fiber, but how are its hundreds of specifications to be selected and related to price differences and performance differences in the fibers? The answer to this question depends upon a comparison of the environmental costs, including disposal costs and pollution costs, between virgin paper production and secondary paper production. Comparison of total costs, private and environmental, indicate that a considerable shift toward secondary fiber is justifiable.

DEPOSIT SYSTEMS

The failure to include disposal cost in a product's price encourages too much material flow through the economy and permits the composition of waste flow to shift toward environmentally harmful materials. The price system would provide better signals if a tax could be imposed upon the final owner of each product, equaling the cost of disposal and varying according to the method of disposal. The tax might be a penny or so for a person who disposed of a beverage container in a public trash can and considerably higher for another who littered the same container on a highway.

Clearly such fine tuning of the tax system is impossible, for there is no way to administer or police such a scheme. There are, however, two rough approximations of a disposal tax conditioned upon disposal method. The first is a regulatory method. Littering is outlawed. If a beverage container is disposed of in a trash can the tax is zero; if the container is thrown on the highway the tax is the chance of being caught, paying a fine and perhaps being ordered to pick up a mile's worth of roadside litter. Unfortunately this chance is virtually zero, so that the $50 or $100 fines for littering have very little effect. Undoubtedly littering is one of the nation's most common crimes with one of the lowest conviction rates.

The second approximation to a disposal tax conditional on disposal method is a deposit system. Suppose you buy a beverage and pay a five cent deposit on the container. If the container is subsequently littered, you have in effect paid a five cent disposal fee (besides bearing the faint risk of a littering fine). On the other hand, if you return the bottle, there is no cost to society for picking up the litter or collecting an added volume of municipal solid waste and correspondingly a zero disposal tax.

It is sometimes argued that a deposit system on containers-the most common form of the system-is a piecemeal policy and that the solid waste problem should be solved with broad policies. However, the 60 odd billion beverage containers produced annually constitute roughly 4% of the volume of residential and commercial solid waste and 60% of the volume (not item count) of the litter.24 Though indeed piecemeal, deposit systems are the best approximation to a conditional disposal tax and have the virtue of being self administrating. It may in fact. turn out that deposit systems are one of the best ways to handle materials which have a "negative price" in parts of their flow cycles and which, in consequence, have a tendency to leak into the environment. Other materials, such as automobiles and automotive crankcase oil, come readily to mind as materials well suited for deposit systems.

Bingham and Mulligan, The Beverage Container Problem: Analysis and Recommenda tions, USEPA. September 1972, pp. 17-35. Both the number of containers produced and the container fraction of solid waste are growing.

Deposit systems are so popular that several hundred bills have been proposed on state and local levels in the past few years. Understandably container manufacturers have fought the bills with the result that deposit systems are in effect in only a few areas. Of the laws in existence, in Oregon, in Oberlin, Ohio, and in British Columbia, the Oregon experiment is perhaps the most important. The Oregon law is a two tier system. A beverage distributor collects a deposit for each container of beer or soft drink sold to the retailer. The retailer in turn collects a deposit from the consumer. Upon return of the container to the retailer the deposit is returned to the consumer. And upon the return of the container to the distributor the deposit is returned to the retailer. Pull tabs are outlawed and there is an incentive to market containers interchangeable among different beverage companies.

The basic arguments used by container manufacturers, national brewers, and the Soft Drink Association are that: (1) people's littering behavior won't be changed by an economic incentive of a few cents; (2) people prefer the convenience of one-way containers and won't switch to returnables even if the latter are cheaper; (3) mandatory deposit systems are unconstitutional because they are discriminatory, deny due process and impose an undue burden on interstate commerce; (4) mandatory deposit laws will destroy the beverage industries; (5) and containers are a small part of both the solid waste problem and the litter problem.

The constitutionality of deposit systems has been upheld in Oregon, although an appeal of that decision is pending.25 It is also interesting to note that in the thirties deposit systems were mandatory in several states. The Oregon law, which has been in effect since October, 1972, appears to be working. The Oregon Liquor Control Commission reports that total beer sales have been largely unaffected while there has been a massive shift from cans to bottles (cans also require a refund). In a litter survey the Oregon State Highway Department reported that the volume of littered beverage containers fell by 76% from October 1, 1972, before the law, to February 1, 1973, and, interestingly, that other forms of litter fell even more.

Data are still unavailable on the number of refills that can be expected per container. Hannon estimated that with an average of fifteen trips per bottle there would be energy saving of 75% in a returnable bottle system compared with a throwaway system.26 Folk estimated that a deposit system would spread employment and increase it, in the aggregate.27 In British Columbia, where there has been a two cent deposit for several years, the return rate is reported to be 94%.

25 The bottle bill was upheld in the Circuit Court, Oregon, by Judge Val Sloper, September 1. 1972.

26 Hannon. Bruce, "System Energy and Recycling: A Study of the Beverage Industry." Center for Advanced Computation Document No. 23, Univ. of Illinois, January 5, 1972. Folk. Hugh, "Employment Effects of the Mandatory (Illinois) Deposit Regulation" Illinois Institute for Environmental Quality, 189 W. Madison, Chicago, Illinois, January,

POLICY OPTIONS

INTRODUCTION

The following policy options will be taken up roughly in an order established by the flow chart in figure 1. The flows indicated below by capital letters refer to figure 1.

ON SOLID WASTES IN MUNICIPAL DUMPS AND ENVIRONMENT (D)

For the past few years, there have been several proposals which would, in effect, extend the percentage depletion allowance to secondary materials. One proposal would allow tax deductions equal to percentages of gross sales value of secondary material bought by manufacturers. Since the deduction is calculated on sales value, it is equivalent to a price subsidy just as is percentage depletion on primary materials. The percentage rates for deduction were set equal to percentage depletion rates on corresponding material. In place of capital gains taxation for primary paper, the bill offered an 18% deduction for secondary paper fiber.

Unlike the percentage depletion deduction for primary materials, the proposed deduction has no 50% of net income limitation. When discovery depletion, the forerunner of percentage depletion, was first in effect, there was no limit for it either. However, after a few years it became clear that oil companies not only could offset their entire taxable income from oil with the depletion deduction but also could have deductions left over to offset income from other sources. Congress first. imposed a 100% of net income limitation in order to prevent the deduction from sheltering income not associated with mineral extraction, and then imposed a 50% of net income limitation in order to have oil companies pay at least some tax.

One trade association of secondary materials has supported the proposal to extend the percentage depletion allowance to secondary materials, while another trade association of secondary materials criticized it because it would provide large windfall gains to users of home and prompt scrap who were recycling anyway. (The deduction was not limited to "mining urban ore" (D), but applied to E and G as well.) EPA was also concerned that the largest benefits would flow to steel companies already using home scrap and paper companies already using forest product residues.

The intention of the bill was to neutralize the misallocation of the percentage depletion allowance by spreading its benefits to scrap materials. There are three problems with this idea to improve allocational patterns. As was discussed above, part of the misallocation of the percentage depletion is that it encourages too much material throughput. Extending the deduction to secondary materials increases the misallocation by encouraging still more throughput. If flows H and I, and consequently waste flows A, B, and C, are already too large from subsidies on extraction these flows will be further increased by subsidizing the flow of D.

P

The result of trying to offset the effect of the depletion allowance by extending it to secondary materials is illustrated in figure 4. With

no subsidy, total quantity of material flow is s, of which s2 is scrap and s1 virgin material. With a subsidy for virgin materials only, the virgin material supply curve shifts to B', the total supply curve to C', and total throughput is increased to ss. When the subsidy is extended to scrap, the scrap supply curve shifts to A", the total supply curve to C" and throughput is again increased, this time to s. Compared to the initial situation with no subsidies, both scrap and virgin material have increased, scrap by (S3-S2) and virgin material by (s-S1). By increasing the subsidy on scrap, it might be possible to decrease virgin material extraction at the expense of further increased throughput and eventual solid waste generation.

The idea of the bill was to cause a substitution of secondary material for primary. The second allocation problem results from the subsidy for prompt and home scrap. While some substitution of secondary for primary material would be likely to occur, part of the depletion allowance for secondary material would spill over to home and prompt scrap. This spillover would increase the advantage of primary material because primary material is the direct source of these two types of

scrap.

The third problem has to do with the stage in processing at which percentage depletion is taken. Granting a 22% depletion allowance to scrap aluminum does not insure that scrap aluminum is put upon equal footing with primary aluminum. The 22% depletion deduction for primary aluminum is based on cheap bauxite, while the proposed extension of the 22% depletion allowance is based on the relatively more valuable scrap aluminum. The same situation may be true of capital gains for timber. Because capital gains is taken on the relatively cheap stumpage value.28 the price effect may be much smaller than the (48/52).(18%) negative sales tax proposed on scrap paper. Equal treatment does not follow from equal percentages of different

values.

Another approach is to offer matching grants or loans to state and local governments to help bear the cost of implementing resource recovery systems. Insofar as they encourage "end-of-pipe" treatment as opposed to treatment at the source, these provisions share the same type of misallocational problem as the proposal to extend the depletion allowance to secondary material: too much throughput. In the

28 Actually, change in stumpage value.

past grant programs have favored capital intensive technological solutions. Subsidizing just one factor of production, capital, causes an imbalance with the other factors of production while creating new demands for material and energy to construct the capital.

ON NEW MATERIAL (J)

A fee, or tax, could be imposed on new products, in their stage of "final configuration," at the manufacturer's level. A glance at figure 1 shows that this incentive would increase recycling in the consumption sector (F). Pianos and cars would be traded more times and product durability would generally lengthen while economic throughput, hence the presently over-stimulated solid waste stream (A) would decrease. The social costs of municipal waste collection and disposal would decrease. While these effects are in the right direction, the tax would actually discourage recycling flows E, G and K.

If the tax were imposed on the basis of weight, its administration would not be difficult. The tax would be no more complicated than other excises already in existence. As solid waste disposal costs are in the range of a penny a pound it has been proposed to set the fee equal to a penny a pound.

In order to reverse the incentive effect on E, G and K, so that these recycling flows would be encouraged rather than discouraged, the tax could allow a rebate upon evidence of satisfactory salvage or recycling of the material. Provision for a rebate, in principle, has considerable merit, because the provision fine tunes the tax to actual downstream disposal costs. And the tax could, in principle, vary according to the "disposability" of the material-its ultimate cost of disposal and environmental cost after disposal. These two features change the tax into a tax conditioned on the total social costs of disposal, as the efficiency criterion requires but they enormously complicate its administration. How does one know what the ultimate disposal costs will be, especially when these costs depend in great part upon which waste stream the consumer throws the product in? What records are required to be kept in order to prove later that one is entitled to a rebate because one's product was eventually recovered in a satisfactory manner? Deposit systems achieve the same incentive effects as this tax, but have the advantage of being self-administrating.

Because a particular product's ultimate fate is hard to keep track of, it is usually suggested that the rebate be on recycled content of the new product. Basing the rebate on where the product material is coming from instead of where it is going greatly simplifies the administrative burden and the amount of record keeping. The saving in administrative cost is achieved at a loss in economic efficiency; the tax no longer, strictly speaking. internalizes later social costs of disposal. In order to define the rebate, the problem is how to determine the fraction of J which comes from E, G, K and I. Should E and K be weighted more than G for the reason that post consumer scrap needs the most encouragement? Unless B and C ́are also taxed, the above proposal will encourage relatively more producer waste per finished product (J). A tax on J and B, with rebates for E, G and K is equivalent to a tax on I. With I taxed and G untaxed by the rebate provision, there is a strong incentive for primary material to be relabeled "home scrap" or "producer residuals" (G). In fact, this