Indirect Source Regulation: The Latest Front in the Sprawl War

Taxing new development won't clean the Central Valley's air

Air pollution officials in California’s Central Valley have opened a new front in the war against urban sprawl, and regulators and environmental advocates throughout the state are watching closely. Starting in March 2006, the San Joaquin Valley Air Pollution Control District plans to become the first regulatory body in the country to impose fees on new residential and commercial development in an attempt to reduce air pollution. Given the high costs and questionable benefits of this approach, other air districts should avoid following in the Valley’s footsteps.

An example of what has been termed “indirect source regulation,” the District’s new fee system — known as Rule 9510 — is based on the notion that new developments don’t increase pollution directly, but through spillover effects such as increased vehicle trips, building construction, lawn mowing, and other activities. Residential and commercial builders will be charged a fee based on the District’s estimate of a project’s impact on air quality.

Developers can reduce fees by integrating energy-efficient features, minimizing construction-related emissions, incorporating compact, mixed-use development designs, and including traffic-reduction features (e.g., narrow streets, speed bumps, bicycle paths, etc.) in development plans. In theory, developments determined to have minimal air quality impact would incur no fee, but the District has already acknowledged that the fee-avoidance threshold will be almost impossibly high.

Predictably, environmentalists and anti-sprawl advocates have cheered the passage of Rule 9510. One environmental activist even called it “a virtual Heimlich maneuver for clearing the valley’s air.” But despite an abundance of good intentions, the rule will do little to improve air quality while imposing significant costs to Valley home buyers and businesses.

This new fee scheme comes with a considerable economic cost. In the first three years of implementation, the District expects to collect $100 million in fees. Curiously, the Air Pollution Control District has failed to specify what it will do with fee revenues, only hinting that they could fund such activities as purchasing low-emission vehicles, promoting alternative fuels, and subsidizing public transit projects.

Fees Based on Bad Science

Rule 9510 is the first regulation of its kind in the nation, and there are no scientifically proven computer models designed to accurately estimate emissions and calculate fees. In fact, the model the District plans to use to estimate development-related emissions has been shown to overstate vehicle emissions by up to 70 percent. Even the District’s own modeling consultant has called it a “sketch-planning” tool, not an accurate gauge of a development project’s emissions. Hence, Rule 9510 is likely to overestimate development-related emissions, resulting in excessive fees assessed to new projects.

Regulation Targets the Wrong Source

Air regulators agree that the main source of most smog-forming pollutants in the Central Valley is vehicle emissions, not new development. But instead of targeting vehicle emissions directly, the District is using new development as a proxy, even though there is no evidence that low-density suburban development increases air pollution. In fact, the higher-density, compact development that the District wants to promote has been associated with higher levels of traffic congestion and air pollution.

The District is making another error by assuming that air pollution rises as driving increases. New vehicles have gotten cleaner in recent decades as a result of improved efficiency and pollution control technology. Despite a national increase in driving of 75 percent between 1980 and 2000, average ozone levels declined 20 percent, and carbon monoxide emissions declined 61 percent over the same time period.

So in reality, the District is attempting to address a problem that is already being solved by technological innovation. Vehicles built to current California emissions requirements will be over 90 percent cleaner over their lifetimes than cars currently on the road. If the valley’s population were to double during the next 25 years, auto emissions would still decline at least 80 percent as the fleet modernizes.

Regulations are Costly to Consumers, Businesses

While it won—t reduce air pollution, the new rule might be to blame for future increases in housing prices. By 2010, mitigation or fees related to the rule on new housing and residential development are projected to exceed $300 million. By the end of the decade, rule 9510-related fees on each new home are expected to total between $3,000 and $4,000.

Costs of that magnitude will harm future homeowners and reduce housing affordability region-wide. Given the significant impact on prospective homeowners, builders and affordable housing advocacy groups lined up against the plan. The California Department of Housing and Community Development also opposed the adoption of Rule 9510, citing concerns that it would negatively impact housing affordability.

Businesses, like home buyers, will also face significant new costs. By 2008, fees are expected to add hundreds of thousands of dollars to the cost of new commercial centers. Higher costs will be passed along to consumers and raise the cost of living throughout the Valley. Smaller businesses may find it particularly difficult to absorb the additional costs. Given that unemployment in the Valley currently exceeds the state and national average by roughly two percentage points, it is puzzling that the District would choose to tax new businesses rather than support their development.

Regulations are Unfair, Lack Accountability

Rule 9510 places an unfair burden on new homeowners and businesses by making them solely responsible for clearing the Valley’s air. All Valley residents — not just consumers of future development — contribute to the pollution problem and would benefit from cleaner air.

The District has also failed to specify how it plans to spend the revenues from fees collected, only offering vague hints about the types of mitigation activities it may choose to fund. Further, Rule 9510 contains no requirement that fees collected from a new development be used to pay for emission reduction activities in the same location; fees collected in Bakersfield could be used to fund clean air projects in Fresno, for example. Valley taxpayers deserve a clear explanation of what the District is going to do with fee revenues and what sort of air quality benefits they can expect to receive in return.

Falling prey to the fallacy that air pollution necessarily increases as driving increases, the District now plans to impose a tremendous, unfair cost on Valley residents and businesses using junk science as a rationale. Worse, anti-sprawl and environmental advocates are eagerly eyeing Rule 9510 as a harbinger of things to come in the wars against urban sprawl and air pollution. Given the high costs and lack of tangible benefits, indirect source regulations like Rule 9510 are one Central Valley export that the rest of the state and nation could do without.

Leonard Gilroy is a certified planner and policy analyst at the Reason Foundation