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Savings from Economic Incentives


The use of economic instruments for managing the environment is increasingly accepted as a useful adjunct to traditional command and control approaches. A recent (1997) report prepared for the US Environmental Protection Agency (EPA) details literally hundreds of applications in the United States at all levels of government. Further uses of economic incentives for managing the environment are being developed on a regular basis. One of the reasons for the interest is the economic savings that economic incentives can provide in achieving any given level of environmental protection. Such savings are widely believed to be of importance at a time of heightened concern with the international economic competitiveness of the United States, the increasing incremental cost of pollution control, and the continuing demand of citizens for a better environment.

If the time has indeed arrived for economic incentives, it is important to develop a comprehensive overview of the potential economic savings from and implementation opportunities available for introducing additional incentives. This report is intended to provide that overview. The conclusion is that there remain opportunities for realizing substantial economic savings in pollution control through the judicious application of economic instruments. These savings are available in both existing and in proposed new programs for environmental improvement.

OPPORTUNITIES FOR COST SAVINGS FROM USE OF ECONOMIC INCENTIVES

Economic incentives have long been advocated by environmental economists as a more efficient means to achieve environmental goals than the present predominantly command and control approach. The following savings are projected to occur in air, water, and land pollution control in the year 2000 without any changes in Federal, state, and local laws, regulations, and programs and the continuation of recent trends in their implementation:

    Medium in Which Incentives Operate
Air
Water
Land
Total
    Projected Savings (billions of 1992 dollars annualized at seven percent)
4.9
2.9
0.6
8.4
    Projected Savings as a Percentage of Total Costs without Savings
8.0
3.8
1.0
4.3

Although in some cases appropriate changes in the relevant legislation would be required, the following additional savings are estimated to be possible in the year 2010 if the most economically efficient incentive programs were instituted (particularly for greenhouse gas emission control):


    Medium in Which Incentives Operate
Air
Water
Land
Total
    Additional Possible Savings (billions of 1992 dollars annualized at seven percent)
17.4
18.6
0.5
36.5
    Additional Possible Savings as a Percentage of Total Costs without Savings
28.6
24.8
0.8
18.8

The $143 billion in total additional savings can be placed in perspective by pointing out that these additional possible savings come to about two percent of gross domestic product. If the projected and the possible additional savings are added together, then the total potential savings would be as follows:

    Medium in Which Incentives Operate
Air
Water
Land
Total
    Total Potential Savings (billions of 1992 dollars annualized at seven percent)
22.2
21.5
1.1
44.8
    Total Potential Savings as a Percentage of Total Costs without Savings
36.6
28.6
1.8
23.1


If the incentives were properly designed, these savings could be achieved with no change in environmental objectives. By 2000, the total costs without savings illustrated are projected to be $156 billion in 1986 dollars and about $194 billion in 1992 dollars.

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