Thinking About Environmental Federalism

Environmental federalism is a complicated and contentious issue. And it is at the center of debates both in this country and in the European Union, where moves are afoot for the harmonization of environmental standards across the member nations. It is helpful in thinking about this issue to go back to some basic "principles." Doing so may not resolve the issue, but at least we can better understand the nature of the argument.

First, the issue is not a simple one of centralization versus decentralization of environmental management. Our governmental systems consist of several levels, and it is clear that there are important roles for nearly all levels of government in environmental protection. The issue is one of aligning specific responsibilities and regulatory instruments with the different levels of government so as best to achieve our environmental objectives.

Second, there exists a body of "principles" (or, perhaps better, "rough guidelines") for making this assignment. In brief (and with some simplification), the central idea emerging from the literature in public economics is that the responsibility for providing a particular public service should be assigned to the smallest jurisdiction whose geographical scope encompasses the relevant benefits and costs associated with the provision of the service.

The rationale for this principle is straightforward. Such decentralization of public decisionmaking allows outputs of public services to be tailored to the particular circumstances—the tastes of residents, the costs of production, and any other peculiar local features—of each jurisdiction. It is easy to show formally that such a decentralized outcome increases social well-being as compared with a centralized solution requiring more uniform levels of public services across all jurisdictions. In Europe, this is known as the "principle of subsidiarity," and it is enshrined in the Maastrict Treaty for the European Union. In the United States, we think of it more colloquially—as an aversion to the "one size fits all" approach.

Applying this general framework, we can envision a system of environmental management in which the central government sets standards and oversees measures for explicitly national pollution problems and intervenes where pollutants (like acid rain) flow across state and local boundaries; in addition, the central government would support research and the dissemination of knowledge on environmental issues, which benefit people everywhere. At the same time, the states and localities would set their own standards and would manage environmental quality for matters that are contained within their own borders (such things, perhaps, as drinking water, refuse disposal, and air pollutants with solely local effects).

Is this, in fact, the way we do things? Not exactly (as they say in the Hertz ads). Under the Clean Air Act, for example, Congress has directed the Environmental Protection Agency to set uniform national standards for air quality—applicable to every point in the United States. Such standards apply irrespective of whether there is any transporting of pollution across jurisdictional lines. Curiously, under the Clean Water Act in contrast, Congress has given the states the responsibility (but subject to EPA approval) for setting their own standards for water quality. Environmental policy in the United States (and Europe as well) is characterized by a certain ambivalence on this matter.

What is the objection to decentralized environmental management? One objection (and this is where things get more complicated) is that state and local governments, in their eagerness to promote economic development through attracting new business investment and creating jobs, will set excessively lax environmental standards to keep down costs of pollution control. What results (so the argument goes) is a "race to the bottom" with states and localities competing with one another to reduce environmental standards. We thus need centralized standard setting and environmental management, as one author has put it, to "save the states from themselves."

But is this true? Note that this is really part of a more general and quite fundamental indictment of all state and local governance that says that economic competition will lead these governments to misbehave—to underprovide public services so as to keep taxes and expensive regulations at excessively low levels. This is curious in one respect. We generally applaud the work of competitive forces in the private sector, where Adam Smith's invisible hand guides self-interested decisions into socially beneficent outcomes. But here we are told that competition is socially harmful in the public sector.

The theory on this is not entirely clear. Certain economic models, for example, find that competition among governments (as in the private sector) encourages precisely the right kinds of decisions. There is no race to the bottom. Active competition for new economic activity in these models provides precisely the correct signals for decisions on public expenditures and taxation. At the same time, it is not difficult to introduce elements (and not unrealistic ones) into these models that generate distortions—in some instances in the form of excessively lax environmental standards. But the theory gives us no sense of the likely magnitude of the potential distortions.

Unfortunately at this juncture we cannot resolve this matter by an appeal to the evidence; existing studies of state and local competition, while of some interest, do not answer our question. At any rate, there exists little systematic evidence that supports the case for a race to the bottom.