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1.3. Types of Economic Incentives Discussed in the Report

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Savings from Economic Incentives


The nation's environmental laws control pollution through a mix of strategies, most of which involve direct regulation of the quantity of pollution allowed by individual sources or the control technology sources must use. This direct regulatory approach to pollution control is termed "command-and-control."

Incentive systems create rewards for preventing or controlling and penalties for increasing one's emissions, effluents, or wastes. Incentive mechanisms can establish a system of rewards and penalties through a variety of specific mechanisms. The following table shows the mechanisms discussed in this report classified according to the time the incentive becomes effective in relation to the time the pollution occurs. Specifically, the table lists the following mechanisms:

(1) Payments based on pollution discharges. Pollution fees, charges, and taxes are payments by polluters based on the quantity of pollutants emitted. They are usually made to government agencies but are sometimes made to private waste disposal companies.
(2) Deposit-refund systems involve payments by potential polluters at the time a product is purchased, which are refunded if the product is disposed of or recycled in specified ways.
(3) Tradeable permit rights allow the transfer of pollution credits and allowances for in-kind or financial compensation.
(4) Information disclosure approaches provide for the release of information related to companies' products or activities, such as data on their emissions or compliance status.
(5) Liability for environmental damage approaches provide for future payment by polluters based on the damages caused by their emissions. A case can be made for including liability for damages to publicly-owned or managed natural resources within category (1) since payments are made to a government agency. It appears easier, however, to group them with other liability approaches.
(6) Payments from government for pollution control subsidies and tax concessions provide financial payments to polluters and tax advantages based on changes in pollution or in return for future pollution control actions.
(7) Extension of private property rights to environmental resources provides incentives for the owners of such rights to prevent pollution of their resource in order to maintain the value of their property.

Incentive Type
Time Incentive Becomes Effective
Dis-
cussed in this Report (see Subject View)
Prior to Time of Pollution
At Time of or as Direct Result of Pollution
Long after Pollution Occurred or Might Have Occurred
    (1) Payments Based on Pollution Discharges
    Fees or Taxes on Inputs to Pollution Producing Processes
    Fees or Taxes on Discharge
    Fees or Taxes on Outputs from Pollution Producing Processes
    (2) Deposit-refund Systems
    Deposits
    Refunds
    (3) Tradeable Permit Rights
    Allowance Trading Systems
    ERC Trading
    ERC Banking
Yes
    (4) Information Disclosure
    Manufacturer- Provided Warnings
    Reports on Incidents
    Disclosure of Past Emissions
Yes
    (5) Liability for Environmental Damage
    Environmental Assurance Bonds
    Superfund Liability for Cleanup; Tort Law for Private Damages; Natural Resource Damages for Public Resources
Yes
    (6) Payments from Government for Pollution Control
    Subsidies for Installing Pollution Control Equipment; Conservation Reserve Payments
    Tax Advantages in Return for Reduced Pollution
No
    (7) Extension of Private Property Rights to Environmental Resources
    Owner Prevents Future Pollution to Avoid Loss
    Owner Charges Polluters for Pollution
    Owner Sues Polluters for Damages to Property
No

Categories (1) through (6) are those identified and used in Carlin (1992). Category (7) was not included in Carlin (1992) because of the lack of examples in the United States but is added here for completeness. The last column of the table shows whether each incentive type is discussed in this report.

The table notes two possible approaches, (6) and (7), that are not discussed in the remainder of this report in the interest of simplifying the analysis. With regard to (7), it can be said that property rights in the United States are primarily creatures of state law, and a variety of legal doctrines affect the ability of states to adjust these boundaries or to alienate public property interests, particularly where these are held in public trust. However, the discussion of pollution fees could apply to privately assessed fees for use of privately held environmental resources. In addition, the report's discussion of liability incentives contem- plates the existence of a privately held right or set of rights (either in traditional forms of property, personal liberty, or some new form of property).

Some incentive mechanisms, generally shown in line (4), establish prices indirectly through market transactions. Within this group are information reporting requirements such as Title III of the Superfund Amendments and Reauthorization Act and California's Proposition 65. Others, such as pollution fees and various trading systems, including EPA's air emission trading program, transferable development rights, and marketable effluent discharge credits, work by directly affecting market prices.

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