Economic instruments can be a very effective way of inducing compliance, raising funds for enforcement activities and environmental protection and cutting compliance and enforcement costs. The OECD has defined economic instruments in the following way:
Economic instruments constitute one category amongst others of environmental policy instruments designed to achieve environmental goals. They can be used as a substitute or as a complement to other policy instruments such as regulations and cooperative agreements with industry. One basic objective of economic instruments is to ensure an appropriate pricing of environmental resources in order to promote an efficient use and allocation of these resources.
Environmental programmes can encourage compliance by providing economic incentives for compliance. This may be an effective approach in public agencies, which are less likely to be deterred by monetary penalties, since they are funded by the Government. The benefit from compliance can be applied to the facility generally, or to an individual based on his or her performance. Economic instruments include:
Fees
The facility if charged based on characteristics (e.g. amount, rate, and toxicity) of its pollution (e.g. effluent, emissions, and wastes). Unlike monetary penalties, fees create an immediate cost to the facility for polluting. Fees generate revenue that can be used by the enforcement program. Fees should be high enough to deter pollution, so as to prevent them being perceived as a “license to pollute.”
Tax Incentives
These are reduced taxes for costs associated with improving environmental quality e.g. installing pollution control equipment, or changing a process to prevent pollution.
Pollution Taxes
These taxes are based on the volume and/or toxicity of emission, effluents, or wastes generated. Pollution taxes can be a purely economic alternative to setting standards.
Subsidies
Subsidies can be used to promote technologies or sectors necessary to implement MEAs. Where environmentally friendly alternatives are more expensive, subsidies can lower the cost to the consumer and thus promote their purchase and use. Alternatively, facilities that comply with requirements can receive a subsidy to help defray the cost of compliance.
Facility or Operator Bonuses
For achieving better results than specified in permits licenses or regulations.
Promotion Points.
For senior managers in government-owned facilities achieving compliance.
Ecotourism
Another way to promote protection of the environment in an economically efficient manner is Ecotourism. Ecotourism is a term that refers generally to tourism in natural areas that promises to protect the environment by generating money for protection while ensuring that visitors act in an environmentally sensitive manner.
Emissions Trading Programmes
While this tool tends to be more common in developed countries, a growing number of countries are exploring and developing emissions trading programmes. Most of these programmes place a “cap” or overall limit on the emission of a particular pollutant or group of pollutants. The companies that are currently operating are allocated a certain amount of emissions, often based on their historic emissions. Sometimes, an amount of emissions is set aside for new companies so that they can enter the market. If a company would like to emit more of that pollutant, it must buy the right to emit that amount from another company. The price is set by the market — what a potential buyer is willing to pay to a seller — and it fluctuates. At the other end of the bargain, the selling company may identify efficiencies in its operations that allows it to reduce its emissions while maintaining (or even increasing) its production. Typically, the initial prices are modest, but tend to grow as companies become more efficient and there are fewer ways for companies to generate extra emissions savings.
Research has shown that enforcement is essential for an emissions trading programme to function effectively. See, for example, http://www.inece.org/emissions/index.html
Creative Financing Arrangements
Cost can be a barrier to compliance. Experience in industrial environmental management has shown that oftentimes facility managers may want to comply but may not be able to afford the cost of fulfilling the requirements. Some creative financing arrangements that can help solve this problem include:
- Offset Requirements. This arrangement is essentially a tax on new investments. It requires investors interested in building a new facility to pay for modifications (e.g. installation of new process technology or controls on existing technology) that will reduce or “offset” pollution at an existing facility. Offset requirements should not be so expensive that they will discourage new investments. Some mechanism will be needed to ensure that the equipment in the existing facility is maintained and operated once it has been installed.
- Peer Matching. Peer matching is similar to offset requirements, but is voluntary. In this case, investors interested in building a new facility are asked to “adopt” an existing facility and help it reduce pollution. Foreign investors, in particular, may be interested in this arrangement, as a means of promoting good will in the local community and with government authorities.
- Sales of Shares. In situations where a government-owned facility is being privatized, the facility can raise money by selling shares in the facility to investors. This option can be particularly attractive if members of the local community are willing to invest. Proceeds can be used to renovate the facility so that it can comply with requirements and reduce or eliminate the impacts of pollution on the local community.
- Loans. Under this arrangement, institutions loaning money for new investments require that a certain portion of the loan be applied to restoration or protection of environmental quality.
- Environmental Bonds. Governments or private owners of a facility subject to environmental requirements can issue bonds to raise money to finance the changes needed to meet the requirements. The owners pay interest on the loan to the bondholders until they are able to pay back the loan in full. In some States, the interest earned from environmental bonds is tax-free. Environmental bonds are particularly appropriate in situations where the facility can recoup the cost of compliance by charging users of the service or product a fee (e.g. municipalities can charge citizens and industry for water use to help pay the costs of water treatment). This revenue helps assure bondholders that their loans will be repaid.
Other States have encouraged environmental protection by using traditional economic mechanisms such as price adjustments, subsidies, and loans.
Envir onmental Taxes and Levies
As noted in the case studies, taxes may be used to generate revenue for environmental purposes, to dissuade particular actions (without prohibiting those actions), to shift environmental burdens to the persons and institutions undertaking environmentally harmful actions, and to encourage the internalisation of environmental costs. In additions, the tax codes (and similar legislation governing levies, duties, and other fees) can be structured to facilitate the use of particular technologies, the conduct of particular actions, or otherwise encourage particular actions.