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Balancing Economic Growth and Environmental Goals

A monograph published May 1994 by the ACCF Center for Policy Research.
ISBN: 1884032028

Introduction

Sound and effective environmental regulation paired with progrowth tax policies can serve the dual objectives of raising U.S. per capita real income and improving the environment.

The American Council for Capital Formation Center for Policy Research sponsored a symposium to address increasing concerns about the most economically efficient choices to achieve desirable environmental policy goals and encourage economic growth. The Center's objective is to demonstrate to public policy makers, through empirical research, (1) the need to establish environmental regulatory priorities on the basis of actual-as opposed to theoretical-risk of harm, and (2) the need to allocate finite national resources on a similarly rational basis, taking into account the importance of balancing environmental remediation and strong economic growth.

This book is a product of the symposium, held September 29, 1993. It is the tenth volume in the ACCF Center for Policy Research series, "Tax and Environmental Policies and U.S. Economic Growth."

In a new assessment of U.S. waste management policies, University of Cincinnati Economics Professor Haynes C. Goddard notes that much has been written on an impending solid waste management crisis. The critical issue in solid waste management arises in large part from the declining number of operating landfills as tighter operation requirements are imposed upon landfill operators. Along with rising landfill costs, the past and current "panaceas" of incineration and recycling are also confronted by high costs and/or poor markets, respectively, with the result in many areas of the nation that recycling costs twice as much as landfilling and therefore has to be subsidized.

The trends in solid waste management are rising waste generation, rising and increasingly expensive recycling, increased governmental mandates, more costly landfilling and incineration, increased subsidization of recycling, rising resistance to landfill siting, and continued weak markets for separated material. If the United States does not revise its approach to managing solid waste, the same mistakes will be made in the recycling area as were made with incineration. The inevitable effect will be that more of the nation's scarce resources will be misspent, damaging the economy's ability to grow and create employment. It should be clear from current recycling and incinerating difficulties that past policy has made solid waste management more expensive than it needs to be. If solid waste management policy formation continues in the same fashion, given the current economic reality of declining real incomes and fiscal pressure on all levels of government, there is a substantial risk that the public will eventually conclude that environmental protection has simply become too expensive. The result will be a lower level of environmental quality than the nation would like and lower than the nation would otherwise choose given its resources.

Goddard notes that there is a policy that can identify and promote a cost-effective balancing of source reduction, recycling, incineration, and landfilling without entailing direct and costly governmental intervention in production decisions. This policy is variously denoted as user charges, variable rates, unit based pricing, pay-as-you-throw, and bag-and-tag pricing policies for charging the household sector for solid waste management services. Goddard stresses that a properly priced collection and disposal system can substantially reduce waste management costs.

Taking on the idea (strongly held by some in the environmental community) that increased environmental regulation can create additional U.S. jobs and promote economic growth, Massachusetts Institute of Technology Professor Richard Schmalensee's new study provides estimates of the substantial social costs of environmental protection in the United States and shows why attempts to transmute those costs into benefits are invalid. He notes, however, the nonexistence of a green free lunch is not a sign that U.S. environmental standards should be relaxed or abolished. Most environmental programs produce benefits, but whatever the associated benefits are, protecting the environment in the United States is expensive. Pretending that such protection is free risks the adoption of environmental policies that will needlessly slow economic growth and lower U.S. living standards without providing commensurate benefits.

Those who believe that environmental protection is a green free lunch assign great importance to the kinds of positive effects on innovation and competitiveness in world markets, as alluded to in President Clinton's 1993 Earth Day Speech. Schmalensee believes that tighter environmental standards will not have the growth and job-creating potential claimed by some policy makers. While it is true that research on environmental products and environmentally benign technologies stimulated by tight standards can on occasion be profitable, there is no reason to think it is likely to be more profitable on average than the research private firms would have chosen to do without the prod of government regulation. If the United States leads in making standards tough, there is the additional risk-particularly if U.S. standards do not make cost/benefit sense-that foreign governments will not soon adopt similar standards. If they follow with a long lag, U.S. firms may find themselves locked into compliance technologies made obsolete by subsequent research. If they never follow, domestic firms will remain disadvantaged indefinitely.

Environmental protection consumes valuable resources and lowers productivity and living standards, according to Schmalensee's study. Rather than pretend that environmental protection is a green free lunch, we should acknowledge its substantial cost, recognize that this cost is ultimately paid by real people, not abstract corporations, and try to get as much as possible for our money. If, and only if, a proposed environmental program has real substantive benefits that exceed its costs should it be undertaken.

According to a study by Professors William E. Wetzel and Jeffrey E. Sohl of the University of New Hampshire, Superfund liability has had a significant impact on small firms' investment decisions. Their study, based on a survey of 5,000 potentially responsible parties (PRPs), concludes that-given the country's reliance on small firms for new products and new jobs-the impact of Superfund on smaller firms' ability to raise capital and invest in plant and equipment takes on particular significance.

Forty percent of the Superfund survey respondents reported that the terms under which they received bank credit became harsher after they became PRPs. These terms and conditions represent implicit costs that in indirect, nonquantifiable ways impose constraints on management's ability to make otherwise optimal business decisions and/or attract capital from other sources. Forty percent of respondents further stated that PRP status reduced or delayed their investment in plant and equipment. More than a quarter of the small firms reported increased "hurdle rates" (the required rate of return on new investment projects) as a result of becoming a PRP under Superfund. Higher capital costs will translate into less investment and slower economic growth.

Since the late 1970s, small firms have been the primary generators of new jobs in the United States. What can be done to minimize the impact of Superfund status on small firms? Almost 70 percent of respondents felt the current liability system for determining a firm's payments was the major burden of Superfund.A keynote address was given by the Honorable Al Swift (D-WA), who commented on the prospects for Superfund reauthorization in 1994 and discussed his ideas on how to implement more efficient waste management policies. Congressman Swift is chairman of the Energy and Commerce Subcommittee on Transportation and Hazardous Materials.

The ACCF Center for Policy Research is grateful to our presenters and respondents for their contributions that made this symposium and book possible. We are also grateful to the underwriters of our 1993 conference series and this book:

Aetna Life & Casualty; Aldus Corporation; American Business Conference; American Electronics Association; American Energy Alliance; American Insurance Association; American Iron and Steel Institute; American Petroleum Institute; Ask Computers; Autodesk, Inc.; Borland International; Cadence Design Systems; Chemical Manufacturers Association; Computer Associates; E.I. DuPont de Nemours & Co.; EBASCO Services, Inc.: Edison Electric Institute; Exxon Company USA; FMC Corporation; Fidelity Foundation; Grocery Manufacturers Association; Lotus Corporation; Merrill Lynch & Co., Inc.; Microsoft Corporation; National Coal Association; National Food Processors Association; National Soft Drink Association; Nestle USA, Inc.; Novell Corporation; Oracle Corporation; Potomac Electric Power Company; Shell Oil Company; Starr Foundation; Synthetic Organic Chemical Manufacturers Association; Sybase Incorporated; Texaco Philanthropic Foundation, Inc.; Thermo Electron Corporation; Weyerhaeuser Company; WordPerfect Corporation; and Xerox Corporation.

The ACCF Center for Policy Research will continue to focus its attention and resources on economic growth through sound tax and environmental policies. We look forward to sharing new information, analyses, and proposals with you. We welcome your thoughts and inquiries about this and all other ACCF Center for Policy Research programs.

Charls E. Walker, Chairman
Mark Bloomfield, President
Margo Thorning, Director of Research