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4.3. Cost Savings from New Incentive Applications for Water Pollution Control

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Savings from Economic Incentives

Eight published studies listed in Table 2-2 show potential savings from using incentive mechanisms to control water pollution. Some of the studies consider hypothetical effluent fees, while other studies considered the potential impact of effluent credit trading systems. The ratio of command and control costs to those that would be incurred with an incentive approach ranged from a low of 1.12 to a high of 3.13.

For a variety of reasons, effluent trading systems are unlikely to be implemented widely unless trading of unlike pollutants is allowed. The most important constraint appears to be the limited number of water bodies for which there are several dischargers of the same pollutant. [U.S. EPA (May 1992) and U.S. General Accounting Office (1992).] Trading between municipal wastewater treatment plants and nonpoint agricultural sources does appear to have the potential for relatively large cost savings, perhaps on the order of one-third to one-half of projected municipal wastewater expenditures of about $6 billion annually through the 1990s.

If there are to be further major savings in compliance costs from an incentive mechanism for water pollution, the most efficient mechanism probably is an effluent discharge fee. If one assumes average savings of one-third of normal command and control costs, somewhat less than the 40 to 50 percent average savings shown in quantitative studies, and applies this to total forecast pollution control costs for all point source dischargers of $50.7 billion in the year 2000, there exists a potential for reducing environmental compliance costs by some $17 billion per year. Some of this saving could be achieved from more widespread and energetic application of state NPDES fees.

Nonpoint source incentives could produce major savings; however, under present law, nonpoint control costs will remain modest through the year 2000. Several analysts (e.g., Freeman, 1990) have concluded that marginal control costs for conventional pollutants are far lower for nonpoint sources than for point sources, leading them to recommend that any new efforts to control conventional pollutants be focused on nonpoint sources. A number of incentive-based mechanisms potentially are available for nonpoint sources: subsidies for creating wildlife buffer zones along watercourses, fertilizer and pesticide taxes, and trading of nutrient reduction requirements among point and nonpoint sources. Drinking water regulations might be amenable to incentive-based mechanisms but the specifics remain unclear. Consequently no savings are projected for this cost category.

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