The most important environmental policy debate of 1981 is likely to be over the Clean Air Act, which is up for congressional reauthorization. Many of the issues that were crucial in the deliberations over the Clean Air Amendments of 1970 almost certainly will be reexamined, including the extent to which air pollution policy should rely on economic incentives or direct regulation of emission sources using available abatement technology.
For a variety of reasons, every state—the states are responsible for choosing and implementing policy—chose the technology-based regulatory approach to meet the primary ambient air quality standards established by the 1970 amendments. Although substantial improvement in air quality was achieved, the 1977 deadline passed with many areas of the country—including most major metropolitan areas—failing to achieve the standards for at least one pollutant. In addition, in areas with air quality better than the standards, maintenance of that quality was not assured.
Accordingly, the Clean Air Act was amended further in 1977 to address the problems of "nonattainment" and "prevention of significant deterioration." Although the Environmental Protection Agency's (EPA's) limited experimentation with economic incentives was allowed to continue, the benefits of such incentives were largely dissipated by other features of the amendments. New or expanding plants were required to ensure a net reduction in pollution, usually by acquiring "offsets" from existing sources. But they also had to meet stringent technology-based standards and secure a preconstruction permit from the EPA. Further, in nonattainment areas an unapproved state implementation plan or insufficient progress toward meeting air quality goals were grounds for the EPA to disallow a permit. By increasing the uncertainty regarding the location and timing of new plant construction, the requirements may have had a significant inhibiting effect on investment.
Although the issues surrounding this year's deliberations over the Clean Air Act are familiar, the context is altogether different. The nation's economy is beset by several interrelated problems that have defied solution: high and persistent inflation, high unemployment, sluggish or nonexistent productivity growth, and overreliance on insecure foreign energy sources. In the minds of many, "excessive" environmental regulation shares the blame for our economic difficulties.
Moreover, many areas of the country are facing, for the first time, the real possibility of economic stagnation caused by binding air quality constraints.
Another contrast between 1981 and 1970 is that we now have had a decade of experience with direct regulation. This approach has failed to achieve ambient air quality standards in many areas, and it has not even addressed what may eventually be regarded as the nation's most severe air quality problem—acid rain. Indeed, by encouraging tall stacks as a solution to local air quality problems, the Clean Air Act may have made matters worse.
In sum, the changed political environment encourages a search for more effective policy alternatives, including greater use of economic incentives.
Back in 1970, economic incentives meant mostly effluent charges. Although charges remain an attractive policy option, another kind of economic incentive—marketable pollution permits—is in the ascendancy. As noted in the article by Paul Portney, under a permit scheme a firm wishing to locate in an area must purchase emission permits from existing polluters, who then must reduce their emission discharges accordingly. This concept is likely to receive more attention than effluent charges because it involves a much smaller institutional change from such current policies as offsets and the bubble.
To be sure, economic incentive approaches are not without problems. Designers of a marketable permit system, for example, may face a difficult dilemma regarding the size of the trading area. It should be sufficiently large to induce enough participants for a market to develop. However, because emissions from different locations can have different environmental effects, allowing one-for-one emission trades in a large area compromises the efficiency of the approach. Either these losses must be accepted or "exchange rates" between traders in different locations must be enforced, action that may lose in administrative headaches what is gained in efficiency.
In spite of the theoretical case for economic incentives and a decade of less than satisfactory progress, support for the technology-based approach continues to be strong, especially among air quality professionals and others with a vested interest. But the disappointments of an actual policy almost always create support for an untried alternative, and much of the implacable hostility to economic incentives formerly found among environmentalists and industrialists alike has disappeared. The outlook for economic incentives has never appeared more promising.
The authors—Winston Harrington and Alan J. Krupnick—are both fellows in RFF's Quality of the Environment Division.
A version of this article appeared in print in the May 1981 issue of Resources magazine.
