Even without the recent revision of air quality standards, many regions would have continued to suffer from their inability to keep their emissions below the National Ambient Air Quality Standards. Unless reversed by Congress, the recent revision will greatly increase the number of non-attainment areas.
The easy emission reductions available from new cars and stationary sources are largely tapped out. Current and potential new non-attainment areas must achieve the lions share of the additional reductions necessary to bring air quality to acceptable levels from the existing fleet of cars, especially the relatively few gross emitters responsible for a disproportionate share of total vehicle emissions. Many emission reduction efforts, especially vehicle use, maintenance, and early retirement incentives must be tailored to local conditions.
The federal government has issued guidelines for vehicle retirement programs, and three states have programs in place. Key features of each are discussed. Economic theory and legal, technology, and political concerns are the basis of an informal analysis and comparison of policy options. The article concludes with policy recommendations.
The Clean Air Act Amendments (CAAA) of 1970 and 1977 produced major air quality gains by subjecting new cars and large stationary sources to strict controls. The 1990 CAAA further tightened the screws on new cars, but the easy-to-achieve gains and the technofix strategies were already largely tapped out. The existing fleet (especially the 10% responsible for the lions share of auto emissions [Peterson and Stedman 1992; Bishop et al 1993]; 45% of volatile organic compound emissions and 90% of carbon monoxide emissions come from cars [Innes 1996]) must be the source of most air quality and cost-effectiveness gains. That means some mix of retrofits, improved maintenance, faster fleet turnover, reduced congestion, and better driving habits. The latter could perhaps include efforts to keep gross emitters away from congested areas, and air quality monitors, especially on days when atmospheric conditions are most conducive to the concentration of pollutants. Preliminary data (UNOCAL 1991, BAR 1994, and Alberini et al 1995) support the hypothesis that such approaches will produce cost-effective emission reductions. The requirements of the 1990 CAAA and associated rules do not create enough of the necessary incentives, and are often in the way. According to CAAA expert Alan Krupnick (1997), the Environmental Protection Agency (EPA) is "severely limited by the CAAA in its ability to implement new ideas."
Despite major emission reductions, there are still many non-attainment areas and the 1990 CAAA created tougher, ostensibly mandatory sanctions (Anderson and Howitt 1995). In recent Congressional testimony, Krupnick (1997) said the new standards would be "incredibly expensive" to implement. However, even without tougher standards, growth threatened to push additional regions into non-attainment (1) status. Non-attainment means the ambient air quality standard for one of the criteria pollutants (most frequently ozone) was exceeded on four different dates in a three-year period. An exceedance occurs when any monitoring station registers a pollutant level, averaged over one hour, above the standard. Unless Congress blocks implementation of the new standards, maintaining or achieving attainment will be even more difficult, though the adoption of a proposed increase in the number of hours over which air quality measurements are averaged to determine whether air quality standards have been exceeded would provide some relief. The current, rather curious, one station, one-hour definition of an exceedance (Lis and Chilton 1994) puts an especially high premium on cutting spatially concentrated, peak emissions during times of adverse weather conditions (hot, still). That puts a premium on incentives-based policies tailored to local conditions. Failure to properly tailor policies could unnecessarily inflate pollution abatement costs, and or cause failure to achieve and maintain official attainment status (and associated economic burdens) even with some significant, but not sufficiently targeted, emission reductions. The new eight-hour, 85 parts per billion (ppb) standard now being phased in will slightly reduce the importance of hourly peaks. However, since the one-hour standard was at 125 ppb, the new standard will increase the importance of much lower daily peaks.
The time-of-day and seasonal use patterns of the oldest, disproportionately dirtiest, cars are not documented anywhere. However, disproportionate use during peak travel times with old-car-friendly driving conditions (summer rush hours) seems reasonable; the times when an exceedance is most likely. The gross emitter problem--where and when they are driven, as well as their presence within the existing fleet--is the focus of this article. The earliest efforts to address the gross emitter problem were limited to the elimination of gross emitters through purchase and retirement. Environmentally-motivated vehicle retirement (EMVR: crushing, shredding, even disassembly and resale of parts) pilot projects by General Motors, the Office of Technology Assessment, the Environmental Defense Fund (EDF), and Resources for the Future (2) identified key issues. They include the best design of EMVR programs, whether they should be continuous or sporadic, and whether they are a second best or temporary component of a regions vehicle emissions policy. Part of the last issue are maintenance incentives, and factors that might influence when and where gross emitters are driven. Most of those issues have not been directly addressed before. Addressing them is the aim of this article. The next section describes the current regulatory environment for vehicle emissions, and the resulting incentives, social benefits, and costs, including some previously overlooked. Section 3 identifies the general policy options, and puts them in perspective. Several that have not been suggested previously, even in Innes' (1996) extensive examination of auto emission reduction strategies, are included. Section 4 recommends a general policy that can be tailored to local conditions. Section 5 is a summary and concluding remarks.
II. THE CURRENT REGULATORY ENVIRONMENT
On February 23, 1993 (Federal Register), the US Environmental Protection Agency (EPA) issued guidelines for states that want to award mobile emission reduction credits (MERC) when clunkers are retired. The EPA's guidelines focus on the legal issues that govern the generation and use of MERCs. The EPA did not suggest specific EMVR policies, but they flagged potential program design issues. The state policies suggest procedural details. For the sake of brevity, the discussion is limited to the most noteworthy policy features. Three states (California, Illinois, and Texas) have EMVR policies or policy proposals, and have conducted EMVR experiments.
The federal MERC guidelines (Federal Register, February 12, 1993) further illustrate how the Command-and-Control core of the CAAA limits the potential environmental and economic benefits of emission trading opportunities. The federal and state MERC policies are new examples of the drawbacks of an evolutionary approach (Merrifield 1990) to environmental policy (creating new programs as add-ons to existing ones).
Stationary sources cannot use MERCs to avoid or delay compliance with the CAAA's strictest technology-based rules (Best Available Control Technology and Lowest Achievable Emissions Rate [LAER], p 111-35). That severely limits the use of MERCs to improve cost-effectiveness and shrink marginal cost gaps. Such restrictions are inefficient, and in non-attainment areas, where new sources must more than offset their emissions, the LAER requirement is environmentally counter-productive.
MERCs can be used to delay compliance with RACT (Reasonably Available Control Technology) or NSR (New Source Review) rules. It's unclear whether a steady stream of MERCs could be used to permanently avoid RACT or NSR compliance. The rules tentatively allow MERCs not used in one time period to be used in another. Allowing MERCs to be banked for later, or borrowed from the future, makes sense if marginal damages are constant, or if the marginal benefits of leveling ups and downs in MERC availability outweigh the effect of any negative differences in marginal damages. Inter-temporal swapping could beneficially shift emissions from daily peaks to off-peak times (more on this later).
California and Illinois envision only sporadic EMVR efforts. MERC banking in Texas allows for continuous EMVR by dealers expecting a continuous demand for MERCs. Illinois suggested a $3/car oversight charge. In California, SCAQMDs (South Coast Air Quality Management District) Director must approve each EMVR episode.
In Illinois and Texas, a retirement creates MERCs that last 2-3 years. In California, MERCs, which SCAQMD calls MSERCs, are good for five years, though cars must only demonstrate a probable minimum remaining life of three years. Nitrous oxide (NOX) and volatile organic compound (VOC: an ozone precursor) credits are marketable. Illinois policy recommendation does not include MERC uses. Texas suggests the private use of MERCs for compliance problems like brief production increases, delayed installation of pollution control equipment, and for the CAAA requirements that apply to non-emitters. SCAQMD in California, prescribes several narrowly defined uses (specific industrial processes) for MERCs, and businesses, including non-emitters subject to employee trip reduction requirements (Wachs and Giuliano 1992), can help fund SCAQMDs air quality investment program in place of compliance with some rules. EMVRs are an explicitly approved use of those funds. SCAQMD may receive additional funds for EMVR efforts through the state Air Resources Boards proposed Measure M-1. The goal of M-1 is to retire up to 75,000 older vehicles between 1999-2010, and lesser amounts in the next couple of years to gain experience.
Local governments may buy MERCs to help show progress towards goals specified in state implementation plans. Local governments in areas nearing non-attainment status may see EMVR as a good way to help avoid a non-attainment designation.
The fleet average is the figure used to compute the size of MERCs, even though not every retired car is replaced (3). In addition, unless the EMVRs inflate used car prices enough to cause sugnificant importing from outside the target airsheds, the average replacement car at the end of the replacement domino effect is newer than the fleet average. The CAAA's environmental bonus requirements and attrition adjustments (4) (as high as Californias 20%/year) build in additional conservatism. Because of selection bias (5), MERCs are given a shorter life than a clunkers average expected lifetime of six years. In Illinois, a clunkers estimated MERC value includes a tampering factor.
In Illinois and Texas, EMVR was grafted onto an existing inspection and maintenance (I&M) program. An EMVR produces a MERC only after two emission tests. A test #1 failure forces a car owner to make repairs (at least enough to qualify for a waiver ) (6) or retire the car. The second test determines the car's MERC value. In Texas, the MERC value also depends on a repair estimate. SCAQMD grants MERCs that vary with vintage on the basis of an emissions model. Though California SMOG CHECK rules probably help clunker owners choose retirement, the only motive cited in the SCAQMD rules is the cash offer of the EMVR sponsor.
In Texas and California, cars must be insured, operable, and registered in the target area to be eligible. Illinois only seems to require a title check. IEPA (Illinois Environmental Protection Agency) said the spring is the best time for an EMVR. Cars used in the winter probably have a lot of remaining life. A mechanical screening is part of Illinois' recommended rules, but a car's condition does not influence the expiration date of the MERCs it represents. Californias Bureau of Automotive Repair (BAR, 1994) conducted a pilot project in the Sacramento area that varied the price paid with measured emissions and an estimate of the car's remaining life.
Since newer cars have much more efficient emission controls, Illinois and SCAQMDs rules require that cars be 1981 models or older. Unless the newer cars' emission control systems decay more rapidly than other parts, there is no reason to ever update the model year constraint. EMVRs and attrition will gradually make EMVRs obsolete. The difference between the emissions of post-1981 clunkers not worth repairing and average replacement cars wont be large enough to generate significant MERCs. Consider, for example, TNRCC (Texas Natural Resource Conservation Commission) data for Harris County (nearly all of Houston), Texas. The number of 1981 and older cars fell from 573,962 in 1989 to 282,921 in 1993; a 19.3% annual rate of decline. Further attrition at that rate, plus about a dozen UNOCAL-sized (1991) EMVR episodes would virtually eliminate the supply of eligible clunkers by the year 2000.
In most cases, vehicle characteristics did not affect price because of concern about tampering. The only exceptions were the Illinois Pilot Project, where prices varied by model year, and the Californias Bureau of Automotive Repair Pilot Project (1994), where the EMVR cash offers surprised participating motorists. Surprise, a key factor, is lost once EMVR goes beyond a pilot project. An early Texas proposal, later rejected as possibly too speculative, inequitable, and complex, linked the price to repair costs and insurance company data for replacement values.
Paying the same price for each vehicle substitutes selection bias for the tampering incentive (Alberini et al 1994, 1995). EMVR programs' tendency to attract the least driven vehicles with the fewest remaining miles is especially severe when the price paid is low.
Such pricing policies may cause other problems. The context of EMVR (evolving interpretations of the 1990 CAAA) means that MERC prices only reflect their usefulness in easing the burdens the CAAA imposes on local governments and businesses (including non-emitters). Similarly, Anderson and Howitt (1995) found that State Implementation Planners counted only certain air quality benefits of transportation policies. MERC prices will not reflect the many other benefits to society that accrue from an EMVR (Plotkin 1992). Older cars are not as fuel efficient, or as safe, as the newer cars likely to replace them. MERC prices also wont reflect the social benefits of lower levels of pollutants already below legal limits, or the probable benefits of evening out emissions by time of day. Swapping mobile for stationary emissions (except perhaps for electric utilities) should shift some emissions away from the morning and evening peaks that produce the worst ambient air quality, to other times of day. Society also benefits from replacement lags, and when some non-replacement reduces traffic. Those external benefits justify government subsidization of accelerated vehicle retirement.
Another so far unnoticed potential benefit of an EMVR program (especially a continuous one) is that it could make some regional pollution offset markets more competitive. Without MERC sources, pollution sources are few enough in some areas to cause monopoly behavior, including higher prices and the hoarding of credits to limit competition. In some places, the MERCs could make emission offset banking and inter-firm offset trading viable.
The spatial redistribution of emissions may or may not be desirable. It depends on the location of the ambient air quality monitors, and the spatial distribution of people. The latter is also a fairness issue. Low-income housing is often concentrated near stationary sources that may use EMVRs to avoid emission cuts. Large-scale EMVRs could also disproportionately impact low-income households by raising the price of used vehicles.
The tone of state and federal guidelines and recommendations is very tentative. Their authors recognize that additional data and thoughtful analysis of existing evidence can produce some significant insights. For example, Illinois authorities say that an emissions model (7) will eventually replace emissions testing as the basis of MERC calculations.
III. PERSPECTIVE AND POLICY ALTERNATIVES FOR GROSS EMITTERS
There are alternatives to the inspection and maintenance (I&M) and EMVR programs the political process has deployed against emissions from in-use vehicles. In addition, the new stricter standards just approved by the President have increased the importance of heavy duty vehicles. They are overlooked by EMVR programs, natural attrition occurs more slowly for heavy duty vehicles, and they are especially significant causes of the ozone and fine particulate matter targeted by the new standards.
A vehicle emissions fee (VEF) is among the options that do not require technological advances to implement. Mills (1974) was the first to propose a VEF. Mills and Graves (1986), Harrington et al (1994), and Innes (1996) are more recent VEF proposals. A VEF can indirectly link mobile and stationary sources and minimize total abatement costs, because the authorities might maintain a VEF at the level that equates the marginal control costs of mobile and stationary sources.
Mills and Graves (1986) advocated a VEF assessment for new cars based on EPA's test of new cars, and listed on new car window stickers. Innes (1996) argued for an emissions fee for new vehicles, combined with public funding of some EMVR. Mills and Graves (1986) also said each region should levy an emissions fee on used vehicles when they receive the annual or semi-annual inspection already required in non-attainment areas. Each assessment would depend on where the owner lives (how dirty, which pollutants) and miles driven.
A VEF would spur improved maintenance of emission control systems, at least prior to the emission tests that would determine the assessment. Since it isnt worth paying the fee, or the repair costs of reducing those charges, for some still functional vehicles, a VEF would hasten vehicle retirement. A tax rate cut to offset the household budget effect of a VEF could (8) produce efficiency gains in some regions. The fee's above-average impact on low income families could be offset by using some of the revenues to fund lump-sum transfers, or to directly subsidize repairs or the purchase of a replacement car. Because the VEF is much more visible and certain than the offsets, the promise to offset might not reduce political opposition much. However, a VEFs biggest drawback is the difficulty public officials will face keeping the fee for each criteria pollutant in each region at the efficient (9) level.
Careful use of remote sensing technologies (Bishop et al 1993) would reduce VEF shortcomings such as deterioration and tampering between the scheduled I&M inspections (10) that are now as much as two years apart. Remote sensing practices can also bring about significant changes in the location and timing of emissions. A mixture of secret, and well-publicized, sensor deployments could catch gross emitters, and influence the timing and location of emissions significantly. Publicizing the deployment of sensors at chronically congested spots near ambient air quality monitors on hot, windless days will keep some people away from those spots, especially motorists who feel they have high emission rates to hide.
A tradable discharge permit market that mobile sources could participate in through on-board meters (11) for tailpipe and evaporative emissions is an ideal, but still infeasible approach. Tamper-resistant emission-measurement devices for automobile tailpipes already exist (Innes 1996), but they are too still too expensive. A cheaper, real-time, on-board sensor would allow the metering of motorists and other mobile sources. A part of the envisioned, cheaper metering technology is a meter that would deplete emission allowances or credits purchased by motorists from the same regional brokers that already facilitate permit trades among stationary sources. The price of the credits, and hence the incentive to better maintain emission controls, and retire cars before their transportation value disappears, is market-determined. To facilitate tailoring to regional conditions, the new technology should eventually allow the credit depletion rate to vary with the vehicles precise location, the time of day, and atmospheric conditions.
Long ago, an official told me that technical problems are temporary, but people problems are often insurmountable. The intervening years have convinced me that he was right. Therefore, a policy option should not be dismissed because it would require a technology that does not exist. The biggest barriers to new policies are political, not technical. The pace of innovation for a new technology depends on the development of an "environmental policy that produces an economic reward for doing so (Dudek 1993)." Milliman and Prince (1989) found that emission fees and salable emission permits promote technological change best. An interim policy must provide strong incentives to develop the new technology and a smooth transition to the new policy once it is viable. An extension of salable permits to mobile sources is more attractive than EMVR. EMVR only reduces emissions by retiring cars not worth fixing, and its perverse incentives create risks. A salable permits policy would not create perverse incentives. It would reduce emissions of most vehicles by rewarding better driving and maintenance habits.
Though a highway congestion toll assessed electronically (no booth, no stopping) targets specific road segments, rather than vehicles most responsible for air quality deterioration, a congestion toll is a very cost-effective way to cut emissions (Harrington et al, 1994; Sisson, 1995). The technologies exist, but they have political liabilities (see Anderson and Howitts  discussion of restrictive transportation demand management policies) like the VEF. A properly targeted congestion toll is cost-effective because air quality gains are a free side benefit. The benefits of conserving fuel, saving motorists' time, and reduced road capacity requirements are enough to justify a properly targeted toll.
Catching gross emitters with just remote sensing (violators are more rigorously tested), or I&M combined with remote sensing, may be a more politically feasible option. However, fees that vary directly with emissions create stronger, appropriate incentives than a traditional pass-fail I&M test. The centralized I&M only, pass-fail test now in use in many non-attainment areas is encountering resistance. It inconveniences all motorists, and many gross emitters stay on the road by getting waivers, or they avoid inspections by registering their vehicles outside the non-attainment area. Neglect and tampering between inspections is another major source of gross emitters (Glazer et al 1993).
EMVR lacks the political negatives of a VEF, it is technically feasible and legal now, and it may not require mandatory, universal car inspection. The major weakness of EMVR is that it bases a cars value on something bad it would do if left in service. Contrary to the polluter pays principle that underlies most environmental policies, EMVR sponsors pay polluters not to impose uncompensated social costs. Because a clunker's EMVR value depends on the location and size of potential emissions, EMVR Programs could create perverse incentives. These include making cars dirtier, keeping them in service longer in anticipation of a sale to an EMVR sponsor, and moving dirty cars to regions with dirtier air. It could even increase the demand for cars with less efficient emission controls, or controls that decayed more quickly.
IV. POLICY RECOMMENDATIONS
Because of the possible effects of perverse incentives, and the uncertain supply of gross emitters not worth repairing, formal EMVR efforts should be sporadic on an interim basis until new metering technologies allow the use of tradable discharge permits for cars. To maximize cost effectiveness during that interim period of EMVR use, there should be more allowable uses of MERCs, and the prices paid for clunkers ought to vary at least according to the estimated remaining life of the car, and when feasible, according to modeled, not measured emissions. Government-paid mechanics ought to compute the number of remaining miles. That would avoid moral hazard problems, such as deferred maintenance or tampering by owners or brokers, while still keeping brokers' incentives to seek out the dirtiest car types. It also cuts costly emission testing; maybe to zero if simulations can provide enough reliable data to create a Green Book basis (Emerson and McCanlies 1992) of the prices. Linking estimated remaining life and price minimizes selection bias, and increases maintenance incentives. The size of the MERC, and its expiration date, should vary with an annual mileage estimate based on the most recent bill of sale or I&M record. The unpriced benefits of clunker retirement call for reduced conservatism in MERC creation and longevity policies. An EMVR participant that registers a car outside the target region during the projected life of the retired clunker should pay a registration surcharge equal to a pro rata share of the price paid for the clunker. The surcharge revenues are available to replace the expected emission reductions.
Highway congestion fees, and vehicle emission fees (VEFs) are better interim policies. A mixture of random, and skillfully placed, remote sensors would keep a VEF policy from creating uncertainties and perverse incentives like those of an EMVR, or some existing I&M programs. Some well-advertised remote sensor deployments could help discourage the use of high-emitting vehicles at the most damaging times and places. A VEF policy targets actual, rather than hypothetical, emissions. The cost-effective technology necessary to support the ideal, long-term salable permit policy that includes vehicles will develop more quickly if the fee policy is explicitly interim.
V. SUMMARY AND CONCLUSIONS
Emissions from gross emitters are significant contributors to a problem that has many sources, and major consequences. Many regions are unable to comply with the existing standards, and the President recently approved tighter standards the EPA says will produce $120 Billion in health benefits (November 29, 1996 Wall Street Journal). How the affected regions try to comply with (or alter through the political process) ambient air quality standards, will make a big difference in their economic future.
Strengthened maintenance incentives, and accelerated clunker retirement, are indispensable parts of a policy that targets emissions of mobile sources. Many of the policy alternatives, including clunker purchase and a VEF, are most appropriate as explicitly interim policies until technologies improve to facilitate a change to a better approach.
Even if EMVRs are only sporadically-used, interim tools, important questions remain. Since the fleet average is probably an over-estimate of the replacement car's emissions, can we improve upon it? How can we move quickly to an emissions model basis for MERC creation and price estimates? What environmental bonuses, attrition rates, and methods of computing remaining life are appropriate in each region? What is the best time dimension for MERCs? Time dimensions like months or years that imply some credit leveling (banking and borrowing of credit) best serve long-term uses. Short term uses (like to cover delays in pollution control hardware installation or maintenance downtimes or short-term production increases) are best served by a narrower definition (days or hours), because then MERC buyers can better match their MERC purchases to their emission fluctuations.
Finally, there is the sticky issue of subsidy. Clunker retirement generates external benefits like increased highway safety, reduced traffic, and reduced emissions of pollutants already below legal limits. Are they large enough to demand explicit government subsidy beyond taxpayer-funded oversight and modeling services, and periodic car dealer incentives like lower interest financing and direct discounts?
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1. There is no adding up constraint, or cap, in attainment areas. Even if very source is in compliance with applicable rules, growth and the addition of sources could increase the number of standards violations (exceedance) and push a region into non-attainment. The air quality can even deteriorate further in non-attainment areas. New stationary sources must buy offsets exceeding their own emissions, but new mobile sources (just additional cars in many cases) dont have to buy offsets.
4. Some clunkers would not have survived the 2-3 year life of a MERC even if they had not been retired early. A guestimate of that natural attrition rate is used to shrink a MERC with the passage of time since the EMVR that created it.
5. According to Bishop et al (1993), selection bias - encouraging the retirement of the least valued (least driven) cars - is "the fatal flaw in conventional scrappage programs." Alberini et al (1994) found that while selection bias was a serious liability, EMVRPs could still produce emission reductions more cheaply than many existing and proposed policies.
7. The US EPA appears to have such a model, and they used it for their guidance document. However, predicted emissions vary only by model year. All cars of the same model year yield the same emissions. Since substantial variability exists, and has been documented by IEPA (1993), more detailed prediction capabilities would be necessary to permit the cessation of vehicle testing.
9. Emissions fees produce cost-effective results. The marginal control costs end up the same for each emitter. However, an emissions fee produces an efficient result only if the authorities keep the fee at the level where the marginal benefit of resulting emission reductions equals the marginal cost of those reductions. See Milliman and Prince (1989), Nelson (1987), and Welch (1983) for additional discussion of political (adoption), implementation, and dynamic properties of emission fees.
APPENDIX: ACRONYM DEFINITIONS
EMVR = Environmentally Motivated Vehicle Retirement
EDF = Environmental Defense Fund, New York and Washington DC
EPA = US Environmental Protection Agency, Washington DC
IEPA = Illinois Environmental Protection Agency, Springfield
I&M = Vehicle Inspection and Maintenance Program
LAER = Lowest Achievable Emissions Rate
MERC = Mobile Emission Reduction Credit
NSR = New Source Review
RACT = Reasonably Available Control Technology
SCAQMD = South Coast Air Quality Management District, Los Angeles
TNRCC = Texas Natural Resource Conservation Commission
VEF = Vehicle Emissions Fee
VOC = Volatile (or Reactive [ROC]) Organic Compounds