Economics and Hazardous Substances

No single group of issues arouses more alarm among the public than that involving hazardous substances. This is because of the potential magnitude of the problems—indeed, each of us conceivably could eventually be affected by them in some way—as well as their insidious nature. Because of the persistence of hazardous substances and their latent effects, it might be years before we discover damage that already may be taking place. While the metaphor of the ticking time bomb may be somewhat overdrawn, hazardous substances are justifiably of great concern.

Although there is much that economics can say about policies designed to protect us from hazardous substances, there is much that it cannot. For example, proponents of cost-benefit analysis would be hard put to produce an analysis that would indicate to what precise extent the transport of hazardous substances and the disposal of hazardous wastes should be regulated. For the policy analyst, that determination depends largely on a comparison of the benefits and costs associated with varying degrees of stringency. But the calculation of benefits and costs is no simple matter.

In potential regulations governing hazardous wastes, for example, the benefits depend on the answers to several questions:

• How effective would the regulations be in preventing accidental exposures to and contamination by hazardous wastes?
• What would be the adverse human and ecological effects resulting from improper hazardous waste disposal? That is, once wastes were out of control, what harm would they do?
• If it were possible to determine how effective regulation is in preventing contamination, and what adverse health and environmental effects could be forestalled, how could we value the adverse consequences prevented by regulation?

Resolving the last question is most difficult and sensitive. For a twenty-year-old, how do we value a reduced risk of contracting cancer thirty years from now? What value do we attach to a reduced probability of birth defects several generations hence? How do we value the peace of mind that might result from knowing that wastes are being managed in such a way as to avoid a future Love Canal? Difficult as they are to determine, these are precisely the benefits that must be monetized if cost-benefit analysis is carried to its logical extreme.

There also are inherent problems in estimating costs. For example, how can we know to what extent future technologies will reduce the cost of hazardous waste disposal? What new and more benign substitutes will be developed for existing substances, thus obviating the need for expensive controls on their disposal?

Economics is limited in what it can tell us about the ideal level of regulation because such decisions must evolve from the political process, albeit one informed by natural and social scientific analysis. But economics can tell us a good deal about how to regulate once the decision to do so is made.

To understand the role of economics in the problems of controlling hazardous wastes, it is useful first to understand how these problems arose.

The production of final goods and services from inputs of labor, capital, and natural resources inevitably generates residuals, or uneconomic leftovers, in the form of materials (liquids, gases, solids) and energy (heat, light, noise). This has always been true in the past, and it will continue to be so in the future.

Historically, society permitted residuals to be released—free of charge—into the air and water and onto the land. Indeed, this may have made some sense before residuals generation became so great and so toxic as it is today and before populations grew to their current size. Since the disposal services of the environment were free, producers did what we all do when confronted with free goods—they used these services in almost unlimited quantities.

Rather than devote expensive labor and capital to the recovery or disposal of wastes, producers responded to the economic incentives—or lack thereof—and contributed to environmental degradation. Similarly, those offering waste disposal services had no incentive to take extraordinary measures to secure the safety of their sites. They, too, made use of the "free" services of the environment and the fact they could shift costs to others.

Thus, we found ourselves with air that often was unbreathable, waterways that on occasion burst into flames, and lands rendered unsafe by the wastes so long deposited on them. Thus, while all this free disposal was imposing little or no cost to producers, it was not necessarily free to society. Instead other costs—in the form of pollution-related illnesses, higher cleaning bills, destruction of fisheries, preemption of outdoor recreation, contamination of drinking water, and reductions in property values—were being borne by the victims of pollution, who often were uninvolved in the production, distribution, and sale or purchase of the final products.

In the 1960s and early 1970s, the United States began to develop its first comprehensive national responses to air and water pollution, now embodied in the Clean Air Act Amendments of 1970 and the 1972 Amendments to the Federal Water Pollution Control Act. The purpose of these laws, of course, was to force polluters—including households and local governments as well as industries—to begin to assume, or internalize, the costs of production they had been imposing on third parties. As for the success of these laws, suffice it to say that their record is on the whole encouraging with respect to air quality, even though work remains to be done. The record is less satisfactory with respect to water quality.

Broadly speaking, the federal approach in air and water pollution policy has been technology-based. That is, the government has tried to identify what abatement technologies are available in each industry and then either required that these technologies be adopted out-right or established discharge standards that almost forced the adoption of those technologies.

The deficiencies of this approach gradually have become apparent. First among the drawbacks is cost, relative to other approaches that allow for flexibility in the choice of abatement techniques. The Environmental Protection Agency's (EPA's) "bubble" and "offset" policies illustrate this point.

For example, by allowing a steel manufacturer to regard a plant as if it were within a giant bubble—say, to control particles blown from roadways and slag heaps rather than those originating at its stacks—it could save millions of dollars per year at the same time that ambient concentrations of particulates are being reduced. In effect, the bubble concept treats an entire plant as if it were one source of residuals.

Similarly, in air quality nonattainment regions, the EPA's offset policy now allows firms wishing to locate or expand there to do so, provided they secure greater than offsetting reductions in emissions from other sources in the region. This makes unnecessary the installation of phenomenally expensive control equipment designed to eliminate airborne emissions altogether.

For both the bubble and the offset policies, the savings that are possible even from subtle relaxations of the technology-based approach are substantial. These real-world findings are buttressed by more than two decades of academic and engineering studies that have shown potential savings in control costs of as much as 90 percent when more flexibility is permitted in environmental management.

A second drawback to technology-based standards is, paradoxically, that they inhibit the development of new and potentially innovative technologies. For what would induce a firm to come up with new and cheaper ways of eliminating residuals if, as a result, standards will only be tightened further, thus wiping out potential savings? Moreover, under the current system, adherence to the recommended technology has an additional attraction for a firm: if the technology fails to produce the desired reduction in emissions, the blame for the failure can be shifted to the EPA. The firm was "just following orders," so to speak.

What does a decade of experience in air and water pollution control policy tell us? And how can these lessons be applied to the development of policy for the transportation and disposal of hazardous substances?

First, we can address the problems associated with hazardous substances more innovatively and less expensively. Specifically, where possible, it might be wise to alter the set of economic incentives faced by the generators, transporters, and disposers of hazardous substances, allowing them to respond to these incentives in whatever way they see fit.

Where possible, we should avoid telling manufacturers what substances they may and may not use in production; what processes they may and may not employ; and what equipment they must or must not install. Similarly, we should avoid ordering transporters to use certain kinds of equipment. And we should avoid regulations that specify in minute detail how wastes should be handled, how disposal facilities should be designed, and how safety should be approached.

What kinds of economic incentives can be used to replace legalistic or command-and-control approaches? The one most often discussed is a tax (or effluent charge) on hazardous substances or wastes generated. For example, a tax on waste could be assessed per unit of waste produced and logically might vary with both the toxicity of the waste and its expected longevity.

Such a tax would give waste generators an incentive to alter production processes to reduce their by-products and a further incentive to recover and reuse those wastes that could not be eliminated easily, to avoid paying the charge on the wastes that ultimately are produced. Also, charges of sufficient size would induce manufacturers to alter input choices and production processes to produce less dangerous wastes with a shorter lifespan. Finally, the charges on manufacturers would be passed, at least in part, to consumers of the intermediate and final products, thus reducing consumer demand for those products. Production will be decreased, and the generation of hazardous wastes will be further curtailed.

Note that all these changes would be induced by the simple application of a charge on units of waste generated, perhaps measured in dollars per pound. No detailed instructions need be issued. Furthermore, by allowing the specific response to the charge to vary from firm to firm—some will change inputs, some will change their method of production, some will recover or recycle wastes along the way, some will alter the toxicity of ultimate wastes, and some will do all of the above—we accomplish something else. Because each firm will choose the least expensive way to respond to the charge, this approach guarantees that the resulting reduction in waste will occur at least cost to society. This is not the case when firms follow detailed regulations—that approach robs waste-generators of the chance to save money through creative responses.

One way this idea could be applied to transporters of hazardous substances would be to develop a system of fines for accidents—again, a system which varied with the toxicity of the substance, the number of people exposed, and so forth—that would stimulate transporters to take extraordinary protective measures. By leaving the choice of measures up to individual transporters, they can establish the most economical ways to achieve safety. Some may build extremely safe transport vehicles, some may reschedule routes or alter shipping times to avoid busy areas, some may attempt to neutralize wastes before shipment, and some may try all these approaches.

It is less easy to envision a set of incentives that might supplant or supplement direct regulation of the disposal of hazardous wastes. On what would a charge or penalty be based? It is, after all, hard to measure seepage into an underground aquifer or leechate in surface waters attributable to a specific disposal site.

Yet even here economics can tell us something about the design of regulation. It makes little sense to require the same design conditions to be set at each and every disposal site regardless of the kinds of wastes that will be handled or the size of the populations or environmental resources that might be affected.

Surely some sites are safer than others. While each should meet certain absolute safety standards, we should require less stringency at remote sites for a simple reason: if we do so, it will cost less to dispose of wastes there, hence more will be disposed of in safer, more remote areas than in other, more populated areas. Thus, flexible design standards have some of the advantages of a charge or other incentive.

To simplify matters, this discussion of economic incentives has been limited to the use of a tax or charge. But it is possible to achieve the same advantages by limiting the total amount of waste generation permitted in a specific area and requiring those wishing to generate wastes to obtain a license or permit to do so. If these permits could be bought and sold in an open market, and if no wastes could be generated without permits, the costs to society of reducing wastes would be minimized. By putting a price on waste generation, generators would have incentives not to produce wastes—if they no longer produce wastes, they no longer require a permit for doing so.

In addition, those buying permits would be those who could not eliminate wastes less expensively. For this reason, the marketable permit approach also secures waste reductions from those who find it relatively inexpensive to do so. Hence, a carefully designed and enforced system of marketable permits is another kind of incentive-based system that could be used in lieu of highly detailed and often expensive regulations.

Moreover, a truly open market for permits would enable concerned non-producers—say the Sierra Club—to purchase permits and retire them, thus reducing the total amount of waste generation in an area.

It should be noted that these taxes, charges, or marketable permits are not easy to design and enforce, but in view of the potential savings that can result from flexibility, society may be much better off under an incentive-based approach, even if extra ingenuity and effort are required for its design and operation.

Unfortunately, establishing a tax or marketable permit system will not eliminate the menacing practice of "midnight dumping." It will continue to exist under any system that forces generators or disposers to internalize costs they would rather shift to others. If, however, the use of economic incentives can reduce the costs associated with waste generation and disposal, it will blunt the incentive that firms may now have to avoid safe disposal through illegal means. But economics can be effective only up to a point: any hazardous waste policy must be accompanied by strict enforcement of laws and stiff penalties for violators.