The Cost of Developing Site-Specific Environmental Regulations: Evidence from EPA's Project XL

The flagship of the Environmental Protection Agency’s regulatory reinvention initiative, Project XL has been touted as a ‘regulatory blueprint’ for a site-specific, performance-based pollution control system. But widespread complaints about the costs of the program beg the question of whether the costs of tailoring regulations to individual facilities are manageable. To address this question, this paper presents original survey data on a sample of 11 XL projects. We find that the fixed costs of putting in place XL agreements are substantial, averaging over $450,000 per firm. While stakeholder negotiations are widely cited as the principal source for these costs, we find that they actually arise mainly from interaction between participating facilities and the EPA. Moreover, EPA management problems are perceived by our survey respondents as having inflated project development costs. Finally, we find that the key factor that explains differences in costs across XL projects is the scope and complexity of the project proposal. These findings suggest that Project XL favors large firms that can afford to pay significant project development costs, that EPA management problems must be resolved to reduce costs, and that there may be a significant economic bias against complex and innovative proposals—precisely the type of proposals that Project XL was designed to foster in order to improve the efficiency of the regulatory system.