August, 1997
THE UNITED STATES EXPERIENCE
WITH ECONOMIC INCENTIVES
IN ENVIRONMENTAL POLLUTION CONTROL POLICY
Environmental Law Institute
1616 P Street, NW
Washington, DC 20036
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
ii August
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August, 1997
THE UNITED STATES EXPERIENCE
WITH ECONOMIC INCENTIVES
IN ENVIRONMENTAL POLLUTION CONTROL POLICY
by
Robert C. Anderson
and Andrew Q. Lohof
Resource Consulting Associates
with the assistance of
Alan Carlin
Office of Economy and Environment
Office of Policy, Planning and Evaluation
U.S. Environmental Protection Agency
Washington, D.C. 20460
Prepared under EPA Cooperative Agreement CR822795-01 with the Office of Economy
and Environment, U.S. Environmental Protection Agency, Washington, D.C. 20460
Project Officer
Alan Carlin
Office of Economy and Environment
Office of Policy, Planning and Evaluation
U.S. Environmental Protection Agency
Washington, D.C. 20460
Environmental Law Institute
1616 P Street, NW
Washington, D.C. 20036
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DISCLAIMER
Although funded by the United States Environmental Protection Agency under
Cooperative Agreement No. CR822795-01, the views expressed in this report do not
necessarily represent those of the Environmental Protection Agency. Mention of trade
names or commercial products does not constitute endorsement or recommendation for
use.
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EXECUTIVE SUMMARY
In the past several years, economic incentives have assumed a prominent position
among the tools for environmental management. Nowhere is this role more explicit than
in the 1990 Clean Air Act Amendments. That legislation authorizes incentive-based
mechanisms for the control of acid rain, for the development of cleaner burning gasoline
and less polluting vehicles, for states to use in controlling urban ozone and carbon
monoxide, and to facilitate the reduction of toxic air emissions.
As other key environmental statutes such as the Clean Water Act and the Resource
Conservation and Recovery Act come up for reauthorization, potential applications of
incentive mechanisms may be actively debated. EPA is currently evaluating a variety of
incentives to support these debates as well as working to implement other mechanisms
under existing statutory authority. At the state level, a wide variety of incentive programs
have been implemented, and many other proposals are currently under active consider-
ation. Outside the United States a diverse group of nations are extending the frontiers for
applying incentives.
With current high levels of interest in incentive mechanisms for environmental
management, it is useful to examine the record to date. Over the past 20 years, federal,
state, and local authorities as well as many foreign nations have enacted a diverse array
of environmental incentive mechanisms. How well have these mechanisms performed?
What can be learned from the record that will assist in the formulation of new mecha-
nisms? How economically efficient have these mechanisms been in achieving their
objectives?
This report updates and extends a 1992 EPA review1 of that record, highlighting
applications of emission and effluent fees, charges for solid waste disposal, marketable
permit systems for air and water pollution, deposit-refund systems, and information and
liability mechanisms. The mechanisms described in this report all satisfy the basic
requirement that a continuous signal be provided to pollution generators to be aware of
and act on opportunities to reduce releases of pollution to the environment.
The report first reviews the available information on the economic efficiency and
environmental effects of economic incentives in general. The literature uniformly finds
that economic incentives should be much more economically efficient in controlling
pollution than the traditional command-and-control approaches. Some studies, however,
indicate that the cost savings actually realized have fallen short of those predicted by these
studies. Economic incentives should be particularly efficient when diverse sources of
pollution are involved which are most efficiently controlled using little-known or yet-to-
1 EPA (July 1992).
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
be developed technologies. The evidence on the environmental effects of economic incen-
tives, while much less extensive than that on economic efficiency, suggests that incentives
mechanisms are fully compatible with environmental objectives.
The historic record concerning individual incentive programs suggests that although
there have been a number of important successes, in some cases incentive programs have
failed to live up to their full theoretical promise. This appears to be the result of the
particular design features of the programs tried, however, rather than the theoretical
promise of the approach. In most cases, fees and charges have been designed primarily
to raise government revenue, and have thus been set too low to have significant incentive
effects. Trading systems have often been constrained by complicated regulations, but
some new ones which have not as yet been fully implemented hold out considerable
promise for being both effective and efficient in reducing pollution. Beverage container
deposits appear to have greatly reduced litter, but there is only limited knowledge of the
impact of other deposit-refund systems and virtually no analysis of the costs and benefits
of any of the deposit-refund mechanisms. Some programs providing information appear
to be having great impact among fully implemented incentives considered in this report
and are likely to be economically efficient as well, but have not been examined with the
detailed scrutiny necessary for a fair evaluation of performance. Liability mechanisms can
and do act as effective incentives, but structuring liability rules to accurately internalize
the costs of pollution has proved difficult.
Finally, a review of the use of economic incentives outside the United States suggests
a preference for a somewhat different mix of incentive mechanisms but somewhat similar
conclusions as to their effectiveness and efficiency as in the United States. The United
States uses many more marketable permit systems than European countries, but much less
environmental labeling. Also, a wider range of commodities are subject to deposit
systems outside the United States. Although charges and fees are used more widely in
Europe, they also tend to be revenue-raising instruments with few incentive impacts, as
in the United States. The lack of incentive impact of charges is due primarily to their low
magnitude and because a number of the charges are not closely linked to waste generation
or product consumption. As in the United States, official interest in economic incentives
appears to be increasing in Europe, Australia, South Korea, Chile, many parts of the
former Soviet Union and elsewhere.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY iii
LIST OF TABLES xiii
LIST OF FIGURES xv
FOREWORD xvi
1. INTRODUCTION 1-1
1.1. PURPOSE OF REPORT 1-1
1.2. DEFINITIONS 1-2
1.3. ORGANIZATION OF REPORT 1-3
1.4. SCOPE OF REPORT 1-8
2. GOVERNMENT POLICIES ON ECONOMIC INCENTIVES 2-1
2.1. SOME RECENT POLICY DEVELOPMENTS 2-1
2.1.1. Rein ven ting En vironmen tal Regula tion 2-1
2.1.2. Economic Report of the President 2-1
2.1.3. Council on Sustainable Development 2-2
2.1.4. Vice-Presidential National Performance Review 2-3
2.1.5. Executive Order 12866 and Related OMB Guidance 2-3
2.2. SOME SIGNIFICANT EARLIER POLICY DEVELOPMENTS 2-4
2.2.1. Economic Incentives: Options for Environmental Protection 2-4
2.2.2. 1990 Clean Air Act Amendments 2-5
2.2.3. The Project 88 Report 2-5
2.2.4. Executive Order 12291 and EPA Guidelines for Performing Regulatory
Impact Analysis 2-5
2.3. CONCLUSIONS 2-6
3. THE ECONOMIC EFFICIENCY AND ENVIRONMENTAL EFFECTS OF IN-
CENTIVE SYSTEMS 3-1
3.1. BACKGROUND 3-1
3.2. COMMAND AND CONTROL 3-3
3.3. INCENTIVE-BASED MECHANISMS 3-5
3.3.1. Pollution Taxes, Fees, and Charges 3-5
3.3.2. Subsidies 3-7
3.3.3. Trading Systems 3-7
3.3.4. Deposit-Refund Systems 3-9
3.3.5. In forma tion Programs 3-10
3.3.6. Liability for Health and Environmental Harm 3-10
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
3.4. RELATIVE ECONOMIC EFFICIENCY 3-11
3.5. ECONOMIC INSTRUMENTS AND TECHNOLOGICAL CHANGE 3-18
3.6. IMPACTS ON ENVIRONMENTAL QUALITY 3-19
3.7. FINDING THE RIGHT INSTRUMENT FOR THE PROBLEM 3-20
4. FEES, CHARGES, AND TAXES 4-1
4.1. INTRODUCTION 4-1
4.2. WATER FEES 4-2
4.2.1. Indirect Discharge and User Fees 4-2
4.2.2. Direct Discharge Fees 4-3
4.2.3. Examples of State Effluent Fees: Louisiana, California, and Wisconsin .... 4-4
4.2.4. St ormwater Runoff Fees 4-5
4.3. AIR FEES 4-6
4.3.1. Permit Fees 4-6
4.3.1.1. Air Emission Permit Fees in Maine 4-6
4.3.1.2. Air Emission Permit Fees in the South Coast Air Quality Man-
agement District 4-7
4.3.1.3. California "Hot Spots" Fees 4-9
4.3.2. Ozone Non-Attainment Area Fees 4-10
4.4. WASTE FEES 4-10
4.4.1. Variable Pricing Programs 4-10
4.4.2. Landfill Taxes 4-16
4.4.3. Hazardous Waste Taxes 4-17
4.5. PRODUCT CHARGES 4-19
4.5.1. Federal Product Charges 4-19
4.5.1.1. Superfund Taxes 4-19
4.5.1.2. Taxes on Fuel-Inefficient Automobiles 4-20
4.5.1.3. Ozone-depleting Chemicals 4-20
4.5.2. State Product Charges 4-21
4.5.2.1. Tire Charges 4-21
4.5.2.2. Fertilizer Charges 4-21
4.5.2.3. Rhode Island Hard-to-Dispose Material Tax 4-21
4.5.2.4. Florida ADF 4-22
4.5.2.5. North Carolina ADF 4-23
4.5.2.6. Texas Clean Fuel Incentive Surcharge 4-23
4.6. ROAD USER FEES 4-23
4.7. WETLAND COMPENSATION FEES 4-24
4.8. GRAZING FEES 4-26
4.9. MINNESOTA CONTAMINATION TAX 4-27
5. DEPOSIT-REFUND SYSTEMS 5-1
5.1. INTRODUCTION 5-1
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Table of Contents
5.2. BEVERAGE CONTAINERS 5-2
5.2.1. Maine Bottle Bill 5-2
5.2.2. California Beverage Container Recycling Program 5-6
5.3. LEAD-ACID BATTERIES 5-9
5.4. MAINE PESTICIDE CONTAINER DEPOSIT SYSTEM 5-10
5.5. OTHER PRODUCTS 5-11
5.6. VOLUNTARY DEPOSIT SCHEMES 5-11
5.7. PERFORMANCE BONDS 5-11
6. TRADING SYSTEMS 6-1
6.1. TRADING OF AIR EMISSIONS 6-2
6.1.1. EPA's Air Emission Trading Program 6-2
6.1.1.1. Offset Program 6-2
6.1.1.2. Bubble Program 6-3
6.1.1.3. Banking 6-3
6.1.1.4. Netting 6-3
6.1.1.5. Evaluation of Emissions Trading Program 6-4
6.1.2. RECLAIM 6-6
6.1.3. Other State Air Emission Trading Programs 6-10
6.1.3.1. Illinois 6-10
6.1.3.2. Delaware 6-11
6.1.3.3. Massachusetts 6-11
6.1.3.4. Michigan 6-11
6.1.3.5. New Jersey 6-11
6.1.3.6. Texas 6-12
6.1.3.7. Wisconsin 6-13
6.1.4. NESCAUM/MARAMA Demonstration Project 6-13
6.1.5. OTC/OTAG RegionalNOxReduction Program 6-13
6.1.6. Open Market Trading 6-14
6.1.7. Acid Rain Allowance Trading 6-15
6.1.8. Chlorofluorocarbon Production Allowance Trading 6-19
6.1.9. Lead Credit Trading 6-20
6.1.10. Gasoline Constituents 6-22
6.1.11. Heavy Duty Truck Engine Emissions 6-23
6.1.12. Hazardous Air Pollutants 6-23
6.1.12.1. Early Reduction Program 6-23
6.1.12.2. Petroleum Industry NESHAPS 6-24
6.1.12.3. Hazardous Organic Chemical NESHAP 6-25
6.1.13. Corporate Average Fuel Economy Standards (CAFE) 6-25
6.1.14. Wood Stove and Fireplace Permit Trading 6-26
6.1.15. Grass Burning Permit Trading 6-27
6.2. TRADING OF WATER EFFLUENTS 6-27
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
6.2.1. Effluent Bubble 6-27
6.2.2. Effluent Trading (point-point) 6-28
6.2.3. Effluent Trading (Point-nonpoint) 6-30
6.2.3.1. Dillon Reservoir 6-30
6.2.3.2. Cherry Creek 6-31
6.2.3.3. Tar-Pamlico Basin 6-31
6.2.3.4. Other Point-Nonpoint Trading Proposals 6-31
6.3. LAND PROTECTION TRADING 6-32
6.3.1. Wetland Mitigation Banking 6-32
6.3.2. Transferable Development Rights 6-33
6.3.2.1. Montgomery County, Maryland 6-34
6.3.2.2. Talbot County, Maryland 6-34
6.3.2.3. Maryland PDR Program 6-35
6.3.2.4. The Pinelands, New Jersey 6-35
6.3.2.5. Palm Beach County, Florida 6-35
6.4. INTERNATIONAL TRADING ACTIVITIES INVOLVING US GOVERN-
MENT 6-36
6.4.1. Joint Implementation 6-36
6.4.2. Proposed Cross-Border Trading Program: El Paso Region 6-37
7. SUBSIDIES 7-1
7.1. INTRODUCTION 7-1
7.2. POLLUTION PREVENTION AND CONTROL 7-4
7.2.1. Tax Benefits 7-4
7.2.2. Louisiana Environmental Scorecard 7-5
7.2.3. Supplemental Environmental Projects 7-6
7.2.4. Loans and Tax-exempt Bonds 7-7
7.3. BROWNFIELDS PROGRAMS 7-8
7.3.1. EPA Pilot Project Grants 7-8
7.3.2. Tax Incentives and Loans 7-9
7.4. FARMING AND LAND PRESERVATION 7-10
7.4.1. Conservation Reserve Program 7-13
7.4.2. Wetlands Reserve Program 7-16
7.4.3. Agricultural Conservation Program 7-17
7.4.4. Compliance Provisions 7-17
7.4.5. Highly Erodible Land Conservation Compliance and "Sodbuster" 7-17
7.4.6. Swampbuster Program 7-18
7.4.7. Acreage Reduction Program 7-19
7.4.8. Subsidy Programs Created under 1996 Farm Bill 7-19
7.4.9. Environmental Quality Incentive Program 7-19
7.4.10. Farmland Protection Program 7-21
7.4.11. Conservation Farm Option 7-21
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Table of Contents
7.4.12. Wildlife Habitat Incentives Program 7-21
7.4.12.1. State Initiatives 7-21
7.4.12.2. Purchasable Development Rights 7-22
7.5. CONSUMER PRODUCT WASTE MANAGEMENT 7-23
7.5.1. Advance Disposal Fee Systems 7-24
7.5.2. Deposit Handling Fees 7-24
7.5.3. Recycling Loans and Grants 7-25
7.5.4. Tax Incentives 7-27
7.5.5. Preferential Procurement of Recycled Products 7-28
7.5.6. Recycled Content Policies 7-29
7.6. NEW JERSEY INFORMATION AWARDS PROGRAM 7-30
7.7. ALTERNATIVE FUELS AND LOW-EMITTING VEHICLES 7-31
7.7.1. Federal Subsidies 7-31
7.7.2. State Subsidies 7-32
7.7.3. Car Buyback Schemes 7-34
7.8. RENEWABLE ENERGY AND CONSERVATION 7-35
7.9. MUNICIPAL SEWAGE TREATMENT PLANT CONSTRUCTION 7-35
7.10. ENVIRONMENTALLY HARMFUL SUBSIDIES 7-37
7.10.1. Subsidies for Timber, Minerals, and Water Extraction 7-37
7.10.2. Agriculture 7-39
7.10.3. Mortgage Interest Tax Deduction 7-40
8. LIABILITY APPROACHES 8-1
8.1. LIABILITY FOR CLEANUP COSTS 8-1
8.2. LIABILITY FOR DAMAGE TO NATURAL RESOURCES 8-2
8.3. CIVIL AND CRIMINAL LIABILITY 8-5
8.3.1. RCRA 8-6
8.3.2. CERCLA 8-7
8.3.3. CWA 8-7
8.3.4. CAA 8-8
8.4. TORT LIABILITY 8-8
9. INFORMATION APPROACHES 9-1
9.1. INTRODUCTION 9-1
9.2. EMERGENCY PLANNING AND COMMUNITY RIGHT-TO-KNOW ACT
(EPCRA) 9-1
9.2.1. Trends in TRI Data 9-3
9.2.2. Incentive Effect of the TRI 9-6
9.3. STATE EPCRA PROGRAMS 9-7
9.3.1. Massachusetts Toxics Use Reduction Act 9-8
9.3.2. New Jersey Reporting Requirements 9-9
9.4. PROPOSITION 65 9-10
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
9.5. HOT SPOTS ACT 9-11
9.6. ENVIRONMENTAL POLICY ACTS 9-12
9.7. LABELING SCHEMES 9-12
9.7.1. Federal Trade Commission Guidelines for Environmental Marketing
Claims 9-13
9.7.2. Green Seal and Other Seals of Approval 9-14
9.7.3. Single-Attribute Seals of Approval 9-15
9.7.4. Report Cards and Information Disclosure 9-16
9.7.5. Energy-Efficiency Labeling 9-17
9.7.6. Hazard Labels 9-18
9.8. ENVIRONMENTAL PERFORMANCE AWARDS 9-19
9.9. SEC DISCLOSURE REQUIREMENTS 9-19
9.10. RADON AND LEAD PAINT DISCLOSURE REQUIREMENTS 9-20
10. VOLUNTARY PROGRAMS 10-1
10.1. GREEN LIGHTS AND ENERGY STAR 10-3
10.2. WASTEWISE 10-4
10.3. 33/50 PROGRAM 10-5
10.4. PROJECT XL 10-6
10.5. ENVIRONMENTAL LEADERSHIP PROGRAM 10-7
10.6. WAVE 10-8
10.7. CLIMATE WISE 10-9
10.8. METHANE RECOVERY PROGRAMS 10-10
10.9. STATE PROGRAMS 10-11
10.9.1. Massachusetts Recycled Newsprint Program 10-11
10.9.2. Texas Clean Industries 2000 10-11
10.9.3. Adopt-a-Highway 10-13
11. FOREIGN EXPERIENCES WITH INCENTIVE SYSTEMS 11-1
11.1. FEES, CHARGES, AND TAXES 11-3
11.1.1. Waste 11-3
11.1.2. Air 11-6
11.1.2.1. Sweden's Nitrogen Oxide Charge 11-7
11.1.2.2. Charges in Less Industrialized Countries 11-9
11.1.3. Water 11-10
11.1.3.1. User fees 11-11
11.1.3.2. Effluent Charges 11-12
11.1.3.3. Effluent Charges in Germany 11-15
11.1.3.4. Effluent Charges in the Netherlands 11-17
11.1.3.5. Effluent Charges in France 11-19
11.1.3.6. Effluent Charges in Less Industrialized Countries 11-20
11.1.4. Noise 11-21
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Table of Contents
11.1.5. Charges on Environmentally Damaging Products and Activities 11-22
11.1.5.1. Charges on Agricultural Inputs 11-22
11.1.5.2. Energy/carbon Taxes 11-24
11.1.5.3. Preferential Taxation of Environmentally Friendly Products 11-28
11.1.5.4. Road User Fees 11-33
11.1.5.5. Singapore Road and Vehicle Taxation 11-34
11.1.5.6. Other Measures to Curb Congestion 11-37
11.2. DEPOSIT-REFUND MECHANISMS 11-37
11.3. MARKETABLE PERMIT SYSTEMS 11-41
11.3.1. Air Pollution 11-42
11.3.2. Water Pollution 11-44
11.3.3. Water Use Rights 11-44
11.3.4. Water-energy Trading 11-45
11.4. SUBSIDIES 11-45
11.4.1. Subsidies for Environmentally Friendly Agriculture and Land Manage-
ment 11-46
11.4.1.1. Subsidies to Reduce Vehicle Emissions 11-47
11.4.2. Subsidies for Resource Conservation 11-48
11.4.3. Environmentally Harmful Subsidies 11-49
11.5. PRODUCT LABELING 11-49
11.6. INFORMATION DISCLOSURE REQUIREMENTS 11-52
11.7. VOLUNTARY PROGRAMS 11-54
11.8. DEBT-FOR-NATURE SWAPS AND JOINT IMPLEMENTATION 11-54
11.9. TREND OF INCREASING USE OF ECONOMIC INSTRUMENTS IN
FOREIGN COUNTRIES 11-55
11.10. CONCLUSIONS 11-58
12. CONCLUSIONS 12-1
APPENDICES
A. BIBLIOGRAPHY A-l
1997 xi
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LIST OF TABLES
3-1: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING ECO-
NOMIC INCENTIVES TO CONTROL AIR POLLUTION 3-13
3-2: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING
ECONOMIC INCENTIVES TO CONTROL WATER POLLUTION 3-15
3-3: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING ECO-
NOMIC INCENTIVES TO REDUCE SOLID WASTE 3-16
3-4: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING ECO-
NOMIC INCENTIVES FROM OTHER POLLUTION-RELATED ACTIONS ... 3-16
3-5: USES OF ECONOMIC INSTRUMENTS 3-21
4-1: OVERVIEW OF FEES, CHARGES, AND TAXES IN ENVIRONMENTAL POL-
ICY 4-1
4-2: STATE EFFLUENT FEES AS OF DECEMBER 1993 4-4
4-3: AIR EMISSIONS PERMIT FEES IN MAINE 4-7
4-4: EMISSION FEES IN SCAQMD 4-8
4-5: AIR TOXICS AND OZONE-DEPLETING CHEMICALS FEES IN SCAQMD ... 4-8
4-6: VARIABLE RATE STRUCTURES IN SELECTED COMMUNITIES 4-11
4-7: CHANGES IN WASTE DISPOSAL IN RESPONSE TO VARIABLE RATE PRIC-
ING PROGRAMS 4-15
4-8: HAZARDOUS WASTE LAND DISPOSAL FEES IN CALIFORNIA, FY 1996 . . 4-17
4-9: HAZARDOUS WASTE GENERATION FEES IN CALIFORNIA, CY 1996 .... 4-18
4-10: PRODUCT CHARGES ON TIRES 4-22
5-1: STATE BEVERAGE CONTAINER DEPOSIT SYSTEMS 5-3
5-2: ESTIMATED COLLECTION AMOUNTS AND COSTS OF CURBSIDE AND
DEPOSIT PROGRAMS IN MAINE COMMUNITY OF 25,000 INHABITANT ... 5-6
5-3: MANDATORY LEAD-ACID BATTERY DEPOSIT SYSTEMS 5-9
6-1: EMISSION TRADING ACTIVITY IN THE LOS ANGELES AREA 6-6
6-2: RECLAIM TRADING CREDIT PRICES 6-9
6-3: ESTIMATED AND AVERAGE REALIZED ALLOWANCE PRICES 6-18
6-4: EXAMPLE OF EMISSION BENEFITS OF EARLY REDUCTION PROGRAM . . 6-24
6-5: PROJECTED COST SAVINGS FROM EFFLUENT BUBBLE 6-29
7-1: THE USE OF SUBSIDIES IN U.S. ENVIRONMENTAL PROTECTION 7-2
7-2: POINTS AWARDED AND SUBTRACTED UNDER LOUISIANA SCORECARD
SYSTEM 7-6
7-3: U.S. DEPARTMENT OF AGRICULTURE CONSERVATION SUBSIDY PRO-
GRAMS 7-10
7-4: CRP ACREAGE AND RENTAL PAYMENTS FOR FIRST 12 ENROLLMENTS 7-14
7-5: PROJECTED SOCIAL BENEFITS AND COSTS OF CRP 7-15
7-6: WRP FIRST ENROLLMENT (1992) 7-16
7-7: BENEFITS AND COSTS OF CONSERVATION COMPLIANCE 7-18
7-8: IMPACTS OF CONSERVATION PROGRAMS ON EROSION AND CHEMI-
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List of Tables
CALUSE, FY 1988-93 7-20
7-9: STATUS OF PDR PROGRAMS AS OF APRIL 1996 7-23
7-10: SUBSIDIES FOR USED TIRE MANAGEMENT 7-24
7-11: WISCONSIN RECYCLING FINANCIAL ASSISTANCE PROGRAMS 7-25
7-12: STATE LOAN FUNDS FOR RECYCLING BUSINESSES 7-26
7-13: ALTERNATIVE FUEL AND ALTERNATIVE FUEL VEHICLE SUBSIDIES . . 7-31
7-14: ALTERNATIVE FUEL VEHICLE PROCUREMENT REQUIREMENTS 7-33
7-15: ANNUAL ALTERNATIVE FUEL AND ALTERNATIVE FUEL VEHICLE
SUBSIDIES IN THE OZONE TRANSPORT REGION 7-34
7-16: U.S. BUREAU OF RECLAMATION WATER SUBSIDIES 7-38
8-1: LARGEST FEDERAL NATURAL RESOURCE DAMAGE SETTLEMENTS .... 8-4
9-1: TRI RELEASES BY INDUSTRY 9-4
9-2: TRI WASTE TRANSFERS 9-5
9-3: CLASSIFICATION OF ENVIRONMENTAL LABELING SCHEMES 9-13
10-1: EPA VOLUNTARY PROGRAMS 10-2
10-2: WAVE INVESTMENTS AND SAVINGS 10-9
11-1: NOTEWORTHY INCENTIVE MECHANISMS OUTSIDE THE UNITED
STATES 11-1
11-2: WASTE DISPOSAL BAG PRICES IN SEOUL METROPOLITAN AREA 11-5
11-3: CHARGES ON LANDFILL OPERATORS IN THE CZECH REPUBLIC 11-6
11-4: SEPA ESTIMATES OF THE NET BENEFIT OF THE NOx CHARGE 11-8
11-5: AIR POLLUTION CHARGES IN EASTERN EUROPE 11-10
11-6: INDUSTRIAL EFFLUENT CHARGES IN THE EUROPEAN UNION 11-13
11-7: DISCHARGE SCENARIOS FOR FIGURE 11-1 11-14
11-8: WATER EFFLUENT CHARGES IN EASTERN EUROPE 11-20
11-9: IMPACT OF SEWAGE CHARGES ON POLLUTION IN SAO PAULO STATE,
BRAZIL 11-21
11-10: ADVANCE DISPOSAL FEES IN SOUTH KOREA 11-23
11-11: FERTILIZER CHARGES IN SWEDEN 11-24
11-12: ENERGY/CARBON TAXES 11-25
11-13: 1994 ENERGY TAXES IN DENMARK 11-26
11-14: CARBON/ENERGY TAXES IN THE NETHERLANDS 11-27
11-15: CARBON/ENERGY TAXES APPLIED TO FUELS
IN THE NETHERLANDS 11-29
11-16: DIFFERENTIAL TAXATION OF LEADED GASOLINE 11-31
11-17: 1992 CLASSIFICATION OF DIESEL FUELS
AND TAX REBATES IN SWEDEN 11-32
11-18: BEVERAGE CONTAINER DEPOSITS IN SELECTED COUNTRIES 11-38
11-19: DEPOSITS IN SOUTH KOREA 11-41
11-20: ENVIRONMENTAL LABELS IN SELECTED COUNTRIES 11-50
11-21: KOREAN ECO-MARK PRODUCT CRITERIA 11-52
11-22: SHARE OF ENVIRONMENTAL TAXES IN TOTAL TAX REVENUES IN
1997 xiii
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
OECD COUNTRIES 11-57
xiv
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LIST OF FIGURES
3-1: INCREMENTAL DAMAGES AND COSTS OF CONTROLLING POLLUTION
3-2
3-2: CONTROL OPTIONS FOR A SOURCE 3-4
3-3: MARGINAL DAMAGES AND COSTS FOR TAX PER UNIT OF EMISSIONS
APPROACH TO POLLUTION CONTROL 3-6
3-4: COSTS FOR EMISSIONS CONTROL FOR FIRMS UNDER EMISSIONS TAX AND
COMMAND AND CONTROL APPROACHES 3-18
4-1: 1994 WATER CHARGE STRUCTURES 4-3
4-2: MONTHLY WATER AND WASTEWATER CHARGES 4-3
4-3: HOUSEHOLD WASTE LANDFILLING AND RECYCLING IN SAN JOSE ... 4-13
4-4: GRAZING FEES UNDER THE PUBLIC RANGELANDS IMPROVEMENT ACT
4-27
5-1: U.S. MARKET SHARE OF REFILLABLE BOTTLES 5-1
5-2: ESTIMATED DISTRIBUTOR COSTS OF MAINE DEPOSIT SCHEMES 5-5
5-3: BATTERY LEAD RECYCLING AND LEAD SCRAP PRICES IN THE U.S 5-10
6-1: PHASE I S02 EMISSIONS 6-19
7-1: WISCONSIN NEWSPAPER RECYCLING AND RECYCLED CONTENT RE-
QUIREMENTS 7-29
7-2: SRF INVESTMENT FY 1988-95 7-36
7-3: U.S. POPULATION SERVED BY MODERN SEWAGE TREATMENT FACILITIES
7-36
9-1: MASSACHUSETTS TOXICS USE AND BYPRODUCTS 9-9
10-1: ENERGY SAVINGS IN SHOWCASE BUILDINGS 10-4
10-2: RELEASES AND TRANSFERS OF 33/50 PROGRAM CHEMICALS 10-6
11-1: ANNUAL CHARGE PAYMENTS FOR HYPOTHETICAL INDUSTRIAL DIS-
CHARGE 11-15
11-2: POINT SOURCE EFFLUENT CHARGES IN GERMANY 11-15
11-3: EFFLUENT CHARGES IN THE NETHERLANDS 11-17
11-4: EFFLUENT CHARGE REVENUES IN THE NETHERLANDS 11-17
11-5: FERTILIZER CHARGES AND USE IN SWEDEN 11-23
11-6: SALES OF DIFFERENT CLASSES OF DIESEL FUEL IN SWEDEN 11-30
11-7: SINGAPORE ANNUAL ROAD TAX 11-34
11-8: PRIVATE CARS ENTERING SINGAPORE CENTRAL BUSINESS DISTRICT
11-36
11-9: MODES OF TRANSPORTATION IN SINGAPORE 11-36
11-10: ALUMINUM CAN RECYCLING RATES 11-39
11-11: CARS SOLD AND SCRAPPED IN SWEDEN 11-39
11-12: PET BOTTLE RECYCLING RATE IN TAIWAN 11-40
11-13: ELECTRIC POWER PRICES, 1988 11-49
1997
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FOREWORD
This report was prepared by Robert C. Anderson and Andrew Q. Lohof of Resource
Consulting Associates under a subcontract to the Environmental Law Institute as part
of cooperative agreement CR822795-01 between ELI and the U.S. Environmental Protec-
tion Agency. Alan Carlin, EPA's Project Officer, provided substantial assistance and
helped to format the report for publication on EPA's World Wide Web Site.
Many individuals provided valuable assistance during the course of this research.
Literally hundreds of individuals in the U.S. and abroad offered details as to the design
and performance of individual market-based approaches used to manage pollution. As
the work progressed, other individuals offered their technical comments and reviews.
In particular the authors would like to thank Tom Gillis and Michael Podolsky of the
EPA Economy and Environment Division, and Byron Swift, the Environmental Law
Institute's project manager.
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1. INTRODUCTION
In recent years, economic instruments have achieved a prominent place among tools
for managing the environment. Once mainly an academic proposition, or a revenue-
raising adjunct to command and control mechanisms, market-based economic incentives
are now being used as the principal instrument of control for a number of environmental
issues. Nowhere is this fact more evident than in the 1990 Clean Air Act Amendments,
which created many programs underpinned by market-based mechanisms. The Clean
Water Act Amendments of 1992, the Safe Drinking Water Act, and a host of state and local
initiatives also contain important new incentive-based initiatives. For example, solid
waste disposal currently is priced on a per unit basis in more than 2,000 communities
throughout the United States.
The reliance on economic instruments is growing, not only here, but in many other
nations as well. Quite possibly nowhere else is interest in these mechanisms higher than
in the former Soviet Union, where newly-independent nations are moving quickly from
central planning to market-based approaches to improve the environment and overall
economic conditions. The pace of change toward market-based mechanisms also has been
rapid throughout Western Europe and other areas such as Australia, Korea, and Chile.
1.1. PURPOSE OF REPORT
A 1992 EPA report documented the use of economic instruments to manage the
environment in the United States and also characterized many of the foreign experiences;
its title: The United States Experience With Economic Incentives To Control Environmental
Pollution. In the five years since that report was issued, many new instruments have been
implemented and existing instruments subjected to evaluation by academics and govern-
ment agencies, making it not only timely for an update but also a good opportunity for
offering new insights and perspectives. While the basic conclusions of the 1992 report are
not changed greatly, the number of instruments that are reviewed has grown substan-
tially. A number of subtle and not so subtle differences in perspective also may be
evident to the reader.
This report attempts to go well beyond simply enumerating existing market-based
mechanisms for managing the environment by examining key issues. How well have
these instruments performed? What can be learned from the record that will assist in the
formulation of new mechanisms? How economically efficient or cost-effective are these
mechanisms in achieving the goals of environmental management? What have been their
environmental effects? Why is it that the theoretical gains from economic instruments
seldom are observed in practice and what can be done to improve this record?
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
1.2. DEFINITIONS
In order to bound the subject, economic incentives for the purposes of this report will
be defined broadly as instruments that provide continuous inducements, financial or
otherwise, for sources to make reductions in their releases of pollutants or to make their
products less polluting. In essence, with incentives sources view each unit of pollution as
having a cost, whereas under more traditional regulatory approaches pollution may be
free or nearly so once regulations have been satisfied. To achieve maximum cost-effec-
tiveness, the cost per unit of pollution faced by different sources should be comparable.
In this fashion, pollution control costs are minimized for a given level of pollution. To
achieve efficiency, the per unit costs of pollution faced by each source should be equated
to the marginal damage to health and the environment caused by that pollution. This
latter objective is much more difficult to achieve, so much so that it is of interest primarily
as an academic or theoretical exercise and does not have great regulatory significance.
This definition excludes mechanisms that use explicit or implicit price signals for
activities that have pollution as a by-product. While sometimes termed environmental
incentives, programs to provide ride sharing, bike paths, high occupancy vehicle lanes
and parking surcharges and the like are beyond the scope of this report, except for a brief
discussion of congestion pricing which addresses an externality not unlike (and quite
likely linked directly to) pollution. While of interest because they may lead to a reduction
in pollution, these mechanisms provide neither an explicit nor an implicit price on units
of pollution. Excluding these mechanisms carries no implications for whether future EPA
actions will consider them as economic incentives. Rather their exclusion is primarily for
the purpose of drawing boundaries around the scope of this report and making it
manageable.
Payments per unit of pollution are perhaps the clearest example of an incentive, as the
term is used in this report. Market-based systems in pollution reduction credits and
allowances also provide direct price signals, since sources receive a paper chit that can be
sold and used by another source if they reduce pollution below permitted amounts.
Subsidies for pollution control and deposit-refund systems also create continuous
financial incentives. Finally, indirect financial incentives for continuous effort at pollution
abatement are created through reporting requirements, liability rules, and voluntary
programs. All of these incentive mechanisms provide a continuous prod to sources to
take actions to reduce their emissions and to make their products more environmentally
friendly.
The contrast between incentive mechanisms and traditional "command and control"
approaches is that the latter do not provide incentives to reduce releases below permitted
levels, or to make their products less harmful to the environment once regulatory
requirements are satisfied. Under pure command and control approaches, sources are
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Introduction
tempted to view releases within permitted amounts as costless and products with
environmental performance better than required levels as having no incremental value
because of that attribute. To achieve improvements in environmental quality, regulators
must tighten requirements on individual sources and products. Sources operating within
the limits of existing regulations have little reason to act until new regulations are issued.
In fact, if firms reduce pollution below permitted amounts or produce products with
superior environmental performance, they may trigger actions by regulators to impose
new requirements equivalent to these improved levels on all activities of the firm. Thus,
under command and control type regulations there may be perverse incentives not to
innovate and not to improve the technology of pollution control.
It should be emphasized that although this report attempts to make a careful distinc-
tion between command-and-control and market-based approaches, these distinctions are
often blurred in practice. A range of pollution control measures exists, spanning the
spectrum from such purely regulatory measures as technology requirements to such
purely market-oriented measures as deposit-refund systems or pay-per-bag methods for
financing municipal waste disposal. Between there exists a broad range of instruments,
with no clear dividing line between command-and-control approaches and methods
based on economic incentives. Many approaches to environmental management embody
some features of incentive mechanisms along with a heavy dose of direct regulatory
action. Most of the best known examples of economic incentive approaches, such as the
acid rain trading program and the gasoline lead credit trading program, also have some
distinctively command and control type features.
1.3. ORGANIZATION OF REPORT
This report is organized into ten additional sections which are summarized briefly
below.
Section 2 examines US government policies regarding incentive mechanisms. Since its
early days in office the Clinton Administration has urged greater reliance on economic
incentives for environmental management. The 1995 report "Reinventing Environmental
Regulation," the 1996 Economic Report of the President, and the 1996 report of the President's
Council on Sustainable Development all support greater use of economic instruments for
dealing with environmental issues.
In the first years of the Environmental Protection Agency in the mid-1970s, incentive-
based programs for environmental management were largely ignored. Early environmen-
tal legislation and agency action dealt primarily with easily identified problems at point
sources using command and control approaches. As these problems were resolved, the
emphasis in law and in Administration actions has shifted toward incentive-based
mechanisms. Nowhere is this more evident than in the 1990 Clean Air Act Amendments
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
with its highly successful market-based approach for controlling acid rain.
Section 3 reviews the efficiency and environmental effects of economic incentives to
control pollution. The criterion of economic efficiency requires that environmental
improvement be sought until the incremental benefits of further controls are just equal to
the incremental costs of those controls. Neither economic incentives nor command and
control mechanisms can guarantee this result; however, several incentive-based ap-
proaches lead to least cost means of accomplishing a given environmental goal. Such a
result generally does not obtain with command and control approaches. In fact, a very
large number of studies point to the conclusion that incentive-based approaches can save
anywhere from 10% to 90% of the cost of controlling pollution under traditional command
and control approaches.
Analysts agree that an important determinant of the long run success of an environ-
mental management strategy is whether it stimulates technical change and innovation in
pollution control. On this ground, pure command and control strategies score poorly.
Well-designed incentive-based mechanisms, on the other hand offer a continuous
inducement for sources of pollution to find better and cheaper ways to control their
pollution and improve the environmental performance of their products.
Section 4 treats fee, charge and tax systems in place in the United States. From an
economic perspective, fees, charges and taxes are largely interchangeable in terms of their
effects, but to governments there may be important distinctions such as which committees
and agencies have jurisdiction, how the receipts may be spent and so forth. There are far
fewer of these instruments actually labeled taxes than called fees. Environmental taxes
are found on landfill operations, and the disposal of hazardous wastes.
Pollution-based fees are imposed on the quantity and/or quality of emissions released
to the environment. Some examples include air emission permit fees in California, Texas
and other states; effluent permit fees in Washington, New Jersey, Wisconsin and other
states; and per can solid waste disposal fees found in over 2,000 communities across the
nation. User fees are levied for use of a resource, with examples including grazing fees
and water use and sewage fees.
From the perspective of environmental management, most fee and tax systems impose
rates that are far too low to have significant impacts on pollution. The reason is that if tax
or fee rates were set at the economically efficient level (equal to marginal damages) or a
level high enough to accomplish environmental goals, polluters typically would have to
make large payments to government agencies. While such payments are not real resource
costs, they are important to the sources of pollution, might affect product prices and
demand for their output, and could affect their competitive position in internationally
traded goods. With few exceptions, fee and tax rates have been set at levels far below
1-4
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Introduction
what efficiency or the satisfaction of environmental goals would dictate. In those
exceptional cases with high fees, a mechanism exists by which the payments for pollutants
are rebated to the sources in proportion to output of useful goods, so that the polluting
sector experiences almost no net payment to the government (e.g., Swedish NOx charge).
Product charges are sometimes levied on products believed to have environmentally
harmful effects. Some examples of product charges include chlorofluorocarbon taxes, the
gas guzzler tax, state taxes on fertilizer, motor oil, packaging and other materials. Other
fees may be charged on activities that are potentially damaging to the environment;
examples include wetland development fees and storm water runoff fees.
Section 5 considers deposit-refund systems, which may be characterized as a product
charge used in conjunction with a recycling subsidy. In the United States, deposit systems
have seen the most extensive application for lead-acid batteries but also are used in some
jurisdictions for a number of other products such as beverage containers, pesticide
containers, and tires. When used products are valuable, as is currently the case for lead-
acid batteries and in years past was true of beverage containers, the private sector may
create and manage a disposal system.
Deposit-refund systems appear to be most appropriate for discrete, solid commodities
such as containers, batteries, and car bodies that would cause environmental harm
through improper disposal. Government mandated deposit systems for substances such
as water and air pollutants have not been attempted but might be feasible. There certainly
are examples in industry where valuable substances in pollution streams are captured and
sold.
One of the main difficulties with deposit systems are their often high transactions
costs. The administrative costs of running these programs can be large and additional
transactions costs imposed on those who collect and return the commodities for credit.
Section 6 covers trading systems. Trading programs can come in many forms; two of
the best known involve credits for pollution reductions that have been achieved and
emissions cap and allowance trading programs which provide allowances for future
releases of pollution. Credits and allowances may be exchanged for cash payments. Most
of the markets where these items are traded are informal, but organized auctions also take
place periodically.
Beyond the best known examples of trading such as the acid rain allowance program
and RECLAIM, are a wide variety of other programs that feature some form of trading in
rights to release pollutants. Some of the high mountain communities in Colorado require
permits to operate wood-burning appliances. Developers who wish to instal such a
device are required to retire two existing permits, a rule that has resulted in pollution
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
reduction and fostered an active market in permits. Certain classes of heavy duty engines
are subject to emissions averaging, in effect intra-firm trading. The rights to burn grass
are subject to trading in Spokane County, Washington. Land development rights are
subject to trading in a few jurisdictions in Maryland, New Jersey and Florida. Wetland
mitigation credits can be created, banked and sold to offset the adverse effects of develop-
ment activities on wetlands.
Trading programs have certain features that have made them increasingly popular in
the United States. Conceptually, they can achieve much of the same efficiency of a tax
approach but have the advantages of protecting the assets of existing firms and providing
more certainty about the magnitude of environmental improvement. A number of
drawbacks are also observed, though, including high transactions costs and inactive
markets. The long-term effects of trading programs on innovation and technical change
are variable among programs. Some, such as the acid rain program, have spurred
considerable innovation, while others have not due to high transactions costs. At worst,
trading programs are neutral in their effects on costs and the environment. Sources will
not engage in trades that worsen their financial situation. Also, pollution increases
generally are not allowed with trading. As an escape valve to burdensome command and
control regulations, trading programs can offer relief.
Section 7 discusses subsidy systems. Generally looked upon with disfavor by econo-
mists because they encourage more of an activity than would occur under a polluter pays
approach, subsidies nonetheless are a commonly-used instrument of government
environmental policy. The subsidies reviewed in this report include grants, low-interest
loans, favorable tax treatment, and preferential procurement policies for products
believed to be environmentally friendly.
The following broad areas of application are reviewed: pollution prevention and
control, the cleanup of contaminated industrial sites, farming and land preservation,
consumer product waste management, citizen monitoring of environmental regulations,
alternative fuels and low emitting vehicles, and municipal wastewater treatment.
Section 8 deals with liability as an incentive. The Clean Water Act requires cleanup of
oil and petroleum product spills into the nation's waters. The Comprehensive Environ-
mental Response, Compensation and Liability Act (CERCLA) and the Oil Pollution Act
(OPA) create liability for harm to the environment caused by releases of hazardous
substances and petroleum, respectively. The incentive effect is clear as environmental
costs become part of the overall cost of doing business. Awards and settlements for
damages to natural resources under these and related state statutes total over $700 million,
with a number of large cases involving a similar sum still in varying states of litigation.
Cleanup costs, while not documented as fully, certainly have involved even larger sums.
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Introduction
Many of the federal environmental statutes provide for civil and criminal liability for
failure to comply with the law and with implementing regulations. The incentive effect
of this form of liability is to encourage individuals to comply with what are largely
command and control regulations. While civil and criminal provisions of environmental
laws are reviewed briefly in this report, such incentives are qualitatively different from
those that price services of the environment and for the most part not within the scope of
this report.
Section 9 scrutinizes the potential incentive effects of information reporting require-
ments of two laws, the Emergency Planning and Community Right-To-Know Act
(EPCRA) and California's Safe Drinking Water and Toxic Enforcement Act, commonly
referred to as Proposition 65. The Toxic Release Inventory reporting requirements of
EPCRA have led to a large reduction in releases of the listed substances, even though no
reductions are actually required by the law. Merely requiring that public reports be filed
seems to provide a strong encouragement for sources to reduce their releases.
Other forms of information reporting are also reviewed in this Section, including
environmental impact assessment reporting, product labeling, environmental perfor-
mance awards, Securities and Exchange environmental reporting requirements, and lead
paint and radon disclosure requirements. Information approaches used outside the
United States are discussed in Section 11.
Section 10 looks at programs under which EPA asks companies to voluntarily partici-
pate in activities to protect the environment. Such programs have become increasingly
popular in the 1990s; a recent EPA publication Partnerships in Preventing Pollution de-
scribes 28 such measures. One incentive for firms to participate in these programs is
favorable public relations, which could help product sales and lessen regulatory pres-
sures. Another reason some firms participate is technical assistance that may be offered
by the regulatory agency. Voluntary programs may also reduce possibly adversarial
relations with residents living near a facility and with the environmental community.
Voluntary programs are criticized for their lack of teeth, for the fact that firms with
already-good environmental records tend to participate but bad actors do not, and for the
general lack of accountability. While positive results are observed for certain programs,
it is difficult to document significant changes in environmental performance as a conse-
quence of many of the voluntary programs.
Section 11 provides an overview of foreign experiences with economic instruments for
managing the environment. A broad array of economic instruments exists outside the
United States. While the United States has relatively more experience with trading
mechanisms, information reporting requirements and, possibly, voluntary programs, the
rest of the world has relatively more experience with sophisticated pollution tax systems,
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
a broader array of deposit-refund systems, and the use of environmental funds.
1.4. SCOPE OF REPORT
Though a great many incentive programs are reviewed herein, this report makes no
pretense of being exhaustive. The literature on economic incentives is immense. Many
levels of government have adopted such programs or are considering their use. Rather
than being exhaustive, an attempt has been made to identify those mechanisms that are
most likely to have long-run significance In doing so, many important initiatives have
undoubtedly been omitted either through lack of information or the need to draw limits
and make this project manageable. For example, economic mechanisms for allocating
water are noted only briefly, despite their potential linkages to the environment, because
pollution control is not their primary objective. Likewise, the brief discussion of highway
pricing and congestion charges merely serves to introduce this important application of
incentives, since the environmental effects of such charges, though potentially significant,
have yet to be documented.
Readers of this report who are aware of interesting applications of incentive mecha-
nisms that they believe should be included in subsequent revisions of the report are
encouraged to send that information to Robert Anderson at the following Email address:
boba@erols.com.
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2. GOVERNMENT POLICIES ON ECONOMIC INCENTIVES
Since its first days in office, the Clinton Administration has expressed strong support
for greater reliance on economic incentives in environmental management. Having
witnessed the success of the acid rain control program, policy makers are convinced that
similar approaches can work in other environmental policy areas.
As discussed in Section 6, experiences with the acid rain control program are very
positive to date, showing that environmental protection can be achieved at less cost than
previously believed. Not only have pollution abatement costs been much less than
expected, the magnitude of emissions reductions has significantly exceeded requirements
to date. Moreover, recent scientific evidence indicates that the health benefits are far
greater than originally forecast.
2.1. SOME RECENT POLICY DEVELOPMENTS
2.1.1. Reinventing Environmental Regulation
Released on March 16, 1995 by the Clinton Administration, "Reinventing Environmen-
tal Regulation" outlines major policy initiatives designed to improve environmental
regulation so that the nation achieves a better environment at lower cost.1 Two of the "10
Principles for Reinventing Environmental Protection" are that environmental regulation
must be "performance-based," allowing flexibility while requiring accountability in
attaining goals and that "market incentives should be used to achieve environmental
goals, whenever appropriate." Open-market air emissions trading and effluent trading in
watersheds are two of the "25 High Priority Actions" described in the document. Some of
the actions seeking to improve compliance, accountability, and enforcement are coordi-
nated through the Environmental Leadership Program described in section 10 of this
report. These include incentives for auditing, disclosure, and correction. Project XL
(another voluntary program discussed in section 10) is described as one of the "Building
Blocks for a New System" of environmental regulation.
2.1.2. Economic Report of the President
Under the terms of the Employment Act of 1946, the President's Council of Economic
Advisors prepares annually an Economic Report of the President. Among the topics
discussed in the 1996 report is regulatory reform and its application to environmental
policy.
The report offers several ideas for "reinventing regulation," which it defines as "taking
a new look at regulation and the regulatory process to ensure that regulations meet
legitimate social needs, and where necessary changing both content and process to
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
improve efficiency and effectiveness." Regulatory reinvention efforts take several forms,
including "better targeting of regulatory efforts to where the need is greatest," "a shift in
emphasis from prescribing methods of compliance to specifying desired outcomes," and
"harnessing economic incentives through market-based regulatory mechanisms."
A significant portion of the report is devoted to reinventing regulation of the environ-
ment and natural resources. "The Administration is improving the way we protect the
environment," states the report, "making government a partner rather than an overseer."
The report cites "cooperation with States and localities, partnerships with the private
sector that engender creative solutions as well as set standards, and careful assessment of
the advantages and disadvantages of alternative government action" as means by which
"environmental protection can be achieved at an affordable cost."
Stating that environmental rules should impose the least possible burden and that their
benefits should justify their costs, the report discusses a number of incentive approaches
that have been or could be used to protect natural resources. The section entitled "Creat-
ing Cost-Effective Policies: Economic Incentives for Environmental Protection" includes
liability for environmental damages, fees and charges, trading systems, conservation
easements, and the provision of information. Trading systems for water and air pollution
and for fishing quotas are discussed at length. On the subject of water pollution, the
report contains Administration estimates that annual compliance cost savings of several
hundred million to several billion dollars could be achieved through expanded use of
effluent trading.
2.1.3. Council on Sustainable Development
Appointed by President Clinton in May 1993, the Council on Sustainable Development
is composed of representatives from the Cabinet, industry, and environmental groups.
The President assigned the Council the task of developing a strategy to achieve long-term
economic growth without harming natural resources.
In its report released in March 1996, the Council recommended the use of performance
targets in lieu of technology standards, commending Project XL for allowing companies
to develop innovative pollution control methods. It also recommended the adoption of
incentives and elimination of disincentives for environmental protection in a number of
areas as well as more cooperation between industry and government in controlling
pollution. One example of cooperation endorsed by the report is the Common Sense
Initiative, under which industry and environmental groups are working with EPA to
study ways to improve environmental regulations affecting six specified industries.
(report site: www.whitehouse.gov/WH/EOP/pcsd/#council_report)
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Government Policies on Economic Incentives
2.1.4. Vice-Presidential National Performance Review
Vice President Gore's National Performance Review released a report in 1993 entitled
Creating a Government That Works Better & Costs Less. Focused on reinventing government,
the report included a number of recommendations for improved environmental protec-
tion, some of which advocated the use of economic incentives. It suggested that EPA
work with Congress to encourage incentive approaches to reduce water pollution,
including wastewater discharge fees. Another recommendation was the modification of
the conditions of access to federal resources for activities such as grazing and mining to
ensure that the government obtains a fair return on its land and to provide incentives for
appropriate land management.
2.1.5. Executive Order 12866 and Related OMB Guidance
The central idea of President Clinton's Executive Order (EO) 12866 of September 30,
1993 is that regulations should be imposed only if their benefits justify their costs. (This
EO replaced President Reagan's EO 12291 described below.) Agencies are required to
conduct cost-benefit analysis for any "significant regulatory action." Actions deemed
"significant" are those that "have an annual effect on the economy of $100 million or more
or adversely affect in a material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State, local, or tribal
governments or communities" or that meet certain other criteria.
EO 12866 also requires that agencies consider the possibility of using incentive-based
approaches for any significant regulatory action. Two specific "Principles of Regulation"
in EO 12866 refer to incentive-based approaches:
lb3: "Each agency shall identify and assess available alternatives to direct regulation,
including providing economic incentives to encourage the desired behavior, such as
user fees or marketable permits, or providing information upon which choices can be
made by the public."
Ib8: "Each agency shall identify and assess alternative forms of regulation and shall,
to the extent feasible, specify performance objectives, rather than specifying the
behavior or manner of compliance that regulated entities must adopt."
In January 1996, an interagency group convened by the Office of Management and
Budget (OMB) issued guidelines for economic analysis of proposed federal regulations
under EO 12866. Among the topics discussed in these guidelines were the importance of
performance-based standards, alternative compliance methods, information approaches,
and economic incentives.2
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
On the first of these topics, the guidelines state, "Performance standards are generally
to be preferred to engineering or design standards because performance standards
provide the regulated parties the flexibility to achieve the regulatory objective in a more
cost-effective way." "Performance standards," the guidelines continue, "should be applied
with a scope appropriate to the problem the regulation seeks to address. For example, to
create the greatest opportunities for the regulated parties to achieve cost savings while
meeting the regulatory objective, compliance with air emission standards can be allowed
on a plant-wide, firm-wide, or region-wide basis rather than vent by vent, provided this
does not produce unacceptable air quality outcomes (such as 'hot spots' from local
pollution concentration)."
On the subject of ensuring compliance, the guidelines state, "When alternative
monitoring and reporting methods vary in their costs and benefits, promising alternatives
should be considered in identifying the regulatory alternative that maximizes net
benefits."
The guidelines mention various "informational measures," including "government
establishment of a standardized testing and rating system (the use of which could be
made mandatory or left voluntary), mandatory disclosure requirements (e.g., by advertis-
ing, labeling, or enclosures), and government provision of information (e.g., by govern-
ment publications, telephone hotlines, or public interest broadcast announcements.)"
The guidelines also call for consideration of economic incentives: "In general, alterna-
tives that provide for more market-oriented approaches, with the use of economic
incentives replacing command-and-control requirements, are more cost-effective and
should be explored." Incentives "that may be considered include fees, subsidies, penalties,
marketable permits or offsets, changes in liabilities or property rights (including policies
that alter the incentive of insurers and insured parties), and required bonds, insurance or
warranties."
2.2. SOME SIGNIFICANT EARLIER POLICY DEVELOPMENTS
2.2.1. Economic Incentives: Options for Environmental Protection
A 1991 report by the EPA Economic Incentives Task Force, Economic Incentives: Options
for Environmental Protection, studied existing and potential incentive mechanisms for the
purpose of stimulating discussion on the role of such mechanisms in environmental
policy. The report focused on four areas where incentives might be applied: municipal
solid waste management, global climate change, water resource management, and multi-
media concerns. In the preface to the report, the EPA Administrator stated, "To maintain
progress toward our environmental goals, we must move beyond a prescriptive approach
by adding innovative policy instruments such as economic incentives. Properly em-
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Government Policies on Economic Incentives
ployed, economic incentives can be a powerful force for environmental improvement."
2.2.2. 1990 Clean Air Act Amendments
With the passage of the 1990 Clean Air Act Amendments, the legislative branch of
government showed a strong interest in economic incentives and a major shift in approach
away from command-and-control requirements that previously had dominated air
pollution control policy. Among the incentive mechanisms included in the Amendments
are the acid rain control program, provisions for offsets and other trading programs in
ozone non-attainment areas, offset provisions for hazardous pollutants, fees based on
pollutant emissions, marketable credits for certain fuel constituents, marketable produc-
tion allowances for ozone-depleting substances, and labeling of ozone-depleting sub-
stances. These incentives are discussed in Appendix B and in relevant sections of this
report.3
2.2.3. The Project 88 Report
Sponsored by Senators Heinz and Wirth, a group of public policy scholars prepared
a report identifying 36 proposals for "innovative solutions to major environmental and
natural resource problems." Among the economic incentives included in these proposals
were:
a national market for C02 offsets;
internationally marketable permits for greenhouse gases;
marketable permits for potential ozone-depleting substances, S02, NOx, and point
and nonpoint sources of water pollution;
a deposit-refund system for containerizable hazardous wastes;
taxes on fuel-inefficient vehicles with rebates for fuel-efficient vehicles;
- taxes on certain pesticides;
air emissions charges for mobile sources.
Round II of the Project 88 Report evaluates in detail implementation issues regarding
three areas where incentives might be applied: global climate change, solid and hazardous
waste management, and natural resource management.
2.2.4. Executive Order 12291 and EPA Guidelines for Performing Regulatory Impact Analysis
President Reagan's EO 12291 of February 17, 1981 required a Regulatory Impact
Analysis (RIA) for proposed "major rules." (The definition of "major rule" was similar to
that of "significant regulatory action" in EO 12866. EO 12866 replaced EO 12291.) Each
RIA was required to contain a "description of alternative approaches that could substan-
tially achieve the same regulatory goal at lower cost, together with an analysis of this
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
potential benefit and costs and a brief explanation of the legal reasons why such alterna-
tives, if proposed, could not be adopted."
After EO 12291 was adopted, EPA developed guidelines for conducting RIAs,
according to which "each RIA should calculate the benefits and costs of a proposed
regulation's full range of effects and should compare them with those of other regulatory
and nonregulatory approaches." In "Considering Alternative Approaches," the guidelines
call for consideration of "market-oriented regulatory alternatives (whether or not they are
explicitly authorized in the Agency's legislative mandate)." Such alternatives "include
using information or labeling to enable consumers or workers to evaluate hazards
themselves and using economic incentives, such as fees or charges, marketable permits or
offsets, changes in insurance provisions, or changes in property rights." EPA must submit
all RIAs and proposed regulations to OMB for review. Although EPA's RIA guidelines
could lead to increased use of incentive mechanisms in environmental regulation, no
study appears to have addressed the extent to which the over 100 RIAs prepared to date
have considered incentive-based alternatives.
EO 12291 builds on a number of earlier Executive Orders and regulations dating back
to President Nixon's "Quality of Life" reviews requiring an assessment of alternatives and
cost comparisons for proposed regulations. President Ford's EO 11821 of 1974 and EO
11949 of 1976 required inflation impact statements for major regulations. President
Carter's EO 12044 of 1978 required Regulatory Analyses of the economic consequences of
proposed regulations and alternatives under consideration and instructed agencies to
select the "least burdensome" alternative.4
2.3. CONCLUSIONS
In short, government policy, as well as industry and the environmental community,
appears to have embraced the following beliefs:
1. Environmental protection should be achieved in such a way as to limit regulatory
burden. Regulation should stress performance targets rather than prescribed compli-
ance methods.
2. Industry and government should act as partners rather than adversaries in environ-
mental protection.
3. The use of economic incentives in environmental protection should be increased.
These beliefs have important implications for the incentive mechanisms described in
the rest of this report.
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3. THE ECONOMIC EFFICIENCY AND ENVIRONMENTAL EFFECTS OF
INCENTIVE SYSTEMS
3.1. BACKGROUND
This Section compares various incentive-based strategies for managing the environ-
ment with traditional command and control approaches. The goal of environmental
management is the control of pollution, or externalities in the terminology of economists.
Pollution is an output that occurs outside of normal market transactions. It has no cost to
the source but may impose costs on other economic actors. How best to get sources to
control their pollution is an issue that has been studied closely by economists and policy
analysts.
One means of control is to rely on private negotiations between those who bear the
costs of pollution and the sources of pollution. Under the assumptions of costless
transactions and no strategic behavior, such negotiations can lead to an optimal level of
pollution control in which the full costs of pollution are taken into account in the decision
process of the source (Coase). While the assumption of no strategic behavior may be
reasonable in many cases, costless transactions, which are necessary for the victims of
pollution to negotiate successfully with sources, may never be a realistic assumption. The
more victims there are, and the more geographically disperse are the victims, the higher
transactions costs are likely to be.
Because negotiations between victims and sources of pollution cannot be relied upon
as a means of control, environmental legislation dictates other mechanisms for internaliz-
ing pollution externalities. In one approach the pollution control authority specifies in
considerable detail requirements for different source categories. The regulations may
impose discharge limits or much more, such as the technology that must be used, the
inputs that must be used, or characteristics of the outputs that are produced. This
regulatory approach is termed "command and control." Market-based or incentive
approaches, by contrast, provide rewards for reducing pollution (and conversely penalties
for releasing pollution). The rewards may be of a financial nature, but need not be. In
contrast to the command and control approach, an incentive-based regulatory strategy
gives sources great flexibility in selecting both the type and magnitude of response.
The basic reference point is Figure 3-1, a stylized depiction of the incremental damage
of increased levels of pollution and the incremental costs of controlling pollution. The
economically efficient level of control limits pollution to Up to that level of pollution
the incremental damage from successive units of pollution are less than the incremental
costs of control. Beyond E1; incremental damage exceeds incremental control cost. Net
benefits of pollution control are maximized at E^
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
If cost and damage functions are as well-behaved as depicted in Figure 3-1, traditional
command and control approaches generally will not perform as well as incentive-based
mechanisms such as pollution taxes, marketable permits, and liability in yielding the
efficient level of pollution control. Several factors affect the economic efficiency of
different tools for environmental management. As will be shown, market-based instru-
ments offer a number of distinct advantages over traditional command and control
approaches. Which instrument performs best, though, depends upon the specific
characteristics of the problem. Consequently, a case-by-case approach probably is
advisable in selecting the most appropriate instrument from among those potentially
available.
Consider first, the sources of pollution. Are the costs of control known with certainty?
If not, how great is the uncertainty? Is the technology of pollution control static, or is it
likely to change over time? Can the quantity of pollution from each source be measured
(or approximated) easily? How many sources are there for each pollutant? Are incremen-
tal control costs similar for different sources, or is there considerable variation?
On the damage side, does a unit of pollution from each source have the same impact
on health and the environment, regardless of where it is released? Are the impacts on
health and the environment known with certainty? If not, how great is the uncertainty?
At which juncture do major uncertainties arise: imprecise knowledge of the effect of
pollution on environmental quality, exposures, physical effects, or economic valuation of
effects? How many parties are experiencing pollution damage? Is it critical to control
pollution within narrow limits to achieve environmental goals, or are damage functions
such that there is a continuum of effects
from less serious to more serious, with no
obvious unacceptable level of pollution?
Depending upon these parameters,
some tools of environmental manage-
ment are likely to perform better than
others. Of course, performance can be
measured in a number of ways. While
economists would place the emphasis on
economic efficiency, other criteria such as
fairness, political acceptability, stimulus
for innovation and technical improve-
ment, enforceability and consistency with
religious and moral precepts also could
be used in place of or in conjunction with
efficiency. Cost-effectiveness is a com-
promise criterion that takes both econom-
Figure 3-1: INCREMENTAL DAMAGES
AND COSTS OF CONTROLLING POL-
LUTION
Emissions
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The Economic Efficiency and Environmental Effects of Incentive Systems
ics and the political and legal structure into account by finding the least cost means of
achieving a stated environmental goal. Alternatively under this criterion, one could
identify the pollution control measure that maximized environmental gains within a given
cost budget.
The following sections describe alternative means for managing the environment,
pointing out circumstances under which one mechanism is likely to perform better than
others.
3.2. COMMAND AND CONTROL
Command and control mechanisms normally operate through one of three means:
ambient standards, source-specific emission limits, or technology requirements. A brief
description of each means illustrates both the strengths and weaknesses of command and
control. Ambient standards specify a minimum level of environmental quality (e.g., a
maximum concentration of pollutants in the atmosphere, or minimum levels of dissolved
oxygen in water) to be achieved through limits on sources, products, and other sources of
pollution. Ambient standards at first blush are unambiguous, though how they are set
and the means by which they are to be achieved clearly is open to debate. Upon closer
inspection, the means by which environmental quality is measured (e.g., the number and
location of monitoring stations, the number of excursions allowed above the standard)
also provides ample room for disagreement.
In principle, ambient standards could be established with reference to incremental
control costs and incremental pollution damage. Environmental laws rarely give EPA this
discretion. The Clean Air Act requires that national ambient air quality standards be set
to protect human health with an adequate margin of safety (below the threshold of effects
E0 in Figure 1) Cost is not supposed to enter the decision process as a criterion. Similarly,
water quality standards such as fishable, swimmable, or drinkable are selected by states
for each body of water. EPA sets effluent limitation standards for different industrial
sectors on the basis of technologies already adopted by cleaner facilities. Cost enters the
standard-setting process only to the extent that large segments of industry must not be
driven to bankruptcy.
Unless costs can be taken into account explicitly in setting standards, the ambient
standards approach may lead to unsatisfactory outcomes from an efficiency perspective.
The ambient standards approach under the Clean Air Act is built on the twin concepts of
thresholds below which effects cannot be observed and margins of safety above thresh-
olds for protecting health with a margin of safety. This approach is giving EPA increasing
difficulties because even small amounts of some air pollutants are likely to have measur-
able effects on health or the environment. The lowest levels where effects can be detected
have moved steadily lower as scientific techniques improve and as effects on sensitive
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
subgroups are studied. Referring to Figure 3-1, the ambient standards approach built on
the assumption of thresholds, eventually would set the maximum permissible emissions
below E0 where effects are first detected.
But this results in the control of emissions
from E0 to Ex whose marginal costs of con-
trol exceed marginal damage. By focusing
only on environmental improvement, ambi-
ent standards are likely to be set at too am-
bitious a level; large costs may be incurred
to achieve incremental improvements in
environmental quality that are worth far
less than they cost.
Emission (or effluent) limits are applied
to individual sources as a means of achiev-
ing health or environment-based ambient
standards. Referring to Figure 3-1, the pol-
lution control authority might attempt to
limit total pollutant releases to Ex , E0 or
some other level by setting emissions stan-
dards for individual sources, such that total
emissions just equaled those amounts. If pollution rights are "grandfathered" to existing
sources, new entrants and expanding existing sources are disadvantaged unless existing
sources can transfer some of their pollution rights. Other pollution allocation formulas
could be used, such as a set number of pounds of pollution per unit of output, that do not
disadvantage new sources.
Unless the pollution control authority is able to identify which sources have the lowest
incremental control costs and insist that those sources implement controls first, the
incremental cost of controlling emissions to Ex will be higher than Cx. As Figure 3-2
depicts, each source generally will have a number of options for controlling emissions.
The least cost option (1) will control some emissions.
Other successively more expensive measures may be implemented until all emissions are
controlled. It is very difficult in practice to identify the least cost strategy for the total
emissions from several sources (the incremental cost curve of Figure 3-1). If all control
measures and their costs are known, linear programming could be used to find the
marginal cost curve. Generally all control measures are not known, and even if they are,
pollution control laws do not permit an agency to impose control measures for different
sources on this basis. Sources would argue that it is not fair. Consequently, emission or
effluent limits are likely to be inefficient.
Figure 3-2: CONTROL OPTIONS FOR A
SOURCE
(Control options ordered in terms of
decreasing incremental cost)
Costs
"5
no control
F.missifins
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The Economic Efficiency and Environmental Effects of Incentive Systems
From a dynamic perspective, identifying the strategies that should be implemented to
achieve least cost control is more problematic. Technology is not static. Over time, the
number of possible options increases, most of which offer improvements over previous
technologies, either in terms of cost or environmental performance. A command and
control strategy to identify and mandate least cost controls would lock firms into technol-
ogies that become progressively less attractive over time.
Technology requirements specify the techniques or equipment that sources must use
to control pollution. Some examples of technology-based standards include the ban on
lead in gasoline and the requirement that automobiles be equipped with catalytic
converters. Some standards that are nominally performance-based demand a level of
emission control that can be met only with one technology and there fore are best
classified as technology standards (e.g., new source performance standards for S02
emissions at coal-fired electric power plants require a 90% reduction relative to uncon-
trolled emissions, a degree of control that can be met only by scrubbing). Technology
standards are likely to be less efficient than emission or effluent standards; the latter give
sources the freedom to choose the least costly method of compliance. Further, technology
standards tend to lock firms into one accepted method of compliance, discouraging
technical change and innovation. When emissions cannot be measured, and/or there are
concerns about the feasibility of enforcing tax or trading systems, technology standards
provide an objective indicator that something is being done about pollution. For that
reason, if no other, technology standards remain popular despite their lack of efficiency.
3.3. INCENTIVE-BASED MECHANISMS
While incentive-based systems have existed in some form for decades as tools of
environmental management, the federal government has aggressively sought their
implementation for only the past 10 to 15 years. Economic incentives rely on decentral-
ized decision-making by hundreds or thousands of economic agents, all acting in their
own self interest, to protect the environment. In contrast, traditional command and
control approaches for environmental management depend upon regulatory commands
by a central authority (the EPA) to limit the amount of pollution. While actual compliance
is accomplished by firms and individuals subject to the regulations, the flexibility sources
have to choose technology, as well as the extent of pollution control, tend to be quite
limited under a command and control approach. Economic incentive methods generally
allow sources to select both the amount of control and the technology.
3.3.1. Pollution Taxes, Fees, and Charges:
The feasibility of imposing emission fees, taxes and charges depends on a number of
parameters, one of which is whether one can measure emissions. From an economic
perspective, these instruments are interchangeable, though from a legislative and legal
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
perspective there are some differences. Proposed taxes must be reviewed by the House
Ways and Means Committee, since tax revenues are a part of general federal revenues.
Perhaps for that reason, there are few environmental taxes labeled as such (one notable
exception being the CFC tax). Fees and charges, in contrast, are designed to recover some
or all of agency administrative costs and need only be reviewed by environment commit-
tees and subcommittees. Fees and charges can arise in two ways: (1) the activity subject
to fees and charges may be specified by an environmental statute, and (2) Section 6501 of
the Omnibus Budget Reconciliation Act of 1990 authorizes EPA to assess and collect fees
and charges for services carried out under the nation's environmental laws.
Long ago economists pointed out that an emission tax provides the pollution control
agency with limited control over the physical quantity of emissions. If the magnitude of
emissions is very important, as could be the case with important health exposure thresh-
olds, an emission tax may be viewed as an inadequate control over actual emissions.
Environmentalists sometimes oppose emissions fees because they seem to sanction
polluting activities; emission fees become a "license to pollute."
In the remainder of this discussion, the simple analytics of fees, charges and taxes (the
terms are used interchangeably) will be described from an economic perspective. Refer
to Figure 3-3 in which a tax per unit of emissions is imposed. A cost-minimizing polluter
faced with an emissions tax controls those emissions for which control costs are less than
the tax and releases the remainder, paying the tax on each of those units of pollution. For
example, if an emissions tax just equal to Cx were imposed, cost-minimizing polluters
would reduce total emissions to Ex. If the tax were less than Cj, emissions would be
greater than Ex.
Emission fees set at Cx per unit of
emissions cause cost-minimizing pol-
luters to pay for all emissions up to Ex,
an amount equal to areas b+c in Figure
3-3. They spend an amount equal to
area d to control emissions beyond Ex
and reduce environmental damage by
an amount d+e. Emission fees set at
levels to materially change behavior
typically would result in large revenue
transfers to the government. That is,
area b+c tends to be large relative to
area d. For this reason, polluters usu-
ally oppose pollution charges, taxes
and fees that would be high enough to
have an incentive effect. Legislation
Figure 3-3: MARGINAL DAMAGES AND
COSTS FOR TAX PER UNIT OF EMISSIONS
APPROACH TO POLLUTION CONTROL
Emissions
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The Economic Efficiency and Environmental Effects of Incentive Systems
authorizing pollution fees, taxes and charges typically limits their magnitude to what is
necessary to recover the costs of administering the program in question or related
programs. Worldwide, the vast majority of emission tax, fee, and charge systems collect
revenues that at the margin are only a few percent of marginal control costs.
Two exceptions that are described in more detail later in this report are worth noting:
(1) U.S. chlorofluorocarbon taxes that were designed to remove a windfall that would
otherwise accrue to producers while the quantities of CFCs allowed in commerce were
being reduced by government regulation; and (2) the Swedish NOx charge, which is set at
a high level with the objective of changing behavior, then rebated to affected power
plants in proportion to their energy output to avoid the large revenue transfers that
otherwise would occur. Relatively "clean" facilities receive rebates in excess of payments
while relatively "dirty" facilities pay more than they receive in rebates.
The pollution damage function depicted in Figures 3-1 and 3-3 is idealized. In many
situations, the function is not well known, so the ability of an agency to set charges to
equate marginal control costs and marginal damages is questionable. Moreover, the
damage function may differ from one localized area to another depending upon the
population at risk, prevailing winds, sunshine, temperature, and other factors. If mar-
ginal control costs or marginal damages differ from one region to another, a single charge
level may be inappropriate; regionally differentiated charges may be required to attain
efficient pollution control.
3.3.2. Subsidies
Subsidies are the mirror image of emission taxes. Rather than taxes to encourage firms
to reduce emissions, the subsidy approach offers cash payments to firms for reducing
emissions. Polluters who release emissions forgo the cash payment. Under a subsidy
system, polluters have an incentive to control all units of pollution whose marginal control
cost is less than the subsidy. Subsidy systems for pollution control are especially popular
in two sectors: farming and municipal government.
Economists point out a major drawback of subsidy systems. While existing firms,
farmers and the like have an incentive to reduce their pollution, new entrants may be
attracted by the higher profits earned as a result of subsidies. In some extreme situations
this could have the perverse effect of increasing total pollution.
3.3.3. Trading Systems
Two main forms of trading systems are observed: emission (or effluent) reduction
credits (ERC), and tradable allowances for future pollution. ERCs are earned by releasing
less pollution than authorized in a facility's permit. With either form of trading, sources
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
with high marginal control costs will try to find sources with low marginal control costs.
Trading ERCs or allowances in such a situation is mutually beneficial.
For trading systems to function well,
a number of requirements must be
satisfied. There should be several
potential participants in trades to
create a functioning market. Exactly
how small a universe of potential
participants there can be and still
have a functioning market is difficult
to say, but simulation experiments
suggest that 8-10 is a reasonable esti-
mate. If sources are dispersed geo-
graphically, trading ratios other than
one to one might have to be imposed
to assure no degradation in environ-
mental quality. This could dampen
interest in trading. Trading requires
that pollution control agencies have
the ability to monitor emissions (or
measure a surrogate) reasonable well.
The commodity to be traded needs to
be well-defined. Generally a well
defined commodity requires a base-
line from which to calculate the emis-
sion reduction credits (or allowances)
that may be traded. Establishing
baselines is likely to require good
historic data on emissions, input use,
etc.
Trading systems tend to be more
popular than tax systems with pollu-
tion sources because the sources generally do not have to pay for their rights to pollute up
to permitted amounts. In fact those rights become the commodity that is traded and hence
immediately have a value once a trading system is created.
The literature cited later in this Section predicts large potential savings from trading
systems, yet available evidence points to relatively modest savings. In searching for
reasons for the wide gap between the potential and what actually is accomplished, Stavins
identifies transactions costs as the primary culprit. With transactions costs as a barrier to
Price versus Quantity Instruments
I lie economics literature makes an important
distinction between price and quantity in
struiiienls in a soiling ol uncertainty over
control cost and damage luiu lions
(Weil/man). Quantity instruments. such as
marketable pen nils and credit I lading within
caps, provide llie pollution control authority
strict control over the quanlitv ol emissions.
I'rice insti umenls. such as pollution taxes
and lees, provide strict limits on how much a
linn must spend to control pollution hut do
not limit the release ol emissions.
Willi uncertainly, the regulatory authority
would nol have good inloi mat ion concerning
I he cosls ola quail I i I \ based approach, or I he
environmental consequences ol a price based
approach. Which type ol uncerlaiiilv is more
serious? II'I here are important environmen
lal threshold effects. a quantity approach
would he preferred. I Jut lew pollutants have
that characteristic: most exhibit stable (lose
response relationships. Rather, the iinpor
tant discontinuities are likelv to lie1 in the
cost function. as different technologies must
be used to achieve progressively greater
(-on11ol over emissions. I liouuli he declines to
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The Economic Efficiency and Environmental Effects of Incentive Systems
trading, sources tend not to venture far from their initial allocation of pollution rights. As
transactions costs rise, the prices that sellers receive for pollution rights fall and the prices
that buyers must pay rise, making transactions less likely. Transactions costs were
especially high in EPS's early Emissions Trading Program, described later in this report,
with the result that fewer than one percent of the emissions potentially available for
trading actually were traded (Hahn, 1989). Transactions costs were lower for programs
such as lead credit trading, resulting in a far higher proportion of available credits
actually being traded. Transactions costs also feature prominently in the choice between
making trades internally within a firm and externally between firms. For all of the
trading programs that have been studied, firms exhibit a strong preference for internal
trading when that is feasible, often even when larger cost savings are available externally.
(Burtraw, Kerr)
3.3.4. Deposit-Refund Systems
A deposit-refund system operates like a tax system on the original purchase with a
subsidy system for returning a used item to a designated collection site. The purpose of
the subsidy or refund it to encourage individuals and firms to dispose of items in an
environmentally acceptable manner. The tax or deposit is made on the original purchase
and yields sufficient revenue to pay future refunds. Some or all of the unclaimed deposits
may be used to subsidize collection facilities.
Though most deposit-refund systems are created by legislation, deposit-refund
systems occasionally are developed by the private sector when the used product has
economic value. Thus, private sector deposit-refund systems for beverage containers were
widespread in the early part of the twentieth century before cheaper, non-returnable
containers appeared. Mandatory deposit legislation for lead-acid automotive batteries has
been enacted in about a dozen states; the private sector has created deposit systems for
lead-acid batteries in every other state, largely because of the economic value of used
batteries. Ten states have enacted beverage container deposit-refund systems. Deposit
systems exist for car bodies in four European nations, and for a wide variety of containers
through most European nations. In a few nations of Europe, deposit systems help assure
the recycling of used motor oil.
Administrative costs may be important for deposit systems and potentially outweigh
their other attractive features. Ackerman at al. (1995) estimate that these costs average
about 2.3 cents per container (over $300 per ton for steel containers, $1,300 per ton for
aluminum cans) in states with traditional bottle deposit legislation. These costs may be
compared with disposal costs which average nearer to $100 per ton. Also potentially
important are the costs imposed on consumers, who must store used containers and return
them for redemption. Deposit-refund systems appear best suited for products whose
disposal is difficult to monitor and potentially harmful to the environment. When the
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
used product has economic value, the private sector may initiate the program.
3.3.5. Information Programs
By information programs, this report refers to mandatory disclosure requirements,
such as those associated with Title III of the Superfund Amendments and Reauthorization
Act of 1986 and California's Proposition 65. At the time these statutes were enacted there
was little evidence as to how companies would respond to information disclosure rules,
other than that they strenuously objected to such requirements.
A retrospective study of eight firms, conducted by the Center for Environmental
Management at Tufts University found that SARA Title III requirements gave a strong
incentive for those firms to identify and act upon opportunities for reducing accidental
and routine releases of hazardous substances. Information reporting requirements caused
firms to behave as if all emissions were costly. Emissions that could be controlled
relatively cheaply were reduced.
3.3.6. Liability for Health and Environmental Harm
One approach for resolving environmental issues is to make polluters liable for
damage they cause. The purpose is twofold: first to get polluters to make more careful
decisions and second to compensate victims of pollution. Liability operates to control
pollution through the decentralized decisions of polluters.
Refer again to Figure 3-1. If polluters are liable (and must pay) for the damage they
cause, they will control pollution to the optimal level where marginal pollution damage
equals the marginal costs of control. At this point their total payments for controlling
pollution and compensating victims are minimized.
Liability can take two forms: civil and common law. Civil liability is expressly written
into law. For example, many of the environmental statutes, worldwide, have liability
provisions. In the US, the most important ones are the Comprehensive Environmental
Response, Liability and Compensation Act (CERCLA) and the Oil Pollution Act (OPA),
which hold responsible parties liable for cleanup costs and for damage to natural re-
sources caused by releases of hazardous substances and petroleum, respectively. Liability
under CERCLA applies to historic as well as contemporary releases. The form of liability
is strict, joint and several, meaning that one contributor out of many can be held responsi-
ble for all of the damage. Further, since liability is retroactive, an individual can be held
liable for actions that were perfectly legal at the time they occurred. The incentive effect
of retroactive liability is open to question. Does it enhance efficiency? Will it affect future
behavior in the desired manner? CERCLA is apparently the only statute (worldwide)
with retroactive liability for actions that were legal at the time they were done. While the
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The Economic Efficiency and Environmental Effects of Incentive Systems
statute has withstood numerous legal challenges, it clearly lies well outside the main-
stream of ordinary civil liability.
Harm to individuals and their properties caused by pollution is actionable under
various doctrines of common law such as nuisance, trespass, and negligence. Whether
these approaches are effective in dealing with pollution is an open question. In selected
applications, liability can be a strong deterrent, but a number of considerations limit the
effectiveness of this approach as a general solution to pollution-related problems. One
limiting factor is the time limit within which cases can be filed, the statute of limitations.
In most jurisdictions, a case must be filed within two or three years of discovering a harm.
In a few jurisdictions, a case must be filed within a two or three year period of when the
harm occurred. This distinction is very important for cancer and other diseases of long
latency that result from contact with toxic substances, since observable effects may arise
many years or even decades following the exposure.
A second limiting factor is the burden of proof required by law. Typically, a defen-
dant will be judged either guilty or innocent of causing the harm. The burden of proof
required for a guilty verdict is usually the standard of "more likely than not," usually
interpreted as greater than 50 percent probability. Epidemiological studies may suggest
that exposure to a particular toxic substance is but one of many factors that could have
caused a disease. Satisfying the more likely than not criterion can be difficult. Even if a
substance is implicated, it may be difficult to determine the polluter responsible for the
harm. For example, an auto mechanics' mesothelioma may be attributed to inhaling dust
from brake linings, but assigning responsibility to a particular manufacturer may be
impossible. A minority of jurisdictions allow the assignment of proportional responsibil-
ity for both the harm-causing substance and for the determination of who is responsible.
A final limiting factor for liability systems are the transactions costs of pursuing a
claim. These costs include the legal costs of obtaining evidence, agreeing among plaintiffs
how to pursue a case, presenting the case, and following up if the case is appealed.
Liability works best when there is one party on each side of the case and an easily
demonstrated harm. When the harm is large in magnitude, liability systems may perform
reasonably well with transactions costs small in proportion to the amounts awarded, if
there are few defendants and clear causation, even if the number of plaintiffs is large.
3.4. RELATIVE ECONOMIC EFFICIENCY
Economic theory and common sense argue that incentive mechanisms should enhance
the efficiency of pollution control relative to traditional command and control approaches.
The reasons for this conclusion are several. First, some incentive-based mechanisms
explicitly allow trading of pollution reduction obligations. With trading, sources with
high incremental costs of control can have their obligations satisfied by sources with low
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
incremental costs of control. Other incentive-based mechanisms levy a charge or tax on
each unit of pollution. Under such an approach sources would control pollution only to
the point at which the incremental cost of control equaled the charge or tax. In an
idealized world without transactions costs and competitive markets, both permit/credit
trading and pollution charge approaches should result in the marginal cost of controlling
pollution being the same at each source. At every level of pollution, control costs should
be lower than (or at worst the same as) costs associated with a command and control
approach.
A number of other incentive-based mechanisms, such as information reporting
requirements, liability, and voluntary programs, rely on implicit charges for pollution.
The efficiency consequences of such mechanisms are more difficult to predict because
sources are reducing pollution for reasons that have only an indirect financial conse-
quence. And sometimes that financial link is very tenuous. The motives for participating
in voluntary programs are largely one of improving corporate image to customers, to
employees, and to regulators, though management concern for the environment certainly
could be a factor. While the motives for controlling pollution are very real, the benefit to
the firm of reducing emissions is difficult to express in financial terms. Perhaps the best
that could be done is to examine what firms actually spend as part of such programs to
generate a willingness to pay for pollution reduction. One might find that forms respond
in a systematic fashion to various of the indirect incentives. For example across a sample
of firms, liability might generate higher willingness to pay for a unit of pollution reduc-
tion than does an information reporting requirement, which in turn might exceed the
willingness to pay for strictly voluntary activities.
The following tables summarize results of theoretical studies that compare incentive
mechanisms with command and control approaches for managing the environment. One
observes that in every case the command and control approach would be more costly than
the market-based approach, sometimes much more costly. Of course, these are merely
theoretical studies of potential savings. Actual savings could be much less if sources face
high transactions costs with trading regimes that are the basis for comparison in most of
the studies.
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The Economic Efficiency and Environmental Effects of Incentive Systems
Table 3-1: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING
ECONOMIC INCENTIVES TO CONTROL AIR POLLUTION
Pollutant Con-
trolled
Study
Year, Source
Geographic
Area
Command and
Control
Approach
Ratio of CAC
to Market-
Based Ap-
proach
Hydrocarbons
Maloney &
Yandle (1984)
T
DuPont facili-
ties in U.S.
Uniform per-
cent reduction
4.15
Nitrogen diox-
ide
Seskin at al.
(1983) T
Chicago
Proposed
RACT regula-
tions
14.4
Nitrogen diox-
ide
Krupnick
(1986) 0
Baltimore
Proposed
RACT regula-
tions
5.9
Particulates
(TSP)
Atkinson &
Lewis (1974) T
St. Louis
SIP regulation
6.0
Particulates
(TSP)
McGartland
(1984) T
Baltimore
SIP regulations
4.18
Particulates
(TSP)
Spofford
(1984) T
Lower Dela-
ware Valley
Uniform per-
cent reduction
22.0
Particulates
(TSP)
Oates et al.
(1989) 0
Baltimore
Equal propor-
tional treat-
ment
4.0 at 90 ug/m3
Reactive or-
ganic gases
and N02
SCAQMD
(1992) 0
Southern Cali-
fornia
Best Available
Control Tech-
nology
1.5 in 1994
1.3 in 1997
Sulfur dioxide
Roach et al.
(1981) T
Four Corners
Area
SIP regulation
4.25
Sulfur dioxide
Atkinson
(1983) A
Cleveland
Sulfur dioxide
Spofford
(1984) T
Lower Dela-
ware Valley
Uniform per-
cent reduction
1.78
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Pollutant Con-
trolled
Study
Year, Source
Geographic
Area
Command and
Control
Approach
Ratio of CAC
to Market-
Based Ap-
proach
Sulfur dioxide
ICF Resources
(1989) 0
United States
Uniform emis-
sion limit
5.0
Sulfates
Hahn and Noll
(1982) T
Los Angeles
California
emission stan-
dards
1.07
Six air pollut-
ants
Kohn
(1978) A
St. Louis
Benzene
Nichols et al.
(1983) A
United States
Chlorofluoro-
carbons
Palmer et al.
(1980); Shapiro
and Warhit
(1983) T
United States
Proposed
emission stan-
dards
1.96
All?
Toman et al.
(1994) 0
Poland
EC and Ger-
man standards
1.1 to 1.2
Sulfur dioxide
Haklos
(1994) 0
Europe
Uniform per-
cent reduction
1.42
Ozone
Hahn
(1995) 0
United States
Vehicle man-
date in CA and
Northeast
1.3 (NE only)
2.0 (CA + NE)
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The Economic Efficiency and Environmental Effects of Incentive Systems
Table 3-2: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING
ECONOMIC INCENTIVES TO CONTROL WATER POLLUTION
Substance
Controlled
Source
Year, Source
Geographic
Area
Command and
Control
Approach
Ratio of CAC
to Least Cost
Approach
Biochemical
Oxygen De-
mand
(BOD)
Johnson
(1967) T
Delaware Es-
tuary
Equal propor-
tional treat-
ment
3.13 at 2 mg/1
1.62 at 3 mg/1
1.43 at 4 mg/1
BOD
O'Neil
(1980) T
Lower Fox
River, WI
Equal propor-
tional treat-
ment
2.29 at 2 mg/1
1.71 at 4 mg/1
1.45 at 6.2
mg/1
BOD
Eheart et al.
(1983) T
Willamette
River, OR
Equal propor-
tional treat-
ment
1.12 at 4.8
mg/1
1.19 at 7.5
mg/1
BOD
Eheart, et al.
(1983) T
Delaware Es-
tuary
Equal propor-
tional treat-
ment
3.00 at 3 mg/1
2.92 at 3.6
mg/1
BOD
Eheart et al.
(1983) T
Upper Hudson
River, NY
Equal propor-
tional treat-
ment
1.54 at 5.1
mg/11.62 at
5.9 mg/1
BOD
Eheart et al.
(1983) T
Mohawk
River, NY
Equal propor-
tional treat-
ment
1.22 at 6.8
mg/1
Heavy metals
Opaluch &
Kashmanian
(1985) 0
Rhode Island
jewelry indus-
try
Technology-
based stan-
dards
1.8
Phosphorus
David et al.
(1977) A
Lake Michigan
Selenium
EDF
(1994) 0
Central Valley,
CA
Best manage-
ment
Dractices
1.2
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 3-3: QUANTITATIVE STUDIES OF POTENTIAL SAVINGS FROM USING
ECONOMIC INCENTIVES TO REDUCE SOLID WASTE
Substance
Controlled
Study
Year, Source
Geographic
Area
Command and
Control
Approach
Ratio of CAC
to Least Cost
Approach
Municipal
solid waste
Palmer, et al.
(1995) 0
United States
Uniform per-
cent reduction
of 10%
2.0
Table 3-4: QUA]
ECONOMIC I
NTITATIVE STL
NCENTIVES FR(
[DIES OF POTE1S
DM OTHER POL
JTIAL SAVINGS
LUTION-RELAT
FROM USING
ED ACTIONS
Substance
Controlled
Study
Year, Source
Geographic
Area
Command and
Control
Approach
Ratio of CAC
to Least Cost
Approach
Fuel efficiency
Charles River
Associates
(1991) 0
United States
CAFE stan-
dards
4.5
Agricultural
chemicals
Rendleman et
al.
(1995) 0
United States
Uniform per-
cent reduction
1.1
Traffic conges-
tion
Hau
(1990) 0
Hong Kong
Car ownership
restraint
2.5
Footnotes for Tables 3-1 to 3-4
a. Based on 85 percent reduction of emissions from all sources.
b. The trading of lead credits reduced the cost to refiners of the lead phasedown by about
$225 million.
c. Ratio based on 40 g/m3 at worst receptor, as given in Tietenberg (1985), Table 4.
d. Ratio based on a short-term, one-hour average of 250 g/m3.
e. Because it is a benefit-cost study instead of a cost-effectiveness study, the Harrison
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The Economic Efficiency and Environmental Effects of Incentive Systems
comparison of the CA approach with the least-cost allocation involves different benefit
levels. Specifically, the benefit levels associated with the least-cost allocation are only 82
percent of those associated with the CA allocation. To produce cost estimates based on
more comparable benefits, as a first approximation the least-cost allocation was divided
by 0.82 and the resulting number compared with the CA cost.
Acronyms Used: CAC—Command-and-control, the traditional regulatory approach.
DO—Dissolved oxygen; higher DO targets indicate higher water quality.
RACT—Reasonably available control technologies. SIP—State implementation plan.
Sources: A stands for Anderson et al. (1989); they did not compute the ratio or provide the
other information left blank in this table. O stands for original reference. T stands for
Tietenberg (1985), Table 5. See Appendix A for all references.
In many of these studies, a distinction was not drawn as to the precise nature of the
market-based mechanism that would be used. Rather, the assumption was made that
either pollution taxes or marketable permits would yield the least cost outcome identified
through linear programming. Examining the performance of trading systems in particu-
lar, one finds that existing applications fail to achieve anywhere near their theoretical
potential cost savings.5 Trades have been fewer and cost savings smaller, according to this
analysis, than indicated by economic modeling.
A number of explanations have been offered about why the predicted savings are not
realized.6 Regulatory and legal requirements of the actual programs may limit the trading
opportunities to a greater extent than portrayed in the models, especially where the
incentive programs is in addition to existing command-and-control programs. Various
models have not fully reflected aspects of real regulatory programs, including the
transaction costs, restrictive trading rules, monitoring and reporting requirements, and the
administrative burden placed on both emission sources and regulatory agencies.
In addition to limitations imposed by the regulatory structure, potential participants
in trading systems may be reluctant to trade paper credits, preferring instead the greater
certainty of installing pollution control equipment at their facilities. Moreover, pollution
credits have a limited life whereas engineering controls in principle last for the life of a
facility. In most trading systems, the vast majority of trades that take place occur within
firms, not between firms. Further, markets in rights available for sale tend to be thin
(Hahn) and it may be difficult to locate potential sellers of rights.
For tax, charge and fee systems, with a couple of exceptions in Sweden, the principal
limitation to achieving the theoretical efficiency gains has been the generally low level of
charge relative to what would be required to have a significant impact on pollution.
Charges typically are set to recover administrative costs for a program, not to impact
pollution.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Even if the cost savings are less than predicted, the actual savings are still impressive.
In the appropriate circumstances, the wider use of incentive programs that are feasible in
an actual policy setting will result in substantial costs savings while achieving equivalent
environmental goals. In other circumstances, the cost differences between an incentive
program and a well designed command-and-control program will be less,7 although the
incentive program will provide a stronger stimulus for innovation and technical change.
3.5. ECONOMIC INSTRUMENTS AND TECHNOLOGICAL CHANGE
Market-based instruments should have significant advantages over command and
control mechanisms in terms of stimulating technical change and innovation in pollution
control. The reason is that each and every unit of pollution is costly to the firm. In
contrast, under a command and control approach, once a source has satisfied the emission
limits, all pollution within those limits is costless. Why spend valuable resources
instituting further controls when there is no reward? In fact, the incentives may be
negative, for a firm that controls to less than
permitted amounts may be inviting reduc-
tions in what is permitted. In many parts of
the nation pollution control agencies are con-
stantly struggling to find ways of meeting
ambient environmental quality goals. Firms
that demonstrate the possibility of making
emission reductions below permitted
amounts offer an easy target for obtaining
some of the necessary emission reductions.
These same innovative firms may supply the
catalyst for regulations that require other
firms in the same industry to undertake what
has been demonstrated as possible.
Figure 3-4 depicts graphically the differ-
ence in incentives for innovation between an
emissions tax and a command and control
policy. With marginal control costs of MCC1,
a firm controls emissions to El with an emis-
sion standard set at that level, incurring costs
equal to area (a+b). With an emissions tax set
at t, the firm also would control emissions to
El, incurring costs equal to (a+b+c+d+e).
The incentive to the firm to find improved methods of pollution control are much
stronger under the emissions tax, since total pollution control outlays are so much higher.
If the firm finds a new pollution control technology with marginal control costs equal to
MCC2, total abatement costs under the emissions standard approach would fall by an
amount equal to area b. Under the emissions tax approach, total pollution control outlays
Figure 3-4: COSTS FOR EMISSIONS
CONTROL FOR FIRMS UNDER
EMISSIONS TAX AND COMMAND
AND CONTROL APPROACHES
H
Brissions
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August
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The Economic Efficiency and Environmental Effects of Incentive Systems
would decline by an amount equal to area (b+c).
It should not be surprising that the theoretical and empirical literature concludes that
emission taxes provide the greatest stimulus for technical change and innovation, with
marketable permits offering a lesser stimulus and command and control the least. Among
command and control approaches, it is safe to say that performance-based standards
should provide a greater incentive to innovate than would pure technology requirements.
Long-run changes in behavior and technology are among the most difficult economic
effects to document. For that reason, relatively little is known of the effects that take place
as a consequence of different pollution control policies. Yet these effects are thought to be
very important. One author said the rate of technological change in pollution control is
"the single most important criterion on which to judge environmental policies." Another
analyst termed innovation "the key to an effective solution" of environmental problems.
The available evidence suggests that existing environmental policies give only a mild
stimulus for technical change and innovation, though there are important exceptions such
as the U.S. acid rain control program where control costs have fallen dramatically due to
major technical and behavioral changes. Outlays for research and development in
pollution control are between two and three percent of total pollution control expendi-
tures. This is about the same as the average R&D expenditure in all of U.S. manufactur-
ing, but far lower than one might expect in a new and rapidly changing industry. A more
apt comparison might be provided by drugs, electronics and information processing
where R&D runs between 6 and 10 percent of expenditures. Research and development
in pollution control appears to lag behind largely because of the command and control
framework that has been chosen, not because of any other inherent limitation. Pollution
control based more heavily on economic instruments would be expected to stimulate
greater R&D and in turn reduce over the long run the costs of improving the environment.
3.6. IMPACTS ON ENVIRONMENTAL QUALITY
A full understanding of the effectiveness and economic efficiency of incentive pro-
grams requires information on the realized environmental benefits. The literature focuses
almost exclusively on the cost side because of the presumption that the same environmen-
tal goals are being sought. In comparing incentive-based policies with command and
control approaches, or among different incentive-based policies, there may be impacts on
environmental quality that would be of interest to regulators and other parties.
Generally, incentive mechanisms based on trading are designed to produce environ-
mental effects that closely approximate what would be achieved through a command and
control approach. Some distinctions still apply, however, in that a "cap and trade" policy
is likely to give greater control over total emissions than is an "open market" trading
approach. Open market approaches do not provide a limit on total emissions; credits
may be generated as sources see fit. If there is to be a control on total emissions, it would
have to come from a companion command and control regime. In contrast, under a
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
capped trading program, total emissions are limited. Either type of trading will reduce
total emissions if trading ratios of greater than 1:1 are required. Some trading program
described in this report have that feature (e.g., fireplace permit trading) but others do not
(e.g., acid rain allowances).
Emission tax systems typically have not been designed to have an environmental
impact. Rather, modest revenue raising has been the principal goal. However, in the few
examples for which emission fees have been set at a level intended to have environmental
impacts, the benefits were greater than forecast (Swedish NOx and S02 charges, and
United States CFC taxes).
Deposit systems appear to produce environmental effects greater than would be
expected through a command and control method; however, there appears to be a
threshold of deposit size needed in order to induce people to achieve the desired environ-
mental objective. For example, deposits on automobile bodies function well in assuring
the proper disposal of car hulks when set at a high enough level (see the section on
international experiences). In contrast, thousands of abandoned car hulks are removed at
city expense in New York each year despite regulations prohibiting that type of disposal.
Variations in environmental effects can be important in evaluating the overall desir-
ability of different approaches. Often it is not correct to simply assume various ap-
proaches yield the same result. Oates et al. (1989) describe an example of particulate
matter control in the Baltimore region in which "over control" in some areas required
under a command and control approach yields environmental improvements that lessen
the relative attractiveness of an incentive-based policy that produces more uniform
pollutant concentrations.
3.7. FINDING THE RIGHT INSTRUMENT FOR THE PROBLEM
This section has described a wide range of instruments from the perspectives of
economic efficiency, distributional consequences, environmental effects, and incentives to
develop new technologies to deal with pollution. The evidence accumulated from literally
hundreds of applications of economic that is reviewed in the following sections suggests
that the set of instruments that can deal successfully with individual classes of environ-
mental problems is fairly narrow. Table 3-5 identifies the types of incentive-based
instruments that have been applied to a variety of environmental problems. The relative
effectiveness of the different mechanisms is also characterized. The interested reader is
referred to Field and Dower for other perspectives on selecting the correct economic
instrument for individual environmental problems.
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The Economic Efficiency and Environmental Effects of Incentive Systems
Table 3-5: USES OF ECONOMIC INSTRUMENTS
Instrument
Types of Applications
Examples
Pros & Cons
Pollution
Charges
& Taxes
* damage function has little slope
* monitoring data available
Emission charges
Effluent charges
Solid waste charges
Sewage charges
Pro: stimulates new technol-
ogy; effective if the charge is
high
Con: potentially large distri-
butional effects; uncertain
environmental effects
Input or
Output
Taxes &
Charges
* numerous sources
* no monitoring data
* damage function has little slope
* some link between environment
and use of input or output
Leaded gasoline tax
Carbon tax
Fertilizer tax
Pesticide tax
Virgin material tax
Water user charges
CFC taxes
Pro: administratively simple;
raises revenue
Con: often weak link to pol-
lution; uncertain environ-
mental effects
Subsidies
* politically or economically in-
feasible to tax activity
* unlikely to stimulate new
sources to enter
* monitoring is feasible
Municipal sewage
plants
Land use by farmers
Industrial pollution
Pro: politically popular
Con: budgetary cost; may
stimulate too much of activ-
ity; uncertain effects
Deposi
t Refund
Systems
* reusable or recyclable
* damage function has little slope
Lead-acid batteries
Beverage containers
Automobile bodies
Pro: deters littering; stim-
ulates recycling
Con: potentially high trans-
actions costs
Marketab
Permits
e* damage function has steep slope
* strict control over pollution impor
* marginal control costs vary
across sources
Emissions
aMfluenls
Fisheries access
Pro: control over activity;
stimulus to technical change
Con: potentially high trans-
actions costs;
Reporting
Requirem
* damage function unknown or of
shlw slope
* strict control over pollution unimf
Proposition 65
SARA Title III
ortant
Pro: flexible, low cost
Con: impacts may be hard to
predict
Liability
* links between pollution and
harm are clear
* harms not life threatening
Natural resource
damage assessment
Nuisance, trespass
Pro: strong incentive where
applied
Con: assessment and litiga-
tion costs can be high; bur-
den of proof large; few appli-
Volun-
tary Prog
* damage functions unknown
ahsseking control beyond what is
required by law
Project XL
33/50
Greenlights
Pro: low cost; many possible ;
Con: uncertain and perhaps
low effectiveness
itions
>plications
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Endnotes for Section 3
1. A text of "Reinventing Environmental Regulation" can be found in DEN, March 17, 1995,
p. El.
2. The guidelines draw a distinction between "informational measures" and "market-
oriented approaches." This report, however, considers information approaches as a type
of economic incentive. Information approaches are described in Section 9.
3. For further information on economic incentive provisions in the 1990 Clean Air Act
Amendments, see Appendix B of the previous version of this report: EPA (July 1992), The
United States Experience with Economic Incentives to Control Pollution.
4. For a discussion of the evolution of benefit-cost analysis requirements, see Rusin et al
(June 1996).
5. Atkinson and Tietenberg (1991).
6. See Atkinson & Tietenberg (1991), Dudek & Palmisano (1988), Hahn (1989), Hahn &
Hester (1989), Liroff (1986), and Tietenberg (1985 and 1990).
7. Oates etal. (1989).
3-22
August
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4. FEES, CHARGES, AND TAXES
4.1. INTRODUCTION
A pollution charge is a fee based on the quantity and/or content of pollutants dis-
charged into the environment. A user charge is a fee paid in exchange for use of natural
resources or collection or disposal of pollutants. Product charges are imposed on products
that are believed to have environmentally harmful effects. Although the terms
"fee,""charge," and "tax" are used interchangeably in this Section, they do not all convey
the same connotation. Under federal law, a tax is a purely revenue-raising instrument,
whereas charges or fees are intended to offset costs to government. Although the different
types of fees, charges, and taxes discussed in this Section could be classified in various
ways, they may be summarized as follows:
Table 4-1: OVERVIEW OF FEES, CHARGES, AND TAXES
IN ENVIRONMENTAL POLICY
Instrument
DescriDtion
ExamDles
Pollution fee
Charge based on the quan-
tity and/or content of pol-
lutants released into the
environment
1. Air emissions permit fees in
California, Maine, other states
2. Effluent permit fees in Louisi-
ana, California, Wisconsin, other
states
3. Solid waste disposal fees
User fee
Fee for the use of resources
1. Water use fees
2. Road congestion fees
3. Grazing fees
Product charge
Charge on a product be-
lieved to have environmen-
tally harmful effects
1. Gas guzzler tax
2. CFC tax
3. State taxes on fertilizers
4. State advance disposal fees on
tires, motor oil, packaging, other
goods
Other fees on
environmentally
damaging activitic
Various mechanisms
s
1. Wetland development fees
2. Stormwater runoff fees
As discussed in Section 3, most environmental taxes are intended primarily to raise
revenue, often to fund environmental protection activities. The economic rationale behind
such taxes is that those who cause pollution should bear the costs. Such costs include both
damage to the environment and the administrative costs incurred by authorities in
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
regulating polluters. To be economically efficient, environmental taxes should reflect
these costs.
Although some charges, especially product charges, have been imposed on the federal
level, the majority of them have been introduced on the state or local level. In the case of
air and water pollution, the federal government has provided policy guidance on charges,
but the states have developed and implemented charges as they have seen fit.
Given the multiplicity of environmental taxes imposed at various levels of government
and the frequency with which they are adopted or modified, this Section does not attempt
to provide a comprehensive description of all environmental taxes in place in the United
States. Its purpose is rather to describe some of the more important taxes to stimulate
discussion.
4.2. WATER FEES
Water fees take various forms, including user fees (for groundwater, surface water, or
for drinking water supplied by waterworks) and fees for direct or indirect water dis-
charges. Indirect discharges are sent to treatment works. The rationale for water user fees
is that water is not a free good but rather a scarce resource that should be priced to avoid
inefficient use that can cause environmental problems.1 The rationale for discharge fees
follows from the polluter pays principle as described above. Most water fees are intended
primarily to raise revenue, but user fees based on consumption and discharge fees based
on volume or toxicity may have some incentive effect.
4.2.1. Indirect Discharge and User Fees
Fees are imposed on households and businesses for discharges into Publicly Owned
Treatment Works (POTWs). Some larger businesses' fees are based not only on water use
but also on discharge toxicity. To the extent that discharge fees are included in water
consumption bills, they can be difficult to distinguish from water user fees.
As shown in Figure 4-1, periodic surveys of selected water utilities indicate that water
fees are almost always based at least in part on water consumption. The declining block
rate structure is becoming less common, the main reason for the shift being the desire to
promote water conservation.
Figure 4-2 indicates that water and wastewater fees have risen significantly during
every 2 year period since 1986. These price rises have exceeded inflation.
In addition to water and wastewater charges, stormwater charges have been imposed
in a number of areas. Ernst and Young found that the number of utilities with such
charges increased significantly from 1992 to 1994. Their use varies significantly across
regions: They are used by over half of all utilities surveyed in the West but by none
surveyed in the Northeast. In some areas, reduced stormwater fees are assessed in return
4-2
August
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Fees, Charges, and Taxes
Figure 4-1: 1994 WATER CHARGE
STRUCTURES
Figure 4-2: MONTHLY WATER AND
WASTEWATER CHARGES
(Residential Users at 7,000 gallons)
$ per month
Source: Ernst and Ybung 1994 National
Water A Wastewater Rate 8urvey, p. 7
1960 19BB 1990 1992
~ Water VZA Wastewater
Sou roe: Ernst ft %ung 1994 National
Water ft Wastewater Rate Survey, p. S
1994
for measures to promote stormwater management.2
In some states, water user fees generate revenues for drinking water programs. New
Jersey, for example, raises $2.8 million annually (out of a total drinking water program
budget of $5 million) from a water use tax of $0.01 per 1,000 gallons.3
Sims (1977) found that pollutant-based charges provided an incentive for large
industrial facilities to reduce discharges. Some studies have found that household water
demand elasticity is low in winter but significant in summer, and others have found
industrial and agricultural water demand to be sensitive to price.4 Two European studies
cited in Section 9 found residential water demand inelastic, between -0.05 and -0.30.
4.2.2. Direct Discharge Fees
The Federal Water Pollution Control Act of 1972 provides for the regulation of point
source discharges through a system of national effluent standards promulgated by EPA.
All point sources must obtain National Pollution Discharge Elimination System (NPDES)
permits in order to discharge effluent. EPA has authorized 40 states to issue NPDES
permits. In the other ten states, EPA regional offices issue the permits. As of July 1995,
about 59,000 municipal and industrial facilities in the United States had received NPDES
permits.5
As shown in Table 4-2, 39 states assessed NPDES permit fees as of December 1993. In
18 of these states, fees varied according to discharge volume, and in an additional 10, fees
varied according to discharge volume and toxicity.6 Other criteria sometimes used in
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
setting fees include the purpose of the water use, the receiving water, and the type of
discharger. Some states use point or class systems with various criteria to determine
different dischargers' fee levels. Fees for POTWs are sometimes based on the size of the
population presumed to be connected to the local sewage system.
Table 4-2: STATE EFFLUENT FEES AS OF DECEMBER 1993
States with effluent fees that are flat or
vary only according to industry or size
of permittee.
Alabama, Alaska, Delaware, Hawaii,
Kentucky, Maine, Massachusetts, Penn-
sylvania, Rhode Island, Utah, Virginia
States with effluent fees varying accord-
ing to discharge volume
Arizona, Arkansas, Colorado, Connecti-
cut, Florida, Kansas, Minnesota, Mis-
souri, Nevada, New York, North
Carolina, Ohio, Oregon, South Carolina,
South Dakota, Tennessee, Vermont,
Washington
States with effluent fees varying accord-
ing to discharge volume and toxicity
California, Indiana, Louisiana, Mary-
land, Montana, New Jersey, Oklahoma,
Texas, West Virginia, Wisconsin
Source: Duhl, p. 10.
4.2.3. Examples of State Effluent Fees: Louisiana, California, and Wisconsin
Although it is beyond the scope of this report to describe all state water effluent fees,
examples from Louisiana, California, and Wisconsin should illustrate their characteristics.
Louisiana uses water permit fees to fund not only the state permit program but also the
activities of the Office of Water Resources of the Department of Environmental Quality.
(The legislature no longer provides general revenues to the Office.) The annual permit fee
is determined by a worksheet assigning points on the basis of 1) facility complexity, 2)
flow volume and type, 3) pollutants released, 4) heat load, 5) potential public health
threat, and 6) major/minor facility designation. The points are multiplied by a rate factor
of $97.50 per point for municipal facilities and $170.63 per point for industrial facilities to
determine total annual fees. The minimum annual fee is $227.50, and the maximum
annual fee is $90,000. In addition to annual fees, Louisiana imposes application fees for
new, modified, or reissued permits. In most cases, these fees are 20% of the annual fee.
In California, NPDES annual fees are based on the threat to water quality and the
complexity of the permit. There are three categories for each characteristic: I, II, and III for
water quality threat and a, b, and c for permit complexity. Permittees with a I-a rating,
with the greatest threat to water quality and the most complex permits, pay the highest
fees, $10,000 a year. III-c permittees pay the lowest fees, $400 a year. These fees fund
State Water Board programs.
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Fees, Charges, and Taxes
In addition to the NPDES permit fees, California charges Bay Protection and Toxic
Cleanup fees. This fee structure is similar to that of the NPDES permits except that it is
also applied to other sources such as storm drains, boat construction and repair facilities,
marinas, dredging operations, and beach replenishment activities. Another difference is
that its revenues fund the Bay Protection and Toxic Cleanup Program designed to identify
hot spots, develop a water quality database, and help coordinate water policy. Bay
Protection and Toxic Cleanup fees range from $300 for III-c permittees to $11,000 for I-a
permittees. Dredging operations are charged an annual fee of up to $15,000.7
(Bay Protection and Toxic Cleanup fee schedule: www.swrch.ca.gov/pub/FEES/feebptc.zip)
The Wisconsin effluent fee system is believed to have potential incentive effects. Since
the fee rate per pound of pollutant is inversely related to the permit limit for the pollutant,
the most harmful pollutants are taxed at the highest rate. Pollutant loadings are calcu-
lated on the basis of flow and concentration information contained in wastewater
monitoring reports. Polluters are thereby encouraged to reduce both the quantity and the
toxicity of pollutant releases.
The primary purpose of NPDES permit fees is to raise revenue, especially for the
permitting program, which explains why fees are often based on permit complexity. In
a number of states, fees are set to attain revenue targets.
A secondary purpose is to discourage water pollution. Although the incentive effect
of water effluent fees in the United States has not been comprehensively studied, several
factors limit the likelihood of a strong impact. In some cases, fees are based not on actual
discharge characteristics but rather on proxies for discharge data. Moreover, some fee
structures place dischargers into classes for the purposes of discharge volume and/or
toxicity and charge the same fees for all volume and toxicity levels within given classes.
In such cases, polluters have no incentive to limit discharges unless they can move from
one class to another. Finally, the charges are often modest relative to control costs. As of
1993, the largest effluent fees in the United States, paid by two facilities in New Jersey,
amounted to $702,812, and most states had maximum fee levels of less than $100,000. For
large facilities, annual effluent control costs typically exceed $5 million.
4.2.4. St ormwater Runoff Fees
It is common practice for counties to impose fees on real estate developments based on
surface area runoff (paved areas and areas under roof). Fee revenues are used for
stormwater management in stream valleys. These fees differ from the utility stormwater
fees described above in that they apply to runoff into surface water.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
4.3. AIR FEES
As is the case with water pollution, there are no national air emissions fees. However,
the Clean Air Act Amendments of 1990 provided for permit fees and for mandatory
excess VOC fees in ozone non-attainment areas.
4.3.1. Permit Fees
The 1990 Clean Air Act Amendments require states to impose permit fees to recover
the administrative costs of their EPA-approved operating permit programs. The Amend-
ments set the minimum presumptive level for such fees at $25 per ton of emissions of
criteria air pollutants (excluding carbon monoxide) and air toxics and specified that this
amount should be adjusted for inflation. Each state is required to set fees to completely
cover operating permit program costs. If the fees are greater than or equal to $25 per ton
adjusted for inflation (currently about $30 per ton), EPA assumes that they are adequately
high. States with lower fees must present detailed evidence that fee revenues are
sufficient to cover their operating permit program costs. Several state permit programs
have been denied EPA full approval because insufficient information was submitted on
fee adequacy. These states have received interim approval pending submission of
evidence of fee adequacy.
Although states can meet the revenue-raising requirement through flat or other types
of fees, most have chosen incremental fees of approximately $20-30 per ton. Some states
base fees on the pollutant's potential harm to the environment. New Mexico, for example,
charges fees of $150 per ton for air toxics but only $10 per ton for criteria pollutants8. Fee
structures in Maine and Southern California are discussed here for illustrative purposes.
4.3.1.1. Air Emission Permit Fees in Maine
In November 1993, Maine raised its air emission permit fees from $2 to $5 per ton for
emissions up to 1,000 tons, from $4 to $10 per ton for emissions between 1,001 and 4,000
tons, and from $8 to $15 per ton for emissions in excess of 4,000 tons. The minimum
charge rose from $100 to $250, and the maximum charge rose from $100,000 to $150,000.
The fees cover sulfur oxides, NOx, VOCs, and particulate matter. Having since been
adjusted for inflation, their current levels are shown in Table 4-3. The fees apply to all
permit holders, of which there are currently 517.
Maine has also imposed an air quality surcharge based on toxicity of emissions. The
magnitude of the surcharge is determined on the basis of several criteria. Approximately
85 facilities are subject to the tax, which is capped at $50,000. Before the adoption of the
surcharge, the Director of Maine's Air Quality Bureau said it would give polluters an
incentive to identify methods of reducing their emissions of the most toxic substances. An
Air Quality Bureau official says that surcharge revenues have fallen and that the sur-
charge has had a slight incentive effect, but the impact is difficult to isolate from other
potential factors such as the Toxic Release Inventory. Annual revenues are approximately
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Fees, Charges, and Taxes
$1.8 million from permit fees and $0.6 million from toxicity surcharges. Revenues are
used for the air permit program and other air quality activities
Table 4-3: AIR EMISSIONS PERMIT FEES IN MAINE
(in dollars per ton)
Amount emitted
Fee
up to 1,000 tons
5.28
1,000-4,000 tons
10.57
more than 4,000 tons
15.85
Source: Limouze, Maine Air Quality Bureau
9
4.3.1.2. Air Emission Permit Fees in the South Coast Air Quality Management District
The South Coast Air Quality Management District (SCAQMD, located in Southern
California) levies the highest unit air emissions fees in the United States. The fees shown
in Tables 4-4 and 4-5 are adjusted for inflation every May.10
Facilities that temporarily exceed their allowable emissions levels must pay excess
emissions fees. For most pollutants, the excess emissions fees are about the same as the
regular fees. For carbon monoxide, however, they are approximately twice as high. In
addition, SCAQMD imposes fees for visible emissions and various administrative
procedures11.
(www.aqmd.gov/rules/html/r303.html)
Given the presence of command-and-control regulations and other factors that might
influence air pollutant emissions, the incentive effect of the SCAQMD emissions fees
would be difficult to determine. In most cases, these fees are lower than marginal
pollution abatement costs. The main purpose of the fees is to recover the administrative
costs of SCAQMD's activities.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 4-4: EMISSION FEES IN SCAQMD
($ per ton)
Anm iaF,missions
Organic
Gases
SpeafcQpnics12
Nitiq^iQxides
SulfurOxides
ParticulateMatter
4-25 tons
$274.47
$49.16
$156.70
$190.49
$209.95
25-75 tons
$445.50
$77.83
$255.01
$308.27
$340.01
>75 tons
$666.72
$116.75
$384.05
$461.89
$509.00
Source: SCAQMD Rule 301 (www.aqmd.gov/rules/html/r301.html)
Table 4-5: AIR TOXICS AND OZONE-DEPLETING CHEMICALS FEES IN SCAQMD
($ per pound)
Pollutant
FY96-97
FY97-98
Asbestos, cadmium
$2.17
$3.00
Benzene, carbon tetrachloride, ethylene dibromide, ethyl-
ene dichloride, ethylene oxide
$0.90
$1.00
Methylene chloride
$0.05
$0.05
Hexavalent chromium
$2.67
$4.00
Chlorinated dioxins and dibenzofurans
$3.17
$5.00
Nickel
$1.67
$2.00
1,3-Butadiene, inorganic arsenic, beryllium, polynuclear
aromatic hydrocarbons (PAH)
$1.50
$3.00
Lead, vinyl chloride
$0.50
$1.00
1,4-Dioxane
$0.11
$0.21
Formaldehyde, perchloroethylene
$0.21
$0.21
Chlorofluorocarbons
$0.18
$0.18
1,1,1 -trichloroethane
$0,038
$0.40
Source: SCAQMD Rule 301 (www.aqmd.gov/rules/html/r301.html)
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Fees, Charges, and Taxes
4.3.1.3. California "Hot Spots" Fees
The California Air Toxics "Hot Spots" Information and Assessment Act (AB 2588)
requires facilities to report the type and quantity of certain substances they release into the
air. The program is administered by the California Air Resources Board (CARB). The law
also requires CARB to develop and adopt fees to cover administrative costs of the
program incurred by CARB and local air districts. Districts can either set their own fees
or request that CARB set fees for them. Each district is responsible for billing and
collecting the fees and remitting the district's share of state costs to CARB. The informa-
tion component of this law is discussed in Section 9. The fees are discussed here.
(CARB Hot Spots description: arbis.arb.ca.gov/toxics/ab2588/2588summ.txt)
CARB's Hot Spots fee structure, which is used in 12 of California's 34 air pollution
control districts, is no longer based on tonnage of emissions. However, at least two of the
22 districts setting their own fees base them on amounts and toxicity of pollutants and one
bases its fees on amount but not toxicity13. The toxicity-based fee structure of the Bay Area
Air Quality Management District (BAAQMD) is described here.
BAAQMD bases fees on Unit Risk Values (URVs) for carcinogen emissions and
Acceptable Exposure Levels (AELs) for other emissions. Fee amounts depend on quanti-
ties of weighted emissions. For carcinogens, weighted emissions are determined by
multiplying the amount of each substance by 100,000 times its URV (in m3/microgram).
For other toxics, weighted emissions are determined by multiplying the amount of each
substance by the reciprocal of its AEL (in m3/microgram). The sum of the weighted
emissions of all toxics is multiplied by a coefficient to calculate each source's fees. The
coefficient varies from year to year depending on the costs incurred by CARB and
BAAQMD in managing the Hot Spots program.
Facilities with fewer than 50 weighted pounds pay no fees, and facilities with
weighted emissions between 50 and 1,000 pounds pay a fee of $125. For gasoline
dispensing facilities, the fee is simply $5 for each dispensing nozzle. For small businesses,
which are defined as having no more than 50 employees and $5 million in annual receipts,
fees are capped at $5,000. Government facilities are also subject to the fees. Although
there is no maximum for larger businesses, no source has paid more than $60,000 in
annual fees. In 1992, about 1,200 facilities paid $1.16 million in fees.
A total of 81 toxics are subject to the fees. Emissions usually are not measured but
rather estimated on the basis of toxics use data and emissions factors that depend on the
abatement equipment.14
Although fee amounts appear relatively small for larger businesses, BAAQMD officials
believe that the fees have contributed to a decrease in toxic emissions. Facilities have
lowered emissions in various ways, including process changes and toxics use reduction.
When toxicity-based fees were adopted in 1992, for example, hospitals and metal plating
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
facilities emitted relatively large amounts of ethylene oxide and hexavalent chromium.
Since these substances have high URVs, emitting facilities faced high fees. Most of these
facilities installed Best Available Control Technology soon after the structure was adopted.15
However, it is difficult to isolate the effects of the fees from other factors that could
influence toxic emissions, including the information and reductions planning components
of the Hot Spots program and federal TRI requirements. In addition, refineries have
made large investments to comply with reformulated fuel and fugitive emissions standards.16
4.3.2. Ozone Non-Attainment Area Fees
The 1990 Clean Air Act Amendments also provide for excess VOC emissions fees in
areas with dangerously high levels of ozone. To give these areas time to reduce their
ozone levels, the fees will not enter into effect until the next century. Areas with ozone
design values of 0.18 to 0.19 ppm have 15 years to comply with ozone standards; areas
with values of 0.19 to 0.28 ppm have 17 years; and areas with values over 0.28 ppm,
referred to as extreme ozone non-attainment areas, have 20 years. (California's South
Coast Air Quality Management District is currently the only extreme non-attainment
area.) Failure to attain specified levels by the deadlines will subject major stationary
sources to VOC emissions fees of $5,000 (adjusted for inflation) for each ton emitted in
excess of 80% of a baseline quantity.17
4.4. WASTE FEES
This subsection briefly discusses variable rate programs (a relatively new trend in
household waste collection), landfill taxes, and hazardous waste disposal taxes. As
discussed below, such taxes can reduce waste generation, but they also create incentives
to dispose of waste illegally or in other locations where disposal is cheaper.
4.4.1. Variable Pricing Programs
Communities throughout the United States have traditionally levied fixed collection
fees for household waste or included the collection costs in property taxes. Such pricing
practices are inefficient in that the marginal price for the household is zero, whereas the
marginal collection cost is positive.
However, a growing number of communities are now charging for solid waste
collection based on the volume generated by the household. Such variable rate (or "pay-
as-you-throw") programs have been implemented in over 3,400 communities in 37 states,
reaching an estimated 11% of the U.S. population. Four states have mandated the use of
variable rate programs in some or all of their municipalities. Washington's law applies
mostly to private collectors operating in unincorporated areas of the state, but virtually all
municipalities in the state use variable rates. Iowa and Wisconsin require variable rates
only in communities that fail to attain a 25% waste recycling/diversion goal by certain
deadlines. In Minnesota, variable rates are required in all communities.18 EPA is also
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Fees, Charges, and Taxes
encouraging variable rates and has held a series of workshops to explain their advantages
and disadvantages and provide information on how to implement them. The report
inventory on the EPA Economy and Environment World Wide Web site includes several
of the documents cited in this subsection on variable rates.19
(Economy and Environment doc site: www.epa.gov/docs/oppe/eaed/eedhmpg.htm)
Variable rate programs can take several forms. Pre-paid garbage bags or stickers to
affix to bags can be required for collection, or collection fees can be based on the number
and/or size of cans. Some areas have weight-based systems. Others have mixed systems
combining a fixed rate up to a certain amount of garbage and incremental rates for
amounts in excess of the minimum covered by the flat rate. Such mixed systems are
becoming increasingly common, perhaps because they are relatively easy and inexpensive
to implement, provide a stable source of revenue for collection services, have the potential
to reduce illegal dumping, and offer a minimum level of free service to many customers20.
According to one source, collection systems that require periodic billing of customers are
likely to be administratively more expensive than bag or sticker systems21. One disadvan-
tage of bags is that they can tear, especially if handled improperly or penetrated by
animals. Table 4-6 shows variable rate structures in various U.S. communities.
Table 4-6: VARIABLE RATE STRUCTURES IN SELECTED COMMUNITIES
Communitv
Fee structure
Glendale, CA
65-gallon cart: $6.45/month, 2(t/gallon
100-gallon cart: $10.10/month, 2(t/gallon
Pasadena, CA
60-gallon cart: $10.41/month, 4(t/gallon
100-gallon cart: $16.23/month, 4(t/gallon
2 60g carts: $19.01/month, 4(t/gallon
60g & lOOg cart: $22.40/month, 4(t/gallon
2 lOOg carts: $28.62/month, 3C/gallon
San Jose, CA
32-gallon cart: $13.95/month, IOC/gallon
64-gallon cart: $24.95/month, IOC/gallon
96-gallon cart: $37.50/month, IOC/gallon
128-gallon cart: $55.80/month, IOC/gallon
Santa Monica, CA
40-gallon cart: $14.85/month, 9C/gallon
68-gallon cart: $17.76/month, 7C/gallon
95-gallon cart: $21.07/month, 6C/gallon
68g & 95g cart: $37.28/month, 5C/gallon
Oakland, CA
20-gallon can: $10.08/month, 13C/gallon
1st 32-gallon can: $13.74/month, ll(t/gallon
Each extra 32g can: $16.49/month, 13C/g
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Communitv
Fee structure
Portland, OR
20 gallon can: $14.60/month, 18C/gallon
32 gallon can: $17.60/month, 14(t/gallon
35 gallon cart: $19.30/month, 14(t/gallon
60 gallon cart: $24.05/month, IOC/gallon
90 gallon cart: $27.10/month, 8C/gallon
Tacoma, WA
60 gallon can: $17/month, 7C/gallon
90 gallon can: $25.50/month, 7C/gallon
Spokane, WA
20 gallon can: $8.56/month, ll(t/gallon
1st 30 gallon can: $11.07/month, 9C/gallon
Each extra 30g can: $6.01/month, 5C/gallon
Colorado Springs, CO22
1 34g can + 1 30g bag: $9.50/month, 4
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Fees, Charges, and Taxes
systems, communities can set rules regarding collection fees. In St. Paul, Minnesota, for
example, the city operates no collection program but requires that collectors charge
variable rates, and Portland's open system has no city program but sets collection fees
charged by private haulers.
Many communities with variable rates implement public education, curbside recy-
cling, yard waste, white goods, and holiday greenery programs as well. Education has
been found to be an important element in the success of variable rate programs. The
collection frequency, fees, materials collected, and participation requirements for curbside
recycling, yard waste, white goods, and holiday greenery collection programs vary across
communities. These complementary activities can have an important impact on the
success of variable rate programs.
San Jose, California began its variable
rate program in 1993. The city has con-
tracted its
waste collection and curbside recycling
services to two different firms, one serving
the approximately 80,000 single-family
households in the northern half of the city
as well as all multi-family housing and
another serving about 105,000 single-fam-
ily households in the southern half of the
city. A combination cart/sticker system is
used to price household waste collection.
Residents subscribe to specific cart sizes
and pay the fees shown in Table 4-6 for
weekly collection of the waste in these
carts. When they have too much garbage
for their cart sizes, they can put the excess
garbage in 32-gallon plastic bags provided
the bags each bear a sticker sold for $3.50 at local libraries, supermarkets, and convenience
stores. Multi-family dwellings pay flat fees. One potential advantage of the stickers is
that they give households the flexibility to exceed planned waste generation rates on
occasion. San Jose also offers free curbside collection of recyclables since 1987 and yard
waste and collects white goods for a separate fee of $18 for up to three items. Figure 4-3
suggests that the variable rate program has significantly reduced the amount of waste landfilled
and increased the amount recycled. The amount of yard waste set aside for collection and
subsequent composting also increased.
The variable rate systems described thus far base prices on waste volumes. Another,
less common price basis is weight. Communities that have implemented waste-based
pricing include Seattle, Milwaukee, Minneapolis, Durham (NC), Columbia (SC), and
Farmington (MN). Such systems could have a stronger incentive effect by charging for
every additional unit of weight and discourage consumers from compacting trash into
Figure 4-3: HOUSEHOLD WASTE
LANDFILLING AND RECYCLING IN
SAN JOSE
Thousands of tons
Landfilling
250
197.9
158.4
Ytard Waste Collected
66.6
96.8
96.4
Recycling
30.6
76.7
78.4
.....
Landfilling
—
wut* Counted
RaoyolinB
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
containers. Seattle's weight-based scheme lowered the weight of garbage collected by
15%. One disadvantage of weight-based systems is that they tend to be more complicated,
requiring more equipment and increasing the time needed to collect waste. Seattle, for
example, found that collection times were extended by 10% under its weight-based
system. But increased implementation costs could be offset by decreases in the weight of
garbage collected.23
In most areas where variable rate programs have been introduced, amounts of waste
collected have decreased significantly. A 1992 survey of 14 cities with variable rate
programs found that the amount of waste destined for disposal decreased by an average
of 44%.24 A study in Maine found that municipalities with variable rate systems disposed
of less than half as much waste per capita as municipalities without such systems.25
Surveys in Tompkins County, New York and Dover, New Hampshire found that variable
rates led consumers to think of ways to reduce waste generation, including altering their
purchasing habits. A 1996 study of four communities in California and five in the
Midwest found that they achieved reductions in waste disposal of 6% to 50% after
introducing variable rate systems. The higher the unit prices, the greater the reductions.
Moreover, reductions were greater in those communities with relatively small minimum
container sizes. (Some variable rate structures are more variable than others.) If the
minimum container size is too large, consumers often have little incentive to alter their
behavior.26
As shown in Table 4-7, another study found reductions in tons of waste landfilled
ranging from 17% to 74% following the adoption of variable rates in 21 northern cities.
The study found the magnitude of the unit prices to be positively correlated with the
change in the amount of waste recycled and negatively correlated with the change in the
amount of waste landfilled.
The recycling increases shown in Table 4-7 were achieved in areas that did not
simultaneously implement recycling programs. In places where the adoption of variable
rate programs has coincided with new public recycling activities, however, it may be
difficult to determine how much of the decline in waste disposal is due to the variable
rates and how much is due to the new recycling alternatives. The Dover survey found
that curbside recycling programs alone encouraged recycling but that variable rates
provided additional incentive.27 Another study estimates that a variable rate program will
increase the percentage of waste diverted under existing recycling programs by 4-13%.28
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Fees, Charges, and Taxes
Table 4-7: CHANGES IN WASTE DISPOSAL IN RESPONSE TO
VARIABLE RATE PRICING PROGRAMS29
MuniciDalitv
% Reduction in tons of
waste landfilled
% Increase in tons of
waste recvcled
Antigo, WI
50
145
Charlemont, MA
37
N/A
Downers Grove, IL
52
N/A
Grundy Center, IA
32
N/A
Hancock, VT
33
N/A
Hartford, VT
17
29
Harvard, IL
33
113
High Bridge, NJ
18
N/A
Huntingburg, IN
74
N/A
Illion, NY
51
141
Ithaca, NY
31
63
Lisle, IL
53
N/A
Mt. Pleasant, IA
49
N/A
Mt. Pleasant, MI
44
141
Perkasie, PA
54
157
Plains, PA
49
88
Quincy, IL
41
45
River Forest, IL
19
N/A
St. Charles, IL
41
456
Weathersfield, VT
36
150
Woodstock, IL
31
N/A
Source: Miranda, reprinted in Arner and Davis, p. 4.
Despite the evidence cited above, variable rate programs are not without problems.
Data on decreases in collection can be misleading if the programs result in significant
illegal disposal or diversion to cheaper disposal services. Illegal dumping includes direct
discharge to the environment as well as placing waste in someone else's container or
donating unrepairable items to charitable organizations. Direct discharge to the environ-
ment is likely to be of more concern than other types of illegal disposal. The Maine study
found that an increase in backyard burning and a slight increase in roadside dumping and
illegal disposal in commercial containers coincided with variable rate systems. Of the
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
cities surveyed in the 14-city study mentioned above, "six cities reported no problem with
dumping, four reported minor problems, and four reported notable problems." Among
the measures cited to limit illegal disposal are creation of viable recycling alternatives,
public education, the locking of commercial dumpsters, high dumping fines, and mini-
mum flat collection fees.30
Other problems that need to be addressed in designing and managing variable rate
programs are that they can be difficult to implement in multi-family housing such as
apartments and that they can have a regressive effect on the poor and large families. In
addition, the programs can lead to significant decreases in revenue for municipal waste
collectors. The magnitude of these decreases can be difficult to predict.31
Variable rate programs may not be appropriate for all communities. Analysts assert
that variable rate pricing is unlikely to be successful in areas with affordable and environ-
mentally acceptable landfill disposal options, lack of nearby recycling possibilities, nearby
open spaces for easy illegal dumping, and lack of consumer willingness to pay variable
rates32. In some areas, however, they appear to be beneficial. According to a World
Resources Institute (WRI) study, "Where landfill costs are high, disposal charges would
generate net economic savings of $0.17 for every dollar of revenue collected, even after the
gross costs of curbside recycling programs were paid."33
4.4.2. Landfill Taxes
According to the National Recycling Coalition, surcharges on waste delivered to
landfills have been imposed in over 20 states.34 If operators are capable of passing on such
taxes to their customers in their tipping fees, landfill taxes could have effects similar to
variable rate programs.
New Jersey levies three different landfill taxes: a Solid Waste Services Tax of $1.05 per
ton, a Landfill Closure and Contingency Tax of $0.50 per ton, and a Solid Waste Recycling
Tax of $1.50 per ton. For waste in liquid form, the rates are 0.002 cents per gallon for the
Solid Waste Services Tax and the Landfill Closure and Contingency Tax and 0.00225 cents
per gallon for the Solid Waste Recycling Tax.35
In Pennsylvania, counties are required to create trust funds to finance the costs
associated with closing landfills. The amount paid into the fund is a tonnage fee depend-
ing on the estimated cost of closing the landfill and the weight of the garbage to be
disposed of at the landfill before it is closed.
Texas levies a fee of $1.50 per ton on all municipal solid waste disposal. Fee revenues
are used to fund state solid waste control activities and to provide grants to local govern-
ments and other organizations for resource recovery, waste minimization, and waste
facility efficiency enhancement programs.36
It is unclear whether these fees have produced a significant incentive effect. However,
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Fees, Charges, and Taxes
the District of Columbia's experiences with its nearby Lorton, Virginia landfill illustrate
one of the drawbacks of increasing waste disposal fees. Of the $64.39 per ton tipping fee
at Lorton, $28.39 per ton was reserved for the District's residential recycling program.
Private trash haulers have reportedly trucked waste to landfills elsewhere in Virginia and
southern Pennsylvania, where tipping fees are lower. The resulting loss in tipping fee
revenue led the District to suspend its recycling program in 1995. It subsequently re-
established the program but with reduced service. Because of the instability of tipping fee
revenues, the District now relies on general revenues to fund the recycling program37. As
is the case with variable rate programs, other measures that increase incremental waste
disposal prices create incentives to use alternative disposal options.
4.4.3. Hazardous Waste Taxes
A number of states, 31 as of 1990, impose taxes on the generation or management of
hazardous wastes. Some of these have higher tax rates for land filling than for incinera-
tion, and several states impose no tax on incineration. In some states, taxes vary according
to the type of waste and/or whether the waste was generated outside the state. In
addition, on-site disposal is exempt in some states. In 1990, Vermont and California each
had taxes of over $100 per ton for land disposal, and six other states had taxes of over $50
per ton. The mean tax level for all states, including those with no tax, was $21 per ton. To
put these taxes into perspective, a middle-of-the-range estimate of hazardous waste
disposal costs in the late 1980s was $132 per ton.
As shown in table 4-8, for example, hazardous waste disposal fees range up to $220 per
ton in California.38 Table 4-9 shows the generation fees in effect in the state, which are
fixed within a given generation range.
Table 4-8: HAZARDOUS WASTE LAND DISPOSAL FEES IN CALIFORNIA, FY 1996
Waste Category
Rate ($/ton)
Non-RCRA cleanup wastes
7.50
Other non-RCRA wastes
17.94
Ores and minerals
14.30
Extremely hazardous waste
220.00
Restricted hazardous waste
220.00
Hazardous waste (RCRA)
44.44
Source: California Department of Toxic Substances
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 4-9: HAZARDOUS WASTE GENERATION FEES IN CALIFORNIA, CY 1996
Generator Size (tons/year)
Fee ($)
$/ton(mid-range)
less than 5
0
0
5 to 25
169
11.3
25 to 50
1,348
35.9
50 to 250
3,371
22.5
250 to 500
16,855
44.9
500 to 1,000
33,710
44.9
1,000 to 2,000
50,565
33.7
more than 2,000
67,240
<33.7
Source: California Department of Toxic Substances
According to the California Department of Toxic Substances Control, the fees above
are intended to raise revenue and to encourage waste minimization. Tonnage has
declined in the last ten years, but it is difficult to determine to what extent this decline is
due to the fees, as many other factors could influence generation and disposal practices.
Hazardous waste is also subject to numerous other administrative fees in California.
Efforts are currently being made to simplify the existing fee structure, which is widely
viewed as too complicated.39
The findings of several studies suggest that hazardous waste taxes have a impact on
disposal. In the 1980s, two engineering studies, one by CBO and one by EPA, concluded
that such taxes significantly reduced land disposal. By 1987, ten states had taxes exceed-
ing the level at which EPA predicts a 60% reduction in land disposal. Another study
examined empirical evidence on the effects of a two-fold rise in hazardous waste taxes in
New York in 1985 and found that the quantity of hazardous waste disposed of in the state
decreased significantly. Because taxes on incineration remained constant in this case, the
amount of waste incinerated rose but not as much as the amount of waste landfilled fell.
Sigman (1996) studied the impact of landfilling and incineration taxes on the genera-
tion of four types of chlorinated solvent wastes from metal cleaning. Using data from the
1987-1990 Toxic Release Inventories, the study includes a cross-section analysis of
generation across states, using a number of independent variables, including disposal
taxes in the state of generation and in neighboring states. It also studied the impact of
disposal taxes and other factors on the choice of disposal method. The study found that
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Fees, Charges, and Taxes
elasticities of waste generation with respect to taxes on incineration were in the range of
-7 to -22 and that the taxes encouraged generators to choose incineration or other treat-
ment over landfilling as their waste management method. However, the impact of the
taxes was estimated to be minor because they were small relative to total waste manage-
ment costs.
Although M[s]tates' experience suggests that taxes may provide an alternative to the
standard-based policies now used for most hazardous waste regulation," Sigman found,
the design and implementation of such taxes pose several potential problems, including
the determination of tax levels. Taxes should reflect the social cost of hazardous waste
generation, but this cost depends on the type of waste, method of disposal, geographic
location, and various other factors that are difficult to assess and incorporate into tax
structures. Moreover, if taxes are too high, they could encourage illegal dumping, of
which even a small amount could cause enough environmental damage to offset the
increased efficiency achieved by taxes. "In the presence of illegal dumping," the study
states, "a deposit/refund program may be substantially less costly than a waste-end tax."
Another problem is that current federal regulations impose high management costs
that may already provide sufficient incentives to reduce hazardous waste. If existing
(command-and-control) incentives are sufficient, taxes could raise waste disposal costs to
a level that is higher than socially desirable.
4.5. PRODUCT CHARGES
Product charges are imposed either on a product or some characteristic of that product.
Products that are believed to have environmental disadvantages are taxed to reflect the
added social costs they impose. Although some product charges may have a significant
effect on behavior, most of them are intended primarily to raise revenue. Some product
charges take the form of advance disposal fees (ADFs), or taxes on a product to fund its
proper disposal after its use.
4.5.1. Federal Product Charges
Unlike water, air, and waste fees, a number of product charges have been imposed on
the national level. Subject to these taxes are fuels, transportation, transport equipment,
and chemicals. Most of these taxes are intended to raise revenue; they have minimal
incentive effect.40 The following paragraphs discuss the Superfund taxes as well as taxes
on fuel-inefficient automobiles and chlorofluorocarbons.
4.5.1.1. Superfund Taxes
Used to fund the cleanup of inactive hazardous waste disposal sites, the federal
Superfund was until the end of 1995 financed by taxes on crude oil (9.7 cents per barrel),
chemicals ($0.22-$4.87 per ton), and gross business profits (0.12% of amounts over $2
million).41 The oil and chemical taxes could be regarded as product charges, but their
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
purpose is to raise revenue rather than prevent pollution.
4.5.1.2. Taxes on Fuel-Inefficient Automobiles
Introduced in 1978, the gas guzzler tax applies to all automobiles with a fuel efficiency
of less than 22.5 miles per gallon. The magnitude of the tax ranges from $1,000 to $7,700
per automobile, depending on fuel efficiency. Revenues, which amounted to $144.2
million in 1992, contribute to the Highway Trust Fund.42 According to EPA, most gas
guzzler tax payments have been for foreign luxury cars.43
Two measures that could have effects similar to gas guzzler taxes are fines for failure
to meet corporate average fuel efficiency (CAFE) standards and luxury car taxes. CAFE
fines, which could be regarded as non-compliance fees, are based on the extent to which
an automaker violates CAFE standards. Luxury taxes are set at 10% of the sales price of
a car in excess of a base level (originally $30,000 and currently $34,000). Since many
luxury cars are relatively fuel-inefficient, luxury taxes could encourage the use of fuel-
efficient vehicles.
4.5.1.3. Ozone-depleting Chemicals
In accordance with the terms of the 1987 Montreal Protocol on Substances that Deplete
the Ozone Layer and subsequent amendments, production of ozone-depleting chemicals
such as chlorofluorocarbons (CFCs) for most uses in the United States was phased out by
January 1, 1996.44 To facilitate the phaseout, the United States imposed a tax on selected
CFCs on January 1, 1990 and expanded the tax to other CFCs the following year. The
magnitude of the tax was determined by multiplying a base rate per pound by an ozone
depletion factor that varied according to the type of chemical. Initially set at $1.37 per
pound, the base tax amount increased to $3.35 in 1993, $4.35 per pound in 1994, and $5.35
in 1995. The ozone depletion factors, which are intended to indicate each chemical's
damage to the ozone layer, were set by the Montreal Protocol. For example, methyl
chloroform had a factor of 0.1, whereas Halon-1301 had a factor of 10.0. The tax was
imposed on the production and importation of these chemicals as well as the importation
of products which contained them or used them in their production processes.45
Unlike most product charges, this tax is widely credited with a significant incentive
impact. CFC consumption (expressed in CFC-11 equivalents) fell from 318,000 metric tons
in 1989 to 200,000 metric tons in 1990, the year the tax was introduced46. A Congressional
Research Service (CRS) study concluded, "the CFC tax has clearly accelerated the rate at
which CFC uses are being substituted for and the rate at which CFCs are being recovered
for reuse." CRS adds that the tax was also intended to raise revenue for the federal
government and to capture CFC producers' windfall revenues resulting from a tightening
supply situation.47
According to the World Resources Institute (WRI), the tax raised $2.9 billion in its first
five years. WRI adds that the phaseout cost less than EPA's original projection. In 1988,
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Fees, Charges, and Taxes
EPA predicted that the average cost of halving CFC use would be $3.50 per kg. In 1992,
the predicted cost was only $2.45 per kilogram.48
Although the tax is believed to have contributed significantly to the reduction in CFC
use, other factors also had an impact, including a CFC trading system (described in
Section VI), well-publicized CFC phaseout intentions, and EPA's work with the private
sector on CFC recycling and substitutes. As a result of the multiplicity of policy measures,
it is difficult to isolate the effects of the CFC tax.
4.5.2. State Product Charges
States have imposed charges on a number of products, including beverage containers,
fertilizers, furniture, motor oil, pesticides, refrigerators, solvents, and tires. Many of these
have taken the form of advance disposal fees (ADFs). This subsection describes charges
that have been imposed on different products.
4.5.2.1. Tire Charges
Fees have been imposed on automobile tires in 34 states. The fees generally range
from $0.25 to $2.00, but Texas has a fee of $3.50 on truck tires. Some of the fees are
assessed as a percentage of sales price.49 Fee revenue is typically used to finance the
disposal of used tires, which may include the cleanup of tire disposal sites. Given the low
magnitude of the charge levels relative to the price of tires and the lack of substitutes for
tires, the incentive effect of state tire charges is likely to be minimal. As shown in Table
4-7, the Federal Government also imposes product charges on tires ranging from $0.15 to
$0.50 per pound, but revenues from these charges are allocated to the Highway Trust
Fund.50
4.5.2.2. Fertilizer Charges
Product charges have been imposed on fertilizers in 46 states. Nebraska's fee of $4 per
ton is one of the highest; most are below $1 per ton. Assuming fertilizer prices of $ 150-
$200 per ton, the charges are too low to significantly influence fertilizer use. The most
common use of charge revenues is inspection of fertilizers.51
4.5.2.3. Rhode Island Hard-to-Dispose Material Tax
Rhode Island imposes products charges on "hard-to-dispose material": lubricating oil,
antifreeze, organic solvents, and tires. The amounts are 5ct per quart of lubricating oil, 10C
per gallon of antifreeze, 1/4 of one cent per gallon of organic solvents, and 50
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 4-10: PRODUCT CHARGES ON TIRES
Taxinrnirthnritv
Magnitude of tax
Uses of revenues
Federal
Government
Tires 40-70 lbs: $0.15/lb x weight exceed-
ing 40 lbs
Tires 70-90 lbs: $4.50 + $0.30 x weight
exceeding 70 lbs
>90 lbs: $10.50 + $0.50 x weight exceed-
ing 90 lbs
Highway Trust Fund
State Govern
(34)
n$flrii§ to $2.00
Tire recycling, tire dis-
posal site cleanup, other
similar activities
Source: Fullerton, p. A7; Scrap Tire News Legislative Report, pp. 18-19.
4.5.2.4. Florida ADF
On October 1, 1993, an ADF of $0.01 went into effect on a variety of containers in
Florida. Exempted from the tax were containers made of plastic, plastic-coated paper, and
glass with average recycling rates of at least 50%, glass containers with a 35% recycled
content and plastic containers with a 25% recycled content. Paper and plastic packaging
were also subject to the ADF, with exemption possibilities similar to those for glass and
plastic containers. Since the Florida Department of Environmental Protection determined
that aluminum and steel cans had already fulfilled the 50% requirement, they were
exempt from the tax.53 To further encourage recycling, legislation called for the tax to be
doubled in January 1995.
Despite the low fee level, manufacturers reportedly went to considerable trouble to
obtain exemptions. Their efforts appear to have been due more to the public relations
value of exemption than to the ADF itself.54
One interesting aspect of this ADF is the wide range of options that it gave manufac-
turers to obtain exemptions. These options included working with other firms in the same
sector to raise recycling rates, increasing the recycled content of packaging, averaging
recycled content over various containers, and recycling into other products equivalent
amounts of previously discarded waste. In theory, the variety of options should have
allowed each firm to select a relatively cost-effective way to promote recycling. Most
firms sought exemption based on use of recycled content. However, at least two compa-
nies, Piper Plastics and Anheuser-Busch, have built or planned to build recycling facilities.
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Both companies cited the ADF as the decisive factor in their decisions to build in Florida.55
One disadvantage of including various exemption possibilities into the ADF was the
potential administrative burden of assessing requests for exemptions. At least one
industry group criticized the ADF as deceptive, burdensome, and administratively costly.
The ADF expired in October 1995.
(criticism is on http://www.gmabrands.com/news/may95/5_12_95.htm)56
4.5.2.5. North Carolina ADF
North Carolina imposes an ADF on "white goods," such as refrigerators and freezers.
The ADF is $10 for products containing CFCs and $5 for those without CFCs. It is to be
discontinued in June 1998.
Although the ADF is unlikely to have a significant incentive effect, it generates
revenues to manage the disposal of white goods. With the introduction of the ADF,
county landfills are required to accept old white goods for disposal free of charge.
Counties receive 75% of the ADF revenue on a per capita basis to fund the removal of
CFCs and programs to recycle white goods and metal products. Additional ADF
revenues are available for those counties whose disposal costs exceed their per capita ADF
allocations.57
(Information taken from http://wastenot.ehnr.state.nc.us/SWHOME/avail.htm)
4.5.2.6. Texas Clean Fuel Incentive Surcharge
In 1989, Texas introduced a 20C per MMBtu surcharge on boiler oil. The surcharge
applies only to industrial and utility boilers capable of using natural gas, in use between
April 15 and October 15 of each year, and located in ozone non-attainment areas with
populations of 350,000 or more. As part of a larger State effort to encourage the use of
natural gas, the surcharge specifically addresses summer ozone problems resulting from
NOx emissions. Used oil and fuels derived from hazardous waste are exempt. Surcharge
receipts are deposited in the State General Revenue Fund.58 According to one TNRCC
official, the surcharge has had little if any incentive effect because few facilities used fuel
oil before the introduction of the surcharge.59
4.6. ROAD USER FEES
Found throughout the United States, toll roads are generally used to finance road
construction and are beyond the scope of this report. Of particular interest, however, are
congestion pricing tolls intended to reflect some of the social costs of traffic congestion.
One of these costs is increased emissions per mile traveled. One study estimated that in
southern California, if the current level of vehicle miles traveled flowed smoothly, mobile
source emissions would decrease by approximately 13%.60
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On December 27, 1995, a private congestion-based 4-lane toll road opened in the
median of the existing eight-lane Riverside Freeway (SR-91). The road was built and the
toll system is operated by the California Private Transportation Company (CPTC), which
is free to determine toll levels but is subject to a cap on the rate of return on its investment.
Five different toll levels range from $0.25 to $2.50 per 10-mile trip, depending on the time
of day. Toll prices are announced in advance so that motorists can plan their trips
accordingly. Windshield-mounted transponders allow for motorists to pay for toll lane
use without stopping at booths. High-occupancy vehicles with 3 occupants, public transit,
zero-emission vehicles, and vehicles with a disabled person license plate are exempt from
the tolls. CPTC can raise the allowable rate of return on its investment by raising HOV
rates.
By March 1996, over 30,000 transponders were in use, a level the project had not
expected to reach until late June.61 As of May 1996, 45,000 transponders had been issued.62
In interviews with the Los Angeles Times, express lane users have reported time savings of
more than 30 minutes.63 CPTC adds that the toll lanes have not only reduced travel times
for their users but also diminished congestion on the adjacent freeway.64
As part of its Congestion Pricing Pilot Program, the Federal Highway Administration
is studying the experiences of SR91 and funding nine other projects. Six of these are
studies. The other three (in the San Diego area, on the San Francisco-Oakland Bay Bridge,
and in Lee County, Florida) are implementation projects. The San Diego project is
scheduled to be implemented in the Fall of 1996, whereas the San Francisco-Oakland
project still requires legislative approval. The Lee Country project will involve peak and
off-peak tolls on three bridges.65
France, Norway, and Singapore have adopted congestion pricing schemes. These are
described in Section 11.
(See http://www.hhh.umn.edu/Centers/SLP/Conpric/short.html. Changed: need to
update this link)
4.7. WETLAND COMPENSATION FEES66
Wetland compensation fee systems could be described as programs in which a
regulatory agency collects fees in lieu of requiring a developer to compensate for wetland
losses through on-site mitigation or acquiring credits generated by a mitigation bank. The
fees are used in mitigation projects by an agency or non-profit organization. Thus
compensation fees differ from mitigation banking (which is discussed in Section 6) in that
they require a fixed payment as opposed to the purchase or generation of a mitigation
credit. Like banking systems, wetland compensation fees offer the flexibility to mitigate
wetland loss in a more cost-effective manner: Instead of doing on-site mitigation on its
own, the developer pays a fee to another organization to perform mitigation activities in
more suitable locations.
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Fees, Charges, and Taxes
Fee-based mitigation mechanisms have been used in Arkansas, Florida, Illinois,
Louisiana, Maryland, Mississippi, Texas, and Virginia. The magnitude of the fees is
usually set to cover costs such as mitigation, land acquisition, project planning, and site
management.
Initiated in 1986, Florida's Mitigation Park Program is the oldest fee-based wetland
mitigation system in the United States. Fees paid by wetlands developers in lieu of on-site
mitigation are deposited in the Florida Game and Fresh Water Fish Commission's Fish
and Wildlife Habitat Trust Fund to finance the purchase and subsequent management of
large, biologically defensible Mitigation Parks. These parks, which range in size from 400
to 1,500 acres, are publicly owned but may be managed by either public or private non-
profit organizations.
To participate in the program, developers need approval from the regulatory agency
with which they are working. Fees depend on the amount of wetlands developed, the
type of habitat impacted, and the species present at the site of the development. The
developer pays one fee to finance land acquisition, a second fee (15% of the first) to fund
site management, and a third (7% of the sum of the first two) as state tax. Interest accrued
on the second fee revenues is used to fund site management. As of 1995, the Mitigation
Park Program had received over $3.8 million and purchased over 5,600 acres.
In Maryland, the mitigation fees paid by developers into the Nontidal Wetlands
Compensation Fund depend on the number of acres and type of wetlands impacted and
the costs of wetland restoration and construction. The mitigation ratio (the number of
acres that must be enhanced, restored, or created for every acre impacted) is either 1:1, 2:1,
or 3:1, depending on the type of wetland impacted. The 3:1 ratio applies to wetlands of
special concern to the state. Land acquisition costs are assessed based on prevailing
market prices for agriculturally zoned or low density land with little potential for
development. Restoration and construction costs are assessed at $10,000 per acre in low-
cost counties and $50,000 per acre in high-cost counties. Counties with a relatively large
amount of farmed hydric soils, which indicates the former presence of wetlands, are
placed in the low-cost category. Losses of less than 5,000 square feet do not require
mitigation.67
In Louisiana, companies are required to offset their damage to coastal wetlands by
performing a mitigation project on their own property or by contributing mitigation fees
to the Louisiana Wetlands Conservation and Restoration Fund. Mitigation fees range
from $1,500 to $12,000 per acre depending on the quality of the developed wetland.68
Although the costs, benefits, and incentive effects of wetlands compensation fees have
not been comprehensively studied and would be difficult to determine given the various
uses and sources of value of wetlands, some evidence suggests that such fees have been
beneficial. Clustering individual mitigation activities into selected areas increases the
viability of the wetlands. Moreover, the fact that developers have participated in fee-
based schemes suggests that paying fees is more economical for them than carrying out
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
on-site mitigation on their own.69
(CroQkshankieportvvvvwaplQrg/cat/SECl 2htm#10)
4.8. GRAZING FEES
Federal and state governments charge
fees for animal grazing on public lands. Federal
fees date back to 1906 and are currently
charged for grazing on about 167 million
acres of Bureau of Land Management land
and 94 million acres of Forest Service
land. Grazing on this land accounts for
approximately 2% of total beef cattle feed
in the 48 contiguous states and supports
about 10% of livestock producers in the 16
Western states in which fees are charged
based on a formula set by the 1978 Public
Rangelands Improvement Act (PRIA) ,70
(CRS primer on grazing: www.cnie.org/nle/ag-5.html)
The PRIA formula is based on private grazing rates, beef cattle prices, and the cost of
livestock production. The fee is expressed in animal unit months (AUM), where one
AUM is the amount of forage required to sustain one cow and her calf, one horse, or five
sheep or goats for a month. As shown in Figure 4-4, the 1996 fee is $1.35 per AUM.
Under the terms of a 1986 Executive Order, $1.35 is the minimum fee.71
(http://www.fs.fed.us/forum/graznews.htm)
The theory behind such fees is that animal owners should pay fair market value for
use of the land and bear the costs of the damage inflicted by their animals. However,
current fee levels are widely believed to be lower than market value. To the extent that
the fees are too low, they amount to a form of subsidization and are therefore included in
the discussion of environmentally harmful subsidies in Section 7.
(1995 Green Scissors ongrazingfees:www.essential.org/orgs/FOE/scissors95/greenpart22.html)
4.9. MINNESOTA CONTAMINATION TAX
The Minnesota Contaminated Property Tax, which entered into effect in fiscal year
1995, is levied on the "contamination value" of property, i.e. the difference in its value
before and after contamination. Property owners responsible for contamination that do
not have approved cleanup plans pay contamination tax at the full property tax rate. The
contamination tax is halved for owners who have filed an approved cleanup plan.
Owners who purchase contaminated land without notice of the contamination pay 25% of
Figure 4-4: GRAZING FEES UNDER THE
PUBLIC RANGELANDS IMPROVE-
MENT ACT
2.6
Dollars per animal unit month
1.86
1.64
1.92
1.86
1966 1967 1968 1969 1990 1991 1992 1993 1994 1996 1996
8ouroM: Cody; U8DA Grazing F«m Niwi
RtlMM
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Fees, Charges, and Taxes
the property tax rate until a cleanup plan is filed, after which the rate decreases to 12.5%.
According to a local tax official, the tax gives property owners "a strong impetus to clean
up."72
Endnotes for Section 4
1. EPA (March 1991), p. 4-6.
2. For more information on such stormwater credits, see Reese (1996).
3. Morandi et al. (1995), p. 10.
4. EPA (March 1991), p. 4-6.
5. GAO (January 1996), pp. 1-4.
6. Unless otherwise stated, the rest of the information in this sub-section on state effluent
fees is provided by Duhl (1993). This document is obtainable free of charge from the
American Petroleum Institute. www.api.org/cat/SECl2.htm#l2
7. The fee schedule can be found on the California Water Resources Control Board internet
site: www.swrch.ca.gov/pub/FEES/feebptc.zip
8. Information in these last two paragraphs provided by Candace Carraway, Air Quality
Management Division, Environmental Protection Agency, personal communication, June-
July 1996.
9. All information on Maine's air pollution fees provided by DEN, June 22, 1993, p. B-6 and
by Richard Limouze, Maine Air Quality Bureau, personal communication, 1996.
10. Information in tables 4 and 5 and on carbon monoxide fees taken from SCAQMD Rule
301 as revised on May 10, 1996. www.aqmd.gov/rules/html/r301.html
11. SCAQMD, Rule 303. www.aqmd.gov/rules/html/r303.html
12. These are defined in paragraph (b)(20) of rule 301 to include the following:
trifluoromethane (HFC-23);
chlorodifluoromethane (HCFC-22);
dichlorotrifluoroethane (HCFC-123);
tetrafluoroethane (HFC-134a);
dichlorofluoroethane (HCFC-141b);
chlorodifluoroethane (HCFC-142b);
1,1,1-trifluoroethane (HFC-143a);
1,1-difluoroethane (HFC-15 2a);
cyclic, branched, or linear, completely fluorinated alkanes;
cyclic, branched, or linear, completely fluorinated ethers with no unsaturations;
cyclic, branched, or linear, completely fluorinated tertiary amines with no
unsaturations:
sulfur-containing perfluorocarbons with no unsaturations and with sulfur bonds
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only to carbon and fluorine.
13. Carla Takemoto, California Air Resources Board, personal communication, May 1996.
14. Catherine Fortney, Bay Area Air Quality Management District, personal communica-
tion, May and June 1996.
15. Environmental Law Institute (August 1993), pp. 22-23.
16. Fortney, op cit.
17. The baseline amount is the lower of actual or allowable VOC emissions. For details, see
Title I, Section 185 of Clean Air Act.
18. Skumatz (1996), p. 1.
19. The internet site for these documents is www.epa.gov/docs/oppe/eaed. For
references, see Bauer and Miranda; Miranda, Bauer, and Aldy; and Miranda and Aldy in
the bibliography.
20. Skumatz (1996), p. 2.
21. Miranda and Aldy (1996), p. 16.
22. The city of Colorado Springs neither collects garbage nor licenses haulers. The fees
listed here are charged by Waste Management (one of the haulers operating in the city)
when it supplies cans and bags. Customers supplying their own cans and bags pay other
rates.
23. Miranda, Bauer, and Aldy (1995), pp. 8-9.
24. Skumatz (1993), pp. 283-284.
25. Warmer Bulletin, February 1996, p. 16.
26. Miranda and Aldy (1996), p. 19.
27. Skumatz (1994), p. 284.
28. Skumatz (1996), p. 4.
29. The source of the table is Marie Lynn Miranda et al., Managing Municipal Solid Waste:
The Unit-based Pricing Approach, 1993, as reprinted in Arner and Davis (1994). An N/A in
the recycling column denotes either that data were insufficient or that the municipality
implemented a recycling program simultaneously with variable rate pricing.
30. Repetto et al. (1992), pp. 18-19.
31. DEN, pp. A5-6.
32. Skumatz (1994), p. 286.
33. Repetto et al. (1992), p. 27.
34. Miller, p. 3.
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Fees, Charges, and Taxes
35. DEN, February 13, 1996, pp. B3-4. The rates for waste in liquid form were provided by
Tom Lucas, New Jersey Taxation Division's Special Audit Section, personal communica-
tion, 1996.
36. GAO (February 1995), p. 23.
37. Information obtained from DEN, April 21, 1995, pp. A2-3 and from personal
communication with Hallie Clem, DC Department of Public Works, 1996.
38. Disposal and generation fees taken from California Department of Toxic Substances
Control, "Hazardous Waste Fee Summary, Effective 1996." The authors have added the last
column to the second table to provide estimates of fees per ton.
39. Walt Larson, California Department of Toxic Substances Control, personal communica-
tion, May 1996.
40. For a list of federal environmental excise taxes, see Barthold (1994), p. 146.
41. Ibid, pp. 146-147.
42. Fullerton (1995), p. A7.
43. EPA (March 1991), p. 3-18.
44. Unless otherwise stated, the term "CFCs" refers throughout this section to a variety of
ozone-depleting chemicals, including halons and methyl chloroform.
45. Barthold (1994), pp. 137-138.
46. Cook (1996), p. 5.
47. Congressional Research Service (1994), pp. 72-75.
48. Cook (1996), p. 5.
49. Scrap Tire News Legislative Report, "Scrap Tire Laws and Regulations," January 1996, pp.
18-19.
50. Fullerton (1995), p. A7.
51. Information on fertilizer taxes as of March 1994 was provided by the Fertilizer Institute.
52. Rich Girasole, Rhode Island Department of Environmental Management, personal
communication, May 1996.
53. DEN, October 5, 1993.
54. Ackerman (1994), pp. 273-4.
55. Hoerner (1995), p. 16.
56. Grocery Manufacturers of America. Another source of information on the Florida ADF
is Martin (1994).
57. North Carolina Department of Environment, Health, and Natural Resources.
wastenot.ehnr.state.nc.us/SWHOME/grants.txt
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
58. Environmental Law Institute (August 1993), p. 24.
59. Randy Hamilton, Texas Natural Resource Conservation Commission, personal
communication, June 1996.
60. Cameron (1991), p. 8.
61. Transponder figure provided by March 19, 1996 Earthlink release from Greg Brooks,
California Private Transportation Company.
62. Martine Micozzi, Federal Highway Administration, personal communication, May
1996.
63. Federal Highway Administration, Buyline$: Congestion Pricing Updates, Spring 1996.
64. Brooks, CPTC, March 19, 1996 Earthlink release.
65. Federal Highway Administration, Buyline$: Congestion Pricing Updates, Spring 1996.
66. Unless otherwise stated, the information on wetland compensation fees is provided by
Crookshank (1995). www.api.org/cat/SEC12.htm#10
67. Information on Mitigation Park Program and Maryland Nontidal Wetlands
Compensation Fund provided by Crookshank (1995), p. 42. This document describes fee-
based programs in Arkansas, Florida, Maryland, Louisiana, Mississippi, and Illinois.
68. "DNR Sets New Rules for Wetlands Mitigation," Baton Rouge Advocate, August 27, 1995.
69. For a discussion of the economic benefits of off-site mitigation and larger wetlands, see
Anderson and Rockel (1991), pp. 50-51. www.api.org/cat/SECl2.htm#22
70. Cody (1994), p. 1. The states with federal fees calculated according to this formula are
Arizona, California, Colorado, Idaho, Kansas, Montana, Nebraska, Nevada, New Mexico,
North Dakota, Oklahoma, Oregon, South Dakota, Utah, Washington, and Wyoming. Fees
are different for eastern states and for national grasslands managed by the Forest Service.
71. U.S. Department of Agriculture Forest Service news release, "1996 Grazing Fees
Announced." www.fs.fed.us/forum/graznews.htm
72. Hoerner (1995), p. 16.
4-30
August
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5. DEPOSIT-REFUND SYSTEMS
5.1. INTRODUCTION
Deposit-refund systems (hereafter referred to as "deposit systems") are similar to the
advance disposal fees described in the previous section except that the payer of the fee can
obtain a partial or complete refund by returning the used product for recycling or proper
disposal. Such a system could be looked upon as a combination of a product charge and
a recycling subsidy. Manufacturers or vendors of products subject to deposits incur
additional costs in handling returned products, but these costs are often partially offset by
interest earned on deposits, unclaimed deposits, and sales of collected used products.
As noted below, deposit systems are used most commonly for beverage containers but
have also been used for other products such as pesticide containers, lead-acid batteries,
and tires. Some of these systems are voluntarily implemented by industry whereas others
are required by government. As with most other incentive mechanisms discussed in this
report, deposits have been required not by federal government but rather by state or local
authorities, although federal legislation on deposits has been considered.
Several studies have concluded that deposit systems are more cost-effective than other
methods of waste disposal reduction such as command-and-control regulations, recycling
subsidies, and advance disposal fees. A recent study by Resources for the Future con-
cluded that a 10% reduction in waste disposal would cost $45 per ton of waste reduced
under a deposit system compared to $85 per ton under advance disposal fees and $98 per
ton under recycling subsidies. However, the study noted that the relatively high adminis-
trative costs of a deposit system could outweigh these cost savings.1
(RFF study: www.rff.org/dpapers/abstract/9533.htm)
Fullerton and Kinnaman (1995) con-
cluded that waste collection should be
priced positively if disposal and recycling
are the only two disposal options, but that
if illicit burning or dumping is also an op-
tion, the optimal policy is "a tax on output
plus a rebate on proper disposal," i.e., a
deposit system. While waste collection fees
give waste generators an incentive to dis-
pose of waste in an uncontrolled manner,
deposit schemes give them an incentive to
recycle.
As noted below, studies have found
that deposit systems result in higher recov-
ery rates and less contamination of
Figure 5-1: U.S. MARKET SHARE OF
REFILLABLE BOTTLES
(% of drinks sold in refillables)
Year
I I Soft drink* V/A Beer
3ouro*i CR8 (1003), p. CR3-9.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
recyclables than curbside recycling programs. However, deposit schemes are also believed
to cost more than curbside programs.
5.2. BEVERAGE CONTAINERS
Like certain other products, beverage containers have been subject to both voluntary
and mandatory deposit schemes. The beverage industry formerly made extensive use of
voluntary schemes to recover refillable bottles, but as shown in figure #, this practice fell
out of favor with the introduction of cheaper "disposable" containers.
As shown in Table 5-1, ten states have passed "bottle bills" mandating beverage
container deposits ranging in magnitude from 2.5
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Deposit-Refund Systems
amount.3 In some places, reverse vending machines also offer refunds for returned
containers.
Table 5-1: STATE BEVERAGE CONTAINER DEPOSIT SYSTEMS
State
Since
ContainerŁovered
MjndAmourt
% Returned
RedemptionSites
UndamalCqxEb
HandBrgFes
Californ
al987
Beer, soft drinks,
wine coolers,
mineral water
2.5 24 oz
Aluminum 88%
Glass 76%
PET 50%
Overall 84%
State-certi-
fied centers
Program
administra-
tion grants
Per contain
process-
ing fee
Connect
clfiSO
Beer, malt, soft
drinks, mineral
water
Minimum
54
Cans 88%
Bottles 94%
Plastic 70-90%
Retail stores,
redemption
centers
Kept by
distributor
or bottler
Beer 1.54.
soft
drinks 24
Delawai
31982
Non-aluminum
beer, malt, soft
drink, mineral wat
54
;r<2qt
Insufficient data
Retail stores,
redemption
centers
Kept by
distributor
or bottler
20% of
deposit
Iowa
1979
Beer, soft drinks,
wine, liquor
54
Aluminum 95%
Glass 85%
Plastic 70-90%
Retail stores,
redemption
centers
Kept by
distributor
or bottler
it
Maine
1978
Beer, soft drink,
wine, wine
cooler, liquor,
juice, water, tea
Beer, soft
drink, juice
54. Wine,
liquor 154
Beer, soft drink
92%
Spirits 80%
Wine 80%
Juices, non-carbon
75%
Retail stores
and redemp-
tion centers
ated
Kept by
distributor
or bottler
34
Massac
husetts
1983
Beer, soft drink,
carbonated water
54
Overall 85%
Retail stores
and redemp-
tion centers
State
2.254
Michiga
il978
Beer, soft drink,
canned cocktails,
carbonated and
mineral water
Refillables
54,
nonrefill-
ables 104
Overall 93%
Retail stores
75%
environment
programs,
25% han-
dling fees
25% of
aihnclaimed
deposits
New
York
1983
Beer, soft drink,
wine cooler, car-
bonated mineral
water, soda water
54
Wine cooler 63%
Soft drink 72%
Beer 81%
Retail stores
and redemp-
tion centers
Kept by
distributor
or bottler
1.54
Oregon
1972
Beer, malt, soft
drink, carbonated
mineral water
Standard
refillables
34. Others
54
Overall 85%
Retail stores
Kept by
distributor
or bottler
None
Vermon
1973
Soft drink, beer,
malt, mineral
water, liquor
Soft drink,
beer 54.
Liquor 154.
Overall 85%
Certified
redemption
centers. Re-
tail stores.
Kept by
distributor
or bottler
34
Retailers and redemption centers then redeem the used containers to distributors (or
manufacturers) in exchange for 8C refunds. Distributors typically pick up used containers
while distributing new products. Retailers and redemption centers keep the 3C handling
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
fees. Distributors (or manufacturers) have at least three sources of revenue to offset the
costs of handling containers. They can sell the collected containers to processors and keep
unclaimed refunds and handling fees. Half of unclaimed refunds formerly went to the
State, but as a result of distributor complaints about costs, deposit initiators are now
(effective January 1, 1996) allowed to retain all unclaimed refunds.4 A third source of
revenue is interest earned on deposits and handling fees before redemption.
The expansion of the deposit scheme to liquor and wine on September 1, 1990 and to
bottled water, iced tea, and juice on December 31, 1990 resulted in new (and perhaps less
efficient) types of deposit-refund arrangements. Unlike soft drinks and beer, juice is often
distributed by several companies in the same geographic area. If several distributors
operate in the same area, each one often has difficulty determining which containers it is
responsible for collecting. As a result, some distributors may pay more in refunds than
they charge in deposits, while for others, deposits may exceed refunds. Because distribu-
tors fear that they will lose money in charging deposits and paying refunds, manufactur-
ers have had to charge deposits themselves and contract independent collectors to redeem
containers. This collection method may be less efficient than collection by distributors who
already travel to collection sites while distributing new products.
Another problem with juice containers has been misredemptions caused by in-state
distribution without imposing deposits and in-state redemption of containers originally
purchased outside the state. Such misredemptions have resulted in redemption rates in
excess of 100% for certain products. For example, Coca-Cola reported redemption rates for
Minute Maid Juices and Hi-C of 142% in 1993, 281% in 1994, and 126% in the first six
months of 1995.5
Retailers have complained that the deposit system (especially the expanded one)
requires more storage space and more time for recordkeeping and bottle reception and
sorting. In addition, traces of beverages in containers have attracted pests. The administra-
tive burden has probably become more severe since the expansion of the system, as
significant variations in juice containers make them more difficult to sort and store.6
The deposit in Maine is reported to have significantly reduced litter. A Maine Depart-
ment of Transportation study (1979) found that total litter was reduced by 10% and that
container litter was reduced by 56%.7 Since the redemption rate has risen since 1979, it is
likely that litter has decreased further. One reason for the decline in litter is that people
sometimes collect bottle and can litter to obtain refunds. The deposit has also been
credited with increasing recycling by creating a reliable supply of recyclable materials.
Three container processing facilities were created as a result of the system. These facilities
can in turn stimulate demand for recyclables collected outside the deposit system.8
Criner, Jacobs, and Peavey (1991) estimated that the costs of Maine's deposit system
exceed those of curbside collection programs but also result in higher collection rates.
They surveyed retailers, redemption centers, distributors, and manufacturers to develop
cost estimates for the deposit system. Their comparison of the deposit system and
5-4
August
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Deposit-Refund Systems
curbside collection programs relied on the Waste Plan computerized waste management
modeling system.9 Readers should be aware of at least three potential shortcomings of the
data used in the estimates that follow: 1) Survey responses were often incomplete. (For
example, no beer distributors answered the survey, and soda distributors submitted only
"weighted average" data.) 2) Although manufacturers, distributors, retailers, and
redemption centers might have the best access to cost information, they might also have
an incentive to overstate their costs associated with container handling. 3) The report was
published in April 1991, probably too early to incorporate a full range of experiences
under the expanded deposit system, which was not in effect until December 30, 1990.
Criner, Jacobs, and Peavey estimated that retailers incurred costs of 2A
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 5-2: ESTIMATED COLLECTION AMOUNTS AND COSTS OF CURBSIDE
AND DEPOSIT PROGRAMS IN MAINE COMMUNITY OF 25,000 INHABITANTS
No deDosit
Original
deDosit
Expanded
deDosit
Curbside tons recycled, cost per ton
2,538 ($41)
1,917 ($80)
1,378 ($100)
Deposit scheme tons recycled, cost per
ton
0
1,138
($567)
2,037 ($402)
Total tons recycled, weighted average
cost per ton
2,538 ($41)
3,055
($261)
3,413 ($280)
Source: Criner, Jacobs, and Peavey, p. 50.
A significant portion of the costs of Maine's deposit system appear to be passed on to
consumers. In 1990, Criner et al. compared beverage prices in Maine with those of
neighboring New Hampshire, Rhode Island, and Massachusetts. Prices were very similar
for juices, which were not subject to deposits at the time, but were higher in Maine for
soda and beer. As noted above, Massachusetts has a 5C deposit like Maine. Criner et al.
speculate that the deposit system in Massachusetts has not resulted in beverage prices
higher than those of New Hampshire and Rhode Island because distributors in the state
face more competition than in Maine and because the state's density limits the cost of
handling used containers.
Criner et al. also found that prices of most orange and non-orange juices sold at two
Maine supermarkets increased during the period from the fall of 1990 to late February
1991, although prices of orange juice in large plastic containers (64-96 oz.) subject to
deposit requirements fell significantly during the same period. Although these findings
suggest that the expansion of the deposit to juices had an impact on prices, the price
increases at the two stores were not compared with price changes elsewhere.
5.2.2. California Beverage Container Recycling Program12
The 1986 California Beverage Container Recycling and Litter Reduction Act (AB2020)
led to the creation of the Beverage Container Recycling Program (BCRP) in 1987. The
program was originally intended to achieve an overall beverage container recycling rate
of 80%.
California's deposit system differs significantly from that of other states in that retailers
generally are not responsible for collecting deposits and offering refunds to consumers
and used containers are not returned to their original distributors. Instead, manufacturers
of most beverage containers pay a fee of 2
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Deposit-Refund Systems
This scheme resembles an advance disposal fee, with fee revenues used to provide
collection incentives. It is the result of compromise between various interests, including
grocers, who did not want to manage used containers in their stores, and environmental-
ists, who wanted incentives to stimulate recycling.
Retailers with annual revenues of less than $2 million are not required to accept used
containers, and larger retailers can be exempted if there is a recycling center located with
a 1/2 mile radius of their store. In areas where there are no centers, retailers generally
contract a recycling business to establish a collection site or reverse vending machine.
The State also assesses handling fees annually for each type of container. Manufactur-
ers are required to either pay these fees or guarantee a scrap recyclable price equal to the
cost of collection. These requirements have increased scrap prices in the State to the point
of providing incentives to import scrap from other states. By law, such imports may not
be redeemed.
In 1994/95, the BCRP received about $333 million in revenues. However, this figure is
expected fall in the next few years as a result of reductions in processing fees required by
1995 legislation and increases in container redemption.13 Unclaimed deposits and fees not
paid out as subsidies finance grants for non-profit and government organizations for
activities such as litter reduction and recycling.
($333 revenue figure: www.lao.ca.gov/a96b2.html)
Like all other states with deposit systems, California has specific beverage container
labelling requirements. All containers must bear the label "CA Redemption Value" or
"California Redemption Value." To increase awareness of the deposit system, the CRV
must be posted separately on store shelves, in advertising, and on retailer invoices.14
The BCRP required the creation of a government structure to manage the program and
initially generated relatively low return rates. By the early 1990s, however, after the initial
1 (t fee had been more than doubled, the program had achieved return rates comparable
to those of other states with deposit systems. As shown in table 1, the overall beverage
container recycling rate has risen to 84%.
Ackerman et al. (1995) stated that California's redemption system results in lower costs
per redeemed container than systems in which redemption is managed through vendors.
Containers are not sorted by brand and returned to their distributors as in other states. As
a result, administrative costs are estimated at 0.2C in California and 2.3
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
tion.16
Another probable impact has been an increase in the percentage of containers recycled,
although this is difficult to confirm due to a lack of historical data on recycling. One study
estimated that the percentage of PET containers recycled in 1993 was about 80% in states
with deposit systems (excluding California), 70% in California, but only 53% nationally.17
A 1990 study found that almost 2/3 of the glass recycled in the U.S. came from the deposit
states excluding California, even though these states made up only 18% of the U.S.
population. If California is included, the ten states accounted for over 80% of recycled
glass. All deposit states also report aluminum can return rates in excess of the national
average.18
A related phenomenon is the relatively high share of refillable containers in states with
deposit schemes. In the case of beer containers, for example, all nine deposit states
(excluding California) exceed the national average for market share of refillables. The
unweighted average for these nine states was 15% in 1990, three times the national
average.19
A 1993 Congressional Research Service comparison of deposit systems and curbside
recycling programs found that deposits generally resulted in higher percentages of
materials returned and less contamination of collected materials. None of the states with
large curbside programs but lacking deposits, the study found, had attained a recovery
rate equal to that of states with deposit schemes. Moreover, glass collected through
curbside programs is much more likely to break before it can be sorted by color. Such
breakage makes it difficult to recycle not only glass bottles but also other recyclables that
may be contaminated with glass. The largest user of recycled PET reported that because
of concerns over contamination, more than 90% of the PET it purchased came from states
with deposit schemes.20
The costs of deposit systems may be substantial for manufacturers, distributors,
vendors, consumers, and regulatory authorities, and one study found California's system
to be more cost-effective than those in which retailers accept redeemed containers. Deposit
systems could also divert revenues from and lower the cost-effectiveness of curbside
recycling programs, but at least one study found evidence suggesting that "local govern-
ments would achieve a greater diversion of solid waste from disposal at a lower cost per
ton if both a bottle bill and a curbside collection program were in place."21 One difference
between the two approaches is that the costs of deposits are borne by manufacturers and
distributors, who in turn pass on some costs to consumers, whereas the curbside programs
are often funded by general revenues or waste tipping fees. Lack of information on the
costs and benefits of litter reductions and recycling and on the costs incurred by consum-
ers in returning containers makes it difficult to thoroughly evaluate beverage container
deposit systems.
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August
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Deposit-Refund Systems
5.3. LEAD-ACID BATTERIES
Unlike beverage containers, lead-acid batteries are still subject to voluntary deposit
systems in most areas. The lead in used batteries has positive economic value for battery
makers. Deposit amounts are typically $5-$ 10. Consumers can obtain rebates by returning
a used battery soon, usually 7 to 30 days, after the purchase of a new one.
Despite the presence of numerous voluntary schemes, 11 states have required deposit
systems. As shown in Table 5-3, state laws have addressed such questions as the refund
period and what portion of unclaimed refunds goes to different parties.22
Table 5-3: MANDATORY LEAD-ACID BATTERY DEPOSIT SYSTEMS
State
Amount
Unclaimed Refunds
RefundPeriod
Arizona
$5
Retailer
30 days
Arkansas
$10
Retailer
30 days
Connecticut
$5
Retailer
30 days
Idaho
$5
Retailer
30 days
Maine
$10
Retailer
30 days
Minnesota
$5
Retailer
30 days
New York
$5
Retailer
30 days
Rhode Island
$5
80% State
20% Retailer
7 days
South Carolina
$5
Retailer
30 days
Washington
Mini-
mum $5
Retailer
30 days
Source: Weinberg, Bergeson & Neuman.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
As with beverage containers, deposit
systems for lead batteries appear likely to
have a significant incentive effect by offer-
ing motorists payments in return for a
used product. As shown in Figure 5-3, the
percentage of battery lead recycled has
been estimated at over 90% since 1988.23
Figure 5-3 also suggests that recycling
rates may be positively related to the price
of lead. The fall in lead prices beginning in
1991 coincided with a fall in the percent-
age of battery lead recycled.24
Oeadpriradatawwwiiteto
5.4. MAINE PESTICIDE CONTAINER
DEPOSIT SYSTEM
The discovery of over 400 uncontrolled
disposal sites in Maine led the state's authorities to initiate a deposit system for pesticide
containers in 1985. The rule applies to all limited and restricted use pesticides sold in
glass, metal, or plastic containers, a category consisting mainly of conventional agricul-
tural and forestry applications. Deposit amounts are $5 for containers of less than 30
gallon capacity and $10 for larger containers.
Farmers must rinse containers three times before returning them for refunds. Contain-
ers found to have significant traces of pesticides are not accepted for refunds. Collections
are made at designated points once a year according to publicized schedules. Pesticide
dealers arrange for container shredding equipment at the collection sites. According to the
Director of the Maine Board of Pesticides Control, the deposit system has played a
significant role in the reduction of improper container disposal.25
In 1985, the first year of operation of the deposit system, Board of Pesticides Control
staff inspected 7,055 containers. Had these containers simply been drained rather than
properly rinsed, 429 pounds of active ingredient would have been deposited into landfills.
By guaranteeing that the containers were triple rinsed and therefore 99.998% clean, only
0.05 pounds of active ingredient was landfilled.26
One problem with the deposit system is that it does not apply to general use pesticide
containers, which are far more numerous than restricted and limited use pesticides. One
reason why general use products are not included in the system is that inspecting them
would require significantly more resources. For a similar reason, a few larger states have
considered a program similar to Maine's but concluded they would not be able to inspect
the large number of containers in their states.27
Figure 5-3: BATTERY LEAD RECYCLING
AND LEAD SCRAP PRICES IN THE U.S.
100
BO
60
40
20
Percentage recycled
01 96-3
88,6 -sot
*3^
24.1
1967 1986 1969
1990 1991
Year
1992 1993 1994
I I Recycling rate
8ouroMi Smith, Buoklin, and Aasooiatasi
Buainaw Cyola Indicator*.
- Lead ecrap price
5-10
August
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Deposit-Refund Systems
5.5. OTHER PRODUCTS
Rhode Island has required $5 deposits on all types of replacement vehicle tires since
1988. Customers can recover their deposits by returning old tires within 10-14 days of the
date of purchase of the new tires. Their refund payments are limited to one tire for every
tire purchased, and the refunds can be obtained only at the point of sale of the new tire.
In addition to the deposit, Rhode Island imposes product charges of $0.75 on tires to
finance the cleanup of old tire piles.28
Outside the United States, deposit systems have been applied to car hulks, light bulbs,
lubricating oil, and other products. These systems are described in Section 11.
5.6. VOLUNTARY DEPOSIT SCHEMES
In addition to lead-acid batteries, a few other products are subject to deposit schemes
voluntarily operated by industry. Among such products are large paper drums, beer kegs,
propane gas containers, and, in some areas, beer bottles and pesticide containers. As noted
in Section 11, voluntary deposit schemes appear to be much more common outside the
United States.
5.7. PERFORMANCE BONDS
Performance bonds are deposit payments for which the payer can obtain a refund by
fulfilling certain obligations. In that sense, a performance bond acts like a deposit-refund
system.
As an example of an environmental issue addressed with performance bonds, the
Surface Mining Control and Reclamation Act (SMCRA) of 1977 requires performance
bonds for surface coal mining and reclamation permits. The amounts are determined by
the regulatory authority (either the State or the Department of the Interior) and depend on
reclamation requirements specified in the permit and anticipated difficulty of reclamation
due to factors such as topography, geology, hydrology, and revegetation potential of the
site. SMCRA requires that the amount be sufficient to finance reclamation by the regula-
tory authority in case of forfeiture. The minimum amount is $10,000 per permit area.
Deposit amounts are adjusted as mined areas increase or decrease and as reclamation cost
estimates change.
(SMCRA complete text: www.osmre.gov/smcra/smcra.html)
Although such performance bonds give companies an economic incentive to reclaim
mining sites, they are backed up by a command-and-control requirement specified in a
permit. The reclamation requirement may have more of an incentive effect than the
deposit.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Notes for Section 5
1. Palmer et al. (1995), Abstract, www.rff.org/dpapers/abstract/9533.htm
2. The information in the last two paragraphs and in table 1 was supplied by the Container
Recycling Institute.
3. Criner, Jacobs, and Peavey (1991), p. 20.
4. Lucinda White, Maine Department of the Attorney General, personal communication,
July 1996.
5. For more information on redemption problems in Maine, see Maine Legislature Office
of Policy and Legal Analysis (1996). Coca-Cola's over-redemption figures are stated on p.
20 of this source.
6. Criner, Jacobs, and Peavey, pp. 25-26.
7. Cited in Criner, Jacobs, and Peavey (April 1991), p. 41.
8. Criner, Jacobs, and Peavey, p. 44.
9. Tellus Insitute (1990), WastePlan: The integrated solid waste planning model, Boston, MA,
as cited in Criner, Jacobs, and Peavey, p. 48.
10. Information on changes in handling fees provided by Lucinda White, Maine
Department of the Attorney General, personal communication, July 1996.
11. In this table, the original deposit scenario assumes that no beer or soda containers are
collected in the curbside program, and the expanded deposit scenario assumes that no
beer, soda, juice, wine, or liquor containers are collected in the curbside program. Under
the expanded deposit scenario, the curbside program collects only newspaper and ferrous,
glass, aluminum, and HDPE containers or packaging for products other than beverages.
12. Unless otherwise stated, the information on California's deposit scheme is provided by
McCarthy (1993).
13. California LAO internet site, "LAO Analysis of the 1995-96 Budget Bill, Resources, Part
II." www.lao.ca.gov/a96b2.html
14. Beverage World 1994-1995 Databank, p. 275.
15. Ackerman, Frank, Dmitri Cavander, John Stutz, and Brian Zuckerman, Preliminary
Analysis: The Cost & Benefits of Bottle Bills, Boston: Tellus Institute, January 1995, as cited in
Palmer et al. (1995), p. 31.
16. EPA (July 1992), p. 4-1.
17. Wellman Inc. (1994), pp. 66-67.
18. The 1990 glass recycling study was cited by McCarthy (1993).
5-12
August
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Deposit-Refund Systems
19. McCarthy (1993).
20.Ibid.
21. Ibid, summary.
22. The information on state lead battery deposits was supplied by Saskia Mooney and
Weinberg Bergeson & Neuman, April 8, 1996, "Summary of State Lead-Acid Battery
Recycling Law."
23. Smith, Bucklin and Associates (1995), p. 1.
24. Lead scrap price data were obtained from Business Cycle Indicators (BCI):
www.mlinet.com/bci/pages/lsm023.htm. BCI monthly prices were averaged to determine
annual price.
25. Bob Batteese, Director of Maine Board of Pesticides Control, personal communication,
1996.
26. Batteese (1988).
27. Bob Batteese, personal communication, June 1996.
28. Scrap Tire News Legislative Report, January 1996, "Scrap Tire Laws and Regulations," and
Paul Dudra, Rhode Island Department of Environmental Management, personal
communication, 1996.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
5-14 August
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6. TRADING SYSTEMS
Emission trading systems came into use in the U.S. in the mid-1970s as a means for
new sources to locate in nonattainment areas without causing air quality to worsen. From
this important but modest beginning, pollution trading systems now come in a wide
variety of forms, apply to a large and growing number of sources of pollution that impact
air, water and land.
The general principle of pollutant trading systems is that sources may satisfy their
obligations by one of two means: (1) limiting their releases of pollution to no more than
the permitted amount, and (2) releasing more (or less) than the permitted amount and
exchanging credits representing any deficiency (or surplus) in the quantity of emissions
controlled with other sources. Sources with marginal costs of pollution control that are
about average are likely to meet their obligations without trading. Sources with relatively
high marginal control costs are likely buyers of pollution reduction credits and sources
with relatively low marginal costs of control are likely sellers of excess credits.
Trading systems have evolved to include far more than the exchange of pollution
reduction credits. For example, the well-known acid rain trading system is based on
allowances for future emissions. Certain Colorado communities have created programs
to trade the right to own and operate a wood burning stove or fireplace. For a number of
years there was an active program under which refiners could trade lead for use as an
additive in gasoline. Heavy-duty truck manufacturers can meet engine emission stan-
dards by averaging together the emissions performance of all engines they produce.
Programs to trade water effluents are operating in selected locations. Developers whose
activities would cause the loss of wetlands can satisfy mitigation requirements in some
areas by purchasing credits from a wetland mitigation bank. These and other trading
systems for air, water and land are described below. The discussion begins with a review
of trading programs in air emissions, followed by sections on water effluent trading, land
development, and finally, international trading programs in which the US is involved.
A few basic parameters may be used to characterize trading systems: (1) whether
trading is restricted to averaging within single facility, allowed among facilities owned by
the same firm, or allowed among firms or facilities under different ownership: (2) whether
there is a cap on overall emissions or effluents; (3) whether tradable certificates are
obtained as allowances for future pollution or as a credit for previous pollution control
actions: (4) the required trading ratio (one to one or some greater ratio): (5) whether
tradable certificates can be banked or stored for future use; and (6) how credit generation
and trading is monitored. The success of the trading systems described in this Section do
not appear to depend upon any particular formulation; however, trading probably would
not function to lower compliance costs and protect environmental quality if one or more
of these parameters is not defined.
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6.1. TRADING OF AIR EMISSIONS
6.1.1. EPA's Air Emission Trading Program
6.1.1.1. Offset Program
EPA's air emission trading program had its origins in the mid-1970s as a solution to
the problem of locating new sources of air pollution in nonattainment areas.1 To accom-
modate new sources and expansion of existing sources of air pollution, the EPA proposed
the "offset" policy that permitted growth in nonattainment areas provided new sources
install pollution control equipment meeting Lowest Achievable Emission Rate (LAER)
standards and offset any excess by acquiring greater emission reductions from other
sources in the area. Through this process, growth could be accommodated while main-
taining progress toward attainment of national ambient air quality standards.
Of more than 10,000 offset trades (a few of which are described later in this Section),
over 90 percent have been in California. Nationwide, about 10 percent of offset trades are
between firms; the remainder are between sources owned by the same firm. Most offset
credits are created as a result of closure of all or part of a facility.
The offset policy, which was included in the 1977 amendments to the Clean Air Act,
spawned three related programs: bubbles, banking and netting. The common element in
these programs is the Emission Reduction Credit (ERC), generated when sources reduce
emissions below the lower of actual or allowable emissions and apply for the state for
certification of the reduction. To be certified as an ERC, the state must determine that the
reduction is (1) surplus in the sense of not being required by current regulations in the
State Implementation Plan (SIP); (2) enforceable; (3) permanent; and (4) quantifiable.
ERCs are normally denominated in terms of the quantity of pollutant in tons released over
one year. By far the most common method of generating ERCs is closing the source or
reducing its production; however, ERCs also can be earned by modifying production
processes and installing pollution control equipment. Trades of ERCs most often involve
stationary sources, although trades involving mobile sources are permitted.2 States have
approved a variety of activities that sources may use to generate offset credits. California,
for example, accepts the scrapping of older vehicles and lawn mowers as means of
generating credits and applies a formula to determine the magnitude of air pollution
credits for each old car that is scrapped.
The four emission trading programs were subject to numerous revisions, before being
incorporated into EPA's Final Emission Trading Policy Statement, issued in 1986 and
addressing trading of ERCs for criteria pollutants such as sulfur dioxide, nitrogen oxides,
particulate matter carbon monoxide, and volatile organic compounds that contribute to
the formation of ground-level ozone.3 The final policy statement responded to public
comments that pollutant trading could cause environmental damage unless accompanied
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by safeguards (such as trading ratios greater than unity and air quality modeling for some
cases).
6.1.1.2. Bubble Program
The bubble program, established in 1979, allows sources to meet emission limits by
treating multiple emission points within a facility as if they face a single aggregate
emission limit. A bubble can include more than one facility owned by one firm, or
facilities owned by different firms; however, all of the emission points must be within the
same attainment or non-attainment area. Bubbles must be approved as a revision to an
applicable State Implementation Plan (SIP), a factor that has discouraged their use. Prior
to the 1986 final policy, EPA approved or proposed to approve approximately 50 source
specific bubbles. An additional 34 bubbles were approved under EPA authorized generic
bubble rules. The EPA-approved pre-1986 bubbles were estimated to save $300 million
over conventional control approaches; state-approved pre-1986 bubbles saved an esti-
mated $135 million. No estimates are reported for the number or savings from post-1986
bubbles. Bubbles are designed to be neutral in terms of environmental impact.
6.1.1.3. Banking
EPA's initial offset policy did not allow banking of emission reduction credits for
future use or sale. EPA contended that banking would be inconsistent with the basic
policy of the Clean Air Act. But without a provision for storing or banking ERCs, the
policy encouraged sources to continue operating dirty facilities until they needed credits
for internal use. New and expanding firms without internal sources of ERCs had to
engage in lengthy searches for other firms willing to create and supply credits.
The offset policy in the 1977 amendments to the Clean Air Act included provisions for
banking of emission reduction credits for future use or sale. Although the EPA has
approved several banks, there has been limited use of the provision, most likely because
of the uncertain nature of the banked ERC. EPA determined in 1980 that an ERC cannot
be an absolute property right and that communities must have the option of modifying
the use of ERCs, including the debiting of part or all of banked ERCs.4 A 1994 report
identified 24 emission banks; some limited ERCs to a life of as little as five years.5 Most
of the banks provided a registry to help buyers of ERCs find potential sellers. Some states
debit a percentage of each ERC deposit for use by the state to attract new industry or to
meet anticipated SIP requirements.
6.1.1.4. Netting
Netting, the final component of EPA's emission trading policy, dates from 1980 and
allows sources undergoing modification to avoid new source review if they can demon-
strate that plant-wide emissions do not increase significantly. Netting is the most widely
used of the emission trading programs; one source estimates that between 5,000 and
12,000 sources have used netting.6
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In each application netting is designed to have no significant impacts on environmen-
tal quality; however, with a large number of netting transactions a modest adverse impact
might ensue. The total savings in control costs from netting are difficult to estimate
because the number of transactions is not known precisely and the cost savings from
individual transactions can be highly variable. Cost savings can arise in three ways. First,
netting may allow a firm to avoid being classified as a major source, under which it would
be subject to more stringent emission limits. Reductions in control costs in such a case
would depend upon the control costs and emission limits which the firm must satisfy after
netting. One source estimated that netting typically results in savings between $100,000
and $1 million per application (indicating aggregate savings of $500 million to as much as
$12 billion).7 Second, the aggregate cost savings from avoiding the cost of going through
the major source permitting process could range from $25 million to $300 million. Third,
additional savings could arise from avoiding construction delays caused by the permitting
process.
EPA's Office of Air and Radiation announced on April 3, 1996 a series of proposed
revisions to new source regulations expected to reduce by more than one-half the number
of permitting actions new sources and sources undergoing changes must take. Because
the proposal shares many of the features of netting, it is described here. The proposed
regulations would allow sources to use plantwide limits and also provide exemptions for
pollution prevention activities and so-called "clean" emission sources in a facility.
Under the proposal, sources making changes could avoid new source review require-
ments by establishing a plantwide emissions cap (generally this would be the source's
maximum potential emissions). Process changes could be made so long as the changes
did not result in an increase in emissions beyond the cap.
6.1.1.5. Evaluation of Emissions Trading Program
Foster and Hahn provide the most comprehensive evaluation of the emissions trading
program, using data for offset transactions in the Los Angeles area.8 They obtained data
on trading activity from the South Coast Air Quality Management District, reported in
Table 6-1. The large increase in offset transactions in 1991 and 1992 reflects activity at two
special funds created by the SCAQMD in 1991: the Community Bank, which serves small
sources producing less than 2 tons per year; and the Priority Reserve, which secures
credits for essential public services.
During the period 1985-1992, over 10,000 tons of pollutants were traded in the offset
program, with total expenditure on ERCs estimated to be on the order of $2 billion
(indicating an average price for traded pollutants of about $200 per ton. Nearly three
quarters of the trades involved reactive organic gases (SCAQMD terminology for a subset
of volatile organic compounds), but there also were trades in CO, NOx, PM, and S02.
AER*X, a broker in the Los Angeles offset market, supplied data for prices for over 40
of the trades from 1985 to 1992.9 The minimum price per ton in trades of reactive organic
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gases (ROG) fluctuated in the $40 per ton range over this period, while the minimum
value for NOx trades was about $120 per ton. High prices for ROG increased steadily over
the period, from $135 to $711 per ton; and high NOx prices increased from about $320 per
ton to $655 per ton over the same period. For a variety of reasons, one would not expect
all tons of ROG or NOx to be valued identically. First, the markets are imperfect and
information on historic trades is not widely disseminated. Second, credits that have been
banked involve additional costs to the selling party. Third, offset ratios vary with the
distance and location of parties to the transaction. The low end of prices could be
determined largely by transactions costs to the seller (thought to be a minimum of $10,000
per transaction). In a few cases, transactions costs apparently exceeded the market value
of the credits that were exchanged.
Though the highest and average prices increased over the period, most of the change
in 1991 can be attributed to a change in SCAQMD rules the prior year. None of the
observed prices remotely approach the typical incremental control costs for ROG and NOx
in the Los Angeles area over that period: on the order of $5,000 per ton for ROG and
$8,000 per ton for NOx.
Emission trading has not lived up to expectations; trades have been fewer and offset
prices lower than many had expected. Several factors seem to have limited the appeal of
the emissions trading policy. In order to assure that air quality did not deteriorate, state
environmental administrators often required expensive air quality modeling prior to
accepting proposed trades between geographically separated parties. Deposits to
emission banks typically were "taxed" by the air quality management authority to meet
state SIP requirements or to generate a surplus the area could offer to attract new firms.
Offset ratios greater than unity further depressed the value of ERCs. In many areas it
appears that ERCs had an economic value less than the transactions costs of completing a
sale to another party.
In other respects, the emission trading program revealed the myriad possibilities for
emission trading and many of the features that would be necessary to make trading
viable. It served as the foundation for the enormously successful lead credit trading
program and the many emission trading features of the 1990 Clean Air Act Amendments.
In some respects, however, the 1990 Amendments reduced the scope of trading programs.
For example, Section 173(b) restricts the use of growth allowances in State Implementation
Plans, limiting the use of offsets. A number of states have redesigned their offset pro-
grams as trading programs without emission caps (examples include Delaware, Massa-
chusetts, Michigan, New Jersey, Texas, and Wisconsin as described below). The Los
Angeles area has developed a much more significant trading initiative known as RE-
CLAIM with an emissions cap and phased reductions in allowable emissions of S02 and
NOx. Illinois expects to have a similar program with an emissions cap in place soon.
Regional trading programs that involve several states also are under development, as
described below. In June 1993 NESCAUM (Northeast States for Coordinated Air Use
Management) launched a Demonstration Project to trade discrete emission reductions
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(DERs). The Ozone Transport Commission (OTC) received approval from EPA for "cap
and trade" system in NOx emission allowances. The Ozone Transport Assessment Group
(OTAG) is working on a regional trading program for NOx and perhaps also VOC that
would cover the eastern one-half of the U.S.
Table 6-1: EMISSION TRADING ACTIVITY IN THE LOS ANGELES AREA
(all trades reported to SCAQMD)
Year
Offsets
Netting
Total
pre-1977
5
5
1977
30
30
1978
34
34
1979
72
72
1980
129
129
1981
238
238
1982
210
210
1983
258
258
1984
256
256
1985
7
235
242
1986
27
432
459
1987
24
329
353
1988
55
358
413
1989
30
352
382
1990
53
394
447
1991
2,208
155
2,363
1992
3,678
77
3,755
Source: Foster and Hahn
6.1.2. RECLAIM
The highest ozone levels in the nation are recorded in the Los Angeles area, with
readings often exceeding twice the national ambient air quality standard of 0.12 ppm.10
The South Coast Air Quality Management District (SCAQMD or District) also fails to meet
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the particulate and CO standards, though not by such a large margin. Historically, the
SCAQMD has relied on command and control rules to limit emissions of ozone precursors
(as well as other pollutants).
Despite making substantial progress over the past three decades in improving air
quality in the Los Angeles Basin, it was apparent to SCAQMD officials that further
progress toward attaining federal standards would be prohibitively expensive using
traditional regulatory approaches.11 By 1990 the marginal costs of NOx control in the
District had reached $25,000 per ton at electric power plants, versus $5,000 (or less)
nationally. Proposed S02 controls on catalytic cracking units at refineries would have cost
$32,000 per ton, versus national costs of perhaps $500 per ton (see the section describing
the Acid Rain allowance trading program). Consequently, the District began to investi-
gate the feasibility of creating a marketable permit in the ozone precursors VOC and NOx
as well as S02 (the latter for its role in the formation of small particulate matter) as a
means of accomplishing air quality goals at lower cost.
The District initially proposed a marketable permits program termed RECLAIM (for
Regional Clean Air Incentives Market) that would include about 2,000 sources of reactive
organic gases (representing about 85 percent of permitted stationary source emissions),
700 sources (representing 95 percent of permitted NOx emissions), and about 50 sources
of S02 (representing about two-thirds of permitted stationary source emissions). Each
market would start with an allocation of emissions equal to the 1994 emissions target in
the District's Air Quality Management Plan (AQMP). Each marketable permit program
would reduce emissions annually by amounts necessary to achieve the AQMP targets:
attainment of air quality standards by 2003 for S02 and NOx and VOC emissions goals by
2010.
For the NOx and S02 programs, emissions originated at combustion sources with well-
defined exit points to the environment. Emission monitoring would be based on stack gas
measurement, a relatively simple task that increasingly is accomplished with remote
sensing devices. For VOC the market was based largely on evaporative emissions, which
are inherently more difficult to measure. Prospective VOC trading also was complicated
by the fact that ROG are not homogeneous; some react much more readily than others to
form ozone. Further, some ROG also are classified as toxic pollutants and regulated
separately. After about one year of analysis and discussion, RECLAIM officials decided
to defer including ROG and concentrate on program design for NOx and S02.
A basic issue for both programs was which facilities would be included. Despite the
prospect for lower control costs that would accompany participation in a marketable
permit program, a number of sources argued for exemptions due to concerns about the
future price and availability of marketable permits. District officials eventually exempted
sewage treatment plants, landfills, and three small municipally-owned power plants.
Baseline emission allocations proved contentious. According to the basic design
features for RECLAIM, emission allocations would be based on the 1994 emission target
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for each source. This was computed in the AQMP by taking reported 1987 emissions and
deducting projected reductions mandated by air quality regulations. Due to a recession
in the early 1990s, emissions in 1991, 1992 and 1993 were lower for many sources than
what the AQMP required. Many interest groups, including the affected sources, argued
that baseline allocations should be based on the AQMP. Environmental groups argued
that actual 1993 emissions should serve as the baseline for emission allocations. The
compromise that was struck defines the emission cap for each source as the highest year
of reported emissions between 1989 and 1991, less any reductions required by regulations
implemented through 1993.
Monitoring and reporting issues also proved controversial, with lengthy debates over
how emissions would be measured and how often reports would be filed. Industry
sought to file one report per year, while public health agencies and environmentalists
wanted daily or weekly reporting. The EPA sought assurance that the hourly NOx
standard would not be violated. In an attempt to allay industry concerns that frequent
monitoring would be too expensive, the AQMD developed a central computer that would
accept data directly from the participating facilities in RECLAIM. Sources installed
continuous emission monitors (costing $100,000 to $150,000 each) on every boiler emitting
10 tons annually or more. The CEM recorded pollutant readings minute by minute and
sent the readings to a remote terminal that averaged the readings over fifteen minute
periods and forwarded the number to the AQMD central computer. An artificial intelli-
gence system analyzed the data and verified compliance by each boiler. When the system
detected a potential problem, inspectors were dispatched to investigate further.
The District projected that the one-time costs of installing monitoring equipment
would be approximately $13 million with negligible annual operating costs. The District
projected that annual savings in compliance costs relative to command and control
regulations would be an average of $58 million annually for each of the next ten years,
muting industry complaints about the costs of monitoring equipment.
The actual trading works as follows. Each source has a declining allocation of
RECLAIM Trading Credits (RTC) for each year from 1994 to 2003.12 After 2003 the balance
remains constant. The RTC are denominated in pounds: one RTC equals one pound of
emissions. Sources are free to trade RTCs for the current year or for future years; how-
ever, all RTCs are good only for the year for which they are issued. Trades in RTCs are
limited by geographical factors; for a potential buyer, the number of credits required to
offset a pound of emissions varies with the location of the seller. The District maintains
records of all transactions in RTCs and shares that information with market participants.
The RTC bulletin board can be reached via modem at 909-396-3499.
Under RECLAIM rules, the District may impose penalties for net emissions (including
trades) in excess of permitted amounts. One potential penalty is a reduction of next year's
emission allocation by the amount of the exceedance. Other possible actions include civil
penalties and the loss of the operating permit.
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In 1994, the N0X and S02 markets began with 370 sources and 40 sources, respectively.
Both markets represented approximately 70 percent of stationary source emissions.
Analysis shows that the program should reduce NOx emissions by an average of 8.3
percent per year (amounting to a cumulative reduction of 80 tons per day by 2003) and
S02 emissions by 6.8 percent per year (a cumulative 15 tons per day by 2003). The District
projects that RECLAIM will lower compliance costs by 42 percent compared to a com-
mand and control approach: $80.8 million versus $138.7 million.
As a means of jump starting the market, the SCAQMD held an auction of RTCs on July
29, 1994. Utilities, which had by then installed new emission control equipment and did
not need their full allocation, were large sellers of NOx credits. A total of 114,676 NOx
credits and 9,400 S02 credits changed hands at the auction. Prices for RTC were low for
near years and much higher for more distant years (See Table 6-3). In all cases, though,
the cost for a ton of credits was far lower than the marginal control costs from recently
enacted or proposed command and control regulations. In a privately negotiated
transaction in August 1995, Unocal reported paying Anchor Hocking $3.65 million for 8.6
million pounds of NOx emission credits. The per ton price ranged from less than $20 to
$2000, depending upon the credit's year of validity, prices that are very much in line with
the 1994 auction.
Table 6-2: RECLAIM TRADING CREDIT PRICES
(July 1994 auction)
—Yrnr—
1\T n
cn
1994
2
1995
334
1,500
1996
574
1,900
1997
1998
1999
1,480
2000
1,580
2001
1,700
2002
1,830
2003
2,090
Source: BNA Daily Environment Report, August 10, 1994, p. A-l
In June 1995, the SCAQMD proposed adding VOC emissions to RECLAIM; the
initiative included almost 1,000 facilities in 14 industrial categories that generated 4 tons
or more of VOC annually. In contrast to the NOx and S02 programs that were scheduled
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for 7 years, the VOC program would last 14 years. Officials estimated that the program
would reduce emissions from these sources from 53 tons a day, the projected level for
1996, to 15 tons a day by 2010.
The proposal met with fierce opposition from environmentalists who charged that the
1989 baseline selected for emissions could result in a huge increase in emissions over 1993
levels when the program starts.13 Regulators sought the 1989 baseline to avoid locking
industry into emission levels associated with recessionary conditions in 1991 through
1993. Industry representatives note that the AQMP has a schedule for orderly reductions
over time toward the 2010 goals. In their view, emissions increases from 1993 to 1996 as
the economy pulls out of a recession are not relevant so long as emissions remain below
the target levels in the AQMP.
Unable to resolve the baseline issue, the 12-member SCAQMD governing board set
aside in January 1996 the proposed rule to include trading of VOCs within RECLAIM and
directed its staff to develop a program to trade VOC emissions separately.
RECLAIM officials hope to launch by the fall of 1996 an expansion of the program to
30,000 companies, from the 400 at present. And in the latest of its innovations for
reducing ozone precursor emissions, the SCAQMD announced on May 13, 1996 that it will
offer tradable "smog credits" to lawn mower retailers for accepting and scrapping the 1.7
million gasoline-powered mowers in the District.14 SCAQMD estimates that a single
mower used for 20 hours a year emits as much VOC emissions as a new car driven 26,000
miles. Credits for scrapping lawn mowers would complement other means available to
firms for earning credits, such as scrapping older cars and increasing employee use of car
pools.
RECLAIM has won praise for its progress to date. A state-mandated performance
review found that the District has a state-of-the-art air quality program that is performing
efficiently and effectively.15 According to the report, RECLAIM, demonstration projects
to stimulate technological development, and outreach and compliance programs have
helped save or create over 10,000 jobs while achieving air quality improvement.
6.1.3. Other State Air Emission Trading Programs
6.1.3.1. Illinois
Unveiled in March 1995 and expected to begin operations in 1997, the Illinois Clean
Air Market will allow the trading of VOC emission credits between firms in the Chicago
nonattainment area. Like RECLAIM, the program is designed with an overall emissions
cap and phased reductions to meet air quality goals. By 2007 when the market is sched-
uled to end, the Chicago area must be in attainment for the national ambient air quality
standard for ozone. If all eligible sources of 10 tons of VOC per year choose to participate,
the program would have 283 participants. The Illinois EPA estimated that companies
would have the potential to save $160 million annually in compliance costs.16
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An earlier program in Chicago was aimed at trading NOx allowances; however, the
Lake Michigan Ozone Study released in 1994 showed that reducing NOx emissions substan-
tially could have the effect of increasing ground level ozone. Consequently, efforts to
reduce NOx levels in the immediate Chicago area have been put on hold.
6.1.3.2. Delaware
In December 1995, the state Department of Natural Resources and Environmental
Control proposed a trading program in VOC and NOx emissions. The program would
stationary sources and mobile sources, through such features as vehicle scrapping and
employee trip reduction efforts. The program is expected to become operational in early
1996.
Delaware also was one of the first states to approve facility-wide permitting. In
October 1995 Chrysler obtained permission to set a facility-wide limit on air emissions
from its Newark Delaware auto assembly plant.17
6.1.3.3. Massachusetts
In September 1993, Massachusetts officials announced a trading program involving
new and existing stationary source and mobile source emissions of three pollutants: VOC,
NOx, and CO. The program allows sources to bank emission reduction credits (ERC)
obtained for reducing emissions below permitted levels. On February 22, 1995 the US
EPA gave tentative approval to the program. In June 1995, Massachusetts officials
announced the first trade under the program, as Montaup Electric bought NOx credits
from New England Power Company. Montaup Electric also announced that it would
donate to the state 5 percent of the 65 tons of ERCs it purchased and retire any credits it
does not use.
6.1.3.4. Michigan
The Michigan Department of Environmental Quality designed a voluntary statewide
air emissions trading program in VOC and all criteria pollutants except ozone that took
effect on March 16, 1996. The Michigan program is voluntary, allowing all stationary and
mobile sources to participate. Sources earn ERCs for emission reductions beyond what is
required by an emission standard or limitation. Sources may bank ERCs for future use,
trade emission reduction credits, or engage in emission averaging. To ensure an environ-
mental benefit, the DEQ will retire 10 percent of all ERCs.
6.1.3.5. New Jersey
Under the 1991 Pollution Prevention Act, the State's Department of Environmental
Protection is testing the use of facility-wide permits that would incorporate pollution
prevention into the permitting process and improve the overall administrative efficiency
of permitting by consolidating the air, water and waste permits into a single, facility-wide
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permit.18 This meant that as many as 150 separate permits at a facility were rewritten as
a single permit. As an inducement for firms to participate in the pilot test, New Jersey
allows operations with facility-wide permits to change processes without prior approval
provided the facility continues to meet existing emission standards and the process
changes do not increase hazardous air emissions or wastes. Firms that apply for the pilot
program must agree to expand the number of pollutants in their pollution prevention
plans. As of December 1995, New Jersey had accepted three firms (out of 18 applicants)
into the program.
In mid-June 1995, New Jersey officials proposed an air pollution trading system that
would allow companies to meet permit limits by acquiring credits earned by other
companies for reducing emissions below permitted amounts. The US EPA indicated the
proposal would be accepted.19
6.1.3.6. Texas
With a grant in 1992 from the EPA, the Texas Air Control Board began to evaluate and
design a marketable permit program for air pollutants with special emphasis on the
Houston nonattianment area. Using an incremental approach, the State first created an
emission reduction credit bank in 1993 and later adopted rules for community-wide
trading. One of the means by which ERCs may be generated is scrapping polluting motor
vehicles. The Texas scrappage provisions require actual measurement of vehicle emis-
sions to determine the number of credits earned. This differs from the approach in
California which relies on a formula to determine credits.
The first trade under the trading program took place in July 1995 and involved Anchor
Glass Container, which sold 125 tons of NOx ERCs to Rollins Environmental Services.
Rollins plans to use only 96 tons of ERCs with the remainder to be retired to improve air
quality in Houston. A broker involved in the transaction indicated terms of the sale are
confidential, but that if Anchor has more credits for sale they could be sold for between
$5,000 and $15,000 per ton in the Houston area.20
The Texas ERC bank had 370 tons of VOC in inventory as of July 1995 waiting for a
buyer. Demand for VOC credits has been slow because sources have been able to achieve
required reductions internally, partly as a consequence of new "flexible" permitting rules.
Texas implemented "flexible" air permit rules effective December 1994 that allow a
company to make equipment and process changes at a facility provided that total
emissions remain below a permitted maximum level. Emission caps under this program
are set at levels that reflect use of state of the art equipment and are generally lower than
what is allowed under traditional permitting. Historically, the State required the ap-
proval of individual pieces of pollution control equipment and the modification of a
source's permit every time there was a process change. The "flexible" permitting approach
allows sources to engage in intra-plant trades within the emission cap. In the 14 months
to March 11, 1996, the State had issued 11 "flexible" air permits.
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6.1.3.7. Wisconsin
In 1996 the Wisconsin Air Bureau expects to have EPA approval for a trading program
in VOC and NOx emissions. The chief remaining point of contention in developing the
program is the credits to offer in instances of facility shutdown and production rollback.
To discourage the long-term banking of emission credits, the State proposed to subject
banked shutdown credits to a "banking" fee of $35 per ton in the first year the credit is
certified, with the fee doubling every year thereafter until the credit is used or sold.21 Like
the four other state programs described above, the Wisconsin proposal was developed
largely in response to provisions of the Clean Air Act Amendments of 1990 regarding the
use of offsets for new sources.
6.1.4. NESCAUM/MARAMA Demonstration Project
The NESCAUM/MARAMA Demonstration Project, initiated in June 1993, joins
regulators, environmentalists and members of the business community to resolve the
issues surrounding emission trading in the states from North Carolina to Maine.22 The
first phase in 1993 developed principles for creating discrete emission reductions (DERs).
The second phase, completed in 1995, developed portocols to promote an environmen-
tally sound trading system by reviewing actual and proposed trades. The third phase
assisted the EPA in developing its Open Market Trading Rule, enacted on July 26, 1995
(see below).
Phase two reviewed twelve proposed DER trades. Several trades were completed,
including a June 1 1995 transaction in which Merck purchased 10 tons of NOx credits valid
for one year from Public Service Electric and Gas Co. for $16,000, or $1,600 per ton, to
meet requirements in its operating permit.
6.1.5. OTC/OTAG Regional NOx Reduction Program
Title I of the Clean Air Act Amendments establish a northeast transport region
consisting of 12 states and the District of Columbia, which runs from northern Virginia to
New England. This region in effect is treated as one Moderate ozone nonattainment area
requiring RACT controls. Title I also called upon EPA to establish an Ozone Transport
Commission (OTC) as a consensus building organization with representation from each
affected jurisdiction to recommend additional control measures. By September 1994, the
OTC had obtained agreement among all participants except for Massachusetts and
Virginia that its model rule for controlling NOx should be implemented.23 Massachusetts
signed recently, leaving Virginia as the only non-signatory. Virginia has declined to sign
the agreement before ozone modeling is done (possibly a reflection of the fact that
northern Virginia, the only part of the state in the OTR, has few large NOx sources.
The agreement divides the region into three zones with different magnitudes of NOx
reduction. Within the Inner Zone, which includes the northeastern corridor from northern
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Virginia to southern New Hampshire, large stationary N0X sources (utilities and indus-
trial boilers) must achieve the less stringent of a 65 percent reduction relative to 1990
baseline emissions or an emissions rate no greater than 0.2 pounds of NOx per million Btu
by May 1, 1999. By 2003 these requirements become a 75 percent reduction and 0.15
lb/MBtu for Inner Zone facilities. Facilities in two other zones, designated the Outer Zone
and the Northern Zone, are required to achieve lesser reductions.
The agreement establishes a program for trading NOx reduction credits that closely
parallels the acid rain allowance trading program. Both programs create allowances and
provide for trading of allowances under a cap that decreases over time and both programs
encourage banking of excess allowances. The OTG has worked out the total NOx budget
for 1999 and 2003, as well as allocations to each state. Under the OTC plan, states would
be responsible for the further division of allocations to individual sources within the state.
OTC estimates that the trading feature of its proposal will save approximately 30 percent
in compliance costs (nearly $80 million on an annualized basis) relative to uniform
reductions at each source. The OTC NOx trading program is scheduled to begin in May,
1999.
The issue of expanding the control of NOx emissions (and perhaps also VOC emis-
sions) outside the ozone transport region is being addressed by the Ozone Transport
Assessment Group, which was organized through a March 1995 EPA policy memoran-
dum that asked each of the 37 states east of the Mississippi River and the District of
Columbia to look at the problem of ozone formation and transport within that entire
region.24 OTAG is at a much earlier stage of development than its OTC counterpart. Its
primary activity to date is modeling the effects of different ratios of NOx and VOC
throughout the OTAG region. NOx has been the primary focus of the modeling efforts
since it is transported over greater distances than are VOC. If OTAG determines that
controls on NOx or VOC beyond those called for the Clean Air Act Amendments of 1990
are required, OTAG is expected to propose a trading option.25
6.1.6. Open Market Trading
On March 16, 1995, President Clinton announced 25 initiatives for regulatory
reinvention at EPA, the first one of which was an "open market" air emissions trading rule
to help achieve the national ambient air quality standard (NAAQS) for ozone in
nonattainment cities faster and at lower cost. The announcement read in part:
EPA will issue an emissions trading rule for smog-creating
pollutants that will allow States to obtain automatic approval
for open market trading of emissions credits with accountabil-
ity for quantified results. Expanding use of market trading on
a local and regional level will give companies broad flexibility
to find lowest cost approaches to emissions reductions. The
rule will encourage experimentation with new trading op-
tions, while enabling States to pursue more quickly allowance-
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based cap systems, which are already under development in
some areas.26
In August 1995, EPA published a proposed open market trading rule, demonstrating
the Agency's strong support for innovative, market-based approaches that would produce
less expensive and faster progress toward meeting the NAAQS for ozone.27 The term
"open market" was used to distinguish the approach from programs with an emissions
budget or cap, the so-called "closed market" system. Offered as a model of what states
could adopt within their State Implementation Plan (SIP), the proposed rule would allow
sources to legally substitute discrete emission reductions (DER) for on-site compliance
with pollution control equipment. DERs could be offered on the market by sources that
control more than required, much like the earlier offset program. The open market
trading rule placed responsibility for the quality of DERs on firms that used them for
compliance.
The Agency received numerous comments on the proposal, not all of them favorable.
One of the most common complaints was that the seller of DERs should bear some (or all)
of the responsibility for assuring their quality. Otherwise, the market could be flooded
with offers, many of them of dubious quality, and sources seeking to use the DERs for
compliance would have great difficulty determining the quality of what they were
acquiring. The market in DERs could flounder unless this problem is resolved, according
to potential DER users. Whether (and in what form) the Agency reproposes the open
market trading rule remains under consideration as of the writing of this Section.
Many of the programs developed by states and local areas in response to (or are at
least compatible with) EPA's open market trading initiative are summarized in the EPA
Directory of Air Quality Economic Incentive Programs: On-line Database, which can be
accessed from the following Web address: http://www.epa.gov/omswww/market.htm.
6.1.7. Acid Rain Allowance Trading
An early solution to the problem posed by S02 and nitrogen oxide emissions from
power plants was to build tall stacks to disperse the pollutant away from populated areas.
By the 1980s, though, this strategy fell into disfavor as studies began to demonstrate
probable harm to lakes and forests, agricultural crops, materials, and other valuable
resources from acidic precipitation. Studies also revealed that acidification of soils and
waters could release heavy metals and aluminum previously bound in the soils, posing a
risk to human health and to ecosystems.28
Though great scientific uncertainty surrounded almost every aspect of the acid rain
issue, legislators in states affected by acid rain were understandably interested in
implementing some form of control program. In Title IV of the Clean Air Act Amend-
ments of 1990, Congress created a program for the control of S02 emissions from utility
sources that would cut total national emissions by approximately one-half at an estimated
cost of $4 to $5 billion per year. The program sets a cap of 8.95 million tons of S02 per
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
year, to be achieved in two phases. During the Phase I, which began in 1995 and ends in
2000, the 110 highest emitting coal-fired power plants (with a total of 256 coal burning
"units") must reduce emissions to meet a tonnage cap equal to 2.5 lbs. of S02 per million
Btu multiplied by each unit's average 1985-1987 Btu consumption.29 The tonnage cap is
expressed in terms of "allowances," with each allowance good for one ton of S02. Phase
I will yield a nationwide reduction in emissions of 3.5 million tons of S02. Sources that
fail to meet these limits are subject to a penalty of $2,000 per ton of "excess" emissions. In
the second phase, which begins in 2000, all power plants producing more than 25
megawatts and all new facilities must meet an emission cap computed as 1.2 lbs. of S02
per million Btu times each unit's 1985-1987 Btu consumption.30 Phase II reductions will
total an additional 5 million tons and will reach the overall 8.95 million ton cap.
Utilities must install continuous emission monitoring systems (each one costing
approximately $250,000) to verify compliance with the emission limits, and file quarterly
reports of their hourly emissions data with EPA. Initially sources mailed these data to
EPA on floppy disks, but EPA is now encouraging electronic transmission. Continuous
emission monitoring systems (CEMS), the accepted industry standard for measuring S02,
NOx, and C02, provide an accurate accounting of emissions, assuring both buyers and
sellers that the commodity they are trading is real.
Prior to the drafting of this title of the Clean Air Act, a number of studies had identi-
fied potential cost savings of up to $1 billion per year through emission trading due to
significant differences among utility sources in the marginal cost of abatement.31 Title IV
created a market-based trading system in S02 under which utilities may buy or sell
allowances for future production of S02. Title IV also sets allowable limits on NOx
emissions from utility boilers. Though these emissions are not subject to the same type of
market-based trading system as S02, an owner of two or more power plants may comply
with the NOx requirement by averaging emissions across all of its power plants.
S02 allowances may be used for 30 years, giving utilities the flexibility to develop
compliance approaches during their regular planning cycles. Utilities may satisfy their
emission limits by controlling emissions to the required extent or through participation in
the allowance market. Under the authority of Title IV, EPA developed an allowance
tracking system that serves as the official record of ownership and transfers. In addition
to private transactions in allowances, Title IV directed EPA to offer at an annual auction
beginning in 1993 allowances equivalent to about 2.8 percent of total allowances to assure
that some allowances would be available for utilities that planned on complying with
their emission limits by purchasing allowances. EPA also was authorized to make a small
quantity of allowances available at the price of $1500 per ton to guarantee the availability
of allowances if utilities found themselves out of compliance and had no other recourse.
Beginning January 1, 1995 the EPA can allocate up to 300,000 bonus allowances from
its Conservation and Renewable Energy Reserve to utilities that undertake energy
efficiency and renewable energy measures. In December 1995, the EPA announced
awards to ten utilities totalling 8,635 allowances under this program.32
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Trading Systems
In March 1995, EPA expanded the acid rain program to include industrial facilities that
burn fossil fuels. The rule establishes an "opt-in" program that allows industrial and other
sources to participate in the existing S02 program that previously included only utilities.33
Industrial sources that participate in the program will have an allocation of allowances
that they can use for compliance or sell or trade to other sources.
Results from 1995 and 1996 show that the Acid Rain Program has been very successful,
with firms over-achieving the reductions target at less than one-half the forecasted cost.
These results appear to derive more from the emissions cap and flexible technological
requirements, rather than trading, per se. By early 1997 utilities had exchanged over 7.2
million allowances and purchased an additional 300,000 allowances through the annual
auction. Intra-firm transfers, which are believed to be significant, are not included in this
total. While this activity is not negligible, most utilities were not relying on trading
allowances to achieve compliance. The price of allowances has been far below what had
initially been forecast, an issue that has attracted considerable attention (see Table 6-3).
Before the Clean Air Act Amendments of 1990 were passed, industry estimates of
abatement costs were as high as $1500 per ton, leading Congress to use that figure for the
price of direct allowance sales by the EPA.
In searching for explanations for the relatively low level of activity, analysts have cited
transactions costs that could reduce realized gains from trading allowances, the behavior
of public utility commissions, and state legislation that promotes the use of locally-
produced coal.34 Another factor is that utilities have traded between facilities owned by
the same company (so-called "intra-utility" trading) rather than between facilities owned
by different parent companies ("inter-utility" trading). Only the latter trades are included
in the totals reported above.
Low allowance prices appear to have their explanations too, as detailed by Burtraw.
Prices for virtually every form of compliance have declined well below what had been
anticipated before 1990. The price of low-sulfur western coal delivered to midwest and
eastern markets has declined due to productivity improvements in extraction and
transport. Engineers have found ways to blend low-sulfur coal with high sulfur coal to
reliably meet emission limits. Innovations in the scrubber market have cut the cost of
scrubbing by approximately one-half. Apparently the decline in allowance prices over
time is largely a consequence of improvements in productivity and technology, encour-
aged by the flexibility of the Acid Rain Program.
Economists have criticized the mechanics of the auction, suggesting that it may also
contribute to lower prices than otherwise would occur.35 The Act requires what is termed
a discriminating price auction, which ranks bids from highest to lowest.36 EPA has
interpreted this as requiring that each seller receive the bid price of a specific buyer. The
auction awards allowances offered by the seller with the lowest asking price to the bidder
with the highest bid price first and moves up the supply list and down the bid list until no
bidder is willing to offer what a seller demands. This unusual auction mechanism
apparently causes sellers to misrepresent and under-reveal their true costs of emission
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
control.37 EPA may consider using a single price auction, which in theory should elicit
higher bids
Table 6-3: ESTIMATED AND AVERAGE REALIZED ALLOWANCE PRICES
(nominal dollars per ton)
Pre-1989
1990
Early
1993
1994
1995
1996 CBOT
1997 CBOT
industry
EPA
trade
CBOT
CBOT
CBOT
auction
auction
esti-
esti-
s
auction
auction
auction
mates
mate
$1,500
$750
$250
$122
$140
$126
$66
$110
The role that allowance trading is playing in stimulating cost-effectiveness in S02
control at coal-fired power plants will continue to be debated. There is no doubt that S02
control has experienced tremendous technological and productivity improvements over
a very short period of time, leading to much lower allowance prices than had been
anticipated. The issue is the extent to which these gains could have been achieved
without allowance trading. One analyst concluded that it is the flexible, performance-
based design of the acid rain control program, rather than allowance trading per se that
has stimulated the development of low cost compliance measures seen in Phase I, and that
allowances trading had played a positive but lesser role.38
A question, then, is what effect trading actually has had - and what effect it is likely to
have in the future. A few utilities clearly are buying allowances as part of their compli-
ance plan. At the March 29, 1993 auction, Carolina Power and Light bought approxi-
mately two-thirds of the allowances offered. At the March 27, 1995 auction Duke Power
bought over one-half of the allowances offered. More broadly, however, allowance
transactions and especially auctions provide a very visible price benchmark against which
utilities and regulators can gauge performance.
Phase II of the Acid Rain program is likely to see much greater reliance on allowance
trading. Phase II will involve 700 additional sources, more of whom are expected to select
scrubbing as their method of compliance. Because more scrubbing should result in
greater variation in the marginal costs of control across sources, there should be greater
incentives to trade allowances to achieve compliance in phase II.
A recent EPA assessment of the Acid Rain program put the costs at $1.2 billion
annually in Phase I and $2.2 billion annually in Phase II.39 Early estimates of the costs of
acid rain control put the costs at $4.5 to $6 billion annually if a command and control
approach were adopted.40 The same report estimated the mean value of annual health
benefits at $10.6 billion in Phase I and $40 billion in Phase II. Benefits to the environment
and to materials previously had been placed at approximately $2 billion annually.41
Interestingly, health benefits were not a major concern in the design of acid rain control
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Trading Systems
legislation, yet they now appear to be the dominant benefit component, dwarfing earlier
estimates for the environmental effects.
Phase I, which began in 1995, affects
263 separate combustion units at 110 coal-
fired power plants. An additional 182
combustion units joined Phase I as com-
pensation or substitution units, raising
the total of Phase I units to 445. Prelimi-
nary emissions data compiled by EPA
show that S02 emissions control is far
ahead of schedule; during 1995, emissions
from all Phase I sources amounted to 5.3
million tons, approximately 40 percent
below the required level of 8.7 million
tons and only about one-half of what
these units had emitted during the 1980s
(see Figure 6-1).42
6.1.8. Chlorofluorocarbon Production Allowance Trading
The Montreal Protocol on Substances that Deplete the Ozone Layer called for a cap on
chlorofluorocarbon and halon consumption at 1986 levels, with reductions scheduled for
1993 and 1998.43 At a second meeting in 1990, the parties to the Montreal Protocol agreed
to a full phaseout of the already-regulated CFCs and halons, as well as a phaseout of
"other CFCs," by 2000.
The Montreal Protocol defined consumption as production plus imports, minus
exports. Consequently, in implementing the agreement, EPA distributed allowances to
companies that produced or imported CFCs and halons. Based on 1986 market shares,
EPA distributed allowances to 5 CFC producers, 3 halon producers, 14 CFC importers,
and 6 halon importers.
The marketable permit system for producers and importers resulted in a number of
savings relative to a program that directly controlled end uses. EPA needed just 4 staffers
to oversee the program, rather than the 33 staffers and $23 million in administrative costs
it anticipated would be required to regulate end uses. Industry estimated that a command
and control approach to end uses would cost more than $300 million for record keeping
and reporting, versus only $2.4 million for the allowance trading approach.44
Title VI of the Clean Air Act Amendments of 1990 modified the trading system to
allow producers and importers to trade allowances within groups of regulated chemicals
segregated by their ozone depleting potential.45 As an example, EPA assigned producers
and importers allowances for five types of CFCs (CFC-11, CFC-12, CFC-113, CFC-114, and
CFC-115). Producers and importers could trade allowances within this group. For
Figure 6-1: PHASE I S02 EMISSIONS
(millions of tons)
12
10
8
6
4 ¦
2
0
1880
8ouro«: EM Aoid Rain Overview
1006
1086 1000
Year
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
example, 14 million kilograms of CFC-11 and CFC-113 were traded for CFC-12 in 1992 as
air conditioner makers and foam producers reduced use of these substances, while CFC-
12 users maintained their demand. By 1994, the quantity of CFC-11 and CFC-113
swapped for CFC-12 grew to 26 million kilograms. EPA rules implementing Title VI
specify that each time a production allowance is traded, one percent of the allocation is
"retired" to assure further improvement in the environment.
EPA coupled the marketable allowance trading system with excise taxes on CFC
production, which are discussed in the section on fees, taxes, and charges. The rationale
for the excise taxes was that the restrictions on the quantity of CFCs and halons offered on
the market would lead to rapidly escalating prices. The excise taxes were designed to
capture "windfall profits;" whereas the allowance trading system was designed to assure
that production and import of the substances was efficient (concentrated at the lowest cost
producers, who then produced the most valued CFCs).
6.1.9. Lead Credit Trading
As early as the 1920s tetra-ethyl lead was added to gasoline by refiners to increase
octane and reduce premature combustion in engines, allowing more powerful engines to
be built. Lead additives in gasoline were the least expensive of several ways of raising
octane. The additives also prevented premature recession of valve seats.
By the 1970s virtually all gasoline contained lead at an average of almost 2.4 grams per
gallon. EPA acted to curtail lead use in gasoline for two reasons. New production
vehicles by 1975 were equipped with catalysts to meet tailpipe emission standards for
hydrocarbons, carbon monoxide and nitrogen oxides mandated by the 1970 Clean Air Act.
Unleaded fuel was required for vehicles manufactured after model year 1975, since
exhaust system catalysts would be fouled and not function properly if run on leaded
gasoline. As catalyst-equipped vehicles began to dominate the fleet, sales of unleaded
gasoline reached about 80 percent of all gasoline sales by the mid 1980s.
Concerns about the role of airborne lead in adult hypertension and cognitive develop-
ment in children motivated EPA to also limit the overall use of lead in gasoline. EPA
required that the average lead content of all gasoline sold be reduced from 1.7 grams per
gallon after January 1, 1975 to 0.5 grams per gallon by January 1, 1979. Initially these
limits were applicable as quarterly averages for the production of individual refineries,
implicitly allowing trading across batches of gasoline at individual refineries. Later EPA
broadened definition of averaging to allow refiners who owned more than one refinery
to average or "trade" among refineries to satisfy their lead limits each quarter.
During the late 1970s the demand for unleaded gasoline grew steadily as more
catalyst-equipped vehicles were sold. By the early 1980s, the market share of leaded
gasoline had shrunk to the point that EPA's limits on the average lead content of all
gasoline ceased to have an impact on the lead content in leaded gasoline. Meanwhile,
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Trading Systems
evidence mounted concerning the magnitude and severity of the health effects attributable
to lead.
EPA acted to curtail sharply the remaining use of lead in gasoline, initially setting as
a limit an average level of 1.1 gm/gal beginning on November 1, 1982. EPA lowered the
average to 0.5 gm/gal by July 1, 1985 and 0.1 gm/gal by January 1, 1986. To facilitate the
phasedown, EPA allowed two forms of trading, inter-refinery averaging during each
quarter and banking for future use or sale.
Inter-refinery averaging, which operated from November 1, 1982 to December 31,
1985, allowed refineries to "constructively allocate" lead. To take an example, suppose
refiner A produced 200 million gallons of gasoline in the first quarter of 1983 with an
average lead content of 1.4 gm/gal. Refiner A could buy 60 million grams of lead credits
from refiner B, who produced an equal quantity of gasoline with lead content of 0.8
gm/gal. In 1985, EPA permitted refiners to bank credits for use until the end of 1987, in
effect extending the life of lead credits to that date.
Lead credits were created by refiners, importers and ethanol blenders (who reduced
the lead content of gasoline by adding ethanol). For example, when the average lead
content was limited at 1.0 gm/gal, a refiner producing 1 million gallons of gasoline with
average lead content 0.5 gm/gal would earn 500,000 lead credits. EPA enforcement relied
on reporting requirements and random testing of gasoline samples. Reporting rules were
simple; each refiner or importer was obligated to provide names of entities with whom it
traded, the volumes for each trade, and the physical transfer of lead additives. The data
allowed EPA to compare reported lead additive purchases and sales for each transaction
to assure compliance. Discrepancies in reported figures could trigger investigations and
enforcement actions. Well over 99 percent of all transactions were reported accurately;
however several dozen fraudulent transactions occurred.46 In one quarter alone, the now-
defunct Good Hope refinery in Louisiana accounted for over one-half of all reported lead
credits sold during one quarter. Subsequent investigation uncovered the fraud.
Judged by market activity, the lead credit trading program was quite successful. Lead
credit trading as a percentage of lead use rose above 40 percent by 1987. Some 20 percent
of refineries participated in trading early in the program, rising to 60 percent by the end
of the program.47 Early in the program 60 percent of refineries participated in banking,
rising to 90 percent by the end. Trading allowed the EPA to phase out the use of lead in
gasoline much more rapidly than otherwise would have been feasible. Given that refiners
faced very different opportunities for reducing the lead content of gasoline, a rapid phase-
down without trading would have rewarded refiners collectively, since the market price
of gasoline would have been determined by the high cost producers.
During the period when lead credits were traded, the price increased from about 3/4
cents/gm to 4 cents/gm.48 Nearly one-half of all lead traded was between refineries
owned by the same firm.49 With external transactions, refiners revealed a preference to
deal with normal trading partners even though they could obtain a better price elsewhere.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
This indicates that even though there was an active market in lead credits, trading did not
produce least cost outcomes.
EPA estimated that the banking provisions alone would involve 9.1 billion grams of
lead credits and save refiners $226 million. Subsequently, the amount of lead banked was
placed at just over 10 billion grams. The lead trading program may be viewed in
retrospect as a considerable success. The use of lead in leaded gasoline was sharply
reduced over a short period of time without spikes in the price of gasoline that otherwise
might have occurred. The market in lead credits was quite active, though, as noted above,
refiners did not maximize gains from trade. Also, despite seemingly foolproof procedures
for catching fraudulent trades, some small refiners and ethanol blenders nonetheless sold
more credits than they had earned.
6.1.10. Gasoline Constituents
Title II of the Clean Air Act Amendments of 1990 imposes substantially tightened
mobile source emission standards by requiring automobile manufacturers to reduce
tailpipe emissions and refiners to develop reformulated fuels. The Amendments require
tailpipe emission reductions of 35 percent for hydrocarbons and 60 percent for NOx,
starting with 40 percent of the vehicles sold in 1994 and increasing to all vehicles sold in
1996. Light-duty trucks are subject to similar requirements. EPA is required to impose a
further cut of 50 percent below these standards by 2003 unless it finds such reductions are
not necessary, technologically feasible or cost-effective.
Title II requires that states with CO nonattainment areas with design values of 9.5 or
higher must implement a program to supply oxygenated fuels in winter months. Gasoline
sold in the 41 cities affected by this requirement must have an oxygen content of 2.7
percent starting in 1992. To meet the percent oxygen requirement, states are "strongly
encouraged" to create a program for marketable oxygen credits to provide flexibility to
suppliers.
Title II requires that the 9 worst ozone nonattainment areas offer reformulated gasoline
during the summer months and specifies several performance characteristics for reformu-
lated gasoline, as well as certain fuel properties including a minimum oxygen content of
2 percent by weight beginning in 1995. Under so called "opt in" provisions, an additional
31 areas applied to be included in the RFG program. Title II allows states to establish
trading systems for three constituents of reformulated fuels: oxygen, aromatics, and
benzene. Under a trading system refiners could meet reformulated content requirements
by producing gasoline that met the specifications or by trading credits in these constitu-
ents with other refiners so that collectively the standards were satisfied.
In October 1992, EPA issued rules for trading programs in oxygenates; however,
participation is optional for the affected states.50 In areas where trading is permitted,
credits in oxygenates can be exchanged between parties that the state has designated as
responsible for satisfying fuel requirements, the Control Area Responsible Party or CAR.
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Trading Systems
Normally the CAR is the party who owns gasoline at a terminal. The CAR receives data
on the volume and oxygen content of all gasoline shipped to the terminal and assures that
the average oxygen content is 2.7 percent by weight. Where trading is allowed, the CAR
would be free to sell excess oxygenate credits to other CARs or buy oxygenate credits
from a CAR to meet the 2.7 percent requirement.
While trading in oxygenates (and other fuel constituents) theoretically offers a cost-
effective means of meeting RFG requirements, in fact the trading programs have been
moribund. Only the Pennsylvania part of the Philadelphia ozone nonattainment area
adopted trading rules and within that area no trades have been reported. Other areas
have declined to allow trading, citing as prohibitive the costs of monitoring such a
program.
6.1.11. Heavy Duty Truck Engine Emissions
Title II of the Clean Air Act Amendments of 1990 directs EPA to set standards for
particulate and NOx emissions from heavy duty truck engines. The standards must
represent the maximum degree of reductions achievable, with the objective to accomplish
a 75 percent reduction in the "average of actually measured emissions." EPA interpreted
this language to allow engine manufacturers to average together the emission perfor-
mance from all heavy duty truck engines they produce.
Averaging of emissions facilitates compliance, since not every class of engines has to
meet the 75 percent reduction standard. How much engine manufacturers actually save
is unknown; however, a recent paper that examined a similar type of engine performance
averaging program for light-duty trucks proposed in California found that the cost
savings were likely to be modest.51
6.1.12. Hazardous Air Pollutants
6.1.12.1. Early Reduction Program
In December 1992, EPA issued final rules for the early reduction of hazardous air
pollutants.52 If a facility qualifies by reducing hazardous air pollutants by 90 percent (95
percent in the case of hazardous particulate emissions) prior to EPA proposing MACT
regulations on the source category, the facility may defer compliance with the new
maximum available control technology standards (MACT) for up to six years. Because
participation in the program is voluntary, a source must anticipate cost savings or it
would not have an incentive to participate. Once a source is accepted into the program it
becomes legally obligated to meet the 90 (or 95) percent emission limitation. Trading
exists intertemporally in that sources exchange their early reductions for their later
reductions.
EPA has shown how such a program can benefit the environment. Assume a source
emits 100 tons per year. Under the early reduction program it would emit 10 tons per
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
year. Further assume that MACT would have the source reduce emissions to 2 tons per
year in year 5 and thereafter. Table 6-4 illustrates the time profile of emissions. The
source has reduced emissions by 360 tons in years 1-4 in exchange for 48 tons of emissions
in years 5-10. Total emissions are reduced by 312 tons.
Table 6-4: EXAMPLE OF EMISSION BENEFITS OF EARLY REDUCTION PRO-
GRAM
Year
MACT Emissions
Earlv Reduction Emissions
1
100
10
2
100
10
3
100
10
4
100
10
5
2
10
6
2
10
7
2
10
8
2
10
9
2
10
10
2
10
Total
412
100
By mid-1993 over 60 chemical plants had asked to participate so as to avoid for 6 years
the synthetic organic chemical MACT standard. Other types of facilities also had applied
to join the program.53
6.1.12.2. Petroleum Industry NESHAPS
This NESHAP rule, promulgated on August 18, 1995, establishes MACT requirements
for process vents, storage vessels, wastewater streams and equipment leaks tanks at
refineries. The rule specifically includes marine tank vessel loading activities and
gasoline loading racks. The rule excludes distillation units at pipeline pumping stations
and certain process vents that EPA determined to be subject to future NESHAP rules:
catalyst regeneration on cracking units, vents on sulfur recovery units, and vents on
catalytic reforming units.
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On September 19, 1995 EPA issued a final NESHAP rule for marine vessel tank
loading operations that affects new and existing marine bulk loading and unloading
facilities that emit 10 tons or more of a hazardous air pollutant (HAP) or 25 tons of any
aggregate HAPs. Affected facilities must install a vapor collection system to collect VOC
displaced from marine tank vessels during loading. The vapor recovery system must
achieve a 95 percent reduction in emissions (98 percent if combustion is used).
Both rules permit the use of emissions averaging among marine tank vessel loading
operations, bulk gasoline terminal or pipeline breakout station storage vessels and bulk
gasoline loading racks, and petroleum refineries. Emissions averaging gives the owner
the opportunity to find the most cost-effective control strategies for its situation. The
owner may over-control at some emission points and under-control at others to achieve
the overall required level of emissions control.
6.1.12.3. Hazardous Organic Chemical NESHAP
The Hazardous Organic Chemical NESHAP (or "HON") affects more than 400 facilities
of the Synthetic Organic Chemical Manufacturing Industry (SOCII). The final rule
requires sources to limit emissions of organic HAPs to apply "reference control" or
equivalent technology at MACT. In recognition of the high costs of some MACT controls
in this industry, the rule allows emissions averaging. Under this alternative method of
compliance, sources engaging in pollution prevention measures that over-control at some
points earn credits that can be used to offset debits for under-control at other points.
6.1.13. Corporate Average Fuel Economy Standards (CAFE)
The Energy Policy and Conservation Act set standards for domestic automobile
manufacturers, beginning at 18 miles per gallon (mpg) in 1978 and rising to 27.5 mpg by
1985. The original standards were modified on two occasions, now standing at 27.5 mpg
for 1990 and later production vehicles.
Corporate average fuel economy and compliance with the CAFE standard is deter-
mined as the harmonic average of the fuel economy of automobiles produced by each
manufacturer. Harmonic average fuel economy is more difficult to achieve than would
be simple averaging. For example, to achieve a CAFE standard of 27.5 mpg, two 35 mpg
vehicles must be sold for every 20 mpg vehicle sold. The penalty for failing to meet the
CAFE standard is $5 per automobile for every 0.1 mpg shortfall. There are carry back and
carry forward provisions akin to banking that allow shortfalls in one year to be met with
credits from another year.
While CAFE standards are directed at fuel economy, they do have a pollution conse-
quence. C02 emissions rise and fall inversely with fuel economy (R2 = .99), while
emissions of CO, NOx and hydrocarbons are largely unrelated to fuel economy.54 Thus,
the CAFE standard can be viewed as an intra-firm trading system to meet a de facto C02
reduction goal. It is only fair to point out that higher gasoline taxes would be a less costly
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means of reducing fuel use (and, implicitly, C02 reductions) since fuel taxes do not distort
the selection of vehicles available to consumers as does a CAFE standard (under which
smaller, less safe vehicles tend to replace larger, safer vehicles) .55 Further, a gasoline tax
affects vehicle use as well as which vehicle is purchased, whereas higher CAFE standards
have the perverse effect of stimulating more use of a vehicle (the so-called "rebound
effect").
6.1.14. Wood Stove and Fireplace Permit Trading
During the 1970s and 1980s a number of mountain communities in Colorado experi-
enced unacceptably high levels of particulate pollution during winter months due to the
use of wood-burning stoves and fireplaces. The growing popularity of skiing and other
winter activities has exacerbated the problem in some of these areas.
Telluride tried to combat the problem through traditional command and control
regulations. In 1977 the city passed an ordinance limiting new residential construction to
one stove or fireplace per unit. While this might have slowed the deterioration in air
quality, continued new construction virtually guaranteed that air quality would continue
to worsen, which it did into the 1980s.
In 1987, the city adopted a program, part command and control and part modeled on
air pollution offsets, that would guarantee improvements in air quality. Existing wood
stove and fireplace owners were grandfathered with operating permits, but required to
meet stringent performance standards within 3 years: 6 grams of particulate matter and
200 grams of CO per hour. During the first two years of the program these individuals
converting their fireplaces and wood stoves to natural gas could earn a rebate of $750,
partially defraying their costs. For new construction, no new permits would be issued for
wood-burning stoves or fireplaces. To install such an appliance in new construction, the
owner must produce permits to operate two fireplaces or stoves. The only place these
permits could be acquired was from existing permit owners.
In a matter of months a lively market in second-hand permits developed, with
potential buyers and sellers making contact through classified advertisements. By the
mid-1990s transaction prices for permits were in the $2,000 range. In the years after
Telluride adopted the program, it has reported no violations of the ambient air quality
standard for particulate matter.
Other communities in Colorado soon implemented similar programs that combined
performance-based standards that encouraged the retirement of older inefficient fireplaces
and wood stoves. The programs all aimed at reducing the burning of wood, but some
offered no rebate for conversion to natural gas. From the available evidence, the pro-
grams appear to have been a success, achieving air quality goals quickly and at a rela-
tively modest cost. A project for future research would compare and contrast the
approaches taken by different communities in limiting the use of heavily-polluting wood
stoves and fireplaces, as well as assess the effectiveness of the programs.
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6.1.15. Grass Burning Permit Trading
The City of Spokane, Washington nestled in the Spokane River basin about 400 feet
below the surrounding Columbia River Plateau, forming a natural trap for air pollution
during temperature inversions. The area exceeds the federal 24 hour PM10 standard
several times each year, due to a combination of unpaved roads, wind-blown dust, grass
burning and wood stoves.
Spokane is a major growing region for turf grass seed, with between 15,000 and 30,000
acres planted for seed production each year. After harvest each year, the fields are burned
in August or September to control weeds and pests and to stimulate the grass to produce
seed rather than concentrate its energy on vegetative growth. In 1990, Spokane County air
pollution authorities implemented an innovative program to reduce grass burning as a
source of PM.56
Grass burning had been subject to permit for years. The program superimposes on the
permit process a County-wide cap of 35,000 acres that may be burned each year. Growers
are allocated permits to burn based on burning permits they held during the base period
1985 to 1989. The overall cap does not appear to be binding; it exceeds the actual acreage
burned in every year since 1971. However, some grass growers found themselves short
of desired permits because they had planted other crops during the base period or they
had rented their land to tenants (who held the permits) during the base period.
The program allows transfers of grass burning permits in three situations: permanent
land transfers; temporary land transfers by lease; and transfer through an auction held by
the Air Pollution District. When permits are transferred through the auction, 10 percent
of the burnable acreage is deducted from the buyers account, resulting in a small decrease
over time in the total number of burnable acres. The auction mechanism is patterned after
the acid rain allowance auction. Parties submit sealed bids and offers prior to the auction.
The party with the highest bid is matched with the party with the lowest offer, with the
actual transaction occurring at a price midway between the bid and offer. If the quantity
offered was not all purchased by that bidder, the bidder with the next lower price is then
matched with the remaining offer. The process continues until all potential transactions
are completed.
6.2. TRADING OF WATER EFFLUENTS
6.2.1. Effluent Bubble
In concept, a water effluent bubble operates identically to the air emission bubble
described earlier. A facility with multiple discharge points is wrapped in an imaginary
bubble, with a facility-wide discharge limit rather than separate limits at the individual
points of discharge. In contrast to the 100-some bubbles approved under the air emission
trading program, only a handful of facilities within the iron and steel industry have
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received the authority to bubble effluents. The historical development of that program is
described below.
Asked by EPA to evaluate the potential for water effluent bubbling, a contractor
ventured in 1981 that bubbling would not produce cost savings for most industrial
facilities.57 The reasons include the fact that most industrial facilities already have
centralized wastewater treatment plants with a single point of discharge, trades between
outfalls may be circumscribed due to water quality concerns, and some facilities already
operated under permits that allowed all technologically feasible tradeoffs to be made.
Despite the acknowledged limitations, a subsequent study identified 4 plants in the
iron and steel industry that potentially would benefit from water bubbling as they went
from BPT (best practicable control technology currently available) to BAT (best available
technology economically achievable).58 The iron and steel industry offered what might be
unique opportunities for bubbling inasmuch as many plants had yet to consolidate their
water treatment at a single processing facility. The projected savings from effluent
bubbles were modest as a percent of control costs, though, as shown in Table 6-5.
EPA's implementation of the effluent bubble for the iron and steel industry was
dictated by a 1983 settlement agreement among the EPA, the Natural Resources Defense
Council, and the American Iron and Steel Institute. The agreement supports the use of
bubbling under the Clean Water Act, but imposes constraints on the approach. Bubbling
of effluents from iron and steel plants is acceptable provided that net reductions are
achieved in total effluents. Relative to BAT limits that are in effect, bubbling must involve
an average reduction of at least 15 percent in the mass of suspended solids and 10 percent
in the mass of other pollutants. The NRDC reserved the right to challenge bubbles that
might be proposed for other industries.
Since the bubble became available to the industry, 7 iron and steel plants in the
midwest have used the provision.59 Three of the mills no longer use the bubble: one
facility closed and two have changed ownership, a cause for termination of bubbling
rights. The steel effluent bubble undoubtedly has produced some compliance cost savings
for the industry, but according to a former EPA employee who is now a consultant to the
industry the bubble has not resulted in any pollution control innovations.60
6.2.2. Effluent Trading (point-point)
Effluent trading dates to the early 1980s, when the State of Wisconsin created a State-
wide program to give sources such as wastewater treatment plants and pulp and paper
mills added flexibility to meet state water quality standards through the trading of
effluent rights. The first and only application of this authority is on the heavily-industrial-
ized lower Fox River.
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Table 6-5: PROJECTED COST SAVINGS FROM EFFLUENT BUBBLE
(in thousands of 1978 dollars)
Facilitv
One-Time
Savings in
Carrital Casts
Percent of
BAT Capital
Costs
Annual
Savings in
O&M Costs
Percent of
Annual BAT
O&M Costs
Republic Steel,
Cleveland
328
5.7
15
3.6
Republic Steel, Warren
200
3.3
10
2.5
U.S. Steel,
Gary
1,103
4.7
55
2.1
Wheeling Pittsburgh,
Steubenville
800
6.2
32
2.7
Source: TBS, p.9.
Analysis showed that the potential from trading was significant: $7 million annually
or roughly one-half of anticipated compliance costs for BOD (biological oxygen demand)
regulations.61 The program that was implemented allows trading between point sources
of rights to discharge wastes that increase BOD. Sources that control more than required
under their discharge permit may sell those incremental right to sources that control less
than is required. Strict conditions are imposed on would-be buyers of rights: trading of
rights is allowed only if the buyer is a new facility, is increasing production, or is unable
to meet required discharge limits despite optimal operation of its treatment facilities.
Traded rights must have a life of at least one year, but may not run past the expiration
date of the seller's discharge permit, at most a five year period. Since effluent discharge
limits may change with each permit renewal, there can be no guarantee that rights that
were traded in during one permit period would be available during subsequent permit
periods.
The State initiated BOD trading programs on two rivers: a 35-mile stretch of the Fox
River and 500 miles of the Wisconsin River. For administrative reasons, the Fox River was
divided into three segments, the Wisconsin River 5 segments. The Fox River program
includes 21 parties: five mills and two towns in each of the three administrative segments.
Twenty-six parties are included in the Wisconsin River program. To date, trading under
these programs has been disappointing, involving a single trade on the Fox River between
a municipal wastewater plant and a paper mill.62 One reason for the limited activity is
that dischargers developed a variety of compliance alternatives not contemplated when
the regulations were drafted. Second, there were and remain questions about the
vulnerability of the program to legal challenge, since the Clean Water Act does not
explicitly authorize trading and the standards set by the State do not conform fully to the
national policy of uniformity established in the CWA. Finally, as noted above, the State
imposed severe restrictions on the ability of sources to trade.
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Currently, the EPA is investigating the feasibility of extending point-point trading to
San Francisco Bay, where copper discharges would be traded, and Tampa Bay, where
nitrogen and suspended solids would be traded.63
6.2.3. Effluent Trading (Point-nonpoint)
Three programs allow the trading of nutrient discharges between point and nonpoint
sources: Dillon Reservoir, Cherry Creek Reservoir, and the Tar-Pamlico Basin. These
programs are discussed in turn.
6.2.3.1. Dillon Reservoir
Dillon Reservoir, which supplies Denver with more than one-half of its water supply,
is situated in the midst of a popular recreational area. Four municipal wastewater
treatment plants discharge into the reservoir: the Frisco Sanitation District, Copper
Mountain, the Breckenridge Sanitation District, and the Snake River treatment plant of the
Keystone area.
Due to concerns that future population growth in the region could lead to eutrophic
conditions in Dillon Reservoir, as well as the discovery that Copper Mountain was
exceeding its discharge limits, EPA launched a study of the Dillon Reservoir in 1982 under
its Clean Lakes program. The study indicated that phosphorus discharges would have to
be reduced to maintain water quality and accommodate future growth. Point source
controls alone were unlikely to be sufficient: runoff from lawns and streets and seepage
from septic tanks also would have to be reduced.
A coalition of government and private interests developed a plan to reduce phospho-
rus releases to the reservoir. The plan established a cap on total phosphorus loadings,
allocated loadings to the four wastewater treatment plants, and provided for the first-ever
trading of phosphorus loadings with nonpoint sources.
The plan relies on 1982 phosphorus discharges as the baseline; that year represented
a near worst-case scenario due to high rainfall and water levels that led to high nonpoint
loadings. Discharges from new nonpoint sources are restricted through regulations
requiring developers to show a 50 percent reduction from pre-1984 norms. The plan
established a trading ratio of 2:1, whereby point sources that are above their allocation
must obtain credits for twice the amount of the excess from sources that are below their
allocation. New nonpoint sources must offset all of their discharges using a trading ratio
of 1:1 with existing nonpoint sources. The system would be monitored through existing
NPDES permits for point sources.
Trading has been very slow. Not only has the region experienced a recession for a
number of years limiting population growth but the wastewater treatment plants have
found cheaper means of controlling phosphorus than were previously envisioned. In the
future, though, opportunities for further control at the wastewater treatment plants are
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thought to be limited and population growth is once again evident, leading to the
conclusion that more trading activity is likely.
6.2.3.2. Cherry Creek
Like the Dillon Reservoir, Cherry Creek Reservoir also is a source of water for the
Denver region and an important recreation area. The Denver Regional Council of
Governments established an effluent trading program for Cherry Creek very similar to
that at Dillon. One difference is that trading at Cherry Creek has been nonexistent to date,
reflecting the fact that phosphorus loadings at municipal wastewater treatment facilities
remain below limits set by the Colorado Water Quality Commission.
6.2.3.3. Tar-Pamlico Basin
The North Carolina Environmental Management Commission designated the Tar-
Pamlico Basin as nutrient sensitive waters in 1989, in response to findings that algae
blooms and low dissolved oxygen threatened fisheries in the estuary. North Carolina law
requires that upon designating an area as nutrient sensitive, the Division of Environmen-
tal Management (DEM) must identify the nutrient sources, set nutrient limitation objec-
tives, and develop a nutrient control plan.
DEM prepared analysis showing that most of the nutrient loadings (nitrogen as the
limiting factor but also phosphorus) came from nonpoint sources, principally agricultural
runoff. Other identified sources included municipal wastewater treatment plants and
industrial and mining operations. DEM proposed a solution to control both nitrogen and
phosphorus discharges from wastewater treatment plants: nitrogen at 4 mg/1 in the
summer and 8 mg/1 in the winter; phosphorus at 2 mg/1 year-round.
Concerned about the potential costs of this regulation, municipal wastewater discharg-
ers worked with state agencies and the North Carolina Environmental Defense Fund to
design an alternative approach. Ultimately accepted by the DEM, the plan requires the
parties to the accord to develop a model of the estuary, identify engineering control
options, and implement a trading program for nutrient reductions. The trading program
allows each of the 12 point source dischargers the opportunity to offset any discharges
above their permitted limits. They may trade with feedlot operators on a 2:1 basis or
cropland managers on a 3:1 basis. To date point source dischargers have found means of
meeting new and stricter discharge limits without resorting to trading. In the future
trading may become more attractive as a compliance option.
6.2.3.4. Other Point-Nonpoint Trading Proposals
The EPA is actively involved in a number of other projects that are likely to lead to
effluent trading between point and nonpoint sources. These projects include: Chehalis
Basin, Washington (BOD); Boone Reservoir, Tennessee (nutrients): Wicomico River,
Maryland (phosphorus): Long Island Sound, New York (dissolved oxygen): Tampa Bay,
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Florida (nitrogen and suspended solids); and Chatfield Basin, Colorado (phosphorus).
(EPA's May 1996 report Draft Framework for Watershed-Based Trading, appendix C, contains
about 20 examples that will be put in a table as an update).
6.3. LAND PROTECTION TRADING
6.3.1. Wetland Mitigation Banking
Wetlands (also sometimes termed swamps, bogs, or floodplain) were long considered
unproductive wastelands. Over time hundreds of thousands of acres of wetlands were
drained by farmers, filled by developers and otherwise converted to "productive" uses.
From the date of the original colonization, the United States has lost over one-half of its
original wetland acreage.
In recent years, as scientists pointed out the ecological importance of wetlands,
government policies at the federal, state and local level have come to emphasize wetland
preservation, not development. Developers whose proposed actions would destroy
wetlands are increasingly being forced to minimize damage to wetlands, and to offset
what damage occurs through wetland protection or enhancement offsite. Sometimes the
offset takes the form of compensation; that approach is described more fully in the section
on fees, charges and taxes. This Section describes wetland mitigation banking, a proce-
dure for offsetting the adverse impacts of development on wetlands.
Wetland mitigation banks are created through a memorandum of understanding
among federal and state officials and a bank administrator. Generally the MOU would
describe the responsibilities of each party, the physical boundaries of the bank, how
mitigation credits will be calculated, and who is responsible for long-term management
of the bank. Typically, credits, which are usually denominated in terms of acres of habitat
values, may only be used to mitigate development within the same watershed. State
regulations would cover issues such as where mitigation credits can be used (e.g., state-
wide or within a watershed) and the compensation ratios that would be required for
various types of development. Existing banks vary from a few acres to over 7,000 acres.
Among existing wetland mitigation banks, most MOUs allow the bank operator to sell
credits only after the bank has actually accomplished wetland enhancement or preserva-
tion. A minority of states allow the manager to sell credits concurrently as preservation
or enhancement actions are undertaken.
The land for a mitigation bank could have any number of origins. Some of the more
common sources of bank lands include existing natural wetland areas, enhanced natural
wetland areas, pits created by the removal of landfill material, and lands that previously
had been drained for agricultural use. Nearly one-half of existing wetland mitigation
banks were established by state highway departments to provide a means of mitigating
losses due to highway construction. Other mitigation banks are operated by conservation
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organizations and for-profit entities that offer credits for sale.
Mitigation banking offers several advantages over more traditional on-site mitigation
activities: environmental values are better protected in large scale developments; econo-
mies of scale in wetland preservation and enhancement can be realized; the cost of
wetland mitigation actions can be made known to developers very early in the develop-
ment process; and with banking there can be greater assurance of long-term management
of the protected area.
Some 60 wetland mitigation banks in at least 15 states are currently in operation and
about 40 more are in advanced stages of planning.64 Wetland mitigation banking was
featured in the 1996 Farm Bill as part of the Wetland Reserve Program. Wetland mitiga-
tion banking has been endorsed by the EPA, the Army Corps of Engineers (which
oversees most development in wetlands under Section 404 of the Clean Water Act), and
by the authors of leading legislative initiatives to reauthorize the Clean Water Act. All of
this suggests that wetland mitigation banking will grow in importance as a means of
protecting and enhancing the nation's wetlands.
6.3.2. Transferable Development Rights
To achieve the goal of restricting development in environmentally sensitive areas,
many communities have sought to zone large tracts of agricultural land to preclude or
severely limit development. Compensation to property owners in exchange for their
accepting restrictive zoning in perpetuity typically takes one of two forms: transferable
development rights (TDR) and purchase of development rights (PDR). PDR payments
typically are established as the difference between appraisals of land value in agricultural
use and for development.
No appraisals are needed with a TDR system. Rather, transferable development rights
are allocated to property owners on the basis of acreage (e.g., one right per acre). TDRs
are available for sale to urban areas designated by the community for further growth.
Property owners in the designated growth areas are allowed to exceed normal building
density limits provided they acquire sufficient TDRs. Thus the market mechanism
provides a means of compensating rural property owners whose land holdings are
restricted in terms of development; no government funding is needed. However,
inasmuch as the price of TDRs is determined by the availability of TDRs and the demand
for more intensive development in designated growth areas, there is no necessary
connection between the payment and the decrease in value of rural land whose develop-
ment is restricted.
A comprehensive treatment of all applications of TDRs is beyond the scope of this
paper. Many of the earliest programs were poorly conceived and little used. A 1981
review of 23 separate TDR programs was able to identify only 6 trades that had taken
place.65 Instead of attempting to review all TDR programs, a small sample of cases are
described that highlight some of the most successful programs to convey to the reader a
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sense of how such programs can operate in practice, the typical range of transaction
prices, and some of the problems that have been encountered. Case studies reported here
include Montgomery County, Maryland; Talbot County, Maryland; The Pinelands, New
Jersey; and Palm Beach County, Florida (the latter to give a sense of why many programs
have failed to live up to expectations). The TDR programs in Maryland are compared
with the State's PDR program.
6.3.2.1. Montgomery County, Maryland
While both programs are directed at preserving agricultural land, Montgomery
County's program differs from Palm Beach County's in one important respect: landowner
participation is compulsory in the designated agricultural portion of Montgomery County.
When Montgomery County downzoned about 90,000 acres in the western portion of the
county from zoning of one dwelling per 5 acres to one dwelling per 25 acres in 1980 and
1981, it distributed TDRs to affected landowners at the rate of one TDR for every five
acres, some 18,000 TDRs in all. Landowners who so elected could receive PDRs; however,
few chose that option. The County designated other areas closer to Washington D.C. as
"receiving" areas in which higher density development would be allowed if TDRs were
submitted with the development application. Over 12,000 units of receiving capacity have
been authorized to date and more than 5,500 TDRs used, at prices ranging from $3,000 to
$7,000 each.
6.3.2.2. Talbot County, Maryland
Talbot County initiated two TDR programs in 1989. One program, designed to protect
the shoreline of Chesapeake Bay and selected interior areas, allows landowners in the
designated interior areas to earn one development credit for each 20 acres permanently set
aside for agricultural use. The credits may be used to increase the density of shoreline
development from one dwelling for every 20 acres to one for every 5 acres, provided
measures are implemented to protect the shoreline from erosion. Under this program
TDRs have changed hands for $40,000 to $50,000, a reflection of the high value of water-
front property.
The second program attempts to protect undeveloped rural areas as farms and to
concentrate future development in areas where land is most valuable. In the designated
"Rural Agricultural Zone" the County distributed TDRs at the rate of one for each ten
acres, the base development rate. The maximum allowed density was increased to one
dwelling for every five acres; however, an extra TDR would have to accompany any
proposal to subdivide a 10 acre parcel and build two dwellings. The result is that the least
valuable lands are preserved in agricultural use while the most valuable areas are
developed residentially.
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6.3.2.3. Maryland PDR Program
Though not a trading system, the purchase of development right (PDR) program in the
State offers a point of comparison with the TDR program. The State purchases develop-
ment easements to protect farmland through a program that requires 40 percent cost
sharing by the county. In the 1980s, the State spent some $26 million, of which the county
shares totaled $11 million, to protect 23,500 acres, or about $1,100 per acre. In Montgom-
ery County, landowners who chose to receive compensation in the form of PDRs instead
of TDRs received an average of about $950 per acre.66 The compensation as PDRs is quite
similar to what has been received for TDRs (transaction prices were equivalent to $600 to
$1400 per acre). More details on the Maryland PDR program are provided in the next
section of the report, which deals with subsidy approaches to environmental manage-
ment.
6.3.2.4. The Pinelands, New Jersey
The New Jersey Pinelands is a largely undeveloped, marshy area in the south eastern
part of the State encompassing approximately one million acres that provides habitat for
several endangered species. In an effort to direct development to the least environmen-
tally sensitive areas, the Pinelands Development Commission established a system of
TDRs known as Pineland Development Credits. Landowners in environmentally
sensitive areas receive PDCs in exchange for limiting development at the rate of 1 PDC for
every 39 acres of existing farmland, 1 PDC for every 39 acres of preserved upland, and 0.2
PDCs for every 39 acres of wetlands. One PDC could be used by a developer within
designated growth areas to exceed the base density by four units.
While simple in concept, the program was actually complex in that it sought to include
52 local governments located within the Pinelands, several of which failed to see the
advantages of participation at first. While the program was slow to gain acceptance, and
suffered for years from a glut of already-approved development projects, more recently
there are definite signs of success.
The Commission established a Pinelands Development Credit Bank to act as a
purchaser of last resort for PDCs at the statutory price of $10,000 per credit. In 1990 the
Bank auctioned its inventory at the price of $20,200 per PDC. To date, developers have
used well over 100 PDCs.
6.3.2.5. Palm Beach County, Florida
In 1980, Palm Beach County adopted a plan directed at controlling growth and
alleviating a chronic deficiency in public facilities. Future growth would be managed to
encourage higher density development in built up areas of the County and 25,000 acres
were earmarked for an Agricultural Reserve in which future development would be
restricted. The County's plan for the agricultural area was ambiguous in that it continued
to allow development on five acre lots throughout the entire 25,000 acres and more
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intensive 1 acre developments on planned unit developments of 40 acres on which
farmers had based their borrowing. Investors who control about two-thirds of the 25,000
acres have held off selling TDRs since they expected the future value of the land for
residential development to exceed what they could receive for TDRs and land restricted
solely to agricultural uses.
Meanwhile, demand from developers has not materialized to the extent once antici-
pated. A large supply of permitted construction remains in the pipeline; for this no TDRs
are needed. Also, developers can build more densely by obtaining the status of planned
unit districts for which no TDRs are required. While the program eventually may succeed
in protecting parts of the intended 25,000 acre Agricultural Reserve, to date very little has
been accomplished.
6.4. INTERNATIONAL TRADING ACTIVITIES INVOLVING US GOVERNMENT
6.4.1. Joint Implementation
The concept of "Joint implementation" (JI) stems from the United Nations Framework
Convention on Climate Change (FCCC) signed during the 1992 Earth Summit in Rio. By
agreeing to the terms of the FCCC, over 100 countries committed themselves to reducing
their greenhouse gas emissions. Under JI, businesses, non-governmental organizations,
and government entities in one country jointly undertake mitigation and sequestration
with similar interests in another. Projects that diminish, sequester, or avoid global
greenhouse gas emissions may be considered JI projects if the source of emissions being
offset and the site of the emission abatement are located in two different countries.
JI is in effect an incentive mechanism applied to countries by the FCCC, giving them
an "offset" option to meet their greenhouse gas reduction commitments by implementing
reduction activities abroad. Since reduction costs may vary among countries, JI provides
industrialized countries with opportunities to reduce emissions at a lower cost abroad
than they could within their borders. The possibility that such offsets eventually may
become marketable reduction credits provides an added incentive. It should be noted,
however, that the 1995 Conference of the Parties to the FCCC in Berlin decided that no
Parties could earn credits through JI activities during the pilot phase of the project, which
the Conference decided would end on December 31, 1999, at the latest. This decision has
led some industry officials in the United States to ask why they should participate in JI
activities.67
The United States Initiative on Joint Implementation was the first national JI program
to adopt a formal set of criteria and evaluation process for JI proposals. An Evaluation
Panel of representatives of U.S. government agencies determines the acceptability of
proposed projects. The first seven United States JI projects were accepted in January 1995,
and another eight projects were accepted in December 1995. Central America has hosted
most of the projects, but Russia and the Czech Republic have each hosted one as well.
Projects have involved biomass, geothermal, hydroelectric, and wind energy technologies
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and forestry management. Investments in the second round of projects could exceed $200
million.68
Japan is also asking businesses to participate in joint implementation projects. It plans
to set up an " APEC environment technology exchange virtual center" to promote the
transfer of Japanese carbon dioxide emission containment technologies to members of the
Asia-Pacific Economic Cooperation Forum.69
6.4.2. Proposed Cross-Border Trading Program: El Paso Region
The El Paso, Texas region is a nonattainment area for the federal ozone, PM10 and
carbon monoxide standards. Much of the pollution problem can be traced to sources in
Ciudad Juarez, Chihuahua, directly across the Mexican border.70 Because of the very
different levels of economic development and pollution control in the two cities, there
appear to be opportunities for cost-effective control of air pollution in the region through
cross border trading.
On March 29 1996, U.S. and Mexican representatives created a binational committee to
develop recommendations for the prevention and control of air pollution in the interna-
tional air quality management basin (IAQMB). Work of the committee is expected to
include the integration of air quality monitoring networks, exchange of information,
development of outreach programs, evaluation of specific abatement strategies, and the
development and implementation of economic instruments such as emission trading
programs with emission budgets, allowances, and/or caps.
Endnotes for Section 6
1. See Tietenberg (1985) for a comprehensive review of emission trading policy.
2. For example, Unocal earned ERCs to apply against obligations at its Los Angeles
refinery by scrapping old cars.
3. U.S. EPA December 4, 1986.
4. EPA (1980).
5. Crookshank (1994).
6. Hahn and Hester (1989).
7. Hahn and Hester (1989).
8. Foster and Hahn (1995).
9. All price data are expressed in 1992 dollars.
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10. This is a one hour standard, not to be exceeded more than once a year (averaged over
three years).
11. Background papers on RECLAIM include: Selmi (1994) and Lentz and Leyden, 1996.
12. The District originally planned to have a single expiration date of December 31 each
year for all allocations. Concern that there could be a "logjam" of trading near the
expiration date led District officials to randomly divide facilities into two categories of
equal size: Cycle One sources with calendar year compliance dates, whose credits would
expire on December 31 of each year; and Cycle Two sources with a July 1 to June 30
compliance calendar, whose credits would expire on June 30. Sources in Cycle One are
free to trade with those in Cycle Two, but the expiration dates on the credits do not change.
13. The Natural Resources Defense Council contended that basing emissions allocations
on 1989 emission levels could result in an increase in emissions of up to 71 percent over
1993 levels. See: "TRADING PROGRAM FOR VOLATILE ORGANICS STALLS OVER
INITIAL EMISSION ALLOCATION," BNA Daily Environment Report, August 15, 1995, p.
B-l.
14. "LA smog cops seek clean cut in dirty mowers," Financial Times, May 14, 1996, 14.
15. Review conducted by KPMG Peat Marwick and cited in BNA Daily Environment Report,
March 3, 1995, p. B-2.
16. Illinois EPA, 1995. Design for VOC Emissions Trading System.
17. BNA Daily Environment Report, Nov. 11, 1995, B-l.
18. GAO (1996).
19. BNA Daily Environment Report, June 5, 1995, pAA-1
20. BNA Daily Environment Reporter, July 25, 1995, B-5.
21. BNA Daily Environment Report, August 29, 1995, B-l.
22. NESCAUM, which stands for Northeast States for Co-ordinated Air Use Management,
is an association of the state air quality directors of each of the New England states, plus
New York and New Jersey. MARAMA, which stands for the Mid-Atalntic Regional Air
Management Association, is an association of the state air quality directors from
Pennsylvania, New Jersey, Delaware, Maryland, Virginia, North Carolina and the District
of Columbia.
23. The model rule was developed as a template for states to create their own individual
state rules. The model rule may be accessed at www.dep.state.pa.us.
24. Information on OTAG is available on an electronic bulletin board EPA has set up as
part of the Technology Transfer Network and accessible by modem at 919-541-5742.
25. According to Robert Shinn, commissioner of the New Jersey Department of Environ-
mental Protection (www.thompson.com/tpg/enviro/airr/airrapril.html).
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26. President Bill Clinton and Vice President A1 Gore (1995).
27. 60 FR 39668.
28. Five years after the Act was passed, EPA analysis indicated that reduction of sulfates
could have large health benefits, perhaps as much as $40 billion per year for Phase I of the
Acid Rain program. See EPA, Office of Air and Radiation (November, 1995).
29. The 2.5 pounds of S02 per million Btu is adjusted, if necessary, so that aggregate
emissions meet the overall reduction targets.
30. This will add over 700 additional sources to the program, mostly cleaner and/or
smaller plants.
31. ICF Resources Inc. (1989a).
32. BNA Daily Environment Report, December 11, 1995, p. A-3.
33. U.S. EPA, Federal Register, March 29, 1995.
34. Burtraw (1995).
35. Cason (1995).
36. Section 416(d)(2) of the Act states "allowances shall be sold on the basis of bid price,
starting with the highest bid and continuing until all allowances for sale at such auction
have been allocated."
37. Cason (1995), p. 905.
38. Burtraw.
39. U.S. EPA 1995. op cit.
40. ICF Resources (1989).
41. Portney (1990).
42. http://www.epa.gov/acidrain/overview.html.
43. This agreement was ratified by the United States and 22 other countries in September,
1987.
44. EPA, CFC Regulatory Impact Analysis, 1988, vol 2.
45. Canada, Mexico and Singapore also implemented trading programs in CFCs.
46. Loeb (1996).
47. Hahn and Hester (1989).
48. Anderson, Rusin and Hoffman.
49. Kerr (1993).
50. EPA (1992).
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
51. Rubin and Kling (1993).
52. 57 FR 61970 (December 29, 1992).
53. Novello and Martineau (1993).
54. Khazzoom (1995).
55. See, for example, Crandall etal. (1986).
56. Skelton (1994).
57. Putnam, Hayes & Bartlett, Inc. (1981).
58. Temple, Barker & Sloane (1981).
59. Memorandum from Robert Graff and Brian Morrison, Industrial Economics, Inc., to
Richard Kashmanian, Regulatory Innovations Staff, EPA, September 16, 1993.
60. Memo, op cit. p.12., citing conversation with Gary Amendola.
61. O'Neil (1983).
62. In return for a cash payment, the paper mill was able to close its wastewater treatment
facility and send its effluent to the wastewater treatment plant.
63. "Effluent Trading in Watersheds Policy Statement" at
http://www.epa.gov/OW/watershed/tradetbl.html
64. See Environmental Law Institute (1993) and Crookshank (1995).
65. Maabs-Zeno (1981).
66. Schiff.
67. Bureau of National Affairs, Daily Environment Report, June 1, 1995, p. A4.
68. Bureau of National Affairs, Daily Environment Report, December 20, 1995, pp. A5-6.
69. Bureau of National Affairs, Daily Environment, December 1, 1995, p. A4.
70. Texas Natural Resource Conservation Commission (1994).
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7. SUBSIDIES
7.1. INTRODUCTION
For the purposes of this report, subsidies of interest involve government financial
support of activities believed to be environmentally friendly. Types of subsidies de-
scribed in this report include not only grants, low-interest loans, and favorable tax
treatment, but also procurement mandates for products believed to have environmental
advantages.
Research and development, information dissemination, and other services provided
by government below their true cost could also be considered subsidies. However, such
services are too varied and numerous to be included in this report.
Subsidies are often funded by charges on environmentally harmful products or
activities such as emissions charges or product charges. Advance disposal fees, for
example, provide revenues to subsidize the proper disposal of products after their use.
Although it could be argued that such disposal activities are not truly subsidized by
government if they are funded entirely by fees on the product paid by industry or
consumers, this Section includes such mechanisms for the purposes of discussion.
Given the variety of subsidies used in environmental management at all levels of
government, this Section does not attempt to cover the topic comprehensively. Its purpose
is instead to provide an overview with illustrative examples of the types of subsidies and
how they have been used to address specific environmental problems.
The following areas are considered: pollution prevention and control, the cleanup of
contaminated industrial sites, farming and land preservation, consumer product waste
management, citizen monitoring of environmental regulations, alternative fuels and low-
emitting vehicles, and municipal wastewater treatment. The section then concludes with
a discussion of subsidies that have had the unintended effect of promoting environmen-
tally harmful activities.
Table 7-1 summarizes various subsidy instruments, most of which are discussed in this
Section. The second column concerning who pays for the various subsidies does not
attempt to assess distributional impact or the question of whether costs of subsidies are
passed on to other businesses or consumers in some way. Information on funding sources
other than general revenues is included in parentheses where available. Whether the
recipients in column three pass on the subsidy benefits to customers or others is also not
assessed. Environmental subsidies have also been used extensively outside the U.S.
Information on these subsidies is provided in Section 9.
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Table 7-1: THE USE OF SUBSIDIES IN U.S. ENVIRONMENTAL PROTECTION
Subsidy Instrument
Who Pavs?
ReciDients
Grants
Brownfields development grants
EPA, states
Communities,
property owners
Cost-sharing for land conserva-
tion
Federal government
Property owners
Conservation easements
Federal, state, and local
governments (Land trans-
fer taxes)
Property owners
Environmental violation report-
ing rewards
States of New Jersey, Cali-
fornia
Individuals and
organizations
Waste management and recy-
cling grants
Federal, state, and local
governments (ADFs, waste
taxes)
Public and private
organizations
Unit-based waste collection or
reuse payments
State governments (ADFs,
waste taxes)
Businesses
Unit-based payments for alterna-
tive fuel vehicle use
Federal government
Public bus systems
and small busi-
nesses
Municipal sewage treatment
plant construction grants (re-
placed by loans)
Federal and state govern-
ments
Communities
Loans
Pollution control loans
State governments
Small businesses
Brownfields development loans
State governments (waste
taxes)
Property owners
Recycling business loans
State governments (ADFs,
waste taxes)
Businesses
Municipal sewage treatment
plant construction loans (re-
placed previous grant program)
Federal and state govern-
ments
Communities
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Subsidies
Subsidy Instrument
Who Pavs?
ReciDients
Tax benefits
Pollution control property
State governments
Private organiza-
tions
Louisiana environmental score-
card deduction
State of Louisiana
Businesses
Brownfields development
State governments
Property owners
Land use credits
State governments
Property owners
Recycling benefits
State governments
Businesses
Credits for ethanol and com-
pressed natural gas
Federal and state govern-
ments
Alternative fuel
manufacturers
Credits for alter-native fuel vehi-
cles and equipment
Federal and state govern-
ments
Alternative fuel
vehicle purchasers
Renewable electricity generation
credits
Federal government
Businesses
Electric vehicle credits
Federal government
Businesses or
organizations
Interest exemption of pollution
control investment debt
Federal government
Businesses or
organizations
Procurement mandates
Public procurement of recycled
products
Federal, state, and local
governments
Recycled products
manufacturers
Public procurement of alterna-
tive fuel vehicles
Federal, state, and local
governments
AFV manufactur-
ers
Recycled content requirements
Private organizations
Recycled products
manufacturers
AFV use mandates
Private organizations
AFV manufactur-
ers
Miscellaneous
Reduced fines in return for
supple-mental environmental
projects
Federal and state govern-
ments
Businesses
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Subsidv Instrument
Who Pavs?
ReciDients
Relaxed regulatory requirements
(eg. ethanol RVP waiver)
Federal, state, and local
governments
Various organiza-
tions
Research & development; public
education (technical assistance to
participants in voluntary pro-
grams)
Federal, state, and local
governments
Various organiza-
tions
7.2. POLLUTION PREVENTION AND CONTROL
This subsection discusses the use of tax benefits and loans to promote pollution
prevention and control. It also discusses an EPA program under which fines for environ-
mental violations are reduced in exchange for pollution prevention and control activities.
7.2.1. Tax Benefits
Numerous states offer favorable tax treatment for pollution control property to
promote the construction and installation of such property. In most states with such tax
incentives, the equipment must have pollution control as its primary purpose. Equipment
with other purposes in many states receives tax benefits on a prorated basis. Some states
also require environmental regulators to certify equipment eligible for tax breaks.
The benefits usually apply to property or sales/use taxes but can apply to income tax
in a smaller number of states. Air and water pollution equipment are most commonly
subject to benefits. However, New York offers a property tax exemption for industrial
waste treatment facilities, and Ohio offers benefits for noise abatement equipment. Tax
exemptions for production machinery and products directly used in manufacturing also
apply to pollution control equipment in many cases.1
In Texas, for example, a constitutional amendment approved by voters in 1993
provided for exemptions of certain pollution control property from property taxes. The
purpose of the amendment was to ensure that investments made to comply with environ-
mental mandates did not raise businesses' property tax payments. The exemptions
applied only to "devices, equipment, methods, or land used to prevent, monitor, control,
or reduce air, water, or land pollution" purchased in 1994 to "meet or exceed state, federal,
or local laws, rules, and regulations." The vast majority of exemption requests were for
equipment used to comply with Clean Air Act requirements. The total value of the
property for which businesses applied for exemptions was $1.2 billion. A state official
estimated that the applications would lead to tax revenue reductions of $26.6 million.
One problem with such tax benefits is that they can erode state or local tax bases. In
Texas, for example, the $26.6 million revenue shortfall is expected to affect mainly school
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Subsidies
districts but also cities and counties. One tax district appraiser predicted that homeown-
ers would make up the shortfall.2
The incentive effect of such preferential tax treatment is difficult to assess, in part
because of the simultaneous presence of other policies that affect behavior. If the benefits
are offered merely to subsidize compliance with regulations, the regulations themselves
probably have a stronger incentive effect than the benefits. However, the favorable tax
treatment could provide an incentive to exceed requirements.
7.2.2. Louisiana Environmental Scorecard3
Louisiana's environmental scorecard program, which was in effect from October 1990
to January 1992, linked tax exemptions for companies to their environmental performance.
The State's Departments of Economic Development and Environmental Quality built the
scoring system into an existing 10 Year Industrial Property Tax Exemption (IPTEP). In
contrast to the previous practice of awarding 100% exemptions for local property taxes,
new equipment, and other capital expenditures, the scoring system set companies at a
base exemption of 50% and rated their environmental behavior to determine how much
of the remaining 50% they could obtain.
Companies earned points based on their environmental violation record and the
amount of emissions they generated per employee. Table 7-2 shows how these factors
influenced point totals. The values in the second column of table 2 were multiplied by
coefficients ranging from 1 for violations in the past year to 0 for violations 6 years or
older. In column 3, one job was equivalent to $25,000 of payroll. After the Department of
Environmental Quality had assigned a preliminary score to an exemption request, a
company that received fewer than 100 points could raise its score by developing an
emissions reduction plan. Other criteria, such as recycling activities and job creation for
high unemployment areas, could also influence point totals.
Data suggest that this program had a significant incentive effect. Final scores during
the year of existence of the program averaged 94.9, significantly higher than preliminary
scores. Twelve companies submitted emission reduction plans for bonus points worth
$7,030,249 in tax exemptions. This amount is slightly greater than the $5.2 million of
exemptions recovered by the state through the system. Since the system was built into an
existing exemption, administrative costs were reasonably low. It also gave the state the
opportunity to use the exemption carrot to promote not only economic but also environ-
mental health.
Industry, however, opposed the program, perhaps in part because it attached condi-
tions to what had previously been an unconditional tax exemption (IPTEP). It was
industry's opposition that led the governor to terminate the program in 1992.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 7-2: POINTS AWARDED AND SUBTRACTED UNDER LOUISIANA
SCORECARD SYSTEM
Violation fine
Points sub-
tracted from 25
Pounds of emis-
sions Der iob
Points
Awarded
$0-$3,000
1
0-500
25
$3,001$ 10,000
5
501-1,000
20
$10,001-$25,000
10
1,001-2,500
15
Over $25,000
15
2,501-5,000
10
Criminal or felony
violations
20
5,001-10,000
5
Source: Environmental Law Institute (August 1993), p. 119.
7.2.3. Supplemental Environmental Projects
Supplemental environmental projects (SEPs) are "settlements negotiated by EPA and
an environmental law violator in which the company agrees to do an alternative environ-
mental project in return for an agency agreement to lower the proposed penalty."
Although such projects have existed since the early 1980s, they have increased in the 1990s
and are now included in as much as one in ten enforcement actions. More than 200 were
approved in 1992. In the first six months of 1992, one EPA official estimated, EPA
negotiated 164 SEPs worth approximately $23 million. In 1995, 348 SEPs valued at $104
million were negotiated.4
Most SEPs have been pollution prevention activities and involved violations in the
Toxic Substances Control Act (TCSA) or the Emergency Planning and Community Right-
To-Know Act (EPCRA), but SEPs have also been negotiated for violations of other laws.
In New England, for example, a sand blasting and paint company had its EPCRA fines
reduced from $50,000 to $14,000 by agreeing to hire an environmental auditor and launch
a five-year pollution reduction program. In Nebraska, a $5,000 fine for a Federal Insecti-
cide, Fungicide, and Rodenticide Act violation (supplying restricted-use pesticide to an
uncertified user) was reduced to $2,000 when the violating company agreed to install
concrete containment dikes around its pesticide storage tanks and a shower/eye wash.
The measures under the SEP were estimated to cost $7,496. In a RCRA case involving
improper characterization of waste streams, leakage of hazardous wastes from a sewer,
and operation of an unpermitted incinerator, Eastman Kodak will have its penalty
reduced by up to $3 million in return for investing $12 million in six SEPs expected to
reduce hazardous wastes at its Kodak Park facility by 2.3 million pounds by the year 2001.
In a CWA case, the City and Country of Honolulu agreed to spend $30 million on SEPs for
treating and reusing wastewater and sludge.5 Fines have also been reduced in cases for
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Subsidies
early compliance with existing environmental laws.
The advantage of SEPs for EPA is that fines that would be paid to the Treasury are
instead used for environmental protection activities and that the cost of these activities
usually exceeds the negotiated reduction in the fine. Estimates of the ratio of the cost of
the SEP to the reduction in the fine range from 2:1 to 6:1. At the state level, on the other
hand, SEPs have proven much less popular, in part because most states rely on fine
revenues to fund environmental activities.
Despite the high SEP-fine reduction ratio, SEPs can offer violators potential advantages
associated with improved environmental performance, including positive publicity,
reductions in waste management costs, and early preparedness for increasingly stringent
regulations. Another advantage is that unlike a fine, a SEP involves business expendi-
tures that lower taxes. Since all SEPs are voluntarily agreed to by violators, the SEP
mechanism appears to have a significant incentive impact.6
7.2.4. Loans and Tax-exempt Bonds
The federal government exempts from taxation interest on debt issued by state or local
governments to finance pollution-control or waste disposal facilities. This exemption cost
the government an estimated $625 million in 1995.7
Although it is beyond the scope of this report to describe all state financing programs,
several mechanisms used in California are discussed here. The California Pollution
Control Financing Authority (CPCFA) issues tax-exempt bonds to provide low-interest
loans of $1,000,000 to $20,000,000 to small businesses for pollution control and solid waste
recovery projects. (Loans in excess of $20 million are provided under a similar program
for larger businesses.) Repayment periods are usually longer than those of conventional
bank loans. Proceeds from bonds issued by CPCFA on behalf of businesses are deposited
into a fund held by the bond trustee. The borrower uses these funds for the project,
making periodic repayments according to the terms of the loan agreement.
For example, about $1 million in tax-exempt bonds were issued to finance a dry ash
waste recovery investment at the Eel River Sawmills' electricity generating facility. The
equipment purchased through this financing reprocesses ash waste through the electrical
generating facility, thereby reducing the amount of ash waste landfilled per day by 60%,
from 24 tons to 10 tons.8
In addition to these tax-exempt bond programs, CPCFA formerly offered CLEAN
(California Loans for Environmental Assistance Now) loans for pollution control invest-
ments. Under this program, CPCFA issued bonds and lent proceeds at interest rates
about 2% higher than bond rates. CPCFA hoped to repackage and sell these loans to raise
more capital but was unable to do so. In three years, 38 loans ranging from $30,000 to
$500,000 were issued totaling approximately $3 million. Since CLEAN's subsidized
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
interest rates attracted a number of businesses that could have obtained loans from
commercial banks, it ended up financing many pollution control investments that would
have been undertaken without the program. Moreover, CPCFA's loan disbursing process
was slow, its loan marketing poor, and its administrative costs high. The program cost
about $1.40 for every $1 lent.9
To address these problems, CLEAN was replaced by the California Capital Access
Program (CalCAP), under which CPCFA sets up loan portfolio "insurance" to encourage
banks to lend to small businesses. CPCFA matches the sum of premiums paid by the
borrower and the lender into a loss reserve account for the lender. In case of default, the
account covers losses. The maximum loan amount is $2.5 million, because the maximum
premium CPCFA can pay is $100,000 per loan10. As a result of improved marketing and
loan disbursing procedures and the leveraging of reserve funds under CalCAP, $160
million has been lent in two years compared with only $3 million in 3 years under
CLEAN. Under CalCAP, every dollar contributed by CPCFA has resulted in $23 lent.11
7.3. BROWNFIELDS PROGRAMS
Various measures have been taken to subsidize the development of brownfields, or
contaminated industrial sites that pose a relatively low risk to the environment compared
to the most heavily polluted Superfund sites. One reason for the adoption of incentive
measures in this area is that the Superfund program, with its command-and-control
approach to site cleanup, has progressed much more slowly than originally projected,
largely because of litigation surrounding responsibility for cleanups.
One important type of incentive in brownfields development is the limitation of
liability for those who agree to undertake remediation activities at such sites. This
liability-based incentive is discussed in Section 8. This Section briefly discusses the use of
subsidies (grants, loans, and tax benefits) in brownfields programs.
7.3.1. EPA Pilot Project Grants
Under EPA's Brownfields Economic Redevelopment Initiative, whose goal is "to
empower states, communities and other agents of economic redevelopment to work
together in a timely manner to prevent, assess, safely clean up, and sustainably reuse"
lightly contaminated areas,12 EPA has selected and sponsored 60 pilot projects with
funding of up to $200,000 per project. States, counties, communities, and tribes have been
awarded grants to fund a variety of activities related to brownfields development,
including identifying and assessing sites and promoting them to potential developers.
Detroit, for example, received a grant to fund initiatives to combine empowerment zone
activities with case studies of assessment, cleanup, and redevelopment and the prepara-
tion of a manual on brownfields development. Lowell, Massachusetts was awarded a
grant to fund site rankings and assessments, conduct a comprehensive brownfields
education program, and develop sustainable brownfields development funding sources.
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Subsidies
EPA intends to use the results of these pilot projects to design a national program.13
(EPA brownfields site: earthl.epa.gov/swerosps/bf/answers.htm#5.)
7.3.2. Tax Incentives and Loans
New Jersey offers both tax benefits and loans to encourage brownfields development.
Under the Environmental Opportunity Zone Act, which entered into effect in January
1996, developers of contaminated sites can receive a 10-year property tax exemption if
they remediate the site in accordance with state standards and return it to commercial or
industrial use. Loans for cleanups are funded by a dedicated 5% portion of the state
Hazardous Discharge Site Remediation Fund. To qualify for the tax benefits and loans,
the contaminated land must be on the state's list of hazardous discharge sites, be vacant
or underused, and need cleanup because of an actual or potential pollution discharge.
The sites must also be located in environmental opportunity zones designated by state
municipalities. The property tax exemption gradually decreases from 100% in the first
year of development to zero in the tenth year.14
Pennsylvania's Land Recycling and Environmental Remediation Standards Act
established an Industrial Sites Cleanup Fund of up to $15 million to provide low-interest
loans to help property owners clean up pollution that they did not cause. Grants are
available to finance activities by local governments and economic development agencies.
These funds can cover up to 75% of cleanup costs. The Industrial Sites Environmental
Assessment Act allows the Department of Commerce to make grants to municipalities and
other local authorities, nonprofit economic development agencies, and similar organiza-
tions to fund environmental assessments of industrial sites in distressed communities. Up
to $2 million is provided annually for such funding.15 As of the end of 1995, 25 letters of
intent (the first step in the application process) had been submitted for grants and loans
to conduct assessments and remediation projects. At least four grants, one loan, and one
combination grant/loan have been approved for a total value of $1.62 million.16
(Pennsylvania brownfields information: www.dep.state.pa.us/
dep/deputate/airwaste/wm/landrecy)
In 1995, Delaware added credits for brownfields development to its Blue Collar Jobs
Tax Credit program.17 Minnesota and Ohio offer loans to fund cleanups, and Ohio also
provides tax incentives. Arizona and Tennessee pay for cleanup of orphan shares at sites
containing wastes from more than one source.18
On the federal level, the Clinton Administration released a proposal in March 1996 that
would allow cleanup costs in designated brownfields areas to be fully deductible the year
in which they are incurred. This seven-year, $2 billion plan could result in the develop-
ment of approximately 30,000 contaminated sites.19
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7.4. FARMING AND LAND PRESERVATION
Among the types of subsidies used in farming and land preservation are grants, loans,
and tax benefits offered in exchange for improved conservation practices as well as
payments to landowners to either take land out of cultivation or manage it in a certain
manner. As shown in table 7-3, numerous subsidy programs have been implemented in
agricultural land preservation policy.
Table 7-3: U.S. DEPARTMENT OF AGRICULTURE CONSERVATION
SUBSIDY PROGRAMS20
Program,
Amount21
Purpose
Areas
Financial assis-
tance
Agricultural Con-
servation Program
$628.2 million
Prevent soil loss and water
pollution and conserve wa-
ter, forest, and wildlife
All states
and terri-
tories
Up to 75% of total
activity cost; max-
imum $3,500 per
person per year
Colorado River
Basin Salinity
Control Program
$46.9 million
Install conservation practices
to reduce salinity of Colo-
rado River
7 states
Up to 70% of total
activity cost
Emergency Con-
servation Program
$134.9 million
Repair agricultural land
damaged by natural disasters
and conserve water during
drought
All states
and terri-
tories
Up to 64% of cost;
maximum
$200,000 per per-
son per disaster
Forestry Incentives
Program
$44.4 million
Plant trees and improve tim-
ber stands to increase sup-
plies from nonindustrial
private forests
All states
and
Puerto
Rico
Up to 65% of total
activity cost; max-
imum $10,000 per
person per year
Great Plains Con-
servation Program
$91.5 million
Solve soil and water prob-
lems on farms and ranches in
the Great Plains
556 coun-
ties in 10
states
Up to 80% of total
activity cost; max-
imum $35,000 per
agreement
Rural Clean Water
Program
None
Control agricultural nonpoint
source pollution
22 states
Up to 75% of total
activity cost; max-
imum $50,000 per
person
7-10
August
-------
Subsidies
Program,
Amount21
Purpose
Areas
Financial assis-
tance
Small Watershed
Program
$547.0 million
Support activities in water-
sheds under 25,000 acres to
prevent flooding, reduce
erosion, and improve water
quality
37 states
and
Puerto
Rico
Up to 50% of
construction cost;
maximum
$100,000 per per-
son over life of
program
Soil and Water
Conservation Loan
Program
$1.5 million
Provide loans to develop,
conserve, and make proper
use of farm and ranch lands
All states
Up to $50,000,
reimbursable
within 40 years
Stewardship In-
centive Program
$54.8 million
Enhance management of
nonindustrial private forest
lands to increase timber sup-
ply and improve wildlife
habitat and recreation
All states
and terri-
tories
Up to 75% of total
activity cost; max-
imum $10,000 per
person per year
Water Quality
Incentives Projects
$55.3 million
Support farm practices or
systems to reduce agricul-
tural water pollution
All states
and terri-
tories
Payment of up to
$25 per acre
(maximum $3,500
per person per
year) plus cost-
sharing up to
$1,500 per person
per contract
Conservation Re-
serve Program
$6,676.4 million
Conserve and improve soil
and water resources by rent-
ing land to retire from pro-
duction and to establish 10-
year conservation cover
All states
and terri-
tories
Up to 50% of cost
of erosion control
measures plus
annual rents up
to $50,000 per
person
Emergency Wet-
land Reserve Pro-
gram
$39.2 million
Restore wetland functions on
flooded cropland
8 states
75%-100% of
restoration costs
plus market value
to buy easement
1997
7-11
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Program,
Amount21
Purpose
Areas
Financial assis-
tance
Farm Debt
Cancellation-Con-
servation Ease-
ments Program
None
Protect lands under federal
farm loan by buying an ease-
ment
All states
and terri-
tories
Full or partial
debt cancellation
(maximum 33%
of principal for
current borrow-
ers)
Forest Legacy
Program
$28.4 million
Protect environmentally
important nonindustrial
private forests
18 states
and 1
territory
Market value to
buy conservation
easement
Integrated Farm
Management Pro-
gram Option
None
Support use of resource-con-
serving cropping practices
All states
and terri-
tories
Annual price
support for acres
planted to con-
serving uses
Water Bank Pro-
gram
$45.2 million
Conserve water and protect
and enhance migratory wa-
terfowl habitat
13 states
Up to 75% of total
activity cost; max-
imum $3,500 per
par-ticipant per
year; annual rents
Wetlands Reserve
Program
$206.3 million
Restore and protect agricul-
tural wetlands
10 states
Market value
easements; 50-
75% of restoration
costs
Programs Adopted Under 1996 Farm Bill
Environmental
Quality Incentive
Program
$1,330 million
Promote environmental and
conservation improvements
on farmland
TBD
Cost-sharing and
easement terms to
be determined
Farmland Protec-
tion Program
$35 million
Protect prime and unique
farmland
TBD
Conservation
easements
7-12
August
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Subsidies
Program,
Amount21
Purpose
Areas
Financial assis-
tance
Conservation
Farm Option
$197.5 million
Promote soil, water,
wetlands, and habitat conser-
vation measures
TBD
Payments
Wildlife Habitat
Incentives Pro-
gram
$50 million
Promote management prac-
tices to improve wildlife
habitat
TBD
Cost-sharing
Sources: GAO (April 1995); USDA (April 1996).
Most of this subsection is devoted to USDA land conservation subsidy programs,
including cross-compliance provisions linking farm program support benefits to environ-
mental performance and new programs created under the 1996 Farm Bill. The subsection
concludes with a discussion of selected state subsidy schemes, including purchasable
development rights programs to prevent the conversion of agricultural lands to alternative
uses.
7.4.1. Conservation Reserve Program
Established by the Food Security Act of 1985 (also known as the 1985 Farm Bill), the
Conservation Reserve Program (CRP) seeks to protect soil and water resources by taking
land out of cultivation. Participating farmers receive annual payments of up to $50,000
per person to put land in the Conservation Reserve for 10 to 15 years. Applications to
participate in this program must include conservation plans (usually requiring the
planting of grass cover). The federal government pays not only annual rents so that the
land is not cultivated but also half the cost of the erosion control plan measures.
Since landowners have offered more acres than the CRP can afford, they bid for
enrollment. For the first nine signups (through August 1989), bids had to be at or below
the "maximum acceptable rental rate" for a given area. Problems with this approach were
that it did not actively target environmentally sensitive cropland and that farmers
gradually increased their awareness of maximum rates and set their bids accordingly,
often resulting in rental payments in excess of market value.22
As a result of the 1990 Farm Bill, which shifted the emphasis of the CRP to water
quality, the bidding system was changed beginning with the 10th signup in May 1991.
Bids less than or equal to the market rental rate for comparable land in a given area are
evaluated using an Environmental Benefits Index (EBI), which includes the following
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
seven factors: surface water quality improvement, ground water quality improvement,
preservation of soil productivity, conservation compliance assistance, encouragement of
tree planting, and whether the proposed parcel is in a Water Quality Initiative area or
conservation priority area. The EBI is compared with the bid amount to decide whether
to enroll the parcel.
In financial terms, the CRP is USDA's largest conservation program, accounting for
about 77% of its conservation appropriations for FY 1992-95. As of August 1992, 36.4
million acres had been placed in the CRP, nearly 10% of total U.S. cropland estimated at
395 million acres. No funds were appropriated for enrollment for FY 1993-95. The first
nine enrollments were mainly in the Great Plains and Mountains states, but the emphasis
on water quality goals introduced by the 1990 Farm Bill led to increased concentrations in
the Midwest and Great Lakes regions in subsequent enrollments. With 4.2 million acres,
Texas had the most enrollment. As shown in Table 7-4, for the first 12 enrollments, annual
CRP rental payments averaged $50 per acre.23
Table 7-4: CRP ACREAGE AND RENTAL PAYMENTS FOR
FIRST 12 ENROLLMENTS
Resion
Acres
Annual rental
payments
(millions)
Rental
payments
Der acre
Appalachia
1,158,124
$62.5
$53.97
Corn Belt
5,603,333
$416.1
$74.26
Delta
1,248,403
$55.3
$44.31
Great Lakes
3,008,337
$176.5
$58.68
Mountain
6,687,264
$265.3
$39.67
Northeast
226,411
$13.4
$59.29
Northern Plains
9,664,110
$444.5
$46.00
Pacific
1,791,182
$88.8
$42.71
Southeast
1,692,580
$72.3
$42.71
Southern Plains
5,342,989
$214.7
$40.18
Total
36,422,733
$1,809.4
$49.69
Source: GAO (February 1995), p. 13.
In 1990, when 33.9 million acres were enrolled, USD A estimated the net social benefits
7-14
August
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Subsidies
of CRP at $4.2-$9.0 billion over the life of the program. Table 7-5 shows the estimated
amounts of different types of social costs and benefits.24
Table 7-5: PROJECTED SOCIAL BENEFITS AND COSTS OF CRP
(in billions of dollars)
Benefit
Value
Increases in net farm income
S2.1-S6.3
Value of future timber
$3.3
Preservation of soil productivity
$0.6$ 1.7
Improved surface water quality
$1.3-$4.2
Lower damages due to windblown dust
$0.3-$0.9
Wildlife enhancements
$1.9-$3.1
Total benefits
$9.5-$19.5
Cost
Higher consumer food costs
$2.9-$7.8
Vegetative cover on CRP land
$2.4
USDA technical assistance
$0.1
Total costs
$5.4-$10.3
Net benefit
$4.2-$9
Source: USDA (December 1994), pp. 180-1.
Statistics on the first nine enrollments indicate annual soil erosion reductions of
700,000 tons, an average of 19 tons per acre. This represents a 22% reduction in cropland
erosion compared with prior conditions.
One criticism of the CRP is that it could be more cost-effective by concentrating
enrollment on land that is more environmentally sensitive. By concentrating on enrolling
buffer zones instead of entire fields, a GAO study claimed, only about 6 million acres
would need to be enrolled to protect surface water, groundwater, air, and soil. However,
wildlife habitat protection would require significantly more acreage.25
The 1996 Farm Bill addressed this criticism in reauthorizing the CRP through 2002.
While maintaining the maximum number of acres to be enrolled at 36.4 million, the new
bill also allows contract holders to terminate contracts entered into prior to 1995, provided
the contract has been in effect for at least 5 years and the land in question is not of high
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
environmental value. The USDA Secretary was given authority to agree to future early
terminations. The possibility for such terminations is intended to give USDA the opportu-
nity to refocus enrollment on land that is more environmentally sensitive.
7.4.2. Wetlands Reserve Program
Under the Wetlands Reserve Program, which was created by the 1990 Food, Agricul-
ture, Conservation and Trade Act (i.e., the 1990 Farm Bill), farmed wetlands and agricul-
tural land converted from wetlands as well as buffer zones and some riparian areas are
eligible for 30-year or permanent easements. Participants in this program are required to
implement conservation plans approved by the Natural Resources Conservation Service
and the Fish and Wildlife Service. Agricultural activities on enrolled land must be
compatible with wetlands protection. Participants receive a lump sum for permanent
easements or ten equal payments for 30-year easements. Payment amounts are limited to
the loss of market value of the land as a result of the easement. In addition to paying for
easements, the government shares in the cost of approved conservation measures.
As shown in Table 7-6, the number of acres for which bids were made was roughly
five times the acreage enrolled in WRP during the first enrollment. In 1994, WRP was
expanded to several other states.26
Table 7-6: WRP F]
[RST ENROLLMENT (1992)
State
Bid offers
(thousand
acres)
Enrolled
(thousand
acres)
Total cost
($000)
Cost per
acre ($)
California
34.3
6.0
10,768
1,787
Iowa
27.9
5.1
5,951
1,168
Louisiana
69.9
14.1
9,882
702
Minnesota
13.1
0.7
764
1,082
Mississippi
65.0
14.9
10,764
723
Missouri
14.6
2.7
2,753
1,032
New York
0.5
0.1
212
2,934
North Carolina
15.3
4.7
3,675
780
Wisconsin
8.5
1.6
1,287
782
Total
249.1
49.9
46,057
923
Source: USDA (December 1994), p. 194.
7-16
August
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Subsidies
The 1996 Farm Bill reauthorized WRP through 2002 while capping total enrollment at
975,000 acres. Beginning October 1996, land is to be 33% permanent easements, 33% 30-
year easements or less, and 33% wetland restoration agreements with cost sharing. 75,000
acres of land in less than permanent easements must be placed in the program before
additional permanent easements are placed. The Bill provides cost-sharing assistance to
landowners of 75%-100% for permanent easements and 50%-75% for 30-year easements
and restoration cost-share agreements.
7.4.3. Agricultural Conservation Program
Initiated in 1936, the Agricultural Conservation Program (ACP) offers cost-sharing and
technical support to farmers who adopt approved land conservation practices. Up to
$3,500 is provided annually under 10-year agreements. As noted below, the ACP is one
of several programs being replaced by the Environmental Quality Incentive Program
under the terms of the 1996 Farm Bill.
One ACP activity, Integrated Crop Management (ICM), provides cost-sharing assistance
of 75% (usually $7-$20 per acre depending on the type of field) for practices to increase the
efficiency of fertilizer and pesticide use. An analysis of the first year of the program as
implemented in selected areas showed that ICM resulted in a 16%-32% fall in nitrogen
fertilizer application on crops such as corn, wheat, and cotton, but that use of other
fertilizers and insecticides remained generally unaffected.27
7.4.4. Compliance Provisions
Introduced in the 1985 Farm Bill, compliance provisions require farmers to implement
approved conservation plans on highly erodible land and refrain from draining wetlands
to be eligible for farm support programs such as price support loans, federal crop
insurance, and disaster payments. Considering the large amounts of support at stake,
compliance provisions are likely to have a strong incentive effect.
7.4.5. Highly Erodible Land Conservation Compliance and "Sodbuster"
Under the highly erodible land conservation compliance provision, farmers are
required to develop and implement approved conservation plans for designated "highly
erodible" land farmed between 1981 and 1985 to ensure support eligibility. The plans
typically entail adjustments in farming practices and rotations and could include mea-
sures such as the maintenance of crop residues on fields in winter, contour ploughing,
minimum tillage, and shelter belts. The sodbuster provision is similar except that it
applies to highly erodible land not farmed between 1981 and 1985 and is more stringent
in that it requires the adoption of a conservation system that reduces erosion to a level
above which long-term soil productivity may be depleted.28
This cross-compliance rule appears to have a strong incentive effect. Plan implementa-
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
tion costs are estimated at $7-$ 17 per acre depending on the region, whereas a loss in farm
support benefits would cost farmers between $37 and $62 per acre.29
As shown in table 7-7, the estimated net benefit of the conservation compliance
provision varies substantially across regions. Air quality benefits in the table are limited
to household wind damage. Although the estimates show costs exceeding benefits in the
Northern Plains, the benefits might exceed costs if air quality benefits were more broadly
defined.30
Table 7-7: BENEFITS AND COSTS OF CONSERVATION COMPLIANCE
Per-acre benefit from:
Per-acre cost to:
Region
Water
quality
Air qual-
ity
Productiv-
ity
Producers
Federal
govern-
ment
Net
economic
henefits
Bene-
fit/ cost
ratio
Northeast
35.63
0
0.16
3.57
3.43
28.80
5.12
Lake States
21.99
0
0.12
0.32
3.43
18.37
5.90
Corn Belt
15.61
0
0.25
8.90
3.43
3.53
1.29
Northern
Plains
3.47
3.00
0.19
3.35
3.43
-0.11
0.96
Appalachia
23.58
0
0.24
3.51
3.43
16.89
3.43
Southeast
25.63
0
0.12
8.18
3.43
14.15
2.22
Delta
35.50
0
0.12
1.97
3.43
30.22
6.60
Southern
Plains
5.26
4.63
0.33
2.34
3.43
4.45
1.77
Mountain
5.10
4.01
0.15
0.20
3.43
5.63
2.55
Pacific
31.83
1.09
0.14
2.23
3.43
27.40
5.85
Entire US
13.81
1.93
0.21
3.78
3.43
8.74
2.21
Source: USDA (December 1994), p. 186.
7.4.6. Swampbuster Program
Under the swampbuster program, support program benefits are denied to farmers
who plant crops on wetlands converted after 1985 or who drain or otherwise convert
designated wetlands. Conversion is allowed if its impact on the hydrological and
biological value of the wetland is limited or if the farmer restores wetlands of equivalent
value.
The 1996 Farm Bill made several changes to swampbuster provisions which according
7-18
August
-------
Subsidies
to USD A "will give farmers more flexibility in complying with wetland conservation
requirements while protecting natural resources."31 The bill expands wetland mitigation
areas and options, allowing mitigation through restoration, enhancement, or creation,
provided that wetland functions and values are maintained and stipulating that conver-
sion activities authorized by a Clean Water Act permit will be accepted for Farm Bill
purposes if adequately mitigated. The bill also establishes a mitigation banking pilot
program. (See Section 6 for information on mitigation banking.)
7.4.7. Acreage Reduction Program
Under the Acreage Reduction Program, farmers are required to set aside farmland to
remain eligible for price supports. The amounts of land to be set aside depend on overall
crop supplies. Although this program is intended more to limit crop supplies than to
preserve farmland, it promotes land conservation.
Table 7-8 presents some of the effects of USD A conservation programs. The Water
Quality Program activities consist mostly of educational and technical assistance but also
include some financial assistance. Monetary values of some of these impacts have been
estimated. For example, the benefits of salt reduction under the Colorado River Salinity
Control Program have been estimated at $61 annually per ton.32
7.4.8. Subsidy Programs Created under 1996 Farm Bill' '
In addition to modifying several existing programs in ways that USDA believes will
simplify them and enhance their efficiency and flexibility, the 1996 Farm Bill created a
number of new programs. The largest of these (in funding) is the Environmental Quality
Incentives Program. Others include the Farmland Protection Program, Conservation Farm
Option, and Wildlife Habitat Incentives Program.
7.4.9. Environmental Quality Incentive Program
As shown in table 7-3, USDA has implemented a large number of conservation
programs. A 1995 GAO study stressed the need to consolidate these programs, stating
that "they frequently promote identical resource conservation purposes, use similar
financial incentives, serve the same population, and finance the application of the same set
of technical practices." The study asserted that program overlap made it more difficult for
farmers to identify and apply for financial and technical assistance and increased the
administrative burden on USDA.34
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 7-8: IMPACTS OF CONSERVATION PROGRAMS ON
EROSION AND CHEMICAL USE, FY 1988-9335
ImDact and Program
1988
1989
1990
1991
1992
1993
Erosion reductions
Million tons
Conservation Reserve Program
514
596
644
654
672
692
Conservation compliance
0
0
0
NA
236
458
Agricultural Conservation Program
40
34
33
34
30
29
Conservation Technical Assistance and
Great Plains Conservation Program
463
353
353
282
298
321
Annual Acreage Reduction Program
107
62
55
60
39
46
Million lbs.
Nitrogen application reduced by Water
Quality Program
NA
NA
NA
0.9
8.9
NA
Phosphorus application reduced by Wa-
ter Quality Program
NA
NA
NA
1.7
38.5
NA
1,000 lbs. active ingredient
Pesticide load reduced by Water Quality
Program
NA
NA
NA
8.1
5.9
NA
1,000 tons
Salt load reduced by Colorado River
Salinity Control Program
62
75
92
105
127
163
Source: USDA (December 1994), p. 168
The Environmental Quality Incentive Program (EQIP) is intended to replace the
Agricultural Conservation, Colorado River Basin Salinity Control, Water Quality Incen-
tives, and Great Plains Conservation Programs, all of which are scheduled for phaseout
by the end of 1996. EQIP will assist farmers and livestock producers with environmental
and conservation improvements. Participating landowners will agree to five- to ten-year
contracts with conservation plans and receive up to 75% cost-sharing assistance for
structural conservation practices. Payments are limited to $10,000 per person per year or
$50,000 for any multi-year agreement. USDA intends to select projects so as to maximize
environmental benefits per dollar spent under the program.
EQIP has placed added emphasis on livestock as a pollution problem. Half of
program funding is reserved for livestock-related conservation problems, and half for
7-20
August
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Subsidies
other conservation problems. Levels of funding are $130 million in FY 1996 and $200
million annually from 1997 to 2002.
7.4.10. Farmland Protection Program
Under this $35 million program, USDA will work with state and local governments to
purchase conservation easements on 170,000 to 340,000 acres of farmland of special
interest. To be included in this program, land must be subject to a pending offer from a
state or local government for the purpose of protecting topsoil by limiting nonagricultural
uses.
7.4.11. Conservation Farm Option
Under this pilot program for producers of cotton, rice, feed grains, and wheat,
producers may consolidate their CRP, WRP, and EQIP payments into one annual payment
in exchange for entering into 10-year contracts and implementing conservation plans
addressing water, soil and related resources as well as wildlife habitat. The incentive
effect of the possibility of consolidating payments is unknown. A total of $197.5 million
will be provided for this program through 2002.
7.4.12. Wildlife Habitat Incentives Program
This program is intended to offer cost-sharing assistance to landowners to plan and
adopt approved management practices to ameliorate wildlife habitat. Total funding from
FY 1996 to FY 2002 is $50 million.
7.4.12.1. State Initiatives
In addition to the federal programs described above, various types of subsidies have
been used to promote land preservation on the state level. A 1994 USDA report found
that as of 1990, 25 states had cost-sharing programs, 6 offered tax credits, and 5 offered
low-interest loans.36
In Lake Okeechobee, Florida, phosphorus from dairy waste has posed a threat to water
quality. The "Dairy Rule" that entered into effect in June 1987 required dairy farmers to
use specified techniques to prevent barn wash water discharges. The Florida Department
of Agriculture and Consumer Services (DACS) provided cost share construction funds
from the state legislature to facilitate implementation of this policy. Of the 49 dairy
operations affected by the Dairy Rule, 18 chose to participate in a buyout program under
which they received $602 for every cow they permanently removed from their land. The
buyout program took 14,039 cows out of production.37
A survey of wildlife management programs in the 20-state region of the Northeast
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
found that 5 states had cost-sharing programs, 5 offered equipment loans, 4 offered
property tax incentives, 1 offered state income tax benefits, and 8 had tie-in with federal
programs. In Indiana, the Wildlife Habitat Cost-Share Project pays up to 90% of the cost
of establishing permanent wildlife habitat, windbreaks, brushpiles, vegetation manage-
ment, and wetland improvement. Property tax assessments are lowered for landowners
who adopt measures to enhance or preserve existing wildlife habitat.38
Minnesota has a property tax exemption for undisturbed wetlands and ungrazed
prairie.39 The State also has a Pheasant Habitat Improvement Program under which
landowners can receiving cost-sharing assistance of up to 75% and technical assistance in
return for improvements such as food plots, nesting cover, and woody cover.40 In Texas,
the Galveston Bay Comprehensive Conservation and Management Plan approved by the
EPA in April 1995 called for economic incentives, such as tax breaks, for private landown-
ers. The tax incentives are intended to encourage owners to preserve wetlands.41
In November 1995, voters in Texas approved a constitutional amendment to allow
open-space land used for wildlife management to be taxed in the same manner as open-
space agricultural land: based on its productive capacity rather than its higher market
value. The Sierra Club lauded the measure, which it said "will allow landowners to take
lands out of traditional agricultural production without penalizing them for protecting
their property for wildlife."42
7.4.12.2. Purchasable Development Rights
A number of states (11 as of April 1996) and several counties and local governments
have purchasable development rights (PDR) programs in place under which landowners
are paid not to convert farmland to commercial or residential uses. (Such rights are also
known as conservation easements.) As shown in table 7-9, such programs are especially
common in the Northeast and have involved over 400,000 acres at a cost of almost $730
million. In addition to food security and agricultural objectives, PDR programs have
several environmental objectives, including maintenance of habitat and resting places for
wildlife and the aesthetic value of open space. Among the advantages of PDRs are their
voluntary nature that helps avoid legal conflicts that can arise from zoning laws and their
low cost for state and local governments compared to outright land purchase. PDR
program funding mechanisms vary from state to state and include general revenues, land
transfer taxes, property taxes, and bonds. Criteria used to select land parcels to be
purchased include cost, threat of conversion, and location. Many programs prefer to
purchase development rights on parcels that are near each other. Another policy instru-
ment to prevent excessive development, transferable development rights (TDRs), can be
regarded as a trading system and is therefore discussed in Section VI.
7-22
August
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Subsidies
Table 7-9: STATUS OF PDR PROGRAMS AS OF APRIL 199643
State
Year
Started
No. of
Farms
No. of
acres
Funds spent
($000)
Funds Avail-
able ($000)
California*
1980
72
47,992
46,515
23,100
Connecticut
1978
164
25,042
73,430
8,800
Colorado*
1986
6
1,904
3,254
2,800
Delaware
1995
31
8,561
12,000
0
Maine
1990
1
307
380
0
Maryland
1977
809
117,319
125,099
8,100
Massachusetts
1977
398
35,907
86,109
6,000
Michigan
1993
2
79
709
10,000
New Hampshire
1979
57
9,148
no data
0
New Jersey
1981
189
27,924
88,463
107,000
New York*
1976
154
6,941
46,000
4,950
North Carolina*
1987
21
1,255
1,785
0
Pennsylvania
1989
596
74,500
148,000
31,000
Rhode Island
1982
30
2,428
14,000
0
Vermont
1987
140
45,511
26,304
2,000
Washington*
1979
187
12,600
58,000
1,500
Total
417,418
730,049
205,250
*Denotes county or other local programs
Source: American Farmland Trust.
7.5. CONSUMER PRODUCT WASTE MANAGEMENT
Consumer product waste management is one area where command-and-control
measures may be less likely than incentives to protect the environment because it is
difficult to monitor the behavior of millions of consumers. Bans on landfilling used motor
oil or containers, for example, are hard to enforce. Consumers are more likely to respond
to factors such as more convenient collection service (brought about by subsidies) or
refunds.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Various types of subsidies, including grants, loans, payments, and tax incentives, have
been used extensively in consumer product waste management. Also included in the
following discussion are preferential procurement and recycled content policies, both of
which encourage recycling by stimulating demand for recycled products. Most of these
measures have been implemented primarily on the state and local levels.
The example of used tire management, as illustrated in Table 7-10, shows the variety
of subsidy measures that have been adopted in waste management.
Table 7-10: SUBSIDIES FOR USED TIRE MANAGEMENT
Tvne of subsidv
Number of states
Tax benefits
13
Payments based on tires recy-
cled
7
Public procurement
28
Grants and loans
34
Source: Scrap Tire News, January 1996, p. 18.
7.5.1. Advance Disposal Fee Systems
As noted in Section 4, advance disposal fees (ADFs) on consumer products generate
revenues to subsidize the otherwise unprofitable activity of disposing of the products after
their use. In Rhode Island, for example, fees on "hard-to-dispose material," such as motor
oil, tires, antifreeze, and solvents, are used to fund centers to collect these products after
their use as well as research and public education on the disposal and reuse of these
products.
In Virginia, an ADF of $0.50 per tire in effect since 1990 generates revenues for the
State's Waste Tire Trust Fund. Annual ADF revenues are about $2 million, and the Fund
had a balance of $7.6 million as of January 1996. The fund finances used tire disposal site
cleanups, activities in several regions to manage the current flow of used tires, permitting
and inspection, and subsidies of $22.50 per ton for end users of tires.44
(Info on VA program: www.deq.state.va.us/envprog/tires.html)
7.5.2. Deposit Handling Fees
In most states with mandatory bottle deposits, distributors are required to pay
handling fees to retail outlets and other used bottle collection centers. In California and
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Subsidies
Maine, for example, handling fees are 3C per bottle. Such handling fees have encouraged
used bottle collection to the point that many redemption centers have been voluntarily
created to earn profits. See Section 5 for details on deposit-refund systems in California,
Maine, and other parts of the U.S. and Section 11 for information on such systems outside
the U.S.
7.5.3. Recycling Loans and Grants
A total of 24 states have grant or loan programs to promote the recycling industry.45
Under Washington's Model Litter Control and Recycling Act, grants are awarded to
persons developing recycling programs. Under the Litter Control and Recycling Act,
Rhode Island provides grants to communities and organizations for litter and recycling
initiatives.46
As shown in Table 7-11, Wisconsin offers both loans and grants to promote recycling.
The largest program provides grants to municipalities and counties to fund various
recycling activities. Recycling rebates are either general rebates offered for up to five
years to offset the increased cost of making or processing recyclable materials generated
in the state or property rebates covering 5-25% of the cost of qualified property. In 1993-
94, 17 qualified property rebates worth $1,136,805 and 10 general rebates worth $4,599,334
were awarded.
Table 7-11: WISCONSIN RECYCLING FINANCIAL ASSISTANCE PROGRAMS
(in thousands of dollars)
Program
1994-95
Municipal and County Recycling Grants
$29,200
Waste Reduction and Recycling Demonstration Grants
1,750
Recycling Loans
2,519
Minority Business Recycling Grants and Loans
400
Recycling Rebates
5,100
Recycling Market Development Board Assistance
2,892
Waste Tire Reimbursement Grants
750
Waste Tire Management or Recovery Grants
250
Total
$42,861
Source: Bonderud and Shanovich, p. 11.
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Under the Waste Tire Reimbursement Grant Program, Wisconsin businesses receive
payments of $20 per ton for using waste tires in any of the following ways: energy
recovery, including the production of combustible by-products; road base in highway
improvement projects; recycling to make a new product; and other uses approved by the
Department of Natural Resources. Uses must be approved in advance. Businesses receive
payments based on documented tire use over the course of a given calendar year.
Expenditures for 1990-94 totalled approximately $5.5 million.47
As shown in Table 7-12, at least 16 states had loan funds for recycling businesses in
1995. In one of these states, Iowa, loans have included $485,000 for a project to convert
waste gypsum into new wallboard, $145,000 to convert used electrical wire into cushion
for the dairy cattle industry, and $245,000 to manufacture rubber mats from used tires.48
Table 7-12: STATE LOAN FUNDS FOR RECYCLING BUSINESSES
State
Maximum
loan
Interest
rate
Fund size
Funding source
California
$1 million
5.8%
$25 million by
1996
Landfill tipping
fees
Colorado
$150,000
initially
prime
$1-1.5 million per
year (total $4 mil-
lion)
$1 tire fee
Florida
unknown
< prime
$3.5 million
ADFs
Illinois
$750,000
5%
$1-3 million per
year
Landfill tipping
fees
Indiana
$500,000
< prime
$3-4 million per
year
landfill tipping
fees
Iowa
$2 million
0%
$4 million per year
landfill tipping
fees
Kentucky
None for
cities
3.4%
$16 million ini-
tially, reduced to
$4 million
General reve-
nues
Louisiana
$600,000
unknown
$2 million
Tire fees
Maine
$100,000
4%-8%
About $100,000
per year
Brown goods
disposal fee
Michigan
$500,000
0%
$4 million
Landfill tipping
fees
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Subsidies
Minnesota
$500,000
2% below
prime
$4 million
General reve-
nues
Mississippi
$200,000
2% below
prime
unknown
unknown
New Jersey
$500,000
3% below
prime
$21 million
landfill tipping
fees
New York
$500,000
< prime
$5 million,
$100,000 remain-
ing
Petroleum over-
charge funds
Pennsyl-vania
$300,000
3%
$5 million
Landfill tipping
fees
Vermont
TBD
TBD
TBD
TBD
Wisconsin
$750,000
4%
$5.6 million
Business tax
Sources: Trombly (June 1995), p. 38; Louisiana Department of Environmental Quality; California Environmental
Protection Agency.
The California Integrated Waste Management Board offers loans to organizations
located in the state's 40 Recycling Market Development Zones. Zones range in size from
a portion of a city to areas encompassing several counties. Loans are repayable within 10
years with a 5.8% interest rate and can be used to cover up to 50% of the cost of a project,
up to $1 million. In the three years leading up to March 1996, 67 loans totaling $28 million
were approved, of which 42 totaling over $16 million have closed. The California
Environmental Protection Agency has stated that these 42 loans have diverted nearly 1.4
million tons of waste from landfills annually. Recent loans include $ 1 million to finance
the production of custom packaging out of shipping boxes and $475,000 to finance
equipment for producing fire logs out of paraffin-saturated cardboard from grocery stores
and sawdust from a local sawmill.49
(CA recycling loans: www.calepa.cahwnet.gov/epadocs/mar96.txt)
Louisiana's used tire subsidy program combines a loan program with rebate payments
based on the number of tires recycled. Loans of up to $600,000 are available for waste tire
processing activities. Each loan is limited to 25% of the value of the processing facility
and is repayable to the State, with interest, at a rate of $0.15 per tire processed. The State
also offers rebates of $0.85 per tire processed.50
(Louisiana tire program: www.deq.state.la.us/osec/n950124.htm)
7.5.4. Tax Incentives
28 states have offered tax incentives for recycling businesses. Idaho, for example,
enacted a tax credit in 1994 pertaining to equipment for manufacturing postconsumer
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
paper.51 "An Act Concerning Solid Waste Management" in Kansas allows "up to $100,000
of income tax deductions determined at a rate of 20% of purchase price of new equipment
that uses recycled materials to produce products or energy and expands the taxpayer's
ability to use recyled goods."52
7.5.5. Preferential Procurement of Recycled Products
One type of policy measure that could be considered a subsidy is the preferential
procurement of recycled products. By stimulating demand for recycled products, such
policies are intended to promote recycling. This subsection considers only government as
opposed to private procurement practices. Mandates governing private sector use of
recycled materials are discussed in the next subsection.
Preferential procurement could take one of at least two forms. Price preferences refer
to willingness to pay a higher price for recycled products. Set-asides and goals refer to
rules or targets concerning the percentage of total product purchases that must be recycled
products.
Paper is the product most commonly subject to recycled goods procurement policies.
An executive order signed by President Clinton requiring 20% postconsumer content in
federal paper purchasing took effect in January 1995. EPA required the authors of this
report to print it on recycled paper. At least 50 cities and 26 states are now following the
federal policy.53
A 1993 survey conducted by the Northeast Maryland Waste Disposal Authority found
that all fifty states and the District of Columbia favored recycled products, compared to
only 13 states in 1986. In the 38 states (including DC) that had price preference policies,
the preferences were usually 5% (15 states) or 10% (20 states). Oregon had a preference of
12%, and two other states had preferences between 5% and 10%. In 21 of these states, the
preferences applied not only to paper but also to other recyclable products. Vermont used
life-cycle costing in deciding on its purchases, buying recycled products "where the added
cost of using waste materials rather than virgin materials is less than the cost avoided by
not having (that waste) in the waste stream."
The same survey found that 30 states had set-asides or goals, mostly for paper. Iowa,
Montana, and Nebraska had the most stringent set-asides. The first state had set-asides
of 90% recycled printing and writing paper by January 1, 2000 and 100% recycled tissue
products by January 1, 1992. Montana had a set-aside of 95% by 1996. Nebraska bought
only recycled paper and was considering similar policies for plastic bags, motor oil, and
carpet. North Carolina required the use of recycled paper for all reports, memoranda, and
other documents unless written authorization was obtained from the head of the agency.
The 1993 survey also identified 186 local governments that favored recycled products,
with some cities adopting price preferences as high as 20% and some having set-asides.
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Subsidies
Newark, New Jersey required that its agencies use recycled product if available regardless
of price.
In Florida, for example, prison industries reprocess tires for sale to state, county, and
local governments, and state grants to counties are used to purchase products from waste
tires. The State Department of Transportation uses 10,000 tons of crumb rubber (made
from two million waste tires) annually in rubber modified asphalt for roads. As a result
of these initiatives and other market development activities, the percentage of tires
disposed of in landfills has decreased since 1989.54
7.5.6. Recycled Content Policies
To facilitate discussion, recycled content policies as defined here refer only to require-
ments that private organizations use a percentage of recycled products. Recycled content
rules applied to government purchases, such as the aforementioned executive order on
paper purchases, have been placed under the heading of public procurement policies and
therefore discussed in the previous subsection.
Although there is a large element of command-and-control regulation in policies
requiring a minimum recycled content for certain products or containers, such policies
also create incentive effects by stimulating demand for recycled products. If manufactur-
ers are forced to use a certain amount of recycled product, they or their suppliers are more
likely to offer consumers better access to recycling services.
At least 13 states have passed laws and
15 states have created voluntary agree-
ments for recycled content in newspapers.
(The voluntary agreement in Massachu-
setts is described in Section 10 on volun-
tary programs.) A typical example is the
1990 Wisconsin Recycling Law, which
requires newspapers to use recycled con-
tent newsprint. As shown in Figure 7-1,
the minimum content requirements are
rising from 10% in 1992 to 45% in 2000.55
Publishers failing to meet these require-
ments are subject to fees based on the
extent of non-compliance. In this respect,
the law also could be considered a prod-
uct charge on non-recycled newsprint.
However, the Department of Natural
Resources sometimes exempts publishers
from fees if they can show that they could not obtain recycled newsprint at reasonable
cost.
Figure 7-1: WISCONSIN NEWSPAPER
RECYCLING AND RECYCLED CON-
TENT REQUIREMENTS
% of newsprint
40
30
20
31
1992 1993 1994 1996 1996 1997 199B 1999 2000 2001
Year
I I Required Content
nrrrm nmnmrm trmnrrrrn m nmnmn mmnrrm
- Actual Content
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
In 1992 and 1993, over 90% of publishers exceeded the minimum content requirement
of 10%, and fewer than 1.5% failed to meet the requirement. In 1994, however, when the
standard was increased to 25%, 14 publishers (18%) failed to meet the standard.56 Five of
these paid the fee.57
7.6. NEW JERSEY INFORMATION AWARDS PROGRAM58
Under this program, which became effective in 1990, citizens who report illegal
dumping to environmental authorities receive the larger of 10% or $250 of any civil
penalty collected. Information leading to criminal convictions is rewarded by 50% of the
collected penalty. The identity of those seeking rewards is protected.
Four other New Jersey statutes also contain provisions for monetary awards for
reporters of violations:
1. Major Hazardous Waste Facilities Siting Act: 50% of any criminal penalty collected
for the illegal treatment, storage, or disposal of hazardous waste;
2. Regional Low Level Radioactive Waste Disposal Facility Siting Commission: 50% of
any penalty collected for the illegal treatment, storage, or disposal of low level
radioactive waste;
3. The Comprehensive Regulated Medical Waste Management Act: 10% or $250 of any
civil or criminal penalty collected for violations.
4. Ocean Dumping Enforcement Act: 10% of any criminal penalty collected for
violations.
This scheme differs from most subsidies and other incentive mechanisms featured in
this report in that it seeks to affect behavior by rewarding enforcement. As of May 1996,
three penalties had been collected as a result of information provided by citizens. One
payment of $50,000 and two of $250, 10% of the penalties, were awarded in these three
cases. Other rewards are pending.59
A similar source of support for environmentalist organizations is attorney's fees
awarded in successful citizen suits against environmental violators. As noted in Section
9, attorney's fees awards appear to create stronger incentives for private parties to initiate
suits under California's Proposition 65 than the so-called "bounty hunter provision" under
which the person who brought the suit can receive 25% of any fines.
Although other state and federal laws include the possibility of rewards for reporting
potential environmental violations or initiating suits, it is beyond the scope of this report
to determine their extent or their effects on environmental behavior.
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Subsidies
7.7. ALTERNATIVE FUELS AND LOW-EMITTING VEHICLES
Various levels of government subsidize alternative fuels (AF) and alternative fuel
vehicles (AFV) through measures such as tax incentives, rebates, and preferential procure-
ment. The annual costs of federal programs alone have been estimated at more than $1
billion.60 Some of these subsidies result in environmental improvements, but as noted
below, alternative fuels are also subsidized for other reasons.
7.7.1. Federal Subsidies
As shown in Table 7-13, the largest subsidy in the area of cleaner fuels is the exemp-
tion of ethanol blends from $0,054 of the $0,184 per gallon gasoline tax. Since ethanol
blends of 10% receive this deduction, the exemption for ethanol is the equivalent of $0.54
per gallon.
(API paper on this topic: www.api.org/cat/SECl2.htm# 11)
Table 7-13: ALTERNATIVE FUEL AND ALTERNATIVE FUEL VEHICLE SUBSI-
DIES
(in millions of 1994 dollars)
TvDe of subsidv
1994
2000 (Projected)
Research & Development
348
350
Ethanol credit
573
914
Other direct subsidies
53
76
Preferential procurement
6
614
Tax credits for AFVs and
equipment
20
100
RVP waiver for ethanol
blends
95
120
Total
1,115
2,174
Source: Anderson (September 1994), pp. 18-21.
The "other direct subsidies" in Table 7-13 include preferential taxation of compressed
natural gas (CNG) and payments to subsidize purchases of AFVs and AFV infrastructure.
The CNG tax deduction is equivalent to $0,128 per gallon. Although this subsidy is
currently small compared to ethanol tax deductions, it is expected to increase in impor-
tance by the year 2000 as the number of CNG vehicles increases. The federal government
also subsidizes the purchase of alternative fuel mass transit buses and school buses, state
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
AFV planning, and the purchase of alternative fuel vehicles by small businesses.
Tax credits for AFVs and refueling stations currently amount to about $20 million
annually but are predicted to rise to $100 million annually by the year 2000. The federal
government also subsidizes a number of research and development activities.
The RVP (Reid vapor pressure) waiver entitles ethanol blends to an extra pound of
vapor pressure beyond the limits imposed on conventional gasoline. (Adding ethanol to
gasoline raises vapor pressure about 1 lb. of RVP in a 10% ethanol blend. Without the
waiver, ethanol blends would be disadvantaged in the marketplace.) This waiver is worth
approximately $0.09 per gallon of ethanol, based on additional costs incurred by refiners
to produce a blend stock with lower vapor pressure.
Table 7-13 also shows that another type of subsidy, preferential procurement, is
expected to rise significantly in value by the year 2000. This trend is due to the fact that
many procurement requirements are only now entering into effect and are scheduled to
become more stringent over time. Table 7-14 shows these requirements, many of which
will eventually also be applied to private vehicle fleets.
The federal government also provides income tax deductions of $2,000 to $50,000 for
clean-fuel vehicles. Electric vehicles purchases are eligible for 10% income tax credits up
to $4,000. The cost to the government of the electric vehicle credits has been estimated at
$65 million in 1995.61
7.7.2. State Subsidies
Besides the federal AFV purchasing requirements imposed on state governments
shown in table 8, several states, including New York and Massachusetts, have their own
vehicle purchasing requirements. In addition, most states offer tax benefits or grants for
AF or purchases of AFVs.62
(Site containing information on state subsidies:
www.ccities.doe.gov/documents/funding/toe.html)
In Connecticut, for example, vehicles powered by natural gas, propane, or electricity,
vehicle conversion equipment, and AF refueling station equipment are exempt from the
state's 6% sales and use taxes. In addition, businesses are entitled to 50% tax credits for
investments in vehicle conversions and refueling stations. Companies that derive at least
75% of their income from alternative energy sources are exempt from income tax, and
natural gas sales are exempt from gross earnings taxes of 4%-5%.63
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Subsidies
Table 7-14: ALTERNATIVE FUEL VEHICLE PROCUREMENT REQUIREMENTS64
(percentage of new vehicles purchased that must be AFVs)
Model vear
Federal
State
AF sup-
Dliers
Private
Fleets
1993
5,000
1994
7,500
1995
10,000
1996
25%
10%
30%
1997
33%
15%
50%
1998
50%
25%
70%
1999
75%
50%
90%
2000
75%
75%
90%
2001
75%
75%
90%
2002
75%
75%
90%
20%
2003
75%
75%
90%
40%
2004
75%
75%
90%
60%
2005
75%
75%
90%
70%
2006 and
beyond
75%
75%
90%
70%
Source: Anderson (September 1994), p. 10.
The California Air Resources Board (CARB) requires that the seven largest vehicle
manufacturers' sales in the state be at least 2% AFVs by 1998. The percentage will increase
to 5% in 2001 and 10% in 2003. The direct incremental and infrastructure costs of this
mandate have been projected at $19.5 billion through 2010, which makes up almost 80%
of the expected costs of all AF promotion activities.65
A number of cities use AFVs in their mass transit systems. In Los Angeles, for
example, the Metropolitan Transit Area board has adopted the policy that all future bus
purchases will be AFVs.66
As shown in Table 7-15, which focuses on the Ozone Transport Region consisting of 12
Mid-Atlantic and Northeastern states and the District of Columbia, state subsidies for AF
and AFVs are expected to rise significantly over the next fifteen years.
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 7-15: ANNUAL ALTERNATIVE FUEL AND ALTERNATIVE FUEL VEHICLE
SUBSIDIES IN THE OZONE TRANSPORT REGION67
(excluding federal mandates, in millions of dollars)
TvDe of subsidv
1995
2000
2005
AFV procurement
requirements
0
153.3-930.5
719.0-5,875.5
State and local tax
incentives
4.3-4.8
(44.8)-12.0
unknown
Other state and local
incentives
2.9-10.5
0.0-4.0
unknown
Total
7.2-15.3
108.5-946.5
719.0-5,875.5
Source: Perkins (September 1995), p. 9.
(Perkins paper: www.api.org/cat/SECl 2a.htm#52)
The incentive effect of some of the AF and AFV subsidies is likely to be significant.
Preferential tax treatment has played a large role in the rise in ethanol production in
recent years. A 1995 GAO report found that elimination of the excise tax reduction would
result in a 50%-90% reduction in ethanol use.68 The purchase of AFVs has also stimulated
demand for methanol and CNG.
The environmental impact of such incentive effects is unclear. Some alternative fuels
are definitely cleaner than gasoline. Ethanol, however, generates less carbon monoxide
in winter but worsens ozone conditions in summer. Alternative fuels are promoted not
just for environmental reasons but also because their use is thought to increase U.S. energy
security and to provide a market for part of the country's large agricultural surpluses.
7.7.3. Car Buyback Schemes
Several private programs have been implemented to offer cash payments to motorists
to turn in old, high-emitting automobiles. As noted in Section VI, the South Coast Air
Quality Management District (SCAQMD) allows the generation of emission reduction
credits for scrapping not only old vehicles but also lawnmowers, both of which are
blamed for significant air pollution.
In 1990, Unocal Corporation purchased and scrapped 8,376 pre-1971 vehicles in Los
Angeles at $700 per vehicle. Since SCAQMD estimated at $4,900 per ton the cost of
combined NOx and ROC reductions through scrappage of pre-1972 vehicles compared to
$10,000 to $20,000 per ton for traditional control methods, this vehicle scrappage program
appears to have been relatively cost-effective.69
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Subsidies
7.8. RENEWABLE ENERGY AND CONSERVATION
Renewable energy and conservation are subsidized by tax benefits. Renewable
electricity generation earns income tax credits of 1,5
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
reimbursement beginning one year after
project start-up.
Data collected by the State of Ohio
indicate that as of June 30, 1995, the states
collectively had lent $14.6 billion, or 77%,
of the $18.9 billion available to them. The
percentages lent varied significantly from
state to state, with 8 states having lent
over 90% of their funds, 11 less than 60%,
and 3 less than 40%. A GAO study found
that various obstacles had limited states'
lending, including lack of state experi-
ence managing revolving loan funds. In
addition, the requirement that loans be
repaid has discouraged applications from
some small communities with a limited
number of ratepayers to support project
costs. In at least two states, the possibility of obtaining grants from other federal pro-
grams appears to have discouraged SRF loan applications. Eight federal agencies manage
17 different programs that may be used by rural areas for construction, expansion, or
repair of water and wastewater facilities. Some states report that larger communities with
solid credit ratings may be able to borrow money at more favorable conditions from
private sources than from the SRF.77
Unlike the grant program it replaced, the SRF program funds a number of initiatives
other than municipal wastewater treatment, including projects addressing stormwater,
combined (sanitary and storm) sewer
overflows, and agricultural runoff. About
150 loans worth roughly $1 billion have
financed combined sewer overflow control
investments, and approximately 100 loans
worth about $100 million have financed
agricultural and urban runoff control mea-
sures.
Although it is beyond the scope of this
report to provide an evaluation of the
grant and SRF programs, figure # shows
that the population served by modern
sewage treatment has increased signifi-
cantly. EPA has stated that "the SRF is
probably the most efficient program of its
kind in the federal government."78
Figure 7-2: SRF INVESTMENT FY 1988-
95
($billions)
2
Source: EM, 'The Clean Water State
Revolving Fund,' p. 12.
Figure 7-3: U.S. POPULATION SERVED
BY MODERN SEWAGE TREATMENT
FACILITIES
Millions
200
150
100
50
....
q| 1 1 1 1
1072 1988 1092 1806
Souroei EM, 'The Clean Water State
Revolving Fund,' pp. 6-14
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Subsidies
7.10. ENVIRONMENTALLY HARMFUL SUBSIDIES
Some subsidies are widely be-lieved to have the unintended effect of encouraging
environ-mentally harmful activities. In many cases, such subsidies were not designed as
environmental policy instruments but have had adverse environmental consequences.
This subsection briefly discusses a few examples of such subsidies.
7.10.1. Subsidies for Timber, Minerals, and Water Extraction
It has been widely asserted that timber, minerals, water, and public grazing land have
been priced below their true social cost and in many cases even below their private cost.
For all of these resources, user fees such as those described in Section IV have been
assessed. However, to the extent that these fees are lower than the private cost of the
resources or services on which they are charged, such resources and services are actually
being subsidized to the detriment of environmental protection.
As mentioned in Section 4, for example, livestock grazing fees on federal lands
imposed according to a formula established by the 1978 Public Rangelands Improvement
Act (PRIA) are widely believed to be below market value. Although fees have been
between $1.35 and $1.98 per animal unit month (AUM) since 1986, the Bureau of Land
Management (BLM) and Forest Service estimated in 1992 that fair market values were
$4.75 per AUM for sheep and varied across regions from $4.68 to $10.26 per AUM for
cattle and horses.79 The costs of the grazing programs were $2.40 to $3.24 per AUM for the
Forest Service and $2.18 to $3.21 per AUM for BLM. The low end of the cost range applies
if only the funding directly linked to the livestock grazing program is considered, while
the high end considers all range management funding.80 Moreover, state and private fees
are significantly higher than PRIA fees. Data from the National Agricultural Statistics
Service indicate that in 1993, private fees in 17 western states averaged $9.80 and state
government fees average $4.58. As noted in Section IV, the PRIA fee that year was $1.86.81
(CRS Grazing fees primer: www.cnie.org/nle/ag-5.html)
(1995 Green Scissors on grazing fees:
www.essential.org/orgs/FOE/scissors95/greenpart22.html)
Table 7-16 shows that estimated U.S. Bureau of Reclamation irrigation water subsidies
in selected areas ranged from 57% to 97% of the Bureau's full water delivery cost.
Excessive irrigation has been associated with a number of environmental problems,
including water shortages and contamination of water with natural pollutants and
agricultural inputs.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 7-16: U.S. BUREAU OF RECLAMATION WATER SUBSIDIES82
Irrigation district
Irrigable
acres
Subsidy
($/ acre)
Subsidy as % of
full cost
Oroville-Tonasket
9,500
417
82
Black Canyon #2
53,200
762
89
East Columbia Basin
134,500
1,619
97
Cachuma Project
38,700
1,378
81
Truckee-Carson
73,000
931
83
Glen
152,300
101
91
San Luis Unit
571,900
1,422
85
Coachella Valley
78,500
1,000
70
Wellton-Mohawk
65,800
1,787
89
Imperial Valley
519,500
149
74
Moon Lake
75,300
58
57
Grand Valley
23,300
1,623
85
Elephant Butte
102,100
363
64
Lugert-Altus
47,100
675
90
Malta
42,400
812
92
Lower Yellowstone #1
34,500
507
73
Farwell
50,100
1,446
93
Goshen
52,500
416
74
Source: U.S. Dept. of Interior, as cited in Kanazawa, p. 114.
Historically, the mining (including oil and gas) and timber industries have benefitted
from preferential taxation of their income. The impact of subsidizing mineral and timber
production through the tax code is to favor virgin material use over secondary (recycled)
materials. Two types of adverse environmental effects may result from such subsidies:
destruction of natural areas as minerals and timber are harvested and excessive disposal
of materials that otherwise might be recycled.
Percentage depletion allowances for petroleum and other minerals, for example, allow
companies to write off as expenses arbitrary percentage reductions in mineral deposits
resulting from their operations. The value of these allowances for oil and gas was
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estimated at over $2 billion annually from 1980 to 1982 but has since decreased to
insignificant levels. One reason for the decrease is that only independent oil and gas
companies (which account for about 30% of total U.S. oil and gas consumption) are now
entitled to allowances. Moreover, only 25%-40% of these independent companies pay the
standard (rather than alternative minimum) tax required for eligibility for allowance
claims, and many of these are excluded from claims by other criteria under the tax code.
Percentage depletion allowances for other minerals were worth over $500 million
annually for much of the early 1980s but fell in value after the 1986 tax reform. Oil, gas,
and other mineral extraction companies also have the advantage of being able to expense
(rather than capitalize) exploration and development costs.
Timber companies were formerly allowed to consider certain timber income as capital
gains, which are subject to lower tax rates. This practice, worth about $800 million a year
in the first half of the 1980s, was eliminated by the 1986 tax reform. However, the
elimination of this practice led timber companies to increase their use of other previously
underused tax advantages: provisions allowing timber management and reforestation
costs to be expensed rather than capitalized and tax credits and accelerated amortization
for reforestation activities. Government construction of roads to facilitate harvesting is
another form of subsidy for timber.83
7.10.2. Agriculture
The effect of the sugar price support program on the Florida Everglades is frequently
cited as an example of an environmentally harmful subsidy.84 The federal government
subsidizes sugar by guaranteeing a floor price of $0.18 per pound, almost twice the world
market price. The policy is further supported by tariffs of $0.16 per pound on imported
sugar in excess of quota levels. In 1992, this support program resulted in $161.5 million
in benefits for sugarcane farmers and $107.7 million for processors.
The positive impact of the subsidy on sugarcane production increases the amount of
water diverted to sugarcane fields as well as the amount of runoff. The diversion and the
runoff, which is contaminated with pesticides and fertilizers that sugarcane growers apply
to maximize production, damage the ecosystem of the Everglades.
Agricultural subsidies appear to be having similar adverse effects elsewhere in the
U.S. A Competitive Enterprise Institute study found that the use of pesticides and
fertilizers in several Midwestern states was higher on subsidized fields than elsewhere.
The study concluded that "the complete elimination of subsidies could result in a 35
percent reduction in chemical use per acre and a 29 percent reduction in fertilizer use per
acre." The USDA peanut program has also been accused of promoting environmental
degradation. By requiring farmers to grow peanuts on the same land more often than
they otherwise would to retain their sales quotas, critics charge, the program results in
increased pesticide use to counteract the negative effects of lack of crop rotation.85 Price
supports for cotton have been accused of similar effects.86
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7.10.3. Mortgage Interest Tax Deduction
Although most interest deductions from personal income tax were eliminated by the
1986 Tax Reform Act, the deduction of mortgage interest remained in place. This
deduction in effect subsidizes the construction and purchase of large homes. To the extent
that larger homes use more building materials, take up more space, and require more
energy, the deduction has a negative impact on the environment.
Endnotes for Section 7
1. Goldhammer et al. (1995), pp. 1-5.
2. DEN, March 24, 1995, p. Bl-2.
3. Unless otherwise stated, all information on the Louisiana Scorecard system is provided
by Environmental Law Institute (August 1993), pp. 118-21.
4. Joe Acton, Environmental Protection Agency, Office of Enforcement and Compliance
Assurance, personal communication, 1996.
5. The Kodak and Honolulu SEPs are described in EPA (May 1995), p. 2-14.
6. With the exception of the estimate of the number and value of SEPs negotiated in 1995
and information on Kodak and Honolulu SEPs, the information on supplemental
environmental projects comes from Environment Reporter, February 12, 1993, pp. 2692-4.
7. Whitehouse (1996), p. 74.
8. California Pollution Control Financing Authority, "Small Business Pollution Control Tax-
Exempt Bond Financing Program."
9. James Goldstene, California Pollution Control Financing Authority, personal
communication, June 1996.
10. California Pollution Control Financing Authority, "California Capital Access Program."
11. Goldstene, op cit.
12. DEN, May 26, 1995, p. E100.
13. DEN, July 27, 1995, p. A4. For more information on brownfields pilot projects, see EPA
brownfields internet site: earthl.epa.gov/swerosps/bf/answers.htm#5.
14. DEN, January 16, 1996, p. A10.
15. Pennsylvania Department of Environmental Protection internet site, "Land Recycling
Fact Sheet 8: Financial Assistance (Grants and Loans)."
www.dep.state.pa.us/dep/deputate/airwaste/wm/landrecy/
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facts/fs8.htm
16. Pennsylvania Department of Environmental Protection, "Pennsylvania's Land
Recycling Program: Six-Month Progress Report," 1996.
www.dep.state.pa.us/dep/deputate/airwaste/wm/landrecy/facts/
6monrpt.htm
17. DEN, July 18, 1995, p. B2.
18. Environmental Law Institute (1995), p. 76.
19. Environment Reporter, May 17, 1996, p. 279.
20. Table adapted from GAO (April 1995), pp. 2-6. Information on programs created by
1996 Farm Bill provided by USDA (1996).
21. For all programs created before the 1996 Farm Bill, appropriations in this column are
totals for FY1992-1995. For the four programs created by the 1996 Farm Bill (at the bottom
of the table), appropriations are totals for FY1996-2002.
22. GAO (February 1995), p. 13.
23. Ibid, p. 16.
24. USDA (December 1994), pp. 180-1.
25. GAO (February 1995), p. 21.
26. USDA (December 1994), p. 194.
27. Osborn et al. (February 1994), p. 16.
28. USDA (December 1994), p. 182.
29. Rolfe (1993), p. 21. internet: yvrwwl.pwc.bc.doe.ca/ec/frap/fr-pof.html
30. USDA (December 1994), p. 186.
31. USDA (April 1996).
32. USDA (December 1994), p. 166.
33. Information on programs created by the 1996 Farm Bill provided by USDA (April 1996)
and by Tim Osborn, USDA Economic Research Service, personal communication, 1996.
34. GAO (April 1995), pp. 17-18.
35. Ibid, p. 168.
36. USDA (December 1994), p. 175.
37. Sidhu (November 1993), pp. 30-32. www.api.org/cat/SECl2.htm#l3
38. Sendak (1995), p. 5.
39. DEN, July 14, 1995, pp. A3-4.
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40. Sendak (1995), p. 5.
41. DEN, May 2, 1995, p. Bl.
42. DEN, November 14, 1995, p. B5.
43. American Farmland Trust, "Purchase of Agricultural Conservation Easements: Status
of Programs as of 4/12/96," unpublished table.
44. Virginia Department of Environmental Quality, "Waste Tire Program."
www.deq.state.va.us/envprog/tires.html. The amount of the end user subsidy was
provided by Scrap Tire News Legislative Report, p. 19.
45. Steuteville (1995), p. 36.
46. Beverage World 1994-1995 Data Bank, pp. 274-286.
47. Bonderud and Shanovich (1995), pp. 11-32.
48. Trombly (June 1995), pp. 35-38. The information on Louisiana was added to the table
from Louisiana Department of Environmental Quality, "DEQ Announces Programs to Aid
Tire Dealers and Tire Processors," January 25, 1995. California's interest rate was lowered
from 6% to 5.8% on January 1, 1996.
49. "State Waste Board Lowers Interest Rate on Recycling Loan" (March 1996), CAL/EPA
Report, www.calepa.cahwnet.gov/epadocs/mar96.txt
50. Louisiana Department of Environmental Quality (January 25, 1995), "DEQ Announces
Programs to Aid Tire Dealers and Tire Processors,"
www.deq.state.la.us/osec/n950124.htm.
51. Steuteville (1995), p. 36.
52. Beverage World 1994-1995 Databank, pp. 277-8.
53. Steuteville (1995), p. 36.
54. Florida Department of Environmental Protection (1995), "Waste Tires in Florida: State
of the State," and Bill Parker, Florida Department of Environmental Protection, personal
communication, May 1996.
55. Wisconsin Department of Natural Resources, "Wisconsin's Newspaper Recycled
Content Requirements: 1994 Update."
56.Ibid.
57. Julia Barrett, Wisconsin Department of Natural Resources, personal communication,
May 1996.
58. Unless otherwise stated, all information on New Jersey's Information Awards Program
is provided by Environmental Law Institute (August 1993).
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59. Toni Hendricksen, New Jersey Department of Law and Public Safety, personal
communication, May 1996.
60. Unless otherwise stated, all information on federal subsidies for alternative fuels and
alternative fuel vehicles is provided by Anderson (September 1994).
www.api.org/cat/SEC12.htm#ll
61. Whitehouse (1996), p. 74.
62. For a description of state alternative fuel vehicle incentives, see "Clean Cities Guide to
Alternative Fuel Vehicle Incentives & Laws," DOE internet
site:www.ccities.doe.gov/documents/funding/toe.html
63. Perkins (September 1995), pp. 15-17. www.api.org/cat/SECl2a.htm#52
64. Information provided by Anderson (September 1994), p. 10. The requirements for
private fleets could be introduced three years earlier if the Department of Energy
determines that early introduction is necessary in order to attain alternative fuel
replacement goals for 2000 and 2010.
65. Sierra Research (1995), pp. 4-6.
66. Ibid, pp. 33-34.
67. Source: Perkins (September 1995), p. 9. AFV requirements refer to requirements for
zero-emission vehicles and ultra-low emissions vehicles. Negative numbers are in
parentheses. The Ozone Transport Region is composed of Connecticut, Delaware, the
District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, Vermont, and Virginia.
68. DEN, September 26, 1995, p. A4.
69. Environmental Law Institute (August 1993), pp. 5-7.
70. Information on the 1,6
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78. EPA (January 1995).
79. For an explanation of the concept of animal unit month, see the discussion on grazing
fees in Section IV.
80. Cody (1994). www.cnie.org/nle/ag-5.html
81. Green Scissors Campaign of Citizens United to Terminate Subsidies Qanuary 1995).
www.essential.org/orgs/FOE/scissors95/greenpart22.html.
82. Source: U.S. Department of Interior, Acreage Limitation, Interim Report, Government
Printing Office, Washington, DC, March 1980, pp. 38-41 as cited in Kanazawa (1994), p.
114.
83. For more information on subsidies for timber, mining, energy, and water, see EPA
(August 1994b), Federal Disincentives: A Study of Federal Tax Subsidies and Other Programs
Affecting Virgin Industries and Recycling. For a list of taxes affecting timber, mining and
energy, see Barthold (1994), p. 149.
84. See, for example, DEN, August 16, 1995 or Tolman (1995).
85. Tolman (1995).
86. DEN, February 16, 1996, p. A8.
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8. LIABILITY APPROACHES
Two federal environmental statutes, CERCLA and OPA, provide liability for cleanup
of releases of hazardous substances and petroleum, respectively, that pose a threat to
human health and the environment. The statutes also provide for compensation for lost
use of injured resources and for restoration of the environment. The incentive effect is
clear, since environmental values in effect become part of the overall cost of doing
business. Avoiding harm to the environment is good practice when it reduces the overall
cost of doing business.
Several of the federal environmental statutes provide for civil and criminal liability for
failure to comply with the law and implementing regulations. The incentive effect of this
form of liability is to encourage individuals to comply with what are largely command
and control regulations. Such an incentive is qualitatively different from the subject
matter for this report: incentives that put a price on pollution that harms health, the
environment, or natural resources. No study has attempted to address whether the
existing level of penalties and enforcement produce the correct incentive effect (an optimal
level of investment in pollution control). Excessive investment in pollution control is
possible if entities seek to avoid penalties that are too harsh. Also possibility is too little
effort at pollution if penalties are low and enforcement is lax.
Tort law is a fourth means through which liability encourages behavior that improves
the state of the environment. Under tort law, individuals may seek compensation from
polluters for harm to their property or person. The difficulty of proving harm caused by
pollution, particularly chronic health effects, creates a severe barrier to such cases,
meaning that many environmental costs will not be internalized through a liability
mechanism. In fact, it is largely the failure of tort law to address many types of environ-
mental harm that led to the passage of the principal environmental statutes.
8.1. LIABILITY FOR CLEANUP COSTS
Enacted by Congress during the change-over from a Democratic to a Republican
administration in 1980, the Comprehensive Environmental Response, Liability, and
Compensation Act (CERCLA) responded to an issue that had no precedent: the legacy of
contaminated sites containing hazardous wastes. CERCLA established a trust fund (the
Superfund) which is financed primarily by a tax on corporate income, crude oil and
certain chemicals. EPA uses the fund to pay for cleanup and restoration activities at sites
where no solvent responsible party can be identified or where immediate response is
deemed necessary.
The most important feature of CERCLA centers on the cleanup of hazardous waste
sites posing a threat to human health and the environment. CERCLA is unique among the
principal environmental statutes in that it is backward looking, seeking to remedy
problems stemming from past actions, rather than forward looking and trying to prevent
damage from current or future activities. The incentive effects of CERCLA cleanup
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responsibility must lie outside of the actual costs of cleanup, since the actions that
precipitated the need for cleanup are historical not contemporary. But the mere prospect
of CERCLA cleanup liability can affect current and future decisions regarding the disposal
of hazardous wastes.
Section 107(a) of CERCLA provides for liability for anyone who is did something
"from which there is a release (of a hazardous substance), or threatened release which
causes the incurrence of response costs..." The courts have interpreted this to require
strict, joint and several liability for parties deemed responsible for disposing of hazardous
wastes that pose risks to human health and the environment. Joint and several liability
means that if the government can identify just one party out of many that contributed
wastes to a site, potentially the one party can be held responsible for all cleanup costs. In
turn any potentially responsible parties identified by the government may seek to involve
other potentially responsible parties. Joint and several liability appears to some to be a
recipe to ensure litigation over who is responsible for what. Strict liability is a standard
that holds parties responsible regardless of the circumstances of their action.
Private sector cleanup costs under CERCLA certainly have run into the tens of billions
of dollars already and eventually may amount to several hundred billion dollars. As
noted earlier, transactions costs associated with determining liability run high under this
program.
8.2. LIABILITY FOR DAMAGE TO NATURAL RESOURCES
Until 1990, CERCLA included damage to natural resources resulting from oil spills
within its scope.1 Where responsible parties can be identified, CERCLA provides for
compensation to the public by the responsible party for the loss of services from natural
resources: so called "interim lost uses" while pollution and cleanup are ongoing, and
residual damages if restoration is not complete. CERCLA designates federal and state
authorities as trustees for natural resources. Trustees, in conjunction with the Justice
Department pursue the natural resource damage assessments. At the federal level, the
Department of the Interior is the trustee for freshwater anadromous fish, migratory birds
and waterfowl, and endangered species. The National Oceanic and Atmospheric
Administration is trustee for the coastal and marine environment, including commercial
and recreational fisheries, marine mammals and anadromous fish in salt water.
The Oil Pollution Act of 1990 (OPA), enacted following the 1989 Exxon Valdez spill in
Prince William Sound, created an independent statute separate from CERCLA for
addressing damages resulting from oil spills. In Section 1006(e)(1) OPA directed the
National Oceanic and Atmospheric Administration (NOAA), a part of the Department of
Commerce, to promulgate regulations for assessing natural resource damages. On
January 5, 1996 NOAA issued final regulations on natural resource damage assessment
conducted under OPA.2 The Department of the Interior is expected to issue NRDA
regulations for assessments under CERCLA in 1997; those regulations are expected to
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follow closely NOAA's approach. The goal of OPA and the NOAA regulations is to
restore the natural resources and services to their baseline condition and to compensate
for the interim lost use of natural resources and services through the restoration, rehabili-
tation or replacement through the acquisition of comparable resources and/or services.
Damage assessments conducted by trustees in conformance with the NOAA regulations
are accorded the status of a rebuttable presumption, which means that parties responsible
for the damage bear the burden of showing that damage claims presented by trustees are
inappropriate.
The two components of a natural resource damage assessment assure that the public
is made whole following an oil spill. The resource and resource services are restored and
the public is compensated for any lost use of the resource and resource services. In
assuring that responsible parties will pay the amounts necessary to make the public
whole, OPA gives potentially responsible parties a financial incentive not to spill oil.
By 1996, under provisions of CERCLA, OPA, and the Clean Water Act, federal
agencies had settled more than 100 natural resource damage cases for a total of well over
$700 million. By that date state agencies acting as trustees also had settled several cases
on their own for a total of at least another $20 million. In comparison, cleanup settlements
by that date under CERCLA alone totaled at least $10 billion, or approximately 100 times
the magnitude of the natural resource damage settlements. If no settlement agreement can
be reached with the responsible party, OPA authorizes the trustee to file a civil action for
the damages in federal district court or to seek funds from the Oil Spill Liability Trust
Fund for the damages.
A number of large NRDA cases are still pending, at least three of which could amount
to at least $500 million. Several important cases involving the federal government as a
responsible party also are outstanding. The following table summarizes the largest cases
reported as settled (or partially settled) by 1996. Somewhat surprisingly, neither the
Exxon Valdez, nor the Shell Oil Martinez, CA refinery spills are listed. NOAA does not list
the $620 million (present value) Exxon Valdez since the case was settled before the NOAA
Damage Assessment Center was established. The Martinez case is not listed because it
was brought by the State of California.
It is clear that liability for natural resources is having an effect on firm behavior.
Shortly after the Exxon Valdez incident and about the same time as the passage of OPA, the
petroleum industry announced the creation of the $600 million, industry funded Marine
Spill Response Corporation, an organization that would develop response capabilities
specifically for large spills. Another sign of change is the care taken when tankers transit
congested waterways and load or offload petroleum. In the Arthur Kill and Kill Van Kull
of New York and New Jersey, tankers are now accompanied by tug escorts and offloading
tankers are surrounded by booms.
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One largely unresolved issue concerns spills and releases that are too small to justify
an a natural resource damage assessment under either CERCLA or OPA. For example,
the Coast Guard records approximately 10,000 oil spills per year, but fewer than 20 are
followed by an assessment of natural resource damage. While the expected damage from
many of the smaller spills may not justify the costs of a traditional damage assessment,
some natural resource damage may nonetheless exist. Not charging for natural resource
damage gives incorrect price signals to potential polluters (because it fails to internalize
an externality). The petroleum industry has argued that the magnitude of these small
assessments should closely match the actual damage done. The reason for this position
probably has more to do with attempting to avoid formula-type assessments altogether
than with a quarrel over the incentive effect of a formula. The correct economic incentive
for a given spill is provided to potential polluters if the calculated value of the assessment
equals the average harm done by such a spill.
Table 8-1: LARGEST FEDERAL NATURAL RESOURCE DAMAGE SETTLEMENTS
Case
Location
Dollar Amount
Southern California
Palos Verdes Shelf, CA
$54,200,000
City of Seattle
Elliott Bay, WA
$24,250,000
AVX
New Bedford, MA
$21,127,000
Southern Pacific
Cantara Loop Derailment, CA
$14,000,000
Simpson /Port of
Tacoma
Commencement Bay, WA
$13,035,000
Exxon Bayway
Arthur Kill, NY
$11,113,000
Blackbird Mine
Salmon, ID
$7,200,000
Apex Houston
San Francisco, CA
$5,416,000
Tenyo Maru
Olympic Peninsula, WA
$5,160,000
Eagle Pitcher Industries
Tri State Site: MO, KS, OK
$4,734,000
Nautilus
Kill Van Kul, NY/NJ
$3,300,000
Sharon Steel Corp.
Midvale Tailing Site, UT
$2,600,000
Schlumberger
Crab Orchard Wildlife Refuge, IL
$2,500,000
New York Trap Rock Co.
Portland Cement Site, UT
$2,207,510
Presidente Rivera
Delaware River, PA
$2,141,000
Greenhill
Timbalier Bay, LA
$1,878,000
Elepis
Florida Keys NMS, FL
$1,660,000
Charles George Trucking
Co.
Charles George Reclamation Trust
Landfill, IL
$1,378,350
Sources: Department of Justice, NOAA3
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At least four states, Alaska, Washington, Florida and Texas have responded by
enacting compensation formulas or tables that assess charges based on the volume spilled,
the nature of the receiving waters and other factors. In 1995 NOAA proposed a similar
formula approach for small spills, but later withdrew the initiative for further study when
it was pointed out that the proposed method resulted in unrealistically large assessments
in some cases.
8.3. CIVIL AND CRIMINAL LIABILITY
Congress first decreed pollution of the environment to be a federal crime in the Refuse
Act of 1899, which made it a misdemeanor to "throw, discharge, or deposit" into navigable
waters of the United States refuse of any kind other than runoff from streets and discharge
from sewers. Violators convicted of violating the act could be punished by fines not less
than $500 nor more than $2,500, or by imprisonment for not less than 30 days nor more
than one year. The court had the discretion to reward persons who provided information
leading to conviction with one-half of the fine.
More recently, the 1970 Amendments to the Clean Air Act punished violations of the
Act as a misdemeanor. The 1970 Amendments to the Federal Water Pollution Control Act
established misdemeanor penalties for "negligent or willful" release of pollutants into
navigable waters without a permit or in violation of a permit. The Resource Conservation
and Recovery Act of 1976, as amended by the Solid Waste Disposal Act Amendments of
1980, provides felony penalties for treatment, storage or disposal of hazardous waste
without a permit.
Continuing through the 1980s, Congress further refined the scope of environmental
crimes, as well as the maximum fines and terms of imprisonment, in the Hazardous and
Solid Waste Amendments of 1984, the Superfund Amendments and Reauthorization Act
of 1986, and the Water Quality Act of 1990. In the Clean Air Act Amendments of 1990,
Congress increased the penalty provisions to felonies.
By 1995 the Justice Department had indictments against 443 corporations and 1,068
individuals, and had recovered $297 million in criminal penalties. Sentences for individu-
als totaled 561 person-years of prison for those convicted.4
State and local prosecutors also can pursue environmental crimes, since they are
required to demonstrate such a capacity in order to obtain EPA authorization to adminis-
ter locally programs of the Clean Air Act, the Clean Water Act and RCRA. While most
states were not active in pursuit of environmental crimes, there are a number of important
exceptions. New Jersey, Ohio, Pennsylvania and California are active in the prosecution
of environmental crimes. Los Angeles maintains its own team of investigators and
prosecutes cases.
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An important sanction in addition to fines and sentences is mandatory "blacklisting"
of contractors under the CAA and the CWA. Both statutes prohibit the federal govern-
ment from entering into new contracts with or issuing grants to any organization con-
victed of environmental crimes under these laws. Federal agencies and all states also have
the authority to temporarily disqualify contractors from new work pending receipt of
further information, when a contractor is violates a permit and is suspected of harming
the environment. Consequently, environmental violations can adversely affect a firm or
individual even if no criminal conviction is imposed.
The remainder of this Section describes the principal civil and criminal penalties
available under the nation's environmental laws.
8.3.1. RCRA
The purpose of RCRA is to establish a legal framework for a national system to oversee
the management of hazardous waste. Congress included within the RCRA statute several
enforcement authorities and penalty provisions. EPA relies on four types of compliance
orders as its primary enforcement tools.
1. EPA may issue to facilities in violation of a regulatory requirement of Subtitle C an
order requiring compliance within a set time frame, usually 30 days. Such EPA orders
include penalties for any noncompliance period.
2. EPA may require monitoring, testing, analysis and reporting for facilities that
present a substantial threat to human health or the environment.
3. EPA may issue corrective action orders requiring corrective action of other measures
to interim status facilities (without full RCRA permits) to protect human health and the
environment.
4. EPA may sue any person who contributes or contributed to solid waste management
practices that pose an imminent and substantial threat to human health or the environ-
ment.
Beyond forcing compliance with RCRA and making owners of facilities take actions to
protect public health and the environment, compliance orders may also assess a civil
penalty for past and current violations. Civil penalties can be as large as $25,000 per day
for each RCRA violation. Criminal penalties of up to $50,000 per day of violation or
imprisonment for as long as five years may be meted out to any responsible person who
knowingly:
transports hazardous waste to a facility not permitted under RCRA;
treats, stores, or disposes of hazardous waste without a permit;
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makes a false statement or representation in an application, label, manifest, record or
other document used for compliance with RCRA;
generates, treats, or disposes of hazardous waste and intentionally destroys records or
other documents required for compliance with RCRA;
transports hazardous waste without a manifest; or
exports hazardous waste without the consent of or in violation of procedures of the
receiving county.
8.3.2. CERCLA
Any person who releases hazardous substances, other than a federally-permitted
release, from a vessel must notify the National Response Center. Failure to provide
notification "immediately" or knowingly supplying false or misleading information may
be imprisoned for not more than 3 years (5 years in the case of a subsequent conviction),
and fined in accordance with title 18 of the Act.
Within 180 days of enactment of the Act, any person who owns, operates a hazardous
waste storage facility, or who accepted hazardous wastes for transport and selected a
treatment or disposal facility for the wastes, must notify the Administrator of EPA of the
existence of such a facility and supply information concerning the wastes as requested by
the Administrator. Parties subject to the above requirement must retain records concern-
ing the identity, characteristics, origin and condition of the wastes for 50 years. Failure to
comply with either provision can result upon conviction in a fine of not more than $10,000
or imprisonment for not more than one year.
8.3.3. CWA
The EPA can begin civil actions against violators of CWA permits and seek appropri-
ate relief including permanent or temporary injunctions. EPA can seek criminal penalties,
including fines of net less than $2,500 nor more than $25,000 per day of violation or
imprisonment for not more than one year, or both, for parties who negligently violate
permit conditions and limitations. EPA may seek criminal penalties of not less than
$5,000 per day nor more than $50,000 per day of violation or imprisonment of not more
than three years, or both for parties who knowingly violate permit conditions and
limitations. EPA may seek criminal penalties, including a fine of not more than $250,000
or imprisonment of not more than 15 years, or both, for parties who violate permit
conditions and limitations and knowingly place another person in danger of death or
serious bodily injury. An organization found guilty of knowingly endangering another
person may be subject to a fine of not more than $1,000,000. After the first conviction, the
fines and prison terms for subsequent convictions can be doubled.
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The CWA also provides for civil penalties for other offenses, including making false
statements on records, reports and other documents filed under the CWA, or wrongfully
introducing pollutants into treatment works.
8.3.4. CAA
The Administrator of EPA can seek a permanent or temporary injunction and civil
penalties of not more than $25,000 per day for permit violations by major stationary
sources (generally those emitting more than 100 tons per year of a regulated pollutant).
Criminal penalties that include both fines and imprisonment for up to two years may be
sought for any person who knowingly violates permit terms and conditions through such
actions as making material false statements, or omitting material information. Convicted
second-time violators can have their fines and sentences doubled. Negligent violators
who place another human in imminent danger of death or serious bodily injury, upon
conviction, are liable for fines and prison sentences of up to one year. Knowing violators
who similarly endanger human health may, upon conviction, receive fines and sentences
of up to 15 years or both. Finally, organizations can be liable for fines of up to $1,000,000
for knowingly committing permit violations and similarly endangering human health.
8.4. TORT LIABILITY
Litigation concerning claims of personal injury from chronic exposures to toxic agents
in the environment is a relatively recent phenomenon and largely is the domain of
asbestos workers. Workplace-related injury claims are not within the scope of this paper.
However, a few cases involve alleged exposure to toxic substances in ambient air and
water supplies.
The law under which toxic tort actions are brought has undergone considerable
evolution in recent years, brought about by several factors including the need to accom-
modate improved scientific information on the effects of human exposure to toxic agents,
recognition of the potentially long latency periods between exposure and onset of a
disease, and a growing desire by the courts to hold defendants to a standard of strict
liability. Despite the evolution of tort law in favor of plaintiffs, relatively few cases have
been filed that claim harm from pollution in the environment, and of these cases very few
involving health effects have been decided in favor of plaintiffs.
The statute of limitations is an important barrier to litigation in a few states, but most
states have struck down this once-important obstacle by allowing plaintiffs one to three
years after the discovery of an injury to file a case rather than starting the clock with the
date of initial exposure.
A difficult obstacle to plaintiffs in many situations of environmental harm is identify-
ing the party responsible for the harm. Identifying the source of contamination in well
water would be a challenge for most households. Even if the contamination could be
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Liability
traced to a waste disposal facility, it might be very hard to identify whose wastes caused
the contamination. For toxic pollutants in the air, identifying responsible parties is even
more difficult.
Demonstrating causation represents a major challenge, since most diseases that have
been linked to toxic substance exposure have multiple causes. Tort law generally requires
that plaintiffs demonstrate that the harm they experienced was "more likely than not"
caused by the defendant. Courts generally interpret this to mean that the probability the
defendant caused the harm was at least 50%. Imagine a situation in which a polluter
increased the risk of cancer in a nearby residential area by 20%. Rather than 100 people
dying of cancer each year, 120 die. None of the 120 cases would be compensable under
the "more likely than not" criterion. Two other things should be pointed out: (1) statistical
data of this nature are not likely to be accepted by courts, no matter what the standard of
proof, and (2) epidemiology is limited in its ability to detect elevated incidence of a
disease, the smallest detectable excess incidence being on the order of 30%.
In sum, the legal norms under which tort actions for harms caused by exposure to
pollution are such that few cases can satisfy the burdens of identifying the responsible
party and proving causation.
Endnotes for Section 8
1. A good background source is: Ward, Kevin and John Duffield, 1992. Natural Resource
Damages: Law and Economics, John Wiley & Sons, Inc.
2. Natural Resource Damage Assessments: Final Rule, 61 FR 440-510, January 5, 1996.
3. Department of Justice data cited in "Status of Natural Resource Damage Claims,"
testimony of Peter F. Guerrero, US General Accounting Office, before the Subcommittee
on Commerce, Trade, and Hazardous Materials, Committee on Commerce, House of
Representatives, June 20, 1995; and NOAA, "The Damage Assessment and Restoration
Program," 1996.
4. Cooney, John F. et al., 1996 "Criminal Enforcement of Environmental Laws," in
Environmental Crimes Deskbook, Washington, D.C., Environmental Law Institute.
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-10 August
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9. INFORMATION APPROACHES
9.1. INTRODUCTION
For the purposes of this Section, information approaches to environmental protection
may be defined as policy instruments that attempt to improve companies' environmental
behavior through the collection and dissemination of information on the environmental
consequences of their products and activities. They differ from command and control
regulation in that they entail no requirements other than reporting, but the information
reported could have negative or positive repercussions for the firm. If information on
environmental performance is readily available, companies with poor performance could
risk losing customers (and perhaps financing, labor, and other inputs) at the expense of
companies with better environmental performance. Negative information could also be
used in citizen suits against polluters. Information approaches could also help polluters
see the impacts of their pollution on the environment and their profitability and develop
appropriate abatement methods.
In assessing information approaches, one should bear in mind that having an incentive
effect is not their only objective. The Toxics Release Inventory and other mechanisms
discussed below are also intended to provide information to regulators, scholars, and
others interested in pollution.
Information approaches have been used in environmental protection on both the state
and federal levels. This Section begins with a discussion of the federal Emergency
Planning and Community Right-to-Know Act (EPCRA) and two similar state programs.
It then discusses California's Proposition 65 and air toxics release reporting requirements,
environmental impact assessment reporting requirements, product labeling, environmen-
tal performance awards, Securities and Exchange Commission environmental reporting
requirements, and radon and lead paint disclosure requirements. Information approaches
used outside the U.S. are discussed in Section 11.
9.2. EMERGENCY PLANNING AND COMMUNITY RIGHT-TO-KNOW ACT (EPCRA)
Enacted in 1986 as Title III of the Superfund Amendments and Reauthorization Act
(SARA), EPCRA requires emergency planning and disclosure of information on releases
and transfers to disposal facilities of hazardous chemicals. Section 313 of EPCRA requires
certain businesses to report each year on the amounts of toxic chemicals that their facilities
release into the environment and transfer to disposal facilities.1 As a result of the 1990
Pollution Prevention Act, reporting requirements were expanded beginning in 1991 to
include source reduction and recycling information. Data for a given year normally must
be submitted by July 1 of the following year, but the deadline for 1995 data was extended
to August 1, 1996. EPA then compiles the information and makes it available to the public
as the Toxics Release Inventory (TRI).
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
TRI reporting is required of all manufacturing facilities with ten or more employees in
the Standard Industrial Classification (SIC) codes 20 through 39 that manufacture, process,
or otherwise use one or more of the listed chemicals above certain threshold amounts.
Thresholds are 25,000 pounds per year for manufacturing and processing and 10,000
pounds per year for otherwise using. Table 1 shows which industries are included in
these codes. Federal facilities were also required to submit their first TRI reports by July
1, 1995 for the 1994 calendar year.
The number of listed chemicals was originally set at 320 but has since been increased.
(A few chemicals have also been deleted from the list.) The most significant expansion
took place in 1994, when EPA added 286 new chemicals to the list effective for the 1995
calendar year, bringing the number to 654.2 Individuals and organizations can petition
EPA to add or remove chemicals from the list.
Also in 1994, EPA streamlined reporting requirements for small businesses. Facilities
that have a total annual reportable amount of 500 pounds or less of a TRI chemical, and
that manufacture, process, or use 1 million pounds or less of a TRI chemical can now
submit a shorter, annual certification statement in lieu of the longer Form R. These
streamlined requirements became effective for the 1995 calendar year. "EPA believes that
this rule strikes a positive balance between maintaining the community's right-to-know
about toxic chemical releases, and the economic costs (both to EPA and industry) of
collecting the information."3 EPA estimates that the streamlining will result in annual cost
savings of about $17.3 million for industry and $700 thousand for EPA.4
After expanding the number of listed chemicals in what it referred to as phase 1
expansion, EPA turned to phase 2, intended to expand TRI requirements to other indus-
tries that have significant releases of listed chemicals and which are related to facilities
currently subject to reporting. The proposed expansion would extend reporting require-
ments to the following seven industries: metal mining, coal mining, electric utilities,
commercial hazardous waste treatment, petroleum bulk terminals, chemical wholesalers,
and solvent recovery services.5 The expansion is not expected before 1998.
A third phase will focus on expanding the types of data to be collected for the TRI.
New data could include chemical use and materials accounting information. This third
phase is intended to provide more information on topics such as the results of companies'
source reduction efforts and the amounts of chemicals in companies' finished products.
EPA has sought to make TRI information available to industry, environmental groups,
and the general public so that they can know about facilities' toxic releases and transfers
off-site. This information is available via several media, including printed reports, CD-
ROM, and Internet.
(EPA TRI data: www.epa.gov/docs/TRI_94)
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Information Approaches
The emergency planning component of EPCRA calls for the creation of state and local
emergency response bodies to plan for toxic releases. It also requires facilities to inform
these bodies of the existence of certain hazardous substances on their premises, give
immediate notice of accidental releases, and develop response plans to be implemented
in the event of such accidents. Information provided by facilities is available to the public.
9.2.1. Trends in TRI Data
As shown in Table 9-1, reported TRI releases have decreased 44.1% since 1988.
Decreases have been reported in most industry SIC codes.
Although the data in Table 9-1 suggest significant reductions in toxic releases, there
are several reasons why they may not be equal to actual decreases in releases. EPA points
out that TRI increases and decreases can be "real changes" or "paper changes."6 The latter
result from errors, changes in facilities' estimation or calculation techniques, changes in
reporting guidance and facilities' interpretation of that guidance, and facilities' use of
exemptions. Companies generally determine their TRI release amounts through estima-
tion rather than monitoring. EPA guidance has not been issued for all aspects of TRI
reporting, and companies can sometimes lower reported releases by using different
estimation techniques.
EPA says that estimation errors are more likely for releases such as fugitive air
emissions and complex wastewater for which little monitoring data are available.
However, EPA audits have found companies' estimation techniques to be reasonably
accurate. An audit of 1987 data at selected facilities led to the conclusion that releases had
been under-reported by 2%, but a 1988 audit found that companies reported about the
same amount as the auditor's own estimate.7
Another potential problem is that most chemicals have not been subject to TRI
requirements. A 1994 GAO study stated that over 70,000 chemicals are used commercially
in the United States, of which only 320 had been included in the TRI. "Consequently," the
study added, "the companies may maintain or even increase their usage of toxic chemicals
while concurrently reducing the chemicals that are reported to EPA."8 The original list
focused on the most important toxics, and, as noted above, EPA included another 286
chemicals in TRI requirements effective 1995. However, some highly toxic chemicals have
not been included because they are generated in amounts that are too small to meet
criteria for inclusion.
In addition, a number of small sources in SIC codes 20-39 and all sources outside that
code range are currently excluded from the TRI. It is not known what percentage of
releases are currently exempt from reporting. As noted above, however, EPA intends to
include other SIC codes in the system.
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Table 9-1: TRI RELEASES BY INDUSTRY9
(in millions of pounds)
SIC
Industry
1988
1992
1993
1994
% Change
88-94
20
Food
9.1
11.9
12.0
10.3
13.7
21
Tobacco
1.2
0.6
0.6
1.0
-22.1
22
Textiles
34.3
19.1
17.6
15.9
-53.6
23
Apparel
0.9
1.3
1.0
1.3
42.9
24
Lumber
31.1
30.0
29.8
31.7
2.0
25
Furniture
61.4
53.2
54.0
50.6
-17.6
26
Paper
227.7
199.1
179.8
218.6
-4.0
27
Printing
60.7
40.4
35.9
34.2
-43.7
28
Chemicals
1322.8
991.3
874.4
700.7
-47.0
29
Petroleum
67.7
61.7
50.9
43.8
-35.3
30
Plastics
146.6
121.1
111.0
111.6
-23.9
31
Leather
11.9
7.2
4.4
3.6
-69.9
32
Stone/Clay/Glass
27.1
14.3
14.3
12.4
-54.3
33
Primary Metals
496.2
341.2
304.6
293.8
-40.8
34
Fabr. Metals
131.8
100.6
88.6
86.1
-34.7
35
Machinery
59.6
33.0
26.5
23.5
-60.6
36
Electrical
115.8
47.1
32.9
29.0
-75.0
37
Transportation equipment
191.0
125.3
123.8
119.7
-37.3
38
Measure., photo.
49.9
29.1
22.5
15.7
-68.5
39
Miscellaneous
28.6
16.9
15.2
13.7
-52.0
NA
Multiple codes 20-39
446.6
191.8
137.2
142.9
-68.0
NA
Code not reported or not in
20-39 range
14.0
13.6
20.1
16.9
21.2
Total
3536.1
2449.6
2157.4
1976.9
-44.1
Source: 1994 Toxics Release Inventory: Public Data Release, p. 195.
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Information Approaches
Releases are not weighted according to toxicity or the dangers posed by various
methods of disposing of various types of chemicals and do not indicate exposure or
potential effects on human health and the environment. Moreover, the TRI does not
include information on the quantity of toxic chemicals in products leaving the facility.
Such products themselves can eventually be released into the environment.
Although a reduction in releases is generally desirable, another important question is
how the reduction is achieved. Methods include controlled disposal, recycling, conversion
to energy, and source reduction. The 1990 Pollution Prevention Act set source reduction
as the preferred method of reducing releases, but the transfer data in table 9-2 show no
clear trend toward this method. Since recycling and conversion to energy were not
reported as transfers until 1991 (as required under the 1990 Pollution Prevention Act),
1988 total transfers are difficult to compare with total transfers in the period 1992-1994.
Excluding these two types of transfers, reported transfers have decreased significantly
since 1988 but show no clear trend since 1992. Total releases and transfers decreased
significantly from 1992 to 1993 but increased slightly from 1993 to 1994. The decrease in
releases from 1993 to 1994 coincided with an increase in transfers.
Table 9-2: TRI WASTE TRANSFERS10
(in millions of pounds)
Transfers
1988
1992
1993
1994
% Change
1988-94
Recycling
NA
2,609
2,057
2,234
NA
Energy
NA
431
447
463
NA
Treatment
396
257
254
290
-26.8
POTWs
297
226
186
180
-39.3
Disposal
437
217
267
280
-35.9
Other off-site
42
13
2
4
NA
Total transfers
1,173
3,752
3,213
3,451
NA
Total releases
3,536
2,450
2,157
1,977
-44.1
Total releases and
transfers
4,709
6,202
5,370
5,428
NA
Source: 1994 Toxics Release Inventory, p. 171.
The assessment of source reduction achievements is complicated by the lack of TRI
data on quantities of waste decreased by source reduction measures. Only the practices
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
used to reduce waste and not their results are included in the TRI. Changes in waste
generation reported in the TRI could be due to factors other than source reduction,
including estimation errors or changes in production levels of specific products. Lack of
information on source reduction and on chemicals in facilities' products is one of the main
issues surrounding the phase III expansion of the TRI noted above.
As discussed in Section 10, the trend of decreases in releases and transfers is more
pronounced under the voluntary 33/50 program. Total releases and transfers under this
voluntary program have decreased every year from 1988 to 1994, with a total reduction of
51% during that period.
9.2.2. Incentive Effect of the TRI
The incentive effect of the TRI on polluters cannot be assessed solely on the basis of
reported decreases in releases. A number of factors, including command-and-control
regulations and other economic incentive mechanisms discussed in this report, have
affected releases. Pollution prevention is also influenced by a number of factors unrelated
to the TRI.
Nonetheless, the TRI is widely believed to have a significant impact on polluters. EPA
has called it "one of the most powerful tools in this country for environmental
protection"11 and "one of the most successful policy instruments ever created for improv-
ing environmental performance."12 Vice-President Gore called the annual TRI publication
"the single most effective common-sense tool" to promote environmental protection.13
Shortly after the first TRI was released in 1989, citizen groups placed a full-page advertise-
ment in the New York Times listing "the corporate top ten" land, water, and air polluters.
Several of these polluters subsequently promised the EPA that they would improve their
environmental performance, effectively beginning the 33/50 voluntary releases reduction
program described in the next Section.14 Monsanto, for example, promised 90% reduc-
tions of 1987 air emission levels by 1992.15 AT&T said it would halt all TRI air emissions
by the end of the century.16 Dow said it planned to reduce overall emissions by 50% by
1995, and Dupont promised to cut air emissions by 60% by 1993 and cancer-causing
components by 90% by the year 2000. In Minnesota, public outcry over revelations that an
electronic circuits manufacturer was emitting methylene chloride led the facility to
promise 90% reductions in emissions by 1993.17 After 1987 TRI data found an IBM facility
in California to be the state's largest emitter of CFCs, a public interest group organized a
campaign and IBM subsequently promised to end the use of CFCs at the plant by 1993.18
TRI data also appear to influence investors. Some of the investor interest may be
attributed not so much to socially responsible investing but rather to the belief that
companies with relatively high emissions might face mounting environmental costs in the
future.
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Information Approaches
Hamilton (1995) found that companies' 1988 TRI performance (as reported in June
1989) was of interest to journalists and investors. The higher a firm's TRI pollution figures,
the study found, the more likely journalists were to write about the firm's toxic releases,
especially for firms previously less associated with pollution. Those companies that
reported TRI releases underperformed the market during the five days after the data were
released. The more chemicals for which a company submitted data, the greater its under-
performance. The under-performance was less significant, however, for companies
previously associated with pollution.
The Investor Responsibility Research Center has analyzed TRI data to provide clients
with environmental profiles of companies. The Clean Yield investment portfolio manage-
ment group compares companies' TRI data with industry-wide averages of releases per
unit of sales. Fortune magazine has used TRI data in its "green index" of American
manufacturers, assigning scores of zero to 10 in 20 performance categories, including toxic
emissions per unit of sales.19
Although EPCRA's emergency planning element briefly described above has received
less attention than the TRI as an incentive mechanism, it could also have a significant
effect on polluters' behavior. Firms might reduce the amounts of hazardous substances on
their premises if forced to disclose these amounts to local emergency response bodies and
(indirectly) to the public. They might also manage hazardous substances more safely if
required to plan for and give immediate notice of accidental releases.
9.3. STATE EPCRA PROGRAMS
Several states have toxic release reporting programs similar to the federal EPCRA but
with different reporting requirements. The requirements may cover additional chemicals,
industries, or reporting elements; toxics use; and pollution prevention plans.20
The programs in Massachusetts and New Jersey, for example, differ from their federal
counterpart in that they require companies to use materials accounting to plan pollution
prevention activities, report their goals and progress on pollution prevention, and
examine whether inputs and outputs balance.21
One advantage of such requirements is that they offer more information on toxics use
and wastes that could be of interest to the companies themselves, their regulators, and the
general public. One disadvantage of these requirements appears to be the potential
administrative burden they impose on polluters and regulators. If the state attempts to
lessen its burden by taxing the polluters, it adds to the polluters' burden.
EPA has studied these two programs in the context of its phase III expansion to obtain
insight on how the federal EPCRA might be improved.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
9.3.1. Massachusetts Toxics Use Reduction Act
Enacted in 1989, the Massachusetts TURA requires large-quantity toxic material users,
including those in several SIC codes not covered by the federal EPCRA, to submit an
annual Toxic Use Report to the State Department of Environmental Protection and to
develop toxic chemical use and waste reduction plans. Subject facilities must report
annually on their inputs and outputs of materials and their waste generation and manage-
ment methods.
For every production unit, facilities must also report on their use of chemicals and on
use reduction techniques (within range codes to protect confidential business information)
and indicate a Byproduct Reduction Index (BRI) and an Emission Reduction Index (ERI).
("Byproduct" can be considered "waste" in this context, although it may be reusable.)
These two indices are determined in the following manner:
BRI = (A-B) x 100 and ERI = (C-D) x 100, where
A = Byproduct quantity in base year divided by the number of units of product
produced in base year.
B = Byproduct quantity in reporting year divided by the number of units of product
produced in reporting year.
C = Emissions quantity in base year divided by the number of units of product pro-
duced in base year.
D = Emissions quantity in reporting year divided by number of units of product in
reporting year.
Additional data must be reported every two years on actual and projected changes in
chemical use and wastes compared to planned and base year amounts.
Summaries of the chemical use and waste reduction plans must also be submitted
biennially, but the detailed plans remain at the facilities to ensure confidentiality. These
plans must be endorsed by certified Toxics Use Reduction Planners.
TURA also created two agencies to provide technical assistance to toxics users and
conduct training and research on TURA and toxic use reduction techniques. The opera-
tions of these agencies and other program costs are covered by toxics use fees that depend
on the number of employees at a facility and the number of chemicals it uses. These fees
are limited to $31,450 per facility annually and are not closely linked to the quantities or
toxicities of chemicals used. Annual revenues amount to about $5 million.
TURA also contains provisions for citizen involvement. Residents may assist in
monitoring and access the TURA information on toxics use reported to the Department.
The Department is required to act on petitions to inspect a facility's plans and data if the
petitions are filed by 10 or more residents living within ten miles of the facility.
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Information Approaches
The information collected through TURA has also proven helpful to the subject
facilities. By making facilities aware of the quantities of toxics used during production,
released to the environment, and transformed into products, the reporting requirements
allow them to identify improvements in their chemical use efficiency and cost-cutting
opportunities.
TURA set a waste reduction goal of
50% over ten years, using 1987 as a base-
line. Reporting began in 1991 for 1990
data. As shown in figure #, toxics use and
waste generation have fallen since 1990.
(TURA internet site:
www.state.ma.us/dep/bwp/dhm/tura)
9.3.2. New Jersey Reporting Requirements
New Jersey's Worker and Community
Right to Know Act was enacted in 1984,
before the federal EPCRA. Since 1987, the
state has collected data on inputs and
outputs of materials and on amounts of
waste reduced through source reduction
activities.
The 1991 New Jersey Pollution Prevention Act required facilities to undertake
pollution prevention planning and, like the Massachusetts law discussed above, set a goal
of 50% reduction in waste output by 1997, with 1987 as a baseline. Plan Summaries must
be submitted to the State every five years.
Like Massachusetts, New Jersey requires the use of performance indices. Instead of
focusing on waste generation and emissions, however, New Jersey has indices for waste
generation and use of toxics.
The New Jersey Department of Environmental Protection reports that it has conducted
surveys showing that its reporting requirements have been beneficial to companies by
providing them the information they need to assess waste minimization options. Depart-
ment officials also claim that the data allow them to better manage their activities,
including the implementation of the facility-wide permitting scheme described in Section
6.
Figure 9-1: MASSACHUSETTS TOXICS
USE AND BYPRODUCTS
1400
Millions of pounds
1200
- 1138 1141
1000
017
947
800
¦
600
-
400
-
200
123 126 117 108
103
1990 1991 1992 1993
—- Byproduot —Use
1994
Sounrai MA D«pt. of Env. Protection
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
9.4. PROPOSITION 65
Adopted by voter referendum in 1986, California's Safe Drinking Water and Toxic
Enforcement Act, commonly referred to as Proposition 65, requires polluters to issues
warnings if they expose people to significant levels of carcinogens or reproductive
toxicants listed by the Governor. The list currently contains 570 chemicals.22
If a substance is listed as a carcinogen, businesses may not discharge it into drinking
water unless it poses "no significant risk." For any other listed carcinogen exposures
posing "significant risk," the business must provide "clear and reasonable warning." For
reproductive toxicants, the same rules apply, but the threshold is 1/1,000 of the "no
observable effect" exposure level.23 The water discharge ban takes effect 20 months after
listing, and the other requirements take effect 12 months after listing.
State regulation sets the levels of "significant risk" for most important chemicals on the
list, but they can be superseded by more stringent levels mandated by other environmen-
tal laws. The burden of proof that the exposure is below the significant risk level is on the
defendant. Drinking water utilities, government agencies, and organizations employing
fewer than ten people are exempt from the rule.
Citizens have the right to initiate law suits under Proposition 65 if authorities do not
respond to their requests to pursue potential violators. Under the "bounty hunter provi-
sion," the person who brought the suit can receive 25% of any fines. Fines can be as high
as $2,500 a day. Data obtained from the State Attorney General's office indicate that
several environmental groups (including Environmental Defense Fund and As You Sow)
and individuals have been compensated for initiating Proposition 65 suits.24 (A similar
enforcement award scheme in New Jersey is discussed in Section VII.) However, a source
in that office reports that the "bounty hunter provision" creates less incentive for private
parties to initiate suits than the possibility of obtaining attorney's fees, as plaintiffs can
recover all attorney's fees but must give the state 75% of penalties. As a result, plaintiffs
and defendants frequently characterize entire negotiated settlement amounts as attorney's
fees.25
In many cases, businesses in California appear eager to avoid issuing clear warnings
and have been sued for providing warnings deemed too vague or inconspicuous. For
example, the food, drug, and cosmetics industries established a toll-free product informa-
tion number in lieu of placing hazard labels on their products. In another case, warnings
for air emissions of ethylene oxide were published as advertisements in the classified
section of a local newspaper. In both of these cases, the warnings were found by the courts
to be insufficient.26
Process modifications, chemical substitution, and the use of pollution control devices
have all been attributed to Proposition 65. Some products have been reformulated to avoid
negative labeling. For example, solvents were removed from correction fluids and lead
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Information Approaches
from foil and other products. The lead content of tableware was also reduced. However,
products such as tobacco and alcohol had to bear warning labels. Businesses appear much
more likely to take measures to avoid warnings for products such as tableware that
consumers generally believe are safe and for which there are unlabeled substitutes than
for products such as spray paint that consumers know can be dangerous.
At least one study found that consumers were indifferent to some warnings because
they had become so prevalent. "Overuse of labeling may therefore result in a reduction of
effectiveness."27 Another study has suggested that firms might collude to label to excess,
thereby minimizing label impact.28
Proposition 65 gives polluters incentives not only to identify ways of reducing or
eliminating toxic discharges but also to study the effects of toxics to determine safe
exposure levels. Anecdotal evidence suggests that after passage of the law, businesses
devoted significant resources to assessing the risks of exposure to toxics.29 While business
groups asserted that compliance with the law would be very costly, when given the
opportunity by the State of California during a retrospective analysis of the law, they
failed to provide evidence that significant costs actually were incurred.
9.5. HOT SPOTS ACT30
Adopted in 1987, California's Air Toxics "Hot Spots" Information and Assessment Act
(AB 2588) requires stationary sources to report releases of certain substances into the air.
According to the California Air Resources Board (CARB), the goals of the Act are "to
collect emission data, to identify facilities having localized impacts, to ascertain health
risks, and to notify nearby residents of significant risks." The Hot Spots Act uses at least
two potential incentive mechanisms to reduce toxic air emissions: public notification
requirements and unit-based fees. The latter mechanism, which is also intended to cover
all of the administrative costs associated with the Act, is discussed in Section IV. The
former is discussed here.
Facilities are required to submit to air pollution control districts an air toxics emission
inventory plan, a subsequent inventory, and, for certain priority facilities, a health risk
assessment. If the district judges that a facility's emissions pose a potentially significant
health risk, the facility operator must notify all exposed persons.
The Hot Spots Act originally relied on the information requirement and fees to
discourage risky toxic emissions. In 1992, however, it was amended to require facilities to
reduce emissions below the significant risk level within five years or a period not to
exceed ten years as determined by the district. This amendment introduced a considerable
command-and-control element to what previously had been an incentive-based instru-
ment. However, emissions data and health risk assessments remain accessible to the
public and could give polluters incentives to reduce emissions more substantially and
quickly than they otherwise would.
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According to CARB, the Hot Spots inventory requirements have increased facilities
awareness of their toxic emissions, leading to reductions in emissions. Surveys have
revealed voluntary reductions of over 1.9 million pounds per year of air toxics from 21
facilities. Potentially reduced costs, concern for worker health, community relations, and
anticipation of future regulations are some of the motives for these reductions.
(Summary of Hot Spots program: arbis.arb.ca.gov/toxics/ab2588/2588summ.txt)
9.6. ENVIRONMENTAL POLICY ACTS
Under the terms of the National Environmental Policy Act (NEPA), environmental
impact assessments, statements, or reports must be prepared prior to certain government
actions affecting the environment. The results of such reports could influence government,
especially since they are subject to public review. However, most federal actions subject
to NEPA do not concern activities initiated by the private sector.
On the state level, NEPA-like laws could influence private behavior. At least 14 states
have such laws, which vary in nature from state to state but which generally require a
government agency to engage in a public comment process on environmental impact
assessments prior to making a decision.31 In some of these states, the laws apply only to
state-initiated actions. In states such as California, New York, and Massachusetts,
however, the laws apply to public and private actions requiring permits. Laws in these
states have resulted in the restructuring, reconsideration, or withdrawal of proposals
before and after public review.
9.7. LABELING SCHEMES
Labeling products according to their effects on the environment is another type of
information approach to environmental management. Consumers can use the information
provided by such labels in making purchasing decisions. If consumers, investors, and
others prefer companies and products they believe are environmentally friendly, busi-
nesses have an incentive to improve their environmental performance to receive a
favorable label or avoid a negative one.
Table 9-3 shows the classification scheme for environmental labeling programs
proposed by a 1994 EPA study32. Programs can be either voluntary or mandatory.
Moreover, the information provided by labeling can be either negative, positive, or
neutral.
Seals of approval are given to products deemed less harmful to the environment, and
single attribute programs certify that a product has a certain positive environmental
attribute. Report cards and information disclosure schemes inform customers of products'
various impacts on the environment. Hazard labels warn customers of the harmful effects
of a particular product.
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Table 9-3: CLASSIFICATION OF ENVIRONMENTAL LABELING SCHEMES
Program TvDe
Positive
Neutral
Negative
Voluntarv
Mandatorv
Seal-of-Ap-
proval
X
X
Single at-tribute
X
X
Report card
X
X
Information
disclosure
X
X
Hazard warn-
ings
X
X
Source: EPA (1994a), p. 9.
Experience with labeling schemes indicates that they are more likely to influence
behavior if accompanied by promotional activities targeting retailers and consumers. In
many cases, the label itself is only one element of a larger effort to promote the use of
environmentally friendly products. As a result, it is often difficult to isolate the incentive
effect of a label from that of related promotional activities.33
Although the United States does not have a national government-initiated environ-
mental labeling program like many other industrialized countries, it does have a few
public and private labeling schemes. The rest of this subsection discusses various schemes
that have been used in the U.S.
9.7.1. Federal Trade Commission Guidelines for Environmental Marketing Claims
Issued in 1992 and, at the time of this writing, under review for possible revisions, the
FTC Guidelines for Environmental Marketing Claims or "Green Guides" do not constitute
a labeling system as such, but they are designed to have an effect on labeling. The
guidelines are intended to prevent false or misleading use of advertising claims such as
"environmentally friendly," "degradable," and "recyclable." Confusion over the meaning
of such terms affected not only consumers but also companies, who were concerned about
lawsuits over their environmental claims.
The Guides outlined four general principles for environmental claims: qualifications
and disclosures should be sufficiently clear and conspicuous to prevent deception; claims
should make clear whether they apply to the product, packaging, or just a component of
either; claims should not overstate environmental benefits; and comparative claims should
be presented in such a way that the basis for comparison is clear. The guides also ad-
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dressed claims concerning environmental friendliness, degradability, compostability,
recyclability, recycled content, source reduction, refillability, and ozone friendliness.34
9.7.2. Green Seal and Other Seals of Approval
Founded in 1989, Green Seal is the nonprofit organization that awards the Green Seal
of Approval to products that it finds less harmful to the environment. The organization
develops a set of standards for each product category it studies. Categories are chosen
according to the significance of their associated environmental impact and their range of
products. Products within a category are then studied to determine their impacts on the
environment in their various stages of production, use, and disposal. After public review
and comment, Green Seal adopts a standard. Standard criteria vary across categories but
may include reduction of toxic chemical pollution, improved energy efficiency, protection
of water resources, minimization of impacts on fish and wildlife and their habitats,
efficient use of natural resources, protection of the ozone layer, and prevention of global
warming. Products are not subjected to a complete life-cycle analysis but rather judged
according to those aspects of the life cycle with the most significant environmental impact.
Standards are reviewed at least once every three years.
Manufacturers pay product evaluation fees to apply for the Green Seal mark, and
accepted products are also subject to annual monitoring fees. The fees vary according to
the product category and size and number of manufacturing facilities. The Green Seal
mark for approved products appears with an explanation of the basis for certification.
The organization has published environmental standards or criteria for about 25 types
of products. Its list of certified products contains central air conditioning systems (1
brand), architectural coatings (2 brands), cleaning products (1 brand), compact fluorescent
lamps (5 brands), recycled paper (5 brands), recycled newsprint (1 brand), re-refined
engine oil (3 brands), reusable bags (3 models), showerheads (four models), toilets (2
brands), watering hoses (several models), one manufacturer's line of windows and doors,
and one brand each of unbleached coffee filters, baking cups, and parchment.36
Besides labeling, Green Seal helps market environmentally friendly products in several
ways. A list of certified products is included in a catalog with product information and
addresses and phone numbers of product vendors. "Choose Green Reports" are available
on topics such as "Environmentally Preferable Printing" and energy-efficient lighting,
computers, and other office equipment. Organizations that agree to purchase environmen-
tally friendly products, reduce waste, and increase recycling are eligible for the Green Seal
Environmental Partners mark. This mark can be placed on reports, letterhead, and store
signs.
The incentive effects of Green Seal's activities appear not to have been comprehen-
sively studied. In a Green Seal survey, however, 4 of 5 consumers said they would be
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more likely to purchase a Green Seal-certified product than other products of equal
quality and price.37
Some retailers have adopted labeling schemes for products they find environmentally
friendly. In 1989, for example, Wal-Mart created a program under which shelves were
labeled to indicate that their products were environmentally friendly. Wal-Mart ended
this program in 1992, mainly because of difficulties in determining the criteria for
environmental friendliness and in assessing manufacturers' environmental claims.
Wal-Mart's experience illustrates one of the main problems encountered by environ-
mental seal-of-approval schemes: lack of agreed-upon criteria for assessing environmental
friendliness. While seals of approval may be relatively easy for consumers to understand,
they risk not only lacking agreed-upon standards but also oversimplifying complex
environmental issues. Menell (1995) cites a number of cases in which the environmental
friendliness assessments necessary for labeling are difficult. For example, a study of the
environmental impacts of disposable cups found that wax-coated paperboard was
preferable to polystyrene on the grounds of reduced volumes of solid waste generation
but inferior in the areas of energy consumption, air emissions, water pollution, and
weight of solid waste generation. Disposable diapers generate more solid waste than cloth
diapers, but they also use less water and result in less water pollution. Another study
(cited by Menell) found that the environmental impacts of washing machines depend less
on the model of the machine than on how it is used.
9.7.3. Single-Attribute Seals of Approval
The problems of lack of criteria and oversimplification are likely to be less serious for
labeling programs based on a single product attribute. EPA's Energy Star office equip-
ment label is reserved for computers, printers, photocopiers, and typewriters that are
relatively energy-efficient. This label is part of a voluntary energy-efficient office equip-
ment promotion initiative described in Section X.
Created in 1992 and licensed by Earthtrust, a non-profit organization based in Hawaii,
the Flipper Seal of Approval is awarded to companies that harvest tuna in a manner that
minimizes killings of dolphins. The seal has been awarded to tuna companies in the
United States and abroad.
From 1986 to 1991, the Bonneville Power Administration managed a Blue Ribbon
Award Campaign to promote the use of energy-efficient refrigerators and freezers. Under
this program, refrigerators and freezers in the top 15 percent of their size and function
category were awarded blue magnetic ribbons.38 A retailers survey conducted early in the
program estimated that about 22% of customers had been "influenced" in their purchasing
decisions.39
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Scientific Certification Systems (SCS), a for-profit business, has two single-attribute
seal of approval programs. The SCS Forest Conservation Program uses a 100 point index
to evaluate the management of forest tracts by timber operations. A separate score is given
for each of the following categories: sustainability of timber resources, forest ecosystem
maintenance, and socio-economic benefits to the surrounding community. Scores over 60
are required in each category to be awarded the "Well-Managed Forest" label. Operations
scoring in the top ten percent are further labelled as "State-of-the-Art."40 SCS can also use
chain of custody certification to verify that wood products sold to consumers come from
well-managed forests. About ten forestry operations in South, Central, and North America
have been rated by SCS.
SCS has also certified over 500 environmental claims by manufacturers concerning
recycled content, recycling rates, energy efficiency, water efficiency, biodegradability, and
lack of smog-producing ingredients. Some claims concern materials, whereas others
concern final products and packages. Certified products are allowed to bear an authorized
certification emblem.
According to SCS, anecdotal evidence indicates that its labels are valued by businesses
and individuals, with consumers willing to pay a premium for products identified as
environmentally friendly. Glidden Company, for example, found that a label designating
its paints as free of VOCs is valued by institutional customers such as hospitals.41
9.7.4. Report Cards and Information Disclosure
SCS also issues environmental "report cards" that rate products according to various
criteria. (The company refers to these as "eco-profiles.") These profiles are based on a
cradle-to-grave assessment of the environmental burdens associated with raw material
extraction, manufacture, transportation, use, and disposal of a product. The environmen-
tal burdens considered include resource depletion, energy use, air and water emissions,
and solid wastes. Bar graphs for each of approximately twenty types of environmental
impacts are included on the label. Eco-profiles have been done for Holiday Fair (hand-
bags, accessories, and travel ware), North American Plastics (plastic bags), Plasti-kote
(paints), Wellman, Inc. (polyester fiber), and Zeta Consumer Products (plastic bags). Some
companies request eco-profiles for internal use rather than for marketing purposes.
The advantage of such an eco-profile is that it provides more information than simple
seals of approval. Among the disadvantages are that the information on the card can be
difficult to obtain and understand and that the report card may be misinterpreted by
consumers as a product endorsement. Since the SCS report cards are voluntary and appear
only on a limited number of products, they have led many consumers to believe that the
card itself implies the environmental superiority of a product.42
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9.7.5. Energy-Efficiency Labeling
Two other information disclosure programs are required and managed by the federal
government. The EPA manages the Fuel Economy Information Program, under which
new cars must have labels in their windows listing their milage-per-gallon for city and
highway driving, the estimated annual fuel cost associated with their operation, and the
fuel economy of comparable models. This program was voluntary at its inception in 1974
but was made mandatory by the Energy Policy and Conservation Act (EPCA) as of March
1976. Car dealers were also required to have available for customers the Gas Mileage
Guide of car fuel efficiency.
A 1976 study found that more than half of new car buyers had seen the fuel economy
label and that those aware of the label bought cars with higher mileage than other car
buyers. The program was credited with a fuel consumption reduction for 1976 model cars
of 893 million gallons. However, the influence of the labeling program decreased as a
result of falls in gasoline prices after the mid-1970s. Moreover, 64% of buyers did not
believe the mileage estimates. Consumers believed that fuel efficiency was not assessed in
realistic driving conditions and that mileage was therefore overstated. A 1981 DOE survey
found that this skepticism was the main reason why more consumers did not rely on the
labels. EPA changed the fuel efficiency assessment procedure in 1985 to make it more
realistic.43
The 1975 EPCA also required that Energy Guide labels be placed on refrigerators,
freezers, water heaters, washing machines, dishwashers, furnaces, air conditioners, and
heat pumps. The 1992 Energy Policy Act expanded these requirements to fluorescent
lamps, showerheads, faucets, water closets, and urinals. Although labels vary depending
on the type of appliance, they formerly all included information on the manufacturer and
appliance model number and capacity, an energy efficiency rating (EER) or estimated
annual operating cost, the EER or annual operating cost of the most and least efficient
comparable appliances, and a table showing annual estimated costs for varying use habits
and energy prices.
The Federal Trade Commission changed the labels in 1994 so that for refrigerators,
freezers, dishwashers, clothes washers, and water heaters, they now include the kWh of
energy use of the labelled appliance and of the most and least efficient comparable
appliances. Climate control appliances are labelled not according to KWh of energy use
but rather to fuel efficiency indices such as EER, seasonal EER, annual fuel utilization
efficiency, or heating seasonal performance factor. The energy cost table has been replaced
by a single energy cost estimate for products with kWh energy use ratings and for room
air conditioners. Other products must have operating cost information either on fact sheets
or in industry product directories. In a press release on the new labelling requirements,
the FTC stated that they would "make the labels easier to read and more useful to
consumers in comparing the energy efficiencies of the appliances."44
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An in-store survey of appliance buyers conducted for DOE showed that 90% of buyers
had noticed the Energy Guide label, and three-fourths described it as "somewhat" or
"very" helpful in comparison shopping. The same survey revealed that consumers found
the labels confusing and believed that labels should emphasize one or two pieces of
information, such as energy costs.45 Studies have shown that the labels raise consumers'
energy awareness without necessarily influencing their purchases. The energy efficiency
of appliances has risen significantly since the adoption of EPCA, but this rise appears to
be due more to command-and-control requirements than the Energy Guide.46
FTC has also adopted labelling requirements for resistance to heat flow in insulation
materials, emissions characteristics of alternative fuel vehicles, and the minimum content
of alternative fuels.47
An industry initiative, the National Fenestration Rating Council rates the energy
efficiency of windows. Over 120 manufacturers have submitted over 25,000 window
products for NFRC ratings. According to NFRC, building energy codes and utility
programs rely increasingly on these ratings, and manufacturers try to improve energy
efficiency to avoid being listed with poor ratings in the NFRC directory.48
9.7.6. Hazard Labels
Hazard labels inform consumers of environmental risks associated with particular
products. Proposition 65, which was discussed above, has a hazard information require-
ment that frequently results in product labeling, and products have been altered to avoid
a negative label. However, Proposition 65 warnings frequently take forms other than
labels.
Ozone-depleting substances are subject to warning labels under the Clean Air Act. The
incentive effect of this label might have been diminished by announcements that such
substances would be phased out earlier than originally expected.
A variety of toxics, including PCBs and asbestos, have been required to bear warning
labels under authority granted to EPA by the Toxic Substances Control Act. Pesticides are
subject to detailed labelling requirements under the Federal Insecticide, Fungicide, and
Rodenticide Act.
Retailers in Vermont have been required since 1991 to identify household products
containing hazardous constituents with shelf warning labels. The goal of this law is to
discourage consumers from purchasing such products. Among the types of products
subject to the requirement are cleaning agents, auto and machine maintenance products,
hobby and repair products, shoe polish, aerosols, and butane lighters. The state label
bears the text: "REDUCE TOXICS USE. These products contain HAZARDOUS INGREDI-
ENTS." This label must be placed either on the shelf or near the subject products. Green
exemption labels can be attached to shelves displaying products that have been included
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Information Approaches
in the program but contain none of 24 ingredients listed in the Vermont Community
Right-to-Know list of hazardous chemicals. Vermont has a parallel warning program for
pesticides and commercial fertilizers.
9.8. ENVIRONMENTAL PERFORMANCE AWARDS
EPA and numerous state and local governments periodically issue awards for
environmental behavior they deem exemplary. To the extent that such awards generate
positive publicity, they could encourage environmentally friendly behavior.
In California, for example, 305 businesses won awards under the Waste Reduction
Awards Program (WRAP) in 1995. The Target department store chain won awards at 2
distribution centers and 90 stores for recycling and waste minimization efforts that have
resulted in a 75% reduction in garbage. Winners received certificates of recognition from
the Integrated Waste Management Board as well as the right to use the WRAP logo to
publicize their waste reduction achievements.49
(WRAP awards announced: www.calepa.cahwnet.gov/epadocs/janfeb96.txt)
In Texas, Governor's Awards for Environmental Excellence are issued for the follow-
ing categories: large business - technical, large business - non-technical, small business,
government, civic and non-profit organizations, education, youth organization, media,
agriculture, individual, and special.50 (These awards are part of the Clean Texas 2000
initiative that also includes the Clean Industries 2000 program discussed in the next
section.) In the large technical business category, Lockheed Martin Tactical Aircraft
Systems was the 1995 winner. The company has also received awards from EPA for
reducing emissions of ozone-depleting chemicals and VOCs and the EPA Regional
Administrator's Environmental Excellence Award for Excellence in Hazardous Waste
Minimization Program Development.51
9.9. SEC DISCLOSURE REQUIREMENTS
The Securities and Exchange Commission (SEC) requires publicly owned companies
to report financial information to allow investors to evaluate them. Included in this
requirement are environmental expenditures or liabilities that could have a "material"
impact on the company's financial or competitive position. Companies also must report
individual environmental enforcement proceedings expected to cost over $100,000 as well
as environmental litigation that might have significant financial impact. SEC access to
information submitted by companies to EPA enables it to verify company disclosures on
Superfund and RCRA sites and on federal enforcement actions. The SEC is authorized to
require companies to revise filings in case of inaccuracies and has written to companies to
inquire why they did not disclose certain environmental information in their filings.
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The number of large companies disclosing environmental information in Form 10-Ks
is increasing. Among S&P 500 companies, 322 submitted environmental information in
1990 compared to 217 in 1988. The incentive effect of these disclosure requirements is not
known. However, evidence presented elsewhere in this Section indicates that information
on company environmental performance is of interest to investors.52
9.10. RADON AND LEAD PAINT DISCLOSURE REQUIREMENTS
EPA and other public and private organizations have used information as an environ-
mental policy tool in other ways. In many cases, educational activities have influenced
behavior. EPA education on the dangers of radon, for example, has led many people to
adopt appropriate abatement measures. Awareness of the problem has risen to the point
that many homebuyers as well as lending institutions have requested radon measure-
ments before making final purchases or participating in transactions. Such testing is
recommended in EPA's "Home Buyer's and Seller's Guide to Radon." A number of states
have also enacted radon disclosure requirements for real estate transactions. In Illinois, for
example, the Residential Real Property Act, which went into effect in October 1994,
requires sellers to disclose knowledge of elevated radon test result levels.53
(EPA pubs on Radon: www.epa.gov/docs/RadonPubs/index.html)
(Illinois radon act description: www.state.il.us/idns/radon/prgdecsr/radonprg.htm.)
An amendment to the Federal Lead-based Paint Poisoning Prevention Act entered into
effect in 1995 requiring the owner of any house built before 1978 to alert potential buyers
or tenants to possible hazards from lead paint and to disclose lead paint known to be in
the house. The buyer has a 10-day grace period in which to test the house.54
Endnotes for Section 9
1. TRI data distinguish between releases and transfers. A release is an on-site discharge of
a toxic chemical to the environment, whereas a transfer is a movement of waste to another
facility for recycling, energy recovery, treatment, or disposal.
2. EPA (March 1995), "Expanding Community Right-to-Know," p. 4.
3. Ibid, p. 5.
4. 1994 Toxics Release Inventory, p. A11.
5. Wall Street Journal, June 27, 1996, p. B12.
6. 1994 Toxic Releases Inventory, p. 201.
7. Ibid, pp. C2-C3.
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8. GAO (September 1994), p. 14.
9. Because all figures have been rounded to one decimal place, percentage changes may
not correspond exactly with release data and total releases might differ slightly from the
sums of the columns. Not included in these data are delisted chemicals, chemicals added
in 1990, 1991, or 1994, and aluminum oxide, ammonia, ammonium sulfate (solution) and
sulfuric acid.
10. "Other off-site" refers to transfers reported with no management code or invalid codes.
For 1988, "other off-site" may also include codes not required to be reported in that year.
Not included in these data are delisted chemicals, chemicals added in 1990, 1991, or 1994,
and aluminum oxide, ammonia, ammonium sulfate (solution) and sulfuric acid.
11. EPA (March 1995), p. 3.
12. DEN, October 10, 1995, p. El.
13. Wall Street Journal, June 27, 1996, p. B12.
14. Arora and Cason (1995), p. 9.
15. "The Nation's Polluters - Who Emits What, and Where," New York Times, October 31,
1991, as reprinted in ELI (June 1993).
16. "For Communities, Knowledge of Polluters is Power," New York Times, March 24, 1991,
as reprinted in ELI (June 1993).
17. "Right to Know: A U.S. Report Spurs Community Action By Revealing Polluters," Wall
Street Journal, January 2, 1991, as reprinted in ELI (June 1993).
18. 1994 Toxics Release Inventory, p. D-2.
19. Ibid, pp. D7-D8.
20. For a summary of state TRI activities, see the State Fact Sheets section of the 1994 TRI.
21. Unless otherwise stated, information on TRI programs in Massachusetts and New
Jersey provided by EPA (October 1995).
22. Susan Luong, California Office of Environmental Health and Hazard Assessment,
personal communication, May 1996.
23. Helfand (1994), p. 290.
24. California Attorney General's Office (May 1996).
25. Edward Weil, California Deputy Attorney General, personal communication, June
1996.
26. Helfand (1994), p. 289.
27. EPA (April 1994a), p. 29.
28. Helfand (1994), p. 291.
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29. Ibid, p. 293.
30. Unless otherwise stated, information on the Hot Spots Act provided by the California
Air Resources Board, "Overview of the Air Toxics 'Hot Spots' Information and Assessment
Act."
(arbis.arb.ca.gov/toxics/ab2588/2588summ.txt)
31. The states are California, Connecticut, Hawaii, Indiana, Maryland, Massachusetts,
Minnesota, Montana, New York, North Carolina, South Dakota, Virginia, Washington, and
Wisconsin. The District of Columbia and Puerto Rico have similar laws as well. For more
information, see Environmental Law Institute (August 1993), pp. 122-124.
32. EPA (April 1994a), p. 9.
33. Ibid, p. 49.
34. DEN, October 23, 1995, p. A3.
35. Most information in this subsection is based on EPA (April 1994a).
36. A list of published environmental standards and criteria is found in the "Green Seal
Order Form," and a list of products certified by Green Seal is found in "Green Seal's
Choose Green Report: Catalog of Certified Products."
37. Harris and Casey-McCabe, p. 8.
38. EPA (April 1994a), p. 13.
39. Harris and Casey-McCabe, p. 8.
40. EPA (September 1993), p. 118.
41. Rebecca Ward, Scientific Certification Systems, personal communication, May 1996.
42. EPA (September 1993), pp. 145-146.
43. The studies cited in this paragraph are discussed in EPA (April 1994a).
44. Harris and Casey-McCabe, p. 11.
45. Ibid, p. 9.
46. EPA (April 1994a), pp. 27-28.
47. See 16 CFR Part 460 on insulation materials and 16 CFR Part 309 on alternative fuels
and alternative fuel vehicles.
48. Harris and Casey-McCabe, p. 10.
49. "305 State Businesses Win Awards for Reducing Waste," CAL/EPA Report, Vol. 5, No.
1/2, January/February 1996. www.calepa.cahwnet.gov/epadocs/janfeb96.txt
50. TNRCC (March 1995), A Report to the 74th Texas Legislature: Pollution Prevention and
Waste Reduction in Texas, p. 35.
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51. Quinn (1996), p. 25.
52. Investor Responsibility Research Center, pp. 11, 61-62.
53. Illinois Department of Nuclear Safety, "Radon Program Strives to Increase Public
Awareness," internet: www.state.il.us/idns/radon/prgdecsr/radonprg.htm.
54. "Lead in Paint: Controlling the Hazard," Consumer Reports, July 1995, p. 460.
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10. VOLUNTARY PROGRAMS
This Section is devoted primarily to programs under which EPA asks companies to
voluntarily participate in activities to protect the environment. Such programs have
become increasingly popular in the 1990s: a recent EPA publication, Partnerships in
Preventing Pollution, listed and described 28 such initiatives.1 As the EPA stated in its June
15, 1995 report to the President on regulatory reform, "Over the past two years, EPA has
shifted its emphasis from command-and-control to building partnerships with stake-
holders to achieve environmental results in a cooperative manner."2
Although these voluntary programs may not be pure economic incentive instruments
like pollution charges or deposit-refund mechanisms, they differ from command-and-
control approaches. Instead of imposing requirements on businesses, these programs
merely encourage them to participate.
One incentive for businesses to take part in these programs appears to be favorable
public relations, which indirectly could result in less public pressure to regulate partici-
pants and increased market share at the expense of competitors perceived to be less
environmentally friendly. Polls have shown that consumers are willing to pay a premium
for products with environmental advantages.3 Henriques and Sadorsky (1996) found that
pressure from shareholders and customers significantly influenced Canadian firms'
decisions to formulate environmental plans. In this respect, voluntary programs could
have effects similar to the information approaches discussed in Section 9.
Another reason for participation in voluntary programs is that the sponsoring regula-
tory authority often provides technical assistance to participants. Such assistance could be
regarded as a subsidy as discussed in Section 8. As noted below, some companies have
saved money by implementing the activities associated with voluntary programs such as
Green Lights and WasteWiSe.
Moreover, voluntary programs may limit potentially high litigation, monitoring, and
enforcement costs incurred by regulators and businesses. Some of these programs offer
participating companies the opportunity to identify and address environmental problems
that could later subject them to regulatory sanctions. They also sometimes give companies
flexibility to improve their environmental performance at less cost.
A Resources for the Future study of EPA's 33/50 program (discussed below) cited
several reasons other than publicity benefits and added flexibility why firms might
voluntarily overcomply with environmental regulations. In some industries, firms might
improve their performance in the hope of leading government to make such performance
mandatory, thereby creating barriers to the entry of potential competitors. It has also been
suggested that firms overcomply to forestall additional mandatory regulation. Another
possibility is that the "lumpiness" of pollution abatement investments means that large
investments offer significantly more abatement per dollar than a series of small invest-
ments made to comply with progressively tighter restrictions.4
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(RFF study abstract: www.rff.org/dpapers/abstract/9538.htm)
This Section discusses the following EPA-initiated voluntary programs: Green Lights
and Energy Star, WasteWiSe, 33/50, XL, ELP, WAVE (Water Alliances for Voluntary
Efficiency), Climate Wise, and methane recovery. (These programs are listed in table 10-
1.) It concludes with a description of several state voluntary programs. Three other
voluntary initiatives (supplemental environmental projects, joint implementation, and
Brownfields activities) are excluded from this Section because they are discussed else-
where in this report.
Table 10-1: EPA VOLUNTARY PROGRAMS
Program
Objective
Green Lights
Promote the use of energy-efficient lighting
Energy Star Buildings
Promote energy-efficiency in heating, cooling, and ventila-
tion of buildings
Energy Star
Promote the use of energy-efficient office equipment and
other devices
WasteWiSe
Reduce commercial solid waste
33/50
Reduce emissions of selected TRI chemicals
XL
Offer flexibility in meeting federal environmental stan-
dards
ELP
Offer flexibility in compliance management and verifica-
tion systems
WAVE
Encourage businesses to reduce water use
Climate Wise
Reduce greenhouse gas emissions across all sectors
Methane recovery
(4 programs)
Reduce methane emissions and promote reuse of methane
as energy source
(enviro$en$e site for voluntary programs: es.inel.gov/partners)
Businesses voluntarily carry out numerous environmental initiatives on their own,
such as the Chemical Manufacturers Association's Responsible Care program and the
Coalition for Environmentally Responsible Economies' (CERES) principles. While such
purely private sector activities may promote environmental protection, they are beyond
the scope of this report.
10-2
August
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Voluntary Programs
Some voluntary programs are directed primarily at individuals. For example, many
municipalities encourage consumers to voluntarily recycle wastes such as beverage
containers, newspaper, and used oil. These types of programs are not discussed here.
10.1. GREEN LIGHTS AND ENERGY STAR
One of the first of the EPA voluntary programs discussed in this Section, the Green
Lights program was launched in January 1991. Green Lights participating companies
agree to install energy-efficient lighting wherever profitable as long as lighting quality is
not diminished. EPA provides technical assistance and public recognition for participa-
tion. The primary purpose of the program is to encourage the use of energy-efficient
lighting to prevent air emissions (C02, S02, and NOx) and other pollution associated with
electricity generation.
I lie Washington limes installed al ils headquarters (>.3(>() 18 lamps. Ilfil
compact fluoresceins. I-If) occupancv sensors. 109 halogen l'.\k lamps, and lf>3
I.I.I) exit signs, i esull ing in I he Ibl lowing savings:
I -'.leeI riciI v reducl ion:
I iglil ing eleel ricilv savings:
I .norgv cosl savings:
Pollution prevented:
l.08f>.328 kW h/vear
(>2.9"..
S72.8 lO/year
CO,: l.73(>.f>2 1 Ibs/vear
SO,: 8.899.(J8(J grams/year
\().: 2.8k! 1.8f> I urains/vear
Al ils I ail lax. \'.\ head(|uarlers. \lohil (Orporalion installed a number ol 18
lamps, electronic ballasts, halogen reNeclor lamps, compact (|uad lube lamps.
I.I.I) exil signs, and limed light switching devices, resulting in I he following
savings:
kleclricilv reduction: 2.03(>.79 1 kWh/vear
I ighling savings: 17.19".
l-'.nergv cost sav ings: S 1 23.000/vcar
Pollution prevented: CO/ 3.2f)8.8(i9 lbs/\'ear
SO,: 1(1.701.7(H) grams/vear
\()s: f>.k!9f>.(>(>3 grams/\'ear
2. Examples of Green Lights savings
As of May 1996, the program had 1,316 Partners (corporations, industry groups,
nonprofit organizations, hospitals, governments, and universities), 585 allies (electric
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
utilities, lighting manufacturers and distributors, and lighting management companies),
and 286 endorsers (professional and trade associations), with 3.8 billion square feet
committed to the program by December 1993 and 4.3 billion square feet by December
1994. By December 1994, Green Lights investments in energy-efficient lighting had
resulted in annual energy savings of 1 billion kWh, translating into annual energy cost
savings of about $92 million. EPA predicted that the 3.8 billion square feet in the program
in December 1993 would eventually result in the following annual reductions: 8.6 billion
kWh of energy use, 1.8 million metric tons of carbon emissions, 49,590 metric tons of S02
emissions, 21,375 metric tons of NOx emissions, and $600 million in electricity costs.5
The Green Lights program is the re
quired first step in another voluntary energy
savings program, Energy Star Buildings.
Under Energy Star Buildings, EPA asks
participants to perform energy-efficiency
upgrades in buildings where profitable.
After installing energy-efficient lighting,
participants tune up building systems,
invest in upgrades to reduce heating and
cooling loads, improve fans and air han-
dling systems, and improve the heating
and cooling plant. The program began in
June 1994 with a demonstration project
based on 24 Energy Star Showcase Build-
ings, including both public and private
facilities. As shown in Figure 10-1, EPA
predicted that energy costs at Showcase
Buildings could fall by nearly 50%.6
The Energy Star label is awarded to energy-efficient office products, including copiers,
fax machines, computers, and printers. As of December 1994, more than 350 computer
and monitor manufacturers had joined Energy Star and were producing eligible PC
systems. In the first year of the program, 45% of PCs and 85% of printers sold in the U.S.
met Energy Star guidelines. President Clinton has signed an Executive Order directing
the U.S. government to limit computer purchases to Energy Star products.
EPA predicted that an office with 100 PCs and monitors, 20 printers, and 10 fax
machines could save approximately $3,800 a year with Energy Star equipment.7 Energy
Star programs have also been created for transformers and selected household appliances.
10.2. WASTEWI$E
Created in 1994, WasteWi$e is a voluntary program intended to reduce businesses'
solid waste. Participants are required to implement three significant waste prevention
Figure 10-1: ENERGY SAVINGS IN
SHOWCASE BUILDINGS
*2
$1.5
$1
$0.5
$0
Energy oost par square foot par yaar
•1.79
$1.4
$1.25
$1.2
$1.06
$0.98
Baaaline Stag* 1 Stag* 2 Stag* 3 Stage 4 Stag* 6
6ouro»: EM (November 1994), "En#rgy
Star Buildings'
10-4
August
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Voluntary Programs
activities, improve collection programs for recyclables on company premises, and increase
either their purchases of recycled products or the recycled content of the products they
manufacture.
EPA has offered several benefits to WasteWiSe participants. It provides technical
assistance via a telephone hotline, electronic bulletin board, and other information
services and allows participants to use the WasteWiSe logo in their advertising.
As of November 1995, 370 companies had joined WasteWiSe. In the first year of the
program, participating companies conserved over 240,000 tons of solid waste, mostly
transportation packaging. They also recycled about 1 million tons of waste and purchased
twenty different kinds of recycled content products.
Some companies have managed to save a significant amount of money through the
program. Target Stores saved $4.5 million in 1994 by switching to packaging for clothing
requiring less time to unpack and prepare for display. Bank of America saved over $1
million by printing customer statements on both sides of a page.8
10.3. 33/50 PROGRAM9
The purpose of the 33/50 program is to reduce chemical emissions reported annually
in the Toxic Releases Inventory. The specific goals are to reduce 1988 baseline amounts of
17 of the 320 TRI chemicals by 33% by 1992 and 50% by 1995.10 These chemicals were
selected for the program based on their toxicity, the high volumes in which they are
released, and release prevention possibilities.
EPA first issued invitations to take part in 33/50 in February 1991, focusing initially on
555 primarily large companies with the highest releases of the 17 33/50 chemicals. As of
March 1994, EPA had invited over 8,000 companies to join, and almost 1,200 had said they
would participate.
The aforementioned RFF study found that the 33/50 program had a significant
incentive effect. Although willingness to participate varied greatly across industries and
firms and a relatively small percentage of any industry's firms participated, those that did
participate were responsible for most of the toxic emissions within their respective
industries. In the case of petroleum and chemicals, for example, participating companies
were responsible for over 80% of their industries' total emissions. The participation of
large polluters allows the program to be effective in targeting the main sources of
pollution.
RFF also found that participation rates were highest in "consumer contact" industries
(proxied by advertising expenses) and that participants in Green Lights were significantly
more likely to participate in 33/50 as well. This "suggests that 'environmentally con-
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
scious' firms seek to improve their reputation by participating in several voluntary
pollution reduction programs at the same time."
(RFF study abstract: www.rff.org/dpapers/abstract/9538.htm)
Figure 10-2 shows that as of 1994, the latest
year for which data are available, 33/50
chemical transfers and releases had been
reduced by 50.7% from their 1988 baseline
level, surpassing the 50% goal set for 1995.
Although some of these reductions may
have been due to other factors such as
publicity surrounding the TRI itself, re-
ductions during the first full year of the
33/50 program (1992) of the 17 33/50
chemicals were four times greater than for
non-program chemicals. During the pe-
riod 1988-1994, non-program chemical
releases and transfers fell by 38%, a signif
icantly lower percentage than the 50.7%
reduction achieved for 33/50 chemicals.
However, this phenomenon could be due
in part to the availability of more abatement options for 33/50 chemicals, one of the
criteria for including them in the program.
10.4. PROJECT XL
Project XL (Excellence in Leadership) was created in part as a follow-up to the Amoco-
EPA Yorktown refinery experiment which identified VOC abatement options that were
more cost-effective than the wastewater VOC control measures being proposed by EPA.
EPA formally launched XL with the announcement of eight Regulatory Reinvention Pilot
Projects in November 1995. The project is designed to give companies, states, and
communities flexibility in determining how to meet federal environmental standards. The
pilot projects will "test a variety of regulatory management systems as alternatives to
traditional command and control approaches to regulation."11
Selected projects had to meet the following criteria:
1. Improve environmental results;
2. Reduce costs and paperwork;
3. Enjoy stakeholder support and participation;
4. Develop an innovative strategy;
5. Have potential to serve as a model regulatory measure;
6. Be technically feasible;
7. Achieve measurable results;
Figure 10-2: RELEASES AND TRANS-
FERS OF 33/50 PROGRAM CHEMICALS
1800
1600
1400
1200
1000
800
600
400
200
0
Souroti 1
p. 275.
Millions of pounds
1262
1088 1089 1000
4 Toxio* R«Ih*» Inventory,
1001
1802
1008
1004
10-6
August
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Voluntary Programs
8. Avoid shifting pollution to other areas.
The participants in the first eight projects are Intel, Anheuser-Busch, HADCO, Merck,
AT&T Microelectronics, the Minnesota Pollution Control Agency, the South Coast Air
Quality Management District, and 3M. Some of these projects entail different types of
incentive mechanisms discussed elsewhere in this report. The SCAQMD project, for
example, is a "flexible clean air partnership" under which businesses will have the
flexibility to attain the goals of the Clean Air Act's employee trip reduction programs by
implementing their own initiatives to reduce auto emissions. The Merck project will
allow the company to operate its entire Elkton, VA facility under a single air emissions
permit. Intel's "contract" with EPA and the state of Arizona requires it to exceed current
environmental standards for air, land, and water pollution at its Chandler, Arizona
facility in exchange for flexibility in meeting those goals.
EPA intends to implement 50 XL projects targeting specific facilities, entire industries,
communities, and EPA-regulated government agencies. As of November 1995, EPA had
received 20 to 25 applications, all of which either had been chosen or were being re-
viewed.12
10.5. ENVIRONMENTAL LEADERSHIP PROGRAM (ELP)
Like XL, ELP involves innovative approaches to environmental protection through
flexible laws and regulations and seeks to use greater information to empower citizens
and communities. However, ELP focuses on the role of compliance management systems
in enforcement whereas XL focuses on regulatory management systems in regulation.
EPA launched the pilot phase of ELP in April 1995 by announcing the selection of 12
projects selected from a pool of 40 proposals. The projects, which involve ten companies
and two federal facilities, center on compliance management systems, verification
procedures, management accountability systems, and community access and participation
in compliance. EPA has said that participants would receive public recognition for their
efforts as well as a limited time period to correct minor violations discovered in their
audits "so long as the violations are not criminal in nature and do not present an imminent
and substantial endangerment to the public health or environment."13
One ELP participant, Gillette Co., is working with EPA and state authorities on
environmental management system auditing and certification. The company's ELP project
involves the following four steps: development of criteria for compliance audits, prepara-
tion of detailed instructions for conducting such audits, preparation of guidelines for third
party verification, and use of the guidelines for audits of three company facilities.
Gillette officials have cited several reasons for participating in the program. Not only
does it prepare them to comply with ISO 14000 environmental management certification
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
standards, which are expected to become important in the years to come, it also gives the
company the chance to avoid excessive EPA monitoring by monitoring itself.
It is not clear to what extent the results of audits conducted under ELP will be made
available to the public. Public interest groups believe that they are entitled to access to
such information, but businesses maintain that much of the data contained in audits
should be kept confidential. After the pilot projects are completed, EPA will seek to
develop standards for participation in the final ELP program. EPA intends to have the
final program in place by late 1997.14
10.6. WAVE
Another EPA initiative, WAVE (Water Alliances for Voluntary Efficiency) encourages
businesses and institutions, primarily in the lodging sector, to reduce water use while
increasing efficiency, profitability, and competitiveness. EPA says that the program "is
designed to focus attention on the value of water and the need for efficient use of this
important natural resource."15
WAVE participants include partners, supporters, and endorsers. The partners agree
to equip new facilities with water-efficient equipment and to install such equipment in
existing facilities wherever profitable. In exchange, they receive technical support and
EPA assistance in publicizing their water efficiency initiatives. The role of supporters is
to publicize the benefits of water use efficiency and to assist partners in their conservation
efforts. Supporters are also supposed to implement water efficiency measures. Endorsers
include "conservation-minded environmental groups, trade and professional associations"
who "are invited to review and endorse the WAVE program."16
As of April 29, 1996, there were 30 WAVE partners, all of which were in the lodging
sector. (Some of the partners had several hotels participating in the program.) The list of
supporters consisted of 14 consulting firms, 10 equipment distributors, 13 manufacturing
companies, 7 utilities, and 14 water management companies. The American Hotel &
Motel Association, the American Water Works Association, Green Seal, and three other
institutions were WAVE endorsers.
EPA has stated that WAVE'S measures can result in significant decreases in energy,
water and wastewater management costs. In 1995, the program resulted in estimated
annual savings of 500 million gallons of water, 120 billion BTUs of energy, and nearly $3
million in water and energy costs. Table 10-2 shows examples of savings achieved by
individual participants.
10-8
August
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Voluntary Programs
Table 10-2: WAVE INVESTMENTS AND SAVINGS
Hotel
Investments
Savings (millions
of gallons per
vear. %)
Annual
Cost
Savings
Hyatt Regency
Monterey (CA)
Water reclamation sys-
tem for laundry area
4.563
(52% laundry)
$46,000
Sheraton Miramar,
Santa Monica
New faucet aerators,
shower heads, toilet
dams
11
(28%)
$40,000
Outrigger East Hotel,
Honolulu
Early closure devices,
shower heads, faucet
restrictors
7.9
(18%)
$60,000
Boston Park Plaza Ho-
tel & Towers (Saunders
Hotel Group), Boston
Faucet aerators,
flush-meters
7.6
(14%)
$49,000
Westin St. Francis Ho-
tel, San Francisco
Water reuse-system for
laundry area
2.678
(48%)
$32,400
Source: EPA (September 1994)
An EPA official says that the main incentive for businesses to participate in WAVE is
the cost savings that can be achieved, but that positive publicity is also a factor. Although
the program has resulted in water and energy savings, it has not been without problems.
The development of water management software has taken longer and cost more than
originally expected, and marketing the program to hotels and motels has been compli-
cated by reluctance of the lodging industry and by significant variations in hotel branch
ownership and management structures.17
10.7. CLIMATE WISE
Designed to reduce greenhouse gas emissions across all sectors, this program chal-
lenges participants to devise and implement innovative ways of limiting, reducing, or
mitigating greenhouse gases. Methods include process modifications, use of alternative
raw materials, carbon sequestration, and other emissions abatement measures.
According to EPA, participating companies' Climate Wise activities will bring about
annual savings of over $80 million by the year 2000 and emissions reductions of more than
5 million metric tons of carbon equivalent.18 Participants include AT&T, DuPont, Martin
Marietta, Weyerhaeuser, and Quad/Graphics.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
The program is a partnership between EPA and the Department of Energy. It is
working with the Small Business Administration to improve small businesses' energy
efficiency investment financing possibilities and with state and local governments to
improve technical support and outreach services.
10.8. METHANE RECOVERY PROGRAMS
EPA has launched at least four voluntary programs (Natural Gas Star, AgStar, Coalbed
Methane Outreach, and Landfill Methane Outreach) to promote methane recovery. A
greenhouse gas, methane can be recovered for energy use.
Initiated in March 1993, the Natural Gas Star Program is intended to reduce emissions
of methane from natural gas transmission and distribution systems. Methane emissions
can be decreased by up to 1/3 by improving inspection and maintenance practices to
reduce fugitive emissions, replacing equipment that normally vents gas with low-
emission technologies, and repairing or replacing leaking service lines. Over 25 natural
gas transmission and distribution companies have signed on to the program, and the
program was expanded in the summer of 1994 to gas producers. EPA intends to have
Natural Gas Star partnerships in place with 70% of the gas transmission and distribution
industry and 40% of the production industry by 1997.
Under the AgSTAR Program, which was launched in April 1994, EPA works with the
Departments of Energy and Agriculture to encourage swine and dairy producers to
recover methane from manure management. Participants commit themselves to survey-
ing their facilities and installing AgSTAR selected technology wherever profitable and to
appoint managers to oversee their participation in the program. In return, EPA provides
technical assistance and information on potential financing sources for investments under
the program.
The Coalbed Methane Outreach Program encourages coal mining companies to
recover methane released during mining. The program disseminates information to
address a number of obstacles to mine methane recovery and development, including lack
of information on recovery technology, difficulties in obtain financing for recovery
investments, lack of markets for recovered methane, and uncertainty concerning owner-
ship of mine methane.
The Landfill Methane Outreach Program seeks to promote energy recovery from
landfill gas. In April 1994, EPA estimated that over 700 U.S. landfills could install
economically viable landfill gas recovery systems, but that only about 115 had recovery
facilities in place. The program works with State Allies, who "agree to review and explore
opportunities to overcome any unnecessary regulatory, administrative, and other barriers
to widespread adoption of energy recovery at landfills," and with Utility Allies, who
"agree to cooperate with EPA to develop win/win strategies that fulfill the goals and
recognize the constraints of the Utility Ally while promoting the development landfill gas
10-10
August
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Voluntary Programs
energy resources."19 In addition to positive publicity, the program offers Utility Allies the
possibility to receive Renewable Energy Reserve credits under the Acid Rain Program
discussed in Section 6.
10.9. STATE PROGRAMS
Voluntary programs based on agreements between industry and environmental
authorities have also been implemented on the state level. This subsection briefly de-
scribes two programs in Massachusetts and Texas before concluding with a discussion of
adopt-a-highway schemes in place in several states.
10.9.1. Massachusetts Recycled Newsprint Program20
As described in Section VI, Wisconsin has imposed recycled content requirements on
newspaper publishers and fees on those failing to meet the requirements. By contrast,
Massachusetts has developed a voluntary newsprint recycling program. Under the terms
of a 1992 memorandum of understanding between the Commonwealth of Massachusetts
and the Massachusetts Newspaper Publishers Association, the Commonwealth agreed to
develop newsprint collection and processing programs within the state and the Associa-
tion agreed to increase its use of recycled content. The following recycled content targets
were set: 13% by December 1993, 23% by December 1995, 31% by December 1997, and
40% by December 2000.
The publishers agreed to give preference to newsprint recycled within the state. They
are exempt from the targets above if high-quality recycled newsprint cannot be obtained
at prices comparable to those of virgin newsprint.
In return for the publishers' efforts, the Commonwealth agreed to promote de-inking
and processing facilities in an attempt to increase the supply of recycled content newsprint
available to the publishers. It also agreed to oppose recycled content mandates or
penalties for the use of virgin newsprint and to facilitate private investment in the
publishing industry.
10.9.2. Texas Clean Industries 2000
Under this voluntary program, companies in Texas agree to reduce 1987 levels of
hazardous wastes and/or toxic releases at their facilities by at least 50% by the year 2000.
Participating companies must also implement an internal environmental review and
management program to verify compliance with state and federal regulations, create a
citizen communication program, and provide financial or in-kind support for at least one
community environmental project.
Clean Industries 2000 membership applications must include projections of waste
generation and toxic releases. These projections are later compared with the results of
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
participants' mandatory annual reports to ensure compliance. Membership is renewed for
companies that appear to be on schedule. Facilities can abandon their plans for a year in
case of financial hardship.
By participating in Clean Industries 2000, companies can lower waste disposal costs
and receive positive publicity. Another advantage of the program is that instead of
dictating control technology standards, it gives industry the flexibility to meet the
reduction targets in more cost-effective ways. A collection of pollution prevention case
studies compiled by the Texas Natural Resource Conservation Commission (TNRCC),
which oversees the program, shows that Clean Industries 2000 members have used a
variety of techniques to reduce waste, including input changes, segregation of hazardous
and non-hazardous wastes, and waste recovery and reuse.21
Clean Industries 2000 members have three options for meeting citizen communication
program requirements: citizens' advisory committees, community or neighborhood
meetings or open houses, and ombudsman programs. In ombudsman programs, compa-
nies designate a permanent ombudsman with direct access to senior management to
respond to citizen questions and concerns. Over 75 facilities have implemented citizens'
advisory committees, which appear to be the most popular option. 17 facilities chose
ombudsman programs, and 16 chose open house meetings. Several facilities have
implemented more than one type of program. In Freeport, for example, BASF holds
monthly Industrial Community Awareness and Emergency Response meetings. It also has
a Community Advisory Panel that meets once a month and educates the community on
the chemical industry, emergency preparedness, environmental and safety concerns, and
social commitments. Another element of the citizen communication program is guided
tours of the facility.22
The community environmental projects required of Clean Industries 2000 members can
be any of the following types: nature preserve/habitat restoration, environmental quality
monitoring, environmental councils/committees, household hazardous waste, recycling,
Earth Day activities, scholarships/donations, and cleanups. Union Carbide, for example,
sponsored a paper/cardboard recycling program for the 15 schools of the Texas City/La
Marque Independent School Districts. Initiated in 1993, the program included educational
materials for teachers and students and recovered 11 tons of recyclable paper and
cardboard during its first year.23
As of March 1995, the 132 Clean Industries 2000 members had made commitments to
reduce their 1987 baseline levels of hazardous waste generation by 57% and toxic releases
by 64% by the year 2000. These percentages correspond to reductions of 29 million tons of
hazardous waste and 268 million pounds of toxic emissions.24 In 1993, the first year of the
program, member facilities reduced hazardous waste generation by 17% and toxic
releases by 9.5%.25 By March 1996, 147 industrial facilities had joined Clean Industries
2000.26
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Voluntary Programs
(March 1995 TNRCC press releases on Clean Industries 2000:
www.tnrcc.state.tx.us / pub/bbsl / press / clean.txt
www.tnrcc.state.tx.us/pub/bbsl/ press/tri.txt)
10.9.3. Adopt-a-Highway27
In adopt-a-highway programs, volunteers agree to periodically clean up selected
stretches of roadside. Although such programs vary from state to state, they typically
involve agreements by organizations to clean up a stretch of roadside approximately two
miles long, two to seven times a year, for one to three years. The state usually offers trash
bags, safety vests and other gear. Perhaps most important for businesses that participate,
the state also usually provides at least one sign to be placed on the adopted roadside
indicating the name of the adopting organization. However, a 1994 survey revealed that
10 states did not allow businesses to adopt highways and 33 states did not allow adopting
organizations to contract others to perform cleanup.
Adopt-a-highway programs offer advantages both to states and to adopting organiza-
tions. They allow states to maintain roadsides at lower state expense and generate positive
publicity for businesses and other adopting organizations.
Although there is no federal adopt-a-highway activity, state programs have spread
rapidly since Texas created the first one in 1985. The number of states with programs
increased to 41 by 1990. The aforementioned 1994 survey revealed that all states except
Maine and Vermont had programs. According to the same survey, 121,700 adopting
groups composed of 1.3 million volunteers were participating in programs, and over
200,000 miles of roadside had been adopted.
In Virginia, for example, which has one of the largest programs in the country,
families, churches, businesses, and other groups and individuals can adopt a highway.
Adopting organizations agree to clean up a stretch of road that is generally two miles
long, four times a year, for two years. The State Department of Transportation (VDOT)
provides trash bags and bright orange vests and collects and disposes of bagged trash.
Adopting organizations also have the right to recycle the trash. VDOT also provides signs
with the name of the adopting organization at both ends of the adopted stretch of road.
According to VDOT, "Adopt-a-Highway volunteers clean over 14,300 miles of state
highways - about 25% of the state's available roads - and have provided the equivalent
of more than $6.3 million in litter-control services to the state."28
Similar voluntary cleanup programs have been created in various parts of the United
States. The 1994 survey identified 19 states with adopt-a-river, 11 with adopt-a-lake, and
15 with beach cleanup programs. Parks, schools, and trails have also been included in
such programs.
1997
10-13
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Endnotes for Section 10
1. EPA (Spring 1996).
2. DEN, June 23, 1995, p. E9.
3. Arora and Cason (1995), p. 2. www.rff.org/dpapers/abstract/9538.htm
4. Arora and Cason (1995), pp. 3-4.
5. Membership data provided by Amanda Ferguson, EPA. Data on building space
committed by December 1993 and associated savings and pollution reductions provided
by EPA (August 1994a), The Climate is Right for Action, p. 4. Figure on building space
committed by 1994 provided by EPA (June 1995), p. 14.
6. Data based on the Energy Star Buildings upgrade of a 7-story, 196,000 square foot office
building in Washington, DC.
7. EPA (June 1995), p. 26.
8. DEN, November 1, 1995, p. A5.
9. The 1994 release and transfer data were provided by 1994 Toxics Release Inventory. All
other information on the 33/50 program was provided by Arora and Cason (1995).
10. The 33/50 chemicals are cadmium and compounds, chromium and compounds, lead
and compounds, mercury and compounds, nickel and compounds, benzene, methyl ethyl
ketone, methyl isobutyl ketone, toluene, xylenes, carbon tetrachloride, chloroform,
dicholormethane (methylene chloride), tetrachloroethylene, trichloroethane, trichloroethyl-
ene, and cyanides.
11. DEN, November 27, 1995, p. AA2.
12. DEN, November 6, 1995, pp. AA1-2.
13. DEN, June 23, 1995, p. E10.
14. DEN, November 27, 1995, pp. AA1-3.
15. DEN, June 23, 1995, p. Ell.
16. EPA (September 1994).
17. John Flowers, EPA, personal communication, 1996.
18. Ibid, p. Ell.
19. EPA (April 1994b), p. 2.
21. TNRCC (March 1996), Pollution Prevention Ideas from Texas Industries.
22. TNRCC (March 1996), Clean Industries 2000: Citizen Communication Programs, p. 11.
23. TNRCC (March 1995), Clean Industries 2000: Community Environmental Programs, p. 138.
10-14
August
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Voluntary Programs
24. TNRCC (March 1995), A Report to the 74th Texas Legislature, p. 10.
25. TNRCC press releases, March 20 and March 27, 1995.
www.tnrcc.state.tx.us / pub/bbsl / press / clean.txt and
www.tnrcc.state.tx.us/pub/bbsl/press/tri.txt
26. TNRCC (March 25, 1996), "Clean Industries 2000 Fact Sheet."
27. Throughout this subsection, the 1994 survey cited is an "Adopt-a-Highway National
Survey" conducted by the Oklahoma Department of Transportation.
28. Virginia Department of Transportation (April 1996).
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
10-16 August
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11. FOREIGN EXPERIENCES WITH INCENTIVE SYSTEMS
Numerous economic incentives have been used in environmental management in
foreign countries, including several mechanisms little known in the United States.
Although a detailed description and assessment of each of these incentives is beyond the
scope of this report, this Section does contain an overview of charges, deposit-refund
systems, subsidies, product labeling schemes, and market-based permit systems used as
environmental policy instruments in foreign countries to provide perspective on the U.S.
experience. While this Section in general does not include incentive mechanisms that
have been proposed but not implemented, it does describe a few proposals whose
acceptance appears imminent. The incentives are described under the same general
headings as in earlier sections.
Table 11-1 highlights a few noteworthy incentive mechanisms used in foreign coun-
tries. This report does not endorse any of these mechanisms. They are included in the
table because they appear to either differ significantly from incentives used in the United
States or have significant impacts on behavior. More information on these and other
incentives used outside the United States can be found in the rest of this Section.
Table 11-1: NOTEWORTHY INCENTIVE MECHANISMS OUTSIDE THE UNITED
STATES
Mechanism
Where aDDlied
Observations
Environmental
labeling
Virtually all industrialized
and numerous less indus-
trialized countries
Govt, programs to promote envi-
ronmentally friendly products.
Credited with decreasing VOC
and other emissions in Germany
and increasing recycled paper use
in Korea.
Noise pollution
charges
Belgium, France, Ger-
many, Japan, the Nether-
lands, Norway, and Swit-
zerland
Not used in U.S.
Effluent charges
Several countries
Evidence of incentive effects in
Germany, the Netherlands, and
Malaysia.
Water extraction
charges
Several countries
Incentive effects noted in several
Asian countries and projected in
the Netherlands.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Mechanism
Where aDDlied
Observations
Carbon/energy
taxes
Denmark, Finland, the
Netherlands, Norway,
and Sweden
Not used in the U.S. Incentive
effects noted in Sweden and Fin-
land and projected effects in the
Netherlands.
Deposit systems
Numerous countries, in-
cluding Austria, Greece,
Korea, Norway, and Swe-
den
Differ from U.S.: Korea requires
deposits from producers, links
refunds to proper post-consumer
disposal, includes motor oil, other
products. Austria includes light
bulbs. Greece, Norway, and Swe-
den include car hulks, note incen-
tive effects.
Fertilizer and
pesticide charges
Austria, Belgium, Scandi-
navian countries
Higher than fees in U.S. states.
Incentive effects noted in Austria
and Sweden
Other product
charges
Various countries (e.g.,
Belgium's disposables tax,
Italy's plastic bag tax,
Korea's taxes on various
products, Germany's
industry-imposed pack-
aging fees.)
More products than in U.S. incen-
tive effects noted or projected for
some of these charges.
Livestock and
manure charges
Belgium and the Nether-
lands
Little if any use in the U.S.
Motor vehicle
quota system
Singapore
Not used in U.S. incentive effects
noted.
Congestion pric-
ing
France, Norway, and Sin-
gapore
Use just beginning in U.S. Incen-
tive effects noted in all three
countries.
Motor fuel taxa-
tion
Various countries
Higher than U.S. taxes. Unleaded
tax preference differs from U.S.
credit approach. Sweden taxes
diesel according to emissions.
Incentive effects noted in differen-
tial taxation.
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Foreign Experiences with Incentive Systems
Mechanism
Where aDDlied
Observations
NOx emissions
charges
France and Sweden
Little used in the U.S. (except
California). Incentive effects
noted in Sweden.
S02 emissions
charges
France, Japan, other coun-
tries
Differs from U.S. approach of
tradable allowances under acid
rain program.
11.1. FEES, CHARGES, AND TAXES
The different types of fees, charges, and taxes were described in Section 4. As in that
Section, the terms "fee," "charge," and "tax" are used interchangeably throughout this
Section.
As in the United States, many of the environmental charges found in foreign countries
exist in addition to command-and-control pollution regulations and are used to raise
revenue as well as encourage environmentally friendly behavior. The revenue-raising
effect is often stronger than the incentive effect.
11.1.1. Waste
A 1994 OECD study of economic instruments reports that municipal waste user
charges are levied in 18 of the 21 industrialized countries (all but New Zealand, Portugal,
and the United Kingdom) that it surveyed.1 The charges are usually (but not always) flat
rates for households and unit rates for commercial generators. Unit rates are more likely
to have an incentive effect than flat rates that are independent of quantities of waste
generated. The charges usually fund waste collection and/or disposal.
Denmark, for example, levies taxes of 195 DK ($34) per metric ton on waste delivered
to landfills and 160 DK ($28) per metric ton on waste delivered to incineration facilities.
These taxes raised 527.6 million DK ($92.6 million) in 1993.2 Since the tax was introduced
in 1987, the quantity of waste registered at disposal facilities has dropped and the reuse
of building waste as filling material for road construction and other purposes has
increased. There has also been a slight increase in illegal waste disposal. However, it is
unclear to what extent these phenomena can be attributed to the waste tax.3
In the Netherlands, a tax on landfill disposal of waste came into effect January 1, 1995
as part of a broader environmental tax law. The tax was set at 29.2 Dfl ($17.8) per metric
ton and is expected to generate annual revenues of approximately 275 million Dfl ($167
million). The main purpose of the tax is to raise revenue for the national budget, but a
secondary purpose is to discourage waste generation. To promote incineration as a
disposal method, incineration is exempt from the tax. The size of the tax relative to the
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average waste treatment costs of 82 Dfl ($50) per metric ton suggests that the tax could
have significant incentive impact.4
In the United Kingdom, a landfill tax is scheduled to come into effect on October 1,
1996. The tax rate will be 2 Ł ($3) per metric ton for inactive waste such as bricks and 7 Ł
($10.7) per metric ton for other waste. Landfill operators will pay the tax but will be able
to increase their fees. The British Customs and Excise office said that the tax is "designed
to use market forces to protect the environment by making the disposal of waste in landfill
sites more expensive." Businesses' national insurance contributions will be cut to compen-
sate for the effect of the tax on business.5
Outside the OECD, South Korea introduced a system in 1995 under which household
waste can be disposed of only in standardized bags sold in officially designated places.
As shown in table 11-2, bag prices in the metropolitan areas of the capital city of Seoul
range from 60-80 won ($0.08-0.1) for five-liter bags to 1,090-1,450 won ($ 1.41-$ 1.88) for
100-liter bags. Prices are determined by local governments and vary slightly from area to
area. The amount of waste sent to landfills was approximately 40% lower during the six
months after implementation of the system. Unfortunately, a large quantity of the
decrease was attributable not to recycling but rather to uncontrolled incineration or
private disposal. (Perhaps six months is too short a period for viable recycling options to
be created.) Other problems are that the plastic bags themselves are not biodegradable
and thus pose disposal problems and that the bag fees are too low to cover waste disposal
costs.6
In 1994, Turkey introduced an Environmental Cleanup Tax on waste to raise revenue
and to discourage waste generation. The monthly rate was set at 25,000 TL ($0.37) to
100,000 TL ($1.47) for households and 25,000 TL ($0.37) to 5,000,000 TL ($295) for other
generators. The Cleanup Tax was also imposed on waste water.7
Australia, Austria, Belgium, Finland, France, and several German states impose
charges on hazardous waste disposal. Austria's tax of 200 S ($19) per metric ton is used
to fund the cleanup of contaminated land.8 France has imposed a tax on the disposal of
"special industrial wastes," a category including asbestos, chrome, lead, solvents, and
other specified substances. The tax is rising progressively from 20 F ($4) per metric ton in
1994 to 40 F ($8) per metric ton in 1998.9 It is unclear whether these charges have a
significant incentive effect.
The Netherlands and the Flanders region of Belgium impose charges on animal
manure disposal to limit soil pollution. In the Netherlands, individuals are permitted to
dump the manure equivalent of 125 kg of phosphate per hectare per year free of charge.
Quantities between 125 and 200 kg are subject to a charge of 0.25 Dfl ($0.15) for every kg
over 125 kg, and quantities over 200 kg to a charge of 0.5 Dfl ($0.3) per kg.10
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Table 11-2: WASTE DISPOSAL BAG PRICES IN SEOUL METROPOLITAN AREA
(as of January 12, 1995)
Bag size
Price (in won)
Price (in $US)
For households
5 liters
60-80
0.08-0.10
10 liters
110-150
0.14-0.19
20 liters
210-280
0.27-0.36
50 liters
510-720
0.66-0.93
For businesses
20 liters
230-290
0.30-0.38
50 liters
550-730
0.71-0.95
75 liters
820-1,090
1.06-1.41
100 liters
1,090-1,450
1.41-1.88
Source: Rhee (1995), "Waste-Collection Fee and Sustainable Consumption."
Waste charges have also been levied in a number of less industrialized countries,
including the Czech Republic, China, Estonia, Hungary, Poland, Russia, and the Slovak
Republic. Municipal waste charges for households and businesses in the Czech Republic,
which have been in place since before World War II, were significantly increased in 1992.
Municipalities determine prices: In Prague, for example, the rate was 14.53 ECU ($18.2)
per metric ton in 1993, and other municipalities charge fees within 60% of Prague's rate.
One problem with the increased charges is that they appear to have led to an increase in
illegal dumping.11
Since 1992, the Czech Republic has also levied two types of charges on landfill
operators. The first charge, imposed on all landfill operators, generates revenue for the
municipality where the landfill is located to finance environmental protection activities.
The second charge is imposed only on those landfills that do not adhere to specified waste
disposal standards. One report indicates that the charge "very positively motivated the
establishment of new dumps in accordance with the strict required criteria concerning the
safe storing of waste." As shown in table #, the amounts of both charges vary significantly
according to the type of waste, the highest being 5,000 Kc ($184) per metric ton for
dangerous waste. The Slovak Republic has similar charges.12
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 11-3: CHARGES ON LANDFILL OPERATORS IN THE CZECH REPUBLIC
(in Kc per metric ton in 1994, $=27,196 kc)
Waste catesorv
Charge I
Charge II
Earth and organic matter
0
6
Other waste
10
140
Municipal waste
20
210
Special waste (not in categories 3 or 5)
40
640
Dangerous waste
250
5,000
Source: Regional Environmental Center for Central and Eastern Europe (1995), p. 11.
In much of Eastern Europe and the former Soviet Union, charges on waste as well as
air and water pollution are higher for quantities in excess of permitted levels or for
improperly handled quantities. These higher incremental rates for levels in excess of
standards could be looked upon as non-compliance fees.13
11.1.2. Air
Canada, France, Japan, Norway, Portugal, Sweden, and several less industrialized
countries have imposed emission charges on various air pollutants. France, for example,
introduced a charge on emissions of hydrochloric acid, sulfur-containing compounds,
nitrogen oxide-containing compounds, non-methane hydrocarbons, solvents, and other
volatile organic compounds. The tax rates and base were expanded in 1990. The fee, 150
F ($30) per metric ton, has been imposed on combustion facilities with a maximum
thermal power of at least 20 MW, waste incineration facilities with a capacity of three
metric tons per hour, and facilities emitting more than 150 metric tons per year of taxable
pollutants. Approximately 1,400 facilities have been subject to the tax, which generated
revenues of 197 million F ($39 million) in 1993 and 169 million F ($33.5 million) in 1994.
These charges are intended primarily to raise revenues to fund pollution abatement
expenses at the charged facilities.
Japan has levied sulfur emissions charges to generate revenues to compensate victims
of pollution-related diseases. (Since S02 was believed to be the main cause of such
disease, it was chosen for the tax.) Both stationary and mobile sources are charged, the
latter in the form of differential taxation dependent on vehicle weight. Since mobile
sources are thought to generate about 20% of NOx and S02 emissions, the tax ratio
between stationary and mobile sources is 4:1. For stationary sources, tax rates vary from
$0,625 to $56.25 per Nm3, depending on whether the source is located in a designated
area. Since many diseases date back to the 1980s, there is also a levy of $0.82 per Nm3
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Foreign Experiences with Incentive Systems
based on S02 emissions between 1982 and 1986. Ambient S02 concentration levels have
fallen significantly in Japan, but it is unclear to what extent this decrease is due to the tax.
Korea introduced air emissions charges in 1991. Facilities are charged based on the
type and amount of fuel they use and on the region in which they are located. Revenues
are deposited into an Environmental Pollution Control Fund (EPCF) to finance the
development and installation of environmental technology.
11.1.2.1. Sweden's Nitrogen Oxide Charge
Sweden's nitrogen oxide emission charge of 40 SEK ($5.9) per kg ($5,400 per short ton)
imposed in 1992 on energy producers with a capacity in excess of 10 MW and production
of over 50 GwH is intended to have a significant incentive effect. Some 120 heating plants
and industrial facilities, with about 180 boilers, are subject to the tax.
One interesting aspect of this tax is that revenues are rebated to taxpayers based on
their energy generation. At the beginning of every year, facilities report their NOx
emissions and energy production for the previous year to the Swedish Environmental
Protection Agency (SEPA). On the basis of these reports, SEPA calculates total revenues
and refunds per generated MwH. Those facilities facing a net charge must pay by
October, and those entitled to rebates receive them in December. The charge system in
effect transfers income from high-emitting to low-emitting plants. In 1992, for example,
approximately 15,300 metric tons on NOx emissions were subject to the charge, generating
about 610 million SEK ($90 million). As a result of the revenue and rebate calculations,
over 100 million SEK ($15 million) was transferred from high-emitting to low-emitting
facilities.
Most facilities subject to the taxes have installed measuring equipment so that the tax
can be properly assessed. The annual cost of such equipment is estimated at 300,000 SEK
($44,000). For facilities that either have no measuring equipment or whose equipment is
temporarily out of order, a standard of approximately 1.5 times the average emission level
applies. This standard rate, 600 mg NOx/MJ for gas turbines and 250 mg NOx/MJ for
other installations, gives polluters a strong incentive to install measuring equipment.
Measuring equipment must be inspected once a year by an accredited laboratory.
Measuring and reporting are monitored by SEPA.
Since other factors, including the planned introduction of tighter emissions standards
in 1995, can influence NOx emissions in Sweden, it is difficult to determine the effect of the
NOx charge. However, emission reductions appear to have been greater than they would
have been without the charge. Incentive effects were evident as early as 1990 when many
plants took measures to reduce emissions in anticipation of the charge. In 1992, the first
year in which the charge was in effect, emissions from taxed plants were 15,300 metric
tons, down 36% from their 1990 level of 24,000 metric tons. This decrease was not due to
a decrease in energy consumption: emissions per mega-joule fell from 150 mg NOx/MJ in
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
1990 to 99 mg NOx/MJ in 1992. Some plants have even linked staff compensation with
emissions reductions.
The charge was set at 40 SEK ($5.9) per kg because studies by the Swedish Environ-
mental Protection Agency (SEPA) had indicated that control costs varied from 20 to 80
SEK ($2.9-11.8) per kg. SEPA has stated that the value of NOx emission reductions is at
least as high as the amount of the charge. The taxed plants were able to reduce emissions
at an average cost per kg of approximately 10 SEK ($1.5) in 1992. Costs have ranged from
5 to 20 SEK ($0.7-2.9) per kg. Since these costs are significantly lower than the 40 SEK per
kg charge, rational facilities will probably implement more abatement options in future
years. Abatement measures used since the introduction of the charge include not only
investments in new equipment but also measures to limit emissions by optimizing
combustion.
Table 11-4 shows SEPA's estimates of the net benefit of the NOx charge for the 1992
emissions reductions. It is not clear how the benefit of at least 40 SEK per kg ($5,400 per
short ton) was estimated. Annual administrative costs of the charge are approximately 2
million SEK ($290,000) for SEPA and 300,000 SEK ($44,000) for each firm using measure-
ment equipment. (SEPA appears not to have included its 2 million SEK administrative
cost in its cost-benefit table, but this exclusion does not have a significant effect on the
conclusions of its analysis.) Assuming 2 million SEK in administrative costs for SEPA and
18 million SEK ($2.6 million) in measurement costs for those taxed facilities that have
installed measuring equipment, the annual monitoring and administrative costs amount
to 20 million SEK ($3 million), or roughly 3% of charge revenue.
Table 11-4: SEPA ESTIMATES OF THE NET BENEFIT OF THE NOx CHARGE
(for 1992 reductions of 9,000 metric tons)
Type of benefit or cost
SEK per kg reduced
Total (in SEK)
Environmental benefit
>40
> 360 million
Abatement cost
- 10
- 90 million
Measurement cost
- 2
- 18 million
Net societal benefit
> 28
> 250 million
Source: Swedish Ministry of the Environment and Natural Resources (1995), p. 47.
One limitation of the charge is that it reportedly covers only about 6.5% of total NOx
emissions, partly due to some energy producers' tendency to supply just under 50 GwH
to avoid the tax. (Because of the 50 GwH threshold, the marginal taxation of quantities of
energy just over 50 GwH is high.) The threshold will be lowered gradually to 25 GwH by
January 1, 1997. Another potential problem is that the charge on NOx may cause some
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Foreign Experiences with Incentive Systems
plants to increase emissions of other substances, but other control standards are in place
to limit such emissions.14
11.1.2.2. Charges in Less Industrialized Countries
Several Eastern European and Central Asian countries have more air emission charges
than industrialized countries. In many of these countries, higher units fees are charged
for emissions in excess of permitted levels. In some countries, there are no fees for
emissions within permitted levels. Charges assessed only on emissions in excess of
permitted levels could be regarded as non-compliance fees.
In the Czech Republic, thermal units with an energy capacity of 0.2 MW or greater are
scheduled to be subject to the charges shown in Table 11-5. (Class I includes asbestos,
cadmium, mercury, and benzene; class II includes arsenic, chlorine, phenol, and tin; and
class III includes ammonia, acetone, and toluene.) These rates are being gradually phased
in from 30% of their full level in 1992-1993 to 100% in 1997. Facilities that exceed emis-
sions standards are subject to higher unit rates. The polluters are responsible for monitor-
ing, but random inspections are conducted by a state control body. Revenues go to the
state environment fund to control air pollution. The incentive effects are unclear. The
administrative costs of the charges have been estimated at 1% of revenues collected.
A separate charge system exists for thermal sources of less than 0.2 MW. These
charges range from zero for coke, gas, and fire wood to as high as $365 for 100-200 Kw
facilities using slurry. Implementation of these charges is optional and left to the discre-
tion of municipalities. Revenues are used for municipal environmental activities.
Russia also levies air emissions charges for approximately 300 substances. Polluters'
charges depend on the type and quantity of emissions and the socioeconomic and
environmental situation in the areas where they are located. Regional authorities grant
exemptions to some firms based on their pollution control investments.15
Charge revenues in most countries in Eastern Europe and the former Soviet Union go
to environmental funds. In many of these countries, however, the incentive and revenue-
raising effects of these charges have been diminished by lack of enforcement and/or
erosion of real charge rates by inflation. One study points out that the charges in Russia
are much more vulnerable to inflation than the value-added and profit taxes because they
do not rise automatically with increases in the general price level.16 Since non-compliance
fines are significantly higher (ten times higher for Poland's S02 and NOx charges), they are
more likely to have incentive impact, but even these are sometimes too low to influence
polluters.
In February 1996, China announced the introduction of a charge on S02 emissions by
industry. Officials stated that a charge of 2/kilogram implemented on a trial basis in
southern China resulted in a 30% decline in S02 emissions.17
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 11-5: AIR POLLUTION CHARGES IN EASTERN EUROPE18
Country
Charge base and rate
Revenues
Czech Republic
(larger industrial
sources)
Roughly 80 pollutants included.
Rates per metric ton:
PM $109, S02 $37, NOx $29, CO $22,
hydrocarbons $73, Class I pollutants
$730, Class II pollutants $365,
Class III pollutants $37
1992: $27 million
1993: $29 million
Czech Republic
(smaller sources,
<0.2 MW)
Vary according to heat source and
output. Maximum annual rate $365
Unknown (implemen-
tation optional for
municipalities)
Slovak Republic
Similar to Czech charges for smaller
and larger sources.
Larger source: $3.1
million in 1992 and
$7.9 million in 1993.
Smaller source revenue
unknown.
Poland
S02 and NOx: $66/metric ton
C02: $0.05/metric ton
Over 50 other pollutants charged up
to $44,132/metric ton.
1992:
S02:$89.2 million
NOx:$28.6 million
1993:
S02:$149 million
NOx:$28.6 million
Revenue for other
charges unknown.
Bulgaria, Czech
Republic, Hun-
gary, Poland, Ro-
mania, Slovakia
Charges for emissions in excess of
permitted amounts. Amounts vary.
Revenues vary.
Source: Regional Environmental Center for Central and Eastern Europe (1995), p. 10.
11.1.3. Water
As noted in Section IV, economic incentives in water policy include user fees for
groundwater, surface water, or for drinking water supplied by waterworks and fees for
direct or indirect effluent discharges. For many water consumers discharging into sewage,
effluent charges are included in water user fees.
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Foreign Experiences with Incentive Systems
11.1.3.1. User fees
A number of countries levy water service fees. Eighteen of 21 industrialized countries
surveyed by OECD (all but Austria, Iceland, and Japan) reported user fees for water,
sewerage and sewage treatment. Rates in most OECD countries are higher than those in
the United States.19 In the case of industrial users, water fees are usually based on
quantities of water consumed. Water charges for residential consumers are set at flat rates
in some areas and based on amounts consumed in others. To the extent that municipal
water charges include sewage service, they are also indirect effluent charges.
Consumption-based rates are more likely to influence water use than flat rates, but
relatively large price increases might be needed to induce changes in consumer behavior.
A number of studies have found water consumption to be negatively related to unit-based
prices. In 1982, for example, the Hunter and District Water Board in Australia replaced its
fixed-rate pricing system with a pay-for-use system. Water consumption subsequently
declined by 20-30%, a decline that allowed the deferral of water supply construction
projects.20 Briassoulis (1994) found that increases in water prices in Athens in 1990 led to
significant decreases in water use. Although some of the decreases have been attributed
to public education campaigns, the price increases have also been credited with significant
incentive effect. Hansen (1996) found price elasticity of water demand in Denmark to be
-0.1 or smaller. In the Czech and Slovak Republics, increases in water charges since 1991
have led to significant falls in water consumption.21 In Bogor, Indonesia, water rates were
increased by 200-300% in 1988 and a conservation campaign was implemented in 1989.
Domestic and commercial water use fell by 30% within nine months.22 This implies a price
elasticity of demand of-0.10 to -0.15.
Charges on surface and groundwater use differ from the water supply charges
described above in that they can be regarded as taxes on the use of a natural resource
rather than payments for services provided. Charges on surface and groundwater use
have been imposed in several countries. On January 1, 1995, for example, the Netherlands
introduced a ground water tax of 0.34 Dfl ($0.21) per cubic meter for drinking water
companies and 0.17 Dfl ($0.10) per cubic meter for other companies. For surface water
infiltrated and extracted as ground water, rebates are offered so that the net tax is 0.055
Dfl ($0,033) per cubic meter. Although the primary objective of the tax is to raise revenue,
the Netherlands Ministry of Housing, Spatial Planning, and the Environment predicts, on
the basis of current water prices and estimated elasticities of demand of -0.05 to -0.30, that
water use will decline by 1.3% to 12.6% for drinking water consumers and by 5.7% to 51%
for industrial and agricultural consumers who extract their own groundwater. The tax of
0.34 Dfl is equal to about 35% of current water prices for drinking water, and the tax of
0.17 Dfl is over twice as high as current prices for self-extraction. To promote recycling,
groundwater used to rinse reusable packaging such as beverage containers is exempt from
the tax.23 An official with the Netherlands Waterworks Association opposed to the tax said
that the higher rates for tap water and tax exemptions for the first 100,000 cubic meters of
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
self-extracted water would lead farmers to dig more wells, thereby increasing their use of
groundwater.24
Most Eastern European countries charge fees for groundwater and surface water use,
but the fees tend to be too small and to include too many exemptions to have significant
incentive effect. Agricultural water use has been subjected to fees in many countries, but
it has been asserted that these fees are generally too low to promote efficient water use. In
Central Asia, extensive agricultural diversion of water has resulted in a significant
decrease in water levels in the Aral Sea and severe salinization problems. Several coun-
tries in the region recently introduced charges on surface water use. Kazakhstan charges
farmers about 0.2(t per m3, and Uzbekistan charges some (but not all) farmers about 0.1 ft
per m3. Elsewhere in Asia, the introduction of groundwater extraction fees in Jakarta,
Bangkok, and Cebu (Philippines) reduced groundwater depletion.25
11.1.3.2. Effluent Charges
As noted above, indirect charges into sewage are imposed in a number of countries,
often as part of water supply bills. Less common are charges on direct discharges of
effluent into surface or ground water. Australia, Belgium, parts of Canada, China, France,
Germany, the Netherlands, Poland, Portugal, and Spain are among the many countries in
which direct effluent charges have been levied. In most countries, charges on indirect
discharges differ from those on direct discharges. One notable exception is the Nether-
lands, whose effluent charges are explained below.
Schoot Uiterkamp, J.F.J, Leek, and de Savornin Lohman (1995) studied indirect and
direct effluent charges in 12 European Union countries.26 Some of the findings of their
survey are summarized in Table 11-6 and Figure 11-1.
Table 11-6 summarizes the characteristics of effluent charges imposed on industry in
the European Union. Not included in this table are indirect effluent charges in effect in
Germany and Spain but on which little data are available. The six countries with direct
effluent charges on industry (Belgium, France, Germany, the Netherlands, Spain, and
United Kingdom) have imposed similar charges on municipal treatment plants.
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Table 11-6: INDUSTRIAL EFFLUENT CHARGES IN THE EUROPEAN UNION
Country
or region
Pollution parameters
Pollution
assess-
ment
Direct
or indi-
rect
Polluters covered
Belgium:
Flanders
SS, ORG, MET, P, N
COEF,
(MES)
BOTH
>500m3 cons./year or
pump rate >5 m3/day
Belgium:
Wallonia
SS, ORG, MET, P, N,
TEMP
COEF,
(MES)
BOTH
>7 employees
Denmark
ORG, P, N
PERM
INDIR
High amount of SS, P, N
France
SS, ORG, MET, P, N,
TOX, AOX, SOL
COEF,
(MES)
BOTH
Discharges > 200 i.e.
Germany
ORG, MET, P, N,
TOX, AOX
PERM,
(MES)
DIR
Licensed polluters
Greece
NA
NA
INDIR
NA
Ireland
SS, ORG
PERM
INDIR
Licensed polluters
Italy
SS, ORG
PERM
INDIR
Licensed polluters
Luxem-
bourg
None
CONS
INDIR
NA
Nether-
lands (I)
ORG, MET, N
MES
BOTH
> 1000 p.u.
Nether-
lands (II)
ORG, MET, N
COEF,
(MES)
BOTH
5-1000 p.u.
Portugal
SS, ORG
NA
INDIR
NA
Spain
BAND
PERM
DIR
Licensed polluters
UK (I)
BAND
PERM
DIR
Consented discharges
UK (II)
SS, ORG
PERM
INDIR
Consented discharges
PollutionparametersYmbols:
SS
suspended solids
TOX
toxicity indicator
ORG
organics (BOD and/or COD)
AOX
halogenated hydrocarbons
MET
heavy metals
SOL
soluble salts
P
phosphorus
TEMP
temperature
N
nitrogen
BAN
D
discharge classed into bands to which value is at-
tached
Pollution assessment symbols:
MES based on actual measurement (MES) actual measurement as basis is optional
COEF based on sector-specific coefficients PERM based on values specified in permit
CONS based on water consumption
Source: Schoot Uiterkamp, Leek, and de Savornin Lohman (1995), Part 1, p. 33.
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Because of differences in pollution parameters, assessment methods, and polluters
covered, effluent charge levels are difficult to compare across countries. Figure 11-1 shows
comparisons by Schoot Uiterkamp et al. of charge levels for two discharge scenarios for
a chemical industry in the countries for which sufficient charge rate data are available. In
scenario I, the industry subjects its waste water to only basic treatment, whereas in
scenario II, it applies more advanced treatment techniques. In both scenarios, daily flow
is 500 m3. Table 11-7 shows the discharge levels for the two scenarios.
Table 11-7: DISCHARGE SCENARIOS FOR FIGURE 11-1
(mg/liter)
Parameter
I
II
Parameter
I
II
COD
400
100
AOX
1
0.1
BOD
100
20
Zinc
2
1
SS
40
20
Nickel
1
0.5
totalN
20
10
Copper
1
0.5
reduced N
10
5
Lead
1
0.5
totalP
1
0.5
Chromium
0.1
0.01
As shown in Figure 11-1, the absolute difference in charge levels between the two
scenarios is largest in Belgium, Germany, and the Netherlands. The incentive effect
appears to be strongest in these three countries. However, another set of scenarios
considering the impact of differences in flow amounts on charge payments could yield
different results. In the case of the United Kingdom, for example, a polluter could halve
its payments by reducing its daily flow amount from 500 m3 to under 100 m3. Three
illustrative charge systems are discussed in greater detail here.
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Foreign Experiences with Incentive Systems
Figure 11-1: ANNUAL CHARGE PAYMENTS FOR HYPOTHETICAL INDUS-
TRIAL DISCHARGE
Thousands of dollars
Country or Region
IZZl8o«narlo I ^8c»ntrlo II
Source: Schoot Uiterkamp et al.
(1995), Part 1, p. 61.
11.1.3.3. Effluent Charges in Germany
Based on the 1976 Federal Effluent Charge Law, effluent charges have been collected
by German states (Lander) since 1981. Although collection is left to the states, the charge
calculation rules, charge amounts, and
damage unit parameters are determined at
the federal level. German states do not
have the autonomy to set effluent charges
that U.S. states have in setting the NPDES
permit fees discussed in Section 4.
Figure 11-2: POINT SOURCE EFFLU-
ENT CHARGES IN GERMANY
in DM per 'damage unit"
DM
Effluent charges for point sources are
based on "damage units" dependent on
quantities and types of pollutants. One
damage unit is defined as 50 kg organic
matter (COD), 3 kg phosphorus, 25 kg
inorganic nitrogen, 2 kg halogenated hy-
drocarbons (AOX), 20 g mercury (and
compounds), 100 g cadmium (and com-
pounds), 500 g chromium, nickel or lead
(and compounds), 1 kg copper (and
70
60
60-
40
81 82 83 84 86 86 87
80 91 82 93 94 96 96 97
Year
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
compounds), or 3,000 m3 of wastewater divided by T(f), where T(f) is the dilution factor
by which the waste water must be diluted in order to lose its acute toxic effect on fish.
Separate assessment methods are used for stormwater and for discharges from inhabitants
not connected to the sewage system. As shown in Figure 11-2, the charge amounts per
damage unit have increased from 12 DM at the introduction of the charge to a current
level of 60 DM and are scheduled to reach 70 DM in 1997.27
Charge assessment is based on discharges allowed in state-issued permits. Discharg-
ers without permits or with permits lacking discharge limits pay charges based on their
declared discharges. If permitted discharge limits are surpassed, charges are raised
accordingly. Most monitoring is left to polluters with random spot checks by the authori-
ties. However, if a polluter declares in advance that its discharge levels will be at least
20% below levels allowed in its permit over a period of at least three months, the charge
is assessed on the basis of the projected reduced discharge level.
The charge amounts in Figure 11-2 can be reduced in several ways. If a discharger
uses Best Available Technology for hazardous pollutants and Generally Agreed Technol-
ogy Standards for non-hazardous pollutants, its charge per damage unit is reduced by
75%.
In addition, investments in treatment facilities are rewarded by reduced charges for a
period of three years prior to completion of the new facility, provided that the facility will
reduce pollution by at least 20%. The reduced charges are based on the discharge levels
anticipated after completion of the facility. If the facility is not completed and operated as
planned, the polluter must pay back the charge reductions. Municipal authorities
expanding or constructing sewage treatment facilities are eligible for a 3-year charge
exemption provided that the new plant will meet public sewage treatment standards.
Effluent charge revenues fell from 426 million DM in 1988 to 350 million DM in 1992,
despite a 25% rise in the charge rate during this period. The Federal Ministry of the
Environment estimates that about 60% of the revenues are paid by communities and 40%
by industry. According to Smith (1995), administrative expenses associated with the
charge system consume roughly 15% of charge revenues.28 Together with indirect
discharge fees, the remaining wastewater charge revenues cover all the costs of operating
treatment facilities, but only about half the costs of constructing them. The other half
comes from Government funds. However, the contribution of effluent charge revenues to
treatment facilities is small compared to that of indirect discharge (sewerage) fees, which
generated about 10 billion DM in 1991.29
In the period 1977-1987, industrial discharges of waste water (to surface waters and to
sewerage) in Germany declined in volume by 14% while industrial production increased
by 14%.30 Although it is difficult to determine the extent to which this decrease was
caused by effluent charges, the charges appear to have incentive effects. Brown and
Johnson (1984) showed that the chemical company BASF achieved unit abatement costs
that were lower than the charge level. BASF instituted an internal incentive system under
which individual branches received accounting charges per unit of effluent. This system
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Foreign Experiences with Incentive Systems
resulted in significant voluntary discharge decreases through recycling, product changes,
and other measures.31
Two surveys of dischargers in the late
1970s (after the announcement of the
charges but before their adoption) found
acceleration of abatement measures at
affected facilities. In at least some cases,
the authors linked the abatement mea-
sures to the charges. One of the survey
authors, however, claims that the close
links of the charge system with federal
abatement technology standards has
lessened the potential efficiency of the
charge system. The significant reduc-
tions (currently 75%) for compliance with
technology standards could be inter-
preted to mean that the full charges are
essentially non-compliance fees.32 An-
other survey found that for municipal
wastewater treatment facilities paying
the reduced rates, charges make up only
1-2% of total wastewater treatment costs,
whereas in one case of non-compliance,
charges account for about 10% of total
costs.33
11.1.3.4. Effluent Charges in the Netherlands
Introduced in the 1970 Pollution of Surface Waters Act, effluent charges in the
Netherlands are believed to have significant incentive effect on polluters. For discharges
into federal waters, charges are imposed and
collected by the federal government. For
discharges into regional waters and into sewer-
age, charges are imposed and collected by
regional water boards, which are also responsi-
ble for building and operating wastewater
treatment plants. Regional charges are the
same for indirect as for direct discharges. As
shown in Figure 11-3, regional charges vary.
The main reason for the variation is not re-
gional differences in impacts of pollution but
rather differences in costs associated with
wastewater treatment.
Figure 11-4 shows that charge revenues
have risen significantly since they were first
1997
Figure 11-3: EFFLUENT CHARGES IN
THE NETHERLANDS
in Dfl per pollution unit
Dfl per pollution unit
~~ Min. region charge YZZ hi. region charge
t±±±J Max. regional ohargo ESS3 Fodaral ohargo
8ourc»: Uiterkamp and Savornin Lohman,
p. 180.
Figure 11-4: EFFLUENT CHARGE
REVENUES IN THE NETHER-
LANDS
millione of U.8. dollar*
1971 1975 1980 1986
Bourefe Braum and Bohuddtboow, p. 1B7
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
introduced. The revenues cover nearly all public wastewater treatment plant construction
and operation costs. Charge administration costs have been estimated at 3.5% of reve-
nues.
Charges are based on pollution units. For oxygen-consuming substances, a pollution
unit is defined as the average amount of oxygen-consuming material produced by one
person in one day, which is further defined as 136 g of oxygen-producing material. For
heavy metals discharged into federal waters, one pollution unit is defined as 100 g of the
sum of mercury, cadmium and arsenic, and 1,000 g of the sum of copper, zinc, lead, nickel
and chromium. For discharges to sewerage and regional waters, arsenic discharges are
included in the latter group. The government planned to add halogenated hydrocarbons
to the charge base in 1996.
For charge assessment purposes, there are three groups of dischargers:
1. For households and businesses generating fewer than 5 pollution units per day,
charges are usually fixed at 3 pollution units. This group accounts for about 65% of
charge revenues.
2. For dischargers of 5 to 1,000 pollution units (in some industries, the maximum is 100
pollution units) of organic pollutants per day, charges are determined by combining
an industry coefficient with easily obtainable data such as water use and amounts of
raw materials. Facilities that believe they are being overcharged can, at their own
expense, conduct sampling and measurement and be charged according to the
findings. This group contributes approximately 15% of charge revenues.
3. Industrial facilities and municipal treatment plants discharging over 1,000 (or in
some industries 100) pollution units per day of organic pollutants or over 10 pollution
units per day of heavy metals are charged according to actual pollution amounts that
they are required to measure. Municipal treatment plants, however, are not charged
for discharges into regional waters and pay reduced charges (30% of full charge in
1995 and 50% in 1996 and thereafter) for discharges into federal waters. This group
accounts for about 20% of charge revenues.
Since group 1 pays fixed charges and group 2 pays charges according to its industry
and inputs rather than its actual pollution, the charges are likely to have little effect on
these groups' pollution control. (One possible effect of the group 2 charges, however, is
to promote water conservation.) For group 3 facilities, however, charges are directly
linked to pollution.34
At least one study has found that effluent charges in the Netherlands have caused a
significant fall in discharges. Bressers (1994) performed three statistical analyses on the
effects of the charges: One cross-industry analysis examined organic pollution decreases
by industrial sector as a function of the ratio of effluent to production value. (The study
refers to this ratio as the "charge factor.") Two other cross-region analyses examined the
"relative success of abatement" for heavy metals and organic pollution as a function of
effluent charges. The relative success of abatement was "calculated as the difference
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Foreign Experiences with Incentive Systems
between the actual percentage of abatement and the percentage of abatement expected in
view of the industrial structure of the region."
In the first analysis, which included 14 industries accounting for 90% of industrial
organic water discharges in 1969, the charge factor was highly correlated with pollution
decreases, with r=.73. The same analysis was conducted excluding two industries, potato-
starch and animal husbandry. The former industry had been allowed to pay reduced fees
and the latter consisted of thousands of small farms that were rarely charged on the basis
of actual pollution. For the charge factor in this reduced analysis, r=.84.
The second analysis found that 96% of the decrease in organic water pollution in a
given region could be explained statistically by "the decrease to be expected as a result of
the differences in the regional structure of industry" and the increase in effluent charges.
The increase in the rate charged during 1974-80 was strongly correlated with the relative
abatement success, r=.86. Excluding the two water quality districts (out of 15 in the full
sample) that had the most and the least relative abatement success, r=.92. The third
analysis, focusing on the 13 regions that imposed heavy metal effluent charges, found that
the relationship between charges and relative abatement success was significant but not
as strong as for organic pollution, r=.65.
The study also included the results of questionnaires sent to regional water board
administrators to obtain their opinion of the factors behind falls in discharges. "In
general," the study concluded, "the results [of the questionnaires] correspond with those
of the statistical analyses, at least as far as the main points are concerned." In the case of
organic pollution, those questioned believed that charges were the most important factor
behind the fall in discharges. For heavy metals, however, the administrators attached
equal importance to other policy instruments, such as informal negotiation. The study
pointed out that such negotiation and charges appeared to complement each other.
11.1.3.5. Effluent Charges in France35
France's six river basin authorities, each with a committee and an agency, have been
levying effluent charges since 1968. Each river basin's committee functions like a parlia-
ment, while each agency serves as an executive body. Each river basin board sets its own
charge rates annually, subject to approval by the basin committee.
The original basis for assessment was weight of suspended matter and weight of
organic matter, since these two pollutants were relatively easy to detect and control.
Charges parameters were later expanded to include salinity (1973), toxicity (1974),
nitrogen and phosphorus (1982), and halogenated hydrocarbons, toxics, and other metals
(1992). Discharges are estimated based on the emissions class and activity level of the
discharger or, in the case of municipalities, on the basis of population and daily discharge
per inhabitant. The basin authorities and dischargers may request actual measurement,
the costs of which are borne by whoever makes the request.
The charge applies to all municipalities with more than 400 inhabitants and to all non-
municipal facilities discharging at least 200 population equivalents a year. For facilities
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
connected to a public sewage system, the charge applies only if discharges exceed 6,000
m3 per year.
It is not clear to what extent the charges have discouraged pollution. OECD (1994)
concluded that the charges could be considered primarily as revenue-raising instruments.
Charge levels are based not on perceived environmental costs of discharges but rather on
the revenue needs of the river basin authority. The effluent charges, as well as fees for
extracting ground and surface water, generate revenues that are used mainly to finance
water pollution control investments by farmers, industry, and municipalities. Some of the
assistance takes the form of low-interest loans, but most of it is grants that usually cover
30-50% of the total cost of a given investment. During the period 1982-1991, $6 billion in
assistance was provided for projects totalling $14 billion in expenditures. The 1992-96
action plan provides for $6.5 billion in assistance for projects expected to total $15 billion.
11.1.3.6. Effluent Charges in Less Industrialized Countries
As shown in Table 11-8, several Eastern European countries have imposed effluent
fees. These countries, as well as China and most of the former Soviet Union, impose non-
compliance charges that are far higher for pollution in excess of certain specified amounts.
Revenues from most of these charges are used to fund environmental protection activities,
but Slovenia's charge generates revenues for the general federal budget.
Table 11-8: WATER EFFLUENT CHARGES IN EASTERN EUROPE36
Countrv
Charge base and rate
1993 revenues
Czech
Republic
Formula based on BOD5, undissolvable substances,
crude oil substances, evident alkalinity and acidity,
dissolved inorganic salts37
$47 million
Slovak
Republic
Same as for Czech charges
$10 million
Poland
BOD5: $538/ton COD:$397/ton
suspended solids: $48/ton
heavy metals: $5,536/ton
chloride and sulfate ions: $30/ton
$75 million
Romania
Oxygen-consuming substances: $2.3/ton
Suspended substances in solution: $0.58/ton
Unknown
Slovenia
$3 per population equivalent38
$6 million
Source: Regional Environmental Center for Central and Eastern Europe (1995), p. 14.
Like other environmental charges in Eastern Europe and the former Soviet Union,
many of the effluent charges in Table 11-8 are limited in their effectiveness by problems
such as weak enforcement, polluters' inability or unwillingness to pay, and inflation. In
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Foreign Experiences with Incentive Systems
1993, for example, Poland's charge collection rate was only 53%. Slovak charge revenue
fell in local currency by 28% from 1992 to 1993 because of polluters' financial hardships
and recession. Lack of widespread interest in environmental issues, limited experience
with incentive mechanisms, and complicated charge mechanisms have also been cited as
problems with charges in Eastern Europe.
Four states in Brazil have introduced (or begun to introduce) charges for industrial
sewage treatment based on pollution content. As shown in Table 11-9, sewage charges in
Sao Paulo state based on pollution content have been found to have a significant impact
on pollution. The study indicated that the reductions had been achieved through changes
in production methods, use of cleaner inputs, and recycling. Having significantly
underestimated the responsiveness of polluters to increased charges, the state sewage
treatment company now suffers from overcapacity at a treatment plant.39
Table 11-9: IMPACT OF SEWAGE CHARGES ON POLLUTION IN SAO PAULO
STATE, BRAZIL
(% reduction in unit pollution coefficient, 1980-82)
Industry
BOD
Suspended sol-
ids
Pharmaceutical
30
46
Food
42
43
Milk derivatives
57
55
Source: Margulis (1994), p. 111.
China, India, Korea, Malaysia, the Philippines, and Thailand are among the Asian
countries to have imposed effluent fees. For example, palm oil and rubber factories in
Malaysia have been subject to effluent fees since 1978. The fee was originally set at M$
100 ($39) per metric ton of the BOD load in excess of 500 ppm, and an additional license
fee was set at M$ 100 per metric ton of BOD load. Firms could obtain waivers by conduct-
ing research on waste treatment. The effluent fee scheme has been credited with lowering
effluent to the target level of 100 mg per liter.40
11.1.4. Noise
Noise pollution charges have been levied at airports in Belgium, France, Germany,
Japan, the Netherlands, Norway, and Switzerland. In Switzerland, planes are taxed from
0 to 400 SF ($337) per take-off depending on their noise class.41 In Germany, the percent-
age of aircraft conforming with stricter noise standards increased in the late 1980s, but it
is unclear whether this increase was due to noise pollution charges.42
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
11.1.5. Charges on Environmentally Damaging Products and Activities
Levied in numerous industrialized countries, product charges are imposed either on
a product or some characteristic of that product. Although some of these charges may
discourage consumption, many of them are advance disposal fees intended to finance the
proper disposal of the products after their use. Products on which charges have been
imposed include automotive air conditioners (Canada), batteries (Canada, Denmark,
Portugal, and Sweden), beverage containers (Belgium, Finland, Norway, and Sweden),
building materials (Denmark), CFCs (Australia and Denmark), fertilizers (Austria,
Finland, Norway, and Sweden), light bulbs (Denmark and Korea), lubricating oil
(Finland, France, Italy, Norway, and Spain), packaging (Belgium and Germany), pesti-
cides (Belgium, Denmark, Norway, and Sweden), plastic and paper bags (Italy, Iceland,
and Denmark), sulfur in oil (Finland, Norway, and Sweden), and tires (Taiwan and
Canada).
In 1993, South Korea imposed advance disposal fees on several products that are
difficult to treat or recycle. As shown in Table 11-10, a large number of products are
subject to the fees, but the amounts are rather low.
11.1.5.1. Charges on Agricultural Inputs
Several countries have imposed product charges on pesticides and fertilizers. Esti-
mates of price elasticity of demand for these products vary widely, depending perhaps on
the time period studied, crops, geographic area, and other factors. However, some of
these charges are more likely to have incentive impact than the relatively low charges
imposed on these products by U.S. states.
Norway has levied charges on fertilizers and pesticides since 1988. The fertilizer taxes
are NKr 1.17 ($0.18) per kg of nitrogen and Nkr 2.23 ($0.35) per kg of phosphorous,
resulting in average taxation of approximately 7% of the wholesale price. The pesticide
tax is 13% of the purchase price. In Finland, charges of Mk. 1.5 ($0.32) per kg were
imposed on phosphate fertilizers in 1990. Relatively low charges on fertilizers in Austria,
which are no longer in effect, are reported to have had a significant impact on fertilizer
use.
In Denmark, retail sales of pesticides are subject to a 20% tax. Dubgaard estimated
price elasticity of demand for pesticides in Denmark at -0.3. This estimate suggests that
the 20% tax results in a reduction in pesticide use of roughly 7%.43
As shown in Table 11-11, Sweden imposed two different charges on fertilizers in the
1980s. At their highest level, in 1991, the charges equaled 30-35% of the sales price of
phosphate and nitrogen. Figure 11-5 suggests that the charges have had a significant
impact on fertilizer use. The amount of land under cultivation has also decreased but not
in the same proportion as fertilizer use. The reduction in use appears to be most signifi-
cant during the period when the tax was at its highest.44 The Swedish Board of Agricul-
ture administers the charge. Its annual administrative costs associated with the charge
have been estimated at 500,000 SEK ($74,000), roughly 0.4% of total annual charge
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Foreign Experiences with Incentive Systems
revenues of approximately 130 million SEK ($19 million).
Table 11-10: ADVANCE DISPOSAL FEES IN SOUTH KOREA45
Product
Fee amount
($=780 won)
Insecticide/toxics container: <500 ml
>500 ml
Butane gas container
5 won
11 won
6 won
Glass cosmetics bottle: <100 ml
>100 ml
Metal cosmetics container: spray
others
2 won
3 won
6 won
4 won
Candy containers: more than 3 pieces
more than 4 pieces
5 won
10 won
Batteries (lithium, nickel-cadmium, man-
ganese, manganese alkalide)
1.5 won
Anti-freeze solution
20 won
Fluorescent light bulbs
5 won
Chewing gum
0.25% of price
Paper diaper
1 won
Plastics
0.7% of price
Source: Rhee (1994), "The Use of Economic Instruments in Environmental
Protection in Korea," p. 104.
Revenues from the price regulation
charge have been used to subsidize agri-
culture, while revenues from the environ-
mental charge have been used to promote
sustainable agriculture, including invest-
ments in manure management and re-
search and educational programs. Some
of the reductions in fertilizer use depicted
in Figure 11-5 can probably be attributed
to the educational activities funded by the
environmental charge.46
Figure 11-5: FERTILIZER CHARGES
AND USE IN SWEDEN
Charge (8EK per kg)
Uee (1,000 tone/year)
7.41
4.16
3.19
3.43
106
N-
300
200
100
1962 1963 1984 1966 1966 1967 1986 1989 1990 1991 1992 1993
I I Fertilizer charges —Fertilizer uee
8ouroe: The Swedish Experienoe: Tarns
and Chargsa in Environmental Polioy
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 11-11: FERTILIZER CHARGES IN SWEDEN
(in SEK per kg)
Date
Price Regulation
Charge
Environmen-
tal Charge
Total charge
N
P
K
N
P
N
P
K
7/82
0.3
0.58
0.18
0.30
0.58
0.18
7/83
0.6
1.16
0.36
0.60
1.16
0.36
7/84
0.65
1.25
0.39
0.30
0.60
0.95
1.85
0.39
1/85
0.72
1.38
0.43
0.30
0.60
1.02
1.98
0.43
7/85
0.93
1.79
0.56
0.30
0.60
1.23
2.39
0.56
7/86
1.12
2.43
0.76
0.30
0.60
1.42
3.03
0.76
7/88
1.12
2.43
0.76
0.60
1.20
1.72
3.63
0.76
11/9
0
1.46
3.16
0.99
0.60
1.20
2.06
4.36
0.99
3/91
1.75
3.79
1.19
0.60
1.20
2.35
4.99
1.19
7/92
1.12
2.43
0.76
0.60
1.20
1.72
3.63
0.76
12/9
2
0
0
0
0.60
1.20
0.60
1.20
0
Source: Swedish Ministry of the Environment and Natural Resources (1995), p. 12.
11.1.5.2. Energy/carbon Taxes
Energy taxes can be considered product charges. One type of energy tax that has
become a frequent topic of discussion in environmental protection is a carbon tax. Levied
on fuels based on their carbon content and intended to limit emissions of carbon dioxide,
carbon taxes have been adopted in Denmark, Finland, the Netherlands, Norway, and
Sweden. As noted above, Poland also has a small tax on C02 emissions that amounts to
a carbon tax. Carbon taxes are generally small relative to other fuel taxes, although the
relative size of the carbon tax varies according to the type of fuel. Rates often vary
depending on the sector or use of the fuel. In Finland and the Netherlands, the taxes are
assessed partly on carbon content and partly on energy content. The taxes are summa-
rized in Table 11-12.
In 1990, Finland became the first country to adopt a carbon tax, setting its level at Mk
6.66 ($1.45) per metric ton of C02. The tax was raised to Mk 13.59 ($2.96) in 1993 and to
Mk 38.3 ($8.34) in 1995. It is no longer based purely on carbon content but rather 60/40
on carbon/energy content, the energy content portion being 3.5 Mk per MwH ($0.21 per
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Foreign Experiences with Incentive Systems
gigajoule). Products used as raw materials for industrial production or as fuel for planes
and certain other vessels are exempt from the tax.47 Energy produced from peat is also
exempt. According to Finnish government studies, C02 emissions are five percent lower
than they would be without the tax. The government says that the tax has stimulated
investment in renewable energy technology such as biomass gasification. However,
industry representatives claim "that this tax is just another way to increase budget
revenues."48
Table 11-12: ENERGY/CARBON TAXES49
(in $ per ton of C02 unless otherwise stated)
Country
Year Adop-
ted
Rate
Annual
Revenue
Observations
Den-
mark
1992
$9-$18
$560
million
(1993)
Gasoline, natural gas, and biofuels
exempt. Aviation, shipping, and
refinery gas exempt. 50% rebate
for larger businesses.
Finland
1990
$8 +
21C/
gjoule
$314
million
(1994)
Industry raw materials and fuel
for planes and certain vessels
exempt.
60/40 carbon/energy content.
Nether-
lands
1990
$16.4 +
914/gig
a-joule
$850
million
(1995)
Full rate not phased in until 1998.
50/50 carbon/energy content.
Norway
1991
$15-$47
$900
million
(1994)
Coal used in industry exempt.
Sweden
1991
$27-55
$1.7
billion
(FY93-4)
Effective 7/1/96, industry pays
50% of full rate. Uses other than
heating or motor fuels and fuel for
ships, planes, train locomotives,
and electricity generation exempt.
Sources: Muller, "Mitigating Climate Change," p. 17; OECD (1996), Implementation Strategies for Environ-
mental Taxes, pp. 89 94; Netherlands Ministry of Housing, Spatial Planning and Environment.
In Denmark, a tax of 100 DK ($17.6) per metric ton of C02 was adopted in 1992 as part
of a broader energy tax and subsidy package. Table 11-13 shows several features of this
tax common in carbon taxes in other countries as well. First, the amount of the tax differs
according to the type of fuel, specifically its carbon content. The carbon tax is 242 DK
($42.5) per metric ton on coal but only 178 DK ($31.3) per metric ton on lignite. Second,
the amount of the carbon tax is relatively small compared to other taxes on energy,
constituting less than a third of taxes on petroleum coke, 26% of taxes on electricity, and
12% of taxes on gas used as motor fuel. Third, there are numerous carbon tax exemptions.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Gasoline (but not diesel), natural gas, and biofuels are exempt, and value added tax
registered businesses generally receive 50% rebates on their payments. Such rebates are
intended to assist large, energy-intensive businesses. Households, however, receive no
rebates. Carbon taxes on electricity generated by renewable energies and fuels are offset
by subsidies of 0.10-0.17 DK (1.76-3C) per Kwh.
Table 11-13: 1994 ENERGY TAXES IN DENMARK50
(not including 25% value added tax)
Enersv source
Unit
Excise tax
CO-, tax
Unleaded petrol
DK/liter
2.45
exempt
Leaded petrol
DK/liter
3.10
exempt
Light diesel oil
DK/liter
1.67
0.27
Ordinary diesel oil
DK/liter
1.77
0.27
Light fuel oil
DK/liter
1.49
0.27
Heavy fuel oil
DK/kg
1.66
0.32
Fuel tar
DK/kg
1.50
0.28
Kerosine, heating
DK/liter
1.49
0.27
Kerosine
DK/liter
1.77
0.27
Coal
DK/metric ton
690
242
Petroleum coke
DK/metric ton
690
323
Lignite
DK/metric ton
505
178
Gas used as motor fuel
DK/liter
1.18
0.16
Other gas (LPG)
DK/kg
2.00
0.30
Refinery gas
DK/kg
2.00
0.29
Electricity
DK/Kwh
0.30
0.10
Electricity, heating
DK/Kwh
0.27
0.10
Source: OECD (1996), p. 90.
Sweden introduced a carbon tax of 250 SEK ($36.8) per metric ton in 1991 as part of a
broader tax system reform in which general energy taxes were reduced and the value
added tax was extended to energy. In 1993, the carbon tax for industry was lowered to 80
SEK ($12) per metric ton but raised to 320 SEK ($47.2) per metric ton for other consumers,
and the general energy tax was abolished for manufacturing industry and commercial
horticulture. Several energy-intensive industries were entitled to further carbon tax
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Foreign Experiences with Incentive Systems
reductions. The rate has risen every year to 370 SEK ($50.1) per metric ton in 1996, with
industry paying 25% of the full rate. In general, the tax applies only to motor and heating
fuels. Biofuels and fuels used for electricity generation are exempt, as are fuels for ships,
planes, and train locomotives.51
According to a study by the Swedish Ministry of the Environment and Natural
Resources, the carbon tax has influenced energy consumption patterns. Some plant
owners who have shifted their energy sources from fuel oil to biofuels claim that the
carbon tax was a decisive factor in their shift. In the six months after the carbon tax was
reduced for industry in 1993, heavy fuel oil consumption rose by about 20% compared to
the same period of the previous year. The preferential rate for industry also led some
facilities to sell their biobased by-products to heating plants, which were taxed at the full
rate and thus eager to use biofuels.52
Effective July 1, 1996, industry's 75% reduction was lowered to 50%, up to a level
equivalent to 0.8% of annual turnover. For additional amounts beyond the 0.8% turnover
threshold, companies pay 12% of the full rate. Several energy-intensive companies—
mostly in the chemical, cement, lime, and glass sectors—have their payments capped at
1.2% of turnover. A Confederation of Swedish Industries representative stated that the tax
increase would cause Swedish firms to lose market share to foreign competitors generat-
ing more emissions and characterized the measure as "completely counter-productive
from the point of view of the environment, employment growth and future investment."
It has been suggested that industry in Sweden is not opposed to carbon taxation provided
that other countries adopt similar taxes. One problem with carbon taxes and other
measures to limit C02 emissions is that they must be implemented in a sufficient number
of countries to effectively address climate change.53
The Netherlands first adopted a carbon tax in 1990 but replaced it with a 50/50
carbon/energy tax in 1992. This tax is referred to as the Environmental Tax on Fuels.
Another carbon/energy tax, the Regulatory Tax on Energy, entered into effect on January
1, 1996. As shown in Table 11-14, the carbon/energy tax of the environmental levy is 5.16
Dfl per metric ton of C02 and 0.3906 Dfl per gigajoule, and the carbon/energy tax of the
regulatory tax is 27.00 Dfl ($16.4) per metric ton C02 and 1.506 Dfl ($0.91) per gigajoule.
Table 11-14: CARBON/ENERGY TAXES IN THE NETHERLANDS
(in Dfl)
Environmen-
tal tax
Regulatory
tax
Total
Carbon (per metric ton C02)
5.16
27.00
32.16
Energy (per gigajoule)
0.3906
1.506
1.8966
Sources: Netherlands Ministry of Housing, Spatial Planning and Environment, "The Netherlands Environ-
mental Tax on Fuels" and "The Netherlands Regulatory Tax on Energy."
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 11-15 shows the two taxes as applied to different types of fuel as of January 1,
1996. As in other countries, the carbon/energy taxes are not the only levies on fuel. The
various levies have different purposes. The excise and environmental taxes are intended
primarily to raise revenue, and the COVA levy finances strategic oil reserve maintenance.
The regulatory tax was introduced to influence behavior, with revenue generation as a
secondary objective. Not included in this table is the value added tax of 17.5% on all fuel
types and on the taxes paid on them.
As can be seen in table 11-15, the carbon/energy taxes have not been uniformly
applied to all fuels. Some fuels are exempt from either the environmental or the regula-
tory tax. The rate for natural gas depends on the amount used by the consumer subject to
the tax. The appropriate rate for electricity was determined based on estimates of the
amounts of electrical energy generated by different types of sources.
The regulatory tax targets small-scale energy consumers. The government maintains
that other policies are already encouraging large consumers to save energy and that large
additional energy taxes would put industrial energy users at a disadvantage compared to
competitors in other countries without such taxes.
As noted above, the regulatory tax is considered an incentive mechanism with only
secondary revenue-raising objectives. Tax revenues are being recycled back to the
economy through corresponding reductions in personal and corporate income taxes. The
regulatory tax introduction and income tax reductions were legislatively bound to each
other. According to an official source, the revenue recycling is "in line with the govern-
ment's aim of shifting the tax burden away from labor and capital based income and
towards use of the environment."
The government believes that the regulatory tax will reduce C02 emissions by 1.7 to
2.7 million metric tons per year (1.5% of total C02 emissions in the Netherlands) by the
year 2000. Groups targeted by the tax are expected to reduce C02 emissions by 5%.54
11.1.5.3. Preferential Taxation of Environmentally Friendly Products
One type of economic incentive similar to product charges is the preferential taxation
of environmentally friendly products. For example, Australia, Mexico, New Zealand,
Singapore, Taiwan, Thailand, and most European countries have taxed leaded gasoline at
a higher rate than unleaded gasoline. Foreign countries appear to have learned from the
U.S. experience in this area. Motorists in the U.S. often misfueled their vehicles with
leaded fuel because it was cheaper than unleaded. Not only did the use of leaded fuel
release lead into the environment, it also caused releases of other emissions by damaging
catalytic converters. Preferential taxation measures in other countries have given motor-
ists an incentive to use unleaded fuel, thereby contributing to an increase in its market
share. As shown in Table 11-16, the differential is usually limited to 10% of the price of
unleaded fuel.
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Foreign Experiences with Incentive Systems
Table 11-15: CARBON/ENERGY TAXES APPLIED TO FUELS
IN THE NETHERLANDS55
(in Dfl)
Product
Unit
Excises
Environmental
tax
COVA
Regulatory
tax56
leaded gaso-
line
1000
liters
1246.10
25.10
13.50
n/a
unleaded
gasoline
1000
liters
1105.30
25.10
13.50
n/a
light fuel oil
1000
liters
102.60
27.50
13.50
84.60
gasoil
1000
liters
102.60
27.70
13.50
85.30
diesel
1000
liters
649.20
27.70
13.50
n/a
heavy fuel
oil
metric
ton
34.24
32.33
0.00
n/a
coal
metric
ton
n/a
23.38
n/a
n/a
LPG57
metric
ton
78.72
33.08
n/a
100.9
natural gas
m3
n/a
<10 million:
0.02155
>10 million:
0.1410
n/a
<170,000:
0.0953
process gas
1,000
gjoule
n/a
236.82
n/a
n/a
petrocoke
residuals
metric
ton
n/a
32.47
n/a
n/a
liquid resid-
uals
metric
ton
n/a
32.33
n/a
n/a
gaseous
residuals
1,000
gjoule
n/a
236.82
n/a
n/a
electricity
Kwh
n/a
n/a
n/a
0.0295
Source: Netherlands Ministry of Housing, Spatial Planning and Environment, "The Netherlands' Regula-
tory Tax on Energy," p. 10.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
In addition to taxing leaded gasoline at higher rates than unleaded, Sweden has used
several other taxation mechanisms in an effort to promote the use of cleaner fuels. In 1991,
a tax was imposed on diesel (as well as peat and coal) based on its sulfur content. The tax
was set at 27 SEK ($4) per m3 oil for each tenth of percentage weight of sulfur, an amount
corresponding to 30 SEK ($4.4) per kg sulfur. Fuels with a sulfur content no higher than
0.1% are exempt. Rebates are also available for facilities that control sulfur emissions.
Norway has a similar tax on sulfur in fuel.
The Swedish Environmental Protection Agency credited the sulfur tax with lowering
the sulfur content of diesel fuel from 0.15% in 1990 to 0.1% in 1992. In an effort to
encourage the use of even cleaner fuels, Sweden classified diesel fuels into three different
classes and instituted tax rebates for the two cleanest classes. The tax discount was first
set at 350 SEK ($51.6) per cubic meter for class I and 150 SEK ($22.1) per cubic meter for
class II in 1991. In 1992, the discounts were increased by an additional 100 SEK ($14.7).
The rebates have since been changed several more times. In 1995, they were 490 SEK
($72.2) per m3 for class I and 270 SEK ($40) per m3 for class II.
When the tax rebates were increased in 1992, the standards for the two cleaner fuel
classes were also changed. The original standards concerned only sulfur and aromatics
content and distillation range. The new standards lowered the sulfur standard for class II
fuel to 0.005% and added several parameters. The 1992 standards for the two cleaner fuel
classes are shown in Table 11-17.
As shown in Figure 11-6, the percent
age of diesel in classes I and II rose from a
combined total of under 1% to 60% for
class II and 15% for class I after the intro-
duction of this tax differentiation. After
initially relying on imports to obtain the
cleaner fuels, oil companies then made
significant investments to increase their
capacities to produce class I and II diesel
fuel, partly because of the differential
taxation but also because of lower than
expected production costs for class I and
II. One factor that lowered costs was a
downturn in the market for jet oil, which
is similar to the cleaner classes of diesel
subject to rebates. The downturn freed up
capacity for the production of class I and II
diesel. Since the extra cost is estimated at 300 SEK ($44.2) per cubic meter for class I and
170 SEK ($25) per cubic meter for class II, producers have a strong interest in producing
the cleaner classes. Moreover, the tax differentiation increased public awareness of diesel
fuels, leading many consumers to use only I and II and many communities to ban the sale
of class III. However, some consumers are skeptical about the cleaner fuels, believing that
they may be harmful to engines.
Figure 11-6: SALES OF DIFFERENT
CLASSES OF DIESEL FUEL IN SWEDEN
(as % of total)
Clan I Class II Class III
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Foreign Experiences with Incentive Systems
Table 11-16: DIFFERENTIAL TAXATION OF LEADED GASOLINE
($/liter in 1994)
Countrv
Leaded fuel Drice
Tax differential
Belgium
1.02
0.099
Denmark
0.89
0.034
France
1.011
0.07
Germany
1.042
0.073
Greece
0.827
0.071
Ireland
0.891
0.049
Italy
1.05
0.078
Luxembourg
0.807
0.092
Netherlands
1.132
0.09
New Zealand
0.563
0.016
Norway
1.17
0.014
Portugal
0.931
0.046
Spain
0.813
0.04
Sweden
1.017
0.077
Switzerland
0.911
0.063
Turkey
0.547
0.015
United King-
dom
0.871
0.086
Source: IEA, Energy Prices and Taxes, 3rd Quarter 1995.
SEPA believes that it is difficult to determine the net benefits or cost-effectiveness of
the differential taxation, but that a command-and-control approach would have cost more
and taken longer to achieve the desired result and that emissions reductions resulting
from the system have led to more health benefits in cities than abatement investments at
large point sources. Moreover, administrative costs are low, as the rebate was built into
an existing tax.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
Table 11-17: 1992 CLASSIFICATION OF DIESEL FUELS
AND TAX REBATES IN SWEDEN
Parameters
Class I
Class II
Sulfur, max. %
0.001
0.005
Aromatics, max. %
5
20
PAH, max. %
0
0.1
Cetane index
50
47
Density, kg/m3
800-820
800-820
Initial boiling
point
180 C
180 C
Max.Temp. at 95%
recovery
285 C
295 C
1993 tax rebate
(SEK per liter)
0.535
0.25
1995 tax rebate
(SEK per liter)
0.49
0.27
Sources: Bergman (1994), p. 253; OECD (1996), p. 94.
One problem has been determining appropriate rebate amounts. At their original
levels, the rebates had little effect on the diesel fuel market. However, the 1992 rebate
increases combined with developments on the oil market caused a rapid rise in cleaner
fuel use. At their current level, the rebates might be higher than socially desirable. SEP A
maintains that class I is sufficiently expensive to produce that it should be used mainly in
urban areas, but it is apparently used in other areas as well. The cleaner fuels have also
been employed for other relatively inefficient uses such as domestic heating. However,
frequent changes in rebates in response to technological and market developments would
create uncertainty for companies making investments necessary to produce the cleaner
fuels.58
In December 1994, Sweden introduced a similar differentiation system for two classes
of unleaded gasoline. The cleanest class (based on its sulfur, lead, benzene, and phospho-
rus content and vapor pressure) was taxed at 3.22 SEK ($0.47) per liter in 1995, whereas
the other class was taxed at 3.28 SEK ($0.48) per liter.59
In Belgium, Finland, Germany, Greece, Hungary, Japan, the Netherlands, Norway,
and Sweden, motor vehicle taxes have been positively related to pollutant emissions.
Austria and Germany base annual vehicle ownership taxes on emissions. Japan imposes
lower sales tax on cars powered by methanol, electricity, and solar power than on
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Foreign Experiences with Incentive Systems
gasoline-powered cars.
In Belgium, a number of charges designed to reduce waste generation and promote
reusable products came into effect on February 1, 1996. These include a 10 BF ($0.33) tax
on disposable razors and a 300 BF ($9.9) tax on disposable cameras (if not recycled).
Paper and cardboard used in packaging, newspapers, and toilet paper are subject to a tax
of 10 BF ($0.33) per kilo unless they contain a certain percentage of recycled fibers by
specified dates. For paper and cardboard made from non-chlorine bleached pulp, the tax
is 5 BF ($0.16) per kilo. Taxes have also been imposed on pesticides in non-agricultural
products and on batteries. A policy advisor for the Belgian Ministry of Environment said
that the Ministry did not consider these taxes as revenue-raising measures but rather as
incentive mechanisms.60
A 6-7% tax on disposable diapers has been imposed in parts of Canada.61 Several
countries impose higher charges on disposable beverage containers to encourage the use
of refillables.62
In Germany, many manufacturers and distributors participate in a packaging recycling
system managed by the company Duales System Deutschland (DSD). To fund DSD's
activities, participating companies pay fees on packaging depending on the type and
weight of the packaging materials. Fees range from 0.16 DM ($0.11) per kg for glass (an
easy material to sort) to 3 DM ($2) per kg for plastics (difficult to sort). Although these
fees are not government-imposed product charges, they have a similar effect. Industry set
up the DSD system to comply with the German Packaging Ordinance obliging producers
to take back and recycle their packaging materials.63
11.1.5.4. Road User Fees
Several countries levy taxes to reduce road use. Germany, Belgium, Luxembourg, the
Netherlands, and Denmark signed an accord in 1994 imposing a tax on trucks using their
roads. Annual tax rates were set at 750 ECU ($599) for trucks with three axles or less and
1,250 ECU ($998) for trucks with four axles or more. Daily, weekly, and monthly rates are
reduced. Germany, which has the most roads and road usage by trucks in the European
Union and which led the initiative to introduce the tax, intends for the tax revenue to
finance investments in rail transportation infrastructure.64 These taxes could be consid-
ered environmental charges to the extent that truck transportation contributes to pollution.
Austria has imposed on mountain roads linking Germany and Italy in an effort to limit
the damage to its forests caused by vehicle emissions. These tolls have been a significant
source of conflict between Austria and neighboring countries, and the European Union
has threatened legal action against Austria over the tolls.65
Authorities in several countries have attempted to use fees to address the problem of
traffic congestion. The Norwegian cities of Oslo, Bergen, and Trondheim have imple-
mented congestion pricing schemes. In Trondheim, Norway's third largest city with a
population of 140,000, motorists are charged rates ranging from $0.62 to $1.56 to enter the
city between 6 am and 5 pm. Rates are highest during the morning rush hour, between 6
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
and 10 am. The city has a system of 12 toll
stations, all but two of which are unat-
tended. Motorists can pay the fees either
by subscribing to the system and receiving
a transponder tag or by paying at toll
stations with coins or a magnetic strip
card. Since the toll ring began operation
in 1991, inbound traffic during the toll
period has declined by 10%, while traffic
during the non-toll period has increased
by 9%. Weekday bus travel has increased
by 7%. Revenues are 5 times as high as toll
capital and operating expenses.
Experiences in France also suggest that
congestion pricing has incentive effects. In
April 1992, peak-period surcharges were
imposed on the highway connecting Paris and Lille. Sunday afternoon peak rates were
set 25-50% higher than base rates, while off-peak rates were reduced by 25-50%. Despite
an overall rise in weekend traffic since 1992, the tolls decreased congestion by spreading
out traffic over a much longer peak period. Moreover, peak period tolls on a congested
road from Paris to a popular ski resort diverted a significant amount of traffic to a longer,
alternative road where the toll was lower.66
Authorities in Vancouver are considering congestion pricing. A study revealed that a
C$3 ($2.2) fee charged on vehicles entering the downtown area during the morning peak
would decrease the number of automobiles by 19.1% during that period and that a C$6
($4.4) fee would result in a 31.3% decrease.67
11.1.5.5. Singapore Road and Vehicle Taxation68
Congestion tolls are among various road and vehicle taxes that Singapore has imple
mented in an effort to prevent congestion problems such as those affecting large urban
areas in neighboring countries. For convenience, the incentive measures can be classified
as ownership or use taxes in the following manner:
Vehicle ownership: Import duty, two registration fees, annual road tax, and Certifi-
cates of Entitlement:
Vehicle use: Fuel tax, Area Licensing Fees, parking fees.
In addition to import duties of 45% and registration fees of S$ 1,000 ($710), Singapore
imposes an Additional Registration Fee (ARF) based on the market value of the vehicle.
The ARF rose from 15% in 1968 to 175% in 1983, before falling to 150% in 1991. The
annual road tax is based on the engine capacity of the vehicle. As shown in Figure 11-7,
these rates have risen significantly since the early 1970s. The ARF is reduced if an old
vehicle is scrapped when a new one is purchased. The intention of this Preferential
Figure 11-7: SINGAPORE ANNUAL
ROAD TAX
Period
~ up to woo so fZa iooo-woo oo EEH 1B01-2000 00
[S3 2001-3000 00 Ł33 abovo 3000 00
8ouro»: Chia and Phang, p. B
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Foreign Experiences with Incentive Systems
Additional Registration Fee (PARF) is to discourage ownership of older, high-emitting
vehicles and to limit the used car market.
In 1990, Singapore implemented a quota scheme under which vehicle owners are
required to have Certificates of Entitlement (COEs). COEs are valid for ten years and can
be obtained in public auctions held monthly by the Registry of Vehicles. Owners of
vehicles more than ten years old are required to pay the prevailing quota price. The COE
requirement enables the government to determine the total number of vehicles in
circulation based on the country's road capacity. This program could be considered a
trading system such as those discussed below and in Section VI but is included here
because it is part of Singapore's package of measures to limit congestion. COE prices have
increased rapidly: For cars with a capacity over 2,000 cc, they have risen from S$528 ($375)
when they were introduced in 1990 to S$ 17,600 ($12,500) in 1992 to over S$100,000
($70,000) in 1994.
An element of congestion pricing was built into the COE system in 1991 with the
creation of the Weekend Car scheme under which a separate category of Weekend Car
COEs was created. Buyers of Weekend COEs enjoyed tax rebates on the registration fee,
import duty and COE premium, up to a maximum of S$15,000 ($10,700). They were also
entitled to 70% reductions in road tax. Weekend cars could be used only on Sundays and
public holidays and during off-peak hours (between 7 pm and 7 am on weekdays and
after 3 pm on Saturdays). Weekend vehicles were clearly marked by red number plates
that had to be welded onto the vehicle and sealed by an authorized inspection center. To
drive the vehicle outside the authorized times, a S$20 ($14) day license had to be dis-
played on the windshield. Owners had the right to five free day licenses a year.
One problem with the Weekend Car scheme was that many owners of large vehicles
found it cheaper to purchase Weekend COEs but use their vehicles during peak periods,
paying the S$20 daily license. To stop this practice, the Weekend Car scheme was
replaced by an Off-Peak Car Scheme on October 1, 1994. This scheme operates like the
Weekend scheme except that there is no separate category of COEs, the tax rebates have
been raised from S$ 15,000 to S$ 17,000 ($12,000), and the annual road tax reduction has
been set at S$800 ($570).
Like most other countries, Singapore taxes motor fuels. The unleaded gasoline tax is
the higher of S$0.6 ($0.43) per liter or 50% of pump prices (including taxes). Leaded
gasoline is taxed an additional S$0.15 ($0.11) per liter. Diesel is taxed at S$0.08 ($0.06) per
liter. One problem that arose as a result of these taxes was that motorists purchased fuel
in neighboring Malaysia, where a liter of gasoline was about S$0.5 ($0.35) cheaper.
Singapore countered this practice by requiring all vehicles leaving the country to have
their gasoline tanks at least half full in 1989. In 1991, the tank requirement was raised to
3/4 full.
As the main operator of parking facilities, the government also imposes relatively high
parking fees. Parking charges within the Central Business District (CBD) are S$0.9 ($0.64)
per half hour during office hours. Outside the CBD, charges are S$0.45 ($0.32) per half
hour.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
The Area Licensing Scheme (ALS) was
adopted in 1975 to reduce congestion in
the CBD during peak morning hours
(7:30-10:15). Cars entering the CBD with
fewer than four persons were required to
pay a fee that rose from S$3 ($2.1) in 1975
to S$4 ($2.8) in 1976 to S$5 ($3.6) in 1980.
When the fee hours were extended to the
evening peak period (4:30-6:30) in 1989,
the fee was lowered to S$3. Company
cars pay twice this rate. The exemption
for cars with at least four persons was
removed in 1989. Motorcycles pay S$1
($0.7) per day.
Although officials found that the fees
limited vehicle use during peak hours,
traffic problems between peak periods
increased. As a result, the ALS was significantly modified in 1994 to include two types of
licenses: a part-day license at S$2 ($1.4) for entry into the CBD during off-peak hours
(10:15 am-4:30 pm) and a whole-day li-
cense of S$3 to be used between 7:15 am
and 6:30 pm.
As shown in Figure 11-8, the ALS had
a large impact on peak-hour traffic, result-
ing by the end ofl975 ina71.1% decrease
in the number of private vehicles entering
the restricted zone between 7:30 and 10:15.
Figure 11-9 shows that public transporta-
tion became preferred mode of transporta-
tion after the introduction of the ALS. The
1989 expansion of the system to evening
peak hours resulted in further traffic de-
creases and increases in average speeds of
10.8% in morning peak hours and 30.4%
during the evening peak period.
Figure 11-8: PRIVATE CARS ENTER-
ING SINGAPORE CENTRAL BUSINESS
DISTRICT
(7:30-10:15 am)
Thousands per day
501
40 -
30 -
20 -
10 -
0U—i———i———i———i———i———i—
1074 1975 1879 1963 1986 1980
Bouros: Buohan, pp. 2S4-5.
Figure 11-9: MODES OF TRANSPOR-
TATION IN SINGAPORE
1974 1988
Public transport Public transport
46% 68%
The COE and other measures are credited with significantly limiting the number of
vehicles in Singapore. It has been estimated that without vehicle ownership and use
disincentives, the number of vehicles in Singapore would have been 400,000 by 1992
instead of the actual number of 274,000. The U.S. Federal Highway Administration,
which has gathered information on traffic management in Singapore and other countries,
concluded in a recent article, "The road pricing program, combined with other charges on
vehicles ownership, has dramatically reduced traffic and eliminated peak-period conges-
tion in the downtown area. In addition, air pollution has been significantly reduced, and
business activities and rents in the downtown area have not suffered." These achieve-
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Foreign Experiences with Incentive Systems
ments are in stark contrast to severe traffic problems in other southeast Asian cities, such
as Bangkok and Jakarta.
Singapore's vehicle taxes have also raised significant revenues for the government. By
1992, they accounted for 23% of total government tax revenue.
Singapore intends to convert its current manual scheme to an electronic road pricing
system by 1997. Electronic tolls will deduct credits from vehicle transponders and notify
the authorities of vehicles in violation of toll rules. The same transponder cards will
perhaps be usable for public phone calls and other purchases. Toll charges will vary
according to type of vehicle and time of day. The government plans to later extend the
system to its entire road system.
11.1.5.6. Other Measures to Curb Congestion
Mexico opted for a different method of limiting congestion in Mexico City. In 1989,
regulations were enacted to take 20% of the vehicle fleet out of circulation each working
day. Vehicles were assigned their prohibition day based on the last digit of their license
plate. Such a system has a large command-and-control element but could create incen-
tives to carpool or use public transportation. Although the program initially lowered
traffic volume and gasoline consumption in the city, these reductions were subsequently
nullified by the measure's unintended effect of encouraging motorists to use other vehicles
on days when their new vehicles were prohibited. In 1990, the increase in the number of
vehicles registered was twice the number of cars sold, implying that large numbers of
used vehicles were brought into circulation. A survey revealed that 39% of car owners
had obtained another (often older) vehicle to avoid being without a car on the vehicle
prohibition day. The increased number of older vehicles resulted in increased pollution
levels. Moreover, the availability of a second vehicle led family members to reduce their
use of public transportation. Similar vehicle restrictions were recently adopted in Manila,
in the Philippines. Thailand's Deputy Prime Minister has proposed banning new cars
from Bangkok during the period 1997-2000. Owners of old cars would be allowed to
transfer their use rights to new cars.69
11.2. DEPOSIT-REFUND MECHANISMS
The most common application of deposit-refund mechanisms is beverage containers
(see Table 11-18). Numerous countries have deposit systems for glass bottles. Less
widespread, but expanding rapidly, are deposit systems for plastic containers, which are
now found in at least 11 countries. Deposit sizes reach nearly 50% of the purchase price
of the beverage in Denmark and the Netherlands. In some cases, deposit mechanisms are
required by law; in others, they are conducted voluntarily by industry. Sweden, Portugal,
and parts of Canada and Australia have deposit systems for metal cans. In most places
where beverage container deposit systems have been implemented, the percentage of
containers returned is over 50%, and it is often near 100%. In some countries, the percent-
age of containers returned appears to be positively related to the magnitude of the deposit
relative to the price of the beverage.70
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Table 11-18: BEVERAGE CONTAINER DEPOSITS IN SELECTED COUNTRIES71
Country
Containers Covered
DeDOsit Amount
Australia
(regions)
Beer, Soft drinks. Cans, plastic, bottles
Cans and PET: 2.5(t
Refill, glass: 6-13C; One-way
glass: 2.550cl:2499cl:780.51:72(t
REFPET:64(t
Norway
Beer, wine, liquor, carbonated and
non-carbonated drinks
<0.51:16C
>0.51:40.61:404
PET:40t
Sources: Container Recycling Institute; Regional Environmental Center for Central and Eastern Europe
(1995), p. 14; OECD (1994a), pp. 83-5.
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Sweden's deposit on aluminum cans is
voluntarily implemented by industry in
response to 1982 governmental legislation
stipulating that aluminum cans would be
banned unless a 75% recycling rate was
attained. In 1994, the mandatory rate was
raised to 90%. Industry created a corpora-
tion to recover the cans. The deposit was
initially set at 0.25 SEK ($0,037) per can
but was later raised to 0.5 SEK ($0,074) per
can. A fee of approximately l
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
recycling targets are not met voluntarily by industry.76 The mandate led German compa-
nies to create the Duales System Deutschland described above. Austria requires deposits
of 12 S ($11.6) for fluorescent light bulbs.77 The percentage of light bulbs returned is 60-
80%.78
After revising its Waste Disposal Act in 1988, Taiwan implemented a deposit-refund
program for PET bottles. The amount of the deposit is NT$2 (8C) per bottle. Collectors
delivering bottles to recycling plants receive NTS0.50 (2
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Foreign Experiences with Incentive Systems
ing to SLA, "persistent damage to farm land has already become a major factor restricting
the development of some local economies."83
Table 11-19: DEPOSITS IN SOUTH KOREA
Product
Deposit amount ($=780 won)
Paper pack: less than 250 ml
0.2 won
greater than 250 ml
0.4 won
Metal can: lid attached
2 won
lid separated
4 won
Glass bottle: less than 100 ml
1.5 won
less than 350 ml
2 won
over 350 ml
3 won
PET bottle: less than 500 ml
3 won
less than 1,500 ml
5 won
over 1,500 ml
7 won
Batteries: mercury
100 won
silver oxide
50 won
Tires: large
400 won
medium
100 won
motorcycle
40 won
Lubricating oil
20 won
Televisions
30 won
Washing machines
30 won
Air conditioners
30 won
Source: Rhee (1994), "The Use of Economic Instruments in Environmental Protection in Korea," p. 103.
11.3. MARKETABLE PERMIT SYSTEMS
Although marketable permit systems have been considered in several countries, their
use remains much more common in the United States than elsewhere. Systems have been
established on a limited scale in Germany, Canada, Chile, and several other countries to
reduce air pollution, in Australia to reduce water pollution, and in several countries to
limit water use. Singapore and Mexico have used permit systems to lower the use of
ozone-depleting substances.
Singapore's Certificate of Entitlements for motor vehicle ownership also constitute a
market-based permit system. This quota system is discussed earlier in this section in the
sub-section on vehicle taxation. In addition, three Central Asian countries recently
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
announced a trading scheme involving energy and water.
11.3.1. Air Pollution
Under the terms of Germany's 1985 Federal Immision Control Law and 1986 Technical
Instructions on Air Quality Control, new sources of air pollution can be established in
areas with especially poor air quality provided that pollution from nearby sources is
lowered so that total emissions in the area are lower after construction of the new facility.
This rule allows polluters to negotiate to determine who will reduce emissions and by
how much. Under another scheme in effect until 1994, an existing facility could obtain a
temporary exemption from tighter emissions abatement standards if it and nearby
polluters achieved significant combined emissions reductions.
The impact of these offset provisions has been minimal. For existing facilities, trading
opportunities were severely limited by a number of factors:
1. The deadline for submitting detailed trading plans to the authorities was one year,
whereas the deadline for individual plant improvements was three years. Not only
did plans have to be developed within a year, they had to be implemented within 2-5
years.
2. Facilities involved in trading had to be very near each other. In one case, two
facilities within 2.5 km of each other were prevented from trading because they did
not share a common pollution impact area as determined by law. Intra-firm trading
is usually the only viable option.
3. Businesses could not use emissions reductions from newer facilities as credits.
Facility operators say including such sources into the program would have signifi-
cantly increased trading possibilities.
4. Reductions resulting from facility shutdowns could not be counted for trading
purposes.
5. The vagueness of the requirement that "technical measures" be undertaken to
achieve reductions caused uncertainty.
6. Differences between actual emissions and allowable maximum emissions under
clean air laws could not be counted for offsets. Moreover, trading schemes had to
result in emission reductions below what would be achieved through individual plant
improvements.
7. Trading could occur only for a given substance or between substances with the same
health and environmental effects. The question of whether certain substances have the
same pollution effects proved difficult to resolve in a timely manner.
8. In the best of cases, the trading scheme allowed firms to delay (until the 1994
deadline) rather than avoid pollution abatement investment at old facilities.
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Out of roughly 17,000 pollution abatement initiatives in Federal Environment Office
statistics for 1991 and 1992, fewer than 50 involved offsets.84
According to the German Industries Association (BDI), the new source offset provi-
sions, much like those for old sources, have involved almost exclusively intra-firm
trading. The most common application appears to be the creation of a new source
alongside an existing one that it will eventually replace. One recent inter-firm initiative
involved several fluoride-emitting ceramics factories concentrated in the Koblenz region.
The factories sought to negotiate an arrangement under which only the larger ones would
install abatement equipment while the smaller ones would help them pay for it. How-
ever, this initiative failed.85
Canada's acid rain and CFC reduction programs make limited use of trading rights.
The Province of Ontario's electric utility is allowed to trade emissions between its power
stations, and the Province allows trading between S02 and NOx emissions. CFC produc-
ers are allowed to trade production rights between facilities and to trade between
different types of CFCs. Inter-business trading is not allowed under this system. There
has been little trading under these programs.
In Santiago, Chile, an air pollution commission has introduced a tradable permit
scheme for industrial sources of particulate whose emissions exceed 1,000 m3/hour. As
in the United States, new sources are allowed only if their emissions can be offset by
reductions from existing sources. Trading also takes place between sources exceeding
their emissions allowances and those emitting less than their allocated amount. Maximum
daily emissions (and allowances for each source) are gradually being reduced to a target
level to be attained by 1997.86
Poland experimented with tradable air pollution permits in the Chorzow area.
According to an Eastern European study of incentives in environmental policy, this
experiment "proved extremely successful in bringing visible improvements more rapidly
and at a lower cost than attainable through traditional instruments." Lack of legal basis
for tradable permits has prevented the use of such schemes elsewhere in the country. An
environmental protection bill has been proposed including language that would provide
a legal framework for trading schemes.87
A 1993 revision of Taiwan's Air Pollution Control Act included provisions under
which individual sources may be exempted from emission standards if they can control
sufficient amounts of the same types of emissions elsewhere in the same air pollution
control region. It is not clear how widely these provisions have been applied.88
The U.S. Agency for International Development has worked with at least two other
countries, the Czech Republic and Kazakhstan, to create air emissions trading programs.
As of early 1996, the Czech program was still in a developmental stage.89 In late 1996, the
first trade occurred in Kazakstan when one source gave a package of future rights to emit
10 pollutants to a second source in exchange for rights to emit 6 mostly different pollut-
ants plus a modest cash payment. In both cases the rights were unused permitted
amounts. With this trade, air quality is expected to decline since total emissions will
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increase.
Like the United States and Canada, Mexico and Singapore sought to ease the phaseout
of CFCs through marketable production quotas. In Singapore, CFC use permits were
allocated quarterly, half on the basis of historical use and half through sealed bids. In
registering to participate in the bidding, users and importers specified the quantity of
CFCs they wanted and their offer price. The lowest winning bid price served as the price
for all allocations, including those based on historical use. This system gave firms a
strong incentive to substitute other products for CFCs or adopt other measures to limit
CFC use.90
11.3.2. Water Pollution
Three states in Australia take part in the Murray-Darling Basin Commission, which
manages water resources for an area in which over half of Australia's agricultural output
is produced. The basin system is naturally saline, with some stream inflows saltier than
the sea. Extensive irrigation activities in the upstream states of New South Wales and
Victoria, encouraged by the sale of irrigation water to farmers at low prices, increased the
flow of salt into the river system, reducing water quantity and quality to the downstream
state of South Australia. Irrigation activity in South Australia further added to salinity
levels of the water before it reached downstream urban users.
Under the Commission's salinity and drainage strategy, each state is responsible for its
actions affecting river salinity and no actions are permitted that increase overall river
salinity. Credits can be earned for investments that limit the entry of salt into the river
system offset. The credits are used to offset debits for drainage into the system.91 These
credits are transferable between states but not between individuals and businesses.92
11.3.3. Water Use Rights
The Murray-Darling Basin also has periodic water allocation auctions. These alloca-
tions are tradable. Volumes traded, although small compared to total water allocations,
have increased steadily. "Since temporary trading, or leasing of water entitlements was
introduced in 1989 in the Goulburn Murray Irrigation District of Victoria the volume
traded each year has increased from 21927 ML to 206872 ML or 8% of total water use
during the drought of 1994."93 In New Zealand, water use permits may be transferred to
another site provided that both sites are in the same catchment area, the transfer is
allowed by a regional plan, and the transfer application has been approved by the
permitting authority.
Under Chile's 1981 Water Code, water use rights are completely separate from land
use rights and can be purchased, transferred, or sold. New water rights are awarded by
competitive bidding. Between April 1993 and April 1994, 587 sales transactions involving
720 liters of water per second were recorded in the Santiago water registry for a total
estimated value of $366,050. Partly because most water rights (perhaps 50%-65%) are
traditional but not legally recognized, water leases are far more common than sales. In
one area north of Santiago, the price of a three-month lease was estimated at $90-120 per
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Foreign Experiences with Incentive Systems
liter per second. Transaction costs are said to be relatively high because of the need for
infrastructure investments to transfer water, the need for approval from government
authorities, and the lack of legally recognized water rights. In general, however, the
system appears to promote efficient water allocation.94 Intra- and intersectoral gains-
from-trade of water use rights have been significant.95
Water trading takes places in other countries, but no comprehensive list of such
initiatives was identified during the course of the research for this report.
11.3.4. Water-energy Trading
In April 1996, the Central Asian republics of Kyrgyzstan, Uzbekistan, and Kazakhstan
announced an agreement intended to address the region's water and energy supply
problems. Relying on hydroelectric power from the Syr Darya River for its heating needs,
Kyrgyzstan stores water in spring and summer to have sufficient supply flowing through
its hydroelectric dams in winter. The diversion of water in spring and summer has
deprived Uzbekistan and Kazakhstan of water supplies during cotton irrigation season
and contributed to a significant fall in the water level of the Aral Sea. Under the agree-
ment, Kyrgyzstan will supply hydroelectricity and ensure sufficient flow of water through
the Syr Darya River in return for gas from Uzbekistan and coal from Kazakhstan. While
it is too early to assess the effectiveness of this trading scheme, it is patterned after historic
water and energy transfers that took place when the entire region was centrally managed
as part of the Soviet Union.96
11.4. SUBSIDIES
Loosely defined as government financial support of activities believed to be environ-
mentally friendly, subsidies have been used in environmental policy in numerous
countries. They take various forms, including grants, low-interest loans, and tax incen-
tives. Although they are far too numerous and varied to be covered comprehensively in
this report, a few examples are provided below.
In some cases, subsidies are financed by advance disposal fees and other charges such
as those described above. For example, Italy's aforementioned product charges on
batteries, plastic beverage containers, and lubricating oil finance the otherwise unprofit-
able activities of collecting used products. The charge revenue covers the difference
between the cost of collecting these used products and their reuse value. Several other
countries, including Finland, France, and Spain, rely on charges on lubricating oil to
subsidize used oil collection, and Taiwan has used taxes on bottles and tires to subsidize
the collection and reuse of these products. In several European countries, water effluent
charges fund subsidies for water pollution abatement.
Loans can be a form of environmental subsidy. Germany, for example, has used large
portions of its European Recovery Program (ERP) low-interest loan fund to finance
environmental protection activities. In 1995, the German government issued over 2,600
loans totaling DM 4.5 billion ($3.1 billion) to companies for environmental purposes under
the ERP, including DM 1.8 billion ($1.2 billion) for energy conservation, DM 1.1 billion
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
($750 million) for air and noise pollution, DM 1.3 billion ($880 million) for waste manage-
ment, and DM 300 million ($200 million) for water purification. The government-owned
Deutsche Ausgleichsbank administers the loans.97
In most countries in Eastern Europe and the former Soviet Union, environmental funds
have been set up to provide grants and loans for environmental protection initiatives.
These funds are financed primarily by pollution charges. One of the largest is Poland's
National Fund for Environmental Protection and Water Management, which had revenues
of $284.0 million and expenditures of $198.5 million in 1993. Of the expenditures, 47%
were for air, 35% for water, and 18% for other environmental protection activities.98
Environmental funds are also common in East Asia.99 As noted earlier in this section,
taxes have been imposed on sulfur emissions in Japan to generate revenues for a fund to
compensate victims of pollution-related diseases. This fund is administered by the
Pollution-Related Health Damage Compensation and Prevention Association. Japan also
has a 50 billion yen ($470 million) fund to finance air pollution prevention activities. Fund
capital is provided 80% by polluting industries and 20% by government, and fund profits
finance a wide range of "health damage prevention project" activities.
Established in 1993, Korea's Environmental Pollution Prevention Fund is financed by
pollution fines and charges as well as government contributions. Administered by the
semi-governmental Environmental Management Corporation, the fund has provided
long-term, low-interest loans for pollution control investments and compensation of
pollution victims. As of 1990, the fund contained 11.6 billion won ($14.8 million).
Thailand created a 5 billion baht ($190 million) Environment Fund in October 1991.
The fund was initially financed entirely by government and is intended to finance
pollution control investments by small- and medium-size enterprises. Indonesia's
Pollution Abatement Fund was created to provide $300 million to banks to lend to
businesses for pollution control investments and environmental assistance.
According to a study by the American Council for Capital Formation Center for Policy
Research, several countries in Eastern Europe, Asia, and Latin America offer substantial
tax advantages for investments in pollution control technology. The most common type
of tax advantage in foreign countries is accelerated depreciation of pollution control
equipment, but tax credits are also offered in some cases. In general, the report found,
such tax advantages are significantly less generous in the United States than in the ten
foreign countries included in the study.100
11.4.1. Subsidies for Environmentally Friendly Agriculture and Land Management
Numerous countries use subsidies to promote environmentally friendly agriculture.101
Germany, Finland, Norway, and Sweden offer grants to farmers who convert from
traditional to organic farming. Canada's provinces subsidize farmers' efforts to comply
with codes of acceptable environmental practices, and the country's Land Management
Assistance Program provides a variety of land management subsidies. In the Province of
New Brunswick, for example, the Ministry of Agriculture offers payments for practices
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Foreign Experiences with Incentive Systems
that increase the organic content of soil and reduce soil erosion, including payments of
C$15 ($11) per acre for winter catch crops and of C$50 ($30.5) per acre for green manure
crops.
The United Kingdom is one of several European countries that reward farmers for not
spraying around the edge of crops. Studies show that the crop-edge program in the U.K.
has enhanced bird and butterfly populations while having minimal impact on crop yields.
Under Germany's Nature Conservation Act, farmers are rewarded for adopting environ-
mental management practices such as reducing fertilizer use, refraining from converting
grasslands into cropland, and refraining from using meadows while insects are hatching.
The European Union's Common Agricultural Policy requires member countries to
offer financial assistance to farmers for recommended practices in environmentally
sensitive areas such as water protection zones. In nitrate-sensitive areas of the United
Kingdom, farmers can receive annual per hectare payments for limiting their use of
nitrogenous fertilizers and animal manure, establishing crop cover to avoid bare land in
the fall, and keeping hedges and woodland.
Faced with serious manure waste problems, Hong Kong introduced a program in the
late 1980s to pay allowances to farmers if they stopped maintaining livestock.102 Several
Alpine countries subsidize sustainable agriculture and animal husbandry activities in
mountainous areas to prevent environmental degradation.103
Belgium is one of a number of countries subsidizing reforestation activities. In the
Belgian region of Flanders, private forest owners can obtain subsidies for reforestation,
granting access to the public, and forest grouping.104 In 1994, Finland announced revi-
sions in its tax structure for forests. Under the revised system, forest reserved for non-
commercial purposes and designated in officially approved management plans will not
be taxed based on its prospective yield as before, but rather will remain tax-free for a 13-
year transition period.105 The United Kingdom provides grants for the planting of trees
and hedges on agricultural land.106 In Portugal, farmers can obtain subsidies and
concessional loans for reforestation and creation of permanent pastures, and Spain and
Turkey offer grants for afforestation and other land restoration activities. In Japan, forest
owners can receive grants, low-interest loans, and favorable tax treatment in return for
observing specified land management practices.107
11.4.1.1. Subsidies to Reduce Vehicle Emissions
Many countries have used subsidies to attempt to reduce vehicle emissions. France
adopted a law in October 1995 that provides for payments of 5,000 F ($1,000) to 7,000 F
($1,400) for the scrapping of old cars in exchange for new ones. The cars must be at least
eight years old and must be disposed of by authorized scrapping firms to qualify for the
payments. Payments of 5,000 F are offered for buyers of compact cars and of 7,000 F for
buyers of larger models. The offer expires September 30, 1996.108 Purchasers of electric
vehicles are eligible for payments of 5,000 F from the French Government and 10,000 F
from the French national electricity company. These payments are equal to approximately
8-10% of the price of an electric vehicle.109
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In the Canadian province of British Columbia, car owners receive payments of C$750
($550) to retire older vehicles. Jointly funded by the oil industry and automobile dealers,
with support from the public electric and transit companies, the B.C. Scrap-it Program
was introduced in April 1996. It is expected to retire up to 1,100 vehicles in its first year
and to reduce over 10,000 tons of pollution over the next five years. To qualify for the
program, a vehicle must have been manufactured prior to 1983, be driven more than 5,000
kilometers annually, and fail the province's mandatory emissions test. A 1995 study by
the B.C. Lung Association found that vehicle scrapping programs were among the most
cost-effective emission reduction initiatives. According to the B.C. Automobile Dealers
Association President, 40% of vehicles in circulation account for only 25% of distance
traveled but 75% of automobile emissions.110
Japan plans to assign 10-20 low-emission vehicles (powered by natural gas, methanol,
or electricity) to municipalities in 1996. The central government will share maintenance,
fuel, and other costs with the municipalities.111 In Austria, low-noise trucks receive
favorable tax treatment.112 In the Netherlands, public transportation commuters receive
tax advantages.113
In January 1996, the government of Thailand announced incentives for manufacturers
of four-stroke motorcycle engines in an effort to provide alternatives to the two-stroke
motorcycles currently common in major Thai cities. According to a 1993 World Bank
report, the older design two-stroke engines discharge up to ten times as much pollution
per kilometer as the newer four-stroke engines. Manufacturers of four-stroke engines will
benefit from 90 percent reductions in import duties for raw materials. Manufacturers who
locate in Zone 3 areas (i.e., outside the Bangkok area and the surrounding 15 provinces)
will also receive exemptions of machinery import duties, corporate income tax (for eight
years), and double tax deductions for electricity, water, and transportation costs. These
location incentives could help limit congestion and the strain it imposes on the environ-
ment in the Bangkok area.114
11.4.2. Subsidies for Resource Conservation
Another area where subsidies have been used extensively is the promotion of resource
conservation. Denmark has offered grants for activities such as renewable energy source
power generation, energy-saving measures, and used oil collection and exempted energy-
efficient light bulbs from the aforementioned product charge on bulbs.115 The Netherlands
has exempted recycling wastes from its recently imposed waste tax and exempted water
used to wash recyclable beverage containers from its new groundwater tax. Both of these
taxes were described above.
In the Australian community of Kalgoorlie-Boulder, where water is supplied by a 550-
km pipeline, a $2.6 million (US$2.0 million) campaign has been initiated with the goal of
reducing water use from 7,700 ML/year to 6,700 ML/year. The campaign includes water
consumption audits of businesses provided at 50% of cost, a $300,000 (US$232,000)
revolving loan fund to finance water- efficient technologies, and a mail-order package of
domestic water savings options with the possibility of subsidized replacement of less
water-efficient appliances.116
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In Switzerland, individuals may deduct energy-saving improvements from their
taxable income, and businesses' expenditures on energy-efficient equipment, solar power,
and other similar investments are subject to accelerated depreciation. Australia exempts
certain recycled paper products, solar power equipment, and alternative fuel technology
from its Wholesale Tax.117
11.4.3. Environmentally Harmful Subsidies
Section 7 described a number of subsidies found in the United States that are believed
to be detrimental to the environment. Such subsidies are also common in other countries
but cannot be described in detail here.
For example, it has been estimated that tax benefits for businesses contributed to 5%
of the total area deforested in the Brazilian Amazon.118 In much of the world, forest
resources, waste collection, water, and electricity are priced far below their value.
Fertilizers and pesticides, which are taxed in several European countries, are subsidized
in parts of Asia.119 In much of the world, forest resources, waste collection, water, and
electricity are priced far below their value.
As shown in Figure 11-13, electricity is far
cheaper in developing countries than in
OECD countries. While marginal supply
costs in developing countries are generally
at least IOC per Kwh, energy prices are
below 6C per Kwh. These countries use
about 20% more electricity than they
would if consumers paid the true mar-
ginal cost of supply.120
11.5. PRODUCT LABELING
The role of product labeling in envi-
ronmental policy is to inform consumers
of the influence of products on the envi-
ronment. Products that are thought to
have environmental advantages could
bear labels indicating that they are envi-
ronmentally friendly. Products that are believed to be harmful to the environment could
bear labels indicating that they are environmentally unfriendly.
As noted in Section 9, labeling schemes in the United States have all been either private
or limited to certain products or specific product attributes. As shown in Table 11-20,
however, governments in numerous other countries have adopted official seal of approval
labeling initiatives. In addition, a few multi-national labeling systems have been devel-
oped, including the Nordic Council label for Finland, Sweden, Norway, and Iceland and
the European Union eco-label for EU member countries. Several private international
labeling schemes were discussed in Section 9. The Green Dot placed on packaging of
Figure 11-13: ELECTRIC POWER PRICES,
1988
$ par kWh
0.4
kin
OIOD Developing OMintriM Brazil ladift
6ouro»: World Bank (1992), p. 117
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
products managed by the Duales System Deutschland described above is also a form of
environmental labeling that can influence consumer behavior. These labeling systems
vary in extent and in criteria used to determine products' environmental friendliness.
Table 11-20: ENVIRONMENTAL LABELS IN SELECTED COUNTRIES
Countrv or Organization
Label Name
Australia
Environmental Choice
Canada
Environmental Choice
France
NF-Environnement
Germany
Blue Angel
India
Ecomark
Japan
Eco-Mark
Korea
Eco-Mark
Netherlands
Milieukeur (Environmental Review Foun-
dation)
New Zealand
Environmental Choice
Singapore
Green Label
Sweden
Bra Miljoval (Good Environmental Choice)
Thailand
Green Label
European Union
Ecolabel
Nordic Council (Norway, Iceland,
Finland, Sweden)
White Swan
Source: EPA (September 1993), p. 41.
One of the oldest environmental labeling programs is Germany's Blue Angel. Since the
creation of this program in 1977, over 4,000 products, including non-CFC spray cans and
retread tires, have received approval from the German Environmental Agency to use the
Blue Angel. A jury of representatives from industry, environmental groups, public
authorities, and others rates label candidates based on their use of resources, greenhouse
gas emissions, and other criteria.121
The Blue Angel program appears to be well known and to have had significant
incentive effects on German businesses. A 1988 survey found that 79% of German
consumers were familiar with the label and that 68% linked it with environmental
protection.122 The German government says that the label allowed the tightening of oil
and gas heating appliance emissions standards by over 30% in a few years. It also credits
the label with increasing the market for paints, lacquers, and varnishes low in VOC
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Foreign Experiences with Incentive Systems
content, resulting in reductions of solvent air releases of 40,000 tons. One potential
problem is that some firms have been reluctant to seek the label for certain products
because they fear that it will discourage consumers from purchasing their non-labeled
products.123
Under a program introduced in 1989, the Japan Environmental Association, an affiliate
of the Environmental Agency, has authorized approximately 2,500 products in 61
categories to bear the Eco-Mark environmental friendliness label. However, a 1993 report
found that only 30% of the Japanese population purchased eco-friendly products.
Authorities attributed this low percentage in part to lack of education on such products
and are working with industry to publicize the benefits of environmentally friendly
products.124
Canada's Environmental Choice label is awarded to products made or offered in a
manner that improves energy efficiency, reduces hazardous by-products, or uses recycled
materials. Since the introduction of the label in 1988, guidelines have been developed for
about 30 product types, and more than 1,400 products have been approved.
Anecdotal evidence suggests that Canada's label has had incentive impacts. A
Canadian envelope company reported that the share of recycled paper envelopes in its
sales rose from 10% before it became the first envelope to receive the label in 1990 to more
than 40% two years later. A 1993 survey found that 51% of the Canadian public was
aware of the label. A 1992 survey of companies licensed to use the label found that 71%
"agreed" or "strongly agreed" that it was "a good business investment" and that 80% had
used the label in their advertising.
Korea initiated its Eco-Mark labeling program in June 1992.125 Unlike many other
labeling schemes, Korea's program has focused on "defining the single most important
criterion for each product category." This practice stems from the belief "that the large
data requirements for the life cycle approach are difficult to meet in practice." Table 11-21
shows that the labeling criteria for thefirst 12 product categories approved under the
program are far simpler than the life cycle assessment criteria employed in several other
countries.
The program appears to have had incentive effects. Sales of recycled paper increased
by 30% after the introduction of the program. As of 1993, however, there was no evidence
that the label had an effect on sales in other product categories.126
In 1992, the European Communities (now referred to as the European Union) created
an EU-wide eco-label award scheme to "promote the design, production, marketing and
use of products which have a reduced environmental impact during their entire life cycle"
and "provide consumers with better information on the environmental impact of products,
without, however, compromising product or workers' safety or significantly affecting the
properties which make a product fit for use." Criteria are developed for each product
group before products can be considered for the label. One source reports that the EU has
the most thorough product assessment standards of any labeling program and that the
rigorous standards have the possible disadvantages of causing delays and high costs.
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Table 11-21: KOREAN ECO-MARK PRODUCT CRITERIA
Product catesorv
Criteria
Products made with reused paper
> 50% reused paper
Tissues made with reused paper
> 50% reused paper
Reused plastics
> 60% plastics
Aerosol sprays without CFCs
0% CFCs
Reusable diapers
100% cotton
Non-asbestos brake lining
0% asbestos
Aluminum cans with stoppers
Should use aluminum
Filter for kitchen sinks
Holes no larger than 1.5 mm diameter
Non-bleached and un-dyed towels
Made without dyes or bleach
Water valves
Water should not run after valve is
closed.
Packaging materials using wastes
Made with 100% wastes
Soap made with waste edible oil
Made with >50% waste edible oil
Source: EPA (September 1993), p. 92.
Applications are submitted to individual member states and are subject to an applica-
tion fee that must be between 400 ECU ($500) and 600 ECU ($750). Annual fees for label
holders must be between 0.12% and 0.18% of annual sales of the product.127 The EU
labeling scheme has experienced significant implementation delays. As of December
1995, only one company, a washing machine manufacturer, had applied and been
approved for the label.128 In February 1996, the EU Environment Commissioner called the
eco-labeling program a failure and announced that it would be overhauled.129
As noted in Section 9, environmental labeling schemes need not be national or
international in scope. In parts of Australia, for example, the authorities have rated
shower systems on their water use efficiency. Consumers are then informed of the ratings
so that they can purchase water-efficient systems if they so choose.130
11.6. INFORMATION DISCLOSURE REQUIREMENTS
Requirements that firms examine and report on their environmental performance to
government and the public, such as the Toxic Release Inventory requirement in the United
States, give polluters an incentive to behave in an environmentally responsible manner.
Other factors being equal, businesses with relatively strong environmental performances
might be able to attract more customers than their competitors.
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In November 1995, the OECD agreed to a Council Act recommendation proposed by
the United States that each member country develop a pollution release and transfer
database.131 In February 1996, the OECD ministerial Environment Policy Committee
endorsed this initiative as "an important step towards better informing citizens about
pollution sources and risks in their communities."132 Canada, the United Kingdom, and
the Netherlands already have such databases, and several other countries are creating
them. The European Union is reviewing integrated pollution prevention legislation that
is expected to include a database provision.133
At least two international organizations, the International Standards Organization and
the European Union, have prepared guidelines for environmental performance auditing
in businesses. In both of these cases, however, the guidelines are voluntary. The Euro-
pean standards-setting body, CEN, has prepared a document that attempts to help
companies bridge the gap between the two sets of guidelines.
The European Union's eco-management and audit scheme (EMAS) was created by
Council Regulation No. 1836/93 of June 29, 1993. Although it is voluntary, it may still
have a significant incentive effect. A company's mere decision on whether to participate
in such a program could influence the public. Moreover, experiences with such programs
could lead the EU or some of its member states to either make the program mandatory or
create additional incentives for participation. One incentive the EU intends to consider is
the introduction of a logo for participating companies.
In line with the spirit of the EMAS, the Ministers of Environment and Water Manage-
ment in the Netherlands submitted a proposal in January 1996 that would require about
300 industrial firms to report on their environmental performance to the government and
the public. The reports would have to include the effects of a company's activities on the
atmosphere, soil, and surface waters, the environmental protection measures taken by the
company, and the results expected from the measures. Companies already participating
in the EMAS would be exempted from the new Dutch requirements.134
In Indonesia, the Environmental Impact Management Agency rates numerous factories
on their compliance with national environmental standards and their implementation of
environmental management systems. The first of these surveys in June 1995 rated 187
factories and the second in December 1995 rated 213. Five color categories were used to
rate environmental performance: gold for firms that use best technology, green for firms
that exceed national standards, blue for compliance with national standards, red for firms
that fail to meet national standards, and black for those without environmental manage-
ment systems. Evidence suggests that this system could already be influencing behavior:
the percentage of factories in the bottom two categories dropped from more than 60% in
the first survey to 56% in the second survey, and three of the six factories rated as black in
the first survey improved their performance.135
Environmental impact assessments (EIAs), which appear to have been initiated in the
United States, have since become common in numerous other countries. Canada,
Australia, and the Netherlands adopted EIA requirements in 1973, 1974, and 1981,
respectively. OECD issued recommendations on conducting EIAs in 1974 and 1979. The
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European Communities (now the EU) issued a directive in 1985 requiring member
countries to assess the environmental impacts of certain public and private projects.
Several East Asian countries, including Japan, Korea, Indonesia, Taiwan, and Thailand,
also required EIAs. The types of projects subject to the requirements and the degree of
public participation varies.136 The Slovak Republic has required EIAs since 1992. As
noted in Section 9, the information generated by EIAs can influence behavior, especially
if the public is well informed.
11.7. VOLUNTARY PROGRAMS
As discussed in Section 10, voluntary programs have played a role in addressing
numerous environmental problems in the United States. Among the incentives to
undertake voluntary initiatives are the possibility of generating positive publicity and of
avoiding more onerous regulations that environmental authorities might otherwise
impose. In addition, some governments provide free or subsidized technical assistance
under voluntary programs. The large number of programs in various countries rules out
comprehensive coverage here.
The Netherlands' use of covenants, agreements between industry and government, to
address environmental problems has attracted considerable attention in recent years.
Covenants generally have the legal status of private law agreements, allowing the
authorities to seek legal recourse for enforcement. As of 1995, 26 environmental covenants
have been signed between industry and the government concerning products, packaging,
waste, and other matters. In the field of air pollution, covenants have been concluded on
the reduction of S02 and NOx from power plants, the reduction of VOC emissions from
industry, small businesses, and households, and the phaseout of CFCs.137
In Japan, voluntary pollution control agreements date back to the 1950s. As of
September 1991, about 37,000 agreements were in effect. Of the 2,553 agreements con-
cluded over the previous 12 months, 476 involved local citizen participation, of which 259
were reached directly between citizens and businesses.
Under Indonesia's PROKASIH (or Clean Rivers Program), the largest polluters are
encouraged to sign agreements to reduce pollution by specific amounts over a specific
time period. In the first 2 1/2 years after the start of the program, about 1,000 polluters
signed agreements, the majority of which took measures to reduce pollution. The
government has released information on which signatories have complied and which
have not and encouraged press coverage of signatories' performance under the
program.138
11.8. DEBT-FOR-NATURE SWAPS AND JOINT IMPLEMENTATION
Under debt-for-nature swaps, partial debt forgiveness is granted to less-developed
countries (LDCs) on the condition that they fund environmental programs. One rationale
behind such swaps is that indebtedness and environmental degradation are often linked.
Once indebted, LDCs frequently subordinate the environment to more immediate
problems and exploit their natural resources in an unsustainable manner to generate
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revenue for debt servicing.
Since the amount of debt forgiven is usually smaller than the cost the LDC incurs for
the conditional environmental program, the LDC has an incentive to accept such swap
offers. Since a lot of the environmental degradation and pollution in LDCs, such as
emissions of C02 and CFCs and destruction of rain forests, has negative repercussions
throughout the world, wealthier creditor nations gain from debt-for-nature swaps as well.
Swaps can also improve commercial banks' debt portfolios by discounting bad debt.139
As described in Section 6, joint implementation (JI) refers to a process under which
organizations in one country undertake mitigation and sequestration of greenhouse gas
emissions in another. Other countries have not carried out JI activities to the same extent
as the United States. However, Japan is asking businesses to participate in JI projects. It
plans to set up an "APEC environment technology exchange virtual center" to promote the
transfer of Japanese carbon dioxide emission containment technologies to members of the
Asia-Pacific Economic Cooperation Forum.140
Biotechnology development agreements concluded between landowners and biotech-
nology businesses have the potential to create incentives for biodiversity preservation by
allowing landowners to sell genetic resource found on their land.141 An agreement of this
nature between the pharmaceutical company Merck and the National Biodiversity
Institute (INBio-Instituto Nacional de Biodiversidad) in Costa Rica has attracted consider-
able attention. Under the terms of this agreement, INBio received a $1 million payment,
over $100,000 worth of equipment, and staff training locally and at Merck facilities. INBio
is also entitled to a percentage of royalty payments for discoveries made by Merck and
must share its percentage with the Costa Rica Ministry of Natural Resources. Merck has
first rights to patent discoveries.
Frisvold and Condon (1994) concluded that the Merck agreement "provides only
modest incentives for biodiversity preservation," incentives that "are small not only in
absolute terms, but, more importantly, they are small relative to incentives for conversion
created by existing agricultural policies." Such agreements, they find, "can play only a
limited role in a comprehensive strategy to increase incentives for biodiversity conversa-
tion." However, Blum (1993) maintains, "Merck/INBiolike agreements represent a
profitable alternative to deforestation and provide nations with a greater incentive to
preserve their biodiversity than is provided by any type of legislative action or regula-
tion."142
11.9. TREND OF INCREASING USE OF ECONOMIC INSTRUMENTS IN FOREIGN
COUNTRIES
To provide insight into trends in the use of economic incentives, the 1994 OECD report
compared the extent of incentives in eight countries (Finland, France, Germany, Italy,
Netherlands, Norway, Sweden, and the United States) in 1987 and 1992. (These were the
only eight countries for which data had been collected for both years of the comparison.)
Because the 1987 survey studied subsidies and other mechanisms not studied in 1992 and
because the 1992 survey included more data sources, the comparison of the two years is
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
difficult. In general, however, the report concluded that increases had been "minor in
France, Germany, and Italy, moderate in the Netherlands and Norway and extensive in
Finland, Sweden and the USA."143
Examining the countries not included in the OECD comparison and the period since
the comparison, the trend remains. Many of the incentive mechanisms described above
had not been implemented at the time of publication of the previous version of this report
(1992). New incentive mechanisms appear to far outnumber the mechanisms that have
been eliminated.
Further evidence of the trend of increased use of economic instruments is found in the
European Union's recent environmental policy statements. The Union's fifth environmen-
tal action program adopted in 1992 stated that the "traditional regulatory approach would
be continued but supplemented with a wider range of instruments such as the use of
economic and fiscal measures (i.e. 'market-based' instruments)." In 1994, the Union
"published a new framework of controls over the availability of state aid for environmen-
tal purposes." In 1995, the Union prepared a proposal for a Council Directive introducing
a tax on carbon dioxide emissions and energy.144 (However, the Union stopped short of
adopting a carbon tax directive.) The Union's initiatives on eco-labeling and eco-manage-
ment and auditing were discussed above.
The Organization for Economic Cooperation and Development has also expressed
interest in increasing the use of economic incentives. The Communique from the OECD
Environment Policy Committee Meeting held on February 19-20, 1996 stated, "[OECD
environment] Ministers welcomed the expanding use of market-based instruments within
OECD countries both to improve efficiency and to address dispersed sources of pollution,
which are difficult and costly to manage through regulation alone." The ministers urged
the OECD to conduct within two years "a wide-ranging analysis of the effects of subsidies
and tax disincentives to sound environmental practices in various economic sectors, and
the costs and benefits of their elimination or reform, as proposed by the G-7 Environment
Ministers in May 1995" and by 1997 "a further examination of the potential for environ-
mental (or "green") tax reform."145
The United Nations has also expressed increased interest in economic instruments.
After a two-week session of the U.N. Commission on Sustainable Development in April
and May of 1996, the Commission chairman said that economic incentives for businesses
to protect the environment would be a major goal of a 1997 U.N. General Assembly
meeting.146
A related trend is several countries' incorporation of environmental considerations into
the design of their taxation system in an attempt to shift the tax burden from labor and
capital to the use of natural resources and the environment. This principle played a role
in recent tax reforms in the Netherlands, Denmark, Norway, Sweden, and Finland. Even
in some other countries that have introduced environmental taxes outside the context of
major tax reforms, the environmental tax revenues have sometimes been recycled back to
the population or compensated by reductions in other taxes. Indicative of this trend, Table
11-22 shows that the percentage of total tax revenues derived from environmental taxes
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has risen in many countries.
Table 11-22: SHARE OF ENVIRONMENTAL TAXES IN TOTAL TAX REVENUES
IN OECD COUNTRIES
Countrv
1990 (%)
1993 (%)
Austria
4.00
4.35
Belgium
3.83
4.49
Canada
2.87
3.44
Denmark
7.08
7.30
Finland
4.72
5.40
France
4.88
4.92
Germany
5.46
6.12
Greece
7.43
11.85
Ireland
10.35
8.98
Italy
7.82
6.52
Japan
5.11
5.49
Netherlands
5.12
6.12
New Zealand
5.08
4.76
Norway
9.40
10.75
Portugal
10.63
11.52
Spain
5.82
7.54
Sweden
5.77
6.34
Switzerland
4.26
4.65
United Kingdom
7.35
8.23
United States
2.88
3.24
Unweighted Aver-
age
6.02
6.67
Source: Morgenstern (1995), p. 12.
Less developed countries have also implemented many economic incentives and
expressed interest in adding new ones and improving the existing ones. In 1994, for
example, China launched a comprehensive two-year study of its charge system with the
intention of expanding and enhancing it.147
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11.10. CONCLUSIONS
1. The use of economic incentives in environmental management appears to be increasing
throughout the world. The available information suggests that this trend holds for every
type of economic incentive discussed in this section. Numerous countries have recently
implemented a range of economic incentives and are considering others.
2. Among the incentives more widely used in foreign countries than in the United States
are environmental product labeling, differential taxation of motor fuels, noise pollution
charges, and carbon taxes.
3. Most industrialized countries have user fees for municipal waste and water/sewage
and deposit-refund systems for beverage containers. Water user fees are lower in the
United States than in most other OECD countries.
4. Market-based permit systems are more common in the United States than elsewhere.
To address the problems of S02 emissions and leaded gasoline, for example, the United
States has used market-based permits, whereas other OECD countries such as France,
Japan, Portugal, and Sweden have opted for taxes.
5. Most countries have imposed taxes on gasoline, including higher tax rates for leaded
gasoline. These rates are significantly lower in the United States than in all other OECD
countries.
6. Taxation of pollution control investments appears to be more generous in most industri-
alized countries than in the United States.
7. Product charges tend to be revenue-raising instruments with little incentive effect. The
lack of incentive can be attributed primarily to the low level of the charges. Moreover,
some charges are not closely linked to waste generation or product consumption.
However, some of the product charges described in this section, such as fertilizer taxes
and the preferential taxation of cleaner motor fuels, do appear to have significant incen-
tive effects.
8. As evidenced by experiences in France, Norway, and Singapore, congestion-based tolls
appear to have the potential to significantly reduce traffic during peak hours.
9. Several user and pollution charges appear to have incentive effects. Examples include
Sweden's NOx emission charge, water effluent charges in Germany and the Netherlands,
waste charges in Denmark and Korea, and water user or extraction charges in Australia
and several Asian countries. However, many user and pollution charges are primarily
revenue-raising.
10. Several countries, including Denmark, Finland, the Netherlands, Norway, and
Sweden, have attempted to incorporate environmental considerations into the design of
their taxation systems in an effort to shift the tax burden from labor and capital to the use
of natural resources. In other countries that have introduced environmental taxes outside
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the context of major tax reforms, the taxes have sometimes been recycled back to the
population or compensated by reductions in other taxes.
11. Deposit-refund systems for car hulks and beverage containers appear to have signifi-
cant incentive effects. The strength of the effect depends on the relative magnitude of the
deposit and refund.
12. Newly industrialized and less developed countries are making extensive use of
economic incentives for environmental protection. Deposit-refund systems and user fees
appear to be the most common incentives in these countries, but waste and emissions
charges are very common in Eastern Europe and the former Soviet Union.
Endnotes for Section 11
I.OECD (1994a), p. 97.
2. OECD (1995b), p. 95. Unless otherwise stated, all national currencies are converted into
U.S. dollars at the exchange rates of March 14, 1996, as listed in the Wall Street Journal of
March 15, 1996.
3. OECD (1994a), p. 64.
4. Netherlands Ministry of Housing, Spatial Planning and the Environment, "The
Netherlands' Environmental Tax on Waste: Questions and Answers," p. 2.
5. IER, December 13, 1995, p. 953.
6. Rhee (1995). The currency conversions are taken from this article.
7. OECD (1995b), pp. 14, 98.
8. Landesabfallabgabengesetz, Article 4.
9. OECD (1995b), p. 96 and DEN, October 12, 1995, p. B-3.
10. IER, June 19, 1991, p. 350.
II. RECCEE (1995), p. 11.
12. Ibid, pp. 59-60, 154-5.
13. See OECD (1994a), Chapter 6.
14. Swedish Ministry of the Environment and Natural Resources (1995), pp. 44-49, and
OECD (1994a), p. 59.
15. Palmisano (1994), pp. 362-6.
16. Ibid, p. 366.
17. IER, May 15, 1996, p. 406.
18. RECCEE (1995), p. 10. The source stated all charges in ECU, which have been converted
to U.S. dollars according to procedure described above.
19. DEN, February 13, 1996, p. A-8.
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20. Langford (1995).
21. RECCEE (1995), pp. 57-8, 152-3.
22. Steele and Ozdemiroglu (1993), p. 198.
23. Netherlands Ministry of Housing, Spatial Planning and the Environment, "The
Netherlands' Environmental Tax on Groundwater: Questions and Answers," pp. 2-4.
24. IER, February 8, 1995, p. 106.
25. Steele and Ozdemiroglu (1993), p. 198.
26. The twelve countries studied are Belgium, Denmark, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. These
were the only European Communities (now called the European Union) member states at
the time of the research. Since water pollution control policy is the responsibility of regions
in Belgium, the survey provides separate coverage of charge systems in Flanders and
Wallonia, the largest of the country's three regions. In the United Kingdom, the survey is
limited to England and Wales.
27. The charge amounts in figure # and the damage unit parameters are specified in the
Effluent Charge Law (Abwasserabgabengesetz).
28. Stephen Smith (1995), "Green" Taxes and Charges: Policy and Practice in Britain and
Germany, p. 28.
29. User fee and effluent charge revenue figures and shares paid by industry and
government obtained from Schoot Uiterkamp, Leek, and de Savornin Lohman (1995),
Waste Water Charge Schemes in the European Union, Part 2: Country Descriptions, pp. 107-109.
30. M.S. Andersen (1993), Governancyby Green Taxes - Implementing Clean Water Policies in
Denmark, France, Germany, and the Netherlands 1979-1990, PhD dissertation, Institute of
Political Science, Aarhus University, as cited in Schoot Uiterkamp, Leek, and de Savornin
Lohman (1995), Part 2, p. 112.
31. Magda Lovei, "Environmental Financing: The Experience of OECD Countries and
Implications for Transition Economies," in Centre for Co-operation with the Economies in
Transition, Environmental Funds in Economies in Transition, OECD, Paris, p. 72.
32. The two surveys and other information on incentive effects of German effluent charges
are discussed in Smith (1995), pp. 29-31.
33. Andersen (1994), as cited in Schoot Uiterkamp et al. (1995), Part 2, p. 110.
34. Unless otherwise stated, the information above on effluent charges in the Netherlands
was provided by Schoot Uiterkamp et al. (1995).
35. The information on France's effluent charges is based on Cadiou and Due (1994) and
OECD (1994a).
36. Regional Environmental Center for Central and Eastern Europe (1995), p. 14. BOD5
refers to biological oxygen demand during the first five days.
37. For more information on this formula, see ibid, pp. 55-6.
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38. Population equivalent is based on quantity of pollutants multiplied by pollution
coefficients that vary according to the type of production. For more information, see ibid,
p. 165.
39. Margulis (1994).
40. Steele and Ozdemiroglu (1993), p. 218.
41.0ECD (1995b), p. 94.
42. OECD (1994a), p. 59.
43. OECD Environment Monograph #89 (1994b), pp. 55-6.
44. The charge shown in figure 5 is the sum of charges on nitrogen, phosphate, and
potassium. The amounts of these three substances in fertilizers varies.
45. Rhee (1994), p. 104.
46. Swedish Ministry of the Environment and Natural Resources (1995), pp. 11-14.
47. OECD (1996), p. 91
48. IER, February 8, 1995, p. 104.
49. The table draws upon information from Muller (1996), p. 17 and OECD (1996), pp. 89-
94. The tax rates for Norway were expressed in dollars by Muller. The rates for the other
four countries and all the revenue estimates were converted into dollars following the
practice noted under note 2.
50. OECD (1996), p. 90.
51. Ibid, pp. 93-4.
52. Swedish Ministry of the Environment and Natural Resources (1995), pp. 24-31.
53. Financial Times, March 20, 1996, p. 10.
54. Information on energy/carbon taxes in the Netherlands provided by two unpublished
Netherlands Ministry of Housing, Spatial Planning and Environment documents: "The
Netherlands' Environmental Tax on Fuels" and "The Netherlands' Regulatory Tax on
Energy."
55. With the exception of the regulatory tax, these are the rates as of January 1, 1996. As
explained below, the regulatory tax on light fuel oil, gasoil, LPG, and natural gas is being
phased in three roughly equal increments between 1996 and 1998.
56. This is the full rate which will be in effect in 1998. For all products except electricity,
the 1996 rate is roughly 1/3 and the 1997 roughly 2/3 of the full rate. For electricity, the
full rate was imposed on January 1, 1996.
57. LPG used as motor fuel is exempt from the regulatory tax, whereas LPG used for
heating is exempt from the excise duty.
58. Information on differential taxation of diesel fuel in Sweden based on Bergman (1994)
and Ministry of the Environment and Natural Resources (1995).
59. OECD (1996), p. 94.
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
60. IER, February 7, 1996, p. 95.
61.0ECD (1994a), p. 81
62. OECD (1995b), pp. 86-9.
63. German Information Center (1995). Internet: www.germany-info.org/close-
up/environ.htm.
64. IER, February 23, 1994, pp. 163-4.
65 .IER, April 17, 1996, p. 301.
66. Federal Highway Administration, "Congestion Pricing News," Spring 1996, p. 7.
67. Gavin Davidson, Congestion Pricing Forum.
68. Information in this subsection is based on Buchan (1994) and Chia and Phang (1994).
69. Information on the Mexico City vehicle restrictions was provided by Ocampo (1994).
The Thai proposal was discussed in Financial Times, July 8, 1996.
70. OECD (1994a), pp. 83-6, 121.
71. Information on most countries provided by Container Recycling Institute. Information
on Australia, Canada, and Iceland provided by OECD (1994a), pp. 83-5. Information on
Czech Republic, Hungary, and Poland provided by Regional Environmental Center for
Central and Eastern Europe (1995), p. 16. CRI amounts stated in $US. OECD and RECCEE
amounts stated in ECU but converted to $US by authors.
72. Container Recycling Institute (1994), pp. 29-32.
73. OECD (1994a), p. 83.
74. Swedish Ministry of the Environment and Natural Resources (1995), pp. 9-11.
75. OECD (1994a), p. 71.
76. OECD (1994a), p. 86.
77. Helmut Wagner, Commercial Counselor, Embassy of Austria, personal communication,
1996.
78. OECD (1994), p. 86.
79. Ruffing (1995).
80. O'Connor (1994), p. 130.
81. Steele and Ozdemiroglu (1993), p. 177.
82.Ibid, p. 173.
83. DEN, January 17, 1996, p. A3.
84. Scharer (1995), p. 256. The limitations of Germany's trading provisions for old sources
are described in Kalmbach and Troge (1989), pp. 30-35.
85. Dittman and Sander, Bundesverband der Deutschen Industrie, personal communica-
tion, May 1996.
86. Margulis (1994), p. 116.
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87. RECCEE (1995), p. 102.
88. Pan (1994), p. 85.
89. Harvard Institute for International Development, "Highlights in Environmental
Economics & Policy," p. 4.
90. O'Connor (1994), p. 132.
91. Musgrave (1995).
92.0ECD (1994a), p. 89.
93. Langford (1995).
94. Brehm and Quiroz (1995). Figures stated in U.S. dollars in the source.
95. Hearne and Easter (1995).
96. Financial Times, April 9, 1996.
97.IER, May 1, 1996, p. 370.
98. Francis (1995), pp. 43-4.
99. Information on these funds based on O'Connor (1994), pp. 127-8.
100. Thorning (1992), pp. 1-3.
101. Most of the information on environmental subsidies for agriculture is taken from Rolfe
(1993), "Using Subsidies to Promote Environmental Protection in Agriculture: A Review
of Programs in North America and Europe."
102. International Environment Reporter Resource File: Hong Kong, p. 164.
103. IER, February 7, 1996, pp. 103-4.
104. Lust, "The Forest Incentive System in Belgium."
105. IER, February 8, 1995, p. 105.
106. Rolfe, p. 13.
107. OECD (1994b), pp. 58-9.
108. Decret 95-1119.
109. French Ministry of Foreign Affairs (1995).
110. IER, May 1, 1996, p. 367.
111. DEN, September 6, 1995, p. A-5.
112. OECD (1995b), p. 90.
113. Ibid, p. 69.
114. IER, February 7, 1996, pp. 100-1.
115. OECD (1995b), p. 93.
116. Langford (1995).
117. OECD (1995b), pp. 90,92.
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118. Margulis (1994), p. 110.
119. Steele and Ozdemiroglu (1993), pp. 213-4.
120. World Bank (1992), p. 117.
121. Information on Germany's Blue Angel, France's NF Environnement, and Canada's
Environmental Choice labels was obtained from the Canadian Department of Environment
internet site: www.ns.doe.ca.
122. EPA (1993), p. 44.
123. EPA (1994a), pp. 23-4.
124. DEN, February 15, 1996, pp. B2-3.
125. Unless otherwise stated, information on Korea's Eco-Mark program based on EPA
(1993), pp. 90-2.
126. EPA (1994a), p. 22.
127. Council Regulation No. 880/92, March 23, 1992 on a Community Eco-label Award
Scheme, and Commission Decision No. 93/326, May 13, 1993 Establishing Indicative
Guidelines for the Fixing of Costs and Fees in Connection with the Community Eco-label.
The quotation is from Article 1 of the Regulation. The fees are set in Articles 2 and 3 of the
Decision.
128. IER, December 13, 1995, p. 940.
129. IER, March 6, 1996, p. 154.
130. Langford (1995).
131. DEN, December 11, 1995, p. Al.
132. DEN, February 21, 1996, p. E4.
133. DEN, December 11, 1995, p. Al.
134. DEN, January 25, 1996, pp. B3-4.
135. Ibid, p. B3.
136. O'Connor (1994), pp. 149-56.
137. OECD (1994a), Environmental Performance Reviews: The Netherlands, pp. 66, 130-1.
138. O'Connor (1994), pp. 134-5.
139. USDA Forest Service (September 1994).
140. DEN, December 1, 1995, p. A4.
141. Unless otherwise stated, all information on biotechnology development agreements
provided by Frisvold and Condon (1994).
142. Quoted in Frisvold and Condon.
143. OECD (1994a), p. 106.
144. Chance (1995).
145. DEN, February 21, 1996, E5-6.
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146. IER, May 15, 1996, p. 392
147. Potier (1995), p. 18.
Foreign Experiences with Incentive Systems
1997
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
11-66 August
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12. CONCLUSIONS
At least 100 different economic incentive mechanisms are currently being used in the
United States, up from approximately 40 in 1992 when EPA's first survey was conducted.
Economic incentives are being used at many levels of government from individual towns
to the federal government. Some of them have multiple applications in different states or
cities. Although it would be desirable to be able to summarize the cost savings from the
use of each of these instruments, the financial consequences to individual economic
sectors, the impacts on technical change and innovation in pollution control, and the
environmental effects of each of these mechanisms, few have been studied in such detail.
Approximately 30 quantitative comparative studies now exist, all of which indicate
that economic incentives should be more economically efficient than command-and-
control approaches for controlling environmental pollution. The predicted efficiency
gains can quite large, but it must be kept in mind that retrospective studies have found
that the savings actually realized fall well short of the potential, particularly so for many
of the trading mechanisms. There is relatively little information available on the environ-
mental effects of economic incentives. Although incentives are being increasingly used,
they have not always been implemented in the ways advocated by economists. Not sur-
prisingly, therefore, the results have sometimes fallen short of what economists hoped for.
A review of the principal types of incentives suggest several reasons for this result.
Fees and charges, with few exceptions, have not been set equal to marginal treatment
cost, let alone the theoretically more defensible and generally higher values determined
by the marginal damages the pollution causes. Rather, revenue goals have been the
principal drving force behind many of the charge-based incentive mechanisms and fees
and charges generally have been too low to have a true incentive effect. In situations
where fees and charges approximate marginal treatment cost, such as the Swedish NOx
charge and water pollution charges in the Netherlands, the impacts on technical change
and innovation are large, as is the measured environmental improvement. Additional
study of the impact of pollution taxes and charges that approximate marginal abatement
costs is likely to be instructive; potential subject areas include (1) the impact of POTW user
fees on industrial users' discharge, (2) the impact of existing pricing mechanisms for
commercial and industrial generators of solid and hazardous waste, and (3) further
studies on unit pricing of household waste disposal.1
Among the market-based trading systems with which there is experience, only the
lead phase down, wood stove permit and acid rain examples can be termed a full success
and even in these programs there are numerous instances where potentially profitable
trades were not completed. Other emission and effluent trading systems are subject to
severe regulatory constraints that have raised barriers to trading. In nearly every case,
actual cost savings have fallen far short of originally projected amounts. If, as seems
likely, the United States will want to expand the opportunities for market-based trading
of pollution reduction credits or allowances, it is important that unnecessary constraints
not be imposed in future applications and that transactions costs be minimized.
Deposit-refund systems are used for several products at the state level and in Europe.
Beverage container deposits appear to be effective in reducing litter. With the exception
1997
12-1
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
of beverage container deposits, however, there is only limited knowledge of impact and
virtually no analysis of costs and benefits. Lead-acid battery deposits are largely a private
sector initiative, though some states also require deposits. The near-universal application
of this incentive, whether private or public, and the very high rates of recycling that it
achieves, make it worthy of further examination. What special features allow it to thrive
where other deposit systems engender controversy and high cost?
Several programs that act solely to provide information appear to be having great
impact. Many firms have made public announcements of a corporate commitment to
reduce pollution voluntarily in response to reports filed under SARA Title III. One
attractive feature of information requirements is that response is highly flexible; corpora-
tions are free to do nothing or to seek pollution reductions as they see fit. Where pollution
reduction can be achieved at reasonable cost, many corporations see it in their self interest
to make those efforts.
Liability mechanisms can and do act as incentives. Structuring liability rules to
internalize the cost of pollution, without deviating from this objective by a wide margin,
may be difficult to accomplish, if the experience with hazardous waste cleanup and
natural resource damage assessment are any guide.
Subsidies have both positive and negative effects on the environment. Economists
generally do not favor subsidies, believing that there are superior mechanisms to improve
the environment. Economists would favor elimination of environmentally-unfriendly
subsidies.
Voluntary programs have a mixed record, with several not meeting initial expecta-
tions. The lack of a statutory basis for the programs, different expectations on the part of
EPA and program participants, and in some cases mistrust, have slowed progress with
many programs.
Finally, a review of the use of economic incentives outside the United States suggests
a somewhat different mix of incentive mechanisms but generally similar conclusions as to
their effectiveness and efficiency as in the United States. The United States uses many
more marketable permit systems than European countries, but much less environmental
labeling. Although charges and fees are used more widely in Europe, they also tend to be
revenue-raising instruments with few incentive impacts, as in the United States. The lack
of incentive impact of charges is due primarily to their low magnitude and because a
number of the charges are not closely linked to waste generation or product consumption.
As in the United States, however, official interest in economic incentives appears to be
increasing in Europe and indeed throughout much of the world.
Endnotes for Section 12
1. It should be noted that the EPA Office of Water is examining effluent fees and various
pollutant trading systems to support the Clean Water Act reauthorization process.
12-2
August
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APPENDIX A. BIBLIOGRAPHY
For other reports on economic incentives funded by the EPA Economy and Environment
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The U.S. Experience with Economic Incentives in Environmental Pollution Control Policy
250.
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