The full text of this report is available in Adobe PDF format. Click "Greening.pdf" under the red File Attachments header on the right.
Environmental awareness is at an all-time high
among the American public. As the nation is poised to
address old and new environmental problems in the
1990's, citizens and policy makers alike are seeking
solutions that are more cost effective, that require
less government intervention, and that encourage the
development of better technologies. This paper
examines pollution charges, a set of innovative
environmental policy instruments which merit serious
consideration by policy makers, because these
mechanisms can enable our society to meet the
environmental challenges we face at lower overall cost.
The pollution charge mechanisms examined in this
paper can begin to move us away from dependence on
distortionary taxes, which discourage socially
desirable behavior such as labor and the generation of
capital, and move us instead towards greater reliance
on "green taxes," which discourage socially undesirable
behavior, such as environmental pollution and natural
resource degradation. Practical opportunities abound
to apply pollution-charge mechanisms. This paper
investigates four particularly promising problem areas:
greenhouse gas emissions; energy production; solid
waste issues; and hazardous waste management.
The first problem examined is the threat of global
climate change due to the greenhouse effect. Cost
effectiveness and feasibility are likely to be of
paramount importance in any successful policy that
addresses the apparent causes of global warming, which
are linked to fossil-fuel use and hence ubiquitous in
our economy. If goals for controlling carbon dioxide
(CO2) emissions are set by an international agreement,
they must be achieved at the lowest possible cost.
Given the millions of CO2 sources which would have to
be controlled, it is difficult to imagine how
conventional regulatory approaches could provide
meaningful results. Thousands of separate standards
would have to be promulgated and monitored, or the
policy focus narrowed to a few sectors of the economy;
either scenario raises costs dramatically. Pollution
charges linked to the carbon content of fossil fuels,
on the other hand, can provide a feasible alternative
for reaching CO2 emission reduction objectives at the
lowest possible cost to society.
Two other important problem areas are cleaner
energy production and solid waste management.
Environmental costing for electric utilities and
municipal solid waste charge systems can provide for
more appropriate mixes of resource-use and disposal
options. Conventional approaches typically dictate
behavior through fiats and common standards, but what
makes sense in one area of the country simply may not
make sense in another. As a result, conventional
approaches often misallocate resources. Pollution
charges recognize variations in local circumstances; by
realigning price structures to ensure that each
individual citizen or firm bears the full environmental
costs of their actions, charges lead automatically to
the right mix of resource-use and disposal/recovery
options.
Finally, in the case of hazardous waste
management, conventional approaches may not only be
administratively burdensome, but may actually encourage
undesirable behavior such as under-reporting or illegal
disposal. Deposit-refund systems, on the other hand,
discourage dumping and reduce monitoring demands on
government by making it in the financial self-interest
of firms and consumers to dispose of waste properly.
Given the promise of pollution charges, it is
striking that they have been largely ignored as policy
instruments. This may stem from the fact that they are
taxes, a controversial and often forbidden subject for
much of the last decade in Washington, D.C. But
pollution charges can be made revenue neutral through
compensating reductions in other taxes. This tradeoff
would improve economic efficiency even further, since
green taxes encourage socially desirable behavior,
while many current taxes discourage such behavior, thus
distorting economic activity and reducing efficiency.
The American population has been shielded from
many of the very real trade-offs involved in
establishing our environmental goals and standards.
Policy formulation has been shrouded in technical
complexity, which obscures the more basic choice of how
much economic well-being we are willing to sacrifice
for increased environmental quality. Conventional
regulatory approaches impose costs on industry that are
not readily visible. Because neither policy makers nor
citizens can see how much they are really paying for
given levels of environmental protection, they have
little basis for weighing relative risks.
Pollution charges bring these important tradeoffs
into the open by making the incremental costs of
environmental protection explicit. As a result, policy
discussions can move away from a narrow focus on
technical specifications to a broader consideration of
goals and strategies. This shift should facilitate the
involvement of the American public in debates regarding
the degree of environmental protection. In this way,
the public can recapture the critical decisions of
environmental goal-setting from bureaucrats,
technicians, and special interest groups.
Promoting the selective use of pollution charges
will require political courage; but it is the right
thing to do for a variety of environmental problems,
for both environmental and economic reasons.
Furthermore, it offers potential political dividends:
the underlying logic of pollution charges can be
explained simply to the public; their basic principles
will resonate well with Americans' fundamental sense of
fairness -- "the polluter ought to pay."
Even without such political leadership, we may
eventually be compelled to adopt these new approaches.
As new environmental problems arise and old ones
persist, the limited resources of government agencies
and society at large will be stretched further and
further. Pollution charges and other incentive-based
instruments may ultimately be the only feasible courses
of action if we hope to sustain or improve
environmental quality while maintaining economic well-
being. With the necessary political leadership, we can
begin now to move in the right direction.
