United States
Environmental Protection
Agency
Office of Policy
Planning and Evaluation
Washington DC 20460
EPA 230-09 88-037
September 1988
s>EPA
Municipalities, Small
Business, and Agriculture
The Challenge of Meeting
Environmental
Responsibilities
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MUNICIPALITIES, SMALL BUSINESS, AND AGRICULTURE:
THE CHALLENGE OF MEETING ENVIRONMENTAL RESPONSIBILITIES
REPORT TO LEE M. THOMAS
Sector Study Steering Committee
Rebecca Hanmer
Don Clay
Victor Kimm
Louise Jacobs
Thomas Devine
Gerald Yamada
Alexandra Smith
Robert Wayland (Chair)
SEPTEMBER 1988
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Report Prepared By:
ECONOMIC STUDIES BRANCH
OFFICE OF POLICY, PLANNING AND EVALUATION
Workgroup Participants
Allen Basala (Air)
Allen Jennings (Pesticides)
Karen Klima (Surface Water)
A. W. Marks (Drinking Water)
Elizabeth LaPointe (Solid Waste)
Michael Shapiro (Toxic Substances)
Ralph Luken (Policy) (Chair)
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CONTENTS
Page
EXECUTIVE SUMMARY i
Chapter 1 INTRODUCTION 1-1
The Changing Nature of Environmental Regulations 1-1
The Need for Broader Analyses 1-3
The Sector Studies 1-3
Chapter 2 MUNICIPALITIES 2-1
Municipalities and Environmental Regulations 2-2
Study Methodology and Limitations 2-6
The Impact of Environmental Regulations 2-11
Conclusion 2-19
Chapter 3 SMALL BUSINESS 3-1
Small Business and Environmental Regulations 3-1
Study Methodology and Limitations 3-4
Impacts Upon Selected Industries 3-6
Conclusion 3-16
Chapter 4 AGRICULTURE 4-1
Agriculture and Environmental Regulations 4-2
Study Methodology and Limitations 4-3
Impacts on Livestock and Major Field Crops - ... 4-8
Impacts on Specialty ,Crops. 4-12
Conclusion 4-15
Chapter 5 POLICY CONSIDERATIONS 5-1
Municipalities. 5-1
Small Business 5-5
Agriculture 5-8
Appendix Environmental Regulations Included in the Sector Studies
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EXECUTIVE SUMMARY
Over the years, the U.S. Environmental Protection Agency's (EPA) mission has
broadened considerably, and so has its reach into society. New regulations of toxic
materials, hazardous substances, and solid wastes will affect hundreds of thousands of
farms and small businesses, and new drinking water regulations will affect tens of
thousands of small municipalities. This report summarizes the findings of three
studies designed to take a first look at the combined impacts of EPA's new
regulations upon municipalities, small business, and agriculture.
The sector studies examined 85 recent and forthcoming environmental
regulations that have the potential for large and far reaching impacts. The costs of
existing environmental regulations and all other government programs were assumed
to remain constant over the study period. Although the regulations included in these
studies will lead to improvements in environmental quality, the sector studies do not
assess the benefits that will accrue to the municipal, small business, and agricultural
sectors.
Because the sector studies were meant to be initial efforts, they are subject to
a number of qualifications. For example: (1) each study limits the range of its
analysis by selecting a sample of sources, and (2) the costs and even the final forms
of many of the regulations studied are not yet certain. In spite of these limitations,
the sector studies provide an initial reading of the potential impacts of the new
environmental programs and suggest several potential policy initiatives that may
prove useful.
MUNICIPALITIES
i
Recent revisions to environmental legislation have established a broader and
more stringent set of standards to be met by municipalities. Meeting these new
standards will require additional investments in capital, and increases in rates
charged to customers for improved environmental services.
The potential cumulative cost of the environmental regulations examined in the
municipal sector study may require that the national average household spend an
additional $100 per year by 1996. Both municipalities under 2,500 persons and over
250,000 persons will experience the largest average increases in total user charges
and fees paid on a per household basis, with potential average annual increases in
user charges and fees of $170 and $160, respectively. Because smaller municipalities
tend to have lower average household incomes and higher unit costs for improved
environmental services, however, households in communities under 2,500 persons will
be required to pay a greater proportion (0.7%) of their income, on average, for these
services than will households in larger cities (0.5%).
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Most municipalities will be able to meet the expected increases in environmental
expenses and still remain financially sound. The municipalities most likely to
experience difficulty will be those with populations of 2,500 or less. Between 21%
and 30% of these communities may have difficulty because of the high cost of some
individual regulations, the cumulative costs of recent legislative requirements, and the
limited margin for expanding financial obligations in small communities due to
existing demands for environmental and other infrastructure services. These
difficulties are not limited to small cities, but the results suggest that a much
smaller proportion (between 3% and 7%) of the cities over 2,500 persons will face
financial constraints when subject to additional EPA requirements.
The individual environmental regulations that account for the largest potential
increases in expenses in small communities are the drinking water and sewage
treatment requirements. Several of the more costly drinking water regulations will
apply to a greater proportion of smaller municipalities than larger municipalities.
These regulations do not single out smaller municipalities per se, but instead deal
with environmental risks that are present at smaller community water systems. Many
larger water supply systems already have introduced treatment systems capable of
handling some of these risks. The costs of solid waste disposal, asbestos removal in
schools, and underground storage tank regulations, when totalled, also account for a
significant portion of the costs borne by smaller communities.
SMALL BUSINESS
Although it might seem that EPA's 85 regulations would overwhelm any small
business, the actual impacts will vary greatly. Most small businesses will not be
affected directly by any of the 85 regulations. Some firms will be affected adversely
by the regulations, but others -- particularly those that provide pollution control
products or services -- will find that their businesses grow. Thus, the overall
impact of EPA's forthcoming regulations is by no means self-evident.
An examination of statistics provided by the U.S. Small Business Administration
(SBA) reveals that seventy percent of the 3.5 million small businesses in the United
States are in sectors of the economy that produce little or no pollution — wholesale
and retail trade, finance, and services. Most of these businesses will not be affected
directly by any of the 85 regulations. Small businesses that contribute to
environmental problems will incur additional costs to comply with the regulations,
however, and in some industries the costs may be high.
The small business sector study examined the impacts on small businesses in
nine industries judged likely to be adversely affected by several environmental
regulations. The study found that costs may be high for small businesses in three of
the industries -- electroplating, wood preserving, and pesticide formulating and
packaging. If costs prove to be as high as estimated and cannot be passed on to
consumers, some small businesses in these industries may be forced to discontinue
part of their operations or to close. Some small dry cleaners that have underground
storage tanks or require substantial perchloroethylene emissions controls may also
have difficulty meeting environmental requirements. In addition, certain gas stations,
trucking firms, and farm supply stores with leaking underground storage tanks may
face corrective action costs beyond their financial means. Small private water supply
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companies are in a unique position, in that they operate as utilities and generally
obtain rate increases to cover increased costs. While these firms would not be
expected to go out of business, high environmental costs for water supply companies
that fail to meet new drinking water standards may necessitate large increases in
household usage fees. Environmental costs for one of the industries studied—
photofinishing laboratories — were found to be negligible.
The regulations that appear to be most often responsible for high costs in the
industries studied are those covering the handling and reporting of toxic chemicals;
the handling, treatment, and disposal of hazardous wastes; and the operation of
underground storage tanks. Although cost estimates are available for only some of
these regulations, those that are available indicate that the regulations will affect a
large number of firms in many industries and may entail costs in the $5,000 to
$10,000 range. Although these costs may be managed easily by small businesses of
moderate size, they present difficulties for businesses with fewer than twenty
employees. It is these very small businesses that comprise the majority of U.S.
businesses.
AGRICULTURE
The objective of the agriculture sector study was to examine the cumulative
effect of recent and proposed future EPA actions on the financial condition of farms
in the United States. Because of the complexity of the agricultural sector and the
many uncertainties that still accompany the new environmental programs, this study
had to limit its focus to a few "representative" farm types and had to make many
assumptions about future environmental requirements and other factors that will
affect the financial condition of farms, such as farm support programs under the
Food Security Act.
For livestock and major field crops, three specific farm types were examined:
(1) an Illinois corn soybean farm, (2) a Mississippi cotton soybean farm, and (3) a
Kansas cattle wheat farm. For specialty crops, six crops were selected: apples,
tomatoes, potatoes, peas, caneberries (e.g., raspberries, blackberries, etc.), and
peanuts. There proved to be insufficient information to complete the analysis for
caneberries and peanuts, however, so that results are available only for apples,
tomatoes, peas, and potatoes. The difficulty in obtaining information about producers
of specialty crops was itself a significant finding of the study.
Three regulatory scenarios of future EPA actions were considered in the
agriculture sector study, ranging from a conservative (low cost) scenario to an
expansive (high cost) scenario. In addition, two alternative levels of effects were
considered for each of the farms that were examined. In an average impact case it
was assumed that the farm would incur the average environmental costs of all farms
of that type and in a maximum impact case it was assumed that the farm would
incur all of the environmental costs that a farm of that type might face. The
maximum impact cases represent very unlikely worst cases, but provide an upper
bound on the potential losses under each regulatory scenario.
For the three types of major field crop and livestock farms examined in this
study, the effects of EPA actions on farms in different financial conditions were
considered. The loss in income incurred by farms in average financial condition
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under the average impact case (average environmental costs) was 3% or less under
each of the regulatory scenarios considered. Losses of this magnitude resulted in
only very small changes in these farms' debt to asset ratios (less than 1%). Under
the unlikely maximum impact cases, farms in average financial condition experienced
substantial losses in income, but were not forced out of business as a result of EPA
actions.
The major field crop and livestock farms in vulnerable condition were more
sensitive to increased environmental costs than their counterparts in average
financial condition. Although the absolute reduction in income was similar for farms
in vulnerable and average financial condition under each scenario, these losses
resulted in much larger changes in the vulnerable farms' debt to asset ratios. Even
though the vulnerable farms' financial conditions were found to deteriorate more
than the farms in average financial condition, only one of the vulnerable farms was
predicted to go out of business during the forecast period (1987-1996). The Kansas
wheat cattle farm in vulnerable financial condition was predicted to go out of
business even without any environmental costs and was predicted to go out of
business one year earlier than it otherwise would have under one of the regulatory
scenarios considered.
Because of limited data availability, the study did not forecast losses in income
or changes in debt to asset ratios for specialty crop farms. Instead, it examined
changes in net returns per acre (which reflect returns to land and farmer provided
labor). Under the least costly regulatory scenario, the changes were generally less
than 1% for farms experiencing average environmental costs and less than 8% for
even the maximally affected farm. Under the most costly regulatory scenario,
however, losses of the average impacted producers increased substantially,
particularly for apple producers in New York and Michigan, where predicted losses
were 60% and 84%, respectively. These dramatic decreases in net returns may bring
about substantial structural changes in the production and markets for the crops
affected. Large differences in the impact of EPA regulations on crops grown in
different regions occurred because some of the proposed restrictions involve
pesticides that are used in some regions and not in others. Even though the results
of this study must be considered preliminary, these figures show that EPA actions
could create economic problems for some specialty crop farms and suggest that the
Agency exercise caution in this area.
POLICY CONSIDERATIONS
In response to the findings of these sector studies, several areas for potential
policy initiatives have been suggested. While none has been endorsed by the Sector
Study Steering Committee, they are presented to illustrate the kinds of activities
that might be considered and to promote further discussion.
Municipalities
A number of activities have been implemented by EPA and other initiatives have
been suggested to support small communities' compliance with environmental
regulations. These include establishing better lines of communication among EPA,
community leaders, and citizens, and extending technical and financial assistance
programs, as well as several more innovative programs. Public partnerships might be
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promoted, for example, to allow two or more communities to share expertise,
purchase services and goods in larger volumes for discounts, or to raise capital in
larger, more cost-effective blocks. Regionalization is a more structured form of
partnership, in which two or more communities create a joint venture for a
particular purpose, such as construction of a water supply system. Privatization, in
which communities work with private companies to assist in the provision of
environmental services, is another concept that might be promoted to help reduce
costs.
An important finding of the municipal sector study is that not all communities
are expected to face financial difficulties. This fact suggests that further analysis
should be conducted in order to identify the characteristics of small and large
communities that make them more likely to experience difficulty in financing and
affording new environmental protection. If EPA can better identify those
characteristics, then it can improve upon its current efforts to design and implement
programs that will be of greatest benefit to those communities most in need of
assistance.
Small Business
Because the new environmental programs cut across many industries and affect
thousands of small businesses, new compliance strategies may be needed to
supplement EPA's traditional enforcement efforts. Many policy initiatives are
available to help small businesses learn about and comply with the new environmental
regulations. These include educational programs, preparing standardized responses to
paperwork and other requirements, helping to expand environmental services, and
fostering new technologies. All of these potential programs can be developed with
the cooperation of other government agencies and with industry trade associations.
This study has highlighted the value of detailed small business analyses and the
importance of maintaining a current small business data base. The Fin/Stat data
base used in this study was compiled by the SBA, but was discontinued in 1983.
Although slightly out of date, the data enabled the analysis to focus on the smallest
of businesses. EPA might consider working with SBA and other interested agencies
to fund a common small business data base that could be used for all economic
analyses, particularly the small business analyses required under the Regulatory
Flexibility Act.
Agriculture
The agriculture sector study illustrates the advantages of examining the impacts
of environmental regulations at the farm level as well as at the aggregate national
level. While national analyses provide useful information concerning the total losses
incurred by different aggregate types of farmers (e.g., corn farmers as a whole), the
impact of environmental regulations on farms' financial conditions depends on the
distribution of those losses among farmers and on the initial financial conditions of
the affected farms. In order to determine the effect of EPA regulations on the
ability of farms to survive, both aggregate and farm level analyses are necessary.
This study highlights the data and analytical requirements necessary to
determine the impacts of EPA actions on agriculture. Such requirements include
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accurate pesticide usage and efficacy data, improved national commodity price-
quantity models, and better information on the financial and production conditions of
farmers. The importance of using farm level models and improving data and modeling
capabilities is likely to increase in the future as EPA tries to cost-effectively reduce
environmental risks associated with agriculture.
VI
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Chapter 1
INTRODUCTION
Environmental regulations touch all sectors of society -- agriculture, business,
government, and individuals. As these regulations have evolved, their impacts upon
society have evolved as well.
When the U.S. Environmental Protection Agency (EPA) was founded in 1970,
environmental regulation focused on the major sources of air and water pollution—
principally the "smokestack" industries and large municipalities. Over the years,
EPA's mission has broadened considerably, and so has its reach into society. New
regulations of toxic materials, hazardous substances, and solid wastes will affect
hundreds of thousands of municipalities, small businesses and farms, and new drinking
water regulations will affect tens of thousands of municipalities and water supply
systems.
This report summarizes the findings of three studies designed to take a first
look at the combined impacts of EPA's new regulations upon municipalities, small
businesses, and agriculture. Because the scope of environmental regulation is
broadening to affect these sectors of society more and more, the Agency has
commissioned these studies to provide an initial assessment of what economic
problems, if any, can be expected to arise and to suggest areas for more detailed
study.
THE CHANGING NATURE OF ENVIRONMENTAL REGULATIONS
In 1970, the most pressing environmental problems seemed obvious, and the
perpetrators easy to identify. Soot and smoke from automobiles and smokestacks
were fouling our air, and sewage and wastewaters from municipal and industrial
outfalls were contaminating our rivers and streams. Air and water pollution
regulations have done a great deal to abate these more visible forms of pollution.
The air in most of our cities today is far cleaner and healthier. Thousands of miles
of rivers and streams, and thousands of acres of lakes, have been restored for
fishing and swimming. These accomplishments are especially impressive when seen in
the context of the economic expansion and population growth that occurred during
the same period. There are 25 percent more people in the United States now than
20 years ago, and our gross national product has increased by over 60 percent.
But the job is far from finished. As EPA is continuing to implement traditional
environmental programs, it also is confronting new challenges. Environmental
dangers from the use of toxic substances and the disposal of hazardous wastes are
now a major concern. More and more contaminants are being discovered in our
drinking water, so that the Agency is taking a new look at drinking water standards
and is putting in place programs to protect our groundwater from pesticides and
leaking underground storage tanks.
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These new environmental programs present regulatory problems that in many
ways are similar to traditional pollution control programs. As with existing air and
water regulations, the Agency must determine how stringent standards should be and
what technologies are available to meet those standards. The new programs also
present some new challenges, however. One of these is assuring the compliance of
the ever-increasing number of smaller and smaller sources that are covered by the
new regulations. Over the past twenty years, the Agency has developed complex
permit programs that govern the discharge of contaminants by large facilities. Now,
EPA must establish programs that govern the activities of hundreds of thousands of
small sources.
Congress recognized the fact that small sources were an important future
challenge when it amended the Resource Conservation and Recovery Act (RCRA) in
1984 to include generators of relatively small volumes of hazardous waste. These
amendments extended RCRA's coverage from about 15,000 facilities to over 200,000
facilities.
The underground storage tank (UST) program covers even more facilities.
Literally millions of USTs are located throughout our country in every imaginable
setting. Gasoline service stations operate about half of these USTs, but the
remainder are operated by a diverse community, including trucking companies, dry
cleaners, farm supply stores, chemical companies, local and state governments,
military installations, and airports. Altogether, over 500,000 facilities are covered by
the UST regulations.
The new environmental programs not only bring many new sources into the
regulated community, but also bring many new regulations to bear on sources that
before were regulated less intensively. Farmers, for example, once were not
regulated directly, but were affected by restrictions on which pesticides they could
use. Now, farmers not only are encountering more pesticide restrictions, but also
must comply with new regulations covering surface water runoff, the storage and
handling of pesticides and other toxic substances, and the disposal of hazardous
wastes. There are over 2,000,000 farms in the United States today.
Municipalities provide an even more striking example of the broad scope of the
new environmental programs. There are over 35,000 municipal governments in the
United States that are covered by EPA's regulations and many more separate
government jurisdictions, including water supply districts and school systems.
Although local governments provide a broad range of services, the only significant
environmental regulations that affected them in 1970 were those pertaining to sewers
and wastewater treatment. Now, municipalities find that several of their services are
governed by environmental regulations. Two services commonly provided by local
governments -- waste disposal and drinking water supply ~ are the primary focus of
new environmental programs. In both of these areas, programs encompassing several
new environmental regulations are bringing about significant changes. In addition,
municipalities are required to form local planning committees to coordinate plans for
dealing with hazardous substance emergencies. Even local school systems, hardly
considered polluters in the conventional sense, now find that they must comply with
new regulatory programs covering asbestos and radon contamination.
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In today's complex environmental setting, EPA's regulatory mission is governed
by major laws covering air and water pollution; radiation; the protection of drinking
water; the treatment, storage, and disposal of hazardous wastes; the use of toxic
chemicals and pesticides; and the storage of substances in underground tanks. Not
only do EPA's environmental regulations touch every sector of American life, but
each sector finds itself covered by several different kinds of environmental
regulations.
THE NEED FOR BROADER ANALYSES
EPA has been analyzing the impacts of its regulations since its inception, both
to provide information essential to fulfilling its statutory responsibilities and also to
comply with executive orders. Each of the major environmental statutes designates
different factors that EPA must consider when establishing environmental regulations.
At the same time, EPA must provide regulatory analyses for review by the Office of
Management and Budget (OMB). Beginning with the "Quality of Life" reviews under
the Nixon Administration, the requirements for review by OMB have evolved from a
relatively simple analysis of costs to the comprehensive benefit-cost analyses required
for today's Regulatory Impact Analyses (RIAs).
As the analytic techniques and data sources available to EPA have improved,
the regulatory analyses performed as part of the rulemaking process have become
increasingly sophisticated. Their focus, however, has remained on individual
environmental regulations. When one sector of society or one industry is affected by
several environmental regulations, each analysis of an individual regulation paints
only part of the total picture. Recognizing this, EPA from time to time has
examined the combined impacts of several existing regulations on a few major
industries. Furthermore, EPA's periodic Cost of Clean Air and Cost of Clean Water
reports examine the overall impacts of existing environmental regulations on the
entire U.S. economy. EPA has never taken a broad look at the sectors included in
this report, however, nor has it taken a prospective look at the entire range of
forthcoming environmental programs.
The changing nature of environmental programs has prompted many questions
about their potential impacts on the various sectors of society. Will farmers, small
businesses, and local governments be able to afford the combined costs of the new
environmental programs? Will they be able to carry out all of the required
activities? Where are problems likely to arise? To answer these questions, broader
analyses are needed — analyses that look at entire sectors of the economy, span the
complete spectrum of environmental programs, and include forthcoming regulations as
well as those already on the books.
THE SECTOR STUDIES
The three sector studies summarized in this report represent EPA's initial
efforts to examine the overall impacts of new environmental programs on agriculture,
small businesses, and municipalities. They are not meant to be exhaustive studies,
and their conclusions must be regarded as tentative. Rather, they must be regarded
as pilot studies intended to shed a first light on areas where potential impacts can
be expected and to provide guidance for further study.
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The sector studies examine 85 recent and forthcoming environmental regulations.
Although EPA may issue over 200 regulations in a single year, most of these
regulations are relatively minor, without broad-ranging effects. Only 5-10 of the
regulations issued in a single year may be considered to be major. The 85
regulations examined are those deemed to have the potential for large and far
reaching impacts. All other costs, including those of existing environmental
regulations and other government programs, were assumed to remain constant over
the study period.
Appendix A presents a list of the 85 environmental regulations covered in the
three sector studies. Because the titles of most of these regulations are rather long,
the sector studies refer to the regulations by the short titles listed in the appendix.
These short titles were created for the sector studies and may differ from titles used
in other EPA publications.
Because the sectors studied are fundamentally different, each study employs a
different approach. The municipal study uses a newly developed model of municipal
finances to determine the financial conditions of 270 randomly selected municipalities
with and without the regulations. The small business study focuses on nine
industries (1) that will be required to comply with a number of environmental
regulations, and (2) that contain a high percentage or high number of small
businesses. The agriculture study examines the impacts of environmental regulations
on a selected set of livestock, major field crops, and specialty crop farms.
Because the sector studies were meant to be initial efforts, they are subject to
a number of qualifications. For example:
1. Each study limits the range of its analysis by selecting
a sample of sources. While the municipal study uses a
random sampling process, the small business and
agriculture studies focus on sources that will be most
affected by the regulations. Thus, these two studies are
not so much representative of the sectors studied, as
they are illustrative of the heavily impacted segments of
those sectors.
2. Because many of the regulations included have not yet
been promulgated, the costs and even the final forms of
the rules are not yet certain. Thus, the studies'
conclusions about the impacts of some regulations may
prove to be inaccurate, should those regulations not be
promulgated in the forms assumed.
In spite of these limitations, the sector studies provide an initial reading of the
potential impacts of the new environmental programs. The methodology, major
limitations, and principal conclusions of each of the studies are summarized in the
following three chapters. The final chapter presents a summary of the policy
initiatives that have been suggested as a result of these three sector studies.
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Chapter 2
MUNICIPALITIES
Municipalities play a major role in supplying environmental services. Local
governments have taken responsibility for providing drinking water, sewage treat-
ment, and waste disposal in a majority of communities. Over the past fifteen to
twenty years, most of the mandates found in the federal environmental legislation
enacted in the early 1970s have been met. The increase in the number of people
served and improvements in the quality of local environmental services has been
considerable, as has the investment in public infrastructure to meet these laws.
Recent revisions to the environmental legislation have established a broader and
more stringent set of standards to be met by suppliers of environmental services. As
a result, many local governments are now faced with having to maintain all or some
part of their public services at a higher level of performance. To meet these new
standards will require additional investments in capital, and increases in rates
charged to customers for environmental services.
Improvements in environmental services is but one of several demands being
made of local public infrastructure. Studies prepared on public infrastructure needs
and the availability of funds to meet these needs indicate that there may be an
excess demand for financial resources to rebuild and improve upon the existing stock
of public infrastructure. Therefore, it is important to recognize that additional
environmental requirements may have to compete with other infrastructure needs
(e.g., highways, bridges), as well as other public services (e.g., police, education,
health and welfare programs) provided at the local level.
Given the increasing demand for public services, this study* examines what
additional investments the new environmental legislation will require local govern-
ments to undertake, and the likelihood that they will face difficulties raising the
necessary funds through capital markets and revenues from customers. The economic
impacts of individual future EPA actions are considered during the regulatory process
in those situations permitted by environmental statutes. The unique feature of this
study is its attempt to estimate the cumulative costs and impacts of meeting a
combined set of EPA requirements, and to determine whether they may place a
significant burden on the fiscal conditions
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significantly increase existing charges for improved environmental services.
MUNICIPALITIES AND ENVIRONMENTAL REGULATIONS
Because municipalities* are a primary provider of environmental services, they
are also the focus of many regulatory programs. Drinking water standards, for
example, establish criteria for the quality of the water that is supplied by municipal-
ities to their residents. Water pollution control standards establish how municipal
sewage is to be treated, and solid waste regulations govern how the sludge from
wastewater treatment is to be disposed. Other solid waste regulations set standards
for building and operating municipal waste disposal and treatment facilities.
In addition to these environmental services, a number of other municipal
activities fall under the control of environmental regulations. Most municipalities
store fuel for their vehicles in underground storage tanks that are subject to EPA
regulations. Schools and other public buildings must meet EPA standards for
asbestos. Municipalities must also meet the requirements of new environmental
regulations that govern the reporting of and emergency planning for users of toxic
chemicals.
The ability of a municipality to meet the requirements of environmental
regulations depends not only on which regulations it must meet, but also on its
financial health and on how it organizes its environmental services. Geographic,
demographic, and political factors all contribute to a municipality's decision to own,
operate, and choose the level of environmental services it will provide its residents.
In addition, municipalities that allocate resources to environmental services may
effectively reduce expenditures for health care, welfare, and housing. Communities
that reduce environmental risks may succeed in reducing medical and disability costs
from pollution-related illnesses, and limit the damaging effects of pollution to the
existing infrastructure (e.g., roads, bridges, buildings). As shown in Figure 2-1, the
relative proportion of a municipality's budget allocated to environmental services falls
as the size of the community rises. The environmental costs in the figure include
annual operating and capital costs for drinking water, wastewater treatment, and
solid waste disposal. Other miscellaneous expenditures associated with asbestos
removal or underground storage tank technical and financial standards are not
included in this figure. Therefore, these percentages may underestimate the propor-
tion of current municipal budgets expended on all environmental services.
The top graph in Figure 2-2 shows how the average percent of household
income expended on drinking water, wastewater treatment, and solid waste disposal
*For purposes of this study, municipalities are defined as those government
bodies defined by the U.S. Bureau of the Census as municipal governments and
township governments. Municipal governments are political subdivisions within which
a municipal corporation has been established to provide general local government for
a specific population concentration in a defined area. This includes most units
designated as cities, boroughs, towns, and villages. Townships exist to serve
inhabitants of areas defined without regard to population concentrations. This
includes units designated as towns, plantations, locations and townships. For further
discussion, see 1982 Census of Governments, Volume 1: Governmental Organization.
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Figure 2-1
DISTRIBUTION OF MUNICIPAL EXPENDITURES FOR SERVICES IN 1984-1985
Municipalities Under 50,000 Persons
Energy (18.2%)
Miscellaneous (8.8%)
Interest on Debt (4.9%)
Administration (7.0%)
Natural Resources (3.7%)
Housing (2.0%)
Education (4.6%)
Welfare (0.4%)
~ ealth (3.8%)
Transport (9.9%)
Police/Fire (15.5%)
ENVIRONMENT (21.1%)
Municipalities Between 50,000 and 250,000 Persons
Energy (12.4%)
Miscellaneous (10.3%)
Interest on Debt (5.2%)
Administration (5.8%)
Natural Resources (4.8%)
Housing (3.8%)
Education (1,0.3%)
Welfare (0.7%)
Health (3.6%)
Transport (9.5%)
Police/Fire (17.8%)
ENVIRONMENT (15.8%)
Municipalities Over 250,000 Persons
Education (9.0%)
Welfare (5.1%)
Health (5.2%)
Transport (8.7%)
Energy (11.7%}
Miscellaneous (12.3%)
Interest on Debt (5.6%)
Administration (4.9%) ^^^^
Natural Resources (3.9%)V" ^^^ /Police/Fire (15.1%)
Housing (4.5%)
ENVIRONMENT (14.0%)
Source: 1984-1985 Census of Governments - City Finances
2-3
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Figure 2-2
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5
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CURRENT AVERAGE ANNUAL HOUSEHOLD
COSTS FOR ENVIRONMENTAL SERVICES
\
I. Percent of Annual Gross Household Income
0 - 2.5K 2.5 - 10K 10 - 50K 50 - 250K > 250K
$700
II. Annual Dollars Per Household
2.5 - 10K 10 - 50K 50 - 250K > 250K
MUNICIPALITY SIZE CATEGORY
0 - 2.5K
•• Sewer &SS Water
Source: Municipal Sector Study Database
2-4
National
Average
Solid Waste
-------
services varies by size for municipalities sampled in the study. The lower portion of
the figure shows the dollar expenditures for these same services. The differences
between the two presentations is attributable to several factors. For example, the
percent of household income spent for drinking water and wastewater treatment
services tends to fall as municipality size increases, but dollars expended for these
services remains constant or rises with population. Smaller communities tend to have
lower average household incomes than do larger communities. Therefore, households
in smaller municipalities must spend a larger proportion of their income than
households in larger communities in order to expend equivalent dollar amounts.
For many environmental services, the ability of larger communities to take
advantage of scale economies will allow them to enjoy lower unit costs for services
than consumers living in smaller communities. The numbers in Figure 2-2 do not
show a large decline in expenditures as population size rises. These lower unit costs
are partially offset by greater consumption of these services, so the total user fees
paid by households in larger municipalities can be comparable, on average, to fees
paid by households in smaller communities. Grants and loans to communities have
also helped to lower household costs for drinking water and wastewater treatment
services, but it is not clear that the distribution of assistance has been weighted in
favor of small versus large communities. An additional factor contributing to the
similarity in costs across municipality sizes is the more advanced average level of
services provided in larger municipalities. Larger communities have invested in more
advanced and costly treatment technologies, which can offset the advantages of scale
economies for comparable levels of services. The net result is that households in
smaller communities generally spend a larger portion of their available resources—
when measured as a percent of household income -- to obtain drinking water and
wastewater treatment services than do households in larger communities.
Likewise, although scale economies may also occur in solid waste treatment, the
costs in Figure 2-2 do not reflect this. The higher relative household costs of solid
waste disposal for larger municipalities are primarily due to the limited number of
requirements currently affecting smaller communities, and the reliance of some larger
communities on more sophisticated and costly disposal techniques.
When improved environmental services are supplied by municipalities, the
additional costs of raising capital to begin construction of facilities can be funded
through different revenue-raising mechanisms. Current revenues, or "pay-as-you-go"
financing, uses a proportion of revenues to support a capital reserve account. The
revenues may come from taxes or usage fees. This method has often failed to
provide for adequate reserve funds capable of financing large capital investments.
Smaller communities are more likely to use this mechanism, given the amount of
capital they require is often small. They are also likely to use this mechanism
because they lack sufficient expertise and fiscal capacity to raise funds through bond
markets.
Debt service financing involves the issuance of bonds to finance construction of
large-scale projects. General obligation (g.o.) bonds are repaid with revenues raised
from property or income taxes. They are best applied in situations where the
general public benefits from the project, such as with public education or transporta-
tion systems. Revenue bonds are supported by the user charges assessed to custom-
ers directly benefiting from the project. Since revenue bonds rely on customer
payments and g.o. bonds rely on the taxing authority of the local government, the
2-5
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revenue bonds are perceived as more risky to investors and, therefore, require a
higher rate of return on the amount invested. Revenue, bonds can be a more
accessible financing instrument than g.o. bonds, since local governments may be
constrained by federal and state statutes as to the amount of debt the community
can issue, or the amount it can increase tax rates. Revenue bonds are now the
preferred choice of local municipalities to finance drinking water and wastewater
treatment projects. There is also increasing interest in their potential use for solid
waste treatment projects.
The declining availability of federal grants has contributed to the greater
interest in alternative financing mechanisms. A substantial proportion of the capital
investment in wastewater treatment since passage of environmental legislation in the
early 1970s has been financed with federal and state grants. Grants were once a
major source of capital financing for many public infrastructure programs. These
programs have been reduced in favor of federal, state, and local government loan or
debt financing programs. Although federal and state grants will continue into the
next decade, funding levels will decline, so alternative financing mechanisms will be
adopted to meet increasing demands for resources.
STUDY METHODOLOGY AND LIMITATIONS
This study examines the impacts of recent and forthcoming environmental
regulations upon user charges and finances in municipalities. The outputs of the
study include projections of the cumulative costs to communities of upcoming actions,
the proportion of communities expected to face potential difficulties meeting the
household user charge increases necessary to pay for additional requirements, and the
proportion of communities that may have financial difficulties meeting the require-
ments given their present financial conditions.
In addition to having to use a relatively small sample of communities, the study
had to rely upon a number of simplifying assumptions, including the omission of
several important environmental regulations for which estimated costs are not yet
available and the use of economic indicators to assess household burdens and
financial capabilities of municipalities to fund improvements in environmental
services.
Methodology
This study used EPA's MUNFIN model of municipal finances to calculate the
effect of adding the estimated aggregate costs of environmental regulations to the
current user charges and financial statistics of 270 sampled municipalities. As
indicators of potential financial difficulties, the study examined several measures of
the predicted increases in user fees and municipal debt. The environmental regula-
tions considered in the sector study are listed in Table 2-1. The overall methodology
is summarized below.
The study estimated the cost and the incidence rate of each environmental
regulation for municipalities in each size category in order to produce "probabilities
of occurrence" and the relevant associated capital, maintenance, and administrative
costs. The probabilities and cost figures were used to determine the weighted
average costs of each new requirement, and cumulative totals of weighted average
2-6
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Table 2-1
LIST OF REGULATIONS CONSIDERED IN THE MUNICIPAL SECTOR STUDY
Regulations Included in the Cost Analysis Regulation Status
A. Drinking Water
1. Inorganic Compounds (lOCa) In Development
2. Synthetic Organic Compounds (SOCa) In Development
3. Volatile Organic Compounds (VOCs) Promulgated
4. Fluorides Promulgated
5. Lead and Copper Corrosion Control Proposed
6. Lead and Copper MCL Proposed
7. Coliform Monitoring Proposed
8. Surface Water Treatment Rule: Filtered Proposed
9. Surface Water Treatment Rule: Unfiltered Proposed
10. Radionuclides In Development
11. Disinfection In Development
B. Wastewater Treatment
1. Secondary Treatment of Municipal Wastewater Promulgated
2. Pretreatment Requirements Promulgated
3. Sewage Sludge Disposal - Technical Regulations In Development
for Use and Disposal
C. Solid Waste Disposal
1. Municipal Landfill Subtitle D Criteria Proposed
2. Municipal Waste Combusters - Air Standards In Development
3. Municipal Waste Combusters - Ash Disposal In Development
D. Miscellaneous Regulations
1. Underground Storage Tanks - Technical Standards Promulgated
2. Underground Storage Tanks - Financial Standards In Development
3. Stormwater Management In Development
4. Asbestos in Schools Rule Promulgated
5. SARA Title III Requirements Promulgated
Regulations Omitted from the Cost Analysis (due to insufficient data)
A. Drinking Water
1. Wellhead Protection Plan In Development
2. Pesticides in Groundwater In Development
3. Disinfection By-Products In Development
B. Wastewater Treatment
1. National Estuary Program In Development
2. Wetlands Protection Program - 404(c) Permits Promulgated
3. Nonpoint Source Regulations/Guidance/Mgmt. Plans In Development
4. Section 304(1) - Toxics in Water Bodies In Development
C. Solid Waste Disposal
1. National Contingency Plan - Superfund Program In Development
2. Low-Level Radiation Waste Standards In Development
3. Toxicity Characteristics of Solid and In Development
Haiardous Wastes
D. Miscellaneous Regulations
1. Heavy-Duty Diesel Vehicles Promulgated
2. Gasoline Marketing In Development
3. Diesel Fuel Standards In Development
4. Revisions to National Ambient Air Quality In Development
Standards (Oeone, Carbon Monoxide, Particulate
Matter, Nitrogen Oxides, Sulfur Oxides)
B. Asbestos in Public Buildings May Be Required
2-7
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costs for four service categories (i.e., drinking water, wastewater treatment, solid
waste, and miscellaneous costs) were used in the analysis. The weighted average
costs were used to calculate the additional charges to households for environmental
services that would be in effect by 1996. These weighted average costs were
examined in light of the current revenues and expenditures for environmental
services in each municipality in the municipal data base. Taken together, these data
bases provide current and future expenses for all environmental services. The
change in total charges and fees paid by households to meet the new requirements
was used as an indicator of the expected severity of the impact to households. The
household burden measure used was the percentage increase in total charges and fees
paid relative to current charges and fees. As there is no established limit on what
this increase can or should be when addressing the degree of impact to households,
the distribution of the municipalities' percentage increases is presented, and several
points along the distribution are highlighted.
The study also examined the capability of each municipality to obtain financing
for the additional capital expenditures required for the environmental regulations.
Three financial mechanisms were addressed - revenue bonds, general obligation (g.o.)
bonds, and bank loans (primarily for smaller communities excluded from bond
markets).* The first stage of the financial capability analysis considered whether
municipalities in the sample would have difficulty issuing a revenue bond to cover
the costs of meeting additional drinking water or wastewater treatment system
requirements. Their ability to meet the requirements was assumed to be contingent
upon the condition that the increase in user charges to households necessary to meet
additional EPA requirements will not exceed a given level of the household's gross
(pre-tax) annual income. Municipalities that will be required to set user charges at
levels that exceed specified ratios of current gross household income (1.0%, 1.25%,
and 2.0%) are projected to have potential long-term difficulty issuing a revenue bond
to finance the new requirements. Drinking water and wastewater treatment services
were examined in this manner because most municipalities operate these services as
enterprise units, or independent business units, which are normally supported through
user charges and fees.
These thresholds are derived using information on the distribution of current
user charges to households for each drinking water and wastewater treatment
services. As shown in Figure 2-2, current operations require households pay
approximately 0.5% of gross household income for each individual service. The
thresholds set separate limits of 1.0%, 1.25%, and 2.0% for each of the drinking water
and wastewater treatment services. The 1.25% threshold attempts to address the
sensitivity of the results to the selection of a threshold based upon current condi-
tions. The 2.0% threshold -- an approximate doubling of the higher observed current
Although municipalities under 2,500 do not normally issue revenue bonds or
g.o. bonds, financial institutions will use criteria similar to those used by investment
bankers in cases involving larger municipalities. To qualify small systems and
municipalities for long-term loans, investment bankers will evaluate performance
history, user charges (often as a percent of income), and use revenues from the
service as collateral for a loan. Just as in cases where large cities are denied
access to revenue bonds and g.o. bonds, so may banks refuse to approve loans to
smaller municipalities where their systems or finances do not pass the criteria
described in the study.
2-8
-------
user charges for either drinking water or wastewater treatment in the sample -- is
used to present the consequences of using a more relaxed criteria for households
user charges.
For example, for a drinking water system to exceed the 1.0% threshold, the
addition of new environmental costs to the current costs of supplying drinking water
would require that average household user charges be set above 1.0% of the gross
household income for the population served by the system. The same approach is
followed for each of the three thresholds, and is repeated after calculating the
additional environmental costs for wastewater treatment. Therefore, using the 1.0%
threshold example, a municipality may find itself facing one of four possible out-
comes after calculating new household user charges: (1) both drinking water and
wastewater treatment costs fall below the 1.0% threshold; (2) only drinking water
costs exceed the 1.0% threshold; (3) only wastewater treatment costs exceed the 1.0%
threshold; and (4) both drinking water and wastewater treatment costs exceed the
1.0% threshold. If the municipality was projected to face either of the conditions
described in situations (2), (3), or (4), then it was assumed that the relevant drinking
water and/or wastewater treatment system would have difficulty raising capital using
revenue bonds.
Costs for solid waste and miscellaneous requirements are not included in the
revenue bond test due to the limited number of instances that this mechanism has
been used with these "non-enterprise" services. Although more local governments are
choosing to operate their solid waste services as enterprise systems, the limited
number of enterprises in the sample led to the exclusion of solid waste services from
the revenue bond section of the analysis.
The second stage of the financial capability analysis introduces the additional
costs for solid waste disposal and miscellaneous requirements, and examines the
ability of the municipality to use municipality revenues and taxing authority to
finance capital requirements. For those municipalities projected to have long-term
difficulty issuing revenue bonds for their drinking water and/or wastewater treatment
systems, these costs are included with the solid waste and miscellaneous require-
ments. Where no long-term difficulties are anticipated for the drinking water and
wastewater treatment services, only the solid waste and miscellaneous costs are
examined against the municipality's revenue base.
i
The ability of a municipality to issue a g.o. bond was assumed to be contingent
upon the municipality's total existing and new environmental debt service obligations
relative to two measures: (1) the municipality's 1986 total general revenues, and (2)
the municipality's total 1986 market value of assessed taxable property. The first
condition measures existing revenue sources, whereas the second condition considers
potential revenue sources. A series of threshold values were established using
information on the distribution of values for the two measures from the sample of
municipalities. The values were used in conjunction with the relevant environmental
costs to determine which municipalities would have potential difficulty issuing g.o.
bonds (or for smaller municipalities, obtaining a bank loan). A municipality had to
exceed the threshold value for both measures before it was assumed to have difficul-
ty using g.o. bonds. It is the number of municipalities having difficulty meeting
these conditions that best represent the severity of the financial impacts of the
additional EPA regulations considered in this study.
2-9
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Limitations
Many simplifying assumptions necessary to carry out this study limit its
accuracy.
The municipal data base consists of a relatively small sample of communities
(270), and may not be adequate to form the basis for national estimates. In
particular, the analysis may fail to adequately portray the conditions of the smallest
of local governments - those under 500 persons. Furthermore, the data base was
prepared from fiscal balances for only one year (1986). Because the fiscal conditions
of communities continually change with the economy, the data from 1986 may not be
representative of the financial conditions that will exist during the 1988-1996 period.
The cost data used in this study were taken from a limited set of EPA regula-
tions. Although about 40 of the 85 regulations considered in the study were
identified as having some implications for local government, only 22 were at a stage
where cost data were available to be used in the analysis. Several of the omitted
new requirements may require significant investments in local government resources
(e.g., asbestos in public buildings), or may lead to major changes in current land use
patterns (e.g., groundwater protection, nonpoint source guidelines). Furthermore,
because some of the regulations included in the study are not yet final, the eventual
costs may differ from those estimated in this study. Therefore, the results of this
study cannot provide a definitive picture of what local governments will be spending
by 1996 to meet EPA requirements. This study only captures a portion of the total
picture, and even this portion is subject to change.
In preparing the cost data, it was assumed that small municipalities generally
are served by small environmental service systems and large municipalities by large
systems. The actual distribution of systems across municipalities may be different, so
the costs to households may not be well represented by this method. Furthermore,
to reduce the costs of environmental regulations, municipalities may change the way
they provide environmental services. Municipalities may enter into regional service
agreements in order to take advantage of scale economies, or they may look to
private companies or contractors to provide services, thus freeing themselves of sole
responsibility for financing the construction of facilities. They may also find it
economical to purchase services from adjacent municipalities or special districts,
rather than build new systems to supply the services themselves.
The financial indicators used to estimate households' ability to pay increased
user fees and municipalities' ability to finance capital expenditures are based upon
measures currently used in the financial community, but only until local governments
make arrangements to raise fees or initiate bond referendum to finance new con-
struction will the preferences of consumers be known. Consumers may be more or
less willing to pay for improved environmental services than these indicators suggest.
On the other hand, some municipalities may have to finance a large number of public
works other than those included in this study, and consequently may encounter
financial constraints even though they are not predicted to exceed the financial
indicators used in the study.
2-10
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THE IMPACT OF ENVIRONMENTAL REGULATIONS
The study first examined how much municipalities' expenses for environmental
services would increase with the additional environmental regulations. These new
expenses were then added to recent financial statistics from the 270 sample munici-
palities to determine whether the increased environmental expenses would cause any
of the municipalities to fail the financial indicator tests.
Environmental Expenses
The estimated increases in environmental expenses for households in municipal-
ities in each of five size categories is presented in Figure 2-3, both in terms of
dollars per household and percent of household income. The largest potential
increase in average annual costs per household will occur in communities under 2,500
persons, which will experience an increase of $170 in their annual costs. The
households in communities between 2,500 and 250,000 persons will experience a
smaller potential increase of $80 to $90 in their annual expenditures for environ-
mental services. Communities over 250,000 persons may also experience large
increases in costs for services. The average potential increase in annual costs for
the largest communities is $160. The national average increase in annual household
costs is $100.
When expressed as a percentage of household income, the greater relative
increase in costs to communities under 2,500 persons is more evident. The average
increase will require households in the smallest communities spend an additional 0.7%
of gross household income on environmental services. Households in communities
between 2,500 and 250,000 persons will spend an additional 0.2% to 0.4% of gross
household income. Communities over 250,000 will spend an additional 0.5% of gross
household income on environmental services. Although the average dollar increases
in communities over 250,000 are comparable to average dollar increases in com-
munities under 2,500, larger communities have higher average household income levels
than do smaller communities. The potential national average increase in costs will
require that an additional 0.4% of gross household income be spent on improved
environmental services. Adding potential additional costs to existing environmental
expenses suggests that total future dollar expenditures will be approximately the
same for all but the largest municipalities. However, because household income tends
to be lower in smaller communities, the percentage of household income devoted to
environmental expenses will be greatest in communities under 2,500 persons, followed
closely by municipalities over 250,000 persons.
The individual environmental regulations that account for the largest potential
increases in expenses in small communities are the drinking water and sewage
treatment requirements. Several of the more costly drinking water regulations will
apply to a greater proportion of smaller municipalities than larger municipalities.
These regulations do not single out smaller municipalities per se, but instead deal
with environmental risks that are present at smaller community drinking water
systems. Many larger water supply systems already have introduced treatment
systems capable of handling some of these risks. This helps to explain why the
overall increases for smaller communities exceed those for the larger communities.
The costs of solid waste disposal, asbestos removal in schools, and underground
storage tank regulations, when totalled, also account for a significant portion of the
costs borne by smaller communities. Taken individually, these costs tend to be less
2-11
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Figure 2-3
CURRENT AND POTENTIAL ADDITIONAL AVERAGE ANNUAL
HOUSEHOLD COSTS FOR IMPROVED ENVIRONMENTAL SERVICES
8
53
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LU
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Q.
2.4
I. Percent of Annual Gross Household Income
0 - 2.5K
2.5 - 10K
10 - 50K 50 - 250K
> 250K
National
Average
$700
II. Annual Dollars Per Household
$o
National
Average
0 - 2.5K 2.5 - 10K 10 - 50K 50 - 250K > 250K
MUNICIPALITY SIZE CATEGORY
V~* Current Charges ^H Additional Charges
Source: Municipal Sector Study Database
2-12
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than the drinking water and wastewater treatment regulations. However, most
municipalities are subject to these requirements, whereas the costlier water regula-
tions affect a smaller proportion of municipalities. As a result, not only do the
drinking water regulations lead to relatively large changes in fees in a few munici-
palities, but the cumulative costs of the other regulations can add up to sizable
increases in user charges and fees for some municipalities.
Increases in Household User Charges - Household Burden Measures
When the costs of complying with the environmental regulations are added to
existing environmental expenses, the user charges and fees of the vast majority of
municipalities will increase. Some municipalities may have to raise user fees
considerably above current rates. Table 2-2 presents information on the percentage of
municipalities that may potentially burden households with requests for large user
charge and fee increases. The percentage increases are based on a comparison of
current (1986) average charges to households for existing environmental services (i.e.,
drinking water, wastewater treatment, and solid waste disposal) and potential future
(1996) average charges for improved environmental services, once all of the addition-
al regulations examined in the analysis are in-place. Because the study was con-
ducted using average charges and costs of additional regulations to municipalities, the
specific requirements for individual municipalities may require that some spend either
more or less than the average impact results described in the study.
Most of the municipalities that would experience the largest overall percentage
increases in fees are the smallest municipalities. As shown in Table 2-2, the user
fees of 20% of the municipalities under 2,500 persons may rise over 100% above
current levels by 1996. An additional 35% of these sized communities may find their
environmental bills increase between 50% and 100%. None of the municipalities above
2,500 persons in the sample are projected to have their household costs rise by over
100%. Households in 10% of the communities between 2,500 and 10,000 persons and
20% of communities between 10,000 and 50,000 persons may find their expenses
increasing between 50% and 100%. All communities in the sample between 50,000 and
250,000 persons are projected to experience less than 50% increases in household
expenses for improved environmental services. Approximately 20% of the municipal-
ities above 250,000 persons may require household expenditures rise between 50% and
100%. Although a significant number of larger communities may need to raise
household fees between 50% and 100%, most households will not experience large
percentage increases in costs of environmental services. Nationally, only 2% of
households may have their current environmental service charges and fees rise by
more than 100%, and 15% may have to pay between 50% and 100% above their current
payments. Many of the households that are expected to experience initial "rate
shocks" when confronted with rising user fees are in communities having fewer than
2,500 persons.
The magnitude of the rate increases suggest the extent to which problems may
occur, not necessarily where rate increases will be rejected and municipalities will
fail to meet required improvements in environmental quality. Efforts to inform
voters of the benefits of environmental improvements can play a useful role when
faced with households reluctant to accept projected increases in user fees. Further-
more, municipalities may be able to mitigate the increases in household costs by
using innovative technologies or alternative methods of supplying services (e.g.,
regional service arrangements).
2-13
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Table 2-2
POTENTIAL CUMULATIVE IMPACT OF ENVIRONMENTAL REGULATIONS:
PERCENT INCREASE IN HOUSEHOLD USER CHARGES
Municipality
Size Category
0 -
2,500
2,500 -
10,000
10,000 -
50,000
50,000 -
250,000
> 250,000
Percent
Percent
Number of
Municipalities
26,315
6,279
2,694
463
59
of Municipalities
of Population**
This percent increase is calculated as follows:
(Additional Drinkine Water + Wastewater
Percent of
Increase as
0 - 50%
45%
90
80
100
80
56%
83%
Municipalities in the
a Percent of Current
50 - 100%
35%
10
20
0
20
29%
15%
Category
Charges
> 100%
20%
0
0
0
0
15%
2%
+ Solid Waste + Miscellaneous Costs) x 100
(Current Drinking Water + Wastewater + Solid Waste Costs)
Percent of U.S. population living in municipalities and townships within each municipality size category. According
to the 1982 Census of Governments, approximately 85% of U.S. population resides in these government organizations.
Distribution is: 0-2,500 (10%); 2,500-10,000 (16%); 10,000-50,000 (29%); 50,000-250,000 (23%); > 250,000 (22%).
2-14
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Capital Financing Indicators
Table 2-3 presents the percent of municipalities that may have long-term
difficulties raising funds with revenue bonds because of the eventual household rates
that must be charged to meet existing and potential EPA requirements. The drinking
water and wastewater systems were examined using three different threshold values-
-- 1.0%, 1.25%, and 2.0% of gross household income. The two lower thresholds
represent an effective doubling of average current user charges for each of these
improved services. The 2.0% threshold ~ an amount not currently expended in any
municipality in the sample ~ represents a more relaxed criteria of user charges
expended for these services.
Some systems currently have user charges in-place that exceed the lower two
income thresholds. The numbers in brackets in Table 2-3 show the estimated
percentage of systems that exceed the thresholds prior to adding the costs of
additional environmental requirements. These systems, as well as systems charging
households rates below the thresholds, may need to raise rates further if subject to
the additional requirements. Their current conditions may lead to different difficul-
ties in obtaining financing from systems presently below the financial thresholds, and
suggest different solutions may be necessary to meet their financial needs. The
numbers show that a greater percentage of systems serving communities under 2,500
persons presently exceed the 1.0% and 1.25% thresholds than do systems in larger
communities. These circumstances have already led EPA to initiate several programs
to assist smaller communities seeking to meet environmental objectives. Several of
these programs are discussed in Chapter 5.
As shown in Table 2-3, if a 1.0% threshold is used for each individual service,
approximately 26% (21% above the 5% baseline failure rate) of the drinking water or
wastewater systems in municipalities under 2,500 persons may have difficulties in
revenue bond markets. Raising the threshold up to 1.25% of household income
reduces this to 12% (10% above the 2% baseline failure rate) of systems in municipal-
ities under 2,500 persons, and raising the threshold up to 2.0% reduces the failure
rate down to 2% of systems. Larger municipality size categories will have less
difficulty meeting the additional requirements. Using the 1.0% threshold measure,
between 4% and 8% of the systems in municipalities with 2,500 to 250,000 persons
may have difficulty in the revenue bond markets. Raising the threshold to 1.25%
decreases the percent of systems failing the test to 2%. No systems in the sample
serving more than 2,500 persons fail the 2.0% threshold, because none of these
systems are expected to raise rates above 2.0% of gross household income.
A greater percentage of systems in municipalities over 250,000 may experience
difficulties at the 1.0% threshold (11%, or 7% above the 4% baseline failure rate), but
this number falls to 3% when using the 1.25% threshold, and down to zero for the
2.0% threshold. For the nation, 21% (15% above the 6% baseline failure rate) of
drinking water and wastewater treatment systems may have difficulty using revenue
bonds/loans when using the 1.0% threshold. The number drops to 9% (8% above the
1% baseline rate) of systems when using the 1.25% threshold, and less than 1% using
the 2.0% threshold. Because most of the municipalities projected to have difficulties
are small in size, the percent of persons residing in municipalities that may face
each of the income thresholds is relatively smaller than the number of municipalities
failing the criteria (e.g., 9 percent of households exceed the 1.0% threshold, con-
trasted against 21% of the municipalities).
2-15
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Table 2-3
POTENTIAL IMPACT OF ENVIRONMENTAL REGULATIONS ON THE ABILITY OF
DRINKING WATER AND WASTEWATER TREATMENT SYSTEMS TO ISSUE
REVENUE BONDS/OBTAIN BANK LOANS IN THE LONG TERM*
Percent of Municipalities Whose Systems May Be Unable to
Issue Revenue Bonds/Obtain Loans in the Long Term
User Charge/ User Charge/ User Charge/
Municipality Number of Household Household Household
Size Category Municipalities Income > 1.0% Income > 1.25% Income > 2.0%
0 - 26,315 26% 12% 2%
•>**
2,500 [5%] [2%] [0%]
2,500 - 6,279 820
10,000 [2] [1] [0]
10,000 - 2,694 720
50,000 [3] [1] [0]
50,000 463 4 0 0
250,000 [4] [0] [0]
> 250,000
Percent
Percent
59
of Municipalities
e r\ i • ****
of Population
11
[4]
21% [4%]
9%
3
[0]
9% [1%]
3%
0
[0]
< 1% [0%]
< 1%
* Long Term Revenue Bond/Loan Criteria for Drinking Water and Wastewater Services. Percent of municipalities whose
new user charges for either one of the services is greater than the stated threshold value (either 1.0%, 1.25%, or
2.0% of gross household income). The model examines the financial capability of each service separately. For
example, the results in the 1.0% column refers to the results of imposing a 1.0% threshold on drinking water and a
1.0% threshold on wastewater treatment services. A municipality effectively fails the threshold test if either one
or both of the drinking water and wastewater treatment systems fails the 1.0% threshold. The sum of each individual
service is not examined in the study because a significant number of municipalities operate these two services as
separate enterprise units. For more information on thresholds, see Municipal Sector Study report.
Smaller municipalities (under 2,500 persons) generally do not issue revenue bonds. Instead they obtain bank loans
backed by user charges. The criteria used in the revenue bond tests can be applied to these smaller municipalities.
Percent of systems exceeding the threshold prior to incurring potential costs of additional requirements (baseline
systems failing the criteria).
Percent of U.S. population living in municipalities and townships within each municipality size category. According
to the 1982 Census of Governments, approximately 85% of U.S. population resides in these government organizations.
Distribution is: 0-2,500 (10%); 2,500-10,000 (16%); 10,000-50,000 (29%); 50,000-250,000 (23%); > 250,000 (22%).
2-16
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The final stage of the financial analysis takes the information from the revenue
bond test and combines it with information on solid waste and miscellaneous expenses
to determine if the general revenues and taxing authority of the municipality can be
used to finance the additional costs to non-enterprise services and, if necessary, the
enterprise services. As shown in Table 2-4, the municipalities expected to have the
greatest difficulty using g.o. bonds and loans to finance additional environmental
requirements are in the smaller size categories. The small municipalities will have
greater difficulties meeting the solid waste and miscellaneous EPA requirements,
particularly in those instances where the drinking water or wastewater system costs
must also rely upon the municipality's revenue base to raise funds. Using the two
different tests, between 21% and 30% of municipalities under 2,500 persons may have
difficulty financing the additional EPA requirements using both revenue and g.o.
bonds. The table shows that 4% to 9% of municipalities between 2,500 and 10,000
persons, and 2% to 6% of municipalities between 10,000 and 50,000 persons may have
difficulty obtaining capital financing for the cumulative set of EPA requirements.
Municipalities over 50,000 persons are expected to have no difficulty obtaining
financing for their projected requirements.
Although omitted from the presentation in Table 2-4, the different revenue bond
threshold values do not appear to play an important role in determining whether the
municipality can meet its financial requirements. Using a threshold of 1.0% versus
1.25% for drinking water or wastewater treatment costs does not significantly change
the number of municipalities expected to face financial difficulties. Although the
selection of the income threshold in Table 2-3 significantly altered the number of
systems failing the revenue bond test, the g.o. bond test results are most affected by
the current financial conditions of the municipality. The information in brackets in
Table 2-4 show the estimated number of municipalities exceeding the thresholds prior
to adding additional environmental requirements. As many as 8% of the municipal-
ities under 2,500 persons fail the criteria in Test I, and 12% fail the criteria using
Test II. Small municipalities that have already committed themselves to large capital
projects for environmental or other infrastructure needs may have to complete these
projects prior to investing in new projects. Nevertheless, they will face additional
costs and increasing demands on their current financial base.
In addition to the number of financially weak communities, some small munici-
palities currently in good financial shape may be pushed beyond the criteria. The
costs of some individual requirements, or the cumulative costs of several require-
ments that must be met within a short period of time, may strain the financial
capability of several small communities. The large increases in costs for environmen-
tal services in small municipalities may result in a significant proportion of these
municipalities -- between 13% and 18% — having financial difficulty meeting the
additional EPA requirements for improved environmental services. The cumulative
results indicate that between 21% and 30% of the communities in the sample under
2,500 persons may have difficulty financing the requirements.
The numbers in Table 2-4 indicate that the percentage of communities with
more than 2,500 persons failing the baseline is not noticeably different from the
percentage of municipalities failing the criteria after adding the costs of the
additional requirements. These results suggest that the financially weaker municipal-
ities above 2,500 persons are likely to face financial constraints, but the other
communities that have sufficient financial latitude may have little difficulty meeting
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Table 2-4
POTENTIAL IMPACT OF ENVIRONMENTAL REGULATIONS ON THE ABILITY OF
MUNICIPALITIES TO ISSUE GENERAL OBLIGATION BONDS/OBTAIN BANK LOANS
Percent of Municipalities That May Fail to Issue G.O.
Bonds/Obtain Loans in Each Size Category*
Municipality Number of G.O. Bond/Bank G.O. Bond/Bank
Size Category Municipalities Loan Test I Loan Test II
0 - 26,315 21% 30%
2,500*** [8%]**** [12%]
2,500 - 6,729 4 9
10,000 [3] [9]
10,000 - 2,694 2 6
50,000 [0] [6]
50,000 463 0 0
250,000 [0] [0]
> 250,000 59 0 0
[0] [0]
Percent of Municipalities 16% [7%] 24% [11%]
Percent of Population**** 3% 6%
Combined G.O. Bond/Loan and Revenue Bond/Loan Thresholds: Solid waste and miscellaneous regulatory capital costs
are always examined. The capital costs of drinking water and/or wastewater system requirements are included in
calculating required new debt service (total capital costs) if the 1.0% Revenue Bond/Loan Threshold for either
system has been exceeded. For more information on thresholds, see Municipal Sector Study report.
G.O. Bond/Loan Thresholds - percent of municipalities exceeding both of the following: (i) Current annual debt
service plus new debt service expressed as a percent of current annual municipality revenues: (Test I: 20%1. (Test
II: 15%|. (ii) Current annual debt service plus new debt service expressed as a percent of the market value of
taxable property: (Test I: 0.8%). (Test II: 0.6%). Results using 1.25% and 2.0% threshold are not included because
they are not significantly different from results using 1.0% threshold.
Smaller municipalities (under 2,500 persons) generally do not issue revenue bonds or g.o. bonds. Instead they obtain
bank loans that are backed by user charges. The criteria used in the two bond tests can still be applied to these
smaller municipalities.
***
Percent of municipalities exceeding the threshold prior to incurring potential costs of additional requirements
(Baseline municipalities failing criteria).
Percent of U.S. population living in municipalities and townships within each municipality size category. According
to the 1982 Census of Governments, approximately 85% of U.S. population resides in these government organizations.
Distribution is: 0-2,500 (10%); 2,500-10,000 (16%); 10,000-50,000 (29%); 50,000-250,000 (23%); > 250,000 (22%).
2-18
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additional EPA requirements. This conclusion is, in part, contingent upon the
willingness of the community to support its local drinking water or wastewater
treatment systems. If the community should choose not to assist financially con-
strained drinking water or wastewater treatment system operations, then the number
of larger systems and communities failing to obtain financing for additional environ-
mental requirements may fall between the numbers presented in the revenue bond
results of Table 2-3 and the g.o. bond results of Table 2-4.
CONCLUSION
The major findings of this study may be summarized as follows:
Household Impacts
The potential cumulative cost of regulations examined in the study that improve
environmental services provided by municipalities may require that the national
average household spend an additional $100 per year by 1996.
Both municipalities under 2,500 persons and over 250,000 persons will experience
the largest average increases in total user charges and fees paid on a per household
basis. The average potential increase in user charges and fees will be $170 and
$160, respectively. Some of the more costly regulations address technologies that are
in operation at most large municipalities, but have yet to be adopted by small
municipalities. Also, costs per household for many regulations tend to fall as the
population increases, due to economies of scale. These conditions, plus the lower
average household income levels in smaller municipalities, will require that households
in communities under 2,500 persons pay a greater proportion (0.7%) of their income,
on average, for these services than households in larger municipalities (0.5%).
Financial Impacts
Most municipalities will be able to meet the expected increases in environmental
expenses and still remain financially sound. The municipalities most likely to
experience difficulty will be the municipalities with populations of 2,500 or less.
Between 21% and 30% of the communities under 2,500 persons may have difficulty
using revenue bonds, g.o. bonds, and loans because of the high cost of some in-
dividual regulations and the cumulative costs of recent legislative requirements
(affecting between 13% and 18% of small municipalities), and the limited margin for
expanding financial obligations in small communities due to existing demands for
environmental and other infrastructure services (the remaining 8% to 12% of small
municipalities).
These difficulties are not limited to small municipalities, but the results suggest
that a much smaller proportion of the municipalities over 2,500 persons will face
financial constraints when subject to additional EPA requirements. Unlike the small
municipalities, most of the constrained municipalities already are in financially weak
positions, given the criteria. The additional environmental requirements, on average,
should not place financially strong communities into weak financial positions.
Some portion of enterprise systems serving larger municipalities, particularly
those over 250,000 persons, may have difficulties financing their additional require-
2-19
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ments. If the municipalities served by these systems fail to offer support to finance
some portion of the requirements, these systems and municipalities may have
difficulty meeting the additional capital requirements.
Because of the many simplifying assumptions required to carry out this study,
care should be taken in interpreting the results. The municipal government sample
database requires that caution be exercised when seeking to extrapolate results to
the nation as a whole, particularly for very small systems and communities. Several
of the regulations considered are not yet final, so their costs may change. Regula-
tions likely to be important for municipalities and households were not included in
the cost analysis because of insufficient information on costs and number of affected
communities. Their omission may result in an underestimate of the costs to affected
municipalities. On the other hand, municipalities may be able to undertake alter-
native means of meeting environmental objectives that are less costly than original
EPA estimates.
The analysis underscores EPA's efforts to seek additional information on the
finances and environmental options available for smaller municipalities. Knowing
more about individual community requirements will assist EPA in better designing and
modifying programs capable of dealing with their unique problems. This information
may be of most value for smaller communities, as they face the potentially greatest
challenges in the coming decade.
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Chapter 3
SMALL BUSINESS
The United States is a nation of small businesses as much as it is a nation of
large corporations. Over ninety-five percent of all businesses have fewer than 50
employees. Although these firms employ only about one quarter of the people in the
United States and account for about one quarter of total sales, they are an
important part of the economy and an integral part of the American way of life.
While environmental regulations affect all businesses, small businesses have their
own special problems in dealing with them. Firms with only 5 or 10 employees do
not have the financial resources or the legal and engineering staffs available to
larger firms. Often their costs per unit of production to comply with environmental
regulations are much larger than those of their large competitors.
From its inception in 1970, EPA has recognized the special problems of small
businesses in dealing with environmental regulations and has taken these problems
into account in its rulemaking process. Often, EPA has relaxed some environmental
regulations for small businesses and, for some regulations, has exempted small
businesses. EPA's Small Business Ombudsman has been appointed to represent the
special needs of small businesses within the Agency.
This study* investigates the potential impact upon small businesses of the
environmental regulations that will have the most effect from 1988 through 1992.
The study first examines how these regulations will affect small businesses in
general, and then examines in more detail the impacts upon selected industries.
SMALL BUSINESS AND ENVIRONMENTAL REGULATIONS
Although it might seem that EPA's 85 regulations would overwhelm any small
business, the actual impacts will vary greatly. Many small businesses will not be
affected directly by any of the 85 regulations. Some firms will be affected adversely
by the regulations, but others -- particularly those that provide pollution control
products or services -- will find that their businesses grow. Thus, the overall
impact of EPA's forthcoming regulations is by no means self-evident.
The Small Business Sector Study: Impacts of Environmental Regulations on
Small Business: prepared for the U.S. Environmental Protection Agency, Office of
Policy, Planning and Evaluation by Lyman H. Clark and E. H. Pechan & Associates,
Inc.; September 1988.
3-1
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Whether a small business is affected by many environmental regulations, only
one regulation, or none at all depends upon whether the business contributes to
environmental problems or helps to solve them. Most small businesses - for example,
those in the wholesale, retail, financial, and services sectors - are relatively neutral
as regards environmental problems and, hence, are not directly affected by any
environmental regulations. These sectors of the economy include 70% of all small
businesses.
Small businesses are adversely affected by environmental regulations when they
create environmental problems that the nation has decided to address. Traditionally,
the businesses associated with environmental problems have been those in the
"smokestack" industries, such as mining and manufacturing — industries that
discharge pollutants into the air or waterways. The businesses adversely affected by
the new regulations are those that use toxic chemicals in their processes or generate
hazardous wastes. These include some industries that usually are considered to be
polluting industries — petroleum refiners, iron foundries, and electric utilities — and
other industries that generally are not regarded as polluters — dry cleaners, gasoline
service stations, and farm supply stores.
Because one firm's expenditure to comply with an environmental regulation is
often another firm's receipt, many small businesses will find that the forthcoming
environmental regulations create an increased demand for their products and services.
Small businesses that provide engineering or laboratory services, for example, or
manufacture pollution control or monitoring equipment, or clean up hazardous waste
sites should be positively affected by the new environmental programs. Although this
study does not examine these positive impacts, they are worthy of note as part of
the total economic picture.
A list of the industries that could be either negatively or positively affected by
EPA's regulations was prepared as part of the small business sector study and is
presented therein. While this list is not exhaustive and was prepared using
information that, in many cases, was still preliminary, it provides a representative
picture of the kinds of industries that are most likely to be affected, either
adversely or positively. Those industries listed most frequently as potentially
adversely affected by the environmental regulations are examined in Table 3-1. They
include about 3.5% of all small businesses in the United States.
Although firms with fewer than 50 employees account for 95% of all businesses,
the relative importance of small businesses varies from sector to sector. Firms with
fewer than 50 employees account for over half the employment and sales in some
sectors - agriculture, construction, and wholesale trade - but less than 20 percent of
employment and sales in other sectors - mining, manufacturing, and transportation.
Thus, some sectors of the economy can be said to be "small business dominated," and
others can be said to be "large business dominated." Several of the industries listed
in Table 3-1 are clearly small business dominated.
3-2
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Table 3-1
SMALL BUSINESSES* IN SELECTED INDUSTRIES - 1986
SIC Industry
2491 Wood Preserving
2861 Gum & Wood Chemicals
2879 Pesticide Formulators
2911 Petroleum Refining
3292 Asbestos Products
3321 Gray Iron Foundries
3341 Secondary Smelting
3471 Electroplating
4213 Interstate Trucking
4911 Electric Utilities
4941 Water Supply
4953 Refuse Systems
5191 Farm Supply Stores
5541 Service Stations
7216 Dry Cleaners
7395 Photofinishing Labs
Number
of
Firms
344
70
338
315
114
602
506
3,350
24,608
1,376
2,109
2,868
15,810
54,930
15,728
4,739
Number of
Small
Businesses
309
61
307
241
91
370
435
3,050
22,656
864
1,977
2,742
15,609
54,077
15,438
4,547
Small Business Portion of
Firms Employment Sales
90%
87%
91%
77%
80%
62%
86%
91%
92%
62%
94%
96%
99%
98%
98%
96%
49%
4%
13%
1%
4%
10%
25%
56%
27%
4%
32%
31%
66%
71%
79%
42%
54%
18%
14%
5%
3%
11%
25%
51%
30%
4%
28%
30%
65%
62%
79%
47%
* Includes businesses with 1-49 employees.
Source: U.S. Small Business Administration: Small Business Data Base (SBDBX United
States Establishment and Enterprise Microdata (USEEM).
3-3
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STUDY METHODOLOGY AND LIMITATIONS
Because the number and diversity of small businesses make it impossible to
cover all small businesses in this study, the study focuses upon describing the impact
of the environmental regulations upon representative small businesses in nine selected
industries. The methodology has been designed to describe the environmental
regulations that different types of industries will face and to provide a preliminary
indication of how the costs of these regulations will compare to the financial
capabilities of small businesses in each industry. This methodology necessarily limits
the detail of the analysis and the accuracy of the results.
Methodology
The first step in this study was to examine the list of 85 environmental
regulations to determine which industries would be most affected. These industries
were then examined to determine which would be most appropriate for further study.
Table 3-1 lists those industries that were found to be most affected by the
environmental regulations and presents statistics on the relative importance of small
businesses in each industry. Several of the industries listed in Table 3-1 were
selected for further study because they have a high percentage of employment or
sales accounted for by small businesses: dry cleaning, gasoline service stations, farm
supply stores, electroplating, wood preserving, and photofinishing laboratories.
Although small businesses do not account for a high portion of employment or sales
in the interstate trucking industry, this industry was selected simply because it
includes such a large number of small businesses. Two other industries, pesticide
formulators and water supply companies, were selected because their environmental
problems are different from those of most of the other industries on the list.
Definitions of a "small business" vary. The U.S. Small Business Administration
(SBA) uses different definitions for each industrial category. For most manufacturing
industries, SBA defines a small business as a firm with fewer than 500 employees
(99.6% of all firms). The U.S. Occupational Safety and Health Administration
(OSHA), on the other hand, defines a small business as a firm with fewer than 10
employees (75.4% of all firms). Most of the statistics presented in this sector study
focus on businesses with fewer than 50 employees (95.3% of all firms). While this
definition is somewhat arbitrary, it in no way affects the conclusions of the study.
Whatever the definition used, most businesses are small, and the number of small
businesses is about 3.5 million.
The approach used in analyzing each of these industries selected may be
outlined as follows:
1. Describe a "typical" small business in the industry.
2. Identify the environmental "problems" associated with
small businesses in the industry.
3. Identify the environmental regulations that will apply to
these small businesses, and estimate the associated
compliance costs.
3-4
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4. Estimate the paperwork costs associated with the
environmental requirements for each industry.
5. Compare the estimated compliance costs, including the
paperwork burden, with industry financial statistics to
determine whether small businesses might be expected to
have difficulty meeting environmental requirements.
Where the estimated annual cost of compliance was found
to exceed 30% of net profits and/or where the estimated
capital costs were found to exceed 30% of equity, then
small businesses in the industry were identified as having
the potential for financial difficulties.
The threshold value of 30% was selected on more or less an arbitrary basis.
Time and data limitations prevented any extensive financial modeling or detailed
analysis of potential business impacts. This study was designed, instead, to identify
potential problem areas. When estimated environmental costs exceed 30% of the
median small business's annual net profits and/or estimated capital costs exceed 30%
of the median equity, then there seems to be cause for concern. Small businesses in
some industries may be able to pass such costs on to their customers and others may
be able to reduce the costs through innovative techniques. Some of the costs will
be absorbed by reduced taxes. There are a variety of ways that businesses may
adjust to increased costs. Nevertheless, when it appears that increased costs in any
size category of any industry may exceed 30% of profits, it is safe to say that the
potential for financial difficulties exists. Because the study examined the financial
statistics of both the median firm in each size category and the firm at the lowest
quartile level, the results of the analysis are not particularly sensitive to the 30%
threshold value. When costs were close to 30% for the median firm, they were well
in excess of 30% for the firm at the lowest quartile.
This study did not address the issue of whether small businesses will be able to
pass increased environmental costs on to their customers in the form of higher
prices. While economic theory suggests that prices in an industry should rise to
reflect producers' costs, such adjustments may take time and may be inhibited by
competition from substitute or imported products or simply by consumer resistance.
Furthermore, the increased costs experienced by small businesses may be greater than
industry averages. Predicting the price increases that might result from increased
environmental costs is a complex exercise that is beyond the scope of this study.
Exceptions to the general methodology were made for two industries: gasoline
service stations and private water supply systems. The analysis of gasoline service
stations was based upon a financial model developed for EPA's Office of Underground
Storage Tanks. The analysis of private water supply systems was provided by EPA's
Office of Drinking Water based upon its surveys of water supply systems.
For information on the financial condition of small businesses, this study used
the 1976-1983 Fin/Stat file compiled by the SBA. This is the only data base that
provides separate statistics for many different sizes of businesses, including those
that have fewer than 10 employees. Because the estimates of environmental costs
often were available only for an "average" small business, it was not possible to
conduct detailed financial analyses on businesses of each size category. Using the
3-5
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Fin/Stat file made it possible, however, to examine the financial capabilities of firms
of different sizes and to identify potential problem areas.
Although 1976-1983 financial data is slightly outdated, inflation from 1983 to
the end of 1987 was relatively low, about 16%. This is well within the range of
accuracy of the other data used in the study and within the normal year-to-year
fluctuations in the Fin/Stat data. The average (median) dry cleaner in the Fin/Stat
file had lower net profits in 1983 ($12,000) than in 1977 ($14,900), for example, even
though the inflation over that period was almost 64%.
Limitations
The approach used in this study has several limitations. For example:
1. Many of the regulations included in the study are not yet
final. One of the major environmental regulations
affecting electroplaters — for example, the hexavalent
chromium air emission standard ~ is not available yet in
even a preliminary form, and one of the regulations
affecting dry cleaners -- the perchloroethylene air
emission standard — is still under formulation with many
options under study. Thus, the eventual costs and impacts
of many regulations may vary considerably from those
indicated herein.
2. The performances of individual small businesses differ
considerably from industry averages. Although this study
attempts to take this into account in a qualitative way,
the study cannot go so far as to say how many small
businesses might experience difficulties in any industry.
3. The data used in the study, including both the estimates
of environmental costs and the business financial
statistics, are of limited accuracy. Thus, the conclusions
must be regarded as preliminary. I
In spite of these unavoidable limitations, the study provides an initial
description of how environmental regulations will affect small businesses and
identifies many potential policy issues and problem areas for further study.
IMPACTS UPON SELECTED INDUSTRIES
Table 3-2 summarizes the results of the industry analyses. The study found
that costs may be high for most small businesses in three of the industries-
electroplating, wood preserving, and pesticide formulating and packaging. If costs
prove to be as high as estimated and cannot be passed on to consumers, some of
these small businesses may be forced to discontinue part of their operations or to
close. Costs also may be high for small businesses in certain segments of five other
industries. Some small dry cleaners that have underground storage tanks or require
substantial perchloroethylene emissions controls may have difficulty meeting
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Table 3-2
SUMMARY OF IMPACTS UPON SELECTED INDUSTRIES
Industry
Electroplating
Wood Preserving
Pesticide Formulating
and Packaging
Farm Supply Stores
Interstate Trucking
Gasoline Service
Stations
Dry Cleaning
Photofinishing
Laboratories
Water Supply
Most Significant
Regulations
Toxic Chemicals
Hazardous Waste
Chromium Emissions*
Hazardous Waste
Toxic Chemicals
Corrective Action
Stormwater Control*
Toxic Chemicals
Hazardous Waste
Pesticides
UST Standards
UST Corrective Action
UST Standards
UST Corrective Action
UST Standards
UST Corrective Action
Hazardous Waste
UST Standards
UST Corrective Action
Hazardous Waste
Perc Emissions*
None
Drinking Water Standards
Firms That Might
Experience Difficulty
Firms with 1-49
employees
Firms with 1-49
employees
Firms with 10-19
employees
Firms with leaking
underground storage
tanks
Firms with leaking
underground storage
tanks
Firms with leaking
underground storage
tanks
Firms with 1-9
employees that have
USTs or require perc
emissions controls
None
Firms that serve fewer
than 2,500 people
* These regulations are still being formulated.
3-7
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environmental requirements. In addition, certain gas stations, trucking firms, and
farm supply stores with leaking underground storage tanks may face corrective action
costs beyond their financial means. Small private water supply companies are in a
unique position, in that they operate as utilities and generally obtain rate increases
to cover their increased costs. While these firms would not be expected to go out
of business, high treatment costs for water supply companies that fail to meet new
drinking water standards may necessitate large increases in household usage fees.
Environmental costs for one of the industries studied -- photofinishing laboratories-
were found to be negligible.
The environmental regulations that appear to be most often responsible for high
costs in the industries studied are those covering the handling and reporting of toxic
chemicals; the handling, treatment, and disposal of hazardous wastes; and the
operation of underground storage tanks. Although costs estimates are available for
only some of these regulations, those that are available indicate that the regulations
will affect a large number of firms in many industries and may entail costs in the
$5,000 to $10,000 range. While these costs may be managed easily by small
businesses of moderate size, they present difficulties for the smallest of the small
businesses. It is these very small businesses that comprise the majority of U.S.
businesses.
The following sections briefly describe the results of the analyses for each
industry.
Electroplating
The electroplating process requires the use of many toxic and hazardous
materials, such as metals and solvents. Although electroplaters generally reclaim and
recycle these materials, many of which are valuable, some of the toxic materials
remain in electroplating wastewaters and solid wastes. In addition to these problems
associated with hazardous wastes, electroplaters that use chromium may also have a
problem with hazardous air emissions.
Most of the environmental expenditures for electroplaters over the next few
years will have to do with handling and disposing of the sludge that is generated by
these wastewater treatment systems and with the recordkeeping and reporting that
will become a necessary part of handling toxic substances and hazardous wastes.
One other potential expenditure -- emission controls for hexavalent chromium -- will
apply only to the chrome plating segment of the industry.
Because electroplaters with fewer than 10 employees will be exempt from
Section 313 of SARA Title III, their additional costs for the 1988-1992 period will be
approximately $4,430 per year, with an additional cost of approximately $3,680 in the
first year for the hazardous waste generator regulations. The estimated annual costs
amount to about 32% of the median small electroplater's net profit and the additional
first year costs amount to about 7% of their equity. Electroplaters at the lowest
quartile of this size category averaged net profits of only $3,400 over the 1976-1983
period and lost $9,100 in 1983. Although the additional first year expenses amount
to only 15% of their equity, the $4,430 in additional environmental expenses amounts
to 130% of their net profits over the 1976-1983 period. These figures suggest that
the electroplaters in this size category may experience difficulty managing the
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increased environmental costs. Because the $4,430 in annual expenses represents only
about 2% of their average sales, it seems probable that many of these electroplaters
will be able to adjust to the increased costs, but for some marginal electroplaters
the additional expenses could present financial difficulties.
The relative impact of environmental regulations during the 1988-1992 period
will be greatest on electroplaters with 10-19 employees. These are the smallest
electroplaters that will be subject to Section 313 of SARA Title III. Section 313 may
add $9,000 to these electroplater's annual costs, with an additional $3,000 in the first
year. This $9,000 plus $4,430 of other expenses amounts to over 70% of the median
electroplater's 1976-1983 net profits. Electroplaters at the lowest quartile in this
size category averaged net profits of only $3,400 over the 1976-1983 period and lost
$4,300 in 1983. The estimated environmental costs would amount to almost 400% of
their average net profits. These figures suggest that many electroplaters with 10-19
employees will have difficulty meeting the costs of the environmental regulations.
Electroplaters in the next size category, 20-49 employees, may also experience
some difficulty meeting the environmental requirements. Their costs will be
approximately the same as those of the smaller electroplaters, and even though they
have a larger annual profits, the annual costs are still relatively high. The median
electroplater in this size category had net profits over 1976-1983 of $34,000 on
equity of $228,000. The estimated annual environmental expenses of $13,430 amounts
to 40% of their average 1976-1983 net profits. Electroplaters at the lowest quartile
level averaged net profits of only $9,000 over 1976-1983 and experienced a $15,200
loss in 1983. The estimated environmental costs amount to almost 150% of their
average net profits. Thus, some electroplaters in this size category also may have
difficulty meeting the environmental requirements.
It is only in the next largest size category of 50-99 employees that the
environmental expenses amount to less than 30% of the median electroplaters' net
profits ($70,000). The electroplaters in the lowest quartile averaged net profits of
$40,000, however, so that the estimated environmental costs amount to approximately
34% of these electroplater's annual net profits. Thus, the increased expenses will be
high for some of the firms even in this larger size category.
Wood Preserving
Almost all of the substances and chemicals used at a wood preserving facility
are considered toxic or hazardous. In previous years, as the industry was
developing, and environmental concerns were not an issue, the practices of many
wood preserving facilities eventually contributed to serious contamination of the
surrounding area's soil and water. Many of these facilities have had to implement
extensive cleanup operations to correct these problems. The cleanup costs have
strained the financial resources of many firms severely, and several firms have gone
bankrupt.
Over the period 1988-1992, the cleanup of wood preserving facilities will
continue, and wood preservers will be faced with new regulations governing the
disposal of their hazardous wastes, the reporting of toxic chemicals, and the control
of stormwater flows. The problems associated with these new regulations may
involve not only increased costs, but also the unavailability of disposal sites. Wood
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preservers now are finding that there are no disposal alternatives available for their
pentachlorophenol wastes.
Management and reporting of hazardous wastes and toxic chemicals will add
approximately $14,300 in annual costs to wood preservers' environmental expenses.
These costs amount to about 32% of the 1976-1983 median net profits for wood
preservers in both the 10-19 and 20-49 employee size category, and over four times
the reported 1983 net profits. In addition to these costs, some potentially large
costs of forthcoming waste disposal regulations and potentially large capital costs
associated with waste-minimizing technologies have not been included in the
estimates. These figures all suggest that some wood preservers may have great
difficulty meeting environmental expenses.
In addition to these increased annual costs, wood preservers may incur major
construction costs to control stormwater. Although these regulations are still in the
formative stages, the costs of some of the principal regulatory alternatives, such as
constructing roofs or wastewater collection systems for storage yards, have been
estimated to be $200,000 even for small facilities. Capital costs of this magnitude
amount to 150% of the median equity of wood preservers with fewer than 10
employees, and about 80% of the median equity of those with 10-19 employees.
Should costs prove to be as high as the preliminary estimates indicate, small wood
preservers would find it very difficult to meet these requirements.
Pesticide Formulating and Packaging
Pesticide formulating and packaging (PFP) firms handle many materials that are
considered toxic and may present an environmental danger if spilled. Similarly, many
of the wastes generated from PFP processes are considered hazardous. Process
wastewaters from PFP firms may be contaminated with the toxic substances used
and/or with the hazardous wastes generated. Finally, the pesticides produced by
these firms are themselves dangerous and subject to stringent labeling and handling
requirements.
The environmental regulations that will affect PFP firms directly during the
period 1988-1992 include those concerned with the handling of toxic substances and
hazardous wastes as well as those governing the handling and labeling of pesticides.
The PFP plants that currently discharge wastewaters into municipal sewers also will
be subject to categorical pretreatment standards at some time in the future.
The smallest PFP firms, those with 1-9 employees, will be exempt from the most
costly regulation, Section 313 of SARA Title III, and will have annual costs of only
$2,560. These firms should have no difficulty meeting environmental requirements.
PFP firms with 10 or more employees will have to comply with Section 313 of SARA
Title III and will face costs of $11,560 per year plus increased waste disposal costs
and an additional $6,680 in the first year of regulation. They also may have to
replace some of their labels at a cost of $1,000-$2,000 each. Although the capital
costs are relatively low, the annual costs are about 37% of median net profits of PFP
firms with 10-19 employees, and about 200% of the net profits of firms at the lowest
quartile level. These figures suggest that some PFP firms with 10-19 employees may
have difficulty meeting the requirements. Unlike firms in other industries, small PFP
firms may have the option of discontinuing some of their operations rather than
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closing, if they cannot afford to meet these environmental requirements.
PFP firms will be subject not only to the current and forthcoming regulations
that are covered in this study, but also to the continuation of and possible changes
in the many existing regulations that govern the manufacture, distribution, and use
of pesticides. Firms in the pesticide industry are subject to many environmental
product regulations as well as regulations governing the discharge and disposal of
residuals. Regulations governing the registration and labeling of pesticides, for
example, already are a major factor in the PFP industry. EPA is considering
changing many of these existing regulations, which may have a more profound effect
on the PFP industry than the regulations covered in this study.
Farm Supply Stores
Many farm supply stores handle pesticides, with the resultant environmental
dangers in possible spillage. For those firms that offer pesticide application services,
the mixing and use of these pesticides require stringent handling procedures so as
not to contaminate the environment. In addition, those farm supply stores that
provide fuels are concerned with potential spills and leaks from underground storage
tanks containing gasoline or diesel fuel.
Which environmental regulations affect farm supply stores directly depends upon
whether the stores handle pesticides and/or sell gasoline or diesel fuel. Farm supply
stores that handle pesticides will be affected by new pesticide regulations concerning
farmworkers and groundwater. For those farm supply stores that also provide
petroleum products, the underground storage tank technical standards and financial
responsibility requirements will apply. Farm supply stores will also be affected by
reporting requirements for toxic chemicals and by restrictions on the land disposal of
hazardous wastes.
A farm supply store with fewer than ten employees, that does not handle
pesticides and does not sell petroleum fuels, would have no costs associated with the
major regulations. A farm supply store that handles pesticides would face increased
annual costs of approximately $2,100 and would have first-year costs associated with
the farmworkers regulation of approximately $9,000. These annual costs amount to
approximately 5% of annual net profits. The first-year costs amount to about 2% of
the average store's equity. These figures suggest that farm supply stores that do
not sell petroleum should be able to meet environmental requirements without
difficulty.
A farm supply store that sells petroleum fuels would have increased annual
costs of approximately $4,765, plus capital costs and additional first-year costs of
approximately $11,900. These annual costs amount to about 11% of annual net
profits. The capital and first-year costs amount to approximately 3% of equity.
Again, these figures suggest that farm supply stores should be able to meet
environmental requirements without difficulty. Farm supply stores that store
petroleum or chemicals in underground storage tanks, may find that their tanks are
leaking, however. In this event, they would face corrective action costs. If
groundwater contamination or other serious damage must be repaired, these
corrective action costs could exceed $100,000, and thus could exceed the equity of
the smallest farm supply stores that are in less than average financial condition.
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Interstate Trucking
Environmental concerns associated with the trucking industry include potential
spills and leaks from underground storage tanks (USTs) containing diesel fuel or used
oil. If a trucking operation performs its own maintenance, then it uses solvents for
degreasing parts. Waste disposal problems would involve used oil and spent cleaning
solvents. The used oil might be put into USTs or into drums. The washing of
trucks is done with chemicals and steam cleaning, creating wastewater runoff. For a
tank truck, the "heel," or what is left in the tank after draining the previous haul,
must be steamcleaned out and perhaps handled as a hazardous waste. Small trucking
companies usually have these cleaning functions performed by outside services.
The principal environmental regulations that will affect the interstate trucking
industry during the period 1988-1992 are those intended to secure the underground
storage of fuel and correct any damage caused by leaks. These regulations will apply
only to those firms that store petroleum fuels on their premises or store waste oils
in USTs. These are generally only the larger trucking companies. The other
environmental regulations that will affect the interstate trucking industry will do so
indirectly, increasing the price of trucks, fuel, or waste disposal.
Because the most costly regulations will affect only the larger firms, interstate
trucking companies should be able to manage the costs of the environmental
regulations included in this study. The costs of approximately $3,200 per year for
UST and waste-oil regulations represent about 7% of the annual profits of the
smallest companies likely to be affected by the regulations. The required investment
of $3,000 to upgrade each UST represents about 2% of their net worth.
Trucking companies that find that their USTs have been leaking will face much
higher costs, however, possibly exceeding $100,000. EPA's experience to date
indicates that 15 percent to 20 percent of the USTs may be leaking. Some of these
firms with leaking USTs may be unable to afford the required corrective actions.
Gasoline Service Stations
Environmental concerns at gasoline service stations include potential spills and
leaks from USTs containing gasoline, diesel fuel, and/or used oil, and vapor emissions
from the handling of gasoline. Waste disposal problems at retail gasoline outlets
involve used oil and spent cleaning solvents.
The principal environmental regulations that will affect gasoline service stations
between 1988 and 1992 are the technical standards for USTs, and the financial
responsibility requirements for the owners and operators of USTs. In addition,
gasoline service stations in certain areas that are not attaining air quality standards
(e.g., St. Louis) will be required to install air emission controls on the nozzles of
their gasoline pump hoses. Other EPA regulations that may affect retail gasoline
outlets include regulations pertaining to generators of small quantities of hazardous
waste.
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The major impact of the environmental regulations upon gasoline service
stations will depend mostly upon the status of the stations' USTs. The cleanup of
even small releases could place the average station in a poor or distressed financial
condition. The cleanup of large plume releases could result in the average station's
failure. Fortunately, not all firms will incur corrective actions, and some states may
use state funds to aid small firms in meeting the costs of corrective action. The
capital investments required by the environmental regulations can be sustained by
most small firms if they are allowed several years to make the expenditures. If,
however, all capital expenditures under all regulations must be met in a two- to
three-year period, only the strongest firms are likely to survive.
Dry Cleaning
Most of the environmental problems in the dry cleaning industry are related to
dry cleaning solvents. Over the years there has been a pronounced trend away from
the use of petroleum-based solvents and toward the use of perchloroethylene (perc).
Over 84% of all dry cleaning facilities use perchloroethylene. Most of the remaining
facilities use a petroleum-based solvent, and a small percentage use either
fluorocarbon or trichloromethane. Environmental problems are created by the
evaporation of these solvents and by the presence of these solvents in wastewaters
and solid wastes. Spent solvents and wastes contaminated by solvents are considered
hazardous. Dry cleaners that use petroleum-based solvents generally store these
solvents in underground storage tanks, with the consequent environmental risks
associated with spills and leaks.
The principal environmental regulations that will affect dry cleaners during the
1988-1992 period will be those that control the evaporation of perchloroethylene from
perc dry cleaning machines, restrict the handling and disposal of hazardous wastes,
and require the reporting of toxic chemicals stored on premises. Dry cleaners that
use petroleum solvents will not be subject to the perchloroethylene air emission
standards,* but may be subject to EPA's requirements for underground storage tanks.
Dry cleaners also will be affected indirectly by a series of EPA regulations that will
impose stricter standards on waste disposal in general, and hazardous waste disposal
in particular.
The most expensive regulations will apply to selected dry cleaners -- namely,
perc dry cleaners that have no emission controls (about 50%) and petroleum dry
cleaners with regulated underground storage tanks. Unfortunately, the status of
these two important regulations is still uncertain.
Businesses in the dry cleaning industry are among the smallest of the small.
Most dry cleaners have fewer than five employees, and average sales per employee
that are less than half the national average. The median dry cleaner with 1-9
employees in 1983 had profits of less than $10,000 and equity of less than $40,000.
While their rate of return on equity was high, the profit available to absorb
additional costs is low. Dry cleaners at the lowest quartile of profitability in this
size category in 1983 had net profits of only $5,000 and equity of only $8,000.
* Air emission standards for petroleum solvents may be established during the
1988-92 period, but for now EPA has deferred making this decision.
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Should perc emission controls be required of the smallest dry cleaners, current
estimates show they may have to invest $6,000 or more for the perc controls plus an
additional $4,300 for SARA and RCRA and will face additional annual costs of up to
$2,800 to meet all of the regulatory requirements. These costs amount to about 35%
of the median annual net profits and about 33% of the median equity of dry cleaners
with 1-9 employees. Dry cleaners at the lower quartile level of this smallest size
category will have to spend about 60% of their annual net profits and over 150% of
their equity. These figures suggest that some of the smallest dry cleaners may have
difficulty installing perc emission controls in addition to meeting the other
environmental requirements. The perc regulation is still under formulation with many
options under study, however, so that actual costs for perc emission controls may be
much different than preliminary estimates.
Dry cleaners with regulated underground storage tanks will have to invest
approximately $7,300 to upgrade their tanks* and meet the additional first-year costs
and will face additional annual costs of approximately $3,700. These costs amount to
about 40% and 19%, respectively, of the median annual net profits and equity of dry
cleaners in the smallest size category. Dry cleaners at the lower quartile level of
this size category will have to spend about 80% of their annual net profits and about
100% of their equity. These figures suggest that many of the smallest dry cleaners
will have difficulty meeting UST standards. If their underground storage tanks are
found to be leaking, these dry cleaners will face much larger costs to complete the
required corrective actions. These costs could average over $50,000 and at times
could exceed $100,000. Such costs would exceed the equity of the average dry
cleaner even in the 10-19 employee size category. Many small dry cleaners will not
have the resources to pay for such large corrective action costs.
Photofinishing Laboratories
There are five major chemical processing steps that are generally used in
processing color film or paper: developing, stopping development, bleaching, fixing,
and stabilizing. The developing solutions contain silver, a hazardous but also a
valuable material. Some of the other solutions used in photofinishing processes, such
as ferrocyanide bleach, are also hazardous. The silver and hazardous solutions are
potential sources of environmental problems, if they are allowed to contaminate
wastewaters or other wastes.
Because silver is a valuable metal, photofinishers recycle and reclaim the silver
so that they generate little or no silver-containing wastes. Small photofinishers also
avoid generating hazardous wastes by using nonhazardous bleaching solutions, such as
iron EDTA. Finally, photofinishers that process 1,600 square feet of film or less
each day are exempt from EPA's effluent limitations for wastewaters. Consequently,
most small photofinishers have no substantial environmental problems and will not be
affected directly by any of the environmental regulations covered in this study.
These costs assume that USTs containing petroleum solvents are regulated as
petroleum USTs. If they are regulated, instead, as chemical USTs, dry cleaners'
upgrade costs will be greater.
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Water Supply
The water supply industry consists of both publicly owned and privately owned
water supplies. Publicly owned water supplies are predominantly owned by local
municipal governments, although a sizable number are owned by the federal
government. Privately owned systems that serve large populations are usually
investor-owned entities. Privately owned systems that serve smaller populations tend
to be owned by real estate developers, homeowners associations, or mobile home
parks.
Unlike most industries that EPA regulates, water supply companies do not
discharge pollutants or produce hazardous substances. Instead, water supply
companies produce a product, drinking water, that is itself considered to be an
element of the environment. Consequently, EPA's regulations for water supply
companies are similar to product specifications. Instead of establishing standards for
the maximum discharge of pollutants, most drinking water regulations establish
standards for the maximum level of contaminants permitted in the water that these
systems supply to their customers.
Water supply systems are regulated under the 1974 Safe Drinking Water Act
(SDWA) and the 1986 Amendments to the Act. Under the 1986 Amendments, EPA is
required to promulgate National Primary Drinking Water Regulations (NPDWRs) for 83
specific contaminants. The SDWA requires that regulations for these 83
contaminants, as well as other regulations discussed below, must be adopted on a
very stringent schedule -- by June 19, 1989. In addition to the tight EPA regulatory
schedule, NPDWRs must officially take effect at the state level within 18 months of
promulgation, assuming the state fulfills primacy requirements.
Three other provisions of the SDWA are likely to have significant impacts on
the drinking water industry. EPA is required to specify conditions under which
public water systems served by surface water sources are required to install filtration
as a treatment technique. EPA is also required to promulgate NPDWRs for
disinfection as a treatment technique for all public water systems. Further, the
SDWA mandates EPA to publish regulations that require public water systems to
monitor for a number of "unregulated" contaminants at least once every five years.
To help small systems comply with the disinfection requirement and the "unregulated"
contaminants monitoring requirement, the SDWA authorizes funds for EPA and the
states to provide assistance to small systems. These funds have not been
appropriated.
Although the environmental requirements for water supply systems will be
expensive, compliance costs ultimately will be reflected in increased rates and borne
by customers. Due to often inadequate rate bases, small systems ~ particularly
those that serve fewer than 2,500 people -- and their customers face the greatest
difficulty in financing the necessary compliance activities.
Water supply systems will have to monitor their water for a greater number of
contaminants than is currently required and install appropriate treatment equipment
if contaminants exist at unsafe levels. Some small systems will most likely have a
significant number of violations until adequate treatment is in place; therefore, public
notification of violations will be an additional expense.
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Recognizing that small systems may be limited in their ability to comply with
the new regulations, EPA is attempting to minimize the economic impact on small
systems where possible without reducing the protection of public health. The SDWA
provides an exemption procedure that allows water supply companies additional time
to meet the new standards, provided that the water being delivered in the interim
does not present an unreasonable risk to health. It is expected that exemption
procedures will be used primarily to assist small supplies in achieving compliance.
Water supply systems serving less than 500 service connections, or approximately
1,500 people, are eligible for extendible two-year exemptions. These extendible
exemptions may be granted based upon the need for "financial assistance for the
necessary improvements," unless there is an unreasonable risk to health.
CONCLUSION
Although the list of EPA's 85 regulations appears to be foreboding, a closer
examination reveals that seventy percent of the 3.5 million small businesses in the
United States are in sectors of the economy that produce little or no pollution--
wholesale and retail trade, finance, and services. Most of these businesses will not
be affected directly by any of the 85 regulations. Small businesses that contribute
to environmental problems will incur additional costs to comply with the regulations,
however, and in some industries the costs may be high.
This study examined the effects of environmental regulations on small businesses
in nine industries judged likely to experience high compliance costs. The study
found that costs may be high for small businesses in three of the industries--
electroplating, wood preserving, and pesticide formulating and packaging. If costs
prove to be as high as estimated and cannot be passed on to consumers, some small
businesses in these industries may be forced to discontinue part of their operations
or to close. Some small dry cleaners that have underground storage tanks or require
substantial perchloroethylene emissions controls may also have difficulty meeting
environmental requirements. In addition, certain gas stations, trucking firms, and
farm supply stores with leaking underground storage tanks may face corrective action
costs beyond their financial means. Small private water supply companies are in a
unique position, in that they operate as utilities and generally can pass costs on to
their customers. While these firms would not be expected to go out of business,
high environmental costs for water supply companies that fail to meet new drinking
water standards may necessitate large increases in household usage fees.
Environmental costs for one of the industries studied -- photofinishing laboratories-
- were found to be negligible.
While some small businesses will incur additional costs because of environmental
regulations, those small businesses that help to solve environmental problems will.
experience an increased demand for their services. Small businesses that provide
analytical, engineering, or construction services, for example, might be included in
this category. The potentially stimulating effects of environmental regulations have
not been included in this study.
The regulations that appear to be most often responsible for high costs in the
industries studied are those covering the handling and reporting of toxic chemicals;
the handling, treatment, and disposal of hazardous wastes; and the operation of
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underground storage tanks. Although costs estimates are available for only some of
these regulations, those that are available indicate that the regulations will affect a
large number of firms in many industries and may entail costs in the $5,000 to
$10,000 range. Although these costs may be managed easily by small businesses of
moderate size, they present difficulties for the smallest of the small businesses. It
is these very small businesses that comprise the majority of U.S. businesses.
This relationship between environmental damage and pollution control
expenditures is an important element that must be included in this discussion.
Environmental regulations are created to reduce the risk to human health, welfare,
and the environment from pollution and hazardous substances. Any discussion of the
adverse impacts of these regulations must be balanced by a discussion of the benefits
that are generated by these same regulations. Cleaning up sites contaminated by
hazardous waste disposal or leaking underground storage tanks reduces the exposure
of individuals to carcinogens, reclaims and prevents further contamination of drinking
water supplies, and restores property values. Controlling the emissions of
perchloroethylene from dry cleaning machines reduces both ambient and occupational
exposure to a carcinogen. All of the industries studied that will experience
significant adverse impacts because of environmental regulations are industries that
produce substantial environmental risk. To the extent permitted by law, the
regulatory process at EPA includes balancing the costs and impacts of environmental
regulations with the benefits produced by reducing these environmental risks.
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Chapter 4
AGRICULTURE
Environmental regulations affect U.S. farms in many ways. Traditionally, the
most important of these regulations have been those that restrict, and in some cases
prohibit, the use of certain pesticides. Pesticides will continue to be the subject of
the most important environmental regulations for agriculture, not only of the
traditional registration and use regulations, but also of new regulations requiring
health and safety precautions for farmworkers using pesticides, controls on the use
of pesticides in areas with vulnerable groundwater or near targeted estuaries, and
restrictions on the use of pesticides that threaten endangered species. In addition,
other proposed and forthcoming environmental programs affect agriculture. These
include the banning of lead in the gasoline used in farm vehicles, the control of
stormwater and other runoff from agricultural lands, restrictions on agricultural
burning, standards for the operation and repair of underground storage tanks
containing petroleum and chemicals, and the reporting of toxic chemical use.
This study examined the cumulative impact of recent and proposed future EPA
actions on the financial condition of farms in the United States. The actions
included in the analysis are those that have been promulgated since 1982 or are
anticipated to take place by 1992, and have a direct impact on agriculture. The
primary goal of the study is not to determine the aggregate total cost of EPA
actions on agriculture, but to examine the impact of these actions on the
profitability and survivability of U.S. farms. Because of the complexity of the
agricultural sector and the many uncertainties that still accompany the new
environmental programs, . this ' study has had to limit its focus to a few
"representative" farm types and has had to make many assumptions about future
environmental requirements and other factors that will affect farms, such as farm
support programs under the Food Security Act. Accordingly, the study cannot be
considered to cover all potential agricultural impacts or to present the final word on
future environmental programs. It does, however, describe the kinds of effects that
may occur and estimates the range of potential impacts upon a group of farms that
are likely to experience relatively large environmental costs. The study does not
address the yield and quality increases associated with environmental quality
improvements.
The Agriculture Sjectpr Studv: Impacts of Environmental Regulations on
Agriculture: prepared for the U.S. Environmental Protection Agency, Office of Policy,
Planning and Evaluation by Terry Dinan of EPA, and Craig Simons and Roger Lloyd
of Development Planning and Research Associates, Inc.; September 1988.
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AGRICULTURE AND ENVIRONMENTAL REGULATIONS
There are a number of environmental and health hazards that may be associated
with agricultural production. These include:
1. Surface Water Pollution
Water running off farmlands may carry soil particles,
fertilizers, pesticides, and animal wastes into the
surface waters.
2. Groundwater Pollution
Pesticides and sewage sludge applied to fields and
crops, as well as petroleum and chemicals from
leaking underground storage tanks, may seep into the
groundwater.
3. Air Pollution
Air pollution problems may result from agricultural
burning practices and from the use of leaded gasoline-
powered trucks, tractors, and combines. In addition,
increases in tropospheric ozone can decrease crop
yields.
4. Worker Exposure
Farmworkers who handle pesticides may be exposed to
the harmful effects of these chemicals.
5. Endangered Species
Endangered species may be exposed to the harmful
effects of pesticides applied to fields and crops in
their habitat. Another threat is a reduction in their
habitat caused by agricultural expansion.
6. Dietary Risk
Pesticide residues may remain on agricultural products
that reach the consumer.
Pesticides play a role in most of these hazard pathways and are a critical focus
of the environmental regulations that affect agriculture. Every pesticide must be
registered with EPA's Office of Pesticide Programs (OPP). OPP reviews the health,
safety, and environmental effects of these pesticides and, from time to time, issues
regulations that restrict or prohibit the use of certain pesticides that are judged to
present an unreasonable adverse effect. As mentioned above, EPA also issues
regulations controlling the runoff of waters from agricultural lands, the operation
and repair of underground storage tanks, and many other agricultural activities that
may present environmental hazards.
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These regulations affect both large and small farms in the United States.
Restrictions on the use of certain pesticides may require the substitution of more
expensive pesticides and/or may reduce crop yields. Other environmental regulations
may impose extra operating costs or may require additional investments in land
preparation or farm equipment.
The ability of farms to comply with these environmental regulations will depend
not only on the costs of each regulation and the effects of the required activities on
agricultural yields, but also on the financial condition of each farm, the market
conditions at the time the regulations become effective, and the number of farms
that are covered. While some environmental regulations apply to all farms, most
apply to only a portion of all farms, such as those that use a certain pesticide or
have underground storage tanks.
Although the average net farm income in 1984 was identical to that in 1971 —
$12,000 in constant 1986 dollars -- the financial condition of U.S. farms has
fluctuated dramatically over the past two decades. Higher prices, expanding exports,
and low real interest rates combined in the early 1970s to produce not only record
farm incomes ($25,300 average in 1973), but also a rapid expansion in agricultural
production. Unfortunately, these trends all reversed in the early 1980s. Prices
declined, exports decreased, and real interest rates rose at an unprecedented rate.
Average net farm income fell to a low of $10,200 in 1981 and did not surpass the
$12,000 level until 1985. Declining incomes led to declining farmland values and
increasing debt-asset ratios. Recently, this trend has begun to change. Decreased
production expenses, increased government payments, and lower interest rates have
allowed net incomes to rise to an average of $14,000 and have slowed the decline in
farmland values. The average debt-asset level in 1987 is expected to show a decline
from 1986.
Trends for the average farm may belie significant differences within farm size
categories and types. During the 1982-1985 period, farms producing vegetables,
melons, and other specialty crops enjoyed average incomes of $60,000 per year.
These farms, however, account for only a small portion of all farms. Farms
producing cash grain, tobacco, cattle-sheep-and-hogs, general livestock, and animal
specialties all had average incomes of less than $10,000 per year. These farms
account for 70% of all farms and nearly 50% of farm marketings.
The financial condition of a farm, and hence its ability to comply with
environmental regulations, may vary dramatically, even within size categories and
types of farms. For example, a study of the financial characteristics of U.S. farms
in 1985-1986 showed 55% of all commercial farms were in a favorable financial
situation, while 39% were in a marginal situation, and 3% were financially vulnerable.
STUDY METHODOLOGY AND LIMITATIONS
Study Methodology
This study consists of an in-depth examination of the cumulative impact of
environmental regulations on selected livestock, major field crop, and specialty crop
producers. The approach of examining only a limited set of producers was chosen
because the primary goal of determining the cumulative impact of EPA actions on the
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financial condition of producers requires an extensive amount of data collection and
analysis. The approach followed in this study is summarized as follows:
1. Select a subset of livestock, major field crop, and specialty crop
production to study.
2. Define alternative scenarios of EPA policies.
3. Estimate price changes resulting from EPA actions (under each
scenario) for each of the selected crops and livestock.
4. Examine the change in the financial condition of "representative"
producers of each of the selected crops and livestock under each
scenario.
Crop and Livestock Selection
A crucial step was determining which farms to study. An effort was made to
include those farms that were likely to experience relatively large impacts under the
alternative EPA policy scenarios considered. The cases examined, therefore, provide
a variety of impact levels, but include worst-case examples. For livestock and major
field crops, three specific farm types were examined:
* an Illinois corn soybean farm,
* a Mississippi cotton soybean farm, and
* a Kansas cattle wheat farm.
Through discussions with staff at EPA's Office of Pesticide Programs, the
following set of specialty crops was selected:
* apples,
* tomatoes,
* potatoes.
* peas,
* caneberries (e.g., raspberries, blackberries, etc.),
* peanuts.
* peanuts,
There proved to be insufficient information to complete the analysis for caneberries
and peanuts, however, so that results are available only for apples, tomatoes, peas,
and potatoes. The difficulty in obtaining information about producers of specialty
crops was itself a significant finding of the study.
Definition of Policy Scenarios
Because it is difficult to predict future EPA decisions for many regulations, the
study examined three alternative scenarios corresponding to a range of potential
policies. The scenarios can be summarized as follows:
SCENARIO 1: Past and current EPA actions,
(conservative) plus a conservative (low-cost)
set of assumptions about
future actions.
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SCENARIO 2: Past and current EPA actions,
(intermediate) plus an intermediate (mid-
cost) set of assumptions
about future actions.
SCENARIO 3: Past and current EPA actions,
(expansive) plus an expansive (high-cost)
set of assumptions about
future actions.
Actions that EPA has taken in the past five years or plans to take in the very
near future were included in all three scenarios. These include the cancellation of
toxaphene, dinoseb, and chlorodimeform used for yield enhancement; restrictions on
the use of alachlor; farmworker protection standards; regulations under Title III of
the Superfund Amendments and Reauthorization Act; and leaking underground storage
tank regulations. In addition, the three scenarios include alternative assumptions
about EPA actions in the following areas: fungicides, corn rootworm insecticides,
broad spectrum organophosphates, grain fumigants, pesticides in groundwater strategy,
and lead in gasoline restrictions. In general, the higher-cost scenarios include more
pesticide restrictions and cancellations than the lower-cost scenarios. Scenario 3
includes the elimination of lead from gasoline for agricultural use, while scenarios 1
and 2 do not.
Because several of the environmental regulations studied will not affect all of
the farms in any category equally, the study examined two variations for each
scenario:
* Average Impact Case: This case assumes that the
producer experiences the average impact of producers of
that type - e.g., if 10 percent of Illinois corn producers
would experience a cost of $1,000, the average affected
producer would experience a $100 cost ($1,000 x 0.1).
* Maximum Impact Case: This case assumes that the
producer must meet all of the requirements of every
regulation that may possibly affect producers of that type.
Estimation of Price Changes
The next step in the analysis was to translate the effects of the regulatory
scenarios on crop production costs and yields into commodity price changes. In
general, when production costs increase due to the costs of meeting environmental
regulations and yields decline due to restrictions on pesticide use, commodity prices
will rise. Failure to account for these price increases would result in overestimating
the impacts of EPA actions on producers that are directly affected by those actions
and would overlook the potential gain to those producers who are not directly
affected by the regulations.
To predict the price changes on livestock and major field crop producers, the
study used a regional econometric-simulation model, AGSIM. A much more limited
price-quantity model was used to predict price changes for specialty crops. The
specialty crop model does not account for variations in impacts among different
regions or for the impact that EPA actions might have on substitute crops.
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Impacts on Producers' Financial Conditions
Because the information available on producers of major field crops and
livestock was more extensive than that available for producers of specialty crops, the
study used different methodologies to estimate the impacts of environmental
regulations on producers' financial conditions. The study of the impacts on specialty
crop producers was necessarily much more limited than that for the major field crop
and livestock producers.
To examine the impact of EPA policies on producers of major field crops and
livestock, the study used a whole farm financial simulation model of representative
producers, REPFARM, developed for each of the selected producers by the U.S.
Department of Agriculture. Producers' financial conditions were simulated for the
1987-1996 period under a base case (assuming no EPA actions over the next ten
years) and under each of the policy scenarios and impact cases described above.
(Note that although EPA actions occurring over the period 1982-1992 were included
in this study, the forecast period of 1987-1996 was chosen to illustrate both the
effect that past actions have on producers' income and how the effect of actions
that are taken change over time.) For each type of producer, the study simulated
the impacts on farms in two different financial situations: (1) farms in the average
financial condition of all farms of the type/region considered --e.g., the average of
all Illinois corn soybean farms, and (2) farms in the average financial condition of all
"vulnerable" farms of the type/region considered. Vulnerable farms were defined as
farms with a debt to asset ratio of greater than 0.4 and a negative net cash income.
The impact of EPA policies on these producers' income and their ability to survive
was determined by examining changes in net cash farm income* and debt to asset
ratios. It was assumed that a producer would go out of business whenever its debt
to asset ratio reached one — i.e., its level of debt became equal to its assets.
The impact of EPA actions on specialty crop producers was estimated by
examining the change in net returns per acre for producers in different production
regions. Net returns per acre, as used in this study, are equal to farm income minus
all farm expenses on a per acre basis, with the exception of land and non-hired
labor. Net returns per acre, therefore, is a measure of the returns to land and
farmer-supplied labor. Budget information was collected for each of the selected
specialty crop producers in several different production regions to establish a
baseline level of net returns. The specialty crop budgets for each region were then
projected over the 1987-1996 period, using the average and maximum impacts for
each region under each policy scenario, along with the scenario-specific prices
(determined by the national price-quantity model).
Study Limitations
As explained above, the complexity of the agricultural sector, the uncertainty
associated with many environmental regulations, and the lack of information on the
financial conditions of producers of some crops resulted in the study's being limited
to representative farm types and having to rely on many simplifying assumptions.
Each of the study's major limitations is discussed in more detail below.
Net cash farm income is defined as cash farm income minus cash farm expenses.
It does not include depreciation of machinery or off-farm income.
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Examination of a Limited Number of Commodities
Producers of crops not considered in this report will experience levels of
impacts that are different from those reported. An effort was made, however, to
include in this study farms that are expected to experience relatively large impacts.
Limited Information About Producers* Financial Conditions
The initial financial condition of a farm is a crucial factor in determining the
effect that EPA actions will have on the farm's financial health. For livestock and
major field crop producers, the study examined two alternative financial positions.
Only limited information was available, however, on the financial conditions of
specialty crop producers. This made it difficult to determine whether the EPA
actions assumed in the alternative scenarios would actually cause any specialty crop
producers to go out of business.
Uncertainty About Environmental Regulations
As discussed previously, this study does not presume to accurately predict
future EPA actions. Rather, it attempts to define a range of impacts that
correspond to plausible alternative policy scenarios. In addition, this study does not
account for possible indirect impacts on agricultural producers (through regulation of
agricultural input industries), nor does it account for actions taken at the state
level.
Uncertainty About the Incidence and Magnitude of Impacts
Predicting which producers will be required to comply with which environmental
regulations requires an extensive amount of information. For example, if a particular
pesticide is to be canceled, detailed usage data are required to predict which
producers will be affected. Pesticide usage data based on statistically valid samples
for major field crops are available at state and multi-state production region levels.
However, data that are not based on statistically valid samples had to be used for
the county-level usage estimates necessary to model the effects of pesticides in
groundwater.
Predicting the incidence of EPA actions on specialty crops was especially
difficult, because there is less information about pesticide usage on these crops than
for major field crops. Much of the specialty crop data used in this analysis were
derived from private agencies that do not provide information on the sampling
techniques used. This lack of reliable information most be kept in mind when
viewing the results for specialty crops.
In addition to knowing what types of producers are likely to be affected by
each EPA action, it is important to determine the extent of the impact. For a
pesticide cancellation, this requires knowing what alternative will be used in place of
the cancelled pesticide and what cost and/or yield variations the user will experience
with this alternative. These efficacy data are not always readily available. This
increases the uncertainty associated with predicting the yield effects of EPA actions.
Furthermore, there was not sufficient information to fully account for changes in
quality (e.g.,'size, shape) brought about by restrictions in pesticides.
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Finally, impacts of pesticide cancellations are projected to dissipate evenly over
a seven-year period, as users adjust their practices and as new pest control products
become available. The use of an arbitrary assumption of this type was necessitated
by the lack of a reliable method for predicting the development of substitute pest
control products and the adjustment of agricultural practices over time. Clearly, this
assumption may overestimate the adjustment process for some cancellations and
underestimate it for others. Some commodities, such as apples and oranges, are less
able to adjust to pesticide cancellations through the use of more pest resistant
species due to the long term structural adjustment problems associated with tree
removal and replacement.
Model Assumptions
In addition to assumptions about the incidence and magnitude of impacts, the
models themselves use assumptions that affect the results. For example, the
assumptions about how producers respond to changes in production costs and how
consumers respond to changes in food prices are crucial in determining the extent to
which EPA impacts are passed on to consumers in the form of higher prices. For
livestock and major field crops, numerous assumptions about future prices,
government policies, interest rates, and cost and yield trends affect the baseline
projections of net cash farm income and debt to asset ratios obtained from the
REPFARM models. If these assumptions result in an overestimate of the financial
strength of the representative farms in the baseline, then we will overestimate the
ability of producers to survive in the face of EPA actions. Likewise, if these
assumptions result in an underestimate of the financial strength of the farms, then
we will underestimate the ability of producers to bear the costs of EPA actions.
IMPACTS ON LIVESTOCK AND MAJOR FIELD CROPS
This study examined the impact of EPA actions on an Illinois corn soybean
farm, a Mississippi cotton soybean farm, and a Kansas wheat cattle farm. The
modeling of three regulatory scenarios, two regulatory impact cases, and two
financial conditions for each of these representative farms resulted in 18 sets of
output for each farm type. This summary presents the results first for farms in
average financial condition experiencing average environmental impacts, then for
farms experiencing maximum environmental impacts, and finally for farms in a
vulnerable financial condition experiencing average environmental impacts. Only the
results of Scenarios 1 and 3 (the conservative and expansive regulatory scenarios)
are presented, illustrating a range of financial effects predicted based on the full
range of policy scenarios considered in this study.
i
Farms in Average Financial Condition
Tables 4-1 and 4-2 present the results of the modeling effort for farms in an
average financial condition and expected to experience the average environmental
costs and yield reductions for their farm type. Table 4-1 presents the estimated
changes in net cash farm income (NCFI) and Table 4-2 presents the estimated
percentage changes in debt to asset ratios (D/A) for farms.
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As can be seen from these tables, the estimated impacts of environmental
regulations vary depending on the type of farm, but in general are small for the
average impact cases. Under Scenario 1, the average impacted farms experience
mean annual decreases in net cash farm income (NCFI) ranging from less than 1% for
the Illinois corn soybean farm to 3% for the Mississippi cotton soybean farm and
Kansas wheat cattle farm.
A reduction in farm income due to EPA policies may result in increases in
farmers' debt to asset ratios in two ways: (1) it decreases the return to land and,
therefore, the value of land (which is the primary component of farm assets), and (2)
it may cause farmers to borrow funds if they are put into a position of negative
cash flow. As shown in Table 4-2, none of the changes in income brought about by
EPA actions under the average impact case are large enough to result in significant
changes in the representative farms1 debt to asset ratios. In all of the average
impact cases, the change in the debt to asset ratio is less than l%.
Under Scenario 3 (the expansive regulatory scenario) for the average impact
case, the cash income of the Mississippi cotton soybean farm decreases less than
under Scenario 1, and for the Illinois corn soybean farm and the Kansas wheat cattle
farm, the net cash farm incomes actually increase. This occurs because the larger
cost and yield changes incurred by the affected farms result in reduced production
levels overall and lead to higher prices. These higher prices more than offset the
average cost and yield impacts experienced by farms. Higher prices come about,
however, due to decreases in the production of the commodities of interest.
Although the average impact cases result in minor losses or even increases in
NCFI, farms that experience the maximum environmental costs and yield reductions
would be adversely affected. In the maximum impact cases, the study assumed that
the farms would experience the cost increases and yield decreases associated with
each environmental regulation that could possibly affect producers of their type.
The maximum impact cases include, for example, costs for the underground storage
tank regulations. The potential costs associated with this regulation are substantial,
yet only a small percentage of farmers are affected.* The maximum impact cases
also include the yield decreases associated with pesticide cancellations, such as
dinoseb and toxaphene for Mississippi cotton soybean farms. While few farms will
experience the impacts of all regulations, the study examined these cases to put an
upper bound on environmental costs and impacts.
Under the maximum impact case of Scenario 1, farms in average financial
condition experience mean annual decreases in net cash farm income ranging from 8%
for the Illinois corn soybean farm to 18% for the Mississippi cotton soybean farm to
24% for the Kansas wheat cattle farm. Under Scenario 3, these figures are even
larger: 26%, 24%, and 84% respectively. The average increases (1987-1996) in debt to
asset ratios are also several times larger in the maximum impact cases than in the
average impact cases. Under Scenario 3, the increases range from 2% for the Illinois
corn soybean farm to 6% for the Mississippi cotton soybean farm to 22% for the
* Farmers having a petroleum underground storage tank (>1,100 gallons) were
assumed to incur a $2,500/yr. insurance cost (1988-1996) and a $500 charge in 1991
and 1994 for a tank tightness test. No costs were included for remedial action, and
it was not assumed that any farmers would remove their USTs.
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Table 4-1
MAJOR FIELD CROP AND LIVESTOCK FARMS
AVERAGE CHANGE IN NET CASH FARM INCOME (NCFI) (1987-1996)
($1986)
Average Impact Case
Average NCFI
Estimated Change in NCFI
Tvoe of Farm
IL
MS
KS
Corn Soybean
Cotton Soybean
Wheat Cattle
w/o
$
$
$
Regulations
35,400
58,900
11,600
Scenario 1
$ -270
(-.7%)
$
$
-1,720
(-3%)
-380
(-3%)
Scenario 3
$ +4,800
(+14%)
$
$
-1,300
(-20/0)
+310
(+3%)
Table 4-2
MAJOR FIELD CROP AND LIVESTOCK FARMS
AVERAGE CHANGE IN DEBT/ASSETS (D/A) RATIOS (1987-1996)'
Average Impact Case
Type of Farm
Average D/A Ratios
w/o Regulations
Estimated Change in D/A
Scenario 1 Scenario 3
IL Corn Soybean
MS Cotton Soybean
KS Wheat Cattle
.26
.28
.26
.6%
.3%
.3%
.5%
.6%
* Note that increases in the debt to asset ratio appear as a positive percentage
change in this table, but represent a worsening of a farm's financial condition.
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Kansas wheat cattle farm. Even in the maximum impact cases, however, none of the
farms in average financial condition were predicted to go out of business under any
of the regulatory scenarios.
Sensitivity analysis reveals that assumptions about crop yields and future crop
prices have a large effect on these results. For example, upper and lower sensitivity
runs were made assuming that prices were 15% higher and lower respectively in the
years 1991-1996. The resultant NCFIs in the upper sensitivity runs were double
those in the lower sensitivity runs. This analysis illustrates the sensitivity of the
results of this study to critical assumptions, and helps to place the magnitude of the
predicted effects in perspective relative to the other factors that influence farms'
financial health.
Farms in Vulnerable Financial Condition
The initial financial condition of farms is an important factor in determining
the impact of EPA actions. Farms in vulnerable financial condition are characterized
by high debt to asset ratios and negative net cash income. Further losses caused by
EPA actions may force these farms to borrow additional money and, therefore,
worsen their debt to asset ratios. In addition, these losses lower the value of their
primary asset, their land. The REPFARM model assumes that farms go out of
business when the debt to asset ratios reach one.
The percentage of each of the three farm types that are classified as vulnerable
is indicated in Table 4-3. The Kansas wheat cattle farm in vulnerable financial
condition was predicted to go out of business in 1993 in the base run of the
REPFARM model, even without the added burden of environmental regulations. This
farm is predicted to go out of business one year earlier due to the income losses
caused by environmental regulations under the maximum impact case for Scenario 1.
Under all other sets of assumptions, the Kansas wheat cattle farm does not go out
of business any earlier due to environmental regulations. The vulnerable Illinois corn
soybean farm and the vulnerable Mississippi cotton soybean farm were not predicted
go out of business in the REPFARM runs under any of the scenarios with or without
environmental regulations.
Table 4-3
FARMS CLASSIFIED AS VULNERABLE
Total Number Percent
Farm Type of Farms Vulnerable
Illinois Corn Soybean 30,837 10%
Mississippi Cotton Soybean 1,798 14%
Kansas Wheat Cattle 19,966 7%
Although environmental regulations are not expected to generate larger income
losses for farms in vulnerable financial condition than for those who are in better
condition, vulnerable farms are more sensitive to income changes and are more likely
to feel the results of EPA actions on their financial standing. For example, under
the maximum impact case for Scenario 3, both the Illinois corn soybean farm in
average financial condition and that in vulnerable financial condition experience a
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decrease in NCFI of approximately $9,000. The 1987-1996 average debt to asset ratio
of the farm in average financial condition increases only 2% due to this loss,
however, while the debt to asset ratio of the vulnerable farm increases 24%.
IMPACTS ON SPECIALTY CROPS
The study included complete analyses of four specialty crops: apples, potatoes,
tomatoes, and green peas. Because less information was available for specialty crop
farms than for the major crop and livestock farms, the impacts were measured in
terms of the net returns per acre, rather than changes in net cash farm income or
debt to asset ratios. Net returns per acre measure the returns to both land and
farmer-provided labor. Furthermore, the analysis was not able to distinguish between
farms in average financial condition and farms in vulnerable financial condition. The
analysis was carried out for the same three regulatory scenarios used for the major
crop and livestock farms, and for both the average and maximum impact cases.
Because the economics of specialty crop farming vary by region, the analysis was
carried out for each of the major regions growing the specialty crops studied.
The original study plan included caneberries and peanuts. However, major data
problems prevented this part of the analysis. For caneberries, the primary limitation
was the lack of information regarding pesticide use and the efficacy of pesticide
alternatives. The analysis of peanuts was prevented by unreliable cost and yield
estimates associated with various environmental regulations and the lack of critical
crop production parameters (e.g., supply elasticities). Lack of accurate usage data,
efficacy data, and crop production parameters are problems that are commonly
encountered when trying to examine the effects of environmental regulations on
specialty crops.
Average Impact Cases
The results of the analysis for specialty crop farms experiencing average cost
and yield impacts are presented in Table 4-4. The changes in net returns per acre
under Scenario 1 are less than one percent for most regions and less than six
percent for all crops and all regions. The changes in net returns per acre under
Scenario 3 are much greater, particularly for apple farms in New York and Michigan.
Regional differences in impacts are apparent especially under Scenario 3.
Apple producers in all three study regions (Washington, New York, Michigan)
experience similar decreases in net returns per acre under Scenario 1 — from $2.40
to $3.58 per acre — but these decreases are higher on a percentage basis in
Michigan, because of the state's lower average returns per acre. The large impacts
under Scenario 3 and the substantial difference among regions is due to proposed
restrictions on the use of fungicides in 1990. These restrictions would substantially
affect New York and Michigan apple production (e.g., 17% and 12% yield reductions,
respectively, in the average impact case) but have no effect on production
Washington.* The slight rise in Washington producers' net returns is due to the
increase in price above the base year caused by the national decline in apple supply.
* The fungicide restrictions considered under Scenario 3 are the cancellation of
all EBDCs and chlorothalonil.
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Table 4-4
SPECIALTY CROP FARMS
AVERAGE CHANGE IN NET RETURNS PER ACRE (NR/A) (1997-1996
($1986)
Average Impact Case
Average NR/A* Estimated Chance in NR/A
Type of Farm/Region w/o Regulations Scenario 1 Scenario 3
Apples
WA $ 330 -0.7% + .2%
NY $ 220 -2% -60%
MI $ 80 -4% -84%
Tomatoes
CA $ 660 -0.2% -1%
FL $1,500 <0.1% -14%
Potatoes
WA/ID $ 600 <0.1% +3%
MN/ND $ 240 -0.8% -5%
ME $ 130 -0.8% -10%
WI $ 200 -0.6% <0.1%
WA $ 80 -4% -4%
* Net returns per acre without the added environmental regulations are based on
regional budget information and are assumed constant over the period 1987-1996.
Net returns per acre reflect returns to land and farmer-provided labor.
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These price increases offset any initial yield losses and production cost increases
that the Washington apple growers incur under the average impact case. The
decreases in net returns for Michigan and New York apple farms under Scenario 3
are dramatic (84% and 60%,respectively) and may bring about substantial structural
changes. The discussion of these possibilities is beyond the scope of this study,
however.
Decreases in net returns per acre are very small (.2% or less) for both Florida
and California tomato producers under Scenario 1. Losses increase substantially for
Florida producers under Scenario 3, because of estimated yield losses of 20% due to
fungicide restrictions. Because 98% of Florida tomato farms would be affected by
these restrictions, as opposed to only 25% of California tomato farms, the losses in
the average impact case are greater under this scenario in Florida than in California.
The impact estimates for tomatoes under Scenario 3 must be viewed with some
caution, however. Yield declines and cost increases were based on information
provided by pesticide registrants and have not been thoroughly reviewed by EPA.
The changes in net returns per acre for potato farms under Scenario 1 are less
than 1% for all regions. Under Scenario 3, however, the impacts are dominated by
the 1990 proposed restrictions on organophosphate use. These restrictions result in
8% reductions in yield on affected acreage, as well as increases in production costs.
The magnitude of the impacts in Scenario 3 are projected to result in potato price
increases. In Washington-Idaho this increase in price should offset the decline in
yield so that net returns actually increase. In the other regions, the net returns per
acre are estimated to decrease from 5% to 10%.
The impacts on green pea farms are relatively small under both regulatory
scenarios, with the farms in Washington experiencing about a 4% decrease in net
returns, as compared with a negligible change in Wisconsin.
Maximum Impact Cases
Under the maximum impact case, net returns per acre decrease substantially
more than under the average impact case for many crops and regions. There are no
dramatic shifts in relative impacts among crops, however, and the conclusions stated
above for the average impact case remain generally the same. As with the major
field crop and livestock farms, it is important to note that the maximum impact
cases represent very unlikely worst cases.
For apple farms, the maximum impact case approximately doubles the decrease
in net returns per acre under Scenario 1 for all regions. In Michigan, for example,
the decrease is approximately 7%, as compared with 4% in the average impact case.
Under Scenario 3, net returns decrease by approximately 74% in New York and over
182% in Michigan (losses of greater than 100% indicate that net returns are
negative). As mentioned above, these dramatic reductions in net returns per acre
could have a significant effect upon the industry.
The maximum impact case for tomato farms reduces the large differential
between impacts in California and Florida under the strictest regulatory assumptions.
Under Scenario 1, the estimated decreases in net returns per acre are greater in the
maximum impact case than in the average impact case, but remain under 1%. Under
Scenario 3, however, the estimated decrease for Florida remains at about the same
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level as under the average impact case (16% vs. 14%), but the impact for California
increases from about 1% to about 20%. As mentioned above, these impact estimates
for tomatoes under Scenario 3 were based on information that has not been
thoroughly reviewed by EPA, however, and must be regarded as tentative.
For potato farms, the largest percentage change in the maximum impact case
under Scenario 1 occurs in Maine, where net returns per acre decrease by nearly 8%,
as compared with a decrease of less than 1% in the average impact case. The
maximum impact estimates are considerably larger than the average impact estimates
because of such regulations as the EDB cancellation in 1984, the dinoseb cancellation
in 1987, and the groundwater regulations in 1990. While the combined cost and yield
effects of these regulations are significant, only a small percentage of producers are
likely to be affected by all of these regulations. Under Scenario 3, the estimated
decreases in net returns per acre range from 8% in Washington-Idaho to 20% and 22%
in Maine and Minnesota-North Dakota, respectively.
The maximum impact case for green pea farms results in no dramatic changes.
Estimated decreases in net returns per acre remain under 1% for Wisconsin farms and
increase from about 4% to about 6% for Washington farms under both Scenarios.
CONCLUSION
This study examined the impacts of recent and proposed environmental
regulations on three different types of livestock and major field crop farms in both
average and vulnerable financial situations under a variety of regulatory scenarios.
For the three types of farms studied, the financial model predicted no closings of
the representative farms in average financial condition under any of the regulatory
scenarios. The representative Kansas wheat cattle farm in vulnerable financial
condition was predicted to go out of business, even in the absence of environmental
regulations. The representative Illinois corn soybean farm and Mississippi cotton
soybean farm in vulnerable financial condition were not predicted to go out of
business, however, even under the most costly regulatory scenarios. Out of the six
representative farms examined, none of the regulatory scenarios led to the closing of
farms that would not have closed otherwise.
For two of the three types of major field crop and livestock farms studied, the
financial condition of the farms that experience the average cost and yield impacts
actually improved under the more stringent regulatory scenario. This occurs because
the larger cost and yield changes incurred by affected farmers reduce production
levels and raise commodity prices. These higher prices more than offset the cost
and yield impacts experienced by the average impacted farmer.
Farms that would have to bear the maximum environmental costs and yield
changes were found to experience reductions in net cash income many times that
experienced by the average farms. Although none of the regulatory scenarios was
found to result in the closings of even these maximally affected farms that were in
an average financial condition, their average debt to asset ratios were found to
deteriorate by up to 23%. Maximally affected farms were those that were assumed to
incur all of the cost and yield impacts that were possible for that type of farm. It
must be emphasized that the maximum impact scenarios included in this study
represent extremely unlikely worst-case events.
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Because of limited data availability, the study did not forecast changes in the
financial condition of the specialty crop farms. Instead, it examined changes in net
returns per acre (which reflect returns to land and farmer provided labor). Under
the least costly regulatory scenario, the changes were generally less than 1% for the
average farm and less than 8% for even the maximally affected farm. Under the
most costly regulatory scenario, however, losses of the average impacted producers
increased substantially, particularly for apple producers in New York and Michigan,
where predicted losses were 60% and 84%, respectively. These dramatic decreases in
net returns may bring about substantial structural changes in the production and
markets for the crops affected. Large differences in the impact of EPA regulations
on crops grown in different regions occurred because some of the proposed
restrictions involve pesticides that are used in some regions and not in others. Even
though the results of this study must be considered preliminary, these figures show
that EPA actions could create economic problems for some specialty crop farms and
suggest that the Agency exercise considerable caution in this area.
Limitations in the necessary data and models must be considered when viewing
the results presented in this study. These limitations are most severe for specialty
crops, where reliable pesticide usage data often do not exist, and few models are
available to predict commodity crop price impacts and farm-level financial effects.
Reliable pesticide usage data, efficacy data, national price-quantity models, and farm-
level models are important in order to mitigate the potential environmental and
health hazards associated with agriculture in a cost effective way. Such needs are
likely to become increasingly important in the future, as EPA tries to deal with
environmental concerns (such as pesticide damage to endangered species and pesticide
contamination of groundwater) that may necessitate very localized restrictions in
pesticide use.
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Chapter 5
POLICY CONSIDERATIONS
The three sector studies summarized in this report have taken a first look at
the potential effects of recent and forthcoming environmental regulations on
municipalities, small business, and agriculture. Although these studies must be
considered as preliminary efforts to shed some light on very complex questions, they
have proved useful in describing the kinds of effects that are possible and in
suggesting areas of potential policy initiatives and/or of further study.
In response to the findings of these sector studies, several areas for potential
policy initiatives have been suggested. While none has been endorsed by the Sector
Study Steering Committee, they are presented below to illustrate the kinds of
activities that might be considered and to promote further discussion.
MUNICIPALITIES
Two of the findings of the municipal sector study are that there will be
significant increases in household payments for improved environmental services as a
percentage of household income in the coming decade, and that many small and some
large communities may have difficulty raising the capital needed for investments in
new environmental infrastructure. The burden is most severe for small communities
because of their lower income levels and higher costs for environmental services.
The financial difficulties are partly due to the timing of the needs — a large new
set of investments in a fairly short time period — and partly due to constraints
placed on new revenue potential by existing demands on municipal services.
A number of activities have been implemented by EPA and other initiatives have
been suggested to support these small communities' compliance with environmental
regulations. These include establishing public dialogues on the issues, and extending
technical and financial assistance programs, as well as several others. The study
also points to several areas where information from additional research would help
identify which activities supported by EPA and states would be most effective in
assisting communities as they seek to comply with environmental requirements.
Public Education Initiatives
Public education has two purposes. First, making people aware of the potential
net benefits to be gained by investing in environmental protection should provide a
better forum for assessing the merits of the project. Second, where the
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environmental benefits are diffuse and it is difficult to assign benefits to specific
groups of payers (e.g., long-distance air pollution), moral suasion may improve
compliance as people become aware of the larger cooperative undertaking that is
being proposed. Public notification requirements, and efforts to better communicate
information on pollution risks, are but a few of the methods at the disposal of
federal, state and local governments to include the public in establishing
environmental programs and setting priorities.
Technical Assistance Initiatives
Operations Assistance
In many cases, small communities do not need full-time personnel in all
specialties or service areas. Provision (for a fee) of such services by a central
authority, either the federal government or state governments, could allow small
communities to gain from economies of scale and scope.
Such technical assistance programs could take the form of either guidance--
such as sharing scientific, technical, or management information -- or technical
services -- such as supplying laboratory or engineering services. In addition,
educational institutions (technical and academic) can continue to play an important
role in working with local communities in need of their particular levels of expertise.
Public Partnerships
Partnerships provide an informal mechanism for communities to share expertise,
to purchase services and goods in larger volumes for discounts, and, more formally,
to raise capital in larger more cost-effective blocks. Partnerships between unequal
entities could be encouraged by providing incentives to the larger (wealthier) partner.
Potential partners include large cities and small cities, well-to-do cities and poor
cities, and urban cities and rural cities.
Regionalization
Regionalization is a more structured form of partnership, in which two or more
communities create a joint venture for a particular purpose, such as construction of
a water supply system. This action allows a variety of efficiency gains, including
economies of scale and scope, and large-volume purchase discounts. The use of
regionalized services may be more suitable for some environmental services, but not
necessarily for all services. For example, in those instances where regionalization
may lead to a waste disposal service collecting and concentrating pollution risks, the
merits of this approach versus de-centralized treatment and disposal operations must
be examined.
Financial Initiatives
Reform of Existing Rate Structures
In cases where the basic management structure is in place, rate reform may be
necessary to insure the financial viability of the environmental service. Rate reform
may include raising the level of rates (increasing revenue) or changing the rate
structure (e.g., instituting marginal cost pricing, including peak load pricing when
5-2
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appropriate). Communities can examine current rate structures to insure that rates
are generating revenues equal to the full cost of services. Current provisions for
obtaining federal grants include this element, and efforts are underway to evaluate
whether communities have been establishing suitable rate structures.
Development Taxes
Special taxes may be levied in areas undergoing rapid growth and development.
These assessments could be earmarked for the improvement of environmental services
and could be levied on developers directly or on property owners who expect to
profit from development. Since environmental improvements often affect property
values, a similar approach might be used even in relatively low-growth areas. Many
specific versions of development taxes have been devised. A few of the more
common are:
ad valorem on property;
exactions from developers (in kind or cash); and
tax incremental financing (tax rates are not changed, but as
property values rise, property tax revenues above a baseline are
devoted to special uses, such as sewage system construction or
road building).
Special Revenue Districts
Certain geographic areas, within one political jurisdiction or including several
jurisdictions, are created for the purpose of raising revenue from residents in the
area to be used for specified purposes. Examples include road districts, sewer and
water districts, or other types of local service districts.
Enterprise Fund Management
Utilities or enterprise fund management systems are used to ensure that
revenues raised from certain groups of payers are used for the intended purpose and
are managed according to sound financial principles. Organizations of these types
can help to balance costs and revenues by improving financial management and,
therefore, can improve access to capital markets.
Direct Financial Assistance
Direct financial assistance may be appropriate for low-income communities
where it is agreed that the environmental protection services should be made
available to all citizens, regardless of ability to pay. It may be appropriate to
provide assistance only to those communities that fail an "income" or other "ability
to pay" test. Such assistance could be from the state governments, which would
need to consider adopting appropriate tests for directing financial assistance, and
utilizing them in a consistent manner across the agency. Direct financial assistance
could be in the form of either grants for communities that cannot afford the
services in the long run or loans for communities that are experiencing a short-term
cash-flow problem.
5-3
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Other Actions
Compliance Schedules
If certain environmental regulations do not seem reasonable for a specific group
of people, or if the timing of the compliance schedule is not reasonable, then a delay
of the regulation or a permanent exemption may be appropriate. Such actions should
only be allowed subject to certain constraints, such as that no "unreasonable risk to
health" would be created. In all instances, the ability to grant exemptions is
dictated by existing legislation. Several existing laws allow for exemptions, but the
rules are not consistent, and do not dictate what measures should be considered
when allowing for an exemption. The EPA does not have an internally consistent
method for determining when the costs of a requirement are unaffordable, either to
the household, or for purposes of evaluating impacts on municipal finances. Neither
does EPA have criteria for evaluating the cumulative economic impacts of its
programs. Efforts are underway within EPA to resolve existing inconsistencies, and
establish a protocol for granting exemptions where allowed for by law.
Privatization
Communities can explore methods of working with private companies to assist in
the provision of environmental services. Several aspects of privatization include:
- Private sector ownership, construction and/or operation of facilities
(reduce cost of services by taking advantage of economic and/or
administrative efficiencies),
- Private financing of new capital formation, or refinancing existing
financial obligations (reduce financial obligations of community).
Private companies have been involved in the provision of several environmental
activities, particularly solid waste and drinking water services, and a growing number
of companies are expressing interests in wastewater treatment services.
Despite the potential advantages of public/private partnerships, the current
supply of private firms is relatively small. Private involvement in many
environmental services can be affected by federal and state tax requirements, several
of which have undergone significant revisions in recent years. Some of the revisions
have reduced the tax advantages of public/private ownership. In addition, decisions
to use private companies require considerable effort in establishing contractual
arrangements and liability responsibilities in cases of damages or permit violations.
EPA is currently investigating this issue in greater depth, and plans to hold several
conferences with experts in the field and interested parties in the coming months.
Additional Research
An important finding of the municipal sector study is that not all communities
are expected to face financial difficulties. This fact suggests that further analysis
should be conducted in order to identify the characteristics of small and large
communities that make them more likely to experience difficulty in financing and
affording new environmental protection. For example, does a problem typically arise
in communities that are:
5-4
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- very small or sparsely populated (lack economies of scale and
scope),
- poorly managed (have poor access to financial markets),
- low income (are unable to afford environmental protection),
- rural (have poor access to technical services), or
- uninformed (lack understanding of the importance of
environmental protection),
- facing significant environmental burdens (are currently investing an above
average amount of resources to combat existing pollution problems),
- located in a particular state (are some states more aggressive in assisting
their financially constrained communities)?
If EPA can better identify those characteristics of communities that most inhibit
compliance with environmental regulations, then it can improve upon its current
efforts to design and implement programs that are targeted at the sources of the
problem.
SMALL BUSINESS
The small business sector study has provided a number of insights into the
potential impacts of EPA's regulations on small businesses. While EPA's primary
mission is to reduce the risks posed by environmental damage, the Agency also seeks
to minimize the unnecessary adverse social and economic impacts of its regulations
whenever appropriate. In this context, the results of this study suggest a number of
policy initiatives as well as areas for further study.
Policy Initiatives
Because many of the new environmental programs cut across many industries
and affect thousands of small businesses, new compliance strategies may be needed to
supplement EPA's traditional enforcement efforts. Many of the policy initiatives
suggested below will help small businesses learn about and comply with the new
environmental regulations. This in turn will assist the Agency in achieving higher
rates of compliance among small businesses.
These policy initiatives are not necessarily new to EPA. The Agency's Small
Business Ombudsman already operates several programs to assist small businesses and
the Office of Research and Development (OR&D) is engaged in developing several
new technologies for pollution control. The problem areas highlighted by this study
provide specific focuses for existing and new programs alike.
5-5
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Environmental Technology
It may be possible to reduce environmental costs to small businesses by
developing lower-cost control technologies or standardizing existing technologies so
that they can be made available at affordable prices.
The results of this study suggest many areas in which new technologies might
help solve the special problems of small businesses. Potential projects might include
new ways to control stormwater drainage from wood preservers' storage yards, for
example, or new processes for dealing with soil that has been contaminated by
leaking underground storage tanks.
Even when appropriate technology exists, the required equipment may be
available only on a customized basis. By working with the regulated community of
small businesses and informing manufacturers of the potential market, EPA might be
able to bring down the costs of existing technologies.
Environmental Services
In some cases, required environmental services are not available to small
businesses or are available only at restrictive prices. Many wood preservers, for
example, have no disposal facilities available for some of their hazardous wastes.
Electroplaters and dry cleaners are also concerned about the availability of disposal
alternatives for their hazardous wastes. Similarly, many small businesses that own
underground storage tanks are finding that no companies will sell them the required
environmental insurance. EPA might work with the regulated community and
potential service providers to expand the options available to small businesses.
Exemplary Programs
For some of the new environmental regulations, thousands of similar small
businesses may have to prepare almost identical responses. Their costs might be
reduced considerably, if exemplary programs or responses could be made available.
Paperwork costs might be reduced, for example, by examples for answers that will be
the same for most businesses in a category. Exemplary emergency response programs
and employee training programs might be developed as well.
Education and Training
Sometimes, simply learning how to comply with environmental requirements can
be an expensive and time-consuming task for small business owners and operators.
Education programs and packages could help to reduce this expense. Such programs
could include seminars, response lines, pamphlets and other written materials, and
video training programs.
Joint Programs
Policy initiatives such as those suggested above can be undertaken by EPA on
its own or can be carried out with the help of other government agencies. New
environmental control technologies, for example, could be developed by and for small
businesses through the EPA's Small Business Innovative Research grants, with
research targeting problem areas identified in this study. Educational programs could
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be developed with the U.S. Department of Commerce. State and local governments
could be enlisted in the effort as well.
For many programs, it might be desirable to obtain the cooperation of the
industries affected. Joint programs could be developed with industry trade
associations, for example. Alternatively, EPA development efforts could be supported
by small business advisory teams.
Continued Analysis
This study has pointed to several potential problem areas for small businesses.
Additional research might provide more insight into these problems or might show
that the problems will not be as large as this preliminary study has suggested. This
study also has highlighted the value of detailed small business analysis. EPA can
improve the quality of its analyses by maintaining a current data base of financial
statistics on small businesses.
Small Business Analyses
By focusing on industries dominated by small businesses and by paying
particular attention to the smallest businesses in these industries, this study has
shown how detailed analysis can be especially useful in determining whether
environmental regulations will have significant impacts on small businesses. Under
the Regulatory Flexibility Act, EPA has a mandate to conduct such analyses for each
of its regulations.
The detailed analysis of small businesses was made possible through the use of
the Fin/Stat data base provided by the SB A. Because SB A discontinued this data
base in 1983, the data used was slightly out of date. Nevertheless, it provided useful
information on the financial capabilities of small businesses.
EPA could improve the quality of its small business analyses by obtaining a
current data base of financial statistics. Research would be necessary to determine
the best source of such a data base and the best format for its maintenance. The
SBA could be helpful in preparing the data base, and with other regulatory agencies
such as the Occupational Safety and Health Administration, might be interested in
sharing the data base with EPA.
Multi-Regulation Impact Analyses
This study has identified several industries for which the combined effects of
several environmental regulations will result in considerably more impact than the
effects of any one regulation taken alone. Continued analysis of the combined
effects of all of EPA's regulations on those industries identified as being subject to
many regulations will help the Agency maintain a broader perspective of regulatory
impacts and will put the impacts of new regulations in a more accurate perspective.
Regulatory Analyses
This study has pointed to a number of potential problem areas associated with
individual regulations. Continued analysis of these regulations will not only provide
better information on the actual economic impacts of this regulations, but will also
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provide insights into how the regulations might be improved.
A good example of a regulations that might bear further analysis are those
promulgated under Title III of SARA. The cost for an "average small business" to
comply with emissions reporting requirements under Section 313 of Title III has been
estimated to be approximately $9,000 per year, a cost that appears to be prohibitive
for many of the small businesses included in this study. Cost estimates for Section
313 have been prepared, however, using assumptions of an average number of toxic
chemicals reported and an average level of analysis. Furthermore, the estimates do
not consider that many small businesses will be able to take advantage of the range-
reporting option that EPA has developed to reduce their reporting costs. Thus, many
small businesses included in this study may be able to comply with Section 313 at a
cost that is considerably lower than that estimated. Continued analysis of how small
businesses actually comply with these regulations will enable EPA to better assess
not only the impacts but also the efficacy of the regulations.
AGRICULTURE
The agriculture sector study illustrates the advantages of examining the impacts
of environmental regulations at the farm level as well as at the aggregate national
level. While national analyses provide useful information concerning the total losses
incurred by different aggregate types of farmers (e.g., corn farmers as a whole), the
impact of environmental regulations on farms' financial conditions depends on the
distribution of those losses among farmers and on the initial financial conditions of
the affected farms. In order to determine the affect of EPA regulations on the
ability of farms to survive, both aggregate and farm level analyses are necessary.
This study highlights the data and analytical requirements necessary to
determine the impacts of EPA actions on agriculture. Such requirements include:
1. Accurate pesticide usage data,
2. Accurate pesticide efficacy data,
3. Improved information on how initial pesticide
cancelation affects change over time,
4. Accurate incidence data for non-pesticide related
impacts (e.g., underground storage tanks),
5. Improved national price-quantity models to predict commodity price
changes due to EPA actions, and
6. Better information on the initial financial and production
conditions of agricultural producers and farm level models for
estimating changes in these over time.
The need for better data and modeling capability is greatest for specialty crops,
where reliable pesticide usage and efficacy data often do not exist, limited
information is available on producers' initial financial condition, and few models are
available. EPA currently is compiling a directory of all specialty crop models
5-8
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available for use in economic analyses and is funding the development of additional
specialty crop models. Improvements in pesticide usage data might be obtained by
increased cooperation and cost sharing with USDA and states to fund additional
pesticide usage surveys or t add pesticide usage questions to surveys designed for
other purposes. In addition, registrants of pesticides might be required to provide
usage information. The importance of using farm level models and improving data
and modeling capabilities is likely to increase in the future as EPA tries to cost-
effectively reduce environmental risks associated with agriculture.
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Appendix
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
-------
Appendix
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Program/Short Title
Air
1. Rural Fugitive Dust
2. Stratospheric Ozone
3. Municipal Waste
Combustors
4. TSDF Air Standards
5. Diesel Fuel Standards
6. Diesel Particulate
Standards
7. Fuel Volatility
8. Gas Marketing
9. Lead Phasedown
10. NAAQS: Lead
11. NAAQS: Particulate
Matter
12. NESHAP: Chromium
13. NESHAP: Perc Dry
Cleaning
14. NSPS: Small Boilers
15. NSPS: Industrial
Boilers
16. NSPS: Woodstove
Legislative Title
CAA Section 110, 165, 169 / Agricultural
Burning
Stratospheric Ozone Protection Strategy
NSPS: Municipal Waste Combustors
(Assessment of Municipal Waste Combustor
Emissions Under the Clean Air Act)
Treatment, Storage, and Disposal Facility
Area Source Air Emissions - RCRA Standards
Diesel Fuel Modification
Nonconformance Penalties for 1991 through
1994 Model Year Emission Standards for
Heavy-Duty Vehicles and Engines
Control of Excess Evaporative Emissions/
Fuel Volatility
Decision on Air Pollution Regulatory
Strategies for the Gasoline Marketing Industry
Removal of Lead from EPA Certification and
Test Fuels (Revision)
NAAQS: Lead
NAAQS for Particulate Matter (Revision)
NESHAP: Chromium—Electroplating
NESHAP: Perchloroethylene Dry Cleaning
NSPS: Small Boilers
NSPS: Industrial Boilers
NSPS: Residential Wood Combustion
A-l
Promulgation
undetermined
8/88
12/90
9/90
7/89
3/89
1/89
1/89
1/88
3/90
undetermined
3/91
undetermined
9/90
12/87
2/88
-------
Appendix (cont.)
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Proeram/Short Title
Radiation
17. Radon
18. Radiofrequency
Guidance
19. Low Level
Radioactive Waste
20. High Level
Radioactive Wastes
Legislative Title
Federal Radiation Protection Guidance:
Proposed Alternatives for Controlling
Public Exposure to Radiofrequency Radiation
Environmental Protection Standards for
Low-Level Radioactive Waste
Environmental Standards for the Management
and Disposal of Spent Nuclear Fuel, High-
Level and Transuranic Radioactive Wastes
Promulgation
undetermined
7/89
5/89
undetermined
Pesticides
21. Inerts
22. Farmworkers
23. Pesticides in
Groundwater
24. Large Volume
Pesticides
25. Data Requirements
26. Reregistration of
Pesticides
Worker Protection Standards for
Agricultural Pesticides (Revision)
Comprehensive Revision of Pesticide
Registration and Classification
Procedures (Revision)
undetermined
3/89
2/89
undetermined
5/88
undetermined
A-2
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Appendix (cont.)
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Program/Short Title
Toxic Substances
27. Asbestos Ban and
Phasedown
28. Asbestos in Schools
29. Chlorinated Solvents
30. PCBs: Electrical
Equipment
31. PCBs: Electrical
Transformers
32. Premanufacture
Review Program
SARA
33. Title III of SARA
Legislative Title
RCRA
34. Subtitle C Location
Standards
35. Subtitle D Criteria
36. Liner and Leachate
Collection
37. Corrective Action
at SWMUs
38. Hazardous Waste
Burning
Action Concerning Commercial and
Industrial Use of Asbestos
Asbestos Reinspection Rule
Regulatory Investigation of Chlorinated
Solvents
Polychlorinated Biphenyls/Manufacturing,
Processing, Distribution in Commerce and
Use Prohibitions: Use in Electrical Equipment
Polychlorinated Biphenyls in Electrical
Transformers: Final Rule
Promulgation
1/89
10/87
6/89
9/88
7/88
undetermined
Emergency and Hazardous Chemical Inventory 9/89
Forms and Community Right-To-Know Reporting
Requirements, and
SARA Section 313 Toxic Chemical Release 6/89
Reporting Rule
Location Standards for Hazardous Waste 12/88
Facilities
Solid Waste Disposal Facility Criteria 12/88
Double Liner and Leachate Collection 9/88
Systems for Hazardous Waste Land
Disposal Units
Corrective Action for Solid Waste 11/88
Management Units (SWMUs) at Hazardous
Waste Management Facilities
Burning of Hazardous Waste in Boilers 10/88
and Industrial Furnaces
A-3
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Appendix (cont.)
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Program/Short Title
RCRA (cont.)
39. Municipal Ash
40. Land Ban First
Thirds
41. Land Ban - Soil
and Debris
42. Land Ban - Dioxin
43. Land Ban Cal. List
44. UST Financial
Responsibility
45. UST Technical
Standards
Legislative Title
46. Hazardous Waste Tank
Standards
47. Toxicity
Characteristics
48. Small Quantity
Generator
49. Waste Oil Management
CERCLA
50. National Contingency
Plan
51. CERCLA Settlement
Policy
Municipal Waste Combustor Ash Management
Land Disposal Restrictions for First
Third of Scheduled Wastes
Land Disposal Restrictions for Soil and
Debris Containing Hazardous Wastes
Restrictions on Land Disposal of
Specified Solvent Dioxin Wastes
Land Disposal Restrictions for Certain
Hazardous Wastes - California List
Underground Storage Tanks Containing
Petroleum - Financial Responsibility
Requirements
Underground Storage Tanks - Technical
Requirements / Technical Standards and
Corrective Action Requirements for Design
& Operation of USTs Containing Petroleum
and Hazardous Substances
Hazardous Waste Tank Standards
Identification of Hazardous Wastes by
Toxicity Characteristics and Listing of
Additional Organic Toxicants
RCRA Small Quantity Generator Rule
Management of Used Oil
National Oil and Hazardous Substances
Pollution Contingency Plan (NCP)
Promulgation
12/89
8/88
10/91
undetermined
7/87
5/88
5/88
undetermined
8/88
3/86
undetermined
11/89
undetermined
A-4
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Appendix (cont.)
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Program/Short Title
Legislative Title
Promulgation
Drinking Water
52. Total Coliform Rule
53. Surface Water Treatment
Filtration
54. VOCs in Drinking Water
55. SOCs in Drinking Water
56. Inorganics in Drinking
Water
57. Fluoride in Drinking
Water
58. Lead MCL and
Corrosion Control
59. Lead Ban
60. 34 MCLs
61. Radionuclides
62. Disinfection
63. Public Notification
Rule
National Primary Drinking Water Regulations
(NPDWR): Microbials and Filtration of
Surface Drinking Water Supplies
NPDWR: MCLs for Volatile Organic
Chemicals Found in Drinking Water
NPDWR: Inorganic and Organic Compounds
Public Water System Supervision Program:
Ban on Lead in Plumbing
NPDWR: Radionuclides
NPDWR: Disinfection, Disinfectants and
Disinfection By-Products (Revision)
undetermined
undetermined
6/87
undetermined
undetermined
undetermined
undetermined
6/86
undetermined
undetermined
undetermined
10/87
A-5
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Appendix (cont.)
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Program/Short Title
Groundwater
64. Well-head Protection
65. Class I Underground
Injection Wells
66. Class II Underground
Injection Wells
67. Class V Underground
Injection Wells
Surface Water
68. Construction Grants
Program
69. Secondary Treatment
Waivers
70. Municipal Sewage
Sludge
71. State Sludge
Management
72. Pretreatment
73. Stormwater
74. Nonpoint Sources
75. Wetlands
76. National Estuary
Program
Legislative Title
Underground Injection Control Program /
Hazardous Waste Disposal Injection
Restriction for Class I Hazardous Waste
Injection Wells
Comprehensive Construction Grant
Regulation Revision
CWA Section 301(h) Revisions
Sewage Sludge Use and Disposal
Regulations
National Pollutant Discharge Elimination
System Sewage Sludge Permit Regulations;
State Sludge Management Program Requirements
Final Revisions to General Pretreatment
Regulations for Existing and New Sources
NPDES Regulations: Stormwater Application
Requirements (Revision)
Section 319 of the Clean Water Act /
Nonpoint Source Guidance
404(c) Regulations / Actions
Promulgation
12/87
undetermined
undetermined
undetermined
5/89
undetermined
12/89
2/89
undetermined
11/89
undetermined
undetermined
undetermined
A-6
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Appendix (cont.)
ENVIRONMENTAL REGULATIONS INCLUDED IN THE SECTOR STUDIES
Program/Short Title
Surface Water (cont.)
77. Toxic Water
Pollutants
78. Ocean Dumping
79. ELG: Foundries
Legislative Title
80. ELG: Placer Gold
Mining
81. ELG: Machinery
Manufacturing and
Rebuilding
82. ELG: Oil and Gas
83. ELG: Organic Chemicals
84. ELG: Pesticides
85. ELG: Pulp and Paper
Section 304(1) of the Clean Water Act
Regulations
Comprehensive Revisions to Ocean Dumping
Regulations
Metal Molding and Casting Industry Point
Source Category Effluent Limitations
Guidelines, Pretreatment Standards and
Nonpoint Source Performance Standards
Effluent Limitations Guidelines for the
Placer Gold Mining Industry
Effluent Limitations Guidelines for the
Equipment Manufacturing and Rebuilding
Industry
Effluent Guidelines for Offshore Oil
and Gas Extraction Industry (Revision)
Effluent Guidelines for Organic Chemicals
and Plastics and Synthetic Fibers
Effluent Guidelines for Pesticides
Chemicals
Effluent Guidelines for Pulp, Paper
and Paperboard
Promulgation
8/89
10/85
undetermined
undetermined
3/90
12/87
9/91
5/88
A-7
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