Monday, March 01, 2010

The Clean Water Act's Ambiguity Offers a "Natural Experiment" on the Impact of Regulation on Polluter Activity

The New York Times wants the United States to have clean water . But, does Justice Scalia want you to have such an amenity? The original Clean Water Act has a sloppy definition of its geographical scope. To remind you young environmental lawyers out there ; the core issue is a clear, consistent definition of "navigable waters". I have no idea what these words mean but English is not my first language.

"the Clean Water Act that limited it to “the discharge of pollutants into the navigable waters” of the United States. For decades, “navigable waters” was broadly interpreted by regulators to include many large wetlands and streams that connected to major rivers."

The economics of this ambiguity issue are fascinating;

1. There are geographical areas where it is not uncertain whether the Clean Water Act is enforceable.

2. How do polluting firms respond to the possibility of these new "domestic pollution havens"?

3. Will dirty firms move to such areas because they believe that they can pollute with delight and not face costly regulation? As President Obama seeks to create new jobs, will he support this? Will the pursuit of local dirty job growth be an economic development strategy during these tough days?

4. Will incumbent firms who are already located in the "ambiguous regulation" zone start to pollute more? The New York Times says yes but an excellent economist named Tom Lyon would push back and say that firms are strategic and will think through whether there are benefits of "flying under the radar screen" and not polluting to avoid the wraith of the regulator.

5. There is an element of investment under uncertainty here. Right now, there is uncertainty about whether the regulatory rules apply in these cases;

"But the two decisions suggested that waterways that are entirely within one state, creeks that sometimes go dry, and lakes unconnected to larger water systems may not be “navigable waters” and are therefore not covered by the act — even though pollution from such waterways can make its way into sources of drinking water."

Firms may start to purchase land near such areas and take a bet that the Republican dominated Supreme Court will rule that the Clean Water Act does not apply there. This would give such firms an "option" to build a factory later if the area is indeed not forced to comply with Clean Water Act regulation standards.

For those of you who are academic economists, there has been a long literature -- that Vern Henderson and I started (see my 1997 RSUE paper) on the consequences of differential Clean Air Act regulation (i.e that footloose dirty manufacturing moves to areas where the Clean Air Act is not enforced (attainment counties). This case represents the same logic but the Clean Water Act would now be "spatially delineated".