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Economic Incentives for Pollution 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 3-1). 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 thresholds 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 measurable 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 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 E1 whose marginal costs of control exceed marginal damage. By focusing only on environmental improvement, ambient standards are likely to be set at too ambitious 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 achieving health or environment-based ambient standards. Referring to Figure 3-1, the pollution control authority might attempt to limit total pollutant releases to E1, E0 or some other level by setting emissions standards 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 E1 will be higher than C1. 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.

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 technologies 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 SO2 emissions at coal-fired electric power plants require a 90% reduction relative to uncontrolled 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.

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