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The Enron Story and Environmental Policy

July 2003

Citation: ELR 10485

Author: Victor B. Flatt

There are many aspects of the Enron saga that would give pause to someone who thinks about the environment and its problems. One of the most obvious is the concern that allowing unregulated trading of energy might not account for the costs of environmental externalities that are concurrent with energy production and usage.1 Another worry is that reducing the cost of energy may increase consumption and accelerate environmental degradation. However, these are concerns with the concept of energy trading itself, and would be problematic even if (and especially if) Enron had been a well-run and managed company that traded and delivered energy exactly as promised. As such, these are policy questions that exist aside from the demise of Enron and present important issues that are still to be examined in any and all aspects of energy deregulation.

Instead of concerns about energy trading in general, the demise of Enron presents a more fundamental question about the ability of government regulators to curb harmful or illegal behaviors in the face of structural incentives to commit them. More pointedly, can the regulated ever police themselves, and if so, under what circumstances? This question is germane to environmental protection because two strands of environmental regulatory theory may depend on it—the possibility of potential polluters controlling their own pollutants and complying with laws on a voluntary basis, and the dependence on this compliance mechanism in market-based pollutant trading regimes that involve the elimination of command-and-control regimes.

In order to understand the lesson that Enron teaches about the practicalities of environmental compliance and enforcement, this Article will review the collapse of Enron and its relation to problems inherent in a regulatory scheme that purposefully relies on self-policing for compliance. Then, this Article will examine why Enron engaged in certain policies in the newly deregulated California energy market in 2000, and why complex trading schemes are difficult to monitor. And last, this Article will examine what these occurrences suggest about the future of using environmental policies that depend on complex trading regimes and purposefully rely or (because of the complexity of the trading regime or elimination of command-and-control equipment) must rely on self-policing for compliance.

(BRACKET)Editors' Note: This Article is excerpted from Enron: Corporate Fiascos and Legal Implications (Nancy Rapoport & Bala G. Dharan eds., forthcoming Foundation Press 2003).(BRACKET)

The author is the A.L. O'Quinn Chair in Environmental Law, University of Houston Law Center.

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