Environment, Economy, Subsidies, and the Law

By Paul H. Templet

When new environmental laws or rules are proposed industry lobbyists generally testify that cleaning up the environment will eliminate jobs, close down facilities, harm the economy, and generally damage public welfare. The very real costs of continued environmental degradation, including economic costs, are normally ignored or downplayed. Listening to the debate one gets the idea that it is a proven fact that more jobs and a clean environment are adversarial and incompatible. Nothing could be further from the truth. In fact, there are no studies, to the best of my knowledge, that demonstrate a negative relationship between jobs and the environment. The actual data all go the other way, i.e., a number of studies show that states with clean environments have more jobs, not less, and generally have better economies than states with poor environments. In addition, corporations can secure a subsidy by not having to spend on pollution control—a pollution subsidy. That might explain their motivation in opposing environmental progress. The purpose of this article is to present the scientific evidence that a clean environment is good for the economy and public welfare and to expose the jobs vs. environment argument for the myth it is.

The Role of Law

What does this have to do with the law? The law, and rules promulgated pursuant to law, provide the authority that is necessary for the implementation of all governmental programs, including environmental programs. The law, coupled with administrative programs, is the instrument by which state policy, including environmental policy, is carried out. In addition, a substantial portion of our legal system was created to facilitate the workings of our economic system. For example, capitalism relies on the accumulation of wealth and property for reinvestment and the law extends protection to the holders of such wealth through property rights codified by law. Our economic system also relies heavily on markets, and laws exist to try to keep markets working within the parameters laid down by Adam Smith. Some examples of these laws prohibit monopolies, enhance competition, and protect against the abuses of the market, such as child labor and fraud. When public or common resources like air, water, and wildlife, which are not traded in markets, are involved we have created laws to give them standing. The environmental laws that regulate the publicly owned commons or air and water are examples. We have also created a body of law that protects against damages from other parties. This is an attempt to control externalities, i.e., economic production costs passed on to others—like pollution—and to require that all costs are included in the price of a product. Externalities are generally viewed by economists as bad because they result in unrealistically low prices and market failure.

The heavy reliance on law to make government work also creates a large burden of responsibility that the law be based in fact. In our times that usually means scientific fact. But the myth of jobs vs. environment is so pervasive and has been used so often to thwart reasonable environmental efforts that state and national environmental policies and actions are now often driven by myth, to our great detriment. The myth has been used to influence all branches of government and the public. Some examples that come to mind are laws that make it difficult to be more stringent than EPA, that require unrealistic votes of the legislature to raise environmental fees, and that require cost/benefit and risk analyses of environmental agencies (that are required of no other agency) before actions can be taken. Presumably, the legislative and executive branches created these obstacles because they were told that environmental management was detrimental to public or private welfare. In addition, there are ongoing efforts within and without government to relax or eliminate rules, to reduce enforcement of existing law, to reduce the budgets of selected environmental programs and to make public information more difficult to obtain, most recently in the name of security. The most recent example is President Bush’s refusal to sign the Kyoto Protocol aimed at reducing global climate change in the mistaken belief that increasing our energy efficiency will penalize the economy. The actual empirical data shows otherwise. All of these efforts are based, at least partially, on the premise that a clean environment is bad for the economy.

The Role of Government

Do governmental managers have to sacrifice a clean environment to have jobs? The traditional short term view is that environmental quality and resource conservation are adversarial and contradictory to job creation and economic development. Indeed, the belief has achieved the power of myth (Webster defines myth as “ . . . any fictitious story, or unscientific account, theory, belief, etc. . . . “). The myth may originate in developing economies in which increasing pollution and an improving economy can coexist. This does not hold for developed countries, however, and there is a substantial and growing body of practical empirical evidence that demonstrates that, in fact, economic development and job creation are positively correlated with a clean environment and good environmental management. To the best of my knowledge there are no empirical studies that demonstrate a negative impact on the public sector because of environmental policies, although all parties agree that there are private costs involved and there are private and public benefits. Although there has been little public discussion of the benefits to industry of pollution control there is mounting scientific evidence that companies diligent in their pollution prevention efforts enjoy a competitive advantage because of efficiency and innovation improvements. The question for public managers is whether the net costs incurred by the private sector for environmental improvement are offset by gains or benefits in the public sector. The role of government is to improve health and welfare for all citizens (all state officials take an oath to that effect). When agencies of government begin to aid private welfare with no clear showing that public welfare is also benefited they are likely “captured” by the private, special interests the agency is supposed to regulate or otherwise control. Too often we see government actions that can only be interpreted as benefiting private, special interests.

A Model of Economy and Environment

A principle reason for the complementary relationship between economy and environment is that economic systems function within a larger environment that provides “free” services (e.g., clean water and air, energy, materials and other resources) to the economy and accepts wastes when the resources are discarded as pollution. These services are essential to a smoothly functioning economy, without them the economy cannot function. An impacted or diminished environmental base therefore reduces the long-term economic welfare because it can contribute less to the economy. For example, industrial discharges that exceed the assimilation capacity of the environment can accumulate in fish and wildlife and inhibit commercial and sport fishing. Acid rain and other air pollution slow crop and tree growth and economically retard agriculture and forestry. Cities and regions that maintain clean air and an appealing esthetic environment have a better chance of attracting tourists and their dollars. The pollution often results in the loss of more jobs than are created by the economic activity that produced the discharge. The environment can be viewed as infrastructure, which contributes to the economy in the same fashion as the more traditional infrastructure of roads and other public services. The public welfare suffers if electrical and water systems are abused, and environmental abuse will also result in lowered public welfare.

The Evidence

That last statement often runs counter to commonly held beliefs. To demonstrate the relationship between the economy and the environment we need a measure of environmental impact that we can relate to commonly measured indicators of public welfare. It is difficult to determine the end impacts of many processes and consequent exposure to technological risks; however, we can measure the relative risks involved with certain activities, such as pollution discharge levels. The releases-to-jobs ratio (R/J) is derived by dividing the toxic emissions for a sector of the economy by the number of jobs in the same sector. It is a measure of relative risk, that is, those industry types and facilities with a high R/J are inherently riskier than those with low R/J because they pollute more. There is wide variation in R/J across states and a number of possible causes; among them are excessive emissions levels, energy use and efficiency, state and corporate policies, and industry substructure. A leading cause of a high R/J, however, is under-spending on pollution control by the emitting sectors. For example, those states whose industries underspend on pollution abatement relative to the national average for a particular level of emissions generally have a high R/J ratio as pollution costs are passed on (externalized) to the public and the environment. In turn, the polluting industry reaps a subsidy for itself in the form of the retained dollars not spent on pollution control. If the pollution discharges exceed the environment’s assimilation capacity, then ambient pollution levels will rise and the public will incur increased risk. Is this risk related positively or negatively to economic welfare? What we observe is, in fact, that poorer economic conditions exist where environmentally risky activities are more intense. If allowing more pollution resulted in better economic conditions then there might be an argument for allowing poor environmental policies and practices. What the data are showing, however, is that higher unemployment and poorer, not better, economic conditions exist in those states where pollution levels are higher. The strategy of allowing more pollution results in fewer jobs and more pollution: a lose/lose situation. For example, statistical analyses show that as a state’s pollution levels rise, income per capita drops, poverty, unemployment, and energy use increase, and a poorer environment ensues. Thus the data from the fifty states demonstrate that environment and economy are complementary, not adversarial.

In addition, the economic development indicators worsen with increased pollution per job. A telling statistic for economic development is the one between the R/J and the rankings and grades assigned to states by the Corporation for Enterprise Development, a business group, that define a state’s economic health. States are graded and ranked on economic performance, business vitality, and development capacity using over seventy economic indicators. My statistical analysis finds that there are significant inverse relationships between a state’s R/J and its economic grade. In other words, as pollution increases, the economic performance grade decreases and the ranking moves downward. Those states that allow pollution to be excessively externalized to the environment find themselves less attractive to prospective businesses, not more as they might have hoped, and jobs are foregone. The polluted environment acts as a de facto barrier to entry and results in a less diversified economy. The R/J is also positively related to the rate of business failures in a state and to falling retail sales. As R/J rises businesses fail more often, indicating that the economic health for existing businesses declines with pollution increases. Although statistical analyses such as these do not establish the direction of causation, they do indicate the compatibility of a good economy and a clean environment and suggest how we can have both.

Subsidies

There is a larger issue here, however, and that deals with subsidies. One way for an individual or firm to increase profits is to externalize costs, that is, to pass them on to something or someone else. An externalized cost generally results in a subsidy, sometimes hidden, which accrues to whomever is doing the externalizing. Pollution is an example of a cost that is passed on to the environment and ultimately to the people of an area, while the avoided pollution abatement costs (the subsidy) are retained by the polluting industry. Other examples of externalized costs are regressive taxes and low energy costs that provide an implicit subsidy for one economic sector while other sectors and the public bear the cost. For example, our high sales tax and low property and income taxes are subsidies for those with large incomes and property holders that are paid by the public. Industrial energy prices in Louisiana are the lowest of every state except Alaska so our citizens pay higher prices—another subsidy to large energy users. I have calculated the amount of the subsidies resulting from pollution, regressive taxes, and energy pricing for the fifty states as a means of measuring externalities and compared them to other indicators of a state’s general welfare. Louisiana’s subsidies to industry, in the form of cheap energy, low taxes, and high pollution, are the highest in the United States. As subsidies increase, socioeconomic, energy, environmental, and economic development measures all worsen. In general, high subsidy states are poorer, with more pollution, use more energy less efficiently, have fewer jobs, have poorer political and economical development health, and are no more economically competitive than low subsidy states.

The poorer political health finding requires some additional explanation. If subsidies are being created by increasing externalities how do special interests create them? One possibility is that through campaign contributions and other means, firms can influence the voting patterns of elected representatives to promote the firms’ self-interest. There is some statistical justification for this view. As subsidies rise, campaign contributions to federal elections, and presumably state election campaigns, increase while the voting records of congressmen decline, at least from an environmental perspective. Campaign contributions can be determined by state for federal elections from the Federal Elections Commission. Contributions (summed for Democratic and Republican contributions) per candidate are found to have a significant negative effect on congressional environmental voting scores. The League of Conservation Voters assigns scores to each states’ congressional votes annually to indicate the percentage of votes that are pro-environmental. Contributions per candidate are considerably higher for the high subsidy states, in spite of those states’ lower incomes and higher poverty. In addition, higher subsidies also relate negatively to congressional environmental voting scores. One other troubling result from a political health perspective is that voting participation by citizens in federal elections declines significantly in states with high subsidies. Perhaps citizens in high subsidy states perceive that special interests command elected representatives’ attention and that voting will not change anything.

Other Studies about Economy/Environment Relationships

The relationship of environment and the economy has attracted considerable interest. Stephen Meyer of MIT has found that, over time, those states with good environmental programs have better employment, productivity, and economic growth than poor environmental states. He notes that “states with stronger environmental policies consistently out-performed the weaker environmental states on all the economic measures.” A study done at the Bank of America has found similar results. That study found that states with “strong” environmental rankings had higher economic growth rates and lower rental vacancies than states with “weak” environmental rankings. The growth rate differences were very significant, indicating the states with clean environments grow faster economically than states with poor environments. The Bank of America study gave three reasons why a clean environment is good for business.

1. The quality of life is improved. Providing an improved environment is similar to providing any consumer good or service: it fulfills citizens’ needs  and improves the quality of life.

2. Resources are better managed. Environmental regulations allow for the side effects of using resources. For example, if a factory pollutes a river and water quality is not enforced, the water in the river may be unsuitable for use by other factories and cities downstream. Regulating pollution enhances overall economic efficiency and productivity.

3. Long-run growth is maintained. Environmental protection will sustain long-term economic growth. Short-term exploitation of resources can result in unsustainable growth because current market prices do not take future resource limitations into account. Only specific environmental protection can insure that resources will be available for sustainable economic growth.

A recent study entitled “Gold and Green” (Institute for Southern Studies, Durham, North Carolina, 1994) investigated the relationship of economy to environment by ranking states according to both their economic and their environmental health using twenty indicators of each. A statistical correlation of the Gold and Green scores shows them to be very significant and positively related, indicating, again, that a good economy is very compatible with a good environment. Because the economy is a subset of the larger environment and relies on it for services, it is becoming clear that a clean environment is a necessary condition for a good economy.

Conclusion

It has become abundantly clear that there is little or no supporting evidence for the myth that progressive environmental policies are detrimental to a state’s economy. There is substantial and growing evidence, much of it practical empirical evidence, that the converse is true, i.e., that a clean environment not only is good for business, but is probably a necessary condition for a healthy economy over the long term. Continuing to pay homage to the jobs vs. environment myth can only make us poorer. The efforts we make to improve our environment will benefit our quality of life, including our economic life, and improve the quality of life for all citizens.