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About the Commentary

Series Editor: Joshua Linn
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster

Welcome to the RFF Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.

To receive the RFF Policy Commentary by email, or to submit comments and feedback, contact comments@rff.org.

Issues of the Day

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Issues of the Day:
100 Commentaries on
Climate, Energy, the
Environment, Transportation,
and Public Health Policy
Ian W.H. Parry and
Felicia Day, Editors

This Week's Commentary  Previous Commentaries  Future Commentaries  Objectives

This week's commentary discusses enforcement under the Clean Water Act. Increasing the likelihood that noncompliant firms will be detected, along with imposing higher penalties for violations, offers the potential to significantly improve water quality at relatively low cost.

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Improving Clean Water Act Enforcement
Jay P. Shimshack and Michael B. Ward
January 8, 2010

The 1972 Clean Water Act (CWA) is one of the nation’s premier environmental statutes. The law aims to “restore and maintain the chemical, physical, and biological integrity” of the country’s waters and to improve human health, recreational opportunities, and wildlife protection. Under the act, industrial facilities, municipal wastewater treatment plants, and other large point sources are required to obtain permits to discharge pollutants into the nation’s surface waters. These permits cap discharges, and facilities that exceed allowable limits are potentially subject to sanctions. The overall regulatory structure is provided by federal and regional offices of the Environmental Protection Agency, but the vast majority of permitting, inspection, and enforcement activities are delegated to state-level agencies.  

While the country’s overall water quality has generally improved over the past several decades, the most recent national water quality inventory reported that 44 percent of assessed rivers and streams, 64 percent of assessed lakes and reservoirs, and 30 percent of assessed bays and estuaries did not fully support officially designated uses such as safe fishing and safe swimming. Oversight of water pollution laws is becoming increasingly controversial. Even new EPA administrator Lisa Jackson has stated publicly that “the time is long overdue for EPA to reexamine its approach to Clean Water Act enforcement.” In addition, the U.S. Office of Management and Budget asserts that CWA enforcement efforts are inflexible and poorly managed. Other critiques, including a recent high-profile New York Times symposium, suggest that current water enforcement actions are unacceptably rare.

To better understand this ongoing debate, it is useful to provide some context. First, overall CWA compliance is high in some dimensions and low in others. The overview that any single compliance or pollution index provides is highly sensitive to measurement approach, so analysts looking at the same data can reach different conclusions about overall environmental performance. Second, regardless of how one defines environmental performance, CWA sanctions are uncommon relative to the number of violations (for example, failures to meet discharge limits). Monetary penalties are especially rare, and dollar amounts are modest relative to those allowable under the law. Maximum fines reach $50,000 per day. The median of federal and regional penalties levied under the CWA during 2001 to 2008 was $3,000, and these penalties often targeted multiple violations spanning many months. Third, on average, sanctions for water pollution violations are declining over time. For example, EPA CWA administrative penalty numbers fell by more than one-quarter between 2004 and 2008.

Despite infrequent and small sanctions, one clear message from empirical studies over the last two decades is that monetary fines for water pollution violations get results: plants increase compliance and reduce pollution discharges for many months after receiving a fine. In a recent paper, we showed that fines also spill over to deter violations and reduce discharges at plants beyond the sanctioned entity. By fining one violator, the regulator signals a credible threat to fine future violations by other facilities. This amplifies the overall deterrence effect far beyond the impact on the original violator and can produce a very big compliance payoff. For example, in the paper industry, we found states that fined at least one facility subsequently experienced about a two-thirds reduction in the violation rate by other facilities in the state. In contrast to fines, nonmonetary sanctions such as warning letters had no impact.

In a different study, we found that monetary penalties not only encourage CWA compliance, but they encourage “beyond compliance” behavior as well. In other words, fines generate substantial pollution reductions above and beyond those expected from simply deterring violations. Plants that typically comply reduce discharges even further below permitted levels when regulators signal more stringent oversight.

Additionally, plants that may violate in the absence of enforcement often respond to increased regulatory threats by reducing discharges well beyond reductions required by their permits alone. One reason for a beyond compliance enforcement response is that plants build in a margin of safety to allow for random or accidental discharges. When the expected penalty for violations rises, facilities increase their margin of safety.

Another reason for a beyond compliance response is that several distinct pollutants are generated by the same production process. When a plant responds to greater enforcement threats by bringing one pollutant into compliance, as a by-product the plant simultaneously reduces discharges of other pollutants that may have been below permitted levels. In the paper industry, we found that the enforcement-induced beyond compliance effect caused a greater reduction in overall pollution discharges than the standard reduction in violations. The strength, speed, and scope of observed responses to CWA enforcement actions with “teeth” is perhaps surprising at first, especially since those teeth tend to be small on average.


Jay P. Shimshack


Michael B. Ward

The strength, speed, and scope of observed responses to CWA enforcement actions with “teeth” is perhaps surprising at first, especially since those teeth tend to be small on average. However, a basic insight of economics is that optimizing facilities will reduce pollution up to the point where the marginal benefit of doing so equals the marginal cost of doing so. Observed enforcement responses suggest that the incremental benefits of reducing water pollution may be larger than the monetary amount of the avoided fine alone. Indeed, qualitative survey evidence indicates that regulatory enforcement activities impact companies’ reputations among consumer and community groups.

Observed enforcement responses, however, also suggest that the incremental costs of decreasing water pollution may be small, at least for well-studied large industrial facilities. If modest changes in the probability and magnitudes of fines substantially and rapidly decrease pollution, the costs of those reductions are unlikely to be large on average. This is consistent with the sporadic nature of water pollution violations, which can often be prevented by increased maintenance, employee effort, spill avoidance, operational efficiency, and employee training, rather than new equipment installations.

This simple economic logic has powerful implications for managing water quality. Increasing environmental performance may be relatively inexpensive in many cases. Substantial improvements in water quality may be achieved with relatively modest additional investments in the frequency and magnitude of CWA monitoring and sanctions. If standards are not overly tight, these enforcement-induced water quality improvements may translate into significant social welfare gains. In addition, fines should perhaps be well-publicized to fully exploit the spillover effects on other plants. Finally, improvements in CWA performance may not require sweeping departures from our current regulatory system. Greater use of our current tools will have predictable and meaningful results for environmental quality; the potential impacts of voluntary, cooperative, informational, or other alternative approaches are poorly understood.

Jay P. Shimshack is an assistant professor of economics at Tulane University and visiting scholar at the Erb Institute for sustainable enterprise at the University of Michigan.

Michael B. Ward is associate professor at the Crawford School of Economics and Government of the Australian National University. Their joint research stresses the evaluation of environmental policies. They are especially interested in the enforcement and monitoring of environmental laws and the economics of information policies.

Further Readings:

Jackson, Lisa P. 2009. Testimony before the U.S. House of Representatives Committee on Transportation and Infrastructure. Oct. 15.

Shimshack, Jay P. and Michael B. Ward. 2005. Regulator Reputation, Enforcement, and Environmental Compliance. Journal of Environmental Economics and Management 50(3) (November): 519–540.

Shimshack, Jay P. and Michael B. Ward. 2008. Enforcement and Over-compliance. Journal of Environmental Economics and Management 55(1) (January): 90–105.

 

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