Why Not All Government Regulation is Created Equal

Posted: April 13, 2014 in Uncategorized

Regulation is not a straight forward process. No matter how altruistic a policy may be, it is rarely ever clean of some level of corruption or rent-seeking behaviors, not mention unintended consequences. Governmental paternalism has potential for both good and bad outcomes and I want to share a story that can provide an example of how these things can take place, and that we should look past the surface of any policy. This story is not a “n=1” assertion that all regulation is bad, but should provoke a thought process that gets us to think a little deeper about issues.

The EPA wanted to reduce the sulfur emissions of coal plants, a very reasonable goal. Through amendments to the Clean Air Act, the chosen plan was to adopt a “scrubber technology” that was proven to reduce sulfur emissions. Yes, these scrubbers cost some money but the belief was that it helped to solve the externality problem of dirty coal. There was a difference between regional coal, as in general, western coal was clean and eastern coal was dirty. The amendment required that plants purchase the scrubbers to reduce the emissions of coal produced power.

The idea does not seem outrageous at all, right? The problem though was what happened, and was a response to the incentives of regional coal plants. For east and west regions, it was relatively straight forward. Western regions with the clean coal at a higher price, were better off purchasing the local product and having lower emissions. The Eastern coal was dirtier and cheaper and it was more advantageous to just purchase the scrubber and the still use the dirty coal. The key change was the Midwest. Due to the cost of the scrubbers, it was now more cost effective for Midwestern plants to purchase the dirty coal at a lower price rather than the clean coal. This meant that even with the scrubbers, there was more sulfur emissions because of the higher utilization of dirty coal. But this wasn’t supposed to be the case! The regulation did not change much of the operation on the western or eastern front because of logistics, but the Midwest now had real incentive to choose the dirty coal rather than the clean, and all due to the cost of the scrubber. With a goal of reducing emissions, the regulation actually resulted in some an increase in sulfur emissions.

Just for some further interesting information, this was largely due to the political problems of regulation. Eastern coal, the dirty coal, wanted to protect its interest and had a strong presence with legislators. They wanted this regulation and advocated the scrubber. You see, the regulation only allowed for this one scrubber technology to be used, not an open technology competition. This reduced efficiency and innovation of the market and gave way to the poor regulation. What was also interesting is the environmentalist also backed this regulation, but obviously for different reasons than the eastern coal. A fascinating look at this concept is called “Bootleggers and Baptists” theory by Bruce Yandle

Regulation is not a simple task that automatically leads to more efficient outcomes. Next time you hear about any regulation, just think about potential side-effects or spillovers and think about whether there is a bootlegger to the baptist of the issue.

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