August, 1997THE UNITED STATES EXPERIENCEWITH ECONOMIC INCENTIVESIN ENVIRONMENTAL POLLUTION CONTROL POLICYEnvironmental Law Institute1616 P Street, NWWashington, DC 20036The U.S. Experience with Economic Incentives in Environmental Pollution Control PolicyAugustiiAugust, 1997THE UNITED STATES EXPERIENCE WITH ECONOMIC INCENTIVES IN ENVIRONMENTAL POLLUTION CONTROL POLICYbyRobert C. Andersonand Andrew Q. LohofResource Consulting Associateswith the assistance ofAlan CarlinOffice of Economy and EnvironmentOffice of Policy, Planning and EvaluationU.S. Environmental Protection AgencyWashington, D.C. 20460Prepared under EPA Cooperative Agreement CR822795-01 with the Office of Economyand Environment, U.S. Environmental Protection Agency, Washington, D.C. 20460Project OfficerAlan CarlinOffice of Economy and EnvironmentOffice of Policy, Planning and EvaluationU.S. Environmental Protection AgencyWashington, D.C. 20460Environmental Law Institute1616 P Street, NWWashington, D.C. 20036AugustiiDISCLAIMERAlthough funded by the United States Environmental Protection Agency underCooperative Agreement No. CR822795-01, the views expressed in this report do notnecessarily represent those of the Environmental Protection Agency. Mention of tradenames or commercial products does not constitute endorsement or recommendation foruse.EPA (July 1992).11997iiiEXECUTIVE SUMMARYIn the past several years, economic incentives have assumed a prominent positionamong the tools for environmental management. Nowhere is this role more explicit thanin the 1990 Clean Air Act Amendments. That legislation authorizes incentive-basedmechanisms for the control of acid rain, for the development of cleaner burning gasolineand less polluting vehicles, for states to use in controlling urban ozone and carbonmonoxide, and to facilitate the reduction of toxic air emissions.As other key environmental statutes such as the Clean Water Act and the ResourceConservation and Recovery Act come up for reauthorization, potential applications ofincentive mechanisms may be actively debated. EPA is currently evaluating a variety ofincentives to support these debates as well as working to implement other mechanismsunder existing statutory authority. At the state level, a wide variety of incentive programshave 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 forapplying incentives.With current high levels of interest in incentive mechanisms for environmentalmanagement, 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 arrayof 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 theirobjectives?This report updates and extends a 1992 EPA review of that record, highlighting1applications of emission and effluent fees, charges for solid waste disposal, marketablepermit systems for air and water pollution, deposit-refund systems, and information andliability mechanisms. The mechanisms described in this report all satisfy the basicrequirement that a continuous signal be provided to pollution generators to be aware ofand act on opportunities to reduce releases of pollution to the environment. The report first reviews the available information on the economic efficiency andenvironmental effects of economic incentives in general. The literature uniformly findsthat economic incentives should be much more economically efficient in controllingpollution than the traditional command-and-control approaches. Some studies, however,indicate that the cost savings actually realized have fallen short of those predicted by thesestudies. Economic incentives should be particularly efficient when diverse sources ofpollution are involved which are most efficiently controlled using little-known or yet-to-The U.S. Experience with Economic Incentives in Environmental Pollution Control PolicyAugustivbe developed technologies. The evidence on the environmental effects of economic incen-tives, while much less extensive than that on economic efficiency, suggests that incentivesmechanisms are fully compatible with environmental objectives.The historic record concerning individual incentive programs suggests that althoughthere have been a number of important successes, in some cases incentive programs havefailed to live up to their full theoretical promise. This appears to be the result of theparticular design features of the programs tried, however, rather than the theoreticalpromise of the approach. In most cases, fees and charges have been designed primarilyto raise government revenue, and have thus been set too low to have significant incentiveeffects. Trading systems have often been constrained by complicated regulations, butsome new ones which have not as yet been fully implemented hold out considerablepromise for being both effective and efficient in reducing pollution. Beverage containerdeposits appear to have greatly reduced litter, but there is only limited knowledge of theimpact of other deposit-refund systems and virtually no analysis of the costs and benefitsof any of the deposit-refund mechanisms. Some programs providing information appearto be having great impact among fully implemented incentives considered in this reportand are likely to be economically efficient as well, but have not been examined with thedetailed scrutiny necessary for a fair evaluation of performance. Liability mechanisms canand do act as effective incentives, but structuring liability rules to accurately internalizethe costs of pollution has proved difficult. Finally, a review of the use of economic incentives outside the United States suggestsa preference for a somewhat different mix of incentive mechanisms but somewhat similarconclusions as to their effectiveness and efficiency as in the United States. The UnitedStates uses many more marketable permit systems than European countries, but much lessenvironmental labeling. Also, a wider range of commodities are subject to depositsystems outside the United States. Although charges and fees are used more widely inEurope, they also tend to be revenue-raising instruments with few incentive impacts, asin the United States.