How Environmental Laws Can Discourage Pollution Prevention
Case Studies of Barriers to Innovation
By Byron Swift
Editor's Note: This paper was originally published in April, 2000. It was revised August 1, 2000.
Pollution control laws have brought us better health, cleaner water and air, and improved our quality of life. Yet, in some circumstances, these same "first generation" laws inadvertently constrain technological innovation and hinder comprehensive solutions to environmental problems. This paper highlights how some of the regulations putting these laws into practice--and at times the laws themselves--narrow technological choices, add unnecessary costs, and may fail to prevent pollution in the first place.
Using case studies of five industries, this report illustrates how these perverse outcomes may occur, even when the law or regulation on its face appears reasonable.1 These cases also convey a positive message: new technologies, or old technologies creatively applied, can help achieve environmental goals while consuming fewer natural resources, using less energy, and preventing pollution through cleaner processes. Each of the case studies presents different barriers to innovation and a proposed solution tailored to the specific problem:
There are some who believe that environmental regulation is too stringent and
should be relaxed. Others say that injecting flexibility into regulation will inevitably lead
to more pollution. These case studies show that there is a Third Way to achieving better
environmental results by adopting standards that are stringent in their goals, but flexible
in their means of achieving those goals. Standards and regulatory approaches can be
designed to continuously stimulate and reward technological innovation. Laws that
"command" but not "control" would encourage the redesign of
industrial processes to produce less waste, instead of relying on expensive equipment to
clean up pollutants at the end of the production process.
How Some Regulations Inhibit Innovation
Environmental laws and regulations create an imperative to reduce pollution. Depending on how these laws and regulations are written, they can either drive innovation and prevent pollution, or do the opposite and freeze technological choice. Some first generation laws and regulations tend to have this chilling effect on innovation. Hence the moniker "command and control," referring to standards or methods that in practice lead regulators to mandate a specific technology to control pollution at the end of a discharge pipe or smokestack.
One of the biggest culprits inhibiting technological innovation are regulations that implement "technology-based rate standards," which are typically expressed as a concentration limit or percent reduction of a single pollutant coming out of a pipe or smokestack. Examples would be a standard that is expressed as an 80 percent reduction in end-of-the-pipe emissions, or a discharge rate of 25 micrograms per cubic meter. These standards typically begin with a mandate from Congress to the Environmental Protection Agency (EPA), requiring industries to adopt "control technologies" that are either "feasible," "best available," or "maximum achievable." These standards are poor performance benchmarks because they focus only on one pollutant and require reductions only in rates--not in amounts of overall pollutant discharges--and so will favor single-pollutant, end-of-the-pipe solutions.2
Strictly speaking, these kinds of rate standards are not technology mandates, but their practical application can be just as limiting for new technologies. To implement rate standards, EPA and state regulators must evaluate how much each available (i.e. existing) technology can reduce a particular pollutant and judge appropriate costs. Regulators tend to pick and then require an available technology that fits the bill. This discourages firms from taking the risk of choosing or experimenting with newer, potentially superior alternatives. Even if a source could reduce overall pollution through process changes, a rate standard may still require it to add the same end-of-the-pipe equipment anyway, discouraging a move to cleaner processes.
Rate limits have other disadvantages. First, they do not promote continuous
innovation, but instead lead to one-time compliance, often through the use of the identified
available technology. Second, they are inflexible: even if new process technologies are far
cleaner overall, they cannot be permitted if one substance exceeds a single parameter. And
finally, the permitting process can be time-consuming and adversarial: regulators can take
one to two years to issue a permit, adding significantly to regulatory costs.
Second Generation Strategies Thrive on Technological
Innovation
Technological choice and more comprehensive solutions are the keys to producing more environmental benefits at less cost than prescriptive, first generation regulation.3 If we want businesses to innovate, to actively search for creative solutions to reduce pollution, and to lower the costs of environmental compliance, we must move beyond reliance on prescriptive, end of pipe rules. Second generation approaches would:
Second generation tools tested in states and in a few federal programs are
showing that strict environmental standards can be maintained and ultimately exceeded
when regulators offer greater choice in how standards are achieved. Indeed, true
performance standards can be designed to be far more efficient than the rate-based
standards arising from the mind set of pollution control. For example, the sulfur dioxide
emissions trading program in the Clean Air Act achieves major reductions using a cap on
total emissions, eliminates permit-by-permit review of technology, and allows transactions
to take less than 24 hours. 4 Further, "cap and
trade" programs help commercialize emerging technologies that either fail to achieve
a rate standard by a small amount, but are much cheaper; or over achieve a standard, but
are more expensive. Neither has a commercial life without a trading system.
The Current Regulatory System Discourages Private Finance of New
Technologies
Today, there is far less funding for environmental technology than for telecommunications, health, and general industrial sectors. Private venture capital for innovation in environmental technologies, particularly important for small technology developers, has declined precipitously from $200 million in 1990 to less than $60 million today.5 In stark contrast, venture capital investment in the United States reached a new high of $35.6 billion in 1999.6 Environmental mutual funds have shrunk from $240 million in 1993 to $62 million in 1999. Government funds, never plentiful, are also declining. Further, investment in research by the firms that develop and market environmental technologies is also at low levels, around 3 percent of revenues in the major air and water technology sectors.7
Two key factors stemming from regulation inhibit financing - opportunity and
market size. Opportunity is affected because even if a technology works and is
commercially acceptable to business, government regulators must accept it in the
permitting process. Time delays, lack of familiarity with the technology, or other problems
may prevent commercialization. Further, because federal environmental laws delegate
most permitting authority to the states, the environmental market is fractioned into 50 state
markets and hundreds of smaller ones, each one representing a permitting jurisdiction.
Approval in one state or jurisdiction is no guarantee of approval in another, creating a
balkanized market a formidable entry barrier for new environmental technologies. For
these primary reasons, private capital has virtually left the environmental field.
The Call For Change
While current environmental laws provide us with an adequate environmental protection system, they must be reformed if we hope to develop an excellent one. Our laws need to achieve a better integration with business decision-making and promote continuous improvement, but changing the basis for regulation will not come easily. Although second generation strategies could create significant overall economic benefits, some existing firms that already have invested and adapted to the current inflexible system have a stake in preserving it, and high regulatory costs can repel new entrants and potential competitors. On the other side, some in the environmental community seem to perceive inflexible laws as stricter and somehow better, creating further resistance to change.
National and state leaders can breach these attitudes over time by encouraging
further experimentation with second generation strategies that produce consistently better
and more cost-effective environmental outcomes. The following case studies demonstrate
how the first generation regulations can slow environmental improvement, but more
importantly, point the way toward an innovation-friendly second generation of
environmental action.
Case Studies
Baking
A rate standard known as a "percentage rate reduction" requires most bakers to adopt a single technology selected by government regulators, instead of allowing them to choose other technologies with lower total environmental impacts and lower costs.
Problem: Under the Clean Air Act, large bakers in urban areas must install "reasonably available control technology" (RACT) to control their emissions of ethanol, a natural byproduct of yeast fermentation. EPA defines RACT as requiring emission reductions of 80 percent to 95 percent, and has determined that catalytic oxidation is the only reasonably available technology which can achieve this level of reduction. Some innovative technologies can achieve slightly lower levels of ethanol control, yet are many times cheaper and reduce overall environmental impacts by using fewer resources and energy, and no toxic metals. One alternative could even return energy to the plant. Nonetheless, prospective purchasers of these alternative technologies have been unable to receive permits under the RACT emissions rate standard.
Barriers: An emissions rate limit standard creates several barriers to the use of innovative technologies. If regulators determine that an innovative technology is not "available," then it cannot be permitted. Those technologies which fall just short of achieving the 80 percent level cannot obtain the commercial testing, demonstration, and refinement needed to improve their performance and become "available" and commercialized. Trading between sources is prohibited (absent special state programs), even though it would facilitate the use of innovative technologies while achieving similar pollutant reductions. In addition, EPA test methods for ethanol and other volatile organic compounds (VOC) perform poorly in water-laden airstreams like those from bakeries. This puts innovative technologies that condense ethanol into a water medium at a disadvantage. Further, all these barriers are magnified by our federal system, as vendors of innovative technologies have to overcome the same barriers repeatedly in every state.
Bottom Line: These unintended barriers created by the regulatory system create a de facto monopoly position for the catalytic oxidation technology. The environmental benefit of its higher rates of ethanol reduction is more than offset by its higher energy consumption and use of toxic metals. The solution to this problem is to replace the percentage reduction standard with a limit on the overall quantity of emissions(called a "mass-based standard"), but does not dictate technology choices. Especially if combined with a well-designed emissions trading program, this would provide an incentive to switch to more efficient and effective technologies.
Table 1: Baking
| Factor | Regulators' Choice | Alternatives |
| Technology | Catalytic Oxidation | Heat exchanger, wet scrubbing |
| Percent reduction of ethanol | 80 to 95% | 75-80+% |
| Energy savings | 0% | 50-90% |
| Use of Toxic Metals | High | None |
| Cost | -- | 1/2 to 1/3 of regulators choice |
| Test method | Expensive; moderate accuracy | Inexpensive; high accuracy |
Dry Cleaning
For small businesses like dry cleaners, more environment-friendly alternatives are unlikely to gain a foothold in the market unless regulators change their own focus from pollution control to pollution prevention.
Problem: Fire regulations in the 1960s forced dry cleaners to switch from petroleum-based solvents to perchloroethylene (PERC), the main solvent used today by the dry cleaning industry and a hazardous air pollutant. Under the Clean Air Act, dry cleaners have been required to reduce emissions of PERC, and while regulation has led to gradually lower emissions, it has not prompted the industry over four decades to adopt cleaner technologies. Several innovative technologies using water, liquid carbon dioxide (CO2), and ultrasound have all been shown to be as effective as PERC in cleaning garments and would do away altogether with the need for PERC. This shift is not only environmentally preferable, but would eliminate disposal costs and business risks of using toxic materials in urban areas.
Barriers: Regulation focused on end-of-pipe results has done little to eliminate the root environmental problem or stimulate technological transformation in this highly dispersed industry. Regulation is not the only barrier to innovation. Because the industry is so fragmented with over 30,000 independent small businesses it is difficult to raise funds for research, experimentation, and risk-taking. Similar to other environmental technology areas, external sources of funds such as private venture capital or government funding are scarce. The only significant private effort to launch a new process uses liquid CO2, and originated outside the industry in a large technology company. Another major barrier is the "dry clean only" consumer labeling standard developed long before current technologies. The labeling standard imposes a risk of liability on "dry cleaners" using water as the cleaning agent, and inhibits them from using available and demonstrated innovative water-based cleaning technologies.
Bottom Line: Regulation of the dry cleaning industry has simply tightened discharge rates and emission limits. The industry has responded, not by preventing the pollution in the first place, but by modifying its equipment to provide greater and greater end-of-pipe control and treatment of hazardous air emissions. A broader regulatory focus, coupled with more investment funds and vision in this small-business industry, has the potential to stimulate industry research and adoption of alternative processes which avoid pollution altogether.
Table 2: Dry Cleaning
| Factor | Regulators' Choice | Alternatives |
|---|---|---|
| Technology | Reduction of perchloroethylene (PERC) emissions | Water technologies; liquid carbon dioxide/dry wash;ultrasound |
| Reduction of PERC use | 0% | 100% |
| Reduction of PERC emissions | 80-95% | 100% from complete elimination |
| Hazardous chemical disposal costs | High | 0 from complete elimination |
Nitrogen Oxides from Electric Power Generation
Reducing nitrogen oxide (NOx) emissions from power plants to control urban ozone is hampered by two major regulatory flaws: differential treatment of old and new sources, and differential treatment of technologies--with the greatest burden placed on the cleanest technologies.
Problem: Regulations under the Clean Air Act are technology-based rate standards that exempt or impose lenient standards on existing plants, and impose strict standards and more costly reductions on efficient new sources. As a consequence, they perpetuate the life of old, highly polluting plants and actively discourage the introduction of the newer technologies that would simultaneously lower NOx emissions and other pollutants from older coal-fired plants. The result is both higher costs and dirtier air. Large and relatively inexpensive NOx reductions could be achieved with alternative regulatory approaches and technologies.
Barriers: The rate-based standards for NOx require government regulators to establish different rates for each type of power technology based on known pollution control technologies. Such standards fail to provide any incentives to move from dirty to clean technologies, the essential step needed to reduce pollutant emissions from the power sector. The process also often fails to anticipate innovation in compliance technologies that could occur, creating inefficiency. Ironically, for existing plants, the resulting standards place the least requirements on the highest emitters, cyclone coal boilers. The most efficient new sources--combined cycle gas plants with cogeneration--have the highest regulatory burden, and get no regulatory credit for their superior efficiency. Finally, some states require plant owners to install end-of-pipe controls such as selective catalytic reduction to even the cleanest modern gas technologies. These controls can increase emissions of ammonia and other pollutants more than they reduce NOx. These factors inhibit wider use in the market of new gas-fired power sources which emit far lower NOx than existing coal-fired plants, and virtually none of the other major pollutants from coal combustion.
Bottom Line: The best solution to these problems would be for EPA and the states to implement an overall NOx emissions cap and allowance trading system that levels the playing field between old and new sources. This method sets a strict limit on total allowable NOx emissions, but allows great flexibility in choice of technology to yield the lowest-cost reductions. An emissions cap and trading system promotes alternative methods, including a switch to cleaner fuels and processes, as well as end-of-pipe controls. This could achieve more pollution control at a lower cost than any form of rate standards. Alternatively, a less bold but still positive step would be to change the current rate standards to output-based standards that rewarded energy produced efficiently with the least pollution.
Table 3: Nitrogen Oxides from Electric Power Generation
| Factor | Regulators' Choice: RATE STANDARDS | Alternatives:CAP AND TRADE |
|---|---|---|
| Technology promoted | End-of-pipe (especially selective catalytic reduction) | Various (including switching to gas-fired combined cycle turbines) |
| NOx emissions reductions | High | High |
| Other pollutant emissions reductions (SO2, toxics, CO2) | 0% | 60-100% |
| Reward for efficiency | None (moderate, if output-based) | High |
| Regulatory exemption (grandfathering) for old plants | Yes (results in higher emissions | No |
| Compliance costs | High | Medium to high |
| Transaction costs | High | Low |
Iron and Steel
Toxic wastes should be safely disposed, but current law carries this concept to extremes and inadvertently discourages adoption of clean production practices. By emphasizing a "cradle to grave" approach to hazardous wastes, the Resource Conservation and Recovery Act (RCRA) precludes a more sustainable "cradle to cradle" recycling system, and in effect creates waste from material which could otherwise be reused.
Problem: A major pollution problem of the iron and steel industry is the discharge of spent sulfuric, hydrochloric, or mixed acids used to form finished steel. Each year approximately 1.4 billion gallons of spent hydrochloric and sulphuric acids are discharged, primarily to receiving waters, landfills, or injected underground. EPA estimates that only 2 percent are reclaimed and recycled.
Barriers: The most immediate barrier to lowering discharges of acids used in the production process is the definition of solid waste in EPA's RCRA regulations, in which used acids must be treated as a RCRA waste if they are to be reclaimed. This requires a firm to apply for a RCRA storage permit, which is difficult and costly to obtain, and adds significant paperwork if the firm wishes to reuse the material in the production process. These requirements escalate the difficulty and cost of recycling so much that it is more economic for most firms to dispose of the acids instead. Economic barriers also affect the recycling of spent acids, including fluctuating prices paid for the reclaimed byproduct ferric chloride, the cost of transport, and low competing prices for landfilling and underground injection of acids. Another barrier to eliminating these wastes altogether is the lack of industry efforts to research and develop cleaner technologies and non-toxic alternatives to the use of these acids.
Bottom Line: EPA should amend the definition of waste to allow reclamation activities to proceed without having the material become a RCRA waste.8 In addition to removing this regulatory barrier, EPA and the states could alter the economic equation by imposing fees that would make disposal of acids through discharge or underground injection more expensive than reclamation and re-use.
Table 4: Iron and steel
| Factor | Regulators' Choice | Alternatives |
|---|---|---|
| Technology | Disposal of spent acids as RCRA wastes | Reclamation and re-use of spent acids |
| Materials reduction | None | Major reduction in chemicals to make new acids |
| Percent of used acids recycled | 2% | High |
| Waste reduction | Low | High |
| Operational cost savings | None | Medium |
Mercury Reduction
Reducing intentional uses of mercury in products and industrial processes would be a more efficient and effective means of reducing mercury in the environment than regulating emissions from incinerators that burn wastes with mercury-containing products.
Problem: The intentional use of mercury in products and processes results in more than half of mercury releases to the environment (the remainder is released unintentionally, mostly from burning coal). These releases include direct discharges from leakage and product breakage, transfers to landfills (including incinerator ash) where the mercury may potentially remain for long periods of time, and direct air emissions if wastes are incinerated. Current regulation to control mercury pollution derived from intentional uses, however, focuses on air emissions from waste incinerators. This approach is expensive and fails to address major releases through product breakage, leakage, and disposal.
Barriers: Regulation of waste incinerators imposes costs of $500-$3,000 per pound of mercury reduced, and does not provide any incentives for pollution prevention, as waste incinerators are not responsible for the mercury use in the first place. Additionally, these end-of-pipe controls simply capture and transfer the mercury to liquid or solid wastes, where some re- release of mercury to the environment is likely over time. In contrast, under a prevention approach, reductions would be permanent by reducing the use of mercury in products and processes. This approach has been used in laws that eliminated the use of mercury in paints and most batteries, and in voluntary programs for mercury reductions undertaken by some industries.9 However, EPA lacks comprehensive authority to pursue a prevention approach under the strict, control-oriented Clean Air Act regulations for air toxics.10 The price of mercury is currently below $3 a pound, less than 1 percent of the cost of controlling mercury from incinerators. This indicates that reductions in use through product substitution may be far more cost-effective than the high costs of controls on incinerators, although this may vary among individual products and uses.
Bottom Line: Regulation should focus upstream on users not emitters of mercury, who can make prevention decisions. The current uses of mercury principally in older chlor-alkali plants (160 tons), wiring (57 tons), dentistry (40 tons), lamps (29 tons), and measurement instruments (24 tons) are typically not essential, and substitutes are available for most products. Although some recycling programs exist, these capture only a small percentage of the mercury used. The Administration and Congress should work together to adopt legislation that requires source reductions of mercury by all intentional users, taking into account overall environmental gains from reductions in mercury use as well as voluntary recycling programs. This could be implemented by requiring reductions on a sectoral basis, or preferably by placing an overall and declining limit on the amount of mercury that could be sold annually. This approach would achieve dramatically greater reductions in total mercury releases, promote pollution prevention, reduce the problems of re-release of mercury, and cost substantially less than the current emissions abatement approach.
Table 5: Mercury Reduction
| Factor | Regulators' Choice | Alternatives |
| Technology | Emissions reductions | Source reduction |
| Environmental effectiveness | Low (transferred to other media) | Total and permanent |
| Waste reduction | None (significant wastes) | 100% elimination |
| Operational cost savings | High ($500-$5400/lb) and continuing | Low (some at $3/lb) and one-time |
Endnotes
1. This paper draws from research supported by The Joyce Foundation and described in: Environmental Law Institute, Barriers to Environmental Technology Innovation and Use, (Washington, DC: Environmental Law Institute, January 1998).
2. Many observers have noted how rate-based standards inhibit technological innovation. For example, a blue-ribbon panel convened by the U.S. EPA concluded: "Specifically, policy makers should reconsider the way 'best available technology'-based regulations are now developed and applied. Such regulations use agency established technology-based limits and use a technology to demonstrate that the limits are achievable." Even though these are performance-based requirements, they have a strong tendency to lock in the technology that is used to demonstrate achievability. To some extent, reliance on 'best available technology'-based regulations impedes the development and introduction of innovative technologies." U.S. Environmental Protection Agency, Permitting and Compliance Policy: Barriers to U.S. Environmental Technology Innovation, at 39 (EPA 101/N-91/001, January 1991).
3. For discussions of second generation approaches, see for example Debra S. Knopman and Emily Fleshner, Second Generation of Environmental Stewardship: Improve Environmental Results and Broaden Civic Engagement, (Washington, DC: Progressive Policy Institute Policy Briefing, May 1999); National Academy of Public Administration (NAPA), Setting Priorities, Getting Results: A New Direction for EPA, (Washington, DC: NAPA, April 1995); NAPA, Resolving the Paradox of Environmental Protection: A New Direction for EPA, (Washington, DC; Aspen Institute, 1997), The Alternative Path: A Cleaner, Cheaper Way to Protect and Enhance the Environment, (Aspen, Colorado; Center for Strategic and International Studies, Enterprise for the Environment, 1996), The Environmental Protection System in Transition: Toward a More Desirable Future, (Washington, DC, 1998); Marian Chertow and Daniel Esty (eds.), Thinking Ecologically: The Next Generation of Environmental Policy, (New Haven, Yale University, 1997); President's Council for Sustainable Development, Sustainable America, (Washington, DC, 1996).
4. Ellerman, Denny et al., Markets for Clean Air (in press); Burtraw, Dallas & Byron Swift, A New Standard of Performance: An Analysis of the Clean Air Act's Acid Rain Program. 26 Environmental Law Reporter 10411 (August, 1996).
5. Environmental Business International, unpublished data. San Diego, CA, 2000.
6. PricewaterhouseCoopers, 1999 Money Tree Survey
7. Environmental Law Institute, Research and Development Practices in the Environmental Technology Industry (Washington, DC: September 1997).
8. EPA's regulations provide: "(c) Materials are solid wastes if they are recycled or accumulated, stored, or treated before recycling...." There is an exemption to the RCRA definition for recycled material which is returned to an industrial process, but it does not apply whenever the material is reclaimed during this process. 40 CFR 261.2(e) (1996). Spent materials, such as pickle liquor, are specifically stated to be solid wastes when reclaimed. 40 CFR 261.2(c)(3). EPA actively considered a change to these regulations in the late 1990s, to allow either reuse within a plant or among a broader network of users, but this initiative failed due to resistance within EPA and in the
environmental community. Some environmentalists fail to see the problem caused by the restrictiveness of the current regulation, and erroneously believe that the greater the extent to which RCRA applies to materials, the more the environment is protected.9. The chlor-alkali industry has agreed to reduce mercury usage to 50 percent of 1995 levels under an agreement with EPA. In addition, lamp manufacturers have significantly reduced the amount of mercury used per flourescent lamp, and recycle the waste mercury from the manufacturing process. National Electrical Manufacturing Association, Environmental Impact Analysis: Spent Mercury- Containing Lamps (January 2000).
10. EPA has sufficient authority to negotiate individual voluntary settlements and implement agreements arising out of enforcement actions. However, it may not have the authority to impose broad source reduction requirements on an industry-wide or economy-wide basis.
Byron Swift is senior attorney and director of the Energy and Innovation Center at the Environmental Law Institute in Washington, DC, (swift@eli.org). The author wishes to thank Debra Knopman, director of the Progressive Policy Institute's (PPI) Center for Innovation & the Environment, for her assistance in the preparation and editing of this report.