It is all but impossible for government to adopt industrial policies and regulations without creating winners and losers. The Obama administration’s support, for example, turned Tesla, SolarCity, and other cleantech ventures into regulatory winners, while its “war on coal” relegated fossil fuel companies to regulatory losers. The first Trump administration sought to reverse this trend by dialing back clean energy policies and using emergency powers to prop up the nation’s ailing coal industry. And the regulatory pendulum has continued swinging back and forth during the Biden presidency and under Trump 2.0. When changes in policy and regulation interfere with corporate interests, regulatory losers are quick to call foul and demand compensation for their regulatory burdens. But what about those who find themselves on the losing end not by virtue of regulatory activism and change but, rather, due to a persistent lack of regulation? In his excellent new article, Compensating Regulatory Losers, professor Todd Aagaard asks this provocative question and develops thoughtful answers drawing on case studies from climate and energy regulation, among others.
A robust literature grapples with the question of whether and when regulatory losers deserve to be compensated. Some have attempted to frame and answer this question based on the welfare impacts of regulation, while others have turned to (other) notions of fairness in search of answers. Some scholars advocate for replacing regulation-specific compensation with more comprehensive redistribution programs carried out via income taxes. Libertarian entitlement theorists, meanwhile, argue that regulatory losers should be compensated when their reliance expectations are thwarted by changes in regulation. And if fairness arguments do not sway you, leave it to economists to reframe the debate along Pareto and Kaldor-Hicks efficiency metrics.
In Compensating Regulatory Losers, professor Aagaard thoughtfully engages with the major strands of the compensation literature, offering a tailored critique to each of them. In response to calls for comprehensive redistribution in lieu of compensation, for example, Aagaard reminds readers that “[r]egulatory fairness is not a fungible concept that can be aggregated across all policies and delegated to the tax system. To the contrary, the fairness of regulatory outcomes depends on the context in which they arise.” (P. 578.) Similarly, he critiques entitlement and reliance arguments as circular because “[c]hanges in regulation create reliance interests only to the extent that regulatory changes should be treated as unforeseeable, which in a democracy they are inherently not.” (P. 579.) Aagaard’s biggest gripe, however, is with the status quo bias that he finds pervasive throughout the compensation literature: “None of these approaches provides a framework for addressing injustice in the status quo, despite a history that is replete with unfairness.” (P. 583.)
To remedy this oversight, Compensating Regulatory Losers proposes a two-pronged approach. The first prong expands the field of inquiry beyond the consequences of regulatory activism and change to also include “unregulatory consequences” defined as “regulatory outcomes that result from the extent to which regulation does not completely prevent the regulated harm—that is, benefits and burdens as measured against a baseline of completely effective regulation.” (P. 585.) Aagaard convincingly argues that virtually all regulatory measures simultaneously create regulatory consequences (e.g., the compliance burden imposed on the regulated entity) and unregulatory consequences (e.g., the burden suffered by allegedly protected parties from residual harms not mitigated by the regulation). Drawing on evidence from the Clean Air Act, the Occupational Safety and Health Act, and the Consumer Products Safety Commission, the article illustrates the prevalence and magnitude of such unregulatory consequences, juxtaposing the positive impact of these policies and regulations with continuing fatalities from persistent air pollution, unsafe workplaces and consumer products. The dual effect of regulation – regulating some firms, behaviors, and/or harms while leaving others unregulated – leads Aagaard to conclude that “[a]ny even-handed consideration of the consequences of regulation, therefore, must include both regulatory and unregulatory benefits and burdens.” (P. 590.)
Professor Aagaard is no compensation hawk. If anything, he cautions against rushing to compensate for regulatory losses, especially when those losses might be offset by unregulatory benefits, such as when regulation prohibits certain behavior and mitigates a certain type of harm but leaves other behaviors and harms unabated. Furthermore, there is an intertemporal dimension to consider. In the author’s words, “[t]oday’s regulatory burdens are yesterday’s unregulatory benefits.” (P. 595.) Put differently, why should a manufacturer of children’s toys be compensated for regulation banning the use of toxic substances in toys without also considering compensation for children and their families for their previous unregulatory burden (when toys were still permitted to contain the now-banned toxic substances)?
The second prong of professor Aagaard’s approach relies on the principles of distributive fairness and corrective fairness to answer this pivotal question. The article’s conception of distributive fairness “requires mitigating regulatory impacts that exacerbate existing entrenched systemic inequalities” (P. 598) as opposed to regulatory losses perceived as unfair by a few regulatory targets compared to their status quo before the regulation. Aagard acknowledges but is untroubled by the fact that, under this conception, “the circumstances in which distributive justice requires compensating regulatory burdens ought to be quite rare.” (P. 597.) In fact, he crafts a similar argument on the basis of corrective justice; in his view the premise of corrective justice to restore equilibrium after an alleged wrongdoer’s conduct is nearly impossible to apply to regulatory intervention as no such prior equilibrium exists when the “victim” of regulation was previously allowed to harm and thus victimize others. All of this leads the author to conclude that “the vast majority of regulatory burdens are not unfair in a way that requires compensation.” (P. 607.)
I highly recommend Compensating Regulatory Losers is an immensely entertaining and thought-provoking tour de force through the complex and conflicting compensation literature. Professor Aagaard’s introduction of the concept of unregulatory consequences into the conversation may ultimately raise more questions than he can answer (for now). But isn’t that the mark of truly transformative thinking and scholarship?
