Three pollution-control techniques

Historically, three pollution-control techniques have been considered: emission standards, which are an important form of command-and-control measure; emission charges, fees, or taxes; and marketable emission allowances:

An emission standard is simply a legal emissions rate or a limit on the amount of a pollutant an entity can emit. Standards allow pollutant emission levels to be precisely controlled, but they do little or nothing to promote cost minimization and seldom vary with the relative impact of the pollutant.

Emission charges or fees are financial penalties imposed on each unit of emission from a source. In principle, each emission source reduces its emissions to the point where its marginal control costs are equal to the emission charge. This approach thus encourages emission sources to minimize the cost of control even though the regulating body does not know what the control cost is or how it differs from one facility to another. In theory, the emission fee should equal the marginal damage from the emission, i.e., the externality, had it not been internalized by the emission fee. A disadvantage of this approach, as well as the others, is that it does not account for the impact of these fees on the rest of the economy.

One form of emission fee is expressed in the externality values ("adders") used by some PUCs. Those values are used to monetize the external costs of emissions so that they may be considered in decisions to build new electric power plants.

The two principal methods of monetization are calculating damage costs and calculating control (mitigation) costs. Damage cost estimations involve analysis and prediction of four factors: (1) emission quantities; (2) emission concentrations in the receiving medium; (3) the effect of those concentrations on the medium; and (4) the economic value of those effects. All four factors are subject to significant uncertainty.

Because of the difficulty in estimating damage costs, control costs (usually the cost of the most stringent emission control) are sometimes used as a proxy for damage costs. The implicit assumption in control costing is that society controls pollution until the benefits of additional controls would be outweighed by the costs. However, this assumption may not be valid. For instance, criteria air pollutants are controlled to satisfy health-based standards, not some criterion of overall economic efficiency. Furthermore, control costs seldom reflect the variability in damage costs and are thus often poor proxies.

The use of marketable emission allowances permits regulating bodies to precisely control the total level of emissions and also to minimize the costs of control. Under this approach, each source needs an allowance for each unit of emission and the total number of allowances is limited to reflect the desired emission total. Along with technical options, such as changing fuel mixes or retrofitting facilities with pollution control devices, sources can use their marketable allowances to comply with emission regulations. If the operator of a source perceives the value of an allowance to be greater than the costs of retrofitting or switching fuels, the allowance may be saved for future use or sold in the marketplace to the highest bidder. The regulating body has precisely achieved its goal of a certain emission level by issuing the appropriate number of allowances. Because all marginal control costs for the last unit of emission for each source are equal, the total cost of controlling emissions to the desired level has been achieved at minimum cost. A limitation of this approach is the difficulty of agreeing upon the desired emission total. The use of offsets--for example, planting trees to absorb the CO2 that would be emitted by a new fossil-fueled power plant--is similar to an allowance system and is being tried in several States.
Efficient control programs are much more easily developed for uniformly mixed pollutants than for non-uniformly mixed pollutants because emissions of the former have the same potential for damage regardless of their points of release. The policy objective is simply to control the level of total emissions at the lowest possible cost. The control of a nonuniformly mixed pollutant, on the other hand, is much more complicated. In addition to controlling the total quantity of emissions, regulators must also know the location of the emission sources, relevant wind and rain patterns, and existing environmental conditions within the geographic reach of the pollutant. Because of these factors, a single pollutant emitted from different sources may cause different degrees of damage. Emission charges and marketable allowance systems ideally should account for these differences in order to be as efficient as the systems designed for uniformly mixed pollutants. However, the impracticality of developing such designs could lead to regional dislocations.