Fashioning Entitlements: A Comparative Law and Economic Analysis of the Judicial Role in Environmental Centralization in the U.S. and Europe

Abstract

This paper identifies and evaluates, from an economic point of view, the role of the judiciary the steady shift of environmental regulatory authority to higher, more centralized levels of government in both the U.S. and Europe. We supply both a positive analysis of how the decisions made by judges have affected the incentives of both private and public actors to pollute the natural environment, and normative answers to the question of whether judges have acted so as to create incentives that move levels of pollution in an efficient direction, toward their optimal, cost-minimizing (or net-benefit-maximizing) levels. Highlights of the analysis include the following points:

1) Industrial-era local (state or national) legislation awarding entitlements to pollute was almost certainly inefficient due to a fundamental economic obstacle faced by those who suffer harm from the over-pollution of publicly owned natural resources: the inability to monetize and credibly commit to repay the future economic value of reducing pollution.

2) When industrial era pollution spilled across state lines in the US, the federal courts, in particular the Supreme Court, fashioned a federal common law of interstate nuisance that set up essentially the same sort of blurry, uncertain entitlements to pollute or be free of pollution that had been created by the state courts in resolving local pollution disputes. We argue that for the typical pollution problem, a legal regime of blurry interstate entitlements - with neither jurisdiction having a clear right either to pollute or be free of pollution from the other - is likely to generate efficient incentives for interjursidictional bargaining, even despite the public choice problems besetting majority-rule government. Interestingly, a very similar system of de facto entitlements arose and often stimulated interjursidictional bargaining in Europe as well as in the U.S.

3) The US federal courts have generally interpreted the federal environmental statutes in ways that give clear primacy to federal regulators. Through such judicial interpretation, state and local regulators face a continuing risk of having their decisions overridden by federal regulators. This reduces the incentives for regulatory innovation at the state and local level. Judicial authorization of federal overrides has thus weakened the economic rationale for cooperative federalism suggested by economic models of principal-agent relationships. As a result of the principle of attribution, there is less risk in Europe that (like in the US) courts would enlarge the federal purview and thereby limit the powers of the Member States. Despite this principle, the power of the European bureaucracy (that is, the European Commission) has steadily increased and led to a steady shift of environmental regulatory competencies to the European level. This shift is only sometimes normatively desirable, and yet there is little that the ECJ can or will do to slow it.

Keywords: environmental law and economics, courts, comparative law and economics, environmental federalism

JEL Classification: K32, Q25, Q20, D78