Do Environmental Regulations Hurt the Economy?

Environmental regulations have transformed California's economy but it's not always clear if the result was positive.
by | March 2010
 

Here in California, we are in the middle of not just a recession, but also one of the deepest and most disturbing crises in government finance since the Great Depression. Our state spending is chronically 20 percent above our state revenue. Government services up and down the state are disrupted on a regular basis, followed quickly by a Keystone Cops effort to restore things. And it's never clear from one week to the next whether Wall Street will buy our bonds.

Yet all through this crisis, one aspect of governmental life in California has moved forward unabated: We are constantly creating ever-more-rigorous environmental regulation. Right now, we are implementing one of the world's most aggressive climate change laws - an effort that could fundamentally alter the way we live our lives. We are ramping up our water-quality regulations in a way that will surely cost developers and cities a lot of money. And we continue to push forward on a variety of other fronts, from wetlands to endangered species to coastal protection.

The question that arises from all this is not about environmental protection or quality of life; it's a question about economic development. Is this kind of aggressive regulation a drag on our economy? Or is it the basis for our emerging green economy - and hence the foundation of our future prosperity?

For decades, environmentalists and others on the left have argued that our heavy regulation has actually fueled economic growth - and this argument has only gotten stronger in the last couple of years. Sometimes this has been known as "technology-forcing regulation" - regulation that pressures the private economy to create new, cleaner technologies that will not only clean up the environment, but also generate whole new businesses and industries that will renew the economy.

Over the past few decades, regulation has transformed the California economy in many ways, but it's not always clear that the result has been positive. Restrictions on oil drilling, for example, have led to less drilling and more environmentally responsible drilling when it occurs - but the reduction in oil production has contributed toward America's ongoing dependence on foreign oil. A net plus? Maybe for somebody like me who lives near the beach, but not necessarily for anybody who drives.

Similarly air-pollution regulations have cleaned up the air - but they have done so partly by driving "dirty" industries to Arizona, Nevada and Mexico. The air's cleaner here, but it's not clear that this has had a net benefit either to California's economy or the world's environment.

Yet you can't dismiss regulation-driven change as a way to stimulate a more innovative and greener economy. Although environmental protection is often airily advertised as a matter of making different personal choices or forcing corporations to be more responsible, the down-and-dirty fact is that it's mostly a matter of capital investment.

Removing pollutants from smokestacks means you must install scrubbers. Capturing wind or solar energy means you to have to build and install turbines or solar panels. Reducing overall energy consumption means a whole variety of capital investments, ranging from weatherization to replacing old HVAC systems. Reducing water use means installing drip irrigation - not too hard for the average homeowner, but an enormous cost for the average farmer. Reducing polluted storm-water runoff means building greener storm-water facilities-bioswales instead of culverts, for example.

Inevitably many of these capital investments will be made over the course of time - smokestacks will be replaced, as will irrigation systems, storm-water systems and HVAC systems. The trick to environmental protection and prosperity is to use both the sticks and carrots government has available to drive those capital investments in a certain direction on a certain timeline.

A smokestack or an HVAC system will be replaced sooner or later - but if the private market is left to its own devices, these new capital investments may be no greener or efficient than the old ones. An aggressive regulation can force technological innovation by requiring that new capital investments, in fact, be greener than old ones. Oftentimes, however, that's not enough because the payback period on green capital investments can be so long. Low-cost financing programs - from the government or water purveyors or electrical utilities - may also be necessary to bridge the gap.

That's what's happening in California with the energy efficiency financing programs being created under a law known as AB 811. Under the provisions of AB 811, local governments can create assessment districts that will help provide low-cost, long-term financing for homeowners who wish to green their homes, whether through solar panels or HVAC upgrades.

The AB 811 program has been successful and popular in places as diverse as Berkeley, where the climate is moderate but the voters are not, and Palm Desert, where things are more or less the other way around. It wouldn't work without the government carrot of low-cost financing (assuming anybody will buy the AB 811 bonds, but that's another story) - but it also wouldn't be moving as fast if it weren't for California's climate change bill, which essentially forces reductions in energy consumption. Sometimes the carrots and sticks actually do help California through an economic transition - one that protects the environment and creates new economic opportunity in the process.

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