Pollution Taxes and an Environmental Trust Fund

We should reframe America’s approach to pollution. Instead of addressing pollution through a regulatory regime, we should use pollution charges to allow the market to allocate the scarce resource of clean air, water, and land. A levy would be imposed on polluters proportionate to their pollution.[1] Fines above and beyond the base rate would be collected on those who exceed permitted levels with especially dangerous pollution levels.

That revenue would be dedicated to support the US Federal Government’s broad collection of agencies that monitor, regulate, protect, and restore the environment, reduce the impacts of humans on the environment, and address the problems that arise when we face environmental emergencies or just dealing with the costs of day-to-day pollution. These agencies include the Environmental Protection Agency, the National Oceanic and Atmospheric Administration, the Federal Emergency Management Agency, and large swaths of the Departments of Agriculture, Interior, and Energy among other environmental programs, as well as the Health sector. Estimates of damages from pollution[2] are similar in magnitude to the budgets of the listed government agencies.[3]

As pollution diminishes, funding declines, pollution control and remediation programs would shrink naturally, since they are not needed as much. If pollution rises, the revenue increases, giving the government agencies the resources needed to address the problem and compensate those polluted upon.

A bipartisan Blue Ribbon Commission appointed by the National Academies would be appointed to recommend rates annually based on the best science and economics of the damages that pollution causes (so if avoidance is cheaper than accepting damages it will be undertaken). Any polluter could reduce their taxes by limiting their emissions. Polluters that find that cost-effective will do so. The rates would be phased in over 5 years to allow smooth and economically efficient transitions.

This proposal lowers expenditures on the discretionary budget from general revenue by pulling the listed agencies off the unified budget. This frees up budget resources that could be used for income tax reform, negative income taxes for people with low incomes, or lowering the budget deficit.

The Environmental Trust Fund, supported by a pollution tax, would incentivize the market to determine the best ways to reduce pollution, rather than relying on government regulations and industrial policies ranging from subsidies and loans to tax credits for favored sectors. Internalizing these negative externalities would reward what we want (pollution reduction) and discourage what we don’t (pollution). This would let individuals and organizations figure out best ways to reduce pollution. It would also provide opportunities for significant tax reforms on the general revenue ledger.


[1] For the purposes here pollutants are those that contaminate an environment with manmade wastes. Air pollutants include (but are not limited to) EPA criteria pollutants Pb, SOx, NOx, Hydrocarbons, CO, PM10, PM2.5, as well as ultra fine particulates, and CO2 and other greenhouse gases. Water and land pollution rules would also be established. Other pollutants as defined by the Blue Ribbon Commission would also be appropriate for taxation.

[2] Knittel, Christopher (2012) “Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation” estimates a gas tax on the order $1/gallon would cover the social costs of carbon from cars, and “reduced air pollution would substantially ameliorate the costs of an increased gasoline tax”. This is substantially lower than fuel taxes in many countries. In the US, current gas taxes vary by state but are on the order of $0.40-0.50/gallon (state + federal)

[3] According to the US Energy Information Administration, the US currently consumes about 134b gallons of gasoline annually. http://www.eia.gov/tools/faqs/faq.cfm?id=23&t=10. At $1/gallon dedicated to the ETF, this would raise about $134b (ignoring short run demand response, which is likely on the order of 10%). The actual rates should be determined by the Blue Ribbon Commission. Similar magnitudes of revenue could be raised from pollution taxes on from other economic sectors besides transportation, particularly electricity generation. These funds would be distinct from highway user fees dedicated to road infrastructure.

Current budgets of selected agencies (not all of which are pollution related):