Economic Instruments of Environmental Policy

Abstract

Economic instruments of environmental policy can be both efficient and equitable. They provide incentives for particular actions without removing individual freedom of choice. They generally need to be coupled with or supported by regulatory and technological instruments. From a policy viewpoint they can be used to deter environmentally damaging activities, improve social equity, raise revenue or recover public-sector costs. They are used in few countries at present, but seem to have worked reasonably well to date.

Instruments used to control environmental damage include:

• 1. environmental damage taxes, charges and levies, such as emission charges, environmental protection charges, and development taxes;

• 2. input taxes;

• 3. environmental damage rights and credits, such as emission rights (nets, bubbles, offsets), emission reduction credits, and transferable development credits;

• 4. performance bonds and guarantees, e.g. for rehabilitation or waste management;

• 5. subsidies and bounties;

• 6. tax concessions and rebates; and

• 7. special purpose grants.

Instruments used to control consumption of natural resources include:

• 1. tradeable quotas, e.g. in forestry, fisheries and water supply;

• 2. resource rents and royalties; and

• 3. sliding charges for utilities.

Instruments which affect both damage and consumption include:

• 1. differential excise, sales taxes and tariffs;

• 2. refundable deposits; and

• 3. broad taxes such as payroll and capital gains taxes.