The Problem That Wasn't

The Environmental Protection Agency's acid-rain program has been praised as one of the most innovative environmental-policy experiments of the last couple of decades. By many accounts this law has achieved important gains while saving the taxpayer a bundle. The program costs about $2.5 billion per year; that's $4.5 billion less than it would have if EPA had used a more traditional pollution-control policy.

The program works like this: EPA sets a limit on sulfur dioxide (SO2) emissions. It distributes permits to companies affected by the cap, based on previous emissions. Instead of federally mandated reduction measures, these permits allow firms to choose their own method of reducing SO2. Moreover, if a firm reduces emissions below its allowance, it can sell the surplus permits, giving an added incentive to lower emissions.

Something is wrong, however, with the back-slapping at EPA. The program is creative and has led to reduced costs. But whether the cost is $7 billion or $2.5 billion, it is a lot to spend on a minor environmental problem. In the past it was suspected that acid rain was killing forests as well as aquatic life in the Northeastern United States. In 1980 Congress commissioned a study of the problem. Ten years later, at a cost of nearly $600 million, the National Acid Precipitation Assessment Project (NAPAP) concluded that acid rain has only a minor environmental impact.

NAPAP scientists could find forest damage from acid rain only in less than 0.1 percent of red spruces - a species found in the southern Appalachian highlands. As for the Adirondacks lakes, which had experienced significant fish loss, it was discovered that they are no more acidic than they were prior to European colonization.

As it turns out, slash-and-burn logging at the turn of the century removed a lot of vegetation - a major source of acid in the soil and water - making the soil less acidic. During that time the lakes supported aquatic life. When logging ended, they reverted to their natural state. Some minor man-made acidification has caused fish deaths in lakes only marginally habitable to begin with. Some scientists have suggested adding limestone to these lakes, at a cost of a few hundred thousand dollars, to correct the problem. Unfortunately, Congress ignored the study and passed the costly acid-rain program anyway.

Proponents claim another benefit from the program: By inducing firms to reduce emissions, the government has helped spur efficiency gains that would have gone unrealized. This is fine as far as it goes. But the goal of a firm is overall efficiency, not the efficient use of each input.

In the 1800s it was acknowledged throughout Europe that American woodworking machinery was the best in the world. But Europeans did not adopt it, because it was wasteful. Using wood-consuming but labor-saving machinery in Europe didn't make sense: Wood there was scarce and expensive, while labor was plentiful and cheap. The opposite was true in America. Americans and Europeans both achieved overall production efficiency by using different mixes of input factors based on their relative prices.

When firms today are forced to invest in SO2 reduction, they aren't allowed to determine the most efficient mix of input factors based on market prices. Instead their decisions are distorted by government mandates.

The acid-rain program is an innovative approach. But it is hard to justify spending so much on a small problem that could be addressed in other ways. After all, government's goal should not be to do dumb things wisely, but to do wise things. By this standard the acid-rain program is hardly a success.