III. Smart Environmental Regulation

Governments use policies and regulations to address many of the ongoing and emerging problems they confront. Given the complex trends outlined above, how can government improve its tools to deal with the emerging challenges? This section identifies the specific characteristics of smart environmental regulation.

A. The Goal: Maximising the Public Good

The overriding criteria for assessing regulations and regulatory systems will be the promotion of the public good - i.e. whether the overall benefits of a policy exceed the costs, compared with all relevant alternatives, and considered from the point of view of the overall public.⁵

Determining the public good, however, is not necessarily straightforward. First we need to define the public. While we will be obviously concerned with the Canadian public, there are other "public" groupings that may have claims on the allegiances of Canadians, including communities, provinces, and indeed, an interest in the welfare of the global community.

Regulations may have different and conflicting impacts at these different levels, and good regulation will require assessing and balancing these effects.

B. Addressing Underlying Dynamics

Regulatory instruments should match the nature and context of the issue and target identified. First, the degree of intervention should reflect the risk posed by the problem. Time and resources allocated to the problem, the costs imposed on those regulated, should all be proportionate to the seriousness of the problem.

Second, they must reflect and address the underlying dynamics that contribute to the identified problem. For instance, if the interests of those regulated largely coincide with the public interest, then a voluntary approach may be reasonable. Indeed, expanding the use of voluntary instruments is an active area of regulatory analysis and innovation. Sometimes mandatory information disclosure may be sufficient to re-align interests via pressure from third parties, such as the public or consumers. On the other hand, if interests diverge, the optimal instrument may need a stronger combination of incentives/disincentives backed up with more intense monitoring and enforcement measures. This cautions against applying simplistic, one-size-fits-all approach to regulation.

For example, one goal cited by many policy-makers is to achieve a reasonable consensus amongst stakeholders. A result that leaves all parties reasonably satisfied is sometimes considered the mark of an effective policy or intervention. In some cases, this may be a reasonable and achievable goal. However, it may not be reasonable for a policy or regulatory intervention designed to correct an externality, i.e. where one group is gaining by imposing damage on others. Interests will often diverge in these cases. In short, sound policies and regulations will not always generate win-win results.

C. Characteristics of Smart Regulation

At a pragmatic level, there has been considerable progress in Canada and other countries in our understanding of smart regulation. This progress can be usefully broken down into two areas, reflecting ends and means:

• better regulatory instruments; and

• improved systems for developing regulations and managing the regulatory process.

The two areas are closely connected in that better systems for developing regulations will generally lead to better regulatory tools.

1. Regulatory Instruments

a) Effective

Good regulatory instruments must be effective - i.e. meet the public policy goal for which they are intended. This does not mean 100% success at addressing the identified problem or opportunity, but some reasonable target is achieved.

b) Cost-Effective

All else being equal, the instrument chosen should achieve the intended target at the lowest cost. Better instruments will also promote a reasonable and efficient distribution of costs and benefits. This will involve consideration of competitiveness impacts, and concerns about fairness to different regulatees and stakeholders.

c) Manage Uncertainty and Risk

All policies and regulations are developed with imperfect information, creating uncertainty and risks, which need to be properly managed. Further, there is also a demand on regulators from many stakeholders to create greater certainty for the market place.

Unnecessary uncertainty stemming from poor policy should always be avoided. However, in some clearly-defined cases, it may be in the public interest and more efficient to let real risk and uncertainty be handled by the market; or balance increased certainty with the need to ensure the regulatory system can adapt and respond to new information and developments. Proper risk assessment and management will help establish this balance.

d) Performance-Based

Instruments that are performance-based, i.e. that ensure targets are achieved and yet allow for sufficient flexibility to enhance efficiency and effectiveness, and promote innovation on the part of those regulated, are often more effective than other approaches.⁶

e) Innovative

Regulation should be seen as an opportunity to increase efficiency, and productivity - within government, the regulated community and the broader economy. Within government, policy- makers and regulators will also want to identify opportunities to explore new policy instruments, and promote public-sector innovation. Policies and regulations will also need to consider how they can encourage greater innovation on the part of the private sector.⁷

f) Complementary

Good government intervention is also rarely a matter of finding a single optimal instrument - it usually requires a balanced combination of instruments that integrate a number of policy goals. This subtler form of intervention requires a comprehensive and up-to-date policy toolbox.

g) Administratively Efficient

Many of the practical elements involved in developing and implementing regulations are fairly generic business activities relating to communication, and information collection and dissemination. Yet, as any administrator knows, such activities can generate significant transaction costs for all parties. Administrative processes need to be reviewed to ensure all the information requested is reasonable, and that there is a good balance between the need for checks, and a streamlined process.

h) Adequately Monitored and Enforced

Well-designed regulations can still fail if not properly implemented. Regulatory success requires that the resources and mechanisms needed to monitor and enforce the instrument be provided.

i) Identify Appropriate Authority(ies)

Finally, regulatory instruments must be designed and implemented by those best situated and able to act. This should include involvement of all the different jurisdictions needed to achieve the policy target. Globalisation and considerations of competitiveness, business efficiency, and administrative streamlining have all increased the pressures for jurisdictions to harmonise regulatory activities.⁸

2. Regulatory Development

a) Consultations and Collaboration

Consultations are now an essential element of the regulatory process in a modern democracy, and consultation is a formal requirement under federal statutes such as CEPA 1999. From early in its history, Environment Canada has identified the importance of good communication and consultation with the public and concerned stakeholders. Opportunities for general public input, particularly from direct stakeholders, need to be built in at several stages in the development of a regulatory instrument. Effective consultation requires that the process and documents supporting the development of the regulation are open, clear, and easy to understand.

Environment Canada has a sophisticated system for managing federal, provincial and territorial relations, as well as for engaging international partners. Canada endorses a multilateral approach on international issues when appropriate, but has also participated in and actively supported regional and bilateral efforts to address environmental issues⁹.

b) Open and Transparent

An open and transparent process requires a clear enunciation and development of the rationale for selecting a particular instrument. Information on the regulation and process must be fully accessible, and effectively communicated.

c) Adequate Research

Good information is critical for the development of all policies and regulations. Time and resources are needed for adequate research to understand the problem and issues. Policy-makers and regulators also need information on a complete and up-to-date toolbox of instruments in order to select the best instrument available, including a review of best practices from other jurisdictions, and new approaches being proposed by the research communities.

Information is not only needed in the initial development of the policy or regulation. The regulatory process should integrate provision for ongoing feedback and retrospective analysis. Both the effectiveness and the costs of regulatory interventions needs to be assessed after implementation in order to ensure targets are being met, confirm original estimates, revise methodologies, and identify unintended consequences.

d) Balance Quality versus Time and Resources

All of these best practices will take time and resources - yet a "smart" regulatory process should also avoid being too time-consuming and/or resource intensive. The consultations, checks and balance, and the required research should not be excessively burdensome. The regulatory process needs to be sufficiently flexible that it can respond to the need for urgent intervention. Regulators need to be able to assess the type of intervention contemplated, and allocate time and resources accordingly.¹⁰

D. Developing Smart Regulation - Art or Science?

The factors contributing to Smart Regulation identified above are numerous, complex, and often in tension with each other. Malcolm Sparrow in his book The Regulatory Craft summarises the dilemma as follows:

"Regulators, under unprecedented pressure, face a range of demands, often contradictory in nature:

• be less intrusive - but more effective;
• be kinder and gentler - but don.t let the bastards get away with anything;
• process things quicker - and be more careful next time;
• deal with important issues - but do not stray outside your statutory authority;
• be more responsive to the regulated community - but do not get captured by industry
"

As the title of his book implies, there is no magic algorithm that will guarantee good regulation. The practice requires, knowledge, skill and wisdom.

⁵ Of course it is not always possible to monetise or even quantify all the benefits and costs related to a policy or regulation. However, even if assessments are only qualitative, the discipline the cost-benefit framework imposes will help improve the quality of analysis and decisions.

⁶ However, in special circumstances, such as where the costs linked to monitoring or enforcing performance are very high, using a proxy for performance, such as prescribing known technology, may still be justified.

⁷ The research initiated by Michael Porter, the noted competitiveness expert, on how well-designed regulations can stimulate innovation and become a source of competitive advantage, deserves particularly close attention.

⁸ How to deal with these pressures and opportunities is dealt with in detail in later sections.

⁹ Specific developments and opportunities in these areas are also discussed later in the paper.

¹⁰ Environment Canada's proposals to address administrative streamlining are presented in the final section on Areas of Opportunity.