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process of redefinition has already begun. The recycled content of paper has nominally increased because wood chips and other residuals of the virgin material are now classified as “forest product residues," hence recycle material. How far can the process of redefinition go? Can a virgin ingot which falls off an assembly line be called scrap and then become “recycled content" when put back on the line?

One way of avoiding this definitional problem is to tax the output of the extractive sector (I) instead of the virgin material input to the productive sector (also I) which easily gets mixed up with recycling Hows E, G and K. As mentioned, a tax on J with rebates for social costs avoided

encourages too much B and C relative to the other flows. Taxing the output of the extractive sector includes B and avoids at least part of the distortion of taxing product output (J) alone. An objection to collecting the tax at the level of the extractive sector instead of the manufacturing sector is that the tax might escalate as it is passed along. This would be contrary to the usual situation for which the burden of a tax is shared backward as well as forward and not magnified. Again we have an unresolved question, this one being the effect of a tax directly on I.

On the level of new products, an alternative to fees reflecting disposal costs is a regulatory approach. EPA could be required to classify packaging materials according to degradability and recyclability and prohibit use in packaging those materials classified as nondegradable or non recyclable. Manufacturers could show that products are in fact recyclable by instituting deposit systems or by other means. A sufficient product warranty, lengthening a product's life, might substitute for degradability or recyclability.

Another regulatory approach would be to instruct GSA to set specifications for government purchases besides paper such as government fleet cars. EPA or another agency could be instructed to develop standards governing the recycling or disposal of bulky items of solid waste such as tires, major appliances, automobiles, construction equipment, and the like. Standards might specify minimum useful life of these products and establish a system of fees or some other mechanism to assure that a high percentage of these items are made available for reconditioning, reuse, recycling or disposal with minimal environmental harm.

It is hard to imagine either approach, setting fees or developing regulations, without raising the cries "unfairness" and "too much government control” from many of those affected. Ideally, for either approach, the economic flows in figure 1 would be redirected to satisfy both the efficiency and conservation criterion.

When markets fail, that is when there are socially borne costs not internalized, there is a basis for government action. But a basic principle of the price system is that economic decisions, especially the many millions of decisions of product design, are best made in the market where the incentives are greatest toward economizing and decision making should be as decentralized as much as possible.

Generally a tax system, which induces changes in market behavior, is more decentralized than a regulatory system. A tax on the output of the extraction sector allows and encourages individual manufacturers to make their own decisions economizing material. They may design less material using products, more durable ones, or more repairable

ones. A regulation, on the other hand, which requires aluminum wires in cars to enhance their recyclability makes a design decision for the manufacturer. Some regulations aim to improve markets by providing better information rather than to set design decisions. A regulation requiring that the average mileage per gallon of gasoline be placed on the price sticker of each new car would tend to conserve fuel without prescribing design decisions.

But the question is not one of either fees or regulations, and at times it may be appropriate to use both approaches at once. In the Oregon bottle bill there is a deposit, which is a conditional disposal fee, and also a ban on pull tabs, which is a regulation making a design decision for the manufacturer.



In large measure the solid waste problem is a result of (1) federal subsidies given to virgin material extraction and (2) failure to internalize disposal cost into product price. Instead of trying to equalize the subsidies by extending them to scrap material--a proposal which encourages a still greater flow of solid waste material-an alternative policy option is to dismantle the subsidies to virgin material. Principal subsidies, not including foreign tax credits, to the extraction and hence the depletion of our resources, were estimated by the Treasury as follows: Fiscal year 1970 : Expensing of mineral exploration and development costs.

$340 Capital gains on timber income.-Capital gains on coal and iron royalties--Excess of percentage depletion over cost depletion.

1, 470 Forest improvement of non-Federal land---

26 Source : "The Economics of Federal Subsidy Programs," JEC, Jan. 11, 1972.

Many of the subsidies for virgin material extraction were instituted years ago when mineral development was a national policy and resources seemed limitless. Now that conditions have changed they need to be reexamined. It is often argued by those who benefit from these subsidies that they have indeed been re-examined and have been found to serve important public policy goals: national defense, a stimulus for exploration, etc. A reading of those justifications, however, shows that a thorough analysis linking these subsidies to national goals remains to be done.29 30



* Example : It is often maintained that the percentage depletion deduction is needed to stimulate oll exploration so that we don't run out of energy. More to the point is the goal of maintaining a high enough reserve/output ratio so that we have sufficient lead time to develop substitute technologies. Does the depletion allowance raise or lower the reserve/output ratio ? Because the percentage depletion deduction is set equal to 22 percent of gross output value. It is a direct subsidy on sales and only an indirect one on exploration. In order for the deduction to increase a reserve/output ratio of 12:1 it would have to stimulate exploration more than 12 times more than sales. Elasticity studies by Fisher and Erickson on exploration for new oil and demand for oll indicate that this is highly unlikely. While expensing of exploration expenditures is likely to increase the reserve/output ratio the reverse is true of percentage depletion. See Fisher, Franklin, Supply and Costs in the U.S. Petroleum Industry: Two® Economic Studies, Resources for the Future, Johns Hopkins Press, 1964 ; and Erickson, Edward, Economic Incentives, Industrial Structures and the Supply of Crude oil in the U.S., unpublished Ph. D. dissertation, Vanderbilt University,

30 For an excellent discussion of the subsidies and their evolution, see Agria, Susan, "Special Tax Treatment of Mineral Industries," in Arnold Harberger 'and Martin Bailey, eds. The Taration of Income from Capital, Washington, D.C., Brookings Institution. 1969.

For a discussion of how tax burdens are related to policy choice see Cox, J. C. and Wright, "The Economics of the oil Industry's Tax Burden," in Compendium prepared for the House Committee on Ways and Means and the Senate Committee on Finance, Copyright by Taxation with Representation, 1973.


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An alternative to eliminating the subsidies on virgin material extraction is to impose a tax on virgin materials. Such a tax, usually called a severance tax, can be based on the value of the product (ad valorem tax) or on some measure of quantity (specific tax). It may seem strange to have both severance tax and percentage depletion exist at the same time, but in fact both do. Severance taxes are becoming increasingly popular on the State and local level. Louisiana, for exa ample, recently increased its severance tax on gas and oil by about 35 percent.

ON LAND USE (H) As discussed above, the policy of open access encourages too much and too early mineral exploration relative to the efficiency criterion compared with other land uses. A policy option is to eliminate the rule of capture provision in the 1872 Mining Act and to make other changes in land use policy. The Outer Continental Shelf Act (1953) suggests some possible alternatives: bonus bids for mineral rights and the greater use of royalty payments to the government. A royalty pay: ment to the government is a risk sharing form of the property tax and essentially a severance tax. Land use zoning of publicly owned land is another option. Requirements for restoration of land used for mining and lumbering would increase recycling and conservation while de. creasing solid waste flows by increasing the price on flows from the extraction sector. In a report for the National Commission on Materials Policy it is recommended that “where repair is not possible mining or lumbering should be prohibited.” 31


There are a number of proposals to achieve greater equality of trans port rates, one having been made by the Institute of Scrap Iron and Steel (ISIS). ISIS does not ask that a ton of scrap steel travel at the same rate as a ton of ore, but that the transportation costs of a ton of scrap steel be equalized to the transportation costs of that amount of iron ore and coke which would make the same quantity of finished product as would the scrap source of material.

This criterion of parity between substitutable and competing materials has limited economic appeal. Suppose, for illustration, that iron ore and coke both travel 200 miles while scrap steel travels 1,000 miles. In this hypothetical case should the transportation cost be equalized? Because transistor radios substitute for vacuum tube radios, should they travel at the same rate?

The ISIS proposal for parity may have been a result of the ICC position, which has still less economie appeal, that scrap iron and steel do not compete against iron ore. If there is no competition, then the ICC can argue that there is no discrimination even when the rates are very different. The ICC is required by Congress to prevent discriminatory rates, thus the ICC's insistence that there is no competition makes its life easier. In trying to establish the obvious fact that scrap steel is a substitute for iron ore, ISIS throws in the coke, free for the ride.

31 Man, Jatcrials, and Environment, a report for the National Commission on Materials Policy by the National Academy of Sciences and National Academy of Engineering, March,


Other policy options on transportation:

1. Congress could instruct the ICC to bring the rates between directly competing materials more nearly in line, leaving the ICC to decide how much cost differences should be taken into account. To do so the rates on primary material could be increased.

2. The ICC could be instructed to complete its study of the rate base on a given timetable.

3. Scrap materials could be deregulated as with the case of vegetables or the regulations with respect to trucking be simplified.

4. The ICC could be instructed to justify rate differences for all commodities, not just competing pairs, more on the basis of cost differences than it does at present. By the ICC's own cost studies it appears that scrap materials pay substantially more than the out-of-pocket costs of shipment while many primary materials pay substantially less than out-of-pocket costs. Thus it appears that scrap materials are presently subsidizing primary materials contrary to our stated policy of promoting recycling 32

22 Ex Parte No. 270 "Investigation of Railroad Rate Structure” (Burden studies) 1966 and 1969; data from the ICC Waybill Sample.

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