Two current issues illustrate the pitfalls of traditional command-and-control approaches to environmental policies. The first is that of power plants that burn trash to generate electricity and that were constructed as the result of a state law passed a third of a century ago. These require increasing public subsidies to keep operating. The second is a perennial one: government mandates that gasoline contain ethanol. In this case, it is whether the 10 percent federal mandate should be increased to 15 percent.
First, let’s look at the burning issue. It started in 1980 when Minnesota passed a law mandating a hierarchy of actions to deal with solid waste. These included using less, reusing materials and recycling. If these were not possible, waste should be burned to generate electricity. Landfilling it was the last resort. Local officials could not use measures lower in the hierarchy unless higher ones were clearly not feasible.
Sherburne County set up a trash-to-electricity facility in Elk River; Washington and Ramsey counties partnered to establish one in Newport. They required all waste haulers in their counties to dump at these plants, with “tipping fees” set so that, together with revenues from sales of electricity and from recovered recyclables like steel and aluminum, they could cover all costs, including amortization of the initial construction and ongoing operations.
The financial feasibility depended on the counties being able to exercise a monopoly and thus force all haulers to use the facility. This financial apple cart was upset by a 1993 U.S. Supreme Court decision which said haulers had a right to choose to dump at other facilities, including landfills, and to haul to out-of-state disposal facilities.
Without a mandate, these facilities now must compete for business by keeping fees low enough to attract haulers. The shortfall for the Newport plant is made up by the counties paying a $28-per-ton subsidy in addition to the $40 per ton paid by the haulers. This totals more than $8.4 million per year of public money, or about $11 per resident per year in the two counties.
The ethanol-gasoline mandate increase is simpler and better known. Three decades ago, corn-producing states such as Minnesota began imposing the requirement that all gasoline contain 10 percent ethanol. This was presented as a measure that would reduce both pollution and U.S. dependence on imported crude oil. These arguments were debatable from the start, but the mandates had substantial political support in states where corn growers and their suppliers form a significant bloc of the electorate.
The federal government adopted a nationwide mandate in 2007. Complying now requires production of some 14 billion gallons of ethanol from 38 percent of the nation’s corn crop. This has helped increase corn prices and is a factor in the sharp increase in farmland prices.
While the environmental benefits continue to be in contention, the consensus among scientists and economists is that this is a very expensive way to improve air quality compared with alternative measures.
Several lessons are evident in current issues. First of all, legislative bodies are extremely poor at making scientific judgments and weighing the marginal costs and benefits of environmental measures.
The judgment that turning waste into energy was always better for society than simple landfilling had little objective basis.
The 10 percent and proposed 15 percent ethanol content measures have always been nice round numbers driven by political pressures, with no economic or scientific analysis supporting them as being better than any other level, including zero.
A second lesson is that when some specific measure is mandated, people soon make significant investments in necessary facilities such as trash-burning power plants or ethanol distilleries. These now total about $400 million for waste-burning plants in Minnesota and even more for all the ethanol plants. Much of this is owned by local governments, and their officials are loath to mothball obviously expensive facilities constructed in error by their predecessors.
Nationwide, tens of billions of dollars are invested in ethanol plants, with the money coming from large corporations such as Archer Daniels Midland Company and from farmer cooperatives. None of these owners wants to write off a big fraction of their net worth, and both groups have political clout disproportionate to their size.
A third lesson is that specific command-and-control mandates are very vulnerable to new technological and political developments. Few people anticipated the increase in natural gas production now underway; when adopted for truck fleet operations, municipal buses and locomotives, it has the potential to reduce oil use and improve the environment far more than ethanol.
Few anticipated how demand from China would generally drive up agricultural commodity prices. Combined with corn use for ethanol and other non-feed things such as high fructose corn syrup, it has driven corn prices to levels that, by themselves, render many ethanol plants only marginally profitable.
Hardly anyone anticipated the Supreme Court decision that would destroy the ability of waste-burning facilities to amortize their costs through tipping fees passed on to customers of trash haulers. The only alternative to this tax-in-kind is an overt tax.
Economists exhibit rare unanimity in arguing that emissions taxes, as advocated by British economist Arthur Pigou 92 years ago, would be much more effective in improving air quality and reducing the external costs of solid waste disposal. These provide an incentive for people to take measures to reduce the harmful outcomes, while leaving it up to them to find the best method for doing so. Conservative Republican economists argued for this for years and brought liberals around. But now, their own party’s antitax fetish keeps us from improving our collective prosperity with this better alternative.