Regulation - American Chemistry Council

Regulations are specific standards or instructions issued by government agencies under delegated authority, dictating what individuals, businesses and other organizations can and cannot do.

Justification for Regulation

Regulation of commerce is often justified when markets fail to allocate societal resources optimally. These market failures include:

Externalities: When prices do not reflect the full social cost of a good (e.g., pollution).
Market Power: When production or consumption is highly concentrated (e.g., monopoly).
Information Asymmetry: When buyers or sellers lack sufficient information to make optimal decisions (e.g., moral hazard).

Regulations on the Rise

Regulations are issued by governmental agencies at all levels: local, state, federal and international. Once issued, regulations are rarely rescinded, leading to an increasing regulatory burden over time.

The federal government is the most prolific regulator, issuing an average of 3,200 new regulations annually. A small subset of regulations, about 3%, have the largest economic impact with each costing at least $200 million annually or otherwise significantly affect the economy. The cumulative compliance costs for old and new regulations on businesses are estimated to be in the hundreds of billions of dollars annually, which is similar in magnitude to corporate income taxes.

Chemical manufacturing is the most heavily regulated subsector of manufacturing, in terms of regulatory compliance cost as a share of total labor cost.1 The 2021 Code of Federal Regulations (CFR) imposes over 100,000 restrictions on domestic chemical manufacturing, representing 10% of all CFR restrictions. The number of restrictions has doubled over the past twenty years, with the majority related to environment, health and safety (EH&S), followed by tax and labor.

Because regulations, once imposed, seldom are eliminated, the accumulation of regulatory requirements over time has become significant, particularly for sectors that are heavily regulated. This presents a significant barrier to entry for new firms and for smaller firms that lack personnel dedicated entirely to regulatory compliance. Although regulatory agencies are supposed to consider the cumulative impact of their requirements and that of other regulators, they seldom do because (1) their priority is to develop and enforce new regulations and (2) there are no well-established methods for estimating cumulative impact.

2x

Regulations on chemical industry have doubled over the past two decades.

Regulatory Restrictions Doubled in the Last 20 years

Most Regulatory Restrictions Relate to EH&S and Tax

Biggest Compliance Challenges

Compliance Challenges

Given the sheer number and complexity of regulations at the local, state, federal and international levels, ensuring compliance is a challenging exercise. Chemical manufacturers typically follow a six-step process:

Identify applicable requirements.
Understand these requirements and their impact.
Develop or modify standard operating procedures (SOPs).
Educate and train employees.
Develop or modify a management system.
Allocate resources and revisit priorities.

The most challenging steps, especially for smaller firms, are identifying and understanding new requirements. Therefore, the first year of a new requirement is particularly important if the regulatory objective is to be achieved in a timely manner.

Smart Regulation

Regulations vary enormously in cost-effectiveness. For example, for regulations designed to save lives (e.g., pollution control, workplace safety, food safety, transportation safety), cost effectiveness varies by 6 orders of magnitude—from $100,000 per life saved to $1 trillion per life saved. This large variation suggests that regulations could save more lives at the same cost and/or the same number of lives at a much lower cost.

To achieve this goal, regulatory agencies should employ smart regulation—a set of principles and analytical techniques that represent best practice. For federal regulatory agencies, the principles and techniques are described in three Executive Orders—12866 (Clinton), 13563 (Obama), and 14094 (Biden)—and Office of Management and Budget Circular A-4 (on regulatory analysis).

Smart regulation should be guided by two fundamental principles:

First, a regulation must be essential, meaning it is required by law, necessary for interpreting a law or driven by a significant public need, such as correcting market failures.

Second, it should be designed and enforced to ensure that the overall benefits to society outweigh the costs.