Whether regulation generally—and environmental regulation, in particular—imposes significant burdens on property owners and other regulated parties is sharply contested. The people who bear those costs claim they are significant. Supporters of regulation, on the other hand, dismiss those claims as overblown.
Take, for instance, the dusky gopher frog case that the Supreme Court will hear next year. In that case, the U.S. Fish and Wildlife Service designated 1500 acres of private land as critical habitat for the shy frog, even though the land is currently uninhabitable by the species. According to the agency, the cost of the designation to the property owners may be as high $34 million. They focus on the high end of the estimate and understandably so in my view (but, in the interest of disclosure, I’m one of the attorneys representing them in the Supreme Court).
Center for Biological Diversity, which intervened in the case to defend the critical habitat designation, dismisses these costs concerns. In its brief urging the Court to reject the case, it describes them as “exaggerated,” having “no basis in reality,” “disingenuous,” and “overblown.” Although CBD acknowledges that the U.S. Fish and Wildlife Service estimated an upper bound of $34 million in costs for the property owners, CBD focuses instead on the lower bound ($0).*
These different perspectives shouldn’t surprise. You would expect that someone who will bear some uncertain costs will be concerned with the full extent of the risk imposed. Someone with no skin in the game, however, will be less concerned with this risk. They may instead be inclined to inflate the benefits and downplay costs to reinforce their policy preferences.
This disagreement suggests a thought experiment: what if, instead of battling about the costs of environmental regulations in the political arena and the courts, property owners and environmental groups treated their differences as an opportunity for arbitrage? If the two sides sincerely disagree about the likely costs and benefits of regulatory burdens, there should be an opportunity for mutually beneficial contract.
Suppose, for instance, that an environmental group offered to complete the permitting or environmental review process for a property owner in exchange for a share of the perceived costs to the landowner. If the environmental group believes that process can be completed for $1,000 and the property owner believes it would cost $10,000, the environmental group could offer to do the work for $5,000. Both would benefit from the arrangement, as the environmental group would raise $4,000 to fund its conservation work and the property owner would avoid $5,000 in perceived cost.
The particulars of any deal would vary, of course. But there are at least two ways that environmental groups could benefit from such an arrangement. First, the environmental group can trade on the perceived costs to navigate the permit or review process. If the market misperceives those costs, correcting that price distortion could return substantial funds to the group to pursue its environmental work. It would also provide broader benefits to the general public, by minimizing the dead weight loss attributable to environmental regulation.
Second, the group could package its work to navigate the regulatory process with an agreement to help implement any conditions or mitigation requirements that are imposed as a result. If, as these groups often claim, these costs are far less than property owners assert, there should be an opportunity for mutually beneficial exchange on this frontier too.
Of course, this is just a thought experiment. Implementing it in the real world would not be easy. It’s possible, for instance, that one or both sides are being disingenuous in their claims that these costs are high or low. If the gap between what they actually believe is much smaller, the potential for arbitrage shrinks. Another challenge is that a contract would require trust that both sides will uphold their end without trying to take advantage of the other. That trust may not be easy to build due to the intense political conflicts that have dominated environmental issues.
But if both sides are being sincere in their perception of the costs and burdens of environmental regulation, there should be plenty of room for arbitrage. Pursuing that path could not only correct a possible market distortion, but would allow property owners and environmental groups to resolve their differences amicably rather than through politics and litigation, both of which waste a massive amount of resources that could be better put to conservation.
*To justify that focus, CBD refers to a Defenders of Wildlife report finding that reviews under the Endangered Species Act do not kill projects entirely, which is often mischaracterized as showing that these reviews are not costly to the landowner. In congressional testimony last year, I explained that this is a misreading of the data, which do not undermine many other costs and delays attributable to the review process.
