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A Compendium of Economic Instruments for Environmental Policy August 2004 eftec, 73-75 Mortimer Street, London W1W

A Compendium of Economic Instruments for Environmental Policy

August 2004

eftec, 73-75 Mortimer Street, London W1W 7SQ; tel: 0207 580 5383; fax: 0207 580 5385; eftec@eftec.co.uk ; www.eftec.co.uk

A Compendium of Economic Instruments for Environmental Policy

TABLE OF CONTENTS

 
  • 1. INTRODUCTION

1

1.1.

Objectives and tasks

1

1.2

Scope

1

1.3

Report structure

1

  • 2. ECONOMIC INSTRUMENTS

2

2.1

What are economic instruments and why use them in environmental policy?

2

2.2

Types of economic instruments

..................................................................................

3

2.2.1

Economic instruments using existing markets

............................................................

4

2.2.2

Economic instruments – creating new markets

5

2.2.3

Summary

6

2.3

Evaluating economic instruments

9

  • 3. REVIEW OF ECONOMIC INSTRUMENTS

13

3.1

Economic Instruments for Agriculture

14

3.1.1

Danish Pesticides Tax

14

3.1.2

Swedish Pesticides Tax

....................................................................................

16

3.1.3

The Dutch Minas System - Nitrogen and Phosphorus Surplus Levies

.................................

18

3.1.4

Swedish Charge on Cadmium Content in Fertiliser

19

3.2

Economic Instruments for Nature Protection

20

3.2.1

Transferable Development Rights for Farmland Preservation in the US

............................

20

3.2.2

Individual Tradable Quotas for Fisheries in New Zealand

23

3.2.3

Direct Payments for Forest Conservation in Costa Rica

...............................................

25

3.2.4

Performance Bonds for Mining Sector in Queensland, Australia

27

3.2.5

Oil Pollution Charge for Shipping, Finland

..............................................................

29

3.2.6

Tax on Aggregates Extraction in Sweden

................................................................

31

3.2.7

Marine Park Fee Systems around the World

............................................................

33

3.2.8

User Fees for Egypt’s Red Sea Islands and Coral Reefs

37

3.3

Economic Instruments for Solid Waste

39

3.3.1

Irish Plastic Bag Levy (‘Plastax’)

39

3.3.2

UK Landfill Tax

..............................................................................................

41

3.3.3

Waste Disposal Charges and Non-compliance Fines in Central and Eastern Europe

44

3.3.4

Beverage Container Deposit Refund System in Maine, US

46

3.3.5

Charge on Car Batteries in Hungary

48

3.4

Economic Instruments for Water

...............................................................................

50

3.4.1

Water Quality Permit Trading in the US

.................................................................

50

3.4.2

The Hunter River Salinity Trading Scheme, Australia

52

3.4.3

Transferable Water Entitlements in Victoria, Australia

...............................................

55

REFERENCES

..............................................................................................................

57

ABBREVIATIONS AND ACRONYMS

61

 

A Compendium of Economic Instruments for Environmental Policy

1. INTRODUCTION

1.1. Objectives and tasks

The purpose of this report is to provide a review of the menu of economic instruments that have been used for environmental policy. The review is intended to provide a non-technical summary and is targeted at officials in national and local environment agencies and local agencies responsible for land use planning and development.

In achieving this purpose, the report fulfils two roles. Firstly, in Section 2, it provides an accessible and non-technical explanation of economic instruments (also termed as ‘market-based’ instruments) and their applicability to environmental (including natural resources) management. This section also outlines criteria that could be used in selecting and implementing economic instruments for environmental policy purposes. The second function of this report is to provide examples of the use of economic instruments from around the world. These examples are presented in Section 3.

  • 1.2 Scope

The term ‘economic instrument’ encompasses a wide range of policy measures and tools that may be used to address environmental problems. Of particular relevance to the six Black Sea countries are instruments that have budget neutral or revenue raising properties. With this in mind, the choice of case studies presented in this report focuses mainly on such instruments. Environmental friendly subsidies, though implemented in some countries, are not included in the review since they are not budget neutral or do not generate revenue. Similarly, not many pollution or development permit trading schemes are reviewed, since these require extensive environmental and other institutions and frameworks to be in place for successful implementation and may, therefore, be considered only in the long-run within the region.

The versatility of economic instruments means that they may be applied to virtually the whole range of environmental problems faced by individual countries or groups of countries. The review of case studies presented in this report sets out to reflect this. The exception to this is water use and pollution, especially in the context of nutrient control, since this issue is covered by a project within the GEF Black Sea Ecosystems Recovery Project (eftec, 2004).

  • 1.3 Report structure

Following this introductory section, Section 2.1 introduces the reader to the concept of economic instruments and the rationale for their use in environmental policy. In Section 2.2 the various types of economic instruments that are used for the purposes of addressing environmental problems are summarised. Here, instruments are classified as those which seek to modify the outcome in existing markets (Section 2.2.1) and those which seek to create new markets (Section 2.2.2). By way of a tabular summary in Section 2.2.3, economic instruments are ‘matched’ to different economic sectors and pollution types. Finally, Section 2.3 provides a discussion of the necessary considerations for evaluating the use and role that different economic instruments may play in environmental policy making. The evaluation criteria outlined suggest a framework in which relevant authorities in Black Sea (and other) countries can judge the potential feasibility of different economic instruments.

Section 3 focuses on case study examples of the implementation of various economic instruments that have been applied to address environmental problems. This ‘compendium’ of practical examples presents 20 case studies that are grouped according to instruments for agriculture (Section 3.1), nature protection (Section 3.2), solid waste (Section 3.3) and water (Section 3.4).

Each case study provides a breakdown of the instrument and the environmental issue it addresses, as well as the intended policy objectives/targets and similar examples of instrument operating elsewhere. A more detailed description of the instrument focuses on its practical operation and related discussion. Finally, in most instances further reference material is listed.

A Compendium of Economic Instruments for Environmental Policy

2. ECONOMIC INSTRUMENTS

2.1 What are economic instruments and why use them in environmental policy?

A comprehensive definition of economic instruments (EIs) is a rather difficult task because of the diverse set of policy measures comprising them. Generally, a distinction is made between market-based economic instruments and non-market based ones. The main focus of this report is directed to the former but the latter are not completely excluded in the study because the effectiveness of EIs in reality depends on the right mix of the two types, i.e. to develop a policy package combining market-based and non market- based economic instruments.

The theoretical rationale behind this type of intervention is to secure an optimal level of pollution and to achieve optimum rates of resource use and depletion. The key difference between the two types is that the former relies on the market mechanisms as markets are seen as an efficient means to do the allocation of scarce resources and the latter rely on regulations.

The practical reason for implementing market-based economic instruments is to send out a signal that the use of a resource imposes costs on others, i.e. some form of external costs which are not covered in the price of the product or service. To overcome such environmental problems economic instruments increase efficiency in resource use (thereby decreasing total demand and reducing environmental damage) and/or generate revenue. These two aims can at times be mutually exclusive. For example, a tax that is high enough to create an incentive for polluters to stop polluting would not generate much revenue since polluters would rather reduce pollution than pay the tax.

The main reasons for many environmental problems can be traced back to two fundamental causes: (i) policy failure and (ii) market failure.

Policy failure arises from government policies that generate ‘perverse’ incentives with regard to the uses of resources and pollution behaviour. In other words, these policies encourage overexploitation of resources and excessive amount of waste and other emissions. The policy failure shows itself in the form of environmentally damaging subsidies. These are those subsidies that are put in place to enhance the competitiveness of certain products, processes, economic sectors, or regions and that together with the prevailing taxation regime (unintentionally) discriminate against sound environmental practices.

To recommend and implement new economic instruments to reduce pollution or improve resource management, while such environmentally damaging subsidies are still in place cannot be an efficient policy. Therefore, policy analysis has to start by investigating the existence of environmentally damaging subsidies in relevant economic sectors and country. Identification and removal of such subsidies will not only have environmental benefits and lead to substantial budgetary savings but often result in the users of the natural resources facing higher bills. Therefore, removing subsidies is by no means easy – especially considering the political, competitiveness and distributional implications.

Market failure, on the other hand, refers to the lack of actual markets for certain environmental goods or services and/or the failure of conventional markets to consider the environmental impacts of man-made goods and services or exploitation of natural resources. In other words, prices in actual markets generally do not reflect the ‘true’ or ‘full’ cost of producing the goods and services, leading again to overexploitation of natural resources and excessive amounts of waste and other pollution. The environmental impacts, therefore, are external to the market mechanism, and are often referred to as ‘externalities’. The use of economic instruments, such as taxes, is an increasingly common approach to internalise these externalities in the price of the goods and services and as mentioned below is in accordance with the polluter pays principle.

Economic instruments, in particular taxes and charges, have been introduced as one way to implement the Polluter Pays Principle (PPP), which has become widely accepted as the general framework for internalising environmental externalities. In 1972, the principle was adopted by the OECD Council as an economic principle for allocating the costs of pollution prevention and control (OECD, 1972). The primary concern of the Council in 1972 was to address the international economic and trade implications of environmental policies. The OECD recommendation provided guidelines that place restrictions on the role of government subsidies in order to ensure that polluters pay the costs of protection measures made necessary by their activities. With regard to environmental protection measures, the Council (OECD 1972,

A Compendium of Economic Instruments for Environmental Policy

Annex, A.4) found that they ‘…should not be accompanied by subsidies that would create significant distortions in international trade and investment.’ Rather, by placing costs of pollution prevention on polluters, the PPP demands that the cost of protection activities be reflected in the market prices of goods and services.

The integration of environmental concerns into economic growth and development policies has emerged as a priority concern of modern environmental policies since the 1970s. During the 1970s and 1980s, environmental policies in industrialised countries of the OECD were based primarily on a system of technical regulations. However, it became increasingly recognised that traditional regulatory environmental policy, despite some successes, failed to address new environmental pressures and prevent further unacceptable environmental damage. Moreover, these policies imposed potentially high costs to achieve environmental quality objectives. In recent years, economic instruments, as opposed to “command and control” regulations, have been recognised for their flexibility and cost-effectiveness in attaining environmental objectives (OECD, 2001 and EEA, 2000). However, examples show that economic instruments can only be effective with a well functioning institutional framework 1 as a report published by World Bank summarises:

In a country where environmental regulations are not enforced and environmental agencies are weak, economic instruments are not of much help either. Introducing pollution charges should go along with improving the overall environmental policy framework and strengthening the institutional capacities of environmental agencies’ (World Bank 1998, p. 166)

Another reason for the widespread application of market-based economic policy instruments was their successful implementation. Examples of this are water effluent charges in several European countries, such as France, Germany and the Netherlands, in the 1970s and 1980s coming as a consequence of substantial water pollution problems in many rivers, like the River Rhine.

As mentioned above, policy makers showed a growing interest in market-based instruments for environmental policy during the 1980s. An early indication of this change was the emphasis given to economic instruments in environmental policy by the report of the World Commission for Environment and Development in 1987. Furthermore, the Rio Declaration on Environment and Development (1992) discussed economic instruments, and in particular the Principle 16 states:

‘National authorities should endeavour to promote the internalisation of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.’

The advantages of the use of economic instruments is furthermore highlighted in a more recent EC publication (EC 2000, p.3): ‘The use of economic instruments, such as taxes, subsidies or other incentive payments, or tradable emission permits, will frequently offer a more effective means of achieving environmental policy objectives than traditional environmental policy instruments such as direct regulation of polluting activities.’

The interest in implementing market-based instruments became an essential part of policy to combat environmental pollution, such as climate change and water pollution, in many European countries as well as many developing countries and countries undergoing transition to market economy. However, a major difference in the instruments implemented in Western European countries compared to the situation in the economies in transition can be recognised: the former relied mainly on product taxes, such as energy taxes, while the latter introduced a rather complex system of pollution charges covering a very large number of air emissions and water effluents and in addition the generation of solid wastes.

2.2 Types of economic instruments

As mentioned above market-based economic instruments (EIs) comprise a rather broad group of policy instruments. Their common element is found in their reliance on market price mechanisms to internalise costs and provide financial incentives to economic actors.

Because of their flexibility, these economic instruments are traditionally discussed in contrast to regulatory or ‘command-and-control’ instruments. While theoretical treatments often consider market-

1 See Söderholm 1999 for more information analysing the relation between economic instruments and the institutional framework.

A Compendium of Economic Instruments for Environmental Policy

based EIs as alternatives or substitutes to regulatory instruments, the margin between the two is sometimes very narrow. Many of the most effective examples of achieving environmental policy targets illustrate that regulatory and economic instruments are interrelated and complementary.

Moreover, several environmental pressures exist for which the application of market-based economic instruments is not an effective policy tool. For example, economic instruments may not be appropriate in areas such as hazardous wastes, or concentrated “hot spot” pollution areas that pose a risk to public health. In such cases, the use of EIs is limited and needs to be utilised in conjunction with other policy measures.

Evaluations of the different instruments applied in environmental policies show that EIs are regularly introduced in parallel with other policy measures, so it is often difficult to isolate the impact of the instrument when reviewing environmental quality trends.

The most common economic instruments in use today fall into one of two categories:

o

Instruments that use the existing markets involve moving towards free market prices on the one hand (by removing or reducing subsidies and perverse incentives, i.e. policy failures) and moving beyond free market prices (by addressing market failure) on the other; and

o

Instruments that create new markets are a relatively new approach to solving environmental problems. These instruments are affecting prices not directly but by designing an institutional and regulatory framework addressing current shortcomings and failures in environmental policy.

2.2.1 Economic instruments using existing markets

Economic instruments belonging to this group are generally more common today and the following instruments belong to this category.

Subsidy removal or reduction is a classic and well-known example of policy reform: reduction in or elimination of subsidies normally results in reduced environmental impacts (from reduced use of the previously subsidized resources or services) and monetary savings to the governments. Subsidy removal, however, is only the first step.

Environmental taxes and charges can then be used to reflect the additional costs to others (externalities) that are created by the use of resources. Environmental taxes and charges can be based on emissions, inputs and outputs. Based on varying concepts of the role and purpose of these instruments in practice, however, a generally accepted definition of the term “environmental taxes and charges” does not exist in current literature.

The current widely accepted definition by the European Commission, the European Statistical Office (Eurostat) and the OECD is based on the rationale that an environmental tax is defined through the tax base. According to this definition, an environmental tax is ‘a tax whose tax base is a physical unit (or a proxy of it) that has a proven specific negative impact on the environment’ (OECD, 1997 and EC, 1997). Further, a distinction is generally made between the terms tax and charge. ‘Taxes are defined as:

compulsory, unrequited payments to general government. Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments. Charges or fees are defined as compulsory requited payments to either general government or to bodies outside general government, such as for instance an environmental fund or a water management board’ (OECD,

1999).

While taxes may be earmarked for certain purposes, the term charge has generally been applied in Central and Eastern Europe (CEE) and Eastern Europe, Caucuses and Central Asia (EECCA) when their explicit role is for raising revenues for environmental funds. As environmental concerns received greater attention, environmental taxes were recognised by public policy makers for their potential to simultaneously address environmental concerns, finance public services, raise public revenues and potentially replace other taxes. Today, a commonly used classification of taxes and charges distinguishes between three types, based on their function in public/environmental policy.

The first type is revenue-raising taxes, which may influence behaviour but still yield substantial revenues over and above that required for related environmental services or regulation.

A Compendium of Economic Instruments for Environmental Policy

The second type is incentive taxes, which are levied with the objective of changing environmentally damaging behaviour without the intention to raise revenues. Indeed, the success of such a tax may be judged by the extent to which initial revenues from it fall as behaviour changes.

The third type is cost-covering charges or user charges/fees, whereby those making use of the environment contribute to or cover the cost. This type of EIs recognises that many individuals as well as the economic sectors receive important benefits from the use of the environment, but may pay very little

or nothing for this right, often leading to poor levels of service or overuse of the resource. The introduction of user charges is one way to capture part of this benefit, improve levels of management and service, and share the benefits from exploiting natural resources. For example, user charges are imposed to finance public provision of water and sanitation services. The level of a cost-covering charge is determined by the service it is intended to deliver and revenues are primarily used to finance collective services, e.g. water supply, wastewater and waste collection.

These three types of environmental taxes are not mutually exclusive: a cost-covering charge may have incentive effects. For example to encourage the rational use of water, an incentive tax may raise revenues, and revenue-raising tax may be partially used to finance related environmental purposes. In particular, cost-recovery user charges must resemble pure market prices for a good or service, and play an important role both as a financing tool for public services, i.e. covering the full-costs of delivering the service, and incentive instruments that reduce environmental pressures. In practice, the design of overall tax regimes and the environmental concerns being addressed tend to influence which of these functions is primarily being served. Moreover, the type of instruments selected may also determine their impact on broader public policies.

Markets are also useful in establishment of performance bonds and deposit-refund systems. Performance bonds can be used in the field of environmental pollution policy. Non-compliance fees are the most widely applied variation of this bond. In general, performance bonds are payments to authorities which take place prior to an activity that is potentially environmentally harmful. These bonds are refunded if environmental regulations are met, and forfeited if they are not. These are used less frequently than other economic instruments, due to difficulties in monitoring environmental damage and legal restrictions in setting up contracts, and have been applied mainly where there is a clear potential for environmental damage, such as mining. Australia, Norway, Sweden, Canada and the US use slightly different variations of these instruments in controlling environmentally harmful production (Markandya and Perelet, 2002).

Deposit refund schemes require a deposit to be paid upon the purchase of potentially polluting products. This deposit is refunded if the product or its residues are returned for disposal and recycling, thereby avoiding pollution. This is a type of economic instrument which is designed to encourage recycling, and/or to cover the costs of environmentally sound waste disposal. These systems provide incentives to prevent pollution, and reward good behaviour. Deposit refund systems are often applied to widely-used products such as beverage containers, and have sometimes been applied to car hulks. They can be considered a valuable tool for environmental management, although in general they are not powerful enough for major environmental problems, because of their voluntary character and the low value of the deposits. Their use on bottles and cans has proved very effective in reducing the amount of such materials disposed of into the general waste stream. Deposit refund systems are being extended beyond bottles and cans to include disposable batteries, lubricating oils, electronic equipment, white goods (refrigerators, stoves, washing machines) and automobiles. They encourage companies and consumers to take a life cycle approach to product management. Designed appropriately, they can provide an accurate reflection of environmental costs. They also offer new ways for companies to provide services to their clients, such as leasing products instead of selling them, and they can also encourage repeat business (Markandya and Perelet, 2002).

The last category of economic instruments that use existing markets is targeted (environmentally friendly) subsidies, where an explicit subsidy is offered to achieve a socially desirable outcome. Although these go against the general trend of subsidy removal and polluters pay principle, there are cases when such subsidies may be justified. This could especially be the case for projects for public-private partnerships or small/medium sized bankable projects.

2.2.2 Economic instruments – creating new markets

The second group of economic instruments, i.e. those that create new markets, involves defining property rights, privatising and decentralizing, establishing tradable permits and rights, and creating international offsets.

A Compendium of Economic Instruments for Environmental Policy

Establishing property rights, privatisation and decentralization can play an important role in moving many aspects of environmental management out of the state sector, which is often starved for capital and into more commercial operations where there is a strong incentive both to generate revenue and to make investments that will increase revenue in the future. Water and sanitation works are typical examples of these.

Tradable permits and rights involve the explicit creation of a market in environmental resources, encouraging efficient use and fostering the recognition that these resources are scarce and valuable. For the tradable permits to function well, first, the permit must actually create a property right. Second, the question of initial allocations of permits must be handled equitably. Finally, there must be no artificial obstructions to trading permits.

International offset systems extend the notion of a market for environmental resources across country boundaries, permitting firms and institutions to meet environmental objectives by purchasing abatement wherever on the globe it is cheapest. Carbon offsets and joint implementation projects are examples of this. Debt for nature or environment swaps can also be characterised as a form of such international offset systems. The concept behind this approach is to reduce the debt burden of a country by making an agreement between the indebted country and the creditor countries. This deal grants the possibility to write off some of the debt on the condition that the released funds are used to achieve predetermined environmental goals.

In addition to these economic instruments, voluntary approaches have increasingly been used. There are many different types of voluntary approaches, with an equally wide range of terminology used to describe them. However, they can be usefully classified into the following three broad categories:

unilateral commitments: where individual firms, or groups of firms set up environmental improvement programmes without any external involvement and communicate these to their stakeholders; o public voluntary schemes: where public bodies develop general schemes that define minimum standards of performance, and individual firms decide whether to join (eco-labelling is an example for this type of economic instrument); and voluntary or negotiated agreements: where government interacts with firms (either individually or collectively) to agree a performance target (or targets) and to define the commitments and/or obligations of both sides.

o

o

While in the long run voluntary agreements are budget neutral and can even save the government funds if private sector took responsibility for pollution control, they do not generate revenue and do not save much of the monitoring and administration costs for the government. For these reasons and also because of the scarce evidence about their impacts, these instruments are not included in this compendium.

2.2.3

Summary

Regardless of the type of economic instrument, the existence of a well functioning institutional framework is crucial for success. Any environmental policy tool requires a well-structured and enforced regulatory system to be in place along with compliance monitoring and compliance culture as well as well functioning markets and economic, taxation and financial systems. There are many examples around the world of perfectly designed pollution charge systems not being effective due to the lack of a well functioning institutional framework, weak enforcement authorities and, hence, ineffective environmental policy.

With this requirement in mind, Table 2.1 presents the types of economic instruments against each of the relevant sectors and pollution types.

A Compendium of Economic Instruments for Environmental Policy

Table 2.1: A general typology of economic instruments

 

Sector

USING MARKETS

Subsidy

 

Environmental taxes on

Cost covering charges - user

Perform-

Targeted subsidies

removal /

 

fees for

bonds/deposit

reduction

Emissions

Inputs

Products

Natural

Services

refunds

(outputs)

resources

Water

Reduction in

     

Water

Water pricing

   

resources

water subsidy

resources

Watershed

taxes

protection

charges

Water

Reduction in

Water

     

Sewage

 

Tax relief and

pollution

wastewater

effluent

charges

subsidised credit

subsidy

taxes

for environmental investment

Sustainable

Reduction in

 

Taxes on

       

Subsidies for

agriculture /

agriculture

pesticides and

phasing out

soil

subsidies

fertilisers

pesticides and

protection

fertilisers

Biodiversity/

Reduction in

     

Bio-

Watershed

 

Habitat protection

protected

land

prospecting

protection

subsidies

areas

conversion

fees

charges

subsidies

Park

entrance fees

Air pollution

Reduction in

Emission

Energy taxes

Environmentally

Royalties for

 

Refund systems

Subsidies for

energy

taxes

Differentiated

related product

fossil fuel

to award over-

industrial /

subsidies

gasoline prices

taxes

extraction

compliance

household energy

saving measures

Solid waste

Reduction in

Waste

     

User fees for

Deposit-refund

Credit/subsidy

waste subsidy

disposal

waste

systems

policy

taxes

management

Hazardous

Reduction in

 

Product taxes

     

Bond for waste

 

waste/toxic

agrochemical

treatment

chemicals

subsidies

A Compendium of Economic Instruments for Environmental Policy

Table 2.1: Continued…

Sector

CREATING MARKETS

Property

Tradable permits/rights

International offset

Voluntary approaches

rights/decentralization

systems

Water resources

Water rights

Water markets

Water trading across borders

 

Water pollution

Environmental liability

Tradable wastewater discharge permits

 

Industry wide approach of Detergent free washing powder (e.g. through eco-labelling)

Sustainable agriculture

Land ownership Participatory irrigation management

Transferable development rights

 

Best practice production and application of pesticides and fertilizers

Biodiversity/protected areas

Biodiversity patents and bio prospecting rights

tradable conservation credits

Tradable conservation credits; debt-for-nature swaps

 

Air pollution

Environmental liability Private energy production

Tradable emission permits Auctionable permits

Joint implementation on carbon offsets

 

Solid waste

Environmental liability

 

Tradable recycled

 

contents

Hazardous waste/toxic chemicals

Environmental liability

Tradable permits/rights

International offset systems

Best practice production and disposal of chemicals

A Compendium of Economic Instruments for Environmental Policy

2.3 Evaluating economic instruments

Political interventions aiming to correct policy and/or market failures can lead to an improvement in environmental quality and to a greater economic efficiency. As discussed above quite different possibilities for intervention to correct these failures exist. What all of them have in common is that they can be effective only when environmental policy objectives are clearly identified at the beginning of the policy making process. After identifying the environmental policy objectives governments should assess the rationale for getting involved, i.e. why is there a need for government intervention for achieving some predetermined targets.

Governments should further evaluate the costs and benefits of intervention. As briefly mentioned above, the selection process of the most appropriate EIs must be done in the context of the prevailing administrative and institutional framework. Finally, the selected economic instruments have to be implemented, while measures and mechanisms should simultaneously be put in place to evaluate and monitor the progress made in achieving the policy objectives. This last step allows quick action if it becomes necessary to adjust and revise the instruments.

As part of the process of selecting the suitable EIs for tackling individual environmental problems, questions relating to the actual design and measures to assess and evaluate the EIs should be addressed. The latter point of assessing the efficiency of instruments is of great importance but rarely done in practice. The following criteria can be seen as guidance for undertaking such an analysis. The list is certainly not complete but covers the main issues.

o Cost-efficiency of the instrument: e.g. if there are large differences in abatement costs between polluters, there may be considerable cost savings in all economic instruments over regulatory measures.

o Capacity of the instrument to achieve the environmental objectives: e.g. permits perform better than taxes here since the number of permits can be set equal to the emissions target. Taxes have higher risk of underachieving, especially if the tax level is set too low so that polluters prefer to pay the tax rather than change use or emission behaviour.

o

Dynamic efficiency: e.g. instruments can encourage innovation in production processes that cut resource use and emissions beyond a predetermined standard as well as save money.

o Complex environmental criteria / difficulty in monitoring: e.g. when environmental processes are complex and emissions are hard to monitor, more blunt instruments like input or output taxes will have to be preferred.

o Vested interests and concern for distributional issues: e.g. although this depends on the socio- economic, political and cultural characteristics of each country, on the whole taxes are more difficult to ensure political acceptability for than targeted environmentally friendly subsidies. This is not to say that instruments that will not have initial political support should be discarded. It is rather a point about designing and presenting new instruments in a way that takes potential political difficulties into account.

o

The numbers of agents (users or polluters): e.g. if there is a very small number of polluters or resource users, voluntary approaches may be better to implement, while tradable permits work best if there is an intermediate (not too many and not too few) number of users or polluters.

o Rent seeking or strategic behaviour induced by the instrument: e.g. subsidies, no matter how carefully targeted, are likely to encourage strategic behaviour while tradable permits may be used as a barrier to entry into a sector.

o Requirements for institutional framework for successful implementation: e.g. a functioning institutional framework does not only cover formal rules but also ‘informal constraints on human behaviour, such as conventions and norms’ (Söderholm, 1999).

Many of these general criteria can also be found in the list developed by the OECD for assessing the effectiveness of taxes and charges (OECD, 2001) and presented in Box 2.1.

A Compendium of Economic Instruments for Environmental Policy

Box 2.1: The OECD evaluation criteria

• The environmental effectiveness of a tax can be measured as the extent to which the tax delivers its environmental objectives. The quantitative emissions reduction effect of a tax depends on the response of the polluter to the price incentive.

Economic efficiency has two aspects. Environmentally related taxes exploit the different opportunities for abatement within a sector, and within an economy, by creating incentives for those firms, or sectors, with the lowest abatement costs to undertake most abatement of the polluting activity, resulting in an efficient cost-minimising pattern of abatement activity. A measure of economic efficiency is therefore the extent to which there is a tendency to equalise abatement costs across pollution sources.

• It would also be useful to have a measure of dynamic efficiency. Environmentally related taxation creates incentives for firms to develop new technologies and techniques that might abate more cheaply, therefore a possible test is to appraise the type and cost of abatement before and after a tax is levied.

• It is important to design environmentally related taxes to achieve environmental and revenue objectives whilst minimising the administrative costs of operating the tax. Many environmentally related taxes are added to, or modify, existing taxation in order to reduce administrative costs. However, many taxes, such as that on carbon/energy have multiple exemptions and rebates, including rebates linked to negotiated agreements that may be costly to administer. Administrative costs could be compared to other taxation, for example VAT and to total revenues collected.

• A potential advantage of some environmentally related taxes compared to command and control approaches, is a reduction in compliance costs for business or households. Compliance costs include any extra costs of operating less polluting production technology, and the administrative costs of measuring and verifying compliance. Industry can decide how to respond to a tax, whereas with regulation this flexibility is limited. Households may also incur additional expense and loss of utility due to changing consumption patterns.

• The revenues raised by a tax on emissions, activity, or product depend on the behavioural response of the taxpayers to the charge. Revenues are not a good indicator of the environmental effectiveness of a tax. If producers respond to a tax by reducing output and/or investing in abatement activities then the taxable item (the emissions) will reduce, as will revenues. If the price elasticity of the taxed product or activity is low (in absolute value), an increased tax rate could raise higher revenues.

• Environmental taxation will also impact more generally on the economy and on producer and consumer behaviour. It is difficult to disentangle and quantify these “soft” effects that may include changes in the general price level, technology mix, employment, international trade, and income distribution and changes in producer or consumer attitudes and awareness of environmental issues. Where possible qualitative information on these effects could be given.

A sometimes hotly debated theme in the economic literature is the question whether EIs should be used extensively in developing countries and countries in transition to a market economy. One of the arguments for implementing economic instruments in these countries is as Bell (2002) notes that ‘some advisors flatly promised that economic instruments would have lower institutional and human resource requirements than command and control (p. 10)’. However, Bell questions this argument as ‘a glittering and ultimately incorrect promise in countries with small and underfunded environment ministries (p.10)’.

Other constraints impairing the effectiveness of economic instruments for environmental policy, especially of environmental taxes and charges, in economies in transition are discussed by Söderholm (1999) in detail. He identifies the lack of functioning markets and no viable economic and social institutions are factors accountable for this situation. Furthermore, a rather lax monitoring and enforcing environmental compliance is another a factor obstructing the overall good experience gained with EIs in reducing environmental pollution.

Ecotec et al (2001) use a list of criteria to evaluate the effectiveness of environmental taxes and charges. By its very nature, this list applies to ex-post analysis of economic instruments. We have revised this list and adapted for the purposes of an ex-ante analysis as presented below.

A Compendium of Economic Instruments for Environmental Policy

Purpose of tax/charge:

Should / could the tax/charge have a significant incentive effect for environmental protection and management? o Should / could the tax/charge raise revenue for particular environmental activities (e.g. through earmarking)? Should / could the tax/charge raise revenue for the general national budget?

o

o

Tax / Charge Design:

o

What are the current levels and past profiles of the economic instrument to be revised or related

o

economic instruments if a new one is to be designed?; What is the optimum (and/or feasible) point of application for the tax/charge (e.g. households,

o

retailers, wholesalers etc.)? Is there an externality evaluation (in monetary or other units) supporting the design of the tax? If not, decide if one should be commissioned, design and commission such a study if a decision is taken to commission one.

Organisational Arrangements:

o

Which institution should have the responsibility to design the tax/charge (e.g. Ministry of

o

Environment, Finance or other)? Who should be responsible for the implementation/administration (tax collection)?

o

Who should decide whether there would be any exemptions from tax/charge?

o

What are the planned changes to exemptions over time (e.g. exemptions to expire after a given

o

number of years)? What was the collection efficiency for the existing economic instruments (to be revised or related to the one to be designed)?

Portfolio of Policy Instruments – complementarity and substitutability of taxes with other instruments:

o

Is the tax/charge to be implemented on its own, or as a part of a whole package of economic or other

o

policy instruments? If the latter, the whole package needs to be described and analysed to understand the full scale of the effects of the main tax/charge studied. Is the tax/charge a substitute for an existing instrument?

o

Which alternative instruments (e.g. voluntary agreements) been included in the analysis of the impacts of the proposed tax/charge?

Potential Effect and Effectiveness of the Tax:

Is the tax/charge designed to have an incentive effect? Are there any cases of ‘win-win’ effects (environment and economic efficiency) which can be achieved, for example, by reducing other taxes as a result of generating revenue through the proposed environmental tax/charge? Are there likely to be other effects of the tax/charge such as technology or technique innovation etc. (dynamic efficiency)? o Is there any evidence that the tax/charge may create perverse incentives (evasion, relocation of industrial activities from one region to another etc.)?

o

o

o

Effect on Producers:

o

What are the key sectors affected?

o

What are the price effects at the different stages of the production or service chain?

o

What is the level of tax as a percentage of the cost of production?

o

To what extent are the price increases passed on through the value chain? Answering this and the rest of the questions here requires information about the price elasticity of demand and supply.

Effect on Consumers:

o

Which consumers are affected?

o

What is the level of tax/charge as a percentage of the sale price?

A Compendium of Economic Instruments for Environmental Policy

o Have any concerns been raised by consumers of the effect of the tax, and if so what are they and which are important? In order to answer this question, a reasonably well developed design of the proposed instrument has to be opened to stakeholder consultation. The same applies for the responses from producers.

Equity and Distributional Effects:

o

Are there significant differences of tax/charge burden across different sectors of the economy?

o

Are there significant differences of tax/charge burden across different household (income) groups?

o

Is there quantitative evidence for significant regional (geographical) effects?

o

What are these differences, and are there any specifically disadvantaged groups?

o

Is there quantitative evidence for significant distributional effects?

o

Are there measures in place to compensate for distributional effects, and what are these?

o

If only qualitative data are available, are the distributional effects deemed to be significant by the stakeholder consultation?

Trade and Competition Issues:

o

Have concerns been raised regarding adverse effects on competition (e.g. in water market if provided

o

privately or in products and services that cause water pollution), and what are these? What evidence is there of adverse effects on competition?

o

Who are the likely winners and losers? (this links to the effects of producers and consumers)

Revenue:

o

What is the projected tax/charge revenue (on an annual basis)?

Employment:

o

What is the level of revenue as a percentage of GDP, and as a percentage of the turnover affected

o

sectors? Who is to determine the use of revenues? Are the revenues earmarked or not?

o

What is the mechanism for using the revenues (e.g. earmarking, say, with an Environment Fund or

o

through the general budgets)? What would the revenues be used for (to finance environmental or other investments, to support

o

sectors, to replace other taxes)? Is the use of the revenues likely to lead to any likely positive environmental effects (linked to

earmarking)?

o

Have any concerns been raised on the employment impacts of the environmental tax/charge during

o

the technical analysis and/or stakeholder consultation? Is there any evidence for this concern (if mainly voiced during stakeholder consultation)?

o

Is there any indication /estimation of positive effects of taxes/charges on employment?

o

Are there any cases likely to lead to win-win effects (environment benefit and employment gains)?

Administrative and Compliance Cost:

o

Who is managing the tax at the level of government?

o

Is there an administrative burden and what constitutes this burden? Develop a cost estimate for this

o

burden. If only qualitative evidence is available, would it be fair to say that the administrative burden is (a) large (b) medium (c) small (d) insignificant, where the brackets of costs for (a) to (d) will have to be decided during the design process.

A Compendium of Economic Instruments for Environmental Policy

  • 3. REVIEW OF ECONOMIC INSTRUMENTS

The remainder of this report provides a review of the practical implementation of a selection of different economic instruments. The case studies are presented from a variety of different countries, including Western Europe and Scandinavia, Central and Eastern Europe, the United States, Australia and New Zealand, Central America as well as Africa (Egypt). The case studies are grouped on the basis as to whether they are economic instruments for: agriculture (Section 3.1); nature protection (Section 3.2); solid waste (Section 3.3), or; water 2 (Section 3.4).

Each case study provides a summary of the instrument that describes the:

o

Environmental issue/problem to be addressed (e.g. environmental and health impacts caused by

o

pesticide use); Economic Instrument (e.g. tax on pesticide input);

o

Similar examples (e.g. other countries that implement the same instrument);

o

Key targets (e.g. specified reductions/targets);

o

Administering institution (e.g. the environment ministry or tax authority); and

o

Key stakeholders (e.g. electricity generation sector, industries etc).

Following the initial summary, a more detailed description of the instrument is provided. The description section is intended to highlight the background to the instrument and provide information concerning its practical operation. Where relevant this includes rates of tax or charge, revenue receipts, environmental effect, administration details and other salient points. In some case studies an ‘additional comments’ section is included, which focuses on further issues related to the instrument. Finally, references for further reading are given.

The coverage of the review of economic instruments is very much dependent on the availability of source material, both in terms of quantity and quality. Whilst there are many examples of the practical use of economic instruments, studies describing and analysing these instruments in significant detail in terms of the empirical experience are somewhat fewer.

The most comprehensive listing of economic instruments used for environmental policy purposes is provided by the OECD/EEA database 3 . Other detailed sources of information include Ecotec et al (2001), a report to the European Union that outlines the use and environmental implications of environmental taxes in European Union Member States. The study provides a detailed review of nine different taxes and charges, with 27 individual country examples. The US Environmental Protection Agency (US EPA, 2001) provides a similar exercise that reports the US experience with economic instruments and incentives for environmental protection. In relation to Central and Eastern European Countries, the Regional Environmental Center for Central and Eastern Europe (REC) provides several sources of information, under the mandate of the Sofia Initiative on Economic Instruments (Klarer et al, 1999a; Klarer et al 1997b. See also REC Database on Environmental taxes and Charges 4 ). Finally, TemaNord (2002) provides a useful review of the use of economic instruments in the five Nordic countries (Denmark, Finland, Iceland, Norway and Sweden).

2 Note that eftec (2004) provides a detailed report focussing on the role economic instruments can play in the Black Sea region to address nutrient control and remediation. Here the focus is on other water related issues such as allocation and salinity of water supplies, as well as permit trading for nutrient control that was not covered in eftec (2004) (e.g. tradeable effluent permits). 3 See : http://www1.oecd.org/scripts/env/ecoInst/index.htm 4 See: http://www.rec.org/REC/Programs/SofiaInitiatives/EcoInstruments/Database/SIEI_database.html

A Compendium of Economic Instruments for Environmental Policy

3.1 Economic Instruments for Agriculture

  • 3.1.1 Danish Pesticides Tax

Environmental issue:

Environmental and health problems arising from use of pesticides

Type of economic instrument:

Product / input charge

Similar examples:

Sweden, Belgium.

Key Targets:

Reduction in pesticide consumption by 50% by 1997

Administering institution:

Ministry of Taxation

Key stakeholders:

Fertiliser producers, farmers, regulatory bodies

Description

A tax on pesticides was introduced in Denmark in 1986 as part the wider National Action Pesticide Plan. The intention of the National Plan was twofold, firstly to reduce pesticide consumption by 50% within a ten year period both in terms of treatment frequency and the quantity of active ingredient, and secondly, to shift consumption patterns toward less harmful pesticides. The specific target set for 2002 was a reduction in treatment frequency from 2.5 to 2.0 or lower, i.e. annual treatment frequency on treated acreage should be 2.0 or lower, with the tax being one measure employed to attain this reduction.

The pesticides tax is levied as a proportion of the retail price. The use of pesticides is typically measured in terms of the number of doses applied to cultivated land (the treatment frequency) and also in terms of the quantity of active ingredients (e.g. kilograms) within a specific product. Difficulties in measurement meant that it was not possible to implement the tax on the basis of toxicity or other indicators that relate to health and environmental impacts (DEPA, 1999).

Domestic manufacturers and importers of pesticides are required to pay the tax when a pesticide product is sold for use in agriculture. In 1986, the tax was initially introduced as a value-added tax (VAT) at a rate of 3% of the wholesale price of all pesticides. This effectively superseded a charge that was previously levied to finance administration of registration of pesticides. In 1996, the rate was increased to an average 15% of the retail price (specifically insecticides were 27% of retail price; herbicides, fungicides and growth regulators were 13% of retail price; and microbiological agents were 3% of wholesale price). In 1998 the tax was further increased to an average of 37% of retail price (insecticides 35% of retail price including tax but excluding VAT; herbicides, fungicides and growth regulators were 25% of retail price including tax but excluding VAT; and microbiological agents were 3% of wholesale price).

Further tax increases have been introduced in order to meet further objectives of the National Pesticide Action Plan. The tax base is the still the retail price of pesticides. Current tax rates are 53.85% of the retail price (excluding VAT) of insecticides, 33% of the retail price (including VAT) of herbicides, fungicides and growth regulators and 3% of the gross value (including VAT) of microbiological agents (Nienhaus and Knickel, 2004).

In 1994, revenues from the pesticide tax were approximately €5.9 million. As a result of increase in the tax rate, revenue from the tax rose to approximately €40.1 million in 1998. Revenues from the tax have been redirected to agriculture via reductions in property taxes and other measures. Approximately 55% of the tax revenue has been used to reduce property/land taxes whilst 35% of revenue funds monitoring and research programmes concerning pesticides and the environment. Remaining revenue typically covers the costs associated with administering the tax (Ecotec et al, 2001).

The Danish pesticide tax provides an example of a case where an economic instrument is introduced as part of a package of measures implemented to address a particular environmental problem. In addition to the tax, complementary policy instruments that have been implemented include regulation (for sale and consumption of pesticides), voluntary agreements between the Danish Ministry of Environment and local authorities regarding the phasing out of pesticides, and measures aimed at providing advice to farmers on how to reduce pesticide use.

Ecotoc et al (2001) report that the average crop-specific treatment frequency fell by 15-20% between 1995 and 1998 (much of this decrease is attributed reduced demand for fungicides), but targets set by the

A Compendium of Economic Instruments for Environmental Policy

National Plan have not been achieved. Moreover, these reductions have been offset by a trend towards crops that require an increasing intensity of pesticide spraying. In terms of active ingredients, sales fell by 40% over the period 1985 to 1996 (6,972 tonnes down to 4,238 tonnes). This reduction is partly attributed to the National Action Plan, but also to an 11% reduction in cultivated arable land and use of lower-dose pesticides (OECD, 1998).

Further reading:

Danish Environmental Protection Agency (DEPA), 1999, Economic Instruments in Environmental Protection in Denmark, Copenhagen.

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Commission. Available at:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

A Compendium of Economic Instruments for Environmental Policy

  • 3.1.2 Swedish Pesticides Tax

Environmental issue:

Environmental and health problems arising from use of pesticides

Type of economic instrument:

Product / input charge

Similar examples:

Denmark, Belgium.

Key Targets:

50% reduction in pesticides use by 1990 and by a further 50% by 1996

Administering institution:

Swedish National Tax Board

Key stakeholders:

Fertiliser producers, farmers, regulatory bodies

Description

In a similar fashion to Denmark, Sweden introduced a tax on pesticides in 1984 with the expressed purpose of reducing the environmental and health risk associated with their use. Again, the tax was part of a larger national programme which intended to reduce the use of pesticides by 50% by 1990 and by a further 50% by 1996 (SEPA, 1997).

Until 1994, the tax on pesticides was, in fact, a charge, with revenues used to finance various pesticides action plans. However, increase in the tax rate in 1994 significantly increased the level of revenues raised and these revenues, which were transferred to the Swedish national budget. Prior to discussing the details of the Swedish pesticides tax, the following paragraph outlines complementary charges that have been levied on the use of pesticides in Sweden.

In addition to the introduction of the pesticide tax/charge, the Swedish government also implemented an additional pesticides ‘price regulation’ charge in 1986 and a further pesticide ‘registration’ charge. The price regulation charge was levied on the basis of €3.2 per dose of pesticide used. Revenue from the price regulation charge was used to support the export of agricultural products. In 1992, the price support charge was abolished along with the ending of guaranteed prices for cereals. The pesticide registration charge is intended to finance the operation of the National Chemical Inspection for control of pesticides. The registration charge is levied annually as 1.8% of sales of pesticides during the year, with a maximum amount of approximately €22,000 and a minimum of €220 for the year.

In contrast to the Danish pesticides tax, the Swedish tax on pesticides is levied at a fixed rate. Initially the tax rate was approximately €0.4 per kilogram of active substance. This was then raised to nearly €0.9 per kilogram in 1988 and further to €2.2 per kilogram in 1994 (Ecotec et al, 2001). Manufacturers and importers of pesticides, who are liable for the tax, are required to register with the Swedish National Tax Board. In addition, all pesticides must be registered and approved by the National Chemical Inspection.

Revenue from the Swedish pesticide tax during the period 1995 – 2001 was between €6.6 million and €8.7 million (Nienhaus and Knickel, 2004). Over this period, there were 44 registered taxpayers including both the importers and the domestic manufacturers. The Swedish Environmental Protection Agency reports that the estimated administrative costs of the tax, incurred by the National Tax Board were less than 1% of the total tax revenue (SEPA, 1997).

Ecotec et al (2001) report that the pesticide tax has had a significant effect on the consumption and use of pesticides. In particular, the 1600 tonnes of pesticides used in 1994 was 35% of the annual average consumption of pesticides between 1991 and 1985. However, the effect of the tax alone is difficult to identify due in part other policy measures that include an advisory service for farmers as well as pesticides research and development (in much the same fashion as the Danish National Action Plan). In addition, during this time there have been a number of changes to agricultural policy (particularly in the abolition of price support for crops), the abolition of the price support charge and the banning of the commercial use of several pesticide products.

In summary, the Swedish Environment Protection Agency (1997) reports that the level of the tax is too low to influence long-term consumption and use behaviour. The tax accounts for between 5-8% of the purchase price of pesticide products. In order to reduce use by 10% in the future, an increase in the tax rate to 25% could be required. Of particular relevance here, is the fact that currently there exist few substitutes to the use of pesticide, so its consumption is particularly insensitive to changes in price.

A Compendium of Economic Instruments for Environmental Policy

Further reading

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and

Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Commission. Available at:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

Swedish Environmental Protection Agency (SEPA) (1997), Environmental taxes in Sweden – Economic instruments of environmental policy, Report 4745.

A Compendium of Economic Instruments for Environmental Policy

  • 3.1.3 The Dutch Minas System - Nitrogen and Phosphorus Surplus Levies

Environmental issue:

Eutrophication of water bodies, contamination of drinking water,

Type of economic instrument:

acidification of land and other impacts caused by fertiliser use in agriculture Product/input charge

Similar examples:

Austria (fertiliser tax abolished in 1994), Finland (fertiliser tax abolished

Key Targets:

in 1994), Sweden (nitrogen fertiliser tax). Reductions in mineral surpluses and increased mineral efficiency in

Administering institution:

conjunction with the Nitrate Directive. The Levies Bureau

Key stakeholders:

Government, farmers, regulatory bodies

Description

The EU Nitrate Directive requires that groundwater and surface water pollution from nitrates be reduced. The Dutch Minas (mineral accounting system) and levy system for the agricultural sector was introduced for nitrogen and phosphorus surpluses in 1998. Farmers are required to record purchases of nitrogen and phosphorus inputs in purchased feed, fertiliser, manure and outputs in plant and animal products. This enables nitrogen and phosphorus balances to be established at the farm level. Surplus of nitrogen and phosphorus above certain pre-determined levels are then subject to levy which the farmer must pay. The levy free surplus is lowered over time.

The surplus is calculated as the input, of nitrogen or phosphorus, per hectare minus the output per hectare. In 2003, the levy free amount of nitrogen was 140kg per hectare for grassland and 100kg per hectare for arable land. For phosphorus, the levy free surplus amount was 20kg per hectare. For surpluses over the levy free amount, the 2003 tax rate was €2.3 per kilogram of nitrogen and €9.1 per kilogram of phosphorus (Nienhaus and Knickel, 2004). Previously for the period 2000 to 2002 the respective tax rates were €0.7 per kilogram for nitrogen and €2.2 per kilogram for phosphorus (Ecotec et al, 2001).

Overall, Nienhaus and Knickel (2004) report that nutrient surplus fell from 512 million kilograms of nitrogen in 1998 to 334 million kilograms of nitrogen in 2002. For phosphorus, the nutrient surplus dropped from 140 million kilograms in 1998 to 87 million kilograms in 2002.

Revenue from the levies is not earmarked and contributes directly to the Dutch Ministry of Finance’s central budget. Annual revenue generated by Minas is reported to be approximately €47.5 million (Nienhaus and Knickel, 2004).

The Minas System is administered by the Levies Bureau, which has the responsibility of implementing and running the scheme. Administering the scheme involves a ‘General Inspection Service’. The Dutch Ministry of Agriculture estimated that the cost of this service would be €11.5 million whilst other administration costs to the Levies Bureau would be €12.7 million per year. In terms of the administration costs incurred by farm, such as recording of inputs and outputs of nitrogen and phosphorus and producing the required accounts, Ecotec et al estimate this to be in the range €220 to €580 per year.

Additional Comment

While an interesting example, according to a ruling of the EU Court of Justice, the Minas System needs to be revised or abolished in the near future since it is not full in accordance with the EU Nitrates Directive.

Further Reading

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Commission. Available at:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

A Compendium of Economic Instruments for Environmental Policy

  • 3.1.4 Swedish Charge on Cadmium Content in Fertiliser

Environmental issue:

Cadmium release to the environment

Type of economic instrument:

Product/input charge

Similar examples:

Austria (fertiliser tax abolished in 1994), Finland (fertiliser tax abolished

Key Targets:

in 1994), Netherlands (nitrogen and phosphate levies), Sweden (nitrogen fertiliser tax). Reduction in the cadmium content in fertilisers

Administering institution:

National Tax Board

Key stakeholders:

Fertiliser producers, farmers, regulatory bodies

Description

In 1994 Sweden introduced a charge on cadmium fertiliser, replacing a charge on phosphorus that had been levied since 1984 (in addition, a charge on nitrogen in fertiliser has existed since 1984 in Sweden). The tax was introduced to reduce the use of fertiliser in the agricultural and forestry sector and also to create an ongoing incentive to reduce cadmium content in fertiliser. The charge is approximately €3.3 per gram of cadmium where cadmium content exceeds 5 mg per kg of phosphorus (Oosterhuis et al, 2000).

In much the same way as the Swedish tax on pesticides reported previously, the tax is levied on domestic manufacturers and importers of fertiliser products who are required to register with the administering authority. Furthermore, the cadmium in charge is actually tax since revenues go to the state budget. Prior to 1994, revenues generated by fertiliser taxes financed environmental projects and research. Revenues from the cadmium charge were approximately €1 million in 1996, of which administrative costs were approximately 1% (Drake and Hellstrand, 1998).

Within two years of the cadmium charge’s introduction, the significant reductions in the cadmium content of fertilisers were seen. Prior to the introduction of the charge, mean concentration of cadmium was approximately 35-40 grams per tonne of phosphorus. Following the implementation of the charge, mean concentration of cadmium fell to 20 grams per tonne of phosphorus (SEPA, 1997). However, the extent to which this arose from the cadmium charge is uncertain since it was only one aspect of government policy that also included standard and voluntary agreements (Drake and Hellstrand 1998).

The cadmium charge is administered by the National Tax Board (in conjunction with the tax on nitrogen). Producers and importers are required to report quantities and cadmium content of fertilisers each month. Enforcement is limited to audits (25 of which were carried out in 1999), but actual cadmium contents are not measured by authorities.

Further reading

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Union. http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

Oosterhuis, F.H., Brouwer, F.M. and Wijnants, H.J. (2000) A possible EU wide charge on Cadmium in phosphate fertiliser: Economic and Environmental Implications, Final Report to the European Commission.

Swedish Environmental Protection Agency (SEPA) (1997a), Environmental taxes in Sweden – Economic instruments of environmental policy, Report 4745.

A Compendium of Economic Instruments for Environmental Policy

3.2 Economic Instruments for Nature Protection

  • 3.2.1 Transferable Development Rights for Farmland Preservation in Calvert County, Maryland, US

Environmental issue:

Urban development of farmland

Type of economic instrument:

Transferable development rights

Similar examples:

New Jersey Pinelands, Montgomery County (Maryland) and Dade County

Key Targets:

(Florida), all US. Maintenance of the rural landscape and sustaining agriculture through

Administering institution:

the preservation of farmland, forests, environmentally sensitive and unique natural areas, and historic landmarks. Local Government

Key stakeholders:

Landowners, Developers, Local Government

Description

Between 1973 and 1997 agricultural land cover fell from 27% to 21% and forest land cover fell from 63% to 51% in Calvert County, Maryland, US. Land development pressure arose due the close proximity of two major urban areas, Washington D.C and Baltimore. For example, during the 1990s Calvert County experienced a population increase of over 45%.

The Calvert County transferable development rights (TDR) programme began in 1978 and is the primary instrument for addressing the many land-use and environmental problems that land development poses. Typically, the negative environmental effects associated with development are not taken into account in private decision-making (e.g. they are external to the market). In addition, undeveloped land provides non-market and public good benefits such as open-space, wildlife habitats. Generally, in the absence of some form of intervention, existing markets will ignore these benefits.

The TDR programme is an example of an economic instrument that creates a new market in order to address planning and environmental pressures. Within the created market, the right to develop land can be traded between buyers and sellers of TDRs. Because a market solution is sought, TDRs have the potential to result in efficient land use allocations. The market price signals to land owners the relative values of preservation and development.

The basic premise behind a TDR programme entails the local government determining the maximum level of land that may be developed within a specific area. Development rights, corresponding to the maximum amount of land that may be developed in the area, are then distributed to landowners in the area. If landowners face different opportunity costs of not developing their land, some will sell their rights whilst others will seek to purchase more rights that enable them to build at a higher density than their initial allocation permits. The flexibility allowed by the creation of a market for development rights enables land to be allocated to its most efficient use.

Typically different locations within the TDR scheme area are designated as either ‘sending’ areas or ‘receiving’ areas. Sending areas are usually rural locations in which the right to develop is ‘sent away’, whilst receiving areas are usually located in areas of urban growth. Hence the intention is to preserve currently undeveloped areas by redirecting development to areas that are already serviced by urban amenities (such as transport, water and sewerage etc).

Typically, landowners (such as farmers) may build a certain number of residential units on their land. However, with a TDR scheme, rather than sell their property for development, the landowner may sell the rights to develop those residential units elsewhere. Hence, developers may purchase TDRs in order to develop land in receiving areas. Once a landowner has sold the TDRs relating to their property, the land may only be used for agricultural or forestry purposes. Hence, sale of the TDR permanently preserves land from development.

The Calvert TDR programme focuses specifically on the preservation of farmland in order to maintain the rural character of the area. In order for a property to be eligible to sell TDRs, the landowner must first apply to the County to establish an Agricultural Preservation District (APD). In order to be granted APD

A Compendium of Economic Instruments for Environmental Policy

status, the land (farm or forest) must satisfy soil (‘good’ quality) and acreage (at least 50 acres if standing alone, or 10 acres if adjacent to an existing APD), requirements. A parcel of land in an APD must be kept in its agricultural or forest use for a minimum of 5 years. Over this period of time the landowner is exempt from Calvert County property taxes.

Once land has been designated as an APD, the landowner may sell TDRs as they choose. Each acre of land not previously developed on a property can be granted one TDR. However, the sale of a single TDR from a property places the entire property in permanent easement status. This contrasts to other US examples of TDRs and effectively means that the landowner faces an ‘all or nothing’ decision whether or not to retain full development rights to their land.

Not only may developers purchase TDRs, but the County Government can also act as a buyer of TDRs in order to address concerns over increasing development. In 1991 Calvert County began an initiative of ‘purchasing and retiring’ (PAR) TDRs to address concerns over rapidly increasing development. A second initiative with a lower requirement for expenditure began in 2001, that of ‘leverage and retire’ (LAR). Landowners who sell TDRs to the County under LAR are compensated over time, before the principle value of the TDR is paid after a specified period. For instance, for a 15 year period the landowner receives tax- free interest payments and is then paid the principle after 15 years. This enables landowners to reduce their overall tax liability and transfer income to the future. Under this approach the county can retire a greater area of land for a smaller up-front cost (financed by tax-free bonds). In addition, in order to preserve a specific area of land designated as an APD, the County only needs to purchase one TDR to preserve that area of APD.

Markets for TDRs are similar to that of markets for tradeable emissions permits, but do have a significant distinction in that decisions to sell development rights are of an irreversible nature. In addition, TDR markets are susceptible to domination from few buyers and sellers (e.g. monopsony where a small number of developers purchase TDRs) and this may entail high transaction (and search) costs which could reduce the efficiency of the market. Furthermore, TDR markets typically require a greater role for the Government, not just in determining the overall amount of TDRs and designating sending and receiving areas, but also an active role in purchasing TDRs to preserve land.

In mid 2002 there were approximately 19,600 acres of land designated as APD status in Calvert County. In total, 12,644 TDRs had been sold, corresponding to the permanent preservation of approximately 13,000 acres. This accounts for around 13% of agricultural and forest land in Calvert County (which, in turn, implies that nearly 10% of all county land in has been permanently preserved). Calvert County currently has the objective of preserving 40,000 acres of farmland by 2020.

McConnell et al (2003) report that between 1983 and 1993, average TDR price doubled in real terms from $1,211 in 1983 to $2,578 in 1993 (both US $ 1999). From 1993 to 1999, prices have remained virtually constant in real terms. Over all transactions up to 2001, average TDR price was $2,582 (US $ 1999).

Finally, McConnell et al report that the structure of Calvert County TDR programme is conducive to an efficient market for buying and selling development rights. Specifically, sufficient demand from developers, sufficient supply from farmers and stable TDR prices has helped convince those involved of the viability of the scheme. The Government has allowed the market to develop and move towards improved performance and efficiency and has aided this process through the provision of information and purchases of TDRs at announced prices.

Additional comments

In the Czech Republic an alternative approach has been adopted in order to discourage conversion of agricultural land and forests (Klarer et al, 1999a; REC Database). In 1995 a ‘land conversion charge’ system was introduced, which is administered by the Czech soil protection agency. Developers who wish to convert agricultural or forest land to other uses are subject to the charge. For agricultural land, the level of charge varies according to soil quality and other environmental factors. Furthermore, land in national parks and other protected areas may be subject to even greater rates of tax (between 5 and 20 times the basic rate).

The charge levied on conversion of forested land reflects the importance of this land in the Czech Republic. Approximately one-third of the country is covered by forest, which has not only an important role in water, air and land environment functions, but also has an economic significance through the production of wood. Charge rates for both temporary and permanent conversions of forest land are

A Compendium of Economic Instruments for Environmental Policy

determined by multiplying the average yearly production of wood by the average price of wood and then by a further ‘environmental coefficient’. For forests managed for wood production, this coefficient is 1.4, whilst for protected areas of forests the coefficient ranges from 2.0 to 5.0. Hence, charge rates will typically be higher for protected forest land.

Revenue from both the agricultural and forest land conversion charges is distributed to the state environmental fund (60%) and municipal budgets (40%). Revenues are used to fund environmental protection and rural area support policies (Klarer et al, 1999a). In 1997, revenue from the charge for agricultural land conversion that was allocated to the environmental fund was approximately $14 million, whilst revenue from the forest land conversion charge contributed approximately $0.6 million to the fund. Klarer et al (1999a) note that collection efficiency of the charge is reported to have been limited.

Further reading

McConnell, V., Kopits, E. and Walls, M. (2003) ‘How Well Can Markets for Development Rights Work? Evaluating a Farmland Preservation Program’, Resources for the Future Discussion Paper 03-08. Available from www.rff.org at: http://www.rff.org/Documents/RFF-DP-03-08.pdf

Klarer, J., J. McNicholas, E. Knaus (eds) (1999a) Sofia Initiative on Economic Instruments, Sourcebook on Economic Instruments for Environmental Policy in Central and Eastern Europe: Abridged Version A Regional Analysis.

REC Database:

http://www.rec.org/REC/Programs/SofiaInitiatives/EcoInstruments/Database/SIEI_database.html

A Compendium of Economic Instruments for Environmental Policy

  • 3.2.2 Individual Tradable Quotas for Fisheries in New Zealand

Environmental issue:

Depletion of fish stocks

Type of economic instrument:

Individual Tradable Quotas (ITQ)

Similar examples:

Iceland, South Africa, Chile, Australia

Key Targets:

To keep fish catch within Total Allowable Catch limits based on

Administering institution:

biological assessment of the species Ministry of Fisheries

Key stakeholders:

National government, fishing industry

Description

In the absence of any form of government intervention, fisheries typically suffer from problems of common and open access. Where property rights are ill-defined or non-existent, incentives for sustainable use and management of natural resources, such as fisheries, are usually scarce. Coupled with the difficulties of monitoring and exclusion fisheries are often over-exploited. Furthermore, continual technical improvements in fishing have made boats more effective in for harvesting fish and state subsidies to fishing-related capital equipment (e.g. subsidised loans for boats) and operations have created a vast overcapacity of vessels. As such, many fisheries face the risk of substantial of depletion of stocks. In order to address these problems, the New Zealand Government introduced an individual transferable quota (ITQ) scheme with the objective of creating property rights to fish stocks prior to catch.

Prior to 1976, New Zealand’s fishery policy focused primarily on the development of inshore fisheries that were exhibiting signs of over fishing. For example, catches of red snapper had reached a peak in 1978 and fallen by approximately 43% by 1983. Government instituted programmes from the 1960s onwards had resulted in increased fishing effort. In particular, subsidies for an industry in a regulated open-access setting were cited as the main reasons for excess capacity and the associated depletion of fish stocks in inshore fisheries in the early 1980s.

However, extension of the exclusive economic zone (EEZ) to 200 miles in 1978 had the effect of ‘nationalising’ offshore fisheries. To promote domestic fishing in the offshore fisheries, the Government introduced subsidised loans, duty- free imports of large fishing vessels, and a price support mechanism. In 1983, a quota-based system was established for nine companies fishing seven offshore species. Each company was allocated quotas (i.e. right to catch a given amount of a particular species of fish) for a ten- year period on the basis of investment in catch and processing capital.

The depletion of inshore fisheries, the development of the offshore quota program, and deregulation of markets in the 1980s contributed to a conducive atmosphere for establishing ITQs as a fundamental component of fisheries management in New Zealand. The 1986 Fisheries Amendment Act created the ITQ system after several years of consultation with industry. Since then, further modifying legislation has been passed several times, but the basic structure of the system has remained intact.

The NZ Ministry of Fisheries determines the annual total allowable catch (TAC) of each fish stock on the basis of a biological assessment and other environmental and socio-economic factors. The aim in setting the annual TAC is to move fish populations towards levels that will support the greatest annual catch (known as the maximum sustainable yield). This differs from what, in theory, would be the most efficient level of harvest that accounts for the potential regeneration of the fishery stock. Hence, with the New Zealand ITQ, the total number of permits issued for a particular species each year corresponds to the maximum sustainable yield of that species.

Typically, fishing quotas may only be traded within the same fish stock, i.e. not across species, years or different regions of the EEZ. Quota rights may be ‘broken up’ and sold in smaller quantities or leased or sub-leased in any amount. Furthermore there are no restrictions on the amount of times a quota can be sold, leased or sub-leased. There are, however, limits on foreign quota holdings. Compliance and enforcement of quotas involves detailed reporting procedures that track fish from a vessel to a licensed fish receiver (on land) to export records, along with an at-sea surveillance program including on-board observers.

Initially, individual quotas were allocated free of charge to fisherman on the basis of average catches from 1982 to 1984, in terms of fixed annual tonnages into perpetuity. In some fisheries, the initial catch

A Compendium of Economic Instruments for Environmental Policy

allocations exceeded the maximum sustainable yield, and it was necessary for the Government to buy back quotas. This proved to be expensive; NZ$45 million for inshore fisheries alone. The cost of purchasing quotas led the Government to denominate quotas in terms of the share of the TAC from 1990 onwards. This action shifted the burden of risk and uncertainty over future TAC levels from Government to industry.

Newell et al (2002) observe that NZ ITQ system features a sufficient number of market participants and high enough levels of market activity to support a competitive quota market. Activity in the market has risen over time in line with the notion that the development of tradable quota markets takes time. However, some of the markets for fisheries that tend to be less important economically and ecologically tend to experience relatively few transactions.

In addition, the significant degree of flexibility built into the system suggests that transactions costs will be low and activity will potentially be high. The basic tenets of the system; that of setting a total allowable catch and leaving the market to determine the most profitable allocation of fishing effort, remain as intended in 1983. By 1998, the ITQ management system included 33 species of fish and 157 markets for fishing quotas accounting for approximately 85% of the total commercial catch from New Zealand’s EEZ. The number of quota holders has averaged 1500 over the history of the programme, with an annual average of about 8700 leases (average quantity 30 tonnes) and 2000 sales (average quantity 16 tonnes).

Additional comments

The relative success of the New Zealand system contrasts to that of ITQs for Chilean fisheries, which is largely experimental. Set up under the Fisheries Law of 1991, the ITQ system only covers 10% of total Chilean catch, the rest is managed under a ‘full exploitation system’ managed by traditional command and control instruments. Furthermore, a higher degree of market concentration on the buyer side in Chile, in comparison to New Zealand, appears to have reduced the efficacy of the system for sustaining fish stocks. This is particularly evident in the north of Chile where fisheries are highly concentrated where the largest group controls around 50% of the total catch and the second group around 20%-25%. Hence fisheries policy there is susceptible to political lobbying (indeed there has not been wide support or consensus for the introduction of ITQs) whilst the tradable quota market features few participants and transactions (UNEP 2004).

Further reading

Newell, R.G., Sanchirico, J.N. and Kerr, S. (2002) ‘Fishing market quotas’ Resources for the Future Discussion Paper, 02-20. Available from http://www.umass.edu/resec/pdfs/RFF%20ITQ%20Paper.pdf

UNEP (2004) The use of economic instruments in environmental policy: Opportunities and Challenges, UNEP/ETB/2003/9, United Nations Publication.

A Compendium of Economic Instruments for Environmental Policy

  • 3.2.3 Direct Payments for Forest Conservation in Costa Rica

Environmental issue:

Loss of biodiversity and natural resources from tropical forests

Type of economic instrument:

Direct payment / subsidy

Similar examples:

Mexico

Key Targets:

Preservation of ecosystems

Administering institution:

National Forestry Financial Fund (FONAFIFO)

Key stakeholders:

National government, landowners, non-government organisations

Description

The Costa Rican Environmental Services Payment (ESP) programme began in 1996 with the intention of creating institutional mechanisms that would allow landowners who conserve ecosystems services to be compensated by local, national and international beneficiaries (Ferraro and Simpson, 2000). Under the Costa Rican 1996 Forestry Law (no. 7575), forests are recognised to provide four distinct services:

biodiversity protection, hydrological services, carbon sequestration and fixation and scenic beauty. Landowners who provide these services through the conservation of forested land have the opportunity to receive compensation from the National Forestry Financial Fund (FONAFIFO).

FONAFIFO raises money from national sources, through taxes on fuels and payments made by hydrological plants, and international donors. For instance, 3.5% of revenue raised from taxes on fossil fuels is transferred to FONAFIFO (Reyes et al, 2002). These funds are then distributed by FONAFIFO to individual or groups of landowners. Currently funds are available for three different types of contract: (i) forest preservation; (ii) reforestation, and (iii) sustainable timber management. Each contract specifies a fixed annual payment per hectare of between US $35 - $45 per hectare (approximately €28 – €36 per ha). The most common contract is that of forest preservation.

In addition to the FONAFIFO contracts, the institutional framework that has been created in Costa Rica enables voluntary agreements, typically between Non-governmental Organisations (NGOs) and private companies without the direct involvement of FONAFIFO. For example, in 1998, a Costa Rican private hydropower company established an agreement with a conservation organisation whereby the company pays the NGO US $10 per hectare (€8 per ha) each year to maintain hydrological watershed services provided by a certain area of forest (Reyes et al, 2002).

Priorities for conservation are identified on a regional basis within Costa Rica. Regional conservation agents and NGOs are involved in the identification of potential participants. Payments and contracts are often targeted to areas of land, or ‘buffers’, that surround national parks in Costa Rica.

Between 1987 and 2003, FONAFIFO and its predecessor schemes, has approved and provided financing for a total of 809 projects, amounting to total expenditure of nearly CSC 2 billion (Costa Rican Colons), which equates to around €3.7 million (FONAFIFO website 5 ). In terms of area of land, the ESP programme covered approximately 250,000 hectares of land belonging to private landowners (which accounts for just under 5% of land in Costa Rica). The vast majority of this land, approximately 212,000 hectares, is under forest preservation contracts. A further 15,000 hectares corresponds to forestry plantations (reforestation contracts) and the remaining the remaining 23,000 hectares is accounted for by forestry management (sustainable timber management contracts) (Reyes et al 2002).

Additional comments

Agreeing contracts and paying land owners is the most direct way in which economic incentives can be used to preserve ecosystems that provide important global services, such as tropical forests. Incentive approaches to conservation may either be of a ‘direct’ or ‘indirect’ nature. Indirect incentives intend to create income opportunities that are directly dependent on the core resource (e.g. the forest), such as non-timber products (e.g. ecotourism, biodiversity prospecting, nuts and honey products). The underlying premise of this approach is that if land owners and local people can earn income from more sustainable use of forests, their behaviour will change from conversion of land (typically to agriculture) to conservation.

5 FONAFIFO website: www.fonafifo.com (pages can be translated to English through Google web search – www.google.com).

A Compendium of Economic Instruments for Environmental Policy

Ferraro and Kiss (2002) highlight two issues surrounding the success of such incentive instruments. Foremost is that of institutional complexity where programmes require not only the capacity to arrange contracts with landowners (with the entailed enforcement of property rights and responsibilities and resolution of potential conflicts), but also monitoring of ecosystem health. A second important factor is that of cost. Ferraro and Simpson (2000) find that direct payment programmes may be a more cost- effective approach to conservation than indirect methods. Essentially, it is cheaper to pay directly for something (e.g. conservation of forests) than to pay for something indirectly related to it (e.g. an eco- tourism resort). For example, in their empirical study, Ferraro and Simpson (2000) find that of the $4 million of conservation funds invested in eastern Madagascar rainforests, direct payments would enable 80% of the original forest to be protected whilst indirect payments would only support preservation of 12% of the area.

Further reading

Ferraro, P.J. and Kiss, A. (2002) ‘Direct payments to conserve biodiversity,’ Science, Volume 298, 29 November 2002.

Ferraro, P.J. and Simpson, R.D. (2000) ‘The cost-effectiveness of conservation payments, Resources for the Future Discussion Paper 00-31. Available from www.rff.org at: http://www.rff.org/Documents/RFF-DP-00-31.pdf

Reyes, V., Segura, O. and Verweij, P. (2002) ‘Valuation of hydrological services provided by forests in Costa Rica’ European Tropical Forest Research Network, Newsletter No. 35 Winter 2001/2002, 42-44. Available at: http://www.etfrn.org/etfrn/newsletter/news35/index.html

A Compendium of Economic Instruments for Environmental Policy

  • 3.2.4 Performance Bonds for Mining Sector in Queensland, Australia

Environmental issue:

Land rehabilitation post-mining activity

Type of economic instrument:

Performance bond

Similar examples:

New South Wales, Australia

Key Targets:

Encouraging improved performance of rehabilitation and environmental

Administering institution:

protection Queensland Department of Resource Industries

Key stakeholders:

State Government, Queensland Mining Council, Mining Companies

Description

Environmental impacts that arise from mining include air pollution from dust that is generated by the disturbance of land, pollution of water courses from leaching of heavy metals and acids, increased sediment loads in rivers and over-abstraction of groundwater. Performance bonds, whereby a mining company is required to make a payment to the relevant government authority at the beginning of mining activity, create economic incentives for mining operators to consider the environmental impacts that arise during the operation of the mine and after, once the company’s leasehold on the land has expired. The performance bond payment guarantees that the government authority has sufficient funds to address any environmental concerns that arise should the mining company fail to rehabilitate the site sufficiently once operations have ceased. Furthermore, extension of mining leases requires that conditions concerning the staged rehabilitation of land, specified in operational plans, be met.

Following the 1989 Mineral Resources Act, which came into force in 1990, a performance bond system was adopted by the State of Queensland, Australia. A principle concern of the state government was to encourage improved rehabilitation of former mine sites and environmental protection at operating sites without imposing adverse affects on the economic viability of mining operations (James, 1997). Previously, during the 1980s, mine rehabilitation was subject to direct regulation through a security deposit system that required a flat payment per hectare that had no relationship to the actual cost of rehabilitation. Further objectives foresaw the need for the mining industry to adopt a more self-regulating approach to environmental management. Advantages of such an approach include incentive for industry to act to improve environmental performance and lower cost to government.

The 1989 Mineral Resources Act, which imposes the performance bond and is administered by the Queensland Department of Resource Industries, emphasises the environmental responsibility of mining through exploration, actual operation and closure of activity. In order to implement the Act, the Department of Resource Industries developed the Environmental Policy for Mining. The policy defines the environmental performance criteria and financial aspects of the bond system and was developed in conjunction with the Queensland Mining Council to ensure that the interests of mining companies were considered. The framework for environmental management is provided by an Environmental Management Overview Strategy (EMOS) that links the planned operation of mining companies to studies of environmental impact. EMOS’s consist of the project description, the intended management programmes and an overview strategy.

The Environmental Policy and corresponding EMOS approach requires not only compliance with the Minerals Resources Act, but a whole host of other legislation that includes nature conservation, forestry, water resources, beach protection, rural land protection and noise abatement. The Department of Resource Industries has several measures that operate in conjunction with the performance bonds system, including education programmes for mining leaseholders, reductions in the bond amount required for competent past performance, encouragement of better pollution control technology and imposing penalties for non compliance with the 1989 Mineral Resource Act. The Department may also refuse mining companies tenure of land if they have previously failed in the performance of environmental management (James, 1997).

The performance bond system creates an incentive for mining companies to instigate environmental safeguards. Each mining company is required to lodge a security with the Department of Resource Industries. The security may be in the form of: (i) a cash payment, on which interest is paid; (ii) an indemnity or guarantee from a financial institution such as a bank or insurance company; (iii) a written guarantee from the mining company that shows the shareholders’ equity value of the company to be at least five times the value of the security, or; (iv) a combination of (i) to (iii).

A Compendium of Economic Instruments for Environmental Policy

The security amount is determined by the cost of rehabilitation, which is typically estimated on the basis of past experience, advice from other mining companies, estimates from contractors and local experts in the Department of Resource Industries. The required security deposit may be lowered if mining companies demonstrate competent planning and achieve compliance with previous environmental overview strategies and operational plans. Mining companies are rated in order to determine the risk of non-compliance on rehabilitation. Those that demonstrate that they are able to meet environmental management responsibilities are rated as ‘category 1’, while those that are not been able to demonstrate this are rated as ‘category 6’. Performance discounts may be conferred to leaseholders of both new and existing mines. Mining companies can move from category to another on the basis of submitting new operational plans or by varying existing operational plans.

Environmental auditing is used to establish the performance of the mining company (and the performance category) and to ensure compliance with the plan of operation. In addition, the Department of Resource Industries may undertake site inspections to assess whether the plan of operations is being implemented. Companies not complying may face a penalty fine (with a maximum level of Australian $90,000, roughly around €50,000) or cancellation of their mining lease. An aspect of self-regulation features in the environmental auditing procedures, where the mining company can themselves employ individuals with suitable qualifications to undertake the audit.

In terms of the criteria for environmental management, the Environmental Policy for Mining relates to not only the natural environment and conservation but also cultural heritage. The expressed objectives of the policy are threefold: (i) achievement of acceptable post-disturbance land use capability; (ii) stable post- disturbance landform, and; (iii) preservation of downstream water quality. More specifically, rehabilitated land should correspond to the landform that existed prior to mining activity with similar land use capabilities (alternatively in some cases, a different beneficial land use may be required). All disturbed land and mine waste is required to be rehabilitated to a ‘stable’ condition which is self-sustaining or satisfies certain agreed maintenance requirements. Finally, surface and groundwater in the vicinity of the mine should not be degraded to a ‘significant extent’. This requires that water quality (both current and future) be maintained at quality levels that do not adversely affect downstream users (James, 1997).

Additional Comments

One distinct disadvantage of performance bond schemes is the inability to compensate for irreversible environmental damage. However, James (1997) notes that the performance bond approach to management of rehabilitation provides a strong economic incentive for mining companies to operate in an environmentally responsible manner. Furthermore, the scheme is supported by environmental auditing and inspections to ensure compliance and environmental protection. There appears to be an industry-wide acceptance of the performance bond policy in Queensland. In part, this is due to the role that self- regulation plays and the involvement of the industry in the formulation of the Environmental Policy for Mining.

Moreover, a stronger incentive for compliance is generated by the performance related discounts should the mining companies comply with the environmental criteria for operating.

James (1997) also notes that the self-regulating aspect of the system should entail cost savings within the administering Department for Resource Industries, although no information concerning administration costs is available. However, as with any form of self-regulation by industry, there is the risk that without sufficient monitoring and enforcement mechanism, environmental effectiveness could be reduced. Hence, there is the need for external monitoring of compliance such as that currently provided by inspections.

Further Reading

James, D. (1997) Environmental Incentives: Australian Experience with Economic Instruments for Environmental Management, Environmental Economics Research Paper No. 5, Consultancy report prepared by Ecoservices Pty Ltd for Environment Australia. Available at:

http://www.deh.gov.au/pcepd/economics/incentives/

A Compendium of Economic Instruments for Environmental Policy

  • 3.2.5 Oil Pollution Charge for Shipping, Finland

Environmental issue:

Environmental damage from oil spills at sea

Type of economic instrument:

User charge

Similar examples:

International Oil Pollution Compensation Fund (IOPCF) which is financed

Key Targets:

by levies on certain types of oil carried by sea. The levies are paid by entities which receive oil after sea transport, and normally not by the States that are members of the Fund. Revenue raising for environmental protection and oil spill response fund.

Administering institution:

Ministry of Environment

Key stakeholders:

Shipping industry, Finnish Environmental Institute.

Description

Approximately 78 million tonnes of oil was transported through the Gulf of Finland in the Baltic Sea by shipping in 2003. This is three times the volume of transport activity that was seen during the mid 1990s. Predictions suggest that the volume of transport may rise to 10 million tonnes per year by 2010 (SKYE,

2004).

To address the potential environmental damage that oil spills in the Gulf of Finland could cause the Finnish Government levies an oil pollution protection charge on oil imported to, or transported through the country. The charge is payable on each tonne of oil and is differentiated on the basis of ship design and risk. Oil tankers with double hulls are subject to a charge of €0.37 per tonne of oil, whereas a double charge of €0.74 per tonne of oil is levied on single-hulled tankers (TemaNord, 2002). Hence there is a distinct incentive towards more environmentally safe tankers for oil transportation.

Revenue from the pollution charge is collected by the Finnish Oil Pollution Compensation Fund. Statistics Finland (2003 6 ) estimate that revenue from the oil pollution protection charge was €9 million in 2003, representing an increase from the reported €6 million in 2002 and €5 million in 2001. Through the compensation fund, the oil pollution charge is used to cover costs incurred in preventing and combating oil incidents. The Finnish Environmental Institute (SKYE) is responsible for responding to pollution incidents at sea.

Additional Information:

The International Oil Pollution Compensation Funds (IOPC Funds) are part of an international regime of liability and compensation for oil pollution damage caused by oil spills from tankers. Under the regime the owner of a tanker is liable to pay compensation up to a certain limit for oil pollution damage following an escape of persistent oil from his ship. If that amount does not cover all the admissible claims, further compensation is available from the IOPC Fund 1992 if the damage occurs in a State which is a Member of that Fund.

There are at present two IOPC Funds: the 1971 Fund and the 1992 Fund. These two intergovernmental organisations were established at different times (1971 and 1992), have different maximum amounts of compensation and had different Member States. The membership of the 1992 Fund is increasing. Due to a number of denunciations of the 1971 Fund Convention, this Convention ceased to be in force on 24 May 2002 and the 1971 Fund therefore has no Member States. The 1971 Fund will continue to deal with a number of incidents which occurred in 1971 Fund Member States before that date. The two organisations have a joint Secretariat, based in London.

A new Fund, the International Oil Pollution Compensation Supplementary Fund, is likely to be set up in the near future. The aim of this Fund is to supplement the compensation available under the 1992 Civil Liability and Fund Conventions with an additional third tier of compensation. Membership of the Supplementary Fund is optional and any State which is a Member of the 1992 Fund may join. The Supplementary Fund will only pay compensation for pollution damage in Member States of the Fund for incidents which occur after the Fund has been set up.

6 Statistics Finland (2003) Natural Resources and the Environment 2003 Review. http://www.stat.fi/tk/tt/ymparisto_en.html

A Compendium of Economic Instruments for Environmental Policy

The IOPC Funds are financed by levies on certain types of oil carried by sea. The levies are paid by entities which receive oil after sea transport, and normally not by States. Anyone who has suffered pollution damage in a Member State may make a claim against the IOPC Funds for compensation.

Further Reading

SKYE (2004) Oil and Chemical Spill Response in Finland, Finnish Environmental Institute. Available at:

http://www.environment.fi/download.asp?contentid=18074.

TemaNord (2002) The Use of Economic Instruments in Nordic Environmental Policy 1999-2001, report to Nordic Council of Ministers, Copenhagen 2002. Available at: http://www.norden.org/miljoe/Miljo-

okonomi/rapporter/sk/581

004.pdf.

__

International Oil Pollution Compensation Fund (IOPCF) website: www.iopcfund.org

A Compendium of Economic Instruments for Environmental Policy

  • 3.2.6 Tax on Aggregates Extraction in Sweden

Environmental issue:

Extraction of non-renewable resources

Type of economic instrument:

Tax / input charge

Similar examples:

Denmark, UK

Key Targets:

Conservation of gravel resources and the encouragement of use of

Administering institution:

alternative materials Swedish Gävle Tax Authority

Key stakeholders:

Aggregates extraction operators, construction companies

Description

Typically gravel beds act as an aquifer for groundwater and in some areas of Sweden represent an important source for drinking water. For this reason, the 1996 Law Concerning a Tax on Natural Materials was introduced by the Swedish Government (Ecotec et al, 2001). The tax is levied on any company or body that requires a permit to extract materials under the Swedish Nature Conservation, Water and Road Acts. For the purposes of the tax, natural gravel is defined as naturally sorted earth materials, consisting of sand, gravel, cobble and boulder size fractions (Ecotec et al, 2001). A further distinction is made between the three main types of raw material used in construction: gravel, sand and crushed rock. The tax is applied to gravel and sand, but not crushed rock. The intention of the tax is to conserve gravel resources and encourage the use of substitute materials, such as crushed rock (TemaNord, 2002).

The initial rate of the tax still applies and is approximately €0.55 per tonne of gravel (SEK 5 per tonne). The tax is liable to be paid either when gravel is sold or, for vertically integrated construction operations, when the gravel is used in construction.

Revenue from the aggregates tax is administered by the Gävle Tax Authority. Reported revenue increased from around €7.3 million in 1996 to €16 million in 1999. Such an increase in tax revenue would suggest that extraction and use of gravel has also risen over the same period, however, the Gävle Tax Authority have suggested that the increase in the reported revenue is the result of better reporting by gravel extraction operators (Ecotec et al, 2001).

Uncertainty regarding actual extraction and tax revenue lies in the fact that extraction licenses, which overall allow a total permitted tonnage of gravel that can be extracted within a certain period, do not necessarily measure actual extraction of gravel, say, annually. The Swedish system requires that gravel extractors, therefore, report the actual tonnage of gravel removed during a year to relevant local authority administration boards and also the Swedish Geological Survey. Ecotec et al (2001) suggest that once the ‘gaps’ in reporting usage have been addressed, it should be possible for the effectiveness of the tax to be verified.

Ecotec et al (2001), who report data from Swedish National Roads Administration (NRA), give some indication of the impact of the tax on gravel use. Between 1996 total aggregates (sand, gravel and crushed rock) usage rose from 70 million tonnes to 75 million tonnes. Yet, over this period, usage of sand and gravel aggregates fell from 32 million tonnes to 30 million tonnes. In terms of percentage of total aggregates use, this represents a fall from 46% to 40%. However, Ecotec et al note that usage of sand and gravel aggregates had actually fallen significantly in the two years prior to the introduction of the tax, from 41 million tonnes in 1994 to 32 million tonnes as reported for 1996. Even without the tax it would appear that use of gravel and sand aggregates was declining.

Additional Comments

Similar taxes on the extraction of aggregates exist in both the UK and Denmark. The UK Aggregates Levy came into operation in April 2002 and is administered by the HM Customs and Excise (HMCE). The objective of the tax is to address the environmental impacts associated with quarrying operations such as noise, dust, loss of amenity, damage to biodiversity and visual intrusion, and to encourage the use of alternative materials wherever possible. Currently the levy is charged at £1.60 per tonne (around €2.55 per tonne) and applies to sand, gravel and rock quarried or mined in the UK, as well as that dredged from seabed within UK territorial waters. Imports of aggregates into the UK are also subject to the levy. For the period 2002 – 2003 (the first year of operation of the levy) revenue from the levy was approximately £305 million (approximately €485 million).

A Compendium of Economic Instruments for Environmental Policy

The levy is designed to be budget neutral with all revenue returned, either to UK businesses through a 0.1% reduction in employer National Insurance contributions, or through the Aggregates Levy Sustainability Fund (HMCE website, 2004). Projects that deliver environmental benefits (such as environmentally friendly extraction) may apply for funding from the Sustainability Fund (administered by the UK Department for Environment Food and Rural Affairs), which distributes funds to several UK organisations such as English Heritage, English Nature, the Countryside Agency and the Centre for Environment, Fisheries and Aquaculture Sciences (CEFAS).

Further Reading

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Commission. Available at:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

HM Customs and Excise (HMCE) Website – information on the UK Aggregates Levy:

http://www.hmce.gov.uk/business/othertaxes/agg-levy.htm

A Compendium of Economic Instruments for Environmental Policy

3.2.7 Marine Park Fee Systems around the World

Environmental issue:

Management of protected areas

Type of economic instrument:

User fee

Similar examples:

See Table 3.1 below

Key Targets:

Generation of revenue to fund environmental management of protected

Administering institution:

areas Various

Key stakeholders:

National Government, Park Authorities, Local Tourism Industry (e.g.

diving operators), Visitors

Description

Marine Protected Areas (MPA) enable habitats of significant marine biodiversity to be safeguarded. However, as the World Wildlife Fund points out, an estimated 80% of MPAs are protected in name only, with no active management (WWF website 7 ). These are so called ‘paper parks’. Indeed, many park agencies around the world (both marine and land-based) are faced with the challenge of managing environmentally sensitive areas on limited budgets. Such problems are not only exclusive to lower income countries; the US National Park Service also faces significant financial limitations (Lindberg, 2001). Typically, funding problems faced by protected areas are exacerbated by increased visitation rates, increasing operating costs, and under-funded infrastructure repair requirements.

User (or visitor) fees offer a potential source of revenue for park agencies, which offer the potential for parks to become self-financing and hence reduce burdens upon national funds. In addition, marine parks can play an important role in generating a sustained source of income for local economies, particularly through tourism.

There are several examples of marine parks throughout the world that now operate user fees. Considerable variation exists in the level of fees imposed by parks, and how they are charged. Some parks charge daily fees, whilst some charge per visit (which could cover one or two weeks) or even annual fees (which cover multiple visits). Furthermore, it is common for parks to impose additional fees for activities such as snorkelling or diving, as well as mooring and vessel fees.

Table 3.1 below presents a summary of user fees from various marine parks around the world. In most instances, fees range from US$1 - 5 per day. As the table shows, marine parks in Australia, Belize, Italy, Kenya, Mexico, Netherlands Antilles and the Philippines all retain the revenue generated by the user charges, whilst other parks retain substantial proportions of the generated revenue.

The remainder of this case study highlights several examples of marine park fee systems around the world on the basis of a review of user fees in protected areas by Lindberg and Halpenny (2001a). The following case study (Section 3.2.8), offers a more detailed discussion of a pilot user fee system, implemented in Egypt’s Red Sea Islands.

7 http://www.panda.org/about_wwf/what_we_do/marine/what_we_do/protected_areas/index.cfm

A Compendium of Economic Instruments for Environmental Policy

Table 3.1 Examples of User Fees for Marine Parks throughout the World

Country

Marine Protected Area

Fee (US $)

Type of Fee

Use of Revenue

Australia

Great Barrier Reef

2.36

Daily

Returned to MPA via

Ningaloo

7.50

Treasury

Belize

Hol Chan

7.50

Daily

Returned to MPA

Half Moon Caye

2.50

Brazil

Albrohos

4.25

Daily

50% Treasury

Fernando de Noronha

4.25

50% Park Agency

Costa Rica

Cocos Island

  • 130.00 Per trip

 

-

Ecuador

Galapagos

  • 100.00 Annual

 

90% returned to MPA

Egypt

Giftun Islands

  • 2.00 Daily

 

Environmental Protection Fund

Honduras

Sandy Bay West

  • 2.00 Daily

 

NGO

Indonesia

Bunaken

  • 5.00 80% Park Agency

   

Italy

Miramare

  • 24.00 Daily

(Diving)

 

Returned to MPA

  • 13.00 (Snorkelling)

Kenya

Malindi, Watamu

5.00

Daily

Returned to MPA

Mombassa

5.00

Mexico

Cozumel

2.00

(Diving)

Daily

Returned to MPA

1.00

(Snorkelling)

Netherlands

Bonaire

10.00

Annual

Returned to MPA

Antilles

Saba

  • 6.00 Daily

Papua New

Milne Bay

  • 2.00 Daily

 

-

Guinea

Philippines

Tubbataha

50.00

Annual

Returned to MPA

St Lucia

Soufriere

  • 4.00 (Diving)

 

-

  • 1.00 (Snorkelling)

US (Hawaii)

Hanauma Bay

  • 3.00 80% Park Agency

   

Sources: Lindberg and Halpenny (2001a) and Colby (2003).

Australia - Great Barrier Reef and Ningaloo Marine Parks

All tourist visitors to the Great Barrier Reef Marine Park are subject to an ‘environmental management charge’ (EMC) of approximately $2.30 per day 8 . The EMC was initially introduced in 1993 at a rate of approximately $0.50 per day. The aim of the charge is TO cover management, research and education costs associated with tourism at the park. Overall responsibility for the park rests with the Australian national government. In 1996, the government announced that the EMC would rise to approximately $3. However, lobbying from affected stakeholders (the local tourist industry), resulted in a reduction of the proposed level of the EMC to $2, which would be phased in over several years.

Revenue from the EMC is initially collected by the National Treasury, but is then returned to the park via ear-marking. For 1997-98, EMC revenue was approximately $1.8 million, and amounted to nearly 20% of the total funding for the park. Of the EMC revenue, around 25% has been allocated to marine reef research activities.

From 1995, Ningaloo Marine Park, in Western Australia, has charged visitors $7.50 per day. The park offers visitors the opportunity to swim with whale sharks. Revenue from the visitor fee is used to fund whale shark research, park management and also education activities. Lindberg and Halpenny (2001a) note that there was significant industry opposition to the charge when it was initially announced in 1994, in part due to a short notice period (just 2 months before the start of the tourist season) and also because the industry felt self-monitoring was possible, and hence there was no need for a park agency monitoring programme.

Costa Rica – Cocos Island

Rather then charging a daily user fee, visitors to the Costa Rican Cocos Island are currently subject to a fee of approximately $130 per person per trip plus an additional tax of $28 per dive trip. Up until the mid

8 In this case study all prices are in US dollar terms.

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1990s the tourism industry had opposed even modest increases in the visitor fee. When, more substantial increases were announced in the mid 1990s, tour operators considered boycotting the Tortuguerto National Park in which the Cocos Islands are situated. Such increases in the fee were also blamed for some $65 million loss of national income due to reduced tourism revenues. However, analysis of visitor patterns by Chase et al (1998) would suggest that visitor numbers are typically unaffected by changes in the level of the fee charge. Further analysis by Lindberg and Aylward (1999) also supported the suggestion that user fees do not have a negative impact on visitor numbers.

Italy – Miramare Marine Reserve

Visitors to the Miramare Marine Reserve are subject to a fee of approximately $2.00 per day, with additional charges levied for certain activities. For scuba diving, the additional charge is $22 per person, whilst for snorkelling the additional charge is $12 per person. The marine park receives 75% of its funding from the Italian Ministry of the Environment, with the remainder funded by revenues from the user fees. Whilst the marine park is dependent on government funding, it is actually managed on a day-to-day basis by WWF Italy.

Netherlands Antilles – Bonaire and Saba Marine Parks

The Bonaire Marine Park is often cited as an example in which the role played by tourism has been instrumental in financing protected marine areas. The park charges a fee of $10 per diver per year, which is levied on both local and foreign visitors. The fee was introduced in 1992, and has remained at $10 since then. Revenue from the fee amounts to approximately $270,000 per year (Lindberg and Halpenny, 2001a) and is allocated directly to the marine park. Overall, revenue from the Bonaire user fees covers between 80% and 90% of the Park’s annual expenses, which includes management salaries, operation of vehicles and boats, maintenance of moorings and law enforcement. At the Saba Marine Park, in addition to general management expenses, some revenue is also distributed to conservation activities, including research and monitoring.

The Bonaire fee operates through a ‘tag’ system. Divers pay the fee to the dive operator on arrival, and receive a plastic tag that must be worn when diving. Enforcement is made through spot-checks, although Lindberg and Halpenny (2001a) note that ‘peer-pressure’ from other divers is sufficient to ensure that checks are not required on dive boats.

Initially, the Bonaire fee was opposed, with local dive operators threatening to move to the Cayman Islands if it was implemented. However, despite its existence, visitor numbers have not been reduced. In fact, the number of divers increased from 19,500 in 1992 to 28,000 in 2000 (Lindberg and Halpenny, 2001a). Much of this increase is attributed to the fact that revenue from the charge is used to maintain and manage the coral reefs within the Park. In addition, successful management of the park has also enabled fish populations to increase, despite the increase in diver numbers.

In the Saba Marine Park, foreign visitors are charged $3.00 per dive, which is collected by dive operators. Lindberg and Halpenny (2001a) state that the typical diver makes 10 dives during a stay, so on average, $30 is collected from each diver. Both the Bonaire and Saba parks are managed by NGOs, who collect fee revenue directly from dive operators.

St Lucia – Soufriere Marine Park

The Soufriere Marine Management Authority charges visitor fees of $4 per day for divers (or $12 per year for divers) and $1 per day for snorkellers on commercial tours. In addition to user fees, there are fees for yachts based on the length of stay in the area. Vessels up to 35 feet are subject to a charge of $10 for up to 2 days and $15 for 2 days to a week; vessels between 35 and 65 feet are subject to a charge of $15 for up to 2 days and $20 for 2 days to a week; and vessels greater than 65 feet are subject to a charge of $20 for up to 2 days and $25 for 2 to a week.

Diving operators collect the dive and snorkel fees whilst park rangers collect the yacht fees. Lindberg and Halpenny (2001a) report that visitor numbers have actually increased over the period of operation of fees. The number of daily dive permits sold increased from around 1,200 in 1995 to just about 4,000 in 2000. The number of annual dive permits sold has also increased over the same period, from approximately 750 in 1995 to near 2,000 in the year 2000.

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US – Haunama Bay, Oahu, Hawaii

The Haunama Bay Marine Park is managed by local government. Visitors to the marine park are charged $3 per day. In addition there is an annual fee of $50. The daily fee was previously higher, but was actually reduced since collected revenues exceeded expectations (Lindberg and Halpenny, 2001a). All revenues from the visitor charge are allocated to a fund for managing the park, which includes an education centre. With around 1.2 million visitors per year, revenue from the daily charge alone is approximately $9.6 million.

Further Reading

For further examples of user/visitor fees for protected areas, see a series of three related papers:

Lindberg, K. and Halpenny, E. (2001a) ‘Protected Area Visitor Fees: Country Review’, Draft paper, Cooperative Research Centre for Sustainable Tourism, Griffith University, Australia. Available from:

http://www.owio.wau.nl/sal60310/Literature/Fees%20--%20country%20review%206%20Aug.pdf

or:

http://www.ecotourism.org/onlineLib/Uploaded/Protected%20Area%20Visitor%20Fee%20(Country).pdf

Lindberg, K. (2001) ‘Protected Area Visitor Fees: Overview’, Draft paper, Cooperative Research Centre for Sustainable Tourism, Griffith University, Australia. Available from:

http://www.owio.wau.nl/sal60310/Literature/Fees%20--%20overview%206%20Aug.pdf

Lindberg, K. and Halpenny, E. (2001b) ‘Protected Area Visitor Fees: Summary’, Draft paper, Cooperative Research Centre for Sustainable Tourism, Griffith University, Australia. Available from:

http://www.owio.wau.nl/sal60310/Literature/Fees%20--%20summary%206%20Aug.pdf

or:

http://www.ecotourism.org/onlineLib/Uploaded/Ecotourism%20Factsheet%20-%202000.pdf

A Compendium of Economic Instruments for Environmental Policy

3.2.8 User Fees for Egypt’s Red Sea Islands and Coral Reefs

Environmental issue:

Pressures on coastal marine ecosystems (corals, mangroves) from

Type of economic instrument:

tourism, particularly diving and snorkelling activities User fee

Similar examples:

Australia (Great Barrier Reef), Belize (Hol Chan), Brazil (Abrolhos), Italy

Key Targets:

(Miramare), Kenya (Mombassa), Mexico (Cozumel), St Lucia (Soufriere), US (Hanauma Bay) Generation of revenue to fund environmental management of the area

Administering institution:

Egyptian Environmental Affairs Agency (EEAA)

Key stakeholders:

National and Regional Government, local tourist industry (hotels,

diving/snorkelling operators), tourists.

Description

The Egyptian Red Sea coast extends for some 1800 kilometres and includes both the Gulf of Suez and Gulf of Aqaba in the north of the Country. Much of the western coastline of the Red Sea is bordered by diverse coastal/marine ecosystems, such as coral reefs and mangrove habitats. Until recent years, these areas were considered to be in a healthy condition. In reality, these sensitive areas face threats from human activity such as land reclamation (which causes sedimentation), shipping of oil through the Red Sea (risk of oil spills) and tourism (particularly recreational scuba diving).

The Red Sea chapter in the assessment report, Status of Coral Reefs of the World-2002, states that, Technical reports, personal observations, and comparative data show recent decreases in live coral cover. Fish populations are also declining. Threats to coral reefs…are continuously increasing with the increasing rate of coastal development. The major threats are land filling, dredging, sedimentation, sewage discharges, and effluents from desalination plants. In major tourism areas, there is physical damage by tourists and boat anchors. Fishing pressure is constantly increasing” (Hassan et al, 2002, page 45). Moreover, the threat posed by diving and snorkelling activities, which include the associated boating and mooring impacts on the reefs, has been the focus of environmental management efforts initiated by the Egyptian Environmental Affairs Agency (EEAA).

Sensitive marine areas within the Red Sea Governorate (the regional government authority area) have been designated as Red Sea Marine Protectorates (RSMP). In total, RSMP cover the coral reefs surrounding 22 islands. The EEAA’s objective is to protect the sensitive ecosystems, but it is also recognised that such protection requires significant funding. Hence the goal has been to manage sensitive coastal areas in such a way that visitors are attracted and employment opportunities sustained. Necessarily, this approach requires some form of revenue generating funding mechanism.

In 2000, EEAA introduced a pilot user fee (or ‘entrance’ fee) scheme for the two Giftun Islands, near to the Hurghada in the Red Sea Governorate. Under the scheme, a fee of $2 per day was levied on foreign visitors 9 and a lower fee of approximately $0.30 was levied on Egyptian visitors. In addition to the Giftun Islands, a user fee scheme was introduced for the southern Far Islands, set at $5 per day per visitor, for a minimum of seven days (hence the minimum fee charged was $35). All other islands in the area were not subject to an entry fee.

Colby (2003) reports that there were approximately 102,000 foreign visitor days and 10,000 Egyptian visitor days for the Giftun Islands over the period 2000 – 2002. With addition of a reported 45,000 visitor days for the Far Islands, the pilot user fee scheme generated approximately $483,000 per year in the first two years of its operation. Revenue from the scheme is allocated to the Environmental Protection Fund (EPF). The EEAA, which manages the fund, returned approximately 75% of this revenue back to the RSMP. However, Colby notes that this funding is estimated to cover only 10% of the RSMPs budgetary needs.

An initial analysis of the Giftun Island user fees noted the distorting effect that the pilot scheme had on visitor patterns (Hanafy, 2002). Specifically, the introduction of the fee for only the Giftun Islands had the effect of shifting diving and snorkelling excursions run by boat/tour operators to other nearby islands where no entrance fees existed. The impact was twofold; (i) revenues from the Giftun entrance fee decreased, and (ii) tourism pressures on other areas of the coral reef increased.

9 Initially, the fee per day was set at $5 per day when the scheme started in April 2000, however due to protests from the local tourist industry, the fee was reduced to $2 per day (Colby, 2003).

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Additional comments

Colby (2003) provides an assessment of different options to further develop the revenue generation and funding mechanisms in the northern zone of the RMSP (which includes the Giftun Islands). The options reviewed include: (i) expanding the current user fees system; (ii) implementing a daily hotel environmental fee; or (iii) an airport entrance/exit fee. On the basis of Colby’s analysis, the overall target revenue for the RSMP, EPF and the Red Sea Governorate is $10 - 12 million per year for the purposes of environmental management in the northern zone of the Red Sea.

Expansion of the area covered by the existing user fee scheme would go some way to addressing the distortions noted by Hanafy (2002). Uniform coverage would eliminate the potential for visitors to avoid paying the user fee by simply visiting other islands. However, Colby suggests that such an approach would be resisted by local reef-using industries (which favour a more generally targeted tourist tax) and would require significant effort to improve collection efficiency and to reduce transactions costs. Furthermore, in order for the EEAA to expand the user fee scheme, legislation requires that boundaries of the RSMP be expanded, or that new protectorates are created, since the EEAA only has jurisdiction over existing protected areas.

A daily hotel fee could be imposed as a supplementary tax to the entry user fees. Or alternatively, it could be implemented in place of the user fees and the Red Sea Governorate-wide ‘environment tax’ that is currently levied on diving/snorkelling centres 10 . The advantage of a Governorate-wide daily hotel fee is that there is no need to declare new protectorates or expand the boundaries of the RSMP.

On the basis of the analysis undertaken, Colby (2003) suggests that an annual airport fee would appear to be the favoured option, with the fee being collected from a small number of entry points (specifically, two airports), making it more efficient than alternative options. Moreover, an airport fee also appears to offer the greatest revenue potential at between $12 – 25 million per year. By contrast, both expansion of the user fee and the hotel tax could generate revenues in the region of $2 – 11 million. Finally, the Governorate-wide tax would be supported by the diving and snorkelling industries. In terms of disadvantages, an airport tax would require the significant coordination of legal and institutional matters, particularly in relation to different Ministries in the Egyptian Government.

Regardless of the option chosen, Colby notes the need for an expansion of the area in which tourists are charged some form of user fee and for efficient collection of revenues. Both of these requirements would also need to be fulfilled in a manner that would be supported by local stakeholders. Furthermore, a thorough legal review would be required in conjunction with consultation with other Ministries, whilst the eventual chosen scheme would need a gradual introduction in order to allow the tourist market to adjust.

Further reading

Colby, M.E., with Hanafy, M., McEachern,

J.,

Sarhan, M.I.,

Hegazy, I. Mesbah, N. Moustafa,

A.

and

Dornbusch, D. (2003) Red Sea Marine Protectorates: Revenue Generation Options, report to Program

Support Unit, Egyptian Environmental Policy Program, Cairo, Egypt. International Resource Group, Ltd. Washington.

Hanafy. M (2002) Initial Report on the Impact of the User Fee of Giftun Islands, Translation for US Agency for International Development, Cairo. Egyptian Environmental Policy Program, Program Support Unit.

10 Tax liability is based on customer lists that are required to be provided to the Coast Guard. Tax rates are less than $0.50 per day for divers and snorkellers.

A Compendium of Economic Instruments for Environmental Policy

  • 3.3 Economic Instruments for Solid Waste

    • 3.3.1 Irish Plastic Bag Levy (‘Plastax’)

Environmental issue:

Plastic bag wastage and disposal

Type of economic instrument:

Tax

Similar examples:

Denmark, Italy

Key Targets:

Significant reduction in the number of plastic bags dispensed at retail

Administering institution:

outlets Revenue Commissioners

Key stakeholders:

Department of the Environment Heritage and Local Government,

Revenue Commissioners, Retailers, Consumers

Description

The Irish Department of the Environment Heritage and Local Government identified plastic bags as a visible and persistent component of litter pollution in towns, the countryside and the coastline that impact on ecosystems, habitats and wildlife. A detailed summary of the Irish plastic bag levy is provided by Environment Australia (2002), a report that considers the introduction of a similar instrument in Australia.

In 2001, conservative estimates suggested that approximately 1.2 billion plastic shopping bags were provided free of charge to consumers in Ireland at retail outlets annually. This equates to roughly 325 plastic bags per person per year. To address the excessive and largely unnecessary consumption of plastic bags a levy of €0.15 per plastic bag was introduced through the Waste Management (Environmental Levy) (Plastic Bags) Regulations. All retailers are required by law to pass on the full amount of the tax as a charge to the customer at the point of sale. The express intention of the levy is to alter incentives and reduce the consumption of plastic bags.

Revenues raised from the levy are assigned to the Environment Fund which is used for supporting litter and waste management and other environmental initiatives. Responsibility for implementing and administering the levy is undertaken by the Revenue Commissioners. Collection of the tax is through the online VAT system which most large stores use.

The levy applies to all plastic bags except smaller bags which are used to contain non-packaged products such as fruit, nuts or vegetables; confectionery; dairy products; cooked food (whether cold or hot), and ice. In addition, for food safety reasons, smaller bags which are used to contain fresh meat, fish and poultry (whether packaged or not), are also exempt. Finally, bags that cost more than €0.70 are exempt along with bags supplied to passengers in ports and airports as well as on board commercial ships and aircraft.

Retailers are required to record the opening stock of plastic bags at the beginning of the tax period and subsequent purchases of bags and the number of bags supplied to customers. This is necessary for both levy applicable bags and bags that are excluded from the levy.

Prior to the implementation of the tax an extensive advertising campaign highlighted the environmental problems created by plastic bags and informed the public of the €0.15 levy.

Within three months of implementing the levy, consumption of plastic bags was estimated to be reduced by 90% (giving an estimated annual of approximately 1 billion plastic bags). For the year 2002 – 03 the reported revenue raised from the levy amounted to approximately €10 million. Accounting for start-up and administration costs the net tax receipt was just under €8.5 million.

In addition, the initiative has promoted the sale and use of re-usable shopping bags (‘bags for life’). Initially it was thought that reduction in the use of plastic carrier bags may lead to a substantial increase in the sales of larger refuse bags, since plastic bags are typically used within homes for this purpose, therefore counteracting the resource savings derived in reducing plastic bag consumption. Some retail outlets reported increases in such product sales of approximately 75% although this increase comes from a

A Compendium of Economic Instruments for Environmental Policy

significantly smaller initial level in comparison to that of plastic bags and is insignificant relative to the reduction in plastic bags (Environment Australia, 2002).

Plastic bag taxes have also been implemented in Italy and Denmark. The Italian tax was introduced in 1988 at a levy equivalent to €0.0051 per bag. At such an insignificant level, the tax is seen as having very little impact on plastic bag consumption. In 1994, the Danish government introduced a range of environmentally focussed taxes which included a tax on plastic carrier bags in order to promote the use of re-usable bags. In this arrangement, the tax is levied on the price to the retailer, not the consumer. However the Danish Environment Protection Agency (DEPA) reports that consumption of plastic bags has fallen to a third of pre tax levels.

The Danish tax rate is approximately €2.69 per kilo for plastic bags (a lower rate of around €1.34 per kilo is also levied for paper bags) for bags with a capacity in excess of 5 litres. Note that since the tax is levied on retailers, the relevant tax unit is per kilo rather than per bag. Revenues from the tax were estimated to be just under €23 million by DEPA.

Additional comments

By all reports, the Irish plastic bag levy has been successful, receiving support from both retailers and consumers. The dramatic decrease in plastic consumption has arisen because the tax is direct levied on consumers. Furthermore it has raised awareness of the need for a collective response to issues such as waste and litter management.

Observations suggest that Irish plastic bag levy is relatively high, or in other terms, ‘punitive’ (Environment Australia, 2002) in order to discourage the use of plastic bags all together. Effectively the tax has had the effect of banning plastic bags all together. Interestingly, the level of tax suggested by an initial consultation was approximately €0.025 per plastic bag.

In general, the plastic bag levy is in accordance with European Commission policy outlook, where market based instruments should be employed to attain improved environmental outcomes.

This case study demonstrates that tax/levy can be extremely effective in addressing issues of unnecessary resource consumption. By introducing incentive not to use plastic bags, i.e. a punitive charge, their use has been substantially arrested. The tax is also relatively easy to incorporate into the existing sales tax collection system. Furthermore it is transparent to the consumer (and explicitly detailed on sales receipts) with the full cost passed onto those who eventually are the cause of the environmental problem. In absolute terms the Irish plastic bag levy represents a very small proportion of consumer spending yet it has had a pronounced effect.

Further reading

Environment Australia Department of Environment and Heritage (2002) Plastic Shopping Bags – Analysis of Levies and Environmental Impacts report by Nolan-ITU Pty Ltd in association with RMIT Centre for Design and Eunomia Research and Consulting Ltd.

Irish Department of the Environment, Heritage and Local Government website:

http://www.environ.ie/DOEI/DOEIHome.nsf - various press releases 2001 to 2003.

For Scandinavian examples:

TemaNord (2002) The Use of Economic Instruments in Nordic Environmental Policy 1999-2001, report to Nordic Council of Ministers, Copenhagen 2002. Available at: http://www.norden.org/miljoe/Miljo- okonomi/rapporter/sk/581 004.pdf __

Danish Environmental Protection Agency waste management webpage:

http://www.mst.dk/waste/01000000.htm

A Compendium of Economic Instruments for Environmental Policy

3.3.2 UK Landfill Tax

Environmental issue:

Solid waste management

Type of economic instrument:

Output Tax

Similar examples:

France, Austria, Denmark (landfill and incineration), Norway (landfill

Key Targets:

and incineration) Internalisation of externalities arising from land filling of solid waste.

Administering institution:

HM Customs and Excise

Key stakeholders:

Landfill operators, local authorities, industry and households

Description

Some 434 million tonnes of waste are generated each year in the UK and landfill represents the most common form of waste disposal. Of this total, 28.8 million is described as municipal solid waste and in 2001/02 approximately 77% of this was landfilled (DEFRA municipal waste survey, 2001/02 11 ). Similarly, approximately half of industrial and commercial waste goes to landfill in the UK (DEFRA e-Digest of Environmental Statistics – DEFRA website).

The UK landfill tax was introduced in 1996 with the intention of addressing the environmental impacts associated with landfill. The implementation of the tax was preceded by a wide-ranging consultation that included industry, local authorities and environmental groups as well as assessments of the external costs associated with landfill and incineration (CSERGE et al, 1993) and waste management options (Coopers and Lybrand, 1993).

To make the tax revenue neutral, its implementation was accompanied by reductions in National Insurance Contributions (NIC or the tax levied on the employment of labour) from 10.2% to 10%. Furthermore, some revenue was hypothecated for waste management research purposes and investment projects in landfill areas via an organisation entitled ENTRUST with which those seeking funding registered.

One particular initiative that sought to use revenue for schemes giving rise to environmental and wider social benefits is the landfill tax credit scheme. Within this scheme, landfill operators can use 20% of their tax liability to fund projects that met a set of specified criteria. Tax credit received is equivalent to 90% of the funds, meaning that either the landfill operator or a third party would need to contribute the further 10% funding of the scheme (Ecotec et al, 2001).

The tax is applied to all waste that is disposed of at licensed landfill sites, although some exemptions do exist. There are two rates of tax, a lower rate of £2 per tonne that applies to inert/inactive waste 12 and a standard rate applicable to all other types of waste, which is currently £15 per tonne. On the basis of parliamentary approval, the standard tax rate has increased by £1 per tonne each year, however, from 2005/06, the standard rate is set to rise by £3 per tonne per year until it reaches £35 per tonne (Chancellor’s Pre-Budget Statement 2002 13 ).

The tax is paid by waste collectors when waste is deposited at landfill ‘gate’. However, waste collectors are typically contracted by local authorities to collect municipal waste and the cost of the tax is passed on to local authorities, who in turn levy council tax on households who ultimately, but indirectly pay for the landfill tax (on the municipal waste aspect of waste). Hence, for the household sector, there is no link between the landfill tax and the amount of waste produced by individual households. Making the landfill tax more ‘direct’ to households is likely to entail significantly high implementation and monitoring costs (that could prohibit such an approach).

In contrast, there is a direct link between the disposal of waste from industrial sectors and the landfill tax. Therefore, the tax can have one of three effects on industry. Firstly, firms may simply opt to pay the tax and choose not to change their behaviour. Secondly, they may implement measures to reduce the

  • 11 http://www.defra.gov.uk/environment/statistics/wastats/mwb0102/wbch01.htm#wbch01landfill

  • 12 The classification of inert waste typically includes construction and building material waste. Subject to certain qualifications, tax

exemptions exist for waste material from dredging, mining and quarrying, contaminated land, pet cemeteries (HM Customs and

Excise website: www.hmce.gov.uk).

  • 13 UK Chancellor’s Pre-Budget Statement 2002

http://www.hm-treasury.gov.uk/pre_budget_report/prebud_pbr02/report/prebud_pbr02_repchap7.cfm

A Compendium of Economic Instruments for Environmental Policy

generation of waste or alternatively increase recycling of waste. Finally, firms may attempt to dispose of their waste illegally, also known as fly tipping.

Ecotec et al (2001) provide a summary of the effect the UK landfill tax has had in a variety of areas. The environmental effect the tax has had has been difficult to identify due to a lack of pre-tax data, particularly in relation to construction and demolition wastes. However, a reduction in the quantity of waste received by landfills between 1997 and 1999 suggests that the flow of waste, to licensed landfill sites at least, has reduced. In particular, the quantity of inert waste fell by 15% whilst the quantity of active waste has remained approximately constant.

The effect the landfill tax has on municipal waste from households is limited since there are no incentives for households to change their behaviour. However, some impact upon local government spending did result. In the UK, local authorities contract household waste collection services, thus the impact of the tax required funds to be switched from other areas to meet the increased cost of waste disposal (Ecotec et al, 2001).

The construction and demolition waste has been greatest affected by the landfill tax. Prior to its introduction, these inert waste materials (such as uncontaminated soils, concrete, brick and clays) were typically used for cover materials, in the construction of access roads, or site remediation. A survey of landfill operators suggested that post-tax there had been an 18 million tonne reduction in the landfilling of inert wastes from 42 million tonnes pre-tax. Whilst other factors such as a now defunct fuel escalator tax on transport, a tax on aggregates extraction (that also encourages re-use) and changes in building process promoted by government, the landfill tax is believed to be the main contributor to this reduction (Ecotec et al, 2001). Previously, no or a very small fee was charged for disposal of these waste, hence the tax represents a significant increase in the cost of disposal.

The influence of the tax in terms of altering product prices appears to have been limited to waste management industry. Immediately after the introduction of the tax, waste operators’ disposal fees rose more or less by the full extent of the tax, reflecting the fact that operators’ short run response was limited by geographical factors (especially in relation to transportation costs) and the time required to develop alternative options for waste management.

Initially, concerns were raised that the incidence of the landfill tax would simply lead to a switch to incineration for waste disposal since no tax was levied upon this waste management option. However, the tax also has the effect of increasing interest in recycling and composting options as well as minimisation of waste production at source, particularly for the industrial and commercial sectors (Ecotec et al, 2001).

Ecotec et al (2001) also consider the impacts upon trade and employment. Taxes on the disposal of waste are unlikely to lead to significant impacts on trade, due in main, to the high costs associated with the transportation of waste. Coupled with the UK’s geographical location, the tax has little effect in terms of waste crossing national borders in order for disposal.

The aim of the accompanying reduction in employment costs (the NIC reduction) was to encourage an increase in employment. A notable point of discussion that arose concerned the fact that the tax reduction was targeted at higher NIC rate and higher paid employees, rather than potentially benefiting those in lower paid jobs with lower NICs (Ecotec et al, 2001).

Other employment effects from the tax include the creation within some companies of waste minimisation officers in direct response to the tax. In addition, employment has risen in the waste-recycling sector which is typically labour intensive. Finally, ENTRUST via the Landfill Tax Credit Scheme has distributed around £80 million in local projects with some attributed employment effects (Ecotec et al, 2001).

Additional comments

Ecotec et al (2001) provides an evaluation of the UK landfill tax to date. It is recognised that there has been both positive and negative results. Specifically, the tax was intended to give incentives to switch waste from landfilling but was not accompanied by complementary measures to address other aspects in waste management. This exemplifies the point that often, in the absence of other policy initiatives environmental taxes may struggle to attain multiple policy objectives.

While the impact upon municipal waste management has been somewhat limited, commercial and

industrial have

responded to the introduction

of

the landfill

tax (although it

should be

noted that

A Compendium of Economic Instruments for Environmental Policy

packaging regulations have also had a complementary impact). Furthermore, these sectors have not suffered adversely in terms of competitiveness since the tax level is relatively low.

The tax has had the greatest impact upon local authorities (since waste collection contractors are to pass the incidence of the tax on to the local authorities), and consequently through council taxes on taxpayers. Whilst the link between households and the tax remains indirect in nature, the over-riding impact to the tax is transfer of money from taxpayers to the Treasury.

A further problem facing waste management is that the alternative to landfill is incineration, which faces significant public opposition (Enviros et al, 2004). An alternative approach would be the consideration of wider-spread recycling and composting of appropriate materials by local authorities. In this respect, the ENTRUST initiative has not produced significant results in terms of sustainable waste management.

In summary Ecotec et al (2001) conclude that landfill tax conveys strong signals and incentives (particularly to the industrial sector), but there still remains issues concerning the wider design of waste management strategy in the UK.

Further reading

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and

Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Commission. Available at:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

Turner, R.K. and I, Brisson (1995) A Possible Landfill Levy in the UK: Economic Incenitves for Reducing Waste to Landfill, in Gale, R., S. Barg and A. Gillies (1995), Green Budget Reform: An International Casebook of Leading Practices, International Institute for Sustainable Development (IISD) and Earthscan, London.

A Compendium of Economic Instruments for Environmental Policy

3.3.3 Waste Disposal Charges and Non-Compliance Fines in Central and Eastern Europe

Environmental issue:

Disposal of waste from household and industrial sectors

Type of economic instrument:

Emissions charge and non-compliance fines

Similar examples:

Denmark, Finland, Norway, Sweden, the UK

Key Targets:

Revenue raising, compliance with regulations, cost-recovery

Administering institution:

Various

Key stakeholders:

National and local government, waste collection and disposal operators,

households, industry.

Description

A number of Central and Eastern European (CEE) countries levy charges on the disposal of waste. In addition, several countries operate a non-compliance fine to complement these charges, which are imposed when specified limits on the volume or toxicity/hazardous nature of waste are violated.

Table 3.2 below presents a selection of the charge rates for disposal of waste in CEE countries and associated non-compliance fines (NCF). Typically different levels of charge are levied on a variety of different types of waste. In the Czech Republic and Slovakia, distinction is made between municipal and hazardous solid waste, whilst Hungary classifies waste as either originating from the household sector or industrial sector or other sources. In Latvia and Poland the charge level is differentiated on the basis of toxicity. Non-compliance fines are generally determined by the nature of the violation of waste disposal regulations. In Croatia, the level of the charge is guided by cost recovery principles and is collected by the service provider (REC Database).

Table 3.2: Waste Disposal Charges and Non-compliance Fines in Central and Eastern Europe

Country

Type

Tax rate (€)

Tax base

Croatia

Charge

39/tonne

 

NCF

3952-52,700 per case

Based on violation

Czech Republic

Charge

2.2/tonne

Municipal waste

Charge

12.2/tonne

Hazardous waste

NCF

-

Estonia

Charge

0.1/tonne

Non-hazardous waste

(NCF)

(0.5/tonne)

(non-compliance)

Charge

0.3/tonne

Hazardous waste

(NCF)

(1.5/tonne)

(non-compliance)

Hungary

Charge

13.6

– 23.4 /tonne

Household waste

Charge

11.8

– 25.9 / tonne

Industrial waste

Charge

11.8

– 17.3 / tonne

Other waste

NCF

39.5-19,762 per case

Hazardous waste: based on violation

Latvia

Charge

0.3

/ m 3

Non-toxic waste

Charge

2.41

/ m 3

Toxic waste

Charge

80.3

/ m 3

Highly toxic waste

NCF

3 or 12 × charge

Above limit / Illegal dumping

Poland

Charge

1.7

– 21.7 / tonne

Industrial and hazardous waste:

 

according to level of hazard

NCF

-

Based on violation

Slovakia

Charge

0.5

– 6.8 / tonne

Municipal waste

Hazardous

5.7

– 79.5 / tonne

Hazardous waste

NCF

-

Based on violation

Sources: Klarer et al (1999a); Klarer et al (1999b); Speck et al (2001a) and REC database (1999).

In Estonia, waste disposal charges and non-compliance fines combined generated approximately €2.7 million of revenue in 1999, which was allocated to the national environmental fund administered by the Environmental Department of County Government (REC Database). Similarly in Latvia, revenue is collected by the state revenue service and allocated to two funds; the national environmental fund (40%) and the municipal environmental fund (60%). Revenue from the Polish waste disposal charge, approximately €21.1 million in 1998, is collected by regional administrations, whilst non-compliance fines are collected by the

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regional inspectorate for environment protection (around €0.6 million in 1998). Both sources of revenue are allocated to Poland’s environmental fund. In contrast, revenues collected from the waste disposal charge in Hungary are allocated to waste management companies whilst revenue from the non-compliance fines are collected by the national environmental authority and are subsumed by the central budget.

In relation to waste disposal charges, Klarer et al (1999b) note that charge rates have typically been established at low levels, in order to avoid political and social opposition, and hence only provide moderate incentives for reductions in waste. However, in Croatia, Czech Republic, Hungary and Poland the main objective of waste disposal charges has been to recover waste management costs, whilst in Slovakia, Latvia and Estonia revenues are earmarked for environmental funds. Hence, objectives of reducing the volume of waste produced by different sectors are typically of secondary importance.

Further reading

Klarer, J., J. McNicholas, E. Knaus (eds) (1999a) Sofia Initiative on Economic Instruments, Sourcebook on Economic Instruments for Environmental Policy in Central and Eastern Europe: Abridged Version A Regional Analysis.

Klarer, J., Francis, P. and McNicholas, J. (1999b) Sofia Initiative on Economic Instruments, Improving Environment and Economy: The Potential of Economic Incentives for Environmental Improvements and Sustainable Development in Countries with Economies in Transition, report by the Regional Environmental Center (REC) for Central and Eastern Europe.

REC Database:

http://www.rec.org/REC/Programs/SofiaInitiatives/EcoInstruments/Database/SIEI_database.html

Speck, S., and Markovic, M. (eds) (2001b) Waste Management Policies in Central and Eastern European Countries: Current Policies and Trends, report by the Regional Environmental Center (REC) for Central and Eastern Europe.

For examples of Scandinavian waste disposal charges levied on waste supplied to landfills and incinerators, see:

TemaNord (2002) The Use of Economic Instruments in Nordic Environmental Policy 1999-2001, report to Nordic Council of Ministers, Copenhagen 2002. Available at: http://www.norden.org/miljoe/Miljo- okonomi/rapporter/sk/581 004.pdf __

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Commission. Available at:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

A Compendium of Economic Instruments for Environmental Policy

3.3.4 Beverage Container Deposit Refund System in Maine, US

Environmental issue:

Inappropriate disposal of drinks containers and recycling.

Type of economic instrument:

Deposit refund system

Similar examples:

Several US States, Sweden, Norway, Denmark, Finland and Iceland.

Key Targets:

Reduction in litter and associated health and environmental risks.

Administering institution:

Maine Department of Agriculture

Key stakeholders:

Manufacturers of beverage containers, distributors, retailers,

consumers, local government.

Deposit refund systems combine a charge (the deposit) and a subsidy for disposal or recycling (the refund) of packaging/containers of various products (including beverage containers, pesticide containers) or products (such as lead batteries). These systems may be implemented to discourage improper (or illegal) disposal which gives rise to external costs such as litter and eyesore and also potential environmental and health risks. Effective deposit refund systems also offer the potential to reduce costs associated with the collection and redirection of improperly discarded waste back to the waste stream. Furthermore, recycling objectives can be addressed via the implementation of deposit refund systems.

In the US, the state of Maine is one of ten states that have introduced bottle (beverage container) deposit refund systems (the others being California, Connecticut, Delaware, Iowa, Massachusetts, Michigan, New York, Oregon and Vermont). The scheme was introduced in 1978 for containers of soft drinks and beer. In 1990, the scheme was expanded to include wine, spirits, fruit juice, water and iced tea containers. Distributors (or manufactures) of these drinks are required to levy a $0.05 (or $0.15 in the case of wine and spirits) deposit on the product which retailers then pass on to consumers in the sales price. Consumers can obtain a $0.05 refund if the empty container is returned to a retailer that sells the product or alternatively, to a redemption centre.

In turn, retailers receive a $0.05 payment from distributors (or manufacturers) for each container that is returned. Retailers are also paid a $0.03 handling fee which provides an incentive for them to promote the return of containers to consumers. In some instances, demand by retailers for returned containers has been so high that retailers have offered refunds up to 20% higher than the deposit paid (US EPA 2001).

Returned containers are typically collected by distributors when new stock is delivered. The distributors (or manufacturers) can offset the handling cost arise from collecting returned containers in three ways. Firstly, returned containers can be sold to processors. Secondly, distributors can retain all unclaimed refunds and handling fees. Prior to 1996, distributors were required to share half of all unclaimed refunds with the state government, however, lobbying from distributors with regards to the costs of participation in the scheme led to the allowance for 100% retention of unclaimed refunds. Finally, distributors can earn interest on deposits and handling fees prior to redemption.

The expansion of the deposit refund system in 1990 required the introduction of new deposit-refund arrangements, since for products such as fruit juices there was typically more than one distributor operating in a geographical area (which was generally not the case for soft drinks and beer). This results in difficulties since distributors need to determine which returned containers they are required to collect. Some distributors could therefore pay more in refunds than received in deposits and resultantly, lose money. Hence, in some case, manufacturers have contracted independent collectors to collect returned containers. This method is typically less cost-effective than the case where redeemed containers are collected by distributors when new stock is delivered to retailers.

State-wide deposit refund systems such as Maine’s can potentially suffer from problems regarding the redemption mechanism. Specifically containers may be returned for which no deposit was paid. This may arise from containers purchased in state where no deposit was originally paid, or from the return of containers that were purchased out of state. As result, some specific beverage products have reported redemption rates of over 100%. Such bottle deposit fraud was estimated to have cost the state of Michigan (which runs a similar scheme to Maine) approximately $16 million each year, where around one third of all drinks cans returned in the south-east of the state where purchased outside of the state (US EPA, 2001).

A 1979 study by the Maine Department of Transport reported that the deposit refund system had a significant effect in reducing litter. Specifically total litter had declined by 10% and container litter had declined by 56% (reported in Criner et al, 1991). Furthermore, redemption rates have risen since 1979 and

A Compendium of Economic Instruments for Environmental Policy

it is therefore likely that container litter has decreased further (US EPA, 2001). Recycling capacity may have also increased as a result of the deposit refund system since a reliable supply of recyclable materials is ensured (US EPA, 2001). Three container-processing facilities have been established since the introduction of the deposit scheme.

Criner et al (1991) provide an analysis of the costs of the deposit refund in relation to retailers, distributors and manufacturers. Costs incurred by retailers are estimated to lie in the range of $0.024 to $0.031 per container for both the original and expanded deposit system. On the basis of this, the handling fee of $0.03 paid to retailers would appear to be set at the correct level. For distributors, the cost incurred per container is approximately $0.057 for soft drinks and beer and $0.075 for fruit juice products. Higher collection costs, storage facilities and labour costs for fruit juice containers give rise to this difference, through factors such as variations in types of containers used for juices (which implies a higher cost of storing and sorting) and that manufactures need to contract independent companies to collect the containers.

US EPA (2001) also provides a summary of the Californian Beverage Container Recycling Programme (BCRP), which was introduced in 1986 with the overall objective of achieving a beverage recycling rate of 80%. The system in California differs from Maine, and the majority of other states, in two ways; the collection of deposits and refunding is typically not the responsibility of retailers and containers are not returned to the distributor. Instead, manufacturers typically pay a fee of $0.02 per container (or $0.04 for larger containers) to a state recycling fund. For each returned container, the collector receives a $0.025 payment from the recycling fund ($0.05 for larger containers). Any organisation or individual can be a collector and payments may be passed onto consumers as incentives for containers to be returned.

Effectively the scheme is simpler and more flexible than that in Maine with an approach that is a compromise between retailers, who were not willing to collect returned containers, and environmental pressure groups, who wanted the scheme to promote recycling. Smaller retailers are not required to accept used containers and larger retailers are exempted if there is recycling centre within close proximity. In some cases, retailers will hire recycling firms to establish collection points if there is existing collection point.

For the 6 months of 2003, the overall beverage container recycling rate was 58%. In this period approximately 8.6 billion beverage containers (of all materials were sold) of which just over 5 billion were returned for recycling (Californian Department of Conservation, 2003).

Additional comments

The US EPA (2001) conclude that available evidence concerning beverage container deposit refund systems, in both Maine and California and other states, have significantly reduced litter and increased the proportion of containers that are recycled. For example, the 10 states that operate deposit refund systems account for approximately 80% of the US’s recycled glass (US EPA, 2001).

Further reading

US EPA (2001) The United States Experience with Economic Incentives for Protecting the Environment. Report EPA-240-R-01-001, available from:

http://yosemite.epa.gov/ee/epa/eerm.nsf/a7a2ee5c6158cedd852563970080ee30/4336170c9605caf88525

69d20076110f?OpenDocument&ExpandSection=-4#_Section4

Criner, George K., Steven L. Jacobs, and Stephanie R. Peavey (1991) An Economic and Waste Management Analysis of Maine’s Bottle Deposit Legislation. Maine Agricultural Experiment Station Miscellaneous Report 358. April 1991.

Maine State Planning Office webpage

http://www.maine.gov/spo/recycle/bottlebill/

California Department of Conservation, Division of Recycling

http://www.consrv.ca.gov/DOR/gpi/general_public/

For Scandinavian examples: TemaNord (2002) The Use of Economic Instruments in Nordic Environmental Policy 1999-2001, report to Nordic Council of Ministers, Copenhagen 2002. Available at:

http://www.norden.org/miljoe/Miljo-okonomi/rapporter/sk/581 004.pdf __

A Compendium of Economic Instruments for Environmental Policy

  • 3.3.5 Charge on Car Batteries in Hungary

Environmental issue:

Disposal of batteries through landfill and incineration has the potential

Type of economic instrument:

to cause considerable environmental harm, since heavy metals and sulphuric acid may be released into the environment Product charge

Similar examples:

Italy (battery price surcharge), Denmark, Iceland.

Key Targets:

Encouragement to users to reduce negative impacts on the environment

Administering institution:

Tax Collector Bureau

Key stakeholders:

Consumers

Description

In Hungary car batteries are classified as hazardous waste due to their lead and sulphuric acid, or cadmium and alkali contents. The stock of cars in Hungary has increased by about 4% each year give rise to the increasing problem of disposal of car batteries. To some extent, improvements in the lifetime length of batteries in recent years have mitigated the problems of disposal; however, the tendency has been towards an increase in the numbers for disposal. For example, between 1992 and 1997, the total amount of lead waste generated from car batteries increased from 11,086 tonnes to 16,240 tonnes. (Ecotec et al, 2001).

The Hungarian 1995 Act on Product Charges led to the introduction of the charge on car batteries in 1996. The charge is levied in relation to the weight of the battery. The initial rate in 1996 was 38 HUF per kilogram (approximately €0.21/kg in 1996 prices and exchange rates), which rose to 41 HUF per kilogram (approximately €0.23/kg in 1996 prices and exchange rates) in 1998. IN 1999 the charge was differentiated into two categories; those containing electrolytes and those not containing electrolytes. From 2002, batteries filled with electrolytes are subject to a charge of 50 HUF per kilogram (approximately €0.19/kg in current prices and exchange rates) whilst other batteries are subject to a charge of 70 HUF per kilogram (approximately €0.27/kg in current prices and exchange rates).

Initially, the revenue from the car battery charge was channelled to the Environment Protection Fund. Later, when the Fund is abolished, the revenues were allocated to a special line in the annual budget of the Ministry of Environment called the Environment Protection Fund Appropriation. Such a special budget line allows for transparency of revenue raising and management.

Additional Comments

The Hungarian car battery charge is part of a wider system that also applies charges to gasoline, packaging, tires, refrigerators, batteries and lubricants. The charge system is intended to generate revenue that can be used to reduce the use and consumption of products that damage the environment. Klarer et al (1999b) report that nearly 80% of the Environmental Protection Fund’s total revenue in 1997 was accounted for by the various products (approximately €75 million).

Klarer et al (1999b) provide an assessment of the application of environmentally related charges in Hungary and identify several difficulties that have arisen. Foremost, the charge rates have been set at levels too low to significantly reduce the production and use of the products on which charges are levied. In addition, despite their high share in the Environmental Protection Fund, in absolute terms, the charge revenue is not enough to finance required waste management investments.

Furthermore, it has been apparent that collection of charges has been easiest in relation to refrigerators and fuels, where a relatively small number of large firms are liable for the charge. In contrast, collection of charges from the packaging materials sector has been more difficult, where a large number of small firms are liable for the charge. However, the assumption of authority to collect charges by the Hungarian tax inspectorate has led to improved efficiency in the charge system.

A final point of consideration is that of the harmonisation of the product charges with European Union regulations, for example, within the Single Market foreign firms and products may not be discriminated by national taxation.

A Compendium of Economic Instruments for Environmental Policy

Further Reading

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States.

Klarer, J., Francis, P. and McNicholas, J. (1999b) Sofia Initiative on Economic Instruments, Improving Environment and Economy: The Potential of Economic Incentives for Environmental Improvements and Sustainable Development in Countries with Economies in Transition, report by the Regional Environmental Center (REC) for Central and Eastern Europe.

Scandinavian examples:

TemaNord (2002) The Use of Economic Instruments in Nordic Environmental Policy 1999-2001, report to Nordic Council of Ministers, Copenhagen 2002. Available at: http://www.norden.org/miljoe/Miljo- okonomi/rapporter/sk/581 004.pdf __

A Compendium of Economic Instruments for Environmental Policy

  • 3.4 Economic Instruments for Water

    • 3.4.1 Water Quality Permit Trading in the US

Environmental issue:

Both point and non-point pollution of surface waters. Environmental

Type of economic instrument:

problems include algae growth, eutrophication, low dissolved oxygen arising from pollutants such as ammonia, heavy metals, nitrogen, phosphorus, selenium, and also temperature change. Tradeable effluent permits

Similar examples:

Various examples within the US

Key Targets:

Least cost pollution abatement

Administering institution:

Various US State authorities

Key stakeholders:

US Environmental Protection Agency (US EPA), point (e.g. industry) and

non point (e.g. agriculture) polluters

Description

Water pollution, caused by the discharge of effluents into rivers, lakes and other bodies of surface water, may be generated by point and non-point sources. Point sources include industrial units or facilities such as sewage treatment works, whilst non-point sources refer to diffuse locations such as surface run-off from agriculture (typically the largest contributor to non-point pollution) or run-off from urban areas.

Effluent trading can offer potentially the least-cost approach to reducing effluent discharges. In the basic approach, the administering environmental authority issues a fixed number of permits to discharge effluents. Sources of pollution that face lower abatement costs will have incentive to sell their part of their allocation of permits and abate discharges to a greater extent. In comparison, sources of pollution that face higher abatement costs will opt to purchase permits and abate discharges less. This rationale underlies other existing trading schemes, such as those for air pollution emissions, (e.g. marketable pollution allowances for sulphur dioxide emissions from electric utilities in the US).

In general, two forms of trading scheme may be implemented: (i) uncapped effluent/emissions credit programmes, or; (ii) cap-and-trade programmes. Under the former, credits are assigned if a source specific polluter releases less pollution than a specified limit, and hence this ‘surplus’ may be sold to another source-specific polluter to enable them to meet their permitted target. In contrast, cap and trade systems set a total allowable level of overall pollution and individual polluters are allocated a certain allowance either through free distribution, or ‘grandfathering’ by the Government (based on the amount of emissions in the past) or via auction. Polluters are then able to freely trade permits among each other.

Unlike the US Clean Air Act, the 1990 Amendment of which specifically authorises emissions trading, the US Clean Water Act (1972) does not establish a statutory authority for effluent trading. However, the US Environmental Protection Agency actively promotes the use of market-based approaches such as water quality trading on the basis that these offer potential for significant savings in costs in relation to more traditional forms of regulation (US EPA, 2003). As of 2001, there were 35 effluent trading programmes in 19 different US states (US EPA, 2001). Environomics (1999) provides a brief summary of these schemes. The following describes a selection of these programmes.

In 1981, the State of Wisconsin introduced the Fox River effluent trading scheme, which applied to the heavily industrialised final 45 miles of the river. In fact the river features the greatest concentration of paper mills in the world (Stavins, 2001). The scheme allowed point sources of pollution, such as paper and pulp mills and wastewater treatment plants, to trade effluent rights between each other so that State water quality standards are met. The Fox River scheme applies to effluent discharges that increase the biological oxygen demand (BOD) in rivers. Restrictions are imposed on trading; permits may only be purchased if the buyer is a new facility, or is increasing production or is not able to meet its discharge limit (where the buyers treatment facility is operating optimally) (US EPA, 2001).

Effluent trading, in terms of BOD, has since been extended to 500 miles of the Wisconsin River, which includes 26 separate parties. The Fox River features 21 different parties; 15 paper mills and six municipal wastewater treatment plants (Stavins, 2001). Both Stavins and USEPA (2001) note that trading activity between polluters on the Fox River has been virtually non-existent (just one trade between a municipal wastewater facility and a paper mill). Specifically, polluters have been able to meet their permit limits

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through the introduction of processes that recycle wastewater within the plant and lower-water intensive technologies.

In the early 1980s, the Dillion Reservoir in Colorado was threatened by eutrophication from nitrogen and phosphorus loading from both point and non-point sources. The reservoir provides over half the water supply to the city of Denver. Previous regulation had required point sources of pollution (including four wastewater treatment plants) to adopt best-available technology standards (Stavins, 2001). A tradeable permits scheme was implemented in 1984 in an effort to reduce non-point pollution of the reservoir, mainly from urban and agricultural run-off.

The scheme, which established a cap on phosphorus discharges with the baseline of 1982 levels, represented the first non-point/point effluent trading scheme in the US. Specifically, point sources can offset discharges by financing the control of discharges from non-point sources (provided the non-point source existed before 1984). Such trades must be made at a ratio of 2:1; that is, point sources that have exceeded their discharge allocation must obtain credit from non-point sources (or other point sources) for double the amount of their excess. ‘New’ non-point sources (post-1984) are permitted to trade with other non-point sources at a ratio of 1:1 (Environomics, 1999; Stavins, 2001 and USEPA, 2001).

As with the Fox River example, few trades have taken place, with wastewater treatment plants being able to reduce phosphorus by upgrading their existing plants. However, it is noted that future opportunities for such control are likely to be limited, and recent projected population growth in the area may led to increased activity (USEPA, 2001).

A second example of effluent trading in Colorado is the Cherry Creek Basin Trading Programme. Cherry Creek is an 800-acre reservoir, which is again a source of water for Denver but also provides an important recreational amenity, attracting over 1.5 million visitors each year (USEPA, 2001). In order to protect the water supply and recreational use from algae, a limit on phosphorus levels was introduced. The programme is administered by the Cherry Creek Basin Authority and applies to the watershed area, which features 12 wastewater treatment plants. To reflect the fact that 80% of effluent discharges originate from non-point sources, trading is permitted between point sources and non-point sources. One feature of the programme is the role of the Cherry Creek Basin Authority who ‘pool’ credits through the design and implementation of phosphorus reduction schemes. Polluters may purchase credits either from the authority, or other polluters.

Additional Comments

As highlighted above, trading schemes appear to have seen very little market activity to date. However, the US Environmental Protection Agency (US EPA, 2003) advocates the use of trading schemes particularly with the implementation of total maximum daily loads (TDML) programmes. In 1997, the US EPA estimates the cost to private point source polluters of controlling effluent discharges was approximately $14 billion (around €11.3 billion) whilst the cost of public spending on point source pollution was approximately $34 billion (€27.3 billion). By using flexible approaches to control, such as trading schemes, an estimated $0.9 billion (€0.7 billion) could be saved each year, in comparison to regulatory approaches). In Europe, currently pollution trading for nutrient reduction is under consideration for Danube River Basin, with studies being undertaken that are analysing potential trading schemes.

Further Reading

Environomics (1999) ‘A Summary of US Effluent Trading and Offset Projects’, a report for US Environmental Protection Agency Office of Water, November 1999. http://www.epa.gov/owow/watershed/trading/traenvrn.pdf. See also:

http://www.nutrientnet.org/prototype/html/index.html for a summary of US water trading schemes.

Stavins, R.N. (2001) ‘Experience with Market-Based Environmental Policy Instruments,’ Resources for the Future Discussion Paper 01-58. See www.rff.org for download.

US EPA (2003) Water Quality Trading Policy, Office of Water, January 12 2003. http://www.epa.gov/owow/watershed/trading/tradingpolicy.html

US EPA (2001) The United States Experience with Economic Incentives for Protecting the Environment. Report EPA-240-R-01-001, available from:

http://yosemite.epa.gov/ee/epa/eerm.nsf/a7a2ee5c6158cedd852563970080ee30/4336170c9605caf88525

69d20076110f?OpenDocument&ExpandSection=-4#_Section4

A Compendium of Economic Instruments for Environmental Policy

  • 3.4.2 The Hunter River Salinity Trading Scheme, Australia

Environmental issue: High salinity levels in rivers caused by mine water discharges, cooling water discharge by power stations and low precipitation

Type of economic instrument:

Tradeable salinity discharge permits

Similar examples:

Key Targets: Discharges from industry should never be allowed to cause the river to exceed 900EC (electrical conductivity – measure of salinity). This goal

would ensure that river water could be safely used by everyone while at the same time protecting the river. Administering institution: New South Wales Environment Protection Authority and New South Wales Department of Infrastructure, Planning and Natural Resources Key stakeholders: Environment Protection Authority, mining industry, farmers

Description

The following description of this trading scheme is based on a paper presented by Simon Smith, the Executive Director of the Policy, Economics and Environmental Reporting Department of the New South Wales Environment Protection Authority (Smith, 2003).

The Hunter River drains the largest coastal catchment in New South Wales (NSW), covering some 22,000 square kilometres. Known internationally for the quality of its wines, the Hunter also supports a range of other agricultural activities including dairying, vegetables, fodder, beef and horse breeding. Also located in the valley are over 20 of the world's largest coal mines and three power stations including Australia's largest electricity generator. Newcastle, at the river mouth, is the world's largest coal export port.

Salt occurs naturally in many of the rocks and soils of the Hunter Valley. Some of this salt is leached into groundwater and nearby rivers. Salt levels in the river have a critical impact on water quality and agriculture 14 . During coal mining, salty water collects in mine pits and shafts and has to be pumped out to allow mining operations to continue. Although much of this water is recycled, in some cases the excess cannot be stored on site. Electricity generation uses large volumes of river water for cooling. As this water evaporates in use, natural salt is concentrated in what remains. Excessive clearing of deep-rooted vegetation and over-application in irrigation can also cause salty groundwater to flow to the surface.

As a result of such activities, salinity in the Hunter River increased significantly through the 1970s and 1980s. By the early 1990s there was significant conflict between primary producers and mining operators. Discharges from industry increased salt levels in the river at times making the water unsuitable for irrigation. Up until then, the NSW Environment Protection Authority (NSW EPA) and its predecessor had regulated industrial salt discharges (e.g. mines and power stations) by issuing discharge licences under which each polluter could emit a limited amount of pollution defined in the licence and expressed as a concentration limit. This situation lead to a high variability in salt levels between dry and wet times, jeopardizing agriculture and making salt discharge control too expensive for mining and hence required tighter regulation.

The principal idea of the Scheme is to only discharge salt when there is a large quantity of water in the river. The River is notionally divided into three sectors, the Upper, Middle and Lower sectors. This reflects the different volumes of water that flow through each sector, and the lower salt tolerance of the Upper sector where flows are the lowest. Monitoring points along the river measure whether the river is in low flow, high flow or flood flow. When the river is in:

o

low flow - no discharges are allowed;

o

high flow - limited discharge is allowed. Participants can discharge subject to holding sufficient ‘salt

o

credits’; and flood flow - credits are not required for discharging as the high degree of dilution should mean that water quality is not compromised. However, the industry must still ensure that the river salinity targets are met.

14 Water salinity is estimated by measuring electrical conductivity (EC). The more salty the water is, the more it conducts electricity. Electrical conductivity is measured in microsiemens per centimetre (µS/cm). Drinking water quality measures between 600EC and 1200EC.

A Compendium of Economic Instruments for Environmental Policy

The ‘Total Allowable Discharge’ is the amount of salt that may be added on any given day. This is calculated so that the salt concentration on any day never goes above 900EC in the middle and lower sectors of the river, and never above 600EC in the upper sector. When the river is in flood, unlimited discharges are allowed as long as the salt concentration does not go above 900EC. Members of the Scheme coordinate their discharges so that this goal is achieved.

The water in the river is divided into numbered blocks. A block is a section of water that flows past Singleton, the main town on the river, in a day. For example, block 2003-198 is the block of water that will flow past Singleton on the 198th day of 2003 (17 July). This block of water will flow past other points on the river on different days. For each block, the Scheme operators continually monitor the flow level and the ambient salinity then calculate how much salt can be added to the block (the Total Allowable Discharge) so that salinity stays under the target.

All participants in the Scheme are licensed by the NSW EPA 15 . There are a total of 1000 salt discharge credits in the Scheme held by participants - different licence holders have different numbers of credits. Licence holders can only discharge salt into a river block in proportion to the credits they hold -1 credit allows a discharge of 0.1% of the total allowed. For example, assume that the Total Allowable Discharge for block 2003-198 is 112 tonnes of salt. This ensures 900EC is not exceeded when that block passes Singleton. A licence holder with 20 credits could discharge 2.24 tonnes of salt (112 x 20 x 0.1%), and a licence holder with 45 credits could discharge 5.04 tonnes of salt (112 x 45 x 0.1%) into that block.

Licence holders need to discharge different amounts of salt at different times. The amount of pollution emissions allowed to be emitted in traditional licensing approaches is usually based on ‘best available technology’. Older mine facilities could discharge more because the technology available when they started was not as advanced as that available for newer mines. Focusing on the environmental goal, i.e. keeping salinity under 900EC, gives licence holders flexibility when developing their saline water management strategies. They can choose to combine pollution abatement technologies with salt credits in the most cost effective manner for their organisation. Each licence holder may choose a different strategy, but the combined discharge will not compromise river salinity levels.

Discharge credits within the licence were first allocated free of charge to existing licence holders, based on a formula that took into account the environmental performance, salty water byproduct, employment and economic output of each licence holder (credits issued based on existing entitlements is known as ‘grandfathering’). Every two years 200 new credits will be created to replace those that have expired keeping the total number of credits available at any one time to 1000. The new credits will be sold by public auction. The advantage of a public auction is that it can reveal the market value of credits. New industry can enter the Scheme by buying credits at auction, or by acquiring credits directly from existing licence holders. New entrants will also be able to apply to the EPA for allocation of 85 residual credits that have been retained by the EPA.

Credit trading gives each licence holder the flexibility to increase or decrease their allowable discharge to suit their operating conditions while limiting the combined amount of salt discharged. Therefore, if a licensee needs to discharge more salt at a particular time than they hold credits for, they can purchase additional credits from another licence holder who does not need to use their credits at that time. The trading system is online, allowing licence holders to trade quickly and simply. The trades can be for one or many blocks, i.e. a single day or longer periods, and the terms of the trade are negotiated privately by the parties involved 16 .

Since the start of the trial scheme in January 1994, the target of 900EC has been achieved and salinity levels have been going down despite the drier than average weather pattern in the first few years of the scheme’s operation. The Scheme is now operating on a full-cost recovery basis. Participants are paying an annual contribution for the services provided in conjunction with the Scheme, such as river monitoring, modeling and reporting, and maintaining the river register. Total Scheme costs are to be split between discharge licence holders and credit holders (credit holders do not necessarily have a licence as credits can be purchased by the public through the auctions). Proceeds from credits sold to participants at auction will be deducted from the total annual contributions payable by participants.

15 Environment Protection Licences are issued to participants under the Protection of the Environment Operations Act 1997, see www.epa.nsw.gov.au 16 The website for online trading is located at www.epa.nsw.gov.au/hrsts

A Compendium of Economic Instruments for Environmental Policy

Additional Comments

Key lessons learned from the Scheme are:

o

Clear definition of the environment goal or output of the scheme is paramount.

o

The scheme’s rules must be carefully defined so as not to undermine achievement of this goal.

o

A regulatory framework is essential to underpin the integrity of such a scheme.

o Effective consultation and stakeholder involvement is important to get industry ownership of the scheme and a good level of satisfaction amongst all stakeholders. The EPA developed an on-line credit exchange facility system to ensure fast, efficient, 24-hour credit transfers. This allows participants to respond to discharge opportunities even when discharge events occur outside business hours. An unforeseen benefit of this tool has been that participants now have a better understanding of the Scheme rules. An extended pilot period was necessary to demonstrate that the Scheme would work. Based on the experience of the pilot it was possible to improve and finalise the Scheme. It was necessary to gradually remove the grandfathered entitlements of the original licence holders to enable new industry and development to participate in the Scheme. Grandfathered credits are being progressively withdrawn and reallocated by auction over eight years.

o

o

o

Further Reading

Smith S (2003) What Have We Learned From The Hunter River Salinity Trading Scheme?, paper presented at the AARES 2003 National Symposium: Market-Based Tools for Environmental Management.

NSW EPA (New South Wales Environment Protection Authority) (2003) Hunter River Salinity Trading Scheme – working together to protect river quality and sustain economic development, NSW EPA, Sydney, Australia.

NSW EPA website – www.epa.nsw.gov.au

A Compendium of Economic Instruments for Environmental Policy

3.4.3 Transferable Water Entitlements in Victoria, Australia

Environmental issue:

Allocation of water among competing uses

Type of economic instrument:

Transferable water entitlements (TWEs)

Similar examples:

New South Wales, Australia

Key Targets:

Efficient allocation of water resources

Administering institution:

Victorian Rural Water Corporation (RWC)

Key stakeholders:

RWC, public irrigators, private water diverters, farmers

Description

A further way in which trading mechanisms may be used to address environmental management of the water environment is transferable rights to use water. Transferable rights for water use are similar to tradeable quota systems that may be used for forestry and fisheries. By allowing trade of rights to water use, water should be allocated to production activities that result in the highest return on water inputs, i.e. an efficient allocation of water may be attained.

James (1997) provides a description of a tradeable water use rights scheme in Victoria (Australia), where such schemes are typically referred to as Transferable Water Entitlements (TWEs). In Victoria, management of irrigation is undertaken by the Victorian Rural Water Corporation (RWC). Historically water for irrigation has been over-supplied, primarily due to an inflexible administration of the allocation system and water charges below cost levels. In addition, tightening budget conditions imposed constraints on expansion of supply capacity, giving rise to the need for a more efficient use of water.

The introduction of TWEs in Victoria was facilitated by the 1989 Water Act, which introduced a new legal framework that allowed for entitlements (licenses) to be traded. Prior to 1986 owners of land located beside rivers had the full right to use of river flows. In 1986, the Victoria State government abolished these rights and initiated a process of granting permits or licenses to use water from rivers. This then led to the development of the TWE scheme.

In Victoria, water is allocated at two levels. The first is bulk allocation to different sectors, such as public irrigators, private diverters and rural towns, plus an additional allocation that is committed to protecting the environment. The second is allocation of water within the broad use sectors. One of these sectors is irrigation, for which the RWC has introduced TWEs.

Entitlements that are transferred are termed as either ‘permanent’ or ‘temporary’. Permanent entitlements allow farmers to expand their activities or to undertake extensive on-farm improvements since these licenses are typically issued for 15 years and are usually re-issued at the end of that period. Temporary transfers are used in order to meet seasonal changes in demand for water use, and are only permitted within certain seasons. Transfers of water entitlements cannot be made to non-irrigation sectors.

Where public irrigation systems operate, the amount paid for water rights is based on the amount of land that the irrigator holds that is suitable for gravity fed irrigation. In addition, the different irrigation districts may entail different prices. Irrigators pay an annual charge regardless as to whether the full entitlement is used or not. Entitlements are allocated annually by the RWC. Outside of public irrigation districts, water may be abstracted from rivers and streams under diversion licenses.

In all cases, the prices of TWEs are negotiated between buyers and sellers. Authorities in charge of water stocks and water station act as brokers and provide information on previous transactions. No restrictions exist on the volume that can be transferred, although all transactions are subject to approval by the RWC.

Additional Comments

James (1997) notes that it is difficult to assess the effectiveness of the Victoria TWE scheme. The majority of trades that have been undertaken relate to temporary transfers. Initial analysis by Pigram et al (1992) indicated that prices paid for temporary transfers were around AUS $18 - $20 per megalitre for trades that took place early in the season when total season supply was uncertain. In seasons where excess allocations have been announced, TWE prices have typically been lower, around AUS $8 - $10 per megalitre.

A Compendium of Economic Instruments for Environmental Policy

Trades of permanent transfers have been less common. Primarily, farmers are reluctant to sell long-term rights for water. Where permanent TWEs have been transacted, prices range from AUS $270 - $400 per megalitre. When permanent TWE have been auctioned for new supply allocations, prices have ranged from AUS $100 - $775 per megalitre.

The TWE scheme was not intended as a revenue raising mechanism for the RWC. However, a processing fee for all transfers is imposed which is used to cover all administrative costs. Such costs are minimised by allowing trades to be facilitated through brokers.

In terms of the distribution of water, TWEs should result in water being allocated to its most productive uses and users. James (1997) reports that the RWC has seen a shift of entitlements from mixed farming to dairy farming, from saline to less saline areas, and from less profitable farms to more profitable farms.

Finally James notes that significant obstacles still impede the ability of the TWE scheme to improve the efficiency of water use. In particular, limits placed on transfers with other states (due in the main to differences in water subsidy regimes) and restrictions on trades between water use sectors.

Further reading

James, D. (1997) Environmental Incentives: Australian Experience with Economic Instruments for Environmental Management, Environmental Economics Research Paper No. 5, Consultancy report prepared by Ecoservices Pty Ltd for Environment Australia. Available at:

http://www.deh.gov.au/pcepd/economics/incentives/

A Compendium of Economic Instruments for Environmental Policy

REFERENCES

This reference list contains those used in this report as well as some other that the readers could find useful.

Bell R. G., 2002, Are Market-Based Instruments the Right First Choice for Countries in Transition? Resources Winter 2002 Issue 146, 10 – 14.

Centre for Social and Economic Research on the Global Environment (CSERGE), Warren Spring Laboratory and Economics for the Environment Consultancy (1993) Externalities from Landfill and Incineration, HMSO, London.

Chase, L. C., Lee, D. R., Schulze, W. D., & Anderson, D. J. (1998). Ecotourism demand and differential pricing of national park access in Costa Rica. Land Economics, 74(4), 466-482.

Colby, M.E., with Hanafy, M., McEachern,

J.,

Sarhan, M.I.,

Hegazy, I.

Mesbah,

N.

Moustafa, A. and

Dornbusch, D. (2003) Red Sea Marine Protectorates: Revenue Generation Options, report to Program Support Unit, Egyptian Environmental Policy Program, Cairo, Egypt. International Resource Group, Ltd. Washington.

Coopers and Lybrand (1993) Landfill Costs and Prices: Correcting Possible Market Distortions, HMSO, London.

Danish Environmental Protection Agency (DEPA), 1999, Economic Instruments in Environmental Protection in Denmark, Copenhagen.

Drake, L. and S. Hellstrand (1998) ‘The Economics of Swedish Policy to reduce Cadmium in Fertilisers, KEMI Report PM 2/98, Kemikalieninspektionen, Solna.

Ecotec, CESAM, CLM, University of Gothenburg, UCD, and IEEP (2001) Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States, report to European Union. Available from:

http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

Environment Australia Department of Environment and Heritage (2002) Plastic Shopping Bags – Analysis of Levies and Environmental Impacts