COST SHARING WITH INDUSTRY?
Summary Report of the Working Committee
on Economic Incentives (Revised)
The Working Committee is one of several
Committees under the direction of
The Federal Coordinating Committee
on the
Economic. Impact of Pollution Abatement
November 20, .1967
Room 325
Executive Office Building
395-5080 or Code 103-5080
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CONTENTS Page
Introduction \
Summary i
Recommendations 4
Present Federal Assistance 6
General Assistance 6
Water Pollution Abatement Assistance 6
Air Pollution Abatement .Assistance 9
Current Costs of Pollution Control for Manufacturing Firms . 12
Quest for Better Data 12
Likely Additional Abatement Costs 14
Additional Costs of WateT Pollution Control 14
An Alternative Estimate of the Additional Cost of
Water Pollution Control ^
The Additional Cost of Air Pollution Control 19
An Alternative Partial Cost Estimate: Twenty City
Model of Electric Power Plants 23
Possible Additional Federal Subsidies 26
Tax Writeoffs . 26
Grants and Loans for Industry 29
Assistance Based on Hardship 29
Assistance Based on Burden 33
Performance Grants 34
The User Charge and the Effluent or Emission Charge . 34
Summary 36
Members of the Working Committee on Economic Incentives . 37
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TABLES
Page
Table I Federal Water Pollution Control Grant & Enforcement
Budget (FY 1968 Estimate) 7
Table II Federal Air Pollution Expenditures (FY 1968 Estimate ) 10
Table III State and Local Expenditure for Air Pollution Control
(FY 1967} 11
Table IV Estimate of Replacement Cost, Annual Cost, and
Burden of Water Waste Treatment Facilities for 13
Manufacturing in 1966
Table V Estimate of Additional Annual Cost of Water Pollution
Abatement to Meet a Hypothetical Industrial Standard
Requiring 85% Removal of Biochemical Oxygen Demanding
Wastes and Suspended Solids 16
Table VI Comparison of Waste Treatment Required h. Distribution
of Value of Manufacturing Output Assuming Hypothetical
Waste Treatment of 85% of Biochemical Oxygen Demanding
Wastes and Suspended Solids, 1966 18
Table VII Additional Annual Cost to Achieve the Water Quality
Standard Established for the Delaware River Estuary
and an Extrapolation for All Manufacturing Firms
Based on Waste Water Discharged by Manufacturers
in the Estuary and the Country, 1966 20
Table VIII Annual Cost of Achieving a Hypothetical Standard by
Reducing Human Exposure of Sulphur Oxides and
Particulates by 60 to 75% in a "Typical City" of 2
Million People and Extrapolated for the United States,
1967 22
Table IX Affected Fuel and Hypothesized Cost of Achieving
Fuel Standards for Electric Power Generation Plants
located in or near the Twenty Cities with the Worst
Sulphur Oxide Problems, 1967 25
Table X Comparison of the Additional Subsidy to Industry 28
Through Alternative Forms of Federal Assistance
Table XI Number and Proportion of All Manufacturing Firms
Potentially Eligible to be Considered for Pollution
Abatement Assistance under Programs of the Small
Business Administration 31
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INTRODUCTION
This report summarizes the Working Committee's evaluation
of the advisability of further assistance for industry and possible
alternative approaches for such assistance. The Working Committee
on Industrial Incentives is part of a larger effort to look at the economic
impact of pollution abatement as directed by the President. JJ
The report is divided into six parts: (1) Summary; (2) Recom-
mendations; (3) Magnitude and nature of present Federal assistance
to industry; (4) Summary of the expenditures currently made by
industry; (5) Estimates of costs for air aftd ^'ater abatements; and
(6) Analysis of several proposed Federal subsidies.
SUMMARY
The average additional annual cost caused by higher levels of
pollution abatement are estimated to be significant but relatively small
for all manufacturing firms. Moreover, Federal assistance to industry
is already sizeable and is growing especially in the area of R&D
intended to lower abatement costs. Therefore the need and desirability
of additional assistance for industry should be judged on the basis of
hardship or burden on particular industries, firms or plants (or hardship
on particular communities) caused by abatement actions rather than
on the burden to industry as a whole.
Present Federal Assistance
The Federal Government offers general assistance to industry
in the form of the 7% investment tax credit for capital equipment
including pollution abatement equipment. The overall Federal water
pollution program, in the excess of $400 million annually, is helpful,
to industry as well as States, municipalities, and interstate agencies.
1/ Development of analysis was assigned to Interior, Health, Education,
& Welfare and the Council of Economic Advisers. At the request of all
parties to the evaluation effort, a coordinating committee on the economic
impact of pollution abatement was established last summer. All Federal
agencies having responsibility in the area of pollution abatement are
represented on Federal committee: Agriculture, Atomic Energy Commission,
Bureau of the Budget, Council of Economic Advisers, Commerce, Corps
of Engineers, Federal Power Commission, Health, Education 81 Welfare,
Interior,Labor, Office of Emergency Planning, Office of Science and
Technology, State, Treasury, and the Water Resources Council. The
Working Committee on Economic Incentives is one of several committees
under the coordinating committee and is composed of representatives from
BOB, CEA, Commerce, HEW', Interior, OS/T, Treasury and the Water
Resources Council.
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Elements of this program include research and development, training,
and planning grants and municipal construction grants. Manufacturing
firms benefit from municipal facilities which receive Federal grants
as well as gaining benefits from economies-of-scale.
For air, Federal assistance is estimated to be over $100 million
in FY 1968 and is scheduled to increase markedly under the provisions
of the Clean Air Act of 1967. These funds are now spent for research
and development, demonstration grants, training and data collection.
While Federal assistance is already sizeable, it is reasonable
to believe that additional research and development funds, if directed
towards bottleneck problems, are likely to be highly productive in
reducing the cost of abatement. Moreover, this is a desirable and
appropriate way for government to assist industry.
Additional Cost qf Abatement
The additional annual cost for water pollution abatement (secondary
treatment) by manufacturing plants is estimated to be approximately
$1/4 billion. This is equivalents© . 13% of total value-added by manu-
facturing firms in 1966. The additional cash flow occasioned by the require-
ment to meet the hypothetical standard of secondary treatment (85% level)
within 5 years could cause the demand for pollution abatement funds to
nearly double to approximately $1/2 billion oirl/4% of value-added by
manufacturing. The annual cash flow requirement would correspondingly
be less during the succeeding years unless standards were raised
higher. Roughly one-fifth of additional treatment cost borne by manu-
facturing firms was estimated to occur through using municipal facilities.
The cost of control could be much greater if high environmental quality
standards are set. Or the cost of control would likely be less if
locational factors, special purpose water basins and cheaper production-
process changes are considered -- as they will likely be considered
in practice.
Some manufacturing industries, firms and plants will face
costs which will vary considerably from the average. For example,
the chemical industry is likely to face abatement costs nearly four
times above the average or . 5% of value-added while electrical
machinery can anticipate costs which are one-fourth of the average
or approximately . 04% of value-added.
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The additional costs of air pollution abatement are more uncertain
than for water. However, the additional annual cost in the case of a 60%
to 75% reduction of human exposure to sulphur oxides and particulate
pollutants in all Standard Metropolitan Statistical Areas is estimated
to be about $3/4 billion. Roughly 46% Of $354 million of this cost may-
be borne by manufacturing firms and electric power companies;
therefore, the additional burden should total approximately 0.16%
of value-added in 1966. The additional annual burden for other waste
load emitters -- primarily space heating of residences, apartments
and non-manufacturing businesses --is estimated to be $415 million
or $2. 96 per capita, which is 0.11% of per capita income. The cost
can easily double or quadruple if abatement is required for all waste
load emissions rather than limiting abatement to harmful discharges
only. This is particularly true with electric power generation plants
which are heavy emitters of SO^ but are not necessarily heavy polluters.
The additional annual costt for manufacturing firms and electric
power plants (excluding thermal pollution abatement) to achieve the hypo-
thetical quality standards considered in this report far^hoth air and water
is estimated to be approximately $1 billion or less than 1/3% of
value-added for manufacturing and the electric power industries.
Proposals for Assistance
Various proposals for additional assistance to industry beyond
obvious improvements or expansion of existing Federal programs were
evaluated as follows. Across-the-board assistance for capital investment
such as tax writeoffs (credits or accelerated depreciation) and grants are
unnecessary because the burden of pollution abatement is estimated
to be only moderate. Also, this form of subsidy is inefficient because
such assistance provides an incentive for excessive use of capital and
practically excludes similar assistance to process changes that jointly
reduce pollution and increase productivity. Moreover, such aid is likely
to be an undesirable precedent for using tax writeoffs for other programs
(e. g. , education, training, housings etc. ).
Performance grants, emission charges and^effluent fees are not
now feasible for widespread use. They must await the development of
adequate institutions, improved monitoring methods and better pollution
damage estimates. When these obstacles are overcome, performance
grants and fees are the:type of incentives that would be most efficient
and augment effective enforcement. However, it is important to
experiment with their use now while awaiting the evolution of more
effective pollution management organizations.
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On equity grounds, assistance could be offered industrial plants
that experience real hardship or assistance, could be broadened to
include, all plants that experience high abatement costs per unit of
output. A program of aid to firms that experience severe hardship could
be implemented within the programs administered by the Economic
Development Administration (EDA), Small Business Administration (SBA)
programs; Interior and HEW. EDA can give loans to firms of any
size in designated areas or outside those areas if pollution control
expenditures threaten the viability of a firm and a community. Over
95% of the businesses in the United States are eligible for SBA
assistance -- from the smallest to some of the larger companies.
In addition, study funds used to identify feasible ways for plants to
meet quality standards would be desirable. All of these approaches
would augment the enforcement process.
At the present time, further assistance in addition to current
Federal programs is unnecessary and undesirable for industry as a
whole. However, assistance for planus and firms unable to obtain
funds for pollution abatement capital expenditures or in need of
pollution abatement technical aid can. be justified on both equity
and efficiency grounds.
RECOMMENDATIONS
1. The Secretary of Health, Education, and Welfare and the
Secretary's of the Interior should examine the goals and effectiveness
of programs already available for controlling industrial pollution and
recommend changes in their administration and content to make these
programs more effective. Also the level of assistance already offered
to industry should be highlighted -- such as the 7% investment tax
credit, technical assistance, personnel training, and R&D expenditures
for lowering the cost of abatement.
2. The Federal Government should consider increasing its
investment in research and development in the following areas:
a. More economic methods of industrial pollution abatement.
b. Evaluation of alternative institutional arrangements for
implementation of pollution abatement programs.
c. More effective devices for measuring waste load
discharges and concentration levels.
d. Measurement of damages caused by pollution.
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e. Better estimates of the cost and performance of
alternative abatement measures within firms and within
problem shed areas.
f. Technical bottleneck areas such as desulphurization of
coal and acid mine drainage.
3. Additional assistance in meeting required pollution abatement
standards is recommended only in cases where cost of abatement imposes
a demonstrable hardship on individual plants which were located prior to
1967-- when the Clean Air Act was passed and water quality standards
were required. Consideration should be given to the importance of
hardship plants in each community. Current programs administered by
the Economic Development Administration, Small Business Administration,
Interior, and HEW could accommodate this recommendation.
4. Across-the-board cost-sharing in the form of tax writeoffs
is not recommended because it distorts the tax structure, causes the
total cost of pollution abatement to rise significantly, promotes ex-
cessive use of capital equipment and waste treatment facilities, and
discourages selectivity in environmental quality management. Across-the-
board use of grants and loans is similarly handicapped and, in addition,
is subject to fluctuations in Congressional appropriations-
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PRESENT FEDERAL ASSISTANCE
General Assistance
The Federal Government at the present time extends significant
amounts of assistance to industry. Therefore, it should not be thought
that industry is facing the total cost of pollution abatement alone.
General assistance is offered to industry under the 7% investment tax
credit for capital equipment. This credit extends to all capital equip-
ment investment, including those for air and water pollution control,
and has the effect of reducing the net cost of air and water pollution
control facilities to industrial firms. Perhaps $10-25 Million of
assistance is given each year in this way to manufacturing firms
investing in pollution abatement equipment.
Also air and water pollution control equipment is included
under the accelerated depreciation allowances for capital equipment --
such as double declining balance and sum->of-the-digits. The effect is
similar to an interest-free loan for the amounts involved. The current
annual subsidy through this provision may be $15-30 million for
manufacturing firms investing in pollution control facilities.
Water Pollution Abatement Assistance
The national program of water pollution control rests primarily
with the Department of Interior, with ancillary programs in the Corps
of Engineers (DOD), the Departments of Commerce and Housing and Urban
Development. The Interior Department program includes grants
for comprehensive river basin planning, research, development,
demonstration, training, research fellowships, and construction
expenditures for new municipal waste treatment facilities (See Table I).
The State grants assist States and interstate agencies in
establishing and maintaining adequate measures for the prevention
and control of water pollution. Funds appropriated to the States are
allotted by statutory provision on the basis of population and per
capita income.
The grants and contracts for research, development and demonstra-
tion projects are aimed at developing new and improved methods for the
prevention and control of water pollution. In the water pollution control
program, the total annual appropriation currently is $53 million. At least
$10 million of this amount is allocated for industrial waste problems.
The Clean Water Restoration Act of 19&6 specifically authorized demonstration
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TABLE I
Federal Water Pollution Control Budget
(FY 1968 New Obligational Authority Estimate)
(Millions of dollars)
GRANTS:
Research and Development $37^0
Training $ 4.0
State Program and Planning Grants $10.5
Construction Grants $203.0
DIRECT OPERATIONS $ 41.0
TOTAL $295.5
Source: Federal Water Pollution Control Administration,
Interior.
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grants in three categories: (a) storm and combined sewers, (b) advanced
waste treatment and joint treatment systems for municipal and industrial
waste, and (c) methods for prevention of pollution by industry, including,
but not limited to, treatment of industrial waste. Grants may not exceed
75% of the project cost.
The training grants, contracts and research fellowships are aimed
at encouraging, cooperating with and assisting agencies, institutions, and
individuals in the control and prevention of water pollution. There are
four types of grants -- (a) research grants which support basic and applied
research projects throughout the country and encourage investigators to
explore neglected areas in the causes and controls and prevention of
water pollution; (b) research fellowships which promote specialized
training in the problems of water pollution; (c) training grants which
expand training programs in universities, colleges, and institutions;
and (d) demonstration grants which develop and support projects aimed
at accelerating application of new knowledge to routine water pollution
control practices.
The waste treatment grants are intended to accelerate construction
of local waste treatment facilities. Under the Federal Water Pollution
Control Act, as amended, grants can be made to any State, municipality,
intermunicipality or interstate agency for the construction of waste
treatment plants, including intercepting and outfall sewers.
Grants for municipal waste treatment facilities vary from 30%
to 55%. Industrial firms benefit to the extent they seek waste treatment
service from municipalities, for they obtain economies of scale,
convenience, and the avoidance of most of the capital-raising requirements.
This assistance is limited, however, according to the ability and
willingness of the municipality to provide tffl.fi..service and by the limitations
of Federal funds to assist the municipality in financing the construction.
For fiscal year 1968, $203 million has been appropriated. The total
additional annual cost needed to provide secondary treatment for all
municipalities is estimated to be about $900 million or about $6 per
person living in an^irban area. The total additional capital investment
required to reach this level is estimated to be $6. 8 billion. Coupled
with investment necessary to replace existing facilities, the total
becomes $8.0 billion required during the next 5 to 10 years.
The most significant assistance to industry for water pollution control
is the construction grant program for municipal waste treatment plants.
Industrial firms may negotiate a price.from the municipality for the waste
service that covers only the costs the municipality itself meets. That is,
the price for the service may reflect the Federal grant and thus constitute
a considerable subsidy. Moreover, many municipalities do not require
industrial firms to cover their proportion of capital costs. Therefore
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these municipalities are subsidizing industry too. The effect of the
subsidized price may be to induce carelessness on the part of the firm
in regard to waste controls and disposal. The result could be a larger
waste load at the municipal plant. The impact on the Federal budget
could be to require higher appropriations under the municipal construction
grant program to meet the consequently larger scale municipal facilities.
The encouragement of full-cost pricing by municipalities to induce
effective industrial waste controls and to achieve real economies of
scale is important.
The aim of the Corps of Engineers' water quality control
program is to improve water quality by the timely release of water
from storage reservoirs. While the law prohibits the specific use
of flow augmentation as a substitute for adequate treatment or control
of wastes, it does, nevertheless, provide authority for building reser-
voir capacity for stream flow regulation. In these cases*, the entire
cost allocated to water quality control has been assumed by the Federal
Government when the benefits were considered to be widespread.
However, this arrangement is now under .critical review.
Hydrologic and hydrometeorological data and analyses are provided
for State and local government, communities, and industry concerned
with planning, management, and conservation of water resources.
Other forms of technical assistance are also provided.
Air Pollution Abatement Assistance
Air pollution control, under the primary jurisdiction of the Depart-
ment of Health, Education and Welfare, promotes control of air pollu-
tion through a variety of activities, including research, training,
technical assistance, and grants and aids to State, local and regional
government agencies. (See Table II and III). Direct Federal abatement
activities are undertaken to remedy certain interstate and intrastate
problems. Technical assistance is provided for resolving specific air
pollution problems. Funds for community surveys and control program
plans are available to State and local governmental agencies. Grants
are made for development, improvement, establishment and, under new
legislation, maintenance of abatement control programs. Grants to
universities support advanced training programs. Fellowships are
offered to prospective managers of governmental and industrial control
programs. Research grants support basic scientific inquiry. The
Commerce Department's Environmental Science Services Administration
through its Weather Bureau disseminates weather summaries which
warn of impending, potentially hazardous accumulations of pollution.
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TABLE II
Federal Air Pollution Budget
(FY 1968 New Obligational Authority Estimate)-^
(Millions of dollars)
Research ~ Stand-
and .m " Train- ards Infor- nn^*- T«i-oi
, , stration . „ , Other Total
develop- jest inS Regu- mation
raent lations
Sulphur Dioxide $ 8.A $ 7.9 $0 $0 $0 $0 $16.3
Vehicle Emissions 4.3 0 0 1.9 0 0 6.2
Other Non-Allocable 14.9 1.5 4.8 6.1 1^6 24.9 53.8
TOTAL $27.6 $9.4 $4.8 $8.4 $1.6 $24.9 $76.3
a/ Includes only Federal Funds Managed by HEW.
Source: Health, Education and Welfare.
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TABLE IH
State and Local Expenditure for Air Pollution Control
(FY 1967)
Total Program Federal Local
State Budget Grants Expenditures
California
$5,317,141
$391,483
$4,925,758
Illinois
1,475,876
522,500
953,376
Michigan
796,370
370,918
425,452
New Jersey-
827,021
260,960
566,061
New York
5,466, 768
608,714
4, 858, 054.
Pe nnsy 1 vania
1,279,334
453,086
826,248
Total 6 States
$15,162,510
$2,607,661
$13,554,849
TOTAL ALL STATES
$22,121,364
$6,378,179
$15,743,185
Source: Health, Education and Welfare
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CURRENT COSTS OF POLLUTION CONTROL
FOR MANUFACTURING FIRMS
Industrial plants have invested regularly in pollution abatement
facilities and techniques prior to the passage of the Water Quality Act
of 1965 and the Clean Air Act of 1967. However, as called for by the
provisions of these acts, additional expenditures will be required. But
before proceeding to the likely increase in these expenditures, it should
be emphasized that industry has invested and is continuing to invest in
facilities to reduce the discharge of harmful ^vaste loads.
In the case of water pollution abatement, the Federal Water Pollu-
tion Control Administration (FWPCA), through its study of industrial
waste treatment profiles has estimated the replacement value of exist-
ing industrial waste treatment facilities to be approximately $2 billion;
another $. 7 billion represents the replacemeht value of that portion of
municipal facilities allocated for treatment of industrial wastes. In
1966, the annual cost to industry for water pollution control is estimated
to have been $642 million. This represents .294% of total value-added
by manufacturing plants in 1966 (see Table IV). However, these figures
do not include built-in water pollution controls provided in the design of
new processing units. Although not a burden of industry, but certainly
a benefit, no estimate is made of the Federal pollution control expendi-
tures for reservoirs which improve water quality by the regulation of
flows.
In the case of air pollution abatement, there are no acceptable na-
tional estimates of total investment or annual cost.
Quest for Better Data
During the summer of 1967, an effort was made through the National
Industrial Conference Board (NICB) to obtain waste control cost data by
sample survey techniques. A questionnaire was developed in collabora-
tion with NICB and tested for feasibility on a small sample of 30 firms
with 110 plants. The result was disappointing due, in part, to the com-
plexity of the questions, the reluctance of the firms to answer questions
on their financial situation, and the lack of knowledge of likely waste con-
trol requirements. A more carefully constructed questionnaire was in-
dicated from this experience after firms have had time to analyze their
own abatement requirements under the water quality standards and the
anticipated air quality standards.
Further study is being given to this method, but questionnaire results
do not appear likely for 1968. Pessimism toward this approach is height-
ened by the fact that the firms selected for the pilot study were chosen on
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TABLE IV
Estimate of Replacement Cost, Annual Cost, and
Burden of Water Waste Treatment Facilities for
Manufacturing, 1966
Current Replacement Cost:
Industrial Waste Treatment Facilities
Portion of Municipal Facilities used
by Industrial Plants
TOTAL
$2, 000 million
700 million
$2, 700 million
Annual Cost:
Capital cost of industrial waste treatment
facilities (amortization over 20 years at
6% interest)
Operation and maintenance cost
TOTAL for industrial waste treatment
Capital cost of portion of municipal
facilities used by industrial plants
(Amortization over 25 years at
4-1/2% interest)
Operations and maintenance cost of
the portion of municipal facilities
used by industrial plants
TOTAL for industrial portion of
municipal facilities
TOTAL for Manufacturing
Annual industrial abatement as a percent of
total value-added by manufacturing in
1966 ($218. 6 billion)
$172 million
380 million
$ 47 million
43 million
$ 552 million
90 million
$ 642 million
. 294%
Source: Data from Federal Water Pollution Control Administration, and the
Commerce Department,
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the basis of the interest which they had indicated to the National Indus-
trial Conference Board about air pollution problems. These firms
should have been able to answer a pollution questionnaire more readily
than other firms which have been less concerned about the problem.
UIKELY ADDITIONAL ABATEMENT COSTS
Estimates of the additional abatement costs are much more difficult
to determine for air than for water. For air, there are no precise
measures of total needed abatement, while in the case of water, needed
abatement can be more accurately estimated because of the observable
trend in the level of water quality standards. However, the recently
enacted Clean Air Act of 1967 will help to overcome this deficiency in
laying the groundwork for the establishment of air quality standards.
Even for water, one of the estimates below is based on an across-the-
board 85% level of treatment with all abatement being accomplished by
end-of-line treatment plants and with no consideration of hydrology
or actual river standards.
Future cost of abatement will be significantly affected by the way
in which waste reductions are required and the degree to which more
effective institutions for the enforcement of abatement come into exist-,
ence. In the case of the Delaware River Basin, for example, FWPCA
found that simple equal-proportional reduction of all waste loads --
could cause an increase of 50% in the total cost to achieve the same
quality standard compared to the cost estimated by requiring firms
to reduce their waste loads in proportion to their harmful effects.
But in the case of air, the cost could increase by 200% to 400% if
equal-proportional reduction year-round is proposed. Where the
design of abatement plants can take advantage of the assimilative
capacity and variations in volume of flowing water, the cost is
significantly affected in achieving any given water quality standards;
concerning air, the dilution capacity and daily flow conditions could
affect the cost of control even more.
Additional Costs of Water Pollution Control
The Federal Water Pollution Control Administration of the Depart-
ment of the Interior sought to attain better information on the additional
cost of control through the use of consultants. The consultants developed
reports and analyses on 10 industrial sectors, accounting for 95% of the
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2/
large water users in manufacturing. The reports related waste units to
production units and waste reduction or treatment to costs. The exper-
ience of the consultants augmented by data from previous studies of
selected problems and the Census Bureau's manufacturing production,
water use, and waste water disposal data constituted the frame of reference
of the analyses. The FWPCA staff evaluation of the reports carefully states
the limitations of the data and cautions against conclusions of a definitive
and final nature. Also the hypothetical standards employed for determining
costs were used for computational purposes andoobviously should not be
interpreted as a desirable abatement strategy to meet standards. Never-
theless, this effort constitutes the first attempt at a systematic,
comprehensive survey of industrial liquid waste treatment costs.
The findings of the FWPCA studies indicate that the annual cost
for abatement will rise by $275 million to attain a hypothetical standard
requiring 85% removal of biochemical oxygen demanding (BOD) wastes
and suspended solids. Two-thirds of the total annual cost, or $181 million,
is required for operation and maintenance cost and the remaining one-third,
or $94 million, is for capital cost. The additional burden estimated for
all manufacturing firms is . 126% of total value-added by manufacturing
firms (see Table V). This is rather an insignificant cost increase when
compared to the more than 6% increase in average hourly compensation
in manufacturing that occurred in 1967. Even after adjusting for
productivity changes -- 0. 9% additional output per man-hour -- unit labor
cost rose by over 5% and was a major contributor in increasing the
cost of manufacturing by roughly 3%.
If manufacturing firms continue to use municipal waste facilities
as they do now, then 21%, or $38 million., of the additional annual cost
can be expected to be paid through assessments and fees to municipal
waste treatment organizations. This may be, however, an overstate-
ment of the cost because municipal waste tr^atrpent plants may be sub-
sidized by Federal construction grants and in addition there is reason to
suspect that municipalities do not charge manufacturing firms their full
proportion of both capital and operating costj, Also, manufacturing
firms may increase their use of municipal facilities as concentration
of both industry and people continues.
2/ Food and Kindred Products; Textile Mill Products; Paper and Allied
Products; Chemicals and Allied Products; Petroleum and Coal Products;
Rubber and Plastics Products; Primary Metals, Blast Furnaces; Primary
Metals and Steel Mills, all others; Electrical Machinery; All Other
Machinery; Transportation Equipment.
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TABLE V
Estimate of Additional Annual Cost of Water Pollution Abatement to
Meet a Hypothetical Industrial Water Quality Standard Requiring 85%
Removal of Biochemical Oxygen Demanding Wastes & Suspended Solids
(million of dollars)
Current
Additional
New
Percent of
Annual
Annual
Annual
Total Annual
Cost (1966)b
Cost
Cost
Cost
Add col (1) and (2)
(1)
(2)
(3)
(4)
Capital Costs :a
Manufacturing waste treatment facilities
$172
74c
$246
27%
Portion of municipal facilities used by
manufacturers
47
20
67
7%
Total
219
94
313
34%
Operation and Maintenance Costs:
Manufacturing waste treatment facilities
380
163
543
59%
Portion of municipal facilities used by
0V
f
manufacturers
43
18
61
7%
Total
423
181
604
66%
Total Cost
$642
$275
$917
100%
Average burden on manufacturing firms*,
Percent of total value added by manu-
facturing in 1966 ($218. 6billion)
. 294%
. 126%
.420%
« —
a/Amortized over 20 years at 6% interest for industry and over 25 years at 4-1/2% for municipalities
b/See Table IV
c/Assuming the same proportional use of municipal facilities and that manufacturers actually pay fees
adequate, to cover capital costs
SQurce: Data from Federal Water Pollution Control Administration and Commerce.
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Manufacturing firms will be required to increase the rate of in-
vestment for waste treatment facilities. The additional capital expendi-
ture to reach the hypothetical standard with the current level of industrial
output and mix of industries is estimated to be $1.15 billion. This
could cause some problems for some firms in obtaining funds to make the
needed investment. If manufacturing firms are consistent with their
past behavior, roughly one-fifth of the capital needs will be satisfied
through use of municipal facilities. If the remaining capital investment
is made in the first five year's with only capital replacement expenditures
for the remaining 15 yearB of the economic life of the new-investment,
the demand for additional funds (cash flow) would increase from
$275 million to $468 million for each of the fir^t five ^fears and then
decrease to $201 for each of the next 15 years. Even at the higher
level, requirements for new funds to achieve the hypothetical standard
would only amount to . 214% of total value-adfled by manufacturing --
which is hardly a serious burden oh all manufacturers.
In future years, as population and industry concentrate more
extensively around the Nation's rivers and lakes, abatement cost will
undoubtedly rise. For example, if the hypothetical standard is raised
from 85% to 90% removal of BOD and suspended solids by waste
treatment plants, then additional annual abatement costs are estimated
to be approximately $413 million, or .189% of total value-added by
manufacturing firms. Should the extremely high level of 95% removal
of BOD and suspended solids be achieved, the annual costs are
estimated to rise to $715 million or . 313% of total value-added.
The conclusion from this pioneering study is that the additional
annual burden or the additional cash flow requirement for manufacturing,
on the average, is likely to be small. However, industries and firms
within manufacturing will face costs which will vary considerably from
the average. For example, the chemical industry is likely to spend
nearly four times the average while the machine industry will likely .
spend less than one-fourth (see Table VI). The additional burden upon
manufacturing industries is estimated to vary from nearly zero to . 5%
of total manufacturing output. For each firm on each plant the
variation of additional annual costs will undoubtedly be greater.
It is interesting to note that many of the industries facing the
largest increase in expenditures are generally the same,ones that have already
made large expenditures. Also, these same industries -- e. g. , chemicals,
foods, and steel mills -- have a history of reducing waste discharges by
improving production processes so as to reduce the creation of waste loads
as well as investing in the more conventional wapte treatment facilities.
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TABLE VI
Comparison of Waste Treatment Required and
Distribution of Value of Manufacturing Output
Assuming Hypothetical Wast^ Treatment of
85% of Biochemical Oxygen Demanding Wastes
and Suspended Solids, 1966
Industries
Percent of
Total Manu-
facturing
Output
Percent of Total
Additional Waste
Treatment
Required
Variation in Burden
as a percent of
Average Burden
Col (2) -S- Col (1)
(1)
(2)
(3)
Food and Kindred Products
16.61
20. 91
126
Textile Mill Products
3.86
2. 52
65
Paper and Allied Products
4. 12
7.20
175
Chemical and Allied Products
7.32
26.60
363
Petroleum and Coal Products
3.88
7. 32
189
Rubber and Plastics Products
2,41
2. 94
122
Primary Metals, Blast Furnaces 4.49
9. 34
208
Primary Metals, Steel Mills and 4. 15
4.88
118
All Other
Machinery Electrical
7.54
. 81
11
Machinery, All Others
7.61
2.37
31
Transportation Equipment
13. 90
3. 96
28
All Other Manufacturing
24.11
11. 15
46
Source: Data from Federal Water Pollution Control Administration and Commerce
Department.
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Therefore, the costs from this study are obviously higher than can
be expected.
An Alternative Estimate of the Additional
Cost of Water Pollution Control
In 1966, FWPCA prepared a preliminary report of a comprehensive
water quality control study of the Delaware River Estuary. The study was
developed with the cooperation of industrial firms using the estuary for
waste disposal. Some consideration was given to process changes
within manufacturing plants, to the assimilative capacity of the estuary
for waste disposal and to water quality criteria related to some specific
uses of the estuary such as quality levels to insure success of the
annual shad run through critical areas. In this respect the Delaware
Study is more refined than the industrial profiles.
The estimated additional cost to achieve the high water quality
standard since established for the estuary is $15 million annually if
marginal costs to all polluters are equated by means of an effluent
charge or by means of selective levels of reduction. If uniform treatment
is required then the cost increases by 50% to $24 million. Roughly
two-thirds of the total cost is for operation and maintenance; one-third
is for the estimated annual capital cost.
Although different hydrologic characteristics and quality standards
apply in the other major drainage basins in the country, an indication
of what the national cost is likely to be can be obtained by extrapolating
cost patterns of the industrial firms in the Delaware Estuary to all
manufacturing firms on the basis of waste water discharged. This
method of estimating the additional annual cost for all manufacturing
gives a figure of $234 million. If all firms are required to removeind
equal percentage of wastes produced before discharging the remainder to
the water body, the cost increases by 50% to $374 million. The additional
burden on manufacturing plants is only . 107% to . 171% of total value-
added. (See Table VII). The results are similar to those obtained by
the industrial waste profiles and reinforces the conclusion that the burden
of water pollution abatement is likely to be m'odest.
The Additional Cost of Air Pollution Control
In order to estimate the additional cost of air pollution control, the
National Center for Air Pollution Control with the assistance of a
consulting firm constructed a simulation model of a "typical" major city
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TABLE VII
Additional Annual Cost to Achieve the Water Quality
Standarda Established for the Delaware River
Estuary and an Extrapolation for All Manufacturing
Firms Based on Waste Water Discharged by
Manufacturers in the Estuary and the Country, 1966
(millions of dollars)
Capital Cost
Operatiors and Maintenance
T otal
Percent of Total Value
Added by Manufacturing
in 1966 f$218. 4 billion)
Estuary
All Manufacturing
Uniform
Charge for
All Wastes
Actually
Uniform
Uniform
Charge for
All Wastes
Actually
$ 5
10
15
$ 8
16
24
$ 76
156
234
107%
Uniform
Discharged Treatment Discharged Treatment
$ 123
251
374
171%
a/ Summer average dissolved oxygen of 4 parts per million gallons in the critical
sections of the estuary.
b/ Amortized over 20 years at 6 percent interest.
cj The effect of the charge was to require only harmful waste loads be reduced by
the least costly method.
d/ All dischargers remove an equal percentage of the wastes produced before
discharging the remainder to the steam.
Source: Data from the Federal Water Pollution Control Administration's
Delaware Estuary Study ai*d the Commerce Department.
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experiencing air quality problems. The model of two million people
included realistic discharges of sulphur oxides (SOx) and particulates
from coal and oil fueled electric power plants, multi-family and single
family residential space heating units, a non-ferrous foundry, a
petroleum refinery, a sulphuric acid plant and a municipal incinerator.
The waste loads were scaled down from a rough approximation of
waste loads emitted by a larger city -- New York. Industry that
is not found in New York was included to make the model city more
typical, such as the non-ferrous foundry and the sulphuric acid
plant.
The dispersion of waste loads generated was determined by the
height of smoke stacks and a "typical" meteorological model -- based
upon St. Louis. Costs were collected for various techniques and
technologies useable for reducing harmful waste discharges. As a
proxy for future air quality standards.emissioif were cut back so as
to reduce human exposure from SOx and particulates. Human exposure
was measured by the number of people multiplied times the parts per
million of SO^ and particulates.
The additional annual cost of efficiently reducing human SO and
particulate: exposure by 60-75% from the present level was estimated
to be approximately $11 million for the "typical" city and $769 million
for the United States (See Table VIII). Approximately 85% of the cost
is in the form of increased fuel, operations, and maintenance costs.
Because of the heavy use of fuel substitution, the capital cost is
estimated to be less than 15% of the total cost. However, other studies
by NCAPC indicate that the proportion of capital cost to total cost
increases at higher abatement levels.
The cost of abating particulates appears to be cheaper than reducing
SO by the same proportion. In the model city study less than 20% of the
toteil cost of achieving the hypothetical quality standard is attributable to
particulate control alone.
It should be recognized that not all of these costs will be borne
by manufacturers and utilities. Households, other industrial firms and
other commercial firms will undoubtedly bear a large proportion --
probably about 54%. So all of the cost estimates should be adjusted
downward for industry's likely burden. If manufacturers and electric
power plants account for only 46% of the additional cost, then the additional
burden will be 0.16% of value-added by manufacturing and electric power
production.
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TABLE VIII
g /
Annual Cost- of Achieving a Hypothetical Standard by Reducing
Human Exposure of Sulphur Oxides and Particulates by 60 to
75% in a "Typical City" of 2 Million People and
Extrapolated for the United States, 1967
(Millions of dollars)
Typical Citv
United
States?!/
Least
Cost—/
Propor-
tional
Reduction^
Least
Cost
Propor-
tional
Reduction
Capital Cost
$1.17
$2.29
$81.90
$160.30
Operations and maintenance
9.81
15.78
686.70
1,104.60
TOTAL
$10.98
$18.07
$768.60
$1,264.90
Cost to Industry—i
Percent of value added
5.05
8.31
353.56
0.16%
581.85
0.26%
Cost to others^/-
Per Capita
Percent of per capita incomeS/.
5.93
9.76
415.04
2.96
0.11%
683.05
4.88 V
0.18%
a/ Includes cost from substituting fuels, purchasing more costly lower sulphur-content
fuel, and treatment of emissions whichever is cheaper for each emitter.
b/ Only those discharging harmful waste loads and technically able to reduce waste
loads were required to abate in the simulation.
c/ All waste load emitters must reduce waste discharges by the same proportion,
d/ Assumed same air quality conditions hold for all Standard Metropolitan Statistical
Areas -- 70% of the nation's population of 200 milliori.
e/ All manufacturing, incinerators and electric power companies if abatement costs
were allocated as a proportion of waste loads emmitted.
if Almost entirely fpr space heating.
g/ Per Capita Disposable Income for the entire country was $2,735 in 1967.
h/ In dollars -- e.g. 2.96 dollars and 4.88 dollars.
Source: Data from National Center for Air Pollution Control's
"Typical" City Study and the Commerce Department.
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In the case of both air and water, there will be wide variations
in the cost of abatement and in the relative burden for particular plants
and industries. The range is undoubtedly greater in air than in the
case of water.
As indicated by the model, if enforcement is pursued by asking
all waste load emitters to abate whether they actually contribute to
lowering the hypothetical air quality standard in each air shed, the
annual additional cost doubles. Moreover, proportional reduction will
impact most severely on electric power plants w^iich are heavy emitters
but not necessarily heavy polluters.
Other studies have shown that the cost can quadruple if
seasonality and other facitors are not considered.
An Alternative Partial Cost Estimate: Twenty City Model of Electric
Power Plants
Data were collected from power plants in the twenty cities with
serious sulphur oxide problems.—' Each power plant was identified by
distance and direction from the center of population density in each city;,
type (e. g. , coal, oil or gas), quantity, sulphur content, and seasonality
of fuel consumed; age of major physical facilities, wind vector (direction
and speed) in the vicinity of each plant (air shed), and height of
smokestacks.
Several abatement strategies were simulated for two fuel standards
based upon two levels of minimum sulphur content in coal and oil. Tbe
study showed that raising the severity of the fuel standard from 1. 5%
sulphur-content for Chicago, New York and Philadelphia and 2^0% for
the other cities to 1. 0% for the big three and 1. 5% for the other cities
increased the fuel affected by at least one-third and the cost by
one-fifth.
However, the choice of abatement strategies has the greatest
impact. If all plants are forced to use low-sulphur fuel as opposed to
those that are actually emitting harmful waste loads, the fuel affected
rises by over 100%. For example, if all plants located on the upwind
3/Chicago, Cleveland, Los Angeles, Long Beach, New York, Newark,
Jersey City, Philadelphia, Boston, Detroit, Pittsburgh, St. Louis,
Baltimore, Cincinnati, Gary-Hammond-East Chicago, Indianapolis,
Louisville, Milwaukee, and Washington, D. C.
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-24-
side of each city and those within 5 miles on the downwind side are
asked to abate, only 43% of the oil and 44% of the coal is affected
and cost rises by $27 million (See Table IX). If fuel restrictions are
placed on all plants, 96% of the oil and 95% of the coal will be affected
and the cost rises by $59 million. The high stacks, jet exhaust effect
and location of plants downwind from population centers are the reason
for the dramatic difference in impact.
It is conceivable that the harmful discharges from power plants
are located upwind of the center of town and the bther power plants are
not major contributors to unacceptable sulphur oxide or particulate con-
centrations during most of the year. If this is so, enforcement could
pinpoint these'fuels and only affect 9% of oil and ,24% of coal consumed
and cause an increase in cost of only $13 million -- or only 22% of the
cost of proportional reduction. During the 3-10 days when calm winds
cause all sources of waste loads to be potentially harmful, plants could
switch to low-sulphur fuels temporarily. This strategy is considerably
less expensive than asking plants at all locations to abate all year around.
The cost of abatement can be greatly affected by the opportunity
to build-in pollution abatement devices when new electric power plants
are constructed as compared to adding on abatement facilities to
existing plants. The normal expectation of replacement of plants
within five years is estimated to be only 15% of capacity while the
expected replacement within 10 years is estimated to be one-third of
capacity. 4/
2
4/ Installed Capacity (millions of kilowatt hours) =? 30. 0557 t 2.8996t + . 25l67t
Additions = 1. 6159 + • 5704t
Retirement = . 0312 + . 0337t
Adjustment =,r. 11569 + . 05002t
t = 0 =1946; assumed capacity unalterable until 1970.
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-25-
TABLE IX
Affected Fuel and Hypothesized Cost of Achieving Fuel Standards for Electric
Power Generation Plants Liocated in or near the Twenty Cities with the Worst
Sulphur Oxide Problem, 1967
Abatement Strategy
for each city
1. All Plants
2. All Plants within 10
miles of center
of city
3. Plants located East
within 5 miles and
West within 10 miles
Mild Restrictionsa
Fuel affected
as a percent
Total Fuel
Consumed
Oil Coal
83%
57
43
78%
51
37
Additional
Annual
Costc
($ Millions)
Oil Coal
$10.15 $38. 96
6.90 25.71
5.22 18.59
Total
$49.11
32. 61
23. 81
Severe Restrictions
Fuel affected
as a percent
Total Fuel
Consumed
Additional
Annual
Costc.
($ Millions)
Oil
43
Coal
Oil Coal
96% 95% $11.69 $47.44
57 58 6.97 29.18
44
5.29 22.06
Total
$59. 13
36.15
27. 35
4. Plants located West
27
37
3.33 18.46
21. 79
33
48
4.00 24.24
28 . Zf
5. Plants located South-
we st
24
26
2.92 13.15
16.07
29
34
3.57 17.11
20. 68
6. Plants located North -
we st 3
11
41 5.30
5. 71
14
42 7.13
7. 55
7. Plants in quadrant of
prevailing winds
21
41 10.29
10.70
24
1.06 12.11
13.17
a) Mild sulphur content restrictions: I. 5% for Chicago, New York and Philadelphia; 2. 0% for all other cities.
b) Severe sulphur content restrictions: 1.0% for Chicago, New York and Philadelphia; 1. 5% for all other cities.-
c) Assumed 10% for oil and 15% for coal
Source: Data from Federal Power Commission and Weather Bureau.
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POSSIBLE ADDITIONAL FEDERAL SUBSIDIES
Introduction
It was noted that the Federal Government is now spending $1/2
billion per year for both air and water pollutioii abatement and this
amount is forecast to increase markedly during the next five years.
The largest proportion of these funds are now funneled through
municipalities. Industry also receives considerable assistance from
the 7% investment tax credit and allowances for accelerated depreciation --
perhaps as high as $50 million annually. The size of current annual
expenditures by industry for water pollution abatement is roughly
estimated at $2/3 billion for water and an unknown amount for air --
or perhaps roughly equal to the current Federal Governmeit
expenditure and subsidy for this area. The Government is already
carrying a large part of the burden.
The requirement for additional expenditures is a function of water
and air quality standards, plant location, typography, stream capacity,
meteorology, production processes, and pollutants. Before all of these
factors are weighed, only some rough estimates of additional annual
cost and burden for manufacturing can be made: $275 million and 0.13%
of value-added ty manufacturing for water and $354 million for air --
or $629 million and 0. 29% of value-added for both air and\vwater
(excluding thermal-pollution abatement). For individual industries,
firms and plant3 the burden ie likely to vary widely.
Finally, it is not clear that pollution abatement need affect the firms'
rate of profit insofar as individual firms have considerable flexibility
to shift the small increase in the costs from themselves to the purchasers
of their products. It is with this summary and introduction in mind
that the possible Federal subsidies will be examined.
Tax Writeoffs
Numerous proposals in Congress have been made for offering greater
assistance to industry through increasing the investment tax credit or
accelerating the depreciation allowances on capital expenditures for pollu-
tion abatement. Proposals range from increasing the investment tax credit
from 7% to 14% or 20% and/or from allowing depreciation allowances
normally scheduled over 15 years to be scheduled over five, three or even
one year. The additional capital subsidy would range from 7% for raising
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the investment tax credit to 14% to 33% for implementing a 20% tax credit
and a one-year accelerated depreciation schedule. {See Table X),
The subsidy would total roughly $296 million for water and $75 million
for aii for the three-year accelerated depreciation allowance if applied
to an estimate of-the additional capital required to meet the hypothetical
standards considered in this report.
However, the subsidy is in a small part illusoty because the assistance
would be given for a higher level of expenditure caused by the Bubsidy
creating an incentive to over-use capital to thie neglect of operating and
maintenance expenditures. This would arise because capital costs are
madeaa-Jdfifcially cheaper by Virtue of a tax writeoff. Tax writeoffs are
handicapped because they are incapable of,providing assistance to all
of the coats of abatement. The capital cost accounts for roughly one-
third of the total cost for water pollution abatement and one-eighth for
air pollution abatement. Of course, with subsidies given to capital alone,
the capital cost proportion will tend to ri^e afid unnecessarily consume
more resources. The addition of chemicals or supervisory personnel
often times is less costly than building additional capacity in order to
treat larger waste loads. Fuel substitution alone is estimated to be the
least-(nrest alternative in over 60% of the cases involving air pollution
abatement.
Moreover, tax writeoffs are difficult to apply to many changes in
the production process which reduce the actual generation of waste
loads but which also add to the output of plants. Other studies have
shown that some industries find that over 50% of the least-costly
opportunities for ^ducing waste load discharges are found in such
process changes.— The Treasury Department would be faced with the
difficult task of certifying the proportion or the cost attributable
for pollution abatement or disallowing any assistance for this kiaadcdf
improvement . To the extent of the proportion disallowed, plants
would be given an incentive to ignore many improvements which have
been shown to be least costly.
Also, the implementation of selective writeoffs for pollution abate-
ment opens the door for other programs to receive similar treatment.
Proposals for tax writeoffs for training, education, mining, transportation,
housing and others have already been made. The snowballing effect for
industry could be, conceivably, a necessary increase in the corporate
tax structure or lag in the long-run reduction of corporate tax rates
and thus no net benefit to firms facing pollution abatement expenditures.
Moreover, public accountability of such subsidies, are difficult and
would probably create an annoying problem in its removal once social
policy dictates a change.
_5/ For example in the case of water, see Kneese, Allen and Lof, George.
The Economics of Water Utilization in the Beet Sugar Industry, Manuscript,
Resources for the Future.
-------
TABLE X
Comparison of the Additional Subsidy to Industry ^hrough
Alternative Forms of Federal Assistance-
Type of Assistance
Subsidy as
Percent of
Capital
Cost
Subsidy as
a Percent
of Animal
Cost-
Rough Estimate of likely
Assistance to Industry for
Capital Expenditures to
Meet Hypothetical Standards
in 5 Years 1969-1973^'
($ Minions)
t-f~
Accelerated
Depreciation:
Additional
Tax Credits:
5 years 13%
3 years 16
1 year 20
14% 7
20% 13
Water Air
5%
6
9
2
5
2%
3
4
1
2
Water—/
241
296
370
130
241
Air—1
61
75
94
33
61
Accelerated Depreciation and Tax Credit Combined:
14% tax credit and 3 year accelerated depreciation 23
20% tax credit and 1 year accelerated depreciation 33
Reduced interest loans.
y
10
17
5
8
426
611
108
155
i
OJ
00
1
6% {3% below discount rate.
4% {5%'below discount rate).
11
17
4
7
2
3
204
315
52
80
a/ Assume 48% effective tax rate, 15 year functional life (straight line) for pollution abatement facilities and
9% discount rate. Excluding accelerated depreciation now available in existing tax laws -- e.g. , sum of digitsor
double' declining balance.
b/ 15 years, straight reduction loan, 9% discount rate for industry (if assume 6% then zero gain for 6% inter-
est loan and 7% or $71 million gain for 4% interest loan).
c/ Includes annual capital cost (amortized) and operation and maintenance expenditures, increase in total
cost of abatement because of excessive use of artificially cheaper capital costs.
d/ Assuming all capital expenditures are subsidized whether to industry or households. Capital costs would
undoubtedly drop after the initial investments are made to achieve standards.
e/ Based on industrial profiles: $1. 15 billion additional investment plus $. 7 billion replacement investment
which equals $1. 85 for BOD and suspended solids for hypothetical standard of 85% treatment of industrial wastes,
f / Assuming 20 years of additional capital investment is made in 5 years. The total capital as indicated by the
"Typical City" Study should be $470 million to achieve a hypothetical standard of reducing human exposure by
60-7 5% of SO and Particulates.
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In summary, clearly tax writeoffs are not needed nor are they
a desirable form for offering further assistance to industry.
Grants and Loans for Industry
Demonstration grants for industrial water pollution abatement, are now
provided under the Federal Water Pollution Control Act and for air pollution
abatement under the Air Quality Act. Feasibility study grants and capital
grants have been proposed. Furthermore, programs have been proposed
for-ro1^interest loans.
Grants and loans have the same goals as tax writeoffs in that they
usually are designed to lower the cost of capital expenditures only. As in
the case of tax writeoffs, subsidization limited to capital expenditures
will provide assistance for only a small proportion of the likely total
cost of abatement -- 17% for a 33% capital investment goal for water and
8% for a 33% capital investment grant for air (See Table X). Moreover,
the total cost is likely to rise through unbalanced subsidization of inputs
and the likely exclusion of production process changes. In addition,
certification of expenditures would impose a distasteful chore for Government
and industry alike. However, if grants were made for both capital and
operating costs and administered on the basis of river basin and regional
air quality districts, then such programs would be more desirable,
assuming further cost-sharing is pursued.
An interesting alternative would be to issue grants to air and water
pollution control agencies which encompass a manageable segment of the
problem such as water and air quality organizations which would in turn
dispense these funds to industrial plants requesting assistance for
studies to determine the most feasible way to achieve quality standards.
The plants which are likely to face the largest abatement costs could
be easily identified and feasibility studies could help identify least costly
expenditures in order that these plants can achieve environmental
quality standards. Also, additional information of annon-proprietary
nature could help other plants facing similar problems. Furthermore,
a subsidy of this kind would tend to increase the flow of human and
physical resources into pollution abatement and create greater demand
pressures for technological advance; this would undoubtedly lead to
greater investment in private R&D. However, this alternative, although
not without precedent, does tread close to the presently perceived line
drawn between Government and industry responsibilities in the
American economy.
Assistance Based on Hardship
The studies above clearly indicate the annual expenditures by manu-
facturers for air and water pollution abatement are likely to be relatively small.
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However, some industrial plants may be forcfed to relocate or go out
of business. This may be an unfortunate consequence of abatement
enforcement. Such actions prolong the day when environmental quality
standards are achieved. The enforcement process has attempted to
recognize this problem and has allowed "hardship" cases a longer
time period to comply with abatement actions. Assistance for hardship
cases could provide the necessary incentive to abate earlier
rather than later.
From purely an equity standpoint, assistance could be considered
for "hardship" plants. Such assistance could follow the pattern estab-
lished for firms affected by downward adjustments in tariffs and quotas
(e. g. , Trade Expansion Act and Canadian Automobile Trade Act),
or as provided in the Economic Development Act, or as provided
by the Small Business Administration Acts. This assistance could be
in the form of low-interest loans, loan guarantees, lease guarantees,
preferential Government purchase arrangements and other programs
which already exist.
Small Business Administration Program
The program of the Small Business Administration (SBA) encompasses
approximately 95% of all non-farm industry in the United States. Such
pervasive coverage of American business occurs because of the broad
mandate contained in SBA's legislation: A small business is defined
as a company which is independently owned and operated and is not
dominant in its field. For Defense set-aside purposes, American Motors
is even defined as a small business. Among manufacturing industries,
94% of all firms are now classified as "small business!' (See Table XI).
Moreover, over 90% of the firms in industries facing the greatest abate-
ment costs -- foods, paper,, chemical, petroleum refining, and
Primary Metals (Blast Furnaces) -- are classified as small businesses.
The most useful SBA programs for hardship cases are Section 7A
loans or loan guarantees and the lease guarantee program. Under Section
7A of the Small Business Act of 1958, SBA can make direct loans either
by itself or in participation with banks and can guarantee loans made by
banks. The agency has administratively set limits of $100, 000 on direct
loans, $150, 000 on the SBA share of immediate participation loans, and
$350, 000 on the guaranteed portion of loans made by private banks.
Maximum term is 10 years except for that portion of the loan used for
constructing, facilities on which the term may run up to 15 years. Interest
is set at 5-1/2% on funds provided by SBA and up to 8% on funds provided
by banks either as the bank share of immediate participation loans or
as SBA guaranteed bank loans.
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Table XI
Number and Proportion of All Manufacturing
Firms Potentially Eligible to be Considered
for Pollution Abatement Assistance under
Programs of the Small Business Administration
Standard
Industrial
Classification
Industries
Manufacturing Firms
Potentially Eligible
Estimated Percent of
Number Total Number
20
Food and Kindred Products
31,409
96.3
22
Textile Mill Products
5,613
88.2
26
Paper and Allied Products
3,778
86.9
28
Chemicals and Allied Products
8,977
91.8
29
Petroleum Refining & Related Products
1,187
92.0
30
Rubber & Misc. Plastic Products
4,868
91.8
33
Primary Metal Industries, exclusive
or SIC 3312
5,020
89.9
3312
Blast Furnaces (Including Coke Ovens),
Steel Works & Rolling Mills
87
54.0
35
Machinery except Electrical
31,597
96.2
36
Electrical Machinery, Equipment and
Supplies
8,209
91.0
37
Transportation Equipment
6,232
94.7
All Other Manufacturing Industries
160,532 *
95*
TOTAL
267.509*
94*
* Estimated
Source: Unpublished Special Tabulation of the 1963 Census of Manufactures.
Data made for the Small Business Administration by the Bureau of
the Census.
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The major benefit to hardship firms would be guaranteed access
to loans for purchasing pollution abatement equipment and facilities.
Payment over 10 to 15 years greatly reduces the cash-flow burden that
pollution abatement expenditures can cause. Hardship firms are frequently
unable to secure such loans on their own, or even if they do receive
a loan, they must pay it off within a year or two and at a high rate of interest.
The extremely high cash flow requirement of these loans could cause
firms to go out of business.
The low interest, 5-1/2% on Government loans, offers
an additional benefit. Even the loan guarantee program would reduce
the interest rate facing hardship firms by a few percentage points and
could be equivalent to a 5-15% subsidy.
The Small Business Administration also administers a lease
guarantee program which can be applied to the rental of pollution
abatement equipment, both for the physical plant and land.
Both the loan and lease programs provide considerable flexibility
in meeting the capital requirements (including land) for pollution abatement
actions affecting approximately 95% of industry. However, it does not
include large firms that may have plants that are hit particularly hard
by pollution abatement actions, especially in one-plant towns. Fortunately,
assistance in these cases is potentially available from the Economic
Development Administration programs.
Economic Development Administration Programs
The Economic Development Administration (EDA) can offer financial
and technical assistance to any plant or firm, regardless of size, if
pollution abatement actions should "tend to limit modernization, expansion
or solvency of the facility. 11 Usually such a plant must be in a county
which is designated as a "depressed area. 11 Nearly one-third of the
land area in the United States is currently designated as depressed.
EDA can also serve small areas. For example, as smkll an area
as a set of census tracts within a city were designated as depressed
because of the curtailment of work at the Brooklyn Naval Shipyard.
In all areas, including those outside of "depressed areas, " EDA
can pay 100% of the cost of technical studies for the purpose of
identifying least-costly methods of abating pollution for plants in towns
or sections of cities threatened by reduced economic activity. The only
condition is that the pollution abatement actions against the affected
plant can potentially or actually cause an increase in unemployment-
Such a broad mandate allows adequate latitude for assisting any
hardship plant which is otherwise economically viable except for
the short-term burden of pollution abatement expenditures.
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Assistance Based on Bqrden
Assistance can be offered to industry based solely on the burden
to each plant or firm and not related to the ability of the firm to handle'
the burden. It could be offered no matter whether it threatened the
plant with relocation or failure or just requires an upward adjustment
in product prices to cover the additional costs. The determination of
relative burden could be based upon pollution abatement expenditures
as a percentage of the Value-added for each plant. Once eligibility
was determined, all assistance could be offered heavy burden
cases. In addition, demonstration grants could be screened for use
by the especially affected plants.
There are* however, a number of administrative problems with this
type of assistance which should be recognized. Assistance will
require that there is some measurement of hardship and it is not clear
over what period of time this period of hardship should be measured.
For example, a new plant may have losses in its first year but by its
fifth year be making a reasonable profit. The addition of pollution con-
trols in its first year might be considered a. hardship whereas the addi-
tion of pollution controls after the fifth year' would not be considered a
hardship. However, assistance for a relatively short period of time is
a desirable guidepost, say 5 years. Over the long run, the market-
place should be the determinant of success or failure for each plant
and firm.
There is the question whether assistance should be used to,build
a new plant. Inasmuch as entrepreneurs now gdnei'ally know the ground
rules for pollution abatement, it is felt that new plants should be excluded
from receiving assistance.
Multi-plant firms present another problem. If Plant "A" of a multi-
plant firm is shut down for pollution reasons and relocated, would this
plant be eligible for pollution assistance? Also, if a plant is shut down
in a multi-plant firm, is this of the same severity as a shutdown of a
single-plant firm? The answer to this should depend in part on
whether the multi-plant firm is located in a one plant town. Therefore,
proper criteria and administrative discretion would have to be
built into such an alternative.
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In some cases determining the least cost method of pollution
abatement at each plant, a prerequisite 6f assessing the degree of
hardship, might involve interference with the management prerogatives
of the firm. For example, it might be possible to reduce the pollution
problem in a plant by slightly altering the firm's product or its rate
of output. Thus, pollution control is enhanced in a sulphuric acid
plant if the rate of production is slowed. A coffee roasting plant
which changes its coffee blending techniques might have significantly
fewer pollution problems. Therefore, any program of assistance should
consider the traditionally accepted prerogatives of management.
At higher levels of assistance, or for selective assistance,
eligibility for grants and loans of special certificates for tax benefits
could be distributed through institutions that are required to manage
air and water quality in each problem-shed area. This assistance
could be used on the baaic of both the burden of pollution abatement
expenditures and the need to reduce harmful waste loads. In this
way, a subsidy could augment enforcement and help to minimize
the total cost of pollution abatement. However, river basin and
air-shed organizations are now in their infancy and need further
development before a full scale prograni could be planned, even
though it appears to be highly desirable.
Performance Grants
Grants for other forms of assistance could be offered on the basis
of reduction in damaging waste loads through actual measurement. Such
a subsidy could be based on the marginal effort to abate and thus
would be highly efficient and facilitate enforcement. Moreover, this
approach has the advantage of acting as a carrot. However, performance
measures have not been perfected and therefore grants based on
performance must wait for the future. With the current effort to
improve pollution measuring devices, a performance program may
be feasible within three years.
The User Charge and the Effluent or Emission Charge
Waste controls to reduce adverse effects on the environment may be
produced most efficiently by charging the waste discharger for the damages
his actions impose on the community or for the cost the community
must incur to offset the effects of his waste disposal. The community
in this sense is the (entire array of groups, entities, and persons affected
by the waste disposers actions.
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The charges against the waste disposer must be determined either
as a measure of actual damages caused or assigned against this dis-
charger to produce a predetermined degree of control or reduction
reflecting an environmental quality standard. In either instance the
level of the charge is the critical factor and most difficult to determine.
If the charge is too low, it will not constitute adequate inducement to
reduce the wastes disposed and if the price is too high it will induce
more control than is necessary and will.,be uneconomic in effect. Ex-
perience through the use of such fees will holp reduce this uncertainty.
Experimentation could be fruitfully pursued in a few river basins now.
The term effluent or emission charge is used to refer to the price
charged for direct disposal to the environment. The .term user charge
refers to the price charged for waste treatment service provided in a
treatment facility. The level of the effluent charge for direct disposal
to the environment may be. based on the cost of reducing or treating the
particular wastes in a treatment facility. The treatment facility would
be designed and operated to modify the wastes sufficiently to meet
the environmental standards.
There is considerable experience with the user charge for industrial
waste treatment service in collective public facilities. It has been
successful in providing revenues to communities for replacement
facilities, in encouraging sound industrial waste treatment practices,
and in providing a businesslike way of managing a vital community service.
Some pollution control experts see the establishment of regional waste
treatment facilities for the acceptance of all wastes on a user charge
basis as the appropriate solution to the water pollution control problem.
The regional facility would be operated in accord with the hydrologic
situation and environmental standards. However, waste treatment
facilities on a collective basis are less applicable in the case of air
pollution control.
The only experience in America in this area has been the use of user
charges by municipalities and other organizations handling wastes. Efflu-
ent or emission charges have yet to be tried more extensively, although
numerous task forces and studies have epecifically recommended their
use on an experimental basis. So far, there is no experience with charges
for air pollution control, although the advantage of using them is likely
to be much greater.
It is apparent that many difficulties are involved in setlihg and ad-
ministering effluent charges, especially in the determination of the right
price, surveillance and monitoring of performance when direct dis-
charges or emissions are involved. In the air pollution situation, there
is yet no opportunity to use the cost of treating emissions as a measure
of the proper emission charge. Certainly it is wise to state for the
third consecutive yearttftat effluent and emission fees should be tried
in demonstration projects and experimental programs during 1968.
Current legislative authority would permit such projects or programs.
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The thrust of this report has been to view subsidies for abatement
in terms of other and possibly more effective expenditures. It is this
axiom which supports the recommendation that the Secretary of Health,
Education and Welfare and the Secretary of Interior assess the effective-
ness of the presently available abatement assistance. Performance
grants, emission charges and effluent fees are not now entirely feasible
and must await the development of adequate institutions, improved moni-
toring methods, and better pollution damage estimates. The development
of new institutions for the administration of abatement can contribute
significantly to efficient pollution abatement. Therefore, funds should
be set aside to support experimental projects in this area. Until these
and other developments aire forthcoming, cost-sharing should be limited
to those cases experiencing hardship.
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Members of the Working Committee
on Economic Incentives
Aim, Alvin Li , Bureau of the Budget
Brannon, Gerard M. , Treasury-
Carlson, Jack W. , Chairman of the Working Committee
and the Parent Committee,
Council of Economic Advisers
Caulfield, Henry, Water Resources Council
Dworsky, Leonard, Office of Science and Technology
Elkins, Charles L. , Bureau of the Budget
Flannery, James, Department of the Interior
Frankel, Richard, Resources for the Future
Gerhardt, Paul, Health, Education and Welfare
Smith, Edward, Department of Commerce
Wilson, Douglas, Health, Education, and Welfare
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