Effluent Taxes and Regulation

Present government programs to combat environmental pollution depend heavily on the use of enforcement actions against individual sources of emission, provision of subsidies for treatment plant construction, and to some extent efforts to apply standards to individual sources of emissions. This approach has been characteristic of all levels of government, and the effectiveness with which it has been implemented is highly variable. That this is still the main thrust of national policy was underlined by the water quality bill passed by the Senate in November 1971. It emphasizes each of these elements and sets forth an ambitious goal of ending all discharges to watercourses by 1985.

Many economists have long favored an alternative approach, which would rely much more heavily on the use of taxes or charges on effluents to improve environmental quality in a more efficient and probably more equitable manner. In principle, such taxes or charges should reflect the external or social cost imposed on the larger economy by the particular waste discharged. The tax would make this cost internal to the firm or municipality and provide it with incentive to reduce its waste discharge by any means that would cost less than the tax. This "internalization" of social cost would not only reduce waste discharges to the environment but cause social costs of production to be reflected in the price of products, thereby affecting the quantity demanded by consumers.

In practice, a charge or tax on pollution would probably have to be uniform within zones in a region, for a region as a whole, or even on a national level. Such charges would have to reflect an estimate of average damages or be imposed at a level that would permit an ambient or environmental standard or objective to be obtained—for example, a certain number of parts per million of dissolved oxygen in a water body.
Such a charge system would have desirable effects, even though it did not mirror exactly the social costs of production. For example, if some polluters could reduce their emissions cheaply, it would favor their doing so, thereby automatically allocating more of the assimilative capacity of the environment to those sources which find it most expensive to control their effluents. This means that whatever environmental standard is specified could be achieved at something like the lowest cost to society; various studies have shown that this cost can be quite a lot lower than that imposed by the introduction of uniform emission standards. Furthermore, effluent charges would cause at least a rough approximation of the social costs of production to be reflected in product prices. Finally, they would provide a strong incentive to undertake research and development activities.

In the case of water, economic studies have also shown that there are many alternatives to the reduction of emissions at individual points of discharge if viewed from the standpoint of an integrated river basin. The waste-assimilative capacity of the river can be improved through low flow augmentation and the introduction of air or oxygen to the water course. Additionally, since there are scale economies in treatment, it is often efficient to combine more than one source of waste discharge in treating waste prior to discharge. Operations on such a basis can greatly reduce the costs of achieving specified levels of water quality. This has caused some economists to argue strongly in favor of the development of regional river basin institutions for the management of water quality along with the imposition of effluent charges. The problem of regional institution building is largely neglected in our present national program.

Until recently, the case for effluent charges has been argued primarily by economists. In the last year, however, several politically important conservation groups, which previously had opposed the charges approach, have stepped solidly behind the effort to levy pollution charges or taxes. In July 1971 representatives of the Sierra Club, the National Wildlife Federation, Friends of the Earth, and the Audubon Society testified before a congressional committee in behalf of the pollution tax strategy. The change in position results mostly from their conclusion that the conventional enforcement-subsidy strategy is not working. This new support for effluent charges is of considerable political importance, and on the strength of it Senator Proxmire introduced a bill called the Regional Water Quality Act of 1971. This revised version of a bill introduced by the senator several years ago would levy a national effluent charge on certain waterborne waste and would stimulate the creation of river basin agencies to manage water quality on an integrated regional basis.

Another move on the part of the conservationist groups is the formation of the Coalition To Tax Pollution. So far, the Coalition's efforts have been primarily to promote national legislation to tax sulfur emissions.
Interest in an effluent charge or tax approach to improving water quality has developed in several states. Vermont has enacted (but delayed implementation for a year) a program to charge waste dischargers a fee until they come into compliance with emission standards. This essentially uses the charges device as an enforcement tool. The main purpose is to remove the economic incentive for delaying compliance, which is inherent in the standard enforcement approach. More nearly pure "effluent charge" strategies on water pollution have been or are being considered in several other states, including Maine, Wisconsin, and Illinois.

Of equal interest is the support for effluent charges from the President and his Council on Environmental Quality. In their Second Annual Report, the Council says, "With little doubt, a well-constructed charge system tied to the amount and type of pollutants would quickly curb waste discharges . . . . Pollution charges would provide a strong abatement incentive and would tie environmental costs to the processes that generate the pollution." The Report goes on to advocate a combination of direct regulation and charges. The Administration has proposed taxes on lead and on sulfur oxide emissions which, the Report contends, show the way toward a proper strategy for combining both approaches. Regulatory authority, the Report says, can be used to establish ambient standards and back up enforcement while emission charges or taxes provide the economic incentive to achieve these standards.

Discussion has turned away from rather abstract justifications of different approaches to the question of how various approaches can be implemented and optimally combined; this was highlighted in October, by a conference of the Council on Law-Related Problems, during which implementation questions were discussed in detail.

The use of effluent charges and taxes is still a marginal part of the effort to develop an effective public policy with respect to environmental pollution. However, the realization is growing that environmental problems to a large extent are a product of the failure of our market system to internalize social costs. Also, there is a spreading conviction that our traditional enforcement processes more often than not have been ineffective. These developments have given new significance to discussion of the role of economic incentives in environmental quality management. The main issues in current discussion concern (1) how to determine the proper basis for levying taxes and charges, (2) the desirability of effluent taxes and charges at the national level, and (3) their relation to regional environment schemes for enforcement and regulation. These issues are coming to a focus in efforts to hammer out real legislation as characterized by the Proxmire bill and efforts in several states.