Encourage More Innovative Approaches to Regulation

Encourage More Innovative Approaches to Regulation

Background

One of the biggest challenges federal regulators face is choosing the
best tool to solve the problem. In many cases, non-regulatory approaches
may be the best solution. These include efforts to spur technological
innovation, information disclosure, and consumer education. For example:

--To address the problem of airline delays, the Department of Consumer
Affairs at the Department of Transportation (DOT) publishes the monthly
Air Travel Consumer Report comparing actual and scheduled arrivals and
departures.[Endnote 1]

--For 8 years, the Department of Agriculture's Food Safety and
Inspection Service has operated a toll-free food-safety hotline, to
provide meat and poultry consumers with information regarding food-
borne illnesses[Endnote 2]

--The Environmental Protection Agency (EPA) served as a catalyst in the
creation of a "Golden Carrot" program--a private-sector initiative to
spur development of a more energy-efficient and environmentally friendly
refrigerator by providing monetary rebates to the manufacturer of a
winning design[Endnote 3]

--Regulation by state or local governments may also be an alternative to
direct federal regulation.

If regulation is necessary, agencies must balance a number of
considerations in selecting the best regulatory approach, including
fairness, enforceability, and impact on regulated industries.  One of
the major factors regulators must consider in choosing among alternative
approaches is the cost to the regulated industry and to the government.

REDUCING COST OF REGULATION. The government is obligated to see that the
money spent to achieve health, safety, environmental, economic, and
social objectives is spent wisely. Regulation to achieve these goals
imposes significant costs on those being regulated.[Endnote 4] For
example, industries may be required to pay for installing equipment to
reduce pollution, for investing in monitoring systems to meet worker
health standards, and even for hiring additional personnel to maintain
compliance records.

EPA estimates that the proportion of the gross national product (GNP)
devoted to environmental protection alone will rise from 1.9 percent in
1990 to 2.7 percent in the year 2000, with the private sector bearing
most of these costs.[Endnote 5] The National Highway Traffic Safety
Administration (NHTSA) and the Federal Highway Administration (FHWA)
estimate that between 1966 and 1990 the federal and state governments
and the automobile industry spent an average of $6.[Endnote 5] billion
annually on highway, traffic, and motor vehicle safety.[Endnote 6]

Agencies have traditionally used command-and-control regulations. Under
this approach, the agency dictates what individual firms must do to meet
an established standard or goal and enforces those dictates. For
example, environmental regulations may require the use of specific
pollution control devices; inspection systems may require performance of
specific procedures; or agency officials may themselves decide on
allocation of rights to exploit natural resources.  No doubt exists that
a command-and-control approach is appropriate--and indeed necessary--in
certain cases.  For example, where risks that would result from
noncompliance are high, as in the regulation of nuclear power,
command-and-control may be the only feasible regulatory approach.

Experience has shown that in some situations, however, costs of meeting
regulatory goals can be significantly reduced by choosing approaches
that rely more on market mechanisms. Such mechanisms place more
decisions in the hands of the private sector, provide greater
flexibility to regulated industries, and encourage innovation.
Market-oriented regulation decentralizes decisionmaking, allowing the
market to find the most cost-effective solution to a particular
regulatory goal. Unlike command-and-control, market- oriented regulation
provides greater flexibility to regulated industries and encourages
innovation.

INCREASING EFFECTIVENESS OF REGULATION. Tapping the forces of the market
can also produce more effective regulation. Deposit-refund systems for
beverage containers ("bottle bills"), which have been mandated by a
number of states, demonstrate how powerful economic incentives can be in
influencing the behavior of large numbers of people. Heightened public
awareness about the problems which regulation attempts to address can
also have an impact on the degree to which overall objectives are
attained. For example, automakers are now competing to provide safety
features, such as airbags and anti-lock brakes.

How a regulation is designed has implications for its enforceability,
which is often critical to overall effectiveness. The deposit-refund
system relies very little on traditional enforcement mechanisms.
Effectiveness of command-and-control regulations, on the other hand,
depends directly on enforcement. Lax enforcement is likely to lower
compliance significantly. Because enforcement resources are limited,
agencies should also consider innovative approaches to enforcement, such
as use of auditors, to improve regulatory programs.[Endnote 7]

USING MARKET-ORIENTED APPROACHES. Among the regulatory approaches that
allow greater flexibility for the private sector and make use of market
forces are:

--performance standards,

--marketable permits,

--monetary incentives, and

--information disclosure.[Endnote 8]

"Performance" standards are generally preferable to "prescriptive" or
"design" standards because they give the regulated industry the
flexibility to determine the best technology to meet established
standards.  For example, a design standard for ladders might specify the
materials and exact dimensions to be used, whereas a performance
standard might simply require that the ladder support a minimum weight
and provide a minimum degree of stability. The Occupational Safety and
Health Administration (OSHA) has sometimes been criticized for
prescriptive design standards for plants and equipment relating to
worker safety.[Endnote 9] In 1990, OSHA initiated rulemaking on ladders
and scaffolding to convert to performance standards where possible. The
proposal followed complaints by industry that current standards provided
insufficient flexibility and inhibited technological
developments.[Endnote 10]

The EPA's "bubble" concept for limiting pollution emissions is a type of
performance standard. Under the bubble concept, overall emission limits
are established for a single facility or a group of facilities, rather
than from each source in the facility. This allows companies greater
flexibility in choosing which emissions source(s) to reduce to meet the
overall limit for emissions from the bubble.  EPA estimated that
facilities under the 80 or so bubbles established prior to 1986 saved
$435 million in meeting emissions standards.[Endnote 11]

"Marketable permits" allow the market, rather than the government, to
distribute scarce resources. The 1990 Clean Air Act Amendments establish
an allowance trading system for sulfur dioxide emissions from utilities,
in an effort to reduce acid rain.[Endnote 12] Utilities are allowed to
trade initially allocated allowances, each representing one ton of
emissions.  This allows more of the reduction in emissions to be done by
those plants that can reduce emissions at lower costs. EPA estimates
that this system will save from $700 million to $1 billion per
year.[Endnote 13]

In 1985, DOT issued a rule allowing airlines to buy and sell airport
takeoff and landing rights (slots) at four major airports.[Endnote 14]
Previously, these slots had been allocated by a committee, which
frequently deadlocked. Under the new system, the value of the slots is
determined by the market, which should allocate them most efficiently.
Similarly, in 1990, the National Marine Fisheries Service implemented a
transferable quota system for allocating fishery harvesting privileges
in the New England and Mid- Atlantic regions.[Endnote 15]

"Monetary incentives", if correctly set, can be effective in influencing
behavior. More than 100 communities now charge for garbage collection on
the basis of volume. Because households have an incentive to reduce the
amount of garbage generated, the effect has been to reduce tonnage
collected and to increase recycling. Many states and counties also tax
auto tires to pay for disposal. In a like manner, 10 states have
implemented deposit-refund systems for lead batteries to ensure proper
disposal.[Endnote 16]

"Information disclosure" provides consumers with information they need
to make informed choices.[Endnote 17] Labels, routinely required on such
products as over- the-counter drugs and pesticides, are probably the
most common form of information disclosure. NHTSA provides information
on tire safety to consumers by requiring manufacturers to grade and mark
tires based on a testing protocol to measure traction, treadwear, and
temperature resistance, factors relating to safety.[Endnote 18]

Information disclosure requirements can also provide an incentive to
industries to move toward regulatory objectives. For example, the
Federal Trade Commission's introduction of standard test procedures for
tar and nicotine content in cigarettes helped lead to the introduction
of low-tar cigarettes.[Endnote 19] The Emergency Planning and
Community-Right-to-Know Act of 1986[Endnote 20] requires companies to
disclose information on the use and release of hazardous chemicals. EPA
attributes a significant portion of the 31 percent decrease in air
emissions of these hazardous chemicals to voluntary reductions brought
about by increased industry and public awareness of emission
levels.[Endnote 21]

NEED FOR CHANGE

Federal agencies, for a number of years, have been encouraged to use
alternative approaches to regulation, including more market-oriented
regulation. President Carter in a 1980 Presidential Memorandum directed
the agencies to find areas where alternative techniques could be used in
both existing and new programs. Carter's Regulatory Council created a
short-lived Project on Alternative Regulatory Approaches, which
published a series of guides describing alternative approaches.[Endnote
22] Under his and later executive orders, agencies were required to
include, in their regulatory analyses of all major rules, a discussion
of alternative approaches considered. Presidents Reagan and Bush also
supported use of market-oriented approaches.

Despite more than a decade of high-level support, innovative approaches
are not widely used by agencies. There are a number of constraints to
more widespread use. Congress and agencies commonly respond to problems
by pulling the familiar command- and-control tool out of the toolbox. It
is always easier to model a new program after an old one, and most
often, existing regulations are command-and- control. Lack of
information and knowledge about when other tools should be used is a
significant constraint to introduction of innovative techniques.  Even
where agency staffs have expertise in designing innovative regulation,
their ideas may not be accepted without strong support from agency
leadership. Agencies generally do not actively ask for ideas for
regulatory approaches from the regulated industry or interest groups. On
the other hand, regulated entities may prefer command-and- control
regulations or prescriptive standards over performance standards because
they provide more specific details on the requirements for compliance.
Finally, statutes may not give agencies sufficient discretion in
designing a regulatory approach.
 
Cross-References To Other Npr Accompanying Reports

Department of Labor, DOL07: Redirect Mine Safety and Health
Administration's Role in Mine Equipment Regulation; and DOL10: Refocus
the Responsibility for Ensuring Workplace Safety and Health.

Department of Transportation, DOT02: Streamline the Enforcement Process.

Environmental Protection Agency, EPA01: Improve Environmental Protection
through Increased Flexibility for Local Government; EPA04: Promote the
Use of Economic and Market-based Approaches to Reduce Water Pollution;
and EPA05: Increase Private Sector Partnerships to Accelerate the
Development of Innovative Technologies.

Endnotes

1. Telephone interview with Norman A. Strickman, Chief, Consumer Affairs
Division, Office of the Secretary of Transportation, August 13, 1993.

2. Telephone interview with Susan Conley, Manager, Meat and Poultry
Hotline, Food Safety and Inspection Service, U.S. Department of
Agriculture, August 17, 1993.

3. Telephone interview with Mike L'Ecuyer, Environmental Protection
Specialist, Environmental Protection Agency, August 2, 1993.

4. Estimates of the total cost to the private sector of complying with
federal regulation range from $430 billion to $562 billion annually. See
Office of Management and Budget, Budget of the United States Government
Fiscal Year 1993 (Washington, D.C., 1992), p. 397 for a discussion based
on Hopkins, Thomas D., Cost of Regulation, Public Policy Working Paper
(Rochester Institute of Technology, December 1991).

5. Environmental Protection Agency, Environmental Investments: The Cost
of a Clean Environment, Report of the Administrator of the Environmental
Protection Agency to the Congress of the United States (Washington,
D.C., November 1990).

6. National Highway Traffic Safety Administration and the Federal
Highway Administration, Moving America More Safely: An Analysis of the
Risks of Highway Travel and the Benefits of Federal Highway, Traffic,
and Motor Vehicle Safety Programs (September 1991), p. 30. The agencies
estimate that these programs produced benefits totaling $380 billion due
to averted injuries and deaths. All figures are 1990 dollars.

7. For example, it would be interesting to see whether, in the
environmental, health, and safety areas, independent auditors could
supplement or enhance existing enforcement efforts. Agencies could
require high-risk firms or firms with a high violation rate to use an
independent certified auditor to verify compliance with regulations,
including reporting requirements. Auditors could also serve as
consultants to firms to identify where further compliance efforts were
needed and how to best correct problem areas. The Federal Aviation
Administration currently designates private persons to act as
representatives of the administrator in examining, inspecting, and
testing persons and aircraft for the purpose of issuing airman and
aircraft certificates. 14 C.F.R. Part 183.

8. For general discussions of economic incentives see Carlin, Alan,
Environmental Protection Agency, The United States Experience with
Economic Incentives to Control Environmental Pollution (Washington,
D.C., July 1992); and Office of Management and Budget, Regulatory
Program of the United States Government, April 1, 1992 - March 31, 1993
(Washington, D.C., January 1993), pp. 11-19.

9. Nichols, Albert, and Richard Zeckhauser. "OSHA after a Decade: A Time
for Reason," in Leonard W.  Weiss and Michael W. Klass, eds., Case
Studies in Regulation. Revolution and Reform (Boston: Little, Brown and
Company, 1981).

10. Telephone interview with Terry Smith, Occupational Safety and Health
Specialist, Occupational Safety and Health Administration, July 27,
1993. See 55 FR 13360 (April 10, 1990).

11. Creekmore, Andrew T., "Emission Trades for Sources of Volatile
Organic Compounds," paper presented at a conference of the Air and Waste
Management Association Annual Meeting, 1989. In Carlin, Chapter 3, note
8.

12. Title IV of the Clean Air Act, 42 U.S.C.    7651- 7651o (1991
Supp.).

13. 56 FR 63002-63351 (December 3, 1991).

14. 14 C.F.R.    93.121-93.133, 93.211-93.227.

15. 50 C.F.R. Part 652.

16. Carlin, Chapter 3, note 8.

17. Project on Alternative Regulatory Approaches, Information Disclosure
(Washington, D.C., September 1981).

18. 49 C.F.R.  575.104.

19. Project on Alternative Regulatory Approaches, Information
Disclosure, p. 17.

20. 42 U.S.C.   11001-11050 (1988).

21. Environmental Protection Agency, 1991 Toxics Release Inventory
(Washington, D.C., May 1993), p. 6.

22. Publications under the Project on Alternative Regulatory Approaches
include Marketable Rights, Performance Standards, Monetary Incentives,
Information Disclosure, and Tiering. Copies may be obtained through the
Administrative Conference of the United States (ACUS).