Debate over the movement by the Environmental Protection Agency
(EPA) from a rigid standard-setting process to a flexible system of
transferable pollution reduction credits may be irrelevant if the agency
has neither the apparatus to monitor emissions nor the ability to impose
penalties on owners of sources for failure to comply with their control
responsibilities. A standard-setting process imposes a binding limit on
emissions only if the polluter's expected costs from noncompliance
exceed the costs of obeying the standard. That such a condition is
satisfied by current policies is unlikely.

When the Carter administration assumed responsibility for the EPA,
it immediately identified noncompliance with water and air pollution
standards as a major problem. Since the agency lacked the ability to levy
substantial civil penalties for noncompliance, polluters who faced major
outlays for control had a strong incentive to delay compliance or even
to postpone it indefinitely. The steel industry in particular was recognized
as a major violator of state and EPA standards.

For environmental policy to work properly, the new EPA leadership
reasoned, there must be a civil penalty policy with some teeth in it. As a
result the agency successfully persuaded Congress to include a noncom-
pliance penalty provision in the 1977 Clean Air Act Amendments. ¹ This
provision instructs the EPA to set penalties equal to the present value
of failing to comply, thereby removing the incentive to flout EPA
regulations. The agency failed, however, to get a similar provision
written into the amendments to the Clean Water Act.

The noncompliance penalty was originally developed in Connecticut
as an economic incentive to gain compliance with environmental stan-

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