CHAPTER
10
State Innovation for Environmental Improvements
Experimental Federalism
One of the virtues of the U.S. federal system of government is the ability to allow for geographic differences in policies and experimentation across state lines. But not enough experimentation takes place, because its costs are borne locally while the benefits spread across the country. Mr. President, we urge you to use the power of the federal purse in a “policy auction”—a competition among states and localities for federal funds to implement creative new policies, ones that all other states could learn from and emulate. We particularly urge you to focus the auction on the use of economic incentive-based policy instruments for environmental protection; two applications would be congestion pricing experiments for roads and incentive-based instruments to encourage product stewardship and recycling. The possibility of doing policy experiments is one of the greatest advantages of a federal system, but despite their value, practical barriers prevent many experiments from being implemented.
The Value of Policy Experiments
Policymaking is often a leap in the dark. Despite the most careful analysis, it is impossible to know for sure the effects or the costs of a policy. Policies often have completely unintended consequences. Uncertainty about outcomes also prevents risk-averse policymakers from giving many potentially useful policies a fair hearing.
In a more perfect world, perhaps, there would be a way for policymakers to implement a policy, observe its effects, and then rewind the clock, allowing a fine-tuned policy to be reimplemented at no cost or inconvenience to anyone. Unfortunately, such do-overs are possible only in children’s games and marriage annulments. But the American political system potentially offers the next best thing: a federal structure, in which the central government is supreme but the individual states and local governments still retain significant powers in many policy areas. A federal system permits policies to be tailored to local preferences and conditions, moving government closer to the people, and it allows thoughtful policy experimentation by states or local governments. As Justice Louis Brandeis wrote in a famous Supreme Court opinion 72 years ago, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country” (New State Ice v. Liebman 1932). Following are some examples of such experiments.
■ Worker safety. In 1836, Massachusetts enacted the first child labor law in the United States. Several states followed this example, but it was not until 1938 that Congress enacted legislation that effectively ended child labor in manufacturing.
■ Human rights. Massachusetts was also the first state to outlaw slavery, which the state Supreme Court ruled was incompatible with the state constitution in 1793. The territory of Wyoming was the first place in the country to extend the right to vote to women; when admitted to the Union in 1890, it became the first state to grant female suffrage.
■ Road finance. Oregon imposed the first gasoline tax in 1919. By 1932, when the first federal gasoline tax was authorized, all states had imposed such taxes.
■ Environmental regulation. California implemented the first motor vehicle emissions standards in 1959, anticipating the national government by more than a decade.
■ Land use. New York City enacted the nation’s first comprehensive zoning regulation in 1916. Today few local jurisdictions of any size do not have a zoning ordinance. (Houston, Texas, is the most notable example.)
■ Electricity restructuring. In 1996, California became the first large state, after New Hampshire, to pass legislation opening retail electricity markets to competition and initiating a transition to full deregulation of the price consumers pay for electric energy. Several states, including Massachusetts and New York, followed suit. After a disastrous summer of high prices and rolling blackouts in 2000, California suspended retail competition in 2001, effectively halting all federal efforts to impose retail competition nationwide. Meanwhile, other states remain optimistic that their approach to retail competition will continue to avoid the problems California encountered.
The Supply of Policy Experiments
Despite the numerous examples of interesting state-initiated policy experiments that we can cite, one thing is certain: there have not been enough of them. When a state undertakes a policy intervention of this sort, its citizens bear the risks of a failed experiment, as California did, yet they capture only some of the potential benefits. The policy produces new knowledge of what works and what does not, and this can be used by other states and the federal government to design further policies. The potential value of this information is large, yet few of the information benefits accrue to the state implementing the policy—and paying the price. Other states are likely to want to free–ride. This “market” failure leads to states underexperimenting with new policies.
One thing is certain about state-initiated policy experiments: there have not been enough of them.
Examples of Incentive-Based Policies
Economists have long advocated the use of pricing mechanisms, either directly by taxes or indirectly by construction of artificial markets in permits that are limited in supply, to solve persistent social or economic problems. One particularly compelling example where this approach might work is the imposition of user fees on congested roadways.
Traffic congestion, an inevitable by-product of modern life, is much worse than it has to be. Urban road access is a scarce, valuable resource, yet it is freely accessible to all drivers. Not surprisingly, demand exceeds supply, inevitably leading to lengthy queues, meaning that motorists “pay” for road access even when it appears to be free. But payment in waiting time is an utter waste, whereas payment in road tolls most assuredly is not. Tolls are a revenue source that can be used to provide travel alternatives such as transit, build new roads, or even reduce other taxes.
A more complete explanation of the virtues of road pricing can be found in Chapter 11. Despite these virtues, true congestion pricing—road tolls high enough to appreciably affect use—is uncommon, not only in the United States, but throughout the world. Most examples of successful road-pricing experiments are either “HOT” (high-occupancy/toll) lane experiments, which open up high-occupancy vehicle (HOV) lanes to single drivers willing to pay a toll, or levies on newly constructed lanes. HOT lane experiments are valuable and instructive. To make a real dent in the urban transportation problem, however, pricing reform is needed for the great majority of existing road capacity that is currently free.
Despite its theoretical promise, motorists, and therefore politicians, evidently remain very leery of road pricing. At least part of this leeriness is fear of the unknown. A few real-world experiments could go far toward either allaying these fears or validating them in the most direct possible way.
Another example is using an incentive policy such as a combined product tax and recycling subsidy to reduce solid waste, increase recycling, and promote product stewardship. Recently, managing household waste has become a greater challenge than in the past. After peaking in the early 1990s, recycling rates for many of the products traditionally collected in curbside recycling programs—aluminum cans, PET plastic containers, and glass bottles—have declined. This decline has taken place at the same time that the percentage of the U.S. population with access to curbside recycling has grown. And while these traditional components of the household waste stream are recycled less, the quickening pace of technological change has contributed to a growing number of new products in the waste stream—obsolete computers, cell phones, and other electronic products. Used electronics pose a concern for disposal because of their sheer volume and the fact that they contain hazardous materials. Addressing waste and recycling problems has always fallen to states and localities in the United States; the federal role is minimal. In light of these issues, the time has come for states to be more creative in how they address solid waste and recycling concerns.
One particularly attractive approach for dealing with many waste problems is a combination of an up-front per-unit tax on products and a back-end subsidy, or refund, for recycling. The refund would provide consumers with an incentive to return products for recycling, and the tax should lead to source reduction. If the tax varies with the weight of the product or, perhaps, with the amount of toxic inputs, it would provide an incentive for manufacturers to decrease product weight or substitute away from toxic chemicals that pose a problem at the time of disposal. Research suggests that a tax-and-subsidy policy of this type is a more cost-effective way to reduce waste and promote recycling than many other alternatives, including a so-called advance recycling fee (ARF), used to pay for collection and recycling programs, such as the one considered in the National Electronics Product Stewardship Initiative. And the tax-and-subsidy approach avoids the illegal disposal problems that might occur with disposal fees and landfill bans.
Where combined tax-and-subsidy schemes have been used, they are typically very effective in promoting recycling. For example, states that have deposit-refund programs for beverage containers—so-called bottle bill states—typically achieve higher recycling rates than do states without such programs. The aluminum can recycling rate in 1999 was 80 percent in bottle bill states but only 46 percent in non–bottle bill states. California and several provinces in western Canada have systems for used motor oil and related products such as filters and containers that rely on an up-front fee charged at time of sale, combined with a return incentive paid to collectors of used oil and oil products. The programs in both locations have been very effective, with recycling rates in excess of 70 percent. Lead-acid car batteries and tires, both of which have deposits and refunds applied to them in many states, also have high recycling rates. On the other hand, product-specific recycling programs that fail to provide incentives have met with limited success. Rechargeable batteries are a good example. These are voluntarily recycled by industry, but no incentives are provided for consumers to return them for recycling. We estimate that recycling rates for rechargeable batteries are approximately 12 to 13 percent.
Despite the benefits of incentive-based programs, many states are reluctant to adopt them because of a lack of political will to increase taxes and potential practical difficulties and administrative costs. The waste problem created by many products—particularly new products such as electronics—is becoming widely recognized, but instead of incentive-based policies, states are instituting or proposing bans on particular products in landfills, ARFs that do not vary with product weight or material content and are not accompanied by a return incentive, and so-called producer responsibility schemes mandating that producers provide collection and recycling services for their products.
Implementing policies that combine up-front product fees with subsidies for recycling has some challenges. High transaction costs associated with administering refunds and sorting returned containers by brand have plagued bottle bill programs in several states. California avoids some of these pitfalls by having all containers returned to redemption centers and not requiring brand sorting. Transaction costs can be lowered even more when the tax-and-subsidy system bypasses final consumers and instead pays the refund to collectors, like the usedoil programs do. Collectors in a system such as this have the incentive to collect as much as possible and would be likely to provide incentives to consumers to return products. Tax-and-subsidy policies also face challenges when the products being targeted are durable ones, such as computer monitors or cell phones, or when products include small amounts of hazardous materials. Policies that are set up and implemented differently in different states and applied to a variety of products could provide valuable information to other states thinking of putting such policies in place. They also could provide information about whether the federal government should play a role in policy coordination.
Policies that are set up and implemented differently in different states and applied to a variety of products could provide valuable information to other states thinking of putting such policies in place. They also could provide information about whether the federal government should play a role in policy coordination.
Encouraging State Experiments with Incentive-Based Policies
The very limited use of incentive policies to combat traffic congestion or to encourage recycling indicates that despite the potential payoff, the perceived risks of failure from implementation of these policies are often too great for any state or local politician to take up. If the federal government can persuade a few states or local governments, or even one, to implement experiments in congestion pricing or the use of combined tax-and-subsidy instruments to promote recycling, the knowledge gained will benefit all states.
However, for some policies, it will take a lot of federal persuasion. We know this is true for congestion pricing, because the federal government has tried to get states to adopt experimental road-pricing programs before, with little result. The Department of Transportation began the Congestion (later Value) Pricing Pilot Program in 1991. This program would provide a local Metropolitan Planning Organization (MPO) up to $25 million in planning grants if the plan led to the actual use of road pricing to reduce congestion. An MPO is the local government entity responsible for preparing transportation plans for the metropolitan area, usually consisting of representatives from each of the area’s local governments. The program proved singularly ineffective as a promoter of the use of pricing to ration road access. Although a number of local planning studies led to concrete road-pricing proposals, political opposition to these plans prevented almost all from being implemented.
The federal government has not, to our knowledge, offered financial incentives to states or localities to adopt particular waste and recycling policies. It has, however, put much effort into promoting one incentive-based policy: “pay-as-you-throw” (PAYT) pricing of household solid waste collection and disposal. EPA’s Office of Solid Waste has had an active program since the early 1990s, which includes fact sheets, promotional materials for communities, brochures and videos with advice on how to set up PAYT programs and avoid pitfalls and problems such as illegal dumping, and case studies of communities that have implemented such programs. Although waste reductions have been well documented in PAYT communities, only about 4,000 communities nationwide use this form of pricing.
Recommendations
We recommend that the federal government use a policy auction to encourage states to develop and formulate incentive-based policies to alleviate urban traffic congestion and to promote recycling, and to stimulate other policy experiments as well. The policy auction should include the following key elements:
■ A competitive proposal process. State and local government agencies will be invited to submit proposals for funds to implement actual policy demonstration projects. Because it is difficult to say how much enticement a state or local agency will require to submit a proposal, there should be no limit on the amount requested. Proposals will be judged on the basis of their likely contribution to practical knowledge, their credibility with respect to ultimate implementation, their generalizability to other states or localities, and their budgets.
■ An independent proposal review panel chosen by a committee of qualified experts outside the political process. With the increase in funding suggested here, some safeguards would be needed to ensure that the program does not degenerate into a pork barrel program. To ensure that the proposals are evaluated on a scientific and not a political basis, they should be evaluated by natural and social scientists knowledgeable about the particular subject area. For example, the Transportation Research Board, as a subsidiary of the National Research Council, is the one organization with the expertise, independence, and prestige to evaluate congestion pricing proposals.
■ No transfers of grant moneys (beyond initial planning grants) before the policy begins to take effect. As the whole point is to gain actual experience with the incentive policy, and because decisionmakers in the state or local government agencies responsible for implementing a policy will likely face intense pressure to renege, their feet will need to be held to the fire.
■ Ex post facto evaluation by independent researchers. To get the most out of the experiment and to maximize its credibility, scientific evaluation of outcomes is important. One possibility would be to have the National Academy of Sciences (NAS) convene a group of experts to perform an assessment. NAS has the independence and prestige that would permit a credible assessment; however, the evaluation committee should be unconnected to the committee choosing the applications.
Innovative state policies, such as the use of pricing instruments to reduce congestion or to reduce waste and increase recycling, can be a tough sell. The fact that we have little experience with these instruments in the United States to help inform future policy design is another drawback that contributes to policymakers’ reluctance to try them in the future. The program proposed here will use federal money to break through this logjam.
W.H.
K.L.P.
M.W.