W O R L D R E S O U R C E S I N S T I T U T E

GREEN FEES:How a Tax Shift Can Work for the

Environment and the Economy

ROBERT REPETTO

ROGER C. DOWER

ROBIN JENKINS

JACQUELINE GEOGHEGAN

GREEN FEES: HOW A TAX SHIFT CANWORK FOR THE ENVIRONMENT ANDTHE ECONOMY

Robert RepettoRoger C. DowerRobin JenkinsJacqueline Geoghegan

W O R L D R E S O U R C E S I N S T I T U T E

November 1992

Kathleen CourrierPublications Director

Brooks ClappMarketing Manager

Hyacinth BillingsProduction Manager

Pamela ReznickCover Photo

Each World Resources Institute Report represents a timely, scientific treatment of a subject of public concern.WRI takes responsibility for choosing the study topics and guaranteeing its authors and researchers freedom ofinquiry. It also solicits and responds to the guidance of advisory panels and expert reviewers. Unless otherwisestated, however, all the interpretation and findings set forth in WRI publications are those of the authors.

Copyright © 1992 World Resources Institute. All rights reserved.ISBN 0-915825-76-7Library of Congress Catalog Card No. 92-085230

Printed on Recycled Paper

Contents

Acknowledgments v

Foreword vii

I. The Potential Gains from Shifting theRevenue Burden from Economic "Goods"to Environmental "Bads" 1

A. The Burden of Today's Tax System 2B. The Economic (and Political) Benefits

of Environmental Charges 7

Notes 12

II. Pay-By-The-Bag Household CollectionCharges to Manage Municipal SolidWaste 15

A. Households' Response to Waste-Collection Charges 17

B. Cost Savings Under Pay-by-the-BagSystems 19

1. The Costs of Solid Waste Collectionand Disposal 19

2. Estimates of Solid-Waste Collectionand Disposal Costs 22

C. The Revenues and Net Savings fromWaste-Collection Charges 24

Appendices 30

A. A summary of the Empirical DemandModel 30

B. Estimated Coefficients 32

Notes 34

III. An Analysis of Tolls to ReduceCongestion on Urban Highways in theUnited States 35

A. Other Costs 38B. The Technology 40C. Estimated Benefits of Urban

Congestion Tolls AppliedNationwide 41

D. Other Costs 47E. Projections to 1999 48F. Other Considerations 49

IV. Carbon Taxes to Reduce CO2

Emissions 53

A. Defining a Carbon Tax 54B. Setting the Right Level of a Carbon

Tax 56C. Economic Consequences of Carbon

Taxes 57

1. Macroeconomic Impacts of CarbonTaxes 57

2. Recycling the Revenues 593. What the Models Miss 60

D. Distributional Consequences ofCarbon Taxes 61

1. The Impact of Energy Taxes byIncome Class 62

2. The Impact of Energy Taxes byRegion 63

3. The Impact of Carbon Taxes byIndustry 67

E. The International Context for CarbonTaxes 67

Notes 69

V. Other Potential Environmental Charges . .71

A. Effluent Charges 74

1. Charges on Releases of ToxicSubstances Documented Under theToxic Release Inventory 74

2. Vehicular Emissions Charges inAreas That Don't Meet Air QualityStandards 75

3. Effluent Charges on Surface WaterDischarges 76

B. Activity Charges 77

Recreation Fees on the NationalForests and Other Public Lands 77

C. Product Charges 78

1. Additional Stratospheric Ozone-Depleting Substances 78

2. Agricultural Chemical Taxes 79

D. Reducing Environmentally DamagingSubsidies and Tax Advantages 81

1. Eliminating the Excess of PercentageOver Cost Depreciation for MineralExtraction Activities 81

2. Charging Market Value forCommodities Produced on PublicLands 82

E. Conclusion 83

Notes 84

References 85

IV

Acknowledgments

W e wish to thank numerous col-leagues and friends who gavegenerously of their time, expertise,

and encouragement at every step of this proj-ect. In particular we want to acknowledge thecareful research assistance of Robert Gramlichand Nazmul Chaudhury. From within WRI wethank Alan Brewster, Walter Reid, CarrieMeyer, James MacKenzie, and Rafe Pomerance,who provided generous and helpful comments.We also express our gratitude to colleaguesoutside of WRI including: Harry Kelejian,Doug Lee, Ken Small, and Phil Trostel. Exter-nal reviews were provided by William Baumol,Dawn Erlandson, Richard Morgenstern, andRobert Shackleton. We appreciate their sugges-tions. Of course, we retain sole responsibilityfor the contents of this report.

Our special thanks to Kathleen Courrier forher skillful editing of the report, to HyacinthBillings for her management of the productionprocess, to Allyn Massey for preparing thefigures, to Sue Terry for her help in obtainingnumerous reports and references, to our PolicyAffairs Program for the oversight and manage-ment of the distribution process, and to CindyBarger, Rosemary McCloskey, and EvaVasiliades for their assistance and coordinationat every stage.

R.R.R.C.D.

R.J.J-G

Foreword

T axes, as the saying goes, are inevitable.But what governments tax is by nomeans inevitable. Today, the federal

government relies largely on personal and cor-porate income taxes and, increasingly, payrolltaxes (Social Security and Medicare). State andlocal governments also impose such taxes,along with sales, excise, and property taxes.

Taxes as now structured can assuredly havesome perverse effects on our economy by dis-couraging work, savings, and investment andby distorting economic decisionmaking. Cansome of our tax revenues be generated in abetter way? In Green Fees: How a Tax Shift CanWork for the Environment and the Economy,Robert Repetto, Roger C. Dower, RobinJenkins, and Jacqueline Geoghegan suggestthat the answer is yes. They recommend theuse of "green fees" such as charges on pollu-tion, waste, and congestion. Substituting greenfees for some existing taxes would not onlyproduce a cleaner environment but would alsoreduce the economic disincentives of currenttaxes, thus strengthening the economy. Theproposition is straightforward: we should shiftsome of the U.S. tax burden from activities wewant to encourage—like working and invest-ing—onto activities we want to discourage, likepollution, inefficiency, and waste. We shouldshift more from taxing "goods" to taxing"bads."

The same reasoning would apply if the goalis to raise additional revenues, which could be

used to reduce the federal deficit. The sumsthat can be generated through pollutioncharges and other green fees are potentiallyquite large, and they might well be politicallymore acceptable—or at least less unpalatable—than conventional taxes, since they would belinked directly to environmental improvementsthat Americans want.

Dr. Repetto and his co-authors illustrate theirpoint in detail by analyzing potential economicsavings from three readily adoptable taxeswhich give citizens and corporations an incen-tive to curb environmentally destructivebehavior: (1) pay-by-the-bag household collec-tion charges to reduce the amount of solidwaste that municipalities must dispose of; (2)rush-hour tolls to reduce congestion and airpollution on urban highways; and (3) carbontaxes to reduce carbon dioxide emissions andencourage energy-efficiency. All told, theauthors estimate, these three environmentalcharges could yield at least $100 billion inannual revenues for federal, state, and localgovernments. These revenues would allowgovernments to reduce other, more distortion-ary taxes, producing net benefits to the U.S.economy. These revenues could also be usedto compensate citizens who are disproportion-ately hit by pollution charges, to pay forneeded environmental programs, or to reducegovernment deficits.

Environmental taxes and fees are not theoret-ical inventions. In various forms, they have

VII

been enacted by individual states and localities(and by other countries) and found to be politi-cally acceptable. Among the many possibilitiesare: effluent or emissions charges on a varietyof toxic chemicals; deposit-return charges onbatteries, tires, bottles, and other products;excise taxes on polluting products (e.g., gaso-line, agricultural chemicals); and, not least,elimination of tax write-offs for environmen-tally damaging activities (e.g., groundwaterextraction, employee parking). According to theauthors, such charges work best when theactivities that cause an environmental problemare well understood, widely practiced, and eas-ily monitored; when individual cost considera-tions differ but each unit of activity contributesmore or less proportionately to the overallproblem; and when the dynamics of the prob-lem are changing too fast for a regulatory solu-tion to be effective.

Shifting the U.S. tax burden away from eco-nomic "goods" toward environmental "bads"would benefit the economy as a whole. Eco-nomic productivity and environmental protec-tion are not incompatible. Indeed, the tax codecould become an instrument for enhancingboth at the same time.

Green Fees: How a Tax Shift Can Work for theEnvironment and the Economy is the latest in the

World Resources Institute's continuing series ofreports on options for revising tax policy andother economic incentives to curb pollution andwasteful energy use. This report's recommen-dations extend those of such previous WRIstudies as The Right Climate for Carbon Taxes:Creating Economic Incentives to Protect theAtmosphere; The Going Rate: What it Really Coststo Drive; and Driving Forces: Motor VehicleTrends and their Implications for Global Warming,Energy Strategies, and Transportation Planning.

We would like to thank Alida Rockefeller forher support of our research on carbon taxesand the following foundations for their supportof this and other climate, energy, and pollutionprojects: Nathan Cummings Foundation; theGerman Marshall Fund of the United States;W. Alton Jones Foundation, Inc.; The JoyceFoundation; Charles Stewart Mott Foundation;The William Penn Foundation; Public WelfareFoundation, Inc.; and Rockefeller BrothersFund. We would also like to thank StephanSchmidheiny for his support of WRI's researchon pollution taxes generally. To all of these, weexpress our deep appreciation.

James Gustave SpethPresidentWorld Resources Institute

viu

I. The Pbtential Gains from Shifting theRevenue Burden from Economic"Goods" to Environmental "Bads"

T he U.S. economy has been founderingin recession, fiscal deficits, and loss ofinternational competitiveness. Over the

past decade, output per worker in the UnitedStates has grown only half as fast as in the restof the industrialized world. Our productivitylead over our principal competitors is narrow-ing. The U.S. share in world manufacturingexports, meanwhile, has fallen by 20 percent ofits level in 1970. Unsatisfactory economic per-formance has exacerbated fears about the costsof meeting challenges to the quality of life andenvironment. In recent months, for example,economic concerns have undermined the U.S.Government's willingness to protect endan-gered species and old growth forests in thePacific Northwest, to protect the nation'swetlands from further encroachment, to imple-ment stricter clean air standards, or to joinother nations in preventing potentially irrevers-ible changes in the global climate. In each case,the choice has been cast as one between envi-ronmental protection and jobs or income. Theconflict is not limited to Washington, D.C. Inthe nation's cities and states, recession andrevenue deficits are making it difficult forauthorities to respond to deteriorating physicaland social infrastructure and acute urbanproblems.

The resources with which to address thesedomestic and international problems are not athand. Americans already feel burdened bytaxes. Despite the anti-tax rhetoric of the pastdecade, government is taking a bigger bite, but

U.S. capitalism is finding it harder and harderto deliver the rewards it so widely advertises.

The typical family is struggling to maintainits living standards. Between 1971 and 1990,median family income adjusted for inflationrose only from $33,191 to $34,213, a gain ofonly 3 percent. For families below the median,the gains, if any, were even smaller. Economicimprovements over these years were achievedalmost entirely through increased work, mostlyby women, as the civilian labor force participa-tion rate rose from 60 to 66 percent. For theemployed, average hourly inflation-adjustedearnings in private employment fell from $8.53in 1972 to $7.46 in 1991, and average weeklyearnings declined from $315 to $256. Comparedto 10 or even 20 years ago, the Americanpopulation is working harder and making less.

At the same time, Uncle Sam is taking moreout of the average person's paycheck. Between1972 and 1990, personal income taxes andsocial security payroll taxes together have risenfrom 17.5 to 19.2 percent of personal income.Largely because of the rise in payroll taxes,most people have not seen any cut in the taxesthey pay. There is a widespread and notunfounded perception that tax cuts are only forthose with high-priced lawyers, accountants,and lobbyists.

Most people feel that they are not gettingmuch for their tax dollars. Although the federalgovernment spends $1,400,000,000,000 every

year and state and local governments spend anadditional $800,000,000,000, the quality of edu-cation in the United States is comparativelypoor, access to health care and its cost areproblems, cities are unsafe, public infrastruc-ture is deteriorating, environmental quality hasimproved little over time and, indeed, newglobal threats have emerged. Confidence inpoliticians and public administration is so lowthat most people are willing to shell out moremoney only if they are certain that it will beused effectively for purposes they support.

For these reasons, taxes have becomeextremely controversial. But political debate hasdealt mainly with how much we tax, not whatwe tax. This is unfortunate, for what we tax isimportant. At present, our taxes fall mostly onjust those activities that make the economyproductive: work, savings, investment, andrisk-taking. Naturally, such taxes discouragepeople from undertaking these vital activities.A better system would place more of the taxburden on activities that make the economyunproductive and that should be discouraged:resource waste, pollution, and congestion, forexample. Taxes on these environmentally dam-aging activities would not distort economicdecisions, but rather would correct existingdistortions.

A. The Burden of Today's TaxSystem

Almost all taxes have incentive and disincen-tive effects. Although economists talk of taxesthat don't affect behavior, "lump-sum taxes,"there are almost no practical examples. A taxon any good or service raises its cost to thebuyer while lowering the net after-tax receiptsto the seller. A tax gives the buyer an incentiveto cut back on what has become more expen-sive and to look around for a cheaper substi-tute. It induces the supplier to produce or offerless of the good or service for sale.

Most federal taxes fall on income and profits.Of total tax receipts in 1991 of $1,120 trillion,

41 percent came from the personal income tax,9 percent from corporate income taxes, and 42percent from payroll taxes. State and localgovernments rely more on sales, excise andproperty taxes, but 25 percent of their revenuesalso come from payroll taxes and personal andcorporate income taxes. Personal income taxesare mostly taxes on wages and salaries, and,for better off taxpayers, to some extent taxeson incomes from investments and capital gains.Corporate income taxes, to the extent they areultimately borne by stockholders, are also taxeson investments and capital gains.

Taxes on wage and salary incomes, by lower-ing take-home pay, tend to discourage someworkers, who either withdraw from the laborforce or work fewer hours than they otherwisewould. These labor supply effects are mostpronounced among those women and elderlyand youthful workers whose commitment tofull-time employment is not iron-clad. At thesame time, of course, payroll taxes make work-ers more expensive to employers, and canprompt them to seek cheaper alternatives, suchas automating or moving operations overseas.

Raising taxes on wage and salary incomes isan expensive way to raise government reve-nues because it reduces the economy's laborsupply. The more responsive labor supply is tochanges in after-tax wage rates, the greater theeconomic burden of income and payroll taxes.Taxes on income from investments have analo-gous economic costs. They lower the after-taxreturns from investments and thereby inducepeople to seek tax shelters or to save less. Aninflux of investments into such shelters has aneconomic cost because capital is withdrawnfrom other investments that have a higherbefore-tax rate of return.

By reducing capital formation, a lower rate ofsavings has long-lasting and powerful effectson economic productivity and growth. Themore sensitive the savings rate is to the after-tax return on investments, the greater the eco-nomic cost of taxes on capital. This is not sim-ply a matter of personal decisions about

savings. As world capital markets become morehighly integrated, it's ever more likely that anincrease in U.S. taxes on investment incomecould send U.S. savings abroad or reduce for-eign investment in this country.

Estimating these tax burdens is complicated.When the underlying issue is substituting envi-ronmental charges for conventional income andprofits taxes, the relevant measure is the gainfrom marginally reducing income and profitstaxes, when the revenues lost in this analysisare made up by higher environmental charges.For this reason, we can assume that the levelof government spending remains constant. Wecan further assume that shifts of the tax bur-den among taxpayers in various brackets canbe minimized through careful design of thepackage so that people's after-tax incomes willalso be unchanged. Under these assumptions,the problem becomes one of estimating what istechnically called the "marginal excess burden"of taxes.1

In this light, consider first the tax on laborand income. Many attempts have been madeto measure the sensitivity of labor supply tothe after-tax wage appropriately2 for Americanmale and female workers, using both actuallabor market behavior and the results ofincome maintenance experiments. However,the numerical estimates still vary widely,according to the data sources, analyticalmodels, and econometric techniques used tomake the estimates. Table 1 summarizes thefindings of numerous studies. (Pencavel, 1986,pp. 5-102; and Killingsworth and Heckman,1986, pp. 103-200, Burtless, 1987)

According to these studies, a 10-percent risein after-tax hourly earnings would induce a 1or 1.5 percent rise in hours worked, if after-taxincome were kept constant. For women, theresponse is greater, in the range of 3 to 6 per-cent, for the same percentage wage increase.Combining them, using the relative shares ofmen and women in total labor hours worked inthe United States as weights, suggests that aten percent rise in average hourly earningswould increase labor supply by roughly 2.5percent, income and other things equal.

The problems in estimating the responsive-ness of savings to changes in the interest ratesavers can earn are considerably more complex,and researchers have produced an even widerrange of estimates.4 Most studies of the excessburden of taxes on capital income have esti-mated that if tax rates on capital income wereraised ten percent, total savings would fall byfour percent, while recognizing that the mar-ginal tax rates on different forms of investmentand savings differ substantially. (See Boskin,1986; Ballard, Shoven, and Whalley 1985, pp.128-138; Fullerton and Henderson 1989, pp.435-442; Jorgenson and Yun, 1990; Trostel,1991)

These estimates have been used along withmeasures of marginal tax rates in severalstudies to determine the marginal excess bur-dens of taxes in the United States. Theseburdens are the additional loss of privateincome due to reductions in work effort andinvestment, on top of the direct tax payment.All studies come to two general conclusions:the burdens are high, and the burdens of taxes

Table I.3

MaleFemale

Supply of Labor Elasticity

Number

39111

Estimates

Range

0 to .840 t o 2

Median

0.10.29

Mean

0.110.57

on income from investments are higher thanthose on taxes on labor incomes.5 Table 2 sum-marizes several of these studies. They suggestthat the marginal excess burdens of payrolltaxes are about $0.30 to $0.50 for every extradollar of tax revenues collected thereby; thatthe marginal excess burdens of individualincome taxes are in a somewhat higher rangeof $0.40 to $0.60 per dollar of additionalrevenues collected, and that the marginalexcess burdens of taxes on income from invest-ments are higher still, in the range of $0.60 to$1.20. Since some of these estimates weremade before the tax cuts of the 1980s, whichhave lowered marginal tax rates on manyincomes, the lower ends of these ranges areprobably more applicable today.

These figures imply that government revenueneeds are currently met through taxes that areextremely costly to the United States economyin terms of lost work and savings. People feelburdened by taxes because taxes are indeedburdensome. If considerable governmentrevenues could be raised in non-distortingways, allowing reductions in taxes on income,payroll, and profits, the real economic savingswould be huge. Given the range of estimatesabove, substituting $100 billion of non-distort-ing taxes for a mix of current federal taxesyielding the same revenue might easily gener-ate $40 to $60 billion yearly in additional realincome. This potential-tax reform dividend isas large as the much-heralded peace dividend.

Government revenue needs are currentlymet through taxes that are extremelycostly to the United States economy interms of lost work and savings. Peoplefeel burdened by taxes because taxes areindeed burdensome.

The distorting effects of the current tax struc-ture have another important implication. Ifadditional revenue must be raised, either toreduce the federal government deficit or tofinance additional expenditures, then raising itby imposing non-distorting charges and taxesis much less burdensome on the economy thanincreasing tax rates on income, profits and pay-rolls. Environmental charges, which reduceeconomic distortions, can provide funds fordeficit reduction or expenditure needs at amuch lower cost than other tax options.

The nation's cities and states stand to realizeeven greater economic gains through taxreform. Throughout the nation, most state andlocal governments are under severe fiscal pres-sure. Many have been facing budgetary crises.Since the mid-1980s, state and local govern-ment expenditures have outpaced revenues,undermining fiscal balances. The recessionary

Table 2. Marginal Excess Burden Estimates

Tax Number

Social Security Payroll" 2Individual Income 2Investment Income0 3

a. Ballard (1991) and Jorgenson and Yun (1990).b. Ballard (1991) and Jorgenson and Yun (1990).c. Jorgenson and Yun (1990), Ballard (1991), and

Range

$0.31 to $0.48$0.40 to $0.60$0.58 to $1.18

Trostel (1991).

Median

$0.40$0.50$0.92

Mean

$0.40$0.50$0.88

period just ending exacerbated the imbalance,eroding tax bases while increasing both thedemand for services and the costs of providingthem. During 1991, a projected budget gaptotalling $40 to $50 billion in all the statesnecessitated drastic actions. In 29 states, gov-ernments were forced to cut expenditures bymore than $7.5 billion, while enacting taxincreases totaling $10.3 billion. (NationalGovernors' Association, 1991) In 1992, thirty-five states cut budgeted expenditures by a totalof $5.7 billion while raising $15 billion in newtaxes. (National Governors' Association, 1992)Further tax measures of this sort are expectedfor 1993.

Most state governments have little flexibilityin dealing with these fiscal pressures. Laws orconstitutional provisions require balancedbudgets, even during recessions. Since statesalready rely heavily on sales taxes, opportuni-ties to raise them further to offset declines inconsumer spending are limited. During fiscalyear 1991, over 40 percent of state revenueincreases came from personal and corporateincome taxes. (Belsie, 1990) Several states,including Alabama, New York, California,North Carolina, Minnesota, Missouri, Ohio,Texas, and Vermont, have already raised per-sonal income taxes by a total exceeding $2 bil-lion. Many states, including Alabama,Arkansas, Florida, Kentucky, North Carolina,Ohio, Rhode Island and Wisconsin, have raisedcorporate income taxes. (Dionne, 1991)

These tax increases are measures of despera-tion. Besides the considerable marginal excessburdens that they create,6 they impose addi-tional high costs on state economies. For thestate economy, the problem is not just that ahigher state personal income tax will inducesome workers to work less, it is also that thehigher state tax will induce some other workersto take jobs outside the boundaries of the state.Other things equal, states that impose hightaxes on their citizens' personal income willdiscourage immigration and encourage emigra-tion. Thus, a governor's problem is not justthat a higher state tax on investment income

will discourage savings. It will, but it will alsodiscourage investment within the boundaries ofthe state and encourage savings to flowelsewhere.

Because labor is somewhat mobile and capitalis quite mobile among states, state governmentsinevitably find themselves in tax competition-witness the panoply of special tax incentivesthey offer to attract new businesses. State andlocal taxes also enter the competition. Inevita-bly, states that raise their tax rates relative tothose in force in neighboring and competingstates are penalized. Of course, many house-holds and firms are strongly tied to places andcommunities, and for those that do relocate,taxes are certainly not the only consideration.Nonetheless, overwhelming evidence indicatesthat state tax differentials influence the inter-state movement of both capital and labor.

Much of this evidence has been assessed in arecent study by Timothy Bartik on state andlocal economic development policies. Bartikreviewed 59 empirical studies of the effects ofstate and local taxes on inter-metropolitan orinterstate shifts in employment and businessinvestment. These studies vary significantly inhow they measure tax rates, differentials, andchanges; in how they measure changes inemployment or business location; and in howthey control for such other relevant factors asthe quality of public services and infrastruc-ture. Accordingly, the results can be used onlyto establish plausible ranges for the responsesto higher state taxes.

For example, five studies estimated theresponsiveness of state employment to stateand local income tax levels. (See the first panelof Table 3.) All five studies found that stateand local personal income taxes have substan-tial and statistically significant effects on em-ployment growth within the state, clusteringaround an estimate of 3.9 percent decline inemployment for every ten percent rise in labortax rates. This indicates that jobs shift substan-tially among localities in response to state andlocal taxes.7

Bartik also reviewed studies measuring theeffects of state and local taxes on businessinvestment and location decisions. (See the sec-ond panel in Table 3.) Most of these studiescontrolled for general regional growth differen-tials and for differences among states in thelevel of public investment. Again, the weightof evidence supports the common-sense con-clusion that higher state taxes discourage busi-ness investment within the state.

For local and state economies, these studiesshow, increases in conventional taxes spell dou-ble trouble. They discourage work and savingsas federal taxes do, and they trigger the flightof labor and capital outside the tax jurisdiction.Since labor and capital are more likely to movein response to a change in incentives than towithdraw altogether from the economy, the eco-nomic loss to the state economy from a rise instate taxes, per dollar of revenue collected, islikely to be far greater than the loss to thenational economy per dollar of new federaltaxes. Since economists have not attempted tomeasure this marginal efficiency cost of state

and local taxes directly, all that can be said nowwith any certainty is that the efficiency losses tostate and local economies from state and localtaxes are substantially higher than the alreadyhigh marginal excess burdens of federal taxes.

Along with serious revenue deficits, thesehigh losses of efficiency explain the search fortax alternatives in state government offices allacross the nation. For 1993, only 25 percent ofthe proposed tax increases come from personaland corporate income taxes. State governmentsseem far more willing than the federal govern-ment to impose "sin" taxes, user fees, and en-vironmental charges. For 1993, over half of thenew tax revenues are to come from increases inalcohol and tobacco taxes, gasoline taxes andmotor vehicle registration fees, and other userfees. States already impose a wide variety ofcharges and fees related to environmental pro-grams. Some states, notably Louisiana, SouthCarolina, and New Jersey, have proposed feeson hazardous waste processing facilities, feeson solid-waste facilities, and fees for emissionsdischarge inspections and control.

Table 3. Labor and Capital Supply Elasticities

Effect Number Range Median Mean

Taxes on Labor Supply: elasticity ofemployment with respect to state andlocal individual income taxes

-0.66 to -0.13 -0.39 -0.38

Taxes on Capital Supply: elasticity ofbusiness location or investment withrespect to state and local corporateincome taxes

11" -1.4 to 0.07 -0.17 -0.38

Notes:a. Wasylenko (1988), Quan and Beck (1987), Carroll and Wasylenko (1989), Munnell (1990),

Luce (1990).b. McConell & Schwab (1990), Woodward (1990), Bartik (1989), Bauer & Cromwell (1989),

Deich (1989), Papke (1986, 1987, 1989), Schmenner, Huber & Cook (1987), Bartik (1985),Garofalo & Malhotra (1983), and Hodge (1981).

The logic of environmental charges forstate and local governments isespecially powerful. Since the qualityof life greatly influences wherehouseholds and businesses locate,environmental charges that can raiserevenues while improvingenvironmental quality are moreattractive than taxes that drivebusiness and workers away.

The logic of environmental charges for stateand local governments is especially powerful.Since the quality of life greatly influenceswhere households and businesses locate, envi-ronmental charges that can raise revenueswhile improving environmental quality aremore attractive than taxes that drive businessand workers away. So far, their potential hasbarely been sampled.

B. The Economic (and Political)Benefits of EnvironmentalCharges

Environmental charges are one of severalincentive-based instruments of environmentalpolicy.8 If applied appropriately, they can har-ness market forces in support of environmentalimprovement, and promote cost-effective controlof environmental problems. Unlike command-and-control regulations, they provide marketsignals that allow firms and households torespond in innovative and efficient ways. Ifthere are many actors contributing to a commonenvironmental problem—many firms burningfossil fuels and producing carbon dioxide, forexample—and the cost of cutting back theoffending activities differs among firms, thenregulations mandating cost-effective CO2

cutbacks would have to be complicated andcostly to administer. However, a unit charge onthat activity will encourage each actor to cutback to the extent that his per-unit abatementcost is less than the amount of the charge.Firms who can cut back at little cost will; thosewho would face much higher costs will cut backless. In the end, the unit tax will set a ceilingon costs to which all firms will adjust, and thetotal amount of environmental control inducedby the tax will be achieved at minimum cost.

The potential gains from improved cost-effectiveness in U.S. environmental regulationare very substantial. Currently, the total cost ofadministering and complying with environ-mental regulations in the United States isaround $120 billion per year, more than 2 per-cent of annual Gross Domestic Product.(Carlin, Scodari, and Garner, 1992, pp. 12-44)Numerous studies of specific control programshave shown that actual costs are at least twiceas high as the costs that would be incurred ifclean-up and control responsibilities were real-located to achieve cost-effectiveness. (SeeTietenberg, 1985, p. 65; South Coast Air Qual-ity Management District, 1992)

Taxes and charges, like other environmentalpolicy instruments, are mechanisms for dealingwith the systemic failures in market incentivesthat arise when individual actors are not con-fronted with the full costs (or benefits) of theiractivities. For example, in communities whererubbish collection and disposal is financedthrough local property taxes, individual house-holds pay the same annual amount whetherthey generate a lot of trash or a little. Theyhave little incentive to adjust the amount oftrash they generate to reduce waste-handlingcosts, even though a larger total volume oftrash creates substantially higher total costs forthe community.

Such incentive failures are characteristic ofenvironmental problems, because environ-mental resources—such as air and water—areused in common and not readily divisible intoprivately owned parcels. When such resources

are impaired—through the discharge of efflu-ents, for example—the costs are diffusedamong all users. Unless incentive-based poli-cies are in force, such costs cannot readily becharged to or collected from those whoseactivities cause the damage. Consequently, en-vironmentally damaging activities tend to becarried to excess. That is why we suffer in theU.S. from excessive air and water pollution,noise, toxic wastes and emissions, and loss ofsensitive ecosystems.

Under some conditions, an environmentalcharge cannot only minimize the costs of meet-ing any given target for control of total emis-sions, but also lead to an overall level of con-trol that minimizes the sum of environmentaldamages and control costs. The key is settingthe rate to equal the marginal damages from anadditional unit of the offending activity, at just

that overall level of control at which the mar-ginal damage from an additional unit equalsthe marginal cost of abating it.

This situation is depicted in Figure 1. Thehorizontal axis represents the level of thedamaging activity; the vertical axis, the costs.The line dd portrays the additional privatebenefits that the actor derives from successiveincrements of the damaging activity, and areassumed to decline. The line cc portrays theincremental private costs the actor incurs inincreasing the level of activity. Taking onlythese private benefits and costs into account,the actor will choose a level of activity near thepoint x, which maximizes the private benefitsnet of costs. However, if the activity alsoimposes costs on others—by degrading an envi-ronmental resource that is used in common,for example—the total incremental costs as the

Figure 1. Revenues and Net Savings from an Environmental Charge

t'

Ri'vonui1

Activity Level

Source: WRI(1992)

activity expands might be portrayed as c'c'.The difference between the two cost curvesrepresents what are called external costs, thosenot borne by the actor. At the level x, theactivity results in incremental costs (to all par-ties together) that are greater than the incre-mental benefits. These net losses are repre-sented by the line ce. A level of activity thatmaximizes overall net benefits would be at thepoint y, at which marginal private benefitsequals marginal private and external costs. Solong as activity is above this level, each unit ofactivity incurs net losses. The total loss isrepresented by the entire shaded triangle. Aunit charge on the activity at a rate tt wouldinduce the actor to reduce the level of theoffending activity from x to y. The chargewould bring in revenues in the amount of therectangle ttab, the tax rate times the revenuebase, which is the level of the activity afteradjustment.

What is important to note in this simplifiedexample is that, other than the costs of en-forcement and administration, this charge doesnot create any excess burden. It has disincen-tive effects, but the activity that is discouragedis one that otherwise would be carried toexcess and would cost society more at the mar-gin than it is worth. In fact, by reducing thelevel of the environmentally damaging activityfrom x to y, the charge results in economicsavings amounting to the area of the shadedtriangle. At each level of activity between xand y, the incremental private and externalcosts exceed the incremental benefits, resultingin losses. Avoiding those losses results in netsavings to the economy. Thus, unlike taxesthat discourage economically beneficial activi-ties, such as work and savings, environmentalcharges can discourage activities that, at themargin, cause economic losses. Rather thanimpose excess burdens, environmental chargescan provide revenues and economic gains.9

The theoretical literature on environmentalcharges and other incentive-based policy instru-ments is enormous.10 In the aggregate, itsuggests that charges are appropriate policy

instruments for dealing with certain kinds ofenvironmental problems, though they may beinappropriate—or inferior to other approaches—in dealing with others. The circumstancesunder which environmental charges work par-ticularly well, include:

• When the environmental problem is causedby the activities of numerous heterogeneousparties, so that private negotiations, permittrading, legal proceedings, or direct regulationswould be difficult.

• When each party's actions contribute moreor less proportionately, unit for unit, to theoverall problem, so particular "hotspots" or"bad actors" are not significant.

• When the overall damages resulting fromthe activity are reasonably well-understood andregular—when, that is, neither catastrophicdamage thresholds nor rapidly decreasing mar-ginal damage thresholds are likely to beencountered as the level of the activityincreases.

• When the various parties face significantlydifferent abatement costs because of differencesin technology, age of equipment, availability ofalternatives, size, and so on.

• When the dynamics of the environmentalproblem are changing, so that any regulatorysolution would soon be obsolete.

• When the relevant behavior of each partycan be monitored accurately at reasonable cost,so that incentive-based mechanisms linked tothe level of the activity are enforceable.

• When a conflicting regulatory frameworkbased on permitted technologies or emissionslevels is not already functioning, so that diffi-cult transitional problems are not importantconsiderations.

In circumstances other than these, otherincentive-based policies can probably achievecomparable or superior gains in efficiency with

less administrative difficulty. For example, if acommand-and-control regulatory system isbased on permitted levels of emissions or otherenvironmentally damaging activities, then it istypically easier to reallocate the burden ofclean-up to low cost sources by making thosepermits salable, provided that there aren't toomany regulated parties. (See Tietenberg, 1985)

Nonetheless, many environmental problemsthat would not easily yield to other incentive-based policies meet these conditions. Laterchapters analyze three in some detail. The firstof these deals with municipal solid waste, notbecause it is America's most serious environ-mental problem, but because it most clearlydemonstrates how appropriate environmentalcharges can contribute to the solution. Virtuallyevery household in America generates solidwaste, and every household is different. Thecosts of dealing with the growing volume ofwaste are predictable and rising steadily. Somecosts are private, such as those of waste collec-tion. Others are external, such as the disameni-ties suffered by people living near landfills andincinerators. Direct regulations specifying howmuch of what materials each household candischarge are hardly feasible; nor can peopleliving beside landfills sue their fellow citizensover the trash they send to the dump. Unitcharges—so much per trash bag put out forcollection—are an appropriate instrument. Ourstudies, summarized in Chapter 2, find thatunit charges strongly discourage waste dis-posal. The resulting economic savings per dol-lar of revenue collected in unit charges set toreflect the full incremental costs of waste han-dling and disposal range from $0.05 to $0.20.The highest savings are obtainable in populousEast Coast communities where solid wastecosts are high because disposal options arelimited.

Virtually every U.S. household owns at leastone car. Road congestion is increasing in a dis-tressingly predictable pattern. Every driver ona congested road imposes delays and addi-tional risks of accident on all other drivers onthe road, but is sensitive only to his own travel

costs. Consequently, there is obviously muchmore rush hour traffic than is efficient. It ishard to imagine a market among commuters inrights to get on the Beltway at 8:15 am. Hereagain, charges, in the form of congestion tolls,are the appropriate instrument. The studiesreported in Chapter 3 indicate that if appropri-ate congestion tolls were used on all urbanarteries and collector roads, peak congestioncould be reduced by 11 to 22 percent, and thenet economic savings would be approximately$0.10 per dollar of revenue collected. Thehigher figures for congestion reduction reflecttoll rates set high enough to reflect the fullincremental costs of driving in heavy traffic,including the increased risks of accidents andresulting traffic tie-ups.

Everyone who burns fossil fuel or uses elec-tricity generated with fossil fuels contributescarbon dioxide to the growing concentration inthe atmosphere. In the United States, thatincludes everybody. All carbon dioxide emis-sions contribute more or less equally to theatmospheric build-up, which threatens long-lasting changes in global climate. Since theamount of carbon dioxide emitted per unit ofeach fossil fuel burned is known with reason-able accuracy, and since there is now no eco-nomically feasible way to prevent carbon diox-ide emissions when fuels are burned, the bestway to regulate emissions is to impose a tax onthe carbon content of each fuel. It is not yetpossible to quantify accurately the potentialeconomic damages from climate change, so thenet economic savings from an appropriate car-bon tax cannot be estimated. However, studieshave shown that the potential damages aresubstantial, perhaps as much as 1 to 2 percentof GDP. (Cline, 1992, Ch. 4) Moreover, theenergy savings a carbon tax would inducewould reduce U.S. emissions of other pollu-tants from fossil fuels. It would also help con-siderably in inducing other nations to institutepolicies to reduce carbon emissions. Therefore,though finding the appropriate rate is a chal-lenge, some tax on carbon fuels would yieldnet economic savings along with revenues thatcould be used to reduce other distorting taxes.

10

The total possible gain from shifting toenvironmental charges could easily be$0.45 to $0.80 per dollar of tax shiftedfrom "goods" to "bads"—with no lossof revenues.

Switching some of the revenue burden fromtaxes on income, employment, and profits toenvironmental charges on resource waste, col-lection, and pollution would yield double eco-nomic benefits. Reducing tax rates on incomeand profits would reduce the marginal excessburden by $0.40 to $0.60 per dollar of reducedtax revenue. If those revenues were regainedthrough environmental charges, the additionalnet economic savings would range from $0.05to $0.20 per dollar of revenue. These additionalnet savings are the averted environmentaldamages less the incremental costs of environ-mental protection. Putting these parts togetheryields the striking conclusion that the total pos-sible gain from shifting to environmentalcharges could easily be $0.45 to $0.80 per dollarof tax shifted from "goods" to "bads" with noloss of revenues.11 The gains would come inthe form of improved environmental quality,reduced needs for infrastructure, higher ratesof savings and investment, increased employ-ment, and faster productivity growth. Thesefindings refute the argument that environ-mental and economic goals must conflict—thatenvironmental quality can be obtained only atthe cost of lost jobs and income. Indeed, pro-viding a better framework of market incentivesby restructuring our revenue system can simul-taneously improve environmental quality andmake the American economy much morecompetitive.

The three environmental charges analyzed indetail below could yield at least $100 billion inannual revenues for federal, state, and localgovernments. Congestion tolls on urban

highways could generate $40 to $100 billion,carbon taxes would yield $30 to $50 billion, andsolid-waste charges could raise another $5 to$10 billion. Using just these three revenuesources would allow governments to reducemarginal rates of distorting taxation substan-tially and produce $45 to $80 billion in annualnet economic benefits. Moreover, as the finalchapter of this report demonstrates, manypotential environmental charges in addition tothese three could be used to advantage, con-tributing another $40 to $50 billion in revenuesfor tax restructuring.

Of course, all the revenues from such envi-ronmental charges need not be recycledthrough reductions in other, more distortingtaxes. Some might be used to compensatecitizens who are hit disproportionately by envi-ronmental charges or to make the chargesmore effective. Such options include spendingsome of the money from congestion tolls onpublic transport and spending some revenuesfrom solid-waste charges on community recy-cling programs.12 Some of the additionalrevenues might be used to reduce the federalor states' deficits. But, the gains from cuts inmarginal rates of distorting taxes, which couldwell be greater than $0.30 on the dollar, pro-vide a benchmark by which to judge thereturns from these other options.

If the economic tradeoffs from such tax shiftsare so favorable, what about the politicaltradeoffs? Would such a shift in the revenuebase be politically acceptable? Would it be fair?The answers undoubtedly depend on the waythe issue is framed. If people are askedwhether they favor higher taxes, the answer isoverwhelmingly no, whatever the nature of thetax. If people are asked whether they wouldrather be taxed on their use of energy and onthe amount of waste they generate than ontheir salaries and profits, the answer is verylikely yes.

Americans feel that their taxes are alreadyhigh enough, and most have no confidencethat their tax dollars are being spent wisely on

11

programs they endorse. Consequently, the onlycharges people find acceptable are thosedirectly linked to specific, desirable expendi-tures. For example, though they are highlyregressive and only loosely related to currentor future benefit payments, payroll contribu-tions to the Social Security Trust Fund strikeAmericans as among the fairest and mostacceptable of the taxes they pay. Since mostAmericans strongly support improvements inenvironmental quality, they are likely to findcharges directly linked to environmentalimprovements more acceptable than generaltaxes. The "polluter pays" principle, that thosewho cause the environmental damage bear itscost, is widely accepted as fair and efficient.

Besides, such charges give people an attrac-tive option for savings. By substituting envi-ronmentally benign for environmentally dam-aging activities, they can reduce their tax billwhile acting on their convictions. At present,the only way most people can reduce their taxbill is to work less and earn less income. TheAmerican public is overwhelmingly in favor ofenvironmental protection. If environmentalcharges were in place, they could insteadreduce their tax bills by, for instance, savingenergy, bicycling to work, or recycling.

Whether to reduce the fiscal deficit, tofinance high-priority expenditures, or to allowa reduction in burdensome taxes on incomes,payrolls and profits, environmental charges arethe most attractive revenue option economi-cally, and probably politically as well.

Notes for Chapter 11. There is a very large literature on the excess

burden of taxation. A basic referenceexplaining the concept and estimating theexcess burden of taxes on labor income isBrowning (1987, pp. 11-23). See also Stuart(1984, pp. 352-362). For a recent explanationof the difference among various measures oftax burden, see Ballard and Fullerton (1992)and the literature they cite.

2. The appropriate measure in this context isthe "compensated labor supply elasticity,defined as the percentage response of hoursworked to a small percentage change inafter-tax hourly earnings, adjusted to elimi-nate the (usually negative effects) of higherincomes on hours worked. If a tax increasewere not offset by other tax reductions, leav-ing disposable income unchanged, then themore relevant measure would be the uncom-pensated labor supply elasticity, whichincludes income effects.

3. Some data adjustment was done on outliers.For instance, since compensated labor sup-ply should not be negative, negative esti-mates were not included. However, insteadof discarding those low estimates or equallyextreme estimates on the high end (over 2),they were included as 0 if they were lessthan 0 and 2 if greater than 2. Twenty-nineout of the 150 estimates, or 19%, werechanged in this way.

4. For a recent review, see Joel Slemrod (ed.)(1990).

5. Taxes on goods and services, such as salesand excise taxes, also create analogous eco-nomic burdens, by creating a differencebetween the value of the taxed item to thepurchaser and its cost of production. Thesame elements principally determine themarginal excess burden: the elasticity of sup-ply of the taxed item and its marginal taxrate. The marginal excess burden of broadlybased sales taxes is generally estimated to belower than that of taxes on labor and capital.See Jorgenson and Yun (1990).

6. Since state income taxes are deductibleunder federal income tax law (but not viceversa), an increase in the state tax rate doesnot increase the overall marginal tax rateaccordingly. Therefore, the marginal excessburden of a state income tax is generallylower than that of a corresponding tax atfederal level.

12

7. An earlier literature on labor mobility isassessed by Michael Greenwood (1975, pp.91-112).

8. Others include deposit-refund systems, non-compliance fees or fines, and marketablepermits for environmentally damaging activi-ties (such as emissions). Some analystswould extend the class of incentive-basedpolicies to include liability laws, labellingrequirements, and other measures.

9. It has been pointed out that if the revenuesfrom environmental taxes can be used toreduce other distortionary taxes, then theenvironmental tax rate should be set toreflect these potential gains, as well asthose reducing the environmental external-ity. The resulting tax rate could be eitherhigher or lower than the rate tt depicted inFigure 1, depending on the response of taxreceipts to the tax rate at the rate tt. (SeeLee and Misiolek, 1986, pp. 333-354). As apractical matter, this insight underscoresthe point that under these conditions, themost appropriate rate of environmentaltaxes, where they are feasible, cannot bezero, since a zero tax rate brings in no rev-enue. (See also Terkla, 1984, pp 107-123).

10. A classic treatment of the subject is Baumoland Oates (1975). A work focussed more on

problems of application is Anderson et al.(1977). A broader review of incentive-basedpolicies discussing potential applications iscontained in Project 88, (1988); and Project88-Round II (1991).

11. In this study, these findings are derivedfrom studies of specific taxes consideredseparately. No attempt was made to takeinto account all the interrelated effects onproduct markets, labor markets, and capitalmarkets that such a tax shift would induce.However, a recent study using whateconomists call a "general equilibrium"model that does take such interactions intoaccount reaches the same conclusion.Replacing other taxes with appropriatelydesigned environmental taxes would leadto substantial gains in economic welfare.See Ballard and Medema, (1992).

12. Financing such expenditures through envi-ronmental charges is far more advantageousto the economy than financing themthrough higher income, payroll or profitstaxes. The Ballard and Medema study citedabove finds that, in order to break even, anexpenditure project financed through higherlabor income taxes would have to return 33cents more for each dollar of expenditurethan a project with the same benefits butfinanced through environmental taxes.

13

II. Pay-By-The-Bag Household CollectionCharges to Manage Municipal SolidWaste

L andfills in many American cities are fill-ing up with trash or closing down forenvironmental reasons faster than new

disposal facilities can be created. The pace ofnew landfill construction has slowed as envi-ronmental standards and community resistancehave toughened, though new landfills aremuch larger and better designed than the oldtown dump. Until the recession, the volume ofwaste continued to increase. As a result,landfill-disposal costs are dramatically higherthan a decade ago, and controversies overinterregional (and international) shipments ofwaste have intensified.

Between 1960 and 1988, the volume of muni-cipal solid waste1 more than doubled, from 88to 180 million tons. (National Governors'Association, 1990, p. 11) This averages 4.5pounds of trash discarded daily per person, aworld record. Unless current practices change,the volume is predicted to rise another 20 per-cent by the century's end. Although over halfof this waste volume consists of categories thatare readily recyclable, such as yard waste,newspapers, corrugated cardboard, and bever-age containers, only 13 percent is actually recy-cled, (Table 4) and even that percentage hascreated a glut on most secondary markets.

Nearly three-quarters of all municipal wasteis landfilled, and the remaining unrecycledfraction is incinerated. The large majority ofthe 6,000-odd operating landfills in the UnitedStates would not meet current environmental

and operating standards for new disposal facili-ties. Many contain toxic wastes. In fact, almostone fifth of Superfund sites are old solid-wastedumps. Residents who live near such facilitiesface polluted water, methane gas infiltratingtheir basements, a procession of rubbishtrucks, and other environmental problems.Responding to these problems, many stateshave upgraded standards to conform to pro-posed EPA regulations requiring new landfillsto provide for methane gas extraction, leachatecollection, surface and groundwater monitor-ing; and an impermeable liner. Such require-ments can dramatically increase constructionand operating costs for new landfills.

Such expensive improvements not withstand-ing, community "NIMBY" (Not in My Back-yard) opposition to new landfills has stiffened.In urban regions, finding a site and getting apermit for new landfills can now take two toseven years, at a direct cost of up to $10 mil-lion. Largely for these reasons, the number ofnew landfill openings fell from 381 in 1970 toonly 62 in 1986. (EPA, 1988, p. 11-13) A recentEPA survey found that approximately 80 per-cent of existing landfills will reach capacitywithin the next 20 years. (EPA, 1988; p. 10)Twenty-eight states report less than ten yearsof remaining capacity, and ten states have lessthan five years. (Repa and Sheets, 1992)

Solid waste management problems in thedensely populated parts of the United Statesindicate that market incentives are not inducing

15

Table 4. Recycling of Selected Materials,1986 (In millions of tons andpercent)

Material

Paper andpaperboard

GlassFerrous metalsAluminumPlastics

Quantity

14.61.10.40.60.1

Source: Franklin Associates, Ltd.

% ofgross

2283

251

.6

.5

.6

.0

.0

the right behavioral responses. A particularlyegregious market failure is the absence offinancial incentives for households to discardless solid waste and to recycle more. Althoughit costs most households nothing to put outmore trash, it can cost the community wellover $100 per additional ton generated. Con-versely, most households save no money byrecycling or composting some of their wastes,or by segregating non-recyclable and recyclablematerials, though such behavior could save thecommunity considerable amounts. Since mosthouseholds pay for their rubbish collectionthrough property taxes—a flat annual amountcompletely unrelated to the volume or compo-sition of trash they discard—the incrementalcost or reward to them of varying the amountor composition of their rubbish is preciselyzero.

This incentive problem can be corrected bycharging households the full incremental costsof waste collection and disposal through a"pay by the bag" system, and, where neces-sary, adjusting tipping fees to reflect disposalcosts more accurately. The pay-as-you-discardapproach would give households appropriateincentives to recycle, compost, and adjust theirpurchasing habits to reduce the volume ofwaste they generate. Then, consumer demand

will signal producers and retailers to reducethe amount of packaging and to increase itsrecyclability.

A rapidly increasing number of cities andtowns have already adopted pay-by-the-bagsystems, selling households distinctive trashcontainers or stickers or tags to attach to theirown containers. Usually, these systems areadopted in communities where single-familyhousing predominates to complement curbsiderecycling and other programs designed to helphouseholds reduce their disposal needs.Results have been encouraging. Pay-by-the-bagsystems have been readily accepted by commu-nities, and most have reduced the amount ofwaste generated. Illegal dumping and evasionhave been minimal. Many households, espe-cially those comprising elderly couples or sin-gle individuals, have found they pay less bythe bag than they had previously paid in prop-erty taxes. Through such programs, localgovernments have also reduced waste loadsand increased revenues for financing recyclingprograms.

In order to estimate the potential benefits ofunit pricing, the experience of 10 communitiesacross America with pay-by-the-bag systemsover periods up to nine years was analyzedstatistically for the effect of pricing on the ton-nage of waste sent for landfilling. Althoughhousehold waste disposal charges have beeninvestigated before, this study is the latest andmost complete study of household response towaste disposal charges. It finds that house-holds respond vigorously to price signals, espe-cially if supported by recycling options. A typi-cal community that raised its collection fee per32-lb. bag from zero to $1.50—in line withincremental costs—would probably induceabout an 18-percent reduction in the volume ofsolid waste it had to landfill. If the communityintroduced a curbside recycling program at thesame time, its landfill volume would fall about30 percent.

There are substantial net economic savingsfrom a shift to pay-by-the-bag collection

16

services. These savings are the avoided costs ofwaste handling and disposal less the additionalcosts to households of reducing their wastedisposal. The savings were estimatedseparately for two kinds of communities: thosein the densely populated states where disposalcosts are now high (over $50 per ton); andthose in regions with moderate waste-disposalcosts ($20 to $49 per ton). Sparsely populatedregions where waste disposal costs remain rela-tively low (under $20 per ton) were notregarded as likely candidates for unit pricing.

The net savings would be substantial, evenunder the most conservative estimates of dis-posal costs. As a percentage of the revenue col-lected in pay-by-the-bag systems without curb-side recycling, net economic gains would rangefrom 17 percent in regions where the disposal'costs are high to 6 percent where they aremoderate. Projected across all regions in theU.S. where waste disposal costs are moderateto high, these savings would total more than$600 million per year on annual revenues ofaround $6 billion. For systems including curb-side recycling, in densely populated regions,the savings from reduced landfill costs wouldoffset most of the net costs of curbside recy-cling programs.

If estimates of solid-waste management costsalso include the costs of disamenities sufferedby households living near landfills, the appro-priate charges are about 60 percent higher, andthe net economic savings also increase. Indeed,net savings would range from 25 percent ofrevenues in regions where disposal costs arehigh, to 11 percent in regions where they aremoderate. Again, projected across all regionswith high or moderate waste disposal costs,the total net savings would be almost $1.5 bil-lion on annual revenues from collectioncharges of $8.8 billion.

Clearly, environmental charges can help localcommunities deal with an important environ-mental problem. By charging households forthe volume of wastes they discard instead offinancing waste-management services through

property taxes, communities can arrest thegrowth of the solid waste stream, reduce col-lection and disposal costs, extend the lifetimesof existing landfills, and encourage householdrecycling while generating the revenues andcost savings needed to pay for recyclingprograms.

A. Households' Response toWaste-Collection Charges

In general, the more commodities householdsbuy and use, the more waste they are likely tocreate. From this it follows that wealthier andlarger households will tend to generate morewaste. Such households even generate moreyard waste (leaves and grass clippings) becausethey tend to live in single-family residenceswith larger yards.

Households can change the amount of wastethey put out for disposal by recycling and com-posting and by altering their consumption pat-terns. For this reason, household solid-wastedisposal responds to economic influences.Recycling takes time, for example, so high-wage or multiple-earner households in whichtime is very valuable are less likely to recycle,other factors being equal. The availability oftime-saving curbside recycling facilitiesencourages recycling, especially for richerhouseholds. Recycling can save householdsmoney if the local community operates adeposit-return system for containers or offersrewards for recycled metals and newsprint.The higher such rewards of course, the morelikely households are to reduce their waste dis-posal. Waste-disposal charges also encouragerecycling and discourage consumption of over-packaged items. For purchased items destinedto be thrown away—magazines, for example—the waste-collection charge becomes part of thecost of the article.

Several studies, based on experience in com-munities with household charges in place, haveshown that collection charges tend to reducethe volume of household waste. (See Efaw et

17

al., 1979; McFarland, 1972; Skumatz, 1990;Stevens, 1978; and Wertz, 1976) In this report,to quantify the magnitude of the reductionmore accurately, an econometric investigationof the effect of household waste collectioncharges on the tonnage of waste landfilled in asample of fourteen U.S. communities is used.(See Table 5.) Of these, ten operated pay-by-the-bag or similar volume-based fee systems thatthey initiated at various times between 1980and 1989, and all have kept records of the ton-nage of waste collected and landfilled. Theother four communities included for compari-son, financed waste management systemsthrough property taxes or flat fees and keptsufficiently accurate data on the tonnage ofwaste collected and landfilled.

Table 5. U.S. City Sample

1.2.

3.4.5.6.7.

8.9.

10.11.12.13.14.

San Francisco, CaliforniaThe unincorporated parts of Hills-borough County, FloridaSt. Petersburg, FloridaEstherville, IowaHoward County, MarylandHighbridge, New JerseyBernalillo County, New Mexico (homeof Albuquerque)Seattle, WashingtonSpokane, WashingtonWheaton, Illinois (suburb of Chicago)Dolgeville, New YorkFrankfort, New YorkMohawk, New YorkUtica, New York

In this study, the effects of charges on thevolume of household waste were estimated,taking into account the interactive effects ofcurbside recycling.2 Also considered as influ-ences on the volume of solid waste were popu-lation density, average household size, age dis-tribution, average household income, the pricepaid for recycled newspapers, and climate vari-ables (which particularly affect the amount ofyard waste generated). In addition, specific

correction factors were estimated for each com-munity to capture other effects on the volumeof waste that are independent of the level ofwaste collection charges. (The estimatedstatistical regression equation is presented indetail in Appendix One.)

The results indicate that a community thatreplaced a property tax financing system with a$1.50-per-bag waste-collection fee (a realisticestimate of incremental handling and disposalcosts on the crowded Eastern Seaboard) couldexpect to cut waste by 0.42 lbs. per capita perday, from an average (over the entire sample)of 2.36 lbs. This is a reduction of 18 percent. If,however, the community simultaneouslyintroduced a free curbside recycling program,the waste volume would be reduced by 0.72lbs—more than 30 percent.

Savings like these are not hypothetical.Enough communities now have experiencewith charge systems that the effect on thewaste stream can be verified and potentialproblems can be identified and forestalled.(Harder and Knox, 1992) For example, mostcommunities have found that illegal disposal orlittering can be minimized by simple measures:locking commercial dumpsters, vigorously pub-licizing and enforcing disposal rules in the ini-tial months of the program; reporting house-holds that consistently put out no refuse; and,requiring each household to pay for at leastone small disposal container since all house-holds generate some waste.3

Citizen response to the program in communi-ties where it has been tried has been favorable.A large fraction of households, more than halfin some communities, find that they pay lessby the bag than under a flat-fee system.(USEPA, 1990) Household charges are per-ceived as fairer than property taxes especially ifsmaller bags are sold at reduced prices forthose who discard little waste. Selling bags orstickers individually (instead of in packs of 10or 20) also helps low-income households keepdisposal costs manageable. Retailers are happyto sell the bags, since it brings people regularly

18

into the store. Providing curbside recyclingoptions and special collection services for bulkyhousehold items (such as furniture and majorappliances) has also increased the acceptabilityof the pay-by-the-bag system.

Local governments have also reported favor-able experience with collection charges, espe-cially where landfill costs have been risingrapidly. Most local governments first tried col-lection charge systems because landfill costswere rising or landfill capacity disappearing.While the volume of waste drops, saving thecommunity money, the charge system providesrevenues to finance expanded recycling pro-grams. (USEPA, 1990)

Rubbish haulers find that the system hasboth advantages and disadvantages. Findingwastes neatly packed in uniform bags reducescollection costs and injuries, but householdsthat overstuff bags with compacted wastes area nuisance.4 So, ironically, are households thatput out no trash since the waste hauler muststill complete the route but gets less to showfor it. In several communities, it has been diffi-cult to adjust the fee schedule to cover costssince the volume of waste fell dramaticallyonce collection charges were imposed.

B. Cost Savings UnderPay-by-the-Bag Systems

1. The Costs of Solid-Waste Collectionand Disposal

The economic savings from household solid-waste collection charge systems are principallythe avoided costs of waste collection and dis-posal when the volume of waste is reduced,less the additional costs of running the chargesystem and any ancillary recycling programs. Inthe first instance, savings accrue to local gov-ernments in the form of lower waste-manage-ment costs. Ultimately, they are passed along tocitizens and taxpayers who would otherwisehave to pay higher property taxes or endure theenvironmental costs of a larger solid-waste

disposal system. Against these savings are setthe additional costs to households of reducingthe volume of wastes set out for disposal.

Both collection and disposal costs includemarket and non-market components. Marketcosts consist largely of payments to wastehaulers and landfill operators, though in manyinstances such payments are an imperfectapproximation of actual costs. The non-marketcosts are the "external" costs borne by otherparties, such as households living near land-fills, who may suffer from noise, odor, litter,and extra traffic. (Some of these costs may ofcourse, be reflected in market transactions:property values may be depressed by proximityto a landfill, for example.) A schematicarrangement of these market and non-marketcosts is presented in Table 6.

Obviously, market collection costs depend onthe characteristics of the service provided: itsfrequency, and the option of backyard (ratherthan curbside) pickup, for example. For thesame level of service, operators have managedto keep collection costs steady over the pastdecade by adopting more mechanized technolo-gies, such as mechanical-arm trucks thatrequire only one worker per truck. As nearbyspace suitable for landfills has vanished insome areas, a trade-off has emerged betweenhigher transportation costs to haul waste tomore distant landfills and higher tipping feesat local transfer stations.5 Recent estimates ofwaste-collection charges range from $35 to $65per ton. (Stone & Ashford, 1991, p. 5)

Waste disposal costs have risen rapidly inmany regions. The most important factorbehind the increases have been increasinglystringent environmental restrictions on landfillsand incinerators, and the shortage of availablenew sites due to community opposition. Risingland costs and insurance costs have also playeda role. The value of urban and suburban landrose rapidly in the 1980s. The average existinglandfill covers 86.5 acres (EPA, 1987b, p. G3),and, so they can take full advantage of sitingpermits, new ones are much larger.

19

Table 6. Factors Influencing the Market and

Collection

Market

1. Characteristics of service such asfrequency of pick-up and location ofcollection.

2. Recent switch to less labor-intensivecollection technologies.

3. Variable fuel prices.

Costs constant

Non-Market

1. Probability of injury, especially tochildren, caused by large trash trucksoperating on small residential streets.

2. Litter escaping trash truck en route to thsdisposal site.

Costs constant

Mon-Market Costs of Waste Disposal Services

Disposal

Market

1. Increase in the price of land.2. Stricter environmental regulations.3. Heightened community opposition to

residing near a disposal site.

Costs increasing

Non-Market

1. Health threats posed by environmentaldamage of landfills. Threats should bereduced by stricter environmental regula-

: tions and, indirectly, by community oppo-sition to new landfill sites. Such opposi-tion usually leads to policies that reducethe quantities of waste discarded.

2. Aesthetic problems caused by noises andodors associated with landfills.

Costs decreasing

Community opposition to new landfills hasgreatly lengthened the siting process. Thesearch, the hearings, the permitting process,the negotiations, and legal challenges allextend the period, and the costs of public andcommunity relations have escalated, sometimesprohibitively. It now takes two to seven yearsand some $10 million to complete the sitingprocess in an urban or suburban area.6

Environmental regulations governing landfillconstruction, operation, and maintenance havebecome stricter. In October 1991, the SolidWaste Disposal Criteria (USEPA, 1991) becamelaw, giving the EPA tighter control of landfilloperation and design. States have followed suitby passing more stringent standards for landfills

and incinerators. Because modern landfills aremuch less environmentally risky and muchmore expensive than the old town dump, theprivate, market costs of waste disposal arehigher.

The non-market external costs of older land-fills stem from water pollution, the escape ofmethane gas (sometimes into basements ofnearby homes), and exposure to toxicmaterials. Other environmental costs includeodors and noise from heavy truck traffic.

Stricter regulations have converted someexternal non-market costs to market costs.Higher standards for new landfills havereduced the environmental damages, but raised

20

the costs of constructing and operating newfacilities. At this point, however, few olderlandfills meet these standards. Only 11.5 per-cent have leachate collection systems, 7 percentmonitor methane gas, 36 percent monitorgroundwater, and 15 percent monitor surfacewater. (USEPA, 1987b, Appendix G) The non-market costs of most of the nation's older land-fills are thus still substantial.

Strongly related to population density, bothmarket and non-market costs of waste disposalhave risen fastest in the heavily settled EasternSeaboard. Land values are usually higher inurbanized areas. More people suffer the envi-ronmental impacts of landfills in heavily settledareas, so community NIMBY opposition islikely to be stiffer and environmental regula-tions stricter. (Wiseman, 1991) If states are clas-sified according to the range of landfill tippingfees, the highest are in the New York Metro-politan region. Tipping fees are generallymoderate elsewhere along the Eastern Sea-board, along the West Coast, and in the indus-trial Great Lakes region. (See Table 7.)

Unfortunately, tipping fees are a poor ap-proximation to even the private costs of waste

disposal. In some communities, private opera-tors may be extracting monopolistic rents fromthe shortage of nearby landfill capacity. Still,85 percent of landfills are publicly owned.(EPA, 1988) Municipalities rarely charge the fullincremental costs of waste collection and dis-posal. A survey of 102 municipal authoritiesfound that the actual costs of collection were 30percent higher than represented in municipalaccounts, which typically omitted the laborcosts of vehicle maintenance, the costs ofemployee benefits and other items. (Savas,1979) Direct disposal costs in municipal land-fills are also substantially understated. (ReasonFoundation, 1988) For example, a realistic landrent is rarely charged to the facility. A typicalfacility of 86 acres, often has a current marketvalue much higher than its historical cost tothe city. Few municipalities charge themselvesa rent reflecting this use of valuable land.Nonetheless, since most new large landfills areprivately developed and operated, it isassumed in the following analysis that forincremental landfill capacity all operating andland costs are reflected in market tipping fees.

More importantly, the operator never allowsfor a depletion charge as it fills up landfill

Table 7. State

Greater Than i

ConnecticutMassachusettsNew JerseyNew York

Source: Biocycle

Tipping Fees

150 per Ton Between $20 and $49 per Ton

AlaskaCaliforniaDelawareFloridaHawaiiIllinoisIndianaLouisianaMaineMarylandMichiganMinnesota

(1992, pp. 46-55).

New HampshireNorth CarolinaOhioOregonPennsylvaniaRhode IslandVermontVirginiaWashingtonWest VirginiaWisconsin

21

capacity that can only be replaced at muchhigher cost. (Dunbar and Berkman, 1987) Adepletion charge should be calculated as thediscounted present value of the additional costsper ton that will be borne when the moreexpensive replacement facility is required. Therationale is that each ton dumped today bringscloser the day when more expensive replace-ment capacity will be needed. In this analysis,estimated depletion costs are consideredincremental costs, because the remaining life-time of so many of the nation's landfills is lessthan ten years and because the costs of newcapacity is so much higher. Other omittedcosts, however, are ignored.

Finally, neither municipal nor private tippingfees reflect the non-market environmental costsof waste disposal. These non-market costs—including risks of air and water pollution,noise, and other disamenities—are difficult toquantify. But a study in Massachusetts pro-vides an estimate of $75 per ton (Stone andAshford, 1991), and in another study ofCalifornia, researchers estimated costs of $67per ton for a lined landfill with leachate collec-tion (Tellus Institute, 1991). While neitherstudy used a wholly satisfactory methodology,the results indicate that the non-market costsof disposal are of the same approximate magni-tude as the market costs in these states wheredisposal is expensive. Environmental impactsin typical landfills may be greater in denselypopulated communities, while, in less denselypopulated regions, non-market costs (as well asmarket costs) of landfill disposal are probablylower. In the analysis that follows, it isassumed that non-market disposal costs areequal to market disposal costs in all states.

2. Estimates of Solid-Waste Collectionand Disposal Costs

The avoided costs of waste disposal servicesinclude the market costs of collection andtransportation; market disposal costs (amongthem, tipping fees and excluded depletioncosts); external non-market costs of collection

and transportation; and external non-marketdisposal costs.

In this study, estimates of these cost compo-nents have been assembled for two hypotheti-cal communities: one, on the Eastern Seaboard,has high disposal costs; the other, in the GreatLakes region, has moderate disposal costs.Using these representative communitiesmakes it possible to project the potential sav-ings from solid waste-collection systems to arange of conditions across the United States.(See Table 8.)

In the 1970s and 1980s, collection costs repre-sented two thirds to three fourths of the totalmarket costs of municipal solid waste manage-ment (OECD, 1981, p. 14). But the rapid rise oftipping fees has reduced the share of collectioncosts to 25 to 50 percent.7 In Table 8, the mid-point of this range is used, and collection costsare estimated as 37.5 percent of the total of pri-vate collection and tipping fees. Since no esti-mates of the external non-market costs of rub-bish collection are available, this cost elementis set at zero.

Tipping fees are estimated near the top ofthe ranges observed in high and moderate costregions in 1992 since the recession has tem-porarily weakened demand for waste-disposalservices and tipping fees have fallen consider-ably since 1990. Calculating the appropriatedepletion cost was more complicated. The firstelement, the increased cost of replacementfacilities, was estimated from an EPA study ofthe impact of its proposed stricter environ-mental requirements for new landfills. (EPA,1988, p. 19) According to the EPA, the medianincrease in the costs of complying with thenew landfill regulations will be approximately$10 per ton. However, complying with stricterregulations is not the only reason for higherfuture costs; increasing community oppositionand siting difficulties are also significant.Another study estimates that the cost of timeto acquire permits, the compensation that nowmust be paid to the community that hosts thefacility, and state government special fee

22

Table 8. Marginal Costs of Waste Disposal

Market Collection Costs

Market Disposal CostsTipping FeeDepletion Cost

SUBTOTAL: MARKET COSTS

Non-market Collection CostsNon-market Disposal Costs

SUBTOTAL: NON-MARKET COSTS

TOTAL

Services in High and Moderate Cost

High-CostRegion

45

75(65)(10)

120

075

75

195

Regions ($/ton)

Moderate-CostRegion

20

45(35)(10)

65

045

45

110

assessments on landfills, along with regulatorycompliance, will raise the cost of a typical mid-western landfill by $16 per ton. (Glebs, 1988;Table 9, p. 80) As Table 9 shows, depletioncosts vary directly with the replacement costincrease and inversely with the years ofremaining capacity for the existing facility.

This higher replacement cost estimate of $16per ton provides a more complete estimate ofreplacement cost increases. Using this figureand assuming a 10-percent interest rate and anestimated five years of remaining capacity(which is a median figure for U.S. landfills),

results in an estimated $10 per ton depletioncharge.

To these market costs must be added thenon-market environmental costs of waste dis-posal. As noted, these are an estimated $75 perton for high-cost states and $45 per ton formoderate-cost states. The incremental costs ofwaste handling and disposal thus total $195per ton in such high-cost states as New Yorkand New Jersey and $110 per ton in suchmoderate-cost states as Virginia and Ohio.These figures, though much higher than theestimates of solid waste costs usually cited,

Table 9. Estimates of Depletion

Increase in theTipping Fee at theReplacement Landfill

$10$16

Costs

Years

Five

$6$10

Before Existing Landfill is

Three

$7.50$12

Depleted

One

$9$14.50

23

reflect more accurately the economic savings inavoided costs from measures that reduce thevolume of waste discarded. They thus establisha benchmark for setting appropriate solid-wastecollection charges.

C. The Revenues and NetSavings from Waste-Collection Charges

If the charges for solid-waste disposal ser-vices reflect the incremental costs discussedabove, households will have an incentive toreduce the amount of waste they dispose, aslong as the cost and inconvenience to them donot outweigh the charge they would otherwisehave to pay. Charges set on this principle willprovide households appropriate incentives torecycle and take other steps to reduce waste.8

Moving from a system in which householdsare charged nothing for each extra unit of trashset out for disposal to an appropriate pay-by-the-bag system should achieve net economicsavings. Moreover, the revenues collectedshould be sufficient to finance the community'ssolid-waste collection and disposal services.

The relationship of the appropriate chargelevel to incremental costs, revenues, and neteconomic savings is portrayed graphically inFigure 2. For a hypothetical community, therelationship between the charge level and thevolume of waste is depicted as the slopingdemand curve DD. When services are financedthrough property taxes, the marginal charge iszero and the volume of waste will be ql.

The incremental costs of waste collection anddisposal are represented by the line CC. It is

Figure 2. Revenue and Net Savings from a Solid Waste Unit Charge

Net Savings

Waste Volume

Source: WRIU992)

24

drawn horizontally on the assumption thatcosts per ton remain constant as the volume ofwastes change. This assumption may seem sur-prising, since a higher volume of waste impliesthat landfills will fill up more quickly anddepletion costs will be higher. However, offset-ting this tendency is the fact that the unit costsof landfills diminish with size. On balance,considering that much of the apparent rise incosts in recent years has represented a shiftfrom hidden non-market to monetized marketcosts, it seems reasonable to assume thatincremental costs are constant.

If charges are set to equal incremental costs,then in Figure 2 the volume of waste isreduced to q2. The revenues generated by thecharge are equal to the unit charge times thevolume of waste put out for collection, orc(q2). If costs remain constant or rise, theserevenues would cover the total costs of wastecollection and disposal.

The net economic savings are the avoidedcosts of waste collection and disposal, less thecosts to households of reducing the volume ofwaste discharged. Since households can beexpected to reduce wastes to the extent thatdoing so is cheaper than paying for waste col-lection, the area underneath the demand curveDD represents the costs to households of wastereduction. The net savings is the area over thedemand curve and underneath the incrementalcost curve CC. When the charge is zero, thehousehold has no incentive to reduce wastes,so the entire area underneath the cost curverepresents a net savings. When the disposalcharge equals the unit costs of disposal, thenhouseholds will keep spending on waste reduc-tion until they reach the point at which furtherreductions would cost as much as payingsomeone to take their garbage away, so nofurther net savings are available.

Table 10 indicates the appropriate chargelevel in prototypical cities in regions wheregarbage disposal costs are high and moderate,along with the resulting estimated revenues,waste reduction, and net economic savings.

These calculations are made for charge systemswithout curbside recycling programs. Thecharges analyzed in the first panel are basedonly on market costs; those in the secondinclude both the market and non-market costsof waste handling and disposal. In both cases,the potential benefits are striking.

The appropriate charges based only on marketcosts are $1.12 per 32-gallon bag in the highcost region and $0.60 per bag in the mod-erate-cost region. (Cost units have been con-verted from tons to 32-gallon containersassumed to hold 21 lbs. of solid waste.) Even ifno curbside recycling program is in place, thesecharges would reduce the volume of waste dis-charged in the former region by 12 percent or114 lbs per person per year and in the latter by6.5 percent or 62 pounds per person per year.In communities of 500,000 in these regions, thecharges would raise $20 million and $13 millionper year, respectively. The net economic savingswould be 7.5 percent of revenues collected inthe region with high cost garbage disposal, and3.5 percent of revenues in the region with low-cost disposal. Projecting these results across allstates where waste management costs aremoderate or high, pay-by-the-bag charges with-out associated curbside recycling could produceannual net savings exceeding $220 million onrevenues of almost $4.7 billion.

To reflect both the market and non-marketcosts of waste handling and disposal, theappropriate charges would rise to $1.83 per bagin the high-cost region and $1.03 in the mod-erate-cost region. (See Table 10-B.) With chargesthis high, the reduction in the volume ofwaste, the revenues, and the net welfare gainswould all increase significantly. In communitieswith high disposal costs, the annual volume ofwastes landfilled would fall by approximately20 percent; where costs are moderate, the dropwould be 11 percent. If adopted across theseregions, the annual net economic savings,including both savings in waste handling anddisposal and avoided environmental damages,would total almost $650 million on annualrevenues from charges of $7.25 billion.

25

Table 10. Revenues and Net Economic Savings Generated

A. CHARGE BASED ONLY ON MARKET COSTSAppropriate Charge

Per 32-Gallon Container ($)Per Ton ($)

Reduction in Waste Landfilled(lbs/person/year)

For Community of 500,000 PeopleAnnual Reduction in Landfill Volume (tons)Percentage Reduction in Landfill Volume (%)Net Economic Savings ($ million/year)Revenue from Charges ($ million/year)Net Savings as a Percentage of Revenues (%)

For All High- and Moderate-Cost StatesNet Economic Savings ($ million/year)Revenues from Charges ($ million/year)

B. CHARGE BASED ON MARKET AND NON-MARKETAppropriate Charge

Per 32-Gallon Container ($)Per Ton ($)

Reduction in Waste Landfilled(lbs/person/year)

For Community of 500,000 PeopleAnnual Reduction in Landfill Volume (tons)Percentage Reduction in Landfill Volume (%)Net Economic Savings ($ milion/year)Revenue from Charges ($ million/year)Net Savings as a Percentage of Revenues (%)

For All High- and Moderate-Cost StatesNet Economic Savings ($ million/year)Revenues from Charges ($ million/year)

by Pay-by-the-Bag

High-CostCommunity

1.12120114

25,500121.5207.5

1071,422

COSTS

1.83195187

41,17119.54.129.413.9

2852,059

Charges

Moderate-CostCommunity

0.606562

13,9156.50.4513.13.5

114.33,266

1.03110105

23,43810.91.318.67.0

3605,198

26

Table 11 shows the estimated results of intro-ducing pay-by-the-bag charges along with curb-side recycling. The two programs are highlycomplementary. Charges increase participationrates in recycling programs and the volume ofmaterial collected per household, both of whichlower the unit costs of operating recycling pro-grams. (Word, Higginbotham, and Pluenneke,1992) The two together would greatly decreasethe volume of waste to be landfilled—by up to23 percent in the high-cost region if charges arebased on market costs alone, and by 37 percentif charges are based on the combined marketand non-market costs of waste handling anddisposal.

In communities where disposal costs arehigh, net savings in market waste disposalcosts are more than enough to offset the grosscosts of running curbside recycling programs.(Although recycling costs vary widely amongcommunities, an average figure of $100 perton, ignoring any revenues from sales ofmaterials is reasonable.) (Glenn, 1990; Powell,1991; Snow, 1988) In a typical community of500,000 people, appropriate charges adopted inconjunction with a curbside recycling programwould generate $1.43 in net economic savingsfor every dollar spent on curbside recycling.Moreover, since in such estimates the costsinclude not only those to the municipalities butalso those to households that take steps toreduce waste disposal, the actual budgetary sav-ings to the municipal government from reducedhandling and disposal costs, which wouldexclude the costs to households, are approxi-mately twice the level of net savings—morethan enough to finance recycling programs.

In communities where landfill costs aremoderate, the net savings would offset almost80 percent of gross recycling costs. Here again,though, budgetary savings would be roughlytwice as great as net savings. Moreover, sincethe revenues from sales of recycled materialstypically offset from 10 to 40 percent of thegross costs of recycling programs, the net sav-ings from adopting pay-by-the-bag chargescould offset the net costs of recycling programs,

and the budgetary savings would offset thegross costs, even where landfill costs aremoderate.

Where landfill costs are high, disposalcharges would generate net economicsavings of $0.17 for every dollar ofrevenue collected, even after the grosscosts of curbside recycling programswere paid.

Basing charges on the total market and non-market costs of waste disposal would elicitmuch greater reduction in landfill volume,much more recycling, and much greater rev-enues and economic savings. In fact, wherelandfill costs are high, disposal charges wouldgenerate net economic savings of $0.17 forevery dollar of revenue collected, even afterthe gross costs of curbside recycling programswere paid. The net savings after paying grossrecycling costs (ignoring revenues from sales ofmaterials) would be virtually as high as thosein programs without curbside recycling. Thissuggests that it is more economical to intro-duce curbside recycling programs in conjunc-tion with pay-by-the-bag charges in communi-ties where landfill costs are high, even thoughrecycling programs are expensive to operate.Adopted across all regions where waste man-agement costs are moderate to high, pay-by-the-bag charges accompanied by curbside recy-cling would generate revenues of $6.3 billionper year, and net savings of $432 million afterall the gross costs of recycling programs werepaid.

Not all the potential benefits are reflectedadequately in these estimates. Reducing thevolume of waste puts off the need to find addi-tional waste-disposal facilities or to haul muni-cipal wastes long distances—politically divisivemeasures that can be counted on to generate

27

Table 11. Waste Reduction and Net Economic SavingsCurbside Recycling Programs

A. BASED ON MARKET WASTE DISPOSAL COSTSAppropriate Level of Charges

Per 32-Gallon Container ($)Per Ton ($)

Changes in Waste VolumesReduction in Landfill Volume (lbs/person/year)Increase in Recycled Volume (lbs/person/year)

For a Community of 500,000 PeoplePercent Reduction in Landfill Volume (%)Net Saving from Landfill Reduction ($ million/year)Increase in Recycled Volume (tons/year)Gross Cost of Recycling ($ million/year)Revenues from Charges ($ million/year)

For All High- and Moderate-Cost StatesNet Savings ($ million/year)Gross Cost of Recycling ($ million/year)Revenues ($ million/year)

from Charges Accompanied by

High-CostCommunities

ONLY

1.12120

19082

232.63

18,3001.8317.82

184128

1,248

B. BASED ON MARKET AND NON-MARKET WASTE DISPOSAL COSTSAppropriate Level of Charges

Per 32-Gallon Container ($)Per Ton ($)

Changes in Waste VolumesReduction in Landfill Volume (lbs/person/year)Increase in Recycled Volume (lbs/person/year)

For a Community of 500,000 PeoplePercent Reduction in Landfill Volume (%)Net Saving from Landfill Reduction ($ million/year)Increase in Recycled Volume (tons/year)Gross Cost of Recycling ($ million/year)Revenues from Charges ($ million/year)

For All High- and Moderate-Cost StatesNet Savings ($ million/year)Gross Cost of Recycling ($ million/year)Revenues ($ million/year)

1.83195

320133

376.96

29,6882.9723.57

487206

1,650

Moderate-CostCommunities

0.6065

10644

120.779,8200.9810.96

215274

3,063

1.03110

18075

212.2116,7411.6716.73

618467

4,675

28

intense and acrimonious community opposi-tion. Switching to pay-by-the-bag and curbsiderecycling programs offers communities newways to avoid both these difficulties and therapidly escalating costs of waste disposal.Moreover, such charges also remove a financialburden from property owners, who are inrevolt against higher property tax rates inmany parts of the country.9

In local government, no less than at the stateand federal level, environmental charges can

raise revenues while reducing environmentalproblems and future financing obligations.Compared to traditional revenue sources, suchas property taxes, they provide superior incen-tives and, in the end, increase the commu-nity's economic welfare. Household solid-wastecollection charges are a particularly interestingexample because they have now been tried andfound effective in many large and small com-munities around the country.

29

Appendices

A. A Summary of the Empirical Demand Model

The residential demand model is represented by (B.I).

VRA i

POP, = a? + inCPL,

YR

(5.1)

t = l, . . . ,Ti, i = 3,5,7,8,10,11,12,13,14.

Unfortunately, several communities were un-able to provide data on the quantity of residen-tial waste alone. Instead, they kept track onlyof the sum of residential and commercialwaste. To make use of such data we add the

E* = a +

t = l , . . . ,T i , i = 7.

PPLXc bc

it! 2

CR bR + GuHt9 U9 ^ *~lt

following two equations to our model. Equa-tion (5.2) represents a commercial demandmodel. Equation (5.3) represents a demandmodel for the sum of commercial and residen-tial waste disposal services.

PPIt 3Xc bc + Xc bc

Hi 4 !f5 5£ c (5.2)

POP. P O P . af +XR-

b« +xR

it2CPLx

Y R

L

POPrt/ PPLf\POP

\POPft/ PPIt

POP,,it'

\POP,Ait2D2

e

it I

Ert \

POP,,/

(5.3)

t = l, . . . ,Ti, i = 1,2,4,6,9.

30

The symbols in (5.1) through (5.3) have the fol-lowing meanings.

Y R

Ait9it9

YRYit

l i t

Ait2

Y RAit3

Y R

A l t 4

X•It5

< - R

Mt6

Mt8

= the number of pounds of residentialwaste disposed of per day in commu-nity i in month t;

= the number of pounds of commercialwaste disposed of per day in commu-nity i in month t;

= the number of people living in com-munity i in month t;

= the fixed effect for community irelated to the residential demandequation;

= the fixed effect for community irelated to the commercial demandequation;

= the number of people working incommunity i in month t;

= the residential volume-based user feeper 32-gallon container in communityi in month t;

= disposable income per household incommunity i in month t;

= the population per square mile incommunity i in month t;

= the six-month average of the marketprice paid by paper mills for usednewspapers in community i duringthe six months prior to month t;

= the percent of the population aged 18to 49 in community i in month t;

= the mean temperature in degreesfahrenheit in community i in montht;

= the number of inches of precipitationin community i in month t;

= the average number of persons perhousehold in community i in montht;

Y c

Alt2lt2

Y c

Alt3lt3

an interaction term equal to the prod-uct of the deflated residential userfee and a dummy variable for curb-side recycling.

the regional consumer price indexapplicable to community i in montht;

the weekly commercial volume-baseduser fee per cubic yard of dumpstercapacity in community i in month t;

the population per square mile incommunity i in month t;

the six-month average of the marketprice paid by paper mills for usedcorrugated containers in community iduring the six months prior to montht;

the mean temperature in degreesfahrenheit in community i in montht;

the number of inches of precipitationin community i in month t;

the national producer price index inmonth t;

., b, = the coefficients which corre-spond to the residential regressors;

., bg = the coefficients which corre-spond to the commercial regressors;

= the disturbance term correspondingto the residential demand model;

= the disturbance term correspondingto the commercial demand model.

Equations (5.1) through (5.3) represent thedemand equations that we have estimated. Themethod of estimation was generalized leastsquares (GLS). The following table presents thecoefficient vector estimated with the completedata set. The table also gives the t-statisticsthat correspond to each estimate.

< c

Mt5

PPL•t -

j \>\,

eft

31

B. Estimated Coefficients*

VARIABLE C

DUMMY VARIABLES FOR INTERCEPTSResidential Dummy for San FranciscoCommercial Dummy for San FranciscoResidential Dummy for Hillsborough CountyCommercial Dummy for Hillsborough CountyResidential Dummy for St. PetersburgResidential Dummy for EsthervilleCommercial Dummy for EsthervilleResidential Dummy for Howard CountyCombined Residential and Commercial

Dummy for HighbridgeResidential Dummy for Bernalillo CountyCommercial Dummy for Bernalillo CountyResidential Dummy for SeattleResidential Dummy for SpokaneCommercial Dummy for SpokaneResidential Dummy for WheatonResidential Dummy for DolgevilleResidential Dummy for FrankfortResidential Dummy for MohawkResidential Dummy for Utica

RESIDENTIAL SECTOR REGRESSORSUser Fee for WDS (price - 0.28 - 2.67

per 30 to 32-gallon container)Interaction Term** - 0.20 - 2.33Average Household Income (in thousands) 0.04 2.56Mean Temperature 0.01 10.34Average Precipitation 0.03 5.83Average Household Size - 2.40 - 2.43

FFICIENT

-77.79105.45- 9.41

77.07-17.51-12.04

40.89- 1.16

- 5.24- 0.73

9.56-28.42-45.52103.10-20.17- 4.20-10.82-15.97-17.54

T-STATISTIC

- 4.173.79

- 1.983.64

- 3.06- 3.07

5.93- 0.42

- 1.55- 0.29

13.10- 3.95- 8.03

10.76- 3.50- 1.33- 2.51- 2.98- 3.08

32

APPENDIX—ESTIMATED COEFFICIENTS (continued)*

VARIABLE COEFFICIENT T-STATISTIC

Age Distribution of the Population 0.10 4.15Population Density (in thousands) 4.96 4.38Price Received for Used Newspapers -0.0001 -0.13

(per short ton)

COMMERCIAL SECTOR REGRESSORSUser Fee for WDS (weekly price -0.23 -2.61

per cubic yard for two pick-ups each week)Mean Temperature 0.02 4.42Average Precipitation -0.03 -0.97Population Density (in thousands) -6.28 -3.54Price Received for Used Corrugated 0.002 0.60

Containers (per short ton)

N=636R2 = 0.9305

*The dependent variable for the residential equation is measured as pounds of refuse discardedper capita per day. The mean value of this dependent variable for the sample is 2.36. This meanis based on the average pounds per capita per day of communities for which we had residentialtonnage data only.

The dependent variable for the commercial equation is measured as pounds of refuse discardedper employee per day. The mean value of this dependent variable for the sample is 7.50. Thismean is based on the pounds per employee per day of the community for which we only hadcommercial tonnage data—Bernalillo County.

**The interaction term is equal to the product of the residential user fee and a dummy variable forcurbside recycling. In particular, to calculate the interaction term we first assigned each commu-nity a value of one when a curbside recycling program was in effect and a value of zero whenthere was no curbside program. Then we multiplied this dummy variable by the residential userfee to get a value for the interaction term.

33

Notes for Chapter 21. Municipal solid waste includes both residen-

tial and commercial waste, the latter com-prising discards from such businesses asoffices, shops, and restaurants. Industrial,agricultural, and construction wastes are notcategorized as municipal solid waste.

2. The original research by Robin Jenkins isreported in The Economics of Solid WasteReduction: The Impact of User Fees, EdwardElgar, February, 1993. The research wasextended and revised in collaboration withthe World Resources Institute, and with thecooperation of Waste Management, Inc. incollecting additional field information.

3. One community that banned yard wastefrom collection systems but provided noother disposal alternative noted a substantialincrease in illegal dumping.

4. In one community a man who bought amechanical compactor when the unit pricingsystem went into effect and was putting outbags with the approximate density of kryp-tonite was disappointed to learn from thelocal authorities that his response was not inkeeping with the spirit of the policy.

5. A tipping fee is the price, usually per ton orper cubic yard, that is paid by waste haulersfor the privilege of dumping solid waste at adisposal site.

6. Dr. Ed Repa, Director of Technical andResearch Programs at the National SolidWaste Management Association in Washing-ton, D.C. suggested during a telephone con-versation with the principal author an aver-age siting period of 5 to 7 years. Glebs(1988, p. 5) estimates 2 to 5 years.

7. Dr. Ed Repa, Director of Technical andResearch Programs, NSWMA, in personalconversation with principal investigator.

8. The charge or payment to households forthe materials they set out for recyclingshould also reflect the incremental costs ofrecycling programs, of course. These are thecosts of collecting and recycling thematerials, net of the value of the materials insecondary markets.

9. The decline in real estate markets in theNortheast has fanned this revolt and putlocal communities in even tighter financialpredicaments.

34

III. An Analysis of Tolls to ReduceCongestion on Urban Highways in theUnited States

T raffic congestion is a serious problemin American cities. In Los Angeles,perhaps the worst case, a ten-mile

commute that took 20 minutes just two yearsago now takes 30 to 35 minutes. (ChristianScience Monitor, Nov. 28, 1990) Between 1970and 1989, the total miles travelled by motorvehicles increased by 90 percent, the numberof vehicles registered increased by over 70 per-cent, but urban road capacity increased by lessthan 4 percent. (Highway Statistics, 1989)Nearly 70 percent of rush-hour travel enduresstop-and-go conditions—a 30-percent increasesince 1983. Nevertheless, as of 1983, 74 percentof all drivers commuted alone in their cars, andonly 15 percent carpooled. (Ferguson, 1990)

Increasing urban traffic congestion meanslonger delays, more accidents, wasted fuel, andmore smog, acid precipitation, and greenhousegas emissions. Congestion reduces productivitydirectly by lengthening the time it takes to getpeople, goods, and services to their destina-tions and indirectly by imposing added stresson all drivers. A study of 29 western citiesfound that in 1986 the costs of time delays andexcess fuel consumption due to congestion was$17.5 billion. In Los Angeles alone, these coststotal almost $6 billion a year—$3 a day pervehicle on the road. (Lomax et al., 1988)

Unless something is done, the problem willget much worse. The Federal Highway Admin-istration (FHWA), after studying traffic patternson urban freeways in 37 large cities, predicted

that the total number of hours of delay due tocongestion and accidents would increase byover 400 percent by 2005 if highway capacityremained at 1984 levels because the number ofvehicle miles travelled would rise nearly 50percent over that period. Already in 1984, 1.25billion hours were lost in road delays; by 2005,6.9 billion hours would be lost. This wouldwaste an additional 7.3 billion gallons of fuelper year and increase drivers' costs by $40 bil-lion annually. (Lindley, 1986)

Why do drivers subject themselves to thistorture? There are options: travelling before orafter rush hour, taking the bus, carpooling, or(in the longer run) changing where one worksor lives. These options also have their costs,but in balancing them drivers are victims of amassive "market failure." The full costs ofdriving on crowded roads don't figure intotheir decisions. When drivers decide to enter acongested highway, they consider only theamount of time it will take to reach their desti-nations. They ignore the fact that other cars onthe road will slow traffic down even more, fur-ther delaying all other drivers. For example,one additional car can cause an extra hour indelay, when summed over all drivers alreadyon the Bay area highways during rush hour(Bay Area Economic Forum, 1990), but itsdriver is oblivious or indifferent to these extracosts imposed on fellow travelers. Becausedrivers ignore this "external" cost, thinkingonly of the cost of their own time, too manydecide to embark on rush hour trips. The

35

"price" of travel is too low in that it doesn'treflect its full incremental costs.

For over 30 years, economists have advocatedcongestion tolls to deal with this problem.(Gomez-Ibanez and Fauth, 1980; Goodwin andJones, 1989; Henderson, 1974; Keeler andSmall, 1977; Kraus, Mohring and Pinfold, 1976;Roth, 1970; USDOT, 1982; Vickrey, 1968, 1969;Viton, 1980; Walters, 1961) Such tolls would bebased on the costs that an additional carimposes on all others during congested periodsand would force drivers to make decisions thatmore accurately reflect their overall economicconsequences. Road space during rush hour isa scarce commodity. If drivers faced all of thecosts of using it, to others as well as to them-selves, then road capacity would be allocatedmore efficiently among users.

Road space during rush hour is a scarcecommodity. If drivers faced all of thecosts of using it, to others as well asto themselves, then road capacitywould be allocated more efficientlyamong users.

Congestion tolls will influence many drivingdecisions: the amount of travel, the timing, theroute and destination, and even the choicebetween public and private transportation. The"right" price will induce the optimal numberof trips and types of travel, where the marginalsocial cost of an extra trip equals the marginalsocial benefit it produces.

WRI has analyzed a hypothetical nationwidesystem of urban congestion tolls based on thefull social costs of congestion. Such a systemcould reduce the number of vehicle milestravelled at the highest levels of congestion byas much as 22 percent and generate net eco-nomic savings of $11 billion per year. If

maintained, by 1999 the reduction in vehiclemiles travelled at the most congested levelscould be 23 percent, with net savings exceed-ing $21 billion annually.

As things stand now, rush-hour travel isexcessive because the social costs of drivingexceed the private benefit at the margin. Figure3 illustrates the relationship between travelcosts and the level of congestion. The horizon-tal axis measures the ratio of traffic volume toroad capacity (V/C). (Average capacity for afreeway is about 2000 passenger cars per laneper hour.) For example, a V/C ratio of onemeans that all available road space is taken upby vehicles. (Traffic engineers consider thattraffic jams begin at a V/C ratio of 0.7.) On thevertical axis, travel costs measure the increas-ing time needed to travel in increasingly heavytraffic. As the V/C approaches one, and trafficslows to a standstill, time costs approachinfinity.

As depicted in the private cost curve, driversface increasing private costs as traffic increasesbecause they must spend more time on theroad. Since each additional vehicle alsoimposes delay costs on all other vehicles, themarginal social cost curve lies above the privatecost curve. The marginal social cost equals theprivate cost plus the extra external costimposed on all other drivers. External costs,which increase with the number of vehiclesbeing held up, become increasingly severe ascongestion increases, but individual driversignore them.

Of course, some congestion may be desira-ble. If a trip is so important that it would bemade in the face of its full social costs, thenthat trip should be made, even during rushhour on a heavily used freeway. Congestiontolls will not miraculously make all congestiondisappear, but will guarantee that the truecosts are paid. Efficient congestion tolls, set toequal the external costs so that each driverfaces the full marginal cost of the decision todrive, will lead to an efficient level of conges-tion: the incremental benefits to each additional

36

Figure 3.

($)

Tim

e C

osts

Ave

rage

and

Mar

gina

l

Congestion Costs

10

8.

4 .

2 .

0

E

J^. •

1 i0 0.2

Source: WRI(1992)

Marginal /Social /Cost /

y/ Marginal /

Demand / Private /

Tax Revenue ^^^""^ \

Welfare /— Gain /

= = = : " D A\

i i i i i i — p — — — |0.4 0.6 0.8 1.0

Traffic Volume to Road Capacity (VIC)

traveler will equal the incremental costs thatthat driver imposes on the system. In thissense, congestion tolls promote the "right"degree of congestion.

In Figure 3, the demand curve measures thevolume on the system at different levels oftime cost. As those costs increase, traffic vol-ume slackens off. At any traffic volume, thefigure also indicates each user's marginalwillingness-to-pay for the trip. Since the costone is willing to assume for a trip is at mostequal to the benefit derived, the demand curvealso measures the benefit of an additional tripat various levels of traffic. In general, trafficwill settle at the level where private benefitsand costs balance (point A on Figure 3). But, atthis level of traffic, full marginal costs (point B)are greater than the marginal benefits (pointA). A smaller volume of traffic would be moreefficient. The most efficient volume of traffic

would balance private benefits and marginalsocial costs (point C in Figure 3). This efficientlevel of travel can be induced by charging a feeequal to the external costs of additional trafficat the point where marginal benefits equalmarginal social costs (the distance CD). Thiswill generate a certain amount of revenue (therectangle CDFE in Figure 3), as all cars remain-ing in the system pay the toll. It will alsoresult in an overall welfare gain to societybecause the total time savings as congestion isreduced outweighs the benefits given up as thevolume of traffic falls (the area ABC in Figure 3).

What does this analysis mean? For one thing,it means that congestion tolls, unlike mosttaxes, can generate revenues and simultane-ously improve economic welfare by discourag-ing undesirable activity. Most taxes—onincome, profits, payrolls, property, or sales-have incentive effects that reduce economic

37

welfare by discouraging economically desirablebehavior.

Moreover, congestion tolls can reduce capitaloutlays on highways. The authors of the recentbook Road Work (Small, Winston and Evans,1989) conclude that "plausible congestion tollswould reduce peak traffic volumes 10 percentto 25 percent on many congested highways.Applied to existing roads, the projected reduc-tion could tip the balance so as to make manywidening projects unnecessary; applied to newroads, it would make possible smaller andcheaper facilities in many cases." Such find-ings have persuaded the Secretary of Transpor-tation, Samuel Skinner, of the merits of con-gestion tolls. "Peak period pricing is oneimportant way to encourage the most effectiveuse of existing facilities, by shifting demandthat would otherwise require additional capac-ity to other periods or other modes where facil-ities are underutilized." (DOT, 1990)

In other industries in which adding capacityrequires heavy capital expenditures and thelevel of demand fluctuates over time, usingpricing incentives to shift some users fromperiods of peak demand to off-peak periods hasproved economical. Reducing peak demand canbe much cheaper than providing extra capacitythat will only occasionally be used. This is whatthe phone companies do by giving "discounts"during evenings and weekends, which are off-peak demand periods. Many electric power util-ities, instead of building more power plants,have found it more profitable to decrease peakdemands by giving customers incentives to useenergy more efficiently—whether by givinghigh-efficiency light bulbs to consumers or, saysubsidizing home energy audits. Some utilitiesare also offering consumers lower electricityrates if they allow power to some appliances(hot water heaters, for example) to be switchedoff during peak demand periods. In other coun-tries, for instance France, time-of-day electricitypricing is commonplace.

Dealing with road congestion by expandingcapacity can be self-defeating as well as costly.

When congestion is high, there is considerable"latent demand" for highway travel, becausesome drivers have been discouraged fromusing the roads. When capacity is increased,these extra drivers reappear to fill the newlanes, so congestion is soon as bad as it everwas. For example, when the Bay Area RapidTransit (BART) opened in the San FranciscoBay Area, 8,750 drivers who commuted by caracross the Bay Bridge switched to BART, (Sher-ret 1975) but 7,000 new drivers soon begancommuting across the bridge so trafficremained very heavy. This illustrates the "fun-damental law of traffic congestion" definedthirty years ago: "On urban commuter express-ways, peak-hour congestion rises to meet maxi-mum capacity." (Downs, 1962)

Augmenting road capacity to attack conges-tion has another flaw: rush-hour trips that arenot work related have been increasing muchfaster than commuter trips. Indeed, such jour-neys now account for most rush hour trafficand approximately 75 percent of all weekdaycar trips. (Richardson and Gordon, 1989) Morn-ing rush hour travel for non-work reasonsincreased by 42.1 percent between 1977 and1983, while work related trips increased by 2.7percent. (Gordon, Kumar and Richardson,1988) Since such trips are probably more sensi-tive to cost than work trips are, congestiontolls would encourage people to reschedulemany non-work-related trips now taken duringthe rush hours.

A. Other CostsTime is not all that is lost in rush hour traf-

fic. The more cars on the road, and the heavierthe traffic, the more accidents occur. Road acci-dents already cost the nation almost $275 bil-lion per year (Small 1991) in property damage;absences from work and related sick leave; andmedical, hospital and life insurance (includingadministrative costs). This averages 24 centsper VMT—more than the cost of gasoline.Some of these costs are covered by insurance,but insurance premia are part of the fixed costsof car ownership and do not vary with the

38

Road accidents already cost the nationalmost $275 billion per year in propertydamage; absences from work andrelated sick leave; and medical,hospital and life insurance. Thisaverages 24 cents per VMT—more thanthe cost of gasoline.

decision to drive during rush hour, so insur-ance premia don't discourage overcrowding. Ifthe increased probability of accidents wereproportional to the number of cars that couldpossibly hit each other, then the external costsof accidents would rise as the squared powerof vehicle volume, and marginal accident costswould increase at twice the rate of averagecosts as traffic volume increased. (Newberry,1988) (Another study suggests that the mar-ginal cost is one and a half times the averagecost. (Vickrey, 1968, 1969)

Moreover, even drivers who don't suffer theimmediate damages of an accident lose precioustime whenever they get caught near one. The1986 FHWA study estimated that in 1984 therewere 766.8 million vehicle-hours of delay dueto accidents and breakdowns—5 hours for eachemployed person. The huge external costs ofaccidents can be internalized with congestiontolls. To the extent that road accidents aredirectly related to traffic congestion, tolls caninternalize their costs and reduce them.

Another consequence of congestion is extrapollution from vehicles stuck in traffic. Theoverall environmental health and materialdamages caused by vehicle pollution is conser-vatively estimated at 0.4 cents per VMT.(Small, 1991) This estimate covers the costs ofincreased human mortality and morbidity, aswell as damages to materials. Although 0.4cents per VMT is small relative to the external

costs of delay and accidents, it still adds up to$8.4 billion in 1989. Furthermore, congestionand pollution levels are correlated. If trafficmoved smoothly and steadily at reasonablespeeds, there would be less pollution for thesame number of vehicle miles travelled.

These pollution effects exclude vehicles' con-tribution to greenhouse warming. Nineteenpounds of carbon dioxide are released forevery gallon of gasoline burned. (MacKenzieand Walsh, 1990) Other important external en-vironmental costs from vehicle use, such aswater pollution (from highway run-off) andnoise pollution, are also excluded. Noise pollu-tion from urban roads alone costs an estimated$1.8 billion in 1977 and $2.7 billion in 1985.(Fuller, et al., 1983)

For cities that cannot meet the Clean Air Actprovisions, congestion tolls could help signifi-cantly. A study of an optimal toll scheme inBoston estimated that carbon monoxide concen-trations would be reduced by 7 percent overall,but by up to 60 percent in the central businessdistrict. (Gomez-Ibanez and Fauth, 1980) In theLos Angeles area, a joint study by the Environ-mental Defense Fund and the Regional Insti-tute of Southern California (Cameron, 1991)found that congestion tolls would decrease car-bon monoxide emissions by 12 percent, carbondioxide by 9 percent and NOX by 8 percent,while significantly reducing traffic congestion.This study showed the importance of reducingthe number of trips as well as the total numberof miles travelled. For a typical commute,about half of the pollution generated occursduring the first minute after the car is started.

According to the Reason Foundation inSouthern California, the way to introducerational road pricing is to have private tollroads. Soon this idea will be tested. Two pri-vate toll roads under construction in OrangeCounty in Southern California and another inSan Diego county may all be subject to conges-tion pricing. Three government-owned tollroads are under construction in Orange county,and the county government is also exploring

39

the idea of incorporating peak and off-peakpricing. (Poole, 1992)

According to the Bay Area Economic Forum,northern California faces the same problemsthat drove southern California to experimentwith toll roads and two-tiered pricing systemsfor their use. Congestion has increased by 25%in the Bay area in just three years. (Bay AreaEconomic Forum, 1990) Commuters there wastealmost 100 million hours per year in trafficjams. Besides the costs of lost time, damages tohealth, property, and plant life in the Bay areahave been estimated at $300 million per year.By the year 2000, every major commuter roadis predicted to be severely congested. (BayArea Economic Forum, 1990) The Bay AreaEconomic Forum's report suggests that a sys-tem of efficient congestion tolls throughout theBay area would help avert this crisis, allowingaverage travel speeds to increase from today'slevel of 15 MPH to between 45 and 50 MPH.

B. The TechnologyTechnologies already exist to collect congestion

tolls cheaply and efficiently. The latest technol-ogies employ battery-powered on-board devices("tags") that can accept and store data as wellas transmit it. Thus, when a vehicle enters atollway, the device can have the time and loca-tion "written to" its memory by a stationaryelectronic reader in (or over) the road. When thevehicle exits the tollway, another stationaryreader determines when and where the triporiginated, calculates the appropriate toll, anddeducts it from the account balance stored onthe tag, and charges the new balance to the tag.The tag can be an electronic relay into whichone inserts a credit card-like device with animbedded microprocessor and memory. Such acard could be used in several vehicles, or couldwork like a debit or ATM card. It could ensuresecurity and anonymity. Vehicles without cards—those from other regions, for example—are typi-cally shunted to a separate manned toll lane.

In actual installations, the reliability andspeed of such technologies are phenomenal.

Vehicle identifications are 99.99 percentaccurate, since each moving vehicle can bechecked electronically at least 20 times before itgets out of reach of the toll station. (Halloran,1992) The technologies can also be protectedfrom theft, tampering, and other hazards.Moreover, they are cheap. In large-scaleproduction, the cost of such tags could gobelow $10 each.

Several technologies and approaches havebeen tested in various countries. Hong Kongtested electronic number plates from 1983-1985.During this period, 2,600 government andvolunteer vehicles were equipped with an"electronic number plate" (ENP). As each carcrossed over an electronic "toll" site (whereelectronic sensors are embedded under theroad), the sensor recorded the car's electronictransmission code. These toll sites ringed thecentral business district, so cars couldn't enterthe area without registering on one of thesetoll sites. Each driver was sent a bill at the endof each month for the tolls charged during theperiod. The test proved that the technologyworks: there was a 99.7 percent correct identifi-cation rate of drivers, the ENPs outperformedtheir specifications that more than 90 percentlast for at least 10 years, photographic equip-ment was able to detect violators, and theaccounting, computer, and transmission systemall functioned well. (Catling and Harbord,1985) Had the plan gone into effect after thetest period, traffic would have been reduced byan estimated 20 percent at a typical dailycharge of $2.00. (Dawson and Catling, 1986)

Singapore has had an area licensing schemein effect since 1975. Any car containing fewerthan four people that enters the central busi-ness district during morning rush hour mustdisplay a sticker that costs about $2.50 a day.This is not a true congestion toll since thecharge does not vary with the level of conges-tion, but it shows how pricing policies canreduce traffic in the most congested urbanarea. Right after the system was installed, traf-fic in the restricted areas decreased by 75 per-cent, mostly because of carpooling: after four

40

years, the comparable figure is 69 percent. As aresult, travel speeds have increased by 22 per-cent. (Button and Pearman, 1986) Singapore,using photographic evidence to catchoffenders, has a compliance rate of 98 percent,with deterrence costs of 5 percent of gross rev-enue. Although at first it was feared that thissystem would cause business to move outsidethe central business district, that has not hap-pened to any significant degree. Instead, it hasbecome easier for shoppers, workers, andgoods to enter the central business district.(Watson and Holland, 1978) In 1990, the citytook bids to implement a complete electronicroad-pricing system, which will replace thesticker system now in use.

Electronic toll collection systems are alreadyin place on the Santa Monica freeway, Okla-homa turnpike, Dallas North Tollway, theCrescent City Bridge and Lake PontchartrainCauseway in Louisiana, and on other roadwaysin eight countries. Other such projects areunder construction. Testing began recently onInterstate 190, north of Buffalo, New York, forexample. England's National Economic Devel-opment Office recently predicted that theworld market for traffic monitoring and manag-ing technologies, including electronic toll sys-tems, could expand to $45 billion in annualsales by the year 2010. Several American firms(Amtech, X-cyte, AT/Comm, and Vapor) andtwo British companies (Siemens Plessey, GECMarconi) already have electronic road-pricingsystems on the market. (Tomkins, FinancialTimes, Nov. 1, '91)

"Toll rings" were instituted in Bergen, Nor-way since 1986 and in Oslo in 1990, althoughthese schemes were not intended to reduce con-gestion but to raise revenue for city roadimprovements. A recent study concluded that inOslo the tolls now in effect are much lowerthan the external costs of congestion duringpeak periods, and that, as currently distributed,the tolling sites do not capture all trips withhigh costs related to congestion. (Larson andRamjerdi, 1990) For these reasons, Oslo's sys-tem has done little to reduce congestion: traffic

volume dropped by 5 percent when the policywas first implemented, but has since returnedto the original levels. In Milan, Italy, a similartoll ring has worked better: peak-period entryfees have significantly reduced auto trips intothe central city. (Arillaga & Bhatt, 1992)

In England, transport secretary Malcolm Rif-kind recently recommended more research intocongestion tolls. (The Economist, 1 June 1991)Next year, Cambridge will field test a systemof congestion tolls for approximately twelvemonths. (Personal communication, BrianOldridge, June 1991.) Under this scheme, acharge of 20 pence will be set for each "con-gestion unit," each driver must buy a "smartcard" worth a set amount, and the tolls will bededucted from it as the car crosses meteringpoints. Gas stations will sell the cards.

Interest within the European Community onthe prospect of congestion tolls is high. TheEuropean Community's "DRIVE" program hasa number of projects under way investigatingvarious road-pricing technologies. Under one ofthese, "PAMELA" (Pricing and MonitoringElectronically of Automobiles), two-way com-munications equipment that will connect amoving vehicle and a roadside site for auto-matic payment of tolls will be designed. (Hills,1991) The Netherlands plans to introduce con-gestion tolls in Amsterdam, Rotterdam, andUtrecht within the next few years. In Sweden,Stockholm is considering a system in whichthe "smart card" used for congestion tollsdoubles as a subsidized ticket onto publictransport. (Hamer, 1991; Jones, 1989)

C. Estimated Benefits of UrbanCongestion Tolls AppliedNationwide

The analytical framework described in Figure3 has been used with recent highway trafficdata to estimate the impacts of congestion tollsset at appropriate levels on urban roadsthroughout the nation. The results show sig-nificant reductions in congestion levels, time

41

lost in traffic, and associated costs of accidentsand pollution. In addition, congestion tollswould yield scores of billions of dollars in reve-nue while leaving most drivers who pay thetolls significantly better off than under thepresent system. Projecting these results aheadto the end of the decade demonstrates thatcongestion tolls could arrest the deteriorationin traffic conditions on urban highways whilesaving nearly $50 billion in construction outlaysthat would otherwise be needed to expandpeak capacity.

Congestion tolls could arrest thedeterioration in traffic conditions onurban highways while saving nearly$50 billion in construction outlays thatwould otherwise be needed to expandpeak capacity.

The empirical model underlying this study,based on the theoretical framework discussedabove, was originally developed by DouglassLee at the Department of Transportation for the1982 Final Report on the Federal Highway CostAllocation Study. Lee's 1982 results were recentlydescribed as follows: adopting congestion pric-ing throughout the United States would yieldrevenues of $54 billion a year (1981 dollars)which, after subtracting the direct welfare lossesto road users, leaves net benefits of $5.65 billiona year—mostly in the form of annual travel-delay savings of approximately one billion vehi-cle-hours." (Small, Winston, and Evans, 1989)

Those results refer to the situation a decadeago. To derive more up-to-date results, thebasic model was re-estimated with 1989 high-way statistics (the latest available) derived fromthe FHWA's Highway Performance MonitoringSystem (HPMS). These data, derived from anannual national sample survey covering abouthalf of all urban highways, can be extrapolated

to represent the entire highway system of theUnited States.

Only data for urban highways in the UnitedStates were used in this study. Roads wereclassified into five categories: Interstates (INT),Other Freeways and Expressways (OFE), OtherPrincipal Arteries (OPA), Minor Arteries (MA),and Collectors (COL). In 1989, the total roadmileage for each classification was 11,471 (INT),7,582 (OFE), 51,489 (OPA), 74,746 (MA), and78,474 (COL). One hundred percent of the INTmileage was in the federal aid system, over 90percent of the OFE, OPA, and MA roads, andabout 70 percent of the collector roads. Morethan one trillion vehicle miles of travel weretravelled on these five types of roads in 1989.(See Table 12.) (Some 530,015 miles of localroads outside the federal aid system were notcovered in this study.

To estimate optimal congestion tolls and theirimpacts, it was assumed that highway capacityis fixed—a realistic assumption for the UnitedStates. Indeed, even the last decade's capacityincrease of 4 percent would be hard to matchin the next decade given the fiscal problems offederal and state governments. Moreover, sincevirtually all urban transport policy has untilnow been predicated on capacity expansion,with virtually no attention to demand manage-ment, it is highly likely that efforts to reducepeak road use will be the cheaper alternative.

The empirical model derives the private andsocial cost curves represented in Figure 3 foreach category of road, and the demand curvefor travel. From these, the optimal levels ofcongestion tolls are calculated. Then, on theassumption that these tolls are in place, thereduction in traffic at various levels of conges-tion can be estimated, along with levels of rev-enue, and reductions in time lost in traffic andother congestion costs.

The first step is to relate the time cost oftravel to the level of congestion. Since theunderlying data base contains estimates of aver-age daily traffic on the roads sampled, the

42

distribution of vehicle miles travelled at variousV/C ratios could be calculated. The model usesas inputs the vehicle miles travelled at eachlevel of congestion, broken into 10 unit incre-ments. To derive average cost curves from thesedata, the relationship between travel speed andtraffic density is fundamental since volume isthe product of speed and density. (The engi-neering literature on the relationship betweenspeed and density is extensive. See, for in-stance, Boardman and Lave, 1977; Fare, Gross-kopf and Yoon, 1982; Inman 1978.) A reason-able approximation is that over the relevantrange, speed declines linearly as traffic densityincreases. This implies a quadratic relationshipbetween speed and volume. (See Figure 4.)

Since travel time (hours/mile) is the inverse ofspeed, the time cost of congestion can be esti-mated from this relationship once the value oftravel time to the driver is known. Obviously,distinctions among drivers commuting to work,professional drivers on the job, and recreationaldrivers must be made. Studies suggest that

non-business travel time (such as commuting toand from work) is valued at less than thehourly earnings rate, but that the gap narrowswith increasing income. Various studies for theUnited States estimate the average value oftravel time at 42 percent, 61 percent, 72 percentand 66 percent of the gross manufacturing wagerate. (Lave, 1969; Lisco, 1967; Small, 1983;Thomas, 1968) In this study, the average valueof travel time is estimated conservatively at 50percent of the gross manufacturing wage rate.(Statistical Abstracts, 1990; Small, 1991)

The result of using this analytical frameworkis a private marginal cost curve that rises withthe level of congestion. From this, a marginalsocial cost curve can be derived, taking intoaccount the delay cost that each additional carimposes symmetrically on all other cars on theroad. (See Figure 3.) A quadratic speed-volumerelationship implies that average costs and mar-ginal costs diverge immediately, even at lowtraffic densities. It also implies that a marginalincrease in density has the same marginal effect

Figure 4.

mph

)Sp

eed

The Relation of Speed to Traffic Density (A.) and Volume (B.)

A.

FreeSpeed

Spee

d

\Cridlock

\

B.

^^___^~-^-*^^ i Max

Density (Vehicles per Lane per Mile) Volume (Vehicles per Lane per Hour)

Source: WRI(1992)

43

Table 12. Results of a Nationwide Congestion Toll System: 1989

Original VMTAdjusted VMTPercent ReductionToll RangeRevenue Generated

Most Congested VMTAfter TollPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Interstates CongestionToll

270,652 (million annual)249,647 (million annual)7.80-9 (cents/mile)12.7 (billion dollars

annual)159,707 (million annual)143,290 (million annual)10.31.4 (billion dollars

annual)

With Accident Toll

239,950 (million annual)11.30-16 (cents/mile)23.0 (billion dollars

annual)133,708 (million annual)16.32.7 (billion dollars

annual)

With AccidentDelay Toll

229,459 (million annual)15.20-24 (cents/mile)33.2 (billion dollars

annual)123,217 (million annual)22.84.2 (billion dollars

annual)

Other Freeways andExpressways

Congestion Toll

122,055 (million annual)113,640 (million annual)6.90-11 (cents/mile)5.5 (billion dollars

annual)55,015 (million annual)49,055 (million annual)10.80.6 (billion dollars

annual)

With Accident Toll

109,879 (million annual)10.00-17 (cents/mile)9.5 (billion dollars

annual)45,349 (million annual)17.61.1 (billion dollars

annual)

With AccidentDelay Toll

106,267 (million annual)12.90-26 (cents/mile)13.0 (billion dollars

annual)41,737 (million annual)24.11.6 (billion dollars

annual)

Other PrincipalArterial Congestion

Toll

326,880 (million annual)306,056 (million annual)6.40-12 (cents/mile)13.6 (billion dollars

annual)118,320 (million annual)105,112 (million annual)11.21.2 (billion dollars

annual)

With Accident Toll

299,986 (million annual)8.20-19 (cents/mile)22.7 (billion dollars

annual)99,213 (million annual)16.12.1 (billion dollars

annual)

With AccidentDelay Toll

294,033 (million annual)10.00-27 (cents/mile)29.9 (billion dollars

annual)93,539 (million annual)20.93.1 (billion dollars

annual)

on speed, no matter what the initial level ofspeed.

Although this cost structure was adoptedfrom the original Department of Transportationmodel, a number of theoretical and empirical

adjustments were made to the demand esti-mates. First, all cars forced off the road byincreasing time costs do not simply disappear.Some drivers shift to other roads; others resche-dule their travel. A reduction in traffic on onehighway segment may show up, at least in

44

Table 12. (continued)

Original VMTAdjusted VMTPercent ReductionToll RangeRevenue Generated

Most Congested VMTAfter TollPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Minor ArterialCongestion Toll

234,860 (million annual)222,221 (million annual)5.40-15 (cents/mile)9.1 (billion dollars

annual)55,490 (million annual)48,185 (million annual)13.20.8 (billion dollars

annual)

With Accident Toll

219,653 (million annual)6.50-22 (cents/mile)14.0 (billion dollars

annual)45,696 (million annual)17.71.2 (billion dollars

annual)

With AccidentDelay Toll

217,241 (million annual)7.50-30 (cents/mile)17.4 (billion dollars

annual)43,285 (million annual)22.01.6 (billion dollars

annual)

Collector CongestionToll

101,190 (million annual)97,588 (million annual)3.60-21 (cents/mile)3.0 (billion dollars

annual)10,900 (million annual)9,322 (million annual)14.50.2 (billion dollars

annual)

With Accident Toll

97,240 (million annual)3.90-28 (cents/mile)4.2 (billion dollars

annual)9,005 (million annual)17.40.3 (billion dollars

annual)

With AccidentDelay Toll

96,913 (million annual)4.20-36 (cents/mile)4.9 (billion dollars

annual)8,677 (million annual)20.40.3 (billion dollars

annual)

Total CongestionToll

1,055,637 (million annual)989,153 (million annual)6.30-21 (cents/mile)44.1 (billion dollars

annual)399,432 (million annual)354,964 (million annual)11.14.2 (billion dollars

annual)

With Accident Toll

966,708 (million annual)8.40-28 (cents/mile)73.4 (billion dollars

annual)332,971 (million annual)16.67.3 (billion dollars

annual)

With AccidentDelay Toll

943,912 (million annual)10.60-36 (cents/mile)98.4 (billion dollars

annual)310,455 (million annual)22.310.8 (billion dollars

annual)

part, as increased traffic at another time orplace. These substitutions are taken into accountby assuming that drivers choose among differ-ent routes and travel times to minimize travelcosts and the costs of shifting the trip to a lessdesirable time. If congestion costs rise on the

most preferred route and time, the demand fortravel on that route declines, but demandincreases on substitute routes and times.

The more responsive drivers are to changesin the price of travelling, the more effective

45

congestion tolls will be. Drivers' responsive-ness is summarized by a curve representingthe amount of travel at various travel costs.Since drivers balance the marginal costs andbenefits of travelling, in the absence of a con-gestion toll, traffic will settle where thedemand curve (marginal benefit curve) meetsthe private marginal cost curve, while thesocial optimum will occur where the marginalbenefit curve crosses the social marginal costcurve. The less responsive drivers are to travelcosts, the larger the tax necessary to induce agiven reduction in traffic, so the measure ofdrivers' sensitivity to cost is very important.

Unfortunately, there are no direct empiricalestimates of this sensitivity since there hasbeen no peak pricing of highway use in theUnited States. Indirect estimates have yielded arange of values. (Gomez-Ibanez & Fauth, 1980)In this study, DOT's assumptions were fol-lowed: a ten percent increase in the cost ofdriving at a specific time and place wouldreduce the volume of traffic at that point by 2.7percent. (Small, 1991) Given the private andsocial cost curves, this estimate can be used toestimate the optimal congestion tolls and otherquantities in the model.

However, knowing this value is not enoughto complete the analysis. A measure of inter-temporal substitution of demand is also neededbecause when the cost of travel at peak periodsrises, some people will decide to travel at othertimes. Just how much travel will be shifted tooff-peak times has been the subject of a hugeliterature. An overall schedule delay cost wasestimated by Small (1991) based on previouswork (Arnott, De Palma and Lindsey, 1990).Assuming that the cost per minute of displace-ment from the driver's ideal departure time isconstant as the schedule delay increases, andassuming further that drivers plan their travelto minimize total travel costs, the analysis esti-mated the time-shifting to off-peak hours thatcongestion tolls would induce. In general, asSmall suggests, congestion tolls would stimu-late substantial adjustment in departure timesto avoid congestion and higher toll costs.

Second, when a city driver chooses a routeto a given destination, the major considerationis how long it will take to get there. A longerroute may be preferable to a shorter one if con-gestion is lower and travel speeds are higheron the longer route. Drivers will make thistrade-off as long as any gains can be madefrom switching roads. Therefore, congestiontends to even out on all alternative routes, asall rush hour commuters know. If this werenot the case, then time could consistently besaved by choosing a different route. In thisstudy, it was assumed that the observed distri-bution of vehicle miles travelled on alternativeroutes represents an equilibrium resulting fromdrivers' attempts to minimize costs. When con-gestion tolls are imposed, the costs then con-sist of time costs plus tax costs, changing therelative prices of different routes. Paying bothinduces some drivers to switch to other roads.In order to capture this substitution effect,vehicle miles travelled over alternative routeswere adjusted so that marginal private costs(time plus toll costs) were again equalized afterthe imposition of tolls. Like the adjustmentmade to reflect drivers' rescheduling of trips,this reallocation of traffic across road segmentsfurther cuts peak congestion traffic.

With a tax, travel under the mostcongested conditions would drop by 11percent. The savings in time otherwiselost in traffic delays creates a $4.2billion annual economic gain, net of thevalue of the trips foregone.

This basic model was estimated with 1989data to derive optimal congestion tolls reflect-ing the costs of traffic delays. As the first rowof Table 12 shows, on major urban highways,appropriate rush hour congestion tolls wouldrange from $0.00 to $0.21 per mile, less thantwo dollars for a typical urban trip of ten miles

46

or less. Total traffic volume would fall by about6 percent, and travel under the most congestedconditions would drop by 11 percent. The sav-ings in time otherwise lost in traffic delays cre-ates a $4.2 billion annual economic gain, net ofthe value of the trips foregone. This structureof tolls would raise a total $44 billion per yearin revenues, mostly collected on major arteries,without imposing any excess burden on theeconomy. Indeed, it would yield a net welfaregain. If these revenues were offset by reduc-tions in distorting taxes that discourage laborforce participation, savings, and other sociallydesirable behavior, economic productivitywould rise.

In the mid-eighties, in the United States, theaverage vehicle occupancy rate for automobileswas 1.70 passengers for all travel (Davis et al.,1989) and only 1.15 passengers for commutingtravel (Pisarski, 1987). In this study, only thecosts of time delay to the driver were takeninto account, but, of course, other passengersare equally penalized. For example, if a vehiclestuck in traffic contains two people then thetime cost doubles. Therefore this analysis couldbe adjusted to take the average number ofcommuting passengers into account by raisingthe value of time by 15 percent. Doing sowould increase optimal tolls, revenues gener-ated, and welfare gains. In short, the results inTable 12 present only a lower bound on thepossible welfare gains and revenues that road-use pricing could generate.

D. Other CostsIf other costs attributable to congestion are

taken into account, the optimal tolls, the reduc-tions in congestion, the net economic gains,and the revenues all increase. For example, thesecond row in Table 12 shows the results ofincorporating the social costs of increased acci-dents in the calculation of congestion tolls. Aconservative estimate of this cost is $0.10—$0.13, or 52 percent of private marginal costs.(Newberry, 1988) This is much lower than theestimates discussed above, which ranged from1.5 to 2 times the average cost. However, the

exact relationship between congestion and acci-dent costs is uncertain. More accidents occurwhen traffic is heavy, but these low-speed,low-impact accidents cost less per accident indamages to property and persons. High speedaccidents, by contrast, typically involve ahigher probability of fatalities and greater over-all damage costs. Since there is no directempirical relationship between the costs of acci-dents and the level of congestion, average cost(private marginal cost) and social marginal costwere assumed in this study to diverge by aconstant amount. Since drivers do not considerthat by entering a roadway they are increasingthe probability of an accident, the private mar-ginal cost curve does not shift. Internalizingthese accident costs requires a toll of ten centsper vehicle mile travelled over all levels of con-gestion, compared to the average fuel tax in1989 of $0.011/vehicle mile.

The results in the second row of Table 12 arecumulative: they include the traffic reductionsand revenue generated by the congestion tolland accident tax. If both are included, the totaltoll on a ten-mile urban trip would be up to$2.80, inducing an overall 8.4 percent reductionacross all roads from the original traffic vol-ume. Adding an accident tax increases theoriginal amount of revenue generated to $73billion per year. Part of these tolls paid bydrivers would be offset by lower insurance pre-mia as accident costs fell. In addition, the gainin welfare achieved by reducing traffic andaccident casualties rises to $7.3 billion dollars ayear. This is again net of the value to driversof trips foregone because of higher tolls.

A related external time cost captured by thismodel was the external cost of time lost to acci-dents and breakdowns by those not directlyinvolved. Traffic pile-ups behind accidents andvehicle breakdowns and associated "rubber-necking" delays rank among the most gallingof the urban commuter's vexations. Althoughthese incidents are not as inevitable as themorning rush hour, FHWA studies based ontraffic simulation models and probability theoryhave predicted their frequency. (Lindley, 1987)

47

Some 200 hours per million vehicle miles arewasted during such incidents on roads withshoulders and 79 on roads without shoulders.Statistical regression analysis indicated thateach additional VMT above a V/C of 0.7 can beexpected to result in an additional 1.5 minutesof delay due to traffic incidents.

These results, although derived through adifferent methodology, lend themselves to theanalysis of congestion costs. In this study, thesame value of time spent in travel was appliedto the estimates of delay to derive the privateand social marginal costs of incident delay.Added to other cost elements, these higherexternal costs lead to a third estimate ofoptimal congestion tolls. Each VMT at or abovea V/C (volume to capacity ratio) of 0.7 shouldbe charged an additional toll of 12 cents permile to internalize the costs of delay due toextra traffic incidents.

Over all urban highways, tolls would rangefrom $0.10 to $0.36 ($3.60 for the typical ten-mile trip). Peak congestion would fall by morethan 22 percent. Net welfare gains, includingthe value of time saved and traffic casualtiesaverted, would exceed $10 billion per year onrevenues of $98 billion nationwide. As variouscosts associated with traffic congestion areinternalized, the net welfare gains rise relativeto the revenues collected.

E. Projections to 1999The results of this study suggest that con-

siderable reductions in congestion as well aseconomic savings can be achieved now if tollsare used to control peak-traffic flows. But,what of the future? If present trends continuethrough the end of the century, most U.S. cit-ies will face severe traffic jams much of thetime. Can measures to control peak demandhelp avert this crisis?

For this analysis, past trends in vehicle milestravelled, capacity growth, and congestionlevels were used to project the conditions thatwould occur in 1999 should these disturbing

growth trends continue. For example, thegrowth rates in vehicle miles travelled, esti-mated from the past ten years of data, rangedfrom 6.2 percent for interstates to 2.4 percentfor collector roads, while capacity on variousroad types has grown from 1.2 to 2.3 percent.A 6.2-percent growth rate means that in a littleover 11 years, the vehicle miles travelled oninterstates will double. Both the growth rate inVMTs and their distribution across roads andtime spell bad news for urban drivers on inter-states. In 1989, 30.8 percent of the VMTsoccurred at a V/C level greater than 0.95—bumper to bumper traffic. By the year 1999, atleast half will be. In 1989, over half (52.6 per-cent) of all travel on urban interstates wasunder severely congested conditions (V/C >0.70). This percentage is expected to increase to79.7 percent in 1999 if current growth ratescontinue. Almost 8 out of every 10 milestravelled on urban interstates will be in heavytraffic by the turn of the century. The samedreary prognosis holds for other freeways andexpressways, on which the growth rate inVMT is 4.1 percent and that of road capacity is1.2 percent. The percentage of travel at themost congested levels is estimated to growfrom 38.0 percent in 1989 to 54.7 percent by1999. For the other three categories of road-ways, traffic is also growing much faster thancapacity, indicating heavier congestion in thefuture: the growth rates for vehicle milestravelled and road mileage are 4.3 percent and1.6 percent for other principal arteries, 3.8 per-cent and 1.6 percent for minor arteries and 2.4percent and 1.5 percent for collector roads.

The analysis performed on the 1989 data wasrepeated with these estimates for 1999. AsTable 13 shows, overall VMT is expected togrow from 1,055,637 million miles annually to1,661,724 million miles annually between 1989and 1999. Using the optimal tax policy for thethree externalities discussed would reduceVMTs overall to 1,452,054 million miles in1999—a 12.6-percent reduction in the projectedlevels of future vehicle miles travelled. Vehiclemiles travelled under heavily congested condi-tions would be reduced by 23 percent. This

48

policy would generate revenues of over $178billion dollars annually (in 1989 dollars) and anet welfare gain of $21.3 billion. Congestiontolls are an increasingly powerful tool for avert-ing gridlock on urban highways.

F. Other ConsiderationsGiven their potential effectiveness, why have

congestion tolls never been adopted in theUnited States? Why is there so little experi-mentation with them even now? In 1976, thenSecretary of Transportation Coleman invitedmayors of several U.S. cities to host DOT-funded demonstration congestion toll projects.Most mayors turned down the offer. Typicalwas Atlanta's response: " . . .the city shouldnot participate... due to potential practical,technical, political and financial problems."(Higgins, 1986) Projects were considered inBerkeley, California; Madison, Wisconsin; andHonolulu, Hawaii, but no demonstrationprojects came about, mostly because there wasno political support for them.

The idea is unpopular because congestion tollsare thought to be an intrusive, inconvenient,regressive tax for the use of roads for whichtaxpayers have already paid at the gas pump,as well as through property and income taxes.Congestion tolls would indeed raise total travelcosts for some motorists—those whose value oftime is relatively low, and those who use com-peting toll-free roads that become more con-gested for instance. Although the gains from aproperly designed system would substantiallyexceed such losses, some of the toll revenuesshould definitely be used to compensate thosewho lose under a new toll-based system. (DOT,FHWA, 1992) Indeed, revenues could be usedto improve public transportation options, or toreduce other kinds of taxation. As noted earlier,popular support for the congestion toll conceptis much higher when it is part of a financialpackage including program or tax-reliefproposals for using the revenues. (Small, 1992)

If the revenues they generate are offset byreductions in other taxes, congestion tolls can

readily be made revenue neutral. A tax packageof this kind can also be designed to avoid ineq-uitable burdens on lower-income households orother hard-hit groups. A study of the distribu-tional effects of congestion tolls (Small, 1983)showed that, depending on how the newrevenues are used, congestion tolls can generatenet benefits for all income groups. Put simply,the economic gains from reduced congestionwould outweigh the burden of additional driv-ing costs at all income levels. If the revenuegenerated were distributed equitably among thepopulation, the driver with average incomewould enjoy a net gain of $135 per year, whilethose in the lowest income group would gain$96 per year. (Small, et al., 1989) Of course, therevenue generated could be distributed in vari-ous ways to achieve any equity goal.

Congestion tolls, like other environmentaltaxes, are also among the least costly and fairestways for states facing unsustainable revenuedeficits to raise additional revenue. Unlike con-ventional taxes, which impose an excess eco-nomic burden, congestion taxes increase eco-nomic productivity. In fact, congestion tolls areno more regressive than many other revenueoptions, including sales and excise taxes. More-over, since the charge is directly related to thedriver's contribution to a widely perceivedsocial problem and drivers can reduce their pay-ments by adjusting their driving patterns, con-gestion tolls are fairer than most taxes.

Many people fear that tollbooths would actu-ally exacerbate traffic congestion or that elec-tronic license plates would create a govern-mental record of each citizen's movements, adangerous invasion of privacy. But old-fashionedpay-as-you-slow-down tollbooths have beenreplaced by a high-performing electronic tech-nology that performs well, ensuring accuracyand convenience. As for privacy, electronic tollpre-paid cards ensure the drivers' completeanonymity.

The perception that congestion tolls impose"double" taxation arises because road usersalready pay gasoline taxes. But gas taxes by no

49

Table 13. Projected Results of a Nationwide Congestion Toll System: 1999

Original VMTAdjusted VMTPercent ReductionToll RangeRevenue Generated

Most Congested VMTAfter TollPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Interstates CongestionToll

503,122 (million annual)457,302 (million annual)9.10-9 (cents/mile)29.3 (billion dollars

annual)400,988 (million annual)359,852 (million annual)10.33.6 (billion dollars

annual)

With Accident Toll

432,406 (million annual)14.10-16 (cents/mile)52.4 (billion dollars

annual)335,080 (million annual)16.46.8 (billion dollars

annual)

With AccidentDelay Toll

405,219 (million annual)19.50-24 (cents/mile)77.9 (billion dollars

annual)307,894 (million annual)23.210.6

Other Freeways andExpressways

Congestion Toll

183,915 (million annual)169,656 (million annual)7.80-11 (cents/mile)9.6 (billion dollars

annual)100,602 (million annual)89,764 (million annual)10.81.1 (billion dollars

annual)

With Accident Toll

162,824 (million annual)11.50-17 (cents/mile)16.3 (billion dollars

annual)83,014 (million annual)17.51.9 (billion dollars

annual)

With AccidentDelay Toll

156,239 (million annual)15.00-26 (cents/mile)22.8 (billion dollars

annual)76,429 (million annual)24.02.9 (billion dollars

annual)

Other PrincipalArterial Congestion

Toll

502,525 (million annual)469,968 (million annual)6.50-12 (cents/mile)21.3 (billion dollars

annual)184,929 (million annual)164,219 (million annual)11.22.0 (billion dollars

annual)

With Accident Toll

459,990 (million annual)8.50-19 (cents/mile)35.5 (billion dollars

annual)154,504 (million annual)16.53.3 (billion dollars

annual)

With AccidentDelay Toll

450,627 (million annual)10.30-27 (cents/mile)46.7 (billion dollars

annual)145,142 (million annual)21.64.9 (billion dollars

annual)

means cover the full costs of road construction,maintenance, and associated public costs of theautomotive transport system. (MacKenzie,Dower, and Chen, 1992) Moreover, those taxesdo not address the peak-load congestion prob-lem. If congestion tolls were fully implemented,

the typical commuter round trip during themost congested hours would cost about $4.00 intolls. But other driving costs would fall. Forexample, since there would be fewer accidents,insurance rates would be lower. Since less gaswould be wasted, fuel costs would be lower. In

50

Table 13. (continued)

Original VMTAdjusted VMTPercent ReductionToll RangeRevenue Generated

Most Congested VMTAfter TollPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Adjusted VMTPercent ReductionToll RangeRevenue Generated

Adjusted Congested VMTPercent ReductionWelfare Gains

Minor ArterialCongestion Toll

343,437 (million annual)325,267 (million annual)5.30-15 (cents/mile)13.0 (billion dollars

annual)77,617 (million annual)66,951 (million annual)13.71.1 (billion dollars

annual)

With Accident Toll

321,213 (million annual)6.50-22 (cents/mile)19.8 (billion dollars

annual)63,003 (million annual)18.81.8 (billion dollars

annual)

With AccidentDelay Toll

317,370 (million annual)7.60-30 (cents/mile)24.6 (billion dollars

annual)59,160 (million annual)23.82.5 (billion dollars

annual)

Collector CongestionToll

128,725 (million annual)123,759 (million annual)3.90-21 (cents/mile)4.1 (billion dollars

annual)16,091 (million annual)13,587 (million annual)15.60.3 (billion dollars

annual)

With Accident Toll

123,170 (million annual)4.30-28 (cents/mile)5.8 (billion dollars

annual)13,032 (million annual)19.00.4 (billion dollars

annual)

With AccidentDelay Toll

122,599 (million annual)4.80-36 (cents/mile)6.8 (billion dollars

annual)12,461 (million annual)22.60.6 (billion dollars

annual)

Total CongestionToll

1,661,724 (million annual)1,545,952 (million annual)7.00-21 (cents/mile)77.3 (billion dollars

annual)780,226 (million annual)694,369 (million annual)11.08.1 (billion dollars

annual)

With Accident Toll

1,499,602 (million annual)9.80-28 (cents/mile)129.8 (billion dollars

annual)648,634 (million annual)16.914.2 (billion dollars

annual)

With AccidentDelay Toll

1,452,054 (million annual)12.60-36 (cents/mile)178.8 (billion dollars

annual)601,086 (million annual)23.021.3 (billion dollars

annual)

addition, drivers on less congested roads wouldbe saved a great deal of time and spared aggra-vation. If in place in 1989, a nationwide systemof congestion tolls would have saved over 450million hours of time lost in traffic jams overthe course of the year. If in place by 1999, the

system would save almost two and a half billionhours per year.

Drivers and non-drivers alike would alsobenefit from cleaner air. Many metropolitanareas, such as Southern California, chronically

51

violate Clean Air Act ambient air quality stan-dards, and face stringent, expensive, andwideranging "command-and-control" abate-ment requirements. These requirements could,some observers fear, retard industrial develop-ment, dictate transportation policies, and ham-per economic development in non-attainmentareas. Reducing road congestion, desirable initself, would improve air quality substantially.For example, adopting the system of road-usepricing suggested in this report would reducethe pollutants listed in Table 14.

Table 14. Pollution Reduction('000 metric tons)

1989 1991Pollutant Reductions Reductions

Particulates 110Sulfur oxides 60Nitrogen oxides 60Volatile organics 470Carbon monoxide 3,350Lead 240

210120

1,200930

6,600—

Source: Based on WRI calculations.

Consider the alternative. If congestion tollsare not introduced to reduce peak-trafficvolumes, what would be the cost of increasingroad capacity to achieve the same improvementin congestion? In other words, what would itcost to increase highway capacity so that trafficwas no more congested in 1999 than it was in1989 even though the number of vehicle miles

would increase? That is, how much would itcost just to prevent the current situation,already bad enough, from getting worse? Theanswer: almost $50 billion dollars in additionalcapital expenditures, just to increase capacity.This huge price tag is purely additional. It doesnot reflect the fact that most of our roads andbridges are deteriorating now and have to berepaired or replaced just to keep highwaycapacity the same. Therefore, congestion tollswould save the federal and local governmentsthe immense cost of increasing capacity, whilegenerating many billions of dollars in revenuefor use by governments, possibly to pay for thedeferred maintenance of the United States'existing transportation infrastructure.

The political prospects for congestion tollsnow looks brighter. In the 1991 IntermodalSurface Transport Efficiency Act, Congressrelaxed restrictions on the use of tolls on feder-ally financed projects and authorized theexpenditure of $25 million annually over tenyears to establish, maintain, and monitorcongestion-pricing pilot programs in coopera-tion with state or local governments. At thestate level, in regions facing severe transporta-tion and air pollution problems, the possibilityof road-use pricing has become a reality.(Cameron, 1991; Elliot, 1986; Poole 1988) Newinterest in congestion pricing should come asno surprise. What other transportation policywould reduce congestion, raise economicproductivity, decrease pollution levels, preservedrivers' freedom of choice, save governmentsthe construction costs of increasing capacity,and, as an extra bonus, generate significantrevenues in a way that imposes no excess bur-den on the economy?

52

IV. Carbon Taxes to Reduce CO, Emissions

T he combustion of fossil fuels to powerhomes, factories, businesses, cars, andtrucks results in the discharge of a

wide array of pollutants into our environment.While several of the pollutants from the burn-ing of fossil fuels—among them, sulfur dioxide(SO2), volatile organic compounds, particulates,and nitrogen oxides (NOX)—are regulated byfederal, state, and local governments, onemajor pollutant, carbon dioxide (CO2), remainsunconstrained. Unfortunately, man-made emis-sions of carbon dioxide are the leading cause ofthe build-up of greenhouse gas emissions,which trap heat and intensify the naturalgreenhouse effect and may warm Earth'satmosphere. In the United States, most of thecarbon dioxide released during human activi-ties, some 1.5 billion U.S. tons of carbon peryear, is emitted when fossil fuels are burned.

Carbon dioxide emissions have no immediateeffects on health and the environment, andtheir full environmental impacts take decadesto unfold. But while scientists continue todebate the timing, degree of risk, and environ-mental impacts of global warming, consensusis solidifying that average global temperaturesare likely to increase as atmospheric concentra-tions of greenhouse gases rise, and it is alreadyclear that the environmental risks are poten-tially large and diverse. The local physicaleffects of increasing temperatures mightinclude coastal erosion due to sea level rise ordrought due to changing weather patterns. Theecological effects may include the loss of

wetlands and numerous species or, if theycan't adapt fast enough as climate zones move,even entire ecosystems.1 On the other hand,moderate levels of warming may entail somebeneficial environmental impacts. No boonsshould be anticipated, but, for example, cropyields for certain plant varieties might increaseas a result of increased CO2 fertilization.

All of these changes ultimately have eco-nomic and political ramifications as well. Evenif, for example, efforts are made to adapt to cli-mate change by building coastal defenses, thecosts associated with the loss of agriculturaland fisheries harvest, coastal-based tourism,and other economic activities, as well as theneed for new water supply and drainage sys-tems and so on, may be painfully high. Thentoo, many of the world's poorest people liveon coastal or marginally productive lands andcould be forced to migrate, perhaps triggeringeconomic and political instabilities.

Many long-term energy forecasts or projec-tions conclude that without policy intervention,carbon dioxide emissions are expected to growboth in the United States and worldwide dueto population growth, economic growth, andincreased reliance on coal. (EIA, 1990) Forexample, the National Energy Strategy esti-mates that, in the absence of policy changes,U.S. energy use will increase by 64 percent by2030. Coal, which now accounts for 22 percent-of total energy use, will increase to 38 percentin 2030. This projected trend is even more

53

pronounced for other regions of the world.Scientists warn that avoiding unprecedentedrates of climate change requires reversing thisupward trend. The 1988 Toronto Conferencesuggested reducing carbon dioxide emissions byroughly 20 percent from current levels within adecade and making larger reductions thereafter.("The Changing Atmosphere," 1988)

A. Defining a Carbon TaxAny serious effort to reduce atmospheric con-

centrations of greenhouse gases will involvereducing CO2 emissions.2 This is not a simpleproblem. Carbon dioxide is emitted from mil-lions of individual sources, ranging from carsand trucks to huge electric utilities. Fossil-fueluse is affected by consumer choices about howmuch heat, light, and other energy servicesthey want to consume, how efficient theirappliances are, and which type of energy theirappliances use. Consumers also choose whichnon-energy goods and services they want tobuy, and since some goods require moreenergy than others to make, they indirectlyinfluence how much energy is used in manu-facturing. For their part, manufacturers cantypically choose whether to use relatively morelabor and capital or relatively more energy inproduction, and they too can choose amongenergy types. Electric utilities can choose whichfuels to use in generating power and, in manystates, can also choose to buy or subsidizeenergy-efficient products for their consumersrather than to generate more power. Stillanother variable is whether consumers, manu-facturers, and utilities will replace their energy-using equipment if energy prices change orwait until they have to buy new equipmentanyway.

Clearly, for each source, options for reducingCO2 emissions are diverse. Cars can be drivenless, driven more efficiently, or designed moreefficiently. Industries that emit CO2 can useless coal and more natural gas, invest inenergy efficiency programs, change their mix ofproducts, or do all three. All these options andopportunities are likely to have different costs.

The most direct application of the concept ofenvironmental charges to climate change risksassociated with carbon dioxide would be to taxthe emissions of CO2 from individual sources.But it can't be done. The administrative andenforcement costs of imposing and collectingcharges on the huge number and wide varietyof sources would be overwhelming and likelyto outweigh the economic benefits of usingtaxes rather than other policy instruments. For-tunately, the carbon content of the fuels thatgenerate CO2 when burned can serve as thetax basis without distorting the economicincentive that the charge represents. This istrue for two important reasons. First, virtuallyall of the carbon in fossil fuels is released dur-ing combustion as carbon dioxide. (A poten-tially important exception involves uses of oil,gas, or coal that go directly into products with-out being burned.) Second, there is no techni-cally and economically feasible way of remov-ing CO2 from the emissions of a combustionprocess the way, say, that sulphur dioxide canbe "scrubbed" from the emissions of a coal-fired power plant. Thus, it is fair to assumethat the carbon in a ton of coal, a barrel of oil,or a thousand cubic feet of natural gas, whichis easily measured, will be released as CO2

upon combustion. A charge on the carbon con-tent of fuel is thus equivalent to a charge onemissions.

Following this logic, a carbon tax is definedas an excise tax on the producers of raw fossilfuels (sometimes called primary energy) basedon the relative carbon content of the fuels.Such a tax would thus fall more heavily oncoal than oil, which in turn would be taxedmore than natural gas. (See Table 15.) To bemost effective, the tax would be applied at thepoint that the fuel enters the economy—at thewellhead for natural gas, the minemouth forcoal, and the well or dockside for oil. Thisapproach keeps points at which the tax wouldbe assessed and collected to a manageablenumber. It has the further advantage of taxingcarbon early in the production chain and thusinfluencing all decisions concerning fossil fueluse.

54

Table 15. Carbon Content ofFossil Fuels (lbs of

By Volume

Coal 1440.00 (ton)Crude Oil 6.18 (gallon)

SelectedCarbon)

By EnergyContent(Btu)*

2.041.60

Natural Gas 0.03 (1000 ft3) 1.20Gasoline 5.10 (gallon)

* (units are represented as 10"

1.50

1 lbs per Btu)

Carbon taxes would appear to consumersand manufacturers as energy price increases.But since taxes would be levied on primaryenergy, which represents only one part of thecost of delivered energy (such as gasoline orelectricity), and, more important, since one fuelcan in many cases be substituted for another,overall price increases will not be as large asthe initial tax. Consumers can respond to newprices by reducing energy use and buyingfewer carbon-intensive products (those, forinstance, that require great amounts of carbon-based fuels to produce). In addition, some ofthe money not spent on such products couldbe used to buy other less carbon-intensivegoods and services.

The relative cost-effectiveness of any CO2-reduction mechanism depends heavily on howcomprehensively it covers the wide range ofcarbon sources and the flexibility it allowsregarding the selection of the least expensiveway to reduce emissions. These two factors areimportant for any pollution-control strategy,but especially for carbon dioxide emissionsbecause the individual contributing sources ofthe pollutant are so numerous and varied.Taxes encourage a wide range of marketresponses to reduce emissions and the leastcostly reductions are usually undertaken first.As applied to CO2 emission reduction, taxesoffer significant advantages over alternativecontrol strategies, even other market-based

programs such as emission trading. Compre-hensiveness and flexibility are two. But, threeothers—administrative costs, certainty of reduc-tions, and adjustment costs—are important.3

• Comprehensiveness. If a carbon tax wereapplied to each fuel at the point where it isproduced or imported into the United States, itwould influence virtually all of the downstreamenergy choices of producers and consumers ofcarbon-based fuels, from electricity productionto the use of cars. If imported energy-intensivegoods were also taxed according to roughlyhow much carbon was involved in their pro-duction, the tax's coverage would be evenmore comprehensive. The tax would initiallyfall, however, on the comparatively few com-panies involved at this early stage in energyproduction.

Carbon taxes would appear to consumersand manufacturers as energy priceincreases. But since taxes would belevied on primary energy, whichrepresents only one part of the cost ofdelivered energy (such as gasoline orelectricity), and, more important, sinceone fuel can in many cases besubstituted for another, overall priceincreases will not be as large as theinitial tax.

• Flexibility. Unlike most regulatory pro-grams, market-based programs, such as pollu-tion taxes, can be adapted to changing marketconditions, and they allow the least expensivereduction options to be undertaken first (pro-vided that they achieve complete coverage ofthe different CO2 sources). A carbon tax, how-ever, could have one advantage here over, forinstance, a trading system: it may be easier to

55

adjust the level of the tax (and, thus, emissionreductions) to new information on costs andbenefits. With a carbon tax, raising the rateincreases the level of control. In a permit sys-tem, the number of permits available or theamount of emissions covered by each permithas to be reduced—potentially much more diffi-cult politically. Once allocated, permits will beviewed as a form of wealth or private property,and reducing the emissions allowed under eachpermit would reduce the value of the permits.

• Administrative Costs. The cost-effectivenessof any market-based approach to controllingCO2 emissions can be eroded if administrativecosts are too high. Certainly, a carbon taxwould entail a new collection burden for taxauthorities, but since many of these fuels arealready taxed at the federal or state level,entirely new entities would not be needed toimpose, implement, or enforce the tax codechanges. Indeed, virtually all of the dataneeded on fossil fuel consumption for tax pur-poses is already collected by various agencies.Other economic incentive systems wouldrequire setting up new national marketstructures.

• Certainty of Reductions. Does the relativeuncertainty of emission reductions associatedwith a tax favor other economic-basedapproaches to CO2 reductions, as someanalysts suggest? In the context of dealing withclimate change risks, the trade-off betweenlower control costs and somewhat less certaintyover year-to-year CO2 emission levels can bejustified. Neither the costs nor the benefits ofreducing human-caused climate change can becalculated with certainty. Typically, economistsargue that taxes make more sense than alterna-tive control strategies that directly limit pollu-tion levels when the potential economic risksare high (if also uncertain) compared to the en-vironmental risks. Conversely, controllingquantities of pollution makes more sense whenthe potential environmental risks (even if uncer-tain) are greater compared to the economiccosts. According to this logic, policies appro-priate for highly toxic or acutely dangerous

environmental contaminants may not be asreasonable in efforts to minimize climatechange. The risks of climate change are real,but they are not as immediate as the potentialcosts of control. Yet, some economic risks haveto be accepted today to avoid potentially sig-nificant environmental risks in the future. Pru-dent public policy dictates a control strategywith near-term economic risks that can be eas-ily managed.4

B. Setting the Right Level of aCarbon Tax

The higher the cost of fossil fuels, the lessthey will be used to produce goods and ser-vices, and the less carbon dioxide will bereleased into the atmosphere as a result. Buthow much reduction is enough? How bigshould a carbon tax be? If environmental con-siderations alone are the measure, the ideal taxrate is one set at the point at which thebenefits from the last ton of carbon removedequal the added cost of eliminating that ton.But this point is notoriously difficult to find,especially for benefits that may be many gener-ations in the future or for situations in whichthe science or relative risks are not completelyunderstood. This number cannot be calculateduntil emissions are translated into atmosphericconcentrations; until the effects of increasedconcentrations on the rate and level of warm-ing are estimated; until the environmental andeconomic impacts or injuries associated withthe warming are assessed, and until a dollarvalue is placed on the estimated damages. Asis the case for many pollutants, researcherssimply don't know enough yet to perform theinitial calculations.

Preliminary efforts have been made to assigna dollar value to a small set of potential envi-ronmental risks associated with climate change,including loss in agricultural production. Themost widely quoted of these estimates findseconomic damages from a doubling of atmo-spheric CO2 concentrations in the range of 0.5percent of GNP for the United States.5 But earlyestimates like these must still be considered

56

largely speculative. They are also likely to beconservative since many categories of potentialenvironmental loss that could far outweighmore direct economic losses have yet to bequantified at all. For instance, some scientificconsensus is forming that damages to uniqueor particularly sensitive ecosystems from rapidclimate change constitute especially importantenvironmental risks, but no damage estimatestake the potential economic costs of such lossesinto account.

In a recent analysis of the economic damagesin the United States from climate change, Wil-liam Cline suggests that more inclusive esti-mates may be in the range of 1 to 2 percent ofU.S. gross domestic product, or around $60 to$117 billion annually. The low end of thisrange would imply that the optimal carbon taxshould be set at around $50 per ton of carbon.Cline also notes that these estimates do notconsider the economic losses associated withatmospheric CO2 concentrations that go beyonda twofold increase, even though atmosphericconcentrations would almost certainly pass thedoubling point if no efforts are made to reduceCO2 emissions. He estimates economicdamages from global warming in their verylong-term to be around six percent of U.S.G.D.P. or approximately $340 billion annually.None of these estimates include values fordirect consumer losses from climate change,such as the discomfort of more frequent heatwaves or the inconvenience of more rainy andovercast days. (Cline, 1992)

The most common alternative method ofdetermining the size of a carbon tax is to esti-mate the tax level necessary to achieve a pre-selected level of CO2 emissions. (While concen-trations are the key environmental indicator,emissions must be reduced to lower atmo-spheric concentrations.) For example, a tax canbe chosen to stabilize emissions at 1990 levelsby the year 2000. (This approach is used in acurrent legislative proposal. See Box 1.) Thisapproach avoids the difficulties associated withexplicit assessments of economic damages fromclimate change. It does raise other concerns,

however. Most prominent among these is thatthe "right" tax is difficult to predict anddepends on the timeframe selected and thelevel of control required. The tax necessary tostabilize emissions at one level in the year 2000may differ greatly from a tax to stabilize emis-sions at another in the year 2010 or 2020. Thisconcern is not merely academic. Virtually alleconomic analyses of carbon-reduction possibili-ties suggest that substantial early reductions,say over the next 10 or 15 years, can beachieved quite inexpensively. If so, a fairly lowtax would be sufficient if levied soon. But astime goes on, sustaining or extending thesereductions may become harder and harder,requiring a significantly higher tax. Eventually,of course, once a non-carbon based backstoptechnology becomes economic, no furtherincrease in tax rates is required to reduce emis-sions. In the very long run, tax rates couldactually be reduced.

C. Economic Consequences ofCarbon Taxes

A properly set pollution tax generates netgains in overall social welfare through the envi-ronmental improvements it creates, regardlessof its fiscal implications or its impact on officialGNP estimates. Nonetheless, concerns aboutthe economic consequences of pollution taxesabide. Carbon taxes are especially controversialbecause they have economy-wide effects. Evenif the environmental benefits justify the costsassociated with a carbon tax, policy-makersmust have a clear idea of what these costs arelikely to be. Specifically, they need to know thepotential impact of a carbon tax on the produc-tion of goods and services, as well as who paysor bears the burden of the tax.

1. Macroeconomic Impacts of CarbonTaxes

Numerous studies have estimated the macro-economic consequences of carbon taxes designedto reduce CO2 emissions to various levels. Thestudies differ significantly in both approach andresults, but most models suggest that the

57

Box 1. The Stark Carbon Tax Proposal

Representative Stark (D.CA) has introduced aproposal that illustrates the basic concepts of acarbon tax. H.R. 1086 is based roughly on a car-bon tax option prepared by the CongressionalBudget Office (CBO). It calls for a phased-in taxof $30 per ton of carbon in coal, oil and naturalgas. According to the CBO, a tax of this magni-tude might stabilize emissions of CO2 at current

levels by the year 2000. (This assessment doesnot assume a phased-in tax schedule.) Table 16presents the proposed tax rate by fuel type forthe phase-in period. In Table 17, these rates areexpressed as the estimated percentage increasein the price of the taxed fuels. H.R. 1086 keepsthe real tax rate fixed by allowing it to rise withthe rate of inflation.

Table 16. Proposed Carbon Tax Schedule of H.R. 1086

Year 1Year 2Year 3Year 4Year 5

Table 17

Tax as a

Year 1Year 2Year 3Year 4Year 5

Carbon($/ton)

612182430

. Estimated Affect on

% of Price

Coal($/ton)

3.607.20

10.8014.4018.00

Fuel Prices of H.R.

Coal

1631476378

Oil($/brl)

0.771.542.313.093.85

Nat. Gas($/tcf)

0.100.190.300.400.48

1086 Carbon Tax Proposal

Oil

48

121619

EstimatedRevenue($ bill)

714212836

Natural Gas

48

121619

economic consequences are likely to be eitherfairly small losses or outright gains.

Since a carbon tax makes fossil fuels moreexpensive, it will alter the use of capital, labor,energy, and other economic resources. Inresponse, businesses and households will tryto lower their tax payments by reducing theiruse of fossil fuels and increasing their use ofcapital, labor, and non-fossil energy. Con-sumers might respond to higher electric pricesby buying more efficient appliances or usingthe ones they have less. Utilities might increas-ingly make electricity with energy sources that

emit little or no carbon (biomass and wind orsolar power). The net effect of these switcheswill be to reduce the production of some goodsand services. Under these circumstances,projected GNP would be expected to fall,reflecting the net impact of these changes onoverall market prices and household expendi-tures. The negative GNP estimates presentedin many early studies of carbon taxes demon-strate this set of first-order effects.

The way the revenues from the carbon tax areused, however, changes the picture dramati-cally. The ranges for GNP effects presented in

58

Table 18 represent the impact of different reve-nue recycling options—for example, reducingthe tax rate on capital, labor, and personalincome taxes. By reducing the price of usingcapital and labor, these tax changes thuspotentially improve economic performance. Infact, the projected economic advantages fromthe revenue recycling more than compensatefor any direct GNP loss associated with thecarbon tax.

2. Recycling the RevenuesThe macroeconomic simulations reported in

Table 18 differ on a number of importantbases. Changing the assumptions concerning,for example, future paths for economic growthand energy consumption, as well as possibili-ties for the substitution of one energy input foranother, produce very different results, evenfrom the same model. (Many of these differ-ences are explored in more detail in an earlierWRI report on carbon taxes.6) One critical find-ing, however, is central to the theme of thisreport: these modelling results show that usingpollution tax revenues to lower other distor-tionary tax burdens can improve the nation'seconomic performance.

The large revenue streams generated by a car-bon tax can have economic effects much largerthan those triggered by changes in relativeprices. Such impacts will vary, depending on

how the revenues are used. The studies pre-sented in Table 18 take two different approachestoward handling carbon tax revenues. Theyeither (1) return the revenues to consumers inlump-sum reimbursements (by lowering per-sonal income tax payments) or (2) reinvest themto promote economic growth by cutting themarginal tax rate on selected existing taxes.

Table 18 makes it clear that either reinvestingor recycling the tax revenues into the economyby lowering payroll or capital tax rates can at aminimum offset a significant portion of any esti-mated loss in GNP. If tax reductions are care-fully targeted GNP stays the same or rises rela-tive to what it would have been without thecarbon tax. These results are consistent with therelatively large deadweight losses associatedwith current tax rates on capital and labor.More important, the economic gains fromreducing existing deadweight losses outweighany economic losses associated with reducedfossil fuel use. This possibility has been ignoredin most studies of carbon taxes. Prior to themodelling effort reported in Table 18, carbon taxanalyses evaluated specific types of tax cuts-such as personal income tax cuts—that had theleast impact on reducing deadweight losses inthe tax system. Using carbon tax revenues tocut personal income taxes, simply gives all con-sumers back a portion of the tax and fails toimprove economic productivity. This approachmight stimulate some short-term consumer

Table 18. Estimates of the Macroeconomic Costs of Reducing CO2 Emissions Through aPhased-In $40 Per Ton Carbon Tax

StudyChange in GNP

(%A from baseline)Carbon Reductions in 2010

(%A from baseline)

Jorgenson-WilcoxsinGoulderDRI AnnualLink

-1.0 to 0.9-0.4 to 0.0-0.9 to 4.0-1.1 to 4.0

-22.8 to -22.3-28.7 to -28.4

-6.6 to -3.2-4.0 to 0.3

Source: Shackleton, Robert, et al. (1992).

59

spending, but it does little to overcome thebasic inefficiencies of today's tax code andtherefore to contribute to long-run economicgrowth.

Not surprisingly, the different models yielddifferent answers concerning which tax reformshave the largest impact on economic perform-ance. Internal model assumptions relating tothe responsiveness of labor supply to changesin wage rates and the sensitivity of capitalinvestment to changes in the costs of capital,dictate the degree of estimated economic dis-tortions from existing taxes and thus the eco-nomic benefits of reducing these distortions. Ingeneral, the models agree that returning therevenues of a carbon tax to the economythrough an investment tax credit has the big-gest effect on GNP. By lowering the costs ofnew capital investments, such a credit spursreal growth in the national capital stock andincreases estimated economic growth over whatit would have been without the tax credit. Basi-cally, an investment tax credit (ITC) reducesthe existing tax burden on new capital.

In general, the models agree thatreturning the revenues of a carbon taxto the economy through an investment taxcredit has the biggest effect on GNP.

An ITC has at least two other important eco-nomic implications. First, it essentially lowersthe cost of capital relative to labor and couldslightly increase projected long-run unemploy-ment. Second, in several of the macroeconomicmodels, an ITC promotes enough economicgrowth to offset some fraction of the expectedcarbon dioxide reductions. This is particularlytrue in models that have a fairly inflexible linkbetween economic growth and energy con-sumption and that reflect the assumption thatthere will be relatively few opportunities toswitch to lower carbon fuels.

Many macroeconomic models suggest thatthe negative impacts of an ITC on estimatedemployment can be largely eliminated by com-bining the tax credit with reductions in incometaxes or payroll taxes. For example, one set ofsimulations using the DRI model show thatoffering an ITC, along with reductions in per-sonal income tax and employer payroll taxreductions can keep the GNP constant withoutcausing any net loss in jobs.7 Targeting someportion of the ITC toward investments inrenewable energy sources and energy efficiencycould help make increased growth less depen-dent on increased energy use (with the result-ing CO2 emissions). Although the impact onCO2 emissions and economic growth of an ITCfocused on new energy investments has notbeen carefully evaluated, using such a creditcould help lower the transitional costs of shift-ing to lower carbon energy sources while stillproviding broad tax-reform benefits.

Any number of tax reform options could befinanced through a carbon or other pollutiontax. The choice depends on which public policygoals are considered most important. Thesimulations reported here illustrate the eco-nomic implications of just a few alternatives.The potential benefits of tax-reform initiativescoupled with pollution taxes are not limited tostandard indicators of economic health; theyalso influence how economic wealth is dis-tributed throughout the economy—a subjectdiscussed more fully below.

3. What the Models MissThe macroeconomic models that underlie the

estimates in Table 18 can provide useful guid-ance on the pollution-reduction potential ofvarious levels of carbon tax. But the pictureprovided by models is far from complete. Anearlier report and Congressional testimonyfrom WRI show how and why existing eco-nomic models tend to overstate the economiccosts of various carbon taxes and to underesti-mate CO2 reductions.8 The opportunities forenergy efficiency investments and technologicalinnovation encouraged by higher energy prices,

60

for example, will (everything else being equal)make it possible to achieve any given reductiontarget with smaller taxes.

If the appropriate carbon tax rate hasbeen selected, economic welfare shouldimprove regardless of how the revenuesare used because the economic lossesfrom excessive greenhouse gasaccumulation would be avoided.

A bigger shortcoming of existing models,however, is that they don't accurately portraythe true welfare gains of a carbon tax (or anyother pollution tax) coupled with tax reform.All of the macroeconomic models in Table 18implicitly assume that a carbon tax is a distort-ing tax. In these models, the GNP impacts ofthe tax are reduced or eliminated by loweringeven more distorting taxes, not as a result ofany environmental benefits from a carbon tax.If the appropriate carbon tax rate has beenselected, economic welfare should improveregardless of how the revenues are usedbecause the economic losses from excessivegreenhouse gas accumulation would beavoided. The tax reform benefits would thenbe additional gains to the economy not simplyoffsetting economic losses from imposing thepollution tax.

More important, changes in the national mixof energy sources and reductions in the use offossil fuel would presumably reduce other pol-lutants as well—for example, sulfur dioxide(SO2), nitrogen oxides (NOX), carbon monoxide,heavy metals, hydrocarbons, and particulateemissions. A study by the World Bank sug-gests that the SO2 and NOX reductions aloneresulting from a $26/ton carbon tax could be inthe range of 2,766,000 tons.9 For illustrativepurposes, valued conservatively at $600 a ton,

the economic benefits of these reductionsmight be in the range of $1.5 billion per year.

Accurate estimates of the non-CO2 pollutionbenefits of a carbon tax are not yet available.Appraisal of such benefits for the United Statesis complicated since many of the pollutants arealready subject to fairly stringent control re-quirements. In particular, SO2 and NOX, pri-mary pollutants from coal combustion, are fac-ing tight control under the 1990 CAAA: SO2

emissions, for example, are capped at 10 mil-lion tons per year by the year 2005. A moder-ate stabilization level carbon tax probably won'treduce coal use enough to eliminate the cap asa binding restriction on SO2 emissions. Ofcourse, much higher carbon taxes (with higherCO2-reduction targets) could reduce SO2 emis-sions below the existing requirements. In anycase, the environmental benefits should beincluded in any economic analysis of carbontaxes to ensure that net—not gross—costs getmeasured.

Along with direct environmental benefitsrelated to CO2 emission reductions, modelspecifications also miss other non-climaterelated benefits. For example, most of the eco-nomic models show that oil imports fall undera carbon tax. Such reductions would, ofcourse, be associated with reduced threats toour national security and and might improveour international terms of trade. As for howmuch enhanced security might be worth, astudy by the Energy Information Agency pegsthe benefits of a $40/ton carbon tax at around$18.1 billion.

D. Distributional Consequencesof Carbon Taxes

By nature, taxes—or any kind of revenue-raising measure—make some people worse offthan they would have been without the tax.Indeed, as a practical matter, all forms ofpollution-control programs affect somebody'swealth. The question is whether taxes havebetter or worse distributional effects than

61

alternative control strategies. Unfortunately,the distributional consequences of environ-mental programs do not receive the explicitattention they deserve, given their politicalimportance. The distributional characteristics ofenvironmental initiatives have always figuredcentrally in the design of environmental sta-tutes and the selection of pollution-control pro-grams. In fact, cost-effective control strategieshave often been dismissed because their dis-tributional effects were unacceptable. Yet, fewdistributional studies of pollution programs orpollution taxes have been conducted.

Carbon taxes, a recent exception, have beenwidely evaluated for their distributional conse-quences. But virtually all attention has beenfocused on the cost effects. No studies showhow the damages from climate change wouldbe distributed—a serious gap from the stand-point of the design of pollution tax strategiesand tax-reform initiatives.

The perception that pollution taxes in generaland energy taxes in particular are "unfair" hasbeen perhaps the major barrier to their wide-spread application. Energy taxes have beenroundly criticized as regressive, though otherpotential distributional impacts, both regionaland industrial, have also sparked concern.These claims can't be evaluated accuratelywithout accounting for the economic benefits ofrecycling carbon tax revenues. Except forindustrial impacts, no studies of the distribu-tional implications of carbon taxes take theseeconomic effects into account. The current esti-mates, which are likely to overstate theregional and income-related impacts of carbontaxes, are thus best thought of as "worse case"analyses. Yet, any sound carbon tax strategywould include programs to compensate peopleadversely affected by the net impacts of a car-bon tax, including cuts in other taxes.

1. The Impact of Energy Taxes byIncome Class

Conventional wisdom holds that most formsof energy taxes discriminate against lower-income

families and individuals. Because these groupsspend a higher percentage of their incomes onenergy than other income classes do, any taxbased on energy—this logic goes—hits thesegroups disproportionately hard. But there ismore to the story. The Congressional BudgetOffice and other researchers argue that differ-ent measures of wealth yield different meas-ures of the burden of a tax.10 In particular, theCongressional Budget Office and James M.Poterba of the Massachusetts Institute of Tech-nology have shown that if a broader measureof wealth than income—actual expenditures—isused, energy taxes appear less regressive.(Expenditures represent a more stable long-runmeasure of wealth than income since they areless related to fluctuations in employment sta-tus or earning cycle. They also include govern-ment transfer payments, such as Aid to Fami-lies with Dependent Children (AFDC), whicharen't normally included in income figures.)

Even if energy taxes cannot be calledprogressive, they may be lessburdensome on the poor and middleclass than commonly thought. Withappropriate cuts in payroll taxes, thesegroups could actually come out ahead.

As Table 19 shows, the impact of a carbontax is roughly proportional if expenditures arethe measure. Even if energy taxes cannot becalled progressive, they may be less burden-some on the poor and middle class than com-monly thought. With appropriate cuts in pay-roll taxes, for example, which are generallyconsidered highly regressive (at least in termsof first-order effects), these groups could actu-ally come out ahead.

Other tax or spending reforms could be usedto address any remaining inequities in theincome effects of a carbon tax. These might

62

Table 19. Comparison of EstimatedDistributional Impacts of aCarbon Tax by AlternativeMeasures of Income

Distribution Across Income Classes

Income/Expenditure

Decile% of

Income% of

Expenditures

Source: Poterba, J.M. (1991).

include, for example, expanding the EarnedIncome Tax Credit, increasing food stampbenefits, or increasing the standard deduc-tion.11 None of these uses of the revenues froma carbon tax, however, would improve the effi-ciency of the nation's current tax system (aswould lowering payroll tax rates.) Obviously,special programs may be required to helpindividuals who are outside the current federaltax system.

2. The Impact of Energy Taxes byRegion

Energy taxes can redistribute a nation'swealth by region as well as along economicclass lines. Because energy production, use,and cost vary by region, some parts of thecountry will bear a higher tax burden thanothers. Such potential regional effects can bemeasured in two ways. First, the tax directlyaffects energy expenditures by households inthe region. The regional tax bill will depend

not only on the tax rate, but also on con-sumers' ability to adjust their energy use inresponse to the tax.

The second measure is the indirect (orsecond-order effects) of the tax on a region'sindustrial activity, employment, and wealth. Astaxes translate into higher energy prices andeconomic activity adjusts, regions with themost energy-intensive industrial bases may beput at an economic disadvantage relative toother regions. Both of these impacts—theregional expenditure effect and the regionaleconomic effect—deserve policy attention.

A carbon tax would actually reduceregional energy price inequities.

• Regional Expenditures. D.E. DeWitt, H.Dowlatabadi, and R.J. Kopp of Resources forthe Future have estimated the regional distribu-tion of alternative carbon taxes.12 As Figure 5shows, differences among regions are neithergreat nor significant. The average household inNew England would pay around 20 percentless in taxes than a household in the north-central states. With the exception of the PacificNorthwest, the regions with the highest addedtax burdens are also the regions with thelowest electricity prices—a function of relianceon low-cost coal as an energy source. Fromthese estimates, it appears that a carbon taxwould actually reduce regional energy priceinequities. Another key variable is households'ability to adjust their buying habits in responseto the tax and to adopt, for example, moreenergy-saving products and processes. Esti-mates of regional expenditure rise by almost 15percent if consumers are assumed to have fewoptions for avoiding the tax. In a "conserva-tion" case, in which the Resources for theFuture researchers assume that consumers havemore latitude, the absolute impact falls, thoughthe regional differences remain. Unfortunately,

63

Figure 5. Estimated Changes in Residential Energy Costs from a Carbon Tax by Region

Census Region

Pacific

New England

Mid Atlantic

South Atlantic

West S. Central

East S. Central

Mountain

East N. Central

West N. Central

54.27

-6.39

S.S.73

42.53

•4.05

94.81

96.40

20 40 60

Dollars per Year per Household

100

Source: D.E. DeWitt, H. Dowlatabadi, and R.J. Kopp, Who Bears the Burden of Energy Taxes?, Resources for the Future,Washington, D.C. (March 1991)

this scenario is not very flexible and may notaccurately reflect the full range of economicresponses after the tax has been in place forsome time. Remember too that these estimatesdo not consider the impacts of recycling the taxrevenues.

• Regional Economic Impacts. The relative eco-nomic wealth of states or regions can also be

affected by carbon tax strategies. States thatdepend on carbon-based energy sources forgenerating income or that rely on carbon-basedenergy-intensive industries could be hurt dis-proportionately more by a carbon tax onenergy than by another form of energy tax.Perhaps predictably, determining exactly howmuch a state's economy is affected is no simplematter. In the case of a carbon tax, for example,

64

oil, natural gas, and coal prices would rise, butsimply multiplying the amount of the tax bythe amount of the fossil fuel resource producedin the state is not a sound measure of eco-nomic damage. Instead, the impact of the taxon demand for fuels and, ultimately, on pro-duction levels must be traced.

Virtually all economic models showthat a carbon tax has its greatestimpact on coal production. By the sametoken, most of the reduction in oildemand would come from reducing oilimports. Thus, the wealth of oil-andnatural gas-producing states wouldchange little and much of the reductionin coal demand would come out ofanticipated growth in coal use, notreductions in current levels of use.

Virtually all economic models show that acarbon tax has its greatest impact on coalproduction. By the same token, most of thereduction in oil demand would come fromreducing oil imports.13 Thus, for the level oftaxes considered here, the wealth of oil-andnatural gas-producing states would change lit-tle. Coal production does decline compared towhat it would have been without the tax.Depending on the level of tax, however, muchof the reduction in coal demand comes out ofanticipated growth in coal use, not reductionsin current levels of use. CO2-reduction commit-ments beyond stabilization or 20-percent reduc-tions are likely to require much deeper reduc-tions in coal production.

No published modelling results disaggregateenergy tax burdens on specific industries at thestate or regional level, so the degree to which

the GNP effects of carbon taxes would be borneby any specific state or how coal production inWyoming is reduced relative to that in WestVirginia can't be specified yet. Still, the states atfirst-order risk are relatively easy to identify. AsFigure 6 shows, Wyoming, Kentucky, and WestVirginia which together account for over half oftotal U.S. coal production, would bear a signifi-cant fraction of the costs of lost growth inproduction.

The actual dollar loss to these three states isdifficult to estimate; it depends, in part, onwhat would happen in the absence of a carbontax. For perspective, coal-mining employmentlevels have been falling even though coalproduction has risen. Increased production ofwestern coal (which is capital-intensive) andincreased mechanization of eastern coal mineshave already led to losses in the mining popu-lation, and many Appalachian coal regions arealready amid an economic transition. Between1980 and 1989, for example, coal employmentfell by 43 percent to a total of 116,000 workers(in 1989), while coal production increased byapproximately 30 percent.

Calculations of economic losses due to a car-bon tax should take coal types into accounttoo. Most carbon tax proposals assumeimplicitly that all types of coal contain thesame amount of carbon, but they don't. East-ern bituminous coals can contain as little as 40percent carbon or as much as 80 percent. West-ern sub-bituminous coal typically has lowerpercentages and less variation. A carbon taxbased on an average carbon content will pushcoal users, everything else being equal, to pickcoals with higher carbon contents (and gener-ally higher energy values) than average sincethe price per unit carbon is the same.

These mitigating factors aside, carbon taxesas a whole do fall most heavily on coal produc-tion, and coal-producing states or sectors arelikely to demand fair compensation for theirlosses. While a number of different approachesmight be used to offset losses to coal-produc-ing regions, a block-grant program may be

65

Figure 6. United States Coal Production by State, 1990

Wyoming

Kentucky

West Virginia

Pennsylvania

Illinois

Texas

Virginia

Montana

Indiana

Ohio

North Dakota

Alabama

New Mexico

Utah

Colorado

Arizona

Tennessee

Washington

Maryland

Louisiana

Missouri

Alaska

Oklahoma

184.2

6.1

5.0

3.5

3.2

2.6

1.7

1.7

Kansas II 0.7

Iowa I 0.4

172.5

168.7

W1.4

55.S

37.6

35.9

35.1

24.2

2M.9

24.3

22.1

11.3

50 100

Millions of Tons

150 200

Source: Energy Information Administration, Coal Production 1990, EIA-0118(90), U.S. Department of Energy,Washington, D.C. (1991)

66

most appropriate, giving states the flexibility todesign their own programs.

3. The Impact of Carbon Taxes byIndustry

Not surprisingly, carbon taxes would fallmost heavily and directly on the energy-production sectors—coal mining in particular—and on industries that depend on coal as wellas other fossil fuels. As the initial priceincreases are passed on to final consumers (orback to shareholders), however, the economicburdens of the tax would spread to otherindustries and sectors. The ultimate first-orderimpact on the performance of any individualindustry depends on whether that industryembraces energy efficiency, switches to fuelsthat are taxed less, or passes on the priceincrease to consumers or back to coal-produc-tion sources.

On the other side of the equation, someindustries, of course, would benefit from thetax. Plastics recyclers, biomass producers(including both the agricultural and processingcomponents), and solar power industries forinstance, could all get a break, especially if thenet economic gains associated with recyclingthe revenues from a carbon tax back into theeconomy are considered. The results presentedearlier suggest that more industries will winthan lose. Everything being equal, investmenttax credits or lower corporate capital or labortax rates would benefit many industries, partic-ularly those in which energy represents only asmall percentage of their overall productioncosts. Communication and information ser-vices, financial services, medicine, and otherhigh-technology industries are likely to growfaster under tax-reform initiatives of this sort.Certainly, industries that offer low or no car-bon energy services would also gain under acarbon tax coupled with a tax shift. On anational level, aggregate productivity andgrowth would rise.

Although it is difficult to estimate accuratelythe net change that a carbon tax would induce

Communication and informationservices, financial services, medicine,and other high-technology industries arelikely to grow faster under tax-reforminitiatives of this sort.

in the economic activity of individual industrialsectors, recent preliminary studies by the U.S.Environmental Protection Agency show thepotential for winners as well as losers. Theestimated employment gains in industrial sec-tors that experience growth under a $40/toncarbon tax with revenues recycled through acombination of an ITC, payroll tax deductions,and personal income tax reductions are shownin Figure 7. This simulation was designed tokeep GNP and employment unchanged fromtheir levels in the absence of a carbon tax.Most of the shifts in economic activity aretoward the services and wholesale/retail sec-tors, but the machinery and instruments sec-tors also improve. The point here is not toaccept any specific estimate or number, butrather show that a carefully crafted pollutiontax will increase economic activity in some sec-tors at the same time that others (with rela-tively high levels of pollution) may face eco-nomic losses.

E. The International Context forCarbon Taxes

Compared to the other pollution tax strate-gies considered in this report, carbon tax poli-cies need to be considered in a broad interna-tional context. One reason for this is obvious.The Climate Convention, recently signed byover 150 countries at the Earth Summit in early1992, requires all industrialized countries toadopt and enact limitation strategies together.The other reason is more subtle, but no lessimportant. The potential for a carbon tax to

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Figure 7. Output-Neutral and Employment-Neutral Stabilizing Carbon Tax: Industries withEmployment Increases

1994

B Miscellaneous Mfg.

BB Food & Beverage

[U Furniture & Fixtures

M Apparel

• Rubber

S Instruments

CJ Electrical Machinery

0 Non-ElectricalMachinery

CD Other Services

§ Wholesale & Retail

1995

yyy>yr/rsyrsr/yr/f

1996

1997

1998

i10

I20 30 40 50

I60 70

Thousands of Employees

Source: Yanchar, 1992. (Personal communication with Robert Shackleton, USEPA.)

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affect the competitiveness in international mar-kets of certain goods and services is alreadyplaying a major role in defining the debate overcarbon taxes versus other emission reductiontools. The energy/carbon tax strategy proposedby the European Commission has been madeconditional in the United States and other OECDcountries adopting similar taxes mainly becauseof concerns over the impacts of unilaterally-imposed carbon tax on trade and competitiveness.

Of course, any serious effort to restrict CO2

emissions will raise the price of carbon-intensivegoods and services. To the extent that theseproducts are important components of interna-tional trade flows, unilateral initiatives may wellaffect trade balances—whether or not one coun-try has higher existing energy taxes thananother. The potential impacts on trade flows ofhigh-carbon goods has an important environ-mental dimension as well. Unilateral action mayhave the effect of transporting or "leaking"CO2 emissions from one country or region toanother. An EC-wide carbon tax, for example,might reduce EC emissions but prompt otherOECD countries to generate more. Withoutdoubt, there are clear barriers and costs tounilateral action on carbon taxes.

A carbon tax coupled with tax reformwould create economic benefits for theUnited States even if it was unilaterallyimposed.

This study suggests that a carbon tax coupledwith tax reform would create economic benefitsfor the United States even if it was unilaterallyimposed. The balance of trade in the UnitedStates might be further improved because thetax would lower the oil import bill. Trade lossescould also be reduced by exempting varioususes of carbon-based fuels or exempting keyindustrial sectors, as virtually all of the small

number of carbon tax programs that have beenenacted unilaterally in Europe do. While suchexemptions may minimize the trade effects,they also lower the economic and environ-mental effectiveness of the tax, of course. Tax-ing imports of carbon-bearing goods might alsobe an alternative for minimizing the tradeeffects of a carbon tax, though the administra-tive costs are likely to be enormous.

The environmental, economic, and politicalrealities of designing a carbon tax within aninternational context suggest that encouragingmultilateral action entails fairly substantialbenefits. An OECD-wide system of national car-bon tax strategies would provide a basis for taxreform within individual countries (with differ-ent existing tax distortions) and remove the riskor fear of significant trade effects within theOECD. It would also limit the problem of leak-ing CO2 emissions, at least within the OECD.(Under the Climate Convention only the indus-trialized countries are committed to makingreductions anyway.)

In the longer run, the competitiveness of theUnited States relative to that of our major trad-ing partners, as well as the competiveness of ourtrading partners, will be determined by the abil-ity to improve and sustain the productivity ofdomestic workforces. Meeting this goal requires,among other things, an adequate capital invest-ment. Coupling a carbon tax with broader tax-reform initiatives could create such incentives.

Just as important, some industries are likely tobenefit directly from a carbon-reduction strategy.Producers of renewable-energy and energy-efficiency technologies comprise just one set ofpotential winners. Developing these industriesdomestically would spur opportunities abroad,especially as other nations pursue energy-efficiency and renewable-energy alternatives.

Notes for Chapter Four1. A useful summary of the science of climate

change and its potential risks can be found inIPCC (1990).

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2. Worldwide, carbon contributes 66 percent oftotal Greenhouse gas emissions (weightedby extent of contribution to total warming),a number which is expected to increase overtime. Carbon emissions constitute 53 percentof total U.S. emissions.

3. Some of these points are treated more fullyin Parker (1991).

4. See: Oates, W.E. and P. R. Portney (1991).

5. See in particular, Nordhaus, W.D. (1991).

6. See Dower, Roger C. and M.B. Zimmerman,(1992).

7. Yanchar, J. (1992).

8. See, in particular, Dower, R.C. (May 1992).

9. Shah, A. and B. Larsen (1992).

10. Congressional Budget Office (1990), andJ.M. Poterba (1991).

11. These proposals are discussed in moredetail in Dower and Zimmerman (1992). Seealso Congressional Budget Office (1990),and Greenstein, R. and F.C. Hutchinson(1990).

12. DeWitt, D.E., H. Dowlatabadi and R.J.Kopp (1991).

13. Congressional Budget Office (1990), p. 32.

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V. Other Potential Environmental Charges

S olid waste collection charges, conges-tion tolls, and carbon taxes are impor-tant examples of environmental charges,

but they are by no means the only promisingapplications of the taxing power for environ-mental purposes. The U.S. government alreadyemploys a variety of fiscal mechanisms to pro-mote environmentally desirable practices, todiscourage environmentally damaging activi-ties, and to fund environmental protection pro-grams. Already in the tax code, for example,are tax credits for the production of ethanol andother renewable fuels, excise taxes on gas-guzzling automobiles and certain chemicals thatdeplete stratospheric ozone, and taxes on crudeoil and imported petroleum products to financethe Oil Spill Liability Trust Fund and Superfund.1

Unfortunately, the federal tax code alsocontains many perverse provisions thatpromote environmentally damagingactivities and discourage environmentallybeneficial practices.

Unfortunately, the federal tax code also con-tains many perverse provisions that promoteenvironmentally damaging activities and dis-courage environmentally beneficial practices. Forexample, farmers are allowed to deduct from

taxable income part of the value of groundwaterextracted for irrigation in excess of annualrecharge, a provision that encourages depletionof the nation's aquifers and reduces federal taxreceipts. (Ward et al., 1989) Or, to take anotherexample, employers are allowed to provide freeparking to employees as a tax-free fringe bene-fit, subject to dollar limits much higher thanthose on tax-free reimbursement on public tran-sit commuting costs. This provision stronglyencourages people to drive to work, exacerbat-ing urban congestion and pollution. (Shoup andWilson, 1992) Removing such environmentallyperverse tax advantages is another potentialapplication of the taxing power.

This chapter identifies many additionalpotential environmental charges and tax meas-ures that would make environmental protectionmore efficient and raise government revenuewith less distortion of the economy than con-ventional taxes create. Most have already beenenacted and enforced by some state or localgovernments in the United States or bygovernments in some other countries.2 Theyare not theoretical inventions, but workableinstruments of public policy.

It's useful here to distinguish among variouskinds of environmental charges. There areimportant legal distinctions between taxes andfees. Under the U.S. constitution, federal taxesmust be legislated by Congress. The U.S. Envi-ronmental Protection Agency, therefore, cannotimpose environmental taxes. Furthermore,

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indirect taxes, such as federal excise taxes, mustbe uniform nationally, though rates may varyby relevant categories of the tax base. Moststate constitutions have analogous provisions.By contrast, some fees authorized by statutecan be set and collected by executive agenciesto recapture the costs of public servicesprovided, including the use of public lands,waters, and other natural resources. EPA andstate regulatory agencies may, under variousstatutes, impose fees to fund program servicesand to support regulatory programs. Courtshave upheld such fees even if the revenuesexceed program costs and the rates are set toinfluence or deter activities. (Anderson, 1977,Ch. 5) These distinctions are legally significant,but taxes and fees can be designed to providevery similar incentive effects. The generic term"environmental charges" refers to both.

A simple classification of different kinds ofenvironmental charges, such as that in Table 20,would distinguish charges on environmentallydamaging activities from charges on productswhose use entails environmental costs. Exam-ples of the first include discharges of pollutingwastes into air, water, and soil. Charges im-posed on the basis of the volume and toxicity ofsuch emissions are called effluent charges oremissions taxes. For example, several countries,including France and Sweden impose taxes onairborne emissions of sulfur dioxide, othersincluding Germany and the Netherlands levycharges on effluents discharged into surfacewater.

Other kinds of activities also have environ-mental costs. In France, Switzerland, and Brit-ain, airplane landings are charged through land-ing fees based on the amount of noise theygenerate. The scope for charges on environ-mentally damaging activities is clearly wide.

Product charges are levied not directly on theenvironmentally harmful activity itself, but onthe product whose use is involved in thatactivity. Often, there is a close link between theuse of a particular product and an environ-mentally damaging activity, but the sale of the

product is considerably easier to monitor andtax. For example, although the discharge of CO2

into the atmosphere is what creates the green-house effect, carbon taxes are levied on the car-bon content of fuels that are burned to createcarbon dioxide. For any fuel, average carboncontent is constant, and no cost-effective large-scale methods of sequestering CO2 after com-bustion are known, so the weight of carbon inthe fuel and that of the carbon dioxide dis-charged are proportional. Moreover, imposingadditional taxes on fossil fuels is far easier thanmonitoring and taxing CO2 emissions directly.

Another example of a product charge is theU.S. tax on CFCs and certain other ozone-depleting halons identified in the Montreal Pro-tocol of 1989. Since CFCs are chemically stable,virtually all CFCs used in production eventuallyescape to the atmosphere, contributing to ozonedepletion. Of course, other product charges,such as taxes on petroleum feedstocks tofinance the Superfund, are not directly con-nected to the environmentally damaging activity(in this case, improper disposal of hazardouswastes). The more tenuous the connection, theless effective are product charges in creating theright incentives. Sometimes, a trade-off must bemade between the ease of administering a prod-uct charge and the accuracy in targeting the en-vironmentally damaging activity that an effluentcharge provides.

Related to product charges, but with signifi-cantly different revenue implications, aredeposit-return charges—basically, productcharges that are refunded when the product isreturned to a designated collection point.Deposit-return charges are particularly appro-priate when the policy objective is not only todiscourage use of the product but also toencourage its proper disposal, including deliv-ery to recycling facilities. The best knownexample of a deposit-return charge in theUnited States is that applied in many states tobeverage containers under so-called "bottlebills." However, in other countries, similarcharges are levied on tires, motor oil, lead-acidbatteries, and vehicles.

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Table 20. Illustrative Options for Environmental Charges, by Category

I. Effluent or Emissions Charges1. on water effluents permitted under NPDES system2. on toxic releases documented in Toxic Release Inventory3. on vehicular emissions in Clean Air Non-attainment Areas4. solid waste collection and disposal charges

II. Charges on Environmentally Damaging Activities1. recreational user fees on public lands2. highway congestion tolls3. noise charges on airport landings4. impact fees on installation of septic systems, underground storage tanks, construction

projects with environmental impacts, etc.

III. Product Charges1. taxes based on the carbon content of fossil fuels2. gasoline taxes3. excise taxes on ozone-depleting substances4. taxes on agricultural chemicals5. taxes on virgin materials

IV. Deposit-Return Charges1. on vehicles2. on lead-acid and nickel-cadmium batteries3. on vehicle tires4. on beverage containers5. on lubricating oil

V. Reduction of Tax Benefits and Subsidies1. percentage depletion allowances for energy and other minerals2. percentage depletion allowances for groundwater extraction3. charging market royalties for hardrock mining on public lands4. eliminating below-cost timber sales5. charging market rates for grazing rights on public lands6. charging market rates for state and federal irrigation water7. charging market rates for federal power

Although the product charge is ultimatelyrefundable, deposit-refund systems nonethelessgenerate public revenues. Some deposits arenever claimed, of course. Moreover, chargeslevied on products with long service lifetimescan allow a large interest-earning balance tobuild up in unrefunded deposits. If a charge is

imposed on a product whose sales are growing,this balance also grows over time. Therefore,refundable product charges levied on durablegoods with large markets and long servicelifetimes—such as vehicles, batteries, tires, andconsumer appliances containing CFCs—couldgenerate substantial revenues.

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Fees used to fund local, state, and federalgovernment environmental programs arealready used in forty-three states, generating aquarter of a billion dollars to fund environ-mental programs. (Shields, 1987) In most cur-rent applications, fees are structured primarilyto raise revenues rather than to influencebehavior. In other words, they are typicallyused as adjuncts to environmental regulations,and the rates reflect neither the marginaldamages of the regulated activities nor theshort-run costs regulated parties would incur inchanging behavior. But even if they do notinfluence short-run behavior, as revenuessources fees are good alternatives to distortingtaxes that impose heavy excess burdens on theeconomy. Moreover, in the long-run they arelikely to discourage the environmentallydamaging activity to which they are appliedand encourage the search for substitutes.

Fees can be categorized as fees for service,discharge fees, impact fees, and user fees.(Doyle, 1991) Service fees help cover the costsof such environmental services as providingwater or sewerage connections, or testing andmonitoring water quality. Discharge fees arelevied on the basis of actual or permitted dis-charges, such as vehicle emissions or hazardouswastes generated. Impact fees are imposed toreflect the environmental cost of an activity orthe public costs of mitigating such impacts.Examples would include fees imposed on realestate developments impinging on wetlands orpermit fees on the installation of septic systems.User fees are tied directly to the use of a publicresource, such as water diversion fees or feesfor grazing permits on public lands. (See Table20.)

A. Effluent Charges

1. Charges on Releases of ToxicSubstances Documented Under theToxic Release Inventory

Title III of the Superfund Amendments andReauthorization Act of 1986 (SARA) required

industries to report for public knowledgedetailed information on the use, storage, androutine or accidental release of hazardouschemicals. It also required EPA to develop andmaintain a public database on toxic emissionsto air, land, surface waters, and undergroundsites. EPA's Toxic Release Inventory, publishedsince 1987, now covers almost 24,000 reportingfacilities that manufacture or process more than25,000 pounds of any of more than 300 reporta-ble chemicals. Although the inventory is basedon self-reporting by regulated sources, the lawprovides for checks by regulatory agencies andpenalties on sources for failure to reportaccurately.

Although the public availability of informa-tion about releases by manufacturing firms oftoxic substances has prompted top manage-ment in many corporations to commit them-selves to reduce emissions voluntarily (Smart,1992), the 1990 inventory nonethelessdocumented total releases of toxic chemicals of1.7 billion tons, exclusive of an additional 0.55billion tons transferred to publicly owned treat-ment works (POTWs) and other offsite loca-tions. Over 60 percent of all such emissionswere atmospheric, and two-thirds of thosewere in smokestack gases. These emissions aresubject to regulation under various environ-mental statutes—the Clean Water Act, theClean Air Act, the Safe Drinking Water Act,and RCRA, for example—but the developmentof standards and implementing regulations hasbeen slow and controversial, and thetechnology-based standards that have beengenerated are inefficient. (Portney, 1990)

Releases under the Toxic Release Inventorycould be subject to environmental charges.Because the Inventory includes hundreds ofchemicals released in many different ways intowidely differing localities, basing charges onmarginal damages would be impossible.Nonetheless, as an approximation, chemicalscould be grouped into toxicity classes, basedon EPA toxicity rankings, and charges could begraduated accordingly. For example, EPA hasgrouped chemicals into three overall "toxicity

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potency groups" on the basis of their combinedrankings in five toxicity indices that cover differ-ent aspects of potential risk. (USEPA, 1989)Charges could also be graduated according tomedium of disposal-—air, surface water, under-ground injection, surface impoundment, ortransfer to POTW or offsite facility. Indeed,most POTWs and offsite disposal or treatmentfacilities already levy significant charges ontransfers of toxic materials. Additional studies toestimate the relative damage levels of variouscategories of releases would help in establishingthe appropriate gradations of such charges.Charges graduated in this way would provideincentives for polluters to find low-cost ways ofabating toxic releases, particularly those thatrepresent relatively high risks. Several studieshave concluded that a substantial fraction oftoxic releases could be eliminated at low cost.(US Congress, OTA, 1986) A tax base of 1.7 bil-lion tons of toxic releases per year also creates apotentially large revenue base. For example,charges averaging just $20 per ton would yield$20 to $30 billion in annual revenues, depend-ing on the incentive effect of the tax to stimu-late additional emissions reductions. Charges setat this average level, with variations reflectingdifferences in toxicity and exposure potential,would not be likely to result in excessive emis-sions control since marginal damages are proba-bly considerably higher.

Since charges based on reported TRI dis-charges would create an incentive for sourcesto underreport their releases, some of therevenues raised would have to be devoted toadditional auditing and checking. The technolo-gies available to monitor toxic releases in smallconcentrations in water, air and soils haveadvanced rapidly. To shift the burden ofreporting accuracy to the firm, reportedreleases in a base year (or average of baseyears) prior to the imposition of charges couldbe used as a presumptive basis for the charge.However, regulated sources would be free todemonstrate reductions in releases beneathbaseline levels through documented abatementmeasures and monitoring, and thus lower theirtax liability.

2. Vehicular Emissions Charges inAreas That Don't Meet Air QualityStandards

Many urbanized regions, such as southernCalifornia and the northeastern seaboard, chron-ically violate national air quality standards, par-ticularly for atmospheric ozone. In theseregions, motor vehicle emissions of volatileorganic compounds contribute significantly tothe problem. Federal law requires these non-attainment areas to operate inspection andmaintenance programs to control emissionsfrom the vehicle fleet. In addition, new vehiclesin certain areas must meet more stringent emis-sions standards.

Trying to control vehicular emissions throughstrict and increasingly expensive standards onnew vehicles is relatively inefficient because theeffectiveness of emissions controls deterioratesrapidly as vehicle use rises and improper main-tenance takes its toll. Older vehicles with sig-nificantly higher emissions rates are responsiblefor large fractions of total miles travelled andtotal vehicular emissions. Moreover, evidencesuggests that the added cost of stricter pollu-tion-control equipment on new cars, by raisingtheir prices relative to those of used cars,prolongs the life of older vehicles and raises theaverage age of the fleet. (Gruenspecht, 1982,pp. 328-331).

A charge on vehicular emissions in non-attainment areas could be implemented in con-junction with inspection and maintenance pro-grams. Fees could be set on the basis of esti-mated annual emissions and collected whenand where inspection stickers or vehicle regis-trations are issued. Charge levels could beroughly based on estimated marginal damages.For example, an EPA-sponsored study has esti-mated for the Northeast region that volatileorganic compounds result in marginal damagesof approximately $0.7 per kilogram. (Krupnickand Kopp, 1988) Other recent estimates rangefrom $0.53 to $3.80. (Pace University, 1990) Fora car emitting 1.5 grams of hydrocarbons permile and driven for 10,000 miles per year, the

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damage-based charge of $0.7 would come toabout $10.00 per year. Such a fee would shiftmore of the burden of vehicular pollution con-trol to owners of older cars in areas wherevehicular emissions are especially troublesome,encouraging better maintenance or earlierretirement of highly polluting vehicles. In 1990,some 1.4 trillion vehicle miles were travelled inthe United States, at least half in regions notattaining ambient ozone standards. Emissionscharges averaging $10 per vehicle per yearwould generate approximately $0.5 billion dol-lars in annual revenues.

3. Effluent Charges on SurfaceWaters Discharges

The centerpiece of U.S. water pollution con-trol legislation is a national permit systemrequiring industrial and municipal dischargersto meet technology-based standards that areuniform nationally within industrial categories.This approach, adopted in 1972 to ensure rapidclean-up action, has demonstrated most of theweaknesses of command-and-control regulatoryapproaches. It has taken more than a decade ofdeliberation and litigation to promulgate tech-nology-based standards for all major industries,and the results are neither cost-effective norefficient. The incremental costs per unit ofclean-up may vary by more than an order ofmagnitude among plants in different industriessited side by side on a river. Uniform nationalstandards are not strict enough to attain waterquality goals in some surface water bodies, andmuch stricter than necessary in others. (Peder-son, 1988, pp. 69-102) Even after regulatedsources have installed required equipment,audits have found that significant fractions ofsources are out of compliance for substantialperiods of time because of equipment malfunc-tion, in many cases without inducing anyenforcement activities. (Russell, 1990)

Complementing these technology-based stan-dards, the federal government has subsidizedthe construction of municipal and industrialwastewater treatment plants through grants and

tax advantages. These subsidies have encour-aged pollution sources to adopt end-of-pipetreatment technologies, even though pollutionprevention and waste-reduction alternativeswould have been more economical in manycases.3 Although these efforts to control waterpollution cost the nation more than $45 billion ayear (Carlin, et al., 1992), little actual improve-ment in water quality has resulted. (Freeman,1990) Of water bodies for which monitoringreports are available, water quality in 36 percentof rivers, 54 percent of lakes, and 44 percent ofestuaries is still too poor for swimming, fishing,or other intended uses. (USEPA, 1990)

Effluent charges can create continuing incen-tives for point sources to reduce discharges,particularly into surface waters that do not meetquality targets. Such charges are already usedextensively in Germany, France, the Nether-lands, and other countries. Such charges arebased on formulas involving biological oxygendemand, chemical oxygen demand, suspendedmatter, nitrogen and phosphorus content, andother effluent characteristics. Although designedmainly to bring in revenues, charges in Ger-many and the Netherlands have also reducedindustrial emissions. (Bressers, 1983)

Overall in the United States, more than68,000 permitted sources discharge nearly 300billion gallons of wastewater daily into surfacewaters. The Congressional Budget Office calcu-lates that a charge based on biological oxygendemand at a rate equal to the mid-range ofincremental abatement costs ($0.50 per pound)would raise about $2.4 billion per year. If sucha charge superseded technology-based stan-dards, transferring more of the total abatementburden to sources able to handle it more chea-ply, overall water pollution compliance costsmight drop by 25 to 30 percent—an annual sav-ings of billions of dollars.

However, a nationally uniform effluent chargeis only slightly more efficient than nationallyuniform technology standards since some sur-face waters are now overprotected while othersare underprotected. Moreover, effluents from

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sources located along critical stretches of a waterbody have substantially greater impacts on waterquality than effluents from sources located else-where. Effluent charges linked to local waterconditions and administered by states in con-junction with effluent permits could be a valua-ble policy tool in improving U.S. water quality.If state governments designed and administeredefficient charges, charges on heavily pollutedrivers might be higher and charges on riversalready meeting water quality goals lower.California, New York, Indiana, Oklahoma,Washington, Colorado, Kentucky, and Arkansasalready levy regulatory fees based on pollutant-discharge permits, mostly to raise revenuesrather than to encourage abatement. Unfor-tunately, however, river basin authorities withfiscal authority to levy effluent charges and tofinance treatment works, which can make evenfiner policy adjustments, are still uncommon inthe United States, despite their success in Europe.

B. Activity Charges

Recreation Fees on the NationalForests and Other Public Lands

Recreational uses of the nation's public landsmay cause environmental damage, dependingon the intensity and density of use. Off-roadvehicles in the arid western regions can leavelong-lasting scars on the land and harm fragilebiota. Recreational boating can generate signifi-cant water pollution. Heavy traffic in some ofthe most popular national parks, such as Yose-mite and Yellowstone, can have diverse envi-ronmental impacts ranging from vehicular airpollution to interference with wildlife habitat.Facilities built to accommodate downhill skiersand other recreational users are also sources ofenvironmental disruption. To foster rational useof these valuable, sometimes unique, resources,user charges on these recreational activitiesshould reflect the costs of environmental mitiga-tion and damage.

User charges on recreational activities can pro-vide public resource managers with more

accurate information and stronger incentives tomanage the public lands to achieve their maxi-mum value in multiple uses. At present, theauthority granted to such agencies as the ForestService to charge recreational fees (except forthe use of such facilities as campsites, lodges,and ski resorts) is severely limited by law.(Bowes and Krutilla, 1989, pp. 18-19) Conse-quently, revenues from recreation in theNational Forests are small relative to those fromtimber sales, even though the aggregate valueof recreational services provided by the nationalforests is much greater than that of the annualtimber harvest. With approximately 250 millionvisitor days annually, at a conservative value ofabout $10 per day of recreational use, thenational forests provide recreational servicesworth $2.5 billion per year, compared to thegross value of timber sales of $800 million in1991.

The Forest Service gets most of its operatingfunds from receipts retained from timber salesunder special provisions for reforestation, brushdisposal, and road construction. Most of itsappropriated funds are also linked primarily totimber management and harvest. In otherwords, in every national forest, even in thosewhere timber production is uneconomic andother non-commodity services are more valua-ble, forest managers are overwhelmingly depen-dent on timber operations for funds. Neitherfunding source is linked to the profitability ornet returns from timber harvests; rather, bothare linked to the volume or gross value of sales.As a result, the paramount use of the nationalforests is timber production, even in regionswhere it consistently brings negative economicand financial returns. (O'Toole, 1990; Repetto,1988)

If recreational and environmental benefitswere reflected in Forest Service budgets as tim-ber benefits are, then forest planning andmanagement would serve those multiple useobjectives more faithfully. To change bureau-cratic incentives, individual national forestmanagers should be granted greater discretionin setting user fees to reflect consumer

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demands and the incremental costs of provid-ing services. They should also be empoweredto set their own output plans for commoditiesand non-commodity uses. At the same time,individual national forests should becomefinancially more dependent on net receiptsfrom all sources and less dependent on Con-gressional appropriations.

Fee structures for natural forests could bedifferentiated by use. Campground fees couldbe retained as they are, but differentiated byforest and site to reflect the intensity ofdemand. Licenses to concessionaires and othercommercial users could be revised to reflect fairmarket value. In addition, special permitscould be sold for wilderness and "wild river"use. Other permit stamps could be sold forhunting and fishing in national forests, assome eastern state governments now dothrough cooperative agreements with the For-est Service. In addition, a general annual entryfee in the form of an easily monitored bumpersticker could be sold at a modest price, allow-ing unlimited recreational uses not covered byany other permit or license. (O'Toole, 1992,pp. 18-21) The Forest Service estimates that ifit collected the full value of the recreational ser-vices it provides, annual revenues would reach$5 billion. Even if fees totalled half thatamount, they would dominate timber revenuesin most of the national forests, creating strongincentives for the Forest Service to accordhigher priority to recreational and environ-mental considerations in forest management.At the same time, fees would sensitize con-sumers to the value of the services the forestsprovide.

C. Product Charges

1. Additional Stratospheric Ozone-Depleting Substances

The U.S. committed itself under the 1987Montreal Protocol to halve consumption of themost ozone-depleting CFCs and halons by2000. In 1990, on the basis of new information

about the pace of stratospheric ozone loss, theU.S. and other signatories agreed to a fasterschedule, completely ceasing use of controlledsubstances by 2000, and added ten additionalCFCs and two other compounds, methyl chlo-roform and carbon tetrachloride, to the list ofsubstances to be rapidly phased out. In addi-tion, the London Revisions identified otherhalons as chemicals of concern and specified alist of hydrochlorofluorocarbons (HCFCs) beingdeveloped as CFC substitutes with lowerozone-depleting potential as "transitional sub-stances" to be used with discretion. The 1990Clean Air Act amendments committed theUnited States to a HCFC phase-out by 2030. In1992, the United States announced a furtherschedule acceleration pegged to a phase-outtarget of 1996.

To encourage users to seek out substitutesand to forestall windfall producer profits asoutput declines, Congress in 1989 enacted anexcise tax on these compounds. The rate oneach compound, reflects its ozone-depletingpotential over its atmospheric lifetime relativeto CFC-11, and is scheduled to rise over time.Exemptions and reductions apply to the quanti-ties of these compounds used in rigid foaminsulation as chemical feedstocks, recycled orexported. Tax rates were revised and the cover-age of the tax was extended in 1990, and taxrates were again raised in 1992. Although U.S.production of CFCs has declined rapidly inrecent years, and it is already 40 percent belowceilings under international agreements, thesetaxes generated revenues exceeding $500 mil-lion in 1991.

However, other ozone-depleting substances,principally halons (compounds containing bro-mine) and HCFCs, are currently not taxed.Since the atmospheric lifetimes and ozone-depleting potentials of these substances aretypically less than those of CFCs, and HCFCsin particular can substitute adequately for CFCsin many uses, they have been regarded as anenvironmentally preferable interim replacementfor banned compounds. Already, substituteshave replaced 10 to 25 percent of CFC

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consumption, despite their four or five-foldhigher prices; their use has risen by 8 to 9percent per year since the mid-1980s and isexpected to continue to rise throughout thisdecade. As a consequence, HCFCs and otherhalons have come under increasing scrutiny.Industries have attempted to ensure thatinvestments in increased capacity in these CFCsubstitutes would not be undermined byregulatory bans, and environmentalists havesought to extend regulatory control over them.The Clean Air Act amendments of 1990required a phase-out of HCFCs by 2030,banned certain applications, and mandatedrecycling.

The excise tax on ozone-depleting substancescould usefully be extended to HCFCs andother ozone-depleting substances. Tax ratescould be based on the same scale of ozonedepletion potential now applied to CFCs andother taxed compounds. This would be a bet-ter approach than banning them at a specifiedfuture date. Extending the tax to these com-pounds, with rising rates over time, wouldspur further innovation, encourage substitu-tions, and would discourage increases in con-sumption. In particular, a tax would dis-criminate between essential and irreplaceableuses on the one hand and those for whichrelatively inexpensive alternatives can be devel-oped and adopted on the other. Projected U.S.uses of HCFCs for 1997 total approximately500 million pounds. Applying tax ratesapplicable in that year and an average ozone-depleting potential of 0.05 yields annual poten-tial U.S. tax revenues of roughly $300 million.

Particularly relevant would be extending thetax to methyl bromide, a biocide used mainlyas an agricultural soil fumigant in the produc-tion of such high-valued crops as strawberriesand ornamental plants. Worldwide productionand sales of methyl bromide rose from 42,000to 63,000 tons between 1984 and 1990. (UNEP,1992) U.S. sales in 1990 totalled approximately62,000,000 pounds. In the short run, methylbromide is 30 to 120 times as potent per atomas chlorine compounds, but because its

atmospheric lifetime is only about 1.5 years, itstotal ozone-depleting potential is only 60 per-cent that of CFC-11. Despite its smallatmospheric concentration, reducing methylbromide emissions would reduce ozone deple-tion significantly over the short term. In termsof reducing peak ozone depletion, expected tobe at its worst in the 1990s, each 10-percentreduction in methyl bromide atmospheric con-centrations would be equivalent to a three-yearadvancement of the current phase-out date.(UNEP, 1991)

A tax approach is particularly suitable forreducing methyl bromide use because someuses have ready substitutes and others do not.In most agricultural uses, for example, croprotation, the use of other soil fumigants, andthe acceptance of higher crop losses are allpossible alternatives. However, in someagricultural uses and in quarantine treatments,acceptable substitutes are unavailable andusers would incur heavy losses if methyl bro-mide consumption were curtailed. Therefore,bans would either impose hardships on someusers, or require complicated discriminatorytreatment of different users. A tax, however,would allow users highly dependent onmethyl bromide continued access to it, withstrong incentives to seek substitutes. At thesame time, it would induce users with accessto satisfactory alternatives to methyl bromideto stop using it. At 1993 tax rates of $2.75 perpound, a tax on methyl bromide would raiseapproximately $60 to $90 million per year inrevenues, depending on the elasticity ofdemand. Moreover, since the tax would raisethe price of methyl bromide substantially, itwould provide strong market incentives toaccelerate methyl bromide's replacement withmore benign substitutes.

2. Agricultural Chemical TaxesSerious ecological and health risks stem from

the use of fertilizers and pesticides in theUnited States. Since only a minor fraction ofthe chemicals applied actually reach theirintended target, applications create a

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potentially large externality. In fact, agricul-tural fertilizers constitute the largest non-pointnutrient source of eutrophication of thenation's surface waters. Nitrates leaching intodrinking water supplies from agricultural fer-tilizer applications are recognized as a substan-tial health risk in some regions. According toa recent EPA survey, 2.4 percent of ruraldomestic wells contain nitrates at concentra-tions exceeding EPA's health advisory level.(EPA, Office of Pesticides and Toxic Sub-stances, National Pesticide Survey: Nitrate,Washington, D.C., 1990)

Pesticides as a group are rated high on thescale of environmental risks, though the50,000 registered herbicides, fungicides, andinsecticides on the market vary widely in tox-icity, persistence, ability to bioaccumulate, orto travel through the environment. Next tothe risks to global environment, for example,EPA's Science Advisory Board ranked pesti-cide exposure among the most serious domes-tic ecological and health risks. (USEPA, 1990b)This confirmed the findings of an earlier EPAeffort to prioritize environmental risks; in it,pesticide exposure was characterized as one ofthe most serious risks with respect to cancer,other health effects, and ecological damages.(USEPA, 1987)

EPA's regulatory efforts to control non-pointsource pollution, described in Section 319 ofthe Clean Water Act, emphasize assessmentsand state-level management programs, buthave had limited impact. Provisions in the1990 Farm Bill extend the priorities of USDA'sConservation Reserve Program to take landout of production to improve water quality,to establish a Wetland Reserve Program, andto offer cost-sharing grants and technicalassistance to farmers developing andimplementing farm-level water-quality plans.But these provisions scarcely counteract thestrong economic incentives in the Farm Billthat induce farmers to retain chemical-dependent farming systems and to pushyields above a market equilibrium level.(Faeth, 1991)

Pesticide regulation under FIFRA has beenone of the most difficult and unsatisfactory ofEPA's programs, largely because EPA wascharged with the almost impossible task ofregulating more than 50,000 products based onover 600 active ingredients. EPA is supposedto compare each chemical's risks and benefitsin each of its uses in each distinct agroecologi-cal region. (Dorfman, 1982) Every risk assess-ment involves lengthy, expensive laboratorytests leading in the end to extrapolations oftoxicity from rats exposed at very high dosesto humansexposed at very low doses. Thehealth risks reduced by eliminating any pesti-cide from use depend on what other pesticideis adopted in its place, making it imperativethat assessments consider relative risks forgroups of (chemically quite different) productswith similar uses. Estimating the agriculturalbenefits of using any pesticide is complicatedby complex ecological responses in the field,such as the emergence of pesticide resistanceand pesticides' tendency to stimulate second-ary pest outbreaks. (National Coalition Againstthe Misuse of Pesticides, 1992) Regulatoryanalysis is carried on through complexadministrative procedures safeguarding therights of all parties, and subject to legal chal-lenge at virtually any point. In view of allthese difficulties, it is not surprising that EPAmanages to register only 10 to 15 new activeingredients per year, and since 1988 has com-pleted reregistration proceedings for only 14 ofthe active 614 ingredients already in use. Evenwhen regulations are completed, unless achemical is totally banned from all significantagricultural uses it is difficult for regulatoryagencies to ensure that farm operators followlabel instructions and restrictions.

Environmental charges could strengthen pes-ticide regulations and water quality programsfor non-point sources. An environmentalcharge on pesticides should be set at severaldifferent rates to reflect the relative riskspresented by different compounds. Risk cate-gories can be constructed from existing rank-ings based on acute toxicity to humans,chronic or long-term health risks, toxicity to

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other non-target species, persistence, solubility,soil absorption, and other relevant characteris-tics. Imposing higher charges on pesticidesentailing higher risks would encourage bothproducers and users to find and adopt safersubstitutes. Of course, EPA should continue toban pesticides that pose unacceptable risklevels. But since the pace of this process is soslow, a supplementary charge system wouldhelp reduce risks in the short run and stimu-late the evolution and adoption of safer meansof pest control over time.

A fertilizer tax would give farmers an incen-tive to use less fertilizer, offsetting incentivesbuilt into commodity programs and otheragricultural supports that push them to usemore. Such a tax would extend the "polluterpays" principle to agriculture, creating a stickto supplement the carrots offered to farmersto participate in non-point source pollution-control programs. Studies suggest that theelasticity of response to a fertilizer tax wouldbe significant in any case, partly becausemany farmers are overusing chemical fer-tilizers, with little or no incremental boost toproduction. If commodity support programsallowed farmers more flexibility in plantingand production decisions, it would be greaterstill. (Hrubovcak, et al., 1990, pp. 208-212)

Several states, including California andIowa, impose fees on fertilizers and pesticides,though the rates per ton are quite low. Vari-ous countries, including Denmark, Sweden,and Austria, also employ such charges.According to estimates by the CongressionalBudget Office, a tax on chemical pesticidesand fertilizers at rates averaging 10 percent advalorem would generate revenues of nearly $1billion per year. Current expenditures on pes-ticides, of which two-thirds is for agriculturaluse for example, are approximately $8 billionper year. Most farm expenditures on pesti-cides are for herbicides for use mostly oncrops subject to commodity support programs,such as corn, wheat and soybeans.

D. Reducing EnvironmentallyDamaging Subsidies and TaxAdvantages

1. Eliminating the Excess of PercentageOver Cost Depreciation for MineralExtraction Activities

Current law allows independent oil and gasproducers, hardrock mining companies, andsome other enterprises that extract non-renew-able resources to deduct certain percentages ofgross revenues from taxable income as deple-tion allowances. Over time, these depletionallowances may exceed the cost of the enter-prises' investments in the development andextraction of the resource—a write-off thatinvestors in other industries never get. Theexcess of percentage depletion over cost deple-tion constitutes a large subsidy to the extractiveindustries, raising returns to investors andincreasing production.

These subsidies have damaging environ-mental impacts. First, they stimulate miningand other extractive activities that have heavylocal and regional environmental impacts. Sec-ond, they stimulate the production of suchtoxic materials as asbestos, lead, mercury, cad-mium, and uranium—all of which qualify forthe highest depletion allowance of 22 percent.Third, since they subsidize the production ofvirgin materials, they depress secondarymaterials markets for iron, aluminum, andother metals, thus working against recyclingprograms. Finally, by subsidizing production offossil fuels, they discourage energy conserva-tion and the development of renewable energysources.

According to the Office of Management andBudget, annual revenue losses from the excessof percentage depletion over cost depreciationin the fuels and non-fuels minerals industrytotal well over $1 billion per year. (US Office ofManagement and Budget, 1992, Ch. 24)

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Eliminating this advantage for all remainingbeneficiaries in the oil and gas industry wouldgenerate additional revenues of $795 million in1993. A similar reform in other mining indus-tries would produce $365 million.

2. Charging Market Value forCommodities Produced on PublicLands

a. Minerals

Hardrock mining on public lands remainssubject to the Mining Law of 1872, whichallows claimants to obtain rights to mineralexploitation—without payment of royalties—ata nominal cost of $2.50 to $5.00 per acre.Patenting of land rights under this law alsoallows private parties to obtain land at a smallfraction of its market value. This federal lar-gesse toward the mining industry contrastssharply with the government's treatment of itspetroleum and gas resources, which are leasedto private developers on the basis of competi-tive bids and which generate substantial royal-ties and other revenue payments.

Like percentage depletion, this giveaway ofpublic mineral resources generates direct andindirect environmental damages, while depriv-ing the Treasury of considerable revenues. Inrecent testimony, a former senior governmentbudget official estimated the potential revenuegain from pricing federal mineral resourcesappropriately to be in the vicinity of $0.6 bil-lion per year. (Rivlin, 1989)

b. Water

Irrigation water supplied by Bureau of Recla-mation projects is heavily subsidized. Theintent of initial legislation was that recipientswould repay the costs of constructing, operat-ing, and maintaining the massive storage andconveyance works over time into a revolvingfund. However, fifty-year, interest-free loanswith ten-year grace periods and amortization athistorical costs, together with creative account-ing that continually defers the repayment

period and allocates much of the costs of multi-purpose projects to flood control and powergeneration, have made a mockery of this inten-tion. The average subsidy on 140 of theBureau's operating projects is estimated to be83 percent of full project costs, and the subsidyon projects under construction is likely torange from 92 to 98 percent. (Repetto, 1986,pp. 15-16) The value of this subsidy exceeds $1billion per year—over $35 per acre-foot ofwater. Worse, it goes to fewer than 6 percentof American farmers, and of these, the largest5 percent garner over half the total benefits.Moreover, this subsidy of storage and deliverycosts is just the tip of the iceberg. The wateritself, for which favored farmers pay essentiallynothing, is worth hundreds of dollars per acrefoot in alternative municipal and industrialuses.

These subsidies have encouraged low-valuedand inefficient applications of water. Indeed,almost half of the water supplied is used toirrigate hay, alfalfa, sorghum, corn, and otherrelatively low-valued crops. Conveyance lossesthrough unlined dirt irrigation canals andditches are high, even while municipal, indus-trial, and recreational water users are hard-pressed to find adequate water supplies.Eliminating even this wastage would provideenough additional water to meet all municipalneeds in the West through the end of the cen-tury. (Moore and Willey, 1991, pp. 775-825)

Severe environmental damages accompanythis economic waste. The production of largeareas of farmland within Bureau of Reclamationproject areas has been impaired by salinization.Mineral-laden drainage waters have poisonedwetlands and destroyed wildlife. Excessivediversions and storage have brought aboutextensive ecological changes that threaten thesurvival of several species.

The western states are moving to encouragewater transfers from subsidized irrigators tomunicipal users whose alternative costs fornew water sources are typically an order ofmagnitude higher than the marginal value of

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water to farmers. Such transfer will reallocatewater to higher-valued uses, while allowingfarmers to cash out the value of their subsidies.Renegotiating Bureau of Reclamation contractsto recover the full capital and operating supplycosts of water would encourage such transfers,while stimulating more efficient water usewithin agriculture. At the same time, it wouldadd approximately $500 million per year to fed-eral revenues.

c. Timber

Most of the Forest Service domain is unsuit-able for commercial timber harvest. TheNational Forest Management Act of 1976instructed that areas unsuitable for timberproduction for economic or physical reasons beremoved from the timber base, but timberoperations, driven by national production tar-gets and pressures from local lumberinginterests, have actually increased in manyforests where they consistently generate less inrevenues than the cost to government of grow-ing and selling the timber. Many of the forestregions where timber sales chronically fail torecover these costs contain thin stands of rela-tively low-valued timber, have slow rates ofregeneration and growth, and require expen-sive road construction on difficult terrain.Despite obscure Forest Service accounting prac-tices, analysts inside and outside governmenthave agreed that below-cost timber sales areprevalent throughout the Rocky Mountainstates, in Alaska, and in the East. (Repetto,1988)

The Forest Service has repeatedly justified itsbelow-cost timber sales by claiming that theygenerate non-timber benefits—among them,easier recreational access, improved wildlifehabitat, and increased water supplies. How-ever, the supposed beneficiaries, includingstate Fish and Game Agencies and associationsof naturalists and outdoor recreational users,vehemently oppose Forest Service claims andlogging plans. They cite destruction of wildlifehabitat, the loss of water quality through soilerosion, the elimination of prized roadless

forest areas, and other adverse environmentalimpacts.

Requiring that the Forest Service establish aminimum bid for all timber sales that wouldrecover the full costs of growing and sellingthe trees, and requiring the Forest Service toimplement the National Forest ManagementAct provisions to eliminate uneconomical forestregions from the timber base, would do muchto eliminate these timber subsidies. A morefundamental reform would also amend thelaws that currently set aside percentages ofgross timber sales revenue for payments to localgovernments and use within the Forest Serviceand would instead base such allocations on netreceipts, including receipts from recreationalfees. This new approach is applicable to graz-ing and mining revenues as well as to timberreceipts, and to the Bureau of Land Manage-ment as well as the Forest Service.

The subsidy implicit in below-cost timbersales has fluctuated with the volume of salesand market prices for logs. It has recently beenestimated at approximately $0.4 billion peryear. (Rivlin, 1989) Charging market prices forall commodities produced from the publicdomain would thus bring the federal Treasuryan additional $1.5 billion per year, while cur-tailing substantial ongoing damages to thenation's environment.

E. ConclusionThese wide-ranging examples demonstrate

the ample opportunities for applying environ-mental charges and reducing environmentallydamaging subsidies. The options discussedhere might generate nearly $40 billion in newrevenues and could have been augmented bymany more examples, as Table 20 suggests.Seizing such opportunities will allow federaland state governments to raise revenues inways that improve economic productivity whilestrengthening environmental protection. At themargin, these revenue options are far moreattractive than conventional taxes on payrolls,incomes, profits, and savings that destroy

83

badly needed economic incentives and reducethe competitiveness of the U.S. economy.Shifting as much as 10 to 15 percent of thetotal federal, state, and local revenue basetoward environmental charges—such as thosedescribed here—would help keep America'seconomy and environment healthy and strong.

Notes for Chapter 51. For a more complete inventory, see US Con-

gress, Joint Committee on Taxation (1990).

2. For a more recent survey of environmentalcharges in other OECD countries, see OECD(1989).

3. To qualify for accelerated (5 year) deprecia-tion for tax purposes, a pollution controlfacility must not significantly increase theoutput capacity or useful life of the plant,nor may it reduce operating costs nor payfor itself through waste recovery! Richard A.Westin and Sanford E. Gaines (1989, p.768)

Robert Repetto is Vice President and Senior Economist at WRI and Director of the Institute's Pro-gram in Economics and Population. Formerly, he was an associate professor of economics at theSchool of Public Health at Harvard University and a member of the economics faculty at Harvard'sCenter for Population Studies. Roger C. Dower is Director of the Climate, Energy and PollutionProgram at WRI. Formerly, he was Chief of the Energy and Environment Unit at the CongressionalBudget Office, U.S. Congress. Before that, he was Research Director at the Environmental LawInstitute. Robin Jenkins was a consultant with WRI, investigating household solid waste collectioncharges. Currently, she is an associate professor of economics at St. Mary's College in St. Mary'sCity, Maryland. Jacqueline Geoghegan was a research assistant in the economics and populationprogram investigating the economic and environmental impacts of congestion taxes. Currently, sheis a doctoral candidate in the Department of Agricultural and Resource Economics at the Universityof California at Berkeley.

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