Economic Instruments Session Objectives Identify economic instruments for

Economic Instruments Session Objectives: • Identify economic instruments for specific environmental issues • Identify constraints on application of economic instruments

Agenda • • • What is an economic instrument? Why use economic instrument? Major economic instruments: overview Limitations of economic instruments Discussions

What is an Economic Instrument? • Environmental policy or measure based on market mechanisms • Internalize environmental values in individuals’ decision-making – full-cost pricing – price = marginal private cost + marginal env’tal cost • Objective: to change human behavior • May use economic valuation as a basis

Why Use Economic Instruments? • SD requires change of human behavior • Laws may change behavior, but legal systems are weak/costly in many countries • Education may change behavior, but its alone may not be adequate • Economic instruments provide incentives to which people respond • Economic instruments can help raise funds for nature conservation

Benefits of Full-Cost Pricing • Let market price reflect scarcity & externality, encourage saving & efficiency • Eliminate subsidies to reduce government fiscal burden • Resultant behavior change can save or postpone additional inputs & expenditures • Fiscal surplus can be used to improve the environment & expand social services

Types of Economic Instruments • Property rights • Financial instruments • Market creation • Liability systems • Fiscal instruments • Performance bonds • Charge systems • Deposit-refund systems

Property Rights • Unclear, insecure property rights lead to shortterm behavior, long-term resource cost (user cost) • Property rights need to be well-defined, secure, exclusive, and transferable • Can be private, collective, or state ownership • This instrument can be complemented by other instruments to control externalities from the property

Sub-types of Property Rights • Ownership: land titles. Water rights, mining rights • Use rights (physical division): stewardship, licensing, concession/bidding, turfs • Development rights: patents, prospecting rights

Market Creation • Difficult to assign property rights over certain environmental resources (clean air) • May allocate use rights while ensuring a total aggregate use to the desired level • Allow trading of use rights

Sub-types of Market Creation • Tradable emission/ effluent permits • Tradable catch quotas • Tradable development quotas/rights • Tradable water shares • Tradable resource shares • Tradable land permits • Tradable offsets/ credits

Fiscal Instruments • Use taxes to internalize negative externalities into private costs • Use subsidies to internalize positive externalities into private benefits – Env’tal tax = marginal env’tal cost – Env’tal subsidy = marginal env’tal benefit

Sub-types of Fiscal Instruments • Pollution taxes – effluent taxes – emission taxes • • • Inputs taxes Product taxes Export taxes Import tariffs Tax differentiation • Royalties & resource taxes • Investment tax credits • Accelerated depreciation • Subsidies • Property taxes • Capital gains taxes

Charge Systems • Often confused with fiscal instruments • Charges for the use of resources, facilities, and services • Taxes (fiscal instruments) are a means of raising government revenue

Sub-types of Charge Systems • • • Pollution charges User charges Betterment charges Impact fees Access fees • Road tolls Administrative charges • Resource protection charges • Collection charges

Financial Instruments • Similar to fiscal instruments • Fiscal instruments are part of the government budget • Financial instruments are outside of government budget • Usual sources of funds for financial instruments: foreign aid, foreign debt, debt-for-nature swaps • To support projects/activities that generate positive externalities

Sub-types of Financial Instruments • • Financial subsidies Soft loans Grants Location/relocation incentives • Subsidized interest • Hard currency at below equilibrium exchange rate • Revolving funds • Sectoral funds • Ecofunds/env’tal funds • Green funds

Liability Systems • Legal liability – natural resource damage – environmental damage – property damage – damage to human health or loss of life – noncompliance to env’tal laws & regulations – non-payment to due taxes, fees, or charges • Liability insurance • Enforcement incentives

Bonds & Deposit-Refund Systems • Charge in advance for potential damages • Shift the responsibility for controlling pollution, monitoring, and enforcement to individual producers & consumers • Env’tal performance bonds • Land reclamation bonds • Waste delivery bonds • Env’tal accident bonds • Deposit-refund systems • Forest management bonds

Other Instruments • • Administrative measures Consumer education Disclosure of information on producers Self-regulation by producers’ associations

Caveats • Experience mainly from industrial countries, though there are lessons to learn • Developing country experience not well documented, and country circumstances vary, though possible to implement • Many countries have used administrative measures for years, how to introduce economic instruments without causing disruptions? • Often used to raise revenues, not change behavior