Regulatory failure and the polluter pays principle: why regulatory impact assessment dominates the polluter pays princip

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Regulatory failure and the polluter pays principle: why regulatory impact assessment dominates the polluter pays principle Dieter Schmidtchen1 · Jenny Helstroffer2   · Christian Koboldt3 Received: 14 December 2019 / Accepted: 10 August 2020 © Society for Environmental Economics and Policy Studies and Springer Japan KK, part of Springer Nature 2020

Abstract This paper shows possible inconsistencies in environmental law, in which regulatory impact assessment (RIA) and the polluter pays principle (PPP) coexist. While these norms can be compatible, we show that there are a number of realistic settings in which the PPP does not reach efficiency and systematically leads to regulatory failure. These systematic errors are due to the ex-ante restriction of possible actors, in combination with possible opportunistic behavior, market power issues, the existence of multiple optima and to the neglect of second-best problems in the PPP. We show that RIA, encompasses the polluter pays option and avoids these flaws. Keywords  Polluter pays principle · External costs · Regulatory impact assessment JEL Classification  D62 · H23 · K2

We would like to thank Robert Cooter, Dinko Dimitrov, Thomas Eger, Dominik Karos, Esther Mohr, Marie Obidzinski, Marc Deschamps, Julien Jacob and participants of the 8th annual conference of the Asian Law and Economics Association and the Annual Conference of the German Law and Economics Association and the reviewers for helpful comments on earlier drafts of this paper. * Jenny Helstroffer jenny.helstroffer@univ‑lorraine.fr 1

Center for the Study of Law and Economics, Faculty of Human and Business Science, Saarland University, Saarbrücken, Germany

2

Université de Lorraine, Université de Strasbourg, AgroParisTech, CNRS, INRAE, BETA, Nancy, France

3

DotEcon, London, UK



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Environmental Economics and Policy Studies

1 Introduction Environmental law offers two fundamental concepts for identifying which party or parties should bear the costs that arise from environmental damages (external costs). According to the polluter pays principle (PPP), those who “cause pollution” should pay for the harm they inflict on others (internalization of external costs), for example in the form of taxes, emission allowances (“cap and trade”) or command and control measures (prohibitions, restrictions of activity levels, installation of avoidance and abatement devices). A regulatory impact assessment (RIA), on the other hand, does not start from a presumption about which party should bear these external costs. Rather, it comprises a number of steps to be followed in order to determine the likely consequences of new or existing regulations. These steps essentially cover a thorough cost-benefit analysis of available policy options,1 including taxation and command and control regulation of the polluter and of other parties, as well as the option of regulatory forbearance. Although an RIA may lead to the conclusion that polluters should bear the full cost of environmental damage and may in some ins