To paraphrase an adage, “Oh what a tangled web we create when first we decide to regulate.”
One example of this is the current kerfuffle about Magnetation Inc.’s threat to locate a proposed iron ore processing plant in Superior, Wis., rather than in Minnesota, where the ore tailings that it will use as a raw material are located.
The problem is a broader one, however. Addressing environmental problems would be a lot simpler if pollution stopped at political boundaries and if polluters could not move from one jurisdiction to another. But pollution travels with wind and water, while companies are footloose, and their products can move thousands of miles. So regulation is complicated.
This case, itself, is straightforward. Magnetation is a new company, assisted with a $1 million state loan, that wants to build a $300 million plant near the Iron Range to process tailings. These are low-grade iron ore discarded decades ago in the pretaconite era of high-grade “direct shipping ores.” The plant will produce pellets of iron concentrate similar to those produced from new taconite ore.
The problem is that the process will produce mercury emissions. Mercury harms the environment in several ways. Because it can “bio-concentrate” in fish and because of its effects on fetuses and young children, it poses special risks when pregnant women eat fish frequently.
There are national limits on mercury emissions, but Minnesota also has its own regulations that are more stringent. The company claims it cannot meet Minnesota standards and must cross the St. Louis River into Wisconsin where these standards do not apply. The Minnesota Pollution Control Agency claims there are ways to solve the problem and keep the plant here with 150 new jobs.
One irony is that any mercury emitted probably would not cause much harm since prevailing winds would make most of it end up in Wisconsin or other states and provinces to the east. Just as for mercury emitted by coal-burning power plants, the largest source of mercury emissions, this is a case where Minnesota is choosing to have marginally lower investment and employment, or marginally higher-cost electricity, while most of the benefits of reduced pollution accrue to other states.
In this case, however, the plant would also discharge water with sulfate levels that would harm wild rice production in lakes and rivers downstream. Given that wild rice harvesting is culturally and economically important for Native Americans, this is a social and political issue as well as an environmental one.
There are several lessons here.
First, for those who value “subsidiarity,” the idea that decisions should be made at the lowest jurisdiction that can achieve a good outcome, constructing the plant in Wisconsin rather than Minnesota may be an optimal one. We care more about pollution; Wisconsinites care less. We still get some investment and employment at the mines themselves, but our waters stay cleaner. Duluth residents will be able to drive across a bridge and apply for jobs at the Superior plant, but, like many residents in northwest Wisconsin, will spend much of their earnings in Duluth.
Moreover, to the extent that “the solution to pollution is dilution,” discharging sulfates into Lake Superior probably causes less overall damage to the environment than when discharged into smaller streams and lakes with less ability to absorb pollutants without damage.
These details are specific to this project, however. More broadly, it illustrates the general problem that states face a “prisoner’s dilemma” when they institute environmental rules that are stricter than other states. This may provide the satisfaction of doing the right thing morally and it may reduce local emissions harm, but it does reduce investment and employment or may raise prices.
All political jurisdictions face this dilemma, and so there is a collective disincentive to limit pollution, even when the state-specific benefits of reduced pollution may be substantial and well recognized by voters. For the nation as a whole, we are worse off. Resources are used inefficiently.
This problem for individual states is the classic argument for regulation at the federal level. But one-size-fits-all federal rules inherently are cumbersome and create their own inefficiencies. And getting federal legislation passed is a long, tortuous process. Getting international treaties to regulate problems that cross national boundaries is even worse.
Note that the problems posed by such competition between jurisdictions are not limited to environmental issues.
For example, the more states adopt “right-to-work” laws that limit union organizing, as Indiana just has, the more pressure there is on the remaining states without such laws, including Minnesota, to do the same.
States that have higher business taxes, like Minnesota, perpetually face the threat of companies moving to states with lower taxes, like South Dakota.
Similarly, owners can register ships in flag-of-convenience countries like Liberia and Panama to skirt safety and labor regulations of industrialized countries. But since such laxly regulated vessels can travel freely in international waters adjacent to high-regulation nations, dangerous ships still can cause damages there.
Ditto for financial regulation. Thousands of U.S. and European companies have shell subsidiaries in the Cayman Islands and other fiscal paradises but still want all the advantages of being headquartered in New York, London, Frankfurt or Paris. Goldman Sachs alone established some 270 “structured investment vehicles” in the Cayman Islands that were based on dodgy mortgage-backed securities. But the parent company still enjoys its too-big-to-fail status here.
This is a general problem with no easy solutions. In the specific case of Magnetation, the socially optimal solution may be to ask the company for our $1 million back and wish them well in Wisconsin.