Hastings Law Journal Volume 48 | Issue 2 Article 2 1-1997 State Environmental Standard-Setting: Is There a "Race" and Is It "to the Bottom"? Kirsten H. Engel Follow this and additional works at: https://repository.uchastings.edu/hastings_law_journal Part of the Law Commons Recommended Citation Kirsten H. Engel, State Environmental Standard-Setting: Is There a "Race" and Is It "to the Bottom"?, 48 Hastings L.J. 271 (1997). Available at: https://repository.uchastings.edu/hastings_law_journal/vol48/iss2/2 This Article is brought to you for free and open access by the Law Journals at UC Hastings Scholarship Repository. It has been accepted for inclusion in Hastings Law Journal by an authorized editor of UC Hastings Scholarship Repository. For more information, please contact [email protected]. State Environmental Standard-Setting: Is There a "Race" and Is It "To the Bottom"? by KIRSTEN H. ENGEL* Table of Contents Introduction .................................................... 274 I. The Influence of the "Race-to-the-Bottom" Rationale upon the Development of Federal Law ................. 280 A. Constitutional History of the Race-to-the-Bottom Argum ent ........................................... 280 B. Terminology of the Race-to-the-Bottom Debate and Significance to Current Federal Environmental Laws ................................................ 283 C. The Role of the Race-to-the-Bottom Justification in the Development of Federal Environmental Law ... 284 (1) Prevention of Interstate Spillovers .............. 285 (2) Realization of Efficiency-Related Benefits of Centralized Administration ..................... 287 (3) The Environmental Rights Argument ........... 288 (4) Prevention of Interstate Competition Via Environmental Standards ....................... 292 * Associate Professor, Tulane Law School. The author wishes to thank Richard Lazarus, Richard Revesz, Robert Kagan, Richard Norgaard, Scott Saleska, Daniel Posin, Marjorie Kornhauser, Robert Kuehn, Michael Collins, Oliver Houck, John Stick, Glynn Lunney, Joshua Sarnoff, Brooke Overby, Anthony D'Amato, and James Donovan for their comments on an earlier draft. The author gratefully acknowledges the help of Selma Mon- sky, Survey Research Center, University of California at Berkeley, and Robin Wagner, M.S., Ph.D., for help in survey design, Robin Wagner for the statistical analysis of the survey results, and research assistants Ester Rodriguez, Danielle Cover, Damon Kirin, and Deirdre Brown for the survey implementation and data entry. I am especially grateful to Scott Saleska for his unerring editor's pen, his generous services as math and economics advisor (which proved invaluable for my review of the economic literature), and, most of all, for his encouragement and thought-provoking contributions to this article which emerged during the many insightful discussions we had over the year in which it took shape. [271] HASTINGS LAW JOURNAL [Vol. 48 (5) Discussion ...................................... 294 II. The Theoretical Debate: Does Interstate Competition Reduce or Enhance Welfare? ....... 297 A. Theoretical Foundations for the Race-to-the-Bottom and the Revisionist Critique ........................ 297 (1) The Game-Theoretic Approach of the Classic Prisoner's Dilemma ............................. 301 (a) The "Logic" of Environmental Regulation . 303 (b) The Environmental Regulator's "Dilemma" ................................. 304 (2) The Neoclassical Economic Model of Perfect Competition .................................... 305 C. A Key Assumption Distinguishing the Two Theoretical Models ................................. 310 (1) The Perfect Competition Assumtion ............ 311 (2) Monopoly and Oligopoly ....................... 312 (3) Conclusion ...................................... 314 III. The Empirical Evidence ................................ 315 A. Characteristics of the Interstate Market for Industrial Firms ..................................... 316 (1) Competition Among Firms ..................... 316 (2) Interstate "Bidding Wars" ...................... 319 B. Industry Location Studies ........................... 321 (1) Surveys of Manufacturing Plant Executives ..... 323 (2) Aggregate Studies .............................. 324 (3) Studies Using Establishment-Level Microeconomic Data ............................ 332 C. Survey of Players in State Environmental Policy- Making on the Role of Interstate Competition ..... 337 (1) Survey Design and Purpose ..................... 337 (2) Summary of Survey Results .................... 340 D. Recent Developments in State Environmental Law. 347 (1) "No More Stringent Than" State Legislation ... 347 (2) State Audit Privilege and Immunity Legislation ...................................... 349 IV. Lessons from the Empirical Evidence ................... 351 A. Significance of Empirical Evidence to the Theoretical Debate ................................. 351 (1) The Empirical Data Provide Prima Facie Evidence that States Engage in a "Race-to-the- Bottom " ........................................ 351 January 1997] STATE ENVIRONMENTAL STANDARD-SETITING (2) The Excessive Market Power Held by Industries and States Implies that Interstate Competition Is Inefficient .................................... 354 (3) As Compared to Competitive Neoclassical Models, Game Theory Is a More Appropriate Model of State Interactions ..................... 356 (4) Conclusion ...................................... 359 B. Implications of Empirical Data for the Efficiency of the Oates and Schwab Neoclassical Economic M odel ............................................... 359 (1) Specific Pre-conditions for Efficiency Under the Oates and Schwab Neoclassical Economic M odel .......................................... 359 (2) The Interstate Market for Industry Fails to Comply with Specific Preconditions for Efficiency Under the Oates and Schwab M odel .......................................... 363 V. Solutions to the Race-to-the-Bottom: Are Federal Minimum Standards the Answer? ...... 367 A. Existing Remedies for the Race-to-the-Bottom ..... 367 B. Suggested Revisions to the Existing Approach: The Northeastern Ozone Transport Commission as a Model of Multistate Environmental Decision- M aking ............................................. 369 Conclusion ..................................................... 374 Tables and Figures Figure 1: The State Environmental "Regulator's Dilemma"... 305 Table 1: Impact of Differences in Environmental Regulations Upon Plant Location: Surveys of Manufacturing Plant Executives ...................................... 324 Table 2: Impact of Differences in Environmental Regulations Upon Plant Location: Studies Using Aggregate Data ....................................................... 326 Table 3: Impact of Differences in Environmental Regulations Upon Plant Location: Studies Using Microeconomic Establishment-Level Data ............................ 334 Appendix: Interstate Competition Survey Results ............. 377 Table 4: Profile of Survey Respondents ....................... 377 Table 5: Comparison of Responses by Group Surveyed ....... 378 Table 6: Responses of State Environmental Regulators ....... 385 HASTINGS LAW JOURNAL [Vol. 48 Table 7: Summary of Responses of State Environmental Regulators by Geographic Region .................... 394 Introduction Of the numerous theoretical rationales used to justify federal en- vironmental regulation, perhaps the most broadly compelling is the argument that without such regulation, states would engage in a wel- fare-reducing "race-to-the-bottom" in environmental standard-setting. The term "race-to-the-bottom" refers to a progressive relaxation of state environmental standards, spurred by interstate competition to attract industry, that also occasions a reduction in social welfare below the levels that would exist in the absence of such competition. The widely accepted theoretical model for the race-to-the-bottom is non- cooperative game theory, of which the classic Prisoner's Dilemma is perhaps the most well-known example. According to this model, although all states would be better off if they each cooperated with each other by collectively maintaining optimally stringent environ- mental standards, the incentives are such that each state will instead relax its standards in an ultimately unsuccessful bid to attract industry. Recently, in the wake of a widely cited article by Professor Rich- ard Revesz,1 scholars have begun to question the very existence of a race-to-the-bottom in environmental standard-setting. Swimming against the tide of prior scholarship, 2 these revisionist critics contend that the effects of state competition upon state environmental stan- dard-setting are welfare-enhancing, rather than welfare-reducing3 1. Richard L. Revesz, RehabilitatingInterstate Competition: Rethinking the "Race-to- the-bottom" Rationale for Federal Environmental Regulation, 67 N.Y.U. L. Rv. 1210 (1992) (finding race-to-the-bottom argument unsupported and federal intervention inappropriate). 2. See, e.g., Richard B. Stewart, Pyramids of Sacrifice? Problems of Federalism in Mandating State Implementation of National Environmental Policy, 86 YALE L. J. 1196, 1211-12 (1977) [hereinafter Pyramids]; Richard B. Stewart, The Development of Adminis- trative and Quasi-ConstitutionalLaw in Judicial Review of Environmental Decisionmaking: Lessons from the Clean Air Ac 62 IoWA L. REv. 713, 747 (1977); Craig N. Oren, Preven- tion of Significant Deterioration:Control-Compelling Versus