Environmental Governance - Project description

Research programme
Environmental Policies in Decentralized Governmental Systems:
a Blueprint for Optimal Governance

EXECUTIVE SUMMARY
Peoples and governments the world over have discovered, or are in the process of discovering, the virtues of the sort of decentralization we associate with markets. Some progress, but much less, has also been achieved in discovering the virtues of decentralization of public sectors. The reasons for this slower progress are, firstly, that public sector decentralization in many instances poses inherently more difficult problems than market decentralization does and, secondly, that less empirically driven research has been done on the first than on the second problem.
The difficulties, however, go deeper than a fascination with abstract normative analysis. The challenges posed to business are never easy ones, but in a sense they are less daunting than those confronting collectivities and their governments essentially because there are fewer instruments available in public sectors to deal with ex ante uncertainty and with the consequences of mistakes – like insurance and forward trading. The difficulties are so great that, to progress, we must focus on subsets of problems facing governments. The one motivating our programme pertains to the environment.
Our preoccupation is with policy. We are concerned to examine policy problems in a framework that is respectful of the mechanisms and incentives which decentralization creates and fosters in the real world. In defining the research agenda and throughout the execution of the programme, therefore, we plan to consult policy makers as well people responsible for implementing environmental policies in different countries and at different levels of governance.
Constitutional powers and administrative responsibilities over the environment are almost everywhere already decentralized. However, there is enormous variation in what is done in different countries. That is to be expected if decentralization is at all tailored to the circumstances that prevail in different jurisdictions. Still, the mechanisms set in motion by decentralization – just like the mechanisms set in motion by market forces – should display some similarity whatever the local idiosyncrasies. It is to discover the similarities and the differences and to make them explicit that we propose to sponsor a number of country studies.
The task of bringing scientifically based propositions related to decentralization to bear on environmental matters formulated in an ecological frame of reference is daunting. What is needed is knowledge of what decentralization does and how it works, combined with issues of Law and Economics, Regulatory Economics, Public Economics, Ecological Economics and Economics of Environmental Policy, the role of public opinion, the influence of the media, the evolution of cultures, and the actual workings of democratic politics. To be able to avail ourselves of this vast knowledge, we propose to create and work with a Research Network made up of panels of experts.
The end product of that research activity will be given diffusion through the production of a series of publications: (i) a volume of country studies; (ii) a volume summarizing the output of the research network; and (iii) a final Report.

I. OVERVIEW
With the pressures of population, economic growth, and the movement of people and commodities reaching a scale which threatens the regenerative and assimilative capacities of the biosphere, environmental conservation has come to be recognized as a preeminent global challenge. Concerns for the environment, at the level of research and of policy-making, have been significant, but they are mainly cast in a framework which conceives of environmental problems as problems of degradation through, let us say, pollution and over-exploitation. Such an approach is based on a view of an environment made of unconnected or disjointed components – blue whales, coral reefs, or the Amazonian forest as isolated fragments.
This conventional view identifies as "environment" what are in effect only a few of its attributes. These are typically the ones perceived as most directly related to the immediate well-being of western, urbanized populations – air and water quality in cities, the availability of parks and other recreational sites, the conservation of a few charismatic or symbolic species. It is this simplification that underlies the environmental Kuznets' curve hypothesis (Kuznets, 1955; Grossman and Krueger, 1995) according to which economic growth and the consequently increasing levels of income cannot but be good for the environment: richer societies can afford to spend more on environmental protection. Such a view still permeates much of the economic approaches to environmental issues (see, for example, The Economist, 1999). The attributes listed above and others like them are important, but are essentially derivative of more general properties of the natural ecosystems on which economies and societies rely.
In science it has been known for decades, and has become ever more apparent in recent years, that the biosphere consists of highly interrelated and complex components, where even elements and species performing similar ecological functions are generally important in maintaining the capacity of the overall system to operate, to absorb shocks and stress, and to support life. This view of ecological mechanisms can be found in the scientific literature under several different headings, depending on the specific disciplinary background – systems approach, complexity approach, resilience approach are a few. They all have in common a conviction that a continued increase in resource-absorbing economic activities of a magnitude such as that which has taken place in the 20th century will not continue indefinitely without bringing about major environmental change. A reliable appraisal of the ecological and economic consequences of increased economic activity cannot be based on casual observations, which could reflect other sources of variability, but requires use of a time frame longer than that appropriate for most ordinary decisions. One must recognize, however, the growing consensus on the existence of global environmental change based on a larger and larger body of evidence. Documented ongoing processes include the erosion of topsoil in many developing countries consequent on population pressure and inappropriate management regimes, unprecedented rates of biodiversity loss, deforestation, changes in atmospheric composition and in global climate.
The complexity of ecological systems implies that economic decisions concerning a specific natural resource generally affect more than one ecological component, although the impact is often lagged and difficult to predict. In multi-level governmental systems, characteristic of all democratic societies, this immediately poses the problem of the assignment of environmental powers. The interdependence just noted would seem to dictate the necessity of a highly centralized regulatory structure for the protection of those different components. That would hold, however, only in the presence of extremely high costs of coordination between governments located at different jurisdictional levels. If coordination costs allow, decentralization can bring about potential benefits such as a more direct access to local information, as well as initiative and creativity on the part of the citizenry and of more junior governments. More importantly, decentralization has the power to unleash the forces of competition among units of governmental systems, forces which allow these to adjust automatically, to a degree at least, to exogenous changes. This capacity to adjust is important for decision-making structures that need to be adaptive and flexible to be able to deal with high levels of uncertainty and respond to a continuing flow of new evidence and scientific information.
There is also a more basic reason why a study of environmental policy-making cannot leave the assignment of powers out of consideration. In the conventional welfare economics and environmental economics literatures, governments carry the responsibility for much of the desired environmental conservation. Those literatures, however, tend to ignore that environmental policy-making does not emanate from a single unitary authority but is the outcome of a multi-layered structure designed to deal with the large number of different and conflicting demands that citizens place on their governments. All democratic governments are part of larger governance structures – they are singular units of decentralized governmental systems – because decentralization is a time honoured way of dealing effectively with a large number of objectives. This is a feature that needs to be given prominence in the design of environmental conservation policies. Not only does decentralization increase flexibility in policy-making, it also permits the use of a broader range of policy instruments. In that sense, a correct scientific specification of the problem of the environment and the decentralization of governmental systems into a set of hierarchical tiers, are inseparable components in the design of optimal environmental policies.
A number of dimensions of the environment are global in nature. However, though international arrangements of various sorts exist, there is no international body capable of playing a role of coordination and oversight over the policies needed to deal with these global issues. A study of optimal decentralized governance that aspires to some degree of completeness in the analysis of the assignment of environmental responsibilities could not neglect to address this issue by undertaking a critical analysis of existing institutional arrangements and pointing to possible improvements.
A considerable amount of work on decentralization and the assignment of powers over the environment has been done. To our knowledge, however, none of it addresses the matter of the assignment of powers and of policy instruments in a context in which the environment is conceived as an organic, complex system governed by ecological mechanisms which need to be preserved. Genuine decentralization and environmental conservation must be designed to complement each other.
A perusal of the literature dealing with decentralization and the environment reveals that its concerns and preoccupations have been governed by the concerns and preoccupations of individual scholars and of their particular disciplines. In a way that is inevitable, but it also points to serious limitations. Insights and analysis of the problem of the assignment of environmental powers that would emerge from a sustained interaction among scholars of different disciplines and countries never materialise. In addition, the global nature of some dimensions of environmental preservation tends to be given short shrift.
To deal with these concerns, we decided early on that the research programme would have to be interdisciplinary and international in character. To give substance to this decision, we opted for the creation of a Research Network whose members, working in coordinated panels, would be capable of truly interdisciplinary and international output.
This proposal is constituted of two additional sections. The first (Section II) presents the objectives of the proposed research programme, noting where it differs from other important research being done in the area. Section III outlines the research activities that will be undertaken if resources become available.

II. RESEARCH PROGRAMME

1. Objectives
The primary objective of the proposed research programme is the formulation of a policy framework and the elaboration of a basic set of policies designed, in the context of decentralized governmental systems, to guarantee the preservation of life-supporting ecological functions performed by the natural environment. At this early stage we can identify as obvious candidates regulatory, tax, and expenditure policies. But the set will also include some social and cultural policies. The primary objective is itself constituted of three components that distinguish this proposed research programme from other studies concerned with environmental problems and decentralized governance systems.
The main concerns of the research programme will be, first, the formulation of useful implementable policies. In other words, all the research will ultimately be channelled toward generating results that can be housed in particular policy processes. Second, the proposed research is concerned with policies capable of dealing with behaviours and activities that challenge the assimilative and regenerative capacities of ecosystems and with the possibility that these capacities be critically impaired. Finally, the objective of the research is to recognise explicitly the decentralized character of all democratic governmental systems, whether these be federal, unitary, or, as in the case of the European Union (EU), constituted of federal, unitary, and confederal elements.
The output of the research programme will take three different forms: (i) a volume of country studies (see Section III.1); (ii) a volume bringing together the papers prepared by members of the Research Network (see Section III.2); and (iii) a final Report in which the problems examined will be detailed, the analysis elaborated, and the recommended policies explained and defended (see Section III.3).

2. Decentralized Governmental Systems
To our knowledge, the existing research work on the division of powers that pertain to environmental issues in decentralized governance structures is set in a framework that takes for granted that the relevant governance structure is federal. Two points must be made about this research strategy. The first is that the theory of federalism and the theory of decentralization do not coincide. There are mechanisms at work in federal states that are generally absent in decentralized unitary states; there is therefore a gap in the literature regarding environmental policy-making in the latter. The second is that there now exists a governmental structure of growing importance on the international stage, namely the EU, which is neither a federal nor a unitary state. In that case also, the existing models dealing with environmental policy-making in federal countries cannot be mechanically applied. The objective sought in the present research proposal requires a firm command of the existing theories of decentralization in federal and unitary states as well as a detailed knowledge of the structure and characteristics of all these governance systems.
There are other neglected dimensions in the existing literature on decentralization and the environment. A few important recent developments in the theory of decentralized governmental systems as well as in the theory of environmental externalities have not, as yet, been integrated in the theoretical and policy discussions of how policy-making should be assigned to different levels of government. We deal with decentralization in the remainder of this sub-section, and with environmental externalities in the following.
Within the theory of decentralization, these more recent developments are related to the mechanisms that determine the assignment of powers. Two of the most important problems pertaining to decentralization are: a) which powers should be assigned to the centre and which to the periphery; and b) how much decentralization should there be. Historically, both questions have been answered in a framework based on a listing of the benefits and costs of decentralization. Among benefits, it has been argued (but never empirically established) that more junior governments are closer to the people; that the costs and risks of experimenting in policy implementation are smaller for the more junior governments; and that assigning powers to more junior governments permits a provision of goods and services that is more respectful of heterogeneous preferences. Among costs, it is noted that decentralization causes spillovers (costs that spill over into other jurisdictions) and that it can also prevent the exploitation of economies of scale. The list of both benefits and costs could be extended.
Models of all sorts have been constructed, using one or more of the benefits and costs just listed, to arrive at some notion of an equilibrium assignment. Until recently, none of these models however provided a mechanism that could execute an initial assignment and that would change an assignment should it no longer be appropriate. In 1985, Breton argued that intergovernmental competition could serve to articulate such a mechanism. There is now sufficient research available [see Breton and Salmon (2001), Breton and Fraschini (forthcoming), Oates (1999) and Bird (2000) as well as the literature cited in these papers] that we can be quite certain that an automatic mechanism based on intergovernmental competition operates to determine equilibrium decentralized assignments in federal and in some unitary states. The case of structures like the EU has not been investigated.
The presence of automatic mechanisms is of enormous consequence. It is now generally recognized that the force that drives assignments and re-assignments is vertical competition – that is, competition among governments inhabiting different jurisdictional tiers. That competition, as Breton and Fraschini (forthcoming) have argued, takes the form of invasions of, or trespasses into, the powers of another government by a government located at a different tier. Vertical competition, as a consequence, is more like oligopolistic than atomistic competition. The competitive process is likely to be drawn-out and subject to instabilities. But the process exists and should be taken into account by the legal-political institutions that preside over assignments and re-assignments: neglecting it means failing to minimize the costs of adjustments.

3. Environmental Externalities and Ecological Systems
From an economic perspective, environmental problems are associated with negative externalities, that is related to the unintended negative consequences of otherwise legitimate economic activities. Except for some early work by Baumol (1964) and by Baumol and Bradford (1972) showing that if a negative externality was strong enough it would generate a discontinuity in the production set by reversing the convexity of that set, mainline economics has assumed continuity of all relevant functions. Some recent work, however, has put the problem of discontinuity in the forefront by emphasizing that if a negative externality is sufficiently strong the resilience of the natural system – its capacity for self-repair and adaptation – could be severely affected. Experience in natural resource management, from the harvest of fisheries and forests to the treatment of waste discharges in water bodies and in the atmosphere to the protection of endangered species, provides us with increasing evidence that the damage functions are not linear nor continuous. Indeed, thresholds of degradation exist such that, at some scale, economic activity has little or no apparent impact on the regenerative functions of the environment, but may then trigger sudden, serious and often irreversible change as the activity level oversteps the ecosystem’s assimilative capacity. It is by now well known that ecosystems respond to protracted stress in complex, nonlinear and therefore highly unpredictable ways. As a consequence, as Daly (1968), Perrings (1987), Common and Perrings (1992), Arrow et al. (1995) and many others have persistently argued, irreversible environmental losses are not anticipated by price signals.
This poses a new and difficult problem for the design of environmental policies, one that is particularly relevant for federal countries and for all decentralized governmental systems. Indeed, first reflections on the matter would seem to indicate that for some important issues if decentralization remains desirable, it will have to be done differently to take the discontinuities and the associated uncertainties into account. The question is: how does the existence of critical thresholds in the environmental impact of economic activities affect the efficient design of environmental policies – the regulations and the instruments used to implement them – in a decentralized governmental system in which powers are, to a significant degree, assigned automatically.

4. Uncertainty
Except for a few tentative (and uncirculated) efforts, the research on the division of powers in federal and unitary states has been based on the tacit assumption that uncertainty would not significantly change the results of models based on perfect foresight. Research on the environment has paid more attention to uncertainty and to the problems it poses for the design of policies, but there is need for further study.
It will not be possible to achieve the objectives we have set for the research programme without confronting the problem of uncertainty. We see two avenues of research: one theoretical, the other empirical. The theoretical work will have to range broadly, borrowing approaches, hypotheses, and results from other specialisations in economics and from other disciplines. The empirical work will consist in investigating in detail the considerations and procedures used in actual assignments of powers in a number of countries in response to the uncertainty that characterizes different dimensions of the environment (see Section III.1).

5. Policy-Making
The working habits of welfare economists and of public finance specialists are such that the policy recommendations they put forward are seldom, if ever, formulated for a world in which the practices, institutions, and constraints of democratic politics are important or even play a role. On the other side of the ledger as it were, the work of students of public choice has not concerned itself, for at least a quarter of a century, with the implementation of tax and expenditure policies or with the execution of welfare economics policies. Indeed, public choice's theory of democratic government is concerned almost exclusively with elections.
It is very important that policy recommendations in respect of the environment take into account political cultures, public opinion, as well as the basic institutional structures and the essential behavioural characteristics of democratic politics. The point is not that these must be taken as given, but because they may often be part of the problem, they must be part of the analysis.

III. RESEARCH ACTIVITIES
The research program, as just mentioned, will take the form of three types of activities: 1) the preparation of country studies which will be discussed in a Symposium and subsequently submitted for publication; 2) a critical appraisal of assignments in the countries selected for analysis in the light of current knowledge regarding the resilience of ecosystems and the best use to which implementation instruments can be put; and 3) the writing of a final Report by the Steering Committee on the sort of assignments that would be most respectful of ecological requirements given the best available implementation instruments.

1. Country Studies
In conventional economic, political science, and legal-constitutional approaches to the division of powers between jurisdictional tiers, the focus is often on the norms or criteria that should govern those who have the responsibility of assigning powers. Much attention is, as a consequence, devoted to topics such as the responsiveness of governments inhabiting different tiers, the capacity of differentially located governments to innovate, the size and nature of interjurisdictional spillovers originating in consumption externalities and economies of scale in production, and so on.
In less conventional work, the attention is placed on the organizational costs associated with different assignments. Some of these costs, especially coordination costs, are a function of the size of spillovers, others are a function of the difficulty of eliciting information regarding the preferences of citizens, and so on. Until recently that approach was based on the assumption that those who have the responsibility for assigning powers would act to make these costs as small as possible. Lately, models have been developed which impute to vertical competition between levels of government the task of assigning powers in a way that minimizes such costs.
What is very much needed to give empirically relevant meaning to these general propositions and to help refine them, are specific detailed studies of actual assignments. We propose to ask a number of scholars to undertake studies that would describe, analyse, and criticise the assignment of environmental powers and responsibilities including the assignment of implementation instruments in twelve selected countries.
To insure that the country studies are a useful building-block for the realisation of the research project's ultimate objective, the Steering Committee will prepare a document outlining the issues the country studies should address. The document will offer a definition of what should be taken as "the environment", of the relevant orders of jurisdiction, of the pertinent institutional arrangements, and so on. The purpose of the document is to make comparisons between countries not only easier, but more meaningful.
The country studies will be presented and discussed in a Symposium in which authors will also act as discussants of each other's papers. The Steering Committee will then undertake to prepare a detailed synthesis of the studies, analysing the similarities and differences in assignments, in the use of implementation tools, in institutional arrangements, in decentralization failures, et cetera.
The synthesis will serve two purposes: it will be used as an Introduction to the volume of country studies and together with them submitted to a publisher. It will also be the basic document that will serve as reference and documentation for the work of a Research Network.

2. Research Network
The interdisciplinary nature of the question analysed requires a wide range of competencies across disciplines. As the description of the project should have made clear, in order to formulate the problem correctly and to arrive at the best solutions possible, consideration has to be given to: a) the scientific aspects of the question, including those pertaining to the biology and ecology of environmental processes; b) the economics of natural resources and the environment; c) the economic policy instruments, among which standards, taxes, subsidies, quotas, and permits; d) aspects of regulatory economics including the analysis of contracts and the structure of incentives; e) the problems of governance in decentralized democracies; and f) the role of public opinion and culture. The competence and experience necessary to deal with an issue such as the one at hand require a Research Network.
The Research Network will be constituted of two panels: a) an Environmental Panel; and b) an Implementation Panel. The first will be made up of ecologists, environmental scientists, and environmental economists. The second will be composed of policy makers, experts in Law and Economics, Regulatory Economics, Public Economics, and the Economics of Environmental Policy. We plan to use the panels in the following way.
We will submit the synthesis of the country studies to both panels. To the experts of the Environmental Panel, we will ask each one to prepare a paper on how the existing assignments of environmental powers need to be changed to take into account the scientific evidence on the interconnections in the functioning of ecosystems, the existence of uncertainty and critical thresholds in environmental impact, and the other factors discussed in section II. Each expert will be asked to reflect on the problem of optimal assignments in the perspective of her/his specific competence – biodiversity, pollution policy, natural resource use, etc. To the experts of the Implementation Panel, we will ask for a paper evaluating the policy instruments currently in use paying special attention to the existing assignments of environmental powers but also of environmental policy instruments. We will then organize a Workshop to discuss the papers of the two panels.
Though we do not envisage the creation of an additional ad hoc panel, whenever the need arises we plan to consult experts on culture, public opinion, and other issues essential to the formulation of institutionally relevant policy recommendations.

3. Final Report
The final report will be a book on Environmental Policy in Decentralized Governmental Systems: A Blueprint for Optimal Governance. It will utilize the work done by the country specialists and the contributions of members of the Research Network. It will examine the current state of knowledge and offer a critical appraisal of that knowledge. Above all, however, it will present a systematic analysis of the problems of policy-making in decentralized governance systems, a detailed analysis of environmental problems – how they should be conceived and defined – and a discussion of the results and conclusions that will have been reached during the whole research program.

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