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POLLUTION CHARGES FOR ENVIRONMENTTAL PROTECTION: A POLICY LINK BETWEEN ENERGY AND ENVIRONMENT

Freshwater sources and oceans have an amazing natural ability to break down some waste materials, but not in the quantities discarded by today' s society. The overload that results eventually puts the ecosystem out of balance. Sometimes nature itself can create these imbalances. But most often our waterways are being polluted by municipal, agricultural and industrial wastes, including many toxic synthetic chemicals which cannot be broken down at all by natural processes. Even in tiny amounts, some of these substances can cause serious harm to the plants and animals that live in or near the water. . | Annu. Rev. Energy Environ. 17 187-2to Copyright 1992 by Annual Reviews Inc. Ail rights reserved POLLUTION CHARGES FOR ENVIRONMENTAL PROTECTION A Policy Link Between Energy and Environment Robert N. Stavins John F. Kennedy School of Government Harvard University Cambridge Massachusetts 02138 and Resources for the Future Washington D.c. 20036 Bradley w. Whitehead McKinsey Company Inc. Cleveland Ohio 44114-1873 KEY WORDS market-based environmental policies economic incentives pollution taxes green taxes incentive-based environmental policies CONTENTS MARKET-BASED INCENTIVES FOR ENVIRONMENTAL PROTECTION. 188 New Environmental Challenges. 188 Traditional Mechanisms Versus Market-Based Incentives. 189 POLLUTION CHARGES WHAT THEY ARE AND HOW THEY WORK . 193 The Mechanics of Pollution Charge Systems . 194 Adoption of Charge Systems . 195 Collected Revenue Utilization. 196 Comparing Charges with Tradeable Permits. 196 APPLICATIONS OF POLLUTION CHARGES. 198 Greenhouse-Gas Reductions . 198 Cleaner Energy Production Environmental Costing at Electric Utilities. 202 Other Applications of Pollution Charges. 204 C0NCLUSION. 207 Stavins is an Associate Professor of Public Policy and a Senior Research Associate Center for Science and International Affairs at the John F. Kennedy School of Government Harvard University and a University Fellow of Resources for the Future Whitehead is a Management Consultant for McKinsey Company Inc. 1 7 188 STAVINS WHITEHEAD MARKET-BASED INCENTIVES FOR ENVIRONMENTAL PROTECTION Environmental awareness is at an all-time high among the public in the United States 1 . In the 1970s such awareness led to landmark legislation to improve the quality of our air land and water. In the 1990s much of this legislation is before the Congress for reauthorization and the nation is poised to address old and new environmental problems. The lessons learned and the limitations imposed by increasingly scarce resources however have altered the perspectives from which .