United States Office of July 198C
Environmental Protection Planning and Manr -ment
Agency Washington, DC 2C-.60
Planning & M:nsg$ment "
&EPA Checklist of
Regulatory Alternatives
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f
\
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
JUL 111980
OFFICE OF THE
ADMINISTRATOR
TO: Regulatory Agencies and Regulations Writers
This Checklist of Regulatory Alternatives offers an easy to
use way to help meet our regulatory goals in a flexible, less
burdensome manner.
In March 1978 President Carter directed regulatory agencies
to identify and evaluate alternatives to direct regulation when
developing significant rules. Last month the President reaf-
firmed his commitment to better regulation, calling on agencies
to identify new areas for application of alternatives, speed de-
velopment of alternative approaches already under consideration,
and report their progress by October 1. The Regulatory Council
has been asked to coordinate this government-wide effort, and
its July 2 guidance to agencies refers to the use of a checklist
to ensure consideration of innovation techniques.
Within EPA the Checklist will be routinely distributed to work
group leaders developing new regulations when their start action
notices are filed. It will also be sent to work groups currently
developing significant regulations that are at least six months
from promulgation or proposal.
For those outside EPA we believe the Checklist can serve as a
source of new ideas and as a model Which can be used for non-
environmental regulations.
I think you will find the Checklist both useful and infor-
your inquiries or comments on how it might
Administrator
Environmental Protection Agency
Chairman,
U.S. Regulatory Council
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TO THE USER:
Writing workable regulations is an important job that will
become even more difficult as public attention continues to
focus on the cost, level of detail, and necessity of particu-
lar requirements. While regulation starts with Congressional
action, statutes usually allow agencies to achieve societal
goals by a variety of techniques. To the extent the means
chosen can cut compliance or administrative costs, increase
flexibility, reduce confrontation, and better assure that
the goal will be attained, everyone's task will be made easi-
er. The Checklist which follows can help regulation writers,
enforcers, and complyers; the paragraphs below explain what
the Checklist is and how it can be used.
Traditional regulation may be poorly suited to particular
problems, imposing unnecessary burdens on regulators or unpro-
ductive costs on industry. But because regulators operate
under tight deadlines, are usually rewarded for producing
more rules, and have neither time nor incentive to consider
new approaches, direct regulation is often the only technique
used. Attempts at alternative approaches have frequently
been ad hoc, unaided by a conceptual framework or the exper-
ience of others who have walked similar paths.
The Checklist attempts to help break these deadlocks.
Though it is chiefly meant for use by EPA program personnel, it
can also be used by other Federal, State and local officials.
It focusses on environmental regulation, but can be generalized
to other regulatory programs. It consists of:
° a summary of alternatives; and
° an analytical section which briefly
describes the nature, advantages, dis-
advantages, and most appropriate situ-
tions for use of over 40 regulatory
options, many of which can be combined.
The Checklist is not an end in itself, but a tool to help
those within or outside of EPA begin thinking about alterna-
tives in a comprehensive, realistic manner. It is backed by:
° resource papers discussing each major
alternative in depth, reviewing rele-
vant literature, and identifying suc-
cessful examples;
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-2-
0 background files on the experi-
ences of other agencies and
countries with innovative ap-
proaches ; and
0 limited design or analytical as-
sistance to help solve particular
regulatory problems.
The Regulatory Reform Staff was created to help EPA imple-
ment the Executive Order 12044 requirement for a thorough
analysis of regulatory alternatives, and is part of the
Administrator's commitment that Agency programs find the most
efficient and effective strategies early in the regulation
development process. To the extent resources are available,
we are ready to provide the above services to help you meet
that goal.
Michael H. Levin
Chief, Regulatory Reform Staff
Office of Planning & Evaluation (PM-223)
Environmental Protection Agency
401 M Street, S.W.
Washington, D.C. 20460
(202)287-0750
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SUMMARY OF ALTERNATIVES
DIRECT REGULATORY MECHANISMS
0 Technology-Based Standards
° Performance-Based Standards
° Prohibitions & Limitations
POLLUTION FEES
° Emission Fees
° User Charges
8 Raw Materials Taxes
8 Product Taxes & Excise Fees
CONTROLLED TRADING
0 Offsets
0 Indirect Offsets
0 Bubble
° Banking
0 Multiplant Bubbles
° Variable Offsets
0 Emission Density Zoning
° Transferable Emission
Reduction Assessments
(TERA)
° Marketable Permits
RECYCLE, REUSE & DISPOSAL
INCENTIVES
0 Product Deposits
° Buy-Back Strategies
POLLUTION INDEMNITY
° Performance Bonding
0 Warranties on Pollution
Control Equipment
° Insurance Plans
° Pollution Compensation Plans
INFORMATION MECHANISMS
9 Product Labeling
° Compliance/Violation
Disclosure
8 Training
GOVERNMENT COST SHARING
° Capital Grants
° Tax Credits
0 Cash Payments
0 Loan Assistance
IMPROVED MONITORING &
ENFORCEMENT
° Noncomformance Penalties
8 Noncompliance Penalties
8 Operation & Maintenance
Incentives
8 Bounties on Polluters
8 Environmental Auditors
8 Citizen Suits
INNOVATION INCENTIVES
8 Selective Support of Large
scale Development Projects
8 Procurement Practices
8 Technology Pooling
8 Innovation Incentives for
Firms & Individuals
8 Liberalized Licensing of
Government-Owned Patents
8 Performance Awards
8 Innovation Waivers
8 Cooperative Agreements
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ANALYTICAL CHECKLIST
Mechanism Description Advantage* Disadvantages Application!
DIRECT Direct limitations are
REQULATORY placed on behavior which
MECHANISMS causes environmental
harm. Polluters avoid
associated civil and criminal
penalties by complying with
the limitations.
Technology- Requires particular means of
Based achievement, such as specifia
(Specification) design, equipment, or tech-
Standard niques. Standard applies to
all sources) polluters are
not free to choose means of
abatement.
Monitoring of pollution
is not necessary.
Industry can easily
know if it is in (or
out off compliance*
Threshold ease of
enforcement.
Does not necessarily
lead to least cost
abatement.
Does not guarantee
emission reduction,
only use of the spe-
cified equipment,
design, or procedure.
May constrain produc-
er's ability to in-
crease output to meet
increasing demand
(also, employment
impact)
Discourages Innova-
tive abatement
techniques.
Appropriate Situations
Where truly severe
risks are present
Where use of special
materials, tolerances,
e'qulpment, procedures*
etc., must be
specified.
Where uniform com-
pliance techniques
are essential for
effective enforcement.
Mo incentive to reduce
pollution beyond vftiat
results from the
specification.
Incentive for indus-
try to delay agreeing
to compliance schedules
due to over-control
excessive costs.
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Analytical Checklist
Page Two
Mechanism
Description
Advantages
Performance- Requires that certain results
based such as emission levels be
Standard achieved, without specifying
how they are to be achieved.
A mean or maximum level of
emissions can be established
for pollution sources, with
standards keyed to production
or quantity of pollutant.
A uniform standard can be set
for an entire industry, or
different standards can bo set
for industry subcategories.
Allows firms and indi-
viduals to achieve the
least-costly method
of compliance.
Encourages flexibility
and technical change.
Insures that specified
levels of pollutant
emissions for Individ-
ual sources are not
exceeded.
o Prohibitions
and Limita-
tions
Production, processing, dis-
tribution, use, or disposal
of substances Which present
unreasonable risks to health
or tho environment are banned
or restricted. These mechan-
isms affect the commercial
activity more directly than
performance or technology-
based standards, which are
aimed at polluting by-
products .
Control ovur exposure
to hazard is very
certain.
Disadvantages
Applications
Monitoring of technol-
ogy-based standards
is necessary.
May require extensive
monitoring to insure
compliance.
Does not usually lead
to minimum aggregate
abatement cost for the
whole population being
regulated (see "pollu-
tion fees" for more on
cost-effective regula-
tions) .
No incentive to reduce
emissions or hazard
level a beyond re-
quirement .
Appropriate Situa-
tions
Where threshold
levels of pollu-
tion are important.
Where tech-
nological complexi-
ty or diversity of
production make
specification stand-
ards impractical.
Where desired re-
sults can be plainly
specified and easily
monitored.
Possible adverse eco-
nomic impacts.
May not be cost effec-
tive, especially if
substitutes are not
available.
Constant pressure for
exemptions on case-by-
caee or industrial
subcategory basis.
Appropriate Situa-
tions
Where the hazard is
the product or
service itself, not
just the byproducts
of its production
or use.
Where hazard is
sufficient to jus-
tify drastic action
(e.g., exposure to
potent carcino-
gen) .
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Analytical Checklist
Page Three
Mechanism Description
POLLUTION Discharges are reduced by
FEES increasing the costs of
polluting activities through
direct or indirect charges
which may reflect damages,
cleanup coats, or other surro-
gates for the social impacts
sought to be internalized.
o Emission A charge is levied on each
Fees unit of pollution discharged.
Polluters find it economical
to reduce emissions up to the
point where the unit cost of
taking the next step to re-
duce pollution is greater
than the fee. Sources with
lower abatement costs will
provide more cleanup than
sources with higher abatement
costs. The result is the
least total aggregate amount
of cleanup costs for the group
being regulated.
Advantages
Disadvantages
Applications
Monitoring can be
keyed to amount of
fees paid, with focus
on sources paying low
total fees.
Polluters are encour-
aged to find the
leaBt cost means of
abatement and to
operate and maintain
it.
Mot slanted towards,
"equipment intensive"
or "visible" solu-
tions .
Provides continual
incentive to inno-
vate and further
reduce pollution.
Great compliance
flexibility.
Insufficient incen-
tive to abate if fees
can be readily passed
on to customers.
Little incentive to
keep pollution from
increasing with in-
creased production.
Difficult to establish
level of the feej need
extensive knowledge of
abatement costs to
predict effect on
emissions.
Difficult to adjust
fee after it is set.
Industry required to
pay fee as well as
cleanup costs, unless
zero emissions are
achieved.
May require more accu-
rate emissions moni-
toring than is current-
ly available.
Appropriate Situa-
tlons
Where environmental
damages vary with
level of pollu-
tion; where there
are no threshold
levels and risk of
severe damage is
not present.
Unsuited for hazard-
ous pollutants which
are toxic at rela-
tively low levels.
Where marginal con-
trol costs vary sig-
nificantly among
polluters.
Where environmen-
tal impacts are
relatively uni-
form without regard
to source location.
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Analytical Checklist
Page Four
Mechanism
Description
Revenue generated
Advantages
Revenue stream will
decline if fee works.
Disadvantages
Applications
could fund research
or compensate those
harmed by pollution.
Do not necessarily
insure any set (or
maximum) level of
pollution or risk.
Hay hurt older or
smaller plants where
abatement costs are
higher than for newer
or larger plants in
same or competing in-
dustry.
Depends on ability to
monitor emissions across
entire spectrum, not
just in narrow band
around standard.
For "flat" abatement
cost schedules, a small
change in the fee could
result in large dif-
ferences in the amount
of pollution - i.e. fee
must be carefully set
and, possibly, reset.
Fees may have to be raised
with growth of industry
or inflation to reduce
total pollution. This
could be politically
difficult, similar to
raising taxes.
Fees must vary with ambient
concentrations in each
geographic area to avoid
over- or undercontrol.
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Analytical Checklist
Page Five
Mechanism
Description
Advantages
o User Charges
Charges to recover the
cost of providing public
pollution control ser-
vices and facilities.
Those charges are usu-
ally designed to pay for
the costs of environmental
protection, not achieve
environmental objectives
per Be. Usually result In
less pollution (since
the cost of polluting ac-
tivities is not zero).
Easy to administer,
since most municipal
governments already
have an administra-
tive mechanism in
place.
Charges can be set
to drive cost-
effective controls
by individual sources,
not just recover costs
Municipal sewer sys-
tems, public water
treatment works usu-
ally have a captive
audience.
Can provide revenue
for better operation
and maintenance, re-
serve fund for repairs
due to poisoned or tem
porarily overloaded
systems.
Disadvantages
Applications
Current user charges
are based on the aver-
age cost of pollution
reduction by the muni-
cipality, not the mar-
ginal pollution reduc-
tion costs of the pol-
luter. As a result
optimal individual
waste reduction in the
industry cannot be
assured.
Piqulres close moni-
ring to assure
itable distribu-
tion of charges.
Appropriate Situations
Where polluters must
use a centralized
facility which has
authority to charge
for use.
Where charges can
easily be keyed to
amount of pollution
or a surrogate (e.g.
wastewater volume).
Where surrogate can
be monitored easily and
unambiguously.
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Analytical Checklist
Page Six
Mechanism
Description
Advantages
Administrative mechan-
isms (e.g., income,
excise, property tax
systems) already in
place.
Encouracjcs develop-
ment of techniques to
conserve and recycle
taxed materials.
Can he easily en-
forced through pro-
duction records.
Raw Mater- Charges are levied on raw
ialB Taxes materials which cause
pollution during the pro-
duction-consumption-disposal
cycle. Producers have an
added incentive to substi-
tute less polluting mater-
ials. Manufacturers
have Incentive to reduce
use of pollution-causing
raw materials for final
products.
Product A tax or fee is imposed
Taxes and at the end of the pro-
Excise Fees ductlon cycle to increase
the price of a product
or service judged to have
undesirable environmental
effects. Increased price
encourages reduced demand
for these products and
services, lets buying
public decide which pollut-
ing uses it is willing to
pay for.
Can bo ciilministered
through established
tax systems.
Uses the market to
minimize enforcement
costs.
Heats on unit costs
and is relatively
neutral with res-
pect to individual
producers¦
Disadvantages
May be difficult to
determine appropri-
ate tax.
May disrupt produc-
tion, concentrate
industry, cause other
inequities trtiere
charges cannot easily
be passed to materials
users.
Application
Appropriate Situations
Where cycle includes
few producers but
many users.
Where polluting sub-
stance is a produc-
tion Intermediary
that does not appear
in the final product.
Not effective for
products with
highly inelastic
demand.
May impose hardship
on less affluent
buyers i.e., dis-
tributional effects.
Appropriate Situations
Where use of product
or service can be
directly related to
pollution and amount
of use is sensitive to
price.
See also "Raw
Materials Taxes,"
above.
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Analytical Checklist
Page Seven
Mechanism Description Advantages
CONTROLLED Sources are encouraged to get
TRADING reductions from others Who can
produce them more cheaply, and
to produce cheap extra reductions
Cor use in such trading. Trades
cut costs, reallocate controls
more efficiently and cost-effec-
tively, encourage innovative con-
trol approaches, permit planned
growth with environmental pro-
gress, and can produce declin-
ing emissions when tradeoff ra-
tios (greater than lsl trades)
are used.
o Offsets Emissions from new major
sources or modifications
are offset by concurrent
extra emission reductions
from existing sources,
allowing industry to site
or expand in nonattairunent
areas without contributing
to violations of ambient
standards. The new source
must apply stringent pollu-
tion controls, show state-
wide compliance by other
company-owned Bources, and
demonstrate the trade will
not interfere with reason-
able further progress
towards attainment.
Provides existing
sources continuing
incentive to reduce
emissions, in order
to accumulate market-
able offsets.
Can stimulate compe-
tition among existing
sources to produce
cheapest extra reduc-
tions, promoting more
cost-effective con-
trols.
Avoids constraints on
growth without compro-
mising environmental
progress.
Disadvantages
Applications
Can create Incentive
for existing sources
to inflate allowable
emissions in order to
generate maximum
amount of offsets.
Can result in increased
overall emissions lAiere
offsets are not per-
manent, real.
Added emphasis on, in-
creased administra-
tive burden from, need
to determine baseline
emissions below which
valid offsets are
created.
Difficult to find, sell,
finance, consummate off-
sets through private
search and negotiation.
Appropriate Situa-
tions
Where source-specific
emission limits have
been imposed to
achieve desired am-
bient levels and can
be converted to uni-
form mass emission
units over time
(e.g., tons/year).
Where mechanisms
exist to assure
offsets will im-
pact the same area
as emissions from
the new sources.
Where significant
economic growth or
replacement of cur-
rent industrial
plant is anticipated.
May create political con-
troversy where emissions
decrease in one Locality
at expense of increases in
another.
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Analytical Checklist
Page Seven-A
Mechanism Description Advantages
O Indirect
Offsets
A service charge per pound
of required emission reduc-
tions, based on the estimated
cost of purchasing equivalent
offsets, is levied on regu-
lated sources. Sources c.«n
choose between generating the
required reductions, finding
and purchasing equivalent
offsets, or paying the charge
to a State agency which pur-
chases offsets in turn.
Avoids the transactions
costs of forcing every
source to find and con-
tract for offsets.
Avoids information re-
quirements of setting
a fee.
Provides revenue for
purchasing offsets in
the most cost-effective
manner.
Is not dependent on
forcing control on every
source.
Allows atalu agency to
purchase offsets in
"bulk" to iiiuet require-
ments of nwitiy small
sources at one time.
Ilnilds on existing off-
set, bubble policies.
Disadvantages
Applications
Requires estimates
of the supply and
cost of offsets.
Requires additional
emission measure-
ments .
Appropriate Situations
Particularly useful
for providing incen-
tives for small hy-
drocarbon sources
to reduce emission
or finance equiva-
lent reductions
elsewhere.
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Analytical Checklist
Page Eight
Mechanism
Description
- Advantages
o Bubble
Existing air pollution
sources are encouraged
to treat point-specific
emission limits within
a plant (or plants) more
flexibly, reducing con-
trol where unit or mar-
ginal control costs are
high, in exchange for
increased control vAiere
costs of controlling
the same pollutant
are low. Agency focuses
on collective impact of
all emitting points rather
than particular distribu-
tion of point-specific
limits. Source must demon-
strate equal environmental
impact, reliability, en-
forceability vis-a-vis pre-
existing requirements.
Concept can be used
for water, other
media.
I.ets sources reallocate
controls based on plant-
specific knowledge agen-
cy can't possess.
Can cut control costs
by millions per year.
Provides control flexi-
bility, reduced govern-
ment Intrusion in
corporate decision-
making .
Can promote technology
diffusion, control inno-
vation, greater coopera-
tion between sources and
air agency.
Pi sadvantages
Applications
Air bubble applies
only to existing
sources with emission
liinita under SLate Im-
plementation Plans
(SIPs). New sources,
modifications, other
points subject to tech-
nology-forcing regulat-
ions cannot now be
bubbled.
Generally cannot be
used when SIP has
not demonstrated
attainment of ambi-
ent standards by 1982.
Demonstrating equiva-
lent ambient impact
through air quality
dispersion modelling
may be complex, ex-
pensive.
Requires SIP revision
which may l>e time-
consuming .
Industry may be reluc-
tant to reveal oppor-
tunities for stricter
controlu.
Appropriate Situations
See Offsets, above.
Where bubbled emis-
sion points have
established base-
lines against which
increases, decreases
can be measured.
Where sources have
large numbers of
emission points with
wide variety of
emission limits for
same pollutant.
Where complex model-
ling to 6how equiva-
lent ambient impact
is not necessary
(e.g., hydrocarbon
emissions).
Wherever emissions can
be decreased below
current requirements
at one or several
points (e.g., by fuel
switches, production
curtailments, or shut-
downs, as well as
process or control
changes).
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Analytical Checklist
Page Nine
Mechanism Description Advantages Disadvantages Applications
o Banking Extra emission reduc-
tions by existing air
pollution sources are
qualified as acceptable,
quantified as to amount
and scope of use, and
"stored" for their cre-
ator's future expansion
or sale to others, allow-
ing controlled trading
over time.
Makes extra reduc-
tion an asset.
Encourages sources to
get citrd reductions
when replacing control
devices, creating cheap
offsets duo to economies
of scale, avoidance of
retrofiting.
Makes available off-
sets easier to find,
sell.
Helps growth planning by
communities, economic
development groups. En-
courages innovation, vol-
untary control by re-
gulated, unregulated
sources.
Industry may fear
banked reductions may
be targets for confis-
cation if more reduc-
tions are needed.
Sources may be reluc-
tant to create assets
in which they do not
normally trade.
Brokers, sources of
advance financing
may be necessary.
Sources may be reluc-
tant to disclose price
of offset purchases,
preventing other
firms from knowing
whether investment
in bankable re-
ductions makes sense.
Appropriate Situations
Where offsetting
emission decreases
and increases will
occur over time (e.g.,
sequential replace-
ment of control de-
vices on utility
boilers) rather than
simultaneously.
Where sources are
changing controls,
modernizing pro-
cesses, curtailing
or shutting down
production.
Multiphase construc-
tion or areas exper-
iencing growth of
heavy industry or
rapid turnover of
old plant.
Increased certainty from May not work for
rules known in advance of depressed, economically
individual transactions, stable, or other
protection against arbi- low-growth areas,
trary control if further
reductions are required
to reach attainment.
Banked reductions can be
used for bubbles and
to avoid stringent control of
modifications in clean air
areas, as well as for offsets
for major new sources.
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Analytical Checklist
Page Ten
Mechanism
Description
Advantages
Disadvantages
Applications
o Multiplant
bubbles
Several sources in the
same airshed voluntarily
combine to bubble, con-
centrating resources
where emissions can be
controlled at least
cost to entire group.
Available now under
Air Bubble Policy.
Produces greater
savings, more ef-
ficient control
than intrafirm
bubbles
Sources have great
flexibility, in-
centive to use
private knowledge
to distribute con-
trols efficiently,
allocate control
costs most benefi-
cially to them.
Makes possible
bubbling by many
single-point or
smaller sources.
May require complex
contractual negoti-
ations, arrangements.
May raise anti-trust
questions.
May be difficult to use
except for area-wide
pollutants Which can be
traded pound-for pound
(e.g. hydrocarbons,
NOx).
May occ Ion lengthy
permit, P revision
delays.
Appropriate Situations
See Bubble, above.
Where several sources
with wide variety of
emissions points for
the same pollutant are in
close proximity.
Where average cost of
control for regulated
emission points is
higher than marginal
cost of control.
Where financing more
controls on a few
sources can save
money for all.
Requires no new
administrative or
regulatory mechanisms.
Can help overcome
source reluctance to
rely on others for
needed offsets.
Can promote cooperative
research, monitoring
improvements.
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Analytical Checklist
Page Eleven
Mechanism
Description
Advantages
o Variable Instead of giving away air
Offsets rights in "clean" areas on
first-come first-served
basis> State could require
new sources to get offsets
of less than 1«1, rising
towards 111 as clean-air
increment is consumed.
Prices clean-air in-
crement, forcing
competing potential
sources to determine
how valuable that site
is to them.
Kxtends increment.
Can avoid consumption
of increment by single
sources, averting
economic stagnation,
other inequities.
Uses familiar,
administratively con-
venient mechanisms.
o Emission State determines total
Density emissions Which will
Zoning attain ambient standard,
allocates them to zones,
lets emissions pass with
property right or be
traded across properties
or zones.
Can avoid complex
modelling, associated
costs for individual
cases.
Allows flexible control
reallocations within or
between defined zones.
Lets sources determine
coat-effective controls
Can be used for water,
other media.
Disadvantages
Applications
Difficult to set offset
ratio for particular cases.
May be more burdensome,
only marginally more use-
ful than first-come first-
served .
Will not work where other
sources are not available,
willing to provide suf-
ficient offsets.
Appropriate Situations
Where 2 or more
sources seek to lo-
cate and offsets
from existing sources
are available.
Administrative burdens.
Chance to trade may be
very constrained if site-
specific modelling and
increment or standards
violations are to be
avoided in advance.
May not guarantee avoid-
ance of "hot-spot"
problems (i.e., excessive
concentrations in small
areas).
Appropriate Situations
Where total loadings
can reliably be re-
lated to ambient con-
centrations.
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Analytical Checklist
Page Twelve
Mechanism
Description
Advantages
o Transferable
Emission
Reduction
Assessments
(TERA)
Where new controls are
needed to reach attain-
ment or create growth
margin, all regulated
sources are assessed
equal percentage or
other formula reduction,
then allowed to trade to
meet these assessments.
Great administrative
convenience; allows
mid-course correction
or other SIP revision
through single rule-
making rather than
source-category-by-
category regulation.
Encourages capital-
poor sources with low
marginal control costs to
create extra reductions
for sale to richer
sources with high
marginal costs.
Can overcome inefficient
SIP control distributions
resulting from afford-
ability, political
constraints.
Combines first-stage
equity with second-
stage efficiency.
Can stimulate trading
in low-growth as well as
high-growth areas.
Can utilize industry know-
ledge, create emission re-
ductions that are other-
wise not affordable.
Disadvantages
Applications
May be difficult to
develop acceptable
allocation formula.
(Heavily regulated
sources will object
to any further
regulations).
May force many small,
marginally useful
trades.
May impose infeasible
requirements on some
sources if trades to
meet assessments can-
not be made.
Appropriate Situations
Where margin for growth
or new SIP requirements
to achieve standards
by statutory deadline
become necessary.
Where affected area
contains many sources
emitting same pollutant.
Where many sources will
be able to trade to meet
their assessments be-
cause affordability,
marginal control costs
vary widely.
-------
Analytical Checklist
Page Thirteen
Hechanlem Description Advantages
o Marketable
Permits
Privilege to emit could be
allocated or sold by units
at competitive auction
to dischargers. Environ-
mental quality is con-
trolled by adjustment of
the number of permit
units distributed. Once
allocated, permit units
could be traded among
sources (similar to
trading in an offset
program). Sources with
low control costs will
abate rather than buy
permits; sources with
high control costs will
buy permits instead.
Most sources will control
until unit control costs
equal cost of permits for
the remainder of allowa-
ble emissions.
Certainty about pollu-
tion levels, hence good
control and predicta-
bility.
Will produce cost-
effective abatement
by participating
sources, since those
with low abatement
coats will sell emis-
sion units to sources
with high abatement
costs.
Fosters innovation,
efficient abatement.
Incentive for contin-
uous reductions below
ambient equivalents.
Permits could be issued
for different durations
(e.g. 100 tons/year for
five years, 100 tons/
year for 20 years), let-
ting price fit buyers'
needs.
Local governments
could buy permits or
bid up their price,
forcing plants to pol-
lute less and implicit-
ly tightening "standards
Disadvantages Applications
May result in highly var
iable pollution related
costs (sum of abatement
expenditures and cost of
pollution rights) fori
firms in the same
industry) regions of
the country; large vs.
small firms; and old
vs. new plants.
Requires new admin-
istrative structure.
Auction of permits may
produce very high trans-
actions costs; alloca-
tion of permits may
exclude future sources.
Appropriate Situa-
tions
Where ambient im-
pact is relatively
uniform, not de-
pendent on site-
specific emissions.
Where marginal
costs of control
vary widely amont
permitted sources.
-------
Analytical Checklist
Page Fourteen
Mechanism
Description
Advantages
RECYCLE, REUSE
& DISPOSAL
INCENTIVES
o Product
Deposlts
The coBts of disposing
of materials are usu-
ally borne by taxpayers.
Manufacturers and usara
of these products may
increase reuse and recy-
cling of materials if
they are forced to bear
the costs or have posi-
tive incentives to do
so.
Consumers pay a deposit on
products Which is refunded
When the used products or
their containers are
returned for proper dis-
posal or recycling.
Tills approach can
reduce litter and
solid waste, and
has dono so in
several states with
beverage container
deposit laws.
Disadvantages Applications
Difficult to es-
tablish appro-
priate deposit.
May create
significant
administrative
burdens relative
to benefits
obtained.
Requires well-
organised
collection, dis-
posal network in
advance of charge
to prevent burdens
from falling on in-
dividual retailers.
Appropriate Situations
Where the item can
be easily collected
and returned to
central sites.
Products containing
uniform levels of
toxic constituents
(e.g., chemical
storage barrels,
transformer parts).
-------
Analytical Checklist
Page Fifteen
Mechanism
Description
Government awards subsidies
to firms competitively bidding
to buy back, recycle, and sell
at fixed price specified
amount of material.
Advantages
Competing firms have
incentive to find least-
cost means of collecting,
recycling containers or
other material.
Subsidy can be financed
by product disposal
charges.
Encourages recycling of
materials (e.g., newsprint)
triiich are marginally
profitable to recover.
Disadvantages
Administrative burden
from setting up subsidy
mechanism, monitoring
results.
May grant de facto
monopoly to subsidised
operation which succeeds
in establishing first
collection network.
Has not yet been used
under actual market
conditions.
Applications
o Buy-back
strategies
Appropriate
Situations
RFore materials
might be im-
properly disposed
of, have marginal
¦recovery value,
or are in short
supply.
Can be phased in gradually,
with evaluation at in-
cremental steps.
POLLUTION Firms Which supply goods or
INDEMNITY services that contribute to
significant pollution are lia-
ble to reimburse persons
suffering resulting damages.
o Performance
Bond ing
Firms vfoose activities could
cause serious environmental
harm are required to provide
a bond of surety Which is
forfeited in case of environ-
mental damage.
Relatively easy to iden-
tify appropriate firms
for bonding.
Coulg be limited to sources
where strict liability is
generally perceived as
appropriate.
Can provide flexible
money sanctions precisely
tailored to harm, risk.
Mac precedent in surety
aspects of Connecticut,
Clean Air Act noncompli-
ance penalties.
Would require close
monitoring.
May be difficult to
establish bond or
surety level that is
effective but not
financial overkill.
"Damage" levels of-
ten difficult to
establish; may re-
quire reliable surro-
gate measures.
Appropriate
Situations
Particularly
well suited for
activities in
which damage can
be traced to its
source (e.g.,
transportation and
disposal of hazar-
dous materials).
-------
Analytical Checklist
Page Sixteen
Mechanism
Peecription
Advantages
Warranties
on Pollution
Control Equip-
ment
Manufacturers can be re-
quired to provide written
assurance that pollution
control equipment will
perform to specifications,
providing stronger pro-
tection to purchasers
than usually implied
in a contract.
Can encourage improve-
ments in quality con-
trol by equipment
manufacturers, promote
development of more
reliable control
equipment.
Can reduce liability
suits if liquidated
damage schedules
can be negotiated
with manufacturers in
advance.
o Insurance Firms handling
Plans hazardous substances
or otherwise polluting
are encouraged or
required to participate
in individual or group
insurance plana covering
personal injury related
liabilities for third-
party (not government
sanctions) claims.
Can be combined with
banking to assure that
if specifications are
not met, manufacturer
will finance offsets to
make up the difference.
Can pool risk to pol-
luters, guarantee
proper redress to
injured parties with
certainty of liability
limits to firms.
Can create disincentive
to pollute if prem-
iums are indexed to
past pollution (or
damage claims) record.
Disadvantages
Applications
May involve high
litigation costs
to consumers and gov-
ernment .
Appropriate Situations
Tecnology-inten-
sive pollution con-
trol situations.
May discourage in-
novation due to
potential liability
for factors (e.g.,
operation and
maintenance) affecting
performance, beyond
maker's control.
Difficult to write
w< canty that will
b< tir and easily
em jrced, without
disabling burdens
of proof on
beneficiary.
Premiums cannot be
lnd> id to experience
for dmaller sources(
creating disincentive
to improve since no
reward.
Burden of proof remains
on injured party.
Plans do not generally
cover neglect or dis-
regard of prescribed
procedures.
Appropriate Situations
Especially useful
where link between
cause and exposure can
be clearly established
directly or through
surrogates, and there
is substantial danger
of environmental
damage due to control
equipment malfunction
or accidents In
handlinq, transporting
hazardous materials.
-------
Analytical Checklist
Page Seventeen
Mechanism
Description
Advantages
Can enlist insurance
companies as private
abatement enforcers.
o Pollution
Compensation
Plans
Pollution victims are
compensated from
voluntary or required
insurance pools
financed by charges on
polluters or product
makers.
Can focus top manage-
ment's attention on pol-
lution problems, en-
courage greater re-
sponsibility, more
protection for public.
Can define liability
limits, offer sources
greater certainty
rei their prospective
risk.
Charges can be keyed
to production volume
or historical dis-
charges, creating
incentive to reduce
pollution.
Compensation regardless
of polluter's identity,
tort, liability.
Promotes least-cost
response by polluters
if charges can be
rationally dif-
ferentiated.
Developing pre-
cedent in Japanese,
American superfunds.
Can be combined with
specific liability
approaches.
Disadvantages Applications
Premiums may place
heavier burden on
smaller firms, dis-
courage investment
in control devices
for all firms.
Difficult to set
contributions, relate
them to individual
or industry pollution.
Temptation to set flat
rates, discouraging
control improvements.
Hay disproportionately
impact smaller firms
within covered uni-
verse.
Sources may be able
to pass costs to cus-
tomers, avoiding con-
trol improvements.
Appropriate
Situations
Where difficult to
establish direct
links between
identified damage,
specific source.
Where prompt action
needed to meet
immediate threat
(e.g., oil or
hazardous materials
spills).
-------
Analytical Checklist
Page Eighteen
Mechanism
Description
Advantages
Disadvantages
Applications
INFORMATION
o Product
Labeling
Disclosure of infor-
mation about the extent,
riBks, and effects of
pollution from firms,
products or processes
can be an effective
deterrent to pollution.
Products or services which
poso a significant harm to
health or the environment
carry labels explaining the
nature, extent of risk.
Consumers can make better
decisions because they have
clear, concise information.
Relatively low
cost.
Allow* consumers to
make benefit-risk
asaoasinent for
themselves.
Can let market decide
Which polluting activi-
ties are worth paying
for.
Change in risk and
exposure cannot be
easily predicted.
Consumers may dis-
regard labels where
all products seem
hazardous.
Difficult for agencies,
consumers to prioritise
risks.
Appropriate Situation
Where exposure
can be affected by
behavior of individ-
uals using product.
Where product
poses a hazard
if improperly
handled.
Established precedent
in pesticides, toxics
labeling.
May not be effective
where risk is abstract,
statistically small, or
long-term (e.g., to
future generations).
Compliance/ Pollution control records
Violation of all firms or those with
Disclosure relatively bad performance
vis-a-vis their industry
are publicized, either by
government or through a
self-disclosure process
(e.g., in quarterly and
annual shareholders' re-
ports) .
Provides incentive
for firms, especially
those concerned with
public image, to improve
their environmental per-
formance .
Can mobilize investor,
puhl i<: opinion to
prompt better cleanup,
especially for pnbl1-
cly-tiailoil firms.
Requires close moni-
toring to detect
conditions which
would trigger a dis-
closure.
Difficult to limit
disclosure to sig-
nificant patterns of
noncompliance or
damage, eliminate
single occurrences.
Appropriate Situations
Where potential for
consumer or investor
reaction to dis-
closure encourages use
of environmental safe-
guards.
-------
Analytical Checklist
Page Nineteen
Mechanism
Description
Advantages
o Training
Industry and government
develop training programs
for workers and the general
public to raise level of
environmental awareness,
improve skills needed to
detect or reduce polluting
practices.
May avoid use of
direct regulatory
resources.
Can encourage in-
novative approaches
mutually satisfactory
to parties most
immediately affected,
without mandated
solutions from central
agency.
GOVERNMENT
COST SHAR-
ING
To stimulate'use of proven
or new pollution controls,
Federal government bears
part of their costs for
state and local bodies,
industry, or individuals.
o Capital Grants to state, local
Grants governments help them
undertake costly pollution
control projects.
Stimulates use of
desirable control
technology and
practices.
Reduces direct cost
impact of abatement
on local governments,
industry, or
individuals.
Disadvantages
Applications
Does not insure
reduction of pollu-
tion.
Appropriate Situations
Where control of pollu-
tion depends on good
work practices (e.g.,
prevention of spills
and accidents, proper
operation and mainten-
ance of pollution con-
trol equipment).
Where general public
is a significant
source of pollution.
May hamper innova-
tion if only upeci-
fied technological
approaches are sub-
sidized .
Appropriate Situations
Where pollution clear-
ly requires uae of
capital intensive, or
equipment, solution.
Not cost-effective
where other pollution
control measures, such
as recycling, process
changes, or conservation,
vould be as or more
efficient.
-------
Analytical Checklist
Page Twenty
Mechanism Description
o Tax Credits Credit against tax payments
to encourage investment
in pollution control.
Credit can be based on
actual expenditures or
be implemented through
an accelerated depre-
ciation schedule.
Advantages
Administrative and en-
forcement mechanism
currently exists
through tax system.
Could be combined with
controlled trading to
encourage investment
in extra reductions.
Can provide incentives
for existing firms to
agree to reduce, as
wall as for new sources
to finance reductions.
o Cash pay- Market for materials re-
ments use and recycling can be
stimulated by government
subsidies.
Can give firms
incentive to use
least-cost means to
collect and recycle
materials.
See "Uuy-hack
Strategies," above.
Disadvantages
Applications
Biased towards
capital intensive
abatement approaches.
No incentive to oper-
ate and maintain pollu-
tion control equipment
once Installed.
Tax credit can only
work to point of zero
tax liability, unless
made refundable.
Appropriate Situations
Not effective where
profits are low and
per unit costs of
compliance are high.
Would require a new
administrative
mechanism.
See "Buy-back
Strategies," above.
Appropriate Situations
Where materials are in
shortage, have mar-
ginal recovery value,
and/or are expensive
to dispose of.
-------
Analytical Checklist
Page Twenty-one
Mechanism
o Loan
Assistance
Peacriptlon
Government enters loan
transaction to lower
interest rate below
market level. Inter-
vention can come as cash
payments to offset
interest on private loans
(see Cash Payments), as
direct low-interest
government loans, or as
government guarantee of
private loans.
Advantages
Ijoan assistance terms
could be designed to
promote innovative
pollution control tech-
niques .
Particularly helpful
to smaller businesses,
minority-owned firms.
Can provide large
assistance with mini-
mal government ex-
penditure through lever-
age of private funds.
Broad precedent in other
loan guarantee programs.
Disadvantages
Difficult to imple-
ment where loans are
only for post-order
"compliance."
May be difficult to
determine appropriate
interest rate.
May require new ad-
ministrative struc-
ture to provide cash
payments.
Difficult to implement
vrt\eve high private in-
terest rates compete
for funds.
Applications
Appropriate Situations
HneFa polluting en-
titles do not have
easy access to capi-
tal.
IMPROVED
MONITORING
AND ENFORCE-
MENT
o Nonconform-
ance Penal-
ties
Monitoring and enforcement
to assure compliance are an
important part of any en-
vironmental strategy, since
it is seldom economical for
polluters to acquire and
operate pollution control
equipment or otherwise alter
behavior for the sole purpose
of reducing pollution.
Makers of products Which fail
to meet standards but do not
fall below an established
minimum limit, may continue
to sell their product if
they pay a nonconformance
penalty.
Protects manufacturers
meeting environmental
standards from noncoin-
plying competition.
Can reduce industry
pressure to lower or
delay standards.
May be little in-
centive to comply
if penalty can be
passed to consumers.
Can require detailed
knowledge of com-
pliance cost schedules.
Appropriate Situations
Where there is a ser-
ious environmental
threat, but other
means of pollution re-
duction are not
effective.
-------
Analytical Checklist
Page Twenty-two
Mechanism Description Advantages
Penalties based on
marginal cost of com-
pliance can create con-
tinuing incentive to
come into compliance
without product bans or
other dislocations.
Allows manufacturers
to continue selling
while they develop
controls to meet
standard.
Encourages innovative
controls which are not
certain to meet stand-
ards.
o Noncompli-
ance Penal-
ties .
Penalties on each violator
equal the profits (capital
charges, operating and
maintenance costs) from
noncompliance with a pol-
lution control schedule.
Financial incentive to
resist compliance is removed.
Decreases incentive to
delay Installing pollu-
tion equipment.
Ease of administration
since monthly penalty
amount is ministerial
calculation.
Predictability for
industry.
Does not double-penalize,
since credit is given for
abatement expenditures.
Can incorporate great
flexibility in tailor-
ing sanctions to degree
of noncompliance through
escrow, surety devices.
Disadvantages
Applications
Where technological
compliance capacity
varies widely within
or between affected
industry or indus-
tries .
Where flexible range
of sanctions is
desirable.
May require
sirtlficant initial
in\. istment in admin-
istrative structure.
Still depends on
effective enforcement
to find violators.
Requires relatively
narrow range of
abatement techniques
with well-defined
cost curves.
May be biased against
non-capital-intensive
abatement approaches.
Appropriate Situations
Where compliance costs
are significantly
higher than tradi-
tional sanctions plus
costs of litigation.
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Analytical Checklist
Page Twenty-Three
Mechanism
Description
Advantages
o Operation
and Main-
tenance
Incentives
Penalties equal what
violators save by not
properly operating and
maintaining pollution
controls.
(Same as for noncom-
pliance penalties.)
Can promote development
of design, operating
standards.
Bounties Individuals or organizations
on Pol1u are financially rewarded for
ters. developing, supplying infor-
mation on specific environ-
mental violations.
Can reduce govern-
ment burden of
monitoring com-
pliance.
May encourage public
participation in
environmental pro-
tection programs.
o Environ- Government licenses private
mental auditors to monitor corn-
Auditors pliance with environmen-
tal standards Instead of
expanding Its own
inspection force. Indepen-
dent professionals compete
for auditing contracts
awarded by government or
sources.
Easier to expand and
contract auditing
effort as needed.
Greater Inspection
coverage, frequency,
credibility, de-
terrence .
Disadvantages
(Same as for noncom-
pliance penalties.)
Applications
Appropriate Situations
(Same as for noncom-
pliance penalties.)
Negative poli-
tical overtones.
May flood agencies
with large amounts
of information on
trivial violations.
Appropriate Situations
When violations are
easily observable,
widespread.
Mechanisms needed to
oversee auditors.
Real or perceived con-
flicts of interest must
be guarded against.
May be difficult to
determine who pays
for auditorsi where
real benefits will
be obtained.
Appropriate Situations
Where government en-
forcement manpower is
insufficient and
staffing flexibility
is desirable.
Where clear standards
for adequate
enforcement, or
appropriate screening
mechanisms (e.g. self-
reporting in first
instance) can be
developed.
-------
Analytical Checklist
Page Twenty-Four
Mechanism
Description
Advantages
o Citizen Government helps defray
Suits cost to citizen groups
of bringing environmental
suits in Which EPA or state
agency is not legally an
interested party.
Posters citizen,
not bureaucracy,
involvement.
Saves government
enforcement man-
power.
Citizens act to
protect values
with which they
are most directly
concerned.
INNOVATION Regulations can stifle inno-
INCENTIVES ation by "freezing" control
technology and discouraging
more effective pollution con-
trol. Incentives to stimulate
innovation in environmental
management can counteract
these tendencies.
Disadvantage
Applications
Uncertain legality.
Difficult to
determine which
suits to support.
Possible political
repercussions.
Appropriate Situations
Where strong public
interest groups and
public support for
specific pollution
control programs are
present.
-------
Analytical Checklist
Page Twenty-Five
Mechanism
Description
Advantages
Selective Government supports pro-
Support of grams tdiich demonstrate
Large-Scale operational utility of new
Development technology and can influence
Projects design requirements, demon-
stration projects, and per-
formance standards for pol-
lution control equipment.
Indicates govern-
ment commitment to
pollution abatement.
Can increase technology
transfer in pollution
abatement.
Can be used to
differentially favor
nonconventlona1
innovative approaches.
Disadvantages
Applications
Suspicion of govern-
ment-sponsored
projects.
Hidebound government
concepts of "innova-
tion" may be self-
defeating .
Bureaucratic review
process may also
defeat innovation.
Appropriate Situations
Where there is no
strong interest in or
tradition of
innovating.
Where market restric-
tions inhibit innova-
tive developments.
Where there are clear
public benefits from
development and
implementation of new
technology.
-------
Analytical Checklist
Pago Twenty-Six
Mechanism
Description
Advantages
o Procurement
Practices
Government pays more for
products or services
certified as low-
polluting .
Works through estab-
lished mechanism
the market.
Can encourage in-
novation and develop
market for low-
polluting goods and
services.
o Technology
Pooling
Firms coordinate research
and development information.
Non-profit research insti-
tutes and other joint ven-
tures can aid these efforts
and avoid conflicts with
anti-trust lawB.
Can lead to more cost
effective innovation.
Spreads risk of R&D
which would not be
borne by single
firms.
o Innovation
Incentives
for Firms
and Indi-
viduals
Trade asociations, private
firms or government agencies
institute bonuses or other
incentives to encourage
suggestions on how to reduce
pollution.
Uses private market.
Disadvantages
Only useful for prod-
ucts the Government
buys.
Applications
Appropriate Situations
(See disadvantages.)
Possibility of col-
lusion among parti-
cipating firms
to avoid paying
fair share of
pollution costs.
Possible barriers
to entry into market.
Appropriate Situations
Industries comprised
of small firms unable
to adequately finance
costs of abatement
research and
development.
Difficult to set level
of bonus or other in-
centives.
May produce trivia.
Appropriate Situations
Industries where there
is a significant pol-
lution problem, but
solutions are diffi-
cult to develop.
Where wide variations
among plants, firms
make individualized
suggestions especially
valuable.
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Analytical Checklist
Page Twenty-Seven
Mechanism
Description
Advantages
Liberalized
Licensing of
Government-
Owned Pat-
ents .
Firms which participate
in Government-sponsored
pollution control re-
search can be given
greater freedom to ac-
quire licenses under or
title to patents developed
in course of such research
Promotes development
and dissemination
of new technology.
Promotes com-
mercialization of
prior inventions.
Promotes broader
private participation
in government-
sponsored R&D.
o Performance
Awards
Sources are given positive
Incentives (tax benefits,
subsidies, or more flexi-
ble regulatory require-
ments) to reward perform-
ance exceeding environ-
mental objectives.
Likely to be readily
accepted by industry.
Provides carrot,
not just stick.
May create incentive
for sources to develop
better monitoring
devices on their own.
Disadvantages
Applications
Possibility of govern-
ment favoritism
toward participants.
May be attacked as
"giveaway" of public
property.
Appropriate Situations
Where appropriabilIty
of research results
is important to
continued partici-
pation and Government-
owned patents are not
being commercialized.
Difficult to establish
cost-effective levels
for tax benefits,
subsidies, etc.
Inconsistent with con-
trolled trading, which
makes extra reductions
valuable assets.
Could create greater
monitoring burden by
expanding rango of
results which entail
significant conse-
quences .
-------
Analytical Checklist
Page Twenty-Eight
Mechanism
Description
Advantages
o Innovation
Waivers
Extension of exception to
a regulatory compliance date
for emission limitations is
granted on case-by-case
basis to sources using
innovative approaches
to control pollution.
Reduces risk of new
approaches.
Can encourage
experimentation.
Can confirm com-
mitment to diverse
ideas if properly
implemented.
Can promote cheaper
control at little risk
o Cooperative
Agreements
Government and private
firms jointly fund
R&D projects.
Can encourage develop-
ment of innovative
technology by lowering
risks and resource
coramitments firms
must make.
Disadvantages
Applications
Desire to screen
legitimate requests
from those sought to
delay compliance
may stifle whole pro-
gram.
Requires quick, firm
decisions.
Will require clear
rules, definitions,
procedures, procedural
deadlines to succeed.
Appropriate Situations
Where enforcement
practices or com-
pliance milestones
discourage risky
approaches.
Where small failure
to meet omission
limits can have large
consequences.
V. ntary programs
haze had limited past
success in the United
States.
Appropriate Situations
Where R&D is usually
expensive, will not
be undertaken with-
out special arrange-
ments, and may bene-
fit many industrial
sectors or serve
clear broad public
wel fare goal.
Where subsequent steps
can be handled en-
tirely by private
industry.
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BACKUP PAPERS FOR CHECKLIST OF REGULATORY ALTERNATIVES
The following papers analyze 28 major alternatives or supple-
ments to direct regulation? support and expand upon the preced-
ing Checklist; and are provided here to help regulation writers
better evaluate and apply different approaches, in non-environ-
mental as well as environmental fields. They were prepared for
EPA's Regulatory Reform Staff by JRB Associates of McLean, Virginia,
and are reprinted to provide more detailed information than the
Checklist alone can supply.
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TABLE OF CONTENTS
I. POLLUTION FEES
1. Emission Fees
2. Product Taxes
3. User Charges
4. Raw Material Charges
II. CONTROLLED TRADING
5. Offsets
6. Marketable Permits
7. Bubble Policy
III. PRODUCT DEPOSITS
IV. POLLUTION INDEfNITY
9. Insurance Plans
10. Performance Bonding
11. Pollution Compensation Plans
V. INFORMATION MECHANISMS
12. Disclosure
13. Product Labeling
14. Training
VI. GOVERNMENT COST SHARING
15. Capital Grants
16. Tax Incentives
17. Recycling Market Subsidy
18. Loan Assistance
VII. MONITORING AND ENFORCEMENT
MECHANISMS
19. Nonconformance Penalties
20. Noncompliance Penalties
21. Administrative Fines
22. Bounties for Polluters
23. Environmental Auditors
24. Common Law Alternative
VIII. INNOVATIVE INCENTIVES
25. Procurement Incentives
26. Resource Pooling
27. Industry Standards for Pollution
Control Equipment
28. Rewards Used as Economic Incentives
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CHAPTER I. POLLUTION
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I. EMISSION FEES
l.L DESCRIPTION
Under this system a charge is levied on each unit of a pollutant dis-
charged. Polluters find it economical to reduce emissions up to the point
where the additional cost of reducing a unit of pollution equals the fee.
This approach can be used to replace a direct regulation or to supplement a
regulatory approach by providing a continuing incentive for sources to meet
or do better than established standards.
1.1.1 Substance
This approach has been carefully analyzed by the academic community
and is the nonregulatory approach most often advocated by economists. If
polluters are charged a-fee or tax for use of the environment, they have
an immediate economic incentive to use pollution reduction measures. The
fee is designed to set the marginal costs to industry for reducing t.heir
emissions equal to the marginal cost of damages inflicted on society by
the emissions. No requirement or incentive would exist to apply controls
which are more costly than the fee per unit of pollution. Although the
primary purpose of emission fees is to provide incentives, it also makes
polluters pay some of the societal costs of pollution.
Such a program could lead to lower average pollution control costs than
most regulatory programs because fees encourage more control by polluters
with low marginal abatement costs and less by those wich high abatement coses,
while providing for the same total amount of cleanup.
1.1.2. Procedure
Since damages to society from particular types of pollution are not
readily measurable, it would be necessary in most cases to establish charge
levels according to marginal cleanup costs. Industry analyses could provide
average marginal compliance cost data for different types of sources ana could
1-1
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estimate the effect-of different charge levels on the discharges from different
sources in an area. These are the only cost data which are necessary; cost
data for individual sources are not required. Modeling of pollution discharges
and impacts would be required as in a direct approach to determine the effects
of individual sources on environmental quality.
Ideally, the charge should be levied directly on the activity to be
influenced; in this case, the fee should be levied on the emissions them-
selves. The fee can be effective, however, if it is carefully applied at another
point in the pollution-generating process (.e.g. production, inputs, etc.).
It is important that emissions be carefully monitored on a frequent
basis; however, this is a requirement of most effective pollution control
programs. It would also be in the best interest o£ a firm which must pay an
emission fee to have accurate emissions readings taken frequently while the
firm is implementing measures to reduce its emissions, so that reductions can
be registered and the fees which the firm must pay proportionately reduced
by the agency.
1.2 ADVANTAGES
Since polluters with the lowest marginal costs will be first to reduce
their emissions, pollution control is provided at the lowest total
cost. Several limited studies suggest that pollution' fees could reduce
the cost of achieving a preselected ambient level of pollution by 50%
or more. The costs to polluters of controls plus charges could be
more than the costs of controls to comply with regulations, however.
An effective emission fee^program would be more effective than regu-
latory approaches because polluters would be forced to look for (and
to implement) methods to control pollution which are less expensive
than the fees which they must pay while they continue to pollute.
Pollution fees administratively set should help reduce delavs, since
many firms which currently find it less expensive to delay compliance in
the courts than to comply would have to pay fees while chey delayed.
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Ic would be equitable in the sense that every polluter would have to
pay society for using scarce environmental resources and none would
be faced with control costs which are much more or much less than the
cost to society of pollution damages.
Rather than forcing a particular control technology, this approach
encourages Drivate sector initiative in developing and implementing
less costly, innovative approaches.
Fees can be used as a supplement to oollution standards.
Fees generate revenues which can be used for administration, R&D, or
clean-up and compensation. It should be remembered, however, that if
fees are effective in reducing pollution, then revenues will decline,
making them an unstable source of funds.
Selective monitoring could be keyed to the amount of fee paid, thereby
lowering administration costs. For example, the focus could be on
monitoring those sources paying low fees.
1.3 DISADVANTAGES
Environmental damage could occur if the fee is not set at a high
enough level to provide an adequate incentive for firms to reduce poll-
ution to achieve the desired ambient level. However, if the fee is
set too high, it could have severe economic impacts. Since data is
usually Insufficient to set an emission charge equal to the damages to
society, the fee must be based on marginal pollution control cost
analysis. To the extent that control costs or current emission levels
are not known, a fee system would have more uncertainty about reaching
precisely the desired level of control than would a regulatory approach.
Hence, emission fees may not be appropriate for dealing with certain
toxic or hazardous pollutants which must be controlled to specific
levels. Given the uncertainties in cost data, the more important the
threshold for control, t*>e ore attractive a rar'-.etable permits scheme
looks relative to emission fees.
Monitoring of emissions could be a problem if the courts would recuire
exact measurements of wastes for computation of the fee. It is less
important for direct standards if aeasurements are very accureate except
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where emissions are on the borderline between compliance and noncom-
pliance. The monitoring problem can be averted where all pollutants
stem from measurable inputs to the process (as in the sulfur contents
of fuels) and where the degree of control of emissions of these inputs
can be measured (by the removal efficiency of control equipment or by
the amount of wastes collected). The approach common to European charge
systems is to establish a table of charges using production inputs or
output as a basis for estimating emissions and to allow polluters to
request sampling of their wastes if they think they are being overcharged.
Certainly some user charge systems have proved workable based on at least
limited measurement of emissions of certain pollutants.
Geographic differences may make a uniform fee inappropriate. The
characteristics of different areas may require different levels of
abatement and an appropriate fee level to assure optimal control.
This may be politically unattractive.
Unless fee systems differentiate among types of sources in setting
charges, there could be substantial disruptive impacts. For example,
charges needed to induce controls by steel mills may put nearby
electroplaters out of business because of the differing natures of
their emissions. Setting different charges for different types of
sources to alleviate this problem (just as differentiated regulations
are set) would lead to a more complicated administrative system and
would reduce the savings over a direct regulatory program.
Some firms have stated that fees place too heavy a burden on industry
since firms would be expected to pay the fee while they are investing
in technology for pollution control. They claim that this amounts to
paying twice. However, systems implemented in France and Geraany
provide for a period of grace before the fee goes into effect to let
dischargers invest in control equipment before they start paying the
fee.
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1.4 APPROPRIATE SITUATIONS
Emission fees are appropriate for controlling conventional pollutants
which can be accurately measured. They may also be useful for wider appli-
cation as a supplement to other regulatory approaches. However, emission fees
¦ in some parts of the country and not in others can lead to inefficient
interregional movement of plants.
1.5 APPLICATIONS
There have been a number of proposals in this country to apply emission
or effluent fees for air and water pollution problems.
Charge systems have been proposed to reduce pollution from automobiles.
One approach would tax new vehicles on the basis of their emissions. Also a
tax on gasoline based on the emission level of a purchaser's automobile has
been proposed. None of these approaches has been implemented, however.
In 1970, the Nixon Administration proposed a nationwide sulfur tax for
stationary air sources. This tax was to be 15 cents per pound of sulfur for
sources located in nonattainment areas. This proposal received a good deal
of attention, but was not implemented. The U.S. House of Representatives
adopted amendments to the Clean Air Act in 1976 which would have established
a fee on emissions by major stationary sources in excess of applicable emission
limitations. The fee would have been based on the costs of achieving the
emission limitations. This approach would have supplemented direct regula-
tions as a means to achieving prescribed standards.
Czechoslovakia has been using effluent charges to maintain water
quality at predetermined levels for a number of years. A variable charge
is assessed based on the biological oxygen demand CBOD) and suspended solids
(TSS) . There is also a provision for raising che basic rates in areas v'nere
the water quality standards are below par.
In the U.S., user charges must be collected by municipalities which re-
ceive federal sewer system construction grants. These municipalities are
required to recover operating costs from cheir users (industrial users are
also required to pay a share of capital costs). The formulae for collecting
fees differ amont the municipalities and provide different incentive effects.
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However, Che primary purpose of chose user changes is Co finance creacmenc
facilicies, wich Che provision of incentives as a secondary goal.
Charges have been used in conjunction wich standards in several European
counCries. Boch Ease Germany and Hungary levy fees on discharges which
exceed effluent standards. The basis of Che fee differs becween Che cwo
countries, buc in each case is set at a level sufficient to provide an
incencive. Proposals have been made in Che U.S. Co induce firms Co meec
standards which are based on an assessment of new control technologies.
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2. PRODUCT CHARGE
2.1 Description
A product charge is a fee imposed on a specific product (or service)
judged to have undesirable environmental effects. It is a way to ensure
that the expected environmental harm associated'with the use or disposal
of certain products (or services) becomes part of these products' costs
to their manufacturers or consumers. The product charge is intended to
promote a shift from environmentally less to environmentally more desirable
products or services by increasing the market price of products with
undesirable environmental impacts. This approach could be used as an
alternative or supplement to other regulatory mechanisms.
2.1.1 Substance
Fees levied on environmentally unsound products (or services) which
have undesirable environmental impacts can shift the related costs from
all who are affected to those who produce or consume the specified products.
In this way, fees can narrow the difference between what the costs (or
benefits) are to the individual or group which use the good and other
members of society who are affected by its use. A product charge also
provides an incentive for prevention of environmental ham and for conser-
vation in instances where the charge can be linked to the way in which
a product is handled.
A product charge means that the expected environmental damage in the
use or disposal of products or services is part of the products' cost.
This charge would be treated by producers and consumers just like other
costs which they try to minimize (e.g. fuel, labor or materials). Polluters
will weigh the charge against the cost of eliminating the hazard in order
to avoid the fee. Assuming a rational decision process, firms and individuals
would be induced to abate their activities up to the point where the costs,
including any product charge, of further action would not be justified by the
additional benefits obtained.
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It is important that the charge be properly focused on the activity or
product to be discouraged in order to avoid perverse market incentives and
resulting wastes and inequities. On the one hand, a charge placed on very
narrowly defined activities may unduly discourage the activity by imposing
unusually high costs, whereas application of the fee in another point in the
pollution-generating process may provide the same degree of environmental
improvement at lower cost. On the other hand, an extremely broad definition
for an activity cculd result in a general income loss with no substitution
resulting between environmentally "undesirable" and "more desirable" products
and services.
To be efficient, product charges should be paid by all who contribute
to the hazard so that the incentive is widespread. However, the equity consid-
erations of such a policy are serious. For example, some industries can not
produce viable substitutes, thus the charge may result in significant effects
in prices without solving the environmental problem.
2.1.2 Procedure
Administrative procedures for product charges can be facilitated through
established tax administration systems, particularly if the Congress chooses
to adopt a value-added tax (VAT) on products. This approach entails some
incremental cost to the system, which would be offset by savings from reduced
costs for pollution-abatement procedures.
2.2 Advantages
Product charges provide clear economic incentives for producers to
make changes in the design, marketing, and distribution of products
with undesirable environmental impacts. Producers would be motivated
to change these products so that they were more environmentally
compatible.
If fees are set according to perceived degree of environmental hazard,
and if the market behaves in a competitive manner, product charges can
provide a least cost solution to environmental control. They can induce
firas and individuals to abate their activities up to the point where
costs of further action would noc be justified by the extra benefits
obtained. T>:us, this approach uses the market mechanism in a way
which minimizes abatement costs.
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. The approach also minimizes the need and cost of enforcement
since it relies primarily on the market mechanism applied to
easily measured products and the established tax collection
system through which the program can be implemented.
Administratively applied charges continue through litigation,
so that any delays caused by these legal proceedings would not
be economically advantageous to firms.
Revenue from the taxes and fees can cover the social costs of
environmental damage caused by the production process.
The pollution charge approach is equitable since consumers bear
the full cost both of production and of environmental impact of
the designated products.
2.3 DISADVANTAGES
The product charge approach can be economically inefficient.
Under this approach, a uniform product charge is assessed
although the environmental costs of using and disposing of a
product may vary widely. A product charge cannot distinguish
between the low cost user and Che high cost user of the product.
Thus, overcharges and undercharges may occur and these are
inefficient.
A charge level, which promotes the most cost-effective pollution
control strategy is difficult to determine because of uncertainties in:
1. the marketplace (e.g., variations in product demand,
differences in firms' investment behavior, etc.);
2. the dollar value of pollution damage;
3. the exact level of required abatement or of remaining
hazards.
Problems of equity could result from a product charge program. Because
some consumers and producers do not have viable alternatives they would
be forced simply to pay the tax and continue their normal economic
activity. When carried to all relevant products, the result is a price
increase, falling especially hard on the less affluent.
It would not be effective for products and services for which demand
is inelastic since consumption of the product will remain constant
despite application of a fee.
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2.4 APPROPRIATE SITUATIONS
A product charge approach is most appropriate in situations where:
environmental consequences (assessed in economic terns) are
relatively constant for all users;
use of a product or service can be related to pollution parameters;
demand varies with the price of the product;
good substitute products exist, the use of which would not present
other environmental problems;
economic dislocations could be dealt with (e.g., employment effects,
geographical shifts of production centers, etc.)
2.5 APPLICATIONS
At present, fees are not widely used to internalize external effects
or hazards. However, some examples follow.
In July 1971, New York City passed its "nicotine and tar" tax on
cigarettes. This tax is directly proportional to the tar and nicotine
content of the particular cigarette brand, which means chat high tar
and nicotine cigarettes sell for about five cents a pack more than low
tar ones. A shift of consumer demand (from high to low tar and nicotine
cigarettes) of nearly 13 percent has occurred in New York. Although
the precise reasons for this trend are not easily discerned, the tax
along with other variables (such as increased consumer awareness of
the health hazards posed by high tar and nicotine cigarettes) may have
contributed.
A number of suggestions for using incentive taxes to improve worker
safety have been suggested. In situations where an employer does not
fully account for hazardous conditions, a tax or fee related to work
injuries could be applied on the product.
Fees have been proposed for new cars based on their failure to meet
emission standards or fuel economy standards. This product charge
would provide a disincentive to customers interested in purchasing
these vehicles.
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3. USER CHARGES
3.1 DESCRIPTION
User charges are fees levied on those who use services which are pro-
vided by the government. Users of publicly owned treatment works (POTW's)
for wastewater treatment, solid waste disposal systems, and public recrea-
tional areas are among those who are commonly charged for public services.
Although user charges are not specifically designed to achieve environmental
objectives, studies show that volume or concentration-based user charges
encourage pollution reduction in direct relation to the size of the charge.
User charges can be very similar to emission fees if they are based on
emission levels. However, the primary objectives of the two techniques differ
markedly; user charges seek to recover the cost of pollution control while
emission fees provide a disincentive to pollute.
3.1.1 Substance
Charges are usually set to cover the actual cost to government of pro-
viding the service and can be assessed based on a variety of principles. For
example, fees charged for use of a POTW have been based on effluent concen-
tration, water usage, a flat fee for users, or other mechanisms which are
established by municipalities.
The development of a user charge system first requires the establishment
of a basis for the charges. The charge can be either uniform or variable.
Variable charges can allocate the financial burden of the provided service
among different sources depending on use or ability to pay. In addition,
charges can be varied according to different pollution parameters (e.g., time
of release, type of pollution, etc.)
Variable charges also induce more efficient and effective compliance with
the secondary goal of user chargesachieving pollution control objectives
because the charge varies with the pollution control costs of the specific
sources involved. ' Uniform charges serves the primary purpose of raising
funds to combat environmental damages, but are less likely to reduce emissions.
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User charges are designed primarily to recover direct costs, thus their
effectiveness in internalizing external costs (to members of society) is often
limited. Because of this, distortions of market decisions can' result when a
user charge is applied. For instance, uniform landing charges at airports
inflict costs on travelers by encouraging costly delays during peak travel
hours. No incentive is present for airline operators to avoid scheduling
aircraft during these peak hours. A user charge which differentiated between
peak and off hours for traveling could correct this distortion.
3.1.2 Procedure
Most municipal governments already have compatible administrative struc-
tures in operation. However, the user charges mechanism needs to be specif-
ically geared toward assessing and collecting these fees; little reliance
can be placed on existing tax collection systems. Thus, much study and
analysis is needed before this mechanism could be in place. The amount of
work required to establish a user charges procedure would depend on the basis
for the charges. If the charges were uniform, the mechanism could be fairly
simple. However, if the charges were variable, careful study would be needed
to determine the charges.
3.2 ADVANTAGES
User charges generate revenues with which to combat pollution.
Since most municipalities already have an administrative mechanism
in place, most user charges would be easy to administer, especially
if the charges are uniform.
User charges pLace at least some of the cost of "cleaning up" in the
hands of the polluters.
User charges may provide some incentive for innovation in pollution
technology, by encouraging the discharger to develop new production
technologies which would.not be subject to the charges.
3.3 DISADVANGAGZS
User charges may not be useful in situations where polluters have aarkec
cower and pass the charges along to their customers, rather chan aaopt-
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ing pollution control measures.
In situations where a pollutant is extremely dangerous and no margin
for error in the amount of it that enters the environment can be
tolerated, user charges alone provide inadequate control and other con-
trol measures are required.
User charges are not primarily meant to provide incentives for cost-
effective environmental control or technological innovation in the
production-consumption-disposal cycle. Thus, although they may recover
costs of public facilities, they do not necessarily provide the most
cost-effective solution to environmental problems.
User charges require close monitoring to ensure their equitable
distribution.
3.4 APPROPRIATE SITUATIONS
User charges work well in situations where individual users of a
public facility can be identified and monitored.
User charges do not work well when pollutants are hazardous at low
concentration levels.
Although user charges are primarily meant to raise revenues, other
goals (such as incentives for innovation) can be achieved-through
their use, but at considerably more cost in administration.
3.5 APPLICATIONS
Many municipalities charge users of municipal municipal sewage systems
according to volume of effluent discharged to POTWs. In the past, these
charges have been set to accomplish several goals such as reduction of
effluent flows (i.e., water use), to finance regional or local water
quality projects, or to achieve certain effluent standards.
U.S. sewer user charges take a variety of forms, thereby presenting
users with different incentives and municipalities with different
monitoring responsibilities. Examples include:
3-3
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-Ad valorem taxes which are levied as a proportion of the user's
property tax and thus do not vary with the size of the waste contri-
bution. In this case, no Incentive to reduce discharges exists and
no monitoring is needed.
-Charges which are based upon water volume. These do not necessarily
consider quantity of wastes in the water.
-Unit price charges and sewer surcharges which are related to the vol-
ume and content of waste and therefore require monitoring.
-Peak-period charges for airports, bridges, parking, and other trans-
portation facilities pay for the construction and operation of the
facilities, and, in addition, provide incentives for users of the
facilities to switch to other time periods. Substantial external
benefits to these charges can occur, such as reduced delays, lower
energy consumption and air pollution, and, in the long run, smaller
transportation facilities.
Fees have been used by private associations of dischargers in the Ruhr
Valley of West Germany to finance collective pollution control measures. Costs
are allocated among dischargers based on the cost and difficulty of treating
the particular wastes which they discharge.
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4. RAW MATERIAL TAXES
4.1 DESCRIPTION
A raw material tax (RMT) is a charge assessed on raw materials which
can lead to environmental pollution during the production-consumption-disposal
cycle. Its purpose is to Increase the market price (or cost to users) of mat-
erials which pose risks when they are released into the environment. The RMT
encourages producers both to substitute a less polluting for a more polluting
material and to discover ways to reduce the release of polluting material in
final products.
4.1.1 Substance
RMTs provide incentives to mitigate or avoid the use of environmentally
undesirable raw materials by increasing the cost of using these materials
relative to other materials. The RMT would be treated by firms and Individuals
just like other costs which they try to minimize (e.g., labor, fuel, and
materials) so that material users will, in their normal course of business,
weigh the cost of using a highly polluting material (i.e., material cost
plus RMT) against the cost of using other, less polluting materials.
The effectiveness of an RMT depends upon the substitutability of
intermediate and final products. Many products can be manufactured from
different, but substitutable, materials. For example, the handle of a brush
might be made of wood, plastic resins, or metal. Regardless of the material
used, the brush handle is highly functional. For other applications, however,
no practical substitute is available so that the immediate effect of the RMT
would be to increase the cost of the finished products. This sit-
uation would ultimately lead to higher end-product prices and, to the extent
that there is an inverse relationship between product price and quantity de-
manded, to a resulting drop in the use of goods containing this taxed
material. If the demand for the taxed material or final products is not
sensitive to price increases, the RMT's effect is a reduction in purchasing
power (real income) of consumers of these goods. Understanding this relation-
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ship is essential to properly Levying an RXT on a particular material.
Another essential component is the scope of the materials to be covered
by a particular RMT. If, for example, the tax falls on too broad a grouping
of materials, it might also increase the cost of using substitutes, thus
eliminating incentives to substitute "cleaner" materials for polluting
materials. Such a situation would result in a decrease of real Income for
consumers and business (an "income effect"), with no substitution resulting
between environmentally "undesirable" and "more desirable" products and
services. Too narrow a product definition for RMT coverage may merely
cause substitution of one undesirable material for another. In addition,
to be efficient, the tax should be based on some measure of performance, such
as the level of pollution produced or the degree of health hazard.
RMTs also shift the social cost of pollution to the consumers of the
taxed products. That is, the environmental damage done by use of a given
material is usually a cost borne by all members of society, not just con-
sumers of the material. By charging users of the environmentally undesirable
material more for using that material and putting the extra charge into the
general tax fund, the RMT shifts the social cost to consumers of the specific
material.
4.1.2 Procedure
Administrative procedures for RMTs can be facilitated through established
tax administration systems. Although this would entail some incremental cost
to the existing systems, it would probably be small in comparison to regu-
latory enforcement. The implementation of a value added tax system (VAT)
would further facilitate the use of RifTs.
4.2 ADVANTAGES
The RMT approach provides clear incentives to innovate and pursue the
least costly method of achieving a particular environmental protection
goal. Individuals and firms can consider various possibilities at their
discretion, without having to use a particular approach.
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If fees are sec according to perceived degree of environmental hazard
and if che market behaves in a competitive manner, an RMT systaa can
provide a least-cost solution to environmental control. The reason
is that RMTs can induce firms and individuals to abate their activ-
ities up to the point where costs of further action would not be
justified by the extra benefits obtained.
RMTs minimize the need for and cost of enforcement since they can be
imposed on measurable Inputs to production processes and implemented
through the established tax collection system.
Tax liabilities continue through litigation, so that delavs caused
by litigation involving regulatory standards are not a prooiem.
Revenue from the caxes can cover che social coses of environmencal
I
damage caused oy cne production process.
The approach is eauitable since consumers of "environmentally undesirable"
goods are aware ot, and pay the "full cost" of, these goods.
It encourages "he development of manufacturing techniques which
conserve and recycle the taxed materials.
4.3 DISADVANTAGES
Impacts will be distributed unequally among sectors of the economy
affecting industries and communities which rexv on tne taxed raw mat-
erials .
A tax level which would encourage the most cost-effective pollution
control strategy is difficult to determine because of uncertainties
in:
1) the marketplace (e.g., variations in product demand, differences
in firms, investment behavior, etc.);
2) the dollar value of pollution damage;
3) the exact level of required abatement or of remaining hazards.
Problems of eauitv could result from an R^fT program because some
consumers ana firms can noc use alternative material. They would be
forced simply to pay the tax and continue their normal economic activity.
When generalized to all relevant products, the result is a price in-
crease, falling especially hard on the less affluent.
An RMT would not be effective on materials for which demand ls
inelastic since consumption or cne proauct win remain constant despite
application of the cax.
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A RMT influences the consumer's decision to buy the product (for
example, a soft drink in an aluminum can) only; ic does not influence
what he does with the can after he has finished the drink. If it is
cheaper for him to throw away the can rather than recycle it, he has
no incentive to do the latter. Thus, the RlfT1s effectiveness is lost.
Considerable experimenting and analysis would be necessarv before
such approaches could be lnmlemented on a large scale, since any
precedents are limited in scope. Furthermore, a potential for
considerable and unforeseeable economic dislocations exists.
4.4 APPROPRIATE SITUATIONS
The RMT approach Is likely to be successful in situations where:
The specific material is known to be environmentally undesirable
(e.g., toxic substances used as intermediaries);
Demand for the raw material is elastic;
Available substitutes exist which do not present other environmental
problems;
Economic dislocations could be dealt with (e.g., employment and
community impacts).
4.5 APPLICATIONS
Several schemes have been proposed to tax the use of lead as a gasoline
additive. In 1970, the Nixon Administration proposed a lead additive
tax for gasoline, a proposal which Congress then rejected. Mew York
City currently has a one cent per gallon tax on lead in gasoline.
These schemes were designed to set the stage for forthcoming regulatory
provisions requiring the use of low-lead fuels in all cars. 3y
increasing the price of leaded fuels, the taxes were meant to increase
demand for low-lead fuels. Since the regulatory programs involving
leaded gasoline seek to induce major shifts in production and consumption
patterns of a basic commodity, this tax is important in smoothing out
transition problems.
A number of recycling incentive tax schemes for packaging materials
have been proposed in the past. These taxes are designed to encourage
shifts to packaging materials that can be recycled or reused and to
offset disposal costs for solid wastes. For example, a New York City
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(proposed, hut not implemented, in -19.70711 was to be levied on
retailers and wholesalers of packaged goods, thus entailing signifi-
cant administrative costs. Other proposed schemes call for taxes
on bulk producers or importers of packaging materials, which signif-
icantly reduces Che administrative burden.
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CHAPTER II. CONTROLLED TRADING
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'5. OFFSET POLICY
5.1 DESCRIPTION
In an effort to achieve National Ambient Air Quality Standards
(NAAQS) and at the same time minimize impedance of economic development
in areas which have not achieved these standards, Congress and EPA grant-
ed each State the opportunity to develop its own emission offset policy
(EOP). The purpose of Che offset policy is to allow firms to expand or
develop through the creation of a market to sell (in the case of an ex-
isting plant) or buy (in the case of a proposed plant or plant addition)
reducible air pollution potential. This potential could be sold, bought,
or traded to others who want to engage in activities which would other-
wise exceed NAAQS emissions in that given geographical area. At present,
the offset policy has been applied only to air pollutants; however,
it could be applied to other pollution sources as well.
5.1.1 Substance
The Clean Air Act of 1970 required states to develop State Implemen-
tation Plans (SIP) for meeting National Ambient Air Quality Standards by
July 1975 (or mid-1977, in some cases). By the mid-1970's, it became
apparent that many areas, particularly large urban centers, were not going
to meet the air quality standards deadline. Under the original guidelines,
no expansion or new construction could occur in areas failing to meet these
standards. In response to this situation, EPA issued a ruling (later in-
corporated by Congress into the Clean Air Amendments of 1977) that estab-
lished the emission offset policy. This policy allows for new construc-
tion or expansion of existing plants, under certain stringent conditions,
in areas which have not met the standards.
The offset policy developed in response to industry pressure to allow
a reasonable method for growth and expansion in areas that did not achieve
the air quality standards. The policy, therefore, was not developed as an
economic or technical panacea to the problem, but rather as a legal and
political alternative Co allow some measure of flexibilicy while che reg-
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ulation was implemented.
States are given the responsibility for implementing the offset policy.
For areas not conforming to the air standards, States have two emission
offset options that allow for new construction and development:
1) When any new source (plant) is to be built, the State can require
that a corresponding reduction or offset in another source (plant)
emissions must result.
2) A State can require emission reductions from existing sources,
thereby permitting a margin of growth for new or expanded sources.
At present, approximately one-third of the States have SI? provisions
for an emission offset policy; about one-sixth of the remainder generally
reference the policy without detailing specifics of implementation. The
remaining SIPs contain no information on this policy.
A variation of the offset policy approach can also be applied to a
plant complex, focusing on the total air pollution of the facility rather
than on each point of emissions. This approach is known as the "bubble
concept." It allows a plant to offset an increase in similar pollutants
from one point of discharge with an equal or correspondingly greater decrease
in pollutants from other points of discharge.
5.1.2 Procedure
The emission offset policy is currently implemented by states wishing
to participate through their SIPs . Firms who want to trade pollution off-
sets must do so in accordance with each state's plan.
5.2 ADVANTAGES
The offset policy allows areas which do not meet air quality stand-
ards to experience economic and industrial growth without further
deterioriation of air quality.
The offset policy provides a continuing incentive to reduce emissions
so that a firm can accumulate pollution offsets. Offsets are valu-
able since chey can be sold, traded, kept for possible future expan-
sion needs, or used as a hedge against future reductions in permissi-
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ble pollutant discharges.
5.3 DISADVANTAGES
Firms have had little or no experience in dealing with the offset
market. Thus, they may be hesitant to enter it.
The timetable for an emissions offset seller must coincide with the
offset buver for a deal to occur. If timetables are dissimilar, a
banking system may have to be developed to store the offsets for
future use.
A centralized market place for buyers and sellers of offsets could
lead to significant administrative burdens.
State interpretation of the emission offset policy could lead to
significant differences between states in the stringency of their
emission reduction programs.
Variations in state interpretation could also lead to significant
variations among regions in their interpretation of the required
offset levels. Thus, a state's liberal interpretation of offset
policies might not accomplish the policy's objectives.
5.4 APPROPRIATE SITUATIONS
Offsets are most beneficial in areas that are experiencing signifi-
cant economic development pressures. The emission offset policy per-
mits the states some flexibility in attempting to achieve air
quality standards without stifling industrial development.
Offsets would work well in situations where environmental danages
vary with the level of pollution.
Offsets would not work well in situations where toxic or hazardous
pollutants are present in relatively low concentrations.
Potential applications of the offset policy include solid-waste and
water pollution. Regional emission standards could be applied to
these pollutants and through offsets, a continuing incentive to reduce
wastes would result.
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5.5 APPLICATIONS
The Clean Air Amendments of 1977 allow the use of offsets in areas
not meeting air quality standards. Since 1977, approximately 100 emission
offset agreements (not involving monetary remuneration) among firms have
been reported. Ten of these transactions involved inter-firm trade-offs
with local and state government participation. However, none of these
transactions appears to be a successful market transaction where firms
wishing to acquire an offset pay prevailing market price to the offeror.
The remaining 90 offsets have involved intra-firm trade-offs where a firm
agrees to reduce emissions in an existing facility, thus enabling it to
use part of the reduction to offset the operation of a new or expanded
facility in the same region.
The State of Pennsylvania utilized an emission offset that permitted
desirable industrial development (a Volkswagen plant) to locate in non-
attainment air quality region. In order to offset the plant's prospective
emissions, the State used a more expensive but less polluting road tar on
state highways in the region.
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6. MARKETABLE PERMITS
6.1 DESCRIPTION
Marketable permits (MPs) provide a method to allocate allowable
discharges among pollution sources which are located in a specified area.
MPs place a strict limit on the amount of a substance which can be released
into the environment by limiting the production, transport, use, release, or
disposal of the substance. MPs differ from most permits in that holders
may trade all or part of their allocation after permits are issued. They
can be used in place of, or in addition to, technology-based or emission
standards.
6.1.1 Substance
Permits are Issued for a specific geographical area to limit the
amount of a pollutant which can end up in the environment. A source is pro-
hibited from discharging waste or undertaking other activities which can
cause pollution unless it holds permits which authorize these activities.
Marketable permits could initially be sold at competitive auction or
otherwise allocated to those who wish to use or hold them. A system applying
market forces could be used to facilitate exchange of permits between pollu-
ters, or through a system in which buying and selling of permits among pollu-
ters is sanctioned.
Firms would be willing to buy permits when their cost of cleanup to a
particular discharger level exceeds the market price of the appropriate permits.
A cost-minimizing polluter will treat wastes (and sell excess permits) up to
the point at which the marginal cost of waste discharge reductions equals, the
price of a permit. In this way, firms with lowest cleanup cost would clean
up first.
6.1.2 Procedure
An environmental control agency could allocate permits directly to poten-
tial users either based on a firm's prior use of environmental resources or
through an auction system. The control agency would establish the terms of
the permits, including the-date of issuance, duration, quantity allowed and
trade restrictions (e.g., those allowed to buy and sell including geographic
limitations).
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6.2 ADVANTAGES
The chief advantages of MPs are that they:
Provide a clear ceiling on the level of emissions or other activ-
ities which may cause pollution. But at the same time, they allow
new firms to enter the market for permits.
Promote flexibility to adjust the permissible pollution levels by
varying the number of permits. This can be facilitated by stagger-
ing the length and expiration of permits.
Lead to cost-effective pollution control. Those facing lowest abate-
ment costs will clean up first. The government need not determine
which emissions sources should be allowed to continue and which
should be cut back (and to what extent). The market determines
which sources are most valuable to society and those sources outbid
the others for available permits (or emissions rights), thus avoid-
ing the misallocation of resources which might result if regulators,
in setting regulations, were to miscalculate which sources of emiss-
ions were most valuable to society.
Provide incentive to continue to clean up even after standards are
met. since unused permits may be sold or traded.
Foster innovation by allowing firms the freedom to determine the least
cost methods of reducing pollution.
Lead to an equitable distribution of the burden of cleaning up. Each
polluter must pay the same amountthe market pricefor increases in
waste discharges. Thus, in a very basic sense, sources are treated
equally. Moreover, the MP system provides a good deal of flexibility
with regard to the distribution of the costs of pollution control.
3y subsidizing the purchase of permits (in a way which enhances the
efficiency properties of the market) by certain users, Che costs to
adversely affected economic sectors can be kept down. If economic
conditions warrant, the initial allocation of discharge permits need
not be made via the market. The MP system can function effectively
even if permits are initially given to polluters. This provides the
regulator1/ authority with a means of influencing the distribution of
costs among polluters.
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6.3 DISADVANTAGES
The chief disadvantages of MPs are that they:
May allow adverse regional or local effects if most permits issued
in a wide geographical area are used in a'few areas. This could be
avoided by having local marketable permits systems or specific res-
trictions on geographic use specified by the permits.
May not be traded competitively if a few larger firms corner the
market on the permits or if a speculative trading market develops.
Although pollution would still be restricted in this case to the
total amount allowed by permits, the permits may not be allocated
for uses which society values most. If neither current antitrust
laws nor protective measures within the legislation establishing
the permit system can avoid this problem, then an alternative
approach would be to allocate permits to the current producers pro-
portional to current production levels. This would allow the small-
er firms to stay alive, but would establish valuable rights for
current producers that might inhibit small (or new) producers.
Require establishment of an exact permissible level for emissions and
issuance of an associated number of permits. Incomplete understand-
ing of the release, exposure, and effects of certain substances may
not allow us to establish a ceiling level in an informed way.
6.4 APPROPRIATE SITUATIONS
A marketable permit approach is appropriate where emissions or activities
which cause pollution should be strictly limited. Further, it makes sense
where the impact of the release of a substance is widespread rather than local-
ized. However, localized impacts may be controlled using marketable permits
if a sufficient number of firms to use of exchange permits are present. As
stated above, MPs are less appropriate where exposure is to those who are in-
volved directly with the activity or product which creates the pollution. In
such cases, informational approaches, including encouraging the use of safe
practices, or an approach requiring strict liability is acre appropriate.
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6.5 APPLICATION
The EPA Economic Analysis Division is completing a study of marketable
permits to control non-aerosol uses of chlorofluorocarbons. The Standards
and Regulations Analysis Division and Program Planning Division of EPA are
jointly funding a study to analyze the feasibility of banking and trading
emission reductions for stationary air sources in areas which have not attain-
ed national ambient air quality standards. This approach has also been
studied for application to regional water quality management.
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7. BUBBLE POLICY
7.1 DESCRIPTION
The "bubble" policy views each industrial plant as if it were encased
in a giant bubble. Bubble regulations focus on the plant's overall impact on
the environment rather than dictating pollution levels for each discharge
point. A business can propose its own plan for controlling pollution within
its complex as long as the plant's total pollution does not exceed the sum
of current limits on individual sources. The bubble policy allows plants to
find the most cost-effective way to reduce pollution and can be useful in
combating fugitive and other previously uncontrolled emissions. Ic is
similar to pollution offsets which enable plants to trade emissions among
themselves in order to find a least-cost abatement strategy that maintains
environmental quality.
7.1.1 Substance
The Clean Air Act requires States to develop Implementation Plans and
source-specific compliance schedules to attain and maintain National Ambient
Air Quality Standards. Industry groups, particularly from the steel industry,
have stated that the individual source specification policy is inflexible and
creates cost inefficiencies. It forces plants to adopt unnecessarily expen-
sive controls to achieve uniform air quality standards at every discharge
point.
Industry representatives advocate the "bubble" as a more economically
efficient approach to controlling emissions. It controls the aggregate air
quality impact from each plant rather than from individual source in each
plant. The bubble policy encourages owners of plants to meet their emission
reduction requirements by putting extra controls on discharge points wich
lower control costs in exchange for easing the requirements for discharge
points in the plant with high control costs. The net result is the same
aggregate amount of abatement at a much reduced cost.
The bubble policy does not allow a business to tighten controLs on
one kind of pollutant in order to relax controls on another. Trades are
limited to the sane kinds of pollutants; e.g., sulfur dioxide can only be
traded for sulfur dioxide.
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7.1.2 Procedure
Manufacturers are encouraged to propose an alternative abatement
approach ("bubble" strategy) to meet existing requirements for pollution
control. EPA approves these proposals taking into account whether they
are enforceable and achieve the required levels of abatement.
7.2 ADVANTAGES
The bubble strategy offers plant managers an economic incentive
to develop new control strategies, and thus promotes efficiency
and fosters innovation.
This strategy allows industry greater flexibility in meeting
environmental standards, concentrating resources at points where
pollution can be controlled with least expense.
Since the approach originated with industry, it is more likely
to gain industry support and cooperation.
7.3 DISADVANTAGES
Industry may be reluctant to respond to the bubble approach for fear
that EPA could use whatever new control strategies were developed as
a basis for setting tighter standards in the future. Companies may
feel that they become more vulnerable to increased regulatory demands
by revealing locations and means by which greater pollution control
is possible.
The bubble policy imposes additional burdens on state regulators
and EPA in terms of administering, evaluating, and enforcing
more complex control strategies. The policy may also create
increased opportunities for litigation because the regulations
are more complex with more potential points of contention.
Currently, there are legal limitations on the use of the bubble.
For example, under the Clean Air Act, it does not apply to new or
modified sources subject to Best Available Control Technology
(BACT), Lowest Achievable Emission Rate (LAER), National Enission
Standards for Hazardous Pollutants (MESHAPS), Mew Source Performance
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Standards (NSPS), Reasonable Available Control Technology (RACT),
and Prevention of Significant Deterioration (PSD). Furthermore,
EPA can only approve alternative control strategies in areas where
States have successfully demonstrated that they can meet air quality
standards by the statutory deadlines.
7.4 APPROPRIATE SITUATIONS
The bubble policy is useful where there are multiple sources of the same
pollutant or whea different stages of a plant's production process emit the
same pollutant. Plants with a high variability of control costs among numerous
pollution sources are the best candidates for the bubble.
7.5 APPLICATIONS
The 1977 Clean Air Act Amendments authorize State Implementation
Plans to incorporate "bubbles" proposed by companies.
Companies in a broad range of industries have proposed bubbles whose
characteristics depend on the nature of the manufacturing processes:
- A utility (Cincinnati Gas and Electric) uses the bubble to
attain and distribute the lowest cost mix of low sulfur coal
and/or stack gas cleaning controls among a plant's five boilers.
- A metal fabricator (Union Carbide) may shut down two furnaces
instead of replacing its high-energy scrubber with a bag
collector, and in this way achieve greater particulate reduction
at less cost.
- A chemical company (DuPont) is applying the bubble to hydrocarbon
emissions.
Although the bubble policy was developed for air pollution programs,
it should be equally suitable for water pollution.
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CHAPTER III. PRODUCT DEPOSITS
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8. PRODUCT DEPOSITS
8.1 DESCRIPTION
A deposit system creates an economic incentive to return a product or
Its package. Under the system, a monetary deposit is paid by the consumer
when purchasing the product and refunded upon delivery of the product or its
container to a designated site. In this manner, an economic impetus encourages
recovery of litter and solid wastes and promotes the recycling and reuse of
the product, its package, and/or its raw materials.
8.1.1 Substance
Prior to the early 1960's, the most practical and widespread method
of distributing soft drink and beer containers was through returnable
bottle systems. Now, in an effort to increase recycling and reuse and
alleviate growing litter and solid waste problems (caused in part by
throwaway containers), some government jurisdictions have enacted, and others
are considering, the implementation of compulsory container deposits
for specified products.
Implementation of the product deposit legislation has generally
proceeded in the following manner. The deposits can be placed on the
product at a variety of points in the production-consumption cycle.
Selection of the point at which to apply the deposit depends on the admin-
istrative feasibility of collecting the deposit at that particular point.
The deposit would be refunded to an individual who returns the product to
an authorized collection station. The system should be effective if the
deposit is set high enough to encourage either consumers to return products
for proper disposal or others to recover these products in order to collect
the deposit.
8.1.2 Procedure
Appropriate legislation at the local, State, or Federal level would have
to be enacted in order to implement the product deposits as an environmental
control strategy. Once the legislation is enacted, the product deposit
would require initial administrative supervision. However, after this
8-1
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mechanism is established, minimal government supervision is necessary. If
retailers act as collection stations, their costs should be estimated and
deposit fees established to compensate them for Che' cost of collection.
8.2 ADVANTAGES
Since most of the public has had some experiences with bottle deposits,
the public is generally avare of and understands how the deposit
system works.
Product deposits have proven to be effective in reducing litter in
states that have beverage container deposit laws. For instance,
bottle and can litter decreased by over 65 percent in both Oregon and
Vermont in the year after the deposit and refund schemes went into
effect.
Significant energy savings could result from product deposits. One
EPA study in 1975 estimated that 218 trillion BTU's (equivalent to
approximately 37.5 million barrels of oil) could be saved annually
by the implementation of returnable bottle and can legislation in the
U.S.
Some studies have indicated that the prices of beer and soft drinks
in returnable bottles would be slightly lower than in disposable^,
bottles.
Since the private sector has operaced a bottle deposit system in
the past, once the appropriate legislation is enacted, the private
sector should be able to administer the program with little government
supervision.
8.3 DISADVANTAGES
Substantial industry impacts can result from bottle deposit regulations.
For example, Oregon's law which bans cans with detachable tab openers
and places a deposit on all containers resulted in the closing of the
largest canning plant in the state.
Unless the deposit return centers are convenient to consumers, it can
be quite expensive and time consuming for consumers to recover the
deposits.
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If retailers must act as collection centers, deposits could force
many to participate against their wills. In addition, unless the
deposit legislation differentiated between collection center retailers
and retailers in general, the former would bear very high costs of
storage and handling.
When there is a variation in the deposit laws between states, the law
can be undermined by out-of-state purchases and business lost to out-
of-state retailers.
It is necessary to carfully set deposit charges so as to gain maximum
benefit from the law. That is, the deposit rates should not be set so
low that the incentive to return the product evaporates. Conversely,
deposit charges should not be set so high that consumption patterns
will change drastically. Periodic adjustments in deposit charges may
be necessary in order to maximize deposit incentives and benefits.
Implementation of bottle and product deposit legislation can render
certain types of capital equipment obsolete. In order to minimize the
legislation's impact, a substantial amount of lead time is required
before product deposits are implemented. This time gives industry an
opportunity to adjust equipment and capital spendine plans.
8.4 APPROPRIATE SITUATIONS
Deposits are generally utilized for items that are frequently littered
(i.e., bottles and cans).
Due to the significant disposal problems associated with large items
(such as abandoned automobiles and home appliances), a deposit system
on these products could help to alleviate the municipal disposal burden.
In the industrial sector, deposits could be imposed on containers of
hazardous or toxic materials thus encouraging the proper handling and
disposal of these products.
3.5 APPLICATIONS
There has been significant experience with beverage container deposit
laws around the country.
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Of che four states with container deposit laws (Oregon, Vermont, Mich-
igan, and Maine), Oregon's program is the most extensively documented.
A minimum deposit of five cents is placed on all bottles and cans, with
the exception of standardized containers used by several companies,
where the deposit is two cents. Both retail and wholesale stages are
included. The program enjoys a high degree of public support and has
generally achieved the goals of reducing litter and solid waste and
conserving resources. Its success has been due to high return rates
(in excess of 90 percent) and a smoothly functioning return system.
Predictions of significant employment declines, increased beverage
prices, and lower sales did not materialize. Most studies of a nat-
ional program conclude that similar results could be obtained on a
national scale.
Government jurisdictions below the state level have also enacted
bottle deposit legislation. Fairfax County, Virginia, has implemented
deposit requirements on all carbonated soft drink containers. These
deposits include reusable as well as throwaway bottles and cans.
Beer bottles and cans are not covered under the deposit requirements,
since in Virginia, the State Alcoholic Berverage Commission has juris-
diction over this area. Desoite those exceptions, litter problems
in the county have been significantly reduced.
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CHAPTER IV. POLLUTION INDEMNITY
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9. INSURANCE PLANS
9.1 DESCRIPTION
Insurance plans providing liability coverage could be required or pro-
moted for firms which handle and/or treat hazardous substances. This pollution
liability insurance would Increase the ability of government or affected
individuals (employees or area residents) to obtain compensation in the event
of a pollution incident while protecting firms from complete financial liability.
9.1.1 Substance
As illustrated by the high clean-up costs of such recent cases as the
Love Canal in New York and the James River kepone contamination in Virginia, the
level of liability associated with the poor handling, treatment, and disposal
of toxic materials can be substantial. The encouragement or requirement that
companies which handle or treat these materials carry pollution liability insurance
would serve three purposes: (1) to encourage a high level of compliance by the
firms with pollution control guidelines; (2) to protect the firms from total
financial responsibility in case of a pollution episode;and (3) to provide those
adversely affected by the episode with a means of redress.
9.1.2 Procedure
Firms handling or using substances with the potential to harm the environ-
ment would take out liability insurance policies to insure against the financial
costs involved with a pollution incident. Insurance companies underwriting these
policies would pool the risks of individual firms and determine premium rates
reflecting both an actuarially-based charge and the firm's record of pollution-
related injuries and claims. Liability coverage and limits would need to be
clearly specified since these policies would only protect against unavoidable,
accidental loss and would not generally cover cases caused by carelessness, neg-
ligence, or intentional disregard of reasonable safeguards.
In effect, this insurance coverage for pollution damage would place insurance
companies in the role of enforcers of pollution abatement guidelines. Either
directly through plant inspections or indirectly through claims-based premium
9-1
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races, it is likely that the insurance companies would exert pressure for strict
compliance wich pollution guidelines.
9.2 ADVANTAGES
Pollution liability insurance plans offer an established means for
claimants to obtain monetary redress and relieve the responsible firm of a
portion of the financial impact associated with, paying these pollution claims.
In many cases, damage and/or personal injury claims against a polluting firm
can be larger than the company is capable of paying. The firm then has two
choices: it can delay compensating the claimants through oft-times lengthy
litigation (and hope that the claims are reduced) or it can attempt to pay the
claims and face the prospect of bankruptcy. Insurance plans eliminate the
possibility of either alternative occurring and provide the claimants with
a means of collecting compensation.
These plans also offer an economic incentive to the firms to strictly
control materials harmful to the environment. Since the firm's insurance
premium would reflect its record of pollution episodes, a firm which handled
and/or treated its hazardous substances as carefully as possible would pay a
lower race than a company which was less careful in its treatment and handling.
9.3 DISADVANTAGES
This insurance requiremenC can be expensive, even wich experience-based
premiums. Added Co che expense of complying wich pollucion concrol guidelines,
firms which install costly top quality or innovative treatment technologies
would be unduly penalized.
The fact that a polluter carries liability insurance does not establish
in tort law that civil liability exiscs. Insurance coverage alone will noc
alcer che rules of evidence or the burden of proof which rests wich che plainciff(s) .
In addicion, even chough the presence of chird parcy (che insurance companies)
interests may promote out-of-court settlements, che level of controversy assoc-
iated with past pollution claims will likely force many claimants into suing
*
ex delicto.
^Insurance companies would provide a vehicle for non-judicacory secclamencs
by being more willing Co accept ouc-of-courc secclsments if che cost of tne
claim is less Chan che expecced cose of licigacion.
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An insurance requirement would place a heavier burden on smaller firms
Chan larger ones and chus may upset the competitive balance within an industry.
As evidenced by the James River kepone case (in which the polluter was a small
private firm), pollution danger does not vary by firm size; consequently, insurance
premiums would not vary by firm size. A small firm would find it more diffi-
cult to pay for an insurance policy than a large firm.
Liability Insurance plans would not generally cover cases of neglect
or disregard of prescribed procedures. Therefore, a portion of the pollution
cases may fall entirely outside the scope of insurance coverage.
9.4 APPROPRIATE SITUATIONS
Since required liability insurance coverage would add to the cost of
compliance, fail to alter judicatory procedures, and not cover acts of gross
negligence or intentional disregard, it does not appear that a general appli-
cation of this approach is warranted. The use of insurance plans should probably
be limited to cases where there is a great potential for environmental damage
and/or personal injury and where the cause of the damage can be identified.
9.5 APPLICATION
An analogous situation exists with respect to product liability. Firms
manufacturing products such as pharmaceuticals and machine Cools have experienced
a sharp increase in produce liabilicy claims as che courts are applying a more
general interpretacion of cort in chese cases. Wich sharp increases in boch
che number and size of produce liabilicy awards, produce liabilicy insurance
has gocten more expensive and harder to obtain. Most large firms are currently
self-insuring for a large deductible and are carrying insurance only for
"cacastrophic level" claims. Small companies, however, are not able to self-
insure for large deductibles and can not afford premiums for full coverage.
As a result, these firms are finding it increasingly more difficult co continue
in business. A similar scenario could occur for pollution liability insurance.
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10. PERFORMANCE BONDING
10.1 DESCRIPTION
Finns whose industrial activities could cause serious environmental harm
would be required to furnish a surety or bond guaranteeing the "successful"
(i.e., non-environmentally damaging) performance of these activities. If
a firm failed to meet this performance, the bond would be forfeited.
10.1.1 Substance
Any firm whose industrial activity had considerable potential to be
environmentally damaging would be required to provide a performance bond.
This bond, an arrangement between the firm and EPA, would indicate the
firm's commitment to compliance with the relevant pollution control regulations.
If these regulations are not followed, EPA would then be able to collect on
the bonds. Thus, performance bonds could play a significant role in the
enforcement of environmental regulations.
10.1.2 Procedure
Performance bonding would follow a relatively straight-forward procedure:
(1) the appropriate firms would be identified, based on the environmental
harm potential of their activities; (2) a firm would deposit its bond
with a bank or with another financial institution designated by EPA; and
(3) periodic inspections would take place to ensure the firm's conformance
to bond specifications. However, this simple three-step procedure necessitates
the resolution of several legal and procedual issues, such as :
Amount of the bond. How can an effective bond amount be determined?
Should it be a flat rate per firm or vary according to plant size,
type of discharge or emission, or some other factor(s) or combination
thereof?
Fate of the bond. If it is not forfeit, is it then deposited "permanently"
with the bank? If not permanently, for how long? Does the bond accrue
interest and if so, what happens to these funds?
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Inspection procedures. Who would perform che necessary Inspections
(EPA or a contractor) and how often would these inspections take place?
Both scheduled and unscheduled "spot check" inspections should be
conducted.
All of these questions must be answered before performance bonding can be
effectively utilized as a pollution control measure.
10.2 ADVANTAGES
Performance bonds could facilitate compliance with pollution control
regulations by providing an economic rationale (forfeiting the bond) to comply.
The monies derived from the forfeited bonds would provide capital for some
other EPA activity (I.e. pollution clean-up or victim compensation).
Performance bonding could be relatively easy to administer from the
standpoint of identifying appropriate firms (i.e., those firms whose
industrial activities may cause substantial environmental harm).
10.3 DISADVANTAGES
Performance bonding would require a close monitoring effort to determine
whether or not firms were in conformance with terms of their bonds
and, hence, in compliance with pollution control regulations.
A bond amount which has the desired effect (compliance with environmental
regulations) but is not financially overbearing would be difficult to
determine. If the bond is very high, then it may limit the number of
firms in a given market. Small firms may be forced out by this re-
quirement or may find that they lack the financial resources to even
enter the market.
Performance bonds would also add to the firm's cost of complying with
environmental regulations. Firms already in compliance would be particularly
hard hit. The additional cost of the bond to Che firm would be passed
through to the consumer and, thus, may have an inflationary effect on
the firm's goods or services.
10.4 APPROPRIATE SITUATIONS
Performance bonding is particularly well suited for activities where
environmental damage can be unquestionably traced to a source, such as in the
transportation and disposal of hazardous materials.
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LO.5 APPLICATIONS
Currently, performance bonds are used primarily by Che construction and
service industries. Their use is tied to the successful performance of various
contractual obligations.
A similar idea was proposed for hazardous waste disposal under the Re-
source Conservation and Recovery Act of 1976. The proposed rule stated that
the owner/operator of a hazardous waste management facility should establish
a secured closure trust fund. This fund would, in effect, guarantee that the
facility ceases operation and completes closure in the manner agreed upon with
EPA. Upon the owner/operator's satisfactory accomplishment of this closure,
the principal and the Interest in the closure trust fund would be returned.
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11 . POLLUTION COMPENSATION PLANS
11.1 DESCRIPTION
Pollution compensation plans define liability and provide for compen-
sation in the event of pollution damage. Such plans cover the cost of cleaning
up after a pollution episode as well as the related costs of restoration and
third-party compensation. The plans are financed by the manufacturers and users
of designated products.
11.1.1 Substance
The purpose of this approach is to offer the injured parties better
redress than litigation. Drawbacks to the legal process include procedural
barriers to class action, the public nuisance doctrine, and difficulties in
proving disease causation. Legal proceedings are often cumbersome and protracted
and in instances where those responsible are not identifiable, no court action
can be taken. Any of these drawbacks may impede or even rule out court settle-
ments .
Pollution compensation plans address these concerns and embody three
important principles to deal with them:(L) that pollution damage and control
costs should be initially imposed all or in part on the polluter; (2) that a
mechanism for the enforced collection of a pollution levy should be established;
and (3) that the funds so generated should be used for cleanup, restoration,
and victim compensation.
11.1.2 Procedure
Several procedural issues need to be dealt wich before pollution compen-
sation plans become viable alternatives or supplements to direct regulation.
These include:
Designation of pollution-producing substances, pollution-induced
diseases, and pollution zones. Since different substances require different
treatment, decisions must also be made on the approach to follow in establishing
the liability limits of the firms responsible for Che pollution damage, the
cleanup and restoration procedures to be used, and the compensation due co "he
pollution victims in each particular circumstance.
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Resolution of Che. disease causacion issue. This can be handled in
part as a statistical question. When a "significant" correlation between
disease and pollution is established, causation is then inferred and pollu-
tion victims identified. Epidemiological analysis plays a crucial role in
such determinations and clinical and experimental data along with mortality
and morbidity statistics are also considered. A basic tool for use in this
statistical analysis is the "order of risk" concept which refers to the prob-
ability of disease occurrence when an individual is exposed to certain envir-
onmental conditions.
Establishment of liability limits. What portion of the costs of clean-
up, restoration, and third-party compensation should be paid by the polluter?
Equitable liability limits which neither place undue financial burden on the
manufacturers and users of the specified substances nor unfairly burden
taxpayers have to be determined.
Development of an effective funding system. How should a fund to
make up the difference between what the polluter pays and the actual expenses
be established and maintained? Various methods of assessing a fee for manu-
facturers and users have been suggested, including one based on a flat rate
per unit of hazardous materials or one keyed to the firm's pollution activity,
a charge which might Increase or decrease in proportion to changes in emissions
or discharges.
U.2 ADVANTAGES
Pollution compensation plans streamline the current administrative
i
process by providing immediate funds for cleanup or compensation, thereby avoiding
long and drawn-out litigation. In addition, the plans state that compensation
is furnished regardless of the liability of the responsible party and even when
the responsible party cannot be identified or located, or is judgement proof.
Pollution compensation plans financed by a pollution levy based on
the firm's discharge/emission possess two important attributes. First, they
provide greater flexibility to the polluter Chan direct regulacion. For example,
che firm which faces this type of fee enjoys several alternatives in its quest
to comply. It can modify its discharge/emission by changing fuel or installing
pollution control technology; or it can pay the fee or cry a coTzbination of chese
approaches. Second, chese plans force che responsible party (in a competicive
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market) Co internalize Che cose of che levy. Thus, Che plans serve as an economic
incentive for the firm to modify its polluting activity. A rational firm will
attempt to reduce such costs by adopting pollution control technology or other
preventative measures if the marginal costs of these options are less than
the marginal cost of the charge. If the firm passes the cost of Che charge
to the consumers through a price increase, the consumers can then shift their
purchases to the lover priced goods produced by non-polluting firms. Lou
polluters are rewarded by increased purchases, greater shares of the market,
and higher profits, while high polluters are penalized by declining sales,
lower market shares, and falling profits. In this way, the pollution levy
discourages polluting activity.
11.3 DISADVANTAGES
Pollution compensation plans based on a pollution levy (as above)
can have a number of problems.
1. In highly industrialized countries where Industry may be oligopolistic
or otherwise non-competitive, the deterrent effect of the price mechanism
breaks down. In this case, when one firm passes through the levy co its
customers, all firms may follow suit and increase their prices as well. All
prices in the industry would rise or production might be cut back. The
economic Incentive which worked well in the competitive market fails and
inflation is promoted.
2. If an emission charge is imposed that is linearly proportional to
increased emissions but damage costs are shown to increase exponentially, a
number of deficiencies would occur. This charge system would be grossly in-
equitable, imposing a heavy financial burden on small or medium-sized firms while
granting an economic advantage, tantamount co a license co pollute, Co larger
encerprises. Damage coses lefc externalized would result in further dislocations
in resource allocation and impede economic planning. Finally, che system itself
is deprived of revenues which higher levies could provide. Additional complica-
cions arise under chis financing scheme, including (1) che possibility of infla-
tion increasing exponentially and (2) the difficulty in determining at what
pollution level and what charge co introduce che incencive in order for ic Co be
an affective stimulus.
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- Pollution compensation plans financed by a flat rate fee on users
and manufacturers of the specified products provide no economic incentive to
operate carefully. Since the fee would be levied on volume handled rather
Chan care in handling, a sloppy firm is not motivated to be more careful.
11.4 APPROPRIATE SITUATIONS
Pollution compensation plans are widely applicable in situations of
pollution damage. They are particularly appropriate where a direct link
between the damage and a specific source cannot be established or where prompt
action is needed to deal with an immediate threat to the environment or
human health.
11.5 APPLICATIONS
In the United States, legislation which embodies various types of pollu-
tion compensation plans exist on both the state and federal level. Eighteen
states have enacted statutes establishing liability for oil spills and eleven
of these states established funds to cover cleanup and/or compensation costs
not covered by liability. Four states maintain their funds through a fee
on oil; New Jersey levies a fee on both oil and hazardous substances. In
most cases, state requirements are more stringent than existing federal
regulations.
On the federal level, several sections of the Federal Water Pollution
Control Act contain provisions for cleanup and compensation of pollution
incidents. Section 311, the most relevant section, authorizes a fund to
cleanup both hazardous substances and oil spills in harbors and navigable
waters. To date, however, this section has been implemented for oil alone.
Section 311 also does not include a fee mechanism for establishing and main-
taining this fund; the fund itself is limited to the costs of cleanup only,
not restoration or third party compensation. Three other Actsthe Trans-
Alaska Pipeline Authorization Act, the Deep Water Ports Act, and the Outer
Continental Shelf Funds Act Amendments of 1978establish self-perpetuating
funds and include provisions for taking care of pollution-related costs.
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Currently, the House of Representatives is reviewing proposed legislation
to create an oil "superfund" which would cover the costs of cleanup,
restoration, and third-party compensation. The hazardous substances problem,
the subject of much Administration interest and the focus of an Interagency
task force (sponsored by the Department of Justice), is not covered by the
House initiatives.' EPA hoped to send a hazardous substances superfund bill
to complement the proposed oil superfund legislation to congress in the spring
of 1979.
In the international area, two formal conventions covering oil spill
liability and compensation and two voluntary agreements (by the shipping in-
dustry) have been drawn up. Criticism of all four accords centers on their
low liability limits and the duplication of funds with U.S. arrangements. In
addition, one of the shipping industry agreements awards cleanup costs only
to governments, not to individuals.
An extensive compensation scheme is now in effect in Japan. According
to this program, the Japanese government administers a compensation system
for persons who have suffered debilities from pollution outside the workplace.
The program's costs are paid for by the dischargers of the-specific pollutants.
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CHAPTER V. INFORMATION MECHANISMS
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12. DISCLOSURE
12.1 DESCRIPTION
As a supplement to direct regulation, disclosure is a system through
which the pollution control records of firms are made public, either by the
government or through a self-disclosure process. Disclosure provides an
incentive for firms, especially those concerned with their public image, to
Improve their environmental protection performance.
12.1.1 Substance
Disclosure of pollution control records ran be used as an added incen-
tive to ensure that potential polluters maintain acceptable discharge levels.
This incentive is provided through the impact that disclosure of non-compli-
ance might have on the consumers of a firm's product, or on the integrity of
the firm within an industry. Although disclosure could take several forms,
essentially it would provide the public with direct access to the pollution
control records of individual firms. With the threat of adverse publicity
resulting from disclosure of non-compliance with environmental regulations,
an added incentive beyond other economic and regulatory enforcement strate-
gies would be furnished.
12.1.2 Procedure
Since this mechanism is a supplement to direct regulation, it would
still be necessary for the pollutant discharge levels or appropriate tech-
nologies to be specified. EPA would be responsible for developing these
operational and performance standards. Through public disclosure, a com-
pany's pollution control records could be compared to the actual EPA re-
quirements. Disclosure could take one of several forms:
Voluntary disclosure, in which the firm takes responsibility for
providing access to its own pollution control records.
Government-enforced disclosure, in which EPA or some other public
body would make pollution control records public.
Disclosure as a condition of permitting, where disclosure of
pollution control records would be a aandatory element In obtain-
ing environmental permits, such as NPDES permits. In chis instance,
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industry would be forced to make records public, regardless of compliance,
in order to keep their permits.
12.2 ADVANTAGES
Public disclosure provides industry with a strong incentive to con-
form with environmental regulations, particularly in those instances
where the industry is greatly affected by public opinion. In some
cases, the benefits of a favorable public image may encourage firms
to provide more abatement than is sought by the regulations. Thus,
innovation'may also be fostered.
Disclosure also may preclude the need for other forms of enforce-
ment. Often industry is willing to pay enforcement penalties rather
than implementing costly environmental controls. In may cases, public
disclosure may be an effective substitute for costly enforcement actions.
In addition, it provides those firms with favorable environmental pro-
grams with the opportunity to receive public credit, thereby providing
an additional incentive to properly handle their discharges.
12.3 DISADVANTAGES
Public disclosure is only applicable to certain kinds of industries.
Specifically, it would affect those industries with a public image
to maintain and/or a visible consumer product to market.
Disclosure may require costly oversight by EPA or other administering
agency. Some system of ensuring the accuracy of pollution control
records would be necessary.
It may have an insufficient impact on consumer purchase patterns.
This could be due to the public perception that no real impact will
result in an individual's decision to purchase one product over another.
It could cause an Inequitable burden on industries highly affected
by public opinion and little or no impact on other industries which
have an equal or greater potential to cause environmental harm.
It could force EPA or other administering agencies to provide less
flexibility in meeting pollution control regulations, depending
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upon how che associated risk is perceived by the public.
12.4 APPROPRIATE SITUATIONS
Disclosure is appropriate in situations where industry must comply
with specific environmental performance standards and is most directly
applicable in those cases where firms are sensitive to their public image.
However, it can also be useful in cases where the public can exert signi-
ficant pressure on an owner/operatorin the siting of waste disposal
facilities, for example. In this case, a demonstrated, visible record of
success could make such siting less of a public issue than it normally would
be.
12.5 APPLICATION
The Safe Drinking Water Act provides for notification of consumers by
water districts of violations of drinking water standards. Currently, pur-
suant to Subtitle D of the Resource Conservation and Recovery Act (RCRA),
states will be conducting inventories of their solid waste disposal facili-
ties. These, inventories will contain lists of those disposal facilities
which have been found to be sanitary, and therefore legal, or illegal open
dumps, as defined by the Federal Sanitary Landfill Criteria promulgated
pursuant to RCRA Section 4004. In this manner, the public will be aware of
which owners and operators of waste disposal facilities are operating in an
environmentally responsible manner. Similar disclosure mechanisms could be
considered for such environmental regulations as che National Pollutant
Discharge Elimination System and che National Ambient Air Quality Standards.
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13.. PRODUCT LABELING
13.1 DESCRIPTION
Products posing significant risk of harm to human health or the envi-
ronment would display labels which explain the nature of the risk and provide
instructions for safe handling, use, and disposal.
13.1.1 Substance
Labels, would be required on products which pose a substantial environmental
or human health risk. The information contained on the label would be clear
and straight-forward, so that the hazard was easily understood. The philosophy
behind labeling is that fully informed individuals will make better decisions
about the products they use, consume, or work with than uninformed individuals.
The information provided by labeling would be useful co three groups
workers, employers, and society in general. Workers could use this information
in negotiating with employers to reduce on-the-job risks or to increase hazard-
ous duty pay. Well-informed workers would likely be more careful; this extra
care would result in fewer worker accidents and a reduction in lost work days,
both of which would benefit employers. A reduction in worker accidents would
mean fewer workmen's compensation, insurance, or welfare claims, thereby saving
the public's money. In addition, society in general could use this information
to make sounder market decisions about products consumed.
13.1.2 Procedure
The government would have responsibility for assessing the health and envi-
ronmental risk associated with product use. A search of the relevant literature
would form the basis for deciding the products' toxicity. The government would
then determine whether labeling is an appropriate control approach. A label-
ing standard might be developed first and, subsequently, labeling rules would
be developed to apply the standard to specific products.
13.2 ADVANTAGES
Labeling installs in both the consumer and the worker a greater knowledge
and awareness o£ the risks associated with che use of certain products.
Consumer sovereignty is promoted since che consumer, rather than government,
is che ultimate decision maker. Worker sovereignty is promoted as weli since
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Che worker now has valuable information Co use when handling che produce
or negotiating with employers.
Labeling can also save money for both employers and che public at large.
More careful workers mean that fewer days and less money are lost because
of injuries. In turn, the plant can be more productive. More careful
workers also have less need for compensation and insurance plans and this
means less of a drain on Caxpayers' money.
Produce labeling is invaluable for epidemiological research. Worker
exposure and the exact product and quantity of the product used would be
clearly specified. Thus, long-term studies of the relationship between
worker disease and products handled would be facilitated.
13.3 DISADVANTAGES
Labeling would be costly. Although unit cost is low, this cost must be
multiplied by the number of products needing labels and by the number of
product containers. This figure could be very large. It would also be
expensive for many industries to determine precisely what substances and
how much of chese substances are in their products. Paint companies, for
example, make up paint according to batch specifications and the exact
amount of each ingredient used is usually not known.
Unless a product is seen as a direct, strong threat to the user's health,
heightened awareness may have little effect on consumer behavior since many
regard their individual behavior as too insignificant to affect environ-
mental quality.
Labeling must be clear and concise to be effective. Experts may fail to
convey knowledge adequately co those outside their ranks.
It is difficult to determine the degree to which labeling should be used.
If all products which provide any environmental risks were labeled, users
may become desensitized. Conversely, if a product which posed an "average
risk" did not contain a label, consumers, or workers may mistakenly assume
chat che product was safe.
Labeling could prove Co be an economic hardship for companies which are
not responsive to consumer demand for safer produces.
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13 . 4 APPROPRIATE SITUATIONS
A labeling approach is useful in cases where safe handling is a primary
control procedure and where significant risks are associated with poor handling.
It is not a sufficient control strategy, however, when training is essential
to safe handling and use. A label should provide information which people
do not already have (e.g., people already knew that cigarettes were hazardous
to their health before warnings were printed on cigarettes, which may have
lessened the warning's impact). This approach can be used as a supplement,
well as an alternative, to direct regulation.
13.5 APPLICATION
Labeling has been used in selected instances (e.g., on cigarette packs or
on household chemicals), but empirical data on the effectiveness of this
approach is lacking. Several large chemical companies have begun to label
their products for acute diseases, and some government agencies, such as the
Occupational Health and Safety Administration (OSHA) and the Consumer Products
Safety Commission (CPSC), require labels for certain products they regulate.
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14. EDUCATION AND TRAINING
14.1 DESCRIPTION
Education and training can increase environmental awareness and teach
tbe proper handling of products that are hazardous to human health or have
the potential to pollute the environment. Education and training decrease
the need for regulations to protect users, consumers, and the public-at-large
against these products.
14.1.1 Substance
Education attacks the problem of pollution through active information
disclosure with little need for government intervention. Educational methods
seek to interpret information, bring it more directly to the public's attention,
and/or persuade the public to change its assessment of its own interest.
Education may be used broadly to increase understanding of dangers to
the environment and how these can be dealt with. Education gives users and
consumers of individual goods and services an informed freedom of choice among
competing products. The public's reaction, through demand and price mechanisms,
creates long-term incentives for industry actions that protect health and the
environment.
More narrowly, education can be used to combat specific types of problems
in protecting the environment. In some cases, simple disclosure of informa-
tion needs to be accompanied by education in order to make that information
meaningful. When not enough information is available, education and train-
ing provide the user or consumer with relevant knowledge about the consequences
of using a product.
Actual techniques for reducing pollution can be taught either as part
of courses for increasing general public awareness or in courses specifically
for training those who handle dangerous or toxic substances. These training
courses can also make workers aware of risks involved, rationale and procedures
for proper handling, and appropriate responses to accidents.
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In order to make regulations more effective, education and training
can be directed toward other groups involved in the overall effort to
control pollution. Education for businessmen and consumers can foster
understanding of regulatory intentions and encourage voluntary compliance.
These groups can be drawn into the process of elaborating regulations, which
can lead to a more effective final product. Government personnel can be
trained in preparing clear regulations that accomplish their goals with
minimum economic disruption.
14.1.2 Procedure
Training courses can be instituted by industry and by government. Firms
may wish to provide courses because of incentives, such as insurance require-
ments or pollution charges, or as part of a program of public outreach. The
government can use courses to explain and create support for its regulations.
The government can require firms to provide training courses for the use of
certain substances or processes.
Environmental studies may also be taught as an academic or vocational
discipline within the framework of educational institutions, from the grade-
school level onward, A substantial body of writing exists on the theory,
scope, and implementation of such studies.1
14.2 ADVANTAGES
Training courses can decrease the need for regulatory action bv the
government and thus reduce enforcement costs.
Education can increase voluntary compliance and improve cooperation
between regulators and those regulated.
Education can improve public support for regulations. Education can
accomplish changes in public attitudes which provide the best long ten
assurance of accomplishment of the government's goals.
Education and training allow workers and che public to better defend
themselves against hazards to their health and environment.
Education can improve prevention and responses to individual environ-
mental mishaps.
1 See, for example. Handbook of Environmental Education, edited by Robert
M. Saveland, John Wiley & Sons, Mew York, 1976.
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14.3 DISADVANTAGES
Education and training can be expensive and create additional admini-
strative requirements.
Education and training do not produce guaranteed results. Many indi-
viduals ignore or forget their training. Education does not create
physical barriers to pollution.
General education to increase environmental awareness may not bring
immediate results; rather, a long term commitment may be required to
reach the desired goals.
14.4 APPROPRIATE SITUATIONS
Some type of education or training is appropriate for every situation
in which there is potential for environmental damage or pollution. It is
also appropriate for those involved in the regulatory process. Education
is a passive restraint which must be implemented prior to the events it is
expected to influence. Education can be expected to increase the efficacy
of active restraints but rarely to take their place.
14.5 APPLICATIONS
The Bureau of Alcohol, Tobacco, and Firearms has used education as an
alternative to regulations. In order to increase public awareness of the
dangers of alcohol consumption by pregnant women, the Bureau considered
requiring all liquor bottles to carry a warning label. Instead, the Bureau
developed a campaign of public education which was deemed a less costly and
more effective method of achieving its goal.
Education in environmental dangers has had important effects on the
use of pesticides and of chemical additives in food products.
The Environmental Education Act (PL 91516;20 U.S.C. 1531-1536) authorises
a program of grants and contracts to support research, demonstration, and
pilot projects for educating the public on the problems of environmental
quality and ecological balance. Emphasis is to be placed on developing
skills to identify and evaluate solutions to environmental problems.
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CHAPTER VI. GOVERNMENT COST SHARING
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15. CAPITAL GRANTS
15.1 DESCRIPTION
Capital or construction grants consist of funds provided by the Federal
government to finance the construction of capital projects.
15.1.1 Substance
Usually these grants are made to States, counties, municipalities or
Intergovernmental associations to finance public works projects, such as
highways, mass transit, hospitals, or educational facilities. In many commun-
ities, capital grants are essential in order to meet the substantial obligations
of constructing waste treatment and water purification facilities.
15.1.2 Procedure
Requirements and limitations upon those who wish to qualify vary among
grant programs. Some programs provide funds for planning, design, and other
pre-construction preparation in addition to the actual construction funds.
Other programs are limited to financing of actual construction. Most
require the contribution of state and local matching funds. Generally,
all capital grants program include Federal Government approval of the
project design, verification of the projects' economic feasibility, and
a documented plan for paying the operating and maintenance costs of the
facility.
15.2 ADVANTAGES
The primary advantage of capital grants programs is that they provide
a means of constructing valuable _proj_ects that states and municipalities
could not independently finance.
These programs orovide a vehicle through which the Federal government
can channel funds to address specific national objectives (i.e., pollu-
tion control, mass transit, energy conservation, etc.) ana/or provide
an economic stimulant to depressed areas within the country.
Capital grants free up local monies for other uses which communities
previously could not afford. Federal funds can be substituted for
local funds and in this way, the community is able to undertake new
proj ects.
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15.3 DISADVANTAGES
Capital grants contain restrictions on*the use of grant funds which
can limit the available control options and hinder innovation.
Capital grants generally do not provide funds for both construction,
and operating and maintenance (0 & M) expenses. In some cases, 0 & M
expenses have placed unexpectedly heavy burdens on the jurisdictions.
Capital grants cannot always be applied to the project planning and
development phase, which makes it difficult for potential recipients
to develop a project far enough along to qualify for a grant.
While capital grants provide a beneficial economic stimulus during
period of recession, they exacerbate inflationary problems.
Capital grant programs can skew local funding priorities. If a local
official knows that one project may get matching federal funds and
another will not, he may chose to finance the former project rather
than the latter regardless of community need.
Capital grants programs can be problematic as tools for achieving
particular national objectives by stated deadlines because funding
levels are dependent on the uncertainties of the federal budgeting
process. If federal funds are withheld (through vetoes of legislation
or impoundments of appropriated funds) or cut back, some communities
that need federal funds to comply with deadlines will not be able to
do so.
The negotiation of capital grants may be a complex process with no
assurance that federal policy objectives will be met. The offer
of federal funds to a state may only provide the government with an
opportunity to bargain with, rather than induce compliance from,
the state. Thus, the federal government will find it difficult to
induce states to change substantive policy unless federal goals are
shared.
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15.4 APPROPRIATE SITUATIONS
Capital grants provide a vehicle through which the Federal government
can promote the accomplishment of major national objectives such as water
quality improvement. However, because of the costs and inflationary implica-
tions of capital grants, they would be most effective if reserved for major
programs where significant national-benefits are achievable and where it is
clear that the technology to be subsidized is clearly superior to other
technologies available. Otherwise, a large scale allocation of grants to
projects that return only marginal benefits will place a strain on capital
markets, add to the Federal budget deficit, and increase inflationary pressures,
thus moving the cost/benefit ratio into the unacceptable range.
Even though it is difficult to "turn on" and "turn off" the planning
and development.processes for capital projects, the adverse economic impacts
of grant programs can be substantially reduced if the grants are made during
recessionary periods. Under these conditions, the grants will promote busi-
ness activity and reduce unemployment.
15.5 APPLICATIONS
Numerous Federal grant programs have been used to construct highways,
waste treatment facilities, mass transit systems, etc. Two of the current
programs are the Urban Mass Transit Assistance (UMTA) grants and the EPA
Municipal Waste Treatment Construction grants.
The UMTA grants are made to municipal governments or inter-government
transit agencies to finance the design and construction of mass transit sys-
tems. The grants cover 80 percent of the construction costs. This program
enables the construction of sophisticated and technologically advanced systems
in many cities. However, the program is criticized for encouraging the design
of overly sophisticated and economically questionable systems, since the more
expensive a proposed system, the more Federal funds available to the juris-
dictions. When-built, these systems require significant operating subsidies.
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The EPA grant program for municipal waste treatment facilities began
in 1956 and was expanded in 1966 and 1972. The EPA program is authorized
to pay up to 75 percent of the costs of planning, designing, and constructing
treatment facilities. Approval of a grant is contingent upon acceptance of
the following items: a plan for sludge disposal; satisfactory operating and
maintenance capabilities; an environmental impact review; a discharge permit;
and a plan to pay for the operating and maintenance expenses.
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16. TAX INCENTIVES
15.1 DESCRIPTION
Tax preferences for corporate investments in pollution control projects
can ease the economic burden of compliance with regulatory requirements. Tax
incentives (or subsidies) are the amount by which taxes are decreased below
what they would be through "normal" tax treatment of project expenditures. Tax
incentives can be applied in the form of a tax credit based upon expenditures
for specified pollution control projects (thus lowering a firm's total tax
liability), through tax deferal or through an accelerated depreciation schedule
which allows firms to rapidly recover pollution control capital expenditures.
This approach could be used as a supplement to direct "command and control"
regulations.
16.1.1 Substance
The role of tax incentives in regulatory policy is very similar to those of
direct subsidies in cash or in kind. Both tend to encourage a particular activity
by a firm or individual by lowering the cost of undertaking that activity. Tax
incentives can help firms comply with environmental regulations which require the
expenditure of large amounts of capital. 3ecause pollution control activities
are usually investments in "unproductive" (i.e., not directly revenue-producing)
activities, firms are not encouraged to invest more capital in pollution
control through tax subsidies; but, rather with tax subsidies firms find it less
painful to comply with environmental laws. Similarly, tax incentives would not
be effective in encouraging R. & D related to pollution control, but would ease
the expense of conducting R&D which is necessary to develop technologies for
attaining environmental standards.
16.1.2 Procedure
Tax incentive for pollution control projects in the private sector can
(and are) be implemented through the existing tax structure.
16.2 ADVANTAGES
The tax incentive approach can easily be inplaaer.tsd through "he existing
tax structure.
Tax incentives assist firms in complying with environmental regulations
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by effectively lowering the cost of the required investment.
The rapid amortization of pollution control equipment is especially
advantageous for firms in poor credit positions since it allows a quick
recovery of capital used for non-revenue producing but mandated projects.
Public funds are not required to provide tax incentives, which is an
advantage over subsidies.
16.3 DISADVANTAGES
The levels at which the tax incentive must be set in order to yield
the desired effect is difficult to determine.
The credit only works up to the point of a firm's zero tax liability.
Firms with small profits or with low tax liabilities gain little advantage
under this approach, although these firms have the greatest need for
assistance.
Tax credits do not provide a significant incentive for firms to install
and operate pollution control equipment which does not generate revenues for
the firms. Even with tax relief, firms may lose money on their pollution
control activities.
The accelerated amortization and investment tax credits affect only
tangible capital investments. Thus, no incentive to operate and maintain the
equipment once it is in place is present. If ooeration and maintenance compliance
is to be monitored, oversight by a separate Federal agency may be required.
t The actual budgetary costs of tax preferences are similar to those of
direct subsidies, although certain forms of these tax incentives reduce tax
revenues. Direct subsidies have an advantage over tax credits, where the
capital obtained by a firm from a direct payment method results in higher
profits and, in this way, part of the assistance could be returned to the govern-
ment as tax revenue.
The accelerated amortization mechanism encourages highly capital-
intensive treatment alternatives over possibly more efficient labor intensive
alternatives. EPA's Construction Grants Program to help municipalities
finance sewerage treatment works has been criticized in this way. It has
encouraged municipalities to develop large capital projects»which result in
over capacity for waste treatment, but which are poorly managed, since no
Federal assistance is provided for operation and maintenance.
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Tax preferences, like subsidies, must be carefully calibrated to effect
firm's decisions.
16.4 APPROPRIATE SITUATIONS
Tax credits would be applied most effectively in the following situations:
When capital intensive abatement is the most desirable solution to
pollution.
When firms in an industry have high profits and the tax savings would
be substantial.
When the success of.annual budget justifications (which are necessary
for direct subsidy forms) are uncertain.
When the administrative costs to monitor the pollution control program
are high due to a large number of small firms in the industry.
16.5 APPLICATIONS
Tax credits and incentives have been used widely to influence rates of
investment and production in various U.S. industries. Energy development and
conservation, and pollution control are important areas in which tax credits
have been applied. Personal tax preferences have also been used to encourage
individual investment in non-profit sectors of the economy including education,
health, and religion.
With the enactment of various provisions of President Carter's National
Energy Act, tax credits have been provided for a variety of residential
energy conservation investments. To assist in pollution control, following
the repeal of the Investment Tax Credit in 1969, rapid amortization provisions
were enacted for investment in pollution control equipment to reduce the
financial burden of compliance with federal requirements. This provision has
assisted firms which are in poor credit positions. 3ut since it is applied
to equipment designed specifically for pollution abatement, recycling
facilities or other related projects with pollution control capabilities may
not be qualified for favorable tax treatment. This problem, and that the
program stresses capital-intensive approaches to pollution control, illustrates
the problems inherent in focusing the tax credit'.
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17 . RECYCLING MARKET SUBSIDY
17.1 DESCRIPTION
A market for material recycling and reuse is developed through an
essentially privately-administered recycling system in which the government
subsidizes the activity and recovers its costs through charges on affected
materials or products. Under this approach, the government chooses a target
level for recycling a material and then requests bids from the private sector
to collect, deliver, and recycle enough waste products containing these
materials to meet this target level. Because the bidding to provide this
service is competitive, market forces will provide for the collection and
transport of the waste products at a minimum cost. The cost to the govern-
ment of subsidizing recycling and reuse can be recovered by placing a charge
on goods which require this special handling.
17.1.1 Substance
This approach (the "buy-back strategy') was originally developed as an
alternative to legislation that imposes deposits on beer and soft-drink
containers. The major defect in the product deposit approach which the buv-
back strategy tries to correct is regulation of the bottle return (i.e., spec-
ifying who must collect empty bottles, how high a deposit is required, etc.).
Product deposits are not an economically efficient way to recover bottles.
The buy-back strategy would subsidize! rather than regulate, the return
of used products. The government would decide on a target level for the
collection of used products (e.g., soft drink bottles) to be recycled, reused,
or properly disposed of (as in the case of household products which contain
hazardous substances). Based on the target level (e.g..90 percent of all
beverage containers), the government would accept bids and, in effect, provide
a subsidy to organizations which will provide the service at the lowest cost.
The way in which the subsidized recycling and reuse market would evolve would not
be determined by government regulation, but by market forces.
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At all levels of the system, individuals participate because there is an
incentive to do so. At the first step, the consumer returns the used product,
because he receives some price for doing so. Intermediaries (e.g., collection
centers, mobile collectors, etc.) participate because they will receive a still
higher price from material recycling and reuse firms. The last price in the
sequence, which is paid by the organization with the government contract, is
artificially supported by the government's subsidy. The government, in turn,
recaptures the subsidy by dividing up the cost and by placing a pro-rated charge
or tax on affected products.
17.1.2 Procedure
This strategy can be implemented on a test basis in a selected region
or implemented nationwide. If the program is applied on a regional basis, it
must be assured that materials are not taken from a low subsidy area and
returned to a high subsidy area.
In addition, this strategy lends itself to gradual introduction, so
as to minimize impact on economic sectors which rely on the production of these
products.
The government would have to develop an organization to implement this
system, but the greatest organizational response would come from the private
sector where decisions involving designated products would evolve to reflect
the subsidy and charge.
17.2 ADVANTAGES
With a recycling market subsidy, the "backhaul" (e.g. collection, storage,
and transportation) activity which is an expensive component of a re-
cycling syscem or safe disposal system can be accomplished at che Lowest
cost because the market (not a regulator) determines which methods will
be most cost effective.
The buy-back system can be phased in at any chosen rate to avoid causing
che sudden obsolescence of capital equipment.
The tax schedule to recover the subsidy will impose different costs
on different materials. In this way, materials with lower recycle
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values and/or higher backhaul costs will be taxed at a higher rate
to cover related costs.
This approach will encourage consumers to use materials which are
recyclable or less costly to dispose of.
The marketplace will determine the necessary level for the tax. Rather
than having decision-makers struggle with this politically sensitive
question, the cost of operating the system generates the tax rate.
The approach is equitable in that the price paid for a product will
reflect the cost of recycling or properly disposing of the used pro-
duct, not only the costs of producing and distributing the product.
17.3 DISADVANTAGES
The recycling market subsidy has not been studied as thoroughly as
certain other nonregulatory approaches under actual market conditions.
It also creates new administrative responsibilities for the government.
17.4 APPROPRIATE SITUATIONS
This approach is useful for recovering materials, which would otherwise
be improperly disposed of in many cases. Within this broad category, it
has potentially wide application for conventional and hazardous solid and
liquid wastes.
17.5 APPLICATION
This approach has not yet been applied, but it was proposed for use with
beverage containers. There are numerous household and industrial produces con-
taining hazardous materials which could be properly disposed of through this
method.
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18. LOAN ASSISTANCE
18.1 DESCRIPTION
The Federal government can provide three types of loan assistance for
pollution control programs. These are (1) direct loans (2) interest sub-
sidy (or offset) loans, and (3.) loan guarantees.
18.1.1 Substance
In each of these programs, the firms benefiting from the loan assis-
tance is required to repay all of the principal and a portion of the interest
on the loan. The Federal government can either directly or indirectly share
all or a portion of the Interest costs and the credit risk of financing the
loan.
Direct Loans are loans made directly by a government agency to the
benefiting firm. The interest rate charged may be equal to or below the pre-
vailing market interest rates. If the rate is below the market interest rate,
the government in effect would be subsidizing the benefiting firm. Whatever
the interest rate, the government, by lending directly to the borrower, is
assuming all of the risk associated with the loan. If the benefiting firm
is unable to repay the loan, the Federal government would be the sole credi-
tor at risk.
Interest Subsidy Loans take several forms.* Direct loans made at a
below-market interest rate constitute one form of interest subsidy. Another
is when the Federal government either reimburses the benefiting firm or pays
directly to the lender all or a portion of the interest expense. Finally, the
use of Industrial Development Bonds (IDB's) can be considered a source of in-
terest subsidy since it allows firms co benefit from the lower interest rates
available in the tax-free municipal bond market. The expense of ID3's to the
Federal government consists of a tax revenue loss which results from not tax-
ing the interest earned by bond holders.
"* Since interest on a loan is deductible on income taxes, all loans are al-
ready subsidized by the government to some extent. Here, however, the focus
is on special subsidies in addition to tax deductions.
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Loan Guarantees do not directly require a subsidy or result in a
revenue loss by the Federal government. However, the firms receiving the
guarantees may be able to obtain a lower interest rate because the Federal
government is willing to underwrite the risk of the loan. In some cases,
the guarantees will also enable firms to obtain financing for which they
could not have qualified. The Federal government, in turn, assumes respon-
sibility for payment of the loan in the event of default.
18.1.2 Procedures
Loan assistance can take much of the economic sting out of pollution
control for regulated industries. Loan assistance programs can be used to
reduce financing cost, provide a direct source of funding, and/or share
credit risk. These programs would transfer a portion of the costs of finan-
cing pollution control equipment from the polluting firm to the government
and/or a portion of the credit risk of making a pollution control loan
from the private lender to the government.
18.2 ADVANTAGES
Loan assistance programs will reduce the costs to industry of in-
stalling pollution control equipment, thus lessening the economic
impact. This approach may promote more expeditious compliance, but
it will still cost firms to comply with environmental standards.
These programs wull provide a source of funding to some firms that
otherwise would not be able to secure financing.
In addition to an obvious reduction in plant closures, these pro-
grams will help preserve the price competitiveness of industries
which install pollution control equipment and help minimize the
economic impact on the national economy of the implementation of
pollution control systems. These programs would have a favorable
effect on American competitiveness in foreign markets.
18.3 DISADVANTAGES
The greatest disadvantage is the increased cost which the Federal
government will assume. A 1974 Treasury Department study used that
year's trends to project that the ISS revenue loss from the tax-free
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interest of IDB's vould approach one billion dollars by 1980.* Depending
on the degree of subsidy, direct loans and interest subsidy loans
could also be expected to generate substantial costs to the
Federal government.
Direct loans and loan guarantees greatly increase the liability of
the Federal government and in cases of loan default can result in
substantial costs. In addition, since the firms seeking these loans
and guarantees would probably be firms which could not qualify for
financing without government underwriting, a high default rate
could be expected.
Loan guarantees and direct loans will result in an artificial mani-
pulation of capital markets by channeling funds to firms that other-
wise would not qualify for financing. The free market mechanism in
capital markets will, under normal conditions, allocate funds to
uses according to the rate of return expected to be earned from the
uses. Loan guarantees and direct loans will draw funds out of the
free-market allocation system, resulting in fewer funds for the
free-market mechanism to allocate to competing borrowers. The end
result will be higher interest rates and a reduction in capital
available for the other financing needs of the economy.
Loan assistance can encourage firms to utilize capital extensive
solutions to pollution problems if the assistance is earmarked for
specific technologies.
18.4 APPROPRIATE SITUATIONS
As outlined in the two previous sections, loan programs have significant
advantages and serious disadvantages. Accordingly, their use should be limited
to firms. These programs would be most efficient if reserved for cases
where the purchase of pollution control equipment will produce substantially
reduced environmental impacts and where the affected industries require assis-
tance. In these cases, the benefits gained by lessening the financial burden
George E. Peterson and H. Galper, "Tax-Exempt Financing of Private
Industries Pollution Control Investment", unpublished report; Alice
F. Priest, "IRS Decision on Vhat Pollution Is Will Affect 'A' Plant's
Construction", The Coomercial and Financial Chronicle, 219 (June 15, 1974)
7418, 1.
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of pollution conCrol investment have a clear advantage over the costs and
liabilities of the programs.
18.5 APPLICATIONS
All three types of loan-assistance programs are used by the Federal
government.
Direct loans in the past were available for hospital construction
under the Hill-Burton program and are currently available from the Small
Business Administration (SBA) under various programs. Generally, recipi-
ents of SBA loans must be either small firms, minority-owned firms, and/or
firms and individuals who have suffered a major economic setback (i.e., an
uninsured loss). Small firms in financial difficulty (i.e., unable to ob-
tain capital or forced to pay unreasonably high interest rates) can qualify
for SBA loans to install pollution control equipment. However, because of
these limitations, this program is not used extensively.
Interest subsidy loans are available in many SBA programs and from both
the Commerce Department and the Department of Housing and Urban Development
(HUD). Probably the most extensive interest subsidy programs ever initiated
by the Federal government were the Section 235 and Section 236 housing pro-
grams during the late 1960's. In these programs, HUD paid directly to pri-
vate mortgagees a portion of mortgage interest expense as a means of pro-
viding less expensive single-family homes and multi-family rented units to
low- and middle-income families. These programs were phased out during the
Nixon Administration and have not been reactivated.
Loan guarantees are currently used by the Federal government to aid
individual businesses and to assist certain individuals in obtaining home
nmrtgage funds. The most famous loan guarantees are those extended to Lock-
heed Corporation to assist in the financing of the C-5A airplane. Presently,
Chrysler is seeking a large loan guarantee. However, the Federal Housing
Administration and Veterans Administration mortgage insurance programs
probably constitute the largest volume of loan guarantees issued by the
Federal government. In exchange for a .5 percent (which is added to the
mortgage interest rate), the government insures lenders of these mortgages
against default. .
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CHAPTER VII. MONITORING AND ENFORCEMENT MECHANISMS
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19- NONCONFORMANCE PENALTIES
19.1 DESCRIPTION
Nonconformance penalties are assessed on manufacturers of products and
equipment which do not comply with environmental discharge regulations. The
penalty mechanism serves as an alternative to requiring manufacturers to
withdraw such products. Manufacturers are permitted to pay the penalty and
continue to market their products while they develop the technology necessary
to comply with regulations.
19.1.1 Substance
Nonconformance penalties are particularly useful where performance
standards for manufactured goods have been set according co levels achieved
by the technological leader in a field. Other manufacturers may have in-
sufficient lead time to develop technology to meet the standards. To dimin-
ish Che adverse economic Impact of the standards on these firms, the govern-
ment permits them to pay a penalty and continue to sell their products as
long as they do not exceed the standards by a certain predetermined amount.
The penalty is calculated to prevent these firms from gaining an unfair
advantage over those who have paid the cost to conform with the standards.
The amount of the penalty is increased periodically to strengthen the in-
centive for these firms to develop the required technology. Nonconformance
penalties are not provided where all members of an industry are capable of
complying with standards .
19.1.2 Procedure
A manufacturer who is allowed and chooses to pay a nonconformance penalty
must submit his product to a test to determine the margin by which it fails co
meet standards. The penalty will be calculated on Che basis of che costs
which are avoided by not meeting the standards. For heavy-duty engines, for
example, the penalty race is based on the marginal cosc of reducing emissions
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for a typical engine. A penalty is calculated by multiplying this rate by
the units of emissions in excess of standards. This will generally result
in penalties greater than the "actual cost" of reducing emissions and thus
provide greater Incentive for achieving standards and more protection for
the conforming manufacturer.^"
The limit for noncompliance must also be established. It may be set
at the greatest level of emission limitation achieved by all manufacturers
so that no manufacturer will be forced to suspend production when the regu-
lations go into effect.
19.2 ADVANTAGES
Nonconformance penalties create an economic incentive to comply
with standards. The penalty will be somewhat higher than most
manufacturers' average cost to achieve conformance.
These penalties encourage innovation to develop technology and con-
trols necessary to conform with environmental standards.
They reduce disruption during development and implementation of
controls by permitting manufacturers to continue producing and
selling their products.
The penalties protect conforming manufacturers from unfair compe-
tition based on advantages gained through nonconformance.
The penalties are set according to an objective standard which
minimizes the opportunity for disputes and reduces the need
for court action.
1-9.3 DISADVANTAGES
The procedure may be unwieldy. With an additional step in the
regulatory process, further paperwork is generated. An additional
"For a thorough discussion of this and other procedural issues see "Nonconfor-
mance Penalties for Heavy Dutv Engines" in EPA Docket OMSAPC-78-4.
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test procedure must be established, additional testing equipment
provided, and an additional test carried out. Administrative costs
are increased for the regulatory agency as well as the nonconforming
manufacturer.
The procedure may slow pollution reduction. A large part of an
industry may choose nonconformance penalties and be able to pass
along the cost of penalties to consumers. Manufacturers may choose
not to install controls for equipment and continue to sell their
products until they are driven out of the market by the escalating
penalty.
The penalty does not provide an incentive to reduce pollution
below required standards, although this could be remedied by
linking it to a system of credits for greater abatement.
19.4 APPROPRIATE SITUATIONS
Nonconformance penalties are appropriate where the manufacturer, rather
than the user, is held responsible for pollution caused by a product, where
excess pollution is due to flaws in design specifications rather than opera-
tion and maintenance, and where withdrawal of the equipment from the market is
undesirable because of the economic disruption it would cause the manufacturer.
It must be possible to accurately measure the pollution caused by the noncom-
plying product and it must be expected that the manufacturer will carry out
changes in design to achieve the control standards.
19.5 APPLICATIONS
Nonconformance penalties for heavy duty engine emissions are provided
under Section 206(g) of the Clean Air Act Amendments of 1977. They have
not as yet been implemented although they have been discussed in detail
and procedures have been prepared in a proposed rule for "Gaseous Emission
Regulations for 1983 and Later Model Year Heavy-Duty Engines" (44 FR 9464,
February 13, 1979). The proposal would increase penalties by 25 percent
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with each model year. In its final rule on "Gaseous Emission Regulations for
1984 and Later Model Year Heavy-Duty Engines" (45 FR 4136, January 21, 1980),
the Agency commits itself to a separate rulemaking for nonconformance penalties.
Nonconformance penalties are also under consideration in a proposed rule
for "Evaporative Emission Regulation and Test Procedure for Gasoline-Fueled
Heavy-Duty Vehicles" (45 FR 28922, April 30, 1980). Methods for testing
for evaporative emmissions have not been established and so nonconformance
penalties cannot be proposed yet. EPA believes that the evaporative emission
standard is set at a technically feasible level, but is willing to take into
account unforeseen circumstances.
Nonconformance penalties can be applied in many situations where manu-
facturers face long lead times for bringing their products into compliance
with regulations, for example, where new safety requirements require basic
changes in design of products.
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20. NONCOMPLIANCE PENALTIES
20.1 DESCRIPTION
Noncompliance penalties serve as a deterrent to firms seeking to
avoid or delay implementing pollution controls. The penalties are an economic
incentive which encourages prompt compliance. The firm is assessed a penalty
in the amount it has saved by not complying.
20.1.1 Substance
The noncompliance penalty (NCP) is designed to recover the economic benefits
that a source gains by not complying vith pollution restrictions. The NCP
protects companies which install pollution control devices from unfair competition
by companies which fail to do so. The NCP serves as a supplement to other
types of enforcement action and eliminates the situation where a firm can violate
the lav and save money by investing in litigation instead of control equipment.
The NCP is an economic incentive and is not calculated to be punitive or
to recover the costs of cleaning up damage caused by pollution. Calculation
of the NCP includes capital, operation and maintenance costs of pollution control
equipment.
In general, it is expected that the effect of the NCP on consumer prices and
on the financial performance of industry will be minimal.^" However,the NCP is
likely to be passed through to the consumer in industries where there is less
competition; and the NCP may make it harder for companies in weak financial
condition to raise their capital requirements.
20.1.2 Procedure
After the Agency (or the State) issues a notice of noncompliance, the
source is required to determine the amount of its penalty. The source makes
this' calculation on the basis of an economic model approved by the admini-
stering authority. Wherever feasible, the model should use data that is
specific to the individual source. But for factors which are difficult Co
determine in advance, such as return on equity and inflation rate, industry
and national averages can be used.
1
For a detailed treatment of this question see "The Economic Effects or
Noncompliance Penalties under Section 120 of the Clean Air Act" EPA Docket
Number EN-79-L.
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When the source has calculated the amount of its penalty and the length of
time that it vill need to achieve compliance, a schedule of payments which rise
with inflation is established. Expenditures that the source makes as it
brings itself into compliance will reduce the penalty rate by a proportionate
amount. A source is required to continue paying penalties until it is in
compliance.
After a source has come into compliance, it notifies the authority and a final
calculation of the penalty is made based on the actual cost of compliance.
Where an underpayment has occurred the source must pay the additional amount,
and, likewise, where there is an overpayment it is reimbursed by the authority.
20.2 ADVANTAGES
The NCP creates an economic incentive for Industries to bring
their plants into compliance with legal pollution limits as rapidly
as possible.
As an additional enforcement tool, the NCP reduces the need for
court action in setting and collecting penalties, and eliminates
incentives to invest in litigation instead of control equipment.
The NCP eliminates the economic advantages of noncompliance and
protects complying firms from unfair competition by noncomplying firms.
The NCP sets an objective standard for penalizing polluters.
The penalties are relatively easy to calculate and more likely to
be judged equitable and acceptable than penalties that attempt to
make damage assessments.
20.3 DISADVANTAGES
« The NCP increases demands on the administrative resources of the authority
and the industries.
The NCP fails tc account for the amount of environmental damage
caused by noncompliance.
Some inequities will be possible when firms overestimate the
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amount of time it will take them to achieve compliance and thus
spread their penalty payments over a longer period. For example,
the authority will probably be unable to detect the firm that has
already begun work on pollution control devices but submits a
schedule based on a later starting date. That firm will then have
smaller average payments and be able to save on the penalty by
finishing work ahead of schedule.
The use of industry-wide averages in calculating the NCP penalizes
financially weaker firms and opens the authority to accusations of un-
fairness.2 Large penalty payments create greater difficulties for these
companies.
20.4 APPROPRIATE SITUATIONS
The HCP is appropriate where it is expected that a number of sources will
not be in compliance with pollution limitations. The NCP is particularly
useful as an enforcement mechanism where other types of enforcement do not
create economic incentives for compliance, recourse to the courts will be
necessary, and court-imposed penalties are expected to be less than the
advantages realized by the company through noncompliance. Section 120 of the
1977 Clean Air Act Amendments establishes noncompliance penalties for
stationary sources of air pollution. The Natural Resources Defense Council
has stated that "noncompliance penalties are particularly essential to the
control of acid rain since utilities, the largest industrial sources of
acid rain-causing pollutants, are frequently in violation of the emission
standards applicable to their facilities."
20.5 APPLICATIONS
Connecticut put an NCP into effect in 1976, with the State's
Department of Environmental Protection assessing the fees. The program
has been successful in cases where the costs of compliance were low. 'vhere
compliance costs were high, the program has been subject co the same political
pressures that affect penalty-setting efforts using other approaches.
For example, see "Comments of Chrysler Corporation" in EPA Docket Mo. EN-79-1.
^ Letter from Frances Dubrowski to Douglas Costle, 4/7/30, in EPA Dockec Mo.
EN-79-1.
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The Notice of Proposed Rulemaking for Assessment and Collection of
Noncompliance Penalties was published in 44 FR 17310, March 21, 1979. The
Final Rule is expected during summer 1980.
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21. ADMINISTRATIVE FINES FOR NONCONFORMANCE TO
OPERATION AND MAINTENANCE STANDARDS
21.1 DESCRIPTION
The administrative fines system is Intended co ensure that firias meet
certain performance standards for operating and maintaining pollution control
equipment. A fine is levied against firms which do not pass an inspection of
this equipment. Administrative fines encourage proper operation of pollution
control equipment and thus promote compliance with environmental discharge
regulations.
21.1.1 Substance
The administrative fine is a method of assuring that pollution abatement
equipment is operated in conformance with certain performance criteria. Fail-
ure to conform to these performance criteria, or operation and maintenance (O&M)
standards (derived from the discharge limitations), results in a fine being as-
sessed.
This financial penalty eliminates any gains the firm would achieve by non-
conformance, making it more economical to conform to the O&M standards. The
fine is an economic incentive to firms to comply with the discharge regulations
from which the O&M standards were derived. The fines lead to quicker compliance
and fewer continuing violations by eliminating the profit of delay. It can be
a useful supplement to the expensive and time-consuming legal enforcement pro-
cess.
21.1.2 Procedure
There are several ways to set the fine to enforce O&M stadards. One
method charges the amount it costs to operate the equipment properly, which
can be determined during the testing phase. Another charges the amount saved
by nonconformance. In either case, some additional fee or percentage may be
necessary to impose a meaningful penalty.
The fine can also be set proportional to flow and/or rated to increase
with time so that larger polluters and continuous violators pay a larger fine.
This fine is charged on a regular basis (e.g. monthly, weekly) during the
period of nonconformance. Then, even if a firm chose to take the enforcement
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action Co court, the fine accumulates. In any case, the fine must be high
enough to oenalize and discourage continued nonconformance, without causing
excessive economic damage.
In order to implement the administrative fines mechanism, it is first
necessary to develop performance criteria for the operation and maintenance
of pollution control equipment, based on existing environmental regulations.
This involves testing and analysis of various equipment and systems.
An inspection program is needed to identify firms not conforming to
performance standards. Inspection criteria have to be developed and stan-
dardized so that violations and degrees of nonconformance are consistently
recognized. An administrative agency can oversee the inspection process,
train and certify Inspectors, test new technologies, and collect fines. An
appeals board may be necessary to allow firms to contest an administrative
fine.
The administrative fines system is coordinated with monitoring/report-
ing/ enforcement procedures required in the pollution control regulations. For
example, a violation of the discharge limitations triggers an equipment in-
spection and a fine for nonconformance. Conversely, nonconformance to O&M
standards discovered during an inspection induces closer monitoring and
perhaps enforcement action.
21.2 ADVANTAGES
The administrative fines system promotes a quicker response to the
violation than enforcement action through the courts. Fining firms
for nonconformance puts a price on delay, making it less expensive
to conform to the O&M standards.
The fines system reduces the burden (in time and money) of liti-
gation for the Agency. Firms can be expected to choose to comply
with the standards rather than delay in court.
The inspection procedure helps ensure that pollution control equip-
ment is operated properly. This reduces the likelihood of violations
of the discharge regulations. In addition, well maintained equipment
may be cheaper for the firm to operate than poorly maintained equipment.
The inspection/ticketing procedure is relatively easy to administer
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once in place. The inspection-citation-fine mechanism is not very
different from the procedure used for traffic violations.
The fines generate revenue, which can be used for cleanup, equipment,
administration, and R&D.
The fines system enhances and comple.ments the present monitoring/en-
forcement system. With the inspections acting as a check on the ef-
fluent sampling program and vice versa, both systems are more efficient
at recognizing and enforcing against violations.
21.3 DISADVANTAGES
This system adds a second tier of standards to the regulations. In
addition to meeting discharge standards, firms have to conform to per-
formance standards. There is less incentive to develop new and untested
technologies and techniques for pollution control.
The administrative network is expensive to set up initially. Inspec-
tors have to be trained and certified; O&M standards require testing
and scale studies for various technologies and pollutants; and inspec-
tion procedures have to be developed and standardized.
It may be difficult to acquire the information needed co enforce the
program. Nonconformance and degrees of nonconformance must be recog-
nizable for uniform application of the O&M standards.
Determining the most appropriate fines rate can be difficult. If the
fine is set too low, firms might choose to pay rather than comply,
making the-standards ineffectual. If the fine is set too high, severe
economic impacts could result.
21 .4 APPROPRIATE SITUATIONS
Administrative fines are useful in circumstances where pollution control
regulations are in place and established control technologies exist.
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21.5 APPLICATIONS
An example of an administrative penalty for noncompliance with operation
and maintenance standards is the annual or semiannual inspection of automobiles
done in most states. The state conducts or authorizes service stations to con-
duct periodic inspections of all motor vehicles registered in that state. If
the vehicle does not pass the inspection, a period of time is allowed in which
the owner must make the needed repairs. Failure to make the necessary repairs
results in a fine and/or revocation of the right to lawfully operate the
vehicle.
Recently, an EPA task force considered this approach to publicly owned
treatment works, stationary sources of air pollution, and industrial dischargers
of polluted water which violate environmental protection regulations.
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22. BOUNTIES FOR POLLUTERS
22.1 DESCRIPTION
A bounty is a promised gratuity, compensation, or other reward that is
offered when the services or action of a number of persons are desired. Each
person who acts upon the offer may become entitled to the reward; but the term
"bounty" usually suggests that entitlement is limited to those who succeed at
the desired task.
In the context of environmental enforcement (as well as in other contexts),
bounties have most often taken the form of "informer's fees." Such fees en-
courage persons who have information about illegal polluting activity to provide
that information to government officials responsible for enforcement of app-
licable laws and regulations. However, bounties could be offered for other
services as well, and the reward could be something other than a monetary benefit
or fee (for example, an honorary prize or public recognition).
By offering some sort of a reward for the provision of information or
other services related to Implementation of a regulatory program, it is possible
to provide incentives for Independent Initiatives and cooperation by all members
of the general public, most of whom would otherwise not play any role in
Implementation of a government environmental program.
27.1.1 Substance
Many different types of bounties can be designed by EPA to support
environmental regulations. For any type of bounty, it is important to provide
a clear statement of the desired activity that will give rise to a right to the
reward, reporting procedures, and the nature of the reward. The most common
bounties in American law are those offered for information leading to a convic-
tion for a certain type of specified violation. Such bounties are relatively
common in criminal law.
A bounty system could, however, be designed to reward a much broader
range of citizen activities which either support or improve the impleaentaion
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of environmental regulatiory programs. For example, a bounty might be offered
to citizens who themselves bring actions, in the courts or before the appropriate
federal agency, to enforce environmental statutes and regulations. This citizen
initiated civil action might provide a portion of the fine to the private enforcer.
Alternatively, bounties might be paid for monitoring the waste handling
or pollution-discharging activities of suspected pollutors or regulated industry
in general, without the need for any actual determination that violations have
occurred or that reliance on the citizen information led to actual enforcement.
Finally, a bounty might conceivably be offered as a reward for any citizen
activity, such as workshops and arbitration or negotiation, which lead to the
results sought by EPA's enabling statutes e.g., pollution abatement.
22.1.2 Procedure
Once the desired conduct or action has been defined, the problem of
determining eligibility for the reward remains. If, for example, a bounty is
to be offered for information identifying violators of pollution control laws,
eligibility requirements specifying the quality of information demanded and an
objective threshold for eligibility would be advisable to preclude future pro-
blems.
Information quality, in contrast to an objective threshold, is difficult
to determine and the required strength of the evidence sought is hard to arti-
culate. >fust it be evidence admissable in court, evidence of probative value to
EPA and admissable in Agency proceedings, or evidence below these two criteria
but nevertheless useful In some way to the Agency? Additional information
problems pertain to its confidential or proprietary status and to the method by
whcich it was obtained (by illegal search or breach of contract). An objective
threshold is much easier to specify and is commonly included in bounty systems.
Next, the amount of the bounty must be determined. Some bounty provisions
set the bounty either at one-half the fine imposed or at a percentage of the
value of a confiscated item. Still others sec a flat dollar amount as the
bouncy. SeCting the bounty at a percentage of the fine has Che advantage
of relating the reward to the severity of the infraction, and thereby
provides a sound basis for valuing the information given. Other methods
possible include setting the bounty in proportion to: (1) che number of days
chac the pollution has continued before it is abated; (2) che dollar value of
che resulcing harms, or (3) che coses saved co che Agency.
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These and other considerations might lead to litigation by "bounty
seekers" against the Agency over eligibility. A number of the issues noted
here have, in fact, been litigated, particularly under the Rivers and Harbors
Act of 1899, the most environmentally-relevant experience vith bounties to date.
This experiance should be fully reviewed before EPA promulgates regulations on
bounties. Assuming that the necessary criteria can be articulated by EPA and
that these criteria accurately match the award of bounties to the most desirable
conduct, the problem of properly allocating administrative time between EPA's
direct enforcement and monitoring activities and any bounty system it wants to
implement remains.
These difficulties persist even if the bounty program is designed to provide
incentives for activity other than the provision of information leading to con-
viction. Indeed, the problems of eligibility determination may be more severe
for such other systems, if they lack an objective eligibility threshold.
On the other hand, If the program is Co provide bounties for succesful
enforcement by citizen action, an objective threshold could be easily specified.
The bounty would then be limited to those citizens who are eligible to have the
status of an intervenor in the Agency or standing in the courts in other
words, those who would have an Interest at stake, even apart from the bounty.
22.2 ADVANTAGES
The major advantage of any bounty system is that is provides an incentive
for private citizens Co become involved in environmental programs par-
ticularly in the abatement of pollution and Che prosecution of polluters
and may lead to more rigorous and effective implementation. Certain
pollution activities may go unnoticed unless private citizens "blow the
whistle." Thus, a bounty system may facilitate enforcement of such
laws where detection of violators is difficult. In addition, many
private citizens may have a strong disincentive to report violations,
such as being employed by the polluter, or residing in the same
community and economically dependent on the polluter in some way.
A bounty tends to overcome this disincentive.
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Informer's fees could be allocated so that the highest fees are paid
to those who have provided the best and most useful information, leading
to the most successful enforcement actions and the greatest reduction
in pollution.
Under this system, EPA has additional human resources for implementing
its many programs, without an enlargement of its bureaucracy or payroll.
It may find use of private citizens to be more cost-effective than adding
to its monitoring and enforcement staffs.
22.3 DISADVANTAGES
Administration of a bounty system can be burdensome to the Agency,
especially if it is impossible to articulate objective criteria by
which bounty eligibility and amount are to be determined.
In prosecuting polluters, the Agency's interests may diverge from those
of an informer, if the Agency chooses to settle a case and ao penalty is
collected. This may' foster antagonism between the Agency and those who
undertake to assist its enforcement efforts.
Establishment of a bounty system for informers is likely to be contro-
versial and lead to litigation. The Agency will therefore need adequate
statutory authority to support the use of its discretion in setting up
the bounty system and must also be prepared to defend the system to a
public skeptical of informers.
As a practical matter, few serious pollution violations go totally
unnoticed by federal, state, and local enforcement officials. Extensive
industrial reporting requirement as part of regulatory and licensing
programs are now quite common. Thus, there may be no need for a-vast"
additional information system.
Existing disincentives to providing information against polluters may be
more readily overcome by means of immunities against prosecution,
guarantees of anonymity, or regulatory prohibitions against retaliatory
firings.
Many unsubstantiated accusacions from reporters nay slew down the
regulator/ process and subvert the program as each accusacion i3 checked
out.
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Environmental activist organizations already provide substantial
citizen input into environmental enforcement activities. This input may
well be of a better quality and greater utility than what can be expected
of informers.
Objective eligibility criteria, articulated In advance, may be too in-
flexible to provide rewards commensurate with the true value of the
services provided.
If bounties are tied to some event, less easily identified than convic-
tion of a polluter, demands for bounties are likely to proliferate.
Bounties are, in effect, a "shadow" system of enforcement. It might
prove to be politically unwise to foster outside informers who may be
tempted to secure information through illegal searches, theft, trespass,
and breach of employment or service contracts.
Certain professionals will be put in difficult positions by a bounty
system, such as the consulting engineer called in to assess a company's
pollution problems In confidence, the pollutor's insurors, etc.
Conflicts of Interest may be generated and it may prove unwise for the
Agency to provide a bounty to a commercial competitor who furnishes
information on a polluter in order to obtain an advantage in the market-
place.
22.4 APPROPRIATE SITUATIONS
la the past, bounties have been considered appropriate in those contexts
where (1) violations of a law are widely dispersed and beyond the capability of
government monitoring systems, (2) violations are capable of perception by
citizens, and (3) the bounty is believed necessary to induce provision of the
information to government officials.
22.5 APPLICATIONS
As noted above, the only existing explicit provision for bounties in the
environmental context is under the Rivers and Harbors Act, traditionally admin-
istered by the U.S. Corps of Engineers. This Act states that individuals
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"giving information which shall lead to conviction" of those wrongfully
depositing their refuse are, at the discretion of the court, entitled to one
half of the imposed fine.
For EPA, none of its major environmental statutes appears to prohibit
promulgation of a regulatory bounty system as part of its enforcement powers or
for other purposes discussed above. Such regulations might be deemed to
supplement the citizen suit provisions commonly appearing in these statutes as
well as various recent amendments providing for Agency financial assistance to
citizen's groups in their roles as intervenors before the Agency. Nevertheless,
the potential for controversy and litigation makes it advisable for the Agency
to seek appropriate Congressional amendment of its statutes or an Executive
Order, expressly conferring bounty authority on the Agency.
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23. ENVIRONMENTAL AUDITORS
23.1 DESCRIPTION
Under this system, owners or operators of firms engaging in activities
which pose environmental risks would be required to obtain periodic certi-
fication that they are in compliance with appropriate environmental regula-
tions. Auditing would be provided by licensed professional consultants
who have expertise in specific areas of pollution control. This system
could provide systematic oversight, compliance monitoring, and enforcement
of either command and control regulations or certain alternative approaches
to direct regulations.
23.1.1 Substance
This approach addresses EPA and states' inability to effectively
monitor compliance with certain regulations. In the water program, for
example, EPA currently relies on self-monitoring to track compliance with
abatement schedules and discharge limitations, supplemented by EPA and
state inspections to provide quality control over self-monitoring. The
quality of self-monitoring data varies; EPA's self-monitoring guidelines
are not uniformly applied and may not be reliable since data are collected
by the regulatees themselves. Because -EPA and the states have only been
able to spot check about 20 percent of the dischargers per year, the in-
centive to "cheat" is great.
A private environmental auditor system is meant to eliminate the
problems associated with self-monitoring and, at the same time, provide
EPA with up-to-date pollution data at frequent intervals without in-
creasing the burden on EPA. Under this system, EPA would focus its
energy on assuring that auditors, laboratories and other subcontractors
are performing in accordance with their auditing standards.
23-1.2 Procedure
The Congress would provide legal authority requiring specific industries
to have a periodic environmental audit performed by an EPA-licensed private
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organization (auditor). Important considerations in developing the pro-
gram include:
Criteria determining which sources are to be audited (e.g., firm
size or toxicity of discharge are possible criteria).
Licensing criteria for the auditors, including an examination of
a firm's capabilities, financial stability, and professional
integrity.
Methods to ensure that the auditor undertakes this work in a pro-
fessional and unbiased fashion. To ensure this, the auditor should:
be bonded;
undergo a field investigation and periodic license reviews;
have a professional, permanent staff where- it conducts business;
not audit the same facility in consecutive years.
Financing options. Two options are available. In the first,
financing is left to the market, allowing dischargers to hire auditors to
design and implement their monitoring programs in basically the same way
that the certified public accountant industry now operates. This option
minimizes government involvement, but creates a potential conflict of
Interest for auditors. The second option would allow auditors to work
under contract with EPA and the states, with costs passed to dischargers
through an annual monitoring and surveillance fee.
23.2 ADVANTAGES
Environmental auditing would result in more systematic compliance
monitoring. Collected data would be more uniform and reliable
since all auditors would follow the same procedures.
A greater professionalization of auditors would result. EPA staff
could spend its time in preparing guidance and training programs to
ensure high standards in professional auditing.
Under financing option two (above), the costs of monitoring would
be borne by dischargers and not imposed on the public budget.
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More complete analysis of Che monitoring data would be possible.
Auditors would provide professional interpretation of monitoring'
data and a summary judgement as to whether the discharger had ad-
hered to abatement requirements, thus easing EPA's work burden.
23.3 DISADVANTAGES
EPA would have to expend resources monitoring the auditors and
assuring that they do their jobs as required.
An opportunity for fraud exists if the auditor is employed directly
by a firm.
23.4 APPROPRIATE SITUATIONS
This program shows the greatest promise where extensive monitoring
demands are placed on the Agency by its regulatory programs. It also could
be effective when correct operating procedures are critical to meeting a
regulation.
23.5 APPLICATIONS
In 1977, the Council on Environmental Quality proposed an amendment to
the Federal Water Pollution Control Act which would establish a system of
Licensed Water Pollution Auditors (LWPAs) for monitoring compliance with
water effluent limitations. Under the proposed system, owners or operators
or point sources subject to a 5 402 permit or § 309 order would be required
to obtain periodic certification that they are in compliance with the permit
or order. The auditor would provide sampling, analysis, and certification
of a source's control program.
Recently, this system was considered for use co assure compliance
under Section 5 of the Toxic Substances Control Act. Under the Act, manu-
facturers are required to provide 90-days notice of their intention co
produce a new chemical or to produce a chemical for a substantial new use.
Auditors could be used to ensure that the information which is provided in
che 90-day notice is accurate and complete and that firms have filed notices
as required. Moreover, auditors could be used to assure that production
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processes, produce control and exposure levels are consistent with informa-
tion provided in the notice.
Although the concept of environmental auditors has not as yet been im-
plemented, the idea is still under consideration.
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24. A. COMMON LAW ALTERNATIVE: NUISANCE
24.1 DESCRIPTION
A nuisance is generally defined in common law as an unreasonable
activity or use of property which offends, injures, or otherwise interferes
with another person's reasonable and comfortable enjoyment of life or pro-
perty. Private interests injured by polluting activities can usually bring
a nuisance action to enjoin the harmful activity or to recover damages as
compensation for the harms suffered. Thus, nuisance is often available as
a supplement to environmental regulation and enforcement.
24.1.1 Substance
The law recognizes two types of nuisance: private nuisance and public
nuisance. Both are available for use in tort actions against polluters;
elements of the two are similar; and the plaintiff, in both types, must satisfy
the state courts "standing" (ability to sue) requirement, most easily met if
the plaintiff owns property or has some other traditional property interest
affected by the alleged nuisance.
In order to make out a case for private nuisance, a plaintiff must
prove that:
(1) His life, or his use or enjoyment of his property, is being
interfered with significantly;
(2) This injury is proximately caused by the defendant's activity;
(3) The defendant's activity is unreasonable in light of their
respective circumstances and other considerations.
Causation (number 2 above) can be difficult to demonstrate because of
the technical complexities and uncertainties surrounding, for example, an
air pollutant-human health case, particularly since the court demands that
competent evidence alone is admissable. '.¦/here only a single polluter exists
in the region, the task of proving causation may be easier than if many
polluters function in that region. If the number of sources involved is small
and if their proportional contributions to the harm can be identified, then
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a court may be persuaded to accept this evidence of causation. However,
as the number of sources increases and their combined effects become more
synergistic, the difficulties associated with proving causation multiply
correspondingly. Since the plaintiff has the burden of proof, failure to
establish causation by competent and admissable evidence will result in
dismissal of the claim.
The third element of a private nuisance action, proof that the activity
complained of is unreasonable, is troublesome for several reasons. Virtually
every industrial activity has external impacts, some of which interfere with
the property rights of others. In our industrial society, the law certainly
cannot regard every such impact as a nuisance. Therefore, the courts have
determined that a balancing test should be employed that only those
activities with especially onerous or harsh consequences in excess of the
societal benefits of the activity will be regarded as a nuisance. A power
plant that emits smoke without demonstrable effect on human health is not
necessarily a nuisance since the economic benefit of the plant may outweigh
the harms, in the court's judgment. An activity may be regarded as unreasonable -
and thus a nuisance - when its harms outweigh its benefits or when its harms
are especially concentrated on one or a few parties who should not reasonable
be made to bear these harms.
The second type of nuisance - public nuisance - differs only slightly
from the first. In order to establish that a public nuisance is taking place,
a private plaintiff will have to prove that:
(1) He has suffered a special or peculiar damage, different from that
suffered by the public as a whole;
(2) The public health, safety, welfare, peace, or comfort is being
interfered with;
(3) These injuries are proximately caused by the defendant's activity;
(A) This activity is unreasonable in light of these circumstances.
The special damage requirement limits the availability of public nuisance
litigation to those private plaintiffs who have a real and substantial interest
in pursuing an action. (Nuisance effects general to the public at large are
the responsibility of public officials.) The remaining elements of a public
nuisance action are similar to those of a privace nuisance claim, with the focus
of public nuisance litigation on harms generally suffered by members of the public.
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24.1.2 Procedure
A nuisance action can be brought with three remedies in mind. The
plaintiff may seek to enjoin the continuation of the nuisance, he may seek
compensation for damages he has suffered (but not for those of the public
at large), or he may seek a combination of these two.
In practice, courts have rarely issued injunctions against the continued
operation of large industrial polluters. Injunctive relief was provided in
only a few Instances where the injury was considered irreparable by compensa-
tion (e.g. disease) and no other adequate remedy existed. Generally speaking,
if the court finds that the plaintiff's damages can be remedied by the payment
of compensation, It will not enjoin the nuisance. If the nuisance is a con-
tinuing one, however, and damages are therefore likely to persist, a single
compensation award may very well be deemed Inadequate.
Injunctions are frequently tailored by courts to Impose the minimum
obligation necessary to remedy the nuisance. An injunction may be limited
to directing the implementation of specific measures to ameliorate the impacts
of the offending activity, rather than prohibiting the activity entirely. An
example of this might be an injunction directing the Installation of particular
pollution control equipment or removal of a toxic chemical from an industrial
process.
Even when a court determines that the plaintiff cannot be made whole
merely by the award of compensation, it may nevertheless direct that damages
be paid and refuse to enjoin the nuisance. In a few cases, courts have found
that it is less expensive for the plaintiff to avoid the nuisance than for the
defendant to abate it. In such cases, courts have occasionally made an award
which, in addition to damages to compensate for past harms, includes extra
compensation to induce the plaintiff to avoid the harm.
A number of procedural restrictions limit the availability of nuisance
litigation as a mechanism for pollution abatement. A traditional one - standing
has already been mentioned. Since litigants must have standing to bring nuisance
actions, such actions can be viable pollution control efforts only when Che
pollution involved has special adverse consequences for one or a few plaintiffs.
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These consequences must be so substantial that the potential plaintiff will
be willing to incur the expense of litigation.
A second procedural restriction arises from the rule that those who
"come to the nuisance" (for example, move to an area aware of its pollution)
may not complain of its impacts. While one legal work, the Restatement (Second)
of Torts, has discarded this rule, it retains substantial force in many juris-
dictions .
24.2 ADVANTAGES
The chief advantage of nuisance litigation is that it provides a relatively
simple and familiar mechanism for private citizens to take effective
local action toward pollution control, particularly in situations where
a single activity is causing serious harm to relatively few victims.
Thus, the availability of nuisance action clearly serves as an in-place
and usable supplement to environmental regulation.
As a practical matter, the kinds of polluting activities likely to become
the subject of nuisance litigation are unlikely candidates for the
allocation of scarce government resources for regulation and enforcement
actions. Indeed, a nuisance may be an activity that Is in technical com-
pliance with environmental regulations and therefore immune from regulatory
enforcement action. The courts, however, have been relatively consistent
in finding that evidence of a polluter's compliance with discharge permits,
standards, or other regulatory requirements is not conclusive as to
whether or not a nuisance has occurred.
3y coexisting with environmental regulations, nuisance doctrines and
outcomes provide some measure of accountability for judging the perfor-
mance of regulatory programs.
Whenever nuisance litigation can be relied on to provide acceptable
pollution abatement results, it is clearly more cost-effective for
environmental regulators to defer to private litigants.
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Nuisance law is a part of the "marketplace" system for the internalization
of sociarl costs, and therefore contributes to the "marketplace" solution
to pollution, at least in theory.
24.3 DISADVANTAGES
Because nuisance actions typically are decided on the basis of the
individual facts presented, they collectively do not provide significant
specific guidance for future conduct in other contexts. Nor do many
small cases necessarily comprise a systematic or holistic approach to a
pollution problem. Nuisance law is marked by its unpredictability,
the randomness of its results, and its disaggregated features.
The interests of private litigants and those of environmental regulators
may not be entirely compatible, for example, where a nuisance claim is
made against an activity permitted by regulation. Such divergence of
interests can foster antagonism between regulators and those who under-
take nuisance actions, and can lead to a "de facto" nullification of a
regulatory approach.
Polluters will be confused by the different compliance requirements of
regulatory and nuisance systems. The economic stake in achieving com-
pliance will be less certain to those in industry subject to both
regulatory and nuisance systems.
Nuisance actions are costly to pursue and the poor will not benefit as
they would under a regulatory approach.
2^.4 APPROPRIATE SITUATIONS
Reliance on nuisance litigation may be considered most appropriate in
those circumstances where (1) the activity involved has adverse effects that
are visited upon only a small number of persons; (2) these effects can be
directly traced to a single source or, at most, only a few sources; and (3) the
technical aspects of this causal link are capable of perception by ordinary
citizens. The most common kinds of environmental problems that have been the
subject of nuisance litigation are air pollution (dust, smoke, odors, etc.),
waste disposal (particularly hazardous wastes), and noise.
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24.5 APPLICATIONS
The lav of nuisance coexists with explicit provisions of environmental
regulations. Thus, it theoretically may be applied in any area where environ-
mental hazards can be perceived and may be applied even when regulations can not.
EPA can take the lead in developing nuisance litigation as a mechanism
of environmental pollution control by providing assistance to litigants who
bring public or private nuisance actions. Such assistance might be directed
to individual private parties, public health officials, or relevant interest
groups, but it need not take the form of financial aid to plaintiffs. Rather,
EPA could be more effective in this effort to develop nuisance law by furnishing
education, technical expertise, and legal advice to litigants. In addition,
EPA might develop practical standards by which to evaluate whether a particular
activity should be considered a nuisance, as well as scientific evidence to
support proof of the causal link between such activity and its indirect effects.
EPA's impact can be especially Important in matters neglected by existing
regulatory programs, such as sloppy solid waste practices, noise, odors, and
other air pollutants.
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CHAPTER VIII. INNOVATIVE INCENTIVES
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25. PROCUREMENT INCENTIVES
25.1 DESCRIPTION
Procurement Incentives permit the government to offer slightly higher
prices when purchasing products or services that have been certified as low
polluting. The purpose of this mechanism is to induce in the private sector
the utilization of processes and products that are of a low-polluting nature.
25.1.1 Substance
The Federal government is a major consumer of a wide range of goods.
This places it in a special position to influence decisions which are made
by manufacturers regarding their product line. The government can use its
market leverage to encourage industry to produce less-polluting products. The
government can also set an example for other consumers by publicizing its use
of products which are environmentally safe.
25.1.2 Procedure
The government has established rules and procedures for procurement.
These rules have been used in the past to further public policy objectives (e.g.
to aid minority enterprises, to eradicate discriminatory hiring by contractors,
and to assist small businesses). Federal environmental laws already contain
provisions to further environmental objectives through the procurement process.
GSA and the Department of Defense, with the largest Federal procurement
budgets, have each established rules to guide their procurement practices.
These practices must conform with other Federal statutes, including relevant
provisions of environmental legislation.
25.2 ADVANTAGES
The chief advantages of procurement incentives are that:
In many situations, the reward of a Federal contract is an effective
incentive to alter the decisions of firms which seek these contracts.
The cost to the government is generally low because the plan involves
only a shift frcm one government supplier to another, not a najor
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increase in government spending. The government may, however, have
to pay in addition the marginal cost for more environmentally sound
products.
AHm-fn-tgnrative costs associated with this program should not be great:
This program may provide the easiest way to encourage innovation in
products which are environmentally hazardous.
25.3 DISADVANTAGES
The chief disadvantages are that:
It may be difficult to determine the amount of a premium which should
be paid for an environmentally sound product.
Other Federal agencies may not pay close attention to EPA's procure-
ment guidelines which would limit the impact of the program.
Local employment effects could occur, although unemployment in one
locality is bound to be balanced by an increase in jobs somewhere else.
The added costs of the program will increase government spending levels.
Procurements not judged solely on cost and Quality factors will
result in taxpayers receiving less services for their tax dollars,
although the benefits which accure from a cleaner environment should
be considered.
25.4 APPROPRIATE SITUATIONS
Procurement incentives may be more likely to affect products which
are being developed and have high flexibility in production processes.
The government's ability to influence product design will depend
on the quality of a product which the government curreltly buys and
intends to buy in the future. The greater the actual amount which
the government purchases, or its contribution to gross products sales,
the greater will be its influence.
The program can be particularly effective when the government
purchases an environmentally safe product that replaces an existing more
hazardous one.
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Given Che large quantities of materials purchased by the government,
it might be advantageous to minimize the administrative burdens
and concentrate on offering premiums on a selective basis to categories
of products that might result in the most significant reduction in
polluting materials.
25.5 APPLICATIONS
Federal procurement incentives have been authorized for the following
purposes:
to promote clean air by purchasing low-polluting motor vehicles, through
the Clean Air Act Amendments of 1977;
to promote the greatest use of recycled materials by Federal agencies,
through the Resource Conservation and Recovery Act of L976;
to encourage a reduction of noise from commonly used equipment, through
the Noise Control Act of 1972.
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26. RESOURCE POOLING
26. 1 DESCRIPTION
Resource pooling consists of joint efforts among firms with similar
pollution control needs to share research and development of pollution control
technology as veil as the pollution equipment itself in order to reduce costs
and foster innovation.
26.1.1 Substance
Resource pooling may involve one of two basic approaches, combining
either (1) economic resources to implement a pollution control technology not
economically feasible on an individual plant basis or (2) research results
from and/or research efforts on pollution control, health effects, or toxic
chemical analyses. Thus, resource pooling can be a cost-effective and time-
saving means of achieving national environmental quality goals.
26.1.2 Procedure
Pooling of economic resources would occur when a group of firms with
similar waste treatment needs have their wastes treated at one central facility.
This approach allows smaller plants in the group to achieve the benefits of
economies of scale (in terms of lower treatment costs) available to large plants.
Various financing and management arrangementsrepresenting the public and
private sector as well as cooperative ventures-are possible for such a centralized
treatment facility.
Pooling of research or technical efforts could include coordinating
research and development in areas such as new and more effective control tech-
nologies, new applications of existing technologies or research, or toxic
chemical health effects. Non-profit research institutes could be established
to assist industries in these types of efforts.
26.2 ADVANTAGES
Economic resource poolinz appears to offer small and aedium-sized
plants the opportunity co benefit from economies of scale in che
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treatment of their wastes. Central treatment facilities would also
have professional management, thereby allowing firms to concentrate
on their primary business. As a result, the operation of pollution
control equipment would be improved.
Economic resources from different firms could be combined in research
projects to develop new and more efficient pollution control techniques
and/or equipment, projects which each firm on its own could not afford.
Technology resource pooling could allow for the combination research
efforts and the sharing of research and development which might lead
to a more rapid introduction of new pollution control technologies.
Sharing of research projects may also serve to advance current efforts
on the health effects of various chemicals and pollutants.
26-3 DISADVANTAGES
While it may lead to greater economies of scale in pollution abatement
and research, the pooling of resources by competing firms could take
away a certain portion of the profit-motivated research incentive. In
many cases, this profit motive for developing a pollution abatement
technology which will give the firm a competitive advantage in the
marketplace is a better incentive to the development of new technology
than the creation of resource pools.
26.4 APPROPRIATE SITUATIONS
Certain circumstances (such as the industry's structure or che magnitude
of the pollution problem) may effectively limit research and development efforts
by individual firms. In these cases, resource pooling might significantly
contribute to improved pollution control and lower pollution control costs.
26.5 APPLICATIONS
Economic and technical resources are currently being pooled in several
areas. In the health area, non-profit research foundations are currently
conducting health-related research on various diseases (i.e. cancer, heart
disease, etc.) In the pollution control area, a large number of private
firms are operating waste treatment facilities and land fills. These firms
collect ana/or receive wastes from many different industrial plants. Some of
these firms recover chemicals and/or metals from the wastes while others simply
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process and discharge or dispose of the wastes. EPA is.now studying the
feasibility of centralized waste treatment for electroplating firms on a
national level. Similar studies are also going on at the local level.
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27. INDUSTRY STANDARDS FOR POLLUTION
CONTROL EQUIPMENT
27.1 DESCRIPTION
Industry, rather than the federal government, could set standards
for pollution control equipment. These industry-established standards could
serve as an alternative to government-mandated standards. They would ensure
that the required equipment was built and would work according to uniform
specifications.
27.1.1 Substance
Industry standards would alleviate any disparities in performance that
may occur as pollution control equipment is. built and operated to meet govern-
ment environmental regulations. Manufacturers of this equipment would follow
agreed-upon, industry-wide specifications, thereby ensuring that (1) proper
equipment is designed for a specified need and use; (2) correct materials
are used in equipment design and manufacture; and (3) sufficient safeguards in
the form of Instructions on equipment and operation and maintenance procedures
are developed. Industry standards have the additional advantage of providing
both the equipment purchaser and EPA with assurance that the equipment will
work as required.
27.1.2 Procedure
Industry could develop voluntary (consensus) standards through a joint
effort of manufacturers of the pollution control equipment, the users of this
equipment, EPA, and other interested parties. Work of this sort is currently
being done by such organizations as the American National Standards Institute
(ANSI) and the American Society for Testing and Materials (ASTM) among ochers.
Industry standards might be developed under the auspices of one of these groups
since they follow a recognized standard-setting procedure which does not con-
flict with anti-trust laws, an important consideration in standards development.
The federal government could participate in this process as an equal member of
the development committee.
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A procedure for periodic inspections (either by EPA or industry)to make
sure that these standards are being followed also would need to be established.
In addition, a mechanism to deal with non-conformance to the standards must
be determined.
27 .2 ADVANTAGES
Industry standards for pollution control equipment can result in a better
understanding between buyers, sellers, and distributors. Buyers would
have greater confidence in the equipment they purchase since it con-
forms to these established standards. In addition, buyers would have
a definite legal basis for return or redress in the case of defective
equipment.
Industry standards can serve as a basis for a manufacturer's quality
control program, which ensures that all equipment performs according
to standards. The end result is fewer defective products and a more
efficient use of raw materials.
Industry standards may also be a cost-saving device for both manu-
facturers and buyers. Builders no longer need to redesign equipment
based on new specifications in each new contract. Replacement parts
and service to the users may be reduced in cost and improved in avail-
ability since these items would be provided according to the standards
agreed upon by all in the industry.
These standards could reduce the burden on EPA to develop and enforce
equipment regulations.
27.3 DISADVANTAGES
By establishing uniform equipment ana system performance standards,
innovation and flexibility of control approaches could be lost.
Research and development would slow because of riskiness in using
new technology.
Higher quality equipment might also be used less. The establishment
of a set of minimum product standards will make it aore difficult
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to sell higher quality equipment because design engineers may specify
the minimally acceptable ASTM or ANSI standard.
Sources whose equipment does not function to the satisfaction of the
inspectors may argue that they should be considered in "compliance"
anyway by virtue of their use of "standard" or "approved" equipment
which meets minimum design and construction standards. These sources
may contend that they should not be required to add controls, change
equipment, alter their manufacturing process, or take other actions
to comply. Thus, adherence to the standard's form may become more
important than compliance with its actual intent.
27.4 APPROPRIATE SITUATIONS
Standards may be applicable where the quality of pollution control
equipment used in industry is uneven in quality and performance.
27.5 APPLICATIONS
There are numerous examples of industries that have standardized equip-
ment or other products to increase safety to the user, to garner product con-
fidence, and to serve as a basis for comparison of value. The shipbuilding
industry, with the assistance of ASTM, has developed standards for major parts
and systems of ships. This has lead to greater compatibility of auxiliary
equipment and thus, a greater compatibility of ships. The food service
industry is currently working with ASTM. Users of food service equipment
have been dissatisfied for a number of years. Similar equipment may have
very disparate useful lives due to differences in design or materials and to
difficulties in maintaining the equipment. Because of the loss of time and
money associated with this equipment, the Department of Defense, one of
food service industry's largest contractors, requested ASTM to develop per-
formance standards for food service equipment. Similarly, the codes for the
homebuilding and construction industries now in existence in multi-stace
areas are due mainly to acceptance of ANSI and ASTM specifications and stan-
dards by vendors (builders), purchasers ( the public), and regulators (states
and localities).
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28. PERFORMANCE AWARDS
28.1 DESCRIPTION
Performance awards are positive economic incentives which are used
to encourage industry to attain pollution control objectives. These
incentives can take many forms, including subsidies, loans, grants,
special tax treatment, achievement awards, or more flexible requirements.
28.1.1 Substance
Performance awards can be useful in many ways. Investment in pollu-
tion control equipment is not profitable and industry is often reluctant
to make such investment. Performance awards can provide an economic in-
centive to overcome such reluctance. Awards can also provide direct com-
pensation for pollution control costs. Awards can provide a different
kind of compensation to firms that argue that pollution limits have de-
prived them of "property rights" to pollute established by their long
history of discharging wastes into the environment.
Regulations can stifle innovation with requirements that effectively
fix the technological approach that sources can use to abate pollution.
In addition, regulations may create a disincentive to the development of
more effective pollution control because such progress could lead to even
more stringent and expensive regulations. Performance awards can serve as
an incentive for avoiding these obstacles.
Performance awards are generally used in conjunction with other pollu-
tion control strategies such as direct regulation of waste load levels or
emission fees, since the awards are not concernplaced to fully offset the
costs of pollution control systems.
The determination of the type and amount of the awards can be a
difficult decision for the granting authority. It is necessary to deter-
mine what level of pollution reduction can be achieved by what type of
awards and at what level the value of the pollution reduction equals the
cost of the awards to society.
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28.1.2 Procedure
Administrative procedures for performance awards vary widely accord-
ing to the nature of the pollutants and activities being regulated. Some
procedures can be facilitated through established tax and grant adminis-
tration systems, while others would require the establishment of new
administrative systems.
Tax credits and accelerated depreciation on capital expenditures for
pollution control equipment are examples of awards using the established
tax system. New staff or administrative procedures may be required for
tax authorities to verify that pollution control expenditures have been
accurately classified.
Performance awards more narrowly focused on a specific activity,
product, or pollutant, such as subsidies, may require more specialized
administrative procedures. Some of these programs can be administered by
existing capital grant administration systems, while others might require
physical monitoring and extensive reporting of waste loads and concentra-
tions.
28.2 ADVANTAGES
Performance awards are more effective than penalties in motivating
industry to develop or implement new pollution control technologies.
Since industry possesses an economic incentive co comply with en-
vironmental protection regulations, these awards may also reduce
the need for costly governmental enforcement.
Awards such as accelerated depreciation can reduce industry costs
for capital intensive approaches to pollution control.
Awards are a flexible system or incentives that can be applied at
the discretion of the regulating authority co overcome bottlenecks
or sticking points in the process of bringing industries into
conformance with pollution control standards.
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28.3 DISADVANTAGES
Performance awards can be expensive. In the extreme case, they
will have to pay the entire expense of pollution control, in-
cluding capital costs and a reasonable profit, in order to serve
as an incentive.
Performance awards can have limited usefulness. It has been es-
timated that special tax treatment would not lower the costs of waste
control by even 10 percent which means that it would have limited
impact. Tax benefits are attractive to healthy corporations and
fail to aid companies unable to invest in pollution control innova-
tion. Tax breaks are also an "uncontrolled" type of program. The
legislature has no way to set the total amount of money devoted to
the program or to allocate the funds among recipients according to
any priority scheme.
Subsidies can lead to an inefficient choice of abatement techniques
and will have a varying impact on different sources.
Performance awards distort final goods prices because they lower the
costs borne by waste sources for any given level of waste treatment.
Market prices then do not reflect social costs. The signals to
consumers to curtail their purchases with high environmental impact
will be distorted.
Performance awards may be easily misused. If, for example, the
award is based solely on capital expenditures rather than effective
pollution control, firms could get credit for equipment only margin-
ally useful in reducing polution.
28.4 APPROPRIATE SITUATIONS
Performance awards are particularly appropriate where pollution sources
need to be treated on an individual rather than industry-wide basis. Flexible
incentives of this type are useful when the costs of pollution control exceed
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its immediately obvious benefits. Awards can be tailored to individuals,
companies, or government entities. Awards can give the regulating authority
greater flexibility and leverage to induce compliance by regulatees.
28.5 APPLICATIONS
Financial bonuses to encourage suggestions on how to reduce
pollution. National Environmental Industry Awards for workers
who suggest environmental innovations.
Federal grants and subsidies for municipal sewage treatment
facilities.
Subsidies for mass transit and reduced parking fees for car pools.
Accelerated depreciation for pollution control investments, and
tax breaks for operation and maintenance expenses.
Federal investment in the development of compliance technology.
Department of Energy use of grants and loans as incentives for
energy conservation, and special gasoline allotment to increase
gasohol production.
Civil Aeronautics Board use of subsidies to guarantee air service
to small communities.
EPA use of federal procurement to promote quieter products.
Relaxation of requirements for firms in early compliance or making
special contributions to pollution control methods and technologies.
Cash awards for major innovations in pollution control.
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