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This chapter explored the idea of leveraging property rights to enable either better decision making by stakeholders, usually by changing the ex ante information and incentives, or by re-allocating rights as originally suggested by Coase. We explored Hardin’s (in)famous ‘Tragedy of the Commons,’ from the economic perspectives of rivalry (aka subtractability) and excludability. We explored the impacts of observing the three states of rivalrous, non-rivalrous, and anti-rivalrous against both excludable and non-excludable, yielding six types of goods or services. Traditional property concepts, such as rules of first capture or first mover, could lead to inefficient use of resources. Demsetz's theory is that property rights could emerge, sua sponte, internalising externalities that follow from open access; that property rights enable communities to re-balance the impacts of Pigou’s externalities. Demsetz’s theory does not necessarily imply the establishment of private property rights. Again, the issues of rivalry and excludability came into view. Cooter and Ulen advocated that if property rights could be granted for various natural resources, including wildlife, it would benefit the efforts to protect and conserve those resources.
This book covers the fundamental principles of environmental law; how they can be reframed from a rational actor perspective. The tools of law and economics can be brought to bear on policy questions within environmental law. The approach taken in this book is to build on the existing consensus in international environmental law and to provide it with new analytical tools to improve the design of legal rules and to enable prospective modelling of the effects of rules in pre-implementation stages of evaluation and deliberation. The Pigouvian idea of environmental injuries as economic externalities. The core idea of Pigou’s model is that manufacturing costs that are excluded from the decision-making process will inherently not be reflected in the decision making of producers, and thus, manufacturing costs will be incorrectly perceived as lower than they actually are. The key is to ensure better decision making and to prevent environmental injuries by ‘internalising’ the cost externalities. Rational actors, forced to bear the costs of the injuries resulting from their production activities, will set optimal levels of production inclusive of minimising the costs of pollution injuries via reducing the incidence of those pollution injuries
If all of the potential Pigouvian externalities were internalised, both the positive and negative, then growth could be sustainable development. One of the challenges discussed was the complexity of integrating preferences for future generations who remain unable to voice concerns to present-time policymakers. Law and Economics literature considers the difficulty for decision makers to evaluate the risk of needing to take action based on incomplete information; the transaction costs of implementing the precautionary principle are complex. The polluter pays principle appears based on Pigou’s theory of externalities and on legal notions of justice, that tortfeasors should render damages for the injuries that they caused. Coase’s observation that either side of an injury could efficiently avoid that result and Calabresi’s maxim to search for the ‘least cost avoider’ have made implementation of the polluter pays principle both less obvious and less compelling. The allocation of human cum environmental rights is at its core an act of Coasean re-allocation, to provide one group with ex ante rights to reduce the transaction costs to achieve an efficient outcome for all parties. Overall, the Law and Economics literature has been in broad alignment with many of the key principles of general environmental law.
Law and Economics literature since Calabresi has held that the goal of tort law is to reduce the costs of tortious acts across the whole of society, inclusive of the costs of risk avoidance, of victim damages, and of the institutional costs borne by society at large; so public welfare is best served by reducing the costs across the whole of the system. Law and Economics literature, based on its decision-making paradigm, views torts in two categories: (i) ‘unilateral’ torts when only the tortfeasor is able to make decisions regarding how to encounter the risky activity, and (ii) ‘bilateral’ when both the tortfeasor and the victim are able to make decisions regarding how to encounter the risky activity. The literature also recognises that some behaviours that lead to risk are noticed by the court in evidence but that other behaviours are not taken into account. The accounted-for behaviours are called ‘precautionary’ and the not-accounted-for behaviours are called ‘activity’ and both are measured in ‘levels’. Robustness depends on context for unilateral versus bilateral risks. The Law and Economics model of civil liability is powerful as it enables policymakers to forecast the impacts of their potential liability rules in advance.
Perhaps what it most important from this chapter is the conclusion, from empirical data, that economic development is not an adversary of environmental protection, but rather that the two appear to be mutually reinforcing in many cases. Furthermore, there is no fundamental theoretical reason from a Law and Economics perspective that economic growth and environmental protections need be adversarial, especially if the lessons of Pigou, Coase, and Calabresi are well respected along the way.
Since its suggestion in the early 1990’s, Environmental Kuznets Curve (EKC) supposition holds that beyond an early stage of economic development, that increasing levels of per capita income will be associated with improving environmental qualities or services – that economic development favors environmental protection. There are various assumptions of why this empirical relationship is found; (i) wealthier citizens are better educated and seek better environmental conditions, (ii) wealthier citizens seek to consume higher quality environmental services, (iii) higher level economies shift towards increasingly proportions of service based economies, which are lighter on environmental impacts, or (iv) the Porter Hypothesis, that greener technologies are actually more efficient in a capitalist sense and thus higher per capita income should be associated with greener economies.
The arguments presented in Chapter 9 continue to hold for this chapter on environmental criminal law. But we also join the models from Law and Economics on criminal law, as we noted with Becker’s and Stigler’s analysis. Fundamentally, the key issues here are the ability to deal in non-monetary sanctions, the need to improve the reliability of the environmental criminal law system to actually result in full adjudication from discovery of the crime to sentencing and punishment, as well as the effective determination of the sanction given the known rate of prosecution likelihood. The ability to address environmental aggressors with something beyond financial punishment is a strong tool offered by environmental criminal law. As there is always extra gravitas in the loss of freedom; thus, the potential risk of incarceration provides a strong incentive when the financial tools fail. While environmental law has made great progress in the last fifty years, environmental criminal law remains less often implemented around the globe. It is clear from the Law and Economics literature that sound theoretical models support the use of environmental criminal law alongside other public law efforts.
Law and Economics views the operation of private and public law as complementary, best seen as two aspects of a joint mechanism to guide actors in their environmental behaviours. This is a mechanism design technique from game theory, often referred to in popular press as ‘smart mixes'. Liability rules have their limits. Perhaps most noteworthy is that you have no case until you are already injured, thus civil liability rules are not optimal. Public regulations can monitor behaviour prior to an accident. Public regulation has a more diverse set of governance tools, including criminal law and incarceration. Public regulation is not free from its own problems. Agency capture and deflection of regulatory drafting are major concerns. Private regulatory mechanisms are programmess wherein public authorities design mechanisms that engage several private parties, all related to the environmentally risky activity, to create new interactions that both reveal more data and alter private behaviour to align with public regulatory goals. The story of environmental Law and Economics is not a tale in defence of private law rights against public law regulation, but rather a harmonious tale of two systems that can be integrated to function as a more effective and efficient whole.
Insurance has two basic theoretical motivations. First, for those parties holding a risky asset to purchase a commodity that reduces the overall expected risk of the two assets, being the original asset and the asset of the insurance policy. Insurance policies are available in various forms on the market, but two of the main types of policies for environmental accidents are first-party (damage to self and own assets) and third-party (damage to other parties and their assets) liability insurance. Moral hazard contains the idea that if you assume the risk for someone else, then they no longer face the costs of those risks and thus are more likely to undertake those risks. Market capacity to supply the necessary volume of insurance policies and to be able to pay them out when needed can be reinforced with several tools, including forms of co-insurance, reinsurance, and pooling. Again, it bears repeating that while some injuries, like a wrecked car, might be remedied by cash payouts, this is not often the case for material environmental injuries. Thus, the creation of moral hazard for environmental insurance policies, both first-party and third-party, is a serious concern.
This chapter is in many ways a chapter that reaches interesting abstractions on the nature of power, rights, and of constitutionalism, all in the interests of environmental law. We began with a discussion on Tiebout, who argued that when people with the same preferences cluster together in communities, that competition between local authorities will, under certain restrictive conditions, lead to allocative efficiency. This implies a market in jurisdictions and in states competing in public goods and services. Van den Bergh’s model forecasts a 'bottom up federalisation', wherein the default assumption is that the best level of governance is at the most local level available, unless it is otherwise demonstrable that the particular environmental issue cannot be sufficiently resolved at that level of government. Another point that we addressed is the issue of centralisation, of whether all actors should be required to comply with a singular jurisdiction-wide regulatory requirement to prevent an environmental problem (centralisation), or, should they be allowed to individually discover their own most efficient method of preventing the environmental problem (decentralisation).
This chapter on standard setting began by exploring the differences between legal and economic notions of standards and what standard setting means in both research disciplines. We then further clarified the legal concept for environmental law, wherein we set out three forms of standards to be set: (i) target standards, such as or ambient quality standards; (ii) emission standards, and (iii) production or specification standards. We then discussed optimal standard setting and we reviewed cultural relativity, that different cultural communities might place various environmental goals in different priorities. Standard setting is clearly at the heart of environmental law -- to set environmental goals, predicated on community preferences, to better achieve desired levels of environmental welfare or services. But the task of standard setting is both as complex as the set of environmental challenges facing a community as it is complicated by the particular goals desired in diverse communities. Standard setting is then also a question of ‘environmental federalism; the guidelines for setting standards for local injuries and global injuries might differ substantially.
This chapter covered financial tools beyond conventional insurance, to cover self-insurance, risk-sharing agreements, forms of deposits, and various types of compensation funds. The common element is that the capital either remains solely with the actor or remains closer to the actor, so they are less costly on capital budgets. Self-insurance meant to book a financial reserve to cover certain future risks. In the late 1970s, the term began to include the concept of ‘captives,’ wherein a company owns its own insurance agency and write its own policies. Risk-sharing agreements are contractual agreements between similarly placed firms to agree to pay-up in capital, based on a pre-agreed ratio, to cover any of the co-parties’ capital needs to cover emergencies and damages. Various forms of deposits and guarantees involve a third party holding the capital of the risky first party until a certain event or time period has been successfully reached; however, this type of structure can create substantial moral hazards. Compensation funds can be created in two basic manners, the first is to have the actor pay while undertaking the risky activity in some form, while the second is to have public funds cover the cost of the funds.
The Law and Economics literature details how information can be generated from legal rules drawn from both private and public spheres; designing legal rules to become more effective in creating useful information to improve both private and public decision making. We examined the market-based tool known as marketable emission permits or as tradable permits. The ability to sell permits does provide incentives if holders of permits can find greener solutions at prices attractive enough to sell off their permits. Pigou advocated for placing taxes on activities that led to negative externalities; that by carefully adding tax costs to the activity so that the marginal costs could become accurate, fully reflective of the externalities. Coase’s analysis of transaction costs complicates the question of against whom should the taxes be levied. Taxing activities that could give rise to environmental injuries must carefully understand the relative elasticities of demand to ensure that the tax will actually fall on the correct party and thus create the correct incentives. In conclusion, we found that market-based instruments worked best alongside more traditional forms of public regulation, that market-based instruments are not robustly implemented as a stand-alone alternative to traditional forms of public regulation.