Volts podcast: rampant environmental rule-breaking and how to fix it, with Cynthia Giles
Designing rules (including climate rules) that are harder to break
In this episode, career environmental regulator Cynthia Giles discusses the rampant rule-breaking common in environmental rule and regulations and how to solve the problem — not with greater enforcement, but with smarter rule design.
Full transcript of Volts podcast featuring Cynthia Giles, July 14, 2021
The US has hundreds of environmental rules and regulations on the books, meant to achieve various environmental goals — clean up coal plants, reduce toxins in consumer products, limit agricultural waste, and so on.
Once these rules and regulations are put in place, most people don’t give them a lot of thought. To the extent they do, they tend to believe two things: one, that environmental rules are generally followed (maybe, what, 3-5 percent break the rules?), and two, that the answer to noncompliance is increased enforcement.
According to Cynthia Giles, both those assumptions are dead wrong.
Giles was head of EPA’s Office of Enforcement and Compliance Assurance for all eight years of Obama’s presidency — and had a long career in environmental enforcement before that — so she knows something about rules and enforcing them. Through the Harvard Environmental & Energy Law Program, where she is a guest fellow, Giles has been writing a series of pieces (which will be issued as a book in 2022) on “Next Generation Compliance: Environmental Regulation for the Modern Era.”
In those pieces, she reveals that environmental rule-breaking is absolutely rampant — and that there’s surprisingly little increased enforcement can do about it. Instead, the key is to design rules better, such that compliance is the default choice.
I’m a sucker for policy design, so I was eager to talk to Giles about what she’s learned, how to design rules well (or poorly), and most of all, the best way to design climate rules.
With no further ado, welcome to Volts, Cynthia.
I really enjoyed your articles. As I was saying on Twitter earlier, I love it when I discover an expert who's making a well-argued, well-cited argument in favor of something I believe already but didn't have the chops to defend myself. I feel vindication.
There's a number of mind-blowing things in here, but one of the initial mind-blowing things that people don't understand very well is just how common violations and rule-breaking are. You spent eight years as head of EPA enforcement for Obama. I'm curious: before going into that position, did you know this about environmental rules?
This is certainly something I had strongly suspected for a long time. I've worked in the environmental enforcement arena for a long time and I persistently saw a mismatch between what I was seeing in the field and what I was hearing so many people say — that compliance with environmental rules was good.
After I started in my position in the Obama administration, I asked folks to pull together everything we know about how compliance is with environmental rules. And I discovered that the evidence supported what I had suspected all along, which is that the rate of violations is substantially higher than most people think.
What do we mean by substantially higher? Give us a sense of the scale here.
I'll give you the contrast between what's popularly believed and what the facts are. As I mentioned, I have spent most of my professional career in environmental and compliance-related work. During that time, including during the Obama administration, I've asked a lot of people what they think the rate of non-compliance with environmental law is. The most common answer I get, including from people who have also spent their entire professional careers working in this area, is 5 to 10 percent. That's what people think.
It's nowhere near that. Not close. The rate of serious violations, the ones we care about the most, is 25 percent in most programs. And there are plenty of programs, I'm sorry to tell you, with rates substantially worse than that. It's not rare to find serious violation rates in the 70 percent and higher range.
I want to make sure I'm clear: when I'm saying someone has serious violations, I'm not saying they're violating every single thing, every day, 24/7 — but they are having a lot of violations we care about, in terms of protecting people's health.
So the rate is substantially worse than most people think. And that's just the ones we know about. There's plenty where the data is thin — indications are bad, but the data is not there to say anything definitive about it.
There are all sorts of bad things about common violations, but the central bad thing is that we're not achieving the goals of these rules and regulations. If violations are 50 percent, you're getting 50 percent of what you think you're getting out of the rule, right?
There's a lot of areas where we know there are environmental problems — over 130 million people in the United States live in areas that don't meet the health standards for air quality, and almost half of the waters in the United States are designated as poor quality. There's a lot of evidence about serious issues that affect people's health that are widespread, and certainly this incredibly high rate of violations is a significant contributor to that.
You come into EPA in this enforcement position and inherit a bunch of rules that you have to enforce, but you didn’t have a hand in designing. The other intuitive belief people have about this is, insofar as there are violations, insofar as people are breaking the rules, the solution to that is better enforcement.
From your experience at EPA, how much can you do with additional enforcement? Can you substantially increase compliance? What's the range of effect you can have?
That very much depends on the problem. For some of the most serious and high-rate violations — coal-fired power plants are one example; for many, many years, they were by far the highest-polluting sector and the rates of violation were stunning — EPA decided, correctly in my view, that the health risk was so substantial, and the violation rate was so serious and egregious, that EPA would just sue all the coal fired power plants. One at a time, they’d go after them.
It was essential for public health that they be made to comply and install modern pollution controls — which by the way, reduce pollution by 95 percent. I mean, we're not talking about minor differences. It was really, really big.
Some of these problems — coal-fired power was one, cities that were discharging raw sewage into surface waters around the country was another — were so serious from a public health perspective that EPA decided to go after them individually.
That is not a strategy that can work for the vast array of programs that EPA administers. Some sectors have a million or more regulated entities, or it's hard to tell who's violating. For those kinds of problems, enforcement as your first line of defense is obviously not going to be able to do it. You don't have the resources to do it. But you couldn't do it even if you did nothing else but that one thing.
So for many problems, enforcement can never be the principal way of solving noncompliance.
And even in cases where enforcement can force broad compliance, it is raising the cost of the regulation. Every one of those lawsuits costs money and time.
Coal-fired power is a terrific example. The work to address air pollution from coal-fired power plants has been going on now for more than 20 years, and every one of those years has consumed a lot of people, millions of dollars of money for investigators, enforcement staff, etc. So that kind of approach is really expensive.
Sometimes it's worth it, like it was for that sector, and like it was for cities and raw sewage, but most of the time, it's not a feasible strategy.
It's hard not to look back at our history with coal-fired power plants and think that some heavy-handed, super-simple mandate back in the ‘70s, however economically inefficient it was, was definitely not going to be so inefficient that it costs as much as as suing every coal plant for for 20 years.
Yeah, I don't think anyone would sit down and say, here's our plan, we're gonna just do them all individually. Beyond the expense, you don't get the benefits until the cases are over and the company installs. You have a 5, 10, 15 year delay in the public health benefits.
For both of those reasons, it is not a sensible strategy. Plus, if you take another example that's top-of-mind today, oil and gas wells and pollution, there's over a million wells in the United States. That kind of strategy is hopeless for that.
The key insight at the heart of all your work is that the difference between a rule that is generally complied with and a rule that is generally not complied with does not come down to enforcement — the degree of enforcement, or the strength of enforcement. It's much more to do with the design of the regulation.
So let's start with an example of a rule that is poorly designed, such that it renders non-compliance inevitable and fails to meet its goals. What's a good example of doing it badly?
The perfect storm of a bad-compliance design was a program called New Source Review that Congress started and EPA was charged with implementing, that had a goal of cleaning up the largest sources of air pollution as they modernize.
They exempted existing sources from the tougher controls, but said, you'll have to install them as you modernize your plant. That was Congress's theory, that over time, the largest sources of air pollution, including but not limited to coal-fired power, would gradually clean up their act.
And the presumption was that of course they're all going to modernize at some point.
And they did modernize. But they took advantage of — and manipulated, frankly — the rule to modernize but avoid having to install the pollution controls.
The New Source Review program was set up so that every determination of when are you modernizing enough such that you trigger the obligation to install pollution controls was a very fact-intensive site-specific decision. There was no general rule; every inch of ground was fiercely fought over.
Then there was almost no reporting required, so the companies held the information that was necessary to determine if they had crossed that threshold, and they weren't going to give it to EPA without a fight.
It was quite expensive to install these modern controls. It was totally worth it, because of the huge public health gains — well worth it from a regulatory perspective; the benefits far outweigh the costs. But it gave the companies a lot of incentive to fight.
So what happened after that rule was put in place was exactly what somebody who's looking at rules through the next-generation compliance lens would predict, which is they look for ways around, they obfuscate, they withhold evidence, they fight, and they litigate. Every case takes years and years and years to get done. They lose in the end, in almost all cases, but they've gained some time.
All the economic incentives lined up behind not complying. So that's an example of a disastrous design.
That's a rule where, inadvertently, you've created a massive financial incentive for cheating. It is in the rational self-interests of some of these coal plants to fight and delay. It makes absolute sense for them. You could even argue, insofar as they're beholden to shareholders, that it's their obligation to fight.
Their obligation is to comply with the law, and they weren’t complying. They knew it. So I wouldn't take it that far, but I would agree that it was not only predictable that this would happen, it was inevitable.
Was it predicted? Were there voices at the time saying, “this grandfathering idea is a disaster in the making”?
I wasn't there when this was set up, so I couldn't speak to what the conversations were internally. I would say that it occurred at a time when no one was really challenging this fundamental belief structure, which I think is demonstrably wrong, that most will comply and enforcement will take care of the rest. That was certainly the dominant view about how this structure should work.
That's an example of where the design of the rule makes rule violations inevitable. You point out in your work that you can design a rule such that breaking the rule is more of a hassle than it's worth, or more expensive than it's worth. What's a good example of a rule that pulled that off?
The best example of a completed rule is in the acid rain program, which is particularly interesting for proving the thesis of next-gen, because it covers the same sector. Coal-fired power was the regulated entity, and unlike the compliance catastrophe that happened with New Source Review, the acid rain program had 99 percent compliance.
How did they do it? A couple key interlocking features. No one of these does it by itself, but together they make for a robust compliance structure.
One was continuous emission monitoring — don't estimate, know in real time how much pollution you have. This program was designed to reduce sulfur dioxide pollution from power plants that was causing acidic rain in big parts of the country and devastating ecosystems. Continuous, real-time measurement of sulfur dioxide was coupled with an incentive to use the monitoring by saying, “if your monitor is not working, or you don't pass quality control, we're going to assume you had a lot of pollution.”
You'd think that seems like a no-brainer, but there are still programs that don't have that today — electronic reporting to a central system, which allows monitoring in real time and data analytics, which are important for spotting anomalies and fixing problems.
And then simplicity is an under-appreciated value for getting compliance. Even though it's a complicated program, and monitoring is complicated, there's hundreds of pages of guidance on how to run these monitors and what to do, it all boiled down to a very simple thing: a ton of emissions and one allowance. Do you have enough allowances to cover your tons, yes or no? It’s impossible to miss a violation.
The coup de grâs at the end is automatic penalties. If you don't have enough allowances to cover your emissions at the end of the year, you will be penalized automatically. You don't have to wait to be sued, you owe it right now. And by the way, your penalty is more than it would cost you to go out and buy an allowance.
So this combination of strategies together made it hard to violate. There was really no way to manipulate the situation; everyone was going to know what was going on. There was only one pathway forward, and that was to comply. It was more hassle, more expensive, to violate.
Trying to cheat on that, you'd have to rig your monitor, or lie on your electronic reports, at risk of much greater expense. So it just becomes easy to comply?
Yeah. The whole idea is to try to make compliance the path of least resistance. If you're not paying attention, or you have people that make mistakes — if you make it so that those kinds of things are addressed within your rule, you're not waiting to catch people afterward. It's brought to their attention through the design of the rule itself.
Was the acid rain program notably cheaper for EPA? Is there a way of measuring how expensive it is in terms of enforcement and monitoring and compliance for the agency itself?
There is no perfect way of doing that, and I would say here's part of the rub. We're not measuring what a next-gen strategy would cost versus getting to the same result through enforcement. Because that's not going to happen, there isn't the resources to get to the same result through enforcement. So what you're measuring is a next-gen strategy that gets to your public health endpoint at reasonable cost against not getting there. Those are really the choices.
The enforcement work that was done for coal-fired power is really the exception that proves the rule. This was a one-off that you could do it that way, normally you can't.
Right, you'd have to have a galactic-sized enforcement agency with unlimited funds, which we definitely do not have in the EPA.
Insofar as ordinary people do think about rule design, the in-vogue opinion these days is that market-based is great, flexible is great, performance-based is great; you want to specify the end-goal, not the means, and leave it open to entities how they comply. Ty doing that, you will get the cheapest possible outcome.
This is something close to religion these days in environmental circles, maybe even beyond environmental circles, along with endless bashing of so-called command-and-control regulations, which dare to specify things and dare to impose mandates.
You have a great discussion of this sort of fight. One of the points you make is that these terms have become almost meaningless, they're more identity-based now than referring to any particular features of programs. Could you explain to your average listener who has been generally convinced by the argument that markets are great, they're flexible, and they use the acid rain program as an example of this. Your point is not that market programs are bad, just that the features that make a rule good or bad are orthogonal to this distinction between markets and command-and-control.
I totally agree that performance-based and markets have become their own orthodoxy, comparable in power and breadth to the beliefs that drive the problem, that gave rise to next gen, which is, everyone complies — performance-based and markets are a similar type of orthodoxy.
Both of those strategies have potential in the right circumstance. Markets are primarily about saving money for compliance, not about driving compliance; they're about more efficiency, and they have power to do that.
Two things I would say is that, first, markets happen because of command-and-control. The market doesn't just spring from the earth fully-formed, a market is created, because a regulatory agency decides to create a market, that's what happened with acid rain. By imposing a regulation that says you can only have so much pollution, and you have to report in this way, and you need to have monitors, etc. those are traditional command-and-control type things. But the mechanism for efficiency was a market mechanism.
At the end of the day, the market mechanism has nothing to do with the compliance result. It saved some money, but it did not drive compliance. The thing that drove compliance was this design structure that I described to you, all of which were standard command-and-control things, how you report, how you monitor, what your obligations are, penalties, that kind of thing.
I get that economists love markets, and they really do, because they look great on paper — this idea that you can have individual flexibility and that everyone is so efficient seems great. Next gen is focused on the practical, what’s actually going to happen in the real world, not how it seems in theory.
What I discovered in researching the book is that there’s actually very little data and evidence that supports the idea that markets are more effective than command-and-control in achieving environmental results. The record is just stunningly thin, and it's more an ideology that drives it.
Here's an illustration of some evidence about the market and flexible performance, as opposed to the one-size-fits-all that most people are thinking when they think of command-and-control. So at the beginning of the Clean Water Act, way back when there was a huge problem of water pollution around the country and Congress was like, “okay, that's got to stop. States, you're in charge, go out there and do your monitoring and impose permanent limits and fix this problem; go get them.”
And it didn't happen. It did not happen. The reason is that the states were, as it turned out, unable to surmount the technical and political challenges of imposing the necessary obligations on the sources in the flexible- and ambient-monitoring based way that everybody talks about as being so desirable.
So Congress came back years later and said, “okay, guess what, you blew it. It's not working, states, forget it. Nevermind, we're not doing that. What we are going to do now is, every sewage treatment plant in America is going to meet the following standard. EPA, you write the standard, everyone's gonna meet it. No exceptions.” That's it, period, the end, the classic command-and-control thing. And guess what, the rivers got cleaned up.
So when we look at what the record shows, yes, markets can work when they are accompanied by thoughtful design that looks at all these questions, and there's adequate monitoring, and there's good structure around it, but just saying we're going to get out there and be flexible is a recipe for disaster.
One of the points you make in this respect — which was a little bit of a mind blower for me, too, because I never thought about it in quite this way — is that flexibility for the regulated entities is the mirror image of increased costs for the regulator. All that flexibility for the regulated means that more work for the regulator. People don't take that into account when they're thinking about these market-based rules.
There's all different types. Markets are one way, but there's also plenty of rules that say, “well, people should try to do A, but if you can't do A, then you could consider B, C or D.” And by the way, maybe some people have E, and maybe you're exempt.
By the time you get to the end of this regulatory structure, nobody can figure out who has to do what, and it is very tough from a compliance-driving perspective, nevermind enforcement. If you can't be sure exactly who's supposed to do what, if every determination is very fact-specific, and you have to actually get all the records from the company to figure out why they chose C and not A, to figure out if they're doing anything wrong, you've created a situation where government can't know who's complying and who isn't.
That degree of fog and gray and ambiguity provides lots of places to hide for companies. Some companies are legitimately operating in that zone that they're allowed, and some are hiding there. From the government's perspective, it's almost impossible to tell the difference without a huge investment of resources.
This is another thing you point out. It's easy for lawmakers to say, “oh, we're gonna give all this flexibility to the regulated entities. Sure, that will require more from the regulators, more enforcement, more monitoring, more time and money. But that's fine. We'll just spend the time and money.” But they do not then boost the EPA budget to accommodate that; you don't get the additional resources. And the result is just violations, as you say — just a whole lot of cheating.
That leads to a lot of violations, and just as concerning, it leads to the government being unable to even know how it is going. They don't know whether the facilities are meeting what's required or not. So if there's a lot of monitoring violations, a lot of reporting violations, a lot of ambiguity about the pollution obligations, the government can't really say whether we're achieving the objectives or not.
This is a really bad place to be for the government, when you have obligations that are important for protecting public health and you don't know whether you're getting there or not.
Also, they're in statute, so you're supposed to know.
Are there generalizations you can make about when markets and flexibility are promising solutions, when they're a good fit, and when they're not?
I would say the most important and essential thing for a market to work is a good measurement strategy. If you cannot measure reliably and have a lot of confidence in the thing being traded being actually worth what it claims to be worth, then your market program will not work. There's going to be a lot of mess and confusion, and you will have zero idea whether you're actually getting there.
I would say that’s essential, and all the experts say this too. Deep in the papers of economists favoring markets, they have throwaway lines saying, “of course this only works if you have good monitoring.” Well, okay, yeah. But that's a pretty big point, because there isn't good monitoring.
I just want to emphasize this, because this is a point you made that has also stuck in my head: insofar as you’re specifically mandating facility-level reductions, and measuring performance at the end, that really raises the importance of being able to measure. If you’re not doing these facility-specific measurements, you really need to be able to measure the end-goal precisely, because that’s all you’re doing.
Imagine the acid rain program with no monitoring. “Okay, just get out there and trade your sulfur dioxide emissions. How much did you have? Well, you tell us how much you had and we'll see how it goes.” We would not have achieved the actual reduction to sulfur dioxide and acid rain with a system like that; it’s impossible.
You'd still have all the market features and all the flexibility, but without the measurement, the whole thing falls apart.
You'd have no compliance, and you wouldn't really know how you're doing. You could measure the rain and see, well, we're not getting there. But you wouldn't know why.
So yes, you absolutely have to have measurement. The other thing you need is a group of fairly sophisticated participants. they need to be able to report electronically with a high degree of precision and consistency, and you can't have a huge amount of variability across source types.
Certain types of problems will be good for that, and some problems are impossible for that. It's important that the people who are designing policy recognize that. I would prefer if the ideologues who push markets for every problem would live by what their own colleagues say: you can't do it without monitoring. So don't even talk to me about your market until you show me your monitoring strategy.
Measuring sulfur dioxide is fairly straightforward and possible. There's a limited number of coal plants there, they tend to be owned by big businesses that are relatively sophisticated and have this relationship with EPA already with reporting and monitoring of stuff. So it's a perfect area.
What's an example of a problem where you look at it and say, “a market will never work there?” Where do you need a heavier hand?
We have an example in front of us in the Renewable Fuel Standard, also sometimes known as Low-Carbon Fuel Standard. It's a program designed to reduce greenhouse gas emissions and reduce dependence on foreign oil — from plants, essentially, is the part we're concerned about here. Carbon is recycled by plants. You create carbon when you burn the fuel in your tank in your car, but in theory, carbon is taken up by the plants when they grow. So the great theoretical construct here is that you would have recycling of carbon, so you would reduce the climate impact.
This was about ethanol back in the day; it came about a long time ago and it predated a lot of other climate programs.
So the market-like situation in the Renewable Fuel Standard — the renewable energy credit that’s created was separated from the actual fuel itself. So companies were buying these credits, but they weren't necessarily buying the actual fuel that was made. It’s a market-like system, because it's trading pieces of paper, essentially, that people are trusting, hoping, believing, actually reflect a gallon of actual fuel.
What we've discovered is that they don’t. There was a huge amount of fraud in that program. I shouldn't use the past tense: there is a huge amount of fraud in that program. So substantial that you can't know when you buy one of these credits on paper if it actually reflects either renewable fuel gallon. It is impossible to know.
RFS has a ton of other big problems, which I could talk about, but this market-based element was doomed to failure, because there was no mechanism to be sure that a credit was actually worth what it claimed to be worth. That's why the market can't achieve the endpoint.
And there are ambiguities in the chain here. You have to have the land, and if you plant biofuel crops in the land, maybe you're displacing the farming crops, which will then use fresh land. Maybe the fresh land use gets attributed to the biofuels, maybe not.
You're pointing out the reason why conventional biofuels are not climate enhancers, which is itself an interesting topic, and also has a significant compliance dimension. The narrower point I was raising was just about fraud in the market, because no one could be sure that there was actually a gallon of fuel produced; it was possible for companies to go in and just manipulate a bunch of paperwork and computer stuff, and voilà, they produced credits without fuel. There wasn't really a mechanism to prevent that from happening.
One thing we've observed and learned from real-life experiences is that, if you create a market where people can make a lot of money and you have no controls, there's going to be a lot of fraud. That's just the reality of life.
Rather than bemoan that reality and say, “oh no, there's fraud” — yeah, there's fraudsters, of course — you need to design a program that prevents that. Don’t complain about it and whine about it afterwards. Don't allow it to happen!
Let's use our remaining time to think about how these principles of good regulatory design might apply to climate rules, which are very much in the news now. A lot of the discussion takes the form of, “let's use markets and flexibility, let's not be heavy handed, let's not use command-and-control.” That argument is replicating itself all over the place, to my frustration, and I assume yours.
Let’s look at some specific examples. Your example from electricity was very gratifying to me, as a huge fan of renewable portfolio standards — state-based rules on utilities that say you have to increase the percentage of your total power provided by renewables over time. You say that these things can work, with one big caveat, so tell us about that.
It is not simple, but you can design something that looks like a renewable portfolio standard, where utilities have to buy some percentage of their power from solar, wind, and other forms of renewable energy. That's easy to measure, we know how to do that, we're already measuring that now. That system can be designed to function very well — you know you're getting the carbon reductions you're expecting to get. That's very possible to do.
One that is talked about a lot, that doesn't fit into that structure, is energy efficiency. That goes directly back to the point we were talking about earlier, about measurement. Energy efficiency is how much energy you use to do something versus what you would have used for the counterfactual.
You can already see it's not measurable; there's no way to go out in the world and take a sample that measures what would have happened if you did not do your energy efficiency program. That's one of the first weaknesses.
Another significant weakness is that, because it's not possible to do a big giant modeling that figures out what the impacts of your energy efficiency project are, people have to have a shortcut. Administratively, you can't expect people to do this gigantic measuring thing every time you do a project, so people have developed this shorthand for what energy efficiency usually saves. If I have insulation in my ceiling, I can assume I save X amount of energy, and you can take that to the bank and have it considered as a credit.
The robust research that's been done about those says that they greatly overstate the savings. What we've all been assuming we get in energy savings is not really what we get.
One of my favorite illustrations of how the real world interjects into your theoretical construct is that the least effective energy efficiency is energy efficiency installed on a Friday. Somebody did a study showing that if your energy efficiency is installed on a Friday, it probably doesn't work as well as if it's installed on a Thursday.
I'm just gonna pause for a minute and contemplate why. Everybody should take a moment to guess why that might be, before we get the answer.
On Fridays, people are incentivized to cut corners. You got to get that job done today, because you're not coming back tomorrow, and you don't want to come back on Monday.
This is just one of many studies that have been done saying that the assumptions that we've all been making about what energy savings, and thus carbon reductions, we get from energy efficiency are not right.
The last thing, which is common to every time, every rule, every structure, is: how did the incentives line up? All the incentives [in existing energy-efficiency programs] line up for people to overstate savings — the people who install it, the regulators, the public. Everyone wants to believe this is working well.
Whenever you have a system where everybody benefits if you overstate something, then guess what? They're going to overstate it. And that's what the studies show. There have been some robust studies — including in California, which is one of the most rigorous programs anywhere — showing that because of these incentive structures, people overstate savings.
This is relevant to carbon, and whether a clean electricity standard can achieve carbon reductions. If you include energy efficiency, you have the inherent uncertainty, the inaccuracy of the deemed savings, the incentive structure, all those things aligned to say, when you are trying to sell your energy efficiency credit, you don't know what you have there.
Why is that a big problem? First, we can't solve that through enforcement — that should probably be self-evident. The reason it's a big problem is that if the utility buys energy efficiency credits instead of solar or wind credits, they are going to be emitting more carbon. If you include this hard-to-measure element in your market, you're going to reduce the chances that you achieve your carbon reduction goal.
Which is not to say that energy efficiency isn't good. We gotta have it as much as you can, as fast as you can, everywhere. That's absolutely essential. What I argue is that you need to do that through something like an energy efficiency research standard. You have to mandate energy efficiency as fast as you can.
What you shouldn't do is combine it with the utility’s obligation to achieve a clean electricity standard, because that will undercut your carbon reduction goals.
You keep those separate, basically.
Yes, don't put it into the market, put it into a command-and-control program mandating that people do energy efficiency.
On the energy efficiency side, rather than trying to measure and make the rewards based on reduction in energy use — which is difficult, if not impossible to closely track — you just tell people to insulate buildings. You just require it.
There's ways to design programs of that type that provide incentives and efficiency. The whole idea of an energy efficiency resource standard is not as simple-minded as just telling everybody exactly what to do. But it decouples it from the market. What you can't do is put something that's not measurable, essentially, into a market setting, because you're going to distort that whole market. You will undercut the ability of the market to do what it's supposed to be doing. You need to do it a different way. And there are other ways to get energy efficiency.
As I was reading this section of your paper, it occurred to me that there's an analogous situation in terms of cap-and-trade systems and offsets, which are legendarily entirely based on counterfactuals — what would have happened if X had not happened. You're taking those counterfactual-based credits and sticking them directly into a market where they are doing just what your theory would predict.
Totally. Carbon offset programs have all the same problems we just talked about with energy efficiency, plus some more. All the studies that I've seen have said that offset programs are not delivering anywhere close, not in the same solar system, as what's being claimed. You've got all these incentives for people to over-claim, and of course that's what they're going to do. It's impossible to check up on that. There's been a huge amount of fraud and other significant problems with carbon offsets.
What about cap-and-trade generally? Say you could take offsets off the table, what are your thoughts on trying to marketize carbon dioxide emissions?
From a compliance lens it is totally doable if you have a measurement strategy for every participant. But you have to have something that you can take to the bank, and say, “yep, that's a ton of carbon, I'm sure about it.” If you have that, then a market strategy is a feasible way to drive innovation and reduce costs.
It has potential, but where it runs aground is by allowing in things that are not measurable. The more unmeasurable they are, the more the market will seek those out, because those are going to be cheaper, because they're not real!
That's where you invite disaster, is by allowing the unmeasurable things into your market.
On transportation, one of your other three climate-related examples, we talked about the RFS, the biofuels program, and what a disaster it is. You're a little bit kinder to low-carbon fuel standards of the kind that are now in place all along the West Coast, California and Oregon and Washington, and you're also pretty friendly toward fuel economy standards, i.e., old school CAFE standards. Explain why those work, in contrast to the RFS.
Fuel economy standards, or emission standards for vehicles, are possible to design for strong compliance, Volkswagen notwithstanding. And by the way, Volkswagen’s not the only one. I think the EPA’s eyes were opened to the possibility of cheating and fraud at scale. I felt like saying, “see, see this what I've been telling you.”
People's eyes were opened to that and the adjustments have been made in the vehicles program at EPA to address that. That has now become very, very tough to get away with — and you know, eventually, passenger vehicles are going to shift to electric. That's just a whole different animal in terms of compliance strategy; that seems very doable.
Let me ask you about that, because, from a regulatory point of view, this has always struck me as a little bit of a dilemma. It's one thing to regulate internal combustion engine vehicles, such that they become more efficient and emit less over time. But when you're trying to engineer a mode-switch to a different kind of engine, it seems like just ratcheting up fuel economy standards is a bank-shot approach.
The near-term thing, of course, is to make the vehicles as efficient as they can be and reduce pollution as much as possible — carbon is not the only thing we care about from the roads, there's a lot of health problems associated with vehicles, and huge environmental justice issues, too.
So yes, you can do better than where we are now on efficiency and pollution from vehicles. But on the shift to electric vehicles, that's very manageable, to ensure that people are doing what they claim to be doing — that's a manageable thing in terms of the manufacture of those vehicles.
I just want to be clear, I am not saying that low-carbon fuel programs don't have the same problems that the Renewable Fuel Standard has, in terms of climate impacts. It's a little bit better of a design, because it doesn't have a cliff-like drop off in the obligations like the RFS has. It's a more gradual and market-type system, so it has those benefits. They both depend on trying to figure out how much carbon comes from land use changes. They have the identical problem for that.
Anything that involves biofuels is gonna run into that problem.
If I could throw in another topic on climate: a late breaker that I think is particularly encouraging and interesting is EPA’s proposed rule for hydrofluorocarbons, HFCs, which are massively intensive climate-forcing, I mean, hundreds to 1000s of times more climate-forcing than carbon.
Typically in refrigerants.
This is a next-gen type story in Europe, where they first started regulating HFCs, as they are called. There's been a huge amount of fraud and illegal activity and illegal smuggling, and they got problems out the wazoo over there — they’re more than 30 percent over the standard, already, and that's before they've even gotten into where it's tight. They're in a bad way over there.
And the same thing could have happened in the US. Congress passed the law, in December 2020, telling EPA to regulate HFCs and telling them in general how to do that. In May, EPA put out a proposed rule which is the most forward-thinking next-gen type proposal since acid rain.
Oh, really? Can we pause and ask why? Is it just good people at the EPA or what?
I think it is good people who are open to innovation and who looked at the situation in Europe and thought, “oh, my God.” It's a situation where non-compliance will sink you. It's not around the edges, it could be better — no, you will never get there. You're gonna have mostly illegal activity.
So necessity is the mother of invention.
And they're a great bunch of people over there in the air office at EPA, innovators and thoughtful and very open to trying new things.
The rule they proposed in May has a whole bunch of terrific ideas to try to prevent that kind of disastrous thing from happening in the United States. Let me just give you a couple examples of things that they've included, that Europe doesn't have.
In Europe, the products just come in and the countries hope to track them down if they were unlawful later. Good luck with that, okay; that that's not gonna happen. So what they're proposing is that there'll be a real-time check at the border. You cannot bring a product, customs will not allow it in, unless they connect to the data system and show that A), you’re legitimate, and B), you have enough credits to cover this import. If you don't, then sorry, you can’t come in.
Isn't that expensive?
No, it's not hugely expensive. Customs has, over the years, developed electronic programs to enable it to take advantage of today's IT. EPA can develop its side of that and plug it into the Customs system. Real-time monitoring at the border is a very doable thing in today's IT environment, and it makes total sense that you would try to stop things at the border.
Another thing they included in here is a QR code, like the barcode that you have on just about every product you buy now, on every container, which also links to EPA’s data system. It is possible for anyone with a phone to determine, is this company that's trying to sell me this product legitimate? It is possible to do that today.
There's lots of other things, but those two things illustrate that EPA has designed a very tight system to block things at the border and then to reduce the demand for those unlawful products by making it possible to know in real time if every single container is legal or not.
And thereby make it a huge pain in the ass to try to smuggle stuff in — to try to cheat.
A huge, huge pain. Your chances of getting caught are very high, the consequences are severe, and your market is substantially reduced, because EPA is working on the demand side too. It's a structure that is thoughtfully designed to prevent illegal activity.
This is one of the toughest kinds of compliance problems: how to keep illegal products from coming in across the border. Very hard. But this is a thoughtful and quite groundbreaking proposal from the EPA.
This raises a side question. When people talk about carbon taxes, there's a lot of discussion of border adjustments, which would amount to trying to do roughly the same thing — make public the amount of carbon embedded in every product that comes in over the border. That strikes me intuitively as much trickier than measuring HFC content. Have you given some thought to that?
That gets to the heart of the measurement issue we've been talking about: what is the embedded carbon in your product? There's a jillion judgments that go into that question. The Renewable Fuel Standard is one illustration of that, where the recent science is showing that actually, when you produce the conventional renewable fuel, you end up disturbing a lot of land, and you're arguably making the climate situation worse, not better.
Every product that you attempt to put a carbon stamp on is a gigantic measurement question, and very, very challenging. Imposing a tax once you have a carbon measurement is comparatively quite simple. The tax is not the point. The point is, who puts the carbon label on there, and how confident are you that that reflects real life?
I'm just imagining that every link in the supply chain has the incentive to downplay the amount of carbon involved — literally every entity involved in all of this wants to cheat. And there you are, the regulator with thousands and thousands of these products in front of you.
Whenever you have an incentive system that's lined up to push in one direction — where it's obvious what the regulated parties would prefer the outcome to be, and you have essentially no real way to check — that's where you get these kinds of compliance disasters.
As a final subject, let's talk about oil and gas production. That's your third example — specifically, you're talking about methane. Notoriously, the oil and gas production process leaks methane at more or less every stage, and methane is a very active short-term greenhouse gas, which is a problem. There's been arguments going on for years now about measuring and enforcing this. Industry has been claiming they're doing it on their own, and asking to report their own measurements of what they do.
How do you tackle methane, which is manifestly difficult from a monitoring perspective?
On the one hand, the methane problem, at least from a technical perspective, is fairly straightforward. People know what to do, how to reduce the methane that comes from the wells. People know how to do that. They're not doing it, but they know how to do it. The technical answers are well understood.
The compliance problem is more complicated, because of this point that you've put your finger on, measuring what's going on is so difficult. It's even more difficult than it may appear, because the amount of methane released is intermittent. It could be a huge amount and then it drops off.
It's intermittent and unpredictable as to which wells are going to be the so-called super emitters. Some of them are quite stunningly high numbers for at least some period of time. Until a monitoring solution is figured out — and a lot of people are working on that. Satellites might be part of the answer, there's aerial monitoring strategies, there's some ground-based ones, there's a lot of people applying themselves to this problem. Having a monitoring strategy would be a game-changer for this industry, figuring this problem out and getting it fixed.
But in the meantime, there are things that can be done. I can give you two small examples, but it shows the mind shift that's needed in thinking about these problems.
One is automating what you can. One of the problems is, people leave the hatches open on the tanks at the well pad. Sometimes that happens accidentally, but you got a million well pads, those numbers add up. If you had an automatic closing … that's just an illustration of thinking about your problem differently. See if there's a technical fix.
The other one is a more conceptual fix, which is shifting the burden of proof. There's no way the government can bind your wells; that's not gonna happen. Maybe someday, through satellite imagery, it is possible to get closer, but we're nowhere near that right now. Shifting the burden of proof says, if there's credible evidence that you have a pollution problem, it's on you, the company, to prove it isn't, and to fix it.
The data shows that if you're doing everything right, you shouldn't have that kind of a problem at your site. If you're seeing a huge amount of emissions, something is up — you own it, you control it, you have access to it, it should be on you to go figure that out. You shouldn't be counting on a handful of government inspectors to get out to these million sites around the country to try to figure that out. You own the equipment, you have the inspection records, you have access to the people, you are in the best position to solve this problem.
And you should, because not only does methane have climate change impacts, but along with that are VOCs and other pollutants that neighbors are being exposed to. You have to take care of that problem.
If we know what steps reduce that problem, if the technical problem is solved, why not just go full command-and-control say: all operators of all wells have to take steps one, two, and three, and prove to us that you did it.
That's certainly a sensible way of going.
What I'm talking about is, how do you handle the compliance problem of, did you do it? Let's say you were required to do it, but you didn't do it. EPA finds in the field lots of companies that are at oil and gas wells that are not doing what's required today. It's a big compliance problem, because there's more than a million wells, and methane is intermittent, it's not visible to the naked eye, you gotta have specialized equipment to see the leaks, it's unpredictable.
If you got a lot of companies out there that are, accidentally or on purpose, not doing what they're supposed to be doing, how are you going to find them and get that fixed?
Shifting the burden of proof is one illustration of how you could change the framework under which everybody's operating. You might even be able to, by doing that, bring in the possibility of citizen science. If there are citizens who can meet the threshold for credible evidence, that provides some additional incentive and pressure for companies to do what they're supposed to be doing.
Well, I've kept you too long, but you have now anticipated my final question a couple of times, so clearly you've been thinking about it. One of the trends I've been following is new ways of measuring these things, specifically, satellites that claim to track real-time methane emissions down to the square mile. They're saying the same thing about CO2, with satellites that pinpoint real-time CO2 emissions down to the square mile, all over the Earth. Then there are these other programs where you measure pollutants at the ground level, on a block-by-block basis. You can now get sensors that you can plug into your phone. Anybody can do this.
My point being, insofar as the difficulty of measurement is a huge impediment to good regulation, this trend towards more and more different ways of measuring, which don't rely on regulated entities, do you see that opening up new avenues for regulation? Do you think regulation could get better on the back of monitoring getting better?
I absolutely do. The technological innovation that's going on in monitoring is a huge, huge potential gamechanger for many pollution problems.
There's no silver bullet, though. For example, satellite imagery is great for some types of pollutants, but the resolution isn't that terrific, and it's not so good when it's cloudy. Every type of monitoring system has its own issues.
But also, lots of important environmental problems are not just straight ahead pollution-monitoring type problems. Lead paint is an example. Industrial agriculture. Renewable Fuels Standard. Energy efficiency. There's a lot of important things that are not subject to just being monitored.
Having said that, I do think that the revolution in monitoring, where it's getting cheaper, smaller, more mobile, better, provides a huge amount of opportunity, and is terrific news.
If I could just add one thing. Sometimes, when I talk about next gen, people misunderstand me, and I just want to make sure that I'm leaving no ambiguity. Sometimes people think I'm saying we don't need enforcement. No, no, no, no, I am not saying that. Enforcement is essential, required, and must-have. You cannot have an effective compliance program without it.
My point is that enforcement alone cannot fix the big compliance holes created by bad regulatory compliance design.
I just want to make sure no one's confused. Enforcement is essential, but stronger regulations are going to get much farther down the road than relying on enforcement alone.
You're pushing back against trends in thinking around environmental regulation that have been building for decades now — this obsession with markets and flexibility, this ignoring of enforcement, or this assumption that if you throw more enforcement at it, you can get any rule enforced.
How lonely are you in this fight? In terms of the people running EPA now, how are your ideas catching on? What's the state of thinking in the field?
The assumption that compliance is pretty good and enforcement will take care of the rest is still the entrenched thinking. But there is some traction for these ideas, maybe in part because I've been such a giant pain in the neck.
Compliance is not usually talked about as part of the policy discussion, but it should be, because compliance is about what's going to happen in the real world. That's the place that matters; that's what counts. The people involved in policy discussions do care about what happens in the real world.
I'm out there raising a ruckus, and I'm hoping that we will get compliance at the table at these policy discussions, so that people do not continue blindly along, adopting rules that will not achieve what they're intended to achieve.
And nowhere is that more important than climate. There's no time. We cannot make mistakes and hope to fix them later. It's got to be right. It's got to happen the first time out of the gate. It's essential these ideas get baked in.
Awesome. Well thank you for fighting the good fight, and for taking all this time to talk.