Introduction by Catherine L. Kling
Allen Kneese is commonly regarded as one of the founding intellectual pillars of environmental economics; he helped cement its relevance for policy. Reading the article reproduced here, more than 50 years after it was published, reminds us why. The fundamental insights Kneese clearly articulates about waste discharge into our nation’s waterways, and the need for economic incentives to address the problem, are as true today as in 1970. While the enforcement of point source pollution eventually became consistent enough to force emitters to reduce their pollution, growing evidence suggests that these reductions may have come at a higher cost than necessary. Further, the lack of requirements on so-called “nonpoint” sources of pollution, such as agricultural runoff, has had the sorry but expected result of increasing pollution problems, which in turn has resulted in risks to safe drinking water, increased prevalence of toxic harmful algal blooms, beach closures, and risks to anglers.
Article by Allen V. Kneese
First published in 1970, in Resources no. 34.
The idea of effluent charges as a possible method of controlling water pollution is less familiar in the United States than the alternative approaches of either subsidies or standards, with which we have had more experience. The article that follows is adapted from the testimony of Allen V. Kneese before the Committee on Government Operations of the US House of Representatives on February 6, 1970.
Editor’s note: The US House Committee on Government Operations no longer exists in the same form as in 1970.
Although a number of legislators have made great and sustained efforts to bring about effective water pollution control in the United States, the results have been disappointing. Many authorities seriously doubt that the present strategy can lead to effective management of our water resources.
The strategy is based on two main elements. The first, financial support for the construction of municipal waste treatment plants, was authorized by the Federal Water Pollution Control Act of 1956 and has been continued under subsequent legislation. In 1966, grants totaling $3.4 billion were authorized for the period 1968–71, and it became possible for municipalities to cover up to 55 percent of the costs of treatment plant construction.
The second element is federal enforcement action against individual water dischargers, reinforced by the Water Pollution Control Act of 1965. This act requires that all states set quality standards for their interstate and boundary waters. These standards were to be reviewed by the Secretary of the Interior by mid-1967. Understandably, there were some delays, but for the most part, the requirement has been met.
Each state also was responsible for proposing a program for achieving the standards. These programs were to serve as benchmarks for judging the need for federal enforcement actions. Actually, the government has had authority to bring enforcement proceedings against interstate polluters in the past, but its record of imposing direct regulations on large industries has been dismal, partly because it is difficult and costly to institute enforcement proceedings, and partly because of the political power of the larger industries.
The construction of municipal waste treatment plants has been lagging, since appropriations have fallen far behind authorizations. It has also been asserted that municipalities are holding up construction until federal funds become available.
A recent report by the General Accounting Office is a devastating critique of the scattershot way support has been provided to municipal treatment plants, poor operation of the plants, and overwhelming growth of industrial discharges. In every major river system studied by the General Accounting Office, the conclusion was the same: we have failed to mount a significant attack against the major contributors to pollution. Relying exclusively on the tool of enforcement to remedy this situation would be awkward, expensive, and effective at best only in the short run.
Most of the many proposals to provide federal subsidies for the construction of industrial waste treatment plants have not been put through. This may be fortunate, since subsidies for industrial waste treatment could be less effective than incentives to adopt other waste reduction procedures, such as recycling and byproduct recovery. Moreover, subsidies would diminish the extent to which the costs of using the common property resource are reflected in consumer goods, thus leading to overconsumption of the goods relative to the social cost of their production.
Some industrial plants are connected to municipal systems and benefit from the subsidies for municipal treatment plant construction. Furthermore, the tax reform bill recently passed by Congress would provide for five-year tax amortization of pollution control facilities and, according to recent testimony, would cost the government $400 million a year in forgone revenues.
A weakness of rapid tax amortization is that it cannot help those marginal firms which often serve as the excuse for granting subsidies. In effect, tax write-offs provide most assistance where it is not particularly needed and, unless counteracted by other provisions, permit the death of industrial plants legitimately needing aid.
Several years ago, an alternative strategy for dealing with national water pollution problems received support from economists who had studied the matter. Had it been adopted, our efforts to improve the quality of our national waters would be much further advanced than they are now, and we would be moving into a position to achieve desirable levels of water quality at the least cost to society.
This strategy is based on two main elements. The first rests on the concept that, as far as possible, the waste discharger should bear the cost of the damages his disposal activities impose on the environment, which is the common property of all citizens. The second stems from the knowledge that, in many of our highly developed basins, where pollution problems are concentrated, great savings in costs can be obtained by carrying out a systematic, well-integrated plan of water quality management on a regional basis. This regional plan would extend beyond the treatment of waste waters at particular outfalls.
We must devise ways to make the costs of using national resources a factor in the decisionmaking of industries, local governments, and consumers. The waste-assimilative capacity of our rivers is a valuable asset, but these rivers have alternative uses which conflict directly with waste disposal. Watercourses are essentially unpriced and treated as free goods. This unhappy state of affairs cannot be remedied unless we put a price on waste discharge to watercourses and on the use of other common property resources.
Accordingly, one element of the proposed strategy for water quality management is what may be termed an “effluent charges system.” The proceeds—rental income from a scarce resource—could be used by society for improvement of the environment or in various ways that are beneficial to society. Even more important, the effluent charges would provide an incentive to conserve the use of watercourses for waste discharge.
Careful studies have shown that industries often can reduce waste discharges enormously—and usually at low cost—if they are given a proper incentive to do so. In many instances, the best means of reducing waste discharges are by internal process changes and the recycling of materials that otherwise would be lost.
Similarly, under our present setup, municipalities are paying only a portion of the social costs of disposing waste to streams. The distribution of their payments reflects how much wastewater treatment they have implemented. The effluent charges system would give municipalities an incentive to proceed expeditiously in the treatment of waste.
Another point of some importance is that our present policies put heavy emphasis on the construction of treatment plants, but do not follow through with equal emphasis on operations. Experts point out that most plants operate far below their capabilities. Since the effluent charges system has a deterring effect on what is put into a stream, such a system offers an incentive for the effective operation of existing facilities.
A number of persons have dubbed the effluent charge “a license to pollute”—a cliché which has not contributed to the cause of effective water quality management. It is also sometimes said that effluent charges cannot be implemented because industries do not know precisely what they discharge into watercourses. The latter part of this statement, unfortunately, is true. But it is high time to remedy the situation.
Allen V. Kneese was a senior fellow at Resources for the Future in 1961–2001 and served as the first president of the Association of Environmental and Resource Economists in 1979. He passed away in 2001.