Volts podcast: rampant environmental rule-breaking and how to fix it, with Cynthia Giles

In this episode, career environmental regulator Cynthia Giles
discusses the rampant rule-breaking common in environmental rule
and regulations and how to solve the problem — not with greater
enforcement, but with smarter rule design.


Full transcript of Volts podcast featuring Cynthia Giles, July
14, 2021


(PDF Version)


David Roberts:


The US has hundreds of environmental rules and regulations on the
books, meant to achieve various environmental goals — clean up
coal plants, reduce toxins in consumer products, limit
agricultural waste, and so on.


Once these rules and regulations are put in place, most people
don’t give them a lot of thought. To the extent they do,
they tend to believe two things: one, that environmental
rules are generally followed (maybe, what, 3-5 percent break the
rules?), and two, that the answer to noncompliance is increased
enforcement.


According to Cynthia Giles, both those assumptions are dead
wrong.


Giles was head of EPA’s Office of Enforcement and Compliance
Assurance for all eight years of Obama’s presidency — and had a
long career in environmental enforcement before that — so she
knows something about rules and enforcing them. Through the
Harvard Environmental & Energy Law Program, where she is a
guest fellow, Giles has been writing a series of pieces (which
will be issued as a book in 2022) on “Next Generation Compliance:
Environmental Regulation for the Modern Era.”


In those pieces, she reveals that environmental rule-breaking is
absolutely rampant — and that there’s surprisingly little
increased enforcement can do about it. Instead, the key is to
design rules better, such that compliance is the default choice.


I’m a sucker for policy design, so I was eager to talk to Giles
about what she’s learned, how to design rules well (or poorly),
and most of all, the best way to design climate rules.


With no further ado, welcome to Volts, Cynthia.


I really enjoyed your articles. As I was saying on Twitter
earlier, I love it when I discover an expert who's making a
well-argued, well-cited argument in favor of something I believe
already but didn't have the chops to defend myself. I feel
vindication.


There's a number of mind-blowing things in here, but one of the
initial mind-blowing things that people don't understand very
well is just how common violations and rule-breaking are. You
spent eight years as head of EPA enforcement for Obama. I'm
curious: before going into that position, did you know this about
environmental rules? 


Cynthia Giles:


This is certainly something I had strongly suspected for a long
time. I've worked in the environmental enforcement arena for a
long time and I persistently saw a mismatch between what I was
seeing in the field and what I was hearing so many people say —
that compliance with environmental rules was good.


After I started in my position in the Obama administration, I
asked folks to pull together everything we know about how
compliance is with environmental rules. And I discovered that the
evidence supported what I had suspected all along, which is that
the rate of violations is substantially higher than most people
think.


David Roberts:


What do we mean by substantially higher? Give us a sense of the
scale here.


Cynthia Giles:


I'll give you the contrast between what's popularly believed and
what the facts are. As I mentioned, I have spent most of my
professional career in environmental and compliance-related work.
During that time, including during the Obama administration, I've
asked a lot of people what they think the rate of non-compliance
with environmental law is. The most common answer I get,
including from people who have also spent their entire
professional careers working in this area, is 5 to 10 percent.
That's what people think.


It's nowhere near that. Not close. The rate of serious
violations, the ones we care about the most, is 25 percent in
most programs. And there are plenty of programs, I'm sorry to
tell you, with rates substantially worse than that. It's not rare
to find serious violation rates in the 70 percent and higher
range.


I want to make sure I'm clear: when I'm saying someone has
serious violations, I'm not saying they're violating every single
thing, every day, 24/7 — but they are having a lot of violations
we care about, in terms of protecting people's health.


So the rate is substantially worse than most people think. And
that's just the ones we know about. There's plenty where the data
is thin — indications are bad, but the data is not there to say
anything definitive about it.   


David Roberts:


There are all sorts of bad things about common violations, but
the central bad thing is that we're not achieving the goals of
these rules and regulations. If violations are 50 percent, you're
getting 50 percent of what you think you're getting out of the
rule, right?


Cynthia Giles:


There's a lot of areas where we know there are environmental
problems — over 130 million people in the United States live in
areas that don't meet the health standards for air quality, and
almost half of the waters in the United States are designated as
poor quality. There's a lot of evidence about serious issues that
affect people's health that are widespread, and certainly this
incredibly high rate of violations is a significant contributor
to that.


David Roberts:


You come into EPA in this enforcement position and inherit a
bunch of rules that you have to enforce, but you didn’t have a
hand in designing. The other intuitive belief people have about
this is, insofar as there are violations, insofar as people are
breaking the rules, the solution to that is better
enforcement. 


From your experience at EPA, how much can you do with additional
enforcement? Can you substantially increase compliance? What's
the range of effect you can have?


Cynthia Giles:


That very much depends on the problem. For some of the most
serious and high-rate violations — coal-fired power plants are
one example; for many, many years, they were by far the
highest-polluting sector and the rates of violation were stunning
— EPA decided, correctly in my view, that the health risk was so
substantial, and the violation rate was so serious and egregious,
that EPA would just sue all the coal fired power plants. One at a
time, they’d go after them.


It was essential for public health that they be made to comply
and install modern pollution controls — which by the way, reduce
pollution by 95 percent. I mean, we're not talking about minor
differences. It was really, really big.


Some of these problems — coal-fired power was one, cities that
were discharging raw sewage into surface waters around the
country was another — were so serious from a public health
perspective that EPA decided to go after them individually.


That is not a strategy that can work for the vast array of
programs that EPA administers. Some sectors have a million or
more regulated entities, or it's hard to tell who's violating.
For those kinds of problems, enforcement as your first line of
defense is obviously not going to be able to do it. You don't
have the resources to do it. But you couldn't do it even if you
did nothing else but that one thing.


So for many problems, enforcement can never be the principal way
of solving noncompliance.


David Roberts:


And even in cases where enforcement can force broad compliance,
it is raising the cost of the regulation. Every one of those
lawsuits costs money and time.


Cynthia Giles:


Coal-fired power is a terrific example. The work to address air
pollution from coal-fired power plants has been going on now for
more than 20 years, and every one of those years has consumed a
lot of people, millions of dollars of money for investigators,
enforcement staff, etc. So that kind of approach is really
expensive.


Sometimes it's worth it, like it was for that sector, and like it
was for cities and raw sewage, but most of the time, it's not a
feasible strategy.


David Roberts:


It's hard not to look back at our history with coal-fired power
plants and think that some heavy-handed, super-simple mandate
back in the ‘70s, however economically inefficient it was, was
definitely not going to be so inefficient that it costs as much
as as suing every coal plant for for 20 years.


Cynthia Giles:


Yeah, I don't think anyone would sit down and say, here's our
plan, we're gonna just do them all individually. Beyond the
expense, you don't get the benefits until the cases are over and
the company installs. You have a 5, 10, 15 year delay in the
public health benefits.


For both of those reasons, it is not a sensible strategy. Plus,
if you take another example that's top-of-mind today, oil and gas
wells and pollution, there's over a million wells in the United
States. That kind of strategy is hopeless for that. 


David Roberts:


The key insight at the heart of all your work is that the
difference between a rule that is generally complied with and a
rule that is generally not complied with does not come down to
enforcement — the degree of enforcement, or the strength of
enforcement. It's much more to do with the design of the
regulation.


So let's start with an example of a rule that is poorly designed,
such that it renders non-compliance inevitable and fails to meet
its goals. What's a good example of doing it badly?


Cynthia Giles:


The perfect storm of a bad-compliance design was a program called
New Source Review that Congress started and EPA was charged with
implementing, that had a goal of cleaning up the largest sources
of air pollution as they modernize.


They exempted existing sources from the tougher controls, but
said, you'll have to install them as you modernize your plant.
That was Congress's theory, that over time, the largest sources
of air pollution, including but not limited to coal-fired power,
would gradually clean up their act.


David Roberts:


And the presumption was that of course they're all going to
modernize at some point. 


Cynthia Giles:


And they did modernize. But they took advantage of — and
manipulated, frankly — the rule to modernize but avoid having to
install the pollution controls.


The New Source Review program was set up so that every
determination of when are you modernizing enough such that you
trigger the obligation to install pollution controls was a very
fact-intensive site-specific decision. There was no general rule;
every inch of ground was fiercely fought over.


Then there was almost no reporting required, so the companies
held the information that was necessary to determine if they had
crossed that threshold, and they weren't going to give it to EPA
without a fight. 


It was quite expensive to install these modern controls. It was
totally worth it, because of the huge public health gains — well
worth it from a regulatory perspective; the benefits far outweigh
the costs. But it gave the companies a lot of incentive to fight.


So what happened after that rule was put in place was exactly
what somebody who's looking at rules through the next-generation
compliance lens would predict, which is they look for ways
around, they obfuscate, they withhold evidence, they fight, and
they litigate. Every case takes years and years and years to get
done. They lose in the end, in almost all cases, but they've
gained some time.


All the economic incentives lined up behind not complying. So
that's an example of a disastrous design.


David Roberts:


That's a rule where, inadvertently, you've created a massive
financial incentive for cheating. It is in the rational
self-interests of some of these coal plants to fight and delay.
It makes absolute sense for them. You could even argue, insofar
as they're beholden to shareholders, that it's their obligation
to fight. 


Cynthia Giles:


Their obligation is to comply with the law, and they weren’t
complying. They knew it. So I wouldn't take it that far, but I
would agree that it was not only predictable that this would
happen, it was inevitable.


David Roberts:


Was it predicted? Were there voices at the time saying, “this
grandfathering idea is a disaster in the making”?


Cynthia Giles:


I wasn't there when this was set up, so I couldn't speak to what
the conversations were internally. I would say that it occurred
at a time when no one was really challenging this fundamental
belief structure, which I think is demonstrably wrong, that most
will comply and enforcement will take care of the rest. That was
certainly the dominant view about how this structure should
work. 


David Roberts:


That's an example of where the design of the rule makes rule
violations inevitable. You point out in your work that you can
design a rule such that breaking the rule is more of a hassle
than it's worth, or more expensive than it's worth. What's a good
example of a rule that pulled that off?


Cynthia Giles:


The best example of a completed rule is in the acid rain program,
which is particularly interesting for proving the thesis of
next-gen, because it covers the same sector. Coal-fired power was
the regulated entity, and unlike the compliance catastrophe that
happened with New Source Review, the acid rain program had 99
percent compliance.


How did they do it? A couple key interlocking features. No one of
these does it by itself, but together they make for a robust
compliance structure. 


One was continuous emission monitoring — don't estimate, know in
real time how much pollution you have. This program was designed
to reduce sulfur dioxide pollution from power plants that was
causing acidic rain in big parts of the country and devastating
ecosystems. Continuous, real-time measurement of sulfur dioxide
was coupled with an incentive to use the monitoring by saying,
“if your monitor is not working, or you don't pass quality
control, we're going to assume you had a lot of pollution.” 


You'd think that seems like a no-brainer, but there are still
programs that don't have that today — electronic reporting to a
central system, which allows monitoring in real time and data
analytics, which are important for spotting anomalies and fixing
problems.


And then simplicity is an under-appreciated value for getting
compliance. Even though it's a complicated program, and
monitoring is complicated, there's hundreds of pages of guidance
on how to run these monitors and what to do, it all boiled down
to a very simple thing: a ton of emissions and one allowance. Do
you have enough allowances to cover your tons, yes or no? It’s
impossible to miss a violation.


The coup de grâs at the end is automatic penalties. If you don't
have enough allowances to cover your emissions at the end of the
year, you will be penalized automatically. You don't have to wait
to be sued, you owe it right now. And by the way, your penalty is
more than it would cost you to go out and buy an allowance.


So this combination of strategies together made it hard to
violate. There was really no way to manipulate the situation;
everyone was going to know what was going on. There was only one
pathway forward, and that was to comply. It was more hassle, more
expensive, to violate.


David Roberts:


Trying to cheat on that, you'd have to rig your monitor, or lie
on your electronic reports, at risk of much greater expense. So
it just becomes easy to comply?


Cynthia Giles:


Yeah. The whole idea is to try to make compliance the path of
least resistance. If you're not paying attention, or you have
people that make mistakes — if you make it so that those kinds of
things are addressed within your rule, you're not waiting to
catch people afterward. It's brought to their attention through
the design of the rule itself. 


David Roberts:


Was the acid rain program notably cheaper for EPA? Is there a way
of measuring how expensive it is in terms of enforcement and
monitoring and compliance for the agency itself?


Cynthia Giles:


There is no perfect way of doing that, and I would say here's
part of the rub. We're not measuring what a next-gen strategy
would cost versus getting to the same result through enforcement.
Because that's not going to happen, there isn't the resources to
get to the same result through enforcement. So what you're
measuring is a next-gen strategy that gets to your public health
endpoint at reasonable cost against not getting there. Those are
really the choices.


The enforcement work that was done for coal-fired power is really
the exception that proves the rule. This was a one-off that you
could do it that way, normally you can't.


David Roberts:


Right, you'd have to have a galactic-sized enforcement agency
with unlimited funds, which we definitely do not have in the EPA.


Insofar as ordinary people do think about rule design, the
in-vogue opinion these days is that market-based is great,
flexible is great, performance-based is great; you want to
specify the end-goal, not the means, and leave it open to
entities how they comply. Ty doing that, you will get the
cheapest possible outcome.


This is something close to religion these days in environmental
circles, maybe even beyond environmental circles, along with
endless bashing of so-called command-and-control regulations,
which dare to specify things and dare to impose mandates.


You have a great discussion of this sort of fight. One of the
points you make is that these terms have become almost
meaningless, they're more identity-based now than referring to
any particular features of programs. Could you explain to your
average listener who has been generally convinced by the argument
that markets are great, they're flexible, and they use the acid
rain program as an example of this. Your point is not that market
programs are bad, just that the features that make a rule good or
bad are orthogonal to this distinction between markets and
command-and-control. 


Cynthia Giles:


I totally agree that performance-based and markets have become
their own orthodoxy, comparable in power and breadth to the
beliefs that drive the problem, that gave rise to next gen, which
is, everyone complies — performance-based and markets are a
similar type of orthodoxy.


Both of those strategies have potential in the right
circumstance. Markets are primarily about saving money for
compliance, not about driving compliance; they're about more
efficiency, and they have power to do that.


Two things I would say is that, first, markets happen because of
command-and-control. The market doesn't just spring from the
earth fully-formed, a market is created, because a regulatory
agency decides to create a market, that's what happened with acid
rain. By imposing a regulation that says you can only have so
much pollution, and you have to report in this way, and you need
to have monitors, etc. those are traditional command-and-control
type things. But the mechanism for efficiency was a market
mechanism.


At the end of the day, the market mechanism has nothing to do
with the compliance result. It saved some money, but it did not
drive compliance. The thing that drove compliance was this design
structure that I described to you, all of which were standard
command-and-control things, how you report, how you monitor, what
your obligations are, penalties, that kind of thing. 


I get that economists love markets, and they really do, because
they look great on paper — this idea that you can have individual
flexibility and that everyone is so efficient seems great. Next
gen is focused on the practical, what’s actually going to happen
in the real world, not how it seems in theory.


What I discovered in researching the book is that there’s
actually very little data and evidence that supports the idea
that markets are more effective than command-and-control in
achieving environmental results. The record is just stunningly
thin, and it's more an ideology that drives it.


Here's an illustration of some evidence about the market and
flexible performance, as opposed to the one-size-fits-all that
most people are thinking when they think of command-and-control.
So at the beginning of the Clean Water Act, way back when there
was a huge problem of water pollution around the country and
Congress was like, “okay, that's got to stop. States, you're in
charge, go out there and do your monitoring and impose permanent
limits and fix this problem; go get them.”


And it didn't happen. It did not happen. The reason is that the
states were, as it turned out, unable to surmount the technical
and political challenges of imposing the necessary obligations on
the sources in the flexible- and ambient-monitoring based way
that everybody talks about as being so desirable.


So Congress came back years later and said, “okay, guess what,
you blew it. It's not working, states, forget it. Nevermind,
we're not doing that. What we are going to do now is, every
sewage treatment plant in America is going to meet the following
standard. EPA, you write the standard, everyone's gonna meet it.
No exceptions.” That's it, period, the end, the classic
command-and-control thing. And guess what, the rivers got cleaned
up. 


So when we look at what the record shows, yes, markets can work
when they are accompanied by thoughtful design that looks at all
these questions, and there's adequate monitoring, and there's
good structure around it, but just saying we're going to get out
there and be flexible is a recipe for disaster.


David Roberts:


One of the points you make in this respect — which was a little
bit of a mind blower for me, too, because I never thought about
it in quite this way — is that flexibility for the regulated
entities is the mirror image of increased costs for the
regulator. All that flexibility for the regulated means that more
work for the regulator. People don't take that into account when
they're thinking about these market-based rules.


Cynthia Giles:


There's all different types. Markets are one way, but there's
also plenty of rules that say, “well, people should try to do A,
but if you can't do A, then you could consider B, C or D.” And by
the way, maybe some people have E, and maybe you're exempt.


By the time you get to the end of this regulatory structure,
nobody can figure out who has to do what, and it is very tough
from a compliance-driving perspective, nevermind enforcement. If
you can't be sure exactly who's supposed to do what, if every
determination is very fact-specific, and you have to actually get
all the records from the company to figure out why they chose C
and not A, to figure out if they're doing anything wrong, you've
created a situation where government can't know who's complying
and who isn't.


That degree of fog and gray and ambiguity provides lots of places
to hide for companies. Some companies are legitimately operating
in that zone that they're allowed, and some are hiding there.
From the government's perspective, it's almost impossible to tell
the difference without a huge investment of resources.


David Roberts:


This is another thing you point out. It's easy for lawmakers to
say, “oh, we're gonna give all this flexibility to the regulated
entities. Sure, that will require more from the regulators, more
enforcement, more monitoring, more time and money. But that's
fine. We'll just spend the time and money.” But they do not then
boost the EPA budget to accommodate that; you don't get the
additional resources. And the result is just violations, as you
say — just a whole lot of cheating.


Cynthia Giles:


That leads to a lot of violations, and just as concerning, it
leads to the government being unable to even know how it is
going. They don't know whether the facilities are meeting what's
required or not. So if there's a lot of monitoring violations, a
lot of reporting violations, a lot of ambiguity about the
pollution obligations, the government can't really say whether
we're achieving the objectives or not.


This is a really bad place to be for the government, when you
have obligations that are important for protecting public health
and you don't know whether you're getting there or not.


David Roberts:


Also, they're in statute, so you're supposed to know. 


Are there generalizations you can make about when markets and
flexibility are promising solutions, when they're a good fit, and
when they're not? 


Cynthia Giles:


I would say the most important and essential thing for a market
to work is a good measurement strategy. If you cannot measure
reliably and have a lot of confidence in the thing being traded
being actually worth what it claims to be worth, then your market
program will not work. There's going to be a lot of mess and
confusion, and you will have zero idea whether you're actually
getting there.


I would say that’s essential, and all the experts say this too.
Deep in the papers of economists favoring markets, they have
throwaway lines saying, “of course this only works if you have
good monitoring.” Well, okay, yeah. But that's a pretty big
point, because there isn't good monitoring.


David Roberts:


I just want to emphasize this, because this is a point you made
that has also stuck in my head: insofar as you’re specifically
mandating facility-level reductions, and measuring performance at
the end, that really raises the importance of being able to
measure. If you’re not doing these facility-specific
measurements, you really need to be able to measure the end-goal
precisely, because that’s all you’re doing. 


Cynthia Giles:


Imagine the acid rain program with no monitoring. “Okay, just get
out there and trade your sulfur dioxide emissions. How much did
you have? Well, you tell us how much you had and we'll see how it
goes.” We would not have achieved the actual reduction to sulfur
dioxide and acid rain with a system like that; it’s impossible.


David Roberts:


You'd still have all the market features and all the flexibility,
but without the measurement, the whole thing falls apart.


Cynthia Giles:


You'd have no compliance, and you wouldn't really know how you're
doing. You could measure the rain and see, well, we're not
getting there. But you wouldn't know why.


So yes, you absolutely have to have measurement. The other thing
you need is a group of fairly sophisticated participants. they
need to be able to report electronically with a high degree of
precision and consistency, and you can't have a huge amount of
variability across source types.


Certain types of problems will be good for that, and some
problems are impossible for that. It's important that the people
who are designing policy recognize that. I would prefer if the
ideologues who push markets for every problem would live by what
their own colleagues say: you can't do it without monitoring. So
don't even talk to me about your market until you show me your
monitoring strategy.


David Roberts:


Measuring sulfur dioxide is fairly straightforward and possible.
There's a limited number of coal plants there, they tend to be
owned by big businesses that are relatively sophisticated and
have this relationship with EPA already with reporting and
monitoring of stuff. So it's a perfect area.


What's an example of a problem where you look at it and say, “a
market will never work there?” Where do you need a heavier
hand? 


Cynthia Giles:


We have an example in front of us in the Renewable Fuel Standard,
also sometimes known as Low-Carbon Fuel Standard. It's a program
designed to reduce greenhouse gas emissions and reduce dependence
on foreign oil — from plants, essentially, is the part we're
concerned about here. Carbon is recycled by plants. You create
carbon when you burn the fuel in your tank in your car, but in
theory, carbon is taken up by the plants when they grow. So the
great theoretical construct here is that you would have recycling
of carbon, so you would reduce the climate impact.


David Roberts:


This was about ethanol back in the day; it came about a long time
ago and it predated a lot of other climate programs.


Cynthia Giles:


So the market-like situation in the Renewable Fuel Standard — the
renewable energy credit that’s created was separated from the
actual fuel itself. So companies were buying these credits, but
they weren't necessarily buying the actual fuel that was made.
It’s a market-like system, because it's trading pieces of paper,
essentially, that people are trusting, hoping, believing,
actually reflect a gallon of actual fuel.


What we've discovered is that they don’t. There was a huge amount
of fraud in that program. I shouldn't use the past tense: there
is a huge amount of fraud in that program. So substantial that
you can't know when you buy one of these credits on paper if it
actually reflects either renewable fuel gallon. It is impossible
to know.


RFS has a ton of other big problems, which I could talk about,
but this market-based element was doomed to failure, because
there was no mechanism to be sure that a credit was actually
worth what it claimed to be worth. That's why the market can't
achieve the endpoint.


David Roberts:


And there are ambiguities in the chain here. You have to have the
land, and if you plant biofuel crops in the land, maybe you're
displacing the farming crops, which will then use fresh land.
Maybe the fresh land use gets attributed to the biofuels, maybe
not.


Cynthia Giles:


You're pointing out the reason why conventional biofuels are not
climate enhancers, which is itself an interesting topic, and also
has a significant compliance dimension. The narrower point I was
raising was just about fraud in the market, because no one could
be sure that there was actually a gallon of fuel produced; it was
possible for companies to go in and just manipulate a bunch of
paperwork and computer stuff, and voilà, they produced credits
without fuel. There wasn't really a mechanism to prevent that
from happening.


One thing we've observed and learned from real-life experiences
is that, if you create a market where people can make a lot of
money and you have no controls, there's going to be a lot of
fraud. That's just the reality of life. 


Rather than bemoan that reality and say, “oh no, there's fraud” —
yeah, there's fraudsters, of course — you need to design a
program that prevents that. Don’t complain about it and whine
about it afterwards. Don't allow it to happen!


David Roberts:


Let's use our remaining time to think about how these principles
of good regulatory design might apply to climate rules, which are
very much in the news now. A lot of the discussion takes the form
of, “let's use markets and flexibility, let's not be heavy
handed, let's not use command-and-control.” That argument is
replicating itself all over the place, to my frustration, and I
assume yours.


Let’s look at some specific examples. Your example from
electricity was very gratifying to me, as a huge fan of renewable
portfolio standards — state-based rules on utilities that say you
have to increase the percentage of your total power provided by
renewables over time. You say that these things can work, with
one big caveat, so tell us about that. 


Cynthia Giles:


It is not simple, but you can design something that looks like a
renewable portfolio standard, where utilities have to buy some
percentage of their power from solar, wind, and other forms of
renewable energy. That's easy to measure, we know how to do that,
we're already measuring that now. That system can be designed to
function very well — you know you're getting the carbon
reductions you're expecting to get. That's very possible to do.


One that is talked about a lot, that doesn't fit into that
structure, is energy efficiency. That goes directly back to the
point we were talking about earlier, about measurement. Energy
efficiency is how much energy you use to do something versus what
you would have used for the counterfactual.


You can already see it's not measurable; there's no way to go out
in the world and take a sample that measures what would have
happened if you did not do your energy efficiency program. That's
one of the first weaknesses.


Another significant weakness is that, because it's not possible
to do a big giant modeling that figures out what the impacts of
your energy efficiency project are, people have to have a
shortcut. Administratively, you can't expect people to do this
gigantic measuring thing every time you do a project, so people
have developed this shorthand for what energy efficiency usually
saves. If I have insulation in my ceiling, I can assume I save X
amount of energy, and you can take that to the bank and have it
considered as a credit.


The robust research that's been done about those says that they
greatly overstate the savings. What we've all been assuming we
get in energy savings is not really what we get. 


One of my favorite illustrations of how the real world interjects
into your theoretical construct is that the least effective
energy efficiency is energy efficiency installed on a Friday.
Somebody did a study showing that if your energy efficiency is
installed on a Friday, it probably doesn't work as well as if
it's installed on a Thursday. 


David Roberts:


I'm just gonna pause for a minute and contemplate why. Everybody
should take a moment to guess why that might be, before we get
the answer.


Cynthia Giles:


On Fridays, people are incentivized to cut corners. You got to
get that job done today, because you're not coming back tomorrow,
and you don't want to come back on Monday.


This is just one of many studies that have been done saying that
the assumptions that we've all been making about what energy
savings, and thus carbon reductions, we get from energy
efficiency are not right. 


The last thing, which is common to every time, every rule, every
structure, is: how did the incentives line up? All the incentives
[in existing energy-efficiency programs] line up for people to
overstate savings — the people who install it, the regulators,
the public. Everyone wants to believe this is working well.


Whenever you have a system where everybody benefits if you
overstate something, then guess what? They're going to overstate
it. And that's what the studies show. There have been some robust
studies — including in California, which is one of the most
rigorous programs anywhere — showing that because of these
incentive structures, people overstate savings.


This is relevant to carbon, and whether a clean electricity
standard can achieve carbon reductions. If you include energy
efficiency, you have the inherent uncertainty, the inaccuracy of
the deemed savings, the incentive structure, all those things
aligned to say, when you are trying to sell your energy
efficiency credit, you don't know what you have there.


Why is that a big problem? First, we can't solve that through
enforcement — that should probably be self-evident. The reason
it's a big problem is that if the utility buys energy efficiency
credits instead of solar or wind credits, they are going to be
emitting more carbon. If you include this hard-to-measure element
in your market, you're going to reduce the chances that you
achieve your carbon reduction goal.


Which is not to say that energy efficiency isn't good. We gotta
have it as much as you can, as fast as you can, everywhere.
That's absolutely essential. What I argue is that you need to do
that through something like an energy efficiency research
standard. You have to mandate energy efficiency as fast as you
can.


What you shouldn't do is combine it with the utility’s obligation
to achieve a clean electricity standard, because that will
undercut your carbon reduction goals.


David Roberts:


You keep those separate, basically.


Cynthia Giles:


Yes, don't put it into the market, put it into a
command-and-control program mandating that people do energy
efficiency.


David Roberts:


On the energy efficiency side, rather than trying to measure and
make the rewards based on reduction in energy use — which is
difficult, if not impossible to closely track — you just tell
people to insulate buildings. You just require it. 


Cynthia Giles:


There's ways to design programs of that type that provide
incentives and efficiency. The whole idea of an energy efficiency
resource standard is not as simple-minded as just telling
everybody exactly what to do. But it decouples it from the
market. What you can't do is put something that's not measurable,
essentially, into a market setting, because you're going to
distort that whole market. You will undercut the ability of the
market to do what it's supposed to be doing. You need to do it a
different way. And there are other ways to get energy efficiency.


David Roberts:


As I was reading this section of your paper, it occurred to me
that there's an analogous situation in terms of cap-and-trade
systems and offsets, which are legendarily entirely based on
counterfactuals — what would have happened if X had not happened.
You're taking those counterfactual-based credits and sticking
them directly into a market where they are doing just what your
theory would predict. 


Cynthia Giles:


Totally. Carbon offset programs have all the same problems we
just talked about with energy efficiency, plus some more. All the
studies that I've seen have said that offset programs are not
delivering anywhere close, not in the same solar system, as
what's being claimed. You've got all these incentives for people
to over-claim, and of course that's what they're going to do.
It's impossible to check up on that. There's been a huge amount
of fraud and other significant problems with carbon offsets.


David Roberts:


What about cap-and-trade generally? Say you could take offsets
off the table, what are your thoughts on trying to marketize
carbon dioxide emissions?


Cynthia Giles:


From a compliance lens it is totally doable if you have a
measurement strategy for every participant. But you have to have
something that you can take to the bank, and say, “yep, that's a
ton of carbon, I'm sure about it.” If you have that, then a
market strategy is a feasible way to drive innovation and reduce
costs.


It has potential, but where it runs aground is by allowing in
things that are not measurable. The more unmeasurable they are,
the more the market will seek those out, because those are going
to be cheaper, because they're not real!


That's where you invite disaster, is by allowing the unmeasurable
things into your market. 


David Roberts:


On transportation, one of your other three climate-related
examples, we talked about the RFS, the biofuels program, and what
a disaster it is. You're a little bit kinder to low-carbon fuel
standards of the kind that are now in place all along the West
Coast, California and Oregon and Washington, and you're also
pretty friendly toward fuel economy standards, i.e., old school
CAFE standards. Explain why those work, in contrast to the RFS.


Cynthia Giles:


Fuel economy standards, or emission standards for vehicles, are
possible to design for strong compliance, Volkswagen
notwithstanding. And by the way, Volkswagen’s not the only one. I
think the EPA’s eyes were opened to the possibility of cheating
and fraud at scale. I felt like saying, “see, see this what I've
been telling you.”


People's eyes were opened to that and the adjustments have been
made in the vehicles program at EPA to address that. That has now
become very, very tough to get away with — and you know,
eventually, passenger vehicles are going to shift to electric.
That's just a whole different animal in terms of compliance
strategy; that seems very doable.


David Roberts:


Let me ask you about that, because, from a regulatory point of
view, this has always struck me as a little bit of a dilemma.
It's one thing to regulate internal combustion engine vehicles,
such that they become more efficient and emit less over time. But
when you're trying to engineer a mode-switch to a different kind
of engine, it seems like just ratcheting up fuel economy
standards is a bank-shot approach. 


Cynthia Giles:


The near-term thing, of course, is to make the vehicles as
efficient as they can be and reduce pollution as much as possible
— carbon is not the only thing we care about from the roads,
there's a lot of health problems associated with vehicles, and
huge environmental justice issues, too.


So yes, you can do better than where we are now on efficiency and
pollution from vehicles. But on the shift to electric vehicles,
that's very manageable, to ensure that people are doing what they
claim to be doing — that's a manageable thing in terms of the
manufacture of those vehicles.


I just want to be clear, I am not saying that low-carbon fuel
programs don't have the same problems that the Renewable Fuel
Standard has, in terms of climate impacts. It's a little bit
better of a design, because it doesn't have a cliff-like drop off
in the obligations like the RFS has. It's a more gradual and
market-type system, so it has those benefits. They both depend on
trying to figure out how much carbon comes from land use changes.
They have the identical problem for that.


David Roberts:


Anything that involves biofuels is gonna run into that problem.


Cynthia Giles:


If I could throw in another topic on climate: a late breaker that
I think is particularly encouraging and interesting is EPA’s
proposed rule for hydrofluorocarbons, HFCs, which are massively
intensive climate-forcing, I mean, hundreds to 1000s of times
more climate-forcing than carbon.


David Roberts:


Typically in refrigerants.


Cynthia Giles:


Usually, yes.


This is a next-gen type story in Europe, where they first started
regulating HFCs, as they are called. There's been a huge amount
of fraud and illegal activity and illegal smuggling, and they got
problems out the wazoo over there — they’re more than 30 percent
over the standard, already, and that's before they've even gotten
into where it's tight. They're in a bad way over there.


And the same thing could have happened in the US. Congress passed
the law, in December 2020, telling EPA to regulate HFCs and
telling them in general how to do that. In May, EPA put out a
proposed rule which is the most forward-thinking next-gen type
proposal since acid rain.


David Roberts:


Oh, really? Can we pause and ask why? Is it just good people at
the EPA or what?


Cynthia Giles:


I think it is good people who are open to innovation and who
looked at the situation in Europe and thought, “oh, my God.” It's
a situation where non-compliance will sink you. It's not around
the edges, it could be better — no, you will never get there.
You're gonna have mostly illegal activity.


David Roberts:


So necessity is the mother of invention.


Cynthia Giles:


And they're a great bunch of people over there in the air office
at EPA, innovators and thoughtful and very open to trying new
things.


The rule they proposed in May has a whole bunch of terrific ideas
to try to prevent that kind of disastrous thing from happening in
the United States. Let me just give you a couple examples of
things that they've included, that Europe doesn't have.


In Europe, the products just come in and the countries hope to
track them down if they were unlawful later. Good luck with that,
okay; that that's not gonna happen. So what they're proposing is
that there'll be a real-time check at the border. You cannot
bring a product, customs will not allow it in, unless they
connect to the data system and show that A), you’re legitimate,
and B), you have enough credits to cover this import. If you
don't, then sorry, you can’t come in. 


David Roberts:


Isn't that expensive? 


Cynthia Giles:


No, it's not hugely expensive. Customs has, over the years,
developed electronic programs to enable it to take advantage of
today's IT. EPA can develop its side of that and plug it into the
Customs system. Real-time monitoring at the border is a very
doable thing in today's IT environment, and it makes total sense
that you would try to stop things at the border.


Another thing they included in here is a QR code, like the
barcode that you have on just about every product you buy now, on
every container, which also links to EPA’s data system. It is
possible for anyone with a phone to determine, is this company
that's trying to sell me this product legitimate? It is possible
to do that today.


There's lots of other things, but those two things illustrate
that EPA has designed a very tight system to block things at the
border and then to reduce the demand for those unlawful products
by making it possible to know in real time if every single
container is legal or not.


David Roberts:


And thereby make it a huge pain in the ass to try to smuggle
stuff in — to try to cheat.


Cynthia Giles:


A huge, huge pain. Your chances of getting caught are very high,
the consequences are severe, and your market is substantially
reduced, because EPA is working on the demand side too. It's a
structure that is thoughtfully designed to prevent illegal
activity.


This is one of the toughest kinds of compliance problems: how to
keep illegal products from coming in across the border. Very
hard. But this is a thoughtful and quite groundbreaking proposal
from the EPA.


David Roberts:


This raises a side question. When people talk about carbon taxes,
there's a lot of discussion of border adjustments, which would
amount to trying to do roughly the same thing — make public the
amount of carbon embedded in every product that comes in over the
border. That strikes me intuitively as much trickier than
measuring HFC content. Have you given some thought to that?


Cynthia Giles:


That gets to the heart of the measurement issue we've been
talking about: what is the embedded carbon in your product?
There's a jillion judgments that go into that question. The
Renewable Fuel Standard is one illustration of that, where the
recent science is showing that actually, when you produce the
conventional renewable fuel, you end up disturbing a lot of land,
and you're arguably making the climate situation worse, not
better.


Every product that you attempt to put a carbon stamp on is a
gigantic measurement question, and very, very challenging.
Imposing a tax once you have a carbon measurement is
comparatively quite simple. The tax is not the point. The point
is, who puts the carbon label on there, and how confident are you
that that reflects real life?


David Roberts:


I'm just imagining that every link in the supply chain has the
incentive to downplay the amount of carbon involved — literally
every entity involved in all of this wants to cheat. And there
you are, the regulator with thousands and thousands of these
products in front of you.


Cynthia Giles:


Whenever you have an incentive system that's lined up to push in
one direction — where it's obvious what the regulated parties
would prefer the outcome to be, and you have essentially no real
way to check — that's where you get these kinds of compliance
disasters.


David Roberts:


As a final subject, let's talk about oil and gas production.
That's your third example — specifically, you're talking about
methane. Notoriously, the oil and gas production process leaks
methane at more or less every stage, and methane is a very active
short-term greenhouse gas, which is a problem. There's been
arguments going on for years now about measuring and enforcing
this. Industry has been claiming they're doing it on their own,
and asking to report their own measurements of what they do.


How do you tackle methane, which is manifestly difficult from a
monitoring perspective?


Cynthia Giles:


On the one hand, the methane problem, at least from a technical
perspective, is fairly straightforward. People know what to do,
how to reduce the methane that comes from the wells. People know
how to do that. They're not doing it, but they know how to do it.
The technical answers are well understood.


The compliance problem is more complicated, because of this point
that you've put your finger on, measuring what's going on is so
difficult. It's even more difficult than it may appear, because
the amount of methane released is intermittent. It could be a
huge amount and then it drops off. 


It's intermittent and unpredictable as to which wells are going
to be the so-called super emitters. Some of them are quite
stunningly high numbers for at least some period of time. Until a
monitoring solution is figured out — and a lot of people are
working on that. Satellites might be part of the answer, there's
aerial monitoring strategies, there's some ground-based ones,
there's a lot of people applying themselves to this problem.
Having a monitoring strategy would be a game-changer for this
industry, figuring this problem out and getting it fixed.


But in the meantime, there are things that can be done. I can
give you two small examples, but it shows the mind shift that's
needed in thinking about these problems.


One is automating what you can. One of the problems is, people
leave the hatches open on the tanks at the well pad. Sometimes
that happens accidentally, but you got a million well pads, those
numbers add up. If you had an automatic closing … that's just an
illustration of thinking about your problem differently. See if
there's a technical fix. 


The other one is a more conceptual fix, which is shifting the
burden of proof. There's no way the government can bind your
wells; that's not gonna happen. Maybe someday, through satellite
imagery, it is possible to get closer, but we're nowhere near
that right now. Shifting the burden of proof says, if there's
credible evidence that you have a pollution problem, it's on you,
the company, to prove it isn't, and to fix it.


The data shows that if you're doing everything right, you
shouldn't have that kind of a problem at your site. If you're
seeing a huge amount of emissions, something is up — you own it,
you control it, you have access to it, it should be on you to go
figure that out. You shouldn't be counting on a handful of
government inspectors to get out to these million sites around
the country to try to figure that out. You own the equipment, you
have the inspection records, you have access to the people, you
are in the best position to solve this problem.


And you should, because not only does methane have climate change
impacts, but along with that are VOCs and other pollutants that
neighbors are being exposed to. You have to take care of that
problem. 


David Roberts:


If we know what steps reduce that problem, if the technical
problem is solved, why not just go full command-and-control say:
all operators of all wells have to take steps one, two, and
three, and prove to us that you did it.


Cynthia Giles:


That's certainly a sensible way of going.


What I'm talking about is, how do you handle the compliance
problem of, did you do it? Let's say you were required to do it,
but you didn't do it. EPA finds in the field lots of companies
that are at oil and gas wells that are not doing what's required
today. It's a big compliance problem, because there's more than a
million wells, and methane is intermittent, it's not visible to
the naked eye, you gotta have specialized equipment to see the
leaks, it's unpredictable.


If you got a lot of companies out there that are, accidentally or
on purpose, not doing what they're supposed to be doing, how are
you going to find them and get that fixed?


Shifting the burden of proof is one illustration of how you could
change the framework under which everybody's operating. You might
even be able to, by doing that, bring in the possibility of
citizen science. If there are citizens who can meet the threshold
for credible evidence, that provides some additional incentive
and pressure for companies to do what they're supposed to be
doing.


David Roberts:


Oh, interesting.


Well, I've kept you too long, but you have now anticipated my
final question a couple of times, so clearly you've been thinking
about it. One of the trends I've been following is new ways of
measuring these things, specifically, satellites that claim to
track real-time methane emissions down to the square mile.
They're saying the same thing about CO2, with satellites that
pinpoint real-time CO2 emissions down to the square mile, all
over the Earth. Then there are these other programs where you
measure pollutants at the ground level, on a block-by-block
basis. You can now get sensors that you can plug into your phone.
Anybody can do this.


My point being, insofar as the difficulty of measurement is a
huge impediment to good regulation, this trend towards more and
more different ways of measuring, which don't rely on regulated
entities, do you see that opening up new avenues for regulation?
Do you think regulation could get better on the back of
monitoring getting better?


Cynthia Giles:


I absolutely do. The technological innovation that's going on in
monitoring is a huge, huge potential gamechanger for many
pollution problems.


There's no silver bullet, though. For example, satellite imagery
is great for some types of pollutants, but the resolution isn't
that terrific, and it's not so good when it's cloudy. Every type
of monitoring system has its own issues.


But also, lots of important environmental problems are not just
straight ahead pollution-monitoring type problems. Lead paint is
an example. Industrial agriculture. Renewable Fuels Standard.
Energy efficiency. There's a lot of important things that are not
subject to just being monitored.


Having said that, I do think that the revolution in monitoring,
where it's getting cheaper, smaller, more mobile, better,
provides a huge amount of opportunity, and is terrific
news. 


If I could just add one thing. Sometimes, when I talk about next
gen, people misunderstand me, and I just want to make sure that
I'm leaving no ambiguity. Sometimes people think I'm saying we
don't need enforcement. No, no, no, no, I am not saying that.
Enforcement is essential, required, and must-have. You cannot
have an effective compliance program without it.


My point is that enforcement alone cannot fix the big compliance
holes created by bad regulatory compliance design.


I just want to make sure no one's confused. Enforcement is
essential, but stronger regulations are going to get much farther
down the road than relying on enforcement alone.


David Roberts:


You're pushing back against trends in thinking around
environmental regulation that have been building for decades now
— this obsession with markets and flexibility, this ignoring of
enforcement, or this assumption that if you throw more
enforcement at it, you can get any rule enforced.


How lonely are you in this fight? In terms of the people running
EPA now, how are your ideas catching on? What's the state of
thinking in the field?


Cynthia Giles:


The assumption that compliance is pretty good and enforcement
will take care of the rest is still the entrenched thinking. But
there is some traction for these ideas, maybe in part because
I've been such a giant pain in the neck.


Compliance is not usually talked about as part of the policy
discussion, but it should be, because compliance is about what's
going to happen in the real world. That's the place that matters;
that's what counts. The people involved in policy discussions do
care about what happens in the real world.


I'm out there raising a ruckus, and I'm hoping that we will get
compliance at the table at these policy discussions, so that
people do not continue blindly along, adopting rules that will
not achieve what they're intended to achieve.


And nowhere is that more important than climate. There's no time.
We cannot make mistakes and hope to fix them later. It's got to
be right. It's got to happen the first time out of the gate. It's
essential these ideas get baked in.


David Roberts:


Awesome. Well thank you for fighting the good fight, and for
taking all this time to talk. 


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