Commentary

Timothy J. Sullivan

Oates' article brings the reader to a summit from which he or she can gain an excellent, and sobering, view of the achievements and the issues affecting environmental policy in the United States. The article assembles information from a wide variety of sources, both government documents and foundation reports, to demonstrate that for $50 billion a year, the United States has achieved modest improvements in air quality and has stopped the rise of deterioration in the quality of lakes and rivers. That seems like a lot of money, but Oates puts the cost of environmental controls in perspective: analysts estimate that this expenditure has caused the average annual growth of output to fall by 0.1 percent per annum.

The article moves downward from this grand picture, to analyze the costs of alternatives to current command and control regulations, most notably effluent fees and a system of marketable pollution permits. In my view, it is in this discussion of effluent fees and marketable permits that this article offers the freshest insights. Although in theory either effluent fees or marketable permits can harness the energies of the market to produce the least-cost abatement of pollution, these alternatives differ substantially on a number of critical political, institutional, and bureaucratic levels. Oates identifies four reasons why permits are superior to fees:

1. Permits promise the regulator more direct control over the level of emissions.

2. Permits avoid the need for constant price readjustments.

3. Permits can readily avoid the staggering redistributional effects that a uniform effluent fee would produce. Achieving the level of abatement of NO₂ now produced in Chicago by a command-and-control strategy costing $66 million per year would require industry to pay effluent charges of $303 million a year. These charges would induce private expenditures of $9 million per year to meet the current level of abatement. Although the effluent fees are transfers rather than costs, these sums are staggering. Their size raises substantial political doubts about the acceptability of effluent fees.

4. Finally, permits are a regulatory instrument familiar to regulators and firms that pollute. Indeed, the EPA requires a permit for almost everything it regulates.

Although Oates hesitates to claim to have demonstrated that economists' hopes for effluent fees are false, any analyst who has read this paper will find the message between the lines daunting: If you choose effluent fees to achieve current air and water quality goals, you will not know in advance what emissions will total; you will need political authority to collect taxes that dwarf the current outlays for pollution control; periodically, you will need to increase these charges—and remember, your agency has no experience in collecting taxes. To a practicing policy analyst, further discussion of effluent fees would seem a costly luxury.

By the conclusion of this article, Oates has descended from the elegance of economic theory into the morass where policy analysts work. He worries about the consequences thin markets and noncompliance might have on his marketable rights proposal. Here ideal solutions meet brutal realities. This is an area of inquiry more familiar to the policy analyst and the regulatory bureaucrat. The perspective of the regulatory practitioner suggests that permits will have value only if a monitoring and enforcement system can protect their value. Marketable permits will require an information system that updates records quickly. Finally, the program will require even better monitoring of air quality to insure that emission rights reflect the actual damage done to an airshed, based on the plant location, topology, and local winds. These tasks are difficult, both on an intellectual and a policy level. Some will even require the hard physical work of climbing smokestacks to check what comes out.

I have been working with Andy Gunther, a graduate student who spent a summer climbing smokestacks for the California Air Resources Board. Gunther participated in a study of air pollution in the Los Angeles and San Francisco airsheds, and I looked over his shoulder. In California, the

Air Resources Board regulates the work of regional air quality management districts, much as the United States Environmental Protection Agency oversees the regulatory programs of states. In brief, the study found that 31.7 percent of the stationary sources in the Los Angeles Basin failed to comply with their permit conditions. In the San Francisco Bay Area only 8.3 percent failed to comply. Gunther sought to explain these drastically different compliance rates for identical regulatory programs. His report analyzed the enforcement and monitoring system used in the two localities. It found that the Los Angeles and San Francisco Air Quality Management Districts differed greatly in the ratio of inspectors to sources, the quality of testing equipment, and the percentage of random inspections. This study holds lessons for proponents of marketable permits. Monitoring compliance with the terms of permits that are routinely exchanged and have a monetary value will create an even tougher task. Before one can tap the energies of the market, one must solve the less exciting problem of enforcement.

Regulation by command-and-control strategies is never easy. It becomes possible only through adoption of a number of shorthand rules and pieces of regulatory folk wisdom. Prominent among the shorthand rules is the 90–10 rule, taken from business. The environmentalist's version is that 90 percent of the pollution is caused by 10 percent of the sources. Of the 200,000 existing stationary sources of air pollution, 23,000 produce 85 percent of all stationary source emissions. Similar numbers hold for the generators of hazardous wastes. This folk wisdom makes gigantic regulatory tasks seem much more manageable. Further, all power plants are more or less the same. Unlike cars, they do not move around. They are maintained by engineers. Not many new ones are built. These folk rules and helpful accidents seduce regulators, many of whom are engineers, into thinking that a direct solution to pollution problems is possible. It is not inconceivable that engineers could review the pollution control technologies and the 23,000 stationary sources in this country and make reasonable recommendations. Oates' presentation, however, suggests that this has not happened.

To counteract the pull of established beliefs, regulators will need a set of rules, often only rules-of-thumb, to guide them in their choices of tools for correcting the market failures that produce pollution. These rules-of-thumb must incorporate an assessment of the market efficiency of each regulatory technique, and an analysis of the political and administrative tasks each technique requires. In the EPA, many regulations are written in a windowless shopping mall in southwest Washington by individuals

whose daily work places them in a regulatory and bureaucratic thicket. The view from the regulation writer's desk is not long. Oates' article provides one rule-of-thumb that can help these regulators address the problems of air and water pollution: consider marketable permits as seriously as you consider engineering solutions. More rules-of-thumb are needed for the tasks that lie ahead.