Grandfathering and Environmental Regulation : The Law and Economics of New Source Review

The grandfathering of existing sources of pollution is a common feature of the regulatory state. Sources in operation at the time of the enactment of new regulatory requirements are typically exempted from these requirements because of the high cost of retrofitting their operations. Grandfathering regimes give existing sources a significant advantage relative to new sources and therefore give them an incentive to stay in operation longer than they would in the absence of environmental regulation. This effect is further magnified if the existing sources are allowed to modernize without having to meet the standards applicable to new sources. Over a period spanning more than three decades, from 1970 to 2002, the Environmental Protection Agency crafted a policy for distinguishing between types of plant changes that trigger the application of the new source standards from those that do not. Beginning in 2002, the Bush Administration significantly expanded the scope of permissible grandfathering. This Article challenges the Bush Administration's view that its policy is environmentally beneficial. While the policy does encourage some desirable modernization that would otherwise not take place, as the Administration contends, it discourages desirable modernization that would otherwise take place. The Administration also ignores the perverse interactions between this policy and other regulatory provisions of the Clean Air Act. More generally the Article analyzes the contours of desirable grandfathering policies. It shows why policies that are not limited in significant ways give rise to undesirable incentives and are not justifiable on fairness grounds