environmental improvement through business incentivesgemi.org/resources/ide_004.pdf · on behalf of...

Glo

bal E

nviro

nmental Management Initiative GEMI

Environmental Improvement ThroughBusiness Incentives

First Edition

Business Helping Business AchieveEnvironmental, Health & Safety Excellence

March 1999

Greetings,

A lit tle more than a year ago, the Global Environmental Management Initiative(GEMI) began a process designed to find ways to improve environmentaleffectiveness, address non-traditional environmental problems, and make the currentenvironmental system more efficient.

The members of GEMI’s Incentives Task Force, comprised of corporate environmentalprofessionals from a wide range of businesses, recognized that there was a need fornew thinking, approaches and creativity if we are to both improve our environmentand the economy. The use of meaningful incentives to encourage voluntary actionemerged as a key aspect of any new system.

GEMI initiated a process designed to look at incentives that have worked ingovernment and in the private sector and catalogued the ideas that we collected. Wealso looked at different problems and opportunities that could be addressed creativelythrough the use of incentives. We then met with federal, state, environmental andprivate sector representatives across the country. We incorporated their comments,refined our document and have now completed the First Edition of EnvironmentalImprovement Through Business Incentives.

We believe that this document speaks to GEMI’s mission of achieving environmentalexcellence, and providing value to the environment and the bottom lines of ourcompanies.

On behalf of the members of the project that created Environmental ImprovementThrough Business Incentives we hope that you will carefully review the programopportunities and incentives that are described in this document. Assess with us thepracticality of our recommendations and share with policymakers your thoughts onhow these ideas can provide the environmental performance that all of us want toachieve.

Sincerely,

Susan Moore

Chair, Incentives Task ForceGlobal Environmental Management Initiative

Vice President, Environmental AffairsGeorgia-Pacific Corporation

Glo

bal E

nviro

nmental Management Initiative

Business Helping Business Achieve Environmental, Health and Safety Excellence.818 Connecticut Avenue, NW • Second Floor • Washington, DC 20006 • Phone (202) 296-7449

Fax (202) 296-7442 • E-mail: [email protected] • Website: www.gemi.org

GEMI

About theGlobal EnvironmentalManagement Initiative

The Global Environmental Management Initiative (GEMI) is a non-profitorganization of leading companies dedicated to fostering environmental,health and safety excellence worldwide. Through the collaborative efforts ofits members, GEMI promotes a worldwide business ethic for environmental,health and safety management and sustainable development throughexample and leadership. It should be noted that in this report the termenvironmental should be understood to include health and safety. GEMI’smember companies include:

Anheuser-Busch Companies, Inc.Ashland, Inc.

Bristol-Myers Squibb CompanyBrowning-Ferris Industries

The Burlington Northern and Santa Fe Railway CompanyThe Coca-Cola Company

Colgate-Palmolive CompanyCoors Brewing Company

The Dow Chemical CompanyDuke Energy

The DuPont CompanyEastman Kodak CompanyElf Atochem North AmericaGeorgia-Pacific Corporation

The Goodyear Tire & Rubber CompanyHalliburton CompanyJohnson & JohnsonKoch Industries, Inc.

Lockheed Martin CorporationMerck & Company, Inc.

Motorola, Inc.Novartis Corporation

Occidental Petroleum CorporationOlin Corporation

Pharmacia & Upjohn, Inc.Phillips Petroleum Company

The Procter & Gamble CompanySouthern CompanyTemple-Inland, Inc.

Texas Instruments Incorporated

The GEMI Incentives Project

Global Environmental ManagementInitiative Incentives Task Force

Susan Moore, Georgia-Pacific Corporation (co-chair)Bill Rankin, Olin Corporation (co-chair)

Tanya Blalock, Southern CompanyDorothy Bowers, Merck Corporation

David Buckner, Browning-Ferris IndustriesStephen Evanoff, Lockheed Martin Corporation

Robin Tollett, Procter & Gamble CompanyMitch Griggs, Duke Energy Company

John Hayworth, Browning-Ferris IndustriesJim Hendricks, Duke Energy Company

Joseph Holtshouser, Goodyear Tire and Rubber CompanyHarry Ott, The Coca-Cola Company

Ernie Rosenberg, Occidental International Corp.Bob Sherman, Halliburton Company

Scott Smith, Coors Brewing CompanyBill Sugar, Anheuser-Busch CompaniesJames Thomas, Novartis CorporationDarwin Wika, The Dupont CompanyCarl Wirdak, Occidental Petroleum

Robert Woodall, Southern Company

Global Environmental Management Initiative818 Connecticut Avenue, N.W.

Second FloorWashington, DC 20006-2702

(202) 296-7449Steve Hellem, Executive Director

Consultant to the Incentives Project:Chris Warshaw

Putnam, Hayes & Bartlett, Inc.520 South Grand Ave., Suite 500

Los Angeles, CA 90071(213) 689-1515


The GEMI Incentives Project Page 1

IntroductionEnvironmental regulatory programs are largely mature. Business at titudes towardenvironmental responsibility have matured as well. Many companies now embraceenvironmental responsibility and most insist on compliance. Yet, there is more to bedone—and more can be done if we supplement the mature programs with new ways to tietogether environmental and business performance.

Environmental laws and regulations are always writ ten for the general case and thecontrols they impose are incremental. If they were writ ten for the maximum controltechnically possible for the most modern, cleanest operations, many companies would notbe able to comply. Yet the better facilities may be able to do a better job than required as amatter of law. For this reason, new approaches need to be added to regulatory agencies’tools for achieving environmental goals. The best performance cannot be achieved by thetraditional “command and control” approach. The goal is to find a way to make betterperformance attractive to those businesses that have opportunities to do better, but aredriven to using their financial and human resources to take advantage of other opportunitiesfor making or saving money. General rules help assure that all competitors, at least all ofthose in the United States, have a level playing field, but something more is needed to getthe best from the best.

The Global Environmental Management Initiative (GEMI) initiated the IDEA 21 projectto highlight a way to achieve bet ter environmental results than can be obtained throughthe exclusive use of traditional “command and control” methods: the use of an array offlexible, incentive-based methods of encouraging superior environmental performance.IDEA 21 stands for “incentives, disincentives, environmental performance andaccountability for the 21st Century.” The project’s goal is to offer fresh thinking abouthow cooperative policies that reward continuous improvement in environmentalperformance can be used to improve upon our current system of environmental regulation.

The IDEA 21 project is an outgrowth of three repor ts that GEMI produced last yearcovering the following topics:

• A study of corporate management responses to different environmental incentives;• A review of voluntary incentive-based programs at the federal level; and• A review of selected incentive programs in the states and internationally.1

Collectively, these reports demonstrated that there are opportunities to use incentives toenhance environmental performance, but that effective incentives have been employed onlysparingly in this country. The IDEA 21 project is now working to identify specificincentive-based policies that can be adopted by local, state and federal agencies to rewardimproved environmental performance.2 The project’s goal is to make such informationavailable to government decision-makers who might consider using incentives to obtainbetter results from their environmental programs.

The product from this new effort are the two tables included in this report. The first ofthese tables identifies and summarizes several environmental objectives that can beadvanced through the use of incentives. The second table identifies and summarizes severaloptions for voluntary environmental incentives. Both of the tables are intended to givepolicymakers ideas on the type of incentive mechanisms that can be deployed and the typeof environmental improvements that can be achieved through the use of such incentives.

1 Yosie, Terry F. and Timothy D. Herbst, Corporate Environmental Health and Safety Practices in Transition,Davies, Terry and Jan Mazurek, Industry Incentives for Environmental Improvement: Evaluation of U.S.Federal Initiatives; Beardsley, Daniel P., Incentives for Environmental Improvement: An Assessment ofSelected Innovative Programs in the States and Europe. 1996. These reports can be ordered bycontacting GEMI at 202-296-7449 or through the GEMI web site at http:/www.gemi.org.

2 In this report the term “environmental” refers also to health and safety.


What Is a Voluntary Environmental Incentive?For the purpose of GEMI’s work, a voluntary environmental incentive is any domestic orforeign government program or policy that rewards a company (or other entity) for makinga voluntary environmental improvement.3 Voluntary improvements can be embodied inlaws or regulations or can be stand-alone programs. This reward may be in the form of a taxincentive, a reduction in regulatory costs or any other tangible, financial benefit.

The Need for a Wide Range of IncentivesIn order to achieve the desired result, an incentive must match a business’ needs (or those ofother regulated entities, such as a publicly owned treatment works). Because the needs ofbusinesses vary, it is crucial that there be a variety of incentives available. For some typesof businesses, speed to market is critical. They need a way to avoid the delays associatedwith environmental administrative processes. Others may be most driven by costs and needa way to achieve savings. In cyclical businesses, an incentive that is not at tractive at onepoint in the business cycle may well be attractive at a later date. Smaller businesses mayneed different incentives than large companies. These are just examples. The key point isthat a wide range of incentives is needed to address the incredible variety of industries andeven companies within industries that are affected by today’s sweeping environmentalrules.

The Role of Stakeholders in Incentive ProgramsGEMI member companies are committed to actively involving community members andother stakeholders in our environmental programs. The development and implementation ofmany types of incentive options will both need and benefit from the active involvement ofa broad spectrum of stakeholders. In particular, those incentive options that modify existingregulatory requirements for a company or facility will necessarily demand such stakeholderparticipation. Because GEMI’s purpose at this stage in the project is to gather feedback onthe potential effectiveness of incentives, we specifically address community or stakeholderinvolvement in describing potential incentives options. However, we assume that trans-parency in process and genuine opportunitites for stakeholder involvement are givens inany incentive program.

Environmental Benefits Through the Use of IncentivesThe following table identifies several environmental program objectives that can beachieved through the use of incentives. These program objectives range from encouragingthe reduction in specified pollutants to improving the deployment of program resourceswithin an environmental regulatory program. Note that it will always be up to thegovernmental decision-maker (with input from stakeholders of all kinds) to decide theamount of program benefit that is needed to balance the benefit to the company receivingan incentive. As with companies, different programs, different areas or different times maychange this balance. In some cases, a regulator may want to use incentives to address themost pressing problems (e.g., air, water) in the area in question. In other cases, freeing upenforcement or permitting resources to be used in more productive activities may be acritical consideration. How much of a given benefit the agency (or the environment) mustreceive to warrant granting a given incentive will be very much a case-by-casedetermination. Specific examples and contact points for existing programs in thesecategories can be found in Attachment 1.

3 This report refers primarily to “companies” when describing incentive programs. Such programs howevercan be equally as effective for other regulated entities such as municipalities, special districts and othernon-business entities.


1Increase levelof pollutionprevention

At the federal and state level, many programs are in place to en-courage businesses to voluntarily undertake pollution preven-tion projects. These programs, combined with the potentialprocess efficiencies and cost savings at tributed to pollutionprevention projects, have resulted in real pollution preventiongains. However, many smaller companies lack the technical ex-pertise and resources to implement pollution prevention pro-jects. In addition, many larger companies have already madesignificant reductions and are finding it harder to identify andjustify pollution prevention projects in which the marginal fi-nancial benefit of the reduction exceeds the marginal cost of theproject.

Therefore, there is growing evidence that the rate of pollutionprevention has slowed. Incentives offer a means to promoteadditional pollution prevention while retaining the voluntarynature of most pollution prevention programs. Incentives can beused to encourage the purchase of pollution prevention-relatedequipment or to encourage the meeting of specified pollutionprevention goals.

Environmental Benefits Through the Use of Incentives

Program Objective Environmental Benefits

2Reduce releases of regulatedpollutants

Air and water emissions of various pollutants are currently con-trolled under a variety of state and federal (and sometimes local)regulations. Larger sources are controlled through permits is-sued under the Clean Air Act (Title V permits) and the CleanWater Act (NPDES permits) as well as through pretreatment re-quirements enforced by local sewer agencies.

While these command and control programs have been effectivein significantly reducing releases into the air and water, incen-tive programs offer the opportunity to cost-effectively encour-age additional beyond-compliance reductions in such pollutantsas volatile organic compounds (VOCs), nitrogen oxides (NOx),sulfur dioxide (SO2), carbon monoxide (CO), particulate matterand various toxic pollutants.

3Reduce releases ofnon-regulatedpollutants

Some pollutants are not controlled under existing regulations,notably carbon dioxide and other global warming gases. In ad-dition, some facilities are not required to reduce emissions ofcertain pollutants, even though these pollutants are controlledat other facilities. Oftentimes, the lack of regulation is due toconcern over the economic costs of imposing command-and-control requirements for these pollutants or for certain types offacilities. Incentives offer the opportunity to promote reduc-tions in non-regulated pollutants without the need for extensiveregulatory development and, where needed, the legislative au-thority required for new command-and-control regulations.


4Reducenon-point sourcewater pollution

Non-point source pollution, including run-off from both urbanand rural sources continues to pose challenges for improvingwater quality. Because of the diffuse nature of non-point sourcepollution, the problem does not lend itself as well as other typesof pollution to the application of command-and-control pro-grams. Accordingly, the use of incentives provides the opportu-nity to encourage improvements in pollutant loading from non-point sources without the program resources required toimplement a formal regulatory program.



6Provideregulatorycomplianceassistance to smallbusinesses

Almost all businesses, regardless of their size, have difficultytracking changing regulatory requirements. Small businesses,with their limited staffs, often have an even more difficult timedeveloping a detailed understanding of their regulatory obliga-tions. In addition, given the large number of small businesses,traditional environmental enforcement programs involvingtime-intensive inspections and other forms of compliance moni-toring are not always feasible. Therefore, states and localitiesoften look for more innovative mechanisms to increase the rateof compliance among small businesses. Achieving this, withoutadversely impacting the economic viability of such operationsis an increasingly important goal of many state and local envi-ronmental programs.

5Decreaseconsumption of naturalresources

Incentives can be (and are) used to encourage companies andother entities to decrease their energy and water usage as wellas their consumption of other products. A variety of energy in-centive programs are already in place, offering rate discountsfor reduced energy usage administered either through the U.S.Department of Energy (DOE), EPA or individual electric utili-ties. Similar programs have been used in the water area and arelikely to continue to expand as these have traditionally been




8Encouragevoluntary cleanupand redevelop-ment of suchprojects

Finding ways to encourage the cleanup and redevelopment ofvacant industrial properties (i.e., brownfields) has become animportant public policy objective in the United States. Bringingsuch properties back to productive use can provide both envi-ronmental and economic benefits. Despite progress in the paceof contaminated brownfields redevelopment, many jurisdictionsstill face obstacles in effectively redeveloping properties on awidespread basis. Primary obstacles to increased redevelop-ment often include a lack of project financing and the fear offuture liability. Incentive programs have the potential to addressboth of these obstacles.

7Encourage the useof voluntaryenvironmentalmanagementsystems

There is a growing understanding of the basic management ele-ments that make up an effective voluntary corporate environ-mental management program. When these elements are inplace, companies are more strongly positioned to achieve 100percent compliance and to remain consistently in compliance.Such systems are also the essential elements to move compa-nies beyond compliance and to promote overall risk reduction.Most major companies have many of the elements of a strongenvironmental management system already in place, but couldimprove these systems in particular areas. Small and medium-sized businesses may be less likely to have effective manage-ment systems in place and could improve environmental perfor-mance through the implementation of improved systems.

9Decrease the timerequired to issuepermits withoutincreasingprogramresourcesdedicated to per-mitting or affect-ing the quality ofthe permits

The issuance of permits is a primary mechanism used by regu-latory agencies to establish and enforce specific regulatorystandards. The process of issuing site-specific permits, how-ever, is resource intensive and in some instances may takemonths or years to complete. Many of the incentive optionsincluded in the incentives table below facilitate the more swiftissuance of permits without sacrificing the quality of the stan-dards contained in such permits.




11Encourage the use of innovativeremedial andpollution controlequipmenttechnologies

Important advances continue to be made in both technologies toremediate past contamination and control technologies and pro-duction processes which reduce releases of pollutants. How-ever, businesses are often risk-averse when it comes to pursuingnew technologies for which there is only limited operational ex-perience and, more importantly, which may not definitivelymeet existing regulatory obligations. Incentives may offer theopportunity to encourage more companies to pursue advancedtechnologies, thereby improving their overall environmental per-formance as well helping facilitate the wider acceptance of suchtechnologies.

10Maximize theeffectiveness ofprogramresources forcompliancemonitoring andenforcement

Traditional environmental regulatory programs usually rely ondetailed facility inspections as the primary mechanism for en-suring and encouraging compliance with regulatory require-ments. On-site compliance inspections, however, require signif-icant staff resources on the part of the public agency. Given thelarge number of regulated entities, particularly as more smallbusinesses are covered by regulatory requirements, conductingtraditional on-site inspections becomes a less effective meansof ensuring broad-based compliance, as only a small fraction offacilities can be visited each year. In addition, on-site inspec-tions often provide only a “snap-shot” of a facility’s compli-ance status, as opposed to an assessment of a facility’s abilityto consistently remain in full compliance.

12Increase theglobal consistencyof EHS practices

As the trend toward globalization continues and as the barriersto restricted trade are reduced, it has become increasingly im-portant to promote greater consistency in the environmentalpolicies and practices of both governments and multinationalcorporations. However, regulatory structures and enforcement re-sources vary widely among different countries. It is therefore diffi-cult to promote such consistency solely through command-and-con-trol regulatory structures. Voluntary incentives can play animportant role in encouraging consistency and improved environ-mental performance in those countries without well-developedregulatory structures.




14Improveenvironmentalperformancethroughout thesupply chain

While the environmental performance of many larger compa-nies has improved dramatically in recent years, continued im-provement will come in great part by improving the environ-mental relationships between these companies and theirsuppliers, customers and contractors. The current regulatorystructure primarily emphasizes the individual performance ofspecific operating units. It does not, therefore, encourage linksthroughout a supply chain to work cooperatively in reducing theenvironmental impacts associated with the entire product anddistribution cycle. Voluntary incentives can be used to fill inthis gap in the regulatory system by encouraging companies towork with their suppliers, customers and contractors.

13Increase purchase ofrecycled materials

Creating a stronger demand for recycled products is the keycomponent in developing self-sustaining recycling markets for awide variety of products. While many companies have devel-oped procurement policies that encourage the purchase of recy-cled products, many of these policies include price restrictionssuch that recycled products are only purchased if their pricedoes not exceed the price of virgin products by a specifiedamount.

Such price sensitivity continues to hamper the development ofstrong recycling markets and the ability of recycled products tocompete with products made from recycled materials. Many ofthe incentive options listed in this document can effectively beused to encourage companies and other entities to increase theirpurchases of products made from recycled materials.


Environmental Incentive Options

The following table provides a listing of various incentive options. Once again, it isimportant to bear in mind that a menu of incentives is needed to address the widevariety of businesses (or other regulated entities) with their varying and changingneeds.

Incentive options are divided into five categories as follows:

(1) permit incentives;

(2) product review and approval incentives;

(3) other regulatory incentives;

(4) tax incentives; and

(5) capital incentives.

For each incentive option information is provided on who would grant or enact theincentive and if and how such an incentive mechanism is being used today. It isimportant to note that these options are not necessarily mutually exclusive. For example,a permit incentive program might include automatic permit extensions, expedited reviewtime and consolidation; each of which are presented as separate options in the table that follows.


Environmental Incentive OptionsType of Who Would

Incentive Enact Current Application Proposed Option

Permit Incentives

15Permitextensions

EPA and stateenvironmentalagencies (mayalso needlegislativeauthority)

Existing permits under RCRA,CAA and the CWA must be re-newed on regular schedules(i.e., five to 10 years). The Col-orado Environmental Leader-ship program allows the life ofenvironmental permits to beextended from five to 10 yearsto the degree allowed by law.Permit extensions are also be-ing considered in several of theProject XL pilots.

Allow for theautomatic extensionof permits forcompanies meetingspecifiedenvironmentalcriteria.

16Expeditedpermitting

EPA and stateenvironmentalagencies

Many states are trying to im-plement reforms to expeditethe permitting process. Manyof these programs involve“one-stop” permitting centersand other forms of additionaltechnical assistance to speedthe process. Mississippi hasdesigned a program that as-signs a single contact for thepermitting process and re-quires this contact and a repre-sentative of the company tosign a non-enforceable agree-ment committing the state toprocess the permit under adefined time-frame, if theapplicant submits the neces-sary information.

For qualifying com-panies the permittingagency would committo processing the per-mit and completingthe permit process inan agreed-upon time-frame (e.g., agree toreview and respond topermit applicationswithin 60 days or lessfollowing completeapplication submis-sion).




Permit Incentives

17Increasedpermit flexibility

EPA and Stateenvironmentalagencies

Operational flexibility underpermits (particularly Clean AirAct permits) has been at thecenter of several regulatory ini-tiatives. In particular, several ofthe Project XL initiatives in-volved more flexible permits.For example, the Intel XL pro-ject involved the waiving ofnew permitting requirements fornew construction or other plantmodifications at the company’sChandler, Arizona facility in ex-change for a facility-wide airemissions cap and other envi-ronmental commitments.Similarly, the Weyerhaeuser XLproject caps the facility’s emis-sions at current actual emissionsplus a level less than that whichwould trigger a review under thePSD program. In exchange, thecompany is allowed to make anyoperational changes under thatcap without notifying theAgency.4

Several options existfor increasing permitflexibility:

• Allow qualifying fa-cilities to operateunder a single emis-sions cap coveringall sources withinthe facility. The capwould be equal tobaseline emissions.

• Allow qualifyingbusinesses to oper-ating under a cap forseveral differentsources within afacility.

• Allow qualifyingbusinesses to under-take specifiedchanges to businessoperations withouttriggering a permitrenewal.

4 Note that the Weyerhauser XL project also includes a separate cap on four additional pieces ofequipment which are allowed to operate at their design capacity without triggering PSD review. This capdoes not allow significant equipment modifications.




Permit Incentives

18Multimediapermitting

EPA and Stateenvironmentalagencies

Issuing a single permit underair, water and waste regulationshas also been the focus of sev-eral regulatory reform initia-tives. The Printing Sub-committee of the CommonSense Initiative is developing amodel multi-media permittingprogram for the printing in-dustry. The XL project for JackM. Berry, Inc. in Florida pro-poses to replace existing per-mits with a single “Compre-hensive Operating Permit.” Theadvantage of a multimedia per-mit is that it may reduce over-lap in requirements (e.g., re-porting), reduce overall permitprocessing time and simplifythe permitting process.

Allow qualifying fa-cilities to replace ex-isting media-specificpermits with a singlemulti-media permit.

19Providingsinglepermitcontacts

Stateenvironmentalagencies

Another simple mechanismfor improving the permit tingprocess is for permit ting au-thorities to assign a singlecontact to serve as the pointperson for all of a facility’smedia-specific permits (air,water and waste). Missis-sippi, for example, is re-designing its permit ting pro-gram and will assign a singleSenior Permit manager for allof a facility’s permits.

Assign qualifying fa-cilities a single permitrepresentative whowill facilitate all ofthe facility’s permit-ting and will have suf-ficient time availableto ensure that permitscan be processed in atimely fashion.




Permit Incentives

Congress, EPA,state legisla-tures, stateenvironmentalagencies

20Certifica-tion in lieuof environ-mentalpermits

The most far-reaching permitreforms (and potentially thereforms that could provide thegreatest incentive to compa-nies) involve replacing thelabor-intensive permittingprocess altogether with self-certification programs. Per-haps the best example of sucha program is the Massachu-setts’ Environmental ResultsProgram (ERP). Under theERP, facilities will no longerbe issued State permits.

Instead, a facility will committo a specified level of environ-mental performance and thenreport or “certify” annually ontheir compliance with thesestandards. Instead of focusingon issuing permits, Massachu-setts DEP will establish stan-dards, conduct inspections toensure the accuracy of a com-pany’s certification and takeenforcement actions againstthose who failed to perform orhave falsely certified.

Note that the program onlyapplies to permits under statelaw, not federally based per-mits (i.e., CAA, NPDES orRCRA permits). Federal statu-tory changes would likely berequired to apply the concept

Pursue the wideradoption of the certi-fication concept byother states and byEPA. Eligibility forparticipation in thecertification programwould be contingenton either meeting ageneral definition ofenvironmental excel-lence or commitmentsto specified reduc-tions in releases.




Product Review/Approval/Sales Incentives

21Expeditedreview ofproductsunderFIFRA

Congressand/or EPA

All new pesticides must beregistered under the FIFRAprogram. Pesticides registeredprior to 1984 must be re-regis-tered. The new Food QualityProtection Act establishes agoal of re-reviewing pesticideregistrations on a 15-year cy-cle. The new law also providesfor the expedited review of“safer” pesticides.

Provide priority reg-istration or re-regis-tration at tention forqualifying companies.The review would bebased on the samecriteria and thorough-ness, but the Agencywould provide morestaff resources to ex-pedite the review forqualifying companies.

22ExpeditedPMNreviewunderTSCA

Congress EPA currently provides for anexpedited review for low-vol-ume, test-marketing or lowexposure chemicals. EPA alsooffers a self-implementingreview for polymers. Fewhave taken advantage of thepolymer process because theprocess does not allow thesubstances to be placed on theTSCA inventory, whichcustomers prefer.

Provide for an expe-dited review (45 daysinstead of 90 days)for submissions bycompanies thatdemonstrate environ-mental excellence orprovide more or bet-ter data and riskanalyses.

23Expeditedreview ofnewproductsby FDA

Congressand/or FDA

The Food and Drug Adminis-tration (FDA) currently re-views a variety of products(including pharmaceuticalsand medical devices) prior toallowing such products to bedistributed. Complying withand meeting FDA criteriathrough this approval processis a key “time to market” issuefor many businesses. Hence,an expedited review processwould be a strong incentive toencourage environmentalimprovements.

Provide for an expe-dited review (withoutchanging the qualityof the review) ofproducts from compa-nies meeting speci-fied environmentalcriteria or providemore or better dataand risk analyses.





24Expeditedreview ofnew alter-nativesunder theSNAP pro-gram

Congressand/or EPA

Under Section 612 of theClean Air Act, EPA must iden-tify acceptable alternatives toCFCs, halons and other ozonedepleting substances. Underthe Significant New Alterna-tives Policy (SNAP), manufac-turers of substitutes must sub-mit data covering a wide rangeof physical and chemical in-formation and information onthe substance’s use and bene-fits. EPA has 90 days in whichto review and approve thechemical as an acceptable al-ternative. (Note: this review isconducted in addition to thePMN review).

Provide for an expe-dited SNAP review(45 days instead of 90days) for submissionsby companies thatdemonstrate environ-mental excellence orprovide more or bet-ter data and riskanalyses.

25Preferredvendorstatus

EPA or stateenvironmentalor otherprocurementagencies

The Colorado EnvironmentalLeadership proposal includesan incentive option that wouldgrant qualifying companies“preferred status” in competi-tive bidding to provide thestate government with prod-ucts or services. U.S. EPA andmany state governments haveincorporated environmentalfactors in the specificationsfor the procurement of variousproducts (e.g., recycled papercontent; re-refined used oil;energy efficiency standards).The extension of such prefer-ences to the overall environ-mental performance of a com-pany has not been widelytested.

State or federal pro-curement or contract-ing standards wouldbe modified to pro-vide a preference forcompanies thatdemonstrate environ-mental excellence(e.g., demonstrate areduction in releasesor the adoption of su-perior environmentalprogram elements).




Other Regulatory Incentives

26Consoli-dated orstreamlinedreporting


Several efforts are underwayto streamline environmentalreporting. Several of the Com-mon Sense Initiative projectsinvolve streamlining and con-solidating reporting (comput-ers and electronics sector, ironand steel sector, metal finish-ing sector).

Propose a streamlinedand consolidated re-porting option forcompanies adoptingone or more environ-mental excellence

27Reducedinspectionschedules


The OSHA Voluntary Protec-tion Program (VPP) is the bestcurrent example of a voluntaryprogram that rewards partici-pants through reduced inspec-tions. Under the VPP, compa-nies that demonstrate superiorsafety performance (e.g., haveto be below national averageinjury rates for their industry)and have various managementand safety program elementsin place are eligible to be des-ignated “Merit” or “Star” fa-cilities. Following an initialon-site evaluation, facilitiesthat qualify are not subject toannual compliance inspections(but are subject to injury re-lated inspections). On-site re-views of their programs areconducted every three years.

Establish a nationalprogram similar to theOSHA VPP for theenvironment. Partici-pating facilities wouldbe required to demon-strate an exemplaryhistory of complianceas well as demon-strate an overallrecord of environmen-tal excellence. If thefacility qualifies, itwould not be subjectto regular inspections(e.g., RCRA, TSCAinspections).

The company wouldinstead be subject to aprogram review (ei-ther conducted by theAgency or a self-re-view) every threeyears in order to cer-tify that it meets therequired criteria. Ifthe Agency becameaware of a compli-ance violation duringthis period (e.g., a re-lease, an emission ex-ceedence) it would re-tain the right toconduct an inspection.




Other Regulatory Incentives

28Extensionof com-pliancedeadlines

EPA and/orstate environ-mentalagencies

Complying with changes in en-vironmental regulations oftenrequires significant invest-ments by companies to conductcompliance testing, to initiatethe permitting process and toinstall new pollution controlequipment. The ability to defersuch investments can provide asignificant environmental ben-efit and can therefore be usedas an incentive to encouragesuperior performance.

As an example, EPA’s new airstandards and effluent guide-lines for the pulp and paper in-dustry (known as the “clusterrule”) include an innovativeinitiative known as the Volun-tary Advanced Technology In-centives Program. Under theprogram, paper mills that planto install advanced technolo-gies which reduce dischargesbeyond the requirements in thenew regulations, can defertheir compliance time for boththe air standards and the waterdischarge permit limits.

Expansion of pro-grams similar to theVoluntary AdvancedTechnology IncentivesProgram to other newrulemakings under theClean Water Act andClean Air Act and au-thority for the statesto do so.





29Smallbusinessassistanceprogramthroughstate orregionaltradeassociations

Congress, orEPA, or stateand local envi-ronmentalagencies

Most environmental agenciescurrently operate technical as-sistance and compliance out-reach programs for small busi-nesses. Oftentimes, however,the effectiveness of these pro-grams is hampered by the mis-trust small business ownersmay have of government regu-lators (whether valid or not)and by the lack of intimateknowledge environmentalagencies may have of specifictypes of small businesses.Small businesses are oftenmore comfortable receivinginformation and guidance fromtheir state or local trade asso-ciation and many rely on theirtrade associations for much oftheir current regulatory infor-mation and assistance.

State environmentalagencies could trans-fer current funding fortechnical and regula-tory assistance to lo-cal or regional tradeassociations. Tradeassociations mightuse this funding toestablish regulatoryhotlines, developguidance documentsor establish trainingprograms for theirmembers. Federalgovernment couldprovide funding to thestates to encouragesuch action




Tax Incentives

30Improvedepreciationallowancesfor environ-ment-relatedexpenditures

Congressand/or statelegislatures.

The current federal tax code(Sec. 169) allows for the amor-tization of “certified pollutioncontrol facilities” over a five-year period. At the time of en-actment, this provision was arelatively strong incentive astypical amortization would be10 to 20 years. Now, absentSec. 169, amortization underthe MACRS system would beseven years for many types ofequipment. Also, the plantmust have been in operationbefore 1976 to be eligible.A “certified pollution controlfacility” is defined as a new,identifiable treatment facilityused as a means of abating orcontrolling air or water pollu-tion by removing, altering, dis-posing of, storing or prevent-ing the creation or emission ofpollutants, contaminants,wastes or heat. In addition, thepollution control facility can-not significantly change thenature of the manufacturing orproduction process at the facil-ity (i.e., expand capacity,change nature of productionprocess, extend useful life orreduce operating costs).

Modify current depre-ciation provision for“certified pollutioncontrol facilities” asfollows:• Amend Sec. 169 to

allow for signifi-cantly more acceler-ated depreciation(e.g., 50 percentfirst year and 25percent second andthird years).

• Expand definition of“certified pollutioncontrol facility” toinclude a broaderrange of capital im-provement projects,if those projects candemonstrate pollu-tion prevention ben-efits. For examplethe current restric-tion on capital im-provement projectsthat change the na-ture of the manufac-turing processwould be eased ifthe project candemonstrate a sig-nificant reduction inreleases.

• Change eligibilityrequirements toinclude plants con-structed after 1976.




Tax Incentives

31Improvetax treat-ment ofremedialexpenses

Congressand/or statelegislaturesand/or IRS

IRS policy on which remedialrelated expenses can be de-ducted (i.e., “expensed”) andwhich must be capitalized haschanged in recent years. In thepast IRS policy significantly re-stricted the ability to expensemany remedial costs. The IRSsubstantially reversed this pol-icy in 1994 (IRS Revenue Rul-ing 94-38) by allowing certaintypes of remedial costs to bededucted (e.g., the cost of re-moving contaminated soil or thecost of operating a groundwatertreatment facility), while re-quiring that other costs be de-ducted (e.g., the cost of con-structing a groundwatertreatment facility). The ruling,while beneficial, has been inter-preted rather narrowly. For ex-ample, it is unclear whether thecosts of other types of remedialactivities are deducted (e.g., in-stalling groundwater monitor-ing wells, removing Under-ground Storage Tanks (USTs) orother remedial expenses thatprovide value beyond the taxyear in question) are deductible.

Expand current IRSpolicy to allow (as anoption) the de-ductibility of all re-mediation-relatedcosts in the year inwhich they occur. Un-der this option, com-panies would not haveto distinguish be-tween costs that con-tinue to provide bene-fits beyond the yearin which they oc-curred and othercosts. All remedialcosts would be fullydeductible. (This op-tion could be limitedto voluntarycleanups.)




Tax Incentives

32Corporateincome taxcredits forpollutionprevention

Congressand/or statelegislatures

No federal environment-related income tax credit cur-rently exists. Some at temptsat providing income tax cred-its have been implemented atthe state level. Delawareawards a tax credit to manu-facturers who reduce ToxicRelease Inventory (TRI) re-leases by 20 percent or otherwaste by 50 percent. Thecredit amount is $400 for each10 percent reduction and isprovided over a five-year pe-riod. Minnesota passed an in-come tax credit of 5 percentof the costs of equipment usedprimarily to reduce waste. Thecredit was rarely used and wasremoved as par t of an overalltax simplification effor t.

Provide for income taxcredit for either reduc-tions in pollutants(TRI releases or haz-ardous or industrialwaste) or for compa-nies committing toone or more environ-mental excellence pro-gram elements. If thetax credit is based on areduction in releases,the tax credit couldrely on a formula thatconsiders (a) the per-cent reduction from abaseline year, (b) theabsolute amount ofpollution reduced and(c) the size of the

33Variableincome taxrate tied toreductionin releases


No existing examples. Adjust corporate taxrate depending onpercentage of pollu-tion reduction beyonda compliance base-line. The proposalwould be revenue-neutral as decreasesin the tax rate wouldbe offset by increasesin tax rates for com-pany’s achieving noreductions. Applyingthis to Superfund re-lated taxes might beparticularlyappropriate.




Tax Incentives

35Waiver ofsales taxfor envi-ronment-relatedpurchases

Statelegislatures

Several states currently waiveall or part of the sales tax onthe purchase of pollution con-trol equipment (Alabama,Idaho, Maine, Michigan andothers).

Waiver of all or partof the sales tax on thepurchase of pollutioncontrol equipment, re-cycling equipment orequipment contribut-ing to a pollution pre-vention project.

34Corporateincome taxcredit forhiring EHSemployees

Congress and/or statelegislatures

There are no existing environ-ment-related employee taxcredits. However, many statesand localities offer employ-ment tax credits as economicdevelopment incentives. As anexample, through the federalenterprise zone program, Mis-souri offers a tax credit of upto $1,600 per new employeehired in an enterprise zone.Outside enterprise zones, theState offers a $75 to $100 taxcredit for each new job. At thefederal level, the new “WorkOpportunity Tax Credit” pro-vides a tax credit for compa-nies hiring “hard to employ”workers. The credit is worth35 percent of the first $6,000in wages paid during the firstyear of employment.

Offer a tax credit forcompanies hiringemployees whoseresponsibility is pre-dominantly (e.g., 75percent or more) de-voted to environmen-tal, health and safetyissues. The tax creditwould be phased inover two years to en-sure that employeeswere retained. Ifdeemed appropriateby the relevant legis-lature or agency, thetax credit could belimited to small busi-ness only.




Tax Incentives

36Propertytaxabatements

State legisla-tures or locallyelected bodies

Many state and local govern-ments promote economic de-velopment through the use ofproperty tax abatements to en-courage companies to site orexpand facilities in their re-gions. Several states have ex-emptions for property tax forproperty dedicated to pollutioncontrol (e.g., wastewater facili-ties, air control equipment).

To GEMI’s knowledge the sin-gle example of a broader envi-ronment-related property taxabatement program was inplace in Louisiana from 1990to 1992. The program in-cluded a sliding scale of prop-er ty tax exemptions depend-ing on the score a companyat tained on an “environmentalscorecard.” This scorecardwas based on the company’spast environmental record andon the amount of emissionsgenerated per employee.

Companies scoring highenough were eligible for com-plete property tax exemp-tions. Data from the pro-gram’s two years of existenceindicated that companies bothimproved performance and re-ceived considerable tax relief.However, prior to the pro-gram, vir tually all companieswere receiving a 100 percenttax exemption. The programtherefore represented an in-crease in taxes and was subse-quently terminated.

Adopt a sliding scaleof property taxexemptions for com-panies demonstratingsuperior environmen-tal performance.Companies would beable to choose from aseries of environmen-tal excellence pro-gram elements. Themore of these pro-gram elements acompany commits to,the higher thepercentage of totalproperty tax relief.




Capital Incentives

37Low-interestloans

Statelegislatures

Many states and localities offerlow interest loan programs to fi-nance the purchase of pollutioncontrol equipment and/or under-take pollution prevention pro-jects. Many of these programsare aimed exclusively or pri-marily at small businesses. Oneof the drawbacks in many suchprograms is that they apply onlyto add-on pollution controlequipment and not for more fun-damental modifications in abusinesses operations. For ex-ample, many dry cleaners oper-ate older cleaning units. Replac-ing these units would reduceemissions while also improvingproductivity. However, manyloan programs preclude the useof loans for the purchase ofsuch equipment.

Promote the expan-sion of such programsto more states and lo-calities as well as anexpansion of federal“seed money” to be-gin state or locallybased loan programs.In addition, allow forthe application of theloan program to off-set some or all of thecapital purchases thatimprove productionas well as reduceemissions.

38Interestsubsidiesor creditenhance-ments

Statelegislatures

Offering government subsidiesto lower the interest rates fromprivate lenders (or reduce therisk of such loans) for environ-mental projects (i.e., purchaseof pollution control equipmentor pollution prevention pro-jects) can be a more effectiveand efficient method of makingcapital available to companies,particularly small businesses.

California, for example, runs aCapital Access Program inwhich the state, the lender andthe borrower all contribute to areserve fund designed to coverlosses from a portfolio of loansunder the program. The reservefund effectively reduces therisk associated with privateloans to companies for environ-mental related projects.

Promote the expan-sion of such programsto more states as wellas promote the use offederal “seed money”to begin suchprograms.




Capital Incentives

39Tax-exemptbondfinancing

Congress Companies currently may is-sue tax-exempt “private-activ-ity” bonds to finance the costsof constructing certain facili-ties. Three types of environ-mental facilities are eligiblefor tax-exempt financing.These include sewage facilities(defined as wastewater treat-ment plants meeting certaincriteria), solid waste disposalfacilities and qualified haz-ardous waste facilities (e.g.,incineration and secure dis-posal). These tax-exempt, pri-vate-activity bonds are subjectto an annual state volume capof $50 per capita or $150 mil-lion per state (whichever isgreater).

This cap significantly limitsthe amount of the bond thatwould otherwise be issued. Inmany states, the demand forthe bonds far exceeds the cap.Therefore, many companiesare unable to take advantageof this financing. Prior to theTax Reform Act of 1986, taxexempt bond financing wasalso available for air pollutioncontrol and a broader range ofwastewater treatment facili-ties. The Tax Reform Act of1986 also eliminated the op-portunity to apply accelerateddepreciation to capital invest-ments financed through tax-exempt bonds. Therefore,companies using tax-exemptfinancing are precluded fromusing the accelerated depreci-ation for pollution controlfacilities.

Expand the scope ofeligible environmen-tal facilities to in-clude air pollutioncontrol projects, addi-tional water pollutioncontrol facilities,process improvementswith direct environ-mental impacts (e.g.,installing new produc-tion equipment thatresults in reduced re-leases), reclamationor recycling facilitiesand remediation-re-lated facilities (e.g.,groundwater treat-ment units).

Eliminate or increasethe annual volumecap available for envi-ronmental “private-activity” bonds.




Capital Incentives

40Credits tooff-setfutureenviron-mentalpayments

EPA and stateenvironmentalagencies (mayalso requirelegislativeauthority)

One of the incentives in theColorado Environmental Lead-ership proposal is the awardingof dollar credits to entities thatparticipate in the program.The credits can be used to off-set any future obligations ofthe entity to the state environ-mental agency, excluding finesand penalties.

The credit amount is based ona percentage of the total dol-lars spent on the various elec-tive program elements adoptedby the company (e.g., moneyspent on developing customerenvironmental awareness pro-gram, developing an annual en-vironmental performance re-port and various other actionsspecified in the proposal). Thecredit is capped at $10,000over a three-year period.

Provide dollar creditsto offset future oblig-ations with state en-vironmental agenciesto entities that eithercommit to reductionsin releases or to adoptone or more environ-mental excellenceprogram elements.

Credit amount couldbe based on percentreduction from base-line releases or on thenumber of environ-mental excellenceprogram elementsadopted.

The credits could alsobe transferred (sold) toanother entity as longas the receiving entitywas also a participantin the program.

41Grants


Direct grants are also some-times used for pollution con-trol equipment projects. Thehigh public cost limits the useof such programs.

Promote expandeduse of grants forequipment purchases,pollution preventionprojects and EHStraining.

Role of Incentives in Improving Environmental Performance

The traditional approach to environmental regulation in the United States has primarilyrelied upon the issuance of detailed, media-specific regulations that govern virtually allaspects of a company’s environmental performance. Regulatory agencies, both stateand federal, enforce these regulations through resource-intensive, on-site complianceinspections, and formal enforcement actions, such as Notices of Violation, complianceorders and civil and criminal penalties. Many companies have responded to this systemby investing significant resources in pollution control equipment, large environmentalcompliance staffs and the development of environmental management systems toensure on-going compliance with myriad regulations. The current command-and-controlapproach has been successful in many areas. In particular, the United States haswitnessed dramatic improvements in air and water quality and in the overallmanagement of hazardous wastes.

This success, however, is not perfect. Considerable resources, both private and public,are expended to develop, comply with and enforce environmental standards. EPA’s 1998budget is $7.4 billion.5 According to the Department of Commerce, private industryannually spends over $100 billion dollars on pollution control and related services.While a good portion of these private expenditures are a necessary part of improving ournation’s environmental performance, it is generally acknowledged that there aresignificant inefficiencies in these expenditures. Examples of these inefficiencies includeoverlapping requirements; regulations that restrict companies from using alternativetechnologies that are as effective, yet less expensive; and slow permit processes that cankeep companies from expanding their operations or updating their product offerings. Inaddition to its inefficiencies, the current system is uneven in its application, over-regulating certain sources of pollution and under-regulating others. Similarly, theenforcement of environmental requirements has been uneven. Some industries have feltthe brunt of state and federal inspection and enforcement activities while others haveescaped such scrutiny. Consequently, there is considerable room to improve the currentsystem and achieve the same, if not better, environmental performance at a lower cost.

In addition, while most companies have made vast strides in their environmentalperformance, not all have excelled equally. The barriers to improved environmentalperformance vary depending on the size and nature of the company. For example,smaller companies are often unable to take advantage of the economies of scale that areavailable to larger companies when implementing environmental programs.Unfortunately, there still are companies constrained by a management culture that doesnot emphasize environmental performance. In addition, EPA and state environmentalagencies often have insufficient resources to provide the compliance outreach andsupport needed by the large number of small and medium-sized businesses. Even amonglarger companies, the environmental performance of different facilities within acompany often varies widely. Some of the largest companies with the best overallenvironmental records in the United States may continue to operate facilities in whichthere remains considerable room for cost-effective improvements.

Page 26 The GEMI Incentives Project

5 Budget of the United States Government, Fiscal Year 1998.

Finally, there remain some environmental problems where more traditional regulatoryapproaches appear inadequate. In particular, problems in which the sources are a large number of diffuse activities usually do not lend themselves to prescriptive“command and control” regimes. Urban runoff is a prime example, as is the emission of greenhouse gases. The current regulatory system, with its emphasis on detailed ruledevelopment, compliance inspections and enforcement is unlikely to be successful inaddressing such problems.

A strong dose of environmental incentives is not the cure for all of the system’s currentills. Incentives can, however, aid in each of the areas described above. Becauseincentives rely on the market to drive performance, they can help bring aboutenvironmental improvements at a lower cost (both public and private) and at a fasterrate than prescriptive regulations. Incentives encourage companies to makeenvironmental improvements while offering them the flexibility to find the most cost-effective means of achieving this goal. Incentives are also an effective means ofencouraging improvements among small and medium-sized companies, as these are thecompanies most likely to respond to the potential financial benefits inherent in manyincentive options. Finally, incentives may offer a cost-effective opportunity to addressmore intractable problems, like urban runoff, by reducing reliance on traditionalresource-intensive inspection and enforcement programs.

Different Incentives Appeal to Different Companies

In developing the various incentive options included in this report, GEMI contactednumerous companies to receive input on which incentives have the greatest appeal andwould be most likely to encourage a company to undertake a voluntary environmentalinitiative. The companies we consulted also included GEMI members, which areprimarily large, global companies, as well as representatives of small and medium-sizedbusinesses. The companies also included a range of business sectors, including oil andgas, chemical, pulp and paper, consumer products, electronics, and energy. This processincluded a formal survey of GEMI members to guage the appeal of different incentiveoptions. As a result of this process it became abundantly clear that no single incentiveor even group of incentives appeal to all companies. Companies, even within the samesector, appear to respond very differently to the incentives included in this report.

Generally, the following factors appear to be important in determining which incentivesare most likely to be effective with different companies:

• Company size. Smaller businesses appear to respond more to marginal changes intaxes. In addition, access to capital is often important for small businesses andtherefore, incentives that provide capital at a reduced rate are often appealing. Inaddition, incentive options involving enforcement discretion and/or amnesty appearto have the greatest appeal for smaller businesses.

• Need for swift time to market. The various options described in this report thatreward companies with increased flexibility in their permits (particularly airpermits) hold great appeal to companies that must respond swiftly to changes intheir markets. For example, technology companies often must rapidly change theirproduction to respond to new advances in technology. For these companies,additional flexibility to modify production without being delayed by additionalpermitting can be a powerful incentive. Other companies, however, do not havesuch time-to-market demands and may be less motivated by such flexibility.


• Extent of product regulation. Those incentives involving product review andapproval are clearly most applicable to companies producing highly regulatedproducts, such as chemical producers, pesticide manufacturers and pharmaceuticalcompanies. For these companies, incentives that accelerate the product reviewprocess are likely to be very effective.

• Extent of international operations. Several of the suggested incentives involvechanges to U.S. laws and regulations and are, therefore, primarily appealing tocompanies that operate facilities in the United States. Companies with significantoverseas operations are more likely to respond to incentives that can beimplemented in their non-U.S. facilities. This includes the adaptation of theregulatory incentives to other countries as well as the use of tax and capitalincentives to encourage improved behavior in countries were the regulatorystructure is less well developed.

Because there is no “one-size-fits-all” incentive, several of the incentive programs thathave been implemented to date offer a menu of incentives in order to encourage improvedperformance. Under such an approach, those entities participating in the program aregiven the flexibility to select the incentive which appeals most to their business.

Experience of GEMI Companies With Voluntary Programs

Many companies, including GEMI members, have initiated a wide range of voluntaryenvironmental projects and participated in government-sponsored voluntary programs.One or more of the GEMI companies have participated in vir tually every majorfederal voluntary environmental program offered, including the 33/50, Green Lights,Energy Star, OSHA Star, Waste Wise, Climate Wise, Green Chemistry Challenge andthe Environmental Leadership programs. Companies will no doubt continue toundertake these voluntary activities; however, they are under increasing pressure todemonstrate the financial benefit or value to shareholders of such initiatives. This isparticularly true in the current climate of corporate retrenchment. Much of the impetusfor GEMI’s work in this area was a desire to tip the financial balance to make it easierfor companies, big and small alike, to demonstrate the financial benefits of voluntaryenvironmental projects within their companies and to their shareholders. For manyprojects, even a small incentive can have this desired result.

Differences Between Voluntary Incentives and Market Incentives

In this report “voluntary incentives” are distinguished from the broader idea of “marketincentives.” Much has been written in the last 10 years about relying more on marketforces as a means of improving our environmental regulatory system.6 Many of theideas contained in this table have been discussed in these previous reports. However,discussions on the use of market forces traditionally include a range of mandatoryregulatory structures, such as most pollution trading programs, which are not coveredhere. While many of the concepts, including trading programs, can offer significant

6 See U.S. Environmental Protection Office, Office of Policy, Planning and Evaluation, EconomicIncentives; Options for Environmental Protection, March 1991.


environmental benefits at a lower environmental cost, GEMI’s goal in this effort is tofocus more narrowly on approaches governments can use to encourage voluntaryenvironmental improvements.

Other Issues Associated with the Use of Incentives

GEMI’s research in this area has focused primarily on identifying incentives that havethe promise of encouraging real environmental improvements among small, mediumand large companies. While identifying these incentives is an important first step,GEMI recognizes that an effective incentives system must ensure that the system trulyresults in environmental improvements, that appropriate stakeholders can participate inthe process and that several other important issues are addressed. These importantfactors include the following:

Defining appropriate performance for awarding incentives

Incentives are mechanisms for awarding companies or facilities for makingvoluntary environmental improvements. Therefore, an incentive program has twomain components: the action a company must take and the incentive the companyreceives for taking the action. The appropriate action a company is required to taketo receive an incentive can vary across different industries in recognition of thedifferent environmental issues each faces. Similarly, the required actions may varyaccording to the size of the company or between facilities that have already madesignificant progress in implementing superior environmental programs andfacilities that have less developed programs. One way to address these differencesis to allow companies to choose from a menu of activities, so that companies canselect those that are most appropriate to their operations.

Generally, there are three categories of actions that can be required in order to award anincentive. These include:

• Make an environment-related expenditure. Companies can be providedincentives for expending resources on an environmental project. Suchexpenditures could include the purchase of pollution control equipment, theimplementation of a pollution prevention program or even the hiring of additionalenvironmental staff. Many of the tax incentives included in this report (e.g.,accelerated depreciation, waiver of sales tax) are predicated on some expenditureby a company on an environment-related improvement. In the case of suchincentives, the required action (i.e., making the expenditure) is directly tied to theincentive (a tax incentive tied to the amount of the expenditure). Therefore,implementation of such tax programs is relatively straightforward.

• Reduce emissions or waste generation. Reducing the release of specifiedpollutants above and beyond what is required under current regulations can alsobe rewarded with financial incentives. The reduction could be in hazardouswaste generation, total toxics in effluent discharges, hazardous air pollutantemissions, criteria pollutants (VOCs, NOx, SOx, CO), global warming gases,


total Toxic Release Inventory (TRI) releases or a subset of TRI releases. Tying anincentive to a reduction in releases is the most direct method of rewardingenvironmental improvements.

However, there are several problems associated with this approach. First, manyindustrial facilities have already implemented pollution prevention programs andmade significant reductions in releases. For these facilities, the incremental costof making further reductions is significantly higher than for those facilities thathave not implemented pollution prevention programs. An incentive program tiedproportionately to the amount of release reduction would reward those facilitiesor companies that have been slower to implement pollution prevention programs.Second, establishing appropriate baselines from which to measure reductions hasproved difficult in other programs (e.g., acid rain trading and 33/50).

Finally, it is often difficult to make appropriate comparisons among differenttypes of pollutants in awarding credits. A reduction in one unit of one type ofpollutant may result in a significantly greater public health benefit than areduction in one unit of another pollutant. Therefore, programs that rewardrelease reductions must decide whether to reward all reductions equally or tovary the incentives according to the toxicity or local burden represented by each type of pollutant.

• Implement an EMS program element or undertake a communityenvironmental initiative. Incentives can also be designed to awardenvironmental program initiatives which demonstrate a company’s superiorenvironmental leadership. Such initiatives include the implementation of variousenvironmental management system elements, such as regular EMS audits;obtaining ISO 14001 certification; adopting publicized performance measures;or implementing a regular compliance auditing program. Additionally, suchactivities could include environmental actions a company might take outside itsown operations, such as implementing a supplier or customer awareness program;mentoring another company in the development of their EHS program; orsponsoring a community environmental education program.

All three of these types of actions provide real environmental benefits. Thesebenefits include:

(1) reductions from baseline emissions and releases,

(2) reduced variability in emissions or releases,

(3) increased assurance that companies are in full compliance with all specifiedenvironmental requirements and

(4) increased support for community and consumer environmental programs.

It is important to note that for many of the incentive options included in the table,more than one of these types of actions could potentially be required. For example,a tax incentive could be structured to award companies for each unit of pollutionreduced, for the cost of additional pollution control equipment or for theimplementation of a superior environmental management system.


Accounting for past superior performance

One of the common issues in developing and implementing an incentive program isaccounting for companies or facilities that have already undertaken significantenvironmental improvements and therefore may not be able to take advantage ofnew incentives. For example, as described above, a tax credit that awardscompanies for reducing hazardous waste generation benefits companies that havenot yet implemented comprehensive waste minimization programs significantlymore than those that have made these improvements. The marginal cost of reducinga unit of waste is likely to be higher for the company that has already made largereductions and, therefore, there may be lit tle or no financial benefit from the taxcredit. While encouraging those that have yet to implement these types of programsmay be a primary goal of the incentive program, it may appear to be unfair to thosethat have been more proactive.

There are several options for addressing this apparent inequity. First, the incentiveoption can award verifiable improvements that were made prior to the initiation ofthe program. For example, a tax credit for waste reduction could apply to reductionsmade in each current tax year and to reductions made in the previous five years ifthe taxpayer can validate such reductions (e.g., through the submission of manifestdata or similar information). Such an approach may work if the informationnecessary to substantiate claims of past performance is both readily available andcredible.

Another approach is to give companies several options to qualify for the incentive.For example, a tax credit could be awarded to companies that either reducehazardous waste generation, implement an environmental self-audit program orundertake a mentoring program with a small business. Under such a program,companies who lag behind in their environmental programs would likely reducewaste generation to get the tax credit because their marginal cost for wastereduction is low. Companies that have more well developed environmentalprograms might opt for the implementation of a self-audit program. Sophisticatedcompanies that already have waste reduction and self-audit programs might choosethe mentoring option. Such an approach raises the level of performance of allcompanies, regardless of their past performance and allows the broadest range ofcompanies to participate in the program.

The need for federal flexibility

Past efforts at providing regulatory flexibility or relief as an incentive to improvesuperior environmental performance or improve regulatory efficiency have beenhampered in part by federal statutory or regulatory requirements that appear topreclude such flexibility. As an example, certain environmental statutes andregulations require that environmental permits be renewed on set schedules (e.g.,five or 10 years). Such a statutory requirement effectively restricts a state’sadoption of an incentive option that offers participating companies longer permitrenewal schedules. Similarly, current regulations may restrict the ability to allowmore flexibility in permit modifications.

In cases in which such potential restrictions exist, GEMI members believe thatpilot projects, site-specific rulemakings, temporary enforcement waivers andsimilar mechanisms should be used to allow for the testing of alternative


approaches. Considerable flexibility currently exists to grant such temporarywaivers. When done in the context of pilot programs, allowing such flexibility willprovide EPA and other federal decision-makers with important information aboutthe merits of various innovative regulatory approaches, while not sacrificing thecurrent integrity of existing laws and rules. In instances in which statutorylanguage clearly precludes the use of certain regulatory modifications even on atemporary basis, GEMI would support limited waivers for the short-term pilottesting of innovative incentive programs.


Attachment 1Examples of Incentive-Based State Programs


Increase level of pollution prevention.

Voluntary incentives can (and have) been used to encourage pollution preventionamong both small and larger businesses. While most states have encouragedpollution prevention primarily through information dissemination and technicalassistance, a few states utilize more direct incentives as well.

• Michigan’s Clean Corporate Citizen program encourages companies to

(1) identify pollution prevention opportunities,

(2) establish pollution prevention goals,

(3) report on accomplishments and

(4) participate in information and technical exchange programs. Companiesthat undertake these activities through established state programs as well asaccomplish other environmental objectives are eligible for more flexible airpermits as well as an expedited permit review period.

Frank BaldwinMichigan Department of Environmental Quality(517) 373-3675

• Delaware, through its Green Industries Initiative, promotes decreases in releasesreported under the Toxic Release Inventory through the use of income tax credits.Qualifying companies must demonstrate a minimum 20 percent reduction.Evadne GianniniDelaware Economic Development Office(302) 739-4271

• Oklahoma encourages the installation of equipment used for “recycling, reusing orreducing hazardous waste” by offering a tax credit for 20 percent of the purchaseand installation cost of equipment. The maximum credit is $50,000.Oklahoma Department of Commerce(405) 815-6552

• Oregon also promotes the purchase of “pollution prevention equipment” byoffering a tax credit up to 50 percent of the certified cost of the equipment.Oregon Economic Development Department(503) 986-0123

• Rhode Island encourages the use of “source reduction equipment” by offeringrefunds on the sales tax on the purchase of such equipment when certified by theState.Rhode Island Economic Development Corporation(401) 277-2601

Reduce releases of regulated pollutants.

Several innovative programs are in place to encourage companies to reduceemissions of regulated substances beyond regulatory standards.

• Michigan developed a voluntary statewide Emission Averaging and EmissionReduction Credit Trading program for volatile organic compounds (VOCs) and othercriteria pollutants. The trading program awards credits for reductions in emissions


beyond what is required by an applicable emission standard or limitation or abaseline derived from a facility’s historical operations. Companies that reducebeyond these levels may sell credits to other companies. In addition, localgovernments can purchase credits and use them as economic development incentivesto attract new businesses.Dennis DrakeMichigan Department of Environmental Quality(517) 373-7068

• Several of the XL Projects have involved commitments to reduce regulatedpollutants beyond current standards. For example, Merck & Co., Inc. hascommitted to limit SO2 and NOx emissions from its Elkton, Virginia facility nearthe Shenadoah National Park. To achieve these levels, Merck will convert fromcoal to natural gas at an estimated capital cost of $10 million. Under thiscommitment, Merck will be able to make changes in its production processwithout having to obtain approval from EPA or the Virginia Department ofEnvironmental Quality so long as those changes do not cause the facility toexceed an emissions cap.Robin MoranU.S. EPA Region 3(215) 566-2064

-or-John DanielVirginia Department of Environmental Quality(804) 698-4311

Reduce emissions of non-regulated pollutants.

The use of incentives is the primary mechanism in the federal plan for achievingtargeted reductions in greenhouse gas emissions. The federal plan, announced inOctober 1997 includes a variety of tax incentives to encourage reductions and toencourage research and development in new greenhouse gas reduction technologies.The plan also includes the awarding of credits to companies for the early reductionof emissions.

U.S. Department of EnergyOffice for Energy Efficiency and Renewable Energy(800) 363-3732

Reduce non-point source water pollution.

A good example of a non-point source incentive program was implemented by theMinnesota Pollution Control Agency (MPCA). MPCA used a pollutant tradinginitiative as an incentive to encourage non-point source reductions and to maintainlimits on pollutant loading of a watershed. Under the initiative, a company thatsought to construct a new wastewater treatment was required to offset the increasein point-source discharges with reductions in non-point source discharges up-streamfrom the facility. Without this innovative mechanism, the construction of the newtreatment facility might not have occurred because of the overall cap on totaldischarges imposed by the MPCA.

Norman SenjemMinnesota Pollution Control Agency(612) 822-6243


Provide regulatory compliance assistance to small businesses.

Many state governments have established innovative programs designed toencourage small business compliance:

• Wisconsin, Minnesota, Michigan and Illinois have joined together with industryand environmental representatives to implement the Great Printers Project. Theproject works with the printing industry, comprised mostly of small businesses,to encourage companies to subscribe to the Great Printers Principles, whichinclude compliance with existing laws, moving beyond compliance to maximizewaste reduction and seeking continuous environmental improvements.Companies are encouraged to participate through the provision of industry-targeted environmental regulatory guides, self-assessment and pollutionprevention checklists and through formal public recognition.Lois MorrisonCouncil of Great Lakes Governors(312) 407-0177

• The Illinois Environmental Protection Agency (IEPA) initiated the “Clean Break”program which provides regulatory assistance to small businesses in a non-adversarial manner. Under the program, small businesses wishing to participate mayreceive free regulatory assistance from the Agency with the promise that the Statewill not seek any enforcement action against the company if a violation is discovered.By offering amnesty, IEPA has effectively overcome the fear many small businesseshave of regulatory agencies and has therefore spurred significant increases in smallbusiness compliance.John KellyIllinois Environmental Protection Agency(312) 814-5427

• Alaska’s Department of Environmental Conservation is developing a program toassist small communities improve the performance of locally-owned governmentfacilities. The program provides a cooperative approach toward bringing localfacilities into full compliance with ADEC regulations, through the developmentof a five-year compliance plan based on the prioritization of risk factors.Alan WienAlaska Department of Environmental Conservation(907) 376-5038

• The Maine Department of Environmental Protection runs the EnvironmentalLeadership Program to recognize independent gas stations that have achieved fullcompliance or are going beyond compliance. The incentives in this program areprimarily promotional in nature and include stickers the stations can displayindicating they are certified Environmental Leaders, a sample press releasepackage, information brochures that can be distributed to customers and officialrecognition from the Governors office. The program may be expanded to includeprinters and auto repair facilities.Brian KavanahMaine Department of Environmental Protection798-9802


• In order to encourage compliance among dry cleaners with recordkeeping andreporting requirements, the Florida Department of Environmental Protection(FDEP) developed an easy-to-use “compliance calendar” and distributed it to drycleaners. The calendar identifies important compliance milestones. Compliancewith recordkeeping has risen 74 percent since the issuance of the calendar.Maggie CangroFDEP Southwest District Office(813) 744-6100

Encourage the use of environmental management systems.

• Several states have joined together to form a Multi-State Work Group specificallyto evaluate the effect of ISO 14001 on environmental performance and to testmechanisms for encouraging the adoption of an ISO 14001 EMS. The statesinclude California, Texas, Oregon, Arizona, Illinois, Minnesota, Wisconsin,Pennsylvania, Massachusetts and North Carolina. The pilot tests are using andwill use a variety of approaches to test whether ISO 14001 can in some instancesbe superior to an approach that relies heavily on rules, regulations and traditionalenforcement programs. Under many of the pilots, participating facilities willadopt an ISO 14001 program while being provided discretion on such issues aspermitting, inspection frequency and reporting obligations. The pilots will thenevaluate whether the same or better environmental results were achieved a lowercost (both public and private).Dr. Robert D. StephensCalifornia Department of Toxic Substances Control(510) 540-3003

• As part of the Michigan Clean Corporate Citizen program, companies mustdemonstrate that they have a strong and effective environmental managementsystem in place. The EMS must include, among other components, identificationof environmental impacts, self-initiated compliance audits, public participation, astrong and clear statement of the company’s commitment to environmentalexcellence and environmental training for employees. Companies thatdemonstrate they have such an EMS, as well as demonstrating a strongcompliance and pollution prevention program, are eligible for flexibility in airpermitting as well as expedited permit processing.Frank BaldwinMichigan Department of Environmental Quality373-4720

• The Maine Department of Environmental Protection is promoting the use ofmanagement systems for compliance and pollution prevention through severalmechanisms. One of these mechanisms is an audit policy which providesregulatory relief only for companies with established environmental compliancesystems.Ron DyerMaine Department of Environmental Protection(207) 287-4152


Encourage voluntary cleanup and redevelopment of contaminated properties.

States and localities are currently using a variety of financial incentive mechanismsto spur brownfields development. These mechanisms include revolving loan funds,loan guarantees, credit enhancement mechanisms, grants, tax incentives, taxincrement financing and direct equity participation strategies.

Michigan, for example, has a broad package of incentives for brownfieldsdevelopment which include:• Grants to local governments for site assessments at potential brownfields sites.• A loan fund for local governments to carry out both site assessments and

demolition activities at sites ready for redevelopment.• A tax capture program that allows municipalities to capture the increase in tax

revenue generated from the increased value in a property due to a brownfieldsproject; and

• A business tax credit for businesses making investments in contaminatedproperty.Sharon L. EdgarMichigan Department of Environmental Quality(517) 373-4813

Decrease the time required to issue permits without increasing program resourcesdedicated to permitting or the quality of the permits.

A variety of innovative permitting programs which incorporate incentives forbusiness participation are now being implemented at the state level.

• The Environmental Results Program (ERP) initiated by the MassachusettsDepartment of Environmental Protection (DEP) replaces state environmentalpermits with stringent, industry-wide environmental performance standards.Companies are required to submit annual certifications that they meet theseperformance standards and provide certification information in an on-line,publicly available format. The program, which applies to state permittingrequirements only and not to permits issued in conjunction with federally-delegated programs, eliminates the need for facilities to obtain permits and givescompanies flexibility in meeting standards. It has also reduced the time requiredto review permits, allowing DEP to focus more on other compliance monitoringactivities.Skip RussellMassachusetts Department of Environmental Protection (DEP)(617) 292-5815

• Florida’s Department of Environmental Protection developed an “ecosystemmanagement initiative” that offers “team permitting” as an alternative totraditional permitting. Applicants who need to receive permits from multipleagencies can agree to have team permits known as “ecosystem managementagreements.” This approach results in increased permit flexibility, expeditedpermit processing, alternative monitoring and reporting requirements,cooperative inspections and other incentives. In turn, the applicants must have


• stellar compliance records and must demonstrate that this approach will result in a“net ecosystem benefit” to the affected ecosystem and a reduction in overall risksto human health and the environment.Ernie BarnettFlorida Department of Environmental Management(850) 488-4892

• The Mississippi Department of Environmental Quality “re-engineered” itspermitting process to improve the efficiency and effectiveness of the permittingprogram. The re-engineering included the following modifications to thepermitting process:• Assignment of a single person as a point of contact for all permits issued to a

given facility.• Increased guidance on the use of general permits and options for reducing

permitting requirements based on implementation of pollution prevention intothe facility’s design.

• Customize permit applications that include incentives for pollutionprevention.

• Streamlining the technical review process thereby allowing more efficientdeployment of resources.

Jerry CainMississippi Department of Environmental Quality961-5073

• The Arizona Department of Environmental Quality (ADEQ) is implementing arule that requires ADEQ to establish specific time frames for the issuance oflicenses and permits. Failure of the State to issue licenses under specified permitsresults in a refund of application fees as well as financial penalties for ADEQ.Mark SantanaArizona Department of Environmental Quality(602) 207-4251

Maximize the effectiveness of program resources for compliance monitoring andenforcement.

• The OSHA Voluntary Protection Program (VPP) encourages compliance withsafety laws while at the same time reducing reliance on detailed facilityinspections by OSHA. Under the VPP, companies that demonstrate superiorsafety performance (e.g., at or below national average injury rates for theirindustry) and have various management and safety program elements in place areeligible to be designated “Merit” or “Star” facilities. Following an initial on-siteevaluation, facilities that qualify are not subject to annual complianceinspections, only to on-site reviews of their programs conducted every three yearsand inspections prompted by safety incidents or employee complaints.Occupational Safety and Health AdministrationDivision of Voluntary Programs(202) 219-7266


Glo

bal E

nviro

nmental Management Initiative GEMI818 Connecticut Ave., N.W., Second FloorWashington, DC 20006

phone: 202-296-7449 • fax: 202-296-7442email: [email protected]://www.gemi.org.

printed on Proterra Stucco Cover, with 60% recycled fiber, including 30% postconsumer waste

Trademark of American Soybean Association

TM

environmental improvement through business incentivesgemi.org/resources/ide_004.pdf · on behalf of...

Documents