Law and Economics

NEPA’s Footprint: Information Disclosure as a Quasi-Carbon Tax on Agencies

The National Environmental Policy Act’s (NEPA) information-disclosure requirements have the potential to create a quasi-carbon tax on greenhouse gas emissions arising out of major federal actions. By requiring government polluters to expend more resources, both financial and political, on disclosure as project-related emissions increase, NEPA can operate like a carbon tax that forces agencies to internalize negative externalities associated with emissions. Federal agencies routinely undertake actions with enormous potential to affect the earth’s climate. When the predicted impacts of such actions on the environment are significant, NEPA demands that the agency prepare an Environmental Impact Statement (EIS) to disclose and assess those impacts. Outside of the climate change context, NEPA’s onerous disclosure requirements for significant impacts create incentives for agencies to reduce the impacts of their actions on the environment to avoid these burdens. Due to pervasive uncertainty as to what NEPA requires agencies to disclose in the climate change context, however, NEPA’s potential to spur agencies to reduce or mitigate emissions remains unrealized.

Without amending the existing statute or regulations, the White House Council on Environmental Quality can and should structure NEPA’s burdens and reporting boundaries on a sliding scale to mimic key structural features of a Pigouvian carbon emissions tax. The marginal costs of greater emissions should be payable in increased reporting specificity and breadth, with concomitant economic and political costs. This approach will harness NEPA’s substantive effects to combat global climate change.

False Efficiency and Missed Opportunities in Law and Economics

This Article points out a simple flaw common to many law-and-economics analyses, ranging from fundamental models like the Hand Formula to narrower arguments like those that oppose the doctrine of unconscionability.
The flaw is straightforward: economic analyses of law often assume, either implicitly or explicitly, that when it is more efficient for an activity to occur than for it not to occur, it is efficient for legal rules to encourage the activity. Even on grounds of efficiency alone, however, knowing in isolation whether an activity produces more wealth than its absence is insufficient to conclude that the activity is efficient. The determination of efficient legal rules requires an answer to a further question too often neglected by legal economists: what are the activity's alternatives? Even if an activity is more efficient than its absence, it may produce less wealth (perhaps significantly less wealth) than its alternatives, once its harms are taken into account. Encouraging all activities that appear to produce wealth on their own runs the risk of encouraging opportunistic behavior whose effect is more to transfer wealth than to create it.
As a simple example, a legal regime that followed the Hand Formula would encourage businesses to earn $100,000 by causing $95,000 worth of unavoidable harms to others; that incentive alone, while probably objectionable for other reasons, is not inefficient because, instrumentally speaking, the $100,000 social gains justify the $95,000 social losses. But a rule based on the Hand Formula would also encourage economic actors to engage in that $100,000-earning activity rather than one that paid $90,000 but caused no harms; that incentive is inefficient.
Some economic analyses acknowledge related points, but the law-and-economics movement insufficiently understands the flaw that this Article describes. Similarly, critics of the law-and-economics movement—while aware of other fundamental flaws in legal-economic analysis, such as the inapplicability of the rational-actor model in many circumstances—do not readily enough engage economic models on their own terms. This Article attempts to remedy those oversights, and in doing so, it suggests greater caution in applying economic reasoning to law.