Regulatory change and optimal transition relief

Northwestern University Law Review

Volumn 105, Issue 4, 2011, Pages 1581-1633

  Revesz, Richard L ^a   Westfahl Kong, Allison L ^a  

^a NEW YORK UNIVERSITY SCHOOL OF LAW   (United States)

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EID: 84858233405     PISSN: 00293571     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (413)

1. U.S.C. § 7411(a)(1)-(2), (b)(1)(B) (2006) (providing that stringent federal performance standards only apply to "new sources" of air pollution)
2. see also, e.g., Jonathan Remy Nash & Richard L. Revesz, Grandfathering and Environmental Regulation: The Law and Economics of New Source Review, 101 NW. U. L. REV. 1677, 1717-18 (2007) ("The early Clean Air Act legislative history reflects a compromise to accept an extension of existing plants' lives in exchange for the application of very strict standards to the new plants that would replace them in the future. More than a third of a century after that compromise was struck, many of the plants that were in existence then remain in service now-far beyond the retirement date that most initially expected, even taking into account the introduction of life-extending differential regulatory standards." (footnote omitted)).
3. See, e.g., DANIEL SHAVIRO, WHEN RULES CHANGE: AN ECONOMIC AND POLITICAL ANALYSIS OF TRANSITION RELIEF AND RETROACTIVITY (2000)
4. Michael J. Graetz, Legal Transitions: The Case of Retroactivity in Income Tax Revision, 126 U. PA. L. REV. 47 (1977)
5. Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509 (1986)
6. Steven Shavell, On Optimal Legal Change, Past Behavior, and Grandfathering, 37 J. LEGAL STUD. 37 (2008).
7. See, e.g., Harold M. Hochman, Rule Change and Transitional Equity, in REDISTRIBUTION THROUGH PUBLIC CHOICE 320, 324 (H. Hochman & G. Peterson eds., 1974)
8. Frank I. Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of "Just Compensation" Law, 80 HARV. L. REV. 1165, 1219, 1224 (1967). This argument has also been made in the tax context.
9. See, e.g., U.S. DEP'T OF THE TREASURY, BLUEPRINTS FOR BASIC TAX REFORM 187-88 (1977)
10. Comm. On Tax Policy, N.Y. State Bar Ass'n
11. Retroactivity of Tax Legislation, 29 TAX LAW. 21, 23, 27-28 (1975)
12. Note, Setting Effective Dates for Tax Legislation: A Rule of Prospectivity, 84 HARV. L. REV. 436, 439 (1970).
13. See, e.g., SHAVIRO, supra note 2, at 2-3
14. Kaplow, supra note 2, at 531
15. Graetz, supra note 2, at 64-66, 85.
16. Graetz, supra note 2.
17. Kaplow, supra note 2.
18. Shavell, supra note 2.
19. See, e.g., LOUIS KAPLOW & STEVEN SHAVELL, CONTRACTING (2004)
20. LOUIS KAPLOW & STEVEN SHAVELL, DECISION ANALYSIS, GAME THEORY, AND INFORMATION (2004)
21. LOUIS KAPLOW & STEVEN SHAVELL, FAIRNESS VERSUS WELFARE (2002)
22. Louis Kaplow & Steven Shavell, Economic Analysis of Law, in 4 HANDBOOK OF PUBLIC ECONOMICS 1661 (Alan J. Auerbach & Martin Feldstein eds., 2002)
23. Louis Kaplow & Steven Shavell, Fairness Versus Welfare: Notes on the Pareto Principle, Preferences, and Distributive Justice, 32 J. LEGAL STUD. 331 (2003)
24. Louis Kaplow & Steven Shavell, Moral Rules, the Moral Sentiments, and Behavior: Toward a Theory of an Optimal Moral System, 115 J. POL. ECON. 494 (2007)
25. Louis Kaplow & Steven Shavell, Notions of Fairness Versus the Pareto Principle: On the Role of Logical Consistency, 110 YALE L.J. 237 (2000)
26. Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996).
27. Kaplow, supra note 2, at 615-16.
28. Shavell, supra note 2, at 38-39.
29. This Article focuses on command-and-control regulation and thus does not discuss market-based regimes. We also generally assume regulations that are enforced by injunction as opposed to a system of monetary damages. For an argument that liability-based transition relief is preferable to propertybased relief in the context of environmental regulation, see Jonathan R. Nash, The Cathedral of Transition Relief in Environmental Law 2 (Nov. 11, 2010) (unpublished manuscript) (on file with authors). For a discussion of which institutional actor is best suited to provide transition relief.
30. see Jonathan S. Masur & Jonathan Remy Nash, The Institutional Dynamics of Transition Relief, 85 N.Y.U. L. REV. 391, 436-55 (2010).
31. SHAVIRO, supra note 2, at 2-3 (referring to the position that favors transition relief to protect reliance interests as the "old view").
32. This argument has often been advanced in the tax context.
33. See, e.g., U.S. DEP'T OF THE TREASURY, supra note 3, at 187-88
34. Comm. on Tax Policy, N.Y. State Bar Ass'n, supra note 3, at 23, 27-28
35. Note, supra note 3, at 439.
36. Fairness arguments have also been made in favor of transition relief in a more general context.
37. See, e.g., Hochman, supra note 3, at 324
38. Michelman, supra note 3, at 1219, 1223-24.
39. Jill Fisch has argued that "legal changes must be evaluated individually" and that "[i]n analyzing the effect of a particular new rule, it is necessary to consider the change in context": [I]n the context of an unstable equilibrium our intuitions about the legitimacy of retroactivity are justified, and retroactive lawmaking is an appropriate and efficient means of clarifying, correcting, and incrementally adjusting the regulatory climate. In a stable equilibrium, however, legal change imposes considerable costs on individuals subject to the change and on the legal system as a whole.
40. Jill E. Fisch, Retroactivity and Legal Change: An Equilibrium Approach, 110 HARV. L. REV. 1055, 1100, 1123 (1997).
41. While old-view scholarship is not as common as it was in the 1960s and 1970s, some recent work continues to support the old view.
42. See, e.g., Richard A. Epstein, Beware of Legal Transitions: A Presumptive Vote for the Reliance Interest, 13 J. CONTEMP. LEGAL ISSUES 69, 70 (2003) ("The proper approach starts with a strong presumption and not a categorical denial: beware of legal transitions. Wherever possible try to keep the legal framework constant, and allow the response to societal changes to take place through private adjustments.")
43. Daniel E. Troy, Toward a Definition and Critique of Retroactivity, 51 ALA. L. REV. 1329, 1341-42 (2000) (arguing that retroactive legislation should be avoided because individuals base their behavior on the existing law and providing fair notice of legal changes is "fundamental to the rule of law"). David Hasen has also recently attacked new-view scholarship as being "analytically deficient.".
44. David M. Hasen, Legal Transitions and the Problem of Reliance, 1 COLUM. J. TAX L. 120, 123-24 (2010) (arguing that new-view literature has failed to both "develop consistent definitions of such key concepts as 'transition,' 'legal transition,' and 'transition norm'. [and] demonstrate that a reliance-based view is unable to reach correct results on the question of the proper default norms for changes to positive law and for judicial decisions that adopt new rules"). The topic of retroactivity in the tax context was also recently debated at the 2010 European Association of Tax Law Professors Congress in Leuven, Belgium. Daniel Shaviro argued against the provision of transition relief when disadvantageous tax changes are implemented, while Charlotte Crane argued in favor of transition relief.
45. See EUROPEAN ASS'N OF TAX LAW PROFESSORS, PROGRAM FOR CONGRESS (2010), available at http://www.eatlp.org/uploads/public/Program%20Leuven.pdf. For a summary of the arguments advanced by Shaviro and Crane
46. see DANIEL SHAVIRO & CHARLOTTE CRANE, Retroactivity in Law & Economics, available at http://www.law.nyu.edu/ecm_dlv3/groups/public/@nyu_law_website__faculty__faculty_profiles__dshaviro/documents/documents/ecm_pro_065857.pdf.
47. Michelman, supra note 3, at 1219-21 (discussing transition relief in the context of the Takings Clause). For a detailed discussion of optimal compensation under the Takings Clause
48. see Lawrence Blume, Daniel L. Rubinfeld & Perry Shapiro, The Taking of Land: When Should Compensation Be Paid?, 99 Q.J. ECON. 71 (1984).
49. See Michelman, supra note 3, at 1223.
50. "Settlement costs" are measured by the dollar value of the time, effort, and resources which would be required in order to reach compensation settlements adequate to avoid demoralization costs. Included are the costs of settling not only the particular compensation claims presented, but also those of all persons so affected by the measure in question or similar measures as to have claims not obviously distinguishable by the available settlement apparatus.
51. Id. at 1214.
52. Michelman also discusses what he terms "demoralization costs": "Demoralization costs" are defined as the total of (1) the dollar value necessary to offset disutilities which accrue to losers and their sympathizers specifically from the realization that no compensation is offered, and (2) the present capitalized dollar value of lost future production (reflecting either impaired incentives or social unrest) caused by demoralization of uncompensated losers, their sympathizers, and other observers disturbed by the thought that they themselves may be subjected to similar treatment on some other occasion.
53. Id. at 1223.
54. Louis Kaplow agrees that the failure to compensate will somewhat discourage certain investments but argues that "this 'disincentive' [is] necessary to eliminate the overinvestment that would result from compensation.".
55. See Kaplow, supra note 2, at 561.
56. While Michelman does discuss efficiency concerns and maximizing total utility, he stresses that the compensation decision should ultimately be based on justice "without regard to the effect of the decision on the net social product." Michelman, supra note 3, at 1219. Martin Feldstein, writing in the tax context, suggests that transition relief is important to avoid "inefficient precautionary behavior.".
57. Martin Feldstein, On the Theory of Tax Reform, 6 J. PUB. ECON. 77, 93 (1976).
58. For example, he argues that proposals to nullify the "oil depletion allowance" have inefficiently decreased investment in oil. Id. He contends that the way to prevent this inefficient behavior is to consistently provide transition relief because then "investors know that they will be fully compensated for any losses that result from reform.".
59. Id. at 98.
60. Michael J. Graetz criticizes Feldstein for providing no explanation as to why anticipating legal changes leads to inefficient behavior and argues that market principles suggest that the opposite is true.
61. See Graetz, supra note 2, at 64-65.
62. See Graetz, supra note 2.
63. Id. at 65.
64. Id. at 65-66.
65. Id. at 71.
66. Id. at 74.
67. Id. at 75-76 (noting that reliance may no longer be reasonable once the President publicly endorses a change or one or both houses of Congress pass a bill).
68. See id. at 71 ("[G]randfathered effective dates will often reduce whatever benefits are expected to be realized from the change in the law. The social gains to be realized from the change will often be delayed with a grandfathered effective date.").
69. SHAVIRO, supra note 2, at 2-3, 7, 10-11, 62-63, 81-86.
70. Id. at 8; accord id. at 7-8, 13, 53 (discussing "policy change" retroactive taxes).
71. Id. at 8.
72. To use Shaviro's example, consider the municipal bond preference which exempts from taxation interest earned on municipal bonds. Id. The policy-relevant feature is to prefer municipal bonds to other investment types. There are also various accounting features which were adopted in order to accomplish the policy goal.
73. Id. at 8-9.
74. For example, this tax benefit is provided to bondholders rather than issuers, even though providing the tax preference to issuers would have the same intended economic effect.
75. Id. at 9.
76. In the case of a policy change, a general norm of not providing transition relief serves the purpose of that policy change by producing desirable ex ante incentive effects.
77. See id. at 7, 60.
78. For example, banning a hazardous product constitutes a "policy change" because not providing transition relief in the event of the ban advances the purpose of the legal change-product safety-by giving manufacturers an ex ante incentive to only invest in safe products. However, with an accounting change, a general norm of not providing transition relief does not advance the purpose of the legal change.
79. See id. at 62.
80. To use Shaviro's example, suppose the prevailing currency, which has a green color, is abandoned in favor of a red currency because the green currency is easily forged.
81. Id. at 10.
82. In this case, providing no transition relief-and thus not permitting individuals holding green currency to trade in their green currency for new red currency-would be undesirable because it would not advance the purpose of the new law.
83. Our discussion in the text concerns only policy changes.
84. While Shaviro's conclusion regarding policy changes is in line with Graetz's, his reasoning is somewhat different. While Graetz suggests that "change[s] in tastes or societal conditions [are] reflected through the political process,".
85. see Graetz, supra note 2, at 65, Shaviro questions the extent to which "public political choice" (which is reflected in the laws that are passed) is actually similar to "private consumer choice" (which is reflected by market demand).
86. SHAVIRO, supra note 2, at 64. It is desirable to "let[] the owners of an ice cream parlor absorb the loss from a decline in the public's taste for ice cream [because] it may induce them to try harder to determine what the public wants." Id. Shaviro, however, suggests that making investors bear the risk of a legal change may not make as much sense as making them bear the risk of a market change because, while the demand for a particular product tends to be a good indicator of consumer choice, the laws that are passed are not necessarily good indicators of overall public opinion, partly for public choice reasons.
87. Id. at 67-71.
88. Shaviro argues that this is the case for three reasons: problems of aggregation, problems of organization, and problems of information: [C]ollective choice requires aggregating people's preferences rather than giving each one the result he wants. Hence, the point that 49 percent of the people can buy their own ice cream but not pass their own law. Amongst other implications, aggregation is likely to reduce the level of voter investment in attempting to make good decisions.
89. Id. at 67. Other aggregation problems also arise because people may choose not to vote because "[t]he value of a single vote is so low" and because "voting, unlike the use of money to buy consumer goods, is ordinal rather than cardinal" and thus does not reveal the intensity of voter preferences.
90. Id. at 67, 69-72 (discussing how interest group theory suggests that "democratic politics tends to produce transfers from the many to the few" and noting that information problems are even worse "in the realm of public political choice" than in the market context).
91. SHAVIRO, supra note 2, at 89-90.
92. Id. at 89 (explaining that, in the tax context, "the political impetus to compensate transition losses exceeds that to deny transition gains").
93. Id. at 229 (noting that a norm of not providing transition relief for policy changes "would tend to reduce the prevailing asymmetry in favor of providing greater transitional adjustment when income tax preferences that worsen resource allocation are curtailed than when they are expanded").
94. See Kaplow, supra note 2.
95. Id. at 513-14.
96. In making his argument, Kaplow primarily discusses the transition policy of compensation; however, he explains that his argument generally applies to other forms of transition relief as well.
97. See id. at 556 n.133.
98. Id. at 513, 519.
99. Id. at 529.
100. Id. at 527-28.
101. Id. at 548.
102. Id. at 549.
103. See Saul Levmore, Changes, Anticipations, and Reparations, 99 COLUM. L. REV. 1657 (1999).
104. See id. at 1663 ("[R]egulated firms know or could know more than the government about likely subjects of regulatory concern and, therefore, might be in the best position to forecast the coming, good law. [but] if the law is such that these firms know that they will be compensated for the cost of legal change, then they have little incentive to anticipate new law.").
105. Id. at 1658-59.
106. Id. at 1663 ("The more aggressive the expected application of these new rules, the more it seems likely that well-informed firms will choose to substitute other, less harmful inputs before the government. devises the new controls.").
107. In the tax context, a few scholars have attacked or at least qualified the view that transition relief is generally inappropriate.
108. See Kyle D. Logue, Tax Transitions, Opportunistic Retroactivity, and the Benefits of Government Precommitment, 94 MICH. L. REV. 1129, 1138-40 (1996) (arguing that it is economically efficient to provide transition relief in the context of incentive subsidies)
109. J. Mark Ramseyer & Minoru Nakazato, Tax Transitions and the Protection Racket: A Reply to Professors Graetz and Kaplow, 75 VA. L. REV. 1155, 1163-65 (1989) (arguing that transition relief can be desirable because it minimizes wasteful postenactment lobbying costs). Like Shaviro, Ramseyer and Nakazato criticize the assumption that most tax legislation is efficient and thus desirable.
110. Ramseyer & Nakazato, supra, at 1163. Ramseyer and Nakazato also suggest that, even if new tax legislation is generally desirable, providing transition relief is more efficient than not providing it because transition relief minimizes wasteful postenactment lobbying costs.
111. Id. at 1173.
112. Kyle Logue argues that it is economically efficient to provide transition relief in the context of incentive subsidies, which he defines as "provisions whose primary purpose is to alter taxpayers' decisions regarding how they will invest their resources.".
113. Logue, supra, at 1138 (emphasis omitted). He argues that if transition relief is not provided for incentive subsidies, then "future incentive credits would have to be more generous. to achieve the same amount of increased investment in the targeted asset or activity.".
114. Id. at 1139.
115. To use Logue's example, suppose there was a dearth of low-income housing.
116. Id. at 1144. To remedy this situation, the government might decide to pass an incentive subsidy and grant a tax credit to individuals who invest in low-income housing.
117. By granting this credit, people who otherwise would not invest in low-income housing would be encouraged to do so. If this incentive subsidy was later repealed and transition relief was not provided, those investors would suffer a transition loss.
118. See id. at 1133, 1139.
119. This would cause future investors to be more cautious when making investments based on promised tax credits because there is a possibility that the government would repeal the tax credit, making their investments unprofitable.
120. Id. at 1140. Thus, in order to ensure that the proper level of investment is achieved, the government would have to increase future incentive subsidies or, to use Logue's terminology, increase the "default premium.".
121. Id. at 1139.
122. Shavell, supra note 2, at 38-39.
123. See infra text accompanying notes 56-59.
124. Shavell, supra note 2, at 38-39.
125. See id. at 41.
126. Id. at 56-57.
127. Shavell acknowledges that grandfathering may actually increase participation in certain activities and that "because such enhanced participation would tend to be socially undesirable, grandfathering would be socially desirable less often than [he] found it to be.".
128. Id. at 57.
129. Id. at 42.
130. Id. at 42-43.
131. Id. at 41-42.
132. Id. at 46-47.
133. Id. at 44.
134. See id. at 46-47.
135. Id. at 79.
136. Perhaps the reason Kaplow does not address this argument is that his article is primarily concerned with a strict liability regime, and grandfathering is always undesirable in strict liability regimes where "parties will automatically be induced to take past behavior into account in a socially appropriate manner.".
137. Id. at 39.
138. Kaplow, supra note 2, at 531-32.
139. Shavell argues that "[t]he key to understanding the difference in conclusions is to note that the transitions literature does not distinguish between legal rules based on legal standards and legal rules based on strict liability.".
140. Shavell, supra note 2, at 78. However, as we demonstrate, actors can also be expected to anticipate legal changes when those changes are based on legal standards.
141. See infra Part II.
142. See Shavell, supra note 2, at 79.
143. Id. at 42-43, 80 (assuming that "present regulated behavior. appropriately reflect[s] all possible future changes in the world").
144. Id. at 80 ("[T]he legal standard in period 1 impounds correctly all possible future changes in harm in period 2.").
145. See, e.g., Nicholas Bagley & Richard L. Revesz, Centralized Oversight of the Regulatory State, 106 COLUM. L. REV. 1260, 1268 (2006) (noting that the Office of Information and Regulatory Affairs (OIRA) primarily focuses on Environmental Protection Agency (EPA) regulations due to their economic significance).
146. See Shavell, supra note 2, at 38 ("Consider a firm that installed a type of smoke scrubber that satisfied pollution-control rules 5 years ago when the firm built a factory.").
147. Id. at 79.
148. See infra notes 78-83 and accompanying text.
149. See infra notes 78-79 and accompanying text.
150. Shavell, supra note 2, at 49-50, 61-62.
151. Id. at 68-69 (discussing general stability of the law).
152. Id. at 42-43 (noting that the uncertainty about the level of harm is resolved by the beginning of period 2 and that, at this time, the law will change "in the light of the new information and circumstances")
153. see also id. at 80 (assuming that present regulations reflect "all possible future changes in the world").
154. Id. at 80 (assuming that "present regulated behavior. appropriately reflect[s] all possible future changes in the world" and that "the legal standard in period 1 impounds correctly all possible future changes in harm in period 2").
155. Shavell does, however, acknowledge that imperfect information of the state may change the analysis.
156. Id. at 54-55.
157. See RICHARD L. REVESZ, ENVIRONMENTAL LAW AND POLICY 168 (2008) (noting that performance standards are set "by reference to what the best available technology can accomplish, but. each source [may] choose the actual technology that it intends to use in order to meet the standard")
158. Nathaniel O. Keohane, Richard L. Revesz & Robert N. Stavins, The Choice of Regulatory Instruments in Environmental Policy, 22 HARV. ENVTL. L. REV. 313, 313 (1998) (noting that although design standards "requir[e] a particular technology's usage. performance standards prescrib[e] the maximum amount of pollution that a source can emit")
159. Sydney A. Shapiro & Robert L. Glicksman, Goals, Instruments, and Environmental Policy Choice, 10 DUKE ENVTL. L. & POL'Y F. 297, 308 (2000) ("Performance standards rely on particular technologies to formulate pollution reduction goals, but do not dictate that those same technologies be used as policy instruments to achieve those goals.").
160. See, e.g., Cass R. Sunstein, Congress, Constitutional Moments, and the Cost-Benefit State, 48 STAN. L. REV. 247, 268 (1996) ("[I]f an industry can comply with a sulfur dioxide emission standard by either using clean coal or implementing energy conservation methods, government should not command a particular method of compliance.")
161. Edward W. Warren & Gary E. Marchant, "More Good Than Harm": A First Principle for Environmental Agencies and Reviewing Courts, 20 ECOLOGY L.Q. 379, 425-26 (1993) ("'[P]erformance standards,' which allow regulated companies to choose their own methods of compliance, are more cost effective than 'design standards,' which impose specific compliance methods.").
162. See REVESZ, supra note 78, at 168
163. Shapiro & Glicksman, supra note 78, at 305 ("In theory at least, regulated entities subject to a performance standard have an incentive to develop such alternative means if they provide a more efficient means of achieving the regulatory goal.").
164. See infra text accompanying notes 101-05 (discussing Adamo Wrecking Co. v. United States, 434 U.S. 275, 289 (1978)).
165. See Bruce A. Ackerman & William T. Hassler, Beyond the _ew Deal: Coal and the Clean Air Act, 89 YALE L.J. 1466, 1485 & n.71 (1980)
166. REVESZ, supra note 78, at 216-17
167. see also BRUCE A. ACKERMAN & WILLIAM T. HASSLER, CLEAN COAL/DIRTY AIR 31-54 (1981) (discussing political considerations that motivate alternate methods for complying with the applicable standard).
168. See Shapiro & Glicksman, supra note 78, at 306-07
169. Wendy E. Wagner, The Triumph of Technology-Based Standards, 2000 U. ILL. L. REV. 83, 90 ("[A]lmost all technology-based standards. take the form of quantitative pollution limits and thus allow industry to choose how to best meet the standards-a choice that includes developing new pollution control technologies that run more cheaply or effectively.").
170. For a detailed discussion of what constitutes a modification.
171. see Jonathan Remy Nash & Richard L. Revesz, supra note 1.
172. See also infra notes 232-34 and accompanying text (discussing how certain modifications trigger new source review under the Clean Air Act).
173. 42 U.S.C. § 7411(a)(1)-(2), (b)(1)(B), (b)(4) (2006) (providing that stringent federal performance standards apply to "new sources" of air pollution and including modified sources within the definition of "new source").
174. See, e.g., Robert L. Glicksman, Balancing Mandate and Discretion in the Institutional Design of Federal Climate Change Policy, 102 NW. U. L. REV. COLLOQUY 196, 205 (2008) ("The EPA must identify the best available technology for a particular industry and calculate the performance-based results that the identified technology is capable of achieving. Industry is then free to comply by using the identified technology or any other means it prefers that allow more efficient compliance." (footnote omitted)).
175. § 7411(a)(1).
176. The 1977 Clean Air Act Amendments created two new programs-the Prevention of Significant Deterioration (PSD) Program and the Nonattainment Program. PSD was aimed at preserving the air quality in regions where air quality was superior to the quality required by the National Ambient Air Quality Standards (NAAQS). Clean Air Act Amendments of 1977, Pub. L. No. 95-95, 91 Stat. 685 (1977).
177. REVESZ, supra note 78, at 373, 384-85.
178. The Nonattainment Program provisions are aimed at those areas that have not achieved compliance with the primary NAAQS.
179. REVESZ, supra note 78, at 384-85.
180. The term "major emitting facility" is defined by the source's "potential to emit." § 7479(1). The term "stationary source," as opposed to mobile source, is defined in § 7602(z).
181. Id. § 7479(3).
182. The relevant statutory language reads: Each State shall. adopt and submit to the Administrator. a plan which provides for implementation, maintenance, and enforcement of such primary standard in each air quality control region. within such State. In addition, such State shall adopt and submit to the Administrator. a plan which provides for implementation, maintenance, and enforcement of such secondary standard in each air quality control region. within such State. Id. § 7410(a)(1).
183. Id. § 7501(3)(A)-(B).
184. Id. §§ 7479(3), 7501(3)
185. see REVESZ, supra note 78, at 374, 387.
186. § 7410(a)(1).
187. The Clean Air Act requires states to adopt enforceable emission limitations.
188. See § 7410(a)(2)(A)
189. see also D. R. van der Vaart & John C. Evans, Location, Location, Location: Did North Carolina Go Far Enough?, 10 VT. J. ENVTL. L. 267, 269 (2009) ("The strategy that states develop to satisfy their obligation as the primary implementing agency-typically a mixture of emission standards and regulations-is collectively referred to as the [State Implementation Plan].").
190. Clean Air Act Amendments of 1990, Pub. L. No. 101-549, § 172(c)(1), 104 Stat. 2412, 2414 (1990).
191. see Arnold W. Reitze Jr., Air Quality Protection Using State Implementation Plans-Thirty-Seven Years of Increasing Complexity, 15 VILL. ENVTL. L.J. 209, 227 (2004).
192. Adamo Wrecking Co. v. United States, 434 U.S. 275, 289 (1978) (quoting S. REP. NO. 95-127, at 44 (1977)).
193. 42 U.S.C. § 7412(h)(1).
194. see also Adamo, 434 U.S. at 286 (quoting Clean Air Act Amendments of 1977 § 110).
195. See Adamo, 434 U.S. at 287.
196. Id. (quoting 38 Fed. Reg. 8820, 8821 (Apr. 6, 1973)) (internal quotation mark omitted).
197. The Clean Water Act defines point source as "any discernible, confined and discrete conveyance, including but not limited to any pipe, ditch, channel, tunnel, conduit, well, discrete fissure, container, rolling stock, concentrated animal feeding operation, or vessel or other floating craft, from which pollutants are or may be discharged." 33 U.S.C. § 1362(14) (2006).
198. § 1316(a)(1).
199. See CPC Int'l Inc. v. Train, 515 F.2d 1032, 1045 n.25 (8th Cir. 1975) (citing S. REP. NO. 92-414, at 1477 (1971)).
200. § 1311(b)(1)(A)(i).
201. Id. § 1311(b)(2)(A)(i).
202. REVESZ, supra note 78, at 535 ("The three main types of variances are § 301(c) variances (allowing modifications of BAT standards on the basis of economic capability), § 301(g) variances (allowing modification to BAT standards on water quality grounds), and fundamentally different factor (FDF) variances (allowing modifications to individual point sources that demonstrate characteristics that are fundamentally different from those which define the category in which the source is placed).").
203. In the case of "point sources" the pollution comes out of a "discernible, confined and discrete conveyance," § 1362(14). Typically, the pollution comes out of a pipe. Nonpoint sources, in contrast, are typically agricultural or urban runoff.
204. See REVESZ, supra note 78, at 545-46.
205. Id. at 546.
206. Id. at 515, 546.
207. Id. at 546.
208. See RICHARD L. REVESZ & MICHAEL A. LIVERMORE, RETAKING RATIONALITY: HOW COSTBENEFIT ANALYSIS CAN BETTER PROTECT THE ENVIRONMENT AND OUR HEALTH 135-37 (2008) (noting that switching production processes can be a cheaper method of complying with pollution regulations than purchasing end-of-pipe technology).
209. Id. at 136-37.
210. See, e.g., Jeff Civins, Mary Mendoza & Adam Sencenbaugh, Environmental Due Diligence-Counting Carbon, 24 NAT. RESOURCES & ENV'T 37, 38 (2009) ("Driven by a variety of stakeholders, and perhaps in anticipation of upcoming regulation, many sources of GHG emissions have undertaken voluntary measures to reduce CO2 and other GHGs attributable to their operations.")
211. see also Commission Guidance Regarding Disclosure Related to Climate Change, 75 Fed. Reg. 6290, 6291 (Feb. 8, 2010) (to be codified at 17 C.F.R. pts. 211, 231, 241) (discussing potential for future climate change regulation and noting "increasing calls for climate-related disclosures by shareholders of public companies").
212. Civins et al., supra note 118, at 38-39 (noting that in addition to reducing emissions from stationary sources, which are most likely to be regulated, companies are also voluntarily taking efforts to reduce their overall carbon footprint).
213. See Jeffery Marshall, Corporate Social Responsibility: Hard Choices on Soft Issues, FIN. EXECUTIVE, July/Aug. 2005, at 44, 45-46
214. The Greening of General Electric: A Lean, Clean Electric Machine, ECONOMIST, Dec. 10, 2005, at 77
215. ECOMAGINATION, http://www.ecomagination.com (last visited Nov. 23, 2011) (describing the program and its success so far).
216. See Paul Davidson, Wal-Mart to Double Solar Initiative, USA TODAY, Apr. 22, 2009, at 3B.
217. Jim Carlton, Citigroup Tries Banking on the Natural Kind of Green, WALL ST. J., Sept. 5, 2007, at B1.
218. Greening of Google, SOLARIPEDIA, http://www.solaripedia.com/13/63/greening_of_google.html (last visited Aug. 11, 2011).
219. See ANDREW HOWARD et al., GOLDMAN SACHS, CHANGE IS COMING: A FRAMEWORK FOR CLIMATE CHANGE-A DEFINING ISSUE OF THE 21ST CENTURY 15 (2009), available at http://www2.goldmansachs.com/our-thinking/gs-sustain/gs-sustain/climate-change-research-pdf.pdf.
220. CHI. CLIMATE EXCH., OVERVIEW BROCHURE 3 (2008) (on file with authors) (listing one of the benefits of joining the exchange as the opportunity to "demonstrate unique commitment through a legally binding goal, to shareholders").
221. Id. at 2.
222. If a special event requires a member to emit more than its allotted amount of emissions, the member can purchase a Carbon Financial Instrument contract (CFI) to offset the extra emissions released.
223. Id. at 4.
224. John Collins Rudolf, Cap-and-Trade Exchange Calls It Quits, N.Y. TIMES GREEN BLOG (Nov. 17, 2010, 8:22 AM), http://green.blogs.nytimes.com/2010/11/17/climate-futures-exchange-calls-it-quits ("With climate legislation in the United States dead in the water for the foreseeable future, participants in the exchange have lost interest.").
225. See Pet. for Interpretive Guidance on Climate Risk Disclosures at 8 (2007) (No. 4-547), available at http://www.sec.gov/rules/petitions/2007/petn4-547.pdf ("Investors of all types are aware that climate change, and greenhouse gas regulation, will have enormous implications for long-term capital investments that are being made right now by corporations. They want to know how fully (if at all) companies are taking climate change into account in making those decisions. They want to identify, and invest in, companies that are 'out front' in responding to climate risks and opportunities, and to avoid firms that are behind the curve.")
226. see also Andrew Schatz, Note, Regulating Greenhouse Gases by Mandatory Information Disclosure, 26 VA. ENVTL. L.J. 335, 371 (2008) (discussing how investors are increasingly putting pressure on companies to disclose greenhouse gas emissions).
227. See supra note 76 and accompanying text.
228. See Lynn E. Blais & Wendy E. Wagner, Emerging Science, Adaptive Regulation, and the Problem of Rulemaking Ruts, 86 TEX. L. REV. 1701, 1701 (2008) ("[W]hen new information threatens to unsettle existing regulatory requirements governing powerful stakeholders in the rulemaking process, using it to develop stricter environmental standards is unlikely to be a simple or straightforward matter.").
229. See Richard J. Lazarus, Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future, 94 CORNELL L. REV. 1153, 1180 (2009) ("The essentially conservative, fragmented, and deliberately cumbersome process for lawmaking in the United States does not readily lend itself to such responsive, iterative lawmaking initiatives.")
230. Donald Stever et al., Air Pollution Standards for Stationary Sources: Next Moves (Oct. 6, 2009), in 40 ENVTL. L. REP. 10012, 10013 (2010) ("[W]e don't want to go through a period like the 1980s again, when we waited around for Congress to pass what eventually became the 1990 [Clean Air Act] Amendments."). Delay may be particularly problematic in the environmental context given its "inherently dynamic nature."
231. See Lazarus, supra, at 1180, 1227 ("Environmental law's inherently dynamic nature creates further obstacles in that multiple statutes, statutory amendments, and regulatory revisions are likely to be necessary over time.").
232. See, e.g., Wendy E. Wagner, Congress, Science, and Environmental Policy, 1999 U. ILL. L. REV. 181, 222 ("The oldest model of congressional behavior, the popular democracy model, depicts a federal legislator as the direct representative or agent of the people."). We will consider a less representative model of Congress when we discuss interest group theory and public choice pathologies in Part V.
233. See FRANK R. BAUMGARTNER et al., LOBBYING AND POLICY CHANGE: WHO WINS, WHO LOSES, AND WHY 22 (2009) ("The information environment in Washington is overwhelmingly complex, with thousands of bills being considered each year in Congress, hundreds of hearings occurring in more than a hundred different subcommittees, and public concerns moving from issue to issue at a rapid pace.")
234. RICHARD L. HALL, PARTICIPATION IN CONGRESS 24 (1996) ("Congressmen in committees simply have too much to do legislatively and too little time, energy, and other legislative resources to do it. They cannot take on every issue; they must choose.").
235. See REVESZ & LIVERMORE, supra note 116, at 108 ("[T]he benefits of mitigating climate change will occur in the future. ").
236. Of course, some environmental issues-such as hazardous waste disposal-are highly salient.
237. See, e.g., Barry G. Rabe, Legislative Incapacity: The Congressional Role in Environmental Policymaking and the Case of Superfund, 15 J. HEALTH POL. POL'Y & L. 571, 576 (1990) (describing hazardous waste disposal as a "high-salience" issue, leading to the enactment of both the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)).
238. See James J. Florio, Congress as Reluctant Regulator: Hazardous Waste Policy in the 1980's, 3 YALE J. ON REG. 351, 380 (1986) (noting that because of Congress's "limited attention span," regulatory programs may be subject to "long periods of stagnation")
239. see also BAUMGARTNER et al., supra note 135, at 22 (noting "scarcity of space on the public agenda").
240. Andrew C. Revkin, Global Warming, ASOCIACIÓN DE VOLUNTARIOS PARA EL SERVICIO EN AREAS PROTEGIDAS DE COSTA RICA, http://www.asvocr.org/english/noticias/index.php?subaction=showfull&id=1268024383&archive=&start_from=&ucat=57&(last visited Aug. 11, 2011) ("[A] national preoccupation with the slow economy and competing issues, led by health care, threaten to delay or weaken [climate change] legislation.").
241. Stever et al., supra note 133, at 10013 (suggesting that congressional delay caused amendments to the Clean Air Act discussed in the 1980s to not actually be adopted until 1990).
242. Ari N. Sommer, Note, Taking the Pit Bull off the Leash: Siccing the Endangered Species Act on Climate Change, 36 B.C. ENVTL. AFF. L. REV. 273, 283 n.80 (2009) ("The Clean Water Act (CWA) was passed in its modern form in 1972, with significant amendments in 1977 and 1987.").
243. Rabe, supra note 137, at 573 ("This transformation [from committee to subcommittee governance] enabled multiple House subcommittees to explore the same policy area, compounding the historical problems of overlapping committee jurisdiction.")
244. see also Lazarus, supra note 133, at 1181 ("Fragmentation of congressional committee jurisdiction over environmental issues is inevitable given the ways in which ecological cause and effect span so many diverse human activities.").
245. See Rabe, supra note 137, at 573 ("Multiple hearings and bill referrals became commonplace, resulting. in the enactment of fewer laws and the submission of fewer reports to the full House. However, those laws that were passed were longer and more complex.").
246. see also Lazarus, supra note 133, at 1180 ("Securing passage of environmental law. requires multiple debates.").
247. Rabe, supra note 137, at 576.
248. See, e.g., Eric Biber, Climate Change and Backlash, 17 N.Y.U. ENVTL. L.J. 1295, 1319 (noting that socially desirable environmental regulations often impose concentrated costs on particular industries, thus giving them an incentive to resist the regulation)
249. Krista Yee, "A Period of Consequences": Global Warming Legislation, Cooperative Federalism, and the Fight Between the EPA and the State of California, 32 ENVIRONS: ENVTL. L. & POL'Y J. 183, 200 (2008) ("Global warming legislation often impacts the automobile industry, forcing manufacturers to create new cars in compliance with recently enacted environmental standards, sometimes at great cost. Thus, from a business perspective, it is natural for the automobile industry to resist new environmental legislation." (footnote omitted)).
250. Even if environmental legislation has numerous benefits, members of Congress tend "to weigh the prospect of potential losses more heavily than the possibility of gains" and thus may be wary about passing legislation "that may generate unintended and deleterious consequences" even when the legislation is also likely to produce beneficial results.
251. BAUMGARTNER et al., supra note 135, at 114.
252. See Wendy E. Wagner, Administrative Law, Filter Failure, and Information Capture, 59 DUKE L.J. 1321, 1325-26, 1329 (2010) (discussing the problem of information capture, noting that because "[a]dministrative law. imposes almost no filtering requirements. on any of the participants who engage in the rulemaking," well-financed interest groups can "gain[] control over regulatory decisionmaking in informal rulemakings" through "the excessive use of information. [and a] continuous barrage of letters, telephone calls, meetings, follow-up memoranda, formal comments, postrule comments, petitions for reconsideration, and notices of appeal").
253. Ann E. Carlson, Iterative Federalism and Climate Change, 103 NW. U. L. REV. 1097, 1117 (2009).
254. See E. Donald Elliott, Bruce A. Ackerman & John C. Millian, Toward a Theory of Statutory Evolution: The Federalization of Environmental Law, 1 J.L. ECON. & ORG. 313, 329 (1985)
255. see also Carlson, supra note 148, at 1111 ("Elliott, Ackerman, and Millian theorize that this federal legislation [regulating automobile emissions] came about largely because automobile manufacturers, along with the coal industry, feared inconsistent and potentially more stringent regulations from state and local governments.").
256. See, e.g., ACKERMAN & HASSLER, supra note 82, at 11 n.*, 31
257. Michael G. Faure & Jason Scott Johnston, The Law and Economics of Environmental Federalism: Europe and the United States Compared, 27 VA. ENVTL. L.J. 205, 273 (2009) ("[I]ndustry in countries with a high demand for environmental protection would lobby to impose tough standards on competitors in other jurisdictions, thus benefiting from their higher levels of environmental regulation by effectively creating barriers to entry.").
258. See David Schoenbrod, Goals Statutes or Rules Statutes: The Case of the Clean Air Act, 30 UCLA L. REV. 740, 812-13 (1983) ("A supposed advantage of delegation is that delegated authorities can respond more quickly than Congress to significant new information. Practice under the Clean Air Act, however, has proved far different than theory.").
259. See Thomas O. McGarity, Some Thoughts on "Deossifying" the Rulemaking Process, 41 DUKE L.J. 1385 (1992)
260. Richard J. Pierce, Jr., Seven Ways to Deossify Agency Rulemaking, 47 ADMIN. L. REV. 59 (1995). For examples in more general works
261. see STEPHEN BREYER, BREAKING THE VICIOUS CIRCLE: TOWARD EFFECTIVE RISK REGULATION 48 (1995)
262. Blais & Wagner, supra note 132, at 1704-06
263. Daniel T. Deacon, Note, Deregulation Through Nonenforcement, 85 N.Y.U. L. REV. 795, 825-26 (2010).
264. Pierce, supra note 152, at 62.
265. Id. at 64.
266. Id. at 65.
267. Id. at 84.
268. CARNEGIE COMM'N ON SCI., TECH., & GOV'T, RISK AND THE ENVIRONMENT: IMPROVING REGULATORY DECISION MAKING 108 (1993).
269. Blais & Wagner, supra note 132, at 1715-25 ("EPA is not revising standards frequently, and. when it does revise its standards, it is not necessarily because of advances in pollution-control technologies.").
270. Schoenbrod, supra note 151, at 812-13 (footnote omitted).
271. See Amy Whritenour Ando, Waiting to be Protected Under the Endangered Species Act: The Political Economy of Regulatory Delay, 42 J.L. & ECON. 29, 30, 45-48, 52 (1999) (using empirical analysis to demonstrate how interest group pressure delays endangered species listings).
272. Blais & Wagner, supra note 132, at 1713-15.
273. Shavell, supra note 2, at 79-80 ("[B]y the design of the regulators, present regulated behavior will in principle appropriately reflect all possible future changes in the world. In the model that I examined, for example, the level of precaution chosen by the regulators to be the legal standard in period 1 impounds correctly all possible future changes in harm in period 2.").
274. See Wendy E. Wagner, Commons Ignorance: The Failure of Environmental Law to Produce Needed Information on Health and the Environment, 53 DUKE L.J. 1619, 1641-42 (2004).
275. See Levmore, supra note 44, at 1659.
276. The standard of review for agency regulations depends on the relevant statute. For example, the Occupational Safety and Health Administration (OSHA) has the burden of demonstrating that it developed regulations based upon substantial evidence-a more demanding standard of review than the "arbitrary and capricious" standard. See Indus. Union Dep't, AFL-CIO v. Am. Petroleum Inst., 448 U.S. 607, 705 (1980) (Marshall, J., dissenting) ("This standard represents a legislative judgment that regulatory action should be subject to review more stringent than the traditional 'arbitrary and capricious' standard for informal rulemaking.").
277. See, e.g., United Steelworkers of America, AFL-CIO-CLC v. Marshall, 647 F.2d 1189, 1266 (D.C. Cir. 1980) ("As for technological feasibility, we know that we cannot require of OSHA anything like certainty. Since 'technology-forcing' assumes the agency will make highly speculative projections about future technology, a standard is obviously not infeasible solely because OSHA has no hard evidence to show that the standard has been met.").
278. See, e.g., Indus. Union Dep't, 448 U.S. at 652-53, 662 (holding that OSHA must demonstrate "a significant risk of material health impairment" before issuing standards); Gulf S. Insulation v. U.S. Consumer Prod. Safety Comm'n, 701 F.2d 1137, 1146 (5th Cir. 1983) (overturning formaldehyde regulation because "it is not good science to rely on a single experiment, particularly one involving only 240 subjects, to make precise estimates of cancer risk. To make precise estimates, precise data are required."); Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375, 391 (D.C. Cir. 1973) ("The Administrator may make a projection based on existing technology, though that projection is subject to the restraints of reasonableness and cannot be based on 'crystal ball' inquiry." (quoting Int'l Harvester Co. v. Ruckelshaus, 478 F.2d 615, 629 (D.C. Cir. 1973)); Int'l Harvester Co., 478 F.2d at 645 (rejecting EPA's assumption used to calculate lead adjustment factor as too speculative).
279. See Industrial Union Dep't, 448 U.S. at 652-53 (footnote omitted).
280. See Portland Cement Ass'n, 486 F.2d at 379 ("The action of the Administrator has been challenged on [three] grounds. [including that] [t]he achievability of the standards was not adequately demonstrated.")
281. see also supra note 87 and accompanying text.
282. Portland Cement Ass'n, 486 F.2d at 391 (quoting Int'l Harvester Co., 478 F.2d at 629).
283. Id. at 392 (quoting Int'l Harvester Co., 478 F.2d at 642).
284. See, e.g., Howard Latin, Good Science, Bad Regulation, and Toxic Risk Assessment, 5 YALE J. ON REG. 89, 133 (1988) [hereinafter Latin, Good Science] ("[J]udicial requirements for comprehensive agency assessments of all potentially relevant factors and for a high degree of scientific precision have substantially emasculated environmental control programs in the past decade.")
285. Howard Latin, Regulatory Failure, Administrative Incentives, and the New Clean Air Act, 21 ENVTL. L. 1647, 1663 (1991) [hereinafter Latin, Regulatory Failure] (noting that judicial review leads agencies to avoid regulating under uncertainty); Wagner, supra note 147, at 1422 ("Rather than focusing its energies on developing public-oriented regulatory policy, the agency finds instead that it must devote most of its analysis to preparing rules that can withstand fierce attack from an aggressive group of affected interests and respond to the flood of information loaded into the system by these same groups.").
286. Latin, Regulatory Failure, supra note 172, at 1663 (footnote omitted).
287. The choice would be different, of course, if the old technology could simply be upgraded for the $5000 difference in the cost of the technologies. But just like we cannot upgrade our laptops by paying the difference between the cost of our obsolete three-year-old laptop and the cost of a new one with far greater computing power, typically this type of choice is also not available in the pollution-control context.
288. See infra text accompanying notes 187-91.
289. One might argue that the regulator could consider the date when the actor entered the activity in determining whether to grandfather the actor. That is, the regulator could choose to not grandfather entrants who should have adopted newer precautions. In practice, however, this policy would be difficult to implement because the regulator would have to make assumptions about when this information was first known and would have to be able to defend the decision against the inevitable judicial challenges.
290. Shavell, supra note 2, at 73 ("[U]nlimited duration of grandfathering of plants raises questions.").
291. We assume that the harm is $700,000 in each of the periods.
292. The transition relief literature does not include detailed discussion about how new legal rules are selected, but it is implicit that new, prospective rules are those rules that would be optimal for new sources. Shavell assumes at the outset that the newly adopted regulation is the one that is optimal for new entrants.
293. Shavell, supra note 2, at 48. He then discusses which grandfathering policy would be socially optimal in light of the new rule. Id. Kaplow also implies that the new rule is selected in light of what is optimal for new actors. He suggests that the new rule should be the rule we would want all existing sources to anticipate even in the face of uncertainty.
294. Kaplow, supra note 2, at 521. He also assumes that the substantive policy decision is not affected by the choice of transition policy. Id. ("[T]he discussion assumes that the reforms themselves are desirable at the time they are made. A significant related assumption, implied by the stronger assumption just stated, is that substantive policy decisions are not themselves affected by the choice of transition policy.").
295. See supra note 53 and accompanying text.
296. Nash & Revesz, supra note 1, at 1708-09.
297. Several authors have provided an overview of the old-plant effect.
298. See ACKERMAN & HASSLER, supra note 82, at 67-68
299. Keohane, Revesz & Stavins, supra note 78, at 315 n.10
300. see also Howard K. Gruenspecht, Differentiated Regulation: The Case of Auto Emissions Standards, 72 AM. ECON. REV. 328, 328 (1982) ("The adoption of more stringent emissions standards for new vehicles is shown to prolong the retention of old, high-emission-rate vehicles in the fleet.")
301. Robert N. Stavins, Vintage-Differentiated Environmental Regulation, 25 STAN. ENVTL. L.J. 29, 41-56 (2006) (describing "effects of vintage-differentiated regulation on the lives of durable plant and equipment")
302. Richard Webster & Julia LeMense, Spotlight on Safety at Nuclear Power Plants: The View from Oyster Creek, 26 PACE ENVTL. L. REV. 365, 367 (2009) (describing how NRC regulations which have only "increased the safety requirements for new plants" have produced a "trend. toward relicensing of old plants rather than replacement with new plants").
303. See, e.g., Stavins, supra note 183, at 43 (noting that vintage-differentiated regulation "can lead to short-term emissions increases" and that "when the sources subject to regulation have especially low rates of deterioration and technical obsolescence. the 'short term' is very long").
304. Nash & Revesz, supra note 1, at 1710.
305. Id. at 1711.
306. See Matthew D. McCubbins, Roger G. Noll, & Barry R. Weingast, Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies, 75 VA. L. REV. 431, 467 (1989) ("[T]he abatement system can be included in a new plant's original design, but must be fit into an older plant.")
307. Stavins, supra note 183, at 30.
308. See Peter Huber, The Old-New Division in Risk Regulation, 69 VA. L. REV. 1025, 1027 (1983) ("[The regulation of old risks] therefore often faces large economic and social obstacles and incurs transition costs.")
309. Shavell, supra note 2, at 51-52 (discussing transition costs).
310. REVESZ & LIVERMORE, supra note 116, at 135-37.
311. Id. at 136-37.
312. Shavell, supra note 2, at 44-45.
313. Shavell, supra note 2, at 46.
314. In all three examples, the question is whether the existing source should meet the new source standard or whether, instead, it should be grandfathered. It is possible to design a regulatory scheme under which there is an additional option: the existing source could meet a standard that is less stringent than the one that applies to the new source but that leads to less risk than grandfathering. Analyzing this additional option would complicate the examples but would not change the key argument of this Part: that sequential optimization does not produce the socially beneficial regulatory policy.
315. See Eric Biber, Climate Change and Backlash, 17 N.Y.U. ENVTL. L.J. 1295, 1328 (2009) (noting that opposition to climate change legislation can "be bought off with grandfather exemptions and sidepayments")
316. David Dana & Susan P. Koniak, Bargaining in the Shadow of Democracy, 148 U. PA. L. REV. 473, 483-84 n.24 (1999) ("Grandfather clauses, in contrast to compensation payments, may well facilitate the passage of reform legislation. When the legislature grandfathers current beneficiaries of a certain regulatory regime from new regulations, it reduces or eliminates the opposition of those beneficiaries without extracting money from some other interest group and entailing associated political costs.")
317. Glynn S. Lunney, Jr., A Critical Reexamination of the Takings Jurisprudence, 90 MICH. L. REV. 1892, 1955 (1992) ("Absent the promise of compensation, a concentrated group will too often be able to block even those concentrated-dispersed measures that would benefit society as a whole. By promising compensation, and thereby replacing the concentrated group with a dispersed group, the Court would make enactment of these measures more likely.")
318. Stavins, supra note 183, at 34 ("[G]randfathering is likely to be a politically expedient option for legislators. By limiting the scope of regulation to new capital assets, the burden of regulatory compliance is concentrated on a small subset of the electorate and the cost is transferred to unspecified, future 'new sources.'").
319. See Ramseyer & Nakazato, supra note 48, at 1171-73.
320. We use the term "public choice expenditures" to refer to expenses aimed at influencing governmental officials to adopt particular positions on policy issues. These include campaign contributions, salaries for lobbyists who meet with government officials, and expenses for informational purposes such as commissioning studies in order to bolster the interest group's position. Sometimes the academic literature uses the term "lobbying" to refer only to the transmission of information to political officials for the purposes of accomplishing a particular policy goal, thus excluding campaign contributions.
321. See Frank R. Baumgartner & Beth L Leech, The Multiple Ambiguities of "Counteractive Lobbying," 40 AM. J. POL. SCI. 521, 529 (1996). However, some authors define lobbying more broadly to include campaign contributions.
322. See JEFFREY M. BERRY, LOBBYING FOR THE PEOPLE: THE POLITICAL BEHAVIOR OF PUBLIC INTEREST GROUPS 263 (1977) (describing four strategies of lobbying: law, confrontation, information, and constituency influence which includes campaign contributions). For a description of case studies measuring the influence of interest groups
323. see FRANK R. BAUMGARTNER & BETH L. LEECH, BASIC INTERESTS: THE IMPORTANCE OF GROUPS IN POLITICS AND IN POLITICAL SCIENCE 120-46 (1998). For an overview of the game theoretical literature on interest groups
324. see Jan Potters & Frans van Winden, Models of Interest Groups: Four Different Approaches, in COLLECTIVE DECISION-MAKING: SOCIAL CHOICE AND POLITICAL ECONOMY 337-62 (Norman Schofield ed., 1996) (discussing four models of interest groups: models employing an influence function, models employing a vote function, models employing a composite utility function, and models focusing on the transmission of information).
325. Gordon Tullock, The Welfare Costs of Tariffs, Monopolies, and Theft, 5 W. ECON. J. 224, 228 (1967). There are three types of rent-seeking expenditures that are generally considered socially wasteful: "The efforts and expenditures of the potential recipients of the monopoly[,]. [t]he efforts of the government officials to obtain or to react to the expenditures of the potential recipients[,]. [and] [t]hird-party distortions induced by the monopoly itself or the government as a consequence of the rentseeking activity."
326. DENNIS C. MUELLER, PUBLIC CHOICE III 334 (2003) (citing James M. Buchanan, Rent Seeking and Profit Seeking, in TOWARD A THEORY OF THE RENT-SEEKING SOCIETY 12-14 (James M. Buchanan, Robert D. Tollison, & Gordon Tullock eds., 1980)). Of course, as Ramseyer and Nakazato acknowledge, "resources spent in. lobbying do produce a social good to the extent they create accurate information about the effects of. reform." Ramseyer & Nakazato, supra note 48, at 1171-72 n.44.
327. See supra note 194.
328. Levmore, supra note 44, at 1665-66.
329. See Keohane, Revesz & Stavins, supra note 78, at 317.
330. Id. at 316.
331. See Brennan Van Dyke, Note, Emissions Trading to Reduce Acid Deposition, 100 YALE L.J. 2707, 2720 (1991) (noting that initially allocating permits through a system of grandfathering "has one great advantage over an auction scheme: its political appeal to influential interest groups").
332. Ramseyer & Nakazato, supra note 48, at 1158.
333. Id. at 1171-73.
334. See id. at 1171 ("They will pay honoraria, organize grass-roots political organizations, and contribute to campaigns; to protect their projects from reform, they will coax, cajole, and bribe.").
335. Id. at 1171-73.
336. Id. at 1167-68.
337. Id. at 1172. Congress would essentially agree that, in the event of a repeal, beneficiaries of the tax benefit would receive a "lump sum equal to the net present value of the expected, but as-yetuncollected, tax benefit[]."
338. Id. at 1168.
339. SHAVIRO, supra note 2, at 74-75.
340. Id. at 74-81.
341. See Ramseyer & Nakazato, supra note 48, at 1171 (defining "tax-guaranteed strategy" as "a promise to grandfather, coupled with a promise to pay damages for breach").
342. SHAVIRO, supra note 2, at 74-81.
343. See Ramseyer & Nakazato, supra note 48, at 1171 (defining "tax-contingent strategy" as "Graetz and Kaplow's never-grandfather strategy").
344. SHAVIRO, supra note 2, at 74-81. However, Ramseyer and Nakazato dismiss the concern that greater enactment-period lobbying expenses might offset the reduced postenactment lobbying costs: When Congress decides to grant tax benefits to promote investment, it could either guarantee the benefits or keep then [sic] contingent. All else equal, however, rational investors will consider only the expected net present value of those benefits when deciding how much to invest. As a result, when comparing the enactment-period lobbying costs generated by the tax-contingent and tax-guaranteed strategies, the correct comparison is between strategies that produce postenactment benefits of equal net present value. Yet between tax-guaranteed and tax-contingent benefits of equal net actuarial value, investors will not care. And because they will not care, the tax-guaranteed strategy will induce the same amount of enactment-period lobbying as the tax-contingent one. If so, then the optimal strategy is the one that minimizes the social loss from post enactment period lobbying. The analysis above suggests the tax-guaranteed strategy does just that.
345. Ramseyer & Nakazato, supra note 48, at 1173 (footnote omitted). In Ramseyer and Nakazato's view, the actual value of the benefit Congress chooses to adopt will vary depending on whether Congress adopts a tax-guaranteed or tax-contingent benefit.
346. To borrow an example from Shaviro, if Congress were to adopt a municipal bond tax preference in order encourage investment in municipal bonds, it could "fine-tune the preference upon enactment to take account of the anticipated transition rule in the event that the preference is later repealed. ".
347. SHAVIRO, supra note 2, at 74.
348. Thus, if Congress intended not to grant transition relief in the event of repeal, it would enact a more generous tax benefit than it would if it promised transition relief, "thus keeping the preference's value from being affected by the transition regime." Id. at 75. Assuming such "scaling" occurs, interest groups standing to benefit from the tax benefit would be indifferent between the two approaches to transition relief in the pre-enactment stage.
349. Id. at 74-75. Thus, we would expect that enactment lobbying expenditures would not vary according to the transition rule. However, if Congress later decides to repeal the tax benefit, we would expect postenactment expenditures to be greater when investors have not been promised transition relief-making the tax-guaranteed strategy preferable to the tax-contingent strategy.
350. Ramseyer & Nakazato, supra note 48, at 1172-73.
351. Louis Kaplow, Transition Policy: A Conceptual Framework, 13 J. CONTEMP. LEGAL ISSUES 161, 198-99 (2003).
352. Id. at 198.
353. Kaplow levies this same critique against the argument that transition relief may be necessary in order to "reduce[] opposition to desirable reforms.".
354. Id. at 197.
355. He explains that consistently providing transition relief may merely "buy off. opposition to undesirable reforms"-thus making it easier for policies that have net social costs to prevail.
356. Id. at 198.
357. Id. at 198.
358. Id. at 198-99.
359. See supra notes 183-86 and accompanying text.
360. See, e.g., ACKERMAN & HASSLER, supra note 82, at 26-54, 117-18 (describing how producers of high-sulfur coal lobbied for more stringent regulation of new sources and for standards favoring coal scrubbing over low-sulfur coal to secure a competitive advantage over producers of low-sulfur coal).
361. See Ramseyer & Nakazato, supra note 48, at 1168.
362. Id. at 1169, 1172.
363. See Nash & Revesz, supra note 1, at 1729.
364. For a useful overview of "vintage-differentiated regulations" in environmental law.
365. see Stavins, supra note 183, at 30, 36.
366. The Clean Water Act employs this approach.
367. See 33 U.S.C. § 1311(b) (2006) (establishing timetable for achievement of effluent limitation standards).
368. see also REVESZ, supra note 78, at 507 ("[T]he [Clean Water Act] adopted a phased approach to the setting of federal standards for existing sources, such that EPA was directed to set increasingly stringent effluent limitations for point sources over time.").
369. The Clean Air Act adopts this approach.
370. See infra notes 231-32 and accompanying text. Some land use regulations also provide for initial grandfathering, but require grandfathered buildings to comply with the new regulations once major modifications are made.
371. See Shavell, supra note 2, at 75 & n.55.
372. See generally Nash & Revesz, supra note 1 (presenting an economic analysis of transition relief through a case study of the Clean Air Act).
373. 42 U.S.C. § 7411(a)(2) (2006) (stating that federal performance standards apply to stationary sources, "the construction or modification of which is commenced after the publication of regulations").
374. "Modification" is defined in the statute as "any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted.".
375. Id. § 7411(a)(4). The EPA, however, has promulgated rules exempting from the definition of "modification" certain plant changes, including "routine maintenance, repair, and replacement; an increase in production rate, if the increase did not exceed the 'operating design capacity of the affected facility'; an increase in hours of operation; and use of alternative fuel or raw material if the affected facility could accommodate such use." Nash & Revesz, supra note 1, at 1684-85.
376. See Nash & Revesz, supra note 1, at 1681 ("Commentators regularly note that Congress expected most existing sources to gradually phase out over the course of their ordinary economic lives or to upgrade and trigger the new source performance standards, leaving most major stationary sources subject to federal control.")
377. David B. Spence, Coal-Fired Power in a Restructured Electricity Market, 15 DUKE ENVTL. L. & POL'Y F. 187, 195 (2005) ("Congress does not seem to have intended for grandfathered plants to be grandfathered indefinitely, since the [Clean Air] Act calls for application of a 'new source' permitting standards to 'stationary source[s] the construction or modification of which is commenced after' the effective date of the Act's new source permitting requirements." (second alteration in original) (emphasis added) (citing § 7411(a)(2))).
378. Nash & Revesz, supra note 1, at 1708-09 ("[D]ifferential environmental regulations delay plant retirement."); Spence, supra note 233, at 195 ("[O]lder coal-fired power plants, many of them in the Midwest, continued to pollute at essentially unregulated rates long after the passage of the [Clean Air] Act, depositing acid rain and other pollution on downwind states."). Although the acid rain program has dramatically reduced total sulfur dioxide emissions from coal-fired power plants, by imposing a nationwide cap on emissions, and permitting individual sources to buy and sell emissions allowances (tradable permits). [it] does little to solve other pollution problems posed by unregulated coal-fired power plants, including those associated with emissions of particulates, nitrogen oxides, carbon dioxide and mercury.
379. Id. at 197 (footnotes omitted).
380. Press Release, U.S. Dep't of Justice, U.S. Sues Electric Utilities in Unprecedented Action to Enforce the Clean Air Act (Nov. 3, 1999), available at http://www.usdoj.gov/opa/pr/1999/November/524enr.htm.
381. See PUB. CITIZEN, EPA'S SMOKE SCREEN: HOW CONGRESS WAS GIVEN FALSE INFORMATION WHILE CAMPAIGN CONTRIBUTIONS AND POLITICAL CONNECTIONS GUTTED A KEY CLEAN AIR RULE 6 (2003), available at http://www.cleanupwashington.org/documents/epasmokescreen.pdf. The Department of Justice sued nine utility companies: American Electric Power, Cinergy, Duke Energy Corp., Illinois Power Co. (Dynegy), FirstEnergy Corp., Southern Co., Southern Indiana Gas & Electric Co. (SIGECO), Tampa Electric Co., and the Tennessee Valley Authority. Id. at 7. Three other companies-Virginia Power (VEPCO), PSEG, and Wisconsin Electric-were threatened with a lawsuit but settled.
382. Id. at 6.
383. BRANDON WU, U.S. PIRG EDUC. FUND, PAYING TO POLLUTE: CAMPAIGN CONTRIBUTIONS AND LOBBYING EXPENDITURES BY POLLUTERS WORKING TO WEAKEN ENVIRONMENTAL LAWS 17 (2004), available at http://cdn.publicinterestnetwork.org/assets/PV0eprpcb4arS_TojM2EPA/payingtopollute2004.pdf.
384. PUB. CITIZEN, supra note 236, at 3.
385. See id. at 3, 20.
386. CHARLES LEWIS, THE BUYING OF THE PRESIDENT 2004: WHO'S REALLY BANKROLLING BUSH AND HIS DEMOCRATIC CHALLENGERS-AND WHAT THEY EXPECT IN RETURN 102 (2004).
387. While the industry did give money to the Democrats as well, the lion's share of the campaign contributions went to the Republican Party.
388. Id. at 101-02 ("The top five electric utility contributors to the political parties in the 2000 and 2002 election cycles-Dominion Resources, Inc., Southern Company, Exelon Corporation, Texas Utilities Company, and the National Rural Electric Cooperative Association-gave nearly threequarters (74 percent) of their party donations, $5.1 million, to the Republican national committees and just $1.8 million to the Democrats.").
389. PUB. CITIZEN, supra note 236, at 4.
390. The three officials were Anthony Alexander, president of FirstEnergy, Stephen Wakefield, a vice president at Southern Co., and Thomas Farrell, a vice president at Dominion.
391. Id. at 21.
392. Id. at 4.
393. The OAR is the arm of the EPA directly responsible for drafting NSR rules, whereas a different arm, the Office of Enforcement and Compliance Assurance, primarily serves an enforcement role.
394. See id. at 10-11.
395. Joel A. Mintz, "Treading Water": A Preliminary Assessment of EPA Enforcement During the Bush II Administration, 34 ENVTL. L. REP. 10912, 10918 (2004).
396. NAT'L ENERGY POLICY DEV. GRP., RELIABLE, AFFORDABLE, AND ENVIRONMENTALLY SOUND ENERGY FOR AMERICA'S FUTURE 7-14 (2001), available at http://www.wtrg.com/EnergyReport/National-Energy-Policy.pdf.
397. The ERCC filed its first lobbying report with the Senate Office of Public Records (SOPR) for the second half of 2000.
398. See LDA Reports, U.S. SENATE, http://www.senate.gov/legislative/Public_Disclosure/LDA_reports.htm (last visited Nov. 23, 2011).
399. WU, supra note 239, at 14.
400. All data taken from LDA Reports, supra note 247 (follow "Search the Lobbying Database (LD-1, LD-2)," click the box next to "client name" in the new window that opens and click "submit," type "Electric Reliability Coordinating Council" in the field for client name and click "submit," filter results by year by clicking on "Filing Year" in the chart, and add the amounts in the column "Amt Reported" to get a total of over $10 million).
401. (follow "Search the Lobbying Database (LD-1, LD-2)," click the box next to "client name" in the new window that opens and click "submit," type "Edison Electric Institute" in the field for client name and click "submit," filter results by year by clicking on "Filing Year" in the chart, then add the amounts in the "Amt Reported" column to reach a total of $74,655,466,000 spent between 1999 and 2002).
402. See Nash & Revesz, supra note 1, at 1697-98.
403. See supra note 232 and accompanying text.
404. Nash & Revesz, supra note 1, at 1698.
405. Id. at 1699.
406. Id. at 1702-03. Under this rule, three out of the nine utilities sued by the DOJ claimed that they were no longer in violation of the Clean Air Act and that the actions should be dropped.
407. OFFICE OF INSPECTOR GEN., ENVTL. PROT. AGENCY, REPORT NO. 2004-P-00034, NEW SOURCE REVIEW RULE CHANGE HARMS EPA'S ABILITY TO ENFORCE AGAINST COAL-FIRED ELECTRIC UTILITIES 21 (2004), available at http://www.epa.gov/oig/reports/2004/20040930-2004-P-00034.pdf.
408. See OFFICE OF INSPECTOR GEN., supra note 255, at 21.
409. William S. Eubanks II, The Clean Air Act's New Source Review Program: Beneficial to Public Health or Merely a Smoke-and-Mirrors Scheme?, 29 J. LAND RESOURCES & ENVTL. L. 361, 370 (2009).
410. Prevention of Significant Deterioration (PSD) and Non-Attainment New Source Review (NSR): Equipment Replacement Provision of the Routine Maintenance, Repair, and Replacement Exclusion: Reconsideration, 70 Fed. Reg. 33,838 (June 10, 2005) (to be codified at 40 C.F.R. pts. 51-52).
411. See New York v. Envtl. Prot. Agency, 443 F.3d 880, 890 (D.C. Cir. 2006).
412. See, e.g., Bruce A. Ackerman & Richard B. Stewart, Reforming Environmental Law, 37 STAN. L. REV. 1333, 1341-42 (1985) ("A system of tradeable rights will tend to bring about a least-cost allocation of control burdens, saving many billions of dollars annually.")
413. Robert W. Hahn & Robert N. Stavins, Incentive-Based Environmental Regulation: A New Era from an Old Idea?, 18 ECOLOGY L.Q. 1, 7-8 (1991) ("In contrast to traditional command-and-control approaches, policy mechanisms based on economic incentive systems ensure that firms 'automatically' undertake pollution control efforts in precisely the manner and degree which will result in the cost-effective allocation of the overall control burden." (footnote omitted)).