Pollution Charges, Fees, and Taxes2001 334. Pollution Charges, Fees, and Taxes4.1 IntroductionA pollution charge is a fee based on the quantity of pollutants that are dischargedinto the environment. A user charge is a fee paid in exchange for the use of naturalresources or for the collection or disposal of pollutants. A product charge is a feeimposed on products that are believed to have environmentally harmful effects.Although the terms “fee,” “charge,” and “tax” are used interchangeably in thischapter, there are subtle differences. Under federal law, a tax is a purely revenue-raising instrument, whereas charges or fees are intended to offset costs to thegovernment. Thus, tax receipts would be part of general revenues. While manycharges and fees that are collected must be placed in the Treasury General Fund,some are allowed to be retained and could supplement agency budgets. The differenttypes of fees, charges, and taxes discussed in this chapter can be classified in variousways. They are summarized in Table 4-1.Table 4-1. Fees, Charges, and Taxes in Environmental PolicyInstrument Description ExamplesPollution fee Charge based on thequantity of pollutantsreleased into theenvironmentAir emissions permit fees in California, Maine, otherstatesEffluent permit fees in Louisiana, California,Wisconsin, other statesSolid waste disposal feesUser fee Fee for the use ofresourcesWater use feesCongestion or time-based highway tollsGrazing feesProduct charge Charge on a productbelieved to haveenvironmentally harmfuleffectsGas guzzler taxCFC taxState taxes on fertilizersState advance disposal fees on tires, motor oil,packaging, other goodsOther fees onenvironmentallydamaging activitiesVarious mechanisms Wetland development feesStormwater runoff feesMost environmental taxes are designed primarily to raise revenue, often to fundenvironmental protection activities. The economic rationale behind such taxes is thatthose who cause pollution should bear the costs. Such costs include both damages tothe environment and the administrative costs incurred by the authorities that regulatepolluters. To be economically efficient, environmental taxes should reflect both ofthese costs.Although some charges, especially product charges, have been imposed at the federallevel, the majority of them have been introduced at the state or local level. In the caseof air and water pollution, the federal government has provided policy guidance oncharges, but the states have developed and implemented a wide variety of charges asthey have seen fit.The U. S. Experience with Economic Incentives for Protecting the Environment34 JanuaryGiven the multiplicity of environmental taxesespecially at the state and local levelsand thefrequency with which they are adopted or modified, this chapter does not attempt to provide acomprehensive description of all the environmental taxes in place in the United States. Rather, itspurpose is to describe some of the more important environmental taxes.4.2 Water FeesWater fees take various forms, including user fees (e.g., for groundwater, surface water, ordrinking water supplied by waterworks) and fees for direct or indirect water discharges. Indirectdischarges are sent to treatment works. The rationale for water user fees is that water is not a freeresource but rather a scarce commodity that should be priced to avoid inefficient use and relatedenvironmental problems. The rationale for discharge fees follows from the polluter-paysprinciple described in the previous section. Most water fees are intended primarily to raiserevenue to recover the costs of providing service rather than to allocate a scarce resource amongcompeting interests.4.2.1 Indirect Discharge and User FeesFees are imposed on households and businesses for discharges of wastewater into PubliclyOwned Treatment Works (POTWs). Frequently, the water and wastewater utilities that service ahousehold or business are one and the same. When a single invoice includes both services, usersmay be able to distinguish discharge fees from water user fees only by careful attention to lineitems. Wastewater discharges are not directly metered in most cases; rather they are assumed tobe equal in volume to water consumption, which is measured. Some discharge fees for largerbusinesses are based not only on water use but also on discharge toxicity, which provides themwith a separate incentive to reduce the toxicity of their discharges. Sims found that toxicity-based charges provided an incentive for large industrial facilities to reduce the volume of theirdischarge.29With respect to water user fees, EPA’s 1995 Community Water System Survey estimated that95% of residential water customers and 98% of nonresidential water customers are metered.They pay water charges based directly on their usage.30Whether a water user fee has a greater effect in terms of raising revenue or reducing a potentiallypolluting activity depends largely on the elasticity of the demand for water, that is whetherdemand is responsive to changes in price. If the demand is inelastic, an increase in user fees willraise revenue. User fees will not, however, affect consumption behavior in a significant way. Ifdemand is elastic, however, consumption behavior is likely to be changed by a water fee, but therevenue-raising prospects are limited. Although water demand is often assumed to be inelastic,studies that separate water demand by season have found that household water demand isinelastic in winter but elastic in summer. Others have found that water demand by industrial andagricultural users is sensitive to price changes.31To promote water conservation, many have suggested the use of rate schedules that imposehigher rates per 1,000 cubic feet as use increases. Two periodic surveys give an indication as tothe type of rates that water utilities use. The Ernst & Young survey focuses on only the largesturban utilities, while the EPA Community Water System Survey is a more comprehensive,random-sample survey that includes smaller utilities. The Ernst & Young survey of residentialrates for about 130 utilities reported that 38% use decreasing rates, 37% use uniform rates, andPollution Charges, Fees, and Taxes2001 3522% use increasing rates. It also shows two trends over time: a greater use of increasing rates anda lesser use of decreasing rates. EPA’s Community Water System Survey obtained residentialrates from more than 1,000 systems: 49% use uniform rates, 16% use