Wastewater Treatment Costs and Outlays in Organic Petrochemicals: Standards Versus Taxes With Methodology Suggestions for Marginal Cost Pricing and Analysis

Abstract

With the methodology recommended by Baumol and Oates, comparable estimates of wastewater treatment costs and industry outlays are developed for effluent standard and effluent tax instruments for pollution abatement in five hypothetical organic petrochemicals (olefins) plants. The computational method uses a nonlinear simulation model for wastewater treatment to estimate the system state inputs for linear programming cost estimation, following a practice developed in a National Science Foundation (Research Applied to National Needs) study at the University of Houston and used to estimate Houston Ship Channel pollution abatement costs for the National Commission on Water Quality. Focusing on best practical and best available technology standards, with effluent taxes adjusted to give nearly equal pollution discharges, shows that average daily treatment costs (and the confidence intervals for treatment cost) would always be less for the effluent tax than for the effluent standard approach. However, industry's total outlay for these treatment costs, plus effluent taxes, would always be greater for the effluent tax approach than the total treatment costs would be for the effluent standard approach. Thus the practical necessity of showing smaller outlays as a prerequisite for a policy change toward efficiency dictates the need to link the economics at the microlevel with that at the macrolevel. Aggregation of the plants into a programming modeling basis for individual sectors and for the economy would provide a sound basis for effective policy reform, because the opportunity costs of the salient regulatory policies would be captured. Then, the government's policymakers would have the informational insights necessary to legislate more efficient environmental policies in light of the wealth distribution effects. The weak and all too slowly growing empirical foundation clearly cannot support the proliferating superstructure of pure, or should I say, speculative economic theory.--W. Leontief, Presidential Address, "Theoretical Assumptions and Nonobserved Facts," 85th Meeting of the American Economics Association, Detroit, Michigan, December 29, 1970. [1972], "The bulk of the economic literature, from Kneese onwards, advocates on efficiency grounds the principle that the polluter must pay." However, as Coddington [1972] pointed out, "The major deficiency of this theory is its failure to take account of the fact that the various instruments for achieving such internalization will themselves involve social costs of one kind or another." It is noted that Coddington is using social costs in the sense of distributional costs, not the usual economist's notion of efficiency costs. INTRODUCTION As stated by MuraroStarting with the Federal Water Pollution Control Act amendments (FWPCA) of 1972, the United States Congress legislated best practical technology (BPT) and best available technology (BAT) standards for industrial pollution abatement. As is well known, these standards do not minimize the total treatment costs of achieving a ...