The Greening of America's Taxes: Pollution Charges and Environmental Protection

The views expressed in this paper are those of the authors and publication does not imply their endorsement by CSIA and Harvard University. This paper may be reproduced for personal and classroom use. Any other reproduction is not permitted without written The environmental movement is poised to enter a second generation. For two decades it prompted significant improvements in the quality of our air, water, land, and natural resources, primarily through "command and control" regulations that essentially told firms what pollution control technology to use and how much pollution they could emit. Now, in an era of new environmental challenges and heightened sensitivity to regulatory compliance burdens, there is an emerging awareness that market forces can offer a more powerful, far-reaching, efficient, and democratic tool than centralized regulations for protecting the environment. This paper argues that the progressive challenge for environmentalists in the 1990s is to move toward greater reliance on market-based policies. In particular, our nation can combat many old and new environmental threats with one subset of market-based approaches, called pollution charges or "green charges." Command and control regulations were powerful in the early battles against environmental degradation, but they have begun to reveal many of the same limitations that led to the collapse of command and control economies around the globe. Command and control regulations are often economically inefficient-that is, excessively costly-because they ignore market signals about which firms can reduce emissions most cheaply. Command and control rules can hamper technological innovation by locking firms into outdated pollution control equipment. They ignore important differences among individuals, firms, and regions. And command and control regulations tend to make the environmental debate a closed, technical discussion among bureaucrats and vested interest groups rather than an accessible public dialogue. Market-based policies start with the assumption that the best way to protect the environment is to make it in the daily self-interest of individuals and firms to do so. The key to greater environmental protection, then, is not more centralized rulemaking, but decentralization-by changing the financial incentives that face millions of firms and individuals in their private decisions about what to consume, how to produce, and where to dispose of their wastes. As a result, market-based policies offer many important advantages: • They can enable environmental protection to be pursued at less cost of compliance to private industry, and thereby at less cost to consumers. • They can give firms a …