Karch - Pollution Control Costs Too Much!

POLLUTION CONTROL COSTS TOO MUCH!
An Address By

Kenneth M. Karch, PE

Executive Director

Iowa Department of Environmental Quality
Des Moines, Iowa 50216

Before the

Institute of Environmental Sciences
Shoreham-Americana Hotel
Washington, D. C.

April 30, 1974

I would like to spend the next 15 or 20 minutes talking about a basic defect in the mechanism which this nation has chosen to control pollution and to suggest an alternative which I believe requires serious consideration by the Congress and the Federal and State Environmental Control Agencies. in suggesting this mechanism, I speak as an engineer with 10 years of experience in local and state pollution control agencies, consulting engineers, and with a regional planning agency, and not in my current capacity as Director of the Iowa Department of Environmental Quality.

The basic reason for undertaking economic activity is to produce more of the goods and services that people want. Unfortunately, as a byproduct of this production of goods and services, waste products are generated. These waste products are generally dispersed into the air, into the water, or onto the land, thereby causing pollution and other social costs. Because these costs are not accounted for in the price of the products, they are called external costs, because they are outside the decision making process of the industry or municipality.

Disposal of these materials into the air, water and land has been done indiscriminately in the past because these resources were essentially free for the taking; therefore, dischargers maximize the use of these resources.

As a result of each industry and municipality wishing to utilize the free resource to the maximum extent, the resource capacity for assimilation of discharged materials was exceeded, resulting in air pollution, water pollution and the degradation of our land.

Such a preemption of the assimilative capacity raises the cost to other users of these resources in terms of adverse health effects, property damage, vegetation damage, destruction of natural environments, etc., and in a sense constitutes a capture of the public domain for private use without compensation or in the case of a public discharge, a taking of a right without compensation. Neither of those concepts has achieved widespread legal support.

It was generally conceded that the free enterprise economic system should adjust itself to account for these external costs through some kind of a balancing of benefits and costs among users. The question was how this could be accomplished.

It seemed that there were two basic approaches which might be followed. The first approach was that of direct governmental regulation of individual dischargers. The second was to develop sufficient governmental regulation to allow the market place to allocate these scarce natural resources and internalize the environmental and social costs arising from the disposal of waste materials into the environment.

The approach that was selected in the United States to solve air and water pollution problems was that of direct governmental regulation of individual dischargers. This approach had been used for many years on the State and local level and recently, with the passage of Federal water and air pollution legislation, has been adopted by the Federal government as well.

I should like to suggest in this paper that this approach has largely failed to accomplish the job, has resulted in the waste of huge amounts of scarce public funds, has helped turn the public off on government while building a massive and essentially unnecessary bureaucracy, has delayed the solution to problems, has had severe anti-competitive effects, has created a massive and nationally significant strains on limited energy resources.

Because there are no continuing positive economic incentives to abate pollution, the strict governmental regulation effort has generated reluctance by municipalities and industries to control pollution which has manifested itself in excuses for inaction, proposals for long-term studies to solve the problem, delays of various kinds and ultimately court fights--some of which have delayed effective pollution control for years. In order to try to counteract the negative effects of the direct govern­mental regulatory program, we have attempted to give tax write-offs and subsidies of various kinds to industry, and have developed a construction grant program for municipalities which provided funds for industry as well, until recently.

The pure governmental regulation control method has severe anti­competitive aspects. Economies of scale in production apply equally well to pollution control. Pollution control costs for large industries per unit of production generally tend to be lower than for a small industry. In addition, larger industries tend to be better capitalized, tend to be able to fight regulation more effectively, tend to be able to get more time for compliance, and are generally better able to cope with the regulatory function.

Direct governmental regulation has had severe tax impact as well. Municipalities suddenly were faced with large increases in property taxes for construction of wastewater treatment facilities that they generally didn't benefit from since benefits were largely accrued downstream. Recognizing this, a whole series of construction grant and loan programs from HUD, FHA and EPA and its predecessor agencies were generated. The most significant effect of these grant programs was to give essentially complete control to the Federal, government and to create a near perfect pork-barrel program (everybody gets a little; it's a popular issue; it's a move in the direction of more progressive taxation; it provides increased business for local business, etc.).

A direct governmental regulation program had substantial impacts upon intergovernmental cooperation. The large Federal construc­tion grant programs may have encouraged a "go it alone" attitude, since without such grants local communities probably could not have afforded to go it alone. The recent industrial repayment provision has effectively discouraged industry from seeking out intergovernmental regional joint municipal-industrial treatment approaches. And finally, the States' seem to be fighting amongst each other to get the biggest piece of the Federal construction grants pie in the development of their needs surveys.

The regulatory approach was a deterrent to innovative solutions to pollution problems. The regulatory approach encouraged "end-of-the-pipe" technology. The construction grants and other public subsidy programs has discouraged improved in-plant housekeeping and process changes and reduced innovative waste recovery and reuse and recycling efforts. The program has largely ignored the benefits which might be achieved through progressive urban and basin planning. The regulatory approach has largely ignored the concept of land capability for develop­ment and other land use issues. These issues are only now beginning to be recognized in the designation of the water quality limited segments of our streams.

The regulatory approach upsets the market system by causing sometimes serious distortions in market decisions. There is essentially no way in telling whether an extra dollar in pollution control costs produces an extra dollar in benefits. Industry has been forced to aim at a continually moving pollution control target.

Finally, the emphasis upon governmental regulation has caused technical and economic feasibility problems. The time limitations spelled out in the Clean Air Act and the Water Quality Act were determined with more hope than realism and grave doubts are being expressed about their attainability by EPA and Congress as well as industry. In addition, governmental regulation has played a major part in placing a strain on certain resources including gasoline, natural gas, and low sulfur fuel.

When I was named to organize and head Iowa's then new Department of Environmental Quality some two years ago, I enjoyed toying with my audiences by saying that one of my primary tasks was to assure that we spent as little as possible on pollution control in the State. This attitude both horrified the environ­mentalists, and pleased the polluters, until each began to understand what I meant.

I was convinced then, and I remain convinced today, that the methods being used throughout the nation to control pollution are grossly inefficient from an economic standpoint and although I have no way of proving it, I am convinced that the public is paying, either through increased taxes or increased prices, half again as much and perhaps twice as much as it should have to pay to meet the ambient or water quality standards set up as a result of the air and water pollution control acts. I believe Congress as well as Federal and State pollution control agencies have gone a long way down the road to creating a public crisis of confidence by insisting on a system of uniform national effluent or emission standards, an incredible emphasis on end-of-the-­pipe technology and the creation of a near perfect pork-barrel program of municipal construction grants.

Let me say at this point, that I recognize the social, political, technical, and legal problems associated with the control of air and water pollution in metropolitan areas and in no ways are my remarks today to be construed to downplay those problems. Nevertheless, I feel that a major restructuring of the approach that this nation has used in its air and water pollution control efforts is necessary at the earliest possible time. The reasons for this are many and varied.

First of all, the planning, construction, and operation and maintenance of air and water pollution control facilities have become a significant part of this nation's gross national product. Expenditures for air and water pollution control have been rising continuously for 20 years or more and promise to continue to rise in the short-term future. In view of the increasing demands upon limited State and Federal resources as well as private investment capital, it is essential that funds used for pollution control be expended in the most efficient manner possible.

Second, public expecta­tions created by the passage of the Clean Air Act Amendments and the Water Quality Act Amendments will not permit excuses when deadlines arrive that are not met. Only through economically efficient expenditure of these limited resources, can we hope to ever come close to achieving these deadlines.

And third, and finally, environmentalists are in a very vulnerable position if expenditures for air and water pollution control are not made effectively due to the pressures being applied resulting from the energy crisis.

During the last 2 years I have learned a little bit about tilting with windmills.

Nevertheless, I am heartened by a considerable amount of recent literature describing alternatives to the governmental regulations scheme for controlling air and water pollution. Most of these proposed alternatives involve the use of economic incentive techniques of one sort or another, primarily taxes, effluent charges, and environment leasing mechanisms. It is not my intent in this paper to defend any one particular method, nor to debate their pros and cons. I have attached a bibliography for those who wish to pursue this matter further.

Basically the objective of the various economic incentive plans for controlling air and water pollution rest upon bringing to bear market forces in allocating resources.

As you know, one of the most basic aspects of pollution is that the generator of the pollutant is generally not harmed by it. That harm is often borne by other persons (for example, a downstream community subject to discharges of sewage from an upstream community, or farmers who live downwind from the copper smelter.)

Furthermore, the impacts of the pollutant are generally spread among a large number of receivers. Thus the economic incentive to use the courts was nonexistent, since virtually any court of equity would rule that the massive interest of the polluter was of more importance than the individual interest of the recipient of the pollution. While the class action suit concept helped reverse this legal problem, only in rare cases was the social cost being imposed upon society internalized to the polluter by requiring that these social costs be reflected in the cost of the products of that producer.

While the attempt to establish uniform effluent or emission standards for all industries of like nature will tend to internalize some of these external costs by reducing discharges, such a system inherently results in over-kill for some industries and inadequate control in others, thereby wasting resources, at the same time doing a less than adequate job.

In addition, because of economies of scale, large industries who are forced to meet a uniform effluent standard will do so often at a cost per unit of output substantially less than their smaller competitors, thereby offering large industries a competitive advantage over small industries, contrary to the expressed intent of other Federal legislation. Reliance upon a tax or effluent charge or assimilative capacity exceed capacity of the stream or air shed while assuring that those industries with the least cost treatment options would treat (generally the large industries) while those with high unit cost of treatment (the small industries) would continue to discharge.

The simplest market scheme to implement might involve the rental or lease of the environmental resource, the air, the stream, the lake, etc. to the highest bidder. This was proposed for ocean dumping in the 1971 Economic Report of the President. Such a system would limit the amount of discharge directly but would allow the price for discharging a unit amount of a substance to be set indirectly by the market system. Under such a plan, a governmental agency would determine the capacity of a resource to assimilate different wastes and would then issue permits specifying the type and amount of waste with the total amount permitted not to exceed the natural limit of the resource.

Then the government would auction off these permits to the highest bidders and allow private resale thereby allowing a price to be established for the use of the resource.

Since the prices that the bidders would be willing to pay would measure the costs of alternative waste disposal methods, this method would ensure that scarce waste assimilative capacity of the resource was being put to its most productive use. The beauty of the system lies in its simplicity and flexibility, reducing governmental involvement to the setting of the environment's assimilative capacity (just as we are doing now), the monitoring of discharges and the collection of fees. The revenue derived from the sale of the permits could be applied to other environmental needs.

Other techniques using effluent changes and taxes have also been suggested, in order to cope with particular problems such as interstate control, etc. No single set of economic control techniques will suffice and some combination of such techniques and direct governmental regulation will probably be necessary I believe it is long past the time when we can be satisfied with engineering solutions without considering other factors, and l would urge the Congress and the EPA to press forward with studies of the advantages and disadvantages of alternative regulatory mechanisms so that we can have a basis for making rational, cost-effective decisions on the future of pollution control in this country while minimizing aversive controls which limit freedom of choice.

Bibliography

Riordan, Barrett J., Environmental Quality and New York_. City, First National City Bank, New York, 1972.

--- , More Effective Programs for a Cleaner Environment, A Statement on National Policy by the Research and Policy Committee of the Committee for Economic Development,New York, 1974.

Page, Talbot, Testimony before EPA Upon the Interpretation of No Significant Determination" For the Clean Air Act, Aug. 29, 1973.

Solon, Robert M., The Economists Approach to Pollution and Its Control", Science 173:498, August 6, 1971.

Westman, Walter E. & Gifford, Roger M., "Environmental Impact Controlling the Overall Level", Science 181:819, August 31, 1973.

Delogu, Orlando E., "A State Approach to Effluent Change," Maine Law Review 23:2:281, 1971.

Freeman, A. Myrick, "Economic Incentives in Water Pollution Control," Dept. of Economics, Bowdoin College, Brunswick, Me., 1972.

Seaquaves, J. A. "Surcharges and Stream Changes as Economic Incentives," North Carolina State University West Raleigh Station, Raleigh, N. C., 1972.

Freeman, A. Myrick, & Haveman, Robert H., “Residuals Changes for Pollution Control; A Policy Evaluation," Science  177:322, July 28, 1972.

Hardin, Garret, The Tragedy of the Commons, Science 162,1243, 1968.

Wallich, H. C., Fortune, October 1972, p. 114.

---, Congressional Record, November 2, 1971, p. 517425.

---, U. S. Senate Committee on Public Works, Water Pollution Hearings, Government Printing Office, Washington, D. C., 1970, part 1, p. 187-200, 346-364.

Kneese, A. V., "Environmental Pollution Economics and Policy," American Economic Review (Papers Proc.) 61, 153 (1971).

Ayres, R. U. & Kneese, A. V., "Production, Consumption, and Externalities, " Amer. Econ. Rev. 59,286 (1969).

Gilbertson, W. E., Statement on Effluent Tax for Water Pollution Control, before Joint Economic Committee Hearings on Economic Incentives for Pollution Control, July 19, 1971.

Freeman, M. Myrick, "Cleaning Up Foul Waters: Pollution Tax," New Republic (June 20, 1970) p. 13.

Kneese, A. V., The Economics of Regional Water Quality Management (1964).

Kneese, A. V., & Bower, B., Managing Water Quality: Economics, Technology, Institutions (1968),

Grady, "Effluent Charges and the Industrial Water Pollution Problem," 5 New England Law Review 61 (1969).