?/EPA
United States
Environmental Protection
Agency
Policy, Planning,
And Evaluation
(PM-223X)
230-R-92-001
July 1992
The United States Experience
With Economic Incentives To
Control Environmental Pollution
Printed on Recycled Paper
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EPA-230-R-92-001
July, 1992
THE UNITED STATES EXPERIENCE
WITH ECONOMIC INCENTIVES
TO CONTROL ENVIRONMENTAL POLLUTION
Alan Carlin
Economic Analysis and Innovations Division
Office of Policy Analysis
Office of Policy, Planning and Evaluation
U.S. Environmental Protection Agency
Washington, DC 20460
U.S. Environmental Protection Agency
Region 5, library (PH2J)
77 West Jackson Boulevard, 12th Floor
Chicago, It 60604-3590
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
July
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ADMINISTRATOR'S PREFACE
Since its creation two decades ago, EPA has made great strides in protecting the
environment. For the most part, these environmental improvements were made
through the use of command-and-control regulation; that is, promulgation of uniform,
source-specific emission or effluent limits.
It is becoming increasingly clear that reliance on the command-and-control approach
to environmental regulation will not, by itself, allow EPA to achieve its mission. A
number of persistent, seemingly intractable problems remain. Whereas in the past we
focused mainly on controlling pollution from large, readily identified industrial sources,
we are now confronted by environmental concerns that stem from a diverse range of
products, sources, and activities. Some of these new problems are global in scope, such
as stratospheric ozone depletion and global climate change. Others are local in nature
but require that many people take similar actions individually. These kinds of problems
typically are less amenable to traditional command-and-control approaches than are
large, industrial sources.
To maintain momentum in meeting our environmental goals, we must move beyond
prescriptive approaches by increasing our use of innovative policy instruments such as
economic incentives. Properly employed, economic incentives can be a powerful force
for environmental improvement.
Economic incentives work by providing pollution sources greater flexibility to meet
their environmental responsibilities. Economic incentives harness powerful marketplace
forces to cut environmental pollution, and can significantly lower the cost of environ-
mental programs. When properly designed, economic incentives can stimulate both
consumers and businesses to take actions in their own economic interests that also
advance environmental protection goals.
Consideration of economic incentives could not be more timely. Another EPA
report1 makes clear that the proportion of U.S. Gross National Product devoted to
environmental protection is projected to grow significantly—from 1.9 percent in 1990 to
about 2.7 percent by the year 2000. Most of these costs will be borne by the private
sector.
This projected growth in expenditures raises important issues for maintaining U.S.
competitiveness in the global economy. I do not for a moment believe that we should
pull back from our environmental commitments. After all, the benefits of environmen-
tal protection are substantial. Yet, I am equally convinced that as we pursue our
environmental goals, we must do so in the most cost-effective manner possible. Today,
economic incentives offer an historic opportunity to help reconcile the nation's economic
1 U.S. EPA (1990).
__ _
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
and environmental aspirations.
EPA has promoted economic incentives for a number of years. Our emissions
trading policy and our program to phase down the use of lead in gasoline are two
prime examples. The potential advantages of using appropriate economic incentives has
also been recognized by President Bush and by Congress. The Clean Air Act of 1990
includes numerous economic incentives relating to many aspects of air pollution. A
leading example is the market-based acid rain program that will allow utilities to buy
and sell emission "allowances" to achieve compliance at reduced cost.
Mindful of the advantages of economic incentives, when I first arrived at EPA, I
asked the staff to identify new ways economic incentives could be used to improve
environmental protection. The resulting report2 developed and evaluated a broad array
of proposals. This new report is a companion document to the earlier report in that it
reviews not what could be, but what is (or soon will be). It also looks at the effective-
ness of current efforts in controlling pollution. I hope that this review will prove useful
to all levels of government and the private sector as economic incentives are more
widely applied to reduce pollution.
I want to stress that this report does not endorse nor does it dismiss any particular
economic incentive. Rather, the report is intended to stimulate a continuing dialogue
among policy makers on the uses and usefulness of economic incentives in environmen-
tal policy. The author and I welcome your comments.
William K. Reilly
Administrator
July, 1992
2 U.S. EPA (1991).
iv July
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EXECUTIVE SUMMARY
In the past few years, economic incentives have moved from relative obscurity to a
significant role as a tool for managing the environment. Nowhere is this attention to
incentives more explicit than in the 1990 Clean Air Act Amendments. That legislation
authorizes incentive-based mechanisms for the control of acid rain, for the development
of cleaner burning gasoline and less polluting vehicles, for states to use in controlling
urban ozone and carbon monoxide, and to facilitate the reduction of toxic air emissions.
Other key environmental statutes, the Clean Water Act and the Resource Conserva-
tion and Recovery Act, are now up for reauthorization. Incentive mechanisms promise
to be actively debated as these and other environmental legislative proposals make their
way through Congress. EPA is currently preparing analyses of numerous possible
incentives to support this debate. At the state level, some incentive programs have been
implemented, and many other proposals are currently under active consideration.
With current high levels of interest in incentive mechanisms for environmental
management, it is useful to examine the record to date. Over the past 20 years, federal,
state, and local authorities have enacted a diverse array of environmental incentive
mechanisms. How well have these mechanisms performed? What can be learned from
the record that will assist in the formulation of new mechanisms? How economically
efficient have these mechanisms been in achieving their objectives?
This report examines that record, highlighting applications of emission and effluent
fees, charges for solid waste disposal, marketable permit systems for air and water
pollution, deposit-refund systems, and information and liability mechanisms. All satisfy
the basic requirement that an incentive provide a continuous signal to pollution
generators to be aware of and act on opportunities to reduce releases of pollution to the
environment.
The report first reviews the available information on the economic efficiency and
environmental effects of economic incentives in general. The literature uniformly finds
that economic incentives should be much more economically efficient in controlling
pollution than the traditional command-and-control approaches. Some studies, howev-
er, indicate that the cost savings actually realized have fallen short of those predicted by
these studies. Economic incentives should be particularly efficient when diverse sources
of pollution are involved which are most efficiently controlled using little-known
technology. In addition, incentives provide a stimulus to innovation and technical
change. The evidence on the environmental effects of economic incentives, while much
less extensive than that on economic efficiency, suggests that incentives mechanisms are
fully compatible with environmental objectives.
The historic record concerning individual incentive programs suggests that although
there have been a number of important successes, in some cases incentive programs
1992
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
have failed to live up to their full theoretical promise. This appears to be the result of
the particular design features of the programs tried, however, rather than the theoretical
promise of the approach. In most cases, fees and charges have been designed primarily
to raise government revenue, and have thus been set too low to have significant
incentive effects. Trading systems have often been constrained by complicated regula-
tions, but some new ones which have not as yet been fully implemented hold out
considerable promise for being both effective and efficient in reducing pollution. Bever-
age container deposits appear to have greatly reduced litter, but there is only limited
knowledge of the impact of other deposit-refund systems and virtually no analysis of
the costs and benefits of any of the deposit-refund mechanisms. Some programs
providing information appear to be having great impact among fully implemented
incentives considered in this report and are likely to be economically efficient as well,
but have not been examined with the detailed scrutiny necessary for a fair evaluation
of performance. Liability mechanisms can and do act as effective incentives, but
structuring liability rules to accurately internalize the costs of pollution has proved
difficult.
Finally, a review of the use of economic incentives outside the United States suggests
a preference for a somewhat different mix of incentive mechanisms but somewhat
similar conclusions as to their effectiveness and efficiency as in the United States. The
United States uses many more marketable permit systems than European countries, but
much less environmental labelling. Although charges and fees are used more widely in
Europe, they also tend to be revenue-raising instruments with few incentive impacts, as
in the United States. The lack of incentive impact of charges is due primarily to their
low magnitude and because a number of the charges are not closely linked to waste
generation or product consumption. As in the United States, official interest in econom-
ic incentives appears to be increasing in Europe.
VI
July
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TABLE OF CONTENTS
ADMINISTRATOR'S PREFACE iii
EXECUTIVE SUMMARY v
LIST OF TABLES x
FOREWORD xi
1. INTRODUCTION 1-1
1.1. PURPOSE OF REPORT 1-1
1.2. DEFINITIONS 1-1
1.3. ORGANIZATION OF REPORT 1-3
1.4. TYPES OF ECONOMIC INCENTIVES DISCUSSED IN THE REPORT ... 1-4
1.5. SCOPE OF REPORT 1-6
2. THE ECONOMIC EFFICIENCY AND ENVIRONMENTAL EFFECTS OF IN-
CENTIVE SYSTEMS 2-1
2.1. DIVERSE SOURCES AND LITTLE-KNOWN CONTROL TECHNOLOGY 2-1
2.2. GREATER EFFICIENCY 2-2
2.3. STIMULUS TO INNOVATION AND TECHNICAL CHANGE 2-7
2.4. ENVIRONMENTAL EFFECTS OF INCENTIVE APPROACHES 2-8
3. FEES, CHARGES, AND TAXES 3-1
3.1. NPDES PERMIT FEES 3-2
3.2. PUBLICLY OWNED SEWAGE TREATMENT PLANT USER FEES 3-2
3.3. MUNICIPAL SOLID WASTE DISPOSAL CHARGES 3-3
3.4. AIR EMISSION FEES 3-3
3.4.1. State Permit Fees 3-3
3.4.2. Federal Nonattainment Area Fees 3-4
3.5. INDUSTRIAL SOLID AND HAZARDOUS WASTE CHARGES 3-4
3.6. PRODUCT CHARGES 3-5
3.6.1. Fertilizer Taxes 3-5
3.6.2. Automobile Tire Taxes 3-5
3.6.3. Motor Oil Taxes 3-5
3.6.4. Superfund Feedstock Taxes 3-5
3.6.5. Chlorofluorocarbon Taxes 3-6
3.7. WETLAND COMPENSATION FEES 3-6
4. DEPOSIT-REFUND SYSTEMS 4-1
4.1. BEVERAGE CONTAINER DEPOSITS 4-1
4.2. BATTERY DEPOSITS 4-1
4.3. PESTICIDE CONTAINER DEPOSITS 4-2
1992
vn
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
5. TRADING SYSTEMS 5-1
5.1. SOME ATTRIBUTES OF TRADING SYSTEMS 5-1
5.1.1. Industrial Scope 5-1
5.1.2. Credits Versus Allowances 5-1
5.2.3. Degree of Government Intervention 5-4
5.1.4. Emission Limits 5-4
5.1.5. Geographic Area 5-4
5.1.6. Section Organization 5-5
5.2. INTER-FIRM NON-APPROVAL TRADING 5-5
5.2.1. Acid Rain Allowance Trading 5-5
5.2.2. Oxygenated Gasoline Credit Program 5-6
5.2.3. Low Emission Vehicle Credit Program 5-7
5.2.4. Chlorofluorocarbon Production Allowance Trading 5-7
5.2.5. Lead Trading 5-7
5.2.5.1. The Lead Trading Program 5-8
5.2.5.2. Administration and Enforcement 5-8
5.2.5.3. Effects of Lead Trading on Gasoline Markets 5-9
5.2.5.4. Environmental Effects of Lead Trading 5-9
5.2.6. Transferable Development Rights 5-9
5.2.6.1. Montgomery County, Maryland 5-9
5.2.6.2. Talbot County, Maryland 5-10
5.2.6.3. The Pinelands, New Jersey 5-11
5.2.7. Fireplace and Wood Stove Permit Trading 5-11
5.3. INTER-FIRM APPROVAL TRADING 5-12
5.3.1. Trading of Air Emissions Rights 5-12
5.3.1.1. Bubbles 5-12
5.3.1.2. Offsets 5-13
5.3.1.3. Banking 5-13
5.3.1.4. Netting 5-14
5.3.1.5. Evaluation of Air Emissions Trading Program 5-14
5.3.2. Water Effluent Reduction Trading 5-15
5.3.2.1. Wisconsin • 5-15
5.3.2.2. Dillon Reservoir, Colorado 5-15
5.3.2.3. Cherry Creek Reservoir, Colorado 5-16
5.3.2.4. Tar-Pamlico Basin, North Carolina 5-16
5.3.2.5. Steel Industry Effluent Bubble 5-16
5.33. Wetland Mitigation Banking 5-17
5.4. EMISSIONS AVERAGING 5-17
5.4.1. Reasonably Available Control Technology Requirements 5-18
5.4.2. Heavy Duty Truck Engine Emissions 5-18
5.4.3. California Motor Fuel Characteristics 5-18
5.4.4. Hazardous Air Pollutant Early Reduction Program 5-19
viii July
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Table of Contents
6. OTHER INCENTIVES 6-1
6.1. SUBSIDIES AND TAX CONCESSIONS 6-1
6.2.1. Municipal Sewage Treatment Plant Construction Grants 6-1
6.1.2. Louisiana Tax Concessions 6-2
6.2. LIABILITY APPROACHES 6-2
6.2.1. Superfund 6-2
6.2.1.1. Hazardous Waste Cleanup Liability 6-2
6.2.1.2. Natural Resource Damage Liabilities 6-3
6.2.2. Other Statutes Providing for Environmental Liability 6-3
6.2.3. Tort Law 6-4
6.2.4. Effectiveness of Liability Approaches 6-4
6.3. INFORMATION PROGRAMS 6-4
6.3.1. Proposition 65 6-5
6.3.2. SARA Title UI 6-5
7. NEW INCENTIVE SYSTEMS PROPOSED BUT NOT YET ADOPTED 7-1
7.1. SOUTH COAST AIR BASIN MARKETABLE PERMITS PROPOSAL 7-1
7.2. SCRAPPING OLDER VEHICLES 7-2
8. SOME OTHER INCENTIVES THAT HAVE BEEN SUGGESTED 8-1
8.1. EPA ECONOMIC INCENTIVES REPORT 8-1
8.2. THE PROJECT 88 REPORT 8-1
9. FOREIGN EXPERIENCE WITH INCENTIVE SYSTEMS 9-1
9.1. FEES, CHARGES, AND TAXES 9-1
9.1.1. Waste 9-1
9.1.2. Air 9-2
9.13. Water 9-2
9.1.4. Noise 9-2
9.1.5. Product Charges 9-3
9.2. DEPOSIT-REFUND SYSTEMS 9-4
9.3. TRADING SYSTEMS 9-5
9.4. OTHER INCENTIVES 9-5
9.4.1. Subsidies 9-5
9.4.2. Product Labelling 9-6
9.5. CONCLUSIONS 9-7
10. CONCLUSIONS 10-1
APPENDICES
A. BIBLIOGRAPHY A-l
B. ECONOMIC INCENTIVE ASPECTS OF THE CLEAN AIR ACT
AMENDMENTS OF 1990 B-l
1992
IX
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LIST OF TABLES
Table 1-1: INCENTIVES FACED BY SOURCES UNDER THE COMMAND-AND-
CONTROL APPROACH 1-3
Table 1-2: TYPES OF ECONOMIC INCENTIVES 1-4
Table 2-1: QUANTITATIVE STUDIES OF ECONOMIC INCENTIVE SAVINGS . . 2-3
Table 5-1: ATTRIBUTES OF TRADING SYSTEMS DISCUSSED 5-2
July
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FOREWORD
Many people both inside and outside of EPA have made major contributions to this
report. Inside EPA, Betsy David, Barry Elman, Richard Kashmanian, Barry Korb, Albert
McGartland, and Dan Mussatti of the EPA Office of Policy, Planning and Evaluation
made a number of useful comments on earlier drafts of this report. Three EPA
employees outside OPPE provided valuable and detailed comments: Mark Luttner of
the Office of Water, and Dr. Leland Deck and Karen Martin of the Office of Air Quality
Planning and Standards. Outside EPA, Dr. Randy Lyon of the Office of Management
and Budget made useful comments. Dr. Robert C. Anderson contributed both his time
and expertise generously.
Particular thanks are due to Bob Anderson, Leland Deck, and Barry Elman for
continuing and unusually useful inputs.
1992
XI
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
xn
July
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1. INTRODUCTION
In the past few years, economic incentives have moved from relative obscurity to the
fore as tools for managing the environment. Nowhere is this attention to incentives
more explicit than in the 1990 Clean Air Act Amendments. That legislation authorizes
incentive-based mechanisms for the control of acid rain, for the development of cleaner
burning gasoline and less polluting vehicles, for states to use in controlling urban ozone
and carbon monoxide, and to facilitate the reduction of toxic air emissions.
Other key environmental statutes, the Clean Water Act and the Resource Conserva-
tion and Recovery Act, are currently up for reauthorization. Incentive mechanisms
promise to be actively debated as these and other environmental legislative proposals
make their way through Congress. At the state level, incentive proposals also are being
actively debated and in some cases have already been adopted.
1.1. PURPOSE OF REPORT
With current high levels of interest in incentive mechanisms for environmental
management, it is useful to examine the record to date. Over the past 20 years,
governments at the federal, state and local levels have implemented a variety of
incentive systems for managing the environment. Many European nations also have
implemented incentive mechanisms to supplement traditional approaches for managing
the environment. How well have these mechanisms performed? What can be learned
from the record that will assist in the formulation of new mechanisms? How economi-
cally efficient have these mechanisms been in achieving their objectives? What have
been their environmental effects?
Focusing primarily on results in the United States, this report examines the record
to the extent permitted by available information. Particular attention is paid, where
information is available, to the effectiveness of each incentive in achieving the desired
environmental objective and the economic efficiency with which it is accomplished.
Unfortunately, much less information is available, particularly on the environmental
effects, than would be desirable.
1.2. DEFINITIONS
In order to bound the subject, economic incentives for the purposes of this report
only will be defined broadly as instruments that provide continuous inducements,
financial or otherwise, for sources to make reductions in the environmental pollution
they release. That is, sources view each unit of pollution as having a cost. For maxi-
mum efficiency, the cost per unit of pollution faced by different sources should be
comparable, except as adjusted to reflect differences in harm caused at different
geographical locations or at different times.
1992 1-1
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
This definition excludes certain mechanisms that sometimes are referred to as
incentives. Although such mechanisms may have many admirable characteristics and
some of the attributes of economic incentives as the term is often used, they will not be
discussed in this report. This class of mechanisms prices (explicitly or implicitly)
activities that have pollution as a byproduct. Ride sharing, bike paths, high occupancy
vehicle lanes, and parking surcharges provide examples of this type of mechanism.
While these mechanisms may lead to a reduction in pollution, the mechanisms place
neither an explicit nor an implicit price on incremental units of pollution. Exclusion of
these mechanisms carries no implications for whether future EPA actions will or will
not consider them to be economic incentives. Rather, their exclusion is primarily for the
purpose of limiting the subject of this report to something manageable.
Payments per unit of pollution are the clearest example of an incentive, as the term
is used in this report. Market-based systems in pollution reduction credits also qualify,
for sources earn a credit that can be sold if they reduce pollutants below permitted
amounts. Finally, indirect financial incentives for continuous effort at pollution abate-
ment are created when sources must report publicly the quantities of specified substanc-
es they release and thus risk the loss of market share or a lower demand for their
products. All of these incentive mechanisms operate through the ingenuity and actions
of individual sources, who have an incentive to be on the alert for opportunities to
make reductions in their pollution.
The contrast between incentive mechanisms and traditional "command-and-control"
approaches is that the latter do not provide incentives to reduce the quantity of releases
below permitted levels or to improve the quality of the releases of pollutants beyond
permitted levels, as illustrated in Table 1-1. Under pure command-and-control ap-
proaches, sources view all releases below permitted quantities or above permitted
quality as costless. To have gains in environmental quality, the burden is solely on
regulators to tighten requirements imposed on individual sources. Sources operating
within the limits of existing regulations (the shaded area in Table 1-1) have no economic
reason to act until new regulations are issued.
Unfortunately, there are a wide variety of definitions of economic incentives in
common use as well as a variety of related concepts. One of these related concepts is
"market mechanisms." Generally, this term is used for a somewhat narrower concept
than economic incentives involving only those economic incentives which are imple-
mented through mechanisms having direct effects on economic markets. Thus provid-
ing risk information could be an economic incentive but not a market mechanism while
pollution fees would be both. Risk information can have an indirect effect on economic
markets by shifting either the demand function or the supply function (either through
appealing to profit-motivated market share considerations or liability-aversion), but does
not directly change prices.
It must be emphasized that although this report makes a careful distinction between
1-2 July
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Introduction
Table 1-1: INCENTIVES FACED BY SOURCES UNDER THE COMMAND-AND-
CONTROL APPROACH
t
Tox-
icity
of
Pollu-
tion
Rel-
eased
Excess above
Those
Allowed by
Regulations
Within
Regulatory
Limits
Quantity of Pollution Released-4
Within Regulatory Limits
Fines and Penalties
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, %5 •<•'- f^^^An <*,
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Table 1-2: TYPES OF ECONOMIC INCENTIVES
Incentive Type
Payments to Gov-
ernment for Pollu-
tion (Section 3)
Deposit-refund
Systems (Sec. 4)
Trading of Pollution
Permits (Sec. 5)
Payments from
Government for
Pollution Control
(Sec. 6.1)
Payments to
Damaged Parties
under Liability Law
(Sec. 6.2)
Information on
Pollution (Sec. 6.3)
Time Incentive Becomes Effective
Prior to Time of
Pollution
Deposits
Allowance Trad-
ing Systems
Subsidies for
Installing Pollu-
tion Control
Equipment
Manufacturer-
Provided Warn-
ings
At Time of or as
a Direct Result
of Pollution
Pollution fees
Long after Pollution
Occurred or Might
Have Occurred
Refunds
Credit Trading Sys-
tems
Tax Advantages in
Return for Reduced
Pollution
Tort Law for Private
Damages
Natural Resource
Damages to Public
Resources
Disclosure of Past
Emissions
summarizes some additional incentives that have been suggested but not yet imple-
mented. Section 9 briefly summarizes foreign experience for the purpose of providing
some perspective on the US experience. Section 10 summarizes the conclusions reached
in the report. Finally, Appendix A provides a bibliography of the references used in
each section and Appendix B highlights key incentive mechanisms created or authorized
by the Clean Air Act Amendments of 1990.
1.4. TYPES OF ECONOMIC INCENTIVES DISCUSSED IN THE REPORT
The nation's environmental laws control pollution through a mix of strategies, most
of which involve direct regulation of the quantity of pollution allowed by individual
sources or the control technology sources must use. This direct regulatory approach to
1-4
July
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Introduction
pollution control often is termed "command-and-control."
In a limited number of applications, incentive systems create rewards for preventing
or controlling and penalties for increasing one's emissions, effluents, or wastes. In-
centive mechanisms can establish a system of rewards and penalties through a variety
of specific mechanisms. Table 1-2 shows the mechanisms discussed in this report
classified according to the time the incentive becomes effective in relation to the time
the pollution occurs. A case can be made for including liability for damages to
publicly-owned or managed natural resources within the first category since payments
are made to a government agency. It appears easier, however, to group them with
other liablility approaches.
Some incentive mechanisms, generally shown in the last line of Table 1-2, establish
prices indirectly through market transactions. Within this group are information
reporting requirements such as Title HI of the Superfund Amendments and Reauthoriza-
tion Act and California's Proposition 65. Others, such as pollution fees and various
trading systems, including EPA's air emission trading program, transferable develop-
ment rights, and marketable effluent discharge credits, work by directly affecting market
prices.
More specifically, the economic incentives discussed in this report have been
separated into the following categories:
Pollution fees, charges, and taxes (Section 3) are payments by polluters based on the
quantity of pollutants emitted.
Deposit-refund systems (Section 4) involve payments by potential polluters at the
time a potentially polluting product is purchased, which are refunded if the
product is disposed of or recycled in specified ways.
Pollution trading (Section 5) is the transfer of pollution credits and allowances for in-
kind or financial compensation.
Subsidies and tax concessions (Section 6.1) provide financial payments to polluters
and tax advantages based on changes in pollution or in return for future pollu-
tion control actions.
Liability approaches (Section 6.2) provide for future payment by polluters based on
the damages caused by their emissions.
Information approaches (Section 6.3) provide for the release of information related
to companies' products or activities, such as data on their emissions or com-
pliance status.
New systems that have reached an advanced proposal status but have not yet been
adopted (Section 7).
Other systems that have been suggested (Section 8).
1992 1-5
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
1.5. SCOPE OF REPORT
This report makes no pretense of being exhaustive. The literature on economic
incentives is immense. Many levels of government have adopted such programs or are
considering their use. Rather, an attempt has been made to pick out those efforts that
seem most likely to have the greatest long-run significance. In doing so, many impor-
tant efforts have undoubtedly been omitted either through lack of information or the
need to make this project manageable. For example, economic mechanisms for allocat-
ing water use are not discussed (even though they may have some implications for
environmental pollution control) since pollution control is not their primary purpose.
1-6 July
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2. THE ECONOMIC EFFICIENCY AND ENVIRONMENTAL EFFECTS OF
INCENTIVE SYSTEMS
Before reviewing the actual experience with using particular economic incentives, it
is worthwhile to briefly review the available literature on the economic efficiency and
the environmental effects of incentive systems in general. With respect to economic
efficiency, incentive mechanisms have several properties that could make them especial-
ly well suited to environmental problems the nation faces now and into the future.
First, relative to traditional forms of direct regulation, incentive approaches offer the
prospect of more effectively dealing with pollution from diverse sources, an increasingly
important problem. Second, incentive mechanisms are inherently more economically
efficient; that is, they achieve environmental goals at lower cost than direct regulation.
Third, incentive mechanisms provide a greater stimulus for innovation and technical
change in pollution control than does a direct regulatory approach. These properties are
discussed in the first three subsections. The last subsection summarizes what is known
concerning the environmental effects of incentive systems.
2.1. DIVERSE SOURCES AND LITTLE-KNOWN CONTROL TECHNOLOGY
Direct regulatory approaches generally are most effective when all the affected
sources of pollution have similar emission characteristics, environmental impacts, and
pollution control possibilities and when the regulators have as good a knowledge of the
available abatement opportunities. These conditions do not apply to many of current
environmental problems since the "easy" pollution sources have already been con-
trolled. Many heterogeneous smaller sources discharge effluents into the nation's
streams and rivers. Emissions from small dispersed area and mobile sources contribute
over one-half of the precursors of ozone in most nonattainment areas. Millions of
motorists change their oil and release used motor oil into the environment in a variety
of places and ways. Shortages of capacity and the difficulty of siting new solid waste
facilities in communities across the nation have stimulated interest in ways to reduce the
generation of solid waste by households. For these and similar environmental prob-
lems, direct regulatory action may be much more expensive and less effective than
economic incentives.
Particularly for such diverse sources, individual firms or households are more likely
than regulators or legislators to have the knowledge to choose the most effective pollu-
tion control techniques for their particular situation. Acting on their own knowledge or
with information provided by vendors of equipment or government agencies, individu-
als and firms are most likely to be aware of the full range of options available—from
process changes to input changes to behavioral changes to specific control technologies,
and their costs and effectiveness. Regulatory bodies are not likely to have access to this
range of knowledge. Regulatory approaches further fail to provide an incentive to
adopt pollution controls other than those specified by regulators, even if they would be
more effective.
1992 2-1
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
2.2. GREATER EFFICIENCY
Evaluations of incentive systems that have been implemented typically find savings
in control costs, improvements in environmental quality, or both relative to a command
and control approach. Several of these systems will be described subsequently.
Theoretical modeling of pollution control costs consistently demonstrates that incentive
systems outperform command-and-control approaches in terms of efficiency.
Economists have long suggested that the traditional approach to environmental pol-
lution control, which is predominantly command-and-control in nature, results in
control costs that are higher than necessary to achieve a given level of environmental
protection. They have suggested that costs could be substantially reduced if economic
incentives were used in place of command-and-control regulations. Costs could be
reduced because sources having the lowest costs of additional control would have an
economic incentive to control more and those sources having the highest incremental
control costs could control less rather than all polluters of a given type controlling to the
same extent, as is now usually the case. Many of the quantitative studies done by these
economists are summarized in Table 2-1. The ratio shown for most of the studies in the
last column is the ratio of command-and-control costs to the lowest cost of meeting the
same objective using economic incentives. A ratio of 1.0 suggests that the command--
and-control approach is equal in cost to the economic incentive approach, so that the
savings are zero. A ratio greater than 1.0 means that there are positive potential savings
from using economic incentives. Since all the ratios shown are greater than 1.0, they
support the assertion above that economic incentive approaches are more cost-effective
than other approaches. Some additional studies are listed for which ratios have not
been worked out. A review of these studies suggests that they also support the above
assertion, however. The studies listed alphabetically under Section 2 of Appendix A of
this report constitute the bulk of the quantitative studies done for the United States. No
studies are known to exist for the United States that reach the opposite conclusion.
In particular, three studies of particulate control in the St. Louis area showed that the
current approach costs from three to five times as much as a marketable permit sys-
tem.1 However more modest potential efficiency gains were reported for the control of
six air pollutants in the St. Louis area.2 A potential fourteen-fold decrease in control
expenditures was estimated for nitrogen dioxide (NO2) in the Chicago area through a
permit system.3 Command-and-control regulations were estimated to be 50 percent
more costly than a permit system for the control of sulfur dioxide (SO2) in Cleveland.4
Potential savings also were noted for a marketable permit system for the control of
phosphorous effluent in Lake Michigan;5 and for a marketable permit system for SO2
in Los Angeles.6 Both emission taxes and marketable permits could reduce the cost of
controlling noise at Boston's Logan airport.7 Cost savings could be obtained from a
marketable permit system to restrict chlorofluorocarbons.8 The efficiency of emission
charges for the control of benzene emissions was demonstrated in another study.9
2-2 July
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The Economic Efficiency and Environmental Effects of Incentive Systems
Table 2-1: QUANTITATIVE STUDIES OF ECONOMIC INCENTIVE SAVINGS
Pollutants
Con-
trolled
Study, Year,
and
Source
Geographic
Area
Command-and-
control
Approach
Ratio of CAC
Cost to Least
Cost
AIR
Criteria Air Pollutants
Hydrocar-
bons
Lead in
Gasoline
Nitrogen
Dioxide
(N02)
NO2
Particu-
lates
(TSP)
TSP
TSP
TSP
Reactive
Organic
Gases/
NO2
Sulfur Di-
oxide
Sulfur Di-
oxide
Maloney &
Yandle
(1984) T
U.S. EPA
(1985) A
Seskin et al.
(1983) T
Krupnick
(1986) O
Atkinson &
Lewis
(1974) T
McGartland
(1984) T
Spofford
(1984) T
Oates et al.
(1989) O
SCAQMD
(Spring 1992)
O
Roach et al.
(1981) T
Atkinson
(1983) A
Domestic Du-
pont Plants
United States
Chicago
Baltimore
St. Louis
Baltimore
Lower Dela-
ware Valley
Baltimore
Southern
California
Four Corners
Area
Cleveland
Uniform Percent-
age Reduction
Uniform standard
for lead in gaso-
line
Proposed RACT
Regulations
Proposed RACT
Regulations
SIP Regulation
SIP Regulations
Uniform Percent-
age Reduction
Equal Proportion-
al Treatment
Best Available
Control Technolo-
gy
SIP Regulation
4.15a
See footnote for
$ savings'*
14.4
5.9
6.00C
4.18
22.0
4.0 at 90 ug/m3
1.5 in 1994
4.25
About 1.5
2992
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Pollutants
Con-
trolled
Sulfur Di-
oxide
Sulfur Di-
oxide
Sulfates
Six Air
Pollutants
Study, Year,
and
Source
Spofford
(1984) T
ICF Resourc-
es (1989) O
Hahn & Noll
(1982) T
Kohn (1978)
A
Geographic
Area
Lower Dela-
ware Valley
United States
Los Angeles
St. Louis
Command-and-
control
Approach
Uniform Percent-
age Reduction
Uniform Emission
Limit
California Emis-
sion Standards
Ratio of CAC
Cost to Least
Cost
1.78
5.0
1.07d
Other
Benzene
Chloro-
fluorocar-
bons
Airport
Noise
Nichols et al.
(1983) A
Palmer et al.
(1980); Sha-
piro & War-
hit (1983) T
Harrison
(1983) T
United States
United States
United States
Proposed Emis-
sion Standards
Mandatory Ret-
rofit
1.96
1.72e
WATER
Biochemi-
cal Oxy-
gen De-
mand
(BOD)
BOD
BOD
BOD
Johnson
(1967) T
O'Neil
(1980) T
Eheart et al.
(1983) T
Eheart et al.
(1983) T
Delaware
Estuary
Lower Fox
River, Wis-
consin
Willamette
River, OR
Delaware
Estuary in
PA, DL, & NJ
Equal Proportion-
al Treatment
Equal Proportion-
al Treatment
Equal Proportion-
al Treatment
Equal Proportion-
al Treatment
3.13 at 2mg/l
DO; 1.62 @ 3m-
g/1; 1.43 @
4mg/l
2.29 at 2mg/l
DO; 1.71 @ 4mg-
/l; 1.45 @ 6.2
mg/1
1.12 at 4.8
mg/1; 1.19 @ 7.5
mg/1
3.00 at 3 mg/1
DO; 2.92 @ 3.6
mg/1
2-4
July
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The Economic Efficiency and Environmental Effects of Incentive Systems
Pollutants
Con-
trolled
BOD
BOD
Heavy
Metals
Phospho-
rus
Study, Year,
and
Source
Eheart et al
(1983) T
Eheart et al.
(1983) T
Opaluch &
Kashmanian
(1985) O
David et al.
(1977) A
Geographic
Area
Upper Hud-
son River in
NY
Mohawk
River in NY
Rhode Island
Jewelry In-
dustry
Lake Michi-
gan
Command-and-
control
Approach
Equal Proportion-
al Treatment
Equal Proportion-
al Treatment
Technology-based
Standards
Ratio of CAC
Cost to Least
Cost
1.54 at 5.1
mg/1; 1.62 @ 5.9
mg/1
1.22 at 6.8 mg/1
1.8
Footnotes for Table 2-1
a. Based on 85 percent reduction of emissions from all sources.
b. The trading of lead credits reduced the cost to refiners of the lead phasedown by
about $225 million.
c. Ratio based on 40 g/m3 at worst receptor, as given in Tietenberg (1985), Table 4.
d. Ratio based on a short-term, one-hour average of 250 g/m3.
e. Because it is a benefit-cost study instead of a cost-effectiveness study, the Harrison
comparison of the CA approach with the least-cost allocation involves different benefit
levels. Specifically, the benefit levels associated with the least-cost allocation are only
82 percent of those associated with the CA allocation. To produce cost estimates based
on more comparable benefits, as a first approximation the least-cost allocation was
divided by 0.82 and the resulting number compared with the CA cost.
Acronyms Used: CAC—Command-and-control, the traditional regulatory approach.
DO—Dissolved oxygen; higher DO targets indicate higher water quality. RACT—Reas
onably available control technologies. SIP—State implementation plan.
Sources: A stands for Anderson et al. (1989); they did not compute the ratio or provide
the other information left blank in this table. O stands for original reference. T stands
for Tietenberg (1985), Table 5. See Appendix A for all references.
1992
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
It is important to note, however, that one recent review of retrospective analyses of
emission and effluent trading systems concluded that realized cost savings fall well
short of these projections.10 Trades have been fewer and cost savings smaller, accord-
ing to this analysis, than indicated by economic modeling. A number of explanations
have been offered about why the full savings have not always been realized.11 Regula-
tory and legal requirements of the actual programs may limit the trading opportunities
to a greater extent than portrayed in the models, especially where the incentive pro-
grams is in addition to existing command-and-control programs. Various models have
not fully reflected aspects of real regulatory programs, including the transaction costs,
number of buyers and sellers, trading rules, monitoring and reporting requirements, and
the administrative burden placed on both emission sources and regulatory agencies.
Even if the cost savings are less than predicted, the actual savings are still impres-
sive. In the appropriate circumstances, the wider use of incentive programs that are
feasible in an actual policy setting will result in substantial costs savings while achieving
equivalent environmental goals. In other circumstances, the cost differences between an
incentive program and a well designed command-and-control program will be less,12
although the incentive program will provide a stronger stimulus for innovation and
technical change.
2.3. STIMULUS TO INNOVATION AND TECHNICAL CHANGE
Because most economic incentive programs base the incentive on the quantity of
emissions, they are more likely to provide incentives for innovation and technical
change than command-and-control approaches. When emissions are used as the basis
for determining either incentives or compliance with a command-and-control approach,
polluters have incentives to innovate and introduce technical changes to reduce
emissions to the point where the marginal cost of further reductions equals the magni-
tude of the incentive, or to the required levels in the case of command-and-control.
When some other basis is used, particularly a technology standard, polluters usually
have less of an incentive to innovate. In the case of a technology standard, pollution
sources could have a negative incentive since if they use improved technology, the
regulators may use that as the basis for requiring even tighter control in the future since
it has then been "proven." So although emission-based command-and-control ap-
proaches can be used that provide incentives for innovation, they may be less effective
than an economic incentives approach since they only provide incentives to bring
emissions down to the standard rather than to zero. This may be considerably less
technically challenging.
With this in mind, it is not surprising that studies that have examined the incentives
for technological change and innovation under alternative pollution control regimes
have concluded that emission taxes provide greater stimulus to innovation than direct
controls, with marketable permits providing an intermediate level of stimulus.13
2-6
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The Economic Efficiency and Environmental Effects of Incentive Systems
Long run changes in behavior, technology, and investment are among the most
difficult economic effects to document. For that reason, relatively little is known of such
effects that take place as a result of different pollution control systems. Yet these effects
are thought to be very important; the rate of technological change in pollution control
is "the single most important criterion on which to judge environmental policies,"
according to some analysts.14 Others term innovation in pollution control "the key to
an effective solution" of environmental problems.15
What evidence is available suggests that existing environmental policies give only a
mild stimulus for technical change and innovation.16 Outlays for research and devel-
opment in pollution control are between two and three percent of total pollution control
expenditures. This percentage is about average for all sectors of manufacturing, but far
below that of drug, electronics, and information processing.17 Pollution control is a
newer and growing industry; a low rate of investment in research and development is
unexpected other man in the context of regulation through direct controls.
2.4. ENVIRONMENTAL EFFECTS OF INCENTIVE APPROACHES
To get a full understanding of the effectiveness and economic efficiency of incentive
programs in achieving environmental objectives, it is necessary to have information on
not only the relative costs of incentive-based versus command-and-control programs,
but also the actual environmental benefits realized by both types of programs. The
literature focuses almost exclusively on the relative cost side of the comparison, while
providing very little information or analysis of the environmental benefit side of the
comparison. Thus, while this report attempts to summarize the available information,
it is important to recognize that a complete analysis of incentive-based approaches
would require additional research on the relative environmental benefits that have been
realized by such programs.
Generally, incentive mechanisms based on trading are designed to produce environ-
mental effects that to a first order of approximation are equivalent to a command-and-
control alternative. Trading-based approaches often require trading ratios in excess of
one. That is, more than one unit of pollution is eliminated for every extra unit allowed.
If faithfully executed, this should result in at least modest decreases in total pollution
where such ratios are used. Fee-based incentive mechanisms implemented to date in
the United States and elsewhere typically are used to raise revenue to support pollution
control objectives and management authorities. Because their environmental objectives
are more modest than command-and-control alternatives, the environmental effects are
not strictly comparable. Deposit systems appear to produce environmental effects
significantly greater than could be achieved through command-and-control methods,
although there appears to be a threshold of deposit size needed in order to induce
people to achieve the environmental objective18
Comparisons of environmental effects of alternative pollution control mechanisms
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
need to be made carefully. It is not safe to assume that the effects of command-and-
control and incentive systems are always comparable. Dates et al. (1989) show, for
example, that a command-and-control approach often results in "overcontrol" beyond
a pollution control standard, whereas many of the incentive approaches analyzed in the
literature would just achieve the standard. At least for the example they studied,
particulate matter control in the Baltimore area, the relative attractiveness of the
command-and-control compared to an incentive approach is much closer when mea-
sured in terms of net benefits. For that reason, when comparing the two approaches, it
is important to examine not only differences in costs, but also in environmental effects.
Endnotes for Section 2
1. Atkinson and Lewis (1974 and 1976) and Atkinson and Tietenberg (1982).
2. Kohn (1978).
3. Seskin et al (1983).
4. Atkinson (1983).
5. David et al (1977).
6. Hahn and Noll (1982).
7. Harrison (1983).
8. Palmer et al (1981).
9. Nichols (1983).
10. Atkinson and Tietenberg (1991).
11. See Atkinson & Tietenberg (1991), Dudek & Palmisano (1988), Hahn (1989), Hahn &
Hester (1989), Liroff (1986), and Tietenberg (1985 and 1990).
12. Gates et al (1989).
13. Zerbe (1970), Wenders (1975), Downing and White (1986), and Milliman and Prince
(1989).
14. Kneese and Schulze (1978).
15. Orr (1976).
16. Cramer et al (1990).
17. U.S. Department of Commerce. Articles entitled "Pollution Abatement and Control
Expenditures," published periodically in the Survey of Current Business.
18. See, for example, the Swedish and Norwegian experience with automobile deposits
in Section 9.2.
2-8
-------
3. FEES, CHARGES, AND TAXES
This Section concerns economic incentives involving payments to government for
pollution. These usually take the form of fees, charges, or taxes set by government.
The academic literature has extensive discussions of auction systems, but they have not
been widely used in practice to set prices.
In the last few years, a number of fee or tax-based incentives have appeared at the
federal level. The charges on production of ozone-depleting chemicals provide one
example; charges on "excess" production of hydrocarbons in certain ozone nonattain-
ment areas provide another example.
In contrast, pollution fees have been more common at the state and local level. State
and local pollution fees typically are set at levels to recover the administrative costs of
state and local pollution control agencies. However, fees such as those set by publicly-
owned treatment plants and those charged for disposal of industrial solid and hazard-
ous waste are set to recover the cost of disposing of wastes, which may not always
reflect the full social costs of pollution.
In order to be an economic incentive, pollution fees must vary according to the
pollution produced; in other words, they must have a unit cost pricing attribute. Many
analysts have argued that noncompliance penalties are an economic incentive. Noncom-
pliance penalties rise with increasing levels of pollution, and are used to remove any
economic benefit polluters obtain from command-and-control regulations. They do do
not, however, fully satisfy the definition of an incentive mechanism used in this report
since penalties are imposed only on firms that are not in compliance. Penalties are zero
for firms in compliance with regulations.
As discussed in Section 1.2, pollution fees can also be more or less economically
efficient. To be fully efficient, they must reflect the damages caused by the pollution;
in other words, they must reflect the full social costs of pollution. Those that do are
said to reflect the full social costs of pollution. Those that largely do not are often
referred to as "revenue raisers" since their chief purpose is usually to increase govern-
ment revenues rather than to have a strong incentive effect on polluters. They have
some incentive effect, but nothing dose to that required by economic efficiency.
Thus, although all the incentives discussed in this section will involve unit cost
pricing, none will involve full social cost pricing. These are described in textbooks but
have yet to be implemented as pollution control measures. It should be noted, howev-
er, that some states (e.g., New York) currently are investigating the feasibility of social
cost pricing for electricity.
Pollution fees, charges, and taxes have not proved as popular as trading in the
1992
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
United States, in part because they increase the total financial outlays by polluters above
the cost of pollution abatement since all potential pollution, both controlled and uncon-
trolled must be paid for. Economists, on the other hand, point out that fees, charges,
and taxes provide incentives for pollution control while raising revenue for the govern-
ment. Since some revenue has to be raised anyway, they argue, it may be better to do
it in a less economically distorting manner than most current taxation programs do,
such as through charges for pollution.
3.1. NPDES PERMIT FEES
The Federal Water Pollution Control Act of 1972 provides for the regulation of
discharges of pollutants from point sources through a system of national effluent
standards promulgated by EPA. Point sources such as industrial plants, municipal
sewage treatment facilities and feedlots must obtain permits in order to discharge
effluent. Without a permit, discharging effluent is illegal.
EPA has delegated responsibility for issuing National Pollution Discharge Elimina-
tion System (NPDES) permits to the majority of states. Several of these states impose
charges for NPDES permits based on factors such as volume and toxicity of the effluent.
For example, New York divides effluents into three categories and imposes a separate
schedule of volume-based fees in each category. California uses a fee schedule that is
based on the type and volume of discharge. Many other states, however, impose set
fees for NPDES permits and do not differentiate by volume or toxicity.
Whether current fee levels in some states are sufficiently high to affect the volume
of discharges in unknown. To date there exists no comprehensive examination of the
impacts of volume and toxicity based NPDES fees.
3.2. PUBLICLY OWNED SEWAGE TREATMENT PLANT USER FEES
Publicly Owned Treatment Works (POTWs) impose charges on industrial facilities
and households discharging into their systems. The charge for industrial sources may
be based on effluent volume or the types and amounts of pollutants present. Due to
high monitoring costs, pollutant-based charges generally are limited to large users.
Others industrial users and households are billed based on effluent volume times a rate
specific to the individual sector. Sims (1977) found that pollutant-based charges provid-
ed an incentive for large industrial facilities to reduce effluents. Purely volume-based
charges did not appear to have such an effect, possibly because such charges typically
appear as part of a user's water consumption bill and water prices often reflect lower
historical average costs rather than long-run marginal costs.
3-2 July
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Pollution Fees
3.3. MUNICIPAL SOLID WASTE DISPOSAL CHARGES
Throughout the nation, most communities levy fixed fees for the collection of
household solid waste or include the costs in property taxes. Fees may be set at a fixed
price per month or effectively "hidden" altogether as part of residential property taxes.
Under such as approach, incremental charges are zero despite the fact that incremental
costs to the disposal authority are positive.
In a growing number of jurisdictions, about 100 at present, charges for solid waste
collection are based on the volume generated by the household. One of two pricing
systems may be used: charges based on subscriptions for a certain number of containers
and charges for stickers that must be placed on each bag left for curbside pickup.
Under the subscription syistem, households pay to have the right to dispose of a set
number of containers each week. If the containers nare not filled, the household pays
for the unused capacity. The available evidence suggests that such incremental pricing
can have a significant effect on the volume of wastes produced, particularly when
marginal pricing is coupled with recycling programs.1
In cities where solid waste collection charges are volume-based, the evidence points
to a significant impact on the quantity of waste that is generated. High Bridge, New
Jersey implemented a pay-per-bag program in January, 1988. Since that date the
tonnage of trash collected has decreased by 25 percent. A pay-per-bag system in
Perkasie, Pennsylvania has resulted in a 50 percent decrease in the tonnage of solid
waste collected and an increase of about 30 percent in recycling. Seattle's Solid Waste
Authority estimates that the tonnage of solid waste generated fell by about 20 percent
once its pricing and recycling programs were fully implemented.
3.4. AIR EMISSION FEES
3.4.1. State Permit Fees
The equivalent of air emission fees appear in some states in the form of annual
permit fees that are based on emissions of air pollutants. Generally fee levels are set to
recover administrative costs of state air quality programs. For example, the Texas Air
Control Board set fees at $3 per ton of regulated pollutants for fiscal 1992 and $5 per
ton in fiscal 1993 to finance certain agency activities. This is an example of a fee that
may generate revenue but is unlikely to have much incentive effect to reduce emissions.
Air emission permit fees in California's South Coast Air Quality Management
District (SCAQMD) have greatly increased since first implemented under the Lewis Air
Quality Management Act of 1976 and are presently the highest in the nation. Amend-
ments in June 7, 1991 set fee levels for the largest source category (over 75 tons per
year) at $596 per ton for organic gases, $343 per ton for nitrogen oxides, $413 per ton
sulfur oxides and $456 per ton for particulate matter. Smaller sources face a fee
1992 3.3
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
schedule about one-third lower in cost per ton.
Annual permit fees for the largest sources can amount to $2 million or more per
year. From a financial point of view fees of this magnitude are likely to gain the
attention and concern of plant managers. While SCAQMD permit fees create a financial
incentive to reduce emissions, firms are limited in their ability to respond because
incremental control costs for most sources in the region are considerably higher.
3.4.2. Federal Nonattainment Area Fees
The 1990 Clean Air Act Amendments provide for a variety of new incentive
measures. One of these is a charge of $25 per ton for permits for regulated pollutants,
a fee designed to recover administrative costs of the permit program. Another is a fee
on "excess" emissions of Volatile Organic Compounds (VOCs) in certain ozone nonatt-
ainment areas. Severe ozone nonattainment areas, defined as those with design values
between 0.18 and 0.28 ppm ozone, are given 15 to 17 years to attain the ozone National
Ambient Air Quality Standard (NAAQS); more specifically, they have 15 years for areas
with design values between 0.18 and 0.19 ppm, and 17 years for areas with design
values between 0.19 and 0.28 ppm. Extreme ozone nonattainment areas (currently just
California's South Coast Air Quality Management District), which have design values
above 0.28, are given 20 years to reach attainment. Failure of an area to attain by these
schedules will subject major stationary sources to annual fees on VOC emissions. Fees
are set by statute at $5,000 per ton (adjusted for inflation) for each ton of VOC emitted
that exceeds 80 percent of a baseline quantity. Emission fees are also specifically
authorized under Economic Incentive Program rules (Section 182(g)(4)). Fees are
allowed for highway tolls (Section 108) to reduce pollution and congestion, for consum-
er products (Section 183), and generally in Sections 110 and 172 as a part of a State's
available tools for designing State Implementation Plans.
3.5. INDUSTRIAL SOLID AND HAZARDOUS WASTE CHARGES
In contrast to flat fee schedules (with incremental charges equal to zero) typically
faced by households, commercial and industrial generators of solid waste generally face
costs that rise with increases in volume (positive marginal charges). Charges are based
on the number of containers emptied and the substances contained. Across regions,
charges can vary several fold for the identical volumes of a particular substance.
The pollution control literature contains no reports of generator responses to varying
disposal charges for hazardous waste. Waste disposal firms may have some knowledge
of these relationships.2 . *
3-4 July
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Pollution Fees
3.6. PRODUCT CHARGES
This subsection reviews briefly several product charges that are widely used at the
state level. While the incentive effects of product taxes on pollution is likely to be weak,
such taxes do raise revenues that can be used to finance pollution control activities.
3.6.1. Fertilizer Taxes
According the Fertilizer Institute, 46 states had imposed taxes on fertilizer sales by
1988 to help pay for programs of environmental protection and environmental research.
Tax rates ranged from $0.10 per ton to $1.70 per ton and raised a total of about $14
million annually. With fertilizer prices in the range of $60 to $200 per ton, taxes are no
more than 2.5 percent of value and much less than that in most instances. Incentive
effects, to the extent they exist, would be to dampen overall demand for fertilizer. Input
taxes such as fertilizer taxes are likely to have minimal impact on the manner in which
the product is used and, hence, have minimal impact on pollution. Environmental
protection and research funded trough such taxes may, of course, have a beneficial
impact on pollution.
3.6.2. Automobile Tire Taxes
Many states and/or counties impose special taxes on the sale of automobile tires,
with revenues earmarked for used tire disposal. Fees typically are in the range of $1 to
$3 per tire.
3.6.3. Motor Oil Taxes
In 1989 Rhode Island imposed a fee of five cents per quart on motor oil, the
proceeds of which are earmarked for used oil collection costs, including hauling fees.3
Of the state's 39 municipalities, 28 now have collection sites where residents may
deposit up to five gallons of used oil per quarter free of charge. The state has contract-
ed with a hauler to pick up used oil at these collection facilities for a fee of $.25 per
gallon.
3.6.4. Superfund Feedstock Taxes
The federal superfund (described in section 6.2.1) is financed with a combination of
taxes on domestic crude oil production (8.2 cents per barrel), crude oil and petroleum
product imports (11.7 cents per barrel), petrochemical feedstocks (varying rates), gross
business profits (0.12 percent of amounts over $2 million), and general revenues. The
oil and petrochemical taxes may be characterized as product charges; however, the
intent as with most product charges appears to be to raise revenue for a specific
purpose and not to deter pollution.
1992 3.5
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
3.6.5. Chlorofluorocarbon Taxes
The Budget Reconciliation Act of 1989 imposed taxes on the production of chloro-
fluorocarbons, with the intent to aid in the development of substitutes and speed reduc-
tion in use of ozone-depleting chemicals. Taxes are calculated as a base amount per
pound multiplied by an ozone-depletion factor. The taxes went into effect January 1,
1990, with the rate increasing over time.4
3.7. WETLAND COMPENSATION FEES
Maryland5 and New Jersey6 allow compensation for wetland loss caused by devel-
opment activities in situations where on-site mitigation is not feasible. The State of
Louisiana is currently considering such a system. The funds collected in the New Jersey
and Maryland programs are available for use by state agencies for wetland enhance-
ment and restoration.
In New Jersey, state agencies haVe yet to ask for compensation payments as they
debate whether they want long-term responsibility for wetlands that they enhance or
restore. In Maryland, the state appears ready to assume long-term management
responsibilities when it restores or enhances wetlands. In Maryland, fees range from
$11,500 to $15,750 per acre in Category A (inland) counties and from $50,800 to $58,000
per acre in Category B (coastal) counties. The fees are structured to include design,
construction, and monitoring costs of $10,000 and $50,000 per acre for inland and coastal
counties, respectively, plus an additional fee for land acquisition.
Endnotes for Section 3
1. Anderson et al (1989)
2. Information obtained in telephone conversations with Jack Hornberger, Sr. Vice
president of Rollins Environmental Service, Inc., Wilmington DE and Robert Reineke of
Chemical Waste Management, Oak Brook, IL.
3. Andrew Lohof (1991), pp. 100-101.
4. Internal Revenue Code, sections 4681 and 4682.
5. In Maryland Code (COMAR) 08.05.04.18.
6. In its 1988 Freshwater Protection Act
3-6 July
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4. DEPOSIT-REFUND SYSTEMS
Deposit-refund systems differ from pollution fees because part or all of the fee is
refunded if the person paying the fee takes certain actions—usually returning a product
for recycling or proper disposal.
4.1. BEVERAGE CONTAINER DEPOSITS
In 1972 Oregon became the first state to require mandatory deposits on soft drink
and beer containers. Nine additional states have since enacted similar legislation.1
Meanwhile several other states have failed to adopt proposed deposit legislation.
Although state legislation governing container deposits is of relatively recent origin,
beverage manufacturers had long used deposit-refund mechanisms. These private
systems fell out of favor in the 1960s with the introduction of cheaper "disposable"
containers.
Deposits address two costs that usually are external to beverage manufacturers,
distributors and consumers—namely the costs of disposal and littering. Deposits
provide a disincentive to specified types of litter and an incentive to collect such litter,
and reduce the volume of solid waste. One important outcome of mandatory deposit
legislation is a reduction in litter. Oregon reported a 75 to 85 percent reduction in
roadside litter just two years after enacting deposit legislation. Valuing a reduction in
litter is fraught with problems. While litter pickup costs are readily quantified at about
one-fourth of a cent per container, the amenity costs of litter are largely unknown.
While some states have reported great success with beverage container deposit laws
in terms of reducing litter, such systems involve additional costs to consumers and
retailers.2 In particular, it is difficult to quantify the value of consumers' time expend-
ed to comply with deposit laws. Because key cost and benefit elements of beverage
container deposit laws are known only within very broad ranges, it is not possible at
this time to demonstrate the clear superiority of beverage container deposit laws in
terms of their economic efficiency.
4.2. BATTERY DEPOSITS
In the past three years approximately ten states have implemented deposit systems
for lead batteries.3 Each state requires a $5 or $10 deposit at the point of sale. Depos-
its are refundable if the old battery is returned within seven or 30 days, depending on
the state. In nine of the ten states, unclaimed deposits are retained by the retailer. In
addition, many retailers in other states such as Maryland and Virginia include deposits
in their retail prices and offer comparable rebates when a used battery is returned.
These activities are not required by state laws, but may help the retailers comply with
provisions of the Resource Conservation and Recovery Act.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
4.3. PESTICIDE CONTAINER DEPOSITS
Maine requires deposits on pesticide containers, primarily those destined for
commercial use. The law requires triple rinsing and through a deposit provides an
incentive for the return of rinsed containers. Deposit fees are five dollars per container
of less than 30 gallon capacity and ten dollars for larger containers. Approximately
13,000 containers are returned under this program each year.
Endnotes for Section 4
1. California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Michigan, New York,
and Vermont.
2. Porter (1978).
3. Specifically, the states (and effective dates) are: Arizona (September, 1990), Arkansas
(July, 1992), Connecticut (October, 1990), Idaho (July, 1991), Maine (October, 1989),
Minnesota (October, 1989), New York (January, 1991), Rhode Island (January 1989),
South Carolina (date unknown), and Washington 0uly, 1989). The only state where the
retailer does not retain all unclaimed deposits is Rhode Island, where 80 percent is
retained by the state and 20 percent by the retailer. Based on information provided by
Saskia Mooney of Weinberg, Bergson, and Neuman, Washington, D.C.
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5. TRADING SYSTEMS
Relative to fee or charge-based systems, trading systems generally cost polluters
less1 since under existing practice for allocating pollution rights, the maximum cost to
polluters is the pollution control cost incurred in meeting the regulations or standards;
fee or charge-based systems,, on the other hand, require outlays to control pollution as
well as fees or charges on all units of pollution that are not controlled. In addition,
trading systems provide more certainty regarding total quantities of pollution than do
fee-based systems unless auction approaches are used. For these and other reasons,
trading systems have proved more popular in the United States.
5.1. SOME ATTRIBUTES OF TRADING SYSTEMS
Trading systems can be characterized in terms of a number of important attributes,
including scope of coverage, degree of government intervention, the technical basis for
the trading, and the geograpic limits for the trading. Table 5-1 provides a list of the
trading systems that will be discussed in this Section and shows the attributes of each.
5.1.1. Industrial Scope
Trading programs can be applied to either inter-firm (or inter-polluter trades), intra-
firm trades between product lines, and intra-firm trades between locations (which will
be referred to as inter-plant trades).
5.2.2. Credits Versus Allowances
A trading program can involve either credits or allowances. A credit is created by
a source emitting less than its allowable limit. To obtain the credit, a polluter is
required to show that its actual emissions, plus or minus any traded credits, is less than
its allowable limit. In a credit program, the agency or a designated authority must
certify the creation of the credit as well as record trades.
In an allowance system, on the other hand, trading involves future pollution. Once
the environmental protection agency sets an allowable limit for a source, the source can
add to its allowable limit or reduce it by trading in allowances. The agency should, at
a minimum, record trades, but it need not certify each and every allowance that is
traded. The certification of allowances for each source takes place prior to trading and
may be revised whenever a source changes its pollution control equipment.
Until the past few years, most trading programs were credit programs, but allow-
ance programs are now being more widely used.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Table 5-1: ATTRIBUTES OF TRADING SYSTEMS DISCUSSED
Re-
3ort Sec-
tion
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5.2.6
5.2.6.1
5.2.6.2
5.2.6.3
5.2.7
5.3.1
5.3.1.1
5.3.1.2
5.3.1.3
5.3.1.4
5.3.2
Program Name
Acid Rain Allowance Trad-
ing
Oxygenated Gasoline Credit
Program
Low Emission Vehicle Cre-
dit Program
Chlorofluorocarbon Produc-
tion Allowance Trading
Lead Trading
Transferable Development
Rights
Montgomery County,
Maryland
Talbot County, Maryland
The Pinelands, New Jersey
Fireplace and Wood Stove
Permit Trading
Trading of Air Emissions
Rights
Bubbles
Offsets
Banking
Netting
Effluent Reduction Trading
Scope
of Cov-
erage
Ir-F
Ir-F
Ir-F
Ir-F
Ir-F
Ir-F
Ir-F
Ir-F
Ir-F
Ir-F
Var-
ies
Ir-F
Ir-F
Ir-F
la-P
Ir-F
Govern-
ment In-
terven-
tion
Min
Min
Min
Min
Min
Min
Min
Min
Min
Min
. Ap
Ap
Ap
Ap
Ap
Ap
Cred-
it/ Al- i
low-
ance
Al
Cr
Cr
Al
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Emis-
lon Lim
its
Mass
Av
Av
Mass
Av
Total
Total
Total
Total
Total
Mass
Mass
or Av
Mass
or Av
Mass
or Av
Mass
or Av
Mass
Geo-
graph-
ic Lo-
cation
Nati
Oz
NA
Oz
NA
Nati
Natl
Loci
Loci
Loci
Loci
Loci
Loci
Loci
Loci
Loci
Loci
Loci
5-2
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Trading Systems
Re-
tort Sec-
tion
5.3.2.1
5.3.2.2
5.3.2.3
5.3.2.4
5.3.2.5
5.3.3
5.4.1
5.4.2
5.4.3
5.4.4
7.1
7.2
Program Name
Wisconsin
Dillon Reservoir, Colorado
Cherry Creek Reservoir,
Colorado
Tar-Pamlico Basin, North
Carolina
Steel Industry Effluent Bub-
ble
Wetland Mitigation Banking
Reasonably Available Con-
trol Technology Require-
ments.
Heavy Duty Truck Engine
Emissions
California Motor Fuel Char-
acteristics
Hazardous Air Pollutant
Early Reduction Program
RECLAIM
Scrapping Older Vehicles
Scope
of Cov-
erage
Ir-F
Ir-F
Ir-F
Ir-F
la-P
Ir-F
la-F
la-F
la-F
la-F
Ir-F
Ir-F
Govern-
ment In-
terven-
tion
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Min
Min
Ap
Min
Ap
Cred-
it/ Al- !
low-
ance
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Emis-
ion Lim
its
Mass
Mass
Mass
Mass
Mass
Av
Mass
Av
Av
Mass
Mass
Mass
Geo-
• graph-
ic Lo-
cation
Loci
Loci
Loci
Loci
Loci
Loci
Loci
Natl
Loci
Loci
Loci
Loci
Footnotes for Table 5-1
Abreviations Used:
Industrial Scope: la-F for Intra-firm; Ir-F for Inter-firm; la-P for Intra-plant
Government Intervention: Ap for Approval; Min for Minimal or non-approval
Emission Limits: Av for Average
Credit/Allowance: Al for Allowance; Cr for Credit
Geographic Location: Loci for Local; Natl for National; Oz NA for Ozone Nonattain-
ment Areas.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
5.1.3. Degree of Government Intervention
Although all trading requires some involvement of a pollution control agency, there
is substantial variation in the extent of that involvement In some cases this involvement
is nothing more than recording trades; in others, it involves specific approval of each
and every trade. In the case of credit programs it requires monitoring the creation of
the credits. The major variable between programs is whether the pollution control
agency must also approve each trade. Although all programs involve trade recording
(the function does not necessarily have to be carried out by government), not all require
government approval for a trade to occur. The necessity for approval depends on what
is being traded. Agency approval is more likely to be required when trades involve
different pollutants, pollutants that have differing locational impacts, and pollutants
with different measurement and other characteristics.
5.1.4. Emission Limits
Another distinction concerns whether a trading program involves mass emission
limits or not. Mass emission limits prescribe the total emissions that a polluter may
have over a designated period of time. Other programs do not prescribe total emis-
sions, but rather the rate at which they occur. Within firm trading can be used to meet
both a mass emission limit target as well as a rate-based emission target.
Most of the command-and-control emission regulations limit the rate of emissions,
not the total amount (for example, Federal automobile tailpipe standards). This
distinction is very important, and has important implications for trading systems. A
trading system can be designed either with or without mass limits. Limits are a crucial
distinction because mass emission limits are a significantly different regulatory burden
placed on sources. Many of the most difficult problems associated with a trading
program come from the limits, not from allowing sources to adjust their limit (in a
marketable allowance program) or meet their limit via trading (in an emission reduction
program). Issues including baselines, accurate emission monitoring, and make-up or
other penalty provisions all are limit-related, not trading related.
For other than air and water pollution, the concept of mass emission limits is more
reasonably interpreted as total emission limits.
5.1.5. Geographic Area
The geographic area over which trades are permitted is largely determined by the
type of pollutant. If the pollutant spreads widely and has adverse effects at the low
concentrations found at distant points, the geographic area is likely to be very large. An
example would be chlorofluorocarbons which can damage the ozone layer regardless of
where on earth they may be released. On the other hand, many pollutants have adverse
effects primarily on a small local or regional area. An example is carbon monoxide,
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Trading Systems
which has no short-term adverse effects outside the metropolitan area where it is
initially released.
5.1.6. Section Organization
The choice of the organization for the remainder of this section is essentially the
choice of what to highlight among these various attributes. Although a case can be
made for many combinations of the attributes discussed earlier in this subsection, the
following list of subsections represents one useful way to break the programs down into
a manageable number of categories and will be the one used:
5.2. Inter-firm non-approval trading involves pollution reduction credits that, once
issued, can be relatively freely traded without major intervention by pollution
control agencies;
5.3. Inter-firm approval trading involves pollution reduction credits that can be used
or traded by a polluter with significant intervention of pollution control agencies,
usually because the pollution involved does not have identical environmental
impacts; and
5.4. Intra-firm approval trading involves pollution credits that are tradable only
within a firm, to be used to meet firm standards.
Inter-firm and intra-firm approval trading have in the past been the most common
form of economic incentive used in the United States; with the passage of the Clean Air
Act Amendments of 1990, however, inter-firm non-approval trading is assuming more
importance. Appendix B contains a general overview of the economic incentive
provisions of the 1990 Amendments.
5.2. INTER-FIRM NON-APPROVAL TRADING
5.2.1. Acid Rain Allowance Trading
Title IV of the Clean Air Act Amendments of 1990 directs the Environmental
Protection Agency to establish a program to reduce acid rain. Acid rain is the term
used to describe the phenomenon associated with emissions of fossil fuel combustion,
the transport of these emissions in the atmosphere, and the deposition of their transfor-
mation products.
The Clean Air Act Amendments set a national cap of 8.95 million tons per year on
SO2 emissions from electric utilities, to be accomplished in two phases. Phase I,
beginning in 1995, requires the 110 largest, highest emitting utility plants to reduce
emissions to levels reflecting an intermediate emission limit of 2.5 Ibs. of SO2 per million
Btu. In phase II, beginning in the year 2000, existing utility plants greater than 25
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
megawatts and all new units must reduce emissions to levels reflecting emission limits
of 1.2 Ibs. per million Btu. Through this program total SO2 emissions will be reduced
by 10 million tons relative to 1980 baseline emissions.
The most important feature of the acid rain control program is a trading system of
marketable allowances. EPA issued proposed rules in late 1991 that govern the
operation of the allowance trading system.2 Under the proposed rules, existing utility
sources subject to the program are granted allowances based on historic fuel use and
emission rates set in the 1990 amendments. Each allowance is for one ton of emissions.
Utilities may meet their emission limits by using their allowances or by acquiring
allowances from utilities that control emissions more than is required. Beginning in
1993, a relatively modest number of emission allowances will be auctioned each year by
the EPA. To assure that each utility source is in compliance, sources must install a
system to continuously monitor the flow and concentration of emissions.
At a later date, EPA will promulgate regulations permitting sources not explicitly
affected by the acid rain program the opportunity to participate in the allowance market
through an "opt in" provision.
Because it encourages cost-effective emissions control, the acid rain allowance
trading system has the potential to save affected utility sources billions of dollars in
compliance costs. EPA estimates that savings from the acid rain trading program will
range from $0.7 to $1.0 billion per year.3 Whether the full potential savings are
achieved depends on several factors including state public utility regulation and the
willingness of utilities to participate.
5.2.2. Oxygenated Gasoline Credit Program
Title II of the Clean Air Act Amendments of 1990 tightens mobile source tailpipe
emission standards and provides for the development of new and reformulated fuels.
One of the incentive mechanisms appears as marketable credits for fuel characteristics
in cities where reformulated fuels are required. Fuel credits would be earned by
refiners, blenders or importers who certify that their gasoline or blend has an oxygen
content equal to or greater than 2.0 percent by weight. Credits would be fully market-
able; gasoline containing more than 2.0 percent oxygen by weight would earn a credit
that could be transferred to refiners or importers having a gasoline oxygen content
below the required limit. Proposed guidelines implementing the oxygenated gasoline
credit program were issued by EPA in early 1992.4 The guidelines specify a 2.0 percent
minimum oxygen content by weight during the control period, an averaging period
equal to the control period, and enforcement through an "attest engagement" in place
of audits. EPA declined to provide for banking of oxygen credits for use in subsequent
periods.
Although authorized by the 1990 amendments, EPA has decided not to promulgate
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Trading Systems
trading provisions for the benzene content of gasoline at this time, but may do so at a
later date.5
5.2.3. Law Emission Vehicle Credit Program
Section 249 of Title n of the Clean Air Act Amendments of 1990 concerns a Califor-
nia pilot test program for clean-fuel vehicles and clean alternative fuels. The language
of section 249 closely follows provisions of the California Air Resources Board (CARB)
Low Emission Vehicle (LEV) program that dates from 1984. Section 249(d)(l) authorizes
the State to offer marketable credits to manufacturers who sell more clean-fuel vehicles
than is required. Manufacturers who sell fewer vehicles than required may make up
the deficiency by purchasing credits. EPA proposed rules in 1991 governing LEV credit
trading that follows earlier CARB guidance.6
5.2.4. Chlorofluorocarbon Production Allowance Trading
In 1988 the United States ratified the Montreal Protocol on Substances that Deplete
the Ozone Layer. The Montreal Protocol called for a cap on production of chlorofluoro-
carbons at 1986 levels, with further reductions in 1993 and 1998. EPA issued regulations
implementing the Montreal Protocol in 1988.
Title VI of the Clean Air Act Amendments of 1990 calls for additional restrictions on
Chlorofluorocarbon production. In late 1991 EPA issued a temporary final rule that (1)
apportions baseline allowances, (2) provides for gradual reductions in allowances, and
(3) permits the transfer of allowances among firms.7 Transfers of production allow-
ances are limited only in that the transferor's remaining allowances are reduced by the
amount transferred plus one percent of the amount transferred.
5.2.5. Lead Trading
Since the 1920s tetra-ethyl lead has been added to gasoline to raise its octane and
reduce knocking in engines. Because of concerns over adverse health effects from
airborne lead, the EPA required that unleaded gasoline be made available by July 1974
and restricted the lead content of leaded gasoline to 1.7 grams per gallon after January
1, 1975.8 The schedule for lead phase down had five stages. The final stage, which
occurred after January 1, 1979, limited the average lead content for individual refiners
to 0.5 grams per gallon, averaged across the lead content of leaded and unleaded
gasolines. Similar requirements applied to importers of gasoline.
During the early 1980s, the demand for leaded gasoline decreased steadily, becoming
a small fraction of the total gasoline consumption. Consequently, limits on the average
lead content of all gasolines ceased to have much impact on the lead content of leaded
gasoline. Meanwhile, concern over adverse health effects from airborne lead continued
to grow.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
EPA established a limit of 1.1 grams per gallon for the content of leaded gasoline
beginning on July 1,1985 and announced its intent to further reduce lead in gasoline to
0.5 grams per gallon after July 1, 1985, and 0.1 grams per gallon after Jan. 1, 1986.9
This aggressive schedule of lead reduction was facilitated by a program EPA established
to allow trading in lead credits among refiners. Without trading in lead credits, two
alternatives were likely: (1) the phase down would have taken longer or (2) there would
have been a short-term contraction in the supply of gasoline and possible supply
disruptions in some areas.
5.2.5.1. The Lead Trading Program
Starting July 1, 1983 EPA allowed refiners and importers of gasoline to trade lead
reduction credits to meet the limit for the average lead content of gasoline.10 Refiners
and importers that reduced the average lead content of their gasoline below the EPA
limit generated credits that could be sold to refiners or importers that exceeded the
limit. Reporting was on a quarterly basis; all credits generated in a quarter had to be
used within that quarter.
Once the limit for the average content of leaded gasoline reached 0.1 grams per
gallon, trading would not be allowed because of concern that gasoline with less than 0.1
grams of lead per gallon could cause excessive valve seat wear in older vehicles.
In 1985 EPA allowed refiners to bank lead credits for subsequent use anytime until
the end of 1987.11 Banking effectively extended the life of credits from the quarter they
were generated to the end of 1987.
5.2.5.2. Administration and Enforcement
Refiners and importers were required to report on a quarterly basis all trades,
banking deposits, withdrawals and balances, along with gasoline volumes. Reporting
forms for refiners and importers were simple. They consisted of brief summary
information for each refiner or importer along with two lists: (1) the names of entities
with which the refiner or importer traded and the quantities traded; and (2) a list of
physical transfers of lead additives to or from entities other than lead additive manufac-
turers. The second list contained not only physical transfers of lead additives, but also
any sales of gasoline components or unfinished gasolines to which lead had been added.
Together, this data provided enough information to match individual purchases and
sales of lead credits and to verify that total sales of lead rights equalled total purchases.
Any discrepancies in totals could trigger further investigation and enforcement action.
5.2.5.3. Effects of Lead Trading on Gasoline Markets
There is very limited data on the actual transaction prices of lead credits under the
trading program. Although there was an active market with several hundred partiti-
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Trading Systems
pants, actual transaction prices were known only to the market participants. No price
reporting was made to EPA, only volumes traded. Further, intermediaries played only
a limited role in this market. Consequently, only anecdotal evidence is available
concerning the price of lead credits; that evidence indicates that lead rights traded in the
range of 3/4 to over four cents per gallon.12
The large volume of lead rights traded and banked suggests that the total savings
could have been substantial. EPA estimated that about 9.1 billion grams of lead would
be banked and that banking alone would save refiners $226 million. The actual amount
banked was very close to this estimate: just over 10 billion grams, for an average saving
of 2.5 cents per gram that was banked.13
5.2.5.4. Environmental Effects of Lead Trading
The lead trading program likely had a beneficial effect in terms of reducing the total
amount of lead used in gasoline, at least as rapidly as would have been the case if a
command-and-control approach had been used. It seems likely that the banking
provisons allowed more reductions to occur in the early years than would have
occurred otherwise.
5.2.6. Transferable Development Rights
A number of jurisdictions have adopted systems of transferable development rights
(TDRs) to manage land use and for other reasons. Although these are not strictly
pollution rights, they are closely related since development normally leads to at least
increased water pollution and often air pollution and solid waste. Three such programs
are considered here.
5.2.6.1. Montgomery County, Maryland
Montgomery County is a prosperous county bordering Washington, DC with a
population of about 750,000. The portions closest to the District have become urbanized
and there was a tendency in this direction for even the more distant rural and agricul-
tural areas. To preserve the character of the agricultural areas, the county, in 1980 and
1981, downzoned approximately 90,000 acres from one dwelling per five acres to one
per 25 acres. To compensate land owners for the loss in value and to avoid the
"takings" prohibition of the Constitution, valuable transferable development rights were
distributed to the affected land owners on the basis of one TDK per five acres (minus
one TDK per existing dwelling).14 About 18,000 TDRs were thus created.
On subsequent occasions, the county has designated other areas, known as receiving
areas, where the TDRs can be used.15 In all receiving areas, development without
TDRs is permitted up to a base zoning density. In addition, a higher optional density
up to a specified maximum is available to developers who apply TDRs. Units above the
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
base density require TDRs on a one for one basis. To date, the county has created about
12,000 units of receiving capacity, the difference between optional and base density over
all receiving areas.
A limited market exists where TDRs are sold, directly or indirectly, by farm land
owners to developers.16 Prices initially fell from about $6,000 to below $3,000, recov-
ered to about $7,000, and are now in the range of $4,500 to $5,000 each. Approximately
5,300 TDRs have been used to date.
The program is regarded by the county and others as having achieved its objective
of preventing the further conversion of farms to subdivisions.
5.2.6.2. Talbot County, Maryland
Talbot County has two TDR programs.17 The first program, created in 1989, is
intended to protect environmental amenities, principally the shoreline of the Chesapeake
Bay and certain interior lands. The receiving area for the program is the critical zone
within a thousand feet of the Bay. If a property is eroding at least two feet per year
and the developer takes steps to prevent further erosion, then, with the application of
TDRs, the property can be developed at a density up to one dwelling per five acres
versus the base density of one per twenty acres. One TDR is required for each optional
unit.
The sending area for TDRs is an interior area where it is desired to protect plant and
wildlife, drainage and park sites. TDRs were distributed in this area at the rate of one
per twenty acres which is also the area's zoning density. When a TDR is sent from this
area, the sending parcel can no longer be developed although it may be used for
agricultural purposes.
To date, three units have been built with TDRs. Those TDRs were reportedly
purchased for $40,000 to $50,000 each. The substantial price reflects the high value of
a shoreline lot whose creation they permit.
The second program was created in June, 1991. TDRs were distributed in the five
election districts in the Rural Agricultural Conservation Zone at the rate of one per ten
acres which is the base zoning density throughout the Zone. A TDR is required for any
dwelling built and the maximum density has been raised to one per five acres.
However, the fixed number of TDRs limits overall development to one per ten acres.
The intent is to concentrate development in some areas and to leave others undeveloped
as farms. TDRs cannot be transferred across election districts.
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Trading Systems
5.2.6.3. The Pinelands, New Jersey
The Pinelands is an area of about a million acres in southeastern New Jersey
recognized in federal and state statutes as containing a significant ecosystem of forests,
wetlands and endangered species habitats.18 To implement the policy of channelling
development to selected growth sites, TDRs known as Pineland Development Credits
(PDCs) were created in 1981. Each PDC permits development of four units above the
base zoning density in the growth areas. The PDCs were distributed to landowners in
the preservation and agricultural production portions of the Pinelands in return for
limiting development on their lands. Two PDCs were issued per 39 acres of farmland
in the agricultural production and preservation areas, one per 39 acres of nonfarmland
uplands in the preservation area and 0.2 per 39 acres of wetlands in the preservation
area.
A Pinelands Development Credit Bank was also established. In the early years of
the program, it was a purchaser of last resort of PDCs at a statutory price $10,000. In
May, 1990, it auctioned off its inventory at a price of $20,200 per PDC.
To date, approximately 100 PDCs have been used by developers.
5.2.7. Fireplace and Wood Stove Permit Trading
Many mountain communities in Colorado have historically experienced undesirable
levels of particulate air pollution in the winter months because of the use of wood stove
fireplaces. Increased winter populations due to resort development have worsened the
problem in some of these communities.
Telluride, Colorado, one such alpine resort community, is located in a box canyon at
an altitude of 9,000 feet. The local geography and meteorology produce severe inver-
sions. In 1977, Telluride passed an ordinance limiting new construction to one wood
stove or fireplace per unit, but air pollution from wood stoves only grew worse. In
1987, Telluride initiated a program to reduce the use of wood-burning fireplaces and
stoves. Existing wood stove and fireplace users were granted an operating permit, but
were asked to meet new operating standards of six grams of particulate matter and 200
grams of carbon monoxide per hour within three years. During the first two years of
the three year period, fireplace and wood stove owners could earn a rebate of $750 for
conversion to natural gas. An integral component of the program banned the use of
wood stoves and fireplaces in new construction, unless the developer acquired two
permits surrendered by existing users.
The combined effects of performance standards for existing users and a system of
marketable permits to accommodate growth has yielded a 50 percent reduction in wood
stoves and fireplaces in use. Offers to sell wood stove permits are advertized regularly
in local papers, with current asking prices in the $2,000 range. Since the program was
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
implemented, Telluride has not violated the 24-hour or annual particulate matter
standards.
Aspen, Colorado has a rule similar to that in Telluride that limits the number of
wood-burning stoves and fireplaces in each building. Anyone who wishes to exceed the
limit in a building has to buy fireplace or stove rights from existing rights owners. The
number of rights required depends on the geographical area where the new units are
to be installed.19
Related programs currently operate in Vail, Crested Butte, and other alpine resort
communities in Colorado.
5.3. INTER-FIRM APPROVAL TRADING
As mentioned at the beginning of this section, trading programs described in this
section are characterized by the property that credits or allowances are less freely
tradable. Permission of one or more governmental agencies is needed for each trade.
To secure necessary permission, environmental modeling may be required and trade
ratios other than unity may be set by governmental agencies. Trades may be restricted
in time as well as in space.
5.3.1. Trading of Air Emissions Rights
The air emissions trading program consists of four separate activities: bubbles,
offsets, banking, and netting. The components of EPA's air emission trading program
were developed through regulations and policy statements issued by EPA. The various
programs began independently in the mid- to late-1970s and were revised several
times.20 EPA's Final Emissions Trading Policy Statement, issued in 1986, addresses
trading of criteria pollutants such as sulfur dioxide, nitrogen oxides, particulate matter
and chemicals that contribute to the formation of ground-level ozone.21 The policy
responded to public comments that earlier policies could cause potential environmental
damage unless new protective features were added. Such procedures, including
redefining the emissions baseline and other accounting procedures, are included in the
final policy.
5.3.1.1. Bubbles
The bubble program, first established in 1979, allows existing sources flexibility in
meeting required emission limits by treating multiple emission points as if they face a
single, aggregated emission limit. The bubble can include more man one facility owned
by a firm or facilities owned by different firms, but all the affected emission points must
be within the same attainment or non-attainment area.
Bubbles must be approved as a revision to an applicable State Implementation Plan
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Trading Systems
(SIP). Prior to the 1986 final policy, EPA approved or proposed to approve approxi-
mately 50 source specific bubbles. In addition, 34 bubbles were approved by states
under EPA authorized generic bubble rules. As of March, 1989, EPA approved or
proposed to approve a number of additional bubbles22 under the revised policy.
The pre-1986 bubbles were estimated to save $300 million over conventional control
costs, with an additional $135 million saving from the state generic bubbles.23 Esti-
mates of the additional cost savings from the post-1986 bubbles are not available.
5.3.1.2. Offsets
The offset program was developed in 1976 to lessen the conflict between economic
growth and progress towards air quality goals in areas that did not meet EPA's ambient
air quality standards, referred to as nonattainment areas.24 Without the offset policy,
there was little or no opportunity to locate a major new plant or expand significantly a
major existing plant ("major" generally was defined as plants emitting over 100 tons per
year of one or more criteria pollutants) in areas that did not meet air quality standards.
Under the offset policy, major new or modified existing sources are allowed to operate
in nonattainment areas provided that they obtain offsetting emission reduction credits
from existing sources. States implementing this policy have usually required new or
modified existing sources to offset emissions by a factor greater than one. Under the
1990 Clean Air Act Amendments, higher offset ratios are mandated in ozone non-
attainment areas.
Some 2,500 offset trades have occurred, about 10 percent of which were between
firms and the rest within firms.25 About 90 percent of all offset transactions have taken
place in California, since California has applied offset requirements to smaller sources
than mandated under federal law.
Some states have devised innovative offset programs. On May 8,1991 the Albuquer-
que/Bernalillo County Air Quality Board adopted Regulation No. 38, which governs
trading of hydrocarbon emissions between stationary sources and a variety of other
sources, including gasoline vapor pressure, Stage II vapor recovery systems, and
scrapped vehicles that were designed to be fueled with leaded gasoline. In Salinas,
California, owners of the O'Brien cogeneration facility reached an agreement with state
air quality regulators to offset the plant's emissions by buying and scrapping older
vehicles registered in the Salinas-Monterrey area.
5.3.1.3. Banking
EPA's initial offset policy did not allow the banking of emission reduction credits for
future use or sale. Banking was added by the offset provisions of the 1977 Clean Air
Act Amendments.26 Although the EPA has approved several banks, there has been
only limited use of the provision. One report suggests that the relatively limited use of
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
banking stems from a concern that banked emission reduction credits may be appropri-
ated by states that need emission reductions to attain air quality goals.27
5.3.1.4. Netting
Netting, which dates from 1980, allows sources undergoing modification to avoid
new source review if they can show that plant-wide emissions do not increase signifi-
cantly.28 Netting is the most widely used emission trading activity. Detailed informa-
tion is available only for 1984. In that year, approximately 900 sources used the netting
provision. One source extrapolates from this one year of data to estimate that between
5,000 and 12,000 sources have used netting since 1974.29
The total savings in control costs resulting from the use of netting is difficult to
estimate because the number of transactions is not known precisely and the savings in
individual transactions are quite variable. The savings to firms using netting arise from
three sources. First, netting may allow a firm to avoid being classified as a major
source, under which it would be subject to more stringent emission limits. Reductions
in control costs in such a case would depend in part on the control costs and emissions
limits to which the firm must adhere after netting. One source estimates that netting
typically results in savings between $100,000 and $1 million per source.30 Based on the
previous estimate of the number of netting transactions, control cost savings would
range from $500 million to $12 billion. Second, savings result from avoiding the cost of
going through the major source permitting process. These savings could add an
additional $25 million to $300 million to the estimate of total savings from netting.
Third, additional savings can result from avoided construction delays due to disruptions
caused by the permitting process.
Netting is designed to have no adverse effect on environmental quality. EPA
regulations establish thresholds below which emission increases do not trigger new
source review. Consequently, the impact of netting on air quality for individual
transactions is insignificant. To the extent that large numbers of modified sources use
netting in an area, there could be modest adverse impacts on local air quality.31
5.3.1.5. Evaluation of Air Emissions Trading Program
Quantitative estimates have consistently found air emissions trading has the
potential to substantially reduce industry's cost of complying with air pollution control
programs. Cost savings have been commonly estimated to be 50 percent of traditional
command-and-control costs, and up to 95 percent in one study.32 Unfortunately, as
discussed in Section 2.2, the full potential cost savings predicted by the quantitative esti-
mates have not always been realized. Nevertheless, savings from trading under the air
emissions trading program probably range from $5.5 to over $12.5 billion since 1975.
The overall impact of emissions trading on air quality is likely to have been neutral.
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In theory, the offset ratio of greater than 1:1 ensures some reduction in pollution;
however, netting may allow small increases in pollution.
5.3.2. Water Effluent Reduction Trading
At least three states, Wisconsin, Colorado and North Carolina, have established
programs for trading credits for reducing water effluents.33 The Wisconsin program,
which allows point sources to trade water effluent reduction credits, has been in effect
since 1981. Colorado has two programs to trade credits for rights to further reductions
of phosphorus discharge into reservoirs in the Denver area: Dillon and Cherry Creek.
More recently, North Carolina implemented a program that will permit trading in
further reductions of nutrients released into the Tar-Pamlico Basin.
5.3.2.1. Wisconsin
The Wisconsin program was created to provide flexibility for point sources such as
paper mills and municipal wastewater treatment plants to meet state water quality
standards throughout the State. Sources that reduce discharges containing biological
oxygen demand below permitted amounts are allowed to sell the excess reductions to
other sources. The pulp and paper mill effluent guidelines suggested that substantial
costs would be incurred to meet the stringent limits required to meet the water quality
standards because of the large numbers of dischargers concentrated in a few miles of
the state streams. Analysis showed a potential cost savings from trading of about $7
million.34 In fact, the effuent guidelines far overstated the needed expenditures. Costs
in addition to those needed to meet the national point source requirements were not
incurred and with one limited exception on the Fox River no trades have yet occurred.
5.3.2.2. Dillon Reservoir, Colorado
Dillon Reservoir is the source of one half of Denver's water supply. Surrounding the
Dillon Reservoir is a recreational community that grew during the 1970s and early
1980s. Four municipal treatment plants, sixteen small treatment plants, one industrial
plant and numerous nonpoint sources all discharge wastes into the reservoir. All of the
point sources were subject to strict discharge limits. According to analysis prepared for
the EPA, the municipal treatment plants had a nutrient loading allocation that could be
limiting in the near future. The municipal wastewater treatment facilities faced
incremental control costs for phosphorous that were many times that of nonpoint
sources, providing a rationale for trading.
In 1984 Summit County, Colorado instituted a point/nonpoint source trading
program that allowed the four POTWs to meet their discharge limits by maintaining
their advanced levels of control and earning additional phosphorous reduction credits
for controlling phosphorous loadings from existing nonpoint sources. The system used
a trading ratio between point and nonpoint sources of 2:1 to provide a margin for new
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
growth. Recently, there have been a few trades proposed between non-point sources,
something not anticipated when the program was established. Because of a slowdown
in growth in the region and substantially improved point source removal efficiencies,
point sources have not yet faced a significant need to trade with nonpoint sources.
5.3.2.3. Cherry Creek Reservoir, Colorado
Cherry Creek Reservoir is an important recreation area near Denver that until
recently was experiencing strong development pressure and rapid population growth.
In the mid-1980s, the Denver Regional Council of Governments developed a manage-
ment plan to prevent eutrophication in the reservoir. The plan identified phosphorous
as the critical effluent, projecting that by 1990 loadings would have to be limited in
order to maintain water quality standards established by the Colorado Water Quality
Commission.
The Cherry Creek trading program allows POTWs discharging into the Reservoir to
earn phosphorous reduction credits through the control of nonpoint source phosphorous
discharges.35 The program requires that nonpoint sources reduce their loading by 50
percent on their own before point sources can earn credits for any reductions. Because
growth has slowed, phosphorous loadings remain below established limits and trading
has not materialized yet.
5.3.2.4. Tar-Pamlico Basin, North Carolina
North Carolina has designated certain areas as "nutrient sensitive waters" of the
State for which management strategies will be developed. The North Carolina Depart-
ment of Environmental Health and Natural Resources created what in effect is a basin-
wide bubble for the Tar-Pamlico Basin. The Department gave the Tar-Pamlico Basin
Association, which consists of about a dozen POTWs and one industrial discharger, an
overall limit for nitrogen and phosphorus effluent. If the Association fails to meet the
effluent targets in 1992 through 1995, charges will be imposed.
Upon completion of watershed modeling, the Department will establish new and
probably much lower aggregate effluent limits that will have to be met by the Associa-
tion. In this stage, the Association will be able to arrange for control of nonpoint
effluents in lieu of controlling its own effluents further.36 The Association members are
currently creating a fund to pay for these nonpoint controls.
5.3.2.5. Steel Industry Effluent Bubble
In 1982 the U.S. Environmental Protection Agency issued point source effluent
guidelines for iron and steel manufacturers.37 One provision of the guidelines allows
iron and steel plants to provide central treatment facilities for effluents originating at
multiple outfalls rather than treating each effluent stream separately.
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Alternative effluent limitations for individual pollutants treated under this bubbling
approach are calculated by adding the total mass limits at multiple outfalls and then
subtracting a net reduction amount. In the case of total suspended solids, the minimum
net reduction amount is approximately 15 percent; for all other traded 'pollutants the
minimum net reduction is approximately 10 percent.38
5.3.3. Wetland Mitigation Banking
Federal and state laws require developments in wetlands to minimize adverse effects
on the environment. Section 404 of the Clean Water Act is the principal federal statute
governing such activity. As implemented by the U.S. Army Corps of Engineers (33 CFR
320.4(r)), "mitigation is an important aspect of the review and balancing process...."
Many states also impose mitigation requirements, some of which are more stringent
than federal requirements. Florida's "Mitigation Rule" is illustrative. The State will
accept as mitigation alternatives the creation of new marshes or the enhancement of
existing marshes. Specific requirements include in-kind mitigation, monitoring for 25
years, and a replacement ratio of 2:1 for marshes that are destroyed by development.
Mitigation "banking," a concept developed in 1981 by the U.S. Fish and Wildlife
Service (FWS), attempts to simultaneously reduce the cost and increase the effectiveness
of mitigation actions. Wetland mitigation banking closely parallels emission banking as
developed by the U.S. Environmental Protection Agency. A mitigation bank can involve
the enhancement of an already deteriorated wetland area or the creation of new
wetlands through the diversion of water into an upland area. Mitigation credits
(usually defined in terms of habitat units or acres) are earned by the bank and available
for sale to developers to meet state-imposed mitigation requirements.
Mitigation banking is driven by four objectives: (1) availability of cost information
at the beginning of the permit application process; (2) lower costs per unit of habitat
improvement due to economies of scale; (3) environmental benefits from large scale
preservation or enhancement efforts; and (4) greater certainty regarding the success of
mitigation actions. More than 35 wetland mitigation banks currently function in at least
10 states: California, Florida, Idaho, Louisiana, Minnesota, New Jersey, North Carolina,
North Dakota, Oregon, and Virginia. Several of the contending legislative proposals for
reauthorization of the Clean Water Act contain provisions for wetland mitigation
banking. If enacted, these proposals would extend the availability of wetland mitigation
banking to the entire nation.
5.4. EMISSIONS AVERAGING
Emissions averaging to meet a standard is equivalent to emissions trading in which
all trades are required to be internal to a plant or firm. Emission averaging is permitted
under the emissions trading policy to meet industry-specific Reasonably Available
Control Technology (RACT) standards. Perhaps the best known example of emissions
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
averaging is the fleet averaging approach to controlling motor vehicle pollution from
heavy duty truck engines. A similar proposal for averaging automobile emissions,
included in the Administration's 1989 Clean Air Act reauthorization, failed to win
congressional approval. Fuel characteristics will be averaged as California implements
its plan for reformulating gasoline.
5.4.1. Reasonably Available Control Technology Requirements
For years EPA has allowed RACT requirements to be met through emission averag-
ing. In 1980, EPA allowed can coating operators to compute daily weighted average
VOC emissions in conjunction with a plant-wide emission limitation for satisfying
RACT requirements.39 This so-called "cross line averaging" is available under the
Agency's Emissions Trading Policy to other industrial sectors.
5.4.2. Heavy Duty Truck Engine Emissions
Title II of the Clean Air Act called for an emissions standard for nitrogen oxides that
represented the maximum degree of reduction achievable, with a goal of attaining a
reduction of 75 percent in the "average of actually measured emissions" from heavy
duty gasoline engines. The emissions standard for particulates was to be set in a similar
fashion. While vehicles and engines had to be certified on an individual engine basis,
section 206(g) allowed manufacturers to comply through the payment of a nonconfor-
mance penalty sufficient to remove whatever competitive advantage they obtained from
making high emitting engines. EPA's implementation of these requirements allows
manufacturers to comply by averaging together the emissions performance of all heavy
duty truck engines they produce.
5.4.3. California Motor Fuel Characteristics
California's program for reformulating gasoline is being implemented in two phases.
Phase I, which went into effect on January 1, 1992, specifies a reduction of Reid vapor
pressure to 7.8 pounds per square inch during the summer months, the complete
elimination of lead, and the addition of deposit control additives. Phase II, which is to
be implemented in 1996, contains specifications on the content of sulfur, benzene,
olefins, oxygen, and aromatics, as well as lower vapor pressure limits.
California's implementation program allows refiners three options. Under option 1,
all gasoline produced by the refiner must meet the specified limits. Under option 2, a
refiner may average across batches but the average must comply with standards more
strict than in option 1. Under option 3, a refiner who can demonstrate that the recipe
has lower emission characteristics than the California standards can comply with a
relaxed set of limits.
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5.4.4. Hazardous Air Pollutant Early Reduction Program
Title III of the Clean Air Act Amendments of 1990 substantially revises existing
authorities to regulate hazardous air pollutants. Section 112(i) allows firms six-year
waivers of emission limits for hazardous emissions set under section 112(d). Firms
must voluntarily reduce toxic air emissions by 90 percent (95 percent in the case of toxic
particulates) ahead of the Act's schedule in order to qualify for the waiver. The 90
percent reduction is determined by averaging reductions across participating sources
within a facility. In essence, firms are given the option of making early voluntary
reductions in exchange for somewhat higher emissions, on a termporary basis, in later
periods. This process can be described as emissions averaging over time. For most
participating firms, average emissions will be lower under the program than without it,
yet many firms are expected to participate and experience reduced control costs. To
qualify, firms must commit to making the stated reduction before Maximum Achievable
Control Technology (MACT) standards are proposed. Regulations implementing this
provision were proposed by EPA in June 1991.
The first industrial segment to benefit from this provision will be synthetic organic
chemicals. MACT standards for that sector are expected to require an overall 95 percent
reduction, suggesting that early voluntary efforts will be an attractive option.
Endnotes for Section 5
1. Shapiro and Warhit (1983).
2. 56 Federal Register (FR) 63002-351, December 3,1991.
3. Ibid., p. 63097.
4. 57 FR 4413-48, February 5,1992.
5. While authorized by the 1990 amendments, EPA has decided not to offer a credit
program for the aromatic content of gasoline on the basis that the relevant section of the
1990 Amendments (section 211(k)) does not contain a specific numerical limit, only a
performance standard for emissions (56 FR 31176, July 9,1991).
6. 56 FR 48614, September 25,1991.
7. 56 FR 49548-580, September 30,1991 and 56 FR 67368, December 30,1991.
8. U.S. EPA (1973).
9. U.S. EPA (1982), (1984), and (1985).
10. U.S. EPA (1982).
11. U.S. EPA (1985a).
12. Anderson et al. (1989).
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
13. U.S. EPA (1985a).
14. The motivation for and history of TDRs is drawn from Maryland-National Capital
Park and Planning Commission (1980).
15. The designation of receiving areas is discussed in Maryland National Capital Park
and Planning Commission (1990).
16. Data on prices and uses of TDRs are drawn from Montgomery County Planning
Department (1991).
17. The material in this section is drawn from a telephone conversation of September 3,
1991 with Barry Griffith of the Talbot County Planning Commission.
18. The material for this section is drawn from Tripp and Dudek (1989) and from
telephone conversations with Norma Milner and Lois Cristorelli of the Pinelands
Commission.
19. Aspen/Pitkin Environmental Health Department.
20. See, for example, U.S. EPA (December 11, 1979; April 7, 1982; July 29, 1982; and
August 31, 1983)
21. U.S. EPA (December 4, 1986).
22. Creekmore (1989).
23. Dudek & Palmisano (1988).
24. U.S. EPA (1976).
25. Dudek and Palmisano (1988).
26. U.S. EPA (1979).
27. Hahn and Hester (1989).
28. U.S. EPA (1980).
29. Hahn and Hester (1989).
30. Hahn and Hester (1989).
31. Hahn and Hester (1989).
32. Atkinson & Tietenberg (1991) and Krupnick (1986).
33. Apogee Research, Inc. (1991).
34. O'Neil et al. (1983).
35. Apogee Research, Inc. (1991).
36. Based on information from Glen Anderson of the Environmental Defense Fund and
from Tar-Pamlico Basin Association (1991).
37. 47 FR 23284, May 27,1982, amended at 47 FR 41739, September 22,1982.
38. Code of Federal Regulations (CFR) section 420.03.
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Trading Systems
39. U.S. EPA (December 8,1980).
40. 56 FR 27338-74.
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6. OTHER INCENTIVES
Three other incentives that do not fit easily into the earlier sections will be discussed
in this section, namely:
6.1. Subsidies and tax concessions;
6.2. Liability approaches; and
6.3. Information programs.
6.1. SUBSIDIES AND TAX CONCESSIONS
Subsidies and tax concessions provide financial payments to polluters and tax
advantages based on changes in previous pollution emissions or in return for future
pollution control actions. Two such programs will be described here: federal grants to
municipalities for the construction of sewage treatment plants and state subsidies to
businesses to encourage them to locate in a state. In Louisiana, the latter are being tied
to a firm's environmental record.
6.1.2. Municipal Sewage Treatment Plant Construction Grants
The construction grant program for municipal sewage treatment plants has been in
operation since 1956. Since that time, the federal government (through EPA since 1970)
has awarded grants of 75 percent toward the cost of constructing municipal sewage
treatment facilities. The program was funded by special congressional appropriations
until the most recent reauthorization of the Clean Water Act in 1987. At that time
funding for the program was changed substantially, with monies to come from a newly
created (and much smaller) State Revolving Fund.
A good case can be made that although municipal sewage treatment plant construc-
tion grants involve financial payments that are likely to reduce effluents in future years,
they do not meet the definition of an economic incentive provided in Section 1 because
they are usually granted only to build plants in areas that do not meet water quality
standards and only to bring such areas into compliance with water quality standards
and requirements. On the other hand, it seems likely that through oversight or
miscalculation, some plants have been built which would otherwise not have been built
and which have been operated in such a way as to reduce pollution below standards
and requirements.1 The program is included despite these doubts as to whether it
meets the definition of economic incentives because of its size and prominence.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
6.1.2. Louisiana Tax Concessions
In December 1990, Louisiana enacted a new tax rule that ties the amount of business
property taxes a firm pays to its environmental record. For the past 65 years, an
important part of the State's policy for attracting industry was to exempt from local
property taxes new equipment and capital expenditures for a ten year period. Under
the new policy, a firm applying for an exemption or seeking a renewal of an exemption
is rated on a scale according to the number of environmental violations it has received,
the volume of chemicals it releases into the environment and other, related factors. The
better a firm's record, the higher the score and the larger its tax exemption.2
Several other states have tried in recent years to use tax policy to further environ-
mental objectives. For example, New York and New Hampshire reduce property taxes
for wetlands that are protected from development. Minnesota exempts some wetlands
from property taxes altogether if they are preserved from development. A case can be
made that all of these efforts are really pollution control subsidies where the taxes
reduced represent the actual costs of governmental services provided.
6.2. LIABILITY APPROACHES
Liability approaches provide for future payment by polluters based on the damages
caused by their emissions. Liability approaches to environmental pollution control are
found in a wide variety of places, ranging from tort law to a number of specific statutes.
6.2.1. Superfund
The best known of these is the Comprehensive Environmental Restoration, Compen-
sation and Liability Act of 1980 (CERCLA), otherwise known as Superfund. This
includes a number of liability provisions.
The best known provision of CERCLA creates retroactive liability for generators,
haulers and disposal facility operators for the cleanup of hazardous wastes that pose a
threat to human health and the environment. Another provision that is attracting
increasing attention concerns liability for injury to natural resources caused by the
release of hazardous substances.
6.2.1.1. Hazardous Waste Cleanup Liability
Congress passed CERCLA to address problems posed by abandoned hazardous
waste sites, principally landfills. The objectives of CERCLA were to obtain rapid and
effective cleanup of those sites that posed serious threats to health and the environment.
Note that CERCLA cleanup liability is not intended to influence future waste disposal
practices, though it could have some impact. The statute created a fund otherwise
known as the Superfund financed by a combination of taxes on petroleum,
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Other Incentives
petrochemical feedstocks, and general government revenues. Congress gave EPA the
right to bring damage actions against potentially responsible parties to recover damage
costs.
The EPA sought and won in court the right to assign strict, joint and several liability
to any entity that it identified as a potentially responsible party. Thus, firms and
individuals that made minimal contributions to the overall problems at a site could have
liability for the entire cleanup. Firms and individuals that are identified as PRPs have
the right to bring action against other entities that also contributed wastes to the site.
6.2.1.2. Natural Resource Damage Liabilities
Under provisions of CERCLA, the Department of the Interior issued rules governing
assessments for natural resources damaged by spills of oil and hazardous materials.
The Oil Pollution Act of 1990 directs the National Oceanic and Atmospheric Administra-
tion to promulgate separate rules for oil spills that occur after 1990. Both rules will
require compensation for restoration costs plus the value of lost use.
Liability law such as CERCLA and the Oil Pollution Act of 1990 provide incentives
for individuals transporting, storing and otherwise responsible for the care of a wide
variety of substances to avoid accidental releases. Unlike many of the other incentives
described in this paper, however, liability law generally does not result in predictable
costs per unit of pollution. Nevertheless, the costs imposed may be very large. For
example, liability for natural resource damages amounted to $17 per gallon in the 1990
Exxon Bayway incident, $23 per gallon in the 1989 Shell Martinez release, and about $82
per gallon in the 1989 Exxon Valdez grounding. Petroleum and chemical companies
have responded in a variety of ways, including changes in tanker design and operating
procedures and creation of the Marine Spill Response Corporation for rapid response to
oil spills (at a projected five year cost of $900 million to the industry).
6.2.2. Other Statutes Providing for Environmental Liability
Many of the federal pollution control statutes make certain polluting activities
subject to prosecution as a civil offense. Civil and criminal penalties for disregard of
statutory obligations can include fines and imprisonment of responsible individuals. To
the extent that such penalties are proportional to the emissions for which they are
imposed, they can be regarded as economic incentives.
State legislatures have been active in creating liability for certain polluting activities.
Many states have superfund statutes similar in structure to the federal program.
Several states have enacted provisions for compensation to the state as trustee for
injuries to natural resources caused by releases of hazardous substances. Most, if not
all, states also have established penalties for individuals caught littering.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
6.2.3. Tort Law
In principle, tort law is designed to identify the cause of harm, identify who was
responsible for the harm and quantify how much harm was caused to particular
victims. Through the payment of monetary compensation, those responsible for causing
harm should bear the full costs of their actions. For a variety of reasons, however, tort
law for environmental harm does not and probably cannot approach these objectives.
Under tort law, plaintiffs alleging injuries from pollution must establish that the
defendant's actions were more likely than not the cause of the harm. Plaintiffs may
receive full compensation if they can establish the probability is over 50 percent that the
defendant caused their harm, yet they receive nothing if the probability is under 50
percent that they were harmed by the defendant. Because most harms caused by
pollutants in the environment have more than one possible origin, and often have long
lags between the polluting activity and the onset of any disease, satisfying the more
likely than not test normally is difficult. Nonetheless, in some jurisdictions plaintiffs
have received large awards through tort litigation.
6.2.4. Effectiveness of Liability Approaches
In practice, CERCLA liability has resulted in the rapid and effective cleanup of far
fewer sites than originally envisioned. Largely this is attributable to extensive litigation
by the private sector over the apportionment of liability and the proper cleanup remedy.
Further adding to the overall costs of the program are extensive subsidiary cost
recovery actions by responsible parties against their insurers. Since cleanup liability
focuses largely on past activities, which may have been perfectly legal at the time, it is
debatable whether it has any prospective incentive effect. In other words, how likely is
it that CERCLA causes the current level of care in hazardous waste disposal to exceed
what presently is required by law?
The uneven and unpredictable nature of tort awards, along with high transactions
costs and long lags between polluting activities and subsequent litigation, suggest that
tort law does not provide the correct price signals concerning the damage caused by
pollution.3
6.3. INFORMATION PROGRAMS
Information approaches provide for publicly available data on emissions or expo-
sures furnished by polluters. Two significant programs whose disclosure requirements
are designed to provide incentives for firms to reduce human exposure to toxic sub-
stances are described here: California's Proposition 65 and Title III of the Superfund
Amendments and Reauthorization Act.
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Other Incentives
6.3.1. Proposition 65
California adopted Proposition 65, known formally as the Safe Drinking Water and
Toxic Enforcement Act of 1986, by initiative in the November 1986 election. The Acf s
approach to the regulation of toxic chemicals is fundamentally different from that of
other state or federal law. Rather than the traditional approach of setting standards to
which the regulated community must adhere, the Act shifts the burden of determining
what is acceptable to that community.4
Once a chemical is listed by the Governor as a carcinogen, firms may not expose any
individual to these chemicals without providing a clear and reasonable warning.
Warnings are displayed on alcoholic beverages and tobacco and industry is quietly
coming into compliance on other products. Firms also must comply with the Act's
prohibition on discharge of the listed chemicals into drinking water sources. A
landmark "bounty hunter" provision allows citizens to bring enforcement actions and
receive 25 percent of any fines assessed against violators.
6.3.2. SARA Title HI
Users and producers of hazardous chemicals have long been required by federal law
to comply with applicable regulations aimed at protecting human health and the
environment. The 1986 Emergency Planning and Community Right-to-Know Act
(SARA Title HI) added new requirements for emergency planning and for disclosure of
information on the use and release of hazardous chemicals. The disclosure require-
ments were viewed by Congress as a powerful stimulus, through their effect on public
attitudes, shaping company behavior.5
At the time SARA Title III requirements were enacted, there was little hard evidence
as to how companies would respond to information disclosure requirements—other
than disclosing the required data on production and use of specified chemicals. A
retrospective study of eight firms, conducted by The Center for Environmental Manage-
ment at Tufts University* found that for that sample SARA Title III disclosure require-
ments provided a powerful incentive for companies to identify and act upon opportuni-
ties for reducing accidental and routine releases of hazardous chemicals.
Endnotes for Section 6
1. The Congressional Budget Office (1985 and 1988), among others, offers critical re-
views of the wastewater treatment program.
2. The Louisiana program is summarized by Glenn (1992). The program was terminated
by Governor Edwards in 1992.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
3. A good summary of this can be found in Menell (1991).
4. See Draper and Johnson (1989) and Larson et al (1992) for more details.
5. Ramonas (1989).
6. Baram et al. (1990).
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7. NEW INCENTIVE SYSTEMS PROPOSED BUT NOT YET ADOPTED
This section describes two incentive mechanisms that are likely to be implemented:
one is very close to being implemented in the South Coast Air Basin of California; the
second was recently proposed by the Administration.
7.1. SOUTH COAST AIR BASIN MARKETABLE PERMITS PROPOSAL
Although numerous urban areas in the United States currently exceed the federal
ozone limit, California's South Coast Air Basin has the country's highest ozone level.
Under the Clean Air Act Amendments of 1990, the Basin has until 2010 to reduce its
current peak concentration of over 0.28 parts per million to the federal ozone standard
of 0.12 ppm. As regulations imposed to reduce ozone pollution have become more
onerous to more sources, the need for cost-effective methods of improving air quality
has become more pressing. Title I of the 1990 Amendments encourages states to
develop marketable air emissions permit schemes as a cost-effective mechanism for
improving urban air quality.
The South Coast Air Quality Management District (SCAQMD or District) recently
proposed a marketable air emissions permits program for sources emitting the ozone
precursors NOX and Reactive Organic Gases (ROG).1 The District is considering
adding sulfur dioxide emissions to the trading proposal. Sources will be allowed to
satisfy emission reduction requirements by one of three means: additional emission
controls, the use of reformulated products, or acquiring excess emission credits from
other sources. Emission reduction requirements will be expressed as mass emission
limits, not equipment or process specific concentration limits. Mass emission limits will
decline over time for all emission sources.
Termed RECLAIM, for Regional Clean Air Incentives Market, the program will begin
with ROG and NOX emissions from stationary sources that hold permits for greater than
or equal to four tons annually. The ROG market will encompass about 2,000 sources
with about 85 percent of permitted emissions and the NOX market approximately 700
sources with 95 percent of permitted emissions. Air toxics will not be included in the
plan and trading between ROG and NOX will not be allowed.
The proposal contains several exemptions. Some facilities such as dry cleaners,
restaurants and service stations would be controlled through command-and-control
rules. The District intends to evaluate the feasibility of including in the market sources
that emit less than four tons per year in a second phase. When it appears to be more
cost-effective to regulate small sources through source specific rules, small sources may
be exempted from the market.
The initial baseline for emission reduction is important and several alternatives are
being evaluated. ROG sources will have to reduce emissions approximately five percent
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
per year from the initial baseline. For the years 2000 to 2010, a second annual rate of
reduction will be determined by the SCAQMD. NOX sources will have to reduce their
emissions by approximately eight percent per year relative to their initial baseline.
Facilities operating under the RECLAIM program will have a facility-wide permit
that identifies all sources at the facility. Each facility will be given a mass emissions
limit for each of the next ten years covering the collective emissions from all facility
sources (i.e., each facility will have a facility-wide "bubble" permit). The facility permit
will be amended whenever a facility engages in an external trade.
RECLAIM contains provisions to assure compliance as well as procedures for
monitoring emissions. While the District does not intend to specify the structure of the
market in which trading will take place, it will record all transactions in credits and
disseminate information to participants. Trade in credits will be constrained by
geography and season, but final details of such rules have yet to be developed.
Significant cost savings are anticipated through RECLAIM relative to a command-
and-control approach. Compliance costs for the air quality management plan that
otherwise would be in place are estimated at $660 million for 1994. In comparison,
RECLAIM is expected to require compliance costs of $223 million in that same year, or
a saving of $437 million.
7.2. SCRAPPING OLDER VEHICLES
In March 1992, the Administration unveiled plans to reduce pollution control costs
by increasing the scrapping of old, high-polluting vehicles. While details of the
program have yet to be fully worked out, the plan would grant pollution reduction
credits to companies that bought and scrapped older automobiles. The credits could be
applied toward pollution reductions that the sources would otherwise have to make.
In terms of the classifications used in Section 5, the program would create a system of
approval credits.
Certain design features remain to be resolved.2 One issue concerns the years of
remaining life and the extent of future use of the vehicle that should be assumed in the
credit calculation. A second design issue is what should be assumed as the pollution
per mile of use. Is it the same for all older vehicles (if so, what), or does it vary from
vehicle to vehicle based on some observable characteristics? A third design issue is how
to control the migration of older vehicles into an area where above-market prices are
offered.
In 1990, the Unocal Corporation bought and scrapped 8,400 pre-1971 vehicles
operating in the Los Angeles area.3 According to Unocal estimates, the cost per ton for
removing hydrocarbons was approximately $7,000. Such an expenditure is cost effective
in Los Angeles and other areas where the incremental costs of pollution control already
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New Incentive Systems Proposed but Not Yet Adopted
are high.
Endnotes for Section 7
1. South Coast Air Quality Management District (1992).
2, Schoeer (1991),
3. Unocal (1991).
1992
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
7-4
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8. SOME OTHER INCENTIVES THAT HAVE BEEN SUGGESTED
There have been a wide variety of other incentives suggested over the years. Many
of them have been proposed in the form of bills introduced into the United States
Congress.1 In addition, two recent reports include particularly comprehensive sets of
possible incentives. They will be summarized in this section.
8.1. EPA ECONOMIC INCENTIVES REPORT
At the request of EPA administrator Reilly in early 1989, the Economic Incentives
Task Force began an investigation of new ways incentives could be used to improve
environmental protection. The March 1991 Task Force report entitled Economic Incen-
tives: Options for Environmental Protection2 identified four broad areas where economic
incentives might be applied: municipal solid waste management, global climate change,
water resource management, and multimedia concerns.
Within the area of municipal solid waste management, the report noted volume-
based pricing of municipal waste collection, fees on new tire sales to fund collection and
tire recycling programs, deposit-refund systems for lead-acid batteries, a credit system
of a deposit-refund system for used oil, beverage container deposit systems, incentives
for yard waste composting, and a recycled content standard for newsprint. Under the
topic of global climate change incentives, the report mentioned a carbon fee, internation-
al trading of greenhouse gas emission rights, demand side bidding and least-cost
planning in the provision of electricity, and a fee on gas guzzling automobiles with
rebates for gas sippers. Among possible water resource incentives the report discussed
the marginal cost pricing of water, a deposit system for pesticide containers, and
reduction in federal subsidies for coastal development. The report reviewed several
potential multi-media incentives: fees on VOC emissions from major stationary sources,
fees on VOC emitting consumer products, a deposit system for chlorinated solvents,
labeling for "environmentally responsible" products, marketable permit or surcharge
systems for lead, fees on releases reported under SARA Title III, a reduction in federal
subsidies that encourage virgin material use, and changes in federal procurement policy.
8.2. THE PROJECT 88 REPORT
Sponsored by Senators Heinz of Pennsylvania and Wirth of Colorado, a group of
public policy scholars prepared a report identifying thirty-six proposals for "innovative
solutions to major environmental and natural resource problems."3 Several of these
proposals would rely on economic incentive mechanisms, including:
A national market for CO2 offsets;
Internationally marketable permits for greenhouse gases;
Marketable permits for potential ozone depleters;
Marketable permits for stationary sources of primary air pollutants;
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Emission charges for mobile sources of air pollution;
Marketable permits for SO2 and NOX;
Taxes on low fuel economy vehicles with rebates for fuel efficient vehicles;
Marketable permits for point and nonpoint sources of water pollution;
Taxes on certain pesticides; and
A deposit-refund system for containerizable hazardous wastes.
Round II of the Project 88 Report4 evaluates in detail implementation issues regard-
ing three broad areas where incentives might be applied: global climate change, solid
and hazardous waste management, and natural resource management.
Endnotes for Section 8
1. For a summary of current pending bills introduced in the 102nd Congress, see U.S.
EPA (November 1991).
2. U.S. EPA (March 1991).
3. Wirth and Heinz (1988).
4. Wirth and Heinz (1991).
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9. FOREIGN EXPERIENCE WITH INCENTIVE SYSTEMS
A number of economic incentives have been implemented to control pollution in
foreign countries. It is beyond the scope of this report to provide a detailed description
of each of these incentives, but this section contains an overview of charges, deposit-
refund systems, subsidies, product labelling schemes, and marketable permit systems
used as environmental policy instruments outside the United States for the purpose of
providing perspective on the U.S. experience. Although this section in general does not
include economic instruments that have been proposed but not adopted, it does describe
a few proposals whose acceptance appears imminent. The incentives are under the
same general headings as in earlier sections.
9.1. FEES, CHARGES, AND TAXES
An effluent charge is a fee based on the quantity and/or quality of pollutants
discharged into the environment. A user charge is a fee paid in exchange for collection
or disposal of pollutants. The terms "charge," "fee," and "tax" are used interchangeably
throughout this section on foreign experiences with incentives.
9.1.1. Waste
Almost all industrialized countries impose charges on the disposal of waste, but
since most of these charges are relatively low and/or independent of the quantity of
waste generated, they are intended not to influence waste generators' behavior but to
finance waste handling.
Belgium and Denmark have levied charges on solid waste disposal. The magnitude
of the Belgian charge depends on the type of waste and the manner in which it is treat-
ed.1 Denmark recently raised its charge from 40 DK ($6) to 130 DK ($19) per metric
ton.2 Until 1988, the Netherlands levied charges on companies that stored, treated, or
disposed of chemical waste. However, these and other charges were replaced in 1988 by
the Netherlands' general product charge on fuel.3
In 1989, Austria introduced a charge on the disposal and export of hazardous and
non-hazardous wastes. The magnitude of the charge is 40 S ($3.2) per metric ton for
non-hazardous waste and 200 S ($16) per metric ton for hazardous waste.4 It is not
known whether this charge has a significant incentive effect. Numerous German states
have imposed charges on the generation, collection, or disposal of hazardous or non-
hazardous wastes. As is the case in Austria, it is unclear whether the waste taxes have
influenced generators' behavior. However, the German state of Baden-Wiirttemberg's
tax on hazardous waste generation of 50 DM ($29) to 150 DM ($87) per metric ton
appears to be high enough to encourage waste reduction. Baden-Wiirttemberg plans to
double this tax in 1993.5
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
In 1987, the Netherlands imposed a charge on the disposal of manure in an effort to
reduce acid and phosphate pollution caused by manure. Individuals are permitted to
dump the manure equivalent of 125 kg of phosphate per hectare per year free of charge.
Those who dispose of 125 kg to 200 kg of manure per hectare per year must pay a
charge of 0.25 f ($0.13) for every kg over 125 kg. Quantities above 200 kg per hectare
per year are subject to a fee of 0.5 f ($0.25) per kg.6
9.1.2. Air
In France, emissions of hydrochloric acid, sulfur-containing compounds, and
nitrogen oxide-containing compounds are taxed at 150 francs ($25) per metric ton.
Combustion facilities with a maximum thermal power of at least 20 megawatts, burning
sites for household garbage with a capacity of at least three metric tons per hour, and
installations that emit more than 150 metric tons per year of sulfur-containing com-
pounds, nitrogen oxide-containing compounds, hydrochloric acid, non-methane
hydrocarbons, solvents or other volatile organic compounds are subject to the fees.7
Sweden plans to impose taxes on sulfur and nitrogen dioxide emissions. The sulfur
tax is imposed on sulfur in oil, coal, and peat. Strictly speaking, this tax is a product
charge on sulfur in fuel, but since facilities can receive refunds of the tax by using
emissions control equipment, the tax is in effect imposed on emissions. Nitrogen
dioxide emissions will be subject to a tax of 40 SEK ($6.3) per kg by January 1992. Only
furnaces with an annual production of 50 GWh (gigawatt-hours) or more will be subject
to the nitrogen dioxide tax.8
Like Sweden, Portugal taxes sulfur dioxide and nitrogen oxide emissions. It also
taxes emissions of volatile organic compounds. Japan taxes sulfur oxide emissions.9
9.1.3. Water
Water effluent charges have been levied in Australia, Belgium, France, Germany,
Italy, the Netherlands, Spain, and the United Kingdom.10 In addition, almost all
industrialized countries levy water user charges.11 Water effluent and user charges are
primarily used to fund water policy measures rather than to discourage water pollution
or use.
9.1.4. Noise
France, Germany, Japan, the Netherlands, Sweden, Switzerland, and the United
Kingdom have levied fees on noise emissions from aircraft. The Netherlands began
imposing fees on noise emissions from industrial sources in 1983, but these and other
fees were replaced by a general fuel charge in 1988.12 An OECD report notes that most
of these charges have little incentive effect and are intended to raise revenue to finance
noise abatement measures. According to this report, noise pollution is one of the few
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Foreign Experience with Incentive Systems
areas of environmental policy in which the use of economic incentives is declining.
However, noise fees remain in effect at approximately 30 European airports and at most
civil airports in Japan.13 Moreover, Germany intends to modify its tax on cars so that
this tax is positively related to noise emissions.14
9.2.5. Product Charges
Product charges, fees or taxes imposed either on a product or some characteristic of
that product, have been levied in several industrialized countries. Although some of
these product charges may discourage consumption, many of them are intended to
finance the proper disposal of the products after their use. Charges have been imposed
on various products, including batteries, beverage containers, building materials,
chlorofluorocarbons, fertilizer, lead, lubricating oil, pesticides, plastic bags, sulfur, and
tires.
Product charges have been imposed on batteries in Italy, Norway, Sweden, Switzer-
land, and the Canadian province of British Columbia. In Italy, for example, vehicle
batteries are subject to a charge of 1,900 lire ($1.5) and other batteries to a charge of one
percent of their price. The revenue funds the collection of used batteries.15
Various types of beverage containers have been taxed in Denmark, Finland, Germa-
ny, Italy, Norway, Sweden, and Taiwan. In several of these countries, charges on one-
way beverage containers are intended to promote container deposit systems. As
described below, some of these charges, such as the plastic container charge in Italy and
the bottle charge in Taiwan, are used to fund the recycling of used containers.
Denmark levies a fee of 5 kroner ($0.75) per cubic meter on gravel and sand. The
purpose of this charge is to encourage recycling of building materials.16 Denmark also
imposes product charges on chlorofluorocarbons (ozone-depleting chemicals), disposable
tableware, and light bulbs.17
Product charges have been imposed on fertilizer in Austria, Finland, Norway, and
Sweden. Austria's charge, which was introduced in 1986, is regarded as low, but it has
resulted in a 20 percent decrease in fertilizer use.18
New Zealand levies on fee of NZ$0.066 ($0.039) per gram on lead added to gaso-
line.19 The effect of such a fee is similar to that of preferential taxation of unleaded
gasoline described below.
Lubricating oil is subject to product charges in Finland, France, Italy, and Spain.
Finland, for example, levies a fee on lubricants of 0.25 FIM ($0.06) per kg.20 This and
other product charges on lubricants have little incentive effect, but they provide funds
for used oil collection.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
tioned product charges on batteries, plastic beverage containers, and lubricating oil are
used to fund the otherwise unprofitable activities of collecting used batteries, plastic
containers, and oil. The difference between the cost of collecting these used products
and their reuse value is covered by product charge revenue.34 Several other countries,
including Finland, France, and Spain, use product charges on lubricants to fund used oil
collection.35 Taiwan uses taxes on bottles and tires to fund the collection and reuse of
these products.36
The United Kingdom uses subsidies to encourage farming practices that minimize
nitrate pollution of water. In ten areas with high concentrations of nitrate in water,
farmers who alter their use of land and fertilizer qualify for payments of 55-95 pounds
($32-56) per hectare per year. The payment fanners receive depends on the earnings
they forgo to adopt the environmentally friendly land and fertilizer use practices
suggested by the government. Those who take arable land out of production qualify for
additional compensation, the magnitude of which depends on factors such as the
amount and location of the land. Farmers are not required to participate in this scheme,
but most have chosen to do so.37
Another economic incentive that could be considered a subsidy is preferential
taxation. Examples of preferential taxation are presented above in the section on
product charges.
9.4.2. Product Labelling
The role of product labelling in environmental policy is to inform consumers of the
influence of products on the environment. Products that are believed to have environ-
mental advantages could bear labels indicating that they are environmentally friendly.
Products that are thought to be harmful to the environment could bear labels indicating
that they are environmentally unfriendly.
Canada, Finland, France, Germany, Japan, Norway, and Sweden practice environ-
mental product labelling. These labelling systems vary in extent and in criteria used to
determine products' environmental friendliness. Austria, the Netherlands, and New
Zealand are developing environmental labelling systems.38 Under Germany's Blue
Angel labelling system, which was started in 1978, about 3,500 products, including non-
CFC spray cans and retread tires, have received an environmental label of approval.39
Under France's labelling system, which was introduced in 1991, products are being
evaluated based on energy use, waste generation, and pollution during their entire life
cycle. The first products to be considered for labelling are batteries, paints, varnishes,
insulation, and plastic garbage bags.40
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Foreign Experience with Incentive Systems
deposit relative to the retail price of the beverage could be a more important determi-
nant of incentive effect than the absolute magnitude of the deposit.29
Sweden's refundable deposit on aluminum beverage cans provides evidence of the
incentive effect of deposits. After a deposit of ECU 0.04 ($0.048)30 was imposed on cans
in 1983, the percentage of cans returned was 60-70 percent After the magnitude of the
deposit was doubled in 1987, the percentage of cans returned increased to over 80
percent.
Norway and Sweden impose deposits on car hulks. In both countries, the initial
deposit is lower than the refund. In Norway, where the deposit was ECU 130 ($156) in
1988, over 90 percent of cars are returned. In Sweden, where the deposit was ECU 35
($42) and the refund ECU 42 ($50), the percentage of cars returned was under 50
percent. According to an OECD report, a large number of Swedish motorists did not
return their cars because their spare parts and scrap were worth more than the refund.
To encourage more motorists to return their vehicles, the government recently raised the
deposit and the refund.31
Deposits have been considered for a number of other goods, but few of these have
been implemented. However, Austria recently introduced a deposit system for certain
types of lamps.32
9.3. TRADING SYSTEMS
The use of marketable permits in environmental protection is more common in the
United States than in other industrialized countries. Marketable permit systems have
been studied in Europe, but few have been implemented. However, Germany has a
marketable permit system for air emissions. The establishment of new sources of air
emissions is in most cases prohibited in areas where air quality is especially poor, but
firms may build new facilities if air pollution from nearby existing sources is reduced
so that combined emissions in the area are lower after the construction of the new
facility. Under the system, firms emitting air pollutants can negotiate to determine who
will reduce emissions. Under another marketable permit scheme in Germany, a firm
seeking to renovate a facility can receive an exemption from the requirement to obtain
a renovation license if it and nearby polluters can achieve a significant reduction in
combined emissions.33
9.4. OTHER INCENTIVES
9.4.1. Subsidies
Various industrialized countries subsidize activities that are thought to protect the
environment. Such subsidies, which include grants, soft loans, and tax allowances, are
often financed by charges such as those described above. For example, Italy's aforemen-
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Fees have been levied on pesticides in Denmark, Finland, Norway, and Sweden. In
Denmark, for example, pesticides sold in small containers are subject to a 20 percent
product charge.21
Italy levies a tax of 100 lire ($0.077) on plastic bags that are less than 90 percent
biodegradable. An OECD report notes that since this tax is about five times as high as
the cost of manufacturing taxable plastic bags, it is likely to have a significant incentive
impact22
Norway imposes a fee on the sulfur content of oil.23 Sweden has a similar sulfur
charge, but since refunds of the charge are available if emissions are controlled, this
charge is regarded as an emissions tax and is discussed above.
Product charges have been imposed on tires in Taiwan and in the Canadian
provinces of British Columbia and Ontario. These charges fund tire collection projects.24
Finland, the Netherlands, Norway, and Sweden have imposed carbon taxes, product
charges on fossil fuels based on their carbon content. For example, Finland imposed a
fuel tax of FIM 24,5 ($5.8) per metric ton of carbon.25 Denmark, Germany, and Japan
also plan to introduce carbon taxes. The purpose of these taxes is to reduce the buildup
of carbon dioxide in the atmosphere.
Another form of product charge adopted in several countries is preferential taxation.
Canada, Singapore, and most European countries tax leaded gasoline at a higher rate
than unleaded gasoline. In Austria, Denmark, Finland, Germany, Greece, Japan, the
Netherlands, and Norway, motor vehicles are taxed according to their air pollution
characteristics. "Cleaner" vehicles receive preferential taxation. Germany's tax on cars
is also positively related to cars' noise emissions.26 Japan grants preferential taxation not
only to cleaner cars but also to various pollution abatement facilities and low polluting
products.27 According to an OECD report, the fact that sales of clean cars have exceed-
ed expectations in some countries could be attributed to preferential taxation.28
9.2. DEPOSIT-REFUND SYSTEMS
Perhaps the most common application of deposit-refund systems is the management
of beverage containers, which are subject to refundable deposits in a number of coun-
tries. Some beverage container deposits are levied voluntarily by industry. The types
of containers and beverages for which deposits are used vary from country to country.
Deposits have been used for glass and plastic containers and for beverages such as beer,
soft drinks, milk, liquor, and wine. The percentage of containers returned for reuse is
approximately 90 percent in Finland, 70-90 percent in Norway, 80 percent in the
Netherlands, and 90 percent in Sweden. Although deposit payments on soft drink and
beer containers are lower than deposits on other containers, the percentage of containers
returned is higher for soft drinks and beer. This suggests that the magnitude of the
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Foreign Experience with Incentive Systems
9.5. CONCLUSIONS
A few general observations can be made on the use of economic incentives in
environmental management outside the United States:
Charges tend to be revenue-raising instruments with little incentive impact. The lack
of incentive impact of charges is due primarily to their low magnitude. Another reason
is that some charges are not closely linked to waste generation or product consumption.
However, a number of the charges described above appear to have significant incentive
effects.
The United States to some extent differs from other countries in its mix of economic
instruments. For example, the United States uses many more marketable permit
systems than other countries, but it uses much less environmental labelling.
Official interest in economic instruments appears to be increasing both in the United
States and in other countries. Six countries have official task forces studying the
feasibility of economic instruments, and a number of countries have stated mat they
plan to increase their use of economic instruments.41
Endnotes for Section 9
1. Organization for Economic Cooperation and Development (hereafter referred to as
OECD) (1989), p. 45.
2. OECD (1991), p. 7. Unless otherwise stated, national currencies are converted into
U.S. dollars at the exchange rates of August 23,1991, as listed on page C-17 of the Wall
Street Journal of August 26, 1991.
3. OECD (1989), p. 45.
4. OECD (1991), p. 5.
5. Landesabfallabgabengesetz, Article 4.
6. International Environment Reporter (hereafter referred to as IER), Vol. 14, June 19,1991,
p. 350.
7. Decree 90-389, May 11, 1990; Arreti du 11 mai 1990 relatif a la taxe parafiscale sur la
pollution atmospherique.
8. OECD (1991), pp. 18-19.
9. de Savornin Lohman (1991), Annex Table 3.
10. OECD (1991).
11. OECD (1989), p. 51.
12. Ibid,, pp. 47-49.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
13. OECD (1991a), pp. 33-35.
14. OECD (1991), p. 11.
15. IER, Vol. 14, February 13,1991, p. 71.
16. OECD (1991), p. 7.
17. de Savornin Lohman (1991), Annex Table 6.
18. Ibid., p. 5.
19. Ibid., p. 15.
20. Lohof (1991), p. 38.
21. OECD (1991), p. 7.
22. OECD (1989), p. 58.
23. OECD (1991), p. 16.
24. IER, Vol. 13, January 1990, p. 5; IER, Vol. 14, January, 16,1991, p. 32.
25. OECD (1991), p. 8.
26. Ibid., p. 11.
27. Ibid., p. 13.
28. OECD (1989), p. 116.
29. Ibid., p. 87.
30. The magnitude of this deposit is expressed in ECU (European Currency Units)
because the source of this information, OECD (1989) expresses monetary values in this
currency. All monetary values in this report expressed in ECU were taken from this
report. The ECU rate of exchange used in this report, $1.2 per ECU, is that of August
26,1991.
31. OECD (1989), pp. 82-87.
32. OECD (1991), p. 5.
33. OECD (1989), pp. 97-98.
34. IER, Vol. 14, February 13,1991, p. 71.
35. Lohof (1991), p. viii.
36. IER, Vol. 13, January 1990, p. 5.
37. IER, Vol. 14, June 19,1991, pp. 346-347.
38. IER, Vol. 14, June 19, 1991, p. 332.
39. U.S. EPA (1991), pp. 5.23-5.24.
40. IER, Vol. 14, February 27, 1991, p. 112.
41. de Savornin Lohman (1991), p. 7
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10. CONCLUSIONS
At least 40 different economic incentive mechanisms are currently being used in the
United States. They are being used at many levels of government from individual
towns to the Federal Government. Some of them have multiple applications in different
states or cities. Although it would be desirable to to be able to summarize the cost
savings from their use, the financial consequences to individual economic sectors, and
the environmental effects of each of these mechanisms, the available evidence provides
significant information only on the cost savings.
Over 20 quantitative comparative studies have been done, all of which indicate that
economic incentives should be much more economically efficient than command-and-
control approaches for controlling environmental pollution. The differences in efficiency
are quite large, but it must be kept in mind that some studies have concluded that the
cost savings actually realized fall well short of the potential indicated by these compari-
sons. There is very little evidence available on the environmental effects of economic
incentives. Although incentives are being increasingly used, they have not always been
implemented in the ways advocated by economists. Not surprisingly, therefore, the
results have sometimes fallen short of what economists hoped for. A review of the
principal types of incentives suggest several reasons for this result.
Revenue goals have been the principal driving force behind many of the charge-
based incentive mechanisms. Fees and charges, with few exceptions, have not been set
equal to marginal treatment cost, let alone the theoretically more defensible and
generally higher values determined by the marginal damages the pollution causes. In
other words, fees and charges generally have been too low to have a true incentive
effect. In situations where fees and charges approximate marginal treatment cost,
surprisingly little analysis exists concerning their impact. Areas where such analysis
could be productive include (1) the impact of state effluent discharge permit fees that
vary by toxicity and volume, (2) the impact of POTW user fees on industrial users'
discharge, (3) the impact of existing pricing mechanisms for commercial and industrial
generators of solid and hazardous waste, and (4) further studies on per-can pricing of
household waste.1
Among the market-based trading systems with which there is experience, only the
lead phase down example can be termed a full success. Other emission and effluent
trading systems are subject to severe regulatory constraints that have raised barriers to
trading. With the exception of lead trading, actual cost savings have fallen far short of
originally projected amounts. If, as seems likely, the United States will rely heavily in
the near future on market-based trading of pollution reduction credits or allowances,
this suggests the importance of assuring that unnecessary constraints are not imposed
in future applications.
Deposit-refund systems are used for several products at the state level and in
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Europe. Beverage container deposits appear to be effective in reducing litter. With the
exception of beverage container deposits, however, there is only limited knowledge of
impact and virtually no analysis of costs and benefits.
Several programs that act solely to provide information appear to be having great
impact. Many firms have made public announcements of a corporate commitment to
reduce pollution voluntarily in response to reports filed under SARA Title III. One
attractive feature of information requirements is that response is highly flexible;
corporations are free to do nothing or to seek pollution reductions as they see fit.
Where pollution reduction can be achieved at reasonable cost, many corporations see it
in their self interest to make those efforts.
Liability mechanisms can and do act as incentives. Structuring liability rules to
internalize the cost of pollution, without deviating from this objective by a wide margin,
may be difficult to accomplish, if the experience with natural resource damage assess-
ment is any guide.
Finally, a review of the use of economic incentives outside the United States suggests
a somewhat different mix of incentive mechanisms but somewhat similar conclusions as
to their effectiveness and efficiency as in the United States. The United States uses
many more marketable permit systems than European countries, but much less environ-
mental labelling. Although charges and fees are used more widely in Europe, they also
tend to be revenue-raising instruments with few incentive impacts, as in the United
States. The lack of incentive impact of charges is due primarily to their low magnitude
and because a number of the charges are not closely linked to waste generation or
product consumption. As in the United States, however, official interest in economic
incentives appears to be increasing in Europe.
Endnotes for Section 10
1. It should be noted that the EPA Office of Water is examining effluent fees and
various pollutant trading systems to support the Clean Water Act reauthorization
process.
10-2 July
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APPENDIX A. BIBLIOGRAPHY
ADMINISTRATOR'S PREFACE
U.S. Environmental Protection Agency. November 1990. Environmental Investments: The
Cost of a Clean Environment, Report of the Administrator of the Environmental Protection
Agency to the Congress of the United States. Report No. EPA-230-11-90-083. Washington,
D.C. A summary is available as: Alan Carlin with the assistance of the Environmental.
Law Institute. December 1990. Environmental Investments: The Cost of a Clean Environ-
ment, A Summary. U.S. EPA Report No. EPA-230-12-90-084. Washington, D.C. Both
reports were republished in 1991 as a combined report by Island Press, Washington,
D.C., and Covelo, CA. A summary of the summary report has been published as: Alan
Carlin, Paul F. Scodari, and Don H. Garner. March 1992. "Environmental Investments:
The Cost of Cleaning Up." Environment. 34(2):12-44.
U.S. Environmental Protection Agency. March 1991. Economic Incentives: Options for
Environmental Protection. Office of Policy, Planning and Evaluation. Washington, D.C.
Section 1: INTRODUCTION
Anderson, Robert C, Lisa A. Hofmann, and Michael Rusin. June 1990. The Use of
Economic Incentive Mechanisms in Environmental Management. Research paper #051.
American Petroleum Institute, Washington, D.C.
Organization for Economic Co-operation and Development (OECD). 1989. Economic
Instruments for Environmental Protection. Paris.
Section 2: ECONOMIC RATIONALE
Anderson, Robert C., Lisa A. Hofmann, and Michael Rusin. June 1990. The Use of
Economic Incentive Mechanisms in Environmental Management. Research Paper #051.
American Petroleum Institute, Washington, D.C.
Atkinson, Scott E. 1983. "Marketable Pollution Permits and Acid Rain Externalities."
Canadian Journal of Economics. 16:704-22.
Atkinson, Scott E. 1983. "Nonoptimal Solutions Using Transferable Discharge Permits:
The Implications of Acid Rain Deposition." In Buying a Better Environment, E. F. Joeres
and M. H. David, eds. University of Wisconsin Press, WI.
Atkinson, Scott E., and Donald H. Lewis. 1974. "A Cost-Effectiveness Analysis of
Alternative Air Quality Control Strategies." Journal of Environmental Economics and
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Atkinson, Scott E., and Donald H. Lewis. 1976. "Determination and Implementation of
Optimal Air Quality Standards," Journal of Environmental Economics and Management.
3:363-80.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Atkinson, Scott E., and Thomas H. Tietenberg. 1982. 'The Empirical Properties of Two
Classes of Designs for Transferable Discharge Permit Markets." Journal of Environmental
Economics and Management 9:101-21.
Atkinson, Scott, and Tom Tietenberg. 1991. "Market Failure in Incentive-Based Regula-
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Cramer, J., J. Schot, F. van den Akker, and G. Maas Geesteranus. April-May-June 1990.
"Stimulating Cleaner Technologies through Economic Instruments: Possibilities and
Constraints." UNEP Industry and Environment. 46-53.
David, Martin, Wayland Eheart, Erhard Joeres, and Elizabeth David. December 1977.
"Marketable Effluent Permits for the Control of Phosphorous Effluent in Lake Michi-
gan." Social Systems Research Institute Working Paper, University of Wisconsin.
Downing, Paul, and L. White. 1986. "Innovation in Pollution Control." Journal of
Environmental Economics and Management. 13:18-27.
Dudek, Daniel and John Palmisano. 1988. "Emissions Trading: Why is This Thorough-
bred Hobbled?" Columbia Journal of Environmental Law. 13:217-56.
Eheart, Wayland, E. Downey Brill, Jr., and Randolph M. Lyon. 1983. "Transferable
Discharge Permits for Control of BOD: An Overview." In Erhard F. Joeres and Martin
H. David, eds., Buying a Better Environment: Cost-Effective Regulation through Permit
Trading. University of Wisconsin Press, Madison, WI.
Hahn, Robert W., and Roger Noll. 1982. "Designing a Market for Tradable Emissions
Permits." In Wesley Magat, ed., Reform of Environmental Regulation. Ballinger. Cam-
bridge, MA, pp. 132-133.
Hahn, Robert. 1989. "Economic Prescriptions for Environmental Problems: How the
Patient Followed the Doctor's Orders." Economic Perspectives. 3(2):95-114.
Hahn, Robert and Gordon Hester. 1989. "Where Did All the Markets Go? An Analysis
of EPA's Emissions Trading Program." Yale Journal on Regulation. 6(l):109-53.
Harrison, David, Jr. 1983. "Case Study 1: The Regulation of Aircraft Noise." In
Thomas C. Schelling, ed., Incentives for Environmental Protection. MIT Press: Cambridge,
MA.
ICF Resources International. 1989. Economic, Environmental and Coal Market Impacts of
SO2 Emissions Trading under Alternative Acid Rain Control Proposals. Report prepared for
the Regulatory Innovations Staff, Office of Policy, Planning and Evaluation, U.S. EPA.
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Bibliography
Johnson, Edwin L. 1967. "A Study in the Economics of Water Quality Management."
Water Resources Research. Vol. 3.
Kneese, Alan, and Charles Schultze. 1978. Pollution, Prices and Public Policy. The
Brookings Institution, Washington, D.C..
Kahn, Robert E. 1978. A Linear Programming Model for Air Pollution Control. MIT Press,
Cambridge, MA.
Krupnick, Alan. 1986. "Costs of Alternative Policies for the Control of Nitrogen
Dioxide int Baltimore." Journal of Environmental Economics and Management. 13:189-197.
Liroff, Richard. 1986. Reforming Air Pollution Regulation: The Toil and Trouble of EPA's
Bubble. The Conservation Foundation, Washington, D.C.
Maloney, Michael T., and Bruce Yandle. 1984. "Estimation of the Cost of Air Pollution
Control Regulation." Journal of Environmental Economics and Management.
McGartland, Albert M. 1984. "Marketable Permit Systems for Air Pollution Control: An
Empirical Study." Ph.D. Dissertation, University of Maryland.
Milliman, S., and R. Prince. 1989. "Firm Incentives to Promote Technological Change
in Pollution Control." Journal of Environmental Economics and Management. 17:247-65.
Nichols, Albert L. 1983. "The Regulation of Airborne Benzene." In Thomas C.
Schelling, ed., Incentives for Environmental Protection. MIT Press: Cambridge, MA.
Gates, Wallace E., Paul R. Portney, and Albert M. McGartland. 1989. "The Net Benefits
of Incentive-Based Regulation: A Case Study of Environmental Standard Setting."
American Economic Review, 75:1223-1242.
O'Neil, William B. 1980. "Pollution Permits and Markets for Water Quality." Ph.D.
Dissertation, University of Wisconsin-Madison.
Opaluch, James ]., and Richard M. Kashmanian. 1985. "Assessing the Viability of
Marketable Permit Systems: An Application in Hazardous Waste Management." Land
Economics, 61:263-271.
Orr, Larry. 1976. "Incentives for Innovation as the Basis of Effluent Charge Strategy."
American Economic Review. 56:441-47.
Palmer, Adele R., William E. Mooz, Timothy H. Quinn, and Kathleen Wolf. June 1980.
Economic Implications of Regulating Chlorofluorocarbon Emissions form Nonaerosol Applica-
tions. Report R-2524-EPA. The RAND Corporation, Santa Monica, CA.
Palmer, Adele R., and Timothy H. Quinn. July 1981. Allocating Chlorofluorocarbon
1992^
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Permits: Who Gains, Who Loses, and What Is the Cost? Report R-2806-EPA. The Rand
Corporation, Santa Monica, CA.
Roach, Fred, Charles Kolstad, Allen V. Kneese, Richard Tobin, and Michael Williams.
1981. "Alternative Air Quality Policy Options in the Four Corners Region." Southwest
Review, l(2):44-45.
Seskin, Eugene P., Robert J. Anderson, Jr., and R. O. Reid. 1983. "An Empirical
Analysis of Economic Strategies for Controlling Air Pollution." Journal of Environmental
Economics and Management, 10:112-24.
Shapiro, Michael, and Ellen Warhit. 1983. "Marketable Permits: The Case of Chloro-
fluorocarbons." Natural Resources Journal 23:577-591.
South Coast Air Quality Management District (SCAQMD). January 1992. "Marketable
Permits Program." Working Paper #5: Air Quality Assessment and Sodo-Economic
Inputs.
South Coast Air Quality Management District. Spring 1992. Regional Clean Air Incen-
tives Market. Diamond Bar, California.
Spofford, Walter O., Jr. February 1984. "Efficiency Properties of Alternative Source
Control Policies for Meeting Ambient Air Quality Standards: An Empirical Application
to the Lower Delaware Valley." Unpublished Resources for the Future discussion paper
D-118.
Tietenberg, T. H. 1985. Emissions Trading: An Exercise in Reforming Pollution Policy.
Resources for the Future, Washington, D.C.
Tietenberg, T. H. 1990. "Economic instruments for Environmental Protection." Oxford
Review of Economic Policy. 6:17-33.
U.S. Environmental Protection Agency. April 2, 1985. "Regulation of Fuels and Fuel
Additives; Banking of Lead Rights." 50 Federal Register, pp. 13116-28.
Wenders, J.T. 1975. "Methods of Pollution Control and the Roots of Changing Pollu-
tion Abatement Technology" Water Resources Research. 11:393-96.
Zerbe, R.B. 1970. "Theoretical Efficiency in Pollution Control." Western Economic
Journal. 8:364-76.
Section 3: FEES, CHARGES, AND TAXES
Anderson, Robert C, Lisa A. Hofmann, and Michael Rusin. June 1990. The Use of
Economic Incentive Mechanisms in Environmental Management. Research Paper #051.
American Petroleum Institute, Washington, D.C.
A-4 July
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Bibliography
Apogee Research, Inc. October 23, 1991. Incentive Analysis for CWA Reauthorization:
Point Source/Nonpoint Trading for Nutrient Discharge Reductions. Prepared for EPA Office
of Water.
Lohof, Andrew. January 1991. Used Oil Management in Selected Industrialized Countries.
Discussion Paper #064. American Petroleum Institute, Washington, D.C.
Shapiro, Michael, and Ellen Warhit. 1983. "Marketable Permits: The Case of Chloro-
fluorocarbons." Natural Resources Journal. 23:577-591.
Sims, William A. 1977. Economics of Sewer Effluent Charges. Ph.D. Thesis, Political
Economy, University of Toronto.
Section 4: DEPOSIT-REFUND SYSTEMS
Porter, Richard C. 1978. "A Social Benefit-Cost Analysis of Mandatory Deposits on
Beverage Containers." Journal of Environmental Economics and Management. 5:351-75.
Section 5: TRADING SYSTEMS
Anderson, Robert C., Lisa A. Hofmann, and Michael Rusin. June 1990. The Use of
Economic Incentive Mechanisms in Environmental Management. Research Paper #051.
American Petroleum Institute, Washington, D.C.
Apogee Research, Inc. October 23, 1991. Incentive Analysis for CWA Reauthorization:
Point Source/Nonpoint Source Trading for Nutrient Discharge Reductions. Prepared for
Office of Water, U.S. Environmental Protection Agency.
Aspen/Pitkin Environmental Health Department. Undated. "Procedures for Stove or
Fireplace Variances."
Creekmore, Andrew T. 1989. "Emission Trades for Sources of Volatile Organic Com-
pounds." Air and Waste Management Association Annual Meeting.
Dudek, Daniel J., and John Palmisano. 1988 "Emissions Trading: Why is this Thor-
oughbred Hobbled?" Columbia Journal of Environmental Law. 13:217-56.
Hahn, Robert W., and Gordon L. Hester. 1989. "Where Did All the Markets Go? An
Analysis of EPA's Emissions Trading Program." Yale Journal on Regulation. 6(l):109-53.
ICF Resources International. 1989. Economic, Environmental, and Coal Market Impacts of
SO2 Emissions Trading under Alternative Acid Rain Control Proposals. Report prepared for
the Regulatory Innovations Staff, Office of Policy, Planning and Evaluation, U.S. EPA.
Maryland-National Capital Park and Planning Commission. October 1980. Functional
Master Plan for the Preservation of Agriculture and Rural Open Space in Montgomery County.
1992 A-5
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Maryland-National Capital Park and Planning Commission. 1990. Plowing New Ground.
Revised Edition.
Montgomery County Planning Department. June 1991. 'The Feasibility of Extending
TDR Zoning to Include Multi-Family Densities." Draft.
O'Neill, William, Martin David, Christina Moore, and Erhard Joeres. 1983. 'Transfera-
ble Discharge Permits and Economic Efficiency: The Fox River." Journal of Environmental
Economics and Management. 10:346-55.
Shapiro, Michael, and Ellen Warhit. 1983. "Marketable Permits: The Case of Chloro-
fluorocarbons." Natural Resources Journal. 23:577-591.
Tar-Pamlico Basin Association. Revised February 13,1992. "Tar-Pamlico NSW Imple-
mentation Strategy."
Tripp, James T.B., and Daniel J. Dudek. Summer 1989. "Institutional Guidelines for
Designing Successful Transferable Rights Programs. Yale Journal on Regulation.
U.S. Environmental Protection Agency. December 6,1973. "Control of Lead Additives
in Gasoline." 38 Federal Register, pp. 33734-41.
U.S. EPA. December 21,1976. "Requirements for Preparation, Adaption, and Submittal
of Implementation Plans." 44 Federal Register, p. 55524.
U.S. EPA. December 11, 1979. "Air Pollution Control: Recommendations for Alterna-
tive Emission Reduction Options within State Implementation Plans." 44 Federal
Register, p. 71780.
U.S. EPA. August 8,1988. "Protection of Stratospheric Ozone: Final Rule" 53 Federal
Register, pp. 30566-619.
U.S. EPA. January 16, 1979. "Requirements for Preparation, Adaption, and Submittal
of Implementation Plans." 44 Federal Register, pp. 3274-86.
U.S. EPA. August 7,1980. "Requirements for Preparation, Adaption, and Submittal of
Implementation Plans; Approval and Promulgation of Implementation Plans." 45
Federal Register, pp. 52676-748.
U-S. EPA. December 8, 1980. "Compliance with VOC Emission Limitations for Can
Coating Operations." 45 Federal Register, p. 80824.
U.S. EPA. April 7, 1982. "Emissions Trading Policy Statement; General Principles for
Creation, Banking, and Use of Emission Reduction Credits." 47 Federal Register, pp.
15976-86.
A-6
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Bibliography
U.S. EPA. July 29,1982. "Emissions Trading Policy Statement; General Principles for
Creation, Banking, and Use of Emission Reduction Credits." 47 Federal Register, pp.
32780.
U.S. EPA. October 29, 1982. "Regulation of Fuels and Fuel Additives." 47 Federal
Register, pp. 49322-34.
U.S. EPA. August 31, 1982. "Emissions Trading Policy Statement; General Principles
for Creation, Banking, and Use of Emission Reduction Credits." 48 Federal Register, pp.
39580-39586.
U.S. EPA. August 2, 1984. "Regulation of Fuels and Fuel Additives; Lead Phase
Down." 49 Federal Register, pp. 31032-50.
U.S. EPA. March 7, 1985a. "Regulation of Fuels and Fuel Additives; Gasoline Lead
Content." 50 Federal Register, pp. 9386-99.
U.S. EPA. April 2, 1985. "Regulation of Fuels and Fuel Additives; Banking of Lead
Rights." 50 Federal Register, pp. 13116-28.
U.S. EPA. December 4,1986. "Emissions Trading Policy Statement; General Policies for
Creation, Banking, and Use of Emission Reduction Credits; Final Policy Statement and
Accompanying Technical Issues Document." 51 Federal Register, pp. 43814-60.
U.S. General Accounting Office. 1982. A Market Approach to Air Pollution Control Could
Reduce Compliance Costs without Jeopardizing Clean Air Goals.
Section 6: OTHER INCENTIVES
Baram, Michael S., Patricia S. Dillon, and Betsy Ruffle. May 1990. Managing Chemical
Risks: Corporate Response to SARA Title III. The Center for Environmental Management,
Tufts University.
Draper, Jack A. II, and Mark D. Johnson. 1989. "California Proposition 65: Current
Status and Preventive Law Responses." Air and Waste Management Association annual
meeting, Paper 98-76.4.
Glenn, J. January 15-17,1992. "Louisiana Environmental Scoring System/Property Tax
Exemptions." In U.S. Environmental Protection Agency, Innovative Regulatory Strategies
Workshop: Market-Based Incentives and Other Innovations for Air Pollution Control. Spon-
sored by Air Quality Management Division, Office of Air and Radiation, and Regulatory
Innovations Staff, Office of Policy, Planning and Evaluation. Washington, D.C.
Larson, Douglas M., Gloria E. Helfand, and Brett W. House. 1992. 'Toxics Regulation
and the Burden of Proof: Lessons from California's Proposition 65." Paper presented at
annual meeting of the Association of Environmental and Resource Economists, New
1992 A-7
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
Orleans, LA.
Menell, Peter S. 1991. 'The Limitations of Legal Institutions for Addressing Environ-
mental Risks." Journal of Economic Perspectives. 5(3):93-113.
Ramonas, Lori M. 1989. "SARA Section 313 Emissions Inventory Information: Potential
Impact on Liability." Air and Waste Management Association annual meeting, Paper
89-61.6.
U.S. Congress, Congressional Budget Office. 1985. Efficient Investment in Wastewater
Treatment Plants.
U.S. Congress, Congressional Budget Office. September, 1988. New Directions for the
Nation's Public Works.
Section 7: NEW INCENTIVE SYSTEMS PROPOSED BUT NOT YET ADOPTED
Schroeer, William L. 1991. "Accelerated Retirement." EPA Information Document.
South Coast Air Quality Management District. Spring 1992. Regional Clean Air Incen-
tives Market. Diamond Bar, California.
Unocal Corporation. 1991. "SCRAP: A Clean Air initiative from Unocal."
Section 8: SOME OTHER INCENTIVES THAT HAVE BEEN SUGGESTED
U.S. EPA. March 1991. Economic Incentives: Options for Environmental Protection. Office
of Policy, Planning and Evaluation. Washington, D.C.
U.S. EPA. November 1991. "Economic Incentives in Pending Environmental Legisla-
tion, 102nd Congress." Regulatory Innovations Staff, Office of Policy, Planning and
Evaluation. Washington, D.C.
Wirth, Senator Timothy, and Senator John Heinz. 1988. Project 88, Harnessing Market
Forces to Protect the Environment: Initiatives for the New President. Washington, D.C.
Wirth, Senator Timothy, and Senator John Heinz. May 1991. Project 88-Round II:
Incentives for Action: Designing Market-Based Environmental Strategies. Washington, D.C.
Section 9: FOREIGN EXPERIENCE
Information on foreign experiences with economic incentives in environmental policy
can be found in a 1989 OECD publication entitled Economic Instruments for Environmental
Protection. This work has been updated by two less thorough studies: "Recent Develop-
ments in the Use of Economic Instruments for Environmental Protection in OECD
Countries," is based on information available in October 1990. "Financial Instruments
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Bibliography
and Economic Incentives in OECD-Countries" describes economic incentives that had
been proposed or adopted as of mid-1991. Economic incentives used to discourage
noise pollution are described in Fighting Noise in the 1990s. The International Environment
Reporter, a periodical, also contains articles on economic incentives in environmental
management. The specific sources are as follows:
de Savornin Lohman, A.F. 1991. "Financial Instruments and Economic Incentives in
OECD-Countries." Unpublished paper, Institute for Environmental Studies, Free
University of Amsterdam.
International Economic Reporter, various issues.
Lohof, Andrew. January 1991. Used.Oil Management in Selected Industrialized Countries.
Discussion Paper #064. American Petroleum Institute, Washington, D.C.
Organization for Economic Co-operation and Development (OECD). 1989. Economic
Instruments for Environmental Protection. Paris.
OECD. February 1991. "Recent Developments in the Use of Economic Instruments for
Environmental Protection in OECD Countries." OECD Environment Monographs 41.
OECD. 1991a. Fighting Noise in the 1990s. Paris.
U.S. EPA. March 1991. Economic Incentives: Options for Environmental Protection. Office
of Policy, Planning and Evaluation. Washington, D.C.
Appendix B. ECONOMIC INCENTIVE ASPECTS OF THE CLEAN AIR ACT AMEND-
MENTS OF 1990
Elman, Barry S., Tom Tyler, and Michael Doonan. , June 1992. "Economic Incentives
under the New Clean Air Act." Paper No. 92-176.05, 85th Annual Meeting, Air and
Waste Managment Association, Kansas City, Missouri.
U.S. EPA. January 15,1991. Implementation Strategy for the Clean Air Act Amendmnents
of 1990. Office of Air and Radiation. Washington, D.C.
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
A-10 July
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APPENDIX B. ECONOMIC INCENTIVE ASPECTS OF THE CLEAN
AIR ACT AMENDMENTS OF 1990
The Clean Air Act Amendments of 1990 include provisions in all major air quality
programs. This Appendix will briefly summarize these provisions by Title,1 with
emphasis on those not discussed in the text of the report; where they are discussed in
the text, references will be given to the sections involved.
Title I of the Amendments concerns the attainment of National Ambient Air Quality
Standards (NAAQSs) for criteria pollutants. Incentive mechanisms appear in several
places within this Title. First, sections 110(a)(2) and 172(c)(6) provide general authori-
zation for states to use economic incentives as part of their air quality plans.
Second, section 182(g)(4) mandates the use of incentive-based programs in extreme
ozone and serious carbon monoxide nonattainment areas that fail to meet applicable air
quality milestones or certain other requirements. Incentive programs are optional in
other areas. In developing its guidance under section 182(g)(4), EPA intends to define
incentive programs very broadly—to include permits, subsidies, public awareness and
education programs, and transportation control measures. Further, in addition to
addressing situations where the use of incentive programs is mandated, this guidance
will encourage the discretionary use of incentive programs by states as an integral part
of their air quality plans. The South Coast Basin Marketable Permits Proposal (des-
cribed in Section 7.1 of this report), is one of many discretionary economic incentive
programs currently being developed around the country.
Third, section 183 of Title I gives EPA explicit authority to consider the use of
economic incentives, including marketable permits and auctions of emission rights, as
one of its regulatory options for reducing emissions from consumer and commercial
products. EPA is currently exploring this option.
Finally, section 185 of Title I pertains to the use of emission fees in severe and
extreme ozone nonattainment areas that do not meet attainment deadlines. Severe
ozone nonattainment areas are given 15 to 17 years to attain the ozone NAAQS; extreme
areas (currently just California's South Coast Air Quality Management District) are
given 20 years. Failure to attain by these schedules will subject major stationary sources
in these areas to fees on VOC emissions. These fees are set by statute at $5,000 (as
adjusted for inflation) for each ton of VOC emitted that exceeds 80 percent of a baseline
quantity. (A more detailed discussion of this provision can be found in Section 3.4.2 of
this report).
Title II tightens mobile source tailpipe emission standards and provides for the
development of new and reformulated fuels. Incentive mechanisms appear as market-
able credits for fuel characteristics (described in Section 5.2.2 of this report) and a
California pilot program for dean fuel vehides and dean alternative fuels which allows
1992
B-l
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The U.S. Experience with Economic Incentives to Control Environmental Pollution
credits for companies that exceed their requirements (described in Section 5.2.3). Title
II also includes a marketable credit program for certain vehicle fleet operators who
exceed requirements for the use of dean fuel vehicles.
Title III substantially revises existing authorities to regulate hazardous air pollutants.
Section 112(i) allows firms to obtain six-year waivers of emission limits for hazardous
emissions set under section 112(d). (For a more detailed discussion, see Section 5.4.4 of
this report.) Section 112(g) concerns hazardous air pollutant sources that undergo
modifications that result in increased hazardous air pollutant emissions. Such sources
may avoid new source review and its tighter standards by offsetting these emissions
"by an equal or greater decrease in a more hazardous pollutant."
Title IV establishes a market-based acid rain control program, under which coal-fired
electric power plants will greatly reduce their sulfur dioxide emissions (see Section 5.2.1.
of this report).
Title V mandates that requirements of the Act be listed in state-issued permits
specific to individual sources. Permits will cost at least $25 per ton, providing some
incentive effect. Additionally, the identification of Clean Air Act requirements in
individual permits will facilitate permit review and make possible greater use of other
incentive mechanisms.
Finally, Title VI provides for the transfer of production allowances for chlorofluoro-
carbons (see Section 5.2.4 of this report).
Endnotes for Appendix B
1. For a more complete description of the economic incentives under the Act, see Elman
(1992). For a description of the Agency's strategy for implementation of these incen-
tives, see U.S. EPA (1991).
B-2 July
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