The Chesapeake Bay Cleanup

When President Reagan, in his January 1984 State of the Union address, pledged to help clean up the Chesapeake Bay, he was reaffirming and expanding a major commitment to fund Bay research made by Congress in the waning days of the Ford administration. The capstone of that earlier commitment is a seven-year, $27 million Environmental Protection Agency (EPA) study documenting the declining quality of the Bay. Completed in the fall of 1983, the study blames the decline on excessive nutrients and, to a lesser degree, on toxic effluents and sedimentation. The nutrients—primarily the result of agricultural runoff and municipal waste discharges—spur the growth of algae that deplete oxygen from the water while preventing sunlight from reaching the submerged aquatic vegetation that is critical to the Bay's living resources. Sediment and toxic effluents also directly affect vegetation and fish.

The Bay summit

The preliminary findings of the EPA study—along with evidence of continued declines in landings of striped bass, other fish, and shellfish—galvanized politicians in the affected states of Maryland, Virginia, and Pennsylvania, and in the District of Columbia. Maryland's Governor Harry Hughes and his cabinet and staff began legislative and administrative initiatives to clean up the Bay, as did their counterparts in the other jurisdictions and in the federal government. Their efforts led to a Bay summit in December 1983, attended by more than 700 prominent persons, including Governor Hughes, Virginia's Governor Charles Robb, Pennsylvania's Lieutenant Governor William W. Scranton III, five U.S. Congressmen, and Mayor Marion Barry of the District of Columbia. Out of this conference came a compact pledging increased state funding as well as cooperative efforts on the part of the states and the EPA.

Following the summit, the signatories moved forward to refine and implement their programs. By April 1984, in Maryland alone, ten new laws had been enacted by the General Assembly, and a host of additional administrative initiatives were passed on to state agencies for implementation. The FY85 operating budget for the Bay has been set at $13 million, with an additional $22 million to be raised by a bond issue for capital spending. These funds are to be allocated in four major areas: point-source control, nonpoint-source control, resource protection and enhancement, and protection of land resources. In addition, data collection, monitoring, research, management and environmental education—functions that cut across the above areas—are slated to receive a large share of the funds [see box on page 4]. For its part, the state of Virginia passed similar, but less extensive, initiatives and pledged $13.4 million in operating expenses over two years, while Pennsylvania put in $1 million, and the District of Columbia pledged $250,000.

Meanwhile, the Reagan administration agreed to funnel $10 million to the Bay in FY85 through the EPA's Chesapeake Bay Program. Recently, $10 million more has been added to the EPA's FY86 budget, with another $20 million expected over the next two years. However, because $2.75 million of the first $10 million is slated for administrative expenses, public outreach and monitoring, data collection, and modeling programs, only $7.25 million remains for distribution to the states. To supplement its direct contributions, the EPA has forged cooperative agreements with the other federal agencies who share responsibilities for the quality of the Bay.

As the most recent expression of political will, a conference honoring the one-year anniversary of the Bay summit was held in Washington on December 13, 1984, to review the accomplishments of the past year and to identify plans for the future. Nonetheless, while the commitment to save the Bay is historic and necessary, it must be shored up by well-directed policy design and implementation. In what follows, the policies of two major Bay programs—the Chesapeake Bay Program of state grants and Maryland's Bay initiatives—will be examined.

The Chesapeake Bay Program grant allocations

The states obtain grants by submitting the eligible portions of their Bay projects to the Chesapeake Bay Program (CBP) for review. If the CBP's criteria are met, the states receive matching funds up to their allocation. Although the allocation formula has not yet been determined, it is likely to be 30-30-30-10 (that is, 30 percent of $7.25 million goes to Maryland, Virginia, and Pennsylvania, and 10 percent to the District of Columbia).

While seemingly equitable, the grant-allocation process does have potential drawbacks. Because the prospective formula lacks an obvious or necessary tie to program goals, it may allocate the available funds poorly. Further, by using a matching procedure rather than an outright grant, some funds may go unspent. Pennsylvania's $1 million program—even if fully matched by the federal government—will fall short of its total share by $1.175 million, although other states will be able to apply for Pennsylvania's unspent allocation. Basing funding on the share of pollution caused by each state or on the relative expected cost of pollution controls could make the program more effective.

In addition, the CBP apparently discourages grant applications for multi year projects, although they may be at least as promising as those for shorter periods. The CBP also requires that nonpoint-source-pollution projects be allocated at least 75 percent of the grant, a proportion that may not be appropriate in every case.

Finally, as the geography of the Bay ensures that any cleanup actions taken by one state are likely to confer benefits on others, economic theory suggests that the level of spending will be less than what is socially optimal. Although Pennsylvania does not border on the Bay, its principal river, the Susquehanna, contributes more than half the nutrients and 40 percent of the sediment load to the Bay. This asymmetry between the expense to Pennsylvania of controlling this pollution and the benefits it would receive makes it likely that the state will undercontrol relative to what is optimal for the Bay. Thus, it is up to the federal government to coordinate state policies and to deal directly with the transboundary pollution problem. At solve point, the CBP may take on this role, but at least for the near future, state programs are likely to be treated separately.

Economic policies—such as effluent taxes, marketable pollution permits, and tradable development rights—provide incentives to point-source or nonpoint-source polluters, developers, fishermen, and others to economize on their use of Bay resources by making such use costly. Because they, not the government, are more likely to find the cheapest way of responding to the policy, program goals can be attained at lower cost than is possible through centrally directed actions. Because the cheapest response may be nontechnological—say, by switching to less-polluting inputs instead of installing pollution-control devices—these incentives move policy away from the typical reliance on "technological fixes.” At the same time, they also provide incentives to develop new technology. Where the government desires to use direct approaches, such economic tools as cost-benefit or cost-effectiveness analysis can help stretch scarce government funds by evaluating the efficiency of ongoing policies and improving on policy design.

Yet, can the goals for the Bay be reached m this way? The problems facing the Bay now are enormous, and by the year 2000—according to the Maryland Department of State Planning—the state is expected to experience a 15 percent increase in population , and a 31 percent jump in housing units and developed land. At the same time federal federal grants to the states are declining, no more so than in the municipal construction-grant program: the current federal share has decreased from 75 percent to 55 percent this year ($10.8 million 91 Maryland's FY85 capital budget is designated for filling this gap) and is slated to fall to zero by 1990. For the state's part, while the sums of money devoted to the Bay cleanup are large by historical standards, they still are quite small and are unlikely to grow substantially.

If Maryland's resources, supplemented by the EPA, could be stretched far enough, would the cost be too high, or higher than it needs to be? Conspicuously absent from the Maryland initiatives is a role for the type of decentralized decision making favored by economists—policies and procedures that can minimize the costs of obtaining given ends.

Economic policies—such as effluent taxes, marketable pollution permits, and tradable development rights—provide incentives to point-source or nonpoint-source polluters, developers, fishermen, and others to economize on their use of Bay resources by making such use costly. Because they, not the government, are more likely to find the cheapest way of responding to the policy, program goals can be attained at lower cost than is possible through centrally directed actions. Because the cheapest response may be non-technological—say, by switching to less-polluting inputs instead of installing pollution-control devices—these incentives move policy away from the typical reliance on "technological fixes.” At the same time, they also provide incentives to develop new technology. Where the government desires to use direct approaches, such economic tools as cost-benefit or cost-effectiveness analysis can help stretch scarce government funds by evaluating the efficiency of ongoing policies and improving on policy design.

An evaluation of two of Maryland's most important initiatives—the added funding for Agricultural Best Management Practices (BMPs) and the creation of the Critical Areas Commission—provides more detail on the state's program and, more important, illustrates the role economic analysis could play in solving the Bay's problems.

BMPs for agriculture

To promote through cost-sharing the installation of BMPs by farmers, Maryland has awarded grants totaling $5 million since July 1983, with $2 million more slated for dispersal by June 1985.

The program works much like the federal Agricultural Conservation Program (ACP), in that farmers may voluntarily request Soil Conservation Service personnel to design projects for their farms which, if approved, receive government support. By federal standards, Maryland's program is generous—up to $5,000 per project and up to $25,000 per farm are available from the state as opposed to a $3,500 limit from the ACP. In addition, for projects costing $5,000 or less, 87.5 percent of the installation costs will be picked up by the state (compared with 50 to 75 percent under the federal program). Farmers may even obtain funds from both sources (but not double-dip) for the same projects. A crude cost-effectiveness criterion limits awards to projects with cost to the state per ton of soil loss or animal waste reduction of $50 or less. In one sense, Maryland's program is more restrictive than the ACP's in that, to receive funds, recipients must abide by a fifteen-year maintenance schedule.

Maryland's BMP initiative has been popular. Since July 1983, 1,700 projects have been funded, with an average award of $3,000. Overall, about 900 farmers have received the $5 million, mostly in the Upper Shore area (Cecil, Kent, Queen Anne's, and Caroline counties). And another $2 million is expected to be given out within the next five months.

Nevertheless, the popularity of a program may be a poor indicator of its performance. Economic principles can help in this evaluation. Farmers will volunteer for this kind of subsidy program if the benefit to them exceeds their cost-share for installation plus the discounted value of operating and maintenance costs. However, the choices made by farmers may not, in themselves, do enough for the Bay. Maryland farmers, who lead those in most other states in the percentage of farmland under no-till and other soil-conservation practices, have learned that their soils are ideal for such techniques; in a dry year, they can increase yields substantially. Yet, despite their widespread use, nutrient loads from farms remain unacceptably high.

Moreover, the very popularity of a subsidy program raises suspicions about windfall gains. If the techniques being subsidized are so popular, perhaps subsidies are not needed to promote them. And, if they are necessary, could the cost-sharing percentage be reduced, yet still be attractive to farmers? If so, scarce state funds could be freed for use by other farmers or for other initiatives.

Certainly, a judicious allocation of state funds will be needed if much reliance is placed on the BMP program. With $5 million spent already (and this from a bond issue made in 1974)—only 5 percent of the estimated 18,000 farmers in the state have received funds, and many farms, if not the majority, are located in areas designated by the EPA as lower-priority watersheds.

Accepting for the moment that a voluntary cost-sharing program is the "best" policy, according to economic principles it should be designed to reach its nutrient-reduction goals efficiently, both for society's benefit and to economize on state funds. The idea is to minimize the costs (C) per ton of nutrient inflow reduced (N) to the Bay. Maryland will be targeting funds to watersheds with the potential for high nutrient runoff, a policy that will reduce costs to a limited extent, although within a given watershed C/N ratios still will differ widely. Unfortunately, a talent for grantsmanship, the availability and skill of Soil Conservation Service workers in designing BMPs for a farm, and the farmer's awareness of the program—as well as his income and non-runoff-related farm characteristics—also may influence which farmers get funding. Indeed, one Maryland official noted that the availability of large numbers of Soil Conservation Service personnel in the Upper Shore was the reason for the large number of grants made there. (Of course, personnel can and will be moved to areas of high priority to make this factor work for better targeting. In addition, Maryland emphasizes education and outreach to increase farmer awareness of the program.) Because design and paperwork demands per application may be large, relatively costly, and insensitive to the size of the project, it may be desirable to focus on projects promising bigger payoffs, perhaps by adopting a policy where the cost share rises for larger tonnage reductions.

Other policy changes could help lower the C/N ratio. The farmer's discounted operating and maintenance costs should be included to reduce the incentive for projects that are too capital-intensive. And, as N should measure the nutrients prevented from reaching the Bay, not from leaving the farm, account should be taken of geographic differences in land transport characteristics. Finally, the EPA and others suggest a wide range of theoretically more efficient policies, including the trading of pollution reductions between point- and nonpoint-source polluters and use of cross-compliance strategies. More research is needed to see whether these policies can be made politically acceptable and implementable for the Bay.

The Critical Areas Commission

The Critical Areas Commission, called by many the cornerstone of Maryland's program, is a twenty-five member committee representing county and state interests that will review and approve land resource protection programs developed by local governments. Lands extending 1,000 feet from behind the shoreline of the Bay and its major tributaries to the head of tide are included automatically. However, a local government may request that certain lands be excluded or included. Funds are available to help local governments develop plans, but not implement them (at least not through the Critical Areas Commission's budget).

The key features of this initiative are the criteria local governments must meet to obtain approval of their development plans. The state legislature set guidelines that are so broad—to minimize water-quality impacts, to conserve habitat, and to accommodate growth while addressing the fact that development creates adverse environmental impacts even if pollution is controlled—that little guidance is available for regulation writing. Public hearings now are being conducted as input to the creation of such criteria, to be proposed in June 1985.

A regional commission to oversee Bay development is a good idea, in theory allowing the environmental effects of growth to be internalized at the Bay level. In addition, the commission will be in a position to prevent counties from offering developers excessive reductions in environmental or infrastructure requirements to attract their business.

On the other hand, the commission's authority is spatially quite limited, extending to less than 1 percent of the land area in the Bay watershed. Also, contiguous areas that are at least 50 percent developed may be exempted from the critical area at the localities' discretion. Thus, most of the commission's activity is likely to be directed toward agriculture and shoreline development and not at the fringes of urbanized areas where much of the development is proceeding.

Although it is far too early to make any predictions about the commission's success, commission members probably will demand equitable treatment of their respective countries; such a position may discourage reasonable intercounty competition for development and may interfere to an unwarranted degree with market-based location decisions. In addition, economic theory suggests that uniform policies, where each county is treated identically, usually are more costly than policies that recognize regional differences in control costs, as well as economic and environmental impacts. As an alternative the commission could seek to internalize intercounty and Bay externalities while otherwise letting each county decide how it wishes to balance local economic activity and environmental degradation. Economic incentive policies may offer a way of threading this fine line. The idea is to make development pay for the intercounty and baywide environmental damages it will cause. For instance, holding aside legal and implementation problems, perhaps a charge for land use could be devised to reflect some approximate relative (marginal) damage potential of development. This damage potential could vary by soil type, distance from shore, type of development, or other factors. No jurisdictional boundaries would be respected here but, guided by the tax incentive, "dirty" development would tend to locate away from environmentally sensitive areas of the Bay.

Conclusion

The Bay's economy rivals its ecology in importance and complexity, yet comparatively little thought and effort have been directed at relieving the economic trade-offs inherent in the programs to improve its ecology, or designing policies that can attain a cleaner Bay at the least cost to society. In the heady atmosphere accompanying these new, major government initiatives, these considerations may seem relatively unimportant. But, the enormity of the Bay's problems, coupled with the scarcity of public funds to deal with them, are likely to focus attention on economic procedures and incentive policies. Impetus also may come after the easy, less expensive portion of the cleanup is accomplished and further, but necessary, pollution reductions can be realized only at much higher costs. Such a pattern has appeared before as policymakers began to consider and adopt efficient, incentive approaches as a supplement to regulation-based policies under the Clean Air and Clean Water Acts.

Anticipating future policy changes, the EPA, Maryland, and the other governments wisely include data collection and monitoring initiatives for evaluating the success of their programs. Nevertheless, obtaining the full range of economic and scientific data required for credible economic analysis and effective policy design does not appear on the agenda. Thus, it may be difficult to evaluate current policies and to implement economic incentive policies in the future. Efforts in data collection, modeling, and policy design that integrate economic ideas should be expanded now to help assure that the Chesapeake Bay of the past is more than just a memory.