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International Experiences with Economic Incentives for Protecting the Environment

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This report, which is available only as a download, reviews experiences outside the United States with economic instruments for managing the environment, including air and water quality, water quantity, solid and hazardous wastes. It represents an update and extension of one chapter in the 1997 report by Anderson and Lohof to the US Environmental Protection Agency. That report found widespread use of economic instruments for managing the environment, including some applications not observed in the United States. Seven years later, this report identifies new instruments, more widespread application of older instruments, and greater acceptance of incentive-based mechanisms in environmental management. This report can also be regarded as an addition of international experience to a 2001 EPA report on the US experience with using economic incentives and follows the same basic organization.

Worldwide experience with these instruments is extensive, and a number of survey reports cover portions of this topic. However, some instruments are discussed in detail for the first time in this report. The intention is to offer some depth of treatment for a relatively few examples to provide the reader with an understanding of how the instrument is designed and how it performs, particularly in the context of developing nations. This report draws on other survey literature that covers a portion of this topic, but seeks to avoid redoing their analyses.

There is substantial evidence of growing use of economic instruments for managing the environment. The 1997 report to EPA provides a useful benchmark against which to assess changes. Not only are more countries applying economic instruments but also they are doing so in a more sophisticated manner. Many problems from older applications have been corrected. For example, charge rates have risen to more nearly cover the cost of water deliveries in several nations.

Direct fees and taxes are the most used market mechanisms internationally, as was the case in 1997. These can affect environmental quality in two ways: first, they can directly affect polluting behavior and the choice of inputs to firms and product purchases by households. Second they can provide a source of revenue to pay for governmental oversight of environmental management or to subsidize pollution control activities. Noteworthy trends for this category of instrument include more applications and higher rates, as well as some acceptance in parts of the world where charges heretofore have been difficult to implement. In several nations where it is socially and politically unacceptable to use prices to allocate water, fees to pay for delivery costs are slowly gaining acceptance.

Deposit-refund systems are little changed over the past seven years, both in terms of applications and in deposit amounts.

Trading regimes are shifting to capped allowance systems from more open-ended mechanisms. Marketable permits systems have gained greater acceptance worldwide, particularly for the control of greenhouse gas emissions. New applications of marketable permits for conventional pollutants in nations such as Chile, China and Slovakia are also noteworthy.

Greenhouse gas emission control is an important and rapidly growing application of economic instruments. In 1997 just a handful of nations imposed carbon taxes. Now many more nations rely on carbon taxes and greenhouse gas trading regimes are in place. One can now place buy or sell orders in organized markets for the right to emit these gases.

Reductions in environmentally harmful subsidies are a noteworthy trend that has been encouraged by international lending institutions. The World Bank and other leading lenders often make the elimination of environmentally harmful subsidies a condition for lending. A related phenomenon is an agreement by a group of large international banks active in lending to developing nations. The banks agree not to lend for environmentally damaging projects.

Liability for harms caused to the environment is increasingly being used as a tool to limit polluting and environmentally damaging activities. While cases of this type go back to the 19th Century in England, only relatively recently have cases of environmental damage in developing nations found a sympathetic hearing in the courtroom.

Information is used in many new applications, including product labeling, categorizing firms according to their environmental performance, and disclosure of pollution releases.

Voluntary programs now exist in a host of programs to encourage firms to improve their environmental performance. Much greater attention is also being paid to rewards that can be offered in such programs.

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Date Linked: 05/28/2009

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