The Case for Pricing Pollution

New legislation shows how to move it beyond carbon

Last week, the Save our Future Act was introduced in the  Senate. The bill proposes a carbon tax to address climate change and a series of emission fees for local air pollutants. Pricing pollution achieves three goals. First, raising the cost of emissions induces polluters to limit their discharges, resulting in less harm to the environment and public health. Second, such taxes incentivize firms to invest in green technologies to remove pollution from their production processes. Third, emission taxes can produce significant amounts of revenue which can offset distortionary taxes such as those on income. Such an approach, if enacted, would boost the efficiency of the U.S. economy.

Because CO₂ is currently unregulated at the federal level, the carbon tax proposal in the Save Our Future Act makes good economic sense. Emissions of CO₂ comprise a hidden cost. Compelling polluters to face these costs encourages a more efficient allocation of resources. However, the local air pollutants that the Act would price are already regulated in the United States by the Clean Air Act of 1970 and subsequent amendments.  The basis for existing regulations is the following. For decades, research in epidemiology demonstrates that pollutants like nitrogen oxides, sulfur dioxide, and fine particulate matter adversely affect human health. Premature deaths, especially among the elderly, are paramount among the various health effects due to exposure to air pollution. Local air pollution also causes a host of short-term illnesses, reduced agricultural yields, and impaired visibility. 

So, why levy additional fees over and above the rules under the Clean Air Act? Recent research demonstrates that these pollutants still cause large damages in the United States economy and that these impacts are inequitably distributed across racial and ethnic groups. This, despite the fact that the vast majority of areas in the contiguous United States comply with the ambient standards established under the Clean Air Act for these pollutants. In short, the substantial public health burden imposed by these local air pollutants merits additional abatement.

Emission fees provide the right incentive for firms that discharge these substances into the atmosphere. The logic works as well for CO₂ as it does for local air pollutants. Emission fees induce more pollution removal because discharging pollution into the air becomes relatively more expensive. And, to lower costs from the fees, firms will innovate toward products and technologies that embody fewer emissions, which is exactly what we want from a public health and environmental perspective.

How should pollution fees be calibrated? From the perspective of economics and benefit-cost analysis, pollution fees should reflect the incremental damage inflicted by an emission, typically expressed in per-ton or per-pound terms. When faced with such a charge, polluting firms will minimize costs by equating the incremental cost of removing pollution to the fee. This results in an efficient amount of pollution removal. Further, firms that incur these fees will pass some portion of the compliance costs on to consumers in the form of higher prices for goods that embody pollution. By doing so, the fees nudge people away from purchasing pollution-rich goods toward greener goods. These price signals provide a flexible, incentive-based approach to correcting market failures from pollution.

The Act levies fees that are broadly in line with guidance from the literature. Specifically, the CO₂ fee at about $50/ton reflects estimates of the damage caused by each ton of CO₂ emissions across multiple models specifically designed to calculate the monetary damage from CO₂. While some models suggest per-ton damage is higher–and some suggest lower it is lower–the fee proposed by the Act lies at about the average across models. It is a reasonable starting point for calibrating the CO₂ fee, and much better than zero. In addition, existing research notes that as global emissions of CO₂ continue to rise, the incremental harm caused by emissions will rise as well. The price path proposed in the Act reflects this by stipulating a 6 percent annual increase in the fee. 

The proposed emission fees for particulate matter, sulfur dioxide, and nitrogen dioxide are also reasonably set. Unlike CO₂, which is a globally mixed pollutant, emissions of particulate matter, sulfur dioxide, and nitrogen dioxide have regional effects. This means that the impact per ton varies according to where the emissions occur. Discharges in or near big cities cause much larger damages than those occurring in rural areas. However, setting fees for each emission location could be burdensome from an administrative point of view. The proposed fees for these pollutants in the Save Our Future Act reflect national average incremental damages reported in existing research. The fees appropriately reflect the rank ordering of the incremental damages from these three pollutants.  Though many approaches to curtailing the social costs from pollution exist, a well-calibrated emission fee system can do so efficiently – achieving maximum public health and environmental benefits at least cost. Crucially, emission fees, like other strategies to manage pollution, require a robust monitoring and enforcement apparatus. And, new research indicates that a carbon tax of similar magnitude to that proposed in the Act will yield considerable amounts of revenue. This could offset income taxes in a progressive manner. The fee schedules laid out in the Save Our Future Act have a solid foundation in sound economics, epidemiology, and climate science. 

Photo by Ivan Bogdanov on Unsplash