Field of Green: Exploring Environmental Economics

Don Fullerton considers himself an environmentalist, but he readily concedes that like-minded folks may fervently disagree.

That’s because Fullerton, a visiting professor of finance, is an environmental economist.

“Which is all sort of ironic, because environmentalists tend to hate economists,” he says with a laugh.

But Fullerton explains the divergence in simple terms. He believes that the environmental benefits ought to exceed economic costs of any program to reduce or clean up pollution.

“Environmentalists don’t like that view, because they would always want more pollution abatement. They may believe pollution is inherently wrong, so we should have none of it,” says Fullerton, who arrived at the University of Illinois this fall to join the newly established Center for Business and Public Policy. “That’s not realistic. The only way to have no pollution is to have no economic activity.”

Fullerton has studied how government policies influence consumer behavior in the context of environmental issues. He has focused his research on two hot-button issues: garbage collection and vehicle emissions.

In both spheres, Fullerton has found that government mandates to reduce pollution often fail because governments do not implement the cheapest manner of abatement. For example, costly pollution control equipment may be required on every car, when it could be skipped on cars that are driven very little. In addition, individuals may find ways to get around the mandates, resulting in more environmental damage rather than less.

Making Cents of Waste

Fullerton’s interest in environmental economics was piqued when he saw a Wall Street Journal article 20 years ago about a municipality in Pennsylvania that decided to shun traditional garbage collection and start anew. Instead of collecting a monthly subscription fee, the town initiated a charge based on each bag of garbage collected, assuming that this policy would have the desired effect of reducing pollution and increasing recycling.

But Fullerton found that, in both theory and practice, this isn’t always the case. In one community that changed to the price-per-bag method, he and a graduate student went out into the field and measured the amount of curbside garbage to be collected from 100 households-the weight and the number of bags as well as the weight of the recycling. They measured before the change went into effect and then went back again several months later and repeated the exercise.

What they found was that the number of bags was significantly reduced. In fact, the number of bags fell by 37 percent. However, the weight of each bag increased-so people were simply stuffing more in each bag. The overall weight of their garbage decreased by only 14 percent. And while the amount of recycling went up, the increase was only one-third of the missing garbage amount.

What may account for a lot of the difference is another “market” for garbage-illegal dumping and burning. These illicit practices are difficult to measure, and their ramifications are even more difficult to price in this “market.”

“Yes, a bag of garbage is socially costly,” says Fullerton. “It has external pollution attributes, so many have proposed a charge per bag of garbage. But it is not as costly as that same bag of garbage thrown into the woods or a vacant lot, or thrown out the car window by the side of the road. As soon as you assume that a given bag of garbage is more costly when dumped than when put in a landfill-which must be true- then instead of charging for garbage collection we should be subsidizing it. The policy implications are the exact opposite.”

Fullerton suggests that cities continue municipal garbage service without the price per bag, but market it as a depositrefund system. Instead of bringing those soda bottles back to the store for a mere 10 cents each, this deposit-refund model takes on a more big-picture flavor. When a purchase is made at a store, an extra fee would be collected that would “reflect the social external damages from dumping that item.” The refund then would be “free” collection.

“Cities already do this implicitly when they have sales tax and free collection,” Fullerton says. “The way in which an explicit policy may improve the circumstances a little bit is to have differential rates on products that are more damaging than others.”

Fueling Success

Fullerton sees the regulation of vehicle emissions as a situation analogous to the garbage example, as governments around the world have tried to reduce air pollution by mandating various ways to get people to drive less-and unintended consequences result. Fullerton explains the example of Mexico City, where the government enacted a plan known as “One Day Without a Car,” a program intended to improve air quality in the notoriously dirty city. What it means is that for one day a week, cars with a certain license plate number would not be allowed on the road.

To circumvent this law, families often buy another car- with a different license plate number-usually an older car that has poorer emission controls.

“Mandates certainly can work,” says Fullerton, “but only if the government mandates the cheapest form of abatement. The problem is that the government doesn’t necessarily know what the cheapest forms are, and they usually get it wrong. People have examined these command-and-control mandates, and yes, they can achieve some abatement, but they’re several times more expensive, depending on the program.”

So how do we reduce pollution from vehicle emissions? Just as all garbage pollution can’t be taxed directly-with no way to measure the amount of illegal dumping or burning-Fullerton says that no current mechanism can adequately measure and tax the pollutants an individual puts into the air by driving a car.

“The question, then, is how to design a workable combination of taxes and subsidies: How should policy change the price of each observable driving activity? What should have a higher price, and what should have a lower price? The best pricing would induce the same behaviors you would like to get from an ideal, but unavailable, tax on emissions,” says Fullerton.

His economic analysis shows that: