The United States Experience with Economic Incentives for Pollution Control

Over the the last 20 years, and particularly during the past decade, economic incentives have been increasingly used to control pollution and improve environmental and health protection. The 2001 Report assesses the role of economic incentives for controlling environmental pollution and documents hundreds of uses of economic incentives for controlling pollution at all levels of government to both supplement and substitute for traditional regulatory approaches.

The 2001 Report finds two general trends concerning the use of incentives:

1. Increasing diversity of economic incentives used by EPA--Although historically EPA has relied on regulations to reduce pollution and improve the environment, it has begun to use a wide variety of economic incentive mechanisms in recent years. 
2. Increasing application at other levels of government–Dozens of such applications are discussed in the report but there are hundreds more. Both the number of applications and their diversity is growing rapidly at the state and local level. Incentives are particularly useful in controlling pollution that has not already been subjected to traditional forms of regulation.

The 2001 Report also concludes that economic incentives for environmental pollution control:

• Provide a unique contribution to environmental management--In many cases incentives generate benefits beyond what is possible with traditional regulations; sometimes they are applied where traditional regulations might not be possible. They are particularly useful for small and geographically dispersed sources. They can also provide impetus for technological change.
• Provide cost savings relative to traditional regulatory approaches–Demonstrated theoretically, based on at least 40 studies. One study estimates potential savings of widespread use of economic incentives could reach $45 billion annually. On a practical level, acid rain trading savings are at least $700 million annually.
• Have wide applicability to specific environmental problems–Although a wide variety of incentives are available, any particular one may be effective in managing only a fairly narrow range of problems. The report suggests which incentives are most useful for what problems.

Economic incentives are expected to be particularly useful in controlling pollution not subject to regulation For instance, citizens can be encouraged to reduce curbside solid waste by recycling, composting and other means if there is a disposal charge based on the volume of solid waste.

Examples of economic incentives discussed in the report include:

• Trading of sulfur dioxide allowances in the Acid Rain program, which encourages utilities to find least cost compliance strategies;
• Subsidizing farmers and others to conserve habitat and control pollution;
• Basing air emission permit fees on the quantity of emissions and charging for the disposal of industrial effluents in water treatment plants;
• Requiring a deposit on beverage containers to encourage recycling, which now occurs in ten states; many states have a similar system for lead acid batteries;
• Imposing liability for natural resource damages caused by oil and hazardous material spills, a incentive to encourage pollution prevention;
• Encouraging reductions in toxic emissions by broadly disseminating information about emissions through hazard warning labeling and in communities through the annual Toxics Release Inventory; and,
• Promoting voluntary programs such as Energy Star, Waste Wise, XL and other programs that reduce pollution by assisting and rewarding voluntary actions to reduce energy use and limit pollution.

The 2001 Report is an update and extension of the United States portions of a previous 1992 EPA report and a previous 1997 report to EPA including many additional economic incentive instruments. These previous reports included a section on foreign experiences with incentives which is not included in this 2001 report, but in November, 2004 a report on the International Experiences with Economic Incentives for Protecting the Environment was published by EPA.