Putting the Right Price on Pollution : By Making Industry Pay Efficiently, Bush Is on Right Track

Early this month, President Bush unveiled his preferred approach to amending the Clean Air Act, arguably the nation’s most important environmental statue.

Reactions to date have focused on the breadth and imaginative nature of his proposals. Indeed, the Administration’s approach would cut by nearly half the emissions of the pollutants responsible for acid rain, impose sweeping controls on sources of hazardous air pollutants and implement a series of measures designed to address air-quality problems in urban areas like Los Angeles, Houston, New York and Chicago. Equally important, much of this would be accomplished through the creative use of economic incentives--primarily the use of tradable emissions permits--as a tool of environmental policy.

Lost in the debate so far has been any mention of the price tag. We’re talking real money here. The Administration pegs the eventual cost of its proposals at $10 billion annually, but it is likely to be more, especially if control measures beyond those envisioned in the plan are required. Since we currently spend about $35 billion a year to comply with all existing air-pollution regulations (and $75 billion for all federal environmental regulation together), the Administration proposal isn’t peanuts.

There is no mention in the Bush proposal of federal economic assistance for those who would bear the brunt of these costs. This is just as it should be. Since 1970, our environmental laws have adhered to the principle known as the “polluter pays”--that is, those responsible for pollution of the air, water or land should bear the costs of any required controls. One way to do this--the approach we have taken so far--is to require polluters to install control equipment to reduce their harmful emissions. In this way, they incur costs for using the scarce assimilative capacity of the environment just as they must pay for scarce labor, capital and raw materials.

But won’t the costs be passed on to consumers? Generally, yes. But this, too, is as it should be. In a sense, we as consumers have benefited economically in the past from the careless disposal of hazardous wastes and excessive discharges of air and water pollutants--we have paid artificially low prices for those products that generate pollution as a byproduct. (Human health and environmental quality also have suffered as a result of this carelessness, of course, and that is precisely why environmental laws have been enacted over the last two decades.) Consumers also will bear these increased costs directly in the form of higher prices for automobiles and other products.

As a result of these cost and price increases, at least two good things happen. First, firms are given an incentive to find nonpolluting ways to manufacture their products--by doing so, they can avoid installing expensive pollution-control equipment and, hence, gain a competitive advantage. Second, consumers get a strong signal--through higher prices--to shift their purchases to other, cleaner products. It is these automatic reactions to Adam Smith’s proverbial “invisible hand” that so excite economists.

What about the favorable profit picture in many of the industries at which the new air-pollution regulations are aimed? Is this another reason to favor the Administration’s proposals? Yes and no. Industry profitability can play a role in influencing the timing of new proposals, but profits alone should not drive the decision to regulate. Even if an industry is making money hand over fist, new regulations should be imposed only if the health and/or environmental benefits are worth more to society than the resources the industry must devote to complying with the rules. Similarly, even a struggling industry should not be spared strict regulation if its pollutants are causing great damage to health and the environment. In some cases, we must be prepared to accept plant shutdowns.

There is one thing we can state unequivocally about environmental regulation, new or old: We ought to take advantage of every opportunity to reduce the costs of meeting the environmental goals on which our society insists. On this count, President Bush’s clean-air plan deserves very high marks indeed. By expanding the use of marketable discharge permits to reduce acid rain and urban smog, individual, municipal and industrial polluters will have the flexibility to select the least expensive means of reducing pollution. In many cases this means that the price tag for air-quality improvements can be cut by as much as 50% while meeting the same environmental goals. We would be crazy not to take advantage of such an opportunity.

The economics of air-quality regulation are extraordinarily complicated. It is often hard to know what regulatory proposals will accomplish, what expenditures will be required of affected industries and what the subsequent impact of these expenditures will be on employment, prices, investment and other important measures of economic well-being. One thing we ought to be clear about is this: We shouldn’t spend $20 billion for air-quality improvements we can get for $10 billion. The Administration’s proposal is a step in the right direction on this count, and it should be the point of departure for subsequent congressional debate.