Monday, March 27, 2017

A Helpful Reminder: Environmental Regulations Are Regressive

President Donald Trump promised to loosen energy and environmental regulations during his campaign, and he’s already taken some steps to fulfill this pledge.
Earlier this month, Trump announced that he was reviewing the aggressive auto fuel-economy standards put in place by the Obama Administration. Now, Reuters is reporting that Trump will sign a new executive order this week to relax regulations on the fossil fuel industry.
Even without getting into the details, we all know how the political battle lines will be drawn on this issue. Democrats and progressives will be opposed to the regulatory cutbacks while Republicans and conservatives will be pleased. The left will decry the implications for climate change and the right will cheer it as a boon to economic growth.
But what often goes unmentioned in this debate is the distributive impact of environmental regulations. The fact is that most environmental regulations are economically regressive*–that is, they harm the poorest people more than everyone else.
Defining Regressivity
As a quick primer, regressivity and progressivity are concepts that are generally used in the context of taxes. The terms describe how the tax rate changes for people with higher incomes. For this purpose, the tax rate that matters is the effective income tax rate–which is calculated simply as the amount of tax paid over the amount of income earned.
We would say that a tax is regressive in nature if the effective income tax rate decreases as income rises. A tax is progressive in nature if the effective income tax rate increases as income rises. And if the effective tax rate stays the same as income rises and falls, then the tax would be proportional, also known as a “flat tax”.
Based on these definitions, the US federal income tax system is theoretically progressive in nature–it is designed such that richer people pay a higher share of their income than poor people. (In extreme cases, loopholes might flip this result, but this is the intent.)
Meanwhile, a sales tax on groceries would tend to be regressive in nature. Rich people and poor people both spend a somewhat similar amount each month on groceries, they would also pay a similar amount in sales tax. The richer person may pay more tax in absolute terms. But if we divided the tax paid by each person by their respective incomes, we would find that the poor person is paying a greater share of their income than the rich person. Thus, it’s regressive.
While the terms regressive and progressive are most commonly used for taxes, they can be applied to other policies as well. Any policy that harms poor people more than rich people could be appropriately described as regressive.
Why Environmental Regulations Are Regressive
Environmental regulations are often described in very positive terms: energy efficiency, clean energy, fuel-economy, and so on. At least superficially, these ideas seem silly to oppose. Oh, so you’re against efficiency, huh? What’s wrong with you?
The problem is that these terms obscure the underlying costs to consumers. Let’s take the Clean Power Plan (CPP) as an example. And before we get into details, note that the following economic analysis applies regardless of one’s position on climate change.
The CPP required a 32% reduction in US carbon dioxide emissions through 2030, using 2005 as a baseline year. These reductions were to be achieved substantially through carbon dioxide emission limits on existing power plants.
To the Obama Administration’s credit, the CPP did not mandate, in detail, how states were to achieve this goal. Instead, it gave them flexibility to determine how it would be done–a few suggestions included building more renewable energy, building nuclear power plants, or investing in carbon capture technology, commonly branded as “clean coal”.
The common characteristic of each of these options is that they would cost more money than the status quo. Market costs of renewable energy options like solar and wind have come down recently, but they are still more expensive than carbon dioxide-emitting alternatives. Similarly, retrofitting or rebuilding a coal power plant with carbon capture technology is naturally more expensive than using the plant that already exists today.
It follows that, whatever the CPP’s intention, it would have the effect of making energy more expensive than it otherwise would be. In this way, it has the same net effect as a sales tax that only applies to energy. The way the cost increases is different, but the end-consumer is still paying more.
We can also safely assume that energy usage among different people does not vary as widely as income varies. In general, a family earning $200k a year is not going to use 10 times the energy of a family living off $20k per year. Thus, if we adopt a policy that increases everyone’s energy cost, we have a regressive outcome–poor people get harmed more than rich people as a share of their income.
This same basic analysis would hold for fuel-economy standards, energy efficiency, and others. Boiled down, the mechanism is straightforward. Regulations force businesses to invest additional resources to create a compliant product. Since it costs more to produce, part of the cost will be passed on to the consumer in the form of prices that are higher than they would be otherwise. And since environmental regulations tend to affect the prices of basic necessities where rich and poor alike spend a somewhat fixed amount, the price increase is more impactful to the poor people. So by themselves, environmental regulations are generally regressive.
For conservatives and libertarians, the fact that environmental regulations tend to be regressive is just one more reason to keep them at a bare minimum (and getting rid of many that are on the books today).
But for progressives, it is a more complicated picture. The fact that environmental regulations happen to be regressive does not automatically mean progressives would oppose them. There are high-profile cases, such as Philadelphia’s recent soda tax, where left-leaning politicians adopted a plainly regressive tax in pursuit of ostensibly more important goals–funding pre-K education and improving health. For many progressives, climate change might warrant a similar treatment–perhaps poor people will have to bear a lower standard of living in order to cap emissions?
Wherever you come down on that, the key is to recognize that trade-offs do exist. Environmental regulation is a case where two progressive priorities will often come into direct conflict: helping poor people live a better life right now or protecting the environment from climate change in the long run.
As the debate and bipartisan grandstanding around environmental regulation heats up, it’s worth keeping the underlying economics in mind.
*If the environmental regulation in question amounts to the enforcement of basic property rights, this regressive outcome would not hold. For instance, a law that prevents other people people from dumping waste on your property without your consent could possibly be viewed as an environmental regulation, but it would not have the same economic implications explained here.

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