United States
            Environmental Protection
             Policy, Planning,
             And Evaluation
March 1991
Economic Incentives
Options For
Environmental Protection


           Report  of the

U.S. Environmental Protection Agency
   Economic Incentives Task Force
              March  1991


                        TABLE OP CONTENTS


     Why Pursue Economic Incentives 	c	1-1
     Traditional "Command-and-Control"  Regulations 	1-1
     Use of Economic Incentives in the U.S 	1-2
     International Experience with Economic Incentives	1-2
     Criteria for Evaluating Incentives 	1-4


     Introduction	2-1
     Volume Based Pricing of Municipal Waste Services	2-7
     Incentives to Recycle Scrap Tires 	2-13
     Deposit/Refund System for Lead-Acid Batteries 	2-18
     Credit System or Deposit/Refund System for Used Oil	2-22
     Other MSW Incentives 	2-27


     Introduction	3-1
     Fee on Carbon Content in Fossil Fuels 	3-4
     International Trading of Greenhouse
     Gas Emission Rights 	3-7
     Incentives to Encourage Electricity Conservation	3-11
     "Sipper/Guzzler" Rebate/Fee 	*	3-17


     Introduction 	4-1
     Changes in the Pricing of Water 	4-6
     Deposit/Refund or Tax/Rebate System
     for Pesticide Containers	4-10
     Reduction of Federal Subsidies Encouraging
     Development in Coastal Areas 	4-14


     Introduction	5_1
     Fees on VOC Emissions from Major Stationary Sources	5-5
     Market Incentives to Reduce Consumer and
     Commercial Use of Solvents 	5-10
     Deposit/Refund System for Chlorinated Solvents 	5-18
     Labeling of "Environmentally Responsible" Products	5-22
     Marketable Permit or Surcharge System for Lead	5-26
     Charge on TRI Releases 	5-3 o
     Reduction of Federal Subsidies Encouraging
     Virgin Material Use	5-33
     Federal Procurement Policy Initiatives	5-38

                     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 backed up by the
threat of enforcement actions.

     Yet 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 or many long-
established environmental goals.  A number of persistent,
seemingly intractable problems remain.  Whereas in the past we
focused mainly on controlling pollution from large, industrial
sources, we are now confronted by environmental concerns that
stem from a diverse range of products and activities.  Some of
these new problems are global in scope, such as stratospheric
ozone depletion and global climate change.  These kinds of
problems typically are less amenable to traditional command-and-
control approaches than are large, industrial sources.

     To maintain progress toward our environmental goals, we must
move beyond a prescriptive approach by adding innovative policy
instruments such as economic incentives.  Properly employed,
economic incentives can be a powerful force for environmental

     Because economic incentives influence rather than dictate
action, consumers and businesses can make their own choices.
Economic incentives can stimulate private firms and individuals
to take actions that serve their economic interests while
spurring progress on environmental goals.  When designed
properly, economic incentives harness the marketplace to work for
the environment.

     Consideration of economic incentives could not be more
timely.  Another EPA report ("Environmental Investments:  The
Cost Of A Clean Environment", 1990) makes clear that the
proportion of U.S GNP devoted to environmental protection is
projected to grow significantly  (from about 1.7 percent in 1990
to nearly 3 percent) by the year 2000.  Most of these costs will
be borne by the private sector.  Only a handful of other
countries — The Netherlands, and perhaps Canada and Germany —
spend a similar proportion of their Gross National Product on
environmental protection.

     This level of expenditures thus raises important issues for
maintaining U.S. competitiveness in the global economy.
Nevertheless, I don't for a moment believe that we should pull
back from our environmental commitments.  After all, the benefits


of environmental protection are substantial.  Yet I have
concluded that, as we pursue our environmental goals, we must do
so in the most cost-effective manner.  Today, economic incentives
offer an historic opportunity to help reconcile the nation's
economic and environmental agendas.

     EPA has used 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 wisdom of using
economic incentives has also been recognized by both the Bush
Administration and Congress.  The Clean Air Act Amendments
proposed by the President and adopted by Congress, for instance,
contain a market-based acid rain program that would allow
utilities to buy or sell emission "allowances" to achieve
compliance at reduced cost.

     Mindful of the advantages of economic incentives, when I
arrived at EPA, early in 1989, I asked the staff to identify ways
economic incentives could be used to improve environmental
protection.  The Economic Incentives Task Force drew upon the
experience and expertise of every program in EPA to develop and
evaluate a broad array of incentive proposals.  Drafts of the
report also•benefitted substantially from review by our
colleagues in other agencies.  Needless to say, however, the
final text is a product of the Environmental Protection Agency.

     I want to stress that this report does not endorse any
particular proposal.  Nor is EPA prepared now to render judgement
on the effectiveness of any specific incentive.  Rather, I hope
the report will stimulate a continuing dialogue among
policymakers on the role and efficiency of economic incentives in
environmental policy.  The Task Force has tried to advance the
dialogue by examining some of the key design and implementation
issues surrounding the use of each incentive.  I welcome your
                                        William K.

                                        March, 1991

                        TASK FORCE MEMBERS

  Richard Morgenstern, Office of Policy, Planning and Evaluation
           Michael  Shapiro, Office of Air and Radiation
Stephen Allbee      Office
Robert Brenner      Office
Edward Brooks       Office
David Bussard       Office
John Calcagni       Office
Debra Dobkowski     Office
Eugene Durman       Office
Maryann Froehlich   Office
Allen Jennings      Office
Barry Korb          Office
Betsy Laroe         Office
Ralph (Skip) Luken  Office
Henry Schilling     Office
Pam Stirling        Office
Robert Wolcott      Office
       of Water
       of Air and Radiation
       of Toxic Substances
       of Solid Waste
       of Air and Radiation
       of Solid Waste
       of Policy, Planning, and Evaluation
       of Policy, Planning, and Evaluation
       of Pesticides and Toxic Substances
       of Policy, Planning, and Evaluation
       of Water
       of Policy, Planning, and Evaluation
       of Policy, Planning, and Evaluation
       of Policy, Planning, and Evaluation
       of Policy, Planning, and Evaluation
Dan Axelrad
Allen Basala
David Berg
Ron Burke
Alan Carlin
Truett DeGeare
Robert Dellinger
Jim Democker
Terry Dinan
Cynthia Dyballa
Robert Fegley
Joseph Ferrante
Tom Gillis
Terry Grist
Terry Grogan
Tom Hale
John Harris
Van Housman
Drusilla Hufford
Richard Kashmanian
Peter Kuch
Ron McHugh
William McLeod

Office of Pesticides and Toxic Substances
Office of Air and Radiation
Office of Cooperative Environmental Mgmt.
Office of Solid Waste
Office of Policy, Planning, and Evaluation
Office of Solid Waste
Office of Solid Waste
Office of Air and Radiation
Office of Policy, Planning, and Evaluation
Office of Policy, Planning, and Evaluation
Office of Research and Development
Office of Pesticides and Toxic Substances
Office of Policy, Planning, and Evaluation
Office of Solid Waste
Office of Solid Waste
Office of Policy, Planning, and Evaluation
Office of Solid Waste and Emergency Response
Office of Solid Waste
Office of Policy, Planning, and Evaluation
Office of Policy, Planning, and Evaluation
Office of Policy, Planning, and Evaluation
Office of Policy, Planning, and Evaluation
Office of Solid Waste

Greg Michaels       Office
Bill Painter        Office
Hope Pillsbury      Office
Mahesh Podar        Office
Sara Rasmussen      Office
Christine Ruf       Office
Michael Shelby      Office
Nikos Singelis      Office
Sue Slotnick        Office
Kenon Smith         Office
Sharon Stahl        Office
Harriet Tregoning   Office
Bruce Weddle        Office
John Wilson         Office
of Policy, Planning, and Evaluation
of Policy, Planning, and Evaluation
of Solid Waste
of Policy, Planning, and Evaluation
of Solid Waste
of Policy, Planning, and Evaluation
of Policy, Planning, and Evaluation
of Water
of Policy, Planning, and Evaluation
of Pesticides and Toxic Substances
of Policy, Planning, and Evaluation
of Policy, Planning, and Evaluation
of Solid Waste
of Policy, Planning, and Evaluation
Industrial Economics, Inc., assisted in producing certain draft
materials for this report.


Types of Incentive Policies

     Incentive-based policies influence rather than dictate the
actions of the targeted parties.  Incentive-based policies leave
the ultimate choice of action to the affected parties, based on
their own evaluation of the costs and benefits of the action.  By
correcting the incentives faced by private parties to reflect
important social costs as well as private costs, incentives
policies encourage private decisions that more closely
approximate socially optimal outcomes.

     A variety of market-based measures may be used to promote
environmental goals.  These include:

     o    Creation of Markets - creation of tradable government-
          issued privileges to discharge pollutants or use scarce
          environmental resources;  •

     o    Monetary Incentives - methods to change market
          incentives, including direct subsidies, reduction of
          subsidies that produce adverse environmental effects,
          fees, and taxes;

     o    Deposit/Refund Systems - schemes to discourage disposal
          and encourage central collection of specific products:

     o    Information Disclosure - actions to improve existing
          market operations by providing information to
          consumers; and

     o    Procurement Policies - means by which the federal
          government uses  its own buying power to stimulate
          development of markets — e.g., for recycled products.

     The Task Force and its subcommittees compiled a  list of
potential applications of  a wide range of incentive approaches to
address municipal waste management problems, global climate
change, water resources, and multi-media concerns  (see Exhibit
1).  These  approaches include fees, information policies
 (labeling), marketable rights, deposit/refund systems, reduction
of federal  subsidies with  perverse effects, and procurement

     A key  issue  in the design  and analysis of  incentive
policies, as  in the case of traditional regulatory approaches, is
whether the perceived environmental problem is  serious enough to
warrant government  intervention in the first place.   The Task


             EXHIBIT 1


Municipal Solid Waste Incentives

 1. Volume-Based Pricing of Municipal Waste Services
 2. Incentives to Recycle Scrap Tires
 3. Deposit/Refund System for Lead-Acid Batteries
 4. Credit System or Deposit/Refund System for Used Oil
 5. Other MSW Incentive Applications

Global Climate Change Incentives

 1. Fee on Carbon Content in Fossil Fuels
 2. International Trading of Greenhouse Gas
      Emission Rights
 3. Incentives to Encourage Electricity Conservation
 4. "Sipper/Guzzler" Rebate/Fee to Encourage
      Purchases of More Fuel-Efficient Vehicles

Water Resource Incentives

 1. Changes in the Pricing of Water
 2. Deposit/Refund or Tax/Rebate System
      for Pesticide Containers
 3. Reduction of Federal Subsidies Encouraging
      Development in Coastal Areas

Multi-Media Incentives

 1. Local Fees on VOC Emissions from Major Sources
 2. Market Incentives to Reduce Consumer and Commercial
      Use of Solvents
 3. Deposit/Refund System for Chlorinated Solvents
 4. Labeling of "Environmentally Responsible" Products
 5. Marketable Permit or Surcharge System for Lead
 6. Charge on TRI Releases
 7. Reduction of Federal Subsidies Encouraging
      Use of Virgin Materials
 8. Federal Procurement Policy Initiatives

Force was concerned to avoid any possible implication that the
elegance and flexibility of economic approaches allows them to be
applied more indiscriminately than other types of intervention.
Ideally, intervention of all types should be designed to maximize
net social benefits —  i.e., the difference between total
benefits and total costs.

Evaluation Criteria

     The Task Force defined an initial set of criteria for
evaluating the merits of specific incentive-based policies.
These criteria address both the need for government intervention
of any sort, based on the existence of some market failure that
causes socially undesirable use of environmental resources, and
the relative merits of incentive-based and other policy
approaches where intervention is justified.

     Six general criteria were suggested by the Task Force:

     o    Is the environmental problem the result of some
          externality?               .

     o    How significant is the resulting environmental problem?

     o    Which jurisdiction (local, state, or federal
          government) can most effectively address the problem?

     o    Will an incentive-based approach help maximize net
          social benefits?

     o    Is an incentive-based approach feasible?

     o    Will a particular incentive-based policy be effective?

     In many cases, the information required to apply these
criteria to evaluate specific policies is not currently
available.  Therefore, the evaluation of suggested policies
relied heavily on the expert judgment of the Task Force members.
More analysis is needed to assess the merits of each generic
policy, and careful assessment of costs and benefits is a
necessary prerequisite to the identification of specific policy
options.  Absent these analyses, none of the specific policies is
currently recommended for adoption.

     Although every possible incentive approach for each
environmental problem was not considered, the list of policies
was sufficiently diverse to include the major incentive
approaches  in some form.


                                                        CHAPTER 1

     Environmental improvements have been significant over the
last twenty years, but these improvements have come at
significant cost.  Substantial resources have been spent by all
levels of government to develop, administer, and enforce
regulatory programs.  Vastly greater amounts are being spent by
private parties to comply with these regulations.  The high
potential cost of future environmental improvements makes concern
about balancing policy costs and benefits a high priority.

     The need for government policies to achieve environmental
goals derives from the existence of market failures that make
private market solutions less than optimal.  In particular,
environmental policies are needed to .address externalities caused
by a divergence between the private and social costs of
activities that cause environmental damages.  In most cases,
private markets do not exist for environmental resources
 (breathable air, water suitable for drinking or recreation,
etc.).  Private decisions about uses of environmental resources
are, therefore, often not based on the full social cost of those
uses.  Without government intervention, too much activity that
imposes environmental costs and too little investment in
environmental protection will occur.  Generally, elimination of
all externalities is not practical or desirable.  Government
intervention should be designed to encourage the socially optimal
amount of environmental protection.

     For the past two decades, EPA has relied heavily on
traditional regulations to address all forms of pollution.
these regulations have in many cases dramatically improved
environmental quality, in other cases they have not fully
achieved environmental goals, or have done so at costs that are
higher than necessary.  Well-designed, command-and-control
regulations can increase social welfare, if they impose

 requirements only where the benefits of regulatory action
 outweigh the costs borne to reduce the contamination.   Given the
 wide diversity both in compliance costs and in resulting
 environmental benefits,  it has often proved difficult  to design
 simple and enforceable regulations that meet this  standard.


      Economic incentives seek to  correct market failures
 directly,  by changing the costs faced by private decision-makers
 to reflect the full social costs  of their actions.   Incentive-
 based policies seek to influence  but not to dictate the actions
 of the targeted parties.   If incentives are properly designed,
 private actions can more closely  approximate the socially optimal
 use of environmental resources.

      Some  forms of incentives,  such as  tradable permits,  have
 been studied and applied by EPA for a number of years.   In the
 new Clean  Air Act and elsewhere,  we are expanding  the  use of
 market-based incentives,  such as  fees and marketable permits.
 Market-based initiatives are now  a major part of our approach to
 the problem_of_acid rain.   The Clean Air Act includes  the use of
 tradable emission allowances to reduce  in a more cost-effective
 way sulfur^dioxide emissions from utility plants that  contribute
 to acid rain.   Economic  incentives offer the promise of achieving
 environmental  improvements more cost-effectively in other areas
 as well.   At the state and local  levels, pricing of municipal
 solid waste collection based on the volume  disposed is  an example
 of such a  practice.


      Experience  with market-based  incentives  for environmental
 protection is  not  limited  to  the United  States.  A  recent review
 by the  Organization  of Economic Cooperation  and  Development
 (OECD)  identified  150 different applications  of  economic
 instruments  in^!4  countries.1  While the vast majority  of these
 are_not primarily  aimed at internalizing environmental  costs or
modifying  environmental behavior,   a  number do have a significant
 incentive  component.
     1See _ "Economic  Instruments  for Environmental  Protection,"
OECD, Paris, 1989,  for details  on  the mechanisms discussed in this

Deposit-Refund Programs

     Numerous deposit-refund systems exist in OECD countries for
beer and soft-drink bottles.  Most were introduced by the private
sector for economic reasons.  They have tended to be effective,
efficient, and easily administered.  Under these systems, the
polluter who does not return the container bears more than the
direct costs of disposal.  Norway and Finland have enacted taxes
on non-returnable containers, to prevent excessive use of new
materials such as plastics, which have generally not been covered
by deposit/refund programs.   Norway and Sweden have also
instituted deposit-refund systems for junk cars.

Market Creation

     While U.S. emissions trading programs are the premier
examples of market creation in the environmental area, several
other examples exist.  Germany has followed the U.S. lead with an
air emissions trading program.  However, the current German
program is highly constrained and has been little used.
Recognizing this weakness, the government plans to expand the
program and place it on a more secure footing.


     Two examples exist where governments have used price
intervention  (subsidies) to create or sustain a market important
to environmental protection.  Finland provides freight rail
discounts on vehicle wrecks, other metal scrap, paper, glass, and
textile wastes being transported for recycling.  Similarly,  in
the Netherlands, 10 to 15 percent of the municipalities  guarantee
newspaper collectors  (usually schools and charities) a minimum
fixed price for collected paper to stabilize the collection
process in the face of highly variable prices that would
otherwise be  offered by  recycling  firms.

Differential  Taxes

     A number of European  countries have employed differential
taxes for leaded versus  unleaded gasoline, and  for the
characteristics of cars  related to air pollution.  These programs
have generally been designed to be revenue neutral, with a
combination of surcharge and discount added to  an existing tax.
They have usually been viewed as only transitional instruments,
since direct  regulations also exist.


      While the vast majority of  fee  (tax)  systems  currently  in
 use in OECD countries  have  revenue raising as their principal
 motivation,  several are noteworthy because of their incentive
 aspects.   Austria's nominal fee  on pesticides and  fertilizers
 reduced consumption of these materials by  30 percent  over  a  two-
 year period,  even though the fee was not designed  as  an
 incentive.   Finland is considering expanding its fee  on phosphate
 in  fertilizers to include nitrogen content.  Finland  also  taxes
 the carbon content of  fossil fuels, and Sweden will impose a CO2
 tax beginning next January.   Sweden also plans to  impose a sulfur
 emissions  tax of  $4.90 per  kilogram on the sulfur  content  of
 fuel,  with the possibility  of a  refund if  emissions are

      Denmark has  a tax on raw materials used by the construction
 industry to  encourage  recycling.  It has also established  a  20
 percent tax  on pesticides in small containers.

      The Netherlands has adopted, but has  not succeeded in
 implementing,  a manure charge.   It is combined with direct
 regulations  but is expected to have a significant  incentive
 effect.  For manure levels  greater than 125 kgs per hectare, a
 relatively steep  fee will be imposed.  Funds raised will be  used
 for research and  pilot projects.  The charge is also  expected to
 counteract agricultural overproduction by  reducing the quantity
 of  chickens  and pigs raised.   Implementation has been delayed by
 the government because of resistance by farmers to the lack  of
 adequate lead time and the  complexity of the associated new
 accounting system.

     As a final example,  Sweden will initiate a NOX emission fee
 next year.   Because of difficulties measuring NOX emissions,  the
 charge will  cover only 150 to  200 large furnaces.  To avoid
 discriminating against these large furnaces, the charge has  been
 set up to be  revenue neutral.  All funds raised will be returned
 to  the affected facilities based on the amount of  energy they
 produce.  This  will  reward low-emitting operations and penalize
 facilities with high NOX emissions per  unit of production.


     As we continue  to  evaluate incentive approaches to
 environmental protection, we must agree on a set of criteria for
 determining when  incentive policies should be adopted.  The
merits of an incentive program relative to the merits of no
 government action or of  some other policy approach will differ in
 each application.   We  suggest the following list of criteria as a
basis for future discussion.  While the incentives discussed in

this report were suggested with these criteria in mind, they have
not yet been rigorously tested against them.  Future debate on
these and other incentives will benefit by more explicit testing
against these fundamental standards.

Is the Environmental Problem the Result of an Externality?

     Any government intervention to achieve environmental goals
should be based on the existence of a market failure (an
"externality").  An "externality" is a cost that is borne by a
person other than the person who who caused the cost to arise.
For example, a smokestack emitting thick black smoke may impose a
cost on an open-air restaurant immediately downwind.  Because the
owner of the smokestack does not bear the cost of the smoke
emission, he will not take that cost into account when he
determines the appropriate level of emission reduction (i.e., the
cost is "external" to his decision process).  An appropriate
government policy would induce the owner to take those costs into
account, i.e., "internalize" the external cost.

     Absent market failure, environmental degradation is not by
itself sufficient to justify government action.  After all
externalities have been internalized to decision makers, some
pollution may continue to exist.  Cost-beneficial policies must
reflect the trade-offs between environmental protection and other
societal goals.  Therefore, the first step  in evaluating any
policy proposal is to determine whether and why existing private
markets fail, and what adjustments are required to  redress
environmental market failures.

Is  the Environmental Problem Significant?

     Generally, policy action is justified  only where the
benefits derived from the action are greater than the action's
cost  (in general, interventions should be designed  to maximize
the difference between total benefits and total costs).  One
component of the cost of a policy action is the expenditure of
government  resources to develop and enforce the policy.  If an
environmental problem is not significant, a policy  action to
address that problem is unlikely to generate significant
benefits.   Consequently, even if the cost of compliance for the
private sector  is relatively modest, the policy is  unlikely to
promise positive net benefits because of the policy development
costs.  Therefore, the greatest effort to develop ideas for
incentives  ought to be focused on the most  significant cases  of
environmental  contamination, where  one is most likely  to find the
greatest net benefits.

 Which Jurisdiction can Most Effectively Address the Problem?

      Some externalities affecting environmental resources are
 localized in their effects, and may not justify federal action.
 A case in which both the costs and the benefits of reduced
 contamination would accrue within a state's boundaries, for
 example,  may more appropriately be addressed by the state than by
 the federal government.  Federal action may be justified when the
 effects of contamination cross state boundaries.   Federal
 involvement may also be warranted where an otherwise desirable
 policy can be implemented more effectively or less expensively at
 the^federal than at the state level — for example,  where
 national  markets make uncoordinated state action ineffective —
 or where  other policy goals,  such as constraints on commerce
 imposed by individual state or local regulation,  are significant
 enough to warrant federal intervention.

      The  federal government may play a variety of roles with
 respect to new incentive-based programs,  even in cases  where a
 federal policy is not justified.    The federal government can
 encourage policy innovation by state and local governments by
 providing information on effective policies or by offering grants
 for state program development,  without imposing any  requirements
 for states to adopt specific programs.   To encourage discussion
 of potential applications of incentives at all levels of
 government,  this report discusses some incentives that  might be
 best  implemented at a state or local level,  but where the federal
 government could play a useful  role in supporting such  action.

 Will  an incentive Approach Maximize Net  Social Benefits?

      Once the need for government intervention has been
 determined,  and  the most appropriate jurisdictional  level  has
 been  identified,  different policy approaches  can  be  considered.
 The goal  is  to select the policy  approach  and policy objectives
 that  maximize net social benefits.   Policy approaches should be
 evaluated on the degree to which  they address  the target market
 failure.   To the extent allowed by statute, policies  should  limit
 required  or  induced changes in action to cases where
 environmental  benefits  outweigh costs.

      Economists  have  long argued  that  incentive programs are more
 likely than  command-and-control regulations to minimize the  cost
 of  achieving any given  policy objective.  This is because
 incentives can be  specifically targeted to correct the market
 failure.  Command-and-control regulations can be a clumsy tool
 for^achieving the  same  goals.  Practical problems of
 administration, monitoring, and enforcement may make regulation a
more  effective policy approach in some applications.  However,

incentive-based approaches offer many potential advantages that
should be considered before a policy approach is selected.

     The most important advantage of incentive approaches is the
shift from government decisions to private sector decisions to
achieve policy goals.  Government regulation can in theory
achieve the same results as incentives.  In practice, however,
optimal regulations are difficult to design because they require
detailed understanding of the costs and benefits of numerous
activities.  The more diverse the sources and activities
addressed by a policy are, the more difficult it is for the
government to achieve the optimal outcome through command-and-
control regulation.  Incentive approaches can automatically
encourage action where the benefits are greatest relative to
their costs.

     In addition, command-and-control requirements are often
insufficientlyflexible to adjust easily to dynamic changes in
production and pollution control technologies and in market
conditions.  For example, economic incentives are more likely
than are some forms of command-and-control regulations to induce
improvements in pollution control technologies.

     Finally, it is important to distinguish between the concept
of cost-effectiveness and that of efficiency.  A cost effective
policy reaches a target at the least cost.  To maximize net
social benefits  (efficiency), it is important to choose the right
targets as well as the right instruments.

Is the Approach Feasible?

     Some incentives have strong theoretical appeal but are
likely to prove difficult to apply in practice.  A number of
factors may influence the feasibility of a program, including:

     o    difficulties defining or measuring desired changes in
          behavior, making it difficult to design and/or enforce

     o    difficulties identifying important actors whose
          behavior is targeted by the incentives policy;

     o    difficulty in detecting cheating or other undesirable
          responses (e.g., illegal dumping);

     o    lack of information needed to design or analyze the

     o    limited capability on the part of important actors
          targeted by the program to perform the required roles;

     o    conflicts with other important government policy goals
          (e.g., foreign trade, energy, or development goals or

A program that is difficult to develop, implement, or enforce may
not be effective, or its administrative costs may simply outweigh
its benefits.  Finally, in some cases statutes may limit the
applicability of incentive approaches.

Will the approach Be Efficient and Cost-Effective?

     Applying this criterion requires determining what market
failure, economic conditions, or institutional factors are
preventing or discouraging more desirable behavior under current
conditions.  Incentive-based policies are cost-effective if they
directly address the target market failure, and if they are
directed at the most important constraint on socially desirable
changes in behavior.  Incentive-based programs are efficient if
policy targets are selected to maximize the difference between
total benefits and total costs.

     In addition, as in the case of command and control policies,
it is important to consider whether the proposed incentive policy
would have undesirable effects on our ability to achieve other
environmental goals.  Some responses to either command-and-
control or incentive-based programs may cause undesirable
intermedia shifts of pollution, or may lead to the use of
alternative products with their own harmful effects.  Policies
and policy targets must be selected to minimize undesirable
environmental side effects, and to maximize net social benefits.


     The authors recognize that careful examination of the costs
and benefits of further policy action, and of incentives as a way
to achieve policy goals, is needed in each case to identify cost-
effective program designs and efficient program targets.  Because
further evaluation is needed, this report does not endorse any of
the incentives it describes.  We hope that this report will
encourage more focused study and discussion of these and other
incentives.  This report reflects what has been learned from
EPA's past analyses of incentive approaches, and is intended to
encourage new efforts toward creative use of incentives.   We
encourage debate on these ideas, as well as suggestions for other
applications of incentives.


     Americans generate more municipal solid waste (MSW) per
capita than any other nation.  Approximately 160 million tons of
MSW were generated in the U.S. in 1986, increasing to 180 million
tons in 1988.1   Of this total,  EPA estimates that 10  percent was
recycled and that 10 to 15 percent was incinerated, primarily for
energy recovery.   The remaining 75 - 80  percent was  managed
primarily in landfills.  With current:purchasing and disposal
practices, the amount of waste generated is expected to increase
to 216 million tons by the year 2000.3 The volume and
composition of the municipal solid waste stream can lead to
environmental risk associated with disposal practices (for
example, from toxic substances leaching to groundwater)  , and
problems associated with illegal disposal of waste.  In some
cases, the combination of local incentives and improper pricing
has led to landfill capacity problems.
     1Office  of Technology  Assessment,  U.S.  Congress,  Facing
America's Trash; What Next  for  Municipal Solid Waste?   October
1989.   Estimates cited  are  from final  reports for U.S.  EPA by
Franklin  Associates,  Ltd.,  Characterization  of Municipal Solid
Waste  in the  United States.  1960  to 2000  (update  1988) ,  and
Characterization of Municipal  Solid Waste in the  United States;
Update 1990.

     2Franklin  Associates,  Ltd.,  Characterization of Municipal
Solid Waste  in the United States.  1960 to 2000  (Update.  1988).
final  report,   prepared  for  the  U.S.  Environmental  Protection
Agency, March 1988.

     3Franklin Associates,  Ltd.,  1990.

     Figure 1 illustrates the composition by weight of materials
in the municipal solid waste stream in 1986, after the recycling
of secondary materials.4  Figure 2 characterizes the contribution
of individual products to the total quantities of waste disposed
of, following the recycling of secondary materials.

     Other types of waste not in these figures include:
demolition and construction wastes, wastewater treatment
residues, trees and brush, street refuse, car bodies, non-
hazardous industrial residues, household hazardous waste,
hazardous waste from small-quantity generators, and used oil.
Comprehensive data are not available on the quantities of these
materials disposed of in the municipal waste stream.

     In some areas of the country (in the Northeast, for example)
capacity to manage MSW is rapidly becoming scarce.  One-third of
the nation's existing landfill facilities are expected to close
by 1991, and EPA estimates that 80 percent of the existing
landfills will close over the next 20 years.5   Increasingly
stringent state regulation of landfill and incinerator
facilities, forthcoming federal Subtitle D regulations affecting
municipal landfills and incinerators, and public opposition are
making landfills and incinerators increasingly difficult to site
and more expensive to construct and operate.  Typical costs for
landfill units complying with more stringent environmental
standards could range as high as $45 to $150 per ton of refuse
disposed of, as compared with current costs of $10 to $20 per ton
for many existing landfills.6

     Concern about the environmental risks posed by substandard
landfills and incinerators is a major factor limiting growth in
capacity.  Improperly designed or operated landfills may generate
toxic leachate, may present risks of explosion and fire due to
methane gas, and may emit organics such as vinyl chloride,
benzene, trichloroethylene, and methylene chloride to groundwater
or surface water.   Of the 1,217 sites listed or proposed for
listing on the Superfund National Priorities List, 233 were
identified as municipal landfills.  However, none of the
landfills on the list was designed to meet current standards.  In
formulating MSW policy, it is important to recognize the
      Office of Technology Assessment, 1989, derived from Franklin
Associates, Ltd., 1988.

     5U.S.  EPA* Report  to Congress,  Solid Waste  Disposal  in the
United  States,  ^Volume  II.  Office of  Solid Waste  and Emergency
Response, EPA/530-SW-88-011B, October 1988.

                            Waste  Combustion
     TJ.S.   EPA,  Municipal
Congress, June 1987.
                                               Study r   Report  to









differing environmental risks posed by the substandard disposal
practices of the past and those meeting today's standards.

     Some critics argue that MSW disposal may pose environmental
risks.  Available sampling data indicate that the types of
chemical contaminants found in municipal landfill leachate vary
widely.  However, the related concentrations are generally low.
Perhaps the explanation is that past problems at municipal
landfills are due in large part to past disposal of large
quantities of industrial hazardous wastes which no longer enter
municipal landfills.

     Municipal incinerators emit toxic compounds to the air, and
may generate toxic ash, which is typically landfilled.  EPA
recently proposed air emission standards for municipal waste
incinerators that would, among other things, limit toxic
emissions and establish optimum combustion operating standards.
Tests of leachate from fly ash and bottom ash have shown levels
of lead or cadmium exceeding EP toxicity levels for hazardous
wastes.  It is uncertain, however, whether these results provide
an accurate measure of risks from incineration.

     The link between the types of materials discarded and the
potential risks from MSW facilities is also not well documented,
in part because data on sources of different contaminants in the
waste stream are highly uncertain, and, in part because products
differ in the degree to which they are likely to release toxic
compounds.  One study prepared for EPA estimated the contribution
of different products in MSW to the total amounts of lead and
cadmium in the waste stream.7  As  shown  in  Figure  3,  lead-acid
(automotive) batteries are estimated to be the major source of
lead in MSW, and nickel-cadmium rechargeable household batteries
are the major source of cadmium.

     In addition to capacity problems and potential risks to
human health and the environment from substandard MSW management
facilities,  problems result from the illegal disposal of MSW.
Illegal disposal creates aesthetic problems (e.g., litter)  and
may present environmental risks (e.g.,  disposal of used oil to
storm drains).

     The generators of municipal waste — households, commercial
establishments,  and institutions — often do not bear the full
social costs of their actions  that create waste and environmental
     U.S. EPA, Office of Solid Waste, Characterization of Products
Containing Lead and Cadmium in Municipal Solid Waste in the United
States. 1970 to 2000f  Final Report,  Executive Summary and Chapter
1, prepared by Franklin Associates, January  1989,  EPA/530-SW-89-


C9 J

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GC  (o
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contamination from waste management.  Product prices do not
reflect the relative contribution of different products to
environmental contamination from disposal.  Households are
typically charged for waste disposal service either through their
local property taxes or by a fixed fee paid to a private
collector.  The price the household pays for each additional unit
of waste it generates is" zero no matter what the cost to the
community of providing that additional unit of waste disposal
service.  Littering and illegal disposal provide a zero-cost
waste disposal option that is difficult to detect and discourage.

     Several types of behavior may result from these
externalities.  For example, households and businesses may
generate more waste than is optimal, by

     o    purchasing products requiring more frequent replacement
          and disposal, rather than more durable tires,
          appliances, batteries, and the like;

     o    purchasing more single-use disposable items (e.g.,
          disposable diapers and razors); and

     o    purchasing products contained in extensive packaging.

In addition, households and businesses may use more toxic
products and materials than is optimal, and may engage in
littering and illegal disposal.


     Incentive policies could encourage increased source
reduction (producing less waste in the first place) and recycling
(collection, transport, and recovery of used material).  Only 11
percent of MSW is currently recovered for recycling.  This figure
includes the following percentages of individual materials:

               Aluminum                 25%
               Paper and Paperboard     23%
               Glass                  ;   9%
               Ferrous Metals            4%
               Rubber & Leather          3%
               Plastics                  1%

     Pricing waste management to reflect its full social cost is
the most direct and comprehensive way ito address the market
failures discussed above.  Most users of waste disposal services
pay less than the full social cost of disposal.  Most localities,
even if they cover operating costs, do not charge for land, for
retirement of the existing facility, for construction of the

replacement facility, or for future liabilities associated with
disposal.  Rarely do households or businesses pay fees based on
volume, or fees that include some measure of the present value of
the costs of replacing facilities.

     A current example of how raising the cost of disposal may
work is the Municipal Landfill Criteria rule.  When promulgated,
the rule is likely to raise the costs of landfilling,
particularly in small communities where recycling and source
reduction programs are less prevalent.  Rather than create a
federally mandated level of recycling, this approach will merely
adjust the cost of landfilling to levels better approximating the
real social cost of landfilling, and let the market find the
appropriate level of increased recycling.

     In general, economic incentives should target the specific
market failure that requires addressing.  For example, if one is
concerned primarily with inadequate municipal solid waste
landfill capacity, then the appropriate incentive would encourage
reduction of waste volume in general (by, for example, increasing
the cost of all land disposal).  If one is concerned about a
different problem, such as toxics or lead disposal, then a
variety of product- and material-specific incentives might be
considered to encourage source reduction or reduced contributions
of specific materials to the waste stream.


     The Task Force considered a variety of incentives and hybrid
policies that might be used to encourage reduction of MSW
volumes, of MSW toxicity , and of littering.  The following
specific policies are discussed in this chapter:

     1.   volume-based pricing of municipal waste management

     2.   incentives to recycle scrap tires;

     3.   a deposit/refund system to encourage the collection and
          recycling of lead-acid batteries;

     4.   a credit system to encourage used oil recycling; and

     5.   brief discussions of other MSW incentives, including:

          a.   a beverage container deposit/refund system
               ("bottle bill"),      ;

          b.   incentives to increase composting of yard wastes,

          c.   a newsprint recycled-content requirement that
               incorporates trading (a hybrid of command-and-
               control with incentives).

     In addition, the Task Force evaluated proposals that might
encourage the reduction of MSW and other sources of environmental
releases, including marketable permits or surcharges on lead and
removal of federal subsidies that encourage the use of virgin
materials.  These additional incentives are discussed in Chapter
o •

     Most of the proposals address specific products or types of
waste that represent a large portion of the waste stream or that
are believed to contribute disproportionately to risks from MSW
management.  However, the contribution of these materials to
environmental problems has not been well documented.  In
addition, there is wide geographic variation in capacity
problems, and the risks from waste management facilities are
likely to be localized for the most part.   To the extent that the
environmental impacts are primarily local,  the incentives
described here might best be applied at the state and local
levels, if further analysis indicates;that their use is
justified.  On the other hand, if there are benefits of recycling
that are not realized primarily at the state and local level, a
federal role would be justified.


     Currently, most municipal trash collection and disposal
services are supported through general tax revenues or flat fees.
Residents and businesses do not pay different prices depending on
the volume and characteristics of the wastes they generate.
These pricing practices generate externalities, in that a portion
of the costs attributable to an individual's action is imposed on
the entire community, rather than borne entirely by the

     Volume-based pricing, which bases rates on the amount of
waste generated, is a first step toward marginal cost pricing for
waste management services.  Volume-based rates are designed to
provide residents with better information on the cost of managing
the waste they generate.8  In theory,  households could be charged
rates that reflect both the direct costs of waste collection and
disposal (including the value of scarce landfill capacity used)
and the social costs of any environmental degradation that

     Some municipalities are experimenting with volume-based
rates.  However, most programs are only a few years old and have
been subjected only to limited study.


     Volume-based rate programs can take several forms.  In one
approach, the municipality sells individual trash containers.
For example, the borough of Perkasie, Pennsylvania, requires that
      In this discussion, we focus on residential trash collection
and  disposal.   Variable  rates are  currently  more common  for
commercial enterprises,  in part because  they often  use private
waste management services more  than do  households.   Business and
industry also often need special services — e.g./  for hazardous
waste disposal.

all wastes be disposed of in bags sold by the city.9  A bag that
holds up to 40 pounds costs $1.50; 20-pound bags are  $0.80.

     High Bridge, New Jersey, uses a related alternative by
selling stickers that must be placed on individual bags or trash
items.   In 1989, High Bridge charged each household  $200.00
annually, which covered,, basic pick-up service and 52  stickers for
an average of one container per week.  Stickers may be traded
among residents, and additional stickers may be purchased for
$1.65 each.  Maximum weight and volume restrictions are
established on a per-sticker basis.
     Seattle, Washington, requires residents to subscribe to a
level of service that reflects the number and size of trash cans
they expect to fill per week.11  The charge  for using one mini-
can (19 gallons) per week is $10.70 per month, and the charge for
using one 32-gallon can per week is $13.75 per month.  There is a
minimum monthly charge of $5.95, applied even to owners of vacant
lots.  Residents may purchase stickers when they have waste in
excess of their standard level of service.  Charges are also
higher for customers who request backyard instead of curbside
pick-up.  Recyclables must be separated, and they are collected
free of charge.

     Municipalities tend to focus on the direct costs of services
in setting volume-based rates.  For example, High Bridge's yearly
fee is designed to cover the administrative costs of the local
      Information sources for the Perkasie program include:  Linda
C. Good,  Annual Report  on  the  Borough of Perkasie  for the Year
1988;   Neil  Fosbenner  and  Linda  Becker, Annual  Report  on the
Borough of Perkasie for  the Year 1989.-  Institute for Local Self-
Reliance,  Bevond 25  Percent;  Materials  Recovery  Comes  of Acre.
April 1989, pp.  47 -55;   David Riggle, Biocvcle.  "Only Pay  for What
You Throw Away", February 1989, pp. 39-41.

      Sources of information on the High Bridge program include:
David  Riggle,   Biocvcle. "Only Pay  for  What  You   Throw Away",
February 1989,  pp. 39-41;   The  New York Times,  "Pay-by-Bag Trash
Disposal Really Pays,  Town Learns," November  24, 1988, p. B-l; and
memorandum and ordinance provided by Claire Knapp,  Borough Clerk,
on August 18, 1988.

     "information sources  for Seattle include:   Lisa Skumatz and
Cabell Breckinridge,  Variable Rates iri Solid Waste;   Handbook for
Solid Waste Officials,,   U.S.  Environmental  Protection  Agency and
City of Seattle, 1990;   Lisa Skumatz, "Variable Rates:  Using Your
Rate Structure  to Encourage Waste  Reduction  and Recycling," City
of Seattle, 1989;  Seattle Engineering Department,  "Variable Can
Rate Study," City of Seattle, June 1985.

solid waste utility, as well as disposal costs for one container
per week.  The additional per-sticker fee is derived primarily
from average tipping charges.  Perkasie also based its per bag
charges on the direct cost of waste management services.

     Seattle initially based its rates on direct service costs.
The city recently increased its prices above the marginal costs
of collection and disposal to provide additional incentives for
waste minimization and recycling.  The cost of closing old
landfills is also included in setting these fees.
Effect on Waste Generation,
Disposal, and Purchasing Practices

     Amount of Waste.  Significant decreases in waste tonnages
have been reported after volume-based rate programs have been
implemented.  High Bridge reported a 24 percent decrease in the
first 10 months of its program, and Perkasie reported a 40
percent decrease in the first year.  In Seattle, landfill tonnage
decreased by 24 percent from 1988 to 1989, presumably due to the
combined effects of Seattle's various cost-reduction and
recycling programs.

     More research is needed to assess the effects of volume-
based pricing on waste volumes.  Municipalities generally
implement several changes in different programs at the same time,
which may complicate evaluation of the effects of individual

     Disposal Alternatives.  If volume-based rates are not based
on waste weight as well as volume, they may encourage trash
compacting.  The ability to use compactors may weaken residents'
incentives to minimize waste.  In theory, volume-based rates can
also provide incentives for increased illegal dumping or
littering.  However, people operating volume-based rate programs
claim that there is little evidence that illegal dumping has
increased significantly.
     Purchasing Behavior.  The effect of volume-based programs on
consumer purchases has not yet been carefully studied.  Ideally,
when choosing purchases, such programs would encourage consumers
     12Dan  Goldberg,  Waste Age.  "The Magic  of Volume Reduction,"
February  1990,   pp.  98-104.  Over  a  two-year period,  Perkasie
(population: 5,200) prosecuted six  or  seven cases of disposal in
commercial dumpsters.

to think about the amount and type of packaging, and whether the
packaging is recyclable.  Rising demand for products that
minimize waste would stimulate production and innovation,
increasing the availability of such items.  Volume-based programs
could also encourage consumers to retain and repair items, rather
than replace them.

     Volume-based rates could also encourage consumers to buy
products that are packaged in lighter;or less bulky materials
that are actually more dangerous to the environment, if they take
longer to degrade or contain toxic chemicals.  Again,  policies
to discourage these types of purchases may need to be implemented
concurrently with volume-based rate programs to avoid undesirable

Design of Prices

     While volume-based rates can be set at levels that cover the
total social costs of waste disposal, in practice they often
reflect only the direct costs of services.  In these cases, the
programs will not lead to as much waste reduction as may be
desirable, because the rates are not high enough to fully
internalize the costs of waste management.

     Volume-based rates may be most effective if:

          they encourage the provision of alternative options for
          trash disposal such as improved recycling programs;

          they include provisions to monitor and penalize
          undesirable disposal practices; and

          they adopt rates that reflect the full costs of
          disposal (e.g., that landfill replacement costs should
          be taken into account).

     Environmental Impact.  To fully internalize the social costs
of waste management,  prices would need to reflect collection and
disposal costs, the current and expected future costs of disposal
capacity, and the costs of any resulting environmental harm.
Ideally, costs should include the net present value of closure,
post-closure monitoring, and replacement, and not just
expenditures on current operations.

     Because trash volume is likely to decrease (and recycling is
likely to increase)  in response to volume-based pricing, current
costs may not be an ideal basis for setting rates.   It may be
desirable to estimate the impact of the program on waste volumes
and set rates based on estimated volumes.  Periodic review of the
relationship between rates and volume may also be needed.

     For several reasons, the appropriate charge for volume-based
rate programs will differ from area to area.  First, collection
and disposal costs vary geographically, reflecting regional
differences in the costs of labor, equipment, and land.
     Second, the cost of replacing landfill capacity — and
therefore the economic value of capacity used currently — varies
greatly by region.  In many areas, costs of new landfills are
rising sharply, reflecting lack of suitable sites, expensive
siting processes, and the. cost of installing required pollution
controls.14  In the future, many closing landfills may be
replaced by other waste management technologies, such as disposal
— e.g., waste-to-energy — systems.  These new technologies
generally are more expensive than landfills,
     It can be difficult to determine the marginal value of
scarce landfill capacity, particularly when landfills are owned
and operated by the local government and prices are not set
competitively.  Existing programs often use tipping fees as a
measure of marginal costs.  However, some argue that commercial
tipping fees are currently set too low, because they do not
appropriately account for landfill closure and replacement.

     If volume-based rates are set too low to reflect projected
replacement costs, the program will not fully address concerns
about limited landfill capacity, and households will continue to
generate more trash than would be desirable.
     13C.L. Petit, Waste Age.  "The 1987 Tip Fee Survey," March 1988,
pp. 74-80.

     14For estimates of changes in landfill costs,  see Robert Glebs,
Waste Age, "Landfill Costs Continue to Rise," March 1988, pp. 84-

     ^Frederick  Dunbar and  Mark  Berkman,  Waste Age.  "Sanitary
Landfills  Are Too  Cheap!"  May  1987;    Michael Crew and  Paul
Kleindorfer,  Waste  Agef  "Landfill Tipping  Fees Should  Be  Much
Higher," February 1988.

Federal Role

     The most appropriate federal role may be to encourage — but
not require — volume-based rates.  Federal mandates are
appropriate only if there are significant externalities that
localities cannot address, such as when environmental damages
cross jurisdictional lines.  This is not likely to be a problem
when disposal facilities meet EPA standards.

     The limited use of volume-based rate programs may be due to
the lack of information on program benefits and effective design
and implementation.  Localities may also lack funds for start-up
costs.  It may also be appropriate for the federal government to
address these barriers to the development of better pricing
programs.  For example, the federal government could conduct
program research and disseminate results, fund model or
demonstration programs, or provide seed money to communities
starting such programs.


     Over 82 percent of the  234 million tires that are scrapped
each year are landfilled, stockpiled, exported, or illegally
dumped.  More than 13 percent of the remaining tires are
incinerated for energy recovery or recycled into new products.16
Most landfills do not accept tires because they take up
substantial amounts of space and tend to rise to the surface as
surrounding waste settles, which creates voids and causes uneven
settling.  As a result, approximately two to three billion tires
are currently stockpiled in  the United States.17

     The stockpiling of tires threatens public health and the
environment.  Water that collects in stockpiled tires provides a
favorable breeding ground for mosquitoes that carry diseases,
such as encephalitis and yellow fever.  Stockpiles of tires are
also a potential fire hazard.  The black noxious smoke from tire
fires degrades air quality and produces oils, soot, and other
materials that may contaminate surface and ground water.18

     The number of tires requiring disposal could be reduced by
increasing the service life  of tires (e.g., using steel-belted
tires that last longer than  other tires), by retreading and
reusing tires (e.g., as wheels for farm implements), by burning
scrap tires for energy recovery, or by recycling scrap tires into
other uses.  Since tires have a Btu value comparable to the best
coal (i.e., 12,000 - 16,000  Btu per pound), they are an
economical fuel option in some situations.  Increasing volumes of
tires are being incinerated  in power plants, pulp and paper
plants, and cement kilns.  However, pulp and paper and cement
kilns generally view tires as auxiliary fuels, and are hesitant
to make the capital expenditures required to allow use of tires
as primary fuel, except when coal and other fuel prices are high.
Whole tires can be used as artificial reefs and breakwaters, as
playground equipment, for erosion control, and as highway crash
barriers.  Used tires may also be processed and used to produce
     16U.S. EPA, "Market Development Study for Tires," draft, August

     17Robert L. Hershey et al., "Waste Tire Utilization," Science
Management Corporation, for  the U.S.  Department of Energy, April
30, 1987.

     18EPA has been  notified  of 87  tire pile fires in 1989, 65 in
1988, and 46 in 1987.

rubber mats and other rubber products, asphalt rubber for roads,
playground gravel substitutes, and bulking material for sludge
composting.                          '

     As evidenced by the large stockpiles of tires, the supply of
tires available for recycling substantially exceeds the demand
for scrap tires.  For example, demand for retread tires has
declined considerably over the past decade, and is expected to
decline further in the future.  Thirty-one million tires were
retread in 1978, 15 million were retread in 1986, and only 6
million tires are expected to be retread by 2005.19  Given this
decline in demand, incentives that create or induce greater
demand for recycled tires would be the most effective method to
reduce stockpiles and increase scrap tire recycling.

     The initial findings of EPA's draft report, Market
Development Study for Tires, suggest ;that asphalt rubber and
combustion facilities have the greatest potential to consume
large numbers of tires that would otherwise require disposal.
New technologies are also being developed for the use of scrap
tires for fuel.  Currently, economical processes involve using
the whole tire, rather than shredded parts.  To meet air emission
and fuel standards, however, whole-tire processors need to use
extreme heat to separate hazardous materials from fuel and rubber
by-products.  Permitting costs, concerns over potential air
emission control requirements, and large initial capital
investment requirements have limited the growth of tire-derived
and whole-tire combustion processes to date.  Combustion will be
a promising end use for scrap tires only if the economic costs
are reduced.

     Crumb rubber from scrap tires can be used in asphalt as a
sealant or in the thick overlay applied to road surfaces.  The
rubber may be used at one to six percent concentrations in the
asphalt.  Current formulas for asphalt rubber indicate that 1,200
tires are consumed per mile for an average two-lane project.

     There are several barriers, however, to more extensive use
of asphalt rubber.  State highway departments have been reluctant
to incur the capital investments and added operating costs
associated with adopting new techniques.  Asphalt rubber roads
are approximately twice as expensive to install as conventional
asphalt roads, but it is believed that the rubber-modified
pavement lasts at least twice as long; however, the Federal
Highway Department does not consider "life-cycle costs" in its
requirements for federally funded paving projects.  Many states
have tested sections of road containing asphalt rubber, but test
      Office  of Technology  Assessment,  Facing America's  Trash;
What's Next for Municipal Solid Waste?  October 1989.

results are not yet complete.  Finally, local highway departments
are not responsible for tire disposal problems, and therefore may
not consider reduced tire disposal as a benefit when evaluating
the use of asphalt rubber.


     The Task Force considered a range of policies to encourage
recycling of tires and to discourage inappropriate disposal of
used tires.  First, it considered fees on the sale or disposal of
tires to generate revenues to subsidize recycling, clean up old
tire stockpiles, or conduct research into recycling methods.
Second, it considered incentives that might specifically
encourage greater use of tires in asphalt rubber.

     Currently, thirteen states have passed scrap tire management
legislation, and at least a dozen other states are considering
proposed regulations.  State programs related to tire disposal
have included the following kinds of provisions:

     o    Fees to fund scrap-tire programs.  Types of fees
          include a 50-cent fee on all new tires or motor vehicle
          registrations; a temporary one-dollar fee on all new
          tires sold; a four-dollar fee on motor vehicle
          transfers; and a 12-cent fee on every dollar in tire

     o    Use of the fee revenues for one or more of the
          following purposes:  funding of state tire disposal
          regulation programs; clean up of existing tire piles;
          enforcement, market development, research and
          development; or reimbursement to tire dealers (if they
          are involved in collecting fees) and waste tire firms.

     o    Grants or loans to encourage recycling, processing, or
          incinerating used tires.

     o    Modification of requirements to encourage proper tire
          disposal.  If tires are monofilled, for example, less
          stringent liners than those required for MSW landfills
          can be used. (Monofilled tires are also easier to
          "mine" at a later date.)

     o    Permitting of tire stockpiles.

     Fees could be imposed on tire storage and disposal to
reflect the social costs of these management practices.  Such
fees might encourage return of tires for recycling.  However,
since it appears that lack of demand is the primary barrier to

increased recycling, such fees might simply impose costs on tire
owners without resulting in much reduction in storage and

     Recent legislation, offered by U.S. Representative Torres
and U.S. Senators Heinz and Wirth, would require tire producers
and importers to recycle a specified percentage of the tires they
produce or import.  The companies would have the choice of
recycling tires themselves or purchasing recycling credits from
state licensed tire recyclers.  Tire recyclers would generate
credits for each tire recycled (depending on the method of
recycling used) and the credits would sell at market prices.

     A national charge on the disposal of tires would not induce
migration of scrap tires across state lines, as has occurred with
some existing state programs.  On the other hand, a tire disposal
fee might involve collecting fees at a huge number of sites, and
might simply encourage increased illegal disposal of tires.  A
fee imposed on new tire sales does not directly discourage
disposal, but might encourage purchase of long-lived tires, and
would provide funds for other programs.

     Governments could promote the development and use of asphalt
rubber by removing existing procurement barriers and by
supporting such research projects as:

     o    Changing the Federal Highway Administration (FHA)
          requirements to include consideration of "life-cycle

     o    Revising the EPA procurement guidelines for asphalt
          rubber in highways, and perhaps requiring other federal
          agencies  (e.g., the Departments of Defense, Energy, and
          Interior and the National Park Service) to use or at
          least consider asphalt rubber in a certain proportion
          of the road mileage they build.

     o    Working with the FHA's program that funds state highway
          research projects, to encourage states to study and
          test asphalt rubber use.

     o    Developing a research program with the FHA to develop
          and test non-proprietary asphalt rubber formulations
          that can be applied with standard asphalt paving
          equipment.  Much of the research and field-testing of
          asphalt-rubber has been performed using proprietary
          products and/or paving equipment.

     o    Requiring that federal projects or projects using
          federal money include specifications that allow the use
          of asphalt rubber, and consider using asphalt rubber

          pavement if it meets certain cost and performance

          Encouraging state legislatures and environmental
          agencies to work with their respective highway
          departments to evaluate the use of asphalt rubber in
          paving projects.

     Before a determination can be made about the merits of
policies addressing scrap tires, more analysis is needed to
assess the costs and potential environmental risks of different
tire management options, including landfill disposal, storage,
incineration, rubber processing facilities, and various recycling
applications.  In particular, research on the costs and
performance of asphalt rubber in paving projects appears
worthwhile.  More information is also needed on the effectiveness
of existing state programs that deal with scrap tires.

     Federal involvement in any fee program would prevent
problems of interstate migration of scrap tires, which may occur
when individual states take action to regulate tire disposal.
For example, Florida recently passed tire legislation, and
Alabama is currently concerned about an influx of tires from
Florida.  The landfill tipping fee for tires in Florida (where
tires must now be split into at least 8 pieces before they are
landfilled) is about twice the tipping fee in Alabama.   Although
a national tire disposal fee would not induce migration of tires
across state lines, it might involve collecting fees at a huge
number of sites, and might simply encourage increased illegal
disposal of tires.  A fee imposed on new tire sales does not
directly discourage disposal, but might encourage the purchase of
long-lived tires, and would provide funds for other programs.

     To the extent that tire incentives are motivated by landfill
capacity concerns, any federal program should allow for regional
variations in the severity of capacity problems.  For example,
the federal government could develop model legislation for the
generation and use of tire disposal fees, evaluate and publicize
existing state and local programs, and/or require states to
develop tire management programs.  However, these problems, and
the fact that fires at tire disposal sites have created Superfund
sites, may argue for a more consistent and aggressive federal


     Lead-acid batteries account for an estimated 65 percent of
the lead in municipal solid waste.  Lead is highly toxic, so
landfill disposal or incineration of products containing lead
could pose risks to public health.  As indicated by EPA's
proposed ban on the incineration of lead acid batteries, it is
expected that removal of these batteries will substantially
reduce lead contamination in both air emissions and ash residues.
Similar benefits would be expected for landfilled waste.

     To further ensure that banning lead batteries from disposal
will lead to recycling rather than to illegal dumping, economic
incentives may be an effective complement to such bans.  During
the past few years, lead-acid battery;recycling rates have
averaged roughly 70 to 80 percent, although the level of
recycling varies widely with the price of lead.

     The choice of the most effective approach to encourage
recycling of the remaining 20 to 30 percent of batteries depends
on the nature and extent of the barriers to increased recycling.
The Task Force believes that a significant barrier is the cost or
inconvenience to consumers of returning batteries to collection
points.  An incentive to induce consumers to return old batteries
when they purchase new ones, therefore, may be effective in
increasing recycling.  If lack of demand for secondary lead is
also a problem, then incentives to increase the demand for
reclaimed lead would be required.  These might include increasing
the price of primary lead to users, lowering the cost of
reclaiming lead, or subsidizing recycling.

     Currently, recycling demand appears to exceed the supply of
used batteries.  A deposit/refund incentive would bring more
batteries into the recycling system, reducing landfill and
illegal disposal.


     A state or national deposit/refund system would add a
refundable deposit to the purchase price of a new lead-acid
battery.  A consumer who does not return a used battery while
purchasing a new battery would, in effect, see the deposit as a
fee that would not be paid if a used battery were returned.
Consequently, a deposit/refund system would provide an incentive
for consumers to return lead-acid batteries.

     The detailed arrangements of a deposit/refund system could
take many  forms.  For example, a system similar to that operating
in Rhode Island might include the following characteristics:

     o     Consumers who do not return old batteries receive a
           receipt.  They would have seven days after purchase of
           the new battery to turn in their used battery and
           collect the refund or forfeit the deposit.

     o     Consumers must purchase a new lead-acid battery before
           they can receive a refund.  This requirement
           discourages theft of batteries from automobiles by
           parties seeking to claim deposits.

     o     Battery manufacturers are required to accept used
           batteries, pay retailers a handling fee, contract with
           a secondary smelter for recycling, and document sales
           and recycling of batteries.

     o     Enforcement provisions and procedures would be
           necessary, such as:

           -    retailers documenting inventories, sales, and
               deposits collected and disbursed;

           -    manufacturers documenting receipts of batteries
               from retailers, shipments to recyclers, and
             •  payment of handling fees;

           -    recyclers (independent battery crackers or
               secondary smelters) documenting receipt of
               batteries from manufacturers; and

               EPA inspections or spot-checks of records from
               battery retailers, manufacturers, and recyclers.

     o     If there are unclaimed deposits, some percentage could
           be shared by the state or federal government (to fund
           recycling programs) and the battery retailer (in Rhode
           Island, 80 percent of the funds go to the state, the
           rest to the retailer); all unclaimed deposit funds
           could be kept by the retailer or the state or the
           federal government.


     Maine and Rhode Island currently operate lead-acid battery
deposit/refund systems.  Maine's program requires a ten-dollar
deposit, and Rhode Island's system,  five dollars.  Neither system
has been operating long enough to provide evidence on the

effectiveness of the system in general, or on the level of
deposit fees required to encourage recycling in particular.

     At least half a dozen other states operate mandatory take-
back programs for lead/acid batteries.   The mandatory take-back
system ensures that motivated consumers will have an outlet other
than disposal for their used battery by requiring retailers to
accept used batteries from them.  However, the system must still
rely on existing consumer motivation to return used batteries.

     Experience with existing beverage container deposit/refund
systems provides some insight into the potential effectiveness
and problems of a lead-acid battery deposit/refund program.   A
battery deposit/refund system is likely to be at least as
effective in encouraging returns as are bottle bills, because the
burden placed on consumers is lower than with bottle bills.
Batteries are replaced infrequently, and replacement is often
performed by the battery retailer, requiring no extra trip by the
customer.  More inconvenience would be imposed on do-it-
yourselfers, who might have to make an, extra trip to claim the
deposit.  Because the system would link refunds directly to the
purchase of a new battery, retailers will not experience net cash
outflows due to an imbalance of deposits and refunds, as may
occur with bottle bills.

     A deposit/refund system should be largely self-policing.
The retailer would have an incentive to collect the deposit, to
provide funds to pay refunds for returned batteries.  The
retailer also should have an incentive to return batteries for
eventual recycling, in order to collect the handling fee and
avoid costs of disposal.  As long as the price for secondary lead
exceeds the cost of production plus the handling fee, recycling
should occur.

     In some cases, retailers might simply dispose of batteries
if the handling fee would not cover the cost of returning them.
The greater the distance between retailer and recycler, the
higher the transportation costs, the greater the incentive is to
dispose of rather than reclaim batteries.  Disposal would be more
common in rural areas where there may not be a scrap dealers'
network in place.

     Before considering steps toward implementation of this type
of incentive, further analysis of the:benefits of battery
recycling must be conducted.  The deposit/refund system involves
administrative, storage, handling, and transportation costs that
may or may not be justified by the benefits of increased
recycling.  The fact that the majority of batteries are already
recycled suggests, however, that the costs of collection and
return to recyclers are not substantial in most cases.

      It would  also be useful to know whether batteries collected
 from  consumers are all  recycled for lead, or whether some
 batteries  are  collected but not recycled because secondary lead
 prices are insufficient to cover the costs of recycling.   The
 impact of  hazardous waste  (Subtitle C) requirements on the
 economics  of battery recycling should also be evaluated.  In
 addition,  information on the effectiveness of existing lead-acid
 battery deposit/refund  systems should be evaluated as it becomes

      There would appear to be no strong preference for adopting
 any such program at one particular jurisdictional level.  A
 single national program might be less costly for manufacturers
 and recyclers  to participate in than a variety of diverse state
 programs.   Given the likelihood that most purchasers would have a
 used  battery to trade in at the time of purchase and therefore
 would not  have to pay the deposit, however, the potential for
 interstate purchases does not seem substantial.

    ,  Similarly, the potential disadvantages of uniform national
 programs do not seem significant in this case.  The primary
 motivation for a battery recycling incentive is to reduce the
 toxicity of municipal solid waste, rather than to reduce total
 waste volume.
     20Congress  is currently considering  a proposal --  HR 5359,
introduced by Esteban Torres (D-CA) — that would require battery
manufacturers to  use at least  a minimum  percentage  of  recycled
lead, with  the  percentage  increased  gradually over time.   This
proposal would  increase demand  for secondary lead by effectively
creating a more certain market for recycled lead.


     In 1988, industry, automotive centers, and households used
about 2.6 billion gallons of lube oil (Figure 4).  They in turn
generated about 1.35 billion gallons of used oil (a significant
amount of lube oil is lost during use as a result of loss during
combustion, spills, leaks, etc.).21  Used oil may contain a
variety of heavy metals and toxic organic compounds, which may
present environmental risks if improperly disposed of or burned.

     The two most common destinations;of used oil are burning as
fuel (58 percent) and disposal (including landfill, incineration,
and dumping — 33 percent) (Figure 4).  The burning of used oil
for energy recovery is currently regulated to a limited degree
under the Resource Conservation and Recovery Act (RCRA).  But
substantial quantities are burned outside of the formal used oil
management systems, potentially without adequate controls.  Of
the 1.35 million gallons generated in'1988, for example, only 770
million gallons were recycled commercially or burned subject to
RCRA provisions.  An additional 48 million gallons were recycled
in-house by industrial generators.

     Of all end-uses for used oil, disposal and improper burning
are most harmful to the environment.  Do-it-yourselfers (DIYs),
though responsible for only 14 percent of the waste oil
generated, are responsible for close to 50 percent of illegal
dumping.  Combined, DIYs and other automotive generators are
responsible for over 70 percent (324 million gallons) of used oil
dumping and land disposal.

     The amount of used oil recycled is strongly and inversely
linked to the price of crude oil.   In 1980, for example,
recyclers were paying up to $0.50 per gallon for used oil.  By
the fall of 1989, however, service stations had to pay recyclers
as much as $0.50 per gallon to take the used oil away.22
Currently, the price of used oil is between zero and ten cents
per gallon, depending on location.
      Temple, Barker  and Sloane,  Inc.,   "1988 Used  Oil Flows in
the U.S."   Draft.  All 1988 used  oil  statistics used here are
derived from this source.
      Hazmat World, "Recycling Automotive Oil," November 1989.

  • ^ ^
-J  (0
O  S
1L.  =


     Used oil may be recycled by being reprocessed and burned as
fuel, used in other non-fuel industrial applications, or (if
rerefined) used again as lube oil.  Rerefining includes removing
all contaminants and recycling the product as new lubricant.
Both reprocessing and rerefining generate small amounts of used
oil sludge, which has negative economic value and must be
disposed of as hazardous waste.

     This incentive would encourage increased return and
recycling of used oil, and reduce the;amount of used oil burned
outside regulatory controls or disposed of illegally.


     The Task Force has identified two alternative approaches for
using market incentives to encourage propoer management of used
oil.  The first is a recycling credit system.  The second is a
deposit-refund system.

Recycling Credit System

     This hybrid policy would link production of new lube oil to
recycling of used oil, implementing the requirement with an
incentive-based mechanism.  RCRA-permitted recyclers of used oil
would create credits when reclaiming used oil.  Lube oil
producers would purchase credits from recyclers (reprocessors and
rerefiners), and would be allowed to produce a certain amount of
lube oil per credit.  The credit system would create a source of
revenue for recyclers, tied to the quantities recycled, which
would encourage more recycling.
     To generate credits, recyclers wpuld have to demonstrate
that they received used oil from a registered transporter and
that they recycled and sold the used oil as lube stock or as fuel
for energy, subject to existing regulations on burning.

     The system would stimulate demand for used oil by recyclers,
who would then be more willing to pay generators and gas stations
for used oil, because their recycling would be more profitable.
Gas stations would in turn be more willing to accept used oil
from others.

     A fixed percent ratio between recycled used oil and total
lube oil production might be established at the outset.  The
ratio could be raised over time, if it were determined that
     23Note  that recycling includes  the burning of  waste oil as
well as re-use.

further promotion of recycling was cost-beneficial.  A gradual
increase  (e.g., 2% per year) in the recycling percent would allow
time for  expansion in used oil recycling capacity.

     Both domestic production and imports of lube oil would be
subject to the credit requirement.  Producers and importers would
have to demonstrate that they had recycled sufficient quantities
of used oil themselves, or purchased sufficient credits, given
their sales.

     A bill sponsored by U.S. Congressman Torres  (HR 872) would
require EPA to design a credit system of the type outlined above.
The bill  would require producers and importers of lubricating oil
to recycle a certain percentage each year.  A bill containing
similar provisions (S 399) has been sponsored by Senators Heinz
and Wirth.

     The  credit system could be supplemented with a labeling
requirement for lube oil.  Small containers of lube oil might
bear a notice of the environmental hazards caused by illegal
disposal, describe how used oil should be managed, and perhaps
provide a toll-free number to call for information on the
location  of recyclers or collection points.  This labeling
requirement would improve household and small business awareness
of recycling opportunities.

Deposit-Refund System

     A system of deposits and refunds would also aim at
encouraging increased return of used oil and discouraging
improper  behavior.  Rather than setting the quantity or
percentage of used oil to be managed properly, a deposit-refund
system would set prices (the amounts of the deposit and refund)
to achieve a particular quantity or percentage target which, in
turn, would reflect some measure of the externality.  Deposits
might be  paid by lube oil manufacturers, and refunds might be
paid to recyclers on demonstration of oil sold as lube stock or
burned for energy recovery.  It is conceptually possible to have
the deposit-refund system implemented at the retail store level,
but the transactions cost of such a scheme would likely be large.
In most respects, the implementation of a deposit-refund system
for used  oil is analogous to the credit system.


     Use  of incentives to encourage collection and recycling of
used oil  is likely to be more effective than a command-and-
control approach because of the difficulty of detecting illegal
disposal  of used oil.

     To determine how much additional recycling of various kinds
would result from a credit system, it! is necessary to evaluate
the factors currently discouraging greater recycling.  At one
extreme, the credit system could encourage the recycling of
virtually all used oil, if:          i

     o    only small inducements are heeded to encourage
          generators to send used oil to recyclers, and

     o    the demand for credits creates sufficient revenues for
          recyclers, in addition to the basic value of the
          recycled oil, to cover the costs of recycling.

At the other extreme, the credit system could provide little
inducement to recycle more used oil without a very high
recycling-to-lube oil production ratib if:

     o    large payments for used oil are needed to encourage
          generators to provide used oil, and

     o    the costs of recycling in compliance with permit
          standards are high.

     Because the regulatory framework for used oil is still
evolving, the overall effect of a used oil credit system on
recycling rates is difficult to determine.  A major focus in past
debates has been the potential stigma1 or other adverse
circumstances associated with listing! used oil as hazardous under
RCRA.  Critics of regulating used oil as hazardous argue that
recyclers and consumers who perceive used oil as hazardous may be
reluctant to participate in recycling.

     A deposit-refund system or a credit system could be
implemented at either the federal or the state level.  However,
since lube oil produced and sold in a: deposit state is
indistinguishable from that sold in non-deposit states, a
mechanism would have to be developed to avoid an influx of
"foreign" used oil seeking a refund. ; Further, a credit system
imposed on producers by a state would; reguire some way to measure
how much of each producer's lube oils! was sold in each state
having a credit mechanism.

     If the regulating agency had complete knowledge of the
behavior of used oil suppliers and demanders, credit systems and
deposit/refund systems could be structured to produce equivalent
results.  Because of the potential adverse effects of "misses"
from the optimal price-quantity combination, the regulating
agency may have a reason to prefer deposit/refund systems when
the price effects of a credit system are likely to be large. In
this situation, very high credit prices might be required to
achieve a given quantity goal.  On the other hand, a

deposit/refund system may "miss" the desired change in
environmental effect.  Further research is needed to evaluate the
net benefits of recycling credit vs. deposit/refund systems in
light of the uncertainties concerning price and quantity effects.

     Under a credit system, lube oil supply and demand and the
markets for credits would have to be monitored to ensure that the
system does not result in shortages of lube oil.  In an expanding
economy, demand for lube oil could grow faster than the
generation of used oil for recycling, causing the price of
credits to increase significantly without inducing much new
recycling.  In this event, "artificial" credits could be created
to allow increased production of lube oil.

     Tracking the exchange of credits should not present a major
administrative problem.  EPA estimates that there would be 160
sellers of credits/generators of refunds and 35 to 40 buyers of
credits/payers of deposits.  Records of sales from recyclers and
lube oil producers could be cross-checked, to detect creation of
phony credits.  However, it would be difficult to detect
collusion between buyers and sellers to create phony credits.

     Without testing and recordkeeping, it might be more
difficult to verify the validity of the number of credits created
by recyclers.  Recyclers might increase the number of credits
they generate by adding hazardous wastes, water, or other
substances to the recycled oil, or might simply create credits in
excess of their recycled output.  Some check on the creation of
credits could be provided by requiring recyclers to keep records
of both the quantities of oil received for recycling, and the
quantities of recycled oil produced.  EPA could also require
testing of recycled oil to detect dilution with other substances.
However, it would be difficult to verify quantities of used oil
received and shipments of recycled oil without imposing record-
keeping and reporting requirements on a very large number of gas
stations, transporters, and fuel distributors.

     Finally, either system could encourage greater import of
lube oil, which might contain more hazardous waste or other
impurities than domestically produced used oil.

                      OTHER MSW INCENTIVES

     Economic incentives are designed not to compel a specific
course of behavior, but to encourage efficient behavior by
changing price signals perceived by individuals.  Those price
signals should be changed only where the original prices do not
reflect external costs that are present.  The previous sections
have discussed application of a range of incentive approaches to
encourage reduced municipal waste generation and increased
recycling.  Additional incentive applications have been raised in
a wide variety of publications and elsewhere.  Although, in many
cases, questions remain about the seriousness of associated
environmental market failures and the appropriateness of a
federal role in administration of the incentives, these ideas all
merit further consideration.

     The following section briefly summarizes the Task Force's
discussions of beverage container deposit/refund systems,
incentives to increase yard waste composting (including both
demand and supply-side incentives), the potential role of trading
in a regulatory program that could be established requiring use
of recycled newsprint, and the use of;fees to reduce purchases of
packaging.  A number of these incentives might more accurately be
referred to as hybrid command-and-control/incentive approaches,
as they combine significant elements of each system.


     Goal of Incentive

     The goal of a beverage container;deposit/refund system  (or
"bottle bill11)24 would be  to encourage collection of beverage and
perhaps other containers  for recycling, thereby  reducing litter
and potentially reducing  the quantities of MSW disposed of and
reducing energy use and pollution associated with the extraction
and use of virgin materials.
      "Beverage  container  deposit/refund  systems  are  commonly
referred  to as  "bottle bills,"  although  they typically  cover
beverage cans as well as glass and plastic bottles.

      Description of Incentive

     ^Nine states currently have bottle laws.   Although the
 details of their programs differ,  deposit programs typically
 involve the following steps:

      1.   Retailers pay a deposit  (e.g.,  $.05)  to bottlers (soft
           drink) or wholesalers (beer)  for each beverage
           container product they receive.

      2.   Consumers then pay the same deposit to the retailer
           when they purchase the beverage.

      3.   Consumers receive the deposit back  from a retailer when
           they return the empty container.

      4.   Retailers claim the deposit from the bottler or
           wholesaler when they return the  empty container to
           them.   In addition,  bottlers or  wholesalers usually pay
           a handling fee (typically  $.02 per  container)  to
           retailers for each  container returned.

      Bottle bill  design  issues  include the types  of  containers
 covered, the  level  of  the  deposit, the size  of the handling  fee,
 and the  fate  of unclaimed  deposits.

      Evidence of  the effects  of existing  fees on  the behavior of
 different groups  and in  different regions is limited.  As
 reported in a study by Richard  Porter that examined  Michigan's
 mandatory deposit program, the  return rate one year  after the
 mandatory deposit system took effect was  95  percent, and the
 return rate for containers with a five-cent  deposit  was as high
 as the rate for ten-cent deposit containers.  Porter's research
 concludes that high return rates were attributable to the
 "number, knowledge, and  convenience of container  return centers"
 and did  not depend  on  the  level of the deposit.25  Further,
 evidence from Oregon's system (where deposits are two and five
 cents) shows  that the  return  rate for two-cent containers was
 actually higher than for those  with five-cent deposits.

     Bottle bills are  largely self-implementing.  Once the
 deposit  is collected,  there is  an incentive  on the parts of
      See Richard C. Porter, "Michigan's Experience with Mandatory
Deposits on Beverage Containers," Land Economics. Vol. 59  No  2
May 1983.

consumers and retailers to return containers to reclaim the
deposit.  The normal recordkeeping involved in transactions
between retailer and wholesaler or bottler should be sufficient
to ensure that deposits are being collected and repaid as

     Although estimated return rates typically range from 70 to
over 90 percent, there is controversy about the effects of bottle
bills on reductions in overall litter.  There is also controversy
about how much reduction in MSW disposal results from bottle
bills.  Bottle bills have the potential to reduce disposal by
four percent on average (the portion of the national MSW stream
by weight composed of beverage containers).  However, bottle
bills do not guarantee that all containers collected will be
recycled.  States report that virtually all aluminum is recycled,
but that perhaps 80 percent of plastic containers collected end
up in landfills.

     In addition, there is some concern that bottle bills may
encourage a shift toward purchase of!beverages in plastic
containers.  The Can Manufacturers Institute conducted a study
that found a significant increase in plastic containers' share of
the soft drink market in New York State — from 39 to 52 percent
— after implementation of a bottle bill in New York.  An
increase in the use of plastics is considered undesirable if
plastic containers are less recyclable than glass or aluminum

     Concern has also been expressed about possible economic
conflicts between bottle bills and more general recycling
programs, such as multi-material drop-off or buy-back centers and
curbside recycling.  Because bottle bills take the most
profitable components  (aluminum cans, and some glass) out of the
waste stream, they may discourage recycling efforts that target a
larger  portion of the waste stream.

     While evidence on the benefits and costs of bottle bills is
limited, it  is likely that they vary by region.  These
variations,  in such areas as capacity shortages and the cost of
storing and  backhauling empties, suggest that the benefits of a
bottle  bill  may  not exceed the associated costs in all regions.
Consequently, even  if bottle bills are justified for certain
states  or regions,  a uniform national bottle bill may not be

      To evaluate the merits of a bottle bill, additional
information  is  needed  on:  (1) the extent to which bottle bills
have  resulted in increased recycling  of different types of
containers;  (2)  the extent to which bottle bills have caused
undesirable  shifts  in  container market shares and consumer
purchasing decisions;  (3) the extent  to which bottle bills

 compete with other recycling programs;  and (4)  the costs and
 benefits of bottle bills,  including regional variations in both
 costs and benefits, and the size of economies (if any)  in
 labeling and administrative costs with  a uniform national
 program, compared with the cost of state programs.


      Background and Goal of Incentives

      According to EPA estimates,  yard wastes comprise  from 10  to
 30 percent of the nation's MSW,  varying seasonally and by region,
 with an national average of 20  percent.   Ten states have already
 passed landfill disposal bans on some or all components of their
 yard wastes.

      Composting is environmentally preferred to  either
 landfilling or incineration as  a method for  managing yard wastes.
 Not only do yard wastes take up a significant amount of space  in
 a  landfill,  but methane gas and acidic  leachate  are generated
 during their anaerobic decomposition.   Given their low Btu value
 and potential for contributing  to nitrogen oxide and other air
 emissions,  yard wastes are not  a good source of  potential energy
 for waste-to-energy (WTE)  plants.   Combustion of yard wastes,
 whether at WTE plants or in back yards,  also contributes to air

      Description of Incentives

      In general,  composting involves  creating an aerobic
 (oxygenated),  temperature-controlled  environment for compostable
 material to decompose and  form  a  stabilized  humus-  or soil-like
 product.    The speed of decomposition and the quality  of the
 compost product depend largely  on proper  control  of ventilation
 (oxygen flow)  and temperature.  Decomposition may take  several
 months  or several years, depending  on the nature  of the  yard
 wastes  and the composting  practices.

      Composted yard wastes can be used as a  soil  amendment  or
 mulch by residents, nurseries, farms, park services, government
 and private landscapers, and other  groups.  Households might use
 grass clippings  directly as mulch,  or might use compost  in  home
 gardens  and on lawns.  Centralized programs may give away or sell
      Office  of  Technology  Assessment,  U.S.  Congress,  Facing
America's Trash;   What Next for Municipal Solid  Waste?   October
1989, pp. 184-190.

finished compost to residents, sell it to nurseries, or provide
compost for use in public parks, etc.;

     There are two general forms of yard waste composting:  in
household back yards and at centralized facilities serving
multiple households.  Currently, there are over 986 yard waste
composting facilities in the U.S., and the number is expected to

     Incentives can be used to encourage greater levels of
backyard composting and mulching, centralized composting, and use
of compost.  Incentives to encourage these activities include the

     Purchase rebates or tax credits!for materials used in
backyard composting and mulching.  This approach would subsidize
the purchase of composting equipment, through rebates or tax
credits.  Rebates would be paid by the federal, state, or local
government to consumers submitting proof of purchase.

     Investment tax credits and other subsidies for centralized
composting facilities.  Publicly, privately, or jointly operated
centralized yard waste composting facilities could receive any or
all yard wastes from one or more communities.  Incentives to
encourage construction of new private composting facilities could
include investment tax credits to reduce capital costs.  Another
option is for the municipality to simply pay the owner of a
composting facility a fee to take municipal yard wastes, in an
amount sufficient to make composting profitable but not to exceed
the avoided cost of landfill disposal. Finally, private
composting investments will be more attractive if the
municipality pays for the collection and delivery of yard wastes,
and ensures a predictable supply of yard wastes to the facility.
Collection and transportation costs for operators of eight
municipal yard waste facilities are between one and ten times
greater than processing costs.

     Subsidies or other incentives for use of compost.  The
federal government might also help by subsidizing the cost of
purchasing or using compost.  For example, the application and/or
transport cost of compost could be subsidized when used on
farmland to protect soil productivity, reduce erosion, and
protect water quality.  This  approach could be modeled after the
USDA's cost-sharing programs  to control nonpoint source pollution
       BioCycle.  March 1990.
      8A.C. Taylor  and R.M.  Kashmanian,  Study and Assessment  of
Eight Yard Waste Composting Programs  Across the United  States.
December 30,  1988.   Published as EPA/530-SW-89-066.

 from agriculture.   Alternatively,  development on federal land and
 projects funded by the federal government could be tied to the
 use of compost.

      Technical support and education programs.   Any yard waste
 composting program would need to involve education efforts to be
 successful,  either to provide technical information on backyard
 composting or to publicize the collection of yard wastes,  and
 uses for compost,  with a centralized program.

      The need for  a federal role in encouraging more composting
 of yard wastes is  not clear.   If the merits  of  increased
 composting are due largely to reduced demand for landfill
 capacity,  the benefits of federal  involvement may not be
 compelling,  since  capacity problems vary substantially by  region.
 However,  it  is possible that federal procurement and tax subsidy
 incentives might be more effective than those instituted by state
 or local  governments.   Also,  a federal role  may be effective in
 expanding the market for compost products, particularly if
 suppliers and users of compost products are  located in different


      Background and Goal of Incentive

      An  increased interest in promoting the separation,
 collection,  and reprocessing  of old newsprint (ONP)  is  due in
 part  to the  fact that  newspapers constitute  approximately  5.5
 percent of MSW by  volume,  and also  because,  compared  to many
 materials, newspapers  are easy to  recognize  and  separate out of
 residential  waste.

      Of the  13.7 million tons of ONP generated annually in the
 United States,  approximately  4.5 million tons (33%) are currently
 recycled,  with 1.5  million tons  recycled to produce newsprint
 (i.e., 33% of  the  amount recycled),  2.0  million tons  (44%)  used
 to produce other paper and paperboard products, and 1.0 million
 tons  (22%) exported.  The remaining  9.2  million tons  are
 landfilled or  incinerated.  Due  to the  increasing number of
municipalities with ONP  recovery programs, it is likely that the
 supply of  ONP  available  for recycling will increase considerably
 in the early 1990s.

     The demand for ONP  for use  in newsprint production is
 limited by cost and environmental concerns.  Use of ONP in
newsprint production involves installation of expensive equipment
that removes the ink from the paper.  The secondary fiber  is then
combined with virgin fiber to produce newsprint.  Although
research indicates  that there may be cost savings from using

secondary feed in place of virgin pulp at some plants, the
newsprint industry has exhibited only a moderate shift toward the
use of ONP.  The lack of assured supply of ONP is a major barrier
to investment in deinking capacity, particularly since many
states and localities are legally barred from entering the long-
term supply contracts paper mills need to justify such capital
investment.                          '.

     In addition, the deinking process itself raises
environmental concerns.  The environmental and health risks
associated with recycling have not been thoroughly studied.  This
issue must be carefully explored as the possibility of
commitments to increased newsprint recycling are evaluated.
Newsprint manufacturers may be wary about investing in plants
that solve one environmental problem while possibly creating

     Connecticut and California have enacted
mandate demand for ONP; similar proposals are pending in New
York, Illinois, and Wisconsin.  The Connecticut statute requires
newspaper publishers to increase the recycled content of the
newsprint they consume by 10 percent per year, until the recycled
content reaches 90 percent in 1998.  The recycled content
standard first takes effect in 1993 (when a 20 percent content
will be required).                   :

     A minimum recycled content standard for newsprint imposed on
newsprint producers and importers would create additional demand
for ONP by mandating specified usage .levels.  By increasing the
demand for ONP, this policy would cause an increase in the price
of ONP, and thereby encourage additional collection and
reprocessing of ONP.  Such a standard^ could be imposed on
publishers instead of on newsprint producers, with similar
     Description of Incentive

     Rather than acting as a strict command-and-control approach,
which would require each individual producer or importer  (or
publisher) to meet the standard, this approach would incorporate
a trading scheme, to ensure that the industry-wide standard was
met in a least-cost way.  For example, if the standard required
the use of feedstock containing at least 20 percent of recycled
newsprint, producers and importers could create credits for sale
by producing newsprint using more thain 20 percent recycled
feedstock.  Thus, a producer of 100 tons of newsprint a year who
produced 30 tons of recycled newsprint would have 10 tons worth
of credits to sell to another producer or importer.


      The  content  standard with trading addresses the problem of
 insufficient  demand  for ONP.  A standard system that increased
 the  recycled  content from the current industry average of 10
 percent to  20 percent would  increase the use of ONP in newsprint
 production  from about 1.5 million tons to 3 million tons,
 assuming  no loss  of  volume due to the imposition of the standard.

      The  benefits of reduction in landfill disposal of ONP
 resulting from  the increased use of ONP in newsprint would

      o    on  whether the recycled ONP was produced using domestic
          or  foreign ONP as an input (or, for state-level
          programs,  whether the newsprint with recycled content
          used  ONP from within or outside the state);

      o    on  whether the increased use of ONP in newsprint
          reduced landfill disposal or simply displaced other
          domestic uses of ONP and exports; and

      o    on  the  social value of the landfill space saved.

 Given reports of  stockpiles and reduced collection of ONP due to
 lack of demand, it seems likely that the increased use of ONP in
 newsprint production would result in increased recycling overall,
 rather than simply a shift in the types of products recycled.

      The  social  cost of a recycled content standard would depend
 on a variety  of factors, including:

      o    the cost of expanding deinking capacity, including the
          cost  of complying with applicable regulatory

      o    the cost to society of a reduction in value of products
          made  with  newsprint, due to the possibility of a
          reduction  in product quality as a result of use of
          increased  recycled content; and

      o    the opportunity cost of deterring other forms of ONP

In general, the cost  of complying would vary across firms,
depending on  the  distance between publishers (users of
newsprint), consumers (sources of ONP),  and newsprint producers.

     More information is needed on the economics of using ONP in
producing newsprint,  especially on the costs of collecting and
shipping ONP  to newsprint plants and how these costs affect

economic incentives to use ONP, and on the environmental impacts
of ONP recycling, which may involve the location of noxious
papermaking and deinking processes imiheavily populated areas.  A
newsprint recycled content standard may hurt other users of ONP,
such as manufacturers of other paper'. products made with ONP,
exporters, and insulation suppliers.;  This could significantly
reduce the benefits of the minimum recycled content standard.
Analysis is also needed to determine the distributional effects
of this policy, especially differences in regional impacts.
Information on the foreign trade implications of this policy is
needed — e.g., how severely U.S. demand for Canadian newsprint
would be affected (the U.S. imports approximately 60% of its
newsprint from Canada) by the need to purchase import credits,
whether it is feasible for Canadian plants to employ ONP in
newsprint production, and whether this policy would violate
existing trade agreements.  Finally,ja minimum recycled content
standard does not address the problem of lack of assured supply.
It may be that an easing of state and local restrictions on long-
term contracts would be sufficient to allow the market for
recycled newsprint to function smoothly without a minimum
recycled content standard.



     "Greenhouse" gases released by human activities, such as
carbon dioxide, methane, and chlorofluorocarbons, absorb heat
that has been radiated from the earth's surface and trap it in
the atmosphere.  Scientific theory suggests that a steady
increase in the concentration of greenhouse gases in the
atmosphere could alter global climate, increasing temperatures
and changing rainfall and other weather patterns.

     Carbon dioxide (CO2)  emissions are the largest contributor
to global warming, followed by methane (CH4) ,  chlorofluorocarbons
(CFCs), and nitrous oxide (N2O).1   Detailed measurements of
carbon dioxide levels in the atmosphere since 1958 show an
increase in CO2 concentrations from 315 to 350 parts per million
by volume.  A recent EPA study reports that an estimated 5.5
billion tons of CO2 emissions result from fossil-fuel combustion,
and 0.4-2.6 billion tons from deforestation.2   Table 1 lists the
major stratospheric air pollutants and their sources and effects.

     There is much scientific uncertainty about the magnitude and
timing of temperature changes that may be caused by a build-up of
greenhouse gases.  One recent review of the research suggests
that, by the second half of the 21st !century,  past emissions of
greenhouse gases will raise the global temperature by one to two
      D.A.  Lashof  and  D.A.  Tirpak,   eds.,  Policy  Options  for
Stabilizing Global  Climate;  Draft Report to  Congress;  Executive
Summary.  U.S.  EPA, February 1989, pp.  11-12.

     2Ibid., p.  15.

degrees Celsius.3  By causing temperatures  to  increase,
greenhouse gas emissions may alter precipitation patterns and
increase evaporation.  These climate changes could have profound
environmental and socioeconomic impacts by inducing changes in
forests, biodiversity, coastal wetlands, water resources, and
agriculture.  By the same token, efforts to reduce emissions
could impose high costs, and themselves could cause significant
economic dislocation.

     Global warming raises a unique set of policy issues because
the effects of global greenhouse gas emissions transcend national
boundaries.  The United States is currently engaged in a major
international research effort to assess the potential for climate
change as a result of increased emissions of CO2,  CH4, and other
greenhouse gases.  Support for this effort is needed to ensure
that our policies are based on sound scientific analysis.
Economic factors as well as scientific ones must also be taken
into account.  Estimates of the costs and benefits of alternative
response strategies can be used to identify cost-effective policy
designs and efficient policy targets.

     It is important to recognize, when comparing the benefits
and costs of control actions, that policies to reduce greenhouse
gas emissions would reduce, but not eliminate, any future
warming.  Benefits are measured by the difference in impacts with
and without the policy in place.  In addition, analyses of
policies to reduce emissions must consider their full global
impact.  Policies that raise the cost of production in the United
States may simply shift emissions to other countries, since lost
U.S. production could result in greater production (and thus
greater emissions) in other countries.  In addition, the effect
of restrictions on the consumption of fossil fuels in countries
adopting greenhouse gas policies may be to lower world market
prices for those fuels, thus increasing consumption in countries
not adopting such policies.

     If economic and scientific research indicates that policies
to reduce emissions are warranted, a variety of incentive-based
programs might be used to encourage reduced emissions in the most
cost-effective manner.  Final judgment on the merits of these
incentives will depend on the results of the ongoing research and
analysis.  For these reasons, policies with global leverage, such
as efforts to accelerate the development of new reduced-emissions
technologies that will be voluntarily adopted on a worldwide
basis, may be attractive alternatives to the emission reduction
strategies considered in this chapter.
      J.B.  Smith and D.A. Tirpak, eds.,  The  Potential Effects of
Global  Climate Change  on  the United  States;  Draft Report  to
Congress; Executive Summary. U.S. EPA, October 1988, p. 5.


     Economic incentives could play a valuable role in efforts to
implement any reductions in net greenhouse gas emissions.  First,
no individual country can, through its own actions, have an
adequate impact on the level of global net greenhouse emissions.
Any actions to reduce net emissions would have to be agreed upon
by countries with very different institutional arrangements for
addressing environmental problems.  Moreover, both the costs of
reducing net emissions and the economic resources available to
invest in mitigation vary greatly among countries and sources.
The most cost-effective approach to reducing net emissions would
take into account these differences in control opportunities and
resources.  Incentive approaches could achieve desired reductions
in net emissions at a lower cost than an approach that did not
provide flexibility to reallocate the effort demanded of
different sources and countries.     !

     The Task Force considered four incentive strategies to
reduce emissions of greenhouse gases.  Two of the incentives — a
fee on the carbon content of fuels and a vehicle "sipper/guzzler"
fee/rebate system — could be used to internalize the cost of
environmental damage caused by emissions from use of fossil
fuels.  A third incentive would encourage use of electric utility
rate-setting practices that take more accurate account of the
costs and benefits of conservation.  The fourth policy would
incorporate trading as part of negotiated international
restrictions on net emissions.


     Carbon dioxide (C02)  is the most abundant greenhouse gas
after water vapor.  The combustion of fossil fuels is the major
human source of carbon dioxide emissions, accounting for 65 to 85
percent of global carbon dioxide emissions.  Since preindustrial
times, the atmospheric concentrations of CO2 have increased 23
percent.  Although higher concentrations of carbon dioxide induce
smaller and smaller temperature changes, CO2 is expected to be a
dominant gas in future increases of the greenhouse effect.

     This incentive would impose a fee on fossil fuel production
or on the carbon content of different imported fuels.  The fee
would be higher for fuels containing more carbon and .therefore
contributing more to C02 emissions.   The fee would raise prices
to fuel consumers, and might promote energy efficiency and fuel
substitution, which would in turn reduce greenhouse gas
emissions.4  The fee could also be accompanied by a decrease in
other business taxes (e.g., social security payroll taxes) to
offset its effects on inflation and national income.


     One of two approaches might be taken to set fee levels.
Fees could be set to internalize the social costs imposed by CO2
emissions, with total emission levels to be determined by the
responses of fuel users.  Alternatively, specific emission
targets for greenhouse gases could be established based on
economic and scientific assessments.  Then, fees could be used as
a tool to reach these targets.

     The fees would be imposed on fuels from foreign as well as
domestic sources, to avoid fuel switching by U.S. customers.  The
U.S. Treasury would collect fees at the point of entry for
imported fuels and at the point of primary production for
domestic fuels.  Thus, for domestic fuels, the fee would be
applied to coal shipments from coal mines, crude oil received at
refineries, and natural gas received by pipelines.  The U.S.
Treasury would also be responsible for enforcing the fee.

     Although the fee would be imposed directly on fossil fuel
production or import, consumers of goods and services produced
with fossil fuels would bear this fee in the form of higher
     ^Reductions  in  fossil   fuel  use  would   generate  other
environmental  improvements,  such  as  acid  rain  reduction  and
improvements in urban air quality.

prices.  Initially, consumers might not alter their energy
consumption behavior appreciably.  With time, however, they would
have more opportunities to reduce their consumption and turn to
alternative sources of energy.


     A recent EPA report on global warming concluded that a fee
on fuel carbon content could encourage fuel substitution, reduced
fuel use, and associated reductions in CO2 emissions.
Substantial costs would have to be imposed on fuel users to
achieve significant change in fuel use, however.  For example,
rough estimates indicate that by the year 2000 a fee of $5 per
ton of carbon would reduce annual U.S. carbon emissions between
0.6 and 4.0 percent from baseline levels and raise $7 to $10
billion in revenues per year once fully implemented; a fee of $15
per ton would raise $20 to $30 billion and reduce annual carbon
emissions by 3 to 12 percent from baseline levels; and a fee of
$25 per ton would raise $38 to $50 billion in annual revenues and
reduce annual emissions by 8 to 17 percent from baseline levels.

     The competitiveness of certain U.S. industries could be
affected by large fees on fuel carbon content.  Industries for
which energy costs are a large portion of production costs, such
as primary metals and chemicals, would be most severely affected.
In addition, certain regions that are heavily dependent on fossil
fuels, such as the Northeast, would incur larger costs under such
a program.

     Because the effects of CO2 emissions cross state and
national boundaries, federal government involvement might be
justified to ensure that the cross-boundary effects of emissions
are considered.  However, state-level greenhouse policies have
been proposed.  For example, California's Proposition 128  (Big
Green) included a provision to limit emissions of greenhouse

     The ultimate effect of U.S. efforts on emissions,
international trade, and competitiveness would depend on the
extent to which other countries restricted their greenhouse gas
emissions.  Implementation of a carbon fee in the United States
might therefore be made contingent on efforts by other major
emitting countries.  It also might be accompanied by reductions
in other business taxes.             :

     Substantial additional scientific research is needed on the
costs and environmental benefits of reduced fossil fuel use.  In
     5D.  A.  Lashof and D.  A.  Tirpak,  eds.,  op.  cit.,  pp.  37-38.

particular, more understanding is needed of the relationship
between CO2 emissions and global  warming,  and of the impacts of
possible future global warming, to determine the costs and
benefits of major reductions in fuel use.  Depending on how fee
levels would be established, detailed analysis of the economics
of fuel use may be required.  Finally, in-depth analyses of the
macroeconomic effects and distributional impacts (by industry,
region, and income group) of different fee levels are needed.


     Each greenhouse gas has a different impact on the
atmosphere.  These gases come from diverse sources, both natural
and anthropogenic (human-induced), that involve virtually all
economic sectors.  Humans can also remove greenhouse gases from
the atmosphere by planting trees.

     Substantial reductions in greenhouse gas emissions would
require the cooperation of many nations and changes in a wide
range of economic activities.  The costs of reducing net
emissions would most likely be high, and would vary greatly from
country to country and from one type of source (or sink) to
another.  Policies to limit the economic burden would be
desirable, if further scientific and -economic research indicates
that net greenhouse gas emissions are justified.

     This incentive would introduce trading provisions to an
international limit on net emissions of greenhouse gases.  A
trading component could promote international participation in
the agreement by encouraging the greatest reductions in those
countries with the lowest-cost opportunities to reduce emissions.
In addition, international trading may provide a source of funds
for countries with relatively low-cost options for reducing net
emissions, but with limited funds to invest in those options.


     This incentive assumes that a number of nations reach
agreement to impose limits on net emissions of greenhouse gases
from each nation.  The agreement might address one or more of the
greenhouse gases believed to have the; greatest direct impact:
carbon dioxide (CO2) ,  methane (CH4) , chlorofluorocarbons  (CFCs),
and nitrous oxide (N?O);  or,  it  could also  include gases believed
to have an indirect impact: volatile organic compounds (VOCs),
nitrogen oxides (NOX) ,  and  carbon monoxide  (CO) — each of which
also contributes to tropospheric ozone.

     It is difficult to compare policy options that target
different gases.  Any agreement covering more than CO2  alone
would require some method for establishing net emission limits
for individual gases on an equivalent basis,  since the different
gases vary in their contribution to global warming.  A single
metric that can integrate and estimate the contribution of a mix
of gases would allow policymakers to assess more accurately the
total impact of a policy option on global climate.  Several

proposals have been made for a CO2 equivalent index,  which could
be used to include additional gases in an agreement.

     EPA has recently developed and implemented a comprehensive
method for determining each greenhouse gas's specific
contribution to temperature change.  EPA's approach measures the
emissions of individual greenhouse gases using a common metric:
"carbon equivalents."  The Intergovernmental Panel on Climate
Change recently published a list of these equivalents, the
''Global Warming Potentials" of various greenhouse gases.
Emission equivalents are then summed to yield total current
greenhouse gas emissions.

     The trading component is straightforward in concept.  Each
country would have a target for net greenhouse gas emissions, and
would have two options for achieving the target:  (1) investing
in programs to reduce actual emissions, or (2) purchasing from
another country a right to emit greenhouse gases at levels above
their own target.  Countries could create rights for sale to
other countries by reducing their net emissions below their
agreed-on target.

     The private financial system could provide for the transfer
of funds among countries to finance trades.  Each country would
have to determine how to distribute or collect funds involved in
international trades among its businesses and populations.  One
method for countries with market economies would be to replicate
the trading system on a national scale, and simply allow trading
among private and public sources within each country as well as
among countries.


     Incorporating trading in any international agreement to
limit net greenhouse gas emissions could have a number of
potentially important benefits.

     First, trading could reduce the aggregate worldwide cost of
achieving net emission reductions, by encouraging the greatest
reductions and/or sink enhancement by the countries and emission
sources with the lowest emission reduction costs.

     Second, by allowing flexibility in response, trading may
encourage greater participation among nations in an  international
agreement.  Finding ways to encourage participation would be
crucial, because many countries would most likely face difficult
conflicts with economic and other goals if they agreed to
significant net emissions reductions.  By focusing on the diverse
assortment of greenhouse gases, and not solely on CO2/ systems
like EPA's comprehensive approach may avoid placing  an excess

burden on energy-intensive  (particularly those using fossil fuel)
industries that emit CO2.             ;

     Third, the trading  of  emission rights may help to finance
emission reductions in developing countries, by providing a means
of financing investments in control technologies.  In effect,
trading would create a' new  export "commodity" — rights to emit
greenhouse gases.  Some  developing countries might have a
comparative economic advantage in producing such rights.
Reforestation may be a very promising activity in many of these
countries.  These countries could sell rights to countries that
would incur higher costs to achieve equivalent reductions, at a
price sufficient to cover the cost of the required investments.
Depending on the market  price that emerged for emission rights,
countries with a strong  comparative advantage in net emission
reductions may even find trading to be a positive source of
economic growth.

     However, several areas pose difficult challenges for the
design and implementation of an emission trading system.

     The first and perhaps  most difficult issue is how to
determine initial allocations of emission rights among countries.
There is some precedent  for such an agreement in the Montreal
Protocol on Substances that Deplete the Ozone Layer.  One option
would be to cap emissions at current levels; however, emissions
per capita today vary considerably across the world.  Developing
countries might view a cap  at current levels as unfair, due to
concerns that it could impede economic development.  However,
since growth in emissions from developing countries is a major
source of predicted baseline growth in greenhouse gas emissions,
targets that allow developing countries to emit as much per
capita as industrialized countries would most likely defeat the
purpose of the agreement.  More energy-efficient industrialized
countries might view reductions tied to current emission levels
as inequitable, since it might not compensate for past emission
reductions.  In general, any method for allocating emission
rights among nations would need to consider current emission
levels, and to incorporate  reasonable assumptions about
population growth and likely impacts on economic growth.

     Second, any agreement to limit emissions must specify how
emissions would be monitored.   There are trade-offs between ease
of monitoring and accurate measurement of contribution to global
climate changes.  For example, reduced fuel use might be
relatively easy to monitor,  but it is an imperfect measure of
contribution to greenhouse gas emissions.   Emissions also depend
on the use of control devices, agricultural practices,  and
reforestation.   Methods would have to be developed to express the
contribution of each activity to emissions on an equivalent
basis.  In addition,  systems would be needed to monitor fuel use,

use of control technologies, reforestation, changes in
agricultural practices, and other activities that influence
greenhouse gas emissions.

     All of these issues would arise under any type of
international compact to reduce net greenhouse gas emissions.
Adding a trading component to the system should impose only
limited additional administrative or enforcement complexity, and
could substantially reduce the economic burden imposed by agreed-
upon net emission limits.



      Energy use in electricity generation is  an important source
 of carbon  dioxide (CO2) and other greenhouse gas emissions.
 Sharp increases in oil prices in the early 1970s and increases in
 electric rates due to rising  costs  of construction prompted
 widespread efforts among  U.S.  households,  commercial
 establishments,  government agencies,  and industries to conserve
 electricity.   Substantial improvements in energy efficiency were
 achieved in response to these strong economic  incentives.
 Further reductions in electricity use through  increased
 investment in conservation measures may be justified,  if further
 scientific and economic research indicates that policies to
 reduce greenhouse gas emissions are needed.

      Some  economists  argue that customers  already  have sufficient
 incentives to employ  energy-saving  technologies, because they
 thereby achieve  savings in their electric  bills, and that  many
 proposals  to  promote  further  conservation  are  not  cost-
 beneficial.   Other economists argue that there has been
 underinvestment  in conservation programs.7  The latter view has
 led to various proposals  to encourage greater  utility  investment
 in conservation  programs.

      Discussions concerning conservation often suggest that
 conservation  programs should only be  undertaken if the benefits
 in reduced generation costs (including fuel use) exceed the cost
 of the conservation program.  The relative cost of conservation
 vs. generation therefore  determines the  optimal policy.  However,
 considering the  environmental consequences of  different options
 might  change  the optimal  policy choice.  The contribution  of that
      See Kenneth W.  Costello,  "Ten Myths of Energy Conservation,"
Public Utilities Fortnightly, March 19, 1987.

       Underinvestment in conservation is attributed to a variety
of  causes—for  example,  the  fact  that  the marginal  cost  of
electricity often  exceeds rates charged to  customers  (which are
based on average costs); that some customers (e.g., renters without
individual meters) do not incur the costs of their electricity use
directly; that there are information barriers hindering customers'
evaluation of conservation alternatives; that capital constraints
discourage  investments in  conservation technologies;  and  that
methods used to set  rates do not reflect  the  full  social costs,
including environmental costs,  of electricity generation.

electricity generation using fossil fuel to global warming, acid
precipitation, and other environmental problems would suggest
that conservation has social benefits beyond those reflected in
private costs.

     Incentive programs could be designed simply to remove
existing biases against investment in conservation, or could go
further to account for the contribution of electricity generation
to environmental externalities.


     Regulation of electric utilities is the responsibility of
state regulatory commissions.  Therefore, the primary opportunity
to apply economic incentives arises at the state level.  The
types of programs that can be used include:

     o    demand-side bidding and

     o    utility rate reform.

     The federal government could encourage states to adopt
policies that promote conservation and to factor the
environmental impacts of power generation into regulatory
decisions.  For example:

     o    The Federal Energy Regulatory Commission^(FERC)  has
          already proposed regulations on supply-side bidding to
          promote deregulation.  This proposal could be expanded
          to  incorporate demand-side provisions as well.

     o    The Department of Energy could provide assistance to
          state public utility commissions, to support any of a
          number of  conservation incentive programs.

     o    EPA could  assist states and utility commissions  in
          their evaluation of the environmental costs of
          different  energy options.

Least-Cost  Planning

     Least-cost planning is a  comprehensive method for evaluating
options for meeting  energy-service needs.  The least-cost
planning process differs from  traditional utility  planning by  (1)
explicitly  including conservation and load management programs  as
options,  (2)  considering environmental  and social  as well  as
direct  economic costs,  and  (3) analyzing the uncertainties and
risks as well as expected costs  associated with different  energy

 supply options.  The use of  least-cost planning approaches  in a
 number of states has led to increased interest in demand-side
 management programs generally.   These demand-side programs
 influence the characteristics of customers'  demand for
 electricity,  including both total demand  for energy and the
 timing of demand.   Utility  demand-side management programs have
 included education  programs,  audit services,  promotion of
 appliance efficiency,  and funding of conservation investments.

 Demand-Side Bidding Programs

      Programs designed  to promote deregulation in  power supply
 have become common  in  recent  years.   The  passage  of the Public
 Utility Regulatory  Policies Act  of 1978 created a  new market for
 third-party electricity generation.   For  some utilities,  third-
 party sources have  become a major source  of new additions to
 power supply.   A number of  jurisdictions  have used auction-type
 bidding programs to acquire specified amounts of electric power.
 These programs ensure that  the most  cost-effective method is used
 to  acquire power.

      Recently,  there have been a number of proposals  to include
 "demand-side  options,"  including conservation,  in  such bidding
 programs.   In these proposals,  conservation services would be
 considered as  an alternative  to  new  power sources  in  the  bidding
 process.   Bids might be submitted by utility  customers
 themselves, or by energy service companies, who would share
 savings with the customers.

      The specific design of such programs is  the subject  of  much
 debate.   Various economists have offered  different  approaches to
 structuring the bidding process,  with the goal of ensuring that
 only  efficient conservation measures  (those for which the true
 savings,  based on the marginal cost  of additional generation,
 exceed  their costs)   are undertaken.   Different mechanisms are
 proposed  for sharing the savings  among the utility, the suppliers
 of conservation  technologies and  services, and utility customers.
      See C.  Goldman,  E. Hirst, and F. Krause, Least-Cost Planning
in the Utility Sector;	Progress and Challenges, oak Ridge National
Laboratory, May 1989.

      See Amory  Lovins,  "Saving Gigabucks with Megawatts," Public
Utilities  Fortnightly,  March 21,  1985,  for  a  description  of  a
bidding  system  requiring utilities  to  purchase  "saved" kwh  of
electricity as an alternative to new generation.

     More extensive use of bidding requirements that include
demand-side options might encourage greater investment in
conservation measures, reduce the need for new generating
capacity, and reduce utility fuel use.  Bidding programs could be
designed to provide an advantage to demand-side options, based on
the negative environmental externalities associated with

Changes in Utility Rate-Setting

     The methods commonly used to set utility rates discourage
utilities from investing in or promoting conservation.
factors contribute to this problem.
     First, utilities are generally allowed to earn returns on
investments in generating capacity, which are included in the
utility's rate base.  However, most commissions require that
conservation investments be expensed, providing no addition to
the rate base.

     Second, once rates per kwh have been set in a rate case,
utilities have an incentive to sell as many kwhs as possible.
Encouraging conservation decreases a utility's earnings.

     Some states have revised their procedures to address these
disincentives to invest in conservation.  In some jurisdictions,
utilities are allowed to include conservation investments in
their rate base.  Some states, such as Wisconsin and Washington,
even allow utilities to earn a higher return on conservation than
on other investments.  A variety of methods have been proposed to
address utilities'  incentives to maintain sales.  For example,
California's "Electric Revenue Adjustment Mechanism" adjusts
rates upward if sales fall below forecasted levels.  Utilities
are therefore not penalized if they invest in conservation


     Some studies indicate that significant reductions in future
generation of electricity are possible with increased
conservation efforts.  For example, a study by Applied Energy
Services estimated  that conservation programs could reduce
electricity demand  from projected  levels by 101,000 Megawatts  (or
      "See   Alliance   Technologies   Corp.,   Electric   Utility
Conservation  Incentives;   Potential  Federal Roles.  Draft  Final
Report for U.S. EPA, August 1989, for a discussion of the effects
of utility ratemaking on conservation incentives.

 14 percent of total projected U.S. demand) in the year 2006.11
 The effect of increased conservation incentives on greenhouse gas
 emissions depends on what type of utility generation is displaced
 by conservation.  The greatest emission reductions would occur if
 conservation induced substantial reductions in coal-fired

      Any programs to promote further conservation of electricity
 must address certain basic issues.  These include:

      o    how to define and measure the benefits of conservation,
           including direct savings in electric generation costs
           and reduced environmental impacts,  and

      o    how to design programs that ensure  that beneficial and
           economically justified conservation programs are
           undertaken and that conservation measures with costs
           that exceed their full benefits are not encouraged.

  4..,.3?ere is substantial controversy,  for example,  about whether
 utilities should be required to pay for demand-side conservation
 at all and,  if so,  how much should be paid.12   Among the
 proposals are requirements that utilities pay:

           the average cost of electricity to  the generator

           the utility's full avoided cost of  generation or

           the difference between the average  cost of electricity
           to  the consumer and the avoided costs  to the  utility
           resulting from conservation.

 The differences  among these  proposals basically  involve the
 sharing of savings  from conservation between  the utility and the
 customer.  Some  economists argue  that paying  the customer the
 utility's  full avoided cost  would result  in excessive investment
 in inefficient conservation  measures, because the customer is
 essentially paid twice—once in reduced electric bills  and again
 in payments from the  utility.  The third  approach is designed to
 correct incorrect price  signals to the customer  when rates (based


        Roger F.  Naill, "Least-Cost  Alternatives  for Electricity
Generation," Energy Economics  and  Energy Politicsr  op.  cit., pp.

     1* cl?arles J- Cicchetti and William Hogan, "Including Unbundled
Demand-Side Options in Electric Utility Bidding Programs," Public
Utilities Fortnight!yr June 8,  1989.                        	

on average costs) are below marginal costs, and is less likely to
encourage overinvestment in conservation.

     There are also concerns about the effects of conservation
programs on the rates paid by customers who are not able to
reduce their electricity demand.  Some proposals to promote
conservation impose a "no losers" test, requiring that
conservation programs be adopted or funded only if they represent
savings to the utilities and if no customers face higher rates as
a result.  There is controversy about how much such provisions
discourage the adoption of cost-effective conservation
        Larry  E.  Ruff,  "Least-Cost  Planning  and  Demand-Side
Management: Six  Common Fallacies  and  One Simple  Truth,"  Public
Utilities Fortnightly. April 28, 1988,  pp. 22-25.

                   "SIPPER/GUZZLER" REBATE/PEE

     Automobiles contribute to increasing greenhouse gas
concentrations by emitting carbon dioxide and nitrous oxide as
they burn gasoline.  The most obvious, direct, and efficient way
to limit greenhouse gas emissions from this source would be to
impose emission taxes.  The amount of the tax would be equal to
the economic value of the damages caused by the emissions.  The
advantage of .this approach is that it internalizes the social
cost of pollution, while minimizing interference in the market.

     An alternative, less economically efficient, approach would
be to focus on new-car  fuel efficiency.  Technologies are already
available that can increase automobile fuel economy from current
levels.  A recent study estimated that fleet average levels of 34
mpg could be achieved by the year 2000, as compared with a 1987
level of 27 mpg, without reducing vehicle sizes or performance.14
Substantially greater fuel efficiencies are technologically
feasible, although they may require sacrifices in vehicle size
and performance.  Existing purchase patterns, such as a revealed
preference for expensive optional engines that add to the
purchase price and fueling costs, suggest that consumers place a
high value on performance.  Performance and safety considerations
would merit close attention in any cost-benefit analysis of this

     Existing programs  designed to encourage fuel economy rely on
a traditional "command-and-control" approach.  The primary
mechanism for increasing fuel economy has been the corporate
average fuel economy (CAFE) standard established by the U.S.
Department of Transportation.  Under this program, each auto
manufacturer's fleet of cars produced over a year must meet the
fuel economy standard on average (currently 27.5 miles per
gallon) or pay a penalty.  Auto manufacturers have struggled to
meet these standards,  partly because consumers have continued to
demand high performance and, therefore, less fuel-efficient cars,
despite higher prices for such cars and the gas guzzler excise
      +Carmen  Difiglio,  K.G. Duleep,  and David L.  Green,  "Cost-
Effectiveness of Future  Fuel Economy Improvements," August 1989.
Prepared  for  publication in The  Energy Journal.    However,  most
manufacturers  have   exploited  new  technologies   to  increase
performance rather than fuel economy in recent years.

     This incentive would impose a new gas guzzler fee, with
rebates offered for sales of highly fuel-efficient cars.  The
incentive would encourage vehicle owners to reduce fuel use by:
(1) purchasing more fuel-efficient cars (gas sippers) and (2)
retiring the stock of old, fuel-inefficient cars (gas guzzlers)
more quickly.


     Currently, automobile manufacturers pay an excise tax based
on the mileage rating per gallon of an automobile.  As currently
structured, the gas-guzzler fee paid by manufacturers applies to
a small percentage of sales (less than 5 percent).  To date, the
gas-guzzler tax has been applied mainly to high-priced foreign
luxury car imports; no domestic manufacturer has ever had to pay
the fee.  The current fee is levied on vehicles whose combined
EPA-rated highway and city fuel efficiency is less than 22.5 mpg.
The tax imposed on 1987 cars ranged from $500 for ratings of 22.5
miles per gallon or more to $3,850 for cars with ratings under
12.5 miles per gallon.15

     Designing the incentive system would involve specifying the
amount of fee or rebate to be applied for each fuel-efficiency
level.  The fee and rebates could be indexed over time.  In
deciding where to draw the line between sippers and guzzlers,
decision-makers would have to consider both the average fuel
economy of the existing vehicle stock and the level of the fee to
impose on guzzlers.

     The fees could be set to reflect the social costs imposed by
vehicle gasoline use, without regard to a specific target for
emission reductions.  In this case, the fee/rebate system might
substitute for rather than reinforce the CAFE program.
Alternatively, the program could be designed to achieve a
specific target improvement in overall fuel efficiency, in which
      EPA's  Office  of  Policy Analysis  analyzed  an  alternative
scenario wherein the purchasers of all but the most fuel-efficient
vehicles were  taxed at  the time  of  purchase.    The  preliminary
analysis estimates  the fee  level  necessary to hold  CO,  to 1989
levels through the  year  2000,  and to  maintain this level through
the year 2010.  Using simplified assumptions, the results suggest
that the average  vehicle would need to be  taxed  $1,300 (in 1989
dollars) by the year 2000, and taxed $1,500  by the year 2005.  The
year 2000 goal corresponds  with  a tax schedule  that assesses,  on
average, a  $75.00  penalty  for every mpg  below 50  (the  current
standard for the  most fuel-efficient vehicles  predicted  for the
year 2000).

case careful analysis of baseline trends in vehicle purchases and
of the price sensitivity of different customer groups would be

     The federal government could collect fees and provide
rebates to manufacturers based on their sales over a designated
period.  Systems for measuring and reporting vehicle design fuel
economy are already in place under the CAFE program.


     The effect of specific fee and rebate levels on emissions
would depend in part on the price sensitivity of different
vehicle purchasers.  Many low mile-per-gallon cars are luxury
cars.  Purchasers of these cars appear to be relatively
insensitive to small price increases.  Purchasers of gas sippers
are likely to be more sensitive to vehicle price than purchasers
of gas guzzlers.  Although further analysis is a prerequisite to
implementation, this proposal holds some promise to improve upon
the current programs by adding an incentive for price-sensitive
customers to increase the average fuel efficiency of their

     However, the effects on emissions of encouraging purchases
of more fuel-efficient vehicles, however, are uncertain for two

     First, the effects of improved fuel efficiency might be
reduced by increases in the numbers of miles driven (because of
the reduced marginal costs of driving brought about by the
program) and by failure to maintain cars properly.  Moreover, the
owner of an existing gas guzzler might avoid replacing the
vehicle and instead continue to operate the older, less fuel-
efficient vehicle.

     Second, increases in miles driven can result in higher
levels of other, indirect greenhouse gases,  such as NOX and VOCs.
The relationship between gasoline consumption and emissions can
vary, depending on the nature of design changes used to improve
fuel efficiency.  Some engine design changes that improve fuel
efficiency may increase the rate of emissions per gallon of fuel
for certain pollutants.16

     This incentive does not address vehicle owners'  driving
practices.   If total vehicle emissions continued to be
      Lester  Lave,  "Conflicting  Objectives  in  Regulating  the
Automobile,"  in Public  Expenditure and  Policy Analysis  (Third
Edition), Houghton Mifflin Co., Boston, MA, 1983.

significant despite new incentives to increase fuel efficiencies,
more complex incentives could be considered to target the
behavior of vehicle owners more directly.  Examples of incentives

      o   A federal income tax credit or debit based on the fuel
          economy of new automobiles or the automobile(s) that a
          taxpayer currently owns.  The tax credit/debit could be
          based on a schedule of automobiles classified according
          to fuel economy, fuel use, age, and/or location of

     o    Increasing  the cost of operating fuel-inefficient cars
          through a "smog" tax on gasoline purchases, to
          encourage consumers to buy fuel-efficient cars and
          drive less.17  One study has proposed that cars be
          given a smog rating that would affect the cost of
          gasoline for that car.18  A similar approach might be
          taken using a broader-based index that reflected the
          costs of greenhouse gas emissions.

These alternatives could be considered as supplements to or
substitutes for a fee/rebate program.

     Some new record-keeping systems would be needed to implement
these alternative incentives.  For example, the tax credit/debit
would require vehicle owners to use (and the IRS to audit) an
annual credit/debit schedule incorporated into the computation of
their income taxes.  (Vehicle owners could keep records on
gasoline purchases and mileages in lieu of using the schedule.)
Proof of vehicle characteristics and vehicle maintenance records
are normally kept by consumers, so this would not involve an
additional record-keeping burden.  A "smog tax" would require
record-keeping by gasoline retailers similar to that now done for
collection of gasoline taxes.
     17For  certain emissions,  such as C02, which  is  emitted at a
constant rate per gallon of fuel, the "smog tax" would be in effect
a simple "gas tax."

     18 See A. Myrick Freeman III, Robert H. Haveman, and Allen V.
Kneese, The Economics of Environmental Policy (John Wiley and Sons:
1973), pp. 132-134.


     The U.S. has basically relied on command^and-control
approaches to manage water resources.  EPA has focused on
regulating water quality, while state and local agencies have
focused on water supply.

     Effective management of water resources may require control
of water quality problems, reduced water consumption, and
wetlands protection.  The environmental impacts of these aspects
of water resource management are interrelated.  If water quality
is degraded, less water is available for consumption.
Conversely, excessive withdrawals from surface and ground water
and destruction of wetlands degrade water quality.

Water Supply

     Water is becoming an increasingly scarce resource.
According to the 1983 National Fisheries Survey, low water levels
are harming fish in 68 percent of U.S. inland waters.   In 1975,
two-thirds of the nation's ground water was not fully recharged.
Public opposition to new reservoirs and economic concerns
increase the benefits of relying on improved management and
conservation measures to meet water needs.
     Conservation Foundation, State  of the Environment:  A View
Toward the Nineties, p. 226.

     2Ibid.,  p.  231.

Water Quality Degradation

     Surface Water

     The United States has made considerable progress during the
past twenty years in cleaning up many of the nation's waterways.
However, degraded water quality persists as a problem in certain
areas.  Recent data from the states, as reported to EPA, indicate
that approximately 10 percent of the nation's river, stream, and
coastal water mileage and lake and estuary areas continue to be
too polluted to support recreational fishing and swimming.3	
These data reveal that 17,365 different segments of these water
bodies in 49 states and 6 territories are contaminated by toxic
contaminants, conventional pollutants, or both.

     In a recent study, EPA found that approximately 595 stream
segments are contaminated by one or more of 126 toxic
contaminants.   The major sources of these contaminants  are
industrial facilities, sewage treatment plants, and "nonpoint
sources" (nonpoint-source pollutants originate from nonspecific
sources, such as urban and agricultural runoff).  EPA identified
627 industrial point sources that discharge toxics directly to
surface waters, including metal finishing and manufacturing
plants, pulp and paper mills, petroleum-refining plants, and
organic chemical and plastics plants.  EPA estimated that, in
1987, 554.7 million pounds of toxic chemicals were discharged
directly to surface waters, and 883.5 million pounds were
discharged indirectly through publicly owned treatment works

     Toxic pollutants in surface waters may pose ecological and
health risks in some areas.  EPA studies have shown that certain
toxic organics and metals can threaten aquatic life and build up
in the food chain.  When these chemicals concentrate in fish,
they can pose a significant human health risk if consumed.
       U.S.  Environmental Protection Agency,  Report to Congress;
National Water Quality Inventory—1988.

     4Stream segments are generally six to ten miles long.

     5Section 313 of the  Emergency  Planning  and Community Right-
to-Know Act requires manufacturing  firms to report  releases of
toxic  chemicals  for the  Toxic Release  Inventory  (TRI).   These
reported releases are a subset  of all point-source toxic releases;
non-manufacturing and transportation sources and certain industrial
sources are not included.  The quantities of chemicals discharged
to surface  water that  are  reported here do not  include  sodium

     In addition to health and ecological effects, there may be
significant economic damages associated with toxic discharges to
surface water.  EPA's Unfinished Business report estimated that
industrial discharges to surface water cause losses of
approximately $800 million per year in recreational fishing,
swimming, and boating opportunities.  Similar discharges from
POTWs cause welfare losses of approximately $2.4 billion.

     In many water bodies, nonpoint sources are greater
contributors of conventional and toxic pollution than industrial
or municipal sources.  The primary nonpoint-source pollutants
degrading freshwater are agricultural fertilizers, insecticides,
and herbicides.  EPA knows much less about the quantities and
sources of nonpoint-source pollutants than about point-source
pollutants.  However,  EPA estimated in Unfinished Business that
nonpoint-source pollution causes $3.6 billion in damage to
recreational fishing, swimming, and boating.


     In recent years, EPA and other environmental agencies have
begun to focus on protecting groundwater resources.  EPA has
found that past mismanagement of wastes and products has
seriously contaminated aquifers in certain areas.  This
contamination can pose significant risks of cancer and other
health effects to the people who use the groundwater for drinking

     Improper waste storage and disposal practices may have
contributed to groundwater contamination in some areas.
Underground fuel storage tanks, improper disposal of used
containers of pesticides and other chemical products,  municipal
solid waste landfills, and active and inactive hazardous waste
disposal facilities have been responsible for contaminating
ground water at various locations.  Facilities meeting current
state or federal standards are not likely to pose these types of

     Because of all the public attention to groundwater
protection, the issue has become a major focus of agency
activities.  Both efforts to prevent contamination and to treat
or clean up a contaminated aquifer are expensive and can take
many years.  EPA's estimates of the health risks associated with
groundwater contamination are somewhat speculative.  Improvement
of these estimates is needed to assess the level of intervention
that serves to maximize net social benefits.


      During recent decades,  the United  States has been  filling
wetlands  at a  rate of between  300,000 and  450,000 acres per
year.   Wetlands destruction can result in the loss of a number
of important natural  resources, including:

      o     habitat  for a  large  number of aquatic and terrestrial

      o     natural  filtration for removing  pollutants from water;

      o     storage  area for flood waters; and

      o     primary  production of plants  that provide the
           nutritional basis  for the food chain that supports
           finfish  and shellfish.

These damages  often cannot be  easily reversed.

      EPA  and other federal agencies require permits for the
development of wetlands  under  Section 404  of the Clean  Water Act.
However,  there are important exceptions to Section 404
requirements,  most notably for agricultural users, that have led
to the net loss of freshwater  wetlands  in many areas.   In
addition,  many areas  of  the  United States  are seeking new or
expanding existing drinking  water supplies.  The development of
these supplies may contribute  to a number  of environmental
problems,  including the  destruction of wetlands.


     Incentives can play an  important role in protecting water
supplies  and water  quality where market failures exist,
especially where contamination is caused by numerous small
sources.   The  Task  Force considered three incentives that would
affect water quality  and supplies.  The first incentive addresses
the pricing of water  for consumption by households and
businesses.  This  incentive would alter both the level  and the
structure  of water  rates to  encourage more efficient use.

     The second incentive would involve a deposit/refund system
for pesticide  containers.  Users would return these containers to
central locations for proper reuse or disposal in order to
recover their  deposits.
     6 U.S.  Fish and Wildlife Service,  Status  and Trends Report;
National Wetlands Inventory (1983).

     The third incentive would reduce federal subsidies that
encourage environmentally damaging development in coastal and
wetland areas.  The discussion addresses the National Flood
Insurance Program and various federal infrastructure programs
that subsidize bridges, marine construction, and highways.


      Inefficient use of water resources  can lead  to  a  number of
 environmental problems,  including:

      o    wetlands destruction resulting from construction  of new
           water supply projects;

      o    reductions in assimilative  capacity, temperature
           increases, and changes in natural flow  patterns from
           water withdrawals  and damming  of  streams and rivers;

      o    reductions in ground-water  flow to surface water  due to
           increased withdrawals from  aquifers;

      o    increased contamination of  ground water from excessive
           irrigation of agricultural  areas;  and

      o    excessive demands  on and reductions in  the efficiency
           of  wastewater treatment facilities.

      Inefficient use of  water by households,  firms,  and farms may
be encouraged by current water pricing policies.  Water has
historically  been considered in many  regions as a plentiful  and
"free" good.   However, water is increasingly being viewed as a
scarce resource  that has been improperly  priced.

     Most municipally supplied water  is consumed  by  households,
although practices  vary  among communities.7  Only about five
percent of water consumed indoors by  households is used for
drinking and  cooking;  the remainder of indoor household use  is
for sanitary  purposes.   Water is  also used outdoors  for watering
lawns, washing cars,  and filling  swimming pools.  Household  water
demand is influenced by  location, population density, household
income, season,  and the  price of water.  Studies have found  that
household water  demand in the winter  is relatively insensitive to
price, while  summer water demand shows significant price
elasticity.   Other studies  show that  industrial  and  agricultural
water demand  are  also  responsive to price.
     7Diana C.  Gibbons, The Economic Value  of Water.  Washinqton,
D.C: 1986, pp.  7-8.

     8  Ibid., p.  10.

     The goal of this incentive would be to promote changes in
the level and structure of municipal water prices, to encourage
more efficient use of water resources, and to reduce the
environmental degradation that accompanies ever-expanding water

     As is the case with electricity generation and telephone
service, the variable costs of water supply are relatively small,
while the fixed costs of the distribution of water can be very
substantial.  Frequently, water pricing does not reflect the full
fixed operating and long-term capital costs of providing water
services.  For example, roughly 85 percent of smaller water
utilities use a flat-rate or declining-block-rate pricing
structure.  Few areas have instituted peak load water prices that
reflect the high marginal cost of serving seasonal demands or
increasing-block-rate pricing that would discourage excessive
water use.  In addition, water metering is not universal, so
households may not be billed at all.

     Water pricing has historically been the responsibility of
local governments.  There may be a justification for federal
involvement in water pricing where increased water withdrawals
impose costs that cross municipal and state boundaries, or when
the federal government subsidizes the cost of water supply
projects.  The federal government could encourage municipalities
to improve pricing practices, for example, by:

     o    funding public education activities and research on the
          benefits of changing water-pricing structures; or

     o    providing technical assistance to communities for
          studies on alternative water-pricing structures.

     EPA currently issues a number of permits, grants, waivers,
and approvals to municipalities for water supply and wastewater
treatment projects.  These include:  (1) approval of
environmental impact statements under NEPA; (2) Clean Water Act
section 404 wetlands permits for water supply projects;  (3)
waivers from compliance with certain provisions in the Safe
Drinking Water Act (SDWA); (4) construction grants and state
revolving funds for sewage treatment facilities; and  (5)
exemptions to antidegradation and antibacksliding requirements
for publicly owned treatment works  (POTWs). A larger number of
communities will need to implement new EPA stormwater and safe
drinking water regulations.  For those communities that do
require some form of EPA approval, EPA could require that they
improve their water-pricing structures as a condition for
securing EPA's approval on these items.


     The  effect  of pricing changes on water demand by various
sectors will  depend  on the price levels and the price sensitivity
of each use.  As noted above, water demand may be responsive to
changes in water-pricing structures.  Residential demand for lawn
and garden watering, car washing, and other outdoor water-based
activities can be very responsive to increases in water prices.
These uses tend  to cause peak demand, which often dictates the
size of water supplies.  As a result, future needs for water
supply capacity  can  be influenced by water pricing structures
that account  for the increased costs associated with meeting
these peak load  demands.

     Improvements in water pricing would be designed to
internalize the  true marginal costs of water use.  The
appropriate level and structure for water rates would depend on a
number of local  factors, including the cost of new supplies,
seasonal  variations  in demand, and the relative importance of
different water  supply cost components (fixed vs. variable costs,
distribution  vs. water purchase or source development costs,

     The  benefits of improved water pricing are likely to vary by
region.   In areas where water supplies are plentiful, rates that
accurately reflect supply costs would be relatively low, while in
areas with limited water supplies, water users would pay
substantially higher prices.  The greatest benefit to improved
pricing would result in those areas with high water supply costs
and current pricing practices that seriously understate the cost
of water  use  to  consumers.

     In addition, the costs of implementing improved pricing
would vary in different communities.  Many large water utilities
already bill  consumers for water use based on meter readings.
Changing  the  pricing structure in these communities should
involve few administrative hurdles.  Other communities would have
to pay the cost  of installing metering equipment.  In addition,
city owned or municipally owned utilities may be able to change
their rate structures more easily than privately owned water
utilities, which typically need to seek approval from state
Public Utility Commissions for their rates.

     The  costs of implementing improved rate structures must be
weighed against  the benefits of improved pricing in each
locality.   If the federal government required municipalities to
adopt new pricing practices, there is a danger that the costs of
implementing  these programs would exceed the resulting benefits.
Water use  would be unnecessarily reduced if these costs were

passed through in prices, or utilities would receive lower
earnings, imposing costs that exceeded benefits.  Any federal
program to encourage or mandate changes in water pricing would
have to take account of geographic variations in the costs and
benefits of such programs.

     Water utilities may be reluctant to adopt new pricing
policies due to public opposition to water rate increases.
Changes in water pricing may be more palatable politically if
they are tied to providing safer drinking water and a better
understanding of the scarcity of water supplies.  EPA may have to
combine the incentive program implemented through EPA approvals
with tailored technical assistance and education programs.  In
any event, further detailed analysis is needed before the design
and implementation of incentives of this type.

                     FOR PESTICIDE  CONTAINERS

     EPA estimates that more than 100 million pesticide
containers are discarded annually by commercial and agricultural
applicators in the United States.  Also, approximately 1.1
million pounds of pesticide residues (active ingredients) are
discarded along with these containers.   This figure does not
account for the amount of inert ingredients (e.g., solvents and
diluents) that are also discarded as a significant portion of
pesticide formulations.  Although a portion of these containers
are disposed of legally in regulated hazardous waste facilities,
EPA believes that a significant number are disposed of without
effective hazardous waste controls.  Discarded pesticide
containers vary greatly in size and material type, from large
metal canisters to plastic buckets to paper bags.

     Uncontrolled disposal of pesticide residues and containers
might contribute to groundwater contamination as well as other
environmental problems.  Implementation of a deposit/refund or
tax/rebate system for pesticide containers might encourage proper
management of empty pesticide containers by encouraging the
return of containers to pesticide formulators.


Deposit/Refund System

     A deposit/refund program could affect three groups involved
in the sale and distribution of pesticides:

     o    registrants/formulators;

     o    dealers; and

     o    consumers (agricultural and homeowner).

     When dealers purchase pesticides,  they would pay a deposit
to the formulator.  Dealers would then charge the deposit to
consumers when they purchase the pesticides.  When consumers
return the containers, pesticide dealers would refund the
deposit, or credit the value toward their next purchase.  Dealers
would collect the containers and transport them to pesticide
formulators to obtain their refund.  Formulators would be
responsible for recycling or properly disposing of the waste
materials.  The difference between deposits paid and refunds

generated is, in effect, a tax on losses of containers from the

     Deposits could be set at a single rate (e.g., $5.00 per
container), as is generally done for beverage containers.  The
variability in sizes and types of pesticide containers, however,
makes the use of a single deposit a poor measure of potential
environmental damage from improper disposal.  Instead, the
deposit could be based on the volume of pesticide held in the
container — e.g., $0.50 for each pound of pesticide.  This
approach would provide additional incentives to return larger
containers, which contain the largest quantities of residual

     Deposits might also be higher for containers that hold
exceptionally toxic pesticides.  For example, two or more
toxicity "tiers" could be developed, and deposit amounts would
increase as a function of the toxicity rating.  Use of variable
deposit schedules might make the system more difficult to
administer than a single deposit system, but would internalize
the costs of improper container disposal more accurately.

Tax/Rebate System

     This incentive would be similar to a deposit-refund program,
but would instead place a tax or "fee" on the active ingredients
used in pesticide formulations supplied by pesticide
"registrants."  The fee from registrants would be held in trust
by the federal government and distributed to the states via FIFRA
grants to administer the collection programs.  The states would
have to revise their federally approved pesticide plans to
include pesticide container recycling/disposal plans in
accordance with federal guidelines.  Such guidelines would
presumptively include provisions for rebates paid to
farmers/ranches/other applicators of agricultural pesticides to
return spent pesticide containers.  The state would inspect
incoming containers to ensure they had been properly rinsed (to
qualify for exemption from RCRA) and would then shred the plastic
container for subsequent recycling or disposal.


Deposit/Refund System

     More information is needed on the contribution of pesticide
container disposal to environmental contamination, to determine
whether any policies addressing this source are warranted.  In
particular, better information is needed on the danger posed by
management of pesticide residues and containers in landfills and

waste piles, relative to the hazards associated with general
pesticide use.  The estimated 1.1 million pounds of pesticide
residues disposed of annually is a relatively small amount,
compared to the roughly 2.2 billion pounds of pesticides applied
each year in the United States.  Direct use of pesticides may be
a more important source of nonpoint source pollution, worker
exposure, and consumer exposure through pesticide residues on
food, than improper disposal of residues and containers.
Resources might be better used to reduce exposures to pesticides
by targeting nonpoint-source pollution, training in proper
pesticide application techniques, and worker safety.

     In addition, more information is needed on the extent to
which management of used containers by formulators would be
better than management by end-users or other intermediaries.  A
deposit/refund system would not, by itself, ensure that residues
and containers would be properly managed once returned.  The goal
of the incentive would be to encourage return to locations (1)
where recycling may be a viable option, and (2) where disposal
practices may be more protective and easier to monitor.  Further
research is needed on supply and demand elasticities to determine
the correct level of deposits and refunds.  Evaluation of any
differences between the number of units on which deposits are
paid and the number on which refunds are paid would support
analysis of the "tax" effects of such a system, or it might allow
analysis of whether a higher refund than deposit amount might be
advisable.  For example, if only 80% of pesticide containers were
being returned, then a refund of 125% of the deposit amount might
be feasible.

     To be effective, a deposit/refund system might need to be
accompanied by other programs to improve recycling opportunities.
Many pesticide containers may not be refillable or recyclable as
general-purpose packaging.  More information is needed on the
potential for reuse of pesticide residues and containers,
especially in the manufacture of new formulations and new
pesticide containers.

     Finally, more information is needed on the effects of
existing regulations on the environmental benefits of container
return and on formulators1 incentives to participate in a
deposit/refund system.  The system would most likely result in
reduced contamination if formulators receiving the used
containers were regulated as RCRA Subtitle C hazardous waste
facilities.  However, deposits would have to be high enough to
cover the added costs of RCRA compliance, if many formulators are
not already regulated under Subtitle C.

Tax/Rebate System

     Research would be'-'neCessSry to d^termiirte «both the level of
funding required to run pesticide collection programs in each
state, and the level of refund necessary to attract clean
pesticide containers.  Research would also be necessary to
determine the overall arid "distributional" effects of imposing a
fee on pesticide registrants, as opposed to placing a fee on
containers shipped by formulators in order to address the problem
of container disposal.  If imposed on registrants, a formula
would be required to allocate program costs based on a number of
containers in which such active ingredients might be found.  That
is, based on how a formulator of pesticides marketed or packaged
active ingredients in a product, a gallon of a particular active
ingredient could be found in, e.g., 3, 6, or 12 containers.
Further, research would be necessary to determine the extent to
which taxing active ingredients would encourage substitution of
"inert" ingredients.

                          COASTAL AREAS

     Three out of four Americans live within 50 miles of a water
shore.9  Coastlines,  however,  are not stable.   Over time,  wind
and waves erode and shift the shore, and in the process destroy
and damage buildings, roads, and other structures. During the
last one hundred years, the Atlantic Coast has eroded, on
average, two to three feet per year.

     Despite the risk of hurricanes and floods, low-lying areas
and the beach are attractive home and vacation spots for many
Americans.  Many people have substantial investments in property
and businesses located in these areas.  This development has been
encouraged and supported by a variety of federal programs.

     This development, unfortunately, has deleterious effects on
the sensitive ecosystems of coastal and flood zones.  Development
destroys wetlands and increases vulnerability to flooding and
storms by removing areas that buffer wave action and storm
surges.  Loss of wetlands affects the productivity of fisheries
and the wildlife dependent on these areas.  Development also
stresses the ecosystems by increasing nonpoint- and point-source

     Some federal subsidy programs have been designed either to
reduce the risk of developing in certain areas, or to defray
expenses for large public projects.  These programs have
indirectly encouraged environmental degradation by promoting
development or land-use practices that^degrade water quality,
and/or sensitive coastal environments/"
     The goal of this incentive would be to remove or reduce
subsidies in federal programs that indirectly encourage
environmental degradation.  While over 50 federal programs affect
coastal and inland shores, this discussion focuses on the
National Flood Insurance Program and federal infrastructure
      U.S.  EPA, Office  of  Water,  Office of Marine  and Estuarine
Protection: Briefing Book. January 1989.

     10EPA's Office  of Marine and Estuarine Protection (OMEP)  is
developing a compendium of about  50  federal  financial assistance
programs that have an impact on coastal waters.


The National Flood Insurance Program

     As of 1989, the National Flood Insurance Program  (NFIP)
underwrote 2.1 million policies covering 170 billion dollars
worth of property.11  The average homeowner's premium was $270
per year, generating total annual funding of about $600 million
per year.  When a property loss occurs due to a storm, hurricane,
flood, erosion, or sea level change, those insured under the NFIP
can rebuild or repair the structures through this program.12

     Congress instituted the NFIP in 1968 to reduce the federal
government's need to support property owners suffering damage
from natural disasters such as floods and hurricanes, by
requiring property owners to pay some insurance premiums.  In
addition, the program was to  "minimize the development of land
which is exposed to flood damage and minimize damage caused by
flood losses" by guiding "the development of proposed future
construction, where practicable, away from locations which are
threatened by flood hazards."13  Thus, the program is intended to
reduce federal outlays by creating a self-financed insurance
program and by slowly reducing the number of covered properties
in zones likely to suffer flood, erosion, or hurricane damage.

     The NFIP has failed to meet these objectives.14  According
to the Federal Emergency Management Agency (FEMA), which
administers the NFIP, the number of households located in flood
hazard areas has grown by 40 percent since 1966.  In addition,
the NFIP has not been self-supporting during its existence, and
has had to be funded in part by general revenues.
      In  terms of  domestic liability,  the NFIP  is  the  second
largest government  program.   The  Social Security System  is the
      Other federal subsidy programs,  such as the Federal Disaster
Relief Agency,  the Small Business Administration, the Farmer's Home
Administration, and the Department  of Agriculture programs, also
underwrite the development, repair,  and restoration  of  coastal
      Chapter 50, Section 4001 (e).

     14An  evaluation  of the  National  Flood Insurance  Program is
presented in Storm on the Horizon; The  National  Flood Insurance
Program and America's Coasts, by  Beth Millemann,  Director of the
Coast Alliance, with assistance from Elise Jones, National Wildlife
Federation,  September 1989.  Much of  this  discussion is based on
this report.

     In fact, the NFIP has the mandate and structure in place to
reduce the federal subsidy of coastal and flood zone development
through insurance, or to minimize the environmental damage
resulting from the subsidy.  The Coast Alliance and the Wildlife
Federation have made ten recommendations to improve the
effectiveness of the NFIP, including:

     o    requiring that new and substantially improved
          construction be located behind the erosion-prone zone;

     o    discontinuing issuance of flood insurance policies for
          new or substantially improved development in the
          coastal high-hazard zone, and its corollary along the
          Great Lakes; and

     o    increasing premiums for repeated damage claims to
          encourage relocation instead of reconstruction.

Federal Infrastructure Programs

     Federal infrastructure programs managed by the Departments
of Transportation and Defense and by EPA fund local and state
projects, such as highways, bridges, ports and harbors, water
supply, and sewage treatment.  This development may be located in
ecologically sensitive flood zones or coastal areas.  For
example, some Corps of Engineers (COE) projects to create or
increase water supplies result in upstream dams and diversions,
and coastal dredging operations for ports and harbors disturb
fragile wetlands and estuaries.  Other COE activities, such as
beach replenishment programs, may encourage increased use of
lands in sensitive areas.  The government could amend its
decision criteria for these programs to take greater account of
environmental effects for projects located in sensitive areas.


     The NFIP and federal infrastructure expenditures cause
environmental degradation by promoting development in sensitive
coastal ecosystems.  Over the long term, removing or reducing
subsidies in federal aid programs would limit development in
sensitive areas, thereby improving coastal water quality.

     These programs involve several federal departments or
agencies.  Thus, the responsible agencies would have to initiate
     15In South Carolina, there is legislation to discourage owners
from rebuilding properties  in  the flood zone.   This law is being
challenged in the courts.

rulemaking to modify these programs, and in some cases, Congress
might need to revise the underlying statute.  EPA has effectively
supported environmentally positive changes to existing programs
of other federal agencies in the past, as evidenced by its recent
work with the Department of Agriculture on the Farm Act.

     These programs have encouraged economic development and have
the support of the communities and businesses that benefit from
their provisions.  Changes in these programs should focus on
environmental problems, while mitigating economic impacts.
Strategies might include grandfathering existing buildings,
increasing incentives to relocate structures to less sensitive
areas, and developing more appropriate environmental criteria for
use in evaluating infrastructure projects.

     In addition, more information and public education is needed
about the costs and environmental impacts of these federal
programs.  For example, FEMA estimates that federal agencies
spent $6.5 billion for flood-related disasters between 1979 and


                                                         CHAPTER 5

     Many of EPA's existing regulations  address problems  specific
 to  a single medium (e.g.,  water).   The programs implementing  the
 Clean Air Act and  the  Clean Water Act are prominent examples.
 Regulations under  the  Resource Conservation and Recovery  Act
 (RCRA) governing waste disposal are potentially multi-media in
 scope, but in practice have tended  to focus on groundwater
 protection.   EPA is planning to promulgate additional RCRA
 standards to control air releases from other waste management

     This medium-specific  focus may have had some advantages in
 the past.   For example, the focus on individual media may have
 allowed more timely development of  regulations in the early days
 of new programs.   Regulators were able to focus on the numerous
 sources and  substances of  concern to a specific medium, without
 having to comprehend and craft rules to address all the possible
 transfers to and transformations affecting other media.  Also,
 this approach  may  have allowed regulators to build an expertise
 in the environmental and technical  issues associated with a
 particular medium.  This experience has provided a much clearer
 understanding  of the nature of pollution affecting air, water
 and land.                                                    '

     As media-specific expertise has grown,  however,  so has
 awareness  of potential inter-media effects.   The single-medium
 approach has generated different sets of regulations for
 controlling air and water pollution and for land disposal.
 Differences in the costs of controlling releases to each medium
and in the standards governing these releases,  have led some
 firms to shift pollutants to the medium with the least expensive
control costs or the least stringent regulations.   Unfortunately

the least costly releases may not pose the least risk to human
health or the environment.  Bans on land disposal under RCRA, for
example, increased toxic releases from incineration of the
displaced hazardous wastes.  Stringent incinerator emission
controls designed to capture these releases may create toxic ash
and wastewaters, which must then be disposed of.  This example
leads to the problems inherent in the RCRA land ban, which may
lead to environmental problems in other media.  Furthermore, the
focus on releases to a specific medium, instead of on all
releases from a given source, may be a more costly and less
efficient means to achieve a given degree of risk reduction.  For
this reason, many states have begun to coordinate environmental
permit processes, and to consider all environmental impacts when
designing and issuing permits.  New York's Environmental Quality
Act, for example, requires government agencies to minimize all
adverse environmental effects in decisions on permits or
proj ects.1

     For releases to a given medium, choice of control technology
may also affect the volume and toxicity of releases to other
media.  For example, firms that choose to use a wet scrubber
instead of a dry scrubber to control air emissions generate much
greater volumes of wastewater that must then be disposed of.  For
a rotary kiln incinerator, use of a dry scrubber instead of a2wet
scrubber reduces wastewater  from 130 tons to 20 tons per day.
Air stripping of organics to meet water quality standards may
release toxic organics to the air, instead of reducing overall
releases of toxic organics.  Control technologies  for wastewater
treatment requirements generate large  quantities of potentially
toxic  sludge that may contaminate groundwater if disposed of in
landfills or may cause toxic emissions if incinerated.  Overall,
in  1983, pollution controls  generated  approximately 118 million
dry metric tons of sludge  (80%  from air pollution  controls).

     Releases to one medium  may also be transferred to another
medium in the environment.   Land disposal may result  in air
emissions or leaching of toxics to groundwater;  contaminants in
air emissions may be deposited  on  land or in  surface  water;  and
discharges to surface water  may volatilize to air.  The single-
medium approach has often not adequately addressed chemical or
physical  transformations that may  occur once  a  pollutant  is
released.  For  example,  ambient air quality standards for sulfur
dioxide have been written to protect  against  the health effects
      Conservation   Foundation,   State   of  the  Environment;
 Assessment at Mid-Decade,  1984,  p.  351.
      Conservation  Foundation,  op. cit.  1984, p. 324.

      Conservation  Foundation,  op. cit.  1984, p. 326.

 of inhalation.   However,  sulfur dioxide released to the
 atmosphere may  also combine with water vapor molecules to form
 sulfuric acid,  which leads to corrosion and contaminates soil and
 water when deposited.   Regulations that assume releases will
 remain unaltered and in the original medium may not capture the
 full range of risks posed by a given release.

      EPA's increasing concern over these issues has led to a
 strong emphasis on strategies that take account of all the
 environmental ramifications of its regulatory decisions.
 Reducing the volume and toxicity of waste at the source of its
 generation (source reduction)  is an approach avoids cross-media
 transfers.   Individual applications should reflect the costs and
 benefits of programs in particular areas.


      Multi-media pollution could be reduced through better
 coordination of media-specific regulatory programs.  As the
 number^of sources and  media being considered increases,  however,
 incentive approaches often become more  attractive  than command-
 and-control programs.   While the cost of medium-specific,  "end-
 of-pipe"  pollution controls is often relatively uniform across
 industries,  the cost of source reduction through raw materials
 substitution and process  change can vary dramatically  in
 different sectors.   Assessing the costs  and benefits of
 regulatory  programs becomes more difficult  when source reduction
 and  multi-media pollution reductions are the goal.  Therefore,
 the  problem^of  developing regulations that  are  not  cost-
 beneficial  in some sectors  increases.

      Incentive-based policies  that  allow different  parties  to
 respond differently to  appropriately designed financial
 inducements may reduce  the  risk of  over- or under-regulation in
 many multi-media  applications.


     Many of the  incentives discussed elsewhere  in this report
 have multi-media benefits.  For example, incentives designed to
 encourage the use  of recycled products  (particularly incentives
 to recycle used oil, scrap tires, and lead-acid batteries) could
 lead to potential multi-media benefits.  For example, increased
 recycling of hazardous materials could divert these materials
 from landfills,  sewers, incinerators, or water supplies.

     This chapter describes eight incentives that specifically
 focus on multi-media issues.  These incentives illustrate a range
of approaches to encourage multi-media environmental

improvements, including the use of fees, deposit/refund systems,
labeling programs, marketable permits, improved information
exchange, and removal of federal subsidies.  The incentives
described here are only some of the many ways these general
incentive strategies could be used to address different products
or materials.

                      PEES ON VOC EMISSIONS

     Large stationary sources are significant emitters of VOCs,
and thus contributors to tropospheric ozone formation and air
toxics problems.  The most recent National Acid Precipitation
Assessment Program inventory suggests that these sources emit 1.2
million tons of VOCs annually in areas that are not in attainment
with national standards, or about 10 percent of total VOC
emissions in these areas.  A number of our largest cities,
including Los Angeles and New York, continue to experience local
air quality problems.

     An incremental fee placed on VOC emissions from these large
sources might provide an incentive to reduce emissions below the
regulatory requirements currently imposed on a source.  However,
such action would be desirable only if the existing standards
achieve less than optimal emission reductions.  In areas
currently not in attainment with national standards, any
additional reductions in emissions from major stationary sources
could lead to significant improvements.

     Assuming attainment of the ozone standard by most cities by
2005, ozone non-attainment will be restricted to just a few major
cities.  Therefore, fees should be localized to avoid imposing
increased costs on areas where there is little opportunity for
environmental benefit.


     While the details of the fee can be flexibly tailored to the
circumstances of a given non-attainment area,  certain decisions
must be made in each case.  These include:  (1)  the sources to be
covered; (2)  the amount of the per-ton fee; (3)  the appropriate
non-monetary parameters of the fee,  such as whether fees should
increase over time and the proportion of emissions subject to the
fee; (4) the relationship between the fee and the renewable
permit issued a source under the Clean Air Act;  (5)  whether to
institute a banking and trading program for emission reductions
to encourage more rapid adoption of control strategies;  and (6)
methods of enforcing the program.   Under its authority to issue
Control Technique Guidance,  EPA could assist states and
localities in developing policies for each of these key design

Sources to Be Covered

     Fees could apply only to major sources,  as defined by the
Clean Air Act.  Currently, a "major source" is a source that
emits more than 100 tons of VOCs annually.  Expanding coverage to
include smaller sources would significantly increase the number
of sources, with only a modest increase in emissions subject to
the incentive.  For example, extending the fee program down to
25-ton sources would triple the number of sources covered (from
3,300 to 10,000 nationwide), while increasing the quantity of
emissions affected by only 17 percent.  While extending the
program down to 25-ton sources may not be advisable in most
areas, a state with a strong need for reductions and adequate
staff to administer the program might elect to extend the program
to these smaller sources.
Fee Levels

     Developing a reasonable fee structure is crucial to
designing a cost-beneficial incentive.  Ideally, fees would be
set to reflect the health and environmental damages caused by
incremental VOC emissions.  In practice, states and localities
might instead set fee levels to achieve a pre-determined quantity
reduction in emissions.  The latter approach may not result in
cost-beneficial emission reductions, unless the target quantity
reductions themselves are selected based on cost-benefit
criteria.  For example, high fees to encourage significant
reductions in VOC emissions might encourage pollution control
investments whose costs exceed their environmental benefits, or
might simply place unwarranted economic burdens on sources.  In
addition, substantial information on marginal control costs at
different sources would be needed to set fee levels to achieve a
specific change in emissions.

     If states and localities did elect to set fees on some basis
other than the cost of environmental damages, it might be
desirable to take a conservative approach initially.  For
example, the fee might initially be placed below the marginal
cost of control for the average stationary source, currently
estimated at approximately $5,000 per ton of emissions reduced,
to encourage only firms with relatively low control costs to
further reduce emissions.

     The incremental fee might be assessed on a proportion of the
baseline emissions allowed a major source under existing
regulations.  For example, a state agency could assess a major
source an initial fee of $1,000 per ton on 20 percent of annual
permitted emissions, and increase this by $1,000 per ton after
two and four years until a maximum fee of $3,000 per ton would be
assessed.  If the source were able to demonstrate at any time

 that its annual emissions were 20 percent below the baseline
 (i.e.,  below its permitted level), it would be exempt from the
 fee. After an initial period, fees could be increased to
 encourage more sources to reduce emissions,  if further reduction
 in local emissions were determined to be cost-justified.

      Adjusting the fee over time toward optimal levels would
 reduce  economic impacts at the beginning of the program,  as firms
 evaluate methods to further reduce emissions,  and would give
 firms some time to adjust while still encouraging emission
 reductions.   However,  it would be important to make future fee
 increases predictable,  to ensure that firms can anticipate the
 economics of future emission reductions.

 Non-monetary Parameters

      Linking fees to current emission requirements could  result
 in discrepancies across different sectors  in the costs and
 benefits of  the incentive.   If fees  are linked to existing permit
 levels  for administrative convenience,  some  adjustments may be
 required to  reflect the fact that different  sources  currently  are
 subject to different effective emission limits.   A source that is
 currently subject to a  Lowest Achievable Emissions Rate (LAER)
 standard might  not be required to pay a fee  on the same
 percentage of emissions as  a source  that faces a  Reasonably
 Available Control  Technology (RACT)  standard,  as  the LAER source
 is  already controlling  emissions  to  a greater  extent.   For
 example,  chemical  manufacturers required to meet  a LAER standard
 might pay a  fee  on 10 percent of  emissions, those required to
 meet a  Best Available Control  Technology (BACT) standard might
 pay on  20  percent  of emissions, and  those required to meet a RACT
 standard might pay on 30 percent  of  emissions.  To determine the
 appropriate proportions  for  a particular industry, EPA  could
 assess  the control  technologies and  the characteristics of
 emissions  for the  industry and provide guidance to the  states in
 selecting the appropriate targets.

     A  related issue concerns sources in different industries
that face the same technology standard.  These sources should not
necessarily pay the fee on the same percentage of emissions,
because control technologies achieve different emission levels in
different industries.  For example, states could require a LAER
source  in one industry to pay a fee on 10 percent of emissions,
and a LAER source in another industry  (with a less stringent LAER
standard) to pay a fee on 20 percent of emissions.

Interface with Permit Program

     The percentage of emissions subject to the fee,  and the
timing of any fee increases, could be incorporated in the
source's permit.  The percentage might then be reassessed at the
expiration of the permit so that the percentage could increase if
a major advance is achieved in control technology.  This would
provide a continuous incentive for sources to adopt new

Banking and Trading

     If the percentage reduction in emissions required to avoid
fees remained constant over time, a system that allowed sources
to bank emission credits would not be needed.   A program that
allowed firms to trade emission reductions could be incorporated
into the program.  Furthermore, trading across geographic regions
is inappropriate where the desired pollution reduction is aimed
at ameliorating a localized problem.

Enforcement and Fee Collection

     The enforcement problems associated with this program would
be the same as those associated with the existing permit system.
Administering and collecting fees would not be complicated.
Penalties  for misreporting emissions to avoid fee payment would
need to be severe enough to provide a sufficient  deterrent.


     A well-designed fee system has the potential to encourage
cost-beneficial VOC emission reductions beyond existing
technology-based requirements  if the existing standards achieve
less than  the optimal  levels of emission reductions.  Some
sources may have opportunities to reduce VOC emissions through
changes in chemical usage or better work practices.  These
opportunities are variable  across sources  and are difficult  to
include in a command-and-control program,  even if the reductions
would be cost-beneficial.   A fee system would encourage sources
with such  opportunities to  reduce emissions beyond levels that
can reasonably  be  imposed on all sources.
      10 If adjustments were  made frequently in the proportion  of
 emissions subject to the fee, then it might be appropriate to allow
 firms to bank reductions made below the current standard for future

In addition, unlike technology-based standards, fees would
           t0 C°ntinUe resea?dh and development on Son?ro?


     Use of solvents in consumer and household products and in
industrial processes is a significant contributor to ozone non-
attainment problems.  According to the National Acxd
Precipitation Assessment Program (NAPAP) data base, 4.2 million
tons of volatile organic compound (VOC) emissions are from
solvents.  This is approximately 18 percent of total VOC
emissions.  A wide variety of products and processes generate
these emissions, including the application of architectural
coatings, metal parts decreasing operations, and the application
of household and personal-care products, such as hair spray,
disinfectants, and household pesticides.


     The Task Force considered two market-based approaches to
reducing VOC emissions:  (1) placing a  dollar-per-ton fee on VOCs
emitted from these products, to encourage product  formulators to
make products releasing  less VOCs; and (2) allotting or
auctioning permits to consumer and commercial product
distributors and retailers, allowing them to sell  the permits
among themselves.

     The  CAA generally requires that areas prepare plans to
attain standards within  the next  15 years.  VOC-related non-
attainment problems are  expected  to be limited to  a handful of
cities by 2005.  Therefore, implementation of these incentives
probably  makes most sense at the  local level.  Although solvents
are distributed nationally, and placing a localized fee might
require  formulators to vary their product slightly for different
markets,  to  impose the  fee nationally  would  require attainment
areas to  pay  increased  costs without receiving commensurate
 Product Fee System

      Imposing a fee on VOC-emitting products would involve:

publishing the names and Chemical Abstract Service
(CAS) numbers of all VOCs of concern;

notifying organizations that sell or distribute
products containing any listed VOC that they must
register each product with the regulatory agency if the

           ultimate use of the product releases the VOC contents
           to the atmosphere,  either as an inherent part of the
           product's design (e.g.,  aerosol products)  or because
           the product is used in equipment that is not totally
           enclosed (e.g.,  metal  cleaning);

           providing these organizations with (a)  a registration
           number for each VOC-containing  product,  which must be
           published on the label of each  unit  of the product
           sold,  and (b)  simple forms on which  they must report
           (on a  quarterly basis)  the total  quantity of each
           registered product  sold,  and calculate and remit the
           product fee due on  this  quantity  sold;  and

           providing a simple  formula and  parameters to allow
           calculation of the  fee owed for any  product
           formulation,  based  on  the specific weight of VOCs
           included in each unit  of the product and the fee per
           unit of VOC.11
Thus,Bunder this system  formulators would register all VOC-
emitting products and provide quarterly payment of fees owed,
along with a simple report of the quantity sold for each
registered product.  The regulator could issue a registration
number for each VOC-emitting product to simplify record-keeping
and, through the labeling requirement, assist inspection and
enforcement efforts.

     Requiring formulators to include the registration number on
the label of each unit of registered product could make it
relatively easy to check specific registrations and to identify
products that had not been registered.  Regular inspections of
distributors' inventories as well as cross-checking registrations
with industry statistics on number of products and units shipped
could be used to discover unregistered products sold in areas
where the program was in effect.

     The issue of confidential business information may become
important at the product registration stage,  as formulators may
claim that information about their products'  formulations and
sales quantities are trade secrets.  Since the regulatory agency
need not require a complete list of ingredients for a given
      This  option assumes that  all  VOCs would receive  the same
dollar-per-ton fee.   This is  based  on  the opinion that all VOCs
should be treated the same, as  even slowly reacting compounds will
eventually react to form ozone, due to "multiple-event" (more than
one violation) days  and  the  existence of long-range transport of
these substances.  A  possible alternative would be to scale the fee
based on the photochemical reactivity of the different substances.

product but only needs to know the VOC components, this problem
may not be severe.

     Once the product fee system was in operation, regulators
would receive simple quarterly reports and payments from
thousands of organizations distributing or selling tens of
thousands of products. " This flow of information and payments
would have to be managed to allow accounting for all payments as
well as storage and periodic analysis and reporting of who is and
is not remitting fees, major changes in fee remittance, and so

     Enforcement efforts would need to be directed toward at
least three types of potential noncompliance: (1) unregistered
products, (2) misreported formulations, and  (3)  misreported
quantities shipped and associated product fees owed.  Methods to
detect unregistered products were mentioned above. Misreported
formulations could be discouraged through a program of random
product tests.  Misreported quantities shipped and associated
fees owed could be discouraged through a program of random
inspections of distributor's or retailer's records.  Penalties
for noncompliance in each case would need to be severe enough to
provide a sufficient deterrent, even in view of possible low
probabilities of detection  (which will depend on the extent of
the enforcement efforts).

     The product fee system would require an importer of VOC-
emitting products to pay the same fee as a distributor or
retailer who produces the product in the United States.  In
addition, U.S.-manufactured products that emit VOCs and are
destined for use outside of the United States would be exempt
from the product fee system so as not to place U.S. manufacturers
at a competitive disadvantage in world markets.

     Emissions from these products could be  discouraged by
placing a fee on the manufacturer of the VOC directly, thus
increasing the price of the raw material itself.  This approach
would be simpler to administer than a fee on products because
fewer companies manufacture VOCs than manufacture products using
VOCs.  However, many of these chemicals are  used  in ways that do
not result in air releases.  For example, according to the NAPAP
data base, approximately 540,000 tons of ethylene are emitted
annually.  This is less than two percent of  ethylene production,
according to International Trade Commission  data  on chemical
production.  Thus, a raw material charge would inappropriately
apply to 98 percent of ethylene production.  Since the program is
designed to deal with a local problem, placing a  fee on VOC
production would  inappropriately place the burden of reduction on
all solvent users.  To avoid a poorly targeted incentive, the fee
should be placed  at the local level.

      Impact of VOC Product Fee;   Two Examples

      Personal-Care and Household Products.   According to data
 compiled by California's Air Resources Board (adjusted to
 represent the United States as a whole),  615,000  tons of VOCs
 were emitted from personal-care  and household products in 1984
 These products account for approximately  6  percent of all non-
 mobile VOC emissions,  and include pesticides and  insect sprays
 personal-care products,  aerosol  paints, household cleaners,  and
 automotive products.   Between 70 and 90 percent of VOC emissions
 from this entire  group come from products that are packaged  in
 aerosol cans.

      A VOC fee would encourage formulators  to manufacture aerosol
 products using formulations that contain  less VOCs,  such as  a
 water-based formulation,  or by switching  to a non-aerosol
 packaging device.   Mechanical pump containers release
 approximately one-half the amount of VOCs per application as
 aerosol containers.  Thus,  a fee encouraging a switch to
 mechanical pump containers could reduce VOC emissions by
 approximately 25,000 tons per year.

      Architectura1  Coatinas.   During the  application  of
 architectural  coatings,  solvents  contained  in the  coatings
 evaporate.  According  to  the NAPAP  data,  426,000 tons  of VOCs
 were  emitted  from architectural  coatings  in  1985,  which  is 4
 percent of non-mobile  VOC emissions.  Nearly  70 percent  of all
 VOCs  emitted  from architectural coatings  come  from solvent-based
 paints.   However, these solvent-based products account for only
 30 percent of  total production; water-based products account for
 the other 70 percent.

     A  fee placed on VOC  emissions  from architectural coatings
would increase the price  of both solvent-based and water-based
paints.    However,  the effect on  the price  of solvent-based
paints would be far greater than the effect on the price of
water-based paints.  As a result, one would expect this  fee to
 further encourage the ongoing switch from solvent-based to water-
based paints, further lowering VOC emissions.  For example, a
shift of an additional 5 percent of market share to water-based
paints would reduce VOC emissions by 50,000 tons per year.
      "Water-based" paints do contain some volatile organics.

Marketable Permits System

     Marketable permits are entitlements to emit specified
amounts of a pollutant in a period of time at a specified
location or area.  As with traditional regulations, marketable
permits "ration" the amount of pollution that the control
authority is willing to allow.  Those entities with permits
(usually companies) could only emit the amounts specified in the
permits they own, but would be free to buy and sell permits.
Under this system, firms with low reformulation costs would be
encouraged to adjust their product formulations to provide
reformulated solvents to distributors.  Less flexible femulators
would be unable to compete in the area where permits were
required if the cost of permits exceeded the cost of
reformulating solvents.

     To establish a marketable permits system, the regulator
would need to decide on how the permits are to be allotted
initially.  One method for allotting the permits is based on past
emissions from the products of distributors or retailers.  Using
this method, a distributor or retailer of a household pesticide
that emits 500 tons of VOCs per year would receive twice the
initial permit privileges received by a distributor or retailer
of a pesticide that emits 250 tons of VOCs per year.   However,
this method of allocation may impose unequal economic hardships
on distributors.

     The consumer and commercial products considered would  fall
into two broad categories:  (1) products where VOCs are released
directly during product use, such as spray paint, and  (2)
solvents used in commercial or industrial settings, such as a dry
cleaning solvent.  For the first category of products, permits
could be allotted based on the quantity of VOCs contained in the
product, as this figure will equal emissions from the product.
Specifically, the regulator could require distributors or
retailers to report the total quantity of VOCs contained in each
product of concern over the past three years, and could thus
allocate the permits based on average VOC content over these
three years.  Using an average over three years would reduce the
possibility that a firm is allocated too many or too few permits
      16Another,  more economically efficient possibility would be to
 distribute permit privileges using an auction.  However,  providing
 for thousands  of  companies to  participate  in  an auction  would
 involve some logistical problems.   In addition, deciding who  the
 recipients of the revenues from the auction would be  and how  the
 monies would be spent would need to  be determined.

 based on one exceptionally strong or exceptionally poor year for
 the company.

      For the second category of products,  not all VOGs used as
 solvents are emitted to the environment.   A percentage of the
 solvent is recaptured,  and later recycled.   Because all of the
 solvent is not emitted, permits should be  assigned in a slightly
 different fashion.   Permits could be allotted to solvent
 distributors based on the difference between the amount of
 solvent they sell to commercial and industrial operations and the
 amount of solvent that they recycle.   Thus,  the regulator would
 require these distributors to report each  of these figures for
 the past three years,  and assign permits based on the average
 difference between these figures.

      To accomplish an initial reduction in VOCs from both classes
 of products,  the regulator could assign the  initial permits at a
 level below current emissions.   For example,  allocations could be
 made for 90 percent of  current emissions—i.e.,  a firm that
 distributes or sells products that emit 100  tons of VOCs would be
 allocated permits for 90 tons of emissions.   The regulator might
 also design the system  so that the permits decline over time.
 For example,  permits allowing for 90  tons of emissions in the
 first_year could be worth 10  percent  less, or 81 tons of
 emissions in the second year.   Decreasing the permitted emissions
 over time would reduce  the economic impacts  at the beginning of
 the program,  giving firms time to  adjust while still  encouraging
 emission reductions.

      The Agency could also retain  the right  to periodically issue
 new permits to new  firms who  wish  to  enter the market.   This
 would prevent the marketable  permits  system  from restricting
 competition in a particular product area.

      Permit Trades

      A  large  number  of  firms  distribute or sell  consumer and
 commercial  products  that  contain VOCs; therefore,  a large number
 of  firms may  be  interested  in either buying or selling permits.
 To  facilitate  these  sales,  the regulator could provide
 information on  firms wishing to buy or sell permits to all
 interested parties,  charging a small  fee to cover the
 administrative costs of such a program.  This service would help
 firms—particularly  small firms—minimize the transaction costs
 associated with  identifying other buyers or sellers.
      The regulator may want to assess  a small fee for the initial
purchase of each  permit,  to cover the cost  of  administering the
permit program.

     Enforcement of a marketable permits system would be a two-
stage process.  First, the regulator must encourage firms to
accurately report the amount of VOCs contained in the product
they distribute so that the initial allocation of permits is
equitable.  To accomplish this, the regulator could randomly
inspect distributors' or retailers' records, and cross-check them
against the records of the formulator supplying the solvent to
the distributor.  Penalties for non-compliance would need to be
severe enough to provide a sufficient deterrent.

     Second, after the permit system had been established, the
regulator would need to monitor compliance.  This could be
accomplished by randomly checking distributors' records, and
cross-checking them against other data sources.  The regulator
could also test products "off the shelf" for their VOC content,
multiply this percentage by the quantity of the product sold, and
match the total against the distributors' permits for the
particular product.  Again, penalties for non-compliance would
need to be severe to deter distributors or retailers from
violating their permits.


     The merits of this incentive first depend on whether
reductions in VOC emissions from products are cost-beneficial,
given the social costs and benefits of reduced emissions.  If
reductions are cost-beneficial, incentive approaches might reduce
the cost of achieving these reductions, due to the difficulty of
regulating the numerous and diverse products and processes
emitting VOCs.

     A fee system could be designed to directly internalize the
externalities associated with VOC emissions.  A marketable permit
system would achieve a specific quantity reduction in VOC
emissions cost-effectively.

     These incentive programs would be likely to require no more
resources to establish, manage, and enforce than a command-and-
control system set up for the same regulatory purpose.  Because
of the local nature of the non-attainment problem, fees should be
imposed on distributors and retailers in non-attainment areas
only.  However, since solvents are manufactured nationally, and
these local areas could comprise large consumer solvent markets,
manufacturers could be induced, through demand  for low VOC
solvents, to reformulate their products.  California is
considering both incentive and command-and-control programs as
options for regulating VOC emissions from consumer products.

     Both these incentive schemes would involve thousands of
manufacturers.  To minimize the administrative burden, the
systems proposed here place much of the responsibility on product
distributors, rather than on the regulator.  The systems are
"self-reporting" — which is important, given the very large
number of producers and products involved and limited government
resources.  However, because the systems would depend on self-
reporting by distributors or retailers, effective enforcement
would be essential to the success of the program.


     Each year hundreds of millions of pounds of chlorinated
solvents are released to the environment, primarily to the air,
but also to water and land.  Three chlorinated solvents are among
the top 35 chemicals in total releases and transfers reported in
the 1987 Toxic Release Inventory (TRI):  methylene chloride,
perchloroethylene, and trichloroethylene.  These solvents are
also all among the top 20 TRI chemicals for air emissions.  EPA
considers these chemicals to be probable human carcinogens, and
the Clean Air Act of 1990 specifically addresses them.

     A large proportion of these chemicals are not consumed or
converted into other products, but rather are used to remove
dirt, grease, metals, and other contaminants.  Thus, in addition
to significant air emissions, these processes result in large
volumes of spent solvent, which must then be carefully managed to
minimize risks to human health and the environment.

     These solvents are widely used at a large number of
facilities.  For example, degreasing units (which account for 100
percent of trichloroethylene use, over 50 percent of
trichloroethane use, and at least 15 percent of the uses for the
three other solvents) numbered more than 220,000 in 1981.
Because of this widespread use, it is difficult to ensure that
the spent solvent is disposed of in accordance with EPA

     EPA has announced its intent to list methylene chloride,
perchloroethylene, and trichloroethylene as hazardous air
pollutants and anticipates regulating them under the Clean Air
Act.  Currently, emissions of these three solvents are controlled
— if at all — only by states.

     Most collected spent solvent is currently being recycled.
In 1987, for example, 400 million pounds of solvents were
recycled on site, and another 280 million pounds were recycled
off site.  Despite this, there remain problems:   first, fugitive
solvent losses in the work place are released to the atmosphere,
and second, highly contaminated spent solvent sludges are not
18 U.S. EPA, Office of Air, Noise, and Radiation, "Guidelines
Control  of   Trichloroethylene,   Perchloroethylene,   1,1,1-
Trichloroethane, Methylene Chloride, and Trichlorotrifluoro-ethane
from Existing  Organic Solvent Cleaners,"  Working Group Package,
July 1981.

economical to recycle and thus may be illegally dumped to avoid
disposal costs.

     Should the CAA amendments fail to achieve the optimal level
of emission reductions, a deposit/refund policy could have the
following three objectives:

     o    to encourage solvent users to modify the degreasing
          process to minimize fugitive and accidental releases of
          the chemical;

     o    to combat illegal dumping of spent solvents by making
          it economically preferable to send the solvent to a
          certified disposal/recovery facility; and

     o    to promote the search for substitutes.


     A deposit/refund system would be implemented by first
placing a deposit on each pound of solvent purchased.  These
sales could be tracked using recorded receipts from distributors
of the solvents.  Once the solvent had been used, it would be
taken to a designated off-site recycling facility.  These
facilities would pay the price they normally offer for spent
solvent, plus the amount of the deposit.

     In many cases, solvents are recycled by parties other than
the original solvent distributor (e.g., by independent solvent
recyclers or in on-site recycling).  Therefore, some mechanism is
needed to transfer deposits from the point of deposit to the
point of refund.  EPA could collect deposits from distributors
based on sales records, and then pay refunds to recyclers who
document receipt of solvents for recycling.  To simplify
verification and enforcement, on-site recycling might not be
eligible for refunds.  On-site recycling could continue
nevertheless, in order to avoid paying deposits on new purchases.

     Under the deposit/refund system, solvent users would have an
incentive to retain as much of the solvent as is feasible to
recover the largest refund possible and/or to avoid paying the
deposits for new solvent purchases.  Theoretically, firms would
choose the least-cost combination of lost deposits (due to
releases) and expenditures to recover solvents.  Possible
facility responses include the installation of equipment to
control vapor losses  (e.g., carbon adsorption units, freeboard
chillers), and the substitution of new materials and processes
(e.g., the use of alkaline cleaners in place of chlorinated

      The  deposit/refund  system  could be extended to allow refunds
 of deposits  for  solvents disposed of in specified ways.  This
 would encourage  the use  of the  best waste management methods for
 solvent wastes that are  not economic to recycle.  In addition,
 refunds could be tied to the quantities of solvent actually
 recovered, rather  than to the quantities of spent materials
 delivered for recycling '(to address the issue of solvent mixtures
 that  include non-solvent materials).

      While a large proportion of the solvents under consideration
 could be  returned, significant  quantities are incorporated into a
 variety of products, such that  the solvent could not be returned
 for deposit.  In such cases, the deposit/refund system would
 function  as  a front-end  fee on  the use of the solvent.  For
 example,  methylene chloride is  used in aerosols and is ultimately
 released  to  the  air.  Since the solvent that goes into the
 aerosol can  could  not be returned for a refund, the deposit paid
 would be  essentially a charge on the use of methylene chloride.
 These uses,  as well as applications where the chemical is used as
 an intermediate, could be exempted from paying the deposit.  This
 would make the program more complicated to administer and
 enforce,  since distributors collecting the deposits would need
 evidence  of  how  the chemical is being used to determine whether a
 deposit is required.

      Unclaimed deposits  could be used to finance waste audits at
 metal-cleaning facilities and other solvent use locations, or to
 provide technical  assistance for efforts to minimize solvent
 releases  and to  substitute less toxic materials for solvents.


      Federal administration of  the deposit/refund program is
 likely to be more  effective than having a variety of state
 deposit/refund systems.   State  programs may create incentives for
 solvent users to purchase solvents in neighboring states to avoid
 the deposit.  This would  give an unfair market advantage to
 solvent distributors in  states  without a deposit/refund system.

     A deposit/refund system presents a number of administrative
 complications.  First, a  variety of actors would be involved,
 including solvent distributors, solvent users, and solvent
 recyclers.   Establishing  procedures to verify the accuracy of
 each group's claims may be difficult.   Methods would be needed to
verify sales (and hence deposit collections)  and to verify
 quantities of solvents delivered for recycling (and hence

     Verification of the  solvent content of recovered solvents
 delivered to recyclers could be difficult.   For example,  a

deposit/refund system could encourage solvent users to dilute
spent solvents to obtain a larger refund.  Testing of each batch
of solvent might be required to eliminate, such,practices.  The
laboratory facilities required1for such testing may add
considerably to the cost of conducting the deposit/refund system.
On the other hand, testing of individual solvent shipments is
already standard practice at many recycling facilities.

     Even without deliberate dilution, there can be substantial
variation in the solvent content of spent solvent wastes.
Solvents recovered for recycling often consist of a three-layer
mix of heavy sludge (e.g., grease deposits, metals), solvent, and
water.  The mix of these constituents varies across solvent
applications, and across facilities engaged in the same solvent
application.  Variations in waste composition make accurate
estimation of solvent content difficult if the reclamation
facility simply weighs barrels.  Again, testing of each solvent
shipment may be needed to calculate the appropriate refund.

     The impact of a deposit/refund system on the additional
volume of solvent recovered depends on the size of the deposit.
Specifically, solvent users will increase the volume recovered
only if the deposit charged per unit of solvent is greater than
the marginal cost of implementing measures to reduce solvent

     A decision on the viability of the incentive needs to come
only after clear demonstration of the benefits and resolution of
several issues.

     More information is needed on the availability, cost, and
current degree of implementation of solvent control technology.
Many solvent users have already instituted some of the more
common types of solvent control technology, such as carbon
adsorption.  Research is needed to identify what control
technologies (or other waste minimization measures) have not been
adopted on a large scale.  The cost of these modifications will
play a key role in determining the appropriate deposit level.  If
new control measures have a high marginal cost,  large deposits
will be needed to induce greater solvent collection, and hence
increase recycling of solvents.

     Finally, as with many other incentive approaches, a domestic
deposit/refund system may affect solvent imports and exports.  If
deposits are placed only on sales of domestic solvents, imports
may then have a competitive advantage and exports a disadvantage
relative to the domestic solvent market.  Research on solvent
import and export markets is needed before designing this
incentive system.


     Consumers concerned with minimizing the adverse
environmental impacts of their purchases currently lack
sufficient information to reflect those concerns in their
purchasing decisions.  Product labels seldom contain information
on the efficiency or safety of the manufacturing process, the
recycled materials content, the product's recyclability, or its
toxicity.  In addition, there are no standard terminology or
symbols for producers to use to promote the environmental
benefits of their processes or products, and existing labels may
be difficult to interpret or misleading.  For instance, few
states have regulations governing whether a product with low
recycled content may be labeled "recycled".

     This incentive would establish a product labeling program to
enable consumers to identify products that are manufactured with
a safe or efficient process, or that are recycled, recyclable, or
less toxic.  The objectives of this labeling program would be:

     o    to enable and encourage consumers to make
          environmentally responsible decisions;

     o    to promote commercial development of environmentally
          responsible products and manufacturing processes; and

     o    to ease the waste management burden associated with
          certain products.


     The definition of such terms as "recycled" or "recyclable"
is distinct from the operation of environmental labelling
programs.  The government would appear to have a much larger role
to play in the definitional arena than in the operational one.
The incentive program described here concerns a labelling program

     Programs for labeling consumer products could be managed by
independent boards that set program policy.  Panels of technical
experts would develop guidelines and criteria to determine what
products or product categories would qualify for a seal
indicating their acceptance as environmentally preferred.
Eligibility for various seals could be based on the external
costs generated during production and consumption.

     Submitted products would be tested to ensure that they meet
the panel's guidelines.  The Canadian Standards Association is
the independent testing and certification agency for Canada's
Environmental Choice Program (ECP).   A similar independent group
could be formed for the proposed U.S. program, or the program
could use existing testing labs, such as those of Underwriters

     Anyone would be allowed to submit suggestions of products
that should be considered for a seal, but applications would come
primarily from manufacturers interested in obtaining the label.
Manufacturers would submit the initial application, and the
product would be tested and assessed for compliance with
applicable criteria.  The manufacturer would pay for the testing.

     Once the product was approved,  the manufacturer would pay
for the right to use an approval label.  Charges could be set to
finance the program without discouraging manufacturers from
applying.  Directors of Canada's ECP predict that the program
will be self-financing by 1990.

     A labelling program could be implemented with national
sanction, state sanction, or with no official sanction.  A
national labelling program would yield a single set of product
labels.  This could simplify the message to consumers, avoiding
confusion that may arise with interpreting multiple labels in
different states, and avoiding duplication in efforts to educate
consumers about the labels.  Preemption of different state
labeling requirements may be appropriate if the proliferation of
programs is a major concern.  However, state labelling
requirements in other areas have not been proven to cause
problems.  Entirely private programs of product certification
have also been successful and can be tailored to address
particular concerns of individual consumers.

     Labelling programs will require considerable promotion,
particularly at the outset.  First,  manufacturers must be
informed of the program and told how to apply.  Second, consumers
must be educated as to the meaning of the labels and the overall
goals of the program.  Such information dissemination will be
essential in fostering a widespread response to the labels.

     Experience with similar programs in this country and
elsewhere should guide the design and implementation of this
incentive.  The Canada ECP, which covers several categories of
products, began in January 1989.

     The Blue Angel program in the Federal Republic of Germany
began in 1978.  Product categories receiving labels include
retread tires, returnable bottles, non-CFC spray cans, recycled
paper, and paint low in lead and chromium.  In all, the program

has approved 3,500 products in 60 categories and has achieved
household recognition among 80 percent of consumers.  As one
indication of the program's success, the German environment
ministry has estimated that altered buying patterns have led to a
44,000-ton reduction in the use of carcinogenic or ozone-
depleting solvents.

     Norway began a program modeled after the Blue Angel program
in the fall of 1989.  Japan's "Ecomark" program is run by the
nonprofit Japan Environment Association and has approved labels
for 3000 products.

     Industries in the U.S. have also undertaken labeling
programs related to the environment.  The National Paint and
Coatings Association has developed a labeling statement that
instructs consumers to contact their local environmental control
agency for guidance on disposal of unused paint.  The Society of
the Plastics Industry has developed symbols to help consumers,
collectors, and recycling processors identify the type of resin
used in plastic packaging and other products.


     Product labelling programs would be designed to give
consumers better information so that they may make
environmentally responsible purchases.  By promoting safe and
efficient processes, and encouraging the development of recycled,
recyclable, and non-toxic products, such programs could ease
landfill capacity shortages and prevent toxic products from
entering landfills and incinerators.

     Labelling programs would be entirely voluntary, relying on
improved information to allow consumers to exercise their
preferences for environmentally responsible products, and
creating market incentives for manufacturers to submit products
for review.  Manufacturers must perceive a market advantage
associated with obtaining certification from the labeling
program.  In this sense, the program is very dependent on
consumer preferences for environmentally responsible products.
Canadian polls have shown that 80 percent of the population would
be willing to pay 10 percent more for environmentally responsible
products.  In U.S. surveys, 50 percent of those surveyed said
they would change their purchasing habits to buy recycled or
recyclable products, and 90 percent said they think that
increasing product recycling will help solve the solid waste
problem.  These figures indicate that American consumers may
respond positively to a labeling program, but the evidence is not

     To assess the merits of product labeling programs, closer
examination of consumer preferences for "environmentally
responsible" products is needed.  If-manufacturers are confident
that there is a demand for.environmentally responsible products,
they will have the incentive to develop such products and to
submit the products for review and approval.  More information is
also needed on the costs of administering labeling programs, to
determine whether programs can be self-financing without
discouraging applications or must receive outside funding as
well, and whether the costs of the program would outweigh its

     One complicating factor affecting labeling programs is the
level of subjectivity that is involved in declaring a product
"environmentally responsible."  A multiplicity of labelling
programs could allow for a narrower focus on individual product
attributes, possibly reducing the level of subjectivity.


     Over 213,000 tons of lead enter the municipal solid waste
stream each year.  Lead is a toxic element used in a variety of
consumer and industrial products.  While its use in gasoline has
been phased out, continued use of lead in other products may pose
a serious health threat to different segments of the population.

     Historically, lead exposure has occurred through a variety
of routes that are now subject to regulatory control.  For
example, inhalation has been sharply reduced by the phase-out of
lead additives from gasoline.  Similarly, ingestion of lead has
been substantially reduced by the removal of lead from interior
paint.  Ingestion of lead-contaminated drinking water, which was
primarily caused by lead pipes and solder, also has diminished
due to prohibitions on the use of lead in these products.

     Remaining lead exposures thus are limited to the
manufacture, recycling, and disposal of consumer products that
contain lead, such as lead-acid batteries, plastics, and consumer
electronic parts, and to air emissions from lead smelters and
certain other industrial facilities.  Lead exposures during
manufacturing and recycling have been well demonstrated, but
exposure due to groundwater contamination subsequent to disposal
has not.  Exposures to air emissions tend to be limited to the
immediate vicinity of industrial facilities that use lead, and
waste-to-energy plants and other incinerators in which lead may
be an incidental contaminant of the waste feedstock or fuel.

     Regulations intended to further reduce lead exposure would
be based on pathways that have not yet been subject to regulatory
control.  Such regulations would be good candidates for
incentive-based regulatory systems for two reasons:

     o    Lead is ubiquitous, leading to a variety of exposures,
          potentially requiring a very complex command-and-
          control regulatory structure that would most likely
          have high administrative costs.

     o    Attempts to control releases of and exposure to lead in
          one medium may result in shifts to other media  (e.g.,
          incineration of lead in products banned from disposal
          in landfills may increase air emissions).

     The Task Force considered two incentives designed to limit
the amount of lead produced and used in the United States:   (1) a
marketable permit system, and (2) a surcharge on lead sales.
These incentives are designed to limit future increases of lead

into the environment; they do not address lead contamination due
to past practices (such as lead in paint).  If one wanted to
discourage disposal of lead (i.e., encourage substitution of
recycled for virgin lead in production), then the incentive would
be targeted at virgin lead only.


Marketable Permit System

     Under the marketable permit system, EPA would distribute
permits that allow the production or importation of a limited
amount of lead during some specified time period (perhaps two
years).  The permits would be distributed at an auction where
firms would bid for the right to produce or import lead.  The
funds raised would go to the U.S. Treasury as general revenues.

     Following the initial distribution, firms would be allowed
to trade permits among themselves, but EPA would have to be
notified of all exchanges.  The number of permits could gradually
be adjusted downward as market behavior suggests the development
of cost-effective substitutes, progressively limiting the amount
of lead that is allowed to enter consumer products and industrial

     Two enforcement issues would need to be addressed in
designing the marketable permit system.  First, EPA would have to
perform inspections at lead-producing facilities to ensure that
permitted production levels are not being exceeded.  Second,
imports of lead would have to be monitored to ensure that they
are accompanied by a permit.

     An implementation alternative to this marketable permit
policy would be to require battery manufacturers to produce
products containing a certain content of recycled lead, and
implement this provision with a recycling credit mechanism.  A
bill sponsored by U.S. Congressman Torres and Senators Heinz and
Wirth would require EPA to design a credit system of this type.

Surcharge on Lead Sales

     A surcharge program would impose a fee on the sale of lead,
including imports.  Sellers of domestic or imported lead would be
required to collect a fee from purchasers.  Sellers would
complete formal reports (developed by the IRS)  of all lead sales
and fees collected in each transaction.  The reports and the
associated fees would be submitted to the administering federal
agency (probably the Treasury Department).  The fees would go to
general revenues.


     The basic objective of both the marketable permit incentive
and the surcharge incentive is to make the production and use of
lead more expensive, thereby encouraging the use of substitute
materials and products.

     Reductions in exposure to lead could result through
substitution of other materials for lead in various end-uses and
through overall reduction in the demand for lead-containing
products.  Private markets would continue to allocate lead among
end-uses, with reductions most likely to occur in the lowest-
value uses of lead.

     The effects of either a permit system or a surcharge on lead
exposures are uncertain for several reasons.  First, different
lead uses result in different potentials for exposure.  The
allocation of more scarce and/or costly lead among end-uses may
or may not reduce use in the applications causing the greatest
exposure to lead.  Any comprehensive regulatory system, including
an incentive system that raises the price of lead, has greater
merit if most uses ultimately result in exposure, and less merit
if a limited number of lead uses are the greatest contributors to
human exposure.

     Second, these incentives may encourage recycling of lead.
There is evidence that secondary lead smelting may itself
generate significant releases of lead, primarily through air
emissions and subsequent deposition onto land.  Encouraging
increased recycling, therefore, may or may not result in a net
reduction in exposure to lead.

     Research should be conducted on the short- and long-run
elasticities of supply and demand for lead, to determine where
lead use will decline and who will bear the burden of the charges
(lead producers, lead users, or consumers of final products).  In
addition, lead substitutes should be studied to assess how net
risks posed by these substances compare with net risks from lead.
The benefits of implementation of this type of incentive must
also be demonstrated before any decision is made to proceed.

     These incentive instruments also raise foreign trade issues
worthy of closer examination.  For instance, importers of
televisions might have to purchase permits or pay surcharges
according to the volume of lead contained in television tubes,
insofar as the risks addressed by the regulatory program are
derived from disposal or incineration of discarded products.

     Extending the requirements to lead in imported products,
however, raises two problems.  First, involving importers in the
program greatly increases the Dumber o;f actors whose behavior
must be monitored to verify compliance with the program.  Second,
there is the practical problem of validating the amount of lead
in imported products.  Checking foreign manufacturers' claims
about lead content may be extremely difficult.

     A second foreign trade issue concerns the potential for
creating barriers to the importation of foreign lead.  The United
States imports large quantities of lead.  In 1986, the U.S.
imported over 148,000 tons of lead (compared to roughly 348,000
tons of domestic production), exclusive of all lead contained in
finished products.   Imposing restrictions on imports of virgin
lead may violate existing trade agreements (e.g., the recent
free-trade_agreement with Canada, supplier of over 70 percent of
U.S. lead imports).  More research is needed to assess potential
effects on imports.
      Bureau of Mines,  Metal Statistics.  1987,

                      CHARGE ON TRI RELEASES

     Toxic Release Inventory (TRI) reports for 1987 from
manufacturers have documented 4.6 billion pounds (approximately
20 pounds per person) of potentially toxic substances released to
air or water, or shipped off-site for recycling, treatment, or
disposal.  Most of the releases to air and water are consistent
with existing environmental regulations and permits.  Further
regulation required under the Clean Air Act Amendments of 1990
will substantially reduce air emissions over the next decade.
Similarly, toxic substances disposed of on land according to
regulations promulgated under the Resource Conservation and
Recovery Act minimize risks to human health and the environment.

     While the TRI data base provides a useful measure of total
generation of potentially toxic substances, it does^not deal with
actual exposure to such substances.  Reducing certain TRI
releases through traditional command-and-control regulations
might be time consuming, administratively expensive, and unduly

     Economic incentives could achieve reductions in TRI releases
at less cost than would a command-and-control system.  A charge
on TRI releases could be designed to internalize the social costs
resulting from these releases to the extent that external costs
are not already internalized due to existing regulations.

     This incentive would levy a charge per ton of_reported TRI
releases.  The charge could be applied to all chemicals or to
some subset of TRI chemicals.  If the charge was placed on a
subset of chemicals, two approaches could be used to define the

     o    chemicals with certain toxicity characteristics —such
          as known or probable human carcinogens; or

     o    certain classes or categories of TRI releases — such
          as non-metallic inorganics, halo organics, or metals.

     Charges could be imposed gradually, to allow firms time to
implement waste reduction and emission control efforts without
imposing too great a financial burden initially.  A phased-in fee
should be predictable, to encourage appropriate long-range

responses.  Frequent and major revisions to the fees would be
disruptive to  industry and would make planning difficult.


     Economic  incentives to control toxic releases have the
advantage of encouraging reductions that go beyond regulatory or
statutory (such as in the Clean Air Act) requirements, where
these requirements fail to internalize social costs fully.  A
charge on releases directly addresses the practices of concern —
releases of toxic compounds to the environment — rather than
proxies that may be even more poorly correlated with
environmental  releases.

     A national TRI fee will be inefficient and undesirable if
there are significant differences in the problems posed by TRI
releases across substances.  It will also be inefficient if there
are differences across states or regions.

     The costs of efforts to reduce releases may vary
substantially  among industries.  Owners of some facilities may
find it relatively easy to reduce the quantity of toxics
released, and would be encouraged to do so even by a relatively
low fee.  Owners of other facilities may choose to simply pay the
fee, because the cost of reducing releases exceeds the fee.  The
advantage of an economic incentive approach such as this
(contrasted with a traditional command-and-control approach) is
that it encourages pollution abatement by those who can do so at
the lowest cost.

     The design of the fee should consider differences in the
social costs of releases to different media.  A single fee based
on quantities released could encourage undesirable intermedia
shifts.  For instance,  it may be that a given volume released to
air poses greater overall risk than the same volume released to
land.  Furthermore,  it may be more costly for a facility to
reduce air emissions than to reduce releases to land.   Faced with
a charge on releases based only on volume,  the facility will
choose the least-cost reduction and reduce land releases.   A
shift from land toward air releases may actually increase overall
risk levels.   Therefore,  the fee should be adjusted to reflect
differences in risks via different media releases, as well as
differences in the toxicity of individual chemicals.

     For some types of TRI chemicals,  it may make more sense to
use a marketable permit approach,  which explicitly limits total
releases but allows trading of rights to release the chemicals.
Such an approach may be preferred where it is reasonable to
establish aggregate quantity limits based on the absorptive
capacity of the environment,  and where it does not matter greatly

where the releases occur (e.g., for problems involving global
effects and long-range transport, rather than localized effects).
Control of ozone depleters, for example, might lend itself to
such an approach.

     A charge based on TRI reporting may be difficult to enforce.
TRI reporting is currently based on estimated mass balances.  A
charge on the release of certain chemicals may provide an
incentive to underreport releases.  To discourage underreporting,
EPA must pose a credible enforcement threat.  For example,_
facilities reporting large reductions in volume releases might be
investigated to confirm that waste minimization actually
occurred.  Unfortunately, enforcement in this manner may
discourage responsible pollution prevention efforts, because
facility owners may perceive the threat of investigation as a
cost of release reduction.  Alternatively, random monitoring of
facilities may help to discourage underreporting.

     EPA could also address underreporting by requiring more
documentation of TRI release estimates.  For example, EPA  could
require actual monitoring of air and surface water releases, and
testing and record-keeping for wastes discharged to land,  to
POTWs, or to underground injection.  Such reporting requirements
would  likely be very costly.   Alternatively, EPA could require
record-keeping to  document the quantities of toxic chemicals
purchased or used  and the quantities contained in products, and
simply assume that the residual  not contained in products  is
released to the environment and  is subject to the fee.  Even the
latter approach might be difficult to enforce, since there is
substantial potential for underreporting  initial purchase  or
production of toxic chemicals.  In addition, the latter approach
would  not allow  for differential charges  on releases to different

     Finally, toxic chemicals  are released  from many sectors not
subject to the TRI reporting requirement:   non-manufacturing
industrial processes, use  and  disposal  of consumer products,
agriculture,  and transportation.  In  addition, only manufacturing
facilities using more than certain quantities of TRI chemicals
are required  to  report.   Imposing charges on  releases  from only
some sources  may be difficult  to justify.


     Since the early part of this century, the federal government
has granted preferences in the federal tax system for the
extraction and refining of certain natural resources (minerals,
timber, and energy sources).  These subsidies were implemented to
encourage and sometimes maintain the development of mineral and
other natural resources during periods of economic hardship.20
While some tax preferences were originally intended to be
temporary, many have persisted.  Subsidies to mineral industries
in particular are thought by industry and many others as vital to
our national security.

     Natural resource extraction and refining industries often
generate large volumes of waste, which, if not properly managed,
can contaminate land, groundwater, surface water, or air.
Extraction and refining processes usually consume large .amounts
of both water and energy.  For example, production of aluminum
from virgin materials is estimated to consume 95 percent more
energy than production using recycled materials.  Subsidizing the
production of virgin materials can reduce the relative
competitiveness of secondary (recycled) materials, thereby
working against resource conservation goals.


     Federal policies that subsidize the use of virgin materials
fall into two categories:  federal tax code provisions and
federal programs.
     200ffice  of
America's Trash;
1989, p. 197.
Technology  Assessment,  U.S.  Congress,  Facing
 What Next  for Municipal  Solid  Waste?. October

Federal Tax Code Provisions

     The following tax code provisions have the greatest
potential to result in environmental degradation and to
discourage recycling:

     Mineral Depletion Allowances

     Percentage depletion allowances are tax deductions available
to mineral industries.  Mineral producers are allowed to deduct a
certain percentage of the value of mineral production in
computing taxable income.21  The deductions are computed as a
percentage of gross^income received from production, and not as a
percentage of cost.0"
     The allowances are designed to promote resource exploration
and development by defraying some of the cost of replacing lost
resources.  Depletion allowances range from 5 percent for
materials such as sand, to 22 percent for bauxite.

     Expensing Provisions for the Timber Industry

     Most investments are capitalized and written off once the
investment begins generating revenue.  However, the tax code
currently allows the timber industry to expense some timber
management, costs in the year they are incurred, rather than in
the year the timber is harvested for sale.  Expensing is
•currently allowed for interim management expenses, and
construction of spur roads for harvesting.

     Special allowances in the tax code also favor reforestation
activities.  The direct costs incurred for reforesting a site for
commercial development can be amortized over a 7-year period,
rather than capitalized and recovered when the timber is cut and
     21Office  of  Technology  Assessment,   U.S.  Congress,  Facing
America's Trash; What Next for Municipal Solid Waste? October 1989,
pp. 199.

     22Kieso and Weygandt,  Intermediate Accounting.  Third Edition,
p. 542.

 Federal Programs

      Federal programs that preferentially encourage the
 production and use of virgin materials  include timber production
 and .energy subsidies.

      Timber Production Subsidies

      The federal government transfers ownership of  timber  on
 government land to private enterprises  through the  use of  "timber
 sales."  Sales are often  subsidized  through one of  the following

      o     calculating the sale price based on  the amount the
           industry can pay and still make a reasonable profit,
           rather than on  the market  value of the timber;

      o     charging a  price for the timber that covers  only the
           government's cost;  or

      o     subsidizing private timber harvests  by building  spur
           roads with  public funds.

      Energy Subsidies

      Subsidies  for the development and use of  energy are
widespread,  including  programs of numerous agencies, and federal
loans and loan  guarantees.  These subsidies often lead  to  below-
market  energy prices,  which in turn  subsidize  energy-intensive
industries.  In addition,  since energy production is often waste-
intensive,  energy  subsidies can indirectly increase the volume of

     In general, the federal subsidies described above were
intended to encourage economic development and, in some cases, to
protect national security.  The impacts on the environment, on
waste management, and on recycling industries are unintended side
effects. Removing or reducing these subsidies, then, might have
dramatic impacts on the industries and individuals whom the
subsidies were designed to assist.  Furthermore, if the problem
is the imbalance posed by preferential subsidies to virgin
material producers, extending similar subsidies to recycling
industries is an alternative to eliminating existing subsidies.

     Many of these subsidies are designed to promote multiple,
sometimes competing,  goals.  Predicting their environmental and

economic consequences, especially in increasingly global markets
for the basic commodities affected, is complicated and requires
detailed analysis of each incentive.  For example, it is not
clear that changes in such subsidies will necessarily have any
effect on the price of commodities traded in international
markets, though U.S. competitiveness in these markets could be

     Evaluating the effectiveness of any proposed reductions in
subsidies will require identifying the changes in behaviors that
are likely to result from the reductions, and the positive and
negative environmental and economic consequences of those
changes.  The environmental benefits must be clearly demonstrated
and weighed against the economic impacts on affected groups.

     Furthermore, the merits of reducing or removing these
subsidies should be measured against other policy alternatives.
For example, offering positive incentives to meet environmental
goals may be more effective than the removal of subsidies.

     Reducing or removing subsidies to virgin materials could, in
theory, lead to any of the following types of economic effects,
each with different environmental implications:

     o    No change.  Recycling rates may not change, or the
          industry may reduce costs of other factors to offset
          the reduction in subsidies.

    • o    Foreign virgin materials may be substituted for
          domestic materials, particularly if the U.S. producers
          are price takers in competitive world commodity
          markets.  U.S. producers would be most affected by this
          scenario, as costs increase but prices received do not.
          From the perspective of global environmental goals,  it
          may be undesirable to encourage foreign extraction and
          refining  industries if these industries have less
          stringent environmental  standards.

     o    Recycled materials mav be substituted for virgin
          materials.  Studies done  in the mid- to late 1970s
          analyzed  likely  impacts  of subsidy changes on recycling
          rates  for several products.23   In  general,  they
          determined  that  subsidies appear to have little effect
          on recycling rates for the products examined  (aluminum,
          paper, steel, copper, and lead).  In addition,  if
          removal of  subsidies might increase the use of  recycled
      23Office of Technology Assessment, U.S. Congress, op. cit.,  p.

materials, the environmental consequences of increased
recycling should be considered.
                    •-£       T

Other materials may be substituted for virgin
materials.  Manufacturers may substitute other
materials for virgin materials if subsidy changes alter
the price of virgin materials relative to its
substitutes.  Though general substitution effects are
difficult to predict,  the likely impacts of these
substitutions on the economy and the environment should
be considered.

The consumption of materials may be reduced overall.
Overall consumption of some materials could decrease if
prices for these materials were to increase relative to
income.  More efficient use of virgin material could
also occur.

     The federal government can assume a leadership role in
encouraging the use of certain goods or services (e.g., recycled
goods) by using its procurement authority to increase demand for
those goods or services.  Although this is not, strictly
speaking, an economic incentive to reduce the degree of
externality, it would increase demand, and thus the willingness
of producers to supply goods considered to be socially desirable.


     Recycled products may cost more than comparable virgin
products, especially in the initial development of markets for
those recycled products.  Because such factors as economies of
scale in manufacturing, and tax credits or subsidies provided to
virgin product manufacturers, place recycled products at a
competitive disadvantage, potentially recyclable materials end up
in the nation's landfills.  When the avoided costs of materials
disposal are considered, purchase of more recycled products would
be economically beneficial to society.  However, purchasers of
recycled products do not directly receive the benefits of avoided
disposal costs, and therefore do not have an incentive to
purchase as many recycled products as would be desirable based on
comparison of total costs and benefits to society.

     This same "disincentive" applies to the federal government,
a major purchaser, who could take the lead in expanding purchases
of recycled products.  Guidelines already promulgated by EPA
under Section 6002 of the Resource Conservation and Recovery Act
(RCRA) for five product categories are intended to promote
federal purchase of recycled products.  EPA issued guidelines in
1988 for procurement of fly ash in cement and concrete, paper
products, retread tires, re-refined oil, and building insulation
that uses secondary materials.  Implementation of the guidelines
by federal procuring agencies has been hampered, however, by the
cost of recycled products in comparison with prices of comparable
virgin products.  Consistent with the provisions of Section 6002,
the guidelines currently state that procuring agencies are not
required to purchase a recycled product if the price of the
product is "unreasonable," which has been interpreted as any
price greater than the price of the competing virgin product.

     Thirteen states and five local jurisdictions already have
price preference authority.  The amount of preference ranges from
5 to 10 percent.  Three states and one local jurisdiction have
set-aside authority.  Many of the preferences are for recycled
paper only, although some cover all recycled products.

     Programs that require federal agencies to purchase recycled
products that cost more than comparable virgin products will
obviously increase the government's purchasing costs.  The
impacts on federal budgets will depend (1) on whether purchase .of
higher-cost recycled products is required or simply allowed under
a price preference,  (2) on the size of set-asides, and (3) on the
criteria federal agencies must use to justify a decision not to
buy recycled products under a petitioning process.  With each
option, budget impacts could be limited by a spending cap.

     Three forms of federal procurement incentives were
considered by the Task Force:

     o  Price preferences for recycled products would either
     allow or require federal agencies to purchase recycled
     products with performance characteristics equivalent to
     comparable virgin products at up to a certain price premium.
     For example, agencies might be permitted to purchase
     recycled products that cost up to 10 percent more than the
     comparable virgin product.

     o  Set-asides for recycled products would require that a
     certain portion of federal purchases in a product category
     be reserved for purchase of recycled products — either
     regardless of price differential or, more likely, subject to
     the availability of acceptable recycled products at no more
     than a specified price differential.

     o  A petitioning procedure would allow manufacturers of
     recycled products to petition federal agencies to purchase
     recycled products.  The petitioners would have to
     demonstrate that their product met certain performance and
     price requirements.  By requiring the procuring agency to
     perform a more thorough evaluation of recycled products and
     to justify a decision not to purchase those products, the
     petitioning process would probably generate more purchases
     of recycled products.

     The effects of these programs on the production of recycled
products and on budget outlays will depend on the relative costs
of recycled and virgin products,  compared with the degree of
preference given to recycled products.  For product categories
where recycled products are closely competitive with virgin
products,  a relatively small price preference may be sufficient
to encourage larger federal purchases.  For example,  data
collected by the Office of Solid Waste indicate that some grades
of recycled paper do require a price preference to compete.
Although the price differential between recycled paper and virgin
paper can be as high as 20 percent, the price of most grades is
within 10 percent of the price of virgin products.

     All three procurement incentives, used singly or in
combination, should improve the competitive position of recycled
products in the federal procurement market.  At a minimum,  the
incentives should encourage greater purchases of recycled
products, and therefore reduce disposal of recyclable materials.
A larger and more certain federal market may also encourage
changes that will increase the competitive position of recycled
products in other markets.  If there are scale economies in the
manufacturing of recycled products, for example, an increased
federal purchase of recycled products may allow recycled product
manufacturers to capture those economies and lower their prices,
thus encouraging more purchases of the recycled products by other
levels of government and by the private sector.  Increased
federal purchases may also fund more product innovation to
improve recycled product performance, and development of lower-
cost recycling technologies.  Finally, a relatively certain
federal market may also fund demonstrations of recycled product
performance, which may then encourage more private-sector
purchases of recycled products.

     Before EPA can effectively develop and implement an
incentive of this type, more information and analysis would be
needed on (1) the current price and performance characteristics
of recycled vs. virgin products, and  (2) the size of federal
purchases of each product, to determine how procurement policies
might best be designed.  The experience of states with existing
preference programs should provide useful insight into the costs
and benefits of procurement incentives.


Energy Initiatives

     Federal leadership in improved energy efficiency, through
procurement practices, R&D, and informational programs, can also
serve as an important model to local  and state governments, as
well as to private industry.

     The federal government engages in and finances a variety of
productive activities.  To help improve overall energy efficiency
and reduce harmful pollutants, the federal government could
engage in one or more of the following activities:

     o    increase the fuel efficiency of the  federal vehicle
          fleet, through the purchase of higher MPG gasoline-
          powered vehicles and the purchase of alternative-fueled

     o    tighten and enforce more strictly federal building code
          standards, including lighting and HVAC standards; and

     o    improve the efficiency  of  public housing through
          tightened standards  and increased funding for energy-
          efficiency retrofits.

Water Policy Initiatives

     There are several water policy  areas  where  the federal
government could assume a leadership role  in promoting efficient
use of water resources.  Some  examples  (not confined to
procurement issues) of non-regulatory initiatives  include:

     o    amend the Federal Acquisition Regulations to allow
          federal agencies to  purchase water-efficient fixtures
          and appliances for federal facilities, reducing federal
          building water use and  stimulating demand for such

     o    include water-efficiency programs  that reduce
          wastewater volume in the list of  items that can be
          funded with state revolving funds  (for wastewater
          treatment facilities),  saving local governments money
          and stretching those funds, as well as reducing water
          use;  and

     o    in the absence of market pricing,  provide technical
          assistance to state regulatory commissions and to local
          water providers on the redesign of rate  structures to
          encourage full cost pricing and efficient water use.
                  U.S. Government Printing Office : 1991 - 281-717/40005



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