Market responds to pollution controls

October 24, 1997|By Eban Goodstein and Hart Hodges

GLOBAL WARMING: Scientists warn of apocalyptic damage if the world's greenhouse gas emissions (mostly from coal, gas and oil burning) are not regulated, and industry predicts apocalyptic costs if they are.

Academic and government economists have generally estimated that costs will be more manageable than that. But when the stakes seem so high, whom are we to believe?

Actually, history provides some answers. What it shows is that invariably industry representatives wildly overestimate the costs

of proposed environmental regulations. More surprisingly, academic and government economists consistently do, too.

The forecasters routinely ignore a primary economic lesson: Markets cut costs through innovation.

From A (asbestos) to V (vinyl chloride), the story's been the same. When benzene emissions were regulated, industry developed a process that substituted other chemicals for benzene and virtually eliminated emission control costs.

When it was proposed that chlorofluorocarbons (CFCs) be phased out, substitutes were not available. But industry was able to identify and adopt substitutes within two years.

Or take the repeated experience of the steel industry. Originally, consultants to the Occupational Safety and Health Administration (OSHA) estimated that three steel firms they studied would have to spend $34 million in annual operating costs and $93 million on capital equipment to comply with OSHA's 1976 safety standard for coke ovens.

A later study by Arthur Andersen determined that the three firms actually spent between $5 million and $7 million in 1977 to comply with the standard, and only $1 million to $2 million on capital expenditures.

In the late 1980s, coke production again came under regulatory scrutiny, when Clean Air Act amendments were proposed to control toxic emissions. Robert Hahn, a well-known environmental economist, studied the issue and reported that if the amendments passed, at least 15,000 coke oven jobs would be lost.

Because the pollution control technologies available at the time seemed to be quite expensive, Mr. Hahn assumed that regulating air toxins would simply shut down much of the industry.

The amendments did pass in 1990. Indeed, the bill was in most respects more restrictive on air toxins than the one on which Mr. Hahn had based his huge job loss estimate. The legislation also authorized retraining funds for displaced workers.

Yet in the almost seven years since, the government has found no workers from shut-down coke oven plants who need adjustment assistance. Between 1992 and 1995, production in the coke and (closely related) blast furnace industries actually increased.

New processes

When industry is required to lower pollution, it usually doesn't just slap a filter on an existing process. Like the coke industry, it often invents new processes and new technology.

Of course, it is impossible for economists to predict the specifics of how technology will evolve. But basing cost predictions on scenarios that assume no technical evolution is guaranteed to produce gross overestimates.

Indeed, innovative technologies sometimes produce not just a cheaper cleanup than predicted but also large cost reductions compared to current production practices.

In the late 1980s, for example, when the international phase-out of ozone-destroying CFCs got under way, a company called Nortel began looking for substitutes. The company, which had used the chemicals as a cleaning agent, invested $1 million to purchase and employ new hardware.

Once the redesigned system was in place, however, Nortel found that it actually saved $4 million in chemical waste-disposal costs and CFC purchases.

In the global warming debate, there is a minority opinion among economists that reducing greenhouse gas emissions will actually very, very cheap, and in the long run, even profitable.

The reasons? Existing energy efficiency technologies can help the United States break its addiction to cheap oil without too much pain. And within a decade or two, renewable fuel sources -- coupled with efficiently redesigned technologies -- will be cheaper than oil or coal are today.

In this view, the sooner we redirect the market into a serious search for alternatives to fossil fuels, the richer we will be in the future. These analysts may not be as far off as people think.

At a bare minimum, experience shows that when it comes to reducing pollution emissions at the source, the cost will almost certainly be substantially lower than we expect.

On the other hand, as the Superfund program for cleaning up toxic contamination has demonstrated most dramatically, cleaning up the environment after the damage is already done invariably costs far more than expected. The message should be clear to those now negotiating a global warming accord.

The authors wrote this article for the latest issue of The American Prospect magazine.

Pub Date: 10/24/97

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