A Better Approach at the EPA: Use Regulation to Drive Innovation

The new Environmental Protection Agency administrator, Andrew Wheeler, made clear during his first few days that he is different from his gaffe-prone predecessor, Scott Pruitt. He has stated his commitment to the EPA’s mission, displayed respect for the agency’s professional staff, and evinced little love for the $43,000 soundproof phone booth that Pruitt had built for himself and the isolation that it represented.

While no one in Washington doubts that Wheeler shares Pruitt’s (and President Donald Trump’s) agenda of reducing the costs to business of complying with environmental regulations, he also has a chance to distinguish himself from his predecessor by pursuing that objective in a more sophisticated way: using regulation to stimulate technological innovation. Innovation may lower the burden on business considerably without sacrificing regulation’s environmental benefits to nearly the degree that Pruitt’s slash-and-burn approach did.

While Pruitt will be remembered mostly for his ethical gaffes, his impact on environmental policy should not be forgotten. Under the guise of returning the EPA to its original purpose, Pruitt sought to delay, water down or eliminate many regulations advanced by his predecessors, such as the National Ambient Air Quality and Corporate Average Fuel Economy standards. This endeavor was sanctioned by the White House, notably through its arbitrary edict that two regulations be withdrawn for each new one introduced.

Environmental regulation has many flaws. It can be very costly. It is often cumbersome. And it may be less efficient than simply taxing polluters. But it is a widely popular, firmly established policy tool that has produced demonstrable benefits. Former Massachusetts Gov. Bill Weld, a Republican, memorably captured this when he dove into the formerly filthy Charles River as it flowed by downtown Boston.

Rather than tossing this trusty, if rusty, tool on the scrap heap, the EPA’s new leadership team should polish it up. It should build an agency that can carefully assess the technological opportunities available to firms facing regulation and use the regulatory process thoughtfully so that firms have incentives to pursue these opportunities.

A key first step is to use performance standards that are phased-in and ratcheted up over time whenever possible. Such standards set clear expectations about when and how much pollution must be cut back to achieve environmental benefits, without dictating how to do so and allowing enough time for creative solutions to be tested.

Second, the EPA should take to heart Ronald Reagan’s famous arms control dictum: trust but verify. Companies will always know more about their operations and costs than regulators do. Regulators must elicit this information in order to establish standards that will stretch companies’ technological capabilities without posing such a daunting challenge that the companies would rather fight or shut down than try to comply. Competition among companies can help with verification by providing regulators with multiple sources of information. A high level of sophistication about industrial technology within the agency staff is another key to verification.

Third, the EPA should more frequently share the costs of research, development and demonstration projects that advance the pollution reduction agenda with companies and industry groups. RD&D projects are risky. Cost-sharing provides an incentive to the private sector to take these risks, particularly when the benefits of such projects will flow to the public through reduced pollution. Public-private innovation partnerships may also provide regulators with insights about the technological and competitive landscape that help them make better decisions about the pace and stringency of regulation.

The approach of using regulation to drive innovation is not new, although it hasn’t been adopted consistently in the past. A great example is the development of scrubbers for power plants under the 1970 Clean Air Act, which was aided by a jointly funded technology development program and led to compliance costs far below the utility industry’s initial projections.

CAFE — the same auto emissions standards that Pruitt sought to throw out — is a more recent regulatory process that provides many incentives for innovation and is on track to achieve its 2025 targets. Regulation that is driving air conditioning manufacturers to develop a new generation of technology that will not use greenhouse gases as refrigerants is yet another case in point. Pruitt’s proposal to pull back this regulation was met with loud objections from industry, which has built a multiyear investment plan around the innovation objective.

Innovation is not a panacea. Not every environmental problem can be solved at a low cost by creative technologists. Regulators may not always be clever enough to induce solution-seeking behavior. Adversarial relationships between regulators and companies cannot be avoided in all cases.

But the EPA can surely do much better in the post-Pruitt era. It has a noble mission. Achieving that mission does not need to cost nearly as much as the agency’s foes claim if it uses the tools it has to unlock innovation.

David M. Hart is a senior fellow at the Information Technology and Innovation Foundation and professor of public policy and director of the Center for Science, Technology and Innovation Policy at George Mason University’s Schar School of Policy and Government.

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