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ment system, which they are not providing, and now dump it into the river. We do not seem to have a way as a practical matter to force them to clean up the worst problem that there is. But, we will take some small businessman and we are going to put him out of business,

Mr. AGEE. Yes; I think your observations are quite correct. But, we have not had experience with taking legal action against municipalities. There is a 75 percent grant from the Federal Government for support for municipalities in building waste facilities, and many States also have a grant program now, probably half of them.

Mr. SMITII. Gentlemen, one other question on that, and then I will yield to Mrs. Fenwick. Cities are still forcing people off of septic tanks that are working very well, and, in fact, better than their sewage systems because, in many cases, they do not have the capacity. Are you getting into that at this point at all? In other words, it is a backward step.

Mr. AGEE. I hope what you say is not true, but I am afraid it is or you would not say it. It is probably happening in some cases, but I do not think it is generally happening.

What we have in the administration is the use of construction grant money and each State has an allotment, if you will, and they develop on a priority basis where these moneys should be spent. We have, as a matter of priority, been encourging the States to use that money to treat waste rather than to build collection sewers.

Subsurface sewage disposal facilities, septic tanks, are very, very low on our priority list, and as we note that States have these on their priority list, we encourage the States to take them off.

Mr. SMITH. Of course, the sediment determines whether in some cases you cannot have septic tanks, but in other cases where they work perfectly well, they are being forced off the septic tanks to something really less satisfactory from an environmental standpoint. And then if somebody's septic tank does not work one day, the health officer can be out there and shut that house down. But, there is really nothing you can do about the municipal system that does not adequately take care of the sewage. They just pour it into the river.

Mr. AGEE. Yes, sir.
Mr. SMITII. Mrs. Fenwick?

Mrs. FENWICK. I think you are so right, Mr. Chairman. I do not know how many millions of dollars are going out of those two towers in New York City, raw sewage into the Hudson every single day. And I am sure you have read about it in the papers just as I have. It goes right out from those two towers at the World Trade Center right into the Hudson River.

I wanted to ask you specifically what happens to the small business, are they liable to a citizens suit if they are operating under your guidelines or your direction, or does your order and your temporary deferment because of good faith and special reasons, such as you have outlined, protect them from a citizens suit?

Mr. AGEE. It is my understanding-and I am not a lawyer, so if I am wrong, I would like the opportunity to correct it for the record but it is my understanding that they would not be protected from a citizens suit if they do not have a permit and we have failed to issue

them one for any reason; they would still be liable to a citizens suit for not having a permit. We have recognized this; but because of the workload, we have not been able to get around to all of the smaller ones. But, if a citizen institutes a suit, we have 60 days to issue them a permit in order to get relief from it. So they would have some protection but there still could be a citizens suit.

Mrs. FENWICK. No, but I am interested in, suppose, in other words, a little business applies and the date is clear as to when they apply, and you, because of being understaffed and not being able to get around to issuing the permit, as I understand it, they are then liable to a citizens suit. But when that happens, they will notify you, most probably and you will issue a permit and that would protect them?

Mr. AGEE. Yes; it does. Mrs. FENWICK. So, in other words, if they had been lucky and one of your people was in the neighborhood and could get in, and they were operating under a permit, even if it was unpleasing to the neighbors, they would still be protected from a citizens suit?

Mr. AGEE. Well, a citizen could sue, but they would be protected, I think, so long as they were meeting the requirements that were laid down.

Mrs. FENWICK. That you laid down. That is good. Thank you.
Mr. SMITH. Counsel has some questions.

Mr. POWERS. I notice that in the submission that you made for the record, this Economic Impact Study that was submitted to the Appropriations Committee last November, there is a table on page 36 which projects pollution abatement expenditures for all industries during 1973, $4.9 billion and a similar figure of $6.5 billion for 1974. Were these figures derived as a result of a study that I understand that EPA made in connection with the Chase Econometrics?

Mr. AGEE. I defer to Mr. Brands on that question, if I may.
Mr. BRANDS. Excuse me one moment. Is this the economic impact ?

Mr. Powers. Right. There are numbers in the lower right-hand corner that somebody has penned in. It is table 2.

Mr. BRANDS. Forty-two!
Mr. POWERS. Roman II-5.

Mr. Brands. I do not seem to be able to find that. I am sorry. Now, your question was, are these the costs that were used in conjunction with the joint Chase Econometrics EPA study?

Mr. POWERS. Right. Is that where those figures were derived from? The footnote cites the Department of Commerce, I believe.

Mr. BRANDS. These particular cost numbers are not numbers that are included in the Chase Econometrics/EPA analysis. These are derived, as indicated, from the Department of Commerce surveys. However, the numbers are very close, in fact, for these particular years to those costs we used in the Chase Econometrics study. As you probably are aware, the Chase Econometrics analysis is for a 10-year period. It incorporates the real expenditures for 1973 and 1974 and the expected expenditures for the remaining 8 years, and then tries to assess the impact of those expenditures on the macroeconomic situation such things as what happens to GNP, what happens to employment, what happens to inflation because of the need for these kinds of pollution abatement expenditures.

Mr. POWERS. Would it be possible to submit a copy of that study with its 10-year projections to the committee? Mr. BRANDS. Yes, it would. [Information subsequently received follows:]

THE MACROECONOMIC IMPACTS OF FEDERAL POLLUTION CONTROL PROGRAMS

(By Chase Econometric Associates, Inc., Bala Cynwyd, Pa.)

(C'ndertaken for the Council on Environmental Quality and the Environmental

Protection Agency, January 1975)

FOREWORD

This analysis of the macroeconomic impact of pollution control expenditures was sponsored by CEQ and EPA as part of a continuing effort to assess the impact of environmental programs on the economy. Further studies on this issue are expected to be released this year.

The analysis is based uopn CEQ/EPA estimates of "incremental abatement costs" associated with current Federal air and water pollution control legislation. These costs are defined as the public and private expenditures expected to be made as a result of Federal environmental legislation which would not have been made in the absence of this legislation. The methodology and data sources used in estimating these costs are described in the fifth annual report of the CEQ.*

The cost estimates are primarily based on the assumption that the deadlines and standards established in the Clean Air Act (as amended) and the Federal Water Pollution Control Act (as amended) will be achieved. They, therefore, show a significant peaking prior to 1978. There is some evidence that these deadlines will not all be met, and that some expenditures will be delayed beyond 1978. In this case the macroeconomic effects of the programs would likely be less than projected in these analyses.

However, the cost estimates do not fully include the costs associated with meeting the 1983 standards established by the 1972 amendments to the Federal Water Pollution Control Act, and therefore, the actual macroeconomic impacts at the end of the decade 1973–82 may be greater than projected. It should also be noted that the initial computer runs for this study were made in the fall of 1974 and hence some of the baseline forecasts do not completely reflect subsequent changes in economic conditions.

Further macroeconomic analyses of this type are expected to be undertaken in the future as the abatement cost estimates are changed.

EDWIN H. CLARK, CEQ.

Roy N. GAMSE, EPA. January 1975.

INTRODUCTION

This study represents an updating and continuation of the work done in previous years by Chase Econometrics for the Environmental Protection Agency (EPA) and the Council on Environmental Quality (CEQ) in assessing the macroeconomic impact of Federal environmental programs. The analysis uses abatement cost estimates for the period 1973–1982 supplied by EPA and CEQ for air and water pollution abatement; these figures are given in Table 1. The estimates include capital investment, annualized capital costs, and operating and maintenance costs for each of the years in the period of analysis, and are disaggregated by two-digit industry. The cost estimates are consistent with the “incremental abatement costs" estimates published in the CEQ 1974 annual report.

The analysis was performed using the Chase Econometrics macroeconomic and input/output models, which are linked together into a single solution

*The Council on Environmental Quality, Environmental Quality—1974 (U.S. Government Printing Office, 1974), Anpendix 1 to Chapter 2.

1 The Economic Impacts of Meeting Exhaust Emission Standards, 1971-1990, October, 1971 ; The Economic Impact of Pollution Control Upon the General Economy, October, 1972 : The Economic Impact of Pollution Control : Macroeconomic and Industry Reports, July, 1973.

algorithm. The Chase model system thus allows analysis of both the impacts that different industries have on one another and on the interaction between pollution control expenditures and general economic factors such as the rate of growth, inflation, unemployment, and financial markets.

Most of the analysis is based upon the EPA/CEQ estimated level and timing of costs superimposed on a general cyclical economic scenario taken from a recent Chase Econometrics ten-year forecast. The impacts of the pollution control expenditures are estimated by comparing the economic forecasts including these expenditures with a forecast which is similar in every respect except that it. excludes such additional environmental expenditures. It should be noted, however, that the inclusion of these expenditures involves several sets of adjust. ments to the model, which are discussed in greater detail in the Methodology and Assumptions section. However, an additional 11 simulations were also calculated using different cost estimates, alternative assumptions about the underlying economic scenario, the level of expenditures, and their timing over the tenyear period. These alternative scenarios are discussed in more detail later in this report.

PRINCIPAL CONCLUSIONS Impact on Inflation

By 1978, when the bulk of the incremental investment in the industrial sector is complete, the wholesale price index will be 3.0% higher, the implicit GNP defator will be 1.9% higher, and the consumer price index will be 1.2% higher than would have been the case in the absence of pollution control expenditures. These correspond to an average annual rate of increase of 0.6% for the WPI, 0.4% for the GNP deflator, and 0.24% for the CPI over this period.

In the latter half of the 1973--1982 decade the effect on prices is reduced. By 1982 the cumulative price differentials are only 2.4%, 0.9%, and 0.2%. This reduction in the price differentials results from a substantial reduction in investment and, in part, to the incremental slowdown in the economy. Thus, when averaged over the decade, the WPI increases 0.2% more, the GNP deflator 0.1% more, and the CPI 0.02% more with pollution control expenditures.

The largest single-year increments occur in 1976, when the WPI rises 1.8% more and the GNP deflator 0.9% more because of pollution control expenditures. For the CPI, the largest single-year differential is in 1977, when it rises 0.6% more than it otherwise would have. Impact on Economic Growth

The stimulus of increased expenditures on pollution control growth in the early years of the decade is projecied to raise the rate of economic growth above what it would have otherwise been through 1976. The maximum differential in the rate of growth occurs in 1975, when constant dollar GNP will be 1.6% higher with pollution control expenditures. In the latter half of the decade, however, low levels of pollution control investment combined with a higher rate of inflation leads to slower economic growth. By 1979 real GNP is projected to be 2.0% below the baseline forecast. This difference gradually diminishes and by 1982 the real GNP ends up virtually the same in both forecasts. Impact on Unemployment

In keeping with the pattern of overall economic growth, the unemployment rate is 0.4% lower in 1975 and 0.3% lower in 1976 than it otherwise would have heen. However, it gradually rises to a level of 0.4% above the baseline forecast hy 1979. The difference gradually decreases and returns almost to zero by 1982. Investment

The cost estimates provided by EPA/CEQ show incremental pollution control investments amounting to approximately 5% of total plant and equipment expenditures through 1976. This investment is estimated to result in somewhat lower levels of other types of investment, the substitution taking place approximately at a rate of $0.40 reduction in all other private investment for every $1.00 of investment in pollution control plant and equipment.” However, the housing sector usually accounts for the majority of the reduced investment because of its greater sensitivity to the cost and arailability of borrowed funds. This impact depends very much on the particular fiscal and monetary policy being pursued

2 This result is based on a number of simulations performed with the Chase Econometrics macro model under different assumptions about underlying economic conditions.

by the government. The combined effects of slower economic growth, greater credit stringency, and the increased cost of capital reduce annual investment in plant and equipment some 4.8% below the baseline level in 1979; this difference declines to 2.5% by 1982. Housing starts decline by as much as 15.3% in 1978, although this difference disappears by the end of the forecast period.

POLLUTION ABATEMENT Costs The cost estimates used in this analysis are consistent with the most recent CEQ estimates of “incremental abatement costs” being published in its 1974 annual report. The CEQ defines "incremental” abatement costs as expeditures made to satisfy the requirements of Federal environmental legislation beyond what would have been spent for pollution control in the absence of this legislation. Some industries are shown to have negative investment for air pollution in the years following 1978, which means that the firms in those industries would have undertaken certain investment for pollution control in any case, but did so sooner because of Federal legislation.

The cost estimates, which are predominantly based upon cost estimates provided in the 1974 edition of The Cost of Clean Air and the 1973 edition of The Economics of Clean Water, are summarized in Table I. Those figures were made available to Chase Econometrics for 15 two-digit industries in the manufacturing sector, utilities, and public sector investment. Very small expenditures which were also given for agriculture and mining were combined into the appropriate manufacturing category. These figures were given on an annual basis for the years 1973 to 1982 and were separated into expenditures for air pollution and water pollution abtement. The estimates included investment cost, annual operation and maintenance costs, and total annual costs. Annual costs include depreciation, interest charges, and operating and maintenance expenditures. In addition, figures were supplied for the cost of meeting mobile source emission standards for automobiles,

TABLE 1.-ESTIMATED INCREMENTAL POLLUTION CONTROL EXPENDITURES, 1973-82

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73

24,098

23, 984

15,963

16,865

28, 908

16, 146

1,999

Total fixed source Mobile source emission con

trols.

10,900

21,150

20, 370

53, 280

1 Inciudes feedlots and grain handling.
2 Includes coal cleaning and natural gas production.
3 Includes residential commercial/industrial heating.
Note.-The definitions of investment and annual costs are given on p. 3.

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