The fact that there is a general consensus tto the effect that we must regulate the pollution of our water, air and land, various government agencies, private interest groups, and experts in the field have disputed just how it should be controlled. The mechanisms of pollution control that have been adopted in the United States have tended toward extensive regulation of current and develpoing technologies. By 1970 widespread awareness and concern about dagame to the enviroment crystalized into a significat political entity. The result of this was the creation of the Environmental Protection Agency (EPA) by President Nixon.
In addition to this, the first of the major federal attempts to regulate pollution directly—the Clean Air Act Amendments of 1970, was passed. From then to now, the federal government’s role in regulating pollution has increased greatly. But this state of affairs has begun to change, for although the command-and-control approach is the norm, public officials and envirnmental lobbyists are starting to consider market-based approaches to pollution control.
In nearly every antipollution act, Congress has commishioned the EPA to create and enforce specific pollution regulation for polluters. These regulations are primarily based on the notion of the “best available” technology for each industry. Pollution controls are often placed into the process of production in a way that makes any approximation of their cost very difficult. In addition, pollution controls are known to discourage new facilites and production, but as of this writing no agency or group calculates these indirect values as to what is not produced. The federal government has, however, approximated a subset of costs. These spendings cost both private groups and governments about $100 billion in 1988 alone.
Breaking this down, we see that $40 billion was spent on reducing air pollution, $40 billion on water controls, and $20 billion for a various solid and hazardous waste and other programs. Pollution standards divert economic resources from other economic issues, thereby reducing the size of measured national output. As long as the increased value of the environment is a one dollar for each additional dollar spent on controls, the total value of goods, services, and environmental amenities is not reduced. Unfortunately, that seldom happens, for at least three reasons.
First, the EPA or Congress can choose to control the wrong substances or to regulate some discharges too forcefully. For example, Congress’s Office of Technology Assessment reached the conclusion that attempting to meet the EPA’s guideline for city-based smog reduction could cost more than $13 billion per year, but result in less than $3.5 billion in improved health, agricultural, and amenity benefits.
Second, regulation standards can result in highly inconsistent patterns of control. Some polluters may be made to spend $25,000 per ton to control the discharge of a certain pollutant, while for others the cost is only $500. Significantly, shifting the burden away from the first polluter toward the second would result in lower total control costs.
Thirdly, pollution controls can have negative effects on corporate investment in at least two ways. First, by making certain products— vehicles, paper, chemicals,, metals,—more costly to produce in the United States. Second, because such controls are generally more aggressive towards new sources than for older ones, managers are more likely to keep an old plant in use rather than replace it with a new, more efficient facility.
Problems like these have led policymakers to look for more efficient means of cleaning up the environment. As a result, the 1990 Clean Air Act Amendments look very different from their predecessors of two decades earlier because they include market-based incentives to reduce pollution.
Market incentives are generally of two forms: pollution fees and so-called “marketable permits.” Pollution fees are simply taxes on polluters that penalize them in proportion to the amount they discharge into an airshed, waterway, or local landfill.
Such taxes are common in Europe but have not been used in the United States. Permits are in essence exchangeable licenses for discharges that polluters can buy and sell to meet the control standards placed by authorities. These permits have been used in the United States because they do not impose large taxes on a small set of polluting industries, as would be the case with pollution fees.
The 1990 Clean Air Act enables the EPA to grant “emissions permits” for specific pollutants. In essences, these are rights to pollute that can be traded between polluters. A market for trading emissions permits was allowed by the EPA under the Carter administration in 1979. Said Douglas Costle, EPA chief at the time: “The bubble means less expensive pollution control, not less pollution control.” Tradable permits do work. In 1981, General Electric had three months to meet the state of Kentucky’s deadline for emissions control. To do it, GE paid $60,000 to International Harvester to lease several hundred tons of emissions reductions that International Harvester had “saved.”
Not only did GE meet the deadline, but it also saved $1.5 million in capital and $300,000 in operating costs. Up through 1984, permits approved by the EPA alone have saved an estimated $300 million compared to what would have been spent to comply under traditional pollution controls.
State-approved bubbles, like that used by GE, have saved millions more. Environmental economist Thomas H. Tietenberg estimates that marketable permits can reduce the cost of pollution control by as much as 75 percent. University of Maryland economist Wallace Oates estimates that a complete switch from command-and-control to marketable permits would reduce pollution control costs by at least one-third.
Protecting our environment does not have to put an end to economic progress. Free markets in permits to pollute, like free markets for other resources, can assure that pollution is controlled at the lowest cost possible.
Hahn, Robert W., and Gordon L. Hester. “Where Did All the Markets Go?” Yale Journal on Regulation 6, no. 1 (Winter 1989): 109-53.
Hahn, Robert W., and Roger G. Noll. “Environmental Markets in the Year 2000.” Journal of Risk and Uncertainty 3, no. 4 (1990): 351-67.
Tietenberg, Thomas H. Emissions Trading: An Exercise in Reforming Pollution Policy. 1985.