One way to "internalize" some of the external costs of pollution is for the government to tax pollution. A pollution tax would require that polluting firms pay a tax based on the air, water and land pollution that they generate. This tax would raise the private production cost of a company to include to the social cost of production. In addition, the generated tax revenues could be used by the government to help mitigate the effects of pollution. The main drawback of such a tax is that it would discourage economic activity by increasing costs to the companies. For example, a tax on coal and oil would increase the cost of electricity and gasoline. Taxed companies would be forced to scale back production in response to these higher costs, and investments and employment would suffer. The trick is to set the tax at a level at which economic loss does not exceed the environmental benefits realized.
Tradable Pollution Permits (TPPs) are an alternative to pollution taxes. In 1994, the United States government inaugurated a program to reduce sulfur dioxide emissions by requiring that companies have a permit for each ton of sulfur dioxide they emit. Companies were allocated TPPs based on their historical level of sulfur dioxide emissions. The program allows TPPs to be bought and sold among the companies. Therefore, a company can invest in scrubbers or use more expensive low sulfur coal to reduce its sulfur dioxide emissions and then sell its excess permits, offsetting part of the cost of reducing the pollution.
Cost-benefit analyses
Ideally, one would like to live in a perfect world with zero pollution. Unfortunately, this is not possible with current technology. People drive cars and trucks, and most of these vehicles have internal combustion engines, which emit pollutants. Unless gasoline or diesel powered vehicles are completely banned, that pollution will persist. However, a few electric vehicles are starting to appear on the road, although they are impractical for long distance use or heavy hauling. Obviously, most people are not going to give up their internal combustion engine vehicles in the near future. People generally accept that some pollution is a result of living in a modern society. The critical issue, then, is how much pollution control is economically practical. A cost-benefit analysis provides an estimate of the most economically efficient level of pollution reduction that is practical.
A cost-benefit analysis looks at the social benefits (e.g., health and environmental benefits) that can be derived from pollution reduction versus the cost of achieving that reduction. As the pollution reduction increases, so does the money required to reduce pollution further. It may not be very expensive to clean up the bulk of most pollutants. However, as the reduction in pollutants approaches 100 percent (i.e., zero emissions), the marginal cost of each additional unit of pollution reduction rises dramatically. If public funds are used for pollution control, there is a limit to how much money can be spent before the budgets of other important public services (e.g., police, fire and parks departments) are negatively impacted. A balance must therefore be found between the social benefits of pollution reduction and the cost of pollution reduction. The proper balance between costs and benefits represents the optimum economic level of pollution reduction.
The optimum level is not static, but can change as circumstances change. As technology improves over time, the cost of pollution reduction may decrease. Likewise, as the hazards of pollution become better known, the perceived benefits to be derived from pollution reduction may also increase. In either case, the optimum level of pollution reduction will then increase and a greater level of pollution reduction will be considered economically feasible. The eco-efficiency program at the 3M Corporation is an example of how the optimum level of pollution reduction can be raised through better management and design of manufacturing processes. Over the time period 1990 to 2000, the company reduced its air pollution by 88 percent, water pollution by 82 percent and waste generation by 35 percent.
One problem with using cost-benefit analyses for determining the optimum level of pollution reduction is that it assumes all benefits can be labeled with a price tag. However, aesthetic benefits from pollution reduction cannot be priced, and yet they are just as important as others. The beauty of a clear-running stream and the quiet solitude of a wilderness area cannot be measured in dollars and cents.