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4.1. Cost Savings from New Incentive Systems for Air Pollution Control

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Savings from Economic Incentives

This section uses two different methods for making a lower bound estimate of the potential additional savings that would be possible through a wider use of economic incentive mechanisms for the control of air emissions. The first approach is to review studies that model incentive applications. Of the some 25 studies summarized earlier in this report, the average ratio of CAC costs to incentive-based costs is 5.2, indicating that on average an incentive approach would cost about 20 percent as much as a command and control approach. It would be far too optimistic to assume that savings of this magnitude could be achieved unless improvements are incorporated into new and existing economic instruments. Indeed retrospective studies show that the actual savings from incentive applications have fallen well short of the theoretically predicted magnitudes due to higher transactions costs and greater regulatory hurdles than were anticipated. Consequently, one might more realistically assume that incentive-based mechanisms could save 50 percent over command and control approaches for stationary source air pollution control. Mobile source programs might realistically achieve one-half that percentage saving, primarily from greater reliance on incentives to reduce pollution from existing vehicles rather than new vehicles.

Table 3-2A of EPA (1990) estimates that air regulations will result in $42.8 billion expenditures by non-regulatory groups by the year 2000, $28.7 for stationary sources and $14.1 for mobile sources. Using the assumption of average savings of 50 percent in compliance costs for stationary sources and 25 percent for mobile sources, widespread use of incentive-based programs might reduce compliance costs by $14.4 billion for stationary sources and $3.5 billion for mobile sources in the year 2000. Some of these savings could be achieved through aggressive use of incentive provisions in the 1990 Clear Air Act Amendments. More realistically, new amendments that actively promote incentives rather than simply allow their use would be required to achieve these levels of savings.

An alternative method that can be used to check whether these estimates are reasonable is to identify some major areas where incentive-based mechanisms could be applied and calculate the potential savings for these applications. Of necessity, such an approach will neglect a host of relative minor applications whose cumulative impact on costs could nonetheless be quite large. Also, the discussion should not be taken as advocacy of any particular application, rather merely a rough indication of the magnitude of savings in compliance costs that may be achieved. Savings from incentives are estimated to be in the range of about $1.7 billion (possibly somewhat higher due to failure to calculate a few items), rising to a range of $4.1 billion by the year 2000. The following possible new applications could increase the annual savings by the year 2000 by an additional $10 billion:

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