APPENDIX B

CAPITAL FORMATION OPTIONS TO
FINANCE POLLUTION CONTROL

By

SCOTT C. WHITNEY

Reprinted from

COLUMBIA JOURNAL OF ENVIRONMENTAL LAW

SCHOOL OF LAW, COLUMBIA UNIVERSITY

VOLUME 3, No. 1, FALL 1976

Copyright © 1977 by the Columbia Journal of Environmental Law

Capital Formation Options

to Finance Pollution Control

Scott C. Whitney*

The economic cost of environmental pollution and the cost of implementing far-reaching corrective measures are increasingly recognized as significant national problems.1 Extensive effort has been expended in recent years to analyze and quantify pollution abatement and control costs and forecast capital demands that will be necessary to comply with environmental laws and regulations.2

* Professor of Law, Marshall-Wythe School of Law, College of William & Mary; A.B., University of Nevada, 1949; J.D., Harvard, 1952.

1. See, e.g., COUNCIL ON ENVIRONMENTAL QUALITY, ENVIRONMENTAL QUALITY: THE SIXTH ANNUAL REPORT OF THE COUNCIL ON ENVIRONMENTAL QUALITY 494 (1975) [hereinafter cited as SIXTH ANNUAL REPORT]:

The U.S. economy has been experiencing severe economic problems over the past few years. Inflation, unemployment, and capital scarcity have affected everyone. These difficulties have focused attention on the economic effects of government programs. Environmental programs in particular have come under close scrutiny in their effects on both jobs and prices. The changed economic climate makes it more important than ever to subject these programs to rigorous economic analysis.

Also see COUNCIL ON ENVIRONMENTAL QUALITY, ENVIRONMENTAL QUALITY: The SEVENTH ANNUAL REPORT OF THE COUNCIL ON ENVIRONMENTAL QUALITY 150 (1976) (hereinafter cited as Seventh Annual Report]:

Concern about sufficiency of capital has grown during the last year. Will the economy be able to generate enough capital to make all the investments needed to satisfy our society's many goals-e.g., for a cleaner environment, energy selfsufficiency, more goods and services, and better housing?

See also COUNCIL OF ECONOMIC ADVISORS, ECONOMIC Report of the PRESIDENT 39-47 (1976).

2. See, e.g., U.S. ENVIRONMENTAL PROTECTION AGENCY, THE ECONOMICS OF CLEAN WATER (1973); NATIONAL COMMISSIon on Water QUALITY, STAFF DRAFT REPORT (1975); The Economic Impact of Environmental Regulations: Hearings Before the Joint Economic Comm., Cong. of the U.S., 93d Cong., 2d Sess. (1974); U.S. ENVIRONMENTAL PROTECTION AGENCY, The Cost of CLEAN AIR, ANNUAL REPORT OF THE ADMINISTRATOR OF EPA TO THE CONGRESS IN COMPLIANCE WITH PUBLIC LAW 91-604, THE CLEAN AIR ACT, AS AMENDED (1974); ENERGY & ENVIRONMENT GROUP, OFFICE OF PLANNING & EVALUATION, ENVIRONMENTAL PROTECTION AGENCY, THE ECONOMIC IMPACT OF EPA'S AIR AND WATER REGULATIONS ON THE

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As this analysis has become more sophisticated, environmental costs have been classified into four basic categories: damage costs, avoidance costs, abatement costs, and so-called "transaction" costs.3 Although official concern for pollution abatement costs dates from 1972,4 and although increasingly frequent studies of this problem have subsequently been undertaken,5 it has generally been recognized that this analysis is still in its infancy.6

Despite the difficulties of cost quantification and the recognition that forecast environmental costs are at best approximations, it seems clear that environmental costs will be a major factor affecting the national economy in the foreseeable future. Similarly, it is not feasible at this time to forecast with precision the captial investment that will be required by the private sector during the next decade and beyond to comply with existing federal environmental laws and regulations, and the various state and local requirements. The most recent comprehensive forecast was published by the Council on Environmental Quality (CEQ) in its 1976 Annual Re

ELECTRIC UTILITY INDUSTRY, Vols. I-IV (1975); U.S. Department of COMMERCE: THE EFFECTS OF POLLUTION ON INTERNATIONAL TRADE, Vol. I (1973), Vol. II (1974), Vol. III (1975).

3. COUNCIL ON ENVIRONMENTAL QUALITY, ENVIRONMENTAL QUALITY: THE FOURTH ANNUAL REPORT OF THE COUNCIL ON ENVIRONMENTAL QUALITY 74 (1973). The CEQ was created by Title II of the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. §§ 4321-47 (1970), for the purpose inter alia of developing and recommending programs and policies to the President to foster and promote the improvement of environmental quality. For enumeration of the duties and functions of the CEQ, see id. § 204, 42 U.S.C. § 4344 (1970). Under the CEQ cost classification, damage costs include such items as blighted crops, ill health, corrosion of buildings and the like. Avoidance costs include buying an air or water filtration system or the cost of moving to an unimpacted area. Abatement costs include those resources expended to reduce or eliminate pollution including indirect costs arising from the impact of these expenditures on economic growth, productivity or employment. Transaction costs include the value of resources allocated to research, planning, monitoring and similar activities necessary for pollution abatement.

4. See the summary relating to cost classification in SIXTH ANNUAL REPORT, supra note 1, at 496-532.

5. See note 2 supra.

6. SIXTH ANNUAL REPORT 496-511. For an account of the methodological difficulties of environmental cost quantification, see Whitney, The Trade Act of 1974: Coping with Unequal Environmental Control Costs, 16 B.C. INDUS. & Com. L. Rev. 577, 585-92 (1975). See also ENVIRONMENTAL PROTECTION AGENCY, ENVIRONMENTAL NEWS, THE IMPACT OF ENVIRONMENTAL REGULATIONS ON CAPITAL MARKETS AND ON INDUSTRY CAPITAL-RAISING PROBLEMS 2 (1975) [hereinafter cited as EPA CAPITAL STUDY], in which it is candidly admitted that "EPA analysis of the impacts of capital requirements for pollution control has been quite limited so far and is limited by the state-of-the-art to only modest improvements."

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COLUMBIA JOURNAL OF ENVIRONMENTAL LAW

[3: 42 port. The CEQ estimates incremental pollution control expenditures for the private sector alone during the period 1975-1984 will exceed $300 billion, of which approximately $275 billion will consist of capital investment and capital costs.9

This analysis considers legislative and regulatory options available to cope with future private sector capital requirements to meet both "conventional" and environmental needs. While by no means agreed as to the precise amount of these needs, virtually all studies indicate they will be immense and will place great strain on the national economy. 10

Moreover, it must be recognized that these pollution abatement costs will tend to increase rather than decrease. The as yet unchecked force of inflation is of course one important factor contributing to this problem. More importantly, most existing statutory environmental abatement programs are structured in a way that progressively increases the stringency of environmental requirements and consequently their cost. For example, the incremental cost to achieve national secondary ambient air quality standards will undoubtedly significantly exceed the cost to achieve primary standards. 11 Furthermore, the law requires that once the

7. SEVENTH ANUAL REPORT, supra note 1.

8. Incremental costs are expenditures necessitated by designated federal environmental legislation beyond those expenditures that would have been made absent the legislation. The designated legislation includes air, water, radiation, noise and solid waste. Estimates for land reclamation, strip mining, coastal zone planning, ocean dumping, oil spills, pesticides and other environmental categories are not included. Likewise, the cost of compliance with state and local environmental laws and regulations is not included.

9.

SEVENTH ANNUAL REPORT, supra note 1, at 167, Table 1-37.

10. B. BOSWORTH, J.S. DUESENBERRY, & A.S. CANON, CAPITAL NEEDS IN THE SEVENTIES (1975) (published by the Brookings Institution), the most optimistic study, concludes "[w]e can afford the future, but just barely." The Brookings forecasts are confined to the decade of the Seventies. The methodology of the Brookings forecasts excludes consideration of abatement costs for air pollution, radiation, solid waste, noise, land reclamation, strip mining, pesticides, coastal zone management and other categories including the cost of compliance with state and local programs. The New York Stock Exchange Study, probably the most pessimistic analysis, forecasts an overall capital gap of $650 billion during the period 1974-1985. EPA CAPITAL STUDY, supra note 6, at 4. CEQ in its most recent analysis posed the question, “[w]ill the economy be able to generate enough capital to make all the investments needed to satisfy our society's many goals-e.g. for a cleaner environment, energy self-sufficiency, more goods and services, and better housing?” CEQ noted "the answer is probably no.” Seventh Annual Report, supra note 1, at 150.

11. National primary ambient air quality standards are standards the attainment and maintenance of which are requisite to protect the public heath. National secon

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national ambient air quality standards are attained, they must then be maintained. This maintenance will necessitate an indefinitely ongoing comprehensive nationwide air quality maintenance program. 12 Furthermore, compliance with the judicially enunciated goal of no significant deterioration of the air quality in regions with air cleaner than that required by secondary standards will likewise create increasing direct and indirect incremental costs. 13

The same cost augmentation phenomenon is built into the Federal Water Pollution Control legislation, which likewise envisions implementation of progressively more stringent standards culminating in the goal of eliminating discharges of all pollutants by 1985.14 Like the clean air strategy, maintenance of water quality is required once the mandated goal is achieved. Here too, this maintenance will necessitate costly continued planning and regulatory strategies to accommodate the apparently inevitable national growth while yet adhering to the no discharge requirement. 15

To date no environmental cost forecast methodology has evolved accurate indicia to measure this phenomenon of disproportionately increasing costs, but it is essential to consider this factor when considering what legislative, regulatory or other action is appropriate to devise effective capital formation and/or capital recovery strategies. Before considering possible specific legal-legislative options for capital formation, two basic policy issues must be considered: first, whether it is appropriate for the federal government to assist the

dary ambient air quality standards are standards the attainment and maintenance of which are requisite to protect the public welfare from any known or anticipated adverse effects associated with the presence of such air pollutant in the ambient air. Clean Air Amendments of 1970, §§ 109(b)(1), (2), 42 U.S.C. §§ 1857c-4(b)(1), (2) (1970).

12. Id. § 110, 42 U.S.C. § 1857c-5 (1970).

13. Sierra Club v. Ruckelshaus, 344 F. Supp. 253 (D.D.C. 1972), aff'd, 412 U.S. 541 (1973) (no opinion). See also 39 Fed. Reg. 42510-17 (1974).

14. The Federal Water Pollution Control Act of 1972, 33 U.S.C. §§ 1251-1376 (Supp. V 1975), structures a progressively more stringent control program which requires by July 1, 1977, "the best practicable control technology currently available” and by July 1, 1983, "the best available technology economically achievable" which will result in "reasonable further progress" toward the elimination of all discharges of pollutants by 1985. Id. § 301(b), 33 U.S.C. § 1311(b) (Supp. V 1975).

15. Id. See, e.g., id. § 208, 33 U.S.C. § 1288 (Supp. V 1975) (areawide waste treatment management planning); id. § 209, 33 U.S.C. § 1289 (Supp. V 1975) (basin planning). Other examples of cost augmentation include the increasing cost of federal decision-making arising from judicially expanded NEPA requirements. Current aircraft noise abatement regulations pursuant to the Noise Control Act of 1972, 42 U.S.C. §§ 4901-4918 (Supp. V 1975), likewise involve increased incremental cost.