Is flexibility in regulation always a good thing?
I recently dove into a fascinating 2017 paper by Cary Coglianese and Jennifer Nash: The Law of the Test: Performance-Based Regulation and Diesel Emissions Control. It’s a wonderful explanation of why performance-based standards—often hailed as the ultimate, flexible alternative to rigid command-and-control rules—frequently fall short in the real world. This topic is also well covered in Next Generation Compliance by Cynthia Giles.
The authors of the paper use the backdrop of the 2015 Volkswagen scandal and the strikingly similar 1990s heavy-duty diesel truck engine scandal to show how performance standards can completely backfire.
Here is the breakdown of why this happens, and why performance-based regulation is far from a panacea.
The Three-Way Clash: Outcomes, Engineering, and Markets
Performance-based rules tell companies what outcome to achieve (like passing an emissions test) but leave the how up to them. In theory, this sparks cost-effective innovation. In practice, it creates a massive conflict of interest:
- Regulators Desired Outcomes: Policymakers set strict standards to protect public health by curbing harmful pollutants like NOx and particulate matter.
- Engineering Limitations: Diesel technology faces a brutal physical tradeoff. Tuning engines to run hot destroys soot (particulates) but spikes NOx, while tuning them cooler reduces NOx but floods the exhaust with particulates.
- Market Forces on the Regulated: Truckers and fleet owners operate on razor-thin margins where fuel economy and engine responsiveness are everything.
To stay competitive, engine manufacturers are under immense pressure to prioritize these market demands. When you give firms the flexibility to meet the test however they want, they will naturally optimize for their customers. The result? Engines programmed to clean up their act during laboratory testing, only to prioritize fuel economy and let emissions spike on the open road.
The Teaching to the Test Phenomenon
We see it in classrooms, and we see it in heavy industry: gaming the system. Coglianese and Nash point out that this behavior isn’t necessarily malicious; it’s just the predictable result of flexibility. Precisely because performance-based regulation offers flexibility, it facilitates, if not invites, private-sector firms to innovate in ways that allow them to pass mandated tests while confounding regulators broader policy objectives.
The Complexity Trap: Whack-a-Mole Regulation
So, how do regulators respond when they realize companies are gaming the system? They play a high-stakes game of regulatory whack-a-mole. Instead of keeping things simple, performance-based regimes often become incredibly complex:
- Escalating Red Tape: To prevent gaming, the EPA didn’t simplify; they added layer upon layer of highly prescriptive, complex testing protocols—moving from steady-state lab tests to transient cycles, not-to-exceed limits, and portable in-use monitors.
- The Illusion of Flexibility: When standards are tightened aggressively, the flexibility vanishes. By forcing a 90% reduction in NOx, the EPA effectively forced the entire industry down a single technological path (after-treatment devices), making it no different from a technology mandate.
- Market Distortions: The higher costs and uncertainty of these new complex engines led consumers to pre-buy older, dirtier models before they were phased out and then keep high-polluting trucks on the road longer and delaying the rules benefits – in fact arguably making the situation worse, not better, for air quality.
The Takeaway
Performance-based regulation is not a silver bullet. While it has its place when regulated entities hold better technical information, its success ultimately hinges on the regulators ability to accurately specify, measure, and monitor real-world performance—not just artificial test performance. Contrary to laboratory testing, real world testing is very difficult and costly to do and may very well offset the theoretical cost savings of performance based regulations.
Without constant vigilance and robust, ongoing oversight, flexibility simply invites clever adaptation, sometimes at the expense of public welfare. Sometimes, the rigidity of a clear technology mandate might actually be cleaner, faster, and far less complex than playing whack-a-mole with a test.
