Improving Regulatory Information: New York's Transition to Environmental Fees

Abstract

Regulations tell firms to invest in certain types of technology or processes. Many analysts have criticized such uniform controls as inefficient due to failure to recognize important differences between firms. Under one class of reforms, called market-based regulation, direct controls of firms would be replaced by restructured incentives. Under this approach, agencies would levy fees or taxes on the amount of potential social harm generated by the firms' processes, forcing them to internalize previously externalized costs of production and to correct market failures which justified regulation in the first place. Proponents of marketbased regulation usually concede that administrative and policy problems preclude its wide use. Regulatory agencies are unable routinely to monitor the discharges, emissions, or other residual outputs which are taxable under the programs. If agencies cannot monitor such residuals, then they cannot know how firms will respond to different fees or taxes or even the amounts of fees or taxes which firms would owe over any time period. But major management improvements sometimes emerge unexpectedly as agencies, coping with moderately challenging programs, establish the groundwork for more ambitious ones. This article discusses how the New York State Department of Environmental Conservation indirectly established the basic information system required by market-based regulation as it switched from general revenues to regulatory fees to fund some of its key regulatory programs. New York's experience clarifies some of the key administrative problems that government would face in shifting to marketbased regulation.