Another shortcoming of programs based on performance standards is that they provide no inducement for exceeding the standards. If standards are set on the performance of individual smog-control devices there will be no incentive to develop devices exceeding the established standards, and if standards are set on the kind, number, or overall effect of the devices installed on an individual vehicle, there will be no incentive to install additional or more effective devices. The Smog Tax program, on the other hand, would furnish an incentive for continual reduction in pollutant emission, to the extent that the action in question is sufficiently effective in relation to the cost.

The comparison of the proposed Smog Tax program with alternative programs may be summarized in terms of the five objectives listed initially:

(1) The Smog Tax plan would make a two-pronged attack on the smog generated by automobile, not only encouraging all sorts of measures to improve automobile performance, but also encouraging a reduction in the use of automobiles, particularly the smoggier ones, in the Los Angeles basin. It would thereby accomplish more than other proposals toward reducing automobile-emitted pollutants to an acceptable level.

(2) The Smog Tax plan would encourage the widest possible variety of immediate actions to reduce air pollution, rather than, as in most alternative proposals, relying primarily on yet-to-be-developed smog-control devices. Thus a substantial reduction in smog could be achieved soon, and the eventual smog reduction goal could be achieved at an earlier date than by alternative programs. (3) It is difficult to generalize concerning the relative administrative expense required by the Smog Tax program and alternative programs. All require a substantial inspection program. Enforcement would be less of a problem with the Smog Tax program, because inspection is voluntary. Most cars would probably be submitted for inspection, however, so the inspection activities themselves would most likely be comparable. The collection of the Gross Smog Tax and the computation and remittance of rebates could presumably be accomplished with a fairly modest effort. Gross checking and other measures to detect and deter evasion and fraud might require considerable effort. All things considered, the Smog Tax would probably require an administrative effort comparable to that of other plans, but it would have the advantage of bringing in more than enough revenue to pay for itself.

(4) The Smog Tax involves only two types of compulsory measures: (a) all gasoline purchasers must pay the gross Smog Tax, and (b) the dealers must give proper receipts for all gasoline purchases. The individual is not required to have his car inspected, nor is he required to install any device, approved or otherwise, if he doesn't want to. The Smog Tax does, of course, make it advantageous for the individual to take certain kinds of action, but whether or not he takes advantage of the actions is up to him. Few of the alternative proposals would involve as little interference with individual affairs.

(5) The Smog Tax is designed to give the individual the widest possible latitude in choosing those anti-smog actions most appropriate to his personal circumstances. We believe it affords the fairest possible treatment of individuals in different circumstances, with different types of cars, different transportation needs, different driving habits, and different viewpoints. Each individual is penalized according to his output of pollutants. In a program aimed at the significant reduction of air pollutant output, this formula, we believe, is as fair and effective as any that can be derived.

The battle against air and water pollution is going badly, where it is going at all, and if we don't understand why, there's not much hope we will do better from here on.

The environment is, so to speak, common property, owned by everyone, and thus controlled by no one. Those firms and individuals using the environment to dispose of wastes impose costs on people who use the environment for other things, such as living. Yet the waste dischargers who impose these costs are not required to take them into account in their decisionmaking. The use of the environment for waste disposal appears to the dischargers to have a zero price, when in fact the cost may be quite high. Dischargers thus have incentives to overuse the environment for waste disposal. Our present approach to pollution control-enforcing standards and spending public money for abatement systemsfails to correct these perverse incentives.

At present, profit-maximizing firms and tax-minimizing cities and towns have positive incentives to continue to pollute. Federal expenditures do not alter this. And reliance on legal enforcement proceedings has a reverse effect: it rewards firms which can win court delays or carry out long appeals of enforcement orders or violations. This encourages firms to hire lawyers and lobbyists rather than install abatement equipment, and municipalities and firms skimp on necessary operating expenses even if equipment is installed. There is no positive inducement to seek better ways of treating wastes, or alternative production processes which generate fewer wastes, or ways to recycle materials and avoid waste discharges altogether.

1 Mr. Freeman teaches economics at Bowdoin College and is associated with Resources for the Future.

The whole structure can be turned around to work in favor of the environment, however, by a well-designed system of levies on all wastes being dumped into the environment. The charges would be related to the quantity and kind of polluting substance. In essence, these levies become the price of using the common property resource for waste disposal. If waste charges are properly set, they should serve as a powerful incentive to cut down pollution; that is, if polluters choose to reduce their waste output rather than pay the bill. I believe they will. At least that has been the response where municipal water waste treatment plans have imposed charges on industries that were piping their effluent into the plant. Effluent charges have been an integral part of the successful water pollution abatement strategy in the Ruhr Valley in West Germany for some time.

How is the size of the levy to be decided? In principle, the charges should reflect the damage that pollution does to all other users of the environment. We do not know enough yet about the financial cost of these damages to design the optional set of charges. But the quality of air and water can be substantially improved, by having federal and state regulating agencies impose waste charges, and fixing the charges on the basis of the costs of treating wastes at various levels. The costs of treatment tend to rise as the degree of treatment and waste removal increases. Higher charges are necessary to induce higher levels of abatement. A regulatory agency or commission would have to determine for each river or air shed how much reduction in discharges would be required to achieve acceptable standards; it would then set charges accordingly. Charges could be raised where experience showed them to be too low.

Is this practical? Here is not the place to discuss the technical details of automatic monitoring and measurement. But we can provide the broad outlines of an answer. In the case of water pollution from industrial and municipal sources, the answer is clearly yes. The measurement systems are available, and most of the points of discharge have already been identified and cataloged by state and local authorities. Pesticide and fertilizer runoff into the rivers is another matter. This is so diffuse that it isn't feasible at present to identify sources and to measure runoff. And there are unsolved technical problems in continuously measuring some emissions into the air. It may be necessary to rely on estimates of quantities, based on records of materials processed and on periodic samples. Another air problem is the multitude of sources, including automobiles and home heating. However, periodic emissions checks may be used to determine a tax factor to be added on to the price of fuels. In both cars and heating this would provide an incentive for individuals to obtain and maintain the most up-to-date, economically feasible control equipment (or shift to nonpolluting energy sources) and to economize on the use of fuel. For solid wastes, from dumped automobiles to beer cans, the diversity of materials and points of discard pose real problems in designing an incentive system based on charges. Yet charges (which raise the cost of consuming goods which generate large quantities of solid wastes) are still the best hope of inducing a shift away from consumption items of high disposability, like elaborate packaging and nonreturnable bottles, toward greater recycling and materials recovery.

In summary, there are three major reasons for moving toward a system of levies on waste as rapidly as possible. First, where the measurement problems have been worked out, charges will be easier to administer and enforce than any alternative approach; the profit motive replace compulsion as the primary enforcement weapon. Second, a system of charges would fundamentally change the rules of the game under which polluters operate; the incentives for delay and for less than full compliance would be replaced by economic rewards for quick compliance and for searches for new control techniques and new processes. Third, a charge system would be equitable in that it would assign responsibility for the damages of pollution to those who cause them, and would make them responsible for finding the most effective and efficient way to prevent those damages.

Mr. FREEMAN. Appended to that statement I have included materials which may be of interest to the committee. One, which was written about 11 years ago, proposes a smog tax on general air pollution emissions from automobiles and the other written by myself explains in more general terms the economic aspects of an effluent charge.

The testimony so far today that I listened to has dealt largely with technical questions such as what can refineries do? What are the sub

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stitution possibilities between leaded and nonleaded gasoline? I want to turn attention away from the technical issue and toward what public policy instruments can we use to actually obtain what are the socially desired actions?

Constructing a system of legal or administrative or economic devices to get people to do what they would not ordinarily do is really a tricky business and more often than not we tend to fail at it.

The water and air quality legislation are prime examples of our failure to devise systems adequately.

Broadly speaking, the laws dealing with air and water pollution have created the wrong kind of economic incentives. If I can use an analogy, it is similar to installing a stop sign at an intersection which does not create the incentive to stop or drive slow but rather creates the incentive to watch to see if a patrolman is behind a tree.

Similarly with air and water control, firms have hired lawyers and lobbyists to seek delays in the courts and other legal tactics rather than undertaking pollution abatement-hiring lawyers instead of buying the pollution equipment.

It has sometimes been said that pollution control should be considered a normal cost of doing business but I think this really misses the point. Business men are very good at minimizing the costs of doing business and to the extent that you consider pollution control a cost of doing business I think we would have to admit industrial decisionmakers have been very good at minimizing the cost of pollution control-not doing enough here. I think the answer to this problem is make pollution a cost of doing business-in other words, make pollution control profitable. And the way to accomplish this is to establish systems of charges on pollutants whether they be air or water pollutants.

The net effect of this, if charges were established, would be first to create an incentive to treat waste as long as the costs of treatment were less than the cost of the charge. And, of course, an adequate charge system would have to be designed in this way to meet the pollution control objectives.

But, in addition, a system of charges would create incentives in general to recycle materials, to undertake different processes, to seek process change, and to undertake recovery where appropriate.

I realize some of these remarks are not directly pertinent to the lead tax but the final point is that in addition there would be incentives to undertake real research and development in the area of nonpolluting automobiles or in general nonpolluting or lower polluting products. Another aspect of the change in incentives that would be brought about by charges is to make products that cause the most pollution relatively more expensive and thus shift patterns of consumption and demand away from things that cause pollution and toward things that are relatively safe environmentally.

In principle, the determination of the charge would be related to the economic damage associated with the pollution that you were trying to avoid.

Unfortunately in many instances, the economics are not worked out to a point that we could put dollar values on these damages, but this does not mean a system of charges could not be used in any event.

In practice, the charge can be used as simply a device to achieve the politically established environmental standards or goals. When

they are used in this way they can be administratively simpler. They are essentially self-enforcing because they become part of the normal course of doing business rather than a matter for judicial or administration determination. And they will accomplish pollution abatement in the most effective manner by tapping the profit motive and business incentives and harnessing these to the task of pollution control.

I would like to respond to several points that have been brought out in earlier testimony today and on Monday as I read it in the newspaper. Mr. Biemiller of the AFL-CIO brought up the point that a charge on lead such as this would be a "license to pollute for those who can afford to pay the charge."

But in general this would not be true. Some of the evidence being presented today concerning the low success in marketing nonleaded gasolines that have been brought out thus far suggest that consumers are really quite price conscious when they buy gasoline.

The question here is really not how we are going to get the companies to provide nonleaded gasolines. Rather, the question is how are we going to get the consumers to buy it when it is available and utilize it rather than the leaded and high octane gases.

I think the only way to accomplish this is to make leaded gasoline relatively more expensive which is what the proposed lead tax would accomplish.

I think reliance on good intentions and exhortation is not going to be effective in achieving the shift in consumption of gasoline that we should have.

I think if the tax were passed or something very similar, a tax on leaded additives to gasoline, we would see two kinds of responses on the part of consumers and this is what I want to direct attention to.

We would see some tendency to shift to nonleaded gasolines of the same octane rating and we would probably see shifts to lower octane ratings of low lead or no lead gas. I mention this in my prepared statement, I have come across an unfortunately unpublished study which suggests that the cost of shifting to lower octane with existing cars on the road today would be much lower than might have been suspected heretofore.

In that study they found that a simple change in engine timing of about 4 degrees in retarding the spark would enable a car originally designed to run on 100 octane to run on about 95. A car designed to run on regular 94 or 90 octane would run on 88 or 89 octane with no loss in force, in horsepower.

These were dynamometer tests and the loss was of the order of 2 percent. What I am suggesting is the way consumers and car manufacturers would respond to the tax. This would greatly reduce the use of lead and would not impose costs on the petroleum industry anywhere near the order of magnitude they have been suggesting todaythe four and a quarter billion dollars or up to $7 billion in terms of current prices.

I think that figure is based on assumptions which don't reflect what really would be the response of the consumers and manufacturers to such a tax.

The representative of the chamber of commerce on Monday was quoted as saying he thought such a tax would be an undesirable