A Negative Externality by Any Other Name: Using Emissions Caps as Models for Constraining Dead-Weight Costs of Regulation

Abstract

Emissions caps work on a simple and compelling premise. Regulated entities, in the process of creating something desirable, like energy, create and expel some problematic by-product, such as carbon. They do this because they directly reap a significant set of benefits (e.g., profits, market share, job security) from their efforts, while only diffusely and incidentally, along with the rest of society, suffering the harms caused by their emissions. These emissions, paid for primarily by the rest of society, are called negative externalities. Emissions-cap regimes are designed to make regulated entities more directly accountable for the costs of their emissions and give them heightened incentives to minimize those emissions. This process is known as the internalizing of externalities.

Perhaps ironically, regulatory agencies occupy a position markedly similar to that of the regulated emitters. Such agencies, in the process of creating something desirable, such as a cleaner environment, also create and impose negative externalities, such as burdens on business and the economy. They do this because they directly reap a significant set of benefits (e.g., job security and prospects, additional authority and powers, prestige and self-worth) from their efforts, while only diffusely and incidentally, along with the rest of society, suffering the harms caused by the dead-weight costs of their regulations. Emissions-cap regimes therefore can provide a condign – though nevertheless imperfect – model for establishing a system by which regulatory agencies can be obliged meaningfully to take account of, and to minimize, the efficiency and economic losses occasioned by their regulations.

This article will propose and elaborate for the first time a regulatory “Compliance Cost Cap” system derived from emissions-cap models and the principles that animate such models, designed to oblige regulatory agencies to constrain the deadweight costs of their regulations.

Keywords: administrative law, regulation, regulatory constraint, compliance /costs, cost-benefit analysis, emissions caps, compliance-cost caps, public-choice theory, public-interest theory, agencies, agency costs, environmental law