantage, would begin hiring. The return of supply chains would begin to seem more sensible, and its encouragement would require fewer costly inducements like tax incentives or subsidies.

The effects on air quality would follow directly from the objectives of the reform. There would be no change from the existing facilities that are the vast majority of pollution sources. New and modified facilities would not operate free of all regulation; they would simply be subject to the standards that now apply to existing facilities. Thus, although one would expect improvements in air quality to slow, overall quality could degrade only as the result of a much-needed expansion in output. Meanwhile, the competitive pressure to cut costs through improved energy efficiency would continue to usher in technological improvements that tend to reduce pollution.

Permitting Progress

A second target for reform should be NEPA, which is infamous for imposing red tape on energy and infrastructure projects but can also trigger environmental review processes for other projects that require federal permitting or use federal funds. These reviews can take years and, rather than concluding the matter, a completed one then provides an invitation for environmental groups to launch lawsuits over the quality of the process, occupying years more, even if no legal basis exists for objecting to the project itself.

The extent of these obstacles became obvious during implementation of the 2009 American Recovery and Reinvestment Act, for which Congress appropriated $800 billion with the goal of rapidly boosting employment and—purportedly—upgrading American infrastructure in the process.¹⁷Joe Biden, “What You Might Not Know about the Recovery,” New York Times (July 26, 2009); Michael Grabell, “How Not to Revive an Economy,” New York Times (February 12, 2012). Notwithstanding the typical argument from environmentalists that NEPA “improves governance, increases transparency, and makes infrastructure projects better,”¹⁸Kevin DeGood, “The Importance of NEPA Review for Infrastructure Projects,” Center for American Progress (August 16, 2018). President Obama began granting waivers from its requirements when it was deemed economically vital and politically expedient.¹⁹Kristen Lombardi and John Solomon, “Obama Administration Gives Billions in Stimulus Money without Environmental Safeguards,” Washington Post (November 28, 2010).

In fact, NEPA’s lengthy, unpredictable process is entirely unnecessary and should be replaced. Countries like Canada and Germany, with exemplary environmental bona fides, have streamlined review processes that guarantee short, fixed timelines for review and preclude further litigation once a decision has been made. In Germany, legal challenges to quickly made permitting decisions are tightly cabined and subject to a one-month statute of limitations. Canada’s federal government defers to province-level approvals for most projects.²⁰Philip K. Howard, “Two Years Not Ten Years: Redesigning Infrastructure Approvals,” Common Good (2015). Done right, such approaches could make major industrial investments far more attractive without sacrificing environmental quality. Even if the change entails some environmental risk, that is a trade-off worth making.

The Trump administration has focused intensively on this issue and taken substantial action, proposing new rules that would narrow the categories of projects subject to review and set firm deadlines for completion.²¹Lisa Friedman, “Trump’s Move Against Landmark Environmental Law Caps a Relentless Agenda,” New York Times(January 9, 2020). But administrative action on this front is inherently limited by the reality that it will itself invite years more of litigation, precisely the outcome that reform seeks to short-circuit. Ultimately, NEPA itself must be scrapped in favor of a structure that provides the protection the environment needs rather than the endless stalling tactics that activists crave.

The environmental laws that raise costs, increase risks, and lengthen timelines for investments in domestic industry no longer serve the purposes for which they were created. A genuine commitment to environmental quality requires setting reasonable expectations for progress and pursuing it with the least possible economic burden. Today, the system does the reverse, setting standards without reference to cost and providing opportunities for opponents of investment to create arbitrary burdens without reference to any cognizable environmental goal. Whether policymakers are willing to revisit this arrangement and strike a balance appropriate to the imperative for reshoring supply chains provides a useful litmus test for whether they are serious about supporting domestic production at all.