A New Strategy for Environmental Control

This book is about a strategy for environmental control, which, except for some limited minor experiments, has not been seriously tried in the United States. In this strategy, a legislature authorizes a money charge on environmentally harmful conduct; by raising the costs of continuing that conduct, the charge helps persuade the entity causing the harm to adopt less costly, more environmentally acceptable means of achieving its goals.

Theoretical economists have advocated the charges concept for many years. In the mid-1960s the pollution control committees in Congress gave the concept a brief, lukewarm review, but rejected it as a principal strategy. A decade later, however, a wide variety of economic incentives have been proposed to achieve energy conservation goals. A handful of programs that incorporate some or all of the elements of the charges approach have actually been implemented in a few states and abroad.

Adoption of the charges approach would require a rethinking of many of the basic premises upon which environmental controls have been based to date. The method that the United States has used to carry out its most important and advanced programs has almost invariably been direct regulation. This is true nationally for control of air and water pollution, pesticides, noise, and radiation, for example, and locally for land use and, to some extent, solid waste disposal. Under the direct regulatory approach, the appropriate level of government sets standards of behavior or maximum allowable amounts of discharge for particular pollutants and industries, and administrative and judicial means are used to enforce these standards. This approach has yielded important gains in the struggle against environmental harm. The growth of environmental pollutants and environmentally harmful activities has been slowed and in some instances actually reversed.

Yet, more and more questions are being raised about the regulatory programs which are currently in force. They are costly and cumbersome, and contain defects that chronically forestall a significant reduction in environmental harm. If these programs cannot show more impressive gains at a reasonable price within the next few years, many persons fear that legislatures will weaken them or cast them aside in discouragement.

Although the charge approach has not yet been seriously pursued in the United States, some foreign countries have used it to control some pollutants and one state (Connecticut) has adopted a program that is a step in the same direction.

In 1973, East Germany established an ambitious program that levies charges on emissions of 113 different air pollutants. The charges are paid by every source whose emissions of a charged pollutant exceed the national emission standard for that substance. The incentive effect of the charges is intensified by a prohibition against passing charge costs along to customers through increased prices. The revenues generated by the charges are kept in the region in which they are paid and are used for air pollution control planning, environmental improvement, and compensation for those injured by air pollution.

Also in 1973, Japan enacted the Law for the Compensation of Pollution-Related Health Damage. The law sets up a system of environmental charges designed to finance the payment of compensation to individuals who suffer health damage as a result of air or water pollution.

The goal of the law is to compensate the victims of diseases and other physical ailments caused by pollution. The charge levied on a discharger is based on certain health costs arising from the pollution for which that discharger is responsible. Determining the appropriate charge is difficult, because the effects of different types of pollution on health and the causal links between a given discharge and an identified health effect are not fully understood. In order to avoid this problem, the Japanese compensation program establishes a variety of presumptions that allow administrative "proof" of entitlement without wrestling with difficult questions of direct causation on a case-by-case basis. In carrying out the plan, the Japanese use statistics and epidemiology to allocate social responsibility for injuries in a fashion that is the most advanced application of these tools by any nation. The following discussion of the procedure is simplified, but touches on the main points.

First, toxic substances that could be shown to be statistically correlated with specific identifiable health problems were designated. Among them were sulfur oxides, which have been linked to respiratory ailments. Next, pollution zones were identified, on the basis of extensive investigations of concentrations of the designated pollutants and high incidences of the specified diseases.

If it is determined that apparent victims have the designated disease and were present long enough in a specific pollution zone to infer that pollution caused the disease, they are entitled to compensation for medical care, rehabilitation, disability, survivors' benefits, and funeral expenses. There is no payment for pain and suffering or property damage. Compensation for the designated costs is paid out of revenues from charges on polluters. The same charge funds pay for half the cost of medical and rehabilitation facilities required by pollution victims, but not for the administration of the law.

There are several points concerning the administration of the compensation law that bear mention here. First, the series of presumptions that make the system workable also require the collection and analysis of a great deal of economic, scientific, and medical data. Second, a national industrial association has played a key role in implementing the program. It acted as a spokesman for industry in structuring the program and endorsed the system as finally adopted. The association's continuing acceptance has apparently acted as a powerful disincentive for individual firms to try to evade their responsibilities under the act. As a result, there have been few problems with monitoring or collection.

The compensation law is a supplement to the preexisting pollution control system. It does not supplant the regulatory system, nor does it preclude efforts by compensated victims to obtain additional damages from polluters by bargaining or in court.

The compensation program has been in effect for two years, but there is only a limited amount of information on its impact. Large sums have been paid out for compensation (one steel company has paid over $6 million). While ambient levels of sulfur oxides have declined since the program went into effect, there are other possible explanations for this improvement (e.g., economic recession). There is no evidence yet on the extent to which emission control measures have been adopted as a result of the charges. Since the program went into effect, there has been a trend toward industrial relocation into relatively clean rural areas, but again the causal connection has not been proved. Perhaps the most important consequence of the compensation law is that it has demonstrated that a large-scale charge system designed to internalize some of the more egregious external costs of pollution can be implemented successfully.

The state of Connecticut has recently established a system of civil assessments and sureties that share some important features of the charges approach. This type of enforcement measure is designed to fill a gap between mild steps, such as toothless administrative orders, and severe ones, such as injunctions entirely shutting down polluters. It shares with many of the charge systems discussed here the characteristic of making environmentally damaging activities economically irrational.

The Connecticut program enables enforcement officers to eliminate the economic advantages that regulated sources now enjoy if they delay or avoid compliance with pollution control requirements. Assessment provisions that have been implemented apply to failure to submit progress reports, violation of emission standards, and violation of the terms of abatement orders.

In Connecticut, the economic enforcement devices are applied selectively to sources that have violated emission standards and abatement requirements and have not responded to milder enforcement measures. In this respect, these assessments are significantly different from charges. Assessments are paid only by the recalcitrant few, while charges are paid by all dischargers.

The assessments are levied administratively in accordance with procedures designed to avoid several roadblocks. The state need not go to court to collect a penalty. The potentially overwhelming task of calculating the costs of compliance for a variety of different types of sources is simplified. Initially, penalties are based on estimates which are often derived from simple curves relating abatement costs to readily measurable variables. The penalty amounts can be corrected later, when actual abatement cost data are available. The procedures for levying the penalties provide hearings and court appeals to protect the rights of sources, but discourage frivolous delays because the penalties continue to add up while the appeals are being taken.

The Connecticut program is still in its infancy. The first major penalty has been levied and an administrative hearing and probable court appeal are pending. However, warning letters notifying violators of potential civil penalty liability have cut abatement delays by 30 to 40 percent, minor penalties for failure to submit progress reports have increased the submission rate from approximately 50 percent to 98 percent, and sureties required of a few chronic abatement deadline violators have caused a dramatic shift to punctuality. The clear implication is that polluters will respond to measures that make compliance good business.

Prices and the environment. The basic concept behind charges is fairly easy to understand: the obligation to pay when environmental harm is produced provides an incentive not to cause that harm. But when properly implemented, charges have additional features which, if they are to be fully appreciated, require some explanation of how the environment and the economy are related. The concepts which must be understood before the connection between environmental problems and the economy is clear are the role of prices in allocating resources, the damaging environmental consequences of the free use of valuable resources that as yet have no prices, and the manner in which these resources can be given prices. In a market economy, which the United States still enjoys in a modified form, prices perform the key function of allocating all types of resources—raw materials, production capacity, goods, services—to their most efficient use. When the markets in the economy are functioning properly, the price each resource can command is equal to the value of other resources that are used in producing it. In an economically efficient market, it is not possible to produce an additional unit of a good without reducing the production of another good. One individual cannot be given more of any good without someone else getting less.

However, many environmental resources are still unpriced and remain outside the market. Because ownership rights have not been assigned to them, and because they are not easily broken up into units that can be bought and sold, such valuable environmental assets as watercourses, the air mantle, landscape features, and even silence are "used up," but their use is not accurately reflected in the price system. Economists describe the harms caused by such use as "externalities," because the burden of the resources consumed falls on society at large, not just on the user who actually consumes them.

When the damage resulting from the consumption of unpriced but valuable resources becomes a major social problem, as environmental damage has in recent years, the balance cannot readily be restored by creating private ownership rights. In most cases it is not physically possible to divide air, silence, and the like into marketable units, nor is it socially desirable to vest the use of environmental resources in private hands. While direct regulation of use is the most obvious way to deal with such a situation, the alternative of using market-oriented pricing need not be discarded just because private ownership of resources is not possible. Legislatures could impose prices on environmental resources and attempt to initiate, through legislative control, the functioning of the price mechanism in the marketplace. It is unfortunate that this avenue remains essentially unexplored, since even this brief discussion should have made it clear that environmental damage and the economy are closely related and that economic analysis offers many insights into the causes of environmental decay.

Ideally, in implementing the charges, a legislature or agency should impose on an environmentally damaging activity all of the complex social costs that the activity incurs. The activity would then pay for the resources it consumes, like any other economic activity. Since computing total social damages poses enormous practical difficulties, it will probably not be possible to attain this ideal. However, given a legislatively determined level of environmental quality as a goal, the average costs of controlling environmental harms in various industries could be used to design a charge that achieves a high level of efficiency, even if it does not perfectly reflect all of an activity's social costs. While this approach requires moderately complex economic analysis to identify charge levels that will cause industries and other institutions to control environmental degradation to the desired degree, it is not impractical. The same approach can be applied to the environmentally harmful activities of individuals. The imposition of charges on throwaway containers and other solid wastes, on congestion, road use and the like, requires an identification of the level of economic incentive that will move individuals to respond in the socially desired way—an inquiry that may in the final analysis be a sociological inquiry as much as it is an economic one.

Charges will not function perfectly from an economic point of view, nor will they be totally free of technical, administrative, legal, and political difficulty. But charges compare favorably with direct regulation in so many key ways that they deserve serious attention.

Charges and direct regulation. All environmental programs have to pass through the same law-making process. In comparing charges with direct regulation, we must not forget that many attributes, and difficulties, will be common to both approaches.

A great deal of variety is possible in the amount of emphasis different schemes place on the roles of the legislature, the agencies, and the courts. In most important environmental control programs in the United States, heavy reliance is placed upon direct regulation by administrative agencies, backed up by frequent judicial review in the courts. Under the federal Clean Air Act and Water Pollution Control Act, agencies set standards for the amount of pollutants that can be released to the environment and police the implementation of these standards by the states. Two types of standards are typically involved. The first type, the ambient standard, is a legal specification of minimum conditions which must be met for some indicator of environmental quality at a specified location in one of the environmental media. For example, an ambient standard may state that dissolved oxygen, averaged over a 24-hour period at a selected river mile point, must not fall below 4 parts per million more than one day per year. The second type, the effluent standard, specifies a mean or maximum permissible discharge of a pollutant from a single, particular source. For example, Ajax Corporation Plant Number One may not discharge more than a set number of pounds of sulfur oxides per day.

Perhaps the most frequently used argument in favor of adopting charges rather than direct regulatory approaches is that charges are more cost effective. The comparison of the two approaches on these grounds is important, because the greater the cost effectiveness of the approach adopted, the lower the total bill that society must pay for the achievement of environmental standards.

It is vitally important to reduce the total costs of pollution control wherever possible because the sums involved are so staggering. For example, the National Commission on Water Quality has put the capital cost of achieving the statutorily mandated "best available technology" by 1983 at $43 billion. Thus pollution control by direct regulation could cause a significant shift in national spending patterns, which suggests that less costly solutions should be sought to avoid the risk of a congressional scaling down of the pollution control effort. Charges approaches could help avoid this outcome, because they require fewer real resources than current pollution control schemes in order to achieve the same degree of ambient quality.

Charges systems are a cost-effective means of achieving environmental quality goals because, with charges, each source decides how much to control on the basis of its own control costs. Thus, sources whose costs of control are high will control less; those with low costs will control more. The logical net result is that the average cost of control per unit of pollutant would be lower than it would be under regulatory schemes that do not allow this type of private decision making to take place. With charges, the cost of environmental cleanup is less for the overall economy.

In examining the advantages of such charges we do not want to overstate the economic shortcomings of the regulatory approach. In certain ways current approaches to air and water pollution control do take economics into account. In the actual implementation of the air and water pollution control acts, federal and state officials are striving to achieve a better economic result, primarily by taking into account differences in control costs among different categories and subcategories of sources. However, their purpose is not achievement of economic, or market, efficiency as such, and it is not yet clear exactly what the result is in terms of this criterion.

The major problem with standards-based regulatory programs is not that they in theory are incapable of achieving cost-effective or economically efficient results, but that in practice they could do so only at enormous administrative costs. Current approaches require setting standards based on careful economic analyses of entire polluting industries, mastering the technologies of production and pollution control in the regulated industries, and elaborately subcategorizing industrial processes which are sufficiently different to merit different pollution control standards. The standards arrived at through these involved procedures are often challenged in court on the grounds that they do not represent the "best practicable control technology currently available" or the appropriate statutory standard.

Under a system of monetary charges, after the basic charge rate is decided, the greatest source of continuing debate between polluters and the agency concerns not the technical alternatives available for abatement, but the devices and procedures used to monitor the quantity and quality of the pollutants discharged. Administrative expertise is directed to monitoring technologies. This is a highly favorable turnabout, because it is much more reasonable to expect the U.S. Environmental Protection Agency (EPA) or a state agency to become the recognized authority on monitoring procedures than to expect it to become knowledgeable about every production and pollution control technology in use or soon to be feasible.

Of course, in setting charges the legislature or agency must have at its disposal approximate estimates, prepared as carefully as possible, of the costs of controlling each type of pollution or other activity covered by the legislation. This initial information requirement goes beyond the needs of monitoring; however, this type of information is useful and necessary in any event before a legislature or agency can make any decision about control strategies that take costs into account.

Although charges are still largely untried, they could be a useful adjunct to and in some cases might be superior to direct regulation as a strategy for controlling environmental problems. But this cannot be known for sure until they have been tried. We do not want to imply, moreover, in anything we have written, that the two strategies are mutually antagonistic or inconsistent. Many practical plans for charges in fact call for the meshing of the two approaches. Some environmental problems, such as the control of toxic substances, are not amenable to a charges approach and must be directly regulated, usually to achieve zero discharges. In other cases, a charge may be used as an additional incentive to attain a predetermined discharge level, but may not apply to emissions below that level. The Connecticut charges mentioned were used within a regulatory system to remove the incentive for polluters to delay compliance with discharge standards. The possibilities for combinations of the two approaches are virtually limitless.

Other incentives. While there appear to be possibilities for introducing the charges concept into the arsenal of environmental control strategies, and for coordinating charges and direct regulatory systems, there is one form of "economic incentive," sometimes praised for its potential role in improving environmental quality, which should be considered.

Incentives that have been mentioned in connection with environmental management have included devices such as tax breaks or low-interest loans for the construction of treatment facilities. While it is part of an economic approach to environmental control, this sort of "incentive" is of a wholly different nature from the charges which are discussed here (these could, however, be called "negative incentives"). Even if such incentives induce investment in pollution control facilities, they are an economically inefficient means of reducing pollution, amounting to no more than a subsidy to producers and consumers of the affected products.

Furthermore, all proposals for tax breaks or other forms of subsidy that have come to our attention provide incentives only for investment in treatment equipment. In many cases the most efficient way to reduce discharges is to alter production processes, recover materials, produce marketable goods from by-products, or change the nature or quality of the raw materials. In numerous instances, process changes (use of savealls in paper production, black liquor recovery in pulp production, syrup recovery in canning, and so on) result in both waste reduction and recovery of valuable materials. By providing no incentive for process-related changes, subsidies tend to distort investment decisions toward treatment of wastes after they are generated. Even where they do stimulate investment in the most efficient means of reducing discharges, these proposals do not pass muster. If these incentives were widely introduced, their administration would become extremely complex because of the intimate relationship between production processes and the wastes produced. Without careful policing of individual plants, it would be virtually impossible to distinguish costs incurred to reduce waste loads from costs incurred to increase the profitability of industrial processes. Moreover, the availability of subsidies for treatment facilities would substantially lessen the incentive of a firm or industry to develop new, more efficient means of reducing discharges.

Finally, tax writeoffs and credits would probably not benefit marginally profitable firms, which might have to close down if effective controls are imposed, because the subsidies only partially alleviate pollution control costs. This is ironic because these devices are often justified as protection for the small firm. They protect the small firm just as effectively as our agricultural programs protect the small farm. If real protection is warranted, a more narrowly targeted system must be developed.

In addition to the factors just discussed, subsidy programs are a drain on the federal treasury and on a tax system which many feel is already overworked. In contrast, charges can yield revenue while improving the allocation of resources.

We recognize that the political process and skillful legislative drafting may come up with innovations that make acceptable some aspect of a charge system that at present appears to be undesirable. They may also find intolerable some other aspect that currently seems perfectly acceptable. There is no way to foresee any of this. But we think that careful attention to what we perceive as the major issues will be helpful to those who must develop or react to concrete legislative proposals.