c/EPA
United States
Environmental Protection
Agency
Administration And
Resources Management
(PM-225)
A Preliminary Analysis
of the Public Costs of
Environmental Protection:
1981-
Printed on Recycled Paper
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A Preliminary Analysis of the Public Costs of
Environmental Protection: 1981-2000.
Assistant Administrator's Foreword
Not long ago, America was facing a crisis. Our skies were clouded with black
industrial smoke, our waterways fouled by wastes and chemical residue, our land
defaced by uncontrolled litter, and our wildlife and drinking water poisoned by
harmful pesticides. Slowly, Americans began to realize that the landscape and natural
resources which sustain them were being degraded. The Environmental Protection
Agency was created in 1970 to respond to this crisis.
Without a doubt, our nation has taken giant strides since then. We now enjoy
healthier air and cleaner water in many places. These gains have come at a price.
Government, industry, and individuals have spent hundreds of billions on environ-
mental protection. And while our investment in facilities and equipment has been
heavy, and there has been significant improvement in environmental conditions, our
needs continue to grow. Widespread public support for environmental progress is
prompting increases in services and facilities particularly at the local level.
Many factors exacerbate this situation. Fiscal constraints hamper government's
ability to finance additional investments. Many environmental facilities need to be
repaired, replaced, or modernized. Environmental demands are competing for public
resources with other services such as education, health, fire, and police protection.
In the following report, EPA compares actual and projected public sector costs of
complying with federal environmental regulations to financial resources currently
available to federal, state, and local governments. The report examines actual costs
between 1981 and 1987 and estimates costs to the year 2000. It is one of a series of EPA
studies examining the financial impacts of environmental programs.
Perhaps the most important finding in this report is the projection of significant
differences between the future cost of environmental services and the funds currently
expended to provide them. The differences indicate that an important new environ-
mental challenge is emerging.
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This finding also indicates that traditional roles performed by the public sector to
finance environmental services are changing. Society's failure to react to changes in
government responsibilities and seek alternative technical and financial solutions may
result in a shortage of resources necessary to meet all our needs. Just as this nation did
twenty years ago, we must explore innovative solutions to a difficult problem. We need
to tap the experience and expertise of all our sectors, not just in government, but also
in the private sector. After all, everyone benefits from the conservation of natural
resources.
As EPA prepares to celebrate its 20th anniversary, the Agency is taking time to
reflect on what we have accomplished and what we must plan in the future. This report
is part of our forward thinking. By analyzing past trends and estimating future patterns,
A Preliminary Analysis of the Public Costs of Environmental Protection: 1981-2000
identifies issues which require our attention now and well into the next decade.
Charles
Printed on Recycled Paper
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A Preliminary Analysis of the Public Costs of Environmental Protection: 1981-2000
Table of Contents
Executive Summary
Purpose of the Study i
What Costs are Examined? i
Overall Spending will Increase ii
EPA Expenditures will Decline ii
State Costs are Projected to Grow ii
Local Share of Spending will Increase ii
Local Demands for Capital could Double (1981-2000) iii
Household Costs may Increase Dramatically iii
Where do we go from here? iii
Assumptions for Projections iv
Chapter 1 - Overview: The Cost of Environmental Protection 1
The Cost of Current Environmental Regulations and Services 1
Expenditure Trends by Environmental Program 3
Environmental Expenditures by Level of Government 6
Additional Local Costs of New Regulations 9
Total Local Expenditures by Media for the Year 2000 12
Chapter 2 - Impact of Spending for Environmental
Protection on Capital Markets 15
Capital Requirements of Environmental Regulations 15
Substitution of Local for Federal Capital 19
Financing Local Environmental Facilities 19
Impact on Capital Formation 22
Chapter 3 - Impact of Environmental
Spending on Households 27
Household Costs of Environmental Programs 29
Household Payments by City Size to Maintain Current Levels of
of Environmental Quality 29
Household Payments for New Regulations 29
Household Payments for Environmental Programs
Compared to Income 39
Household Payments by Program 3 \
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Chapter 4 - Conclusions 35
Appendix 1 - Methodology 39
Definition of Expenditures 39
Which Environmental Services, Regulations, and Sectors are Included? 39
Calculating Expenditures to Maintain Current Levels of
Environmental Quality 40
Calculating Local Environmental Costs Associated with
New Regulations 42
How Future Costs were Derived 42
Appendix 2 - List of Environmental Regulations Applicable
to Local Governments But Not Included in the Cost Estimates 45
Appendix 3 - Tables of Data 47
Appendix 4 - Differences in Methodology and Content
Between the Municipal Sector Study and This Report 57
Appendix 5 - Average Annual Household User Charges for
Environmental Services in 1987 (1988 Dollars) 59
Appendix 6 - Sources of Data for Figures Used in Reports 61
End Notes 63
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A Preliminary Analysis of the Public Costs of Environmental Protection: 1981-2000
Executive Summary
Since the early 1970s, the U.S. Environmental Protection Agency (EPA)
has overseen a national mandate to restore and protect our water, land, and
air resources. In this massive undertaking, EPA has relied heavily on state
and local governments to help administer programs and to expend resources
to comply with requirements. However, the expanded programs and tight-
ened controls of the environmental legislation enacted in the 1980s challenge
our ability to pay for future environmental needs.
Purpose of the Study
This study documents the costs of environmental protection for EPA, the
states, and local governments and uses these data to:
Examine differences between current expenditures and future costs of
environmental protection;
Assess trends in the distribution of costs among EPA, the states, and local
governments;
Identify the cost impact of environmental policies on local governments,
capital markets, and households.
What Costs are Examined?
This report examines the public costs of environmental protection over
the period 1981-1987 and projects them to the year 2000. These projections are
estimates of the future costs of maintaining existing environmental stan-
dards, assuming the same level of quality as in 1987. In addition, the report
examines the local costs of selected new environmental regulations and
programs that local governments will bear in the future.
While investments in environmental quality yield substantial benefits,
this report focuses solely on the costs of providing environmental services.
For this reason, no attempt is made to place a value on such benefits as
reduced incidence of disease and death, improved fishing and shellfish
yields, expanded recreational opportunities, and strengthened local econo-
mies.
The report complements the work of the Municipal Sector Study recently
completed by EPA.1 The Sector Study examined the future costs of 22 new en-
vironmental regulations and their impacts on municipalities. Both studies
will serve as building blocks for the Agency's upcoming "Cost of A Clean En-
vironment" report.2
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Overall Spending will Increase
In 1987, EPA, the states, and local governments spent about $40 billion for
environmental protection. If recent trends continue, they will need to spend
approximately $61 billion annually by the year 2000.
Spending trends reveal two potential cost gaps. The first, about $15.6
billion a year by the year 2000, is the amount of EPA, state and local govern-
ment spending needed, in addition to 1987 expenditures, to maintain 1987
levels of environmental quality. The second, $5.3 billion a year by the year
2000, is the amount of local government spending needed to comply with
selected new environmental regulations examined in this study.
Together these gaps represent a difference of nearly $21 billion between
what governments spent in 1987 and what we project they will need to spend
by 2000 for environmental protection. The gap could narrow if we are more
efficient in meeting environmental goals. However, these estimates are also
conservative in that they do not include the costs to EPA and the states of new
regulations, the costs associated with future Congressional mandates, and
the growing number of new state and local environmental mandates.
EPA Expenditures will Decline
EPA expenditures are projected to decline by about one-third, from $6.3
billion in 1981 to $4.3 billion in 2000. EPA's share of spending on the environ-
ment is projected to drop from 13 percent to 8 percent between 1987 and 2000.
This drop is due largely to the Congressionally mandated phasing-out of
EPA grants to build wastewater treatment plants.
State Costs are Projected to Grow
Although relatively little is known about future state outlays for environ-
mental programs, a recent EPA study projects that in 1995 the states will need
an additional $309 million to administer drinking water and wastewater pro-
grams. The study's analysis suggests that by the year 2000, the states will
need to spend more than twice the amount spent in 1987 to administer water
programs.3 State administrative costs could triple by 2000 if air and solid
waste programs impose similar demands.
Local Share of Spending will Increase
Local spending is projected to increase significantly by the turn of the
century. In 1981, local spending was about $26 billion, or 76 percent of the
public share of environmental costs. By the year 2000, localities are expected
to spend over $48 billion just to maintain 1987 levels of environmental qual-
ity and are projected to bear 87 percent of public costs for environmental
protection.
11
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Local Demands for Capital could Double (1981-2000)
A key issue in examining the impact of environmental spending on capi-
tal markets is the ability of local governments to support higher levels of
capital formation. We project that annual local demands for capital to main-
tain current levels of environmental quality could double from about $8
billion in 1981 to over $16 billion in 2000. Additional demands for capital
imposed by new regulations could add more than $3 billion a year by 2000.
Preliminary EPA analysis indicates that increased levels of capital formation
may be difficult for many small and medium-size cities.4
Household Costs may Increase Dramatically
The annual cost of environmental programs for the average household is
projected to increase by 54 percent from $419 in 1987 to $647 in 2000. Over the
same period, however, household costs for small cities are expected to
increase more dramatically. In cities with fewer than 500 people, costs could
more than double, from $670 in 1987 to $1,580 in 2000.
The financial impact of environmental costs on households can be exam-
ined by measuring costs as a percentage of household income. The results
show a significant impact on households in small cities (less than 500 popu-
lation), for whom expenditures are expected to increase from 2.8 percent to
5.6 percent of household income between 1987 and 2000. On average, the
impact is much less for households in all other city size categories, with
projected increases of about 0.2 percent to 0.7 percent of household income
by the year 2000.
Where do we go from here?
The growing costs of environmental protection require a re-examination
of how the nation finances and pays for such investments. The difference be-
tween current and future needs and current spending clearly calls for more
innovative approaches, especially at the local level. We need to take a fresh
look at our requirements as well as the financing and management options
available to meet them.
EPA has developed a number of new initiatives to help address these
challenges. These include pollution prevention, public-private partnerships
and other types of alternative financing, and technology development and
transfer. The Agency has designed these initiatives to support state and local
efforts to meet their environmental responsibilities. A theme common to
these initiatives, is that they seek to involve and tap all available resources,
both public and private in working to this goal.
in
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Assumptions for Projections
The report projects expenditures to the year 2000. All cost figures in the report (past or
projected) are presented in 1988 dollars unless otherwise noted.
Because of the long timeframe, uncertainties exist about what environmental regula-
tions will be implemented and the cost of their implementation. Moreover, rules under de-
velopment may change prior to final promulgation, resulting in costs different from the
original projections. Because of these uncertainties, we made a number of assumptions
about the future costs of existing and new regulations. Readers should keep the following
assumptions in mind:
Existing Regulations
Future costs were estimated by regressing five years of historical trends against time.
Future costs were projected for each medium.5
If historical data did not reveal a definitive trend, a flat spending pattern was projected
based on the last year of actual data.
Projections assume the current level of compliance. If compliance levels change, costs
may be affected by changed levels of investment in pollution abatement and control.
Estimated costs for drinking water and solid waste cover the delivery of services as well
as assurance of quality. For example, drinking water costs include those to upgrade
pipes and pumps as well as costs to meet regulatory requirements.
New Legislation
Estimated local costs are derived from preliminary analysis for Regulatory Impact
Analyses prepared for EPA program offices. (No comparable information is available
on EPA and state costs for new regulations.)
Demands for capital due to new regulations are shown in a lump sum in the year the
capital will first be needed, or spread equally over a short timeframe. This assumption
was made because of timing uncertainties associated with regulatory implementation
and subsequent needs for capital.
Data collection, projections, analyses and graphical interpretations were conducted by
Apogee Research Inc. Estimates of the costs of all new regulations were provided by the
Environmental Law Institute. Editing, layout, and final preparation for printing this report
were conducted by American Management Systems, Inc.
IV
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1
Overview: The Cost of
Environmental Protection
Since the early 1970s, the U.S. Environmental Protection Agency (EPA) has
overseen the national mandate to restore and protect water, land, and air
resources. Carrying out this mandate has proven expensive for all levels of
government.
Faced with escalating environmental protection costs in competition with
the fiscal pressures attributable to other public programs, governments may
be limited in their ability to finance all the environmental protection activities
anticipated by Congress. The largest problems lie with local governments that
have low economies of scale in providing environmental services and limited
ability to raise large amounts of capital.
Under Congress' statutory direction, the EPA has expended considerable
resources to develop the components of broad national programs, including
minimum national standards for environmental quality, permit systems, en-
forcement procedures, and remediation protocols. By offering grants and
other forms of assistance, EPA has encouraged states to help implement our
national programs. Most states, however, also have committed their own re-
sources to administer the basic programs and others that reach beyond
minimum federal standards. Despite federal and state grants to localities,
local governments that provide drinking water, wastewater, and solid waste
management services have contributed much of the cost to build capital facili-
ties and almost all of the cost to operate and maintain them.
This chapter provides an overview of environmental expenditures from
1981 to 2000, both to maintain current levels of environmental quality and to
meet standards associated with new regulations. Expenditures are examined
by program and by sector.6
The Cost of Current Environmental Regulations and Services
In 1987, EPA, states, and local governments spent an estimated $40 billion
for environmental protection (see Figure 1). If recent trends continue, environ-
mental expenditures by all levels of government are expected to increase to
$55.6 billion in the year 2000 just to maintain current levels of environmental
quality. Extending current trends assumes, of course, that recent levels of
compliance and rates of capital expansion and replacement remain steady
throughout the projection period.
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Figure 1
Public* Expenditures to Maintain Current (1987)
Levels of Environmental Quality
56
54
52 h
50
48
46
44
42
40
38
36
34 P
In Billions of 1988 Dollars
32
Actual
Projected
1987 Level of Spending
J i L
i i i i
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
FISCAL YEAR
* EPA, State and Local Government
$15.6 Billion
Additional
EPA, State and
Local
Government
Spending to
Maintain
Current Levels
of
Environmental
Quality.
Source: See Appendix 6
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The capital portion of these expenditure estimates may be low if, as some
experts argue, future spending will have to be higher to recover from the
effects of deferred maintenance and rehabilitation. For this report, we as-
sumed that rehabilitation and maintenance of capital plants would be under-
taken at the same rate as in recent years.7 If spending for maintenance and
rehabilitation has indeed been inadequate in the past, then incorporating the
historical trend of capital outlays in the forecast of future costs embodies the
assumption that the backlog of infrastructure rehabilitation needs will con-
tinue to grow. Capital expenditure estimates are particularly important for
drinking water and water quality because of the large amount of capital plants
associated with these services.
Expenditure Trends by Environmental Program
With the exception of the air quality program, expenditures to maintain
current levels of environmental quality have steadily increased in the 1980s
and are expected to continue to do so in the 1990s (see Figure 2).8 Rapid growth
in spending for "other" environmental programs is attributable largely to
steady increases in Superfund program activities.9 Spending in some pro-
grams, however, will increase more substantially than in others (see Figure 3).
Spending for drinking water and solid waste programs will increase as a per-
centage of total spending; water quality expenditures will decrease as a
percentage of the total.
Water Quality. In 1981, governments devoted roughly $16 billion a year, or
46 percent of all environmental expenditures, to restore the quality of surface
and ground water. Most of the $16 billion was used to build and operate
municipal wastewater treatment plants, In the 1990s, increases in national
spending for water quality are not expected to keep pace with rates of growth
in other environmental programs. Thus, compared to its 46 percent share in
1981, water quality expenditures could drop to a 36 percent share of environ-
mental expenditures by the year 2000. Future water quality expenditures to
maintain current levels of water quality will be dominated by the costs of
building new or upgrading existing facilities to provide secondary treatment
as required in the Clean Water Act (CWA). EPA estimated in 1988 that $83.5
billion in capital expenditures would be required to bring all municipal
wastewater treatment facilities into compliance with minimum national stan-
dards.10
Drinking Water. In 1981, $12 billion, or 35 percent of all environmental ex-
penditures, were spent on drinking water. These expenditures are expected
to nearly double to $22 billion a year by 2000 and to account for 40 percent of
total environmental expenditures. Much of this increase is attributable to
capital replacement and expansion.
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Figure 2
Public* Expenditures to Maintain Current (1987)
Levels of Environmental Quality
In Billions of 1988 Dollars
60
50
40
30
20
10
0
Actual i Projected
SOLID WASTE
WATER QUALITY
DRINKING WATER
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
Source: See Appendix 6
* EPA, State and Local Government
Includes Costs to Deliver Services
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Figure 3
Distribution of Public* Expenditures
to Maintain Current (1987) Levels
of Environmental Quality
Air 3%
Water Quality 46%
Drinking Water 35%
Others 2%
Solid Waste 14%
1981
$35 Billion
Air 2%
Water Quality 41%
Drinking Water 38%
Others 4%
Solid Waste 15%
1987
$40 Billion
Air 3%
Water Quality 46%
Drinking Water 40%
Others 7%
Solid Waste 15%
2000
$55 Billion
* EPA, State and Local Governments in 1988 Dollars
Includes Costs to Deliver Services
Source: See Appendix 6
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Solid Waste. Garbage collection and the construction and operation of solid
waste management units (mostly landfills) accounted for $5 billion to $6
billion a year (or 14 percent of environmental expenditures by governments)
in 1981. The low priority of solid waste management relative to other local
environmental services is due, in part, to the shifting of resources from regu-
lation of solid to hazardous waste, with passage of the Resource Conservation
and Recovery Act of 1976 (RCRA). EPA was authorized in Subtitle D of RCRA
to provide financial and technical assistance to the states and local govern-
ments to develop solid waste management plans. However, federal funds for
Subtitle D were not appropriated after 1980.
Costs will escalate in the 1990s, so that by the year 2000, solid waste spend-
ing could account for 15 percent of environmental expenditures. It is likely
that these estimates are conservative, given the extent of the solid waste
disposal problem in the United States. Approximately 450,000 tons of waste
are being generated every day, 80 percent of which are being disposed of in
landfills that are rapidly reaching the end of their capacity.11 Increased siting
problems are leading to much higher disposal costs. It takes four to five years
to implement plans for a sanitary landfill, and demand far exceeds supply of
these facilities. On average, disposal costs in 1987 were four times the cost in
1977, having increased from $3 or $4 per ton in 1977 to $20 or more in 1987.
Waste-to-energy facilities and incinerators are increasingly favored by local
governments for solid waste management. However, they are more expensive
to build and operate, and face siting problems similar to those of landfills.
Air Quality. Government costs to administer air quality control programs
accounted for 3% of all environmental expenditures in 1981. However, by the
year 2000, solid waste expenditures are estimated to be four times those for air
quality programs. In the absence of renewed programs or changes in recent
rates of compliance, air quality spending is artificially projected as flat
through the turn of the century.
Environmental Expenditures by Level of Government
The future cost of maintaining current levels of environmental quality (the
shaded area shown on Figure 1) falls unevenly on different levels of govern-
ment, with municipalities expected to underwrite a growing share in the
future. While EPA expenditures are expected to decline by a third between
1981 and 2000, local spending could almost double (see Figure 4).
EPA. EPA expenditures to maintain current programs are expected to
decline from $6.3 billion a year in 1981 to $4.3 billion a year in 2000. This drop
from 18 per cent of national environmental expenditures in 1981 to less than
8 percent in 2000 is attributable largely to the phasing-out of federal grants
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Figure 4
Public Expenditures by Level of Government to Maintain
Current (1987) Levels of Environmental Quality
In Billions of 1988 Dollars
20 H
10
0
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
Local
State
EPA
Source: See Appendix 6
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to build wastewater treatment plants. EPA's Construction Grants program
will decline from the $1.2 billion appropriated in 1989 and projected for 1990
to zero in 1991. Federal grants to help capitalize state wastewater treatment
revolving loan funds will peak at $2.4 billion in 1991 and decline to zero by
1995. There is no comparable federal assistance program in solid waste, and
none anticipated within EPA or the Congress. EPA grants to states to
administer the Safe Drinking Water Act have declined by 27 percent in real
terms, from a high of about $56 million in 1979 to an estimated $41 million in
1989.
State Governments. The Bureau of the Census estimates that state outlays to
administer environmental programs, comply with them where applicable,
and provide assistance to localities for their compliance, have grown slowly
from just under $2 billion a year in 1981 to about $2.1 billion in 1987. The
Census data are roughly comparable to the results of a recent survey of state
environmental expenditures that reported 1986 state outlays of $1.9 billion for
air pollution, drinking water, hazardous waste, indoor air pollution, marine
and coastal initiatives, pesticides, solid waste, and water quality.12 If current
trends continue, state environmental expenditures could reach $2.6 billion a
year in 2000. This represents a decrease in the share of total public sector en-
vironmental expenditures accounted for by states, from 6 percent in 1981 to 5
percent in 2000. However, this study does not take into account the growing
demands the states face in responding to new water quality and drinking
water legislation. A recent EPA study found that state environmental depart-
ments as a whole will have a shortfall of $309 million in 1995 alone to admini-
ster water programs.13
From 1982 to 1986, EPA grants to states funded 47 percent of state air
quality control programs, 38 percent of water quality programs, and 54
percent of hazardous and solid waste control programs.14 The remainder of
state program budgets are financed by fees, dedicated taxes, and general tax
revenues. Of particular note, is the fact that grants to states have generally
declined in real dollars as state program costs have increased, the net result
being a precipitous drop in the proportion of state environmental budgets
covered by EPA grants over the period (see Table 1).
Local Governments. Annual environmental expenditures by local govern-
ments are expected to nearly double by the year 2000, assuming there will be
no effort to raise standards to improve environmental quality beyond current
levels. If environmental standards are enforced, local capital expenditures
will also have to double to compensate for scheduled reductions in federal
grants. Operating expenses paid entirely by localities also are growing due to
the use of more advanced chemical and energy-intensive treatment technolo-
gies. In 1981, localities spent about $26 billion (76 percent) of the public share
of environmental costs to comply with federal mandates (see Figure 5). By
8
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Table 1
State Budgets and EPA Grants to States for Air, Water,
and Hazardous Waste Programs
1982
1983
1984
1985
1986
Total State Budgets
(in millions of 1987 dollars)
Air
$210
$213
$206
$202
$213
Water a
$23
$274
$296
$326
$336
Hazardous
Waste b
$64
$76
$110
$146
$169
EPA Grants as a Percentage
of State Environmental Budgets
Air
49%
45%
46%
48%
46%
Water a
49%
38%
35%
34%
33%
Hazardous
Waste b
76%
66%
47%
41%
40%
Source: Congressional Budget Office, Environmental Federalism: Allocating Responsibilities for
Environmental Protection, Staff Working Paper (September 1988).
" Includes water quality programs; some drinking water programs may be excluded.
Includes both hazardous and solid waste programs.
1987, these communities were spending $33 billion and the local share had
grown to more than 82 percent. By the year 2000, localities are projected to
spend over $48 billion and bear more than 87 percent of the public cost of
environmental programs just to maintain current standards.
Additional Local Costs of New Regulations
The costs to local governments associated with new regulations are pro-
jected to reach $5.3 billion by the year 2000 (see Figure 6).15 The report assumes
that costs of municipal waste combustion air standards, $2.5 billion, would be
incurred in 1992, resulting in a large peak in that year. A more likely scenario
is that these costs will be more evenly distributed over several years.
The $5.3 billion is conservative, reflecting only a portion of the costs of
federal environmental regulations that will take effect over the next five to ten
years. It does not include any programs envisioned by Congress beyond 1987,
and none of the growing number of new state or local environmental man-
dates.
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FIGURE 5
Percentage of Public Expenditures by Level of
Government to Maintain Current (1987) Level
of Environmental Quality
LOCAL 76%
STATE 6%
EPA 18%
1981
Total Spending
$35 Billion
LOCAL 82%
1987
Total Spending
$40 Billion
LOCAL 87%
STATE 5%
EPA 8%
2000
Total Estimated Spending
$55 Billion
Source: See Appendix 6
10
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FIGURE 6
Local Government Expenditures
In Billions of 1988 Dollars
1987 Level of Spending
$5.3 Billion
Additional Local
Spending to
Comply with
New Standards
$15.8 Billion
Additional Local
Spending to
Maintain Current
Level of Quality
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
Source: See Appendix 6
11
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Water Quality
Local costs of new water quality regulations will average $2.6 billion per
year in the 1990s (see Figure 7). Most of these new costs are for building new
or upgrading existing facilities to meet the secondary treatment requirements
of the Clean Water Act. EPA estimated in 1988 that $83.5 billion would be
required to bring all municipal wastewater treatment facilities into compli-
ance with minimum national standards.16
Drinking Water
Because the program initiated by the 1986 Amendments to the Safe Drinking
Water Act (SOWA) has been slow getting started, the costs of these new regu-
lations will be relatively low in the early 1990s, averaging $36 million a year.
By 1994, however, costs are projected to jump to $539 million as the capital
costs associated with these regulations start to be incurred. For the rest of the
1990's, annual costs will average $830 million, dropping to $500 million by
2000.
Solid Waste
New regulations included in the study significantly increase estimated
solid waste expenditures. In 1992, for example, costs associated with new
regulations are estimated at $3 billion, almost half of the $7 billion spent to
maintain current environmental standards. This large increase is mostly due
to capital costs associated with municipal waste combustion air standards. It
is assumed that all of these municipal waste combustion capital costs, $2.5 bil-
lion, will be incurred in 1992. For the rest of the 1990s, costs of new regulations
are about $1.2 billion each year.
Local solid waste management is a likely focus of Congress in the 1990s and
the potential for costly new regulations is great. Concerns about hazardous
residue from the incineration of municipal solid waste have already led Con-
gress to consider regulating municipal ash as a hazardous waste. Potential
costs for local governments would be very high. Also, the outcome of EPA's
investigation of regulatory alternatives to control air emissions from munici-
pal waste combustion will be an important determinant of future costs to local
governments for disposal of solid waste.
Total Local Expenditures by Media for the Year 2000
Adding the local costs of new regulations to the costs of maintaining cur-
rent levels of environmental quality results in a small change in the proportion
spent for each environmental program between 1987 and 2000 (see Table 2).
12
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Figure 7
Local Government Expenditures by Media
DRINKING WATER
In Bllllont of 1988 Dollar!
20 -
16
Actual
Projected
1987 LEVEL OF SPENDING
> $0.6 Billion
$6.9 Billion
WATER QUALITY
In Blllloni of 1088 Dollar!
'81 '83 '86 '87 '89 '91 '93 '96 '97 '99
SOLID WASTE
In Blllloni of 1988 Dollar!
20
10
Actual
Projected
$3.0 Billion
$6.7 Billion
'81 '83 '86 '87 '89 '91 '93 '96 '97
Additional Local
Spending to Comply
with N ew
Environ me n tal
Standards
\ $1.4 Billion
} $2.2 Billion
81 '83 '86 '87 '89 '91 '93 '96 '97 '99
Additional Local
Government Spending
to Maintain Current
Level of
Environmental
Quality
Source: See Appendix 6
13
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The most important shift between 1987 and 2000 is the 4 percent increase in
water quality expenditures from 35 to 39 percent of total expenditures and a
corresponding 4 percent reduction in the percentage that is expended for
drinking water, from 45 to 41 percent. This change is due primarily to the
increased local costs of financing wastewater treatment facilities as federal
grants are phased out. This reflects the fact that while local spending on water
quality is increasing, the total public sector spending for water quality is
estimated to decrease by 5 percent between 1987 and 2000 (from 41 percent to
36 percent). The percentage increase for other programs is largely due to costs
imposed by new regulations examined in this study (Underground Storage
Tanks Standards, Asbestos in Schools, and SARA Title IE Requirements).
Table 2
Summary of Local Government Environmental Expenditures by Media
(In Billions of 1988 dollars)
Program
Water Quality
Drinking Water
Solid Waste a
Others
Total Local Spending
1987
$11.4
$14.8
$6.1
$0.3
$32.6
Percentage
of Total
35.0 %
45.4%
18.7%
0.9%
100.0%
2000 b
$21.1
$22.2
$9.7
$0.7
$53.7
Percentage
of Total
39.3%
41.4%
18.0%
1.3%
100.0%
Percentage
Increase 1987
-2000
85%
50%
59%
133%
65%
Source: Apogee Research from U.S. Bureau of the Census and data prepared in 1988 by the
Environmental Law Institute from EPA Regulatory Impact Analyses.
Includes costs to deliver services.
Cost of maintaining 1987 levels of environmental quality plus costs of new regulations.
14
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2
Impact of Spending for
Environmental Protection
on Capital Markets
This chapter examines the impact on capital markets of the financing needs
of local governments. The focus is on local governments because of the
dramatic increase in local demands for capital for environmental services
relative to other sectors and because of the availability of local cost estimates
for implementing new regulations. The capital markets view is an important
one when examining local costs because localities rely on municipal bonds to
finance environmental facilities. Increasing local demands for capital signal
proportional increases in demand for new bond issues.
Capital Requirements of Environmental Regulations
Capital formation by EPA, states, and local governments to maintain cur-
rent levels of environmental quality is expected to fluctuate between $13
billion and $20 billion a year between 1987 and the year 2000 (see Figure 8). If
recent trends continue, by the year 2000 most of the demand for capital to
maintain current programs will be accounted for by local governments. Local
demands for capital are estimated to increase from $9.5 billion a year in 1987
to $16.5 billion a year in 2000 (see Figure 9). State demands for capital are
expected to remain stable over the same period and are relatively small,
averaging about $680 million per year.
Estimated local capital costs of new regulations add an average of $3 billion
a year to local capital needs associated with current environmental regula-
tions. As a result, localities are likely to have capital needs of nearly $19 billion
a year by 2000 (see Figure 9).
Moreover, as operating expenses grow, local governments could be forced
to rely more heavily on borrowed funds to finance their capital needs. Annual
operating and maintenance expenditures are expected to increase by 52 per-
cent, from about $23 billion in 1987 to $35 billion in 2000 (see Figure 10). This
rate of increase in operating expenditures, 3.6 percent a year, is almost three
times the rate of population growth expected over this period. New environ-
mental programs will add another 10 to 20 percent to these totals.
15
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Figure 8
Capital Expenditures
EPA, STATES AND LOCAL GOVERNMENTS
In Billions of 1988 Dollars
25
Actual i Projected
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
Local Capital Expenditures to
Comply with New Regulations
Source: See Appendix 6
EPA, State and Local Expenditures
to Maintain Current (1987) Level of
Environmental Quality
-------
Figure 9
Capital Expenditures
Local Governments Only
In Billions of 1988 Dollars
Actual : Projected
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
Capital Expenditures to Comply with New Regulations
Capital Expenditures to Maintain Current (1987)
Level of Environmental Quality
Source: See Appendix 6
17
-------
Figure 10
Capital and O & M Expenditures*
of Local Governments
In Billions of 1988 Dollars
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
* Includes Expenditures to Maintain Current (1987)
Environmental Quality and to Comply with New Regulations
Source: See Appendix 6
18
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Substitution of Local for Federal Capital
Local demands for capital are projected to increase by 97 percent between
1987 and 2000. Concurrently, EPA's capital grants for local environmental
services are scheduled to end by 1995 (see Figure 11). To a large extent, the
substitution of local for federal capital results from the phasing-out of EPA
construction grants for wastewater treatment facilities. Capital grants are
expected to decline from $4.5 billion in 1981 to zero when grants to capitalize
state wastewater treatment revolving funds expire in 1994.
Financing Local Environmental Facilities
Because of a variation in intergovernmental roles, wastewater treatment
facilities are currently financed differently than either water supply or solid
waste management facilities. The federal role in financing wastewater treat-
ment facilities is much more significant than in the other two areas.
Wastewater Treatment
In the 1980s, municipal bonds have increasingly substituted for declining
federal grants in financing wastewater treatment plants. Averaging $3.9
billion a year, federal grants financed roughly half of all wastewater facilities
from 1980 to 1984. Municipal bonds provided another $2.3 billion a year in
capital, on average. However, the ratio of grant-to-bond dollars fell signifi-
cantly, from 2.93 in 1980 to 0.56 in 1988 (see Table 3). State assistance, private
loans, retained earnings, and private equity made up the remaining sources of
wastewater capital.
Federal support for wastewater treatment will approach zero by 1994.
EPA's Construction Grants program, the largest source of federal aid to build
wastewater treatment plants, ends after 1991.17 Beginning in 1989, federal
grants will help capitalize state revolving loan funds (SRFs) in place of
construction grants, but they expire in 1994. The federal role in financing
wastewater treatment plants will be reduced to small, targeted programs. In
many states, even if SRF payments are reinvested or leveraged, SRF programs
are not expected to meet financing needs.18 Even with the SRF program in
place, some 20 states will face a combined financing need of nearly $57
billion.19
19
-------
Figure 11
Comparison of EPA* and Local
Government Capital Expenditures
In Billions of 1988 Dollars
25
20
15
10
0
Actual i Projected »
1
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99
EPA Capital
Local Capital
Source: See Appendix 6
* Construction Grants
20
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Table 3
Estimated Sources of Capital Used to Finance Municipal
Wastewater Treatment Works (current dollars)
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
Average
Federal
Grants'
$4,720
$4,293
$4,113
$3,416
$2,969
$2,900
$3,113
$2,920
$2,514
$3,440
Municipal
Bonds
$1,610
$1,620
$2,870
$2,410
$3,150
$7,007
$6,823
$4,517
$4,498
$3,834
Ratio of
Grants/Bonds
2.93
2.65
1.43
1.42
0.94
0.41
0.46
0.65
0.56
0.90
Source: Published and unpublished data supplied by the Bureau of the Census and The Public
Securities Association.
3 Includes EPA Construction Grants, Farmers Home Administration Sewer Grants;
Department of Housing and Urban Development Community Development Block Grants
(sewer uses); and Economic Development Administration Grants (sewer uses).
Moreover, municipalities in many of these and other states face escalating
operating expenses, tending to put upward pressure on user fees which, on the
margin, will make capital financing more difficult. In I960, for example, the
average local operating cost per person served by a central sewer system was
$17.67 a year. At the beginning of EP A's Construction Grants program in 1972,
these costs were $19.35 a year. By 1984, they had grown to $41.61 per person.
Per capita operating costs should continue to grow as more sophisticated
energy and chemical-intensive treatment processes come on-line, particularly
in small communities with limited economies of scale. Higher operating
expenses can reduce the ability of localities to issue debt for capital invest-
ments, especially in areas where the average annual income is low.
21
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Water Supply
While water supply capital needs ($4 to $5 billion a year in the 1980s) are
equivalent to those of the nation's wastewater treatment plants, water supply
systems have received almost no federal assistance. Traditionally, municipal
systems have financed capital needs via a mix of tax exempt municipal bonds
(about 60 percent); retained earnings (20 to 30 percent); state and federal grants
(5 to 10 percent); and other sources such as private loans, special tax assess-
ments, and private equity (5 to 10 percent). Larger water systems tend to rely
more heavily on bonds than do smaller ones, which generally rely on private
bank loans to finance capital needs.
Solid Waste Management
There is no federal aid for local solid waste management. Local govern-
ments spend about $700 million a year for capital improvements. The litera-
ture is far less revealing on the financing of solid waste facilities than on
financing for wastewater management and water supply. The few reports that
address the issue agree that municipal bonds provide the majority of invest-
ment capital for publicly-owned waste management facilities.20 Like water
and wastewater plants, however, some publicly-owned facilities finance
capital improvements with retained earnings, private bank loans, or private
equity.
Impact on Capital Formation
The impact of capital demands for environmental services on local capital
formation can be examined from two perspectives: the ability of the market to
respond to the capital demands, and the ability of local governments to raise
capital. Assuming that the market will respond if the price of capital can be
met, the key issue is municipal ability to support capital formation.
Whereas private companies often pass along the costs of capital to consum-
ers by adjusting the price of goods and services, local governments are more
limited in their ability to meet capital needs. Frequently, elected officials face
political difficulties in raising taxes or fees, or legal constraints on their
authority to raise revenues imposed by statutes, regulations, or state consti-
tutions. In other cases, local resources may be inadequate to support large
amounts of debt. This is often true for small municipalities having relatively
high fixed costs of issuing bonds, limited revenue bases and no economies of
scale. If capital-intensive facilities are forced on these and other cities, the cost
of increased capital formation could crowd out other investments.
22
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Can the Capital Markets Respond?
By the year 2000, municipalities will need to issue approximately $18.7
billion in bonds for wastewater, drinking water and solid waste projects.
Compared to the volume of bonds issued to finance these projects in the 1980's-
from $4.5 to $9 billion a year - this change in volume, roughly twice the current
rate, would not be unusual.
In water supply, for example, meeting the capital needs of the 1986 Safe
Drinking Water Act will require an estimated $0.5 billion to $1.0 billion a year
in new capital financing over the period 1994 to 2000. This would represent a
25 to 35 percent increase over the current volume of water supply bonds-
fluctuations well within the range in volume for such bonds between 1977 and
1985.
In addition, debt issued for environmental purposes is a small percentage of
the total debt issued by state and local governments (see Table 4). Debt issued
for water and sewer projects was only 14 percent of state and local debt in 1960
and 1970 and declined to 9 percent by 1987.
Limitations on Municipal Capital Financing
The overall volume of bonds necessary to meet new capital requirements
is not unmanageable from the perspective of market expansion. However,
large capital demands associated with environmental services often cause
large peaks in capital needs that can crowd out other investments. For
example, San Diego has a total outstanding debt of about $1.3 billion but is
faced with a cost of $800 million for an ocean outfall (conveyance of treated
wastewater to the ocean). If financed by long-term debt, the cost of the
conveyance would represent a 61 percent increase in the city's total outstand-
ing debt. The large capital demands for this project would limit the amount
of debt the city could issue for other purposes.
Moreover, the ability of some cities, especially small ones, to issue new debt
is limited and most of the nation's environmental systems are in small
communities. Approximately 90 percent of all community water systems
serve fewer than 3,300 residents; 88 percent of all wastewater treatment
systems handle less than 1 million gallons per day; and most of the solid waste
landfills in the nation serve communities under 10,000.21
23
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Table 4
Water/Sewer Debt as Percentage of Total State and Local Debt
(billions of 1988 dollars)
Year
1960
1970
1980
1987
Water/Sewer
Debt
$4.57
$8.14
$4.49
$9.17
Total State &
Local Debt
$31.67
$59.02
$60.91
$105.83
Water/Sewer as
Percent of Total
14%
14%
7%
9%
Source: Apogee Research from data compiled by the Public Securities Association.
Because they are not well known, small communities do not have estab-
lished credit ratings, forcing them to seek generally higher-cost commercial
loans to finance capital expansion. When they are able to issue bonds publicly,
small denominations often bear a high cost of capital for two reasons: because
the fixed costs (e.g., legal fees and underwriters fees) are more burdensome
when spread over a small base, and because the credit markets generally
demand a premium to compensate the risks of lending money to small com-
munities with a less certain ability to repay principal and interest.
The EPA recently completed a study that examines the ability of different
sized cities to raise capital for environmental programs through the bond
market.22 If the increases in debt service attributable to either the capital
demands of all new drinking water regulations or new water quality regula-
tions were limited to 1 percent of gross household income (about a doubling
in current user fees), EPA estimates that 26 percent of all cities under 2,500
persons (nearly 7,000 cities and towns) could have trouble issuing revenue
bonds. Fewer than 10 percent of cities with populations between 2,500 and
250,000 would have similar problems. Eleven percent of cities with popula-
tions of more than 250,000 would have trouble issuing new revenue-backed
debt.
24
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Even if municipalities were willing to offset user fees with general revenues
and their full taxing powers were brought to bear on the issuance of general
obligation bonds to support new environmental initiatives, most small cities
would be no better off. In contrast, medium and larger cities would benefit
significantly. While about 21 percent of all small cities would still face
difficulties issuing new bonds, the proportion of medium and large cities
expected to have trouble in the capital markets would decline to 3 percent and
0 percent, respectively.
But these calculations account for only the capital demands imposed by new
regulations. The ability of many cities (regardless of size) to support new bonds
to cover total capital needs by the year 2000 capital replacement plus the
demands of new programs worsens the outlook presented above.
25
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3
Impact of Environmental
Spending on Households
As municipalities are the primary providers of environmental services/
local government responses to increasing costs of these services will deter-
mine, to a large extent, the impact on households. There are three ways local
governments may respond (see Figure 12). Local budgets could accommodate
increased demand for resources by increasing own-source revenues through
(l)higher user charges or taxes (2)increasing the efficiency of current pro-
grams, or (3)shifts to environmental services from spending in other budget
areas. Second, local governments could seek alternative sources of finance,
either through federal and state assistance or by involving private companies
in the finance and provision of environmental services. Finally, local govern-
ments could choose not to accommodate the higher costs of environmental
services, which might lead to noncompliance or reduced quality or quantity
of service.
Meeting the increasing costs of environmental services with local revenues
means that households and businesses must pay for regulations financed at
the municipal level through increased user charges, increased general taxes,
or reduced levels of services in competing municipal programs. The house-
hold effects of environmental spending are calculated assuming all capital
facilities are financed with long-term bonds backed by user fees. Under these
assumptions, lump-sum capital outlays are amortized, with the annualized
payments to capital added to operating and maintenance outlays each year.
The result is divided by the number of households served to provide an
estimate of the household resources necessary to pay for environmental
services. After recalculating to take out costs paid by industrial and commer-
cial facilities, the estimates reflect increases in direct costs for average house-
holds.23
To the degree that costs to private companies are passed on to consumers
in the form of increased prices for goods and services, household costs will
increase. However, environmental compliance costs typically constitute only
a small portion of the total cost of production. Therefore, resulting price
increases will not have a significant effect on consumption of a product or
service.
27
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Figure 12
Local Government Responses to Increasing
Costs of Environmental Protection
Increasing Local
Costs of Environ-
mental Protection
Local Budgets
Accommodate
Increased
Need for
Resources
Search for
Non-Local
Sources of
Finance
Local Budgets
do not
Accommodate
New Need
for Resources
Local Resources
Stay Level
Reduce Spending In
Other Budget Areas
I ncreased
Efficiency
Local Resources
Increase
Higher
User
Charges
Higher
Taxes
M ore
Debt
Federal & State
Assistance
Private
Involvement
Noncompliance
Reduce Quantity
or Quality of
Service
28
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Household Costs of Environmental Programs
If current trends continue, the average household will spend $647 a year by
the year 2000 for environmental services including drinking water, wastewa-
ter treatment, and solid waste management (see Table 5). This is 54 percent
more than the average household payment for such services in 1987. The
largest increment, $599 dollars a year in 2000, is attributable to simply
maintaining the current level of environmental and service standards. The
average annual cost of complying with new regulations is estimated to be an
additional $48.24
Household Payments by City Size to Maintain Current Levels of
Environmental Quality
Implementing current environmental programs will have more profound
effects for households in smaller cities than in larger ones. Small cities face
limited economies of scale in the provision of environmental services and
generally higher costs of capital. These two effects combined tend to drive up
the price of environmental protection for small cities.
As a result, households in the smallest cities are expected to pay substan-
tially more than those in large and medium-sized cities through the turn of the
century. Household costs are expected to increase by about 88 percent, from
$670 in 1987 to $1,263 in 2000 in the smallest cities (less than 500 population).
Household payments to maintain current programs in medium-sized cities
(populations from 50,000 to 100,000) will increase by 38 percent, on average
from $373 in 1987 to $515 in 2000. Household costs in large cities (populations
in excess of 500,000) will increase by 36 percent, from $393 in 1987 to $533 in
2000.
Household Payments for New Regulations
The cost of new regulations must be added to the large increases in house-
hold costs of current programs. Households in cities with populations below
500 will pay an additional $317 a year to comply with new regulations in 2000.
For the largest cities, new regulations will cost the average household $93
more each year by 2000. Households in medium-sized cities, with populations
of 10,000 to 50,000 and 50,000 to 100,000, are faced with additional costs of $24
each year.
29
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Table 5
Average Annual Household Payments for Environmental Services
for a Sample of 8,032 Cities, Towns, and Townships (1988 Dollars)
City Size
500 or less
500 - 2,500
2,500 - 10,000
10,000 - 50, 000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
500,000 or more
Population
Weighted
Average
Average
Payments
in 1987
$670
$473
$433
$444
$373
$291
$335
$393
$419
Additional
payments to
maintain current
levels of
environmental
quality in 2000
$593
$223
$143
$197
$142
$111
$126
$140
$180
Additional
payments to
comply with new
environmental and
service standards
in 2000
$317
$67
$29
$24
$24
$34
$68
$93
$48
Total Estimated
household
payments for
environmental
protection in 2000
$1,580
$763
$605
$665
$539
$436
$529
$626
$647
Source: Apogee Research, from U.S. Bureau of Census, 1986 Survey of Community Water Systems,
and data compiled by the Environmental Law Institute from EPA Regulatory Impact
Analyses.
Household Payments for Environmental Programs Compared to
Income
The difference in costs between households based on city size is even more
dramatic when examined as a percentage of household income (see Table 6).
For the smallest cities, with lower household income and higher costs per
household, the cost of environmental protection as a percentage of household
income will increase from 2.8 percent in 1987 to 5.6 percent in 2000. For
medium-sized cities the percentage is expected to change slightly during the
period 1987 to 2000, from 1.0 to 1.2 percent, and in large cities, to change from
1.1 to 1.5 per cent.
30
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Estimates of costs as a percentage of household income may be conserva-
tive because, to the extent that companies pass through environmental costs
to consumers, household income will be reduced. As a result, the costs of
environmental protection as a percentage of household income could be
higher.
Household Payments by Program
Household costs of each environmental program, including those to main-
tain levels of environmental quality and to comply with new regulations in the
year 2000, differ by city size category (see Table 7). Households in smaller cities
will pay comparatively more than households in either large or medium-sized
cities. Pending wastewater improvements along with the additional future
costs of maintaining current levels of environmental quality will cost the
average household in cities of 500 or less about $259 a year by 2000, when all
regulatory programs are assumed to be on-line. Drinking water regulations
will add another $366 a year and solid waste regulations another $218. This
adds up to $910 for households in small cities, in addition to the baseline
amount of $670.
Households in medium-sized cities (50,000 to 100,000) are expected to pay
less than a third of the amount paid by households in small cities for
wastewater treatment, 17 percent of that paid for drinking water, and only 9
percent of the amount spent for solid waste. This is in addition to the baseline
amount of $373 that is about half that of small cities ($670). The largest cities
(500,000 and above) are also expected to pay sums comparably much less than
the smallest ones. Wastewater treatment and solid waste show decreasing
economies of scale with the result that households in large cities will pay more
for these services than those in medium-sized cities. However, household
costs are much less than in the smallest cities. Households in large cities will
pay 56 percent of the amount paid for wastewater treatment in small cities and
18 percent of that paid for solid waste. As drinking water shows increasing
economies of scale, households in large cities will only pay 11 percent of
household costs in small cities. This is in addition to a baseline of $393, that is
only 59 percent of the 1987 cost for households in small cities.
Water Quality
Wastewater treatment is the highest cost service for households in most
city sizes. Costs are estimated to be particularly high for households in the
smallest cities, where substantial investments are necessary to bring wastewa-
ter treatment facilities into compliance with minimum national standards.
31
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Table 6
Cost of Environmental Protection Per Household as Percentage of Household
Income, By City Size (1988 Dollars)
1987 2000
City Size
500 or less
500 - 2,500
2,500 - 10,000
10,000 - 50, 000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
500,000 or more
Population
Weighted
Average
Average
-leasehold Cost
of
Environmental
Programs
$670
$473
$433
$444
$373
$291
$335
$393
$419
Average
Household
Income
$24,277
$26,361
$30,546
$31,685
$37,189
$33,769
$31,943
$34,756
$31,617
Cost as a
Percentage of
Household
Income
2.8%
1.8%
1.4%
1.4%
1.0%
0.9%
1.0%
1.1%
1.3%
Average
Household
Cost of
Environmental
Programs a
$1,580
$763
$605
$665
$539
$436
$529
$626
$647
Average
Household
Income
$28,357
$30,792
$35,680
$37,010
$43,440
$39,445
$37,312
$40,597
$36,931
Cost as a
Percentage
Household
Income
5.6%
2.5%
1.7%
1.8%
1.2%
1.1%
1.4%
1.5%
1.8%
Source: Apogee Research, from U.S. Bureau of Census, 1986 Survey of Community Water Systems,
and data compiled in 1988 by the Environmental Law Institute from EPA Regulatory Impact
Analyses.
Includes exists of maintaining current levels of environmental quality plus costs of complying
with new regulations.
Drinking Water
The largest cost to households in small cities in the year 2000 is estimated
to be for drinking water programs. About 95 percent of the total estimated
costs of drinking water programs in 2000 is associated with current Safe
Drinking Water Act programs and the provision of adequate quantities of
water.
32
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Table 7
Increase in Annual Household User Charges in 2000 to Maintain Existing Levels
of Environmental Quality and To Comply with New Regulations (in 1988 Dollars)
Municipality
Size
Category
500 or less
500 - 2,500
2,500 - 10,000
10,000 - 50, 000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
500,000 or more
Average
Payment
in 1987a
$670
$473
$433
$444
$373
$291
$335
$393
Additional Fees By Program in the Year 2000
Wastewater
Treatment
$259
$174
$85
$124
$77
$63
$114
$146
Drinking
Water
$366
$59
$59
$71
$64
$63
$43
$42
Solid
Waste
$218
$43
$19
$19
$20
$14
$33
$40
Other
$67
$14
$9
$7
$5
$5
$4
$5
Total
Additional
Fees
$910
$290
$172
$221
$166
$145
$194
$233
Source: Apogee Research, from U.S. Bureau of Census, 1986 Survey of Community Water Systems,
and data compiled in 1988 by the Environmental Law Institute from EPA Regulatory Impact
Analyses.
See Appendix 5 for average 1987 payments by media.
Solid Waste
Household expenditures for solid waste show a trend similar to that for the
other environmental services, with households in the smallest cities expected
to pay more than 5 times the amount paid by households in larger cities. For
the larger size categories, estimated household costs of solid waste programs
show reverse economies of scale. This is due to the amount of quality and
quantity-related costs included in total solid waste expenditures. There are
limited economies of scale in providing greater quantities of solid waste
33
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services. Costs of maintaining existing levels of environmental quality, that
are mostly quantity-related, constitute the majority of total costs in cities larger
than 2,500. Thus, for the most part, larger cities do not benefit from economies
of scale normally associated with environmental service provision in medium-
size cities.
34
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4
Conclusions
The purpose of this study was to document the public costs of environ-
mental protection for EPA, the states, and local governments and to use the
data to examine the changes, distribution, and the impact of these environ-
mental costs. Within the context of existing research parameters and specified
methodology, the study successfully documents these costs for the period
1981-1987 and projects them to the year 2000.
Findings
The study found that the public costs of maintaining current (1987)
environmental quality will grow from $40 billion a year in 1987 to more than
$55 billion in 2000. Another $5.3 billion a year will be required by local govern-
ments alone in 2000 to comply with the 22 new environmental regulations also
examined in the study.
Detailed analysis of the data also reveals significant potential cost impacts
on local governments and households. These impacts include:
The local share of public environmental spending is projected to rise from
76 percent to 87 percent during 1981-2000.
Local demand for capital is projected to double during that same period.
Average household costs for environmental services are projected to
increase by 54 percent, with much larger increases occurring in small com-
munities.
These findings represent an important step in examining the current and
future cost implications of the expanded programs and tightened environ-
mental standards that the American people are demanding. They suggest the
need for a continuing re-examination of how the nation finances environ-
mental protection.
Study Qualifications
EPA recognizes the importance of continuing to obtain and refine informa-
tion on the costs of implementing environmental regulations in all program
areas. Accordingly, the Agency is following up on this study with the report
Cost of A Clean Environment that will document private sector/industry costs
35
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as well as all governmental costs for existing and new regulations. This report
is required pursuant to the Clean Air and Water Acts and will serve to further
our understanding of the environmental resource needs facing EPA and the
nation.
Because this cost study was meant to be an initial effort, it is important that
the findings be viewed as preliminary in nature and considered within the
context of a number of qualifications (also see Appendix 1). These include:
The study limits the scope of its analysis by basing projections of future en-
vironmental costs on the 1987 level of environmental quality. Actual com-
pliance levels will most likely differ from this level and vary by program.
No provision is made for changes in existing programs or for new regula-
tions other than the 22 listed. Such changes will occur, but cannot be ade-
quately predicted. And, costs for them cannot be uniformly or accurately
determined.
Documented and projected costs to maintain current standards in the areas
of drinking water and solid waste include costs for the delivery of the
services.
Notwithstanding any limitations, the study provides a valid initial reading
of the fact that governments, particularly local ones, will face significant
environmental management and financing challenges in the years ahead. This
requires immediate attention and action if we are to successfully meet envi-
ronmental mandates.
Next Steps
Recognizing that the costs of environmental protection are growing and
that they call for innovative approaches to financing environmental programs
and activities, EPA has developed a number of Agency-wide initiatives to help
address the environmental and resource challenges, promote greater coopera-
tion with state and local governments, and encourage the use of innovative
technologies. These include:
Pollution Prevention - This initiative promotes an integrated environ-
mental approach stressing the prevention of pollution through techniques
such as waste minimization and recycling.
36
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Public-Private Partnerships - These partnerships exist when the public and
private sectors share responsibility for providing environmental services.
EPA is focusing on promoting and establishing partnerships in drinking
water, wastewater treatment and solid waste at the local level.
Alternative Financing - This initiative assists various government entities
in discovering and using funding mechanisms other than general appro-
priations or federal grants to raise revenues. The Agency's new Environ-
mental Financial Advisory Board is an integral part of this effort.
Technology Development - As part of EPA's support role in providing
states and localities with the tools needed to implement required pro-
grams, this initiative strives to reduce compliance costs via the develop-
ment of cleanup technologies that are more effective and efficient.
Technology Transfer - Technology transfer seeks improved environmen tal
results by creating a climate that fosters cooperative approaches to solving
problems, building knowledge and skills, and expanding the use of
technology transfer through technical assistance training and focused
information dissemination.
With all levels of government and the private sector working together on
these and other environmental initiatives, the nation can begin to address the
significant emerging challenges identified in this report.
37
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Appendix 1
Methodology
This study documents recent EPA, state and local government expendi-
tures for environmental protection and projects future costs to the year 2000.
Costs to local governments associated with new regulations are added to the
EPA, state and local costs of maintaining current levels of environmental
quality for all current programs in order to examine the growing gap between
current expenditures and future costs of environmental protection. In turn,
trends in the distribution of costs among EPA, the states, and local govern-
ments are assessed. Finally, the impacts of environmental policies on local
governments, capital markets, and households are analyzed.
Trends in the expenditures of local governments and impacts at the local
level are examined in more detail than for other levels of government because
more local data are available at this time.25
Definition of Expenditures
The terms expenditures, spending, and outlays are used interchangeably
in this report. They follow the definition of expenditures used by the Bureau
of the Census. Capital expenditures include acquisitions of depreciable plants
and equipment, replacement, and expansion as well as expenditures for
construction in progress. Research and development spending is excluded.
Operating and maintenance expenditures account for the purchase of
materials, parts, supplies, fuel, and power; upkeep or leasing of equipment;
direct labor; and purchased contract services. Depreciation of plants and
equipment are excluded, as are the costs of financing capital equipment.
This report examines two kinds of expenditures: (l)federal, state, and local
spending to maintain the current levels of environmental quality and (2) local
spending to comply with new regulations.
Which Environmental Services, Regulations, and Sectors are
Included?
The following is an explanation of the environmental expenditures in-
cluded and sectors for which data are available. Expenditures to maintain
current levels of environmental quality are more comprehensive because cost
estimates for new regulations are available only for local governments.
39
-------
Calculating Expenditures to Maintain Current Levels of
Environmental Quality
A. Environmental Services
Wastewater Treatment - expenditures pursuant to the Clean Water Act,
including those for construction, management, and operation of facili-
ties to monitor and control municipal and industrial wastewater
Drinking Water - expenditures pursuant to the Safe Drinking Water Act
plus those to supply adequate quantities of potable water
Solid Waste - expenditures pursuant to Subtitle D of the Resource Con-
servation and Recovery Act (RCRA) plus those for solid waste collec-
tion, transportation, and disposal services
Hazardous Waste - other expenditures pursuant to RCRA
Superfund - expenditures pursuant to the Comprehensive Environ-
mental Response, Compensation, and Liability Act (CERCLA)
Air Quality - expenditures pursuant to the Clean Air Act
Toxic Substances - expenditures pursuant to the Toxic Substances Con-
trol Act (TSCA)
Pesticides - expenditures pursuant to the Federal Insecticide, Fungi-
cide, and Rodenticide Act (FIFRA)
Energy - expenditures pursuant to the Energy Security Act
In addition, the study covers several EPA program areas administered
independently of these programs, including management and support, radia-
tion, interdisciplinary, and the Leaking Underground Storage Tanks Trust
Fund.
B. Sectors
Expenditures to maintain current levels of environmental quality include
those by EPA, the states, and local governments, as currently available in
public budgets and national aggregate statistics. Although a major effort was
made to include most of the relevant costs, some gaps in the data were
40
-------
unavoidable. Expenditures that are included in this study and those that we
were not able to gather at this time are summarized below by sector.
Federal. At the federal level, this study includes only programs managed
by the EPA, although other federal agencies administer similar programs.
EPA expenditures by program area were derived from the Agency's annual
budget justification documents.26
State Governments. The Bureau of the Census collects the only consistent
data on state expenditures to administer air, drinking water, and wastewater
treatment programs. They are reproduced in this study as produced and
labeled by the Census Bureau. Expenditures for leaking underground storage
tanks and hazardous waste programs were estimated from the requirements
to match federal grants. For each of these program areas, it is impossible to
distinguish among the various types of state expenditures, such as program
administration, assistance to local governments, compliance, and intergov-
ernmental coordination. At this time, we are unable to gather consistent time-
series data on state expenditures for solid waste, Superfund, or hazardous
waste programs.
Local Governments. Local expenditures are also reproduced from Census
reports, although the figures for intergovernmental grants to localities have
been removed in this study, leaving only local spending from their own
sources. Expenditures are included for drinking water, wastewater treatment,
and solid waste management services. While local expenditures for other pro-
grams are not reported to the Bureau of the Census in separate categories, they
may be reported under one of the above categories.
Local capital and operating expenditures for drinking water and solid
waste management cover both the delivery of adequate quantities of services
(water flows to meet all demands; adequate garbage removal and disposal)
and the assurance of mandated quality of services (maximum concentration of
pollutants in potable water; testing and containment in landfills). To be fair in
a comparison of the effects of future regulations, one might argue that the
appropriate baseline is quality expenditures, exclusive of those to deliver
adequate quantities. While arguably appropriate, the data were not suffi-
ciently detailed to separate expenditures for quantity from those for quality of
service. Therefore, in projecting the cost of maintaining current programs,
both of these components were included.
41
-------
Calculating Local Environmental Costs Associated
with New Regulations
In this report, costs of new regulations include only those for local govern-
ments. The new regulations considered in the study are associated with local
wastewater treatment, drinking water, and solid waste programs. In addition,
estimates of costs are provided for several other regulations that are independ-
ent of these program areas. In total, costs were estimated for 22 new regula-
tions (see Table 8).
The estimated local costs of new regulations were derived from Regulatory
Impact Analyses (RIAs) prepared for EPA program offices in 1988. These es-
timates are conservative for a number of reasons. First, of the 37 pending
regulations impacting local governments, only 22 had sufficiently precise cost
estimates for inclusion in this study.27 Second, when RIAs estimate capital
costs, they generally include only the installed cost of plants and equipment.
When these investments are financed with municipal or industrial bonds or
loans, transaction costs can add 20 percent or more to capital cost estimates.
Moreover, this study cannot account for several regulations that are currently
under development pursuant to federal environmental statutes reauthorized
in the mid-1980s.28 Also, major programs will be reauthorized in the next few
years including RCRA and the Clean Air Act. New costs associated with these
programs could be significant. Finally, this study does not incorporate the cost
of new state environmental regulations that would impose costs in addition to
those attributable to federal regulations.
How Future Costs were Derived
Current Regulations
The future costs of maintaining current levels of environmental quality
were estimated for each program area and level of government by regressing
five years of historical spending trends against time. The projections assume
that factors contributing to recent spending trends will continue to do so in the
future. Such factors include population growth, implementation of current
policies, rates of compliance, replacement of current capital facilities, and
budget cutbacks. Significant changes in any of these factors could have an
important effect on costs. For example, rates of compliance are related to
enforcement efforts. If enforcement activities increase, then costs would be
42
-------
expected to increase as a result of higher rates of compliance. The projections
for both current and new regulations factor in an inflation rate and are
expressed in 1988 dollars.
New Regulations
Full compliance is assumed in estimating costs of new regulations. The
costs and timing of new regulations with an impact on local governments were
estimated based on information included in 1988 Regulatory Impact Analyses
(RIAs) prepared for EPA's program offices. Demand for capital attributable to
these regulations is represented in a lump sum in the year the capital will first
be required, or spread out in equal lumps over a relatively short time. This
method which results in graphs showing erratic changes from year to year was
used because of timing uncertainties associated with regulatory implementa-
tion and the demand for capital. In practice, regulations will phase in,
imposing smoother demands for capital over a 5 to 10 year compliance period.
43
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Table 8
New Regulations That Impose Local Costs
(Included in the Cost Analysis)
Regulation
Status
44
A. DRINKING WATER
Inorganic Compounds (lOCs)
Synthetic Organic Compounds (SOCs)
Volatile Organic Compounds (VOCs)
Fluorides
Lead and Copper Corrosion Control
Lead and Copper MCL
Coliform Monitoring
Surface Water Treatment Rule: Filtered
Surface Water Treatment Rule: Unfiltered
Radionuclides
Disinfections
B. WASTEWATER TREATMENT
Secondary Treatment of Municipal
Wastewater
Pretreatment Requirements
Sewage Sludge Disposal-
Technical Regulations
for Use and Disposal
Stormwater Management
C. SOLID WASTE DISPOSAL
Municipal Landfill Subtitle D
Municipal Waste Combusters
Air Standards
Municipal Waste Combusters
Ash Disposal
D. MISCELLANEOUS REGULATIONS
Underground Storage Tanks
Technical Standards
Underground Storage Tanks
Financial Standards
Asbestos in Schools Rule
SARA Title IE Requirements
In Development
In Development
Promulgated
Promulgated
Proposed
Proposed
Proposed
Proposed
Proposed
In Development
In Development
Promulgated
Promulgated
In Development
In Development
Proposed
In Development
In Development
Promulgated
In Development
Promulgated
Promulgated
-------
Appendix 2
List of Environmental Regulations
Applicable to Local Governments But
Not Included in the Cost Estimates
Regulation Status
A. Drinking Water
Well-head Protection Plan
Pesticides in Groundwater
Disinfection By-products
B. Waste water Treatment
National Estuary Program
Wetlands Protection Program - 404(c) permits
Nonpoint Source Regulations
Guidance/Mgmt. Plans
Section 304(1) Toxics in Water Bodies
C. Solid Waste Disposal
National Contingency Plan - Superfund
Program
Low-Level Radiation Waste Standards
D. Miscellaneous Regulations
Heavy Duty Diesel Vehicles
Gasoline Marketing
Diesel Fuel Standards
Revisions to National Ambient Air Quality
Standards (Ozone, Carbon Monoxide,
Particulate Matter, Nitrogen Oxides,
Sulfur Oxides)
Asbestos in Public Buildings
Asbestos Ban and Phasedown
In Development
In Development
In Development
In Development
Promulgated
In Development
In Development
In Development
In Development
Promulgated
In Development
In Development
In Development
May be Required
In Development
45
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Appendix 3
Tables of Data
Figure 1
Projected EPA, State, and Local Government Expenditures to
Maintain Existing Levels of Environmental Quality Compared to
Current Environmental Expenditures (Millions of 1988 Dollars)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total
$34,608
$33,293
$34,316
$34,765
$36,958
$39,312
$39,749
$41,160
$45,508
$46,478
$50,418
$50,240
$50,115
$49,956
$49,814
$50,957
$52,078
$53,178
$54,258
$55,320
Spending to Maintain Existing
Levels of Environmental
Quality in Addition to Existing
Expenditures (1987)
$0
$0
$0
$0
$0
$0
$0
$1,411
$5,759
$6,729
$10,669
$10,491
$10,367
$10,207
$10,065
$11,208
$12,329
$13,429
$14,509
$15,571
47
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Figure 2
EPA, State and Local Government Expenditures to Maintain Current Levels of
Environmental Quality, by Media, 1981-2000
(In Millions of 1988 Dollars)
Year
1981
1987
2000
Air
$887
$896
$867
DW
$12,253
$15,002
$21,906
WQ
$15,647
$16,339
$20,339
SW
^^^^^^^^^^^
$4,984
$6,056
$8,336
Others
$837
$1,456
$3,873
Total
$34,608
$39,749
$55,320
Figure 3
Percentage of EPA, State and Local Government Expenditures
By Environmental Service, to Maintain Current Levels of Environmental Quality,
By Media, 1981-2000
Year
1981
1987
2000
Air
3%
2%
2%
DW
35%
38%
40%
WQ
46%
41%
36%
SW
14%
15%
15%
Others
2%
4%
7%
Total
100
100
100
48
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Figure 4
Public Expenditures (Capital and O&M), By Level of Government, to Maintain
Current Levels of Environmental Quality
(In Billions of 1988 Dollars)
Voa-r
1981
1987
2000
EPA
Amount
$6.3
$5.0
$4.3
Percent
Share
18%
13%
8%
STATE
Amount
$2.0
$2.1
$2.6
Percent
Share
6%
5%
5%
LOCAL
Amount
$26.3
$32.6
$48.4
Percent
Share
76%
82%
87%
TOTAL
Amount
$34.6
$39.7
$55.3
Percent
Share
100%
100%
100%
Figure 5
Proportion of Environmental Outlays (Capital and O & M), By Level of
Government, to Maintain Current Levels of Environmental Quality, 1981, 1987,
and 2000 (In Millions of 1988 Dollars)
Voar
1981
1987
2000
EPA
Amount
$6,276
$5,036
$4,293
Percent
Share
18%
13%
8%
STATE
Amount
$1,992
$2,132
$2,602
Percent
Share
6%
5%
5%
LOCAL
Amount
$26,340
$32,581
$48,424
Percent
Share
76%
82%
87%
TOTAL
Amount
$34,608
$39,749
$55,319
Percent
Share
100%
100%
100%
49
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Figure 6
Projected Local Government Expenditures to Maintain Current Levels of
Environmental Quality and Comply with New Environmental Standards
(In Millions of 1988 Dollars)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Current Level
of Local Spending
$26,340
$25,680
$27,677
$28,399
$30,029
$32,036
$32,581
$34,068
$37,933
$38,973
$42,520
$42,857
$43,223
$43,542
$43,859
$44,810
$45,740
$46,652
$47,546
$48,424
Additional Spending
to Maintain Current
Environmental Quality
$0
$0
$0
$0
$0
$0
$0
$1,487
$5,352
$6,392
$9,939
$10,276
$10,642
$10,961
$11,278
$12,229
$13,159
$14,071
$14,965
$15,843
Additional Spending to
Comply with Standards
$0
$0
$0
$0
$0
$0
$0
$2,362
$2,986
$3,411
$3,874
$6,985
$4,111
$4,665
$4,815
$4,970
$5,750
$5,542
$6,677
$5,297
50
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Figure 7
Local Government Expenditures to Maintain Current Levels of Environmental
Quality and to Comply with New Environmental Standards, by Media
Drinking Water
Year
1981
1982
1983
1984
198S
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
19%
1997
1998
1999
2000
Current
Programs
(1988 $MM)
$12,073
$12,087
$12^47
$12,533
$13,625
$14,873
$14,816
$15,348
$15,879
$16,411
$16,942
$17,474
$18,005
$18,537
$19,068
$19,600
$20,131
$20,663
$21,194
$21,726
New
Programs
(1988 $MM)
$0
$0
$0
$0
$0
$0
$0
$0
$1
$24
$26
$35
$94
$539
$580
$625
$1,2%
$951
$1,030
$497
Total
(1988 $MM)
$12,073
$12,087
$12,547
$12,533
$13,625
$14,873
$14,816
$15348
$15,880
$16,435
$16,968
$17^09
$18,099
$19,076
$19,648
$20,225
$21,427
$21,614
$22,224
$22,223
Solid Waste
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
19%
1997
1998
1999
2000
Current
Programs
(1988 $MM)
$4,948
$5,043
$5,163
$5,384
$5,771
$5,858
$6,050
$6,233
$6,426
$6,617
$6,804
$6,987
$7,166
$7,340
$7,510
$7,675
$7,836
$7,994
$8,150
$8,302
New
Programs
(1988 $MM)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$357
$3,194
$1,035
$1,069
$1,104
$1,138
$1,172
$1,234
$1,297
$1,361
Total
(1988 $MM)
$4,948
$5,043
$5,163
$5,384
$5,771
$5,858
$6,050
$6,233
$6,426
$6,617
$7,161
$10,181
$8,201
$8,410
$8,614
$8,813
$9,009
$9,228
$9,447
$9,663
Water Quality
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Current
Programs
(1988 $MM)
$9,086
$8,309
$9,693
$10,169
$10,295
$10,967
$11376
$12,148
$15,288
$15,605
$18,433
$18,054
$17,710
$17322
$16,938
$17,192
$17,429
$17,651
$17,858
$18,052
New
Programs
(1988 $MM)
$0
$0
$0
$0
$0
$0
$0
$2,052
$1130
$2,266
$2,305
$2,506
$2,499
$2,574
$2,650
$2,725
$2,800
$2,875
$^951
$3,026
Total
(1988 $MM)
$9,086
$8,309
$9,693
$10,169
$10,295
$10,967
$11376
$14,200
$17,418
$17,871
$20,738
$20360
$20,209
$193%
$19388
$19,917
$20,299
$20326
$20,809
$21.078
Includes costs to deliver services.
51
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52
Figure 8
Total Capital Expenditures by EPA, States and Local Governments, to Maintain
Current levels of Environmental Quality and Local Capital Spending to
Comply with New Regulations, 1981-2000 (In Millions of Dollars)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total Capital Expenditures to
Maintain Current Levels of
Environmental Quality
$13,274
$11,334
$11,399
$11,010
$12,205
$13,468
$12,935
$13,267
$16,433
$16,718
$19,749
$18,640
$17,574
$16,550
$15,567
$15,892
$16,217
$16,541
$16,865
$17,188
Local Capital Costs to Comply
with New Regulations
$0
$0
$0
$0
$0
$0
$0
$2,199
$2,881
$2,994
$3,313
$5,892
$2,177
$2,617
$2,610
$2,597
$3,209
$2,774
$3,707
$2,110
-------
Figure 9
Local Capital Expenditures to Maintain Current Levels of Environmental Quality
and to Comply with New Regulations, 1981 2000
(In Millions of 1988 Dollars)
-\T
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1985
1996
1997
1998
1999
2000
Current Capital
Expenditures
$8,374
$6,877
$7,883
$7,853
$8,650
$9,810
$9,547
$10,262
$13,379
$13,689
$16,517
$16,112
$15,728
$15,366
$15,024
$15,337
$15,650
$15,962
$16,275
$16,587
New Capital
Costs
$0
$0
$0
$0
$0
$0
$0
$2,199
$2,881
$2,994
$3,313
$5,892
$2,177
$2,617
$2,610
$2,597
$3,209
$2,774
$3,707
$2,110
Total
Capital
$8,374
$6,877
$7,883
$7,853
$8,650
$9,810
$9,547
$12,461
$16,260
$16,683
$19,830
$22,004
$17,905
$17,983
$17,634
$17,934
$18,859
$18,736
$19,982
$18,697
53
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Figure 10
Local Governmental Capital and O&M Expenditures to Maintain Current Levels of
Environmental Quality and to Comply with New Regulations
(In Millions of 1988 Dollars)
Year
1981
1982
1983
1984
1985
1986
1988
1989
1990
1991
1992
1993
1994
1985
1996
1997
1998
1999
2000
Local
Capital
$8,374
$6,877
$7,883
$7,853
$8,650
$9,810
$12,461
$16,260
$16,683
$19,830
$22,004
$17,905
$17,983
$17,634
$17,934
$18,859
$18,736
$19,982
$18,697
Local
O&M
$17,966
$18,803
$19,794
$20,546
$21,379
$23,034
$23,969
$24,659
$25,700
$26,564
$27,838
$29,429
$30,224
$31,040
$31,846
$32,631
$33,459
$34,242
$35,017
Local
Total
$26,340
$25,680
$27,677
$28,399
$30,029
$32,581
$36,430
$40,919
$42,384
$46,394
$49,842
$47,334
$48,207
$48,674
$49,781
$51,490
$52,195
$54,223
$53,714
54
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Figure 11
Comparison of EPA and Local Government Capital Expenditures
(In Millions of 1988 Dollars)
Year
-L 1/U.l
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1985
1996
1997
1998
1999
2000
EPA
Capital Outlays
$4,511
$4,071
$3,250
$2,848
$3,126
$3,258
$2,967
$2,566
$2,362
$2,325
$2,288
$1,689
$1,108
$545
$0
$0
$0
$0
$0
$0
Local
Capital Outlays
$8,374
$6,877
$7,883
$7,853
$8,650
$9,810
$9,547
$12,461
$16,260
$16,683
$19,829
$22,004
$17,905
$17,983
$17,635
$17,934
$18,859
$18,736
$19,982
$18,696
55
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Appendix 4
Differences in Methodology and
Content Between the Municipal Sector
Study and This Report
1. The Municipal Sector Study (MSS) estimates local costs associated with new
regulations assuming that costs of existing environmental regulations remain
constant over the period studied, 1988 to 1996. This report (Cost Report)
incorporates these data and, in addition, provides data on expenditures
pursuant to current regulations. For the Cost Report, local expenditures
pursuant to existing regulations are provided for 1981 to 1986 and projected
to the year 2000 to estimate local costs of existing regulations. Tables indicating
costs to municipalities and households in year 2000 include both costs of
maintaining current programs and costs of new regulations.
2. The final years of cost projection differ for the two studies. For the MSS it is
1996 and for the Cost Report it is 2000. While the MSS discusses future costs
for 1996, this report compares 1987 with 2000.
3. All data in the MSS are presented in 1986 dollars and for the Cost Report they
are presented in 1988 dollars.
4. Capital costs were amortized using different methods. The MSS used a 10
percent real rate. The Cost Report assumed a 3 percent real rate.
5. The MSS reports costs in fewer size categories than the Cost Report. The
large expenditures estimated for households in the smallest cities (<500) in the
Cost Report are reduced considerably when averaged across households in
cities with <2,500 people (the smallest size category in the MSS). This is also
true when calculating expenditures as a percentage of household income.
6. Average costs per household are calculated in the MSS based on a survey of
household user charges for environmental services whereas in the Cost Report
household costs are based on necessary expenditures per household to pro-
vide the services. This difference in methodology results in different cost
estimates because revenues from charges do not necessarily equal expendi-
tures to provide a service. In addition, costs of provision vary between cities
even for communities of comparable size. Finally, the use of different
surveys contributes an additional source of variation. The MSS data are based
on survey results gathered specifically for the MSS project. Data in the Cost
Report are based on survey results gathered by the Office of Drinking Water
and the U.S. Census Bureau.
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Appendix 5
Average Annual Household User
Charges for Environmental Services in
1987 (1988 Dollars)
Municipality Size
Category
500 or less
500 - 2,500
2,500-10,000
10,000-50,000
50,000-100,000
100,000 - 250,000
250,000 - 500,000
500,000 or more
Weighted
Average
Drinking
Water
$304
$210
$191
$182
$150
$126
$127
$108
$172
Water
Quality
$304
$213
$174
$184
$143
$106
$92
$100
$164
Solid
Waste
$62
$50
$68
$78
$80
$59
$116
$185
$83
Total
$670
$473
$433
$444
$373
$291
$335
$393
$419
Source: Apogee Research from data compiled by the U.S. Bureau of the Census and 1986 Survey of
Community Water Systems, conducted by the Research Triangle Institute for the
Environmental Protection Agency, Office of Drinking Water, October 23, 1987.
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Appendix 6
Sources of Data for
Figures Used in Reports
Figures 1 through Figure 5:
Apogee Research projections from the following:
U.S. Bureau of the Census, Government Finances (various years); Bureau of
Economic Analysis, Pollution Abatement and Control Expenditures (various
years); Bureau of the Census, Pollution Abatement Cost and Expenditure Survey
(various years); U.S. EPA, Justification of Appropriation Estimates for Committee
on Appropriations (various years).
Figures 6 through Figure 11:
Apogee Research projections from the following:
U.S. Bureau of the Census, Government Finances (various years); Bureau of
Economic Analysis, Pollution Abatement and Control Expenditures (various
years); Bureau of the Census, Pollution Abatement Cost and Expenditure Survey
(various years); U.S. EPA, Justification of Appropriation Estimates for Committee
on Appropriations (various years); and data prepared by the Environmental
Law Institute from Regulatory Impact Analyses for the water quality and solid
waste programs. Costs of new regulations for the drinking water program are
from the preliminary analysis for the "Estimates of the Total Benefits and Total
Costs Associated with the 1986 Amendments to the Safe Drinking Water Act",
November, 1989.
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End Notes
Executive Summary
1 The Municipal Sector Study: Impacts of Environmental Regulations on Municipali-
ties, Office of Policy, Planning, and Evaluation, U.S. Environmental Protection
Agency (September 1988). See Appendix 4 for an explanation of the differ-
ences between the methodology and content of the Sector Study and this
report.
2 The Clean Air and Water Acts require that EPA report to Congress every five
years estimating the costs of carrying out the respective acts. The next report
will be submitted in 1990.
3 State Funding Study, Details of State Needs, Funding, Funding Gap, U.S. Environ-
mental Protection Agency (August 8,1988). Trends in the State Funding Study
were extended from 1995 to 2000 in order to provide consistent data for this
report.
4 EPA, Municipal Sector Study (September 1988).
Assumptions for Projections
5 Determining and Addressing Critical Environmental and Resource Challenges Facing
EPA and Society, Draft Report on Current Expendihires for Compliance with
Federal Mandates. Office of the Comptroller, U.S. Environmental Protection
Agency, August 22,1988.
Chapter 1
Appendix 1 describes the methodologies used in estimating future costs.
National Council on Public Works Improvement, Fragile Foundations: A Report
on the Nation's Public Works (February 1988). The National Council on Public
Works Improvement reported a steady increase in net depreciated capital
assets from 1960 to 1987 for drinking water and wastewater treatment serv-
ices, with asset bases increasing by 2.5 percent each year for drinking water
and by 4.4 percent each year for wastewater treatment. While some of this
investment is due to higher quantity and levels of service, it is clear that new
additions to the capital stock have outpaced the depreciation of existing plants
and equipment.
The Clean Air Act was last reauthorized in 1976 and most of the regulations
attributable to the clean air program have had their major cost effects already.
Congress is now debating a new Clean Air Act, which undoubtedly will
impose new costs on governments and the private sector. That these costs
cannot be included in this study probably underestimates the projected
outlays for air quality control.
The "other" category also includes the Leaking Underground Storage Tanks
Program, interdisciplinary studies, administration within EPA, plus EPA
programs in energy, radiation, pesticides, and toxic substances.
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10 1988 Needs Survey Report to Congress: Assessment of Publicly-Owned Was tewater
Treatment Facilities in the United States, USEPA (February 1987).
11 R.W. Beck and Associates, The Nation's Public Works: Report on Solid Waste
Management, prepared for the National Council on Public Works Improvement
(May 1987).
12 See Council of State Governments, Resource Guide to State Environmental
Management, Lexington, Kentucky (1988).
13 State Funding Study, Details of State Needs, Funding, Funding Gap, U.S. Environ-
mental Protection Agency (August 8,1988).
14 Congressional Budget Office, Environmental Federalism: Allocating Responsibili-
ties for Environmental Protection, Staff Working Paper (September 1988).
15 Estimates were prepared by the Environmental Law Institute from data
abstracted from Regulatory Impact Analyses prepared for EPA's major
pending rules.
16 US EPA, op cit, 1988 Need Survey Report to Congress.
Chapter 2
17 Other Federal aid that can be used for local wastewater treatment works
include Farmers Home Administration water and sewer grants and loans and
Economic Development Administration grants to under-developed regions.
18 Some states such as New York plan to meet the shortfall with highly leveraged
SRFs. That is, the original capitalization will be used to secure bonds, raising
up to five times the amount available for loans in the original capitalization
grants.
19 For details, see Apogee Research, Inc. The Nation's Public Works: Report on
Wastewater Management, prepared for the National Council on Public Works
Improvement (May 1987).
20 See, R.W. Beck and Associates, Report on Solid Waste.
21 For details, see Apogee Research, Inc. and Wade Miller Associates, Inc.,
Problems in Financing and Managing Smaller Publk Works, prepared for the
National Council on Public Works Improvement (September 10,1987).
22 EPA, Municipal Sector Study (September 1988).
Chapter 3
23 See Appendix 4 to this report for an explanation of differences in methodology
between this report and the Municipal Sector Study.
24 Cities were divided into the following population-size categories: less than
500; 500 - 2500; 2500 - 10,000; 10,000 - 50,000; 50,000 -100,000; 100,000 - 250,000;
250,000 - 500,000; more than 500,000.
Appendix 1
2S
EPA is collecting data for the 1990 Report to Congress, The Cost of Clean Air
and Water. In addition to the data provided in the present report, The Cost of
Clean Air and Water will include federal non-EPA expenditures and environ-
mental expenditures by private industry associated with current and new
regulations.
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26 The following programs are included: construction grants, state revolving
fund capitalization grants, water quality, hazardous waste, solid waste,
Superfund, air quality, drinking water, toxic substances, pesticides, energy,
radiation, underground storage tanks, management and support, and interdis-
ciplinary.
27 Appendix 2 to this report presents a list of the pending regulations applicable
to local governments but not included in the cost analysis.
28 Including the 1984 Hazardous and Solid Waste Amendments to the Resource
Conservation and Recovery Act (HSWA), the 1986 Superfund amendments
(SARA), the 1986 Safe Drinking Water Act amendments, and the 1987 amend-
ments to the Clean Water Act.
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