The Price of Pollution

The Clean Air Act of 1990 provides a novel way to reduce air pollution with economic incentives: tradable emissions permits. In their simplest form, each firm in an air basin can emit a certain amount of pollution; before it exceeds that limit, the company must buy permits from firms that emit less than their permitted amount. However, the prices set for the permits could make the Environmental Protection Agency a powerful new taxing authority.

The EPA will set emissions standards for individual air basins. State environmental authorities will then enforce the standards. If a particular basin consistently fails to meet its goals, then the state agency can charge violating companies a per-ton emissions fee. The fees are designed both to reduce pollution and to pay for implementing the emissions plan. State agencies keep any fees they collect.

But if states don't develop plans to implement the standards, the EPA can draw up its own plans and collect the fees. And whatever the EPA collects, it keeps.

The fees—which start at $25 per ton of pollutant—won't necessarily vary from basin to basin: In a truly market-based system, the marginal cost of pollution in Los Angeles would be greater than that in Seattle. The flat rate leads J. Andrew Hoemer of the Tax Foundation in Washington, D.C., to conclude that "the fee appears to be primarily a revenue-producing device."

Since only Congress has the constitutional authority to levy taxes, legal challenges to any fee structure will probably follow. At least one other federal agency—the Federal Deposit Insurance Corp.—assesses charges that aren't explicitly user fees. But FDIC premiums aren't intended to turn a profit for the agency.

Legal challenges may focus on the pricing mechanism the EPA uses. If the agency can demonstrate that its fees reflect the marginal costs of pollution or the costs of implementing the program, the fees may stand. But the courts could reject fees that are seen as arbitrary or as an easy source of revenue for the agency.