Upstream Pollution, Downstream Waste Disposal and the Design of Comprehensive Environmental Policies

Abstract

In this paper, we expand our earlier model of production, consumption, and solid waste disposal (Palmer and Walls, 1997) to include upstream pollution problems such as manufacturing effluent and greenhouse gas emissions from energy use in production. We derive a set of taxes and subsidies that can be used to achieve the socially optimal levels of both upstream pollution and downstream waste disposal when Pigouvian taxes are infeasible. Some observers have suggested use of a single instrument to address "life-cycle" pollution concerns, one example being an "advance disposal fee (ADF)" - i.e., a final product tax that reflects the full environmental costs of the product. We find that no single tax or subsidy can generate the optimum. However, taxes on output can be combined with taxes on and subsidies to raw material inputs to achieve the same outcome as Pigouvian taxes. We also find that the optimal policy to address waste disposal concerns - a deposit-refund -is lower when accounting for upstream pollution. When we incorporate existing upstream pollution standards expressed as limits per unit of output, we find that such standards must be combined with output taxes to generate the optimum. When the upstream pollutant of concern is greenhouse gas emissions associated with energy use in production, we find that the specification of optimal alternative taxes and subsidies depends on the form of each firm's production function, and, therefore, these policies may be very difficult to implement in practice.