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3.3.1. Effluent Charge Systems

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Savings from Economic Incentives

Effluent charges are common in the United States and elsewhere. Dischargers to publicly owned treatment plants face charges that are based on volume or volume multiplied by toxicity weights. In 28 of the states, NPDES permit fees for industrial dischargers to surface waters are based on volume or volume and toxicity. Duhl

Indirect discharge and user fees

Fees are imposed on households and businesses for discharges into Publicly Owned Treatment Works (POTWs). Some larger businesses' fees are based not only on water use but also on discharge toxicity. To the extent that discharge fees are included in water consumption bills, they can be difficult to distinguish from water user fees.

Periodic surveys of selected water utilities indicate that water fees are almost always based at least in part on water consumption. The declining block rate structure is becoming less common, the main reason for the shift being the desire to promote water conservation.

This figure indicates that water and wastewater fees have risen significantly during every 2 year period since 1986. These price rises have exceeded inflation.

In addition to water and wastewater charges, stormwater charges have been imposed in a number of areas. Ernst and Young found that the number of utilities with such charges increased significantly from 1992 to 1994. Their use varies significantly across regions: They are used by over half of all utilities surveyed in the West but by none surveyed in the Northeast. In some areas, reduced stormwater fees are assessed in return for measures to promote stormwater management. For more information on such stormwater credits, see Reese (1996).

In some states, water user fees generate revenues for drinking water programs. New Jersey, for example, raises $2.8 million annually (out of a total drinking water program budget of $5 million) from a water use tax of $0.01 per 1,000 gallons. Morandi,et al. (1995), p. 10.

Sims (1977) found that pollutant-based charges provided an incentive for large industrial facilities to reduce discharges. Some studies have found that household water demand elasticity is low in winter but significant in summer, and others have found industrial and agricultural water demand to be sensitive to price. EPA (March 1991) p. 4-6.

Direct Discharge Fees

The Federal Water Pollution Control Act of 1972 provides for the regulation of point source discharges through a system of national effluent standards promulgated by EPA. All point sources must obtain National Pollution Discharge Elimination System (NPDES) permits in order to discharge effluent. EPA has authorized 40 states to issue NPDES permits. In the other ten states, EPA regional offices issue the permits. As of July 1995, about 59,000 municipal and industrial facilities in the United States had received NPDES permits. GAO (January 1996), pp. 1-4.

As shown in the following table, 39 states assessed NPDES permit fees as of December 1993. In 18 of these states, fees varied according to discharge volume, and in an additional 10, fees varied according to discharge volume and toxicity. Unless otherwise stated, the rest of the information in this sub-section on state effluent fees is provided by Duhl (1993). Other criteria sometimes used in setting fees include the purpose of the water use, the receiving water, and the type of discharger. Some states use point or class systems with various criteria to determine different dischargers' fee levels. Fees for POTWs are sometimes based on the size of the population presumed to be connected to the local sewage system.
      States with effluent fees that are flat or vary only according to industry or size of permittee.
      Alabama, Alaska, Delaware, Hawaii, Kentucky, Maine, Massachusetts, Pennsylvania, Rhode Island, Utah, Virginia
      States with effluent fees varying according to discharge volume
      Arizona, Arkansas, Colorado, Connecticut, Florida, Kansas, Minnesota, Missouri, Nevada, New York, North Carolina, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Vermont, Washington
      States with effluent fees varying according to discharge volume and toxicity
      California, Indiana, Louisiana, Maryland, Montana, New Jersey, Oklahoma, Texas, West Virginia, Wisconsin
            Source: Duhl, p. 10.

Examples of state effluent fees: Louisiana, California, and Wisconsin

Although it is beyond the scope of this report to describe all state water effluent fees, examples from Louisiana, California, and Wisconsin should illustrate their characteristics. Louisiana uses water permit fees to fund not only the state permit program but also the activities of the Office of Water Resources of the Department of Environmental Quality. (The legislature no longer provides general revenues to the Office.) The annual permit fee is determined by a worksheet assigning points on the basis of 1) facility complexity, 2) flow volume and type, 3) pollutants released, 4) heat load, 5) potential public health threat, and 6) major/minor facility designation. The points are multiplied by a rate factor of $97.50 per point for municipal facilities and $170.63 per point for industrial facilities to determine total annual fees. The minimum annual fee is $227.50, and the maximum annual fee is $90,000. In addition to annual fees, Louisiana imposes application fees for new, modified, or reissued permits. In most cases, these fees are 20% of the annual fee.

In California, NPDES annual fees are based on the threat to water quality and the complexity of the permit. There are three categories for each characteristic: I, II, and III for water quality threat and a, b, and c for permit complexity. Permittees with a I-a rating, with the greatest threat to water quality and the most complex permits, pay the highest fees, $10,000 a year. III-c permittees pay the lowest fees, $400 a year. These fees fund State Water Board programs.

In addition to the NPDES permit fees, California charges Bay Protection and Toxic Cleanup fees. This fee structure is similar to that of the NPDES permits except that it is also applied to other sources such as storm drains, boat construction and repair facilities, marinas, dredging operations, and beach replenishment activities. Another difference is that its revenues fund the Bay Protection and Toxic Cleanup Program designed to identify hot spots, develop a water quality database, and help coordinate water policy. Bay Protection and Toxic Cleanup fees range from $300 for III-c permittees to $11,000 for I-a permittees. Dredging operations are charged an annual fee of up to $15,000. The fee schedule is posted on the Internet by the California Water Resources Control Board.

The Wisconsin effluent fee system is believed to have potential incentive effects. Since the fee rate per pound of pollutant is inversely related to the permit limit for the pollutant, the most harmful pollutants are taxed at the highest rate. Pollutant loadings are calculated on the basis of flow and concentration information contained in wastewater monitoring reports. Polluters are thereby encouraged to reduce both the quantity and the toxicity of pollutant releases.

The primary purpose of NPDES permit fees is to raise revenue, especially for the permitting program, which explains why fees are often based on permit complexity. In a number of states, fees are set to attain revenue targets.

A secondary purpose is to discourage water pollution. Although the incentive effect of water effluent fees in the United States has not been comprehensively studied, several factors limit the likelihood of a strong impact. In some cases, fees are based not on actual discharge characteristics but rather on proxies for discharge data. Moreover, some fee structures place dischargers into classes for the purposes of discharge volume and/or toxicity and charge the same fees for all volume and toxicity levels within given classes. In such cases, polluters have no incentive to limit discharges unless they can move from one class to another. Finally, the charges are often modest relative to control costs. As of 1993, the largest effluent fees in the United States, paid by two facilities in New Jersey, amounted to $702,812, and most states had maximum fee levels of less than $100,000. For large facilities, annual effluent control costs typically exceed $5 million.

Very limited information is available concerning the impact of these fee systems on the volume or toxicity of industrial discharges. Simms found that pollutant-based charges provide an incentive for large industrial facilities to reduce effluents. Several studies cited earlier in this report have modeled the potential savings from effluent charge systems, finding possible savings of 20 percent to 50 percent or more.

Cost savings from existing state NPDES permit charge systems are likely to be small because the charge levels are low relative to incremental control costs. Nonetheless there could be small but measurable impacts. State NPDES charge systems apply in 28 states, with an emphasis on states with greater than average industrial activity. Thus of the $40 billion spent annually on water pollution control in the mid-1990s ($50 billion by 2000), about $30 billion takes place in states with NPDES charge systems. The NPDES charge systems might affect as much as 20% of those expenditures and result in savings of 25% of that 20%. Thus a plausible estimate of the savings attrributable to the state NPDES charge systems is $1.5 billion By the year 2000, assuming no change in policy, savings would approximate $2 billion annually.

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