Downwind Pollution: Suing the EPA
According to a Reuters report today eight Northeastern states just sued the US EPA to force it to impose more stringent controls on some largely Midwestern states on the claim that their exclusion by the Environmental Protection Agency, the EPA, from being subject to more stricter smog regulation, is harming their states.
The problem here is that pollution being generated in a particular geographical location, in this case believed to come from these states most of them Midwestern states, does not remain localized as the pollution is driven by wind patterns and settles in these Northeastern states. This drives up the concentration of these pollutants, in this case, smog, which due to the high levels of ozone present in it can cause harmful effects on human health in particular chronic respiratory problems and lung diseases, according to Healthline.com.
From a traditional economics perspective air pollution is a negative externality. The activities being carried out by individuals and businesses are producing byproducts of smog that affect the consumption and production choices of others who are not necessarily (but could be) involved in those activities but yet are harmed and there is no compensation being provided to fully address the cost of the harm they face. In this case though the externality is of a transboundary type - as it is the activities believed to be generated in upwind states that are now harming individuals in downwind states.
Costs of Downwind Pollution
Costs that are borne by residents in downwind states are varied but they can be identified from the need to change behavior in order to avoid the more direct costs associated with failing to change behavior and incurring health problems.
As already alluded to, there are the direct health costs, which might need medical attention and expensive medical treatment, resulting from exposure to high levels of smog. A 2016 study in the Journal of Thoracic Disease, and accessible on the National Institute of Health website says that in addition to the varied respiratory and pulmonary related conditions brought about by exposure to high levels of ozone, there is also the risk of both appendicitis and perforated appendicitis from higher levels of ambient ozone exposure. These health conditions, where existing, could become chronic and have, in some studies, been associated with cancers with continued overexposure to smog.
There is the loss of both economic activity and leisure activities as those who are most susceptible to the exposure to high levels of smog need to limit their outdoor activities. To the extent that such activities cannot be carried out indoors then there are costs to the individuals and businesses affected from making these alternative choices.
There are costs associated with taking out time to check on loved ones - children, the elderly, the sick, who are most prone to being adversely affected by smog, which those people might not have otherwise done. Here it is not just individuals who might be directly impacted by smog that act to protect themselves, but those who may not normally be, yet they have to take actions to protect others who might not be able to provide that protection themselves. This detracts from other more economically viable activities that they would have otherwise have carried out.
Then there are those explicit costs that individuals and governments might take in order to mitigate the impact of these pollutants on individuals and communities. These are costs not arising from any localized benefits associated with the activities being carried, but from activities providing benefits in other areas - the upwind states. With tight budgets both at the household, local and state levels, allocating spending to limiting the impact of these pollutants means less spending on other desirable and important projects.
Taken together these are nontrivial costs especially considering the inclusion of possible deaths from respiratory complications and lung disease that may result from overexposure to smog.
The Problem of Limited Regulatory Scope
The solution to the externality problem in cases like this, considered to involve large numbers of people, is through government regulation. Economists typically recommend the so called "market based regulations", like emission taxes, and systems of tradable permits for emissions, because of their efficiency and cost effective properties. I will not go into the details on these.
The policy process by which intervention takes place is however a political one and regulation often tilts in favor of "direct regulation" where the government in the extreme, bans the activity, or in other instances sets quantity restrictions on the activity or the emission, which it hopes to monitor for compliance. The government could instead require that certain implicating activities which involve the use of certain technologies be carried out using a particular form of technology, the best available technology, that demonstrably reduces or eliminates the pollution.
Under the Clean Air Act (and its amendments), passed by Congress empowering the government to regulate air pollution and establish ambient air quality standards, the Ozone Transport Commission (OTC) was created to address regional ozone pollution. According to the OTC webpage, the OTC is "... responsible for advising the EPA on transport issues and for developing and implementing regional solutions to the ground-level ozone problem in the Northeast and Mid-Atlantic regions". Twelve states in those regions including the District of Columbia are all OTC members. The OTC provides a forum for these states because of their size and proximity to each other for jointly providing solutions to reduce ozone pollution, which in this context is localized for all of them.
The OTC can be seen as providing an overarching form of direct regulation, where these states are expected to jointly reduce ozone pollution to stricter levels desired by the EPA, however the strategies they may choose to use to go about this is what they will agree on within that forum and could include market based instruments. The problem though is that the scope of the ozone problem extends beyond this region.
As stated previously the total amount of smog that these states have to deal with is not limited to what they generate but also what they inherit from upwind states as winds move the pollutants from Midwestern states to their region. However these states are not part of the "regulation". Under the Clean Air Act these upwind states are supposed to have in their implementation plans provisions to limit transboundary emissions to downwind states. The EPA can require states to have such provisions where they fail to do so voluntarily, and if they still do not comply the EPA can implement a federal plan to achieve the necessary emission reductions (EPA).
The basis of the lawsuit is therefore that the EPA is not doing this. It is empowered to add states to the OTC, and the initial appeal made by some of the downwind states in 2013 that those states- Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, Virginia, and West Virginia- be added to the OTC has been denied by the EPA. This therefore excludes those states from having to take more stringent steps at curbing their ozone emissions, thus making it costlier for the downwind states to effectively address their levels of ozone, much of which is imposed as a negative externality on them.
The Political-Economic Quagmire
So why would the EPA refuse to add those states when according to the Reuters' article New York attorney general Eric Scheiderman, who leads the coalition of states behind the suit, states that "the EPA's own studies show that pollution from upwind states substantially adds to harmful levels of smog in New York"?
To be sure pragmatic economics calls for these culprit states to be subject to (stricter) regulation that should lead to further ozone emission reductions, or to hold them accountable for the harm imposed as a result of the smog externality they impose, but politics says otherwise. We only need to note two things: The current administration has made no secret of bringing about a resurgence in coal production to drive energy use in the United States. Next, the states in questions are the very states that lead the nation in coal fired power plants. Further, with the exception of Pennsylvania, the OTC member states are all states that Clinton won in 2016, and are mostly reliably blue states, whereas the culprit states in question with the exception of Illinois and Virginia are all states that Trump carried in 2016.
Regulation imposes costs. High costs leads to the shutting down of businesses and plants and resulting job losses. While there are already existing regulations on ozone emissions across the country, the political economy analysis of these regulations suggest they are by design not too stringent. The Trump Administration which has staked its policy position on supply side economics is not about to increase regulations, especially in states with outcomes that could backfire politically- he would not proverbially turn around to bite the fingers that fed him... the office. So we have an economic political quagmire - what should be in the best interest of the country from an efficiency point of view is not politically convenient, but alas we supposedly have checks and balances in our representative democracy and now it is up to the courts to tackle the EPA's/ Trump's position.
Public Policy Win-Win?
Regulation, in particular environmental regulation, in general is not a liberal policy position. It is a staple in mainstream economic theory and policy for addressing the market failure that results from the presence of externalities. The form in which the regulation takes and perhaps the level of stringency is where some political ideological line may be drawn.
The problem with most policy positions is that because they are designed with a nod to a particular political ideology, they often seek the path of least effort - effort to generate a potential win- win situation. It is often the costly long drawn out legal battles that force policymakers to rethink their positions and look for alternative solutions which, in some cases, are seen in hindsight as being both effective and providing win-win outcomes.
What might be an effective public policy solution that could avoid the legal conflict and yet be amicable to all sides? Well policymaking need not be one dimensional. Ultimately what the current OTC member states want is some way to address the externality problem. It is very likely that the externality generating states could find themselves in a bad bargaining position within the OTC, which would be why they would be opposed to their inclusion, so why not create a different forum for these other states where they are incentivized with a tradable permit system and grandfathered tradable permits to further curb their ozone emissions. Grandfathered permits have already been demonstrated to be politically successful as they provide rents to existing businesses, address the externality and provide further incentives for investments in abatement technologies.
Admittedly there is no escaping the reality that any mechanism that requires cutting emissions will still incur costs despite the incentive of grandfathering the permits. However one can hope that by incentivizing investments in abatement technologies that some form of unrealized efficiency gains might be recovered by businesses - a la the Porter hypothesis - where increased stringency and the possibility of obtaining rents from selling unused permits, leads these businesses to reevaluate their entire production process and come up with more efficient emission reduction strategies that ultimately lower their business costs and need not lead to job losses.