On Environmental Costs

Recently, President Obama overruled the EPA and ordered the EPA director to withdraw a proposal regulating health-based standards for smog-forming ozone. Pro-business people are delighted and pro-environment constituents aren’t happy.

The Setting: If no environmental controls existed, we pay a lot for environmental damage. If we had a life free from environmental damages, we pay a lot for environmental control.

The Key Questions: How much are we willing to pay in cost of damages? How much are will willing to pay in cost of controls?

Whenever costs are involved, human nature wanting the lowest possible cost is quite predictable – which is one reason why I appreciate this graph. Not only does it illustrate the lowest possible cost, but it also identifies the amount of accepted pollution (thus environmental costs) associated with that cost. May I also note that the cost lines are curved, not linear.

(Tietenberg, Tom, and Lewis Lynne. Environmental and Natural Resource Economics, 8th edition. New York. Pearson Education, Inc, 2009, pg 358-362)

The US EPA is the regulatory agency responsible for developing, implementing, and enforcing the regulations to comply with legislation passed by Congress. Interestingly, the White House directly controls the EPA, thus enforcement directly correlates to the party in power and subject to political pressure. Some presidential administrations use Executive Orders to get around the guidelines by reducing EPA enforcement or to increase enforcement. Meanwhile, some candidates campaign to eliminate the EPA.

Without the EPA, our society would rely on the thoughtful nature of the business community to maintain quality air, water, soil, and all other natural resources. Let us not forget the years of burning rivers, poor visibility, waterways with limited life, and other aspects of poor environmental quality. Yes, those of us of a certain age remember those times – but anyone watching the 2008 Summer Olympics from Beijing can recall the images of their atmosphere.

There is no question that environmental controls can be expensive to business – and the stricter the regulation, the higher the preventative cost. However, I end this with these difficult questions: If control costs are too expensive, can control costs become prohibitive to the business? Is there a reasonable balance point regarding preventative costs and acceptable damage? Should the White House continue to control the EPA?