BalticSTERN Management frameworks · frameworks is one of eight Background Papers, where methods and results from BalticSTERN research are described more in detail. In some of the

Management frameworks

Background Paper

Havs- och vattenmyndighetens rapport 2013:4

PrefaceBalticSTERN (Systems Tools and Ecological-economic evaluation – a Research Network) is an international research network with partners in all countries around the Baltic Sea. The research focuses on costs and benefits of mitigating eutrophication and meeting environmental targets of the HELCOM Baltic Sea Action Plan. Case studies regarding fisheries manage-ment, oil spills and invasive species have also been made, as have long-term scenarios regarding the development of the Baltic Sea ecosystem.

The BalticSTERN Secretariat at the Stockholm Resilience Centre has the task to coordinate the network, communicate the results and to write a final report targeted at Governments, Parliaments and other decision makers. This report should also discuss the need for policy instruments and could be based also on results from other available and relevant research.

The final report “The Baltic Sea - Our Common Treasure. Economics of Saving the Sea” was published in March 2013. This Background Paper Management frameworks is one of eight Background Papers, where methods and results from BalticSTERN research are described more in detail. In some of the papers the BalticSTERN case studies are discussed in a wider perspective based on other relevant research.

Contents

1 Introduction ..................................................................... 4

2 Governance frameworks of the Baltic Sea ....................... 52.1 HeLCoM and BsAP ................................................................62.2. eU legislation .........................................................................7

EU Common Agricultural Policy (CAP) ................................................... 8EU Common Fisheries Policy (CFP) .......................................................... 9EU Nitrate Directive (91/676/EEC) ............................................................10EU Urban Wastewater Treatment Directive (91/271/EEC) ......................10EU Water Framework Directive (2000/60/EC) .........................................11REACH (EC1907/2006) ................................................................................11EU Integrated Maritime Policy (IMP) (COM2007/575) ........................ 12Marine Strategy Framework Directive (2008/56/EC) .............................. 12EU Strategy for the Baltic Sea Region (EUSBSR) ..................................... 13

2.3. other international policies and targets .................................13International Convention for the Prevention of Pollution from Ships (MARPOL 73/78) ...................................................................... 13Convention on Long-range Transboundary Air Pollution (CLRTAP) .............................................................................14Convention of Biological Diversity (CBD) ..............................................14United Nations Framework Convention on Climate Change (UNFCCC) ...................................................................... 15

3. Policy instruments ........................................................ 163.1. Categories of policy instruments ............................................16

Market-based instruments ......................................................................... 17Command-and-control ................................................................................ 18Information ................................................................................................... 18

3.2. Criteria for evaluating the effectiveness of instruments ..........18Target fulfilment ...........................................................................................19Cost-effectiveness .........................................................................................19Dynamic cost-effectiveness .........................................................................22Other aspects .................................................................................................23Distributional and equity concerns ............................................................23Administrative feasibility .............................................................................25Uncertainty, risk and information asymmetry ........................................ 26

References ...................................................................... 28

4 Management frameworks

1. IntroductionThe aim of this paper is to provide an overview of the management frame-works relevant for the environmental state of the Baltic Sea.

The concept of governance denotes structures and processes for collective decision-making involving both state and non-state (profit and non-profit) actors on different levels – local, regional, national, European and global (Rosenau, 2003). These decisions define expectations, grant power, or verify performance. Likewise, the concept of ‘environmental governance’ (or similar terms such as ‘governance for sustainable development’) pays special atten-tion to environmental decision-making as a multi-actor and multi-level process, and new modes of regulation and collaboration in an increasingly complex, globalised and less state-centric world (e.g. Pattberg, 2007).

Jentoft (2007) argue that the governance of the marine environment can be regarded as a relationship between two systems: a ‘governing system’ and a ‘system-to-be-governed’. The author regards the former as a social system made up of institutions and steering mechanisms. The system-to-be-governed, is described as a partly social and partly natural system consisting of an ecosystem, and its resources, as well as a system of users and stakeholders who, among themselves, form coalitions and institutions. Both systems are diverse, complex, dynamic, socially ambiguous and vulnerable.

The first part of this paper provides a description of the national, regional and international governmental frameworks that are of significance for the environmental state of the Baltic Sea.

The second part provides an introduction and description of different categories of policy instruments (e.g. taxes, emission standards, subsidies), followed by a description of some criteria over which the performance of policy instruments can be evaluated. In the end, it is the policy instruments applied that determines whether the target can be reached and whether it is reached at the lowest possible cost to society.

5Management frameworks

2. Governance frameworks of the Baltic SeaGovernance of an environmental problem can either target the actual environ-mental state, for example by setting up targets regarding the state of that area, or target the drivers causing the environmental problem, for example by requiring certain sectors to take action in order to reduce the impact on the environment. However, governance having other objectives than improving the environmental state might still have an indirect impact, positive or nega-tive, on this state (e.g. EU Common Agricultural Policy). Governance often provides the framework under which measures and policy instruments aiming at achieving a certain objective can be taken. For example, the HEL-COM Baltic Sea Action Plan (BSAP) and the EU Marine Strategy Framework Directive (MSFD) define objectives for the countries to meet. The respective countries will then choose and implement, on a national level, the measures and policy instruments necessary to meet these objectives.

There are a vast number of directives, legislations and agreements that have some kind of impact on the environmental state of the Baltic Sea. This overview will focus on those that have either a direct objective related to the state of the sea (e.g. BSAP, MSFD), or have a great impact on some of the drivers behind this state (e.g. EU’s Common Agricultural Policy, EU’s Common Fishery Policy, MARPOL). This paper aims to describe the conditions for regional cooperation for the Baltic Sea. Therefore, governance structures on a national level have been excluded in this overview, but, of course, the imple-mentation, monitoring and enforcement related to the international environ-mental governance must, of course, be done on a national level.

In an international comparison, the regional environmental governance of the Baltic Sea ecosystem is well developed. In response to environmental pressures and problems, European integration, and various waves of European enlargement, environmental governance of the Baltic Sea has undergone rapid changes since the 1970s and now consist of a fragmented web of national, European, and transnational governance (Gilek et al., 2011; Hassler, 2011; Karlsson et al., 2011; Kern, 2011).

There is a large variance of national environmental governance among the Baltic Sea states, which has, however, decreased recently due to adaptation to EU legislation by the new Member States. Besides national and regional governance there exists a number of global agreements and international treaties, such as the IMO, that also have implications on the state of the Baltic Sea, as well as the possibilities to reach certain environmental objectives.

Some of these directives/targets are expressed in terms of a state that is to be achieved (e.g. MSFD), while others aim at the drivers affecting this state (e.g. EU Urban Waste Water Treatment Directive). Some are legally binding for the Baltic Sea countries in that they set up targets and develop programs of measures, even though it is up to the country to determine what kind of measures should be implemented in order to reach the targets. This is the case for many of the EU directives, such as the Nitrate directive, the Water Framework Directive (WFD) and the Marine Strategy Framework Directive (MSFD).


2.1. HeLCoM and BsAPThe Helsinki Commission (HELCOM) is an intergovernmental cooperation between all Baltic Sea countries and has acted as the main environmental policy institution for the Baltic Sea area since the Convention on the Protec-tion of the Environment of the Baltic Sea Area (Helsinki Convention) was established. It was signed by the Baltic Sea coastal states in 1974, and is re-garded as the first ever single convention embracing an entire sea and all kinds of pollution threatening it.

The scope of this convention was extended in 1992 when political develop-ment in the region made it possible to address the whole Baltic Sea drainage area and identify pollution “hotspots”. In 2007 a collective action plan, the HELCOM Baltic Sea Action Plan (BSAP), with measurable objectives to restore good environmental status in the Baltic Sea by the year 2021, was signed by the governments of the contracting states under the Helsinki Convention. The environmental issues addressed in the action plan are biodiversity conservation, hazardous substances, shipping, and eutrophica-tion. It aims to implement an ecosystem approach in reaching its objectives. Furthermore, by advocating cost-effectiveness and cost-benefit analysis as guiding principles, the action plan emphasizes economic and social sustain-ability. However, the BSAP only deals with recommendations, thereby not implying any legal requirements for the Baltic Sea countries to meet the targets. (HELCOM, 2007)


EU regulationRegulations are the most direct form of EU law, and have binding legal force throughout every Member State as soon as they are passed. National governments do not have to take action them-selves to implement EU regulations. In this way, EU regulations differ from directives.

EU directivesEU directives lay down certain end results that must be achieved in/by every Member State. In order to meet the goals of these directives, national authorities have to adapt their laws, but are free to decide how this is achieved. Each directive specifies the date by which the national laws must be adapted, giving national authorities the room to maneuver within the deadlines necessary to take account of differing national situations. Directives are used to bring different national laws in line with each other.

EU decisionsEU decisions offer an alternative to regulations and directives. Decisions can come from the EU Council (sometimes jointly with the European Parliament) or the Commission, and are fully binding legal acts. They can only apply to specified authorities and individuals in Member States, companies or a particular Member State, requiring them to either do something or stop doing so-mething, and can also confer rights on them. The EU also issues non-binding instruments, such as recommendations and opinions, as well as rules governing how EU institutions and programs work. Source: http://ec.europa.eu/eu_law/introduction/treaty_en.htm

The management strategy regarding eutrophication of the BSAP is based on the decision support system for the Baltic Sea region called NEST, which is developed under the lead of the Baltic Nest Institute at Stockholm University. The Nest model (http://www.balticnest.org/nest) is also used to estimate the effectiveness in reaching the targets. The BSAP serves as a pilot project under the EU Marine Strategy Framework Directive, which is described below.

2.2. eU legislationSince all countries around the Baltic Sea, with the exception of Russia, are members of the European Union, EU directives and legislation are important for the possibilities of improving the environmental state of the Baltic Sea. EU law (regulations, directives and decisions) takes precedence over national law and is binding for national authorities. Regulations, directives and decisions are of equal legal value and apply without any formal hierarchy.

In the following section, the different EU directives, regulations and policies, judged to be of significant relevance for the environmental state of the Baltic Sea, are presented in a chronological order.EU Common Agricultural Policy (CAP)


The Common Agricultural Policy (CAP) was initiated in the late 1950s and early 1960s, after World War II, and is therefore strongly rooted in the European integration project.

The initial objectives of CAP were set out in Article 39 of the 1957 Treaty of Rome:1

• to increase agricultural productivity, by promoting technical progress and by assuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour;

• thustoensureafairstandardoflivingfortheagriculturalcommunity,inparticular by increasing the individual earnings of persons engaged in agriculture;

• tostabilisemarkets;• toassuretheavailabilityofsupplies;• toensurethatsuppliesreachconsumersatreasonableprices.

In meeting these objectives the CAP consists of two pillars: Pillar I that covers direct payments and market measures providing a basic annual income sup-port to EU farmers and support in case of specific market disturbance, and Pillar II which covers rural development where Member States draw up and co-finance multiannual programs under a common framework2.

Due to its long history, the CAP has been reformed on many occasions, in particular during the past twenty years. At present, the CAP aims to protect agriculture throughout the EU by controlling prices and levels of production and by subsidising the rural lifestyle in order to preserve the countryside.

The 2003 reform introduced the Single Payment Scheme (SPS), with the objective to decouple (i.e. severing the link between subsidies and produc-tion) subsidies for particular crops in order to enable EU farmers to become more market oriented. Each country can choose if the payment will be established at the farm level or at the regional level. In addition, the reform also emphasised cross-compliance with other regulations (e.g. the Nitrate Directive). Farmers who fail to meet these other regulations will face a reduction in their payments from CAP3.

The CAP is to be reformed by 2013, and in November 2010 the Commis-sion presented a Communication on “The CAP towards 2020” (COM 2010/672), which outlines options for the future CAP. The aim of this reform, according to the Communication, is to contribute more to developing intelligent, sustainable and inclusive growth as a response to the new eco-nomic, social, environmental, climate-related and technological challenges facing our society. The Communication mentions the role agriculture and forestry plays in producing environmental public goods, such as landscapes, farmland, biodiversity, climate stability and greater resilience to natural

1 http://ec.europa.eu/economy_finance/emu_history/documents/treaties/rometreaty2.pdf.2 The current legislative framework comprises Council Regulation (EC) No 73/2009 (direct payments), Council Regulation (EC) No 1234/2007 (market instruments, Council Regulation (EC) No 1698/2005 (rural development) and Council Regulation (EC) No 1290/2005 (financing)3 http://ec.europa.eu/agriculture/cap-history/2003-reform/index_en.htm


disaster such as flooding, drought and fire. However, it also acknowledges that many farming practices have the potential to put pressure on the environ-ment, leading to soil depletion, water shortages, pollution, loss of wildlife habitats and biodiversity. The Communication does not explicitly mention the effect of nutrient loss from agricultural production, although this would fall under pollution.

One of the reasons for reforming the CAP, according to the Communica-tion, is ‘to enhance the sustainable management of natural resources such as water, air biodiversity and soil’. To strengthen the environmental sustainability of agriculture and enhance the efforts of farmers, the Commission is pro-posing to spend 30 per cent of direct payments of Pillar I specifically for the improved use of natural resources. Pillar II should focus more on compe-titiveness and innovation, climate change and environment. Farmers would be obliged to fulfil certain criteria such as crop diversification, maintenance of permanent pasture, the preservation of environmental reservoirs and landscapes4.

EU Common Fisheries Policy (CFP) The EU Common Fisheries Policy (CFP) was launched by the six founding members of the European Community in 1970 to manage fish stocks for the union as a whole. The main goal of the CFP is to achieve a long-term sustain-able exploitation of fish stocks, and its aim is that all fish stocks shall be fished at a level that allow maximum sustainable yield (MSY) by 2015. It does so by setting quotas for how large catches of each fish species each Member State is allowed to catch. However, the CFP does not regulate the distribution of these fishing rights. This is the responsibility of the individual Member States and each country thus has slightly different rules.

The reform of the CFP in 2003 (COM, 2009) puts a larger focus on the ecosystem approach and regional seas, and has generated an increased dialogue between the actors and stakeholders by establishing Regional Advisory Councils (RAC’s), recognizing the importance of integrating the CFP into the overall maritime policy context.

In 2009 the EU Commission published a green paper on the reform of the CFP, showing that many stocks are not fished at a sustainable level. The Green Paper paints a vision for European fisheries anno 2020 by, among other things, restoring Europe’s fish stocks to maximum sustainable yields (MSY), and promoting sustainable and more prosperous fishing and aquaculture industries.

The Common Fisheries Policy has a great impact on fisheries management in the Baltic Sea. In 2010 only the two cod stocks and one herring stock were classified as above the MSY stock level and consequently fulfilling the Johannesburg target5 (ICES 2010). However, the cuts in Total Allowable Catches (TAC) adopted in the following years proved to be efficient and the

4 http://ec.europa.eu/agriculture/cap-post-2013/legal-proposals/com631/631_en.pdf5 The Johannesburg target refers to the 2002 Johannesburg World Summit on Sustainable Development agreement that set a target date of 2015 to maintain or recover fisheries to levels consistent with Maximum Sustainable Yield.


number of known stocks at MSY level could go up from this three to six in 2013 if the proposed TAC’s are adopted6.

EU Nitrate Directive (91/676/EEC)The Nitrates Directive, which was introduced in 1991, aims to protect water quality across Europe by preventing nitrates from agricultural sources polluting ground and surface waters, and by promoting the use of good farming prac-tices. In accordance with this directive, Member States have designated areas draining into waters that are, or could be, affected by high nitrate levels or eutrophication, as vulnerable zones.

The various steps of implementation of the Directive are:1. Identification of polluted or threatened waters (N).2. Designation of Nitrogen Vulnerable Zones (NVZs).3. Establishment of Code(s) of good agricultural practice. 4. Establishment of Action Programs, to be implemented by farmers within

NVZs on a compulsory basis. 5. National monitoring and reporting every four years.

Every four years Member States are required to review, and if necessary, revise nitrate vulnerable zones. The directive does not have a legally binding objective for the level of nitrogen in surface or ground waters. Rather, it prescribes action to be taken.

Of the Baltic Sea countries, Denmark, Finland, Germany, and Lithuania have decided to provide the same level of protection to their whole territory, rather than to designate nitrate vulnerable zones. Estonia designated seven per cent of its total land area as NVZ’s, while the corresponding number for Sweden was 15.2 per cent and for Poland only 1.7 per cent. (HELCOM, 2009)

EU Urban Wastewater Treatment Directive (91/271/EEC)The Urban Wastewater Treatment Directive (UWWTD), adopted in 19917, deals with the collection, treatment and discharge of domestic and urban wastewater, and the treatment and discharge of wastewater from certain in-dustrial sectors. Its objective is to protect the public health, water r esources and wildlife from adverse effects caused by these discharges. The Directive was amended in 1998 through the Commission Directive 98/15/EC, which also took into consideration discharges from wastewater treatment plants to sensitive areas threatened by eutrophication (EC Environment, 2010; Eur-Lex, 1991).

The directive implied a shift from legislation aimed at end-use standard to

6 http://ec.europa.eu/commission_2010-2014/damanaki/headlines/press-releas-es/2012/08/20120817_en.htm7 The directive states that waste water, before discharged to the environment, has to be collect-ed and subjected to secondary (biological) treatment according to following time plan: - Discharges from agglomerations of more than 15000 inhabitants, in 2000, at the latest - Discharges from agglomeration of between 10000 and 15000 inhabitants, in 2005, at the latest - Discharges from agglomeration of between 2000 and 10000 inhabitants, in 2005, at the latest (EC Environment, 2010b, Eur-Lex, 1991b).


stricter legislation aimed at regulating the water quality at source. The direc-tive indicated a step towards a more detailed European Union legislation and implied significant investments in improved wastewater treatment in many Member States.

When all the EU Member States around the Baltic Sea have upgraded their wastewater treatment plants in accordance with this directive, as well as with the HELCOM Recommendation 28/E5, the resulting reduction in nutrient load to the Baltic Sea will be significant. Up to now, this process has resulted in an increase of connectivity to urban wastewater treatment and an overall 20 per cent more efficient wastewater treatment, resulting in reduction of nutrient inputs and improved sanitation.8

EU Water Framework Directive (2000/60/EC)The EU Water Framework Directive (WFD) was adopted in 2000. After a tra-dition of disparate regulation of water issues in the EU, where the focus often was on separate water environments, but without reaching the agreed targets (Krämer, 2006), the Water Framework Directive (WFD) was developed. It incorporates much of the previous EU water legislation. The objective of the directive is to prevent further degradation and to achieve “good ecological status” of all European waters by 2015. The directive covers all uses and types of water bodies within national boundaries, that is surface, ground, transi-tional and coastal waters. It covers whole river basins, viewed as integrated systems, and assigns responsibility to Member States to assess the water status (Article 5 & 8), and implement the necessary measures in reaching the objec-tive. This is to be done by setting up river basin district agencies (Article 3) and adopting River basin management plans (Article 13). The WFD strongly advises the use of price policies, in accordance with the “Polluter-Pays-Princi-ple” (Article 9), to get the needed measures implemented.

Even thought this directive does not target the Baltic Sea in itself, the programme of measures implemented to reach “good ecological status” of upstream bodies will have a positive impact on the state of the Baltic Sea.

REACH (EC1907/2006)REACH entered into force in 2007 and is the European Community Regula-tion on Chemicals and their safe use. The main reason for developing and adopting REACH was the lack of sufficient information regarding the hazard posed to human health and the environment from some of the chemical sub-stances manufactured and placed on the market in Europe during many years. Consequently, its main objective is to improve the protection of human health and the environment through better and earlier identification of the intrinsic properties of chemical substances. In doing so, it makes the people who place the chemicals on the market (manufacturers and importers) re-sponsible for understanding and managing the risks associated with the use of these chemi cals. It requires them to register information on chemical sub-stances in a central database run by the European Chemical Agency (ECHA) in

8 http://www.itameriportaali.fi/en/ajankohtaista/uutisia_muualta/2011/en_GB/reducement/


Helsinki. It calls for the progressive substitution of the most dangerous chem-icals for which suitable alternatives have been identified. At the same time, REACH aims to enhance innovation and competiveness of the EU chemicals and allow for the free movement of chemicals within the EU.9

Due to the characteristics of the Baltic Sea, hazardous substances have been a problem for several decades. The accumulation of certain substances in the marine food web have especially been identified as one of the major challenges by HELCOM, and one of the goals of the BSAP is to obtain a Baltic Sea undisturbed by hazardous substances (HELCOM, 2007).

EU Integrated Maritime Policy (IMP) (COM2007/575) The IMP was launched by the EU in 2007 and seeks to provide a more coherent approach to maritime issues. The policy encompasses all elements of marine activity and provides a holistic and integrated approach to address economic and sustainable development on a European Union wide basis.

IMP focuses on five main action areas: 1. Maximizing sustainable use of the oceans and seas. 2. Building a knowledge and innovation base for the maritime policy.3. Delivering the highest quality of life in coastal regions. 4. Promoting Europe’s leadership in international maritime affairs. 5. Raising the visibility of maritime Europe.

The IMP seeks to coordinate different policy areas, but does not aim to re-place policies on specific maritime sectors.

EU Marine Strategy Framework Directive (2008/56/EC)The Marine Strategy Framework Directive (MSFD) constitutes the environ-mental pillar of the EU integrated maritime policy. The MSFD establishes a framework within which the EU Member States shall take the necessary measures to achieve or maintain good environmental status (GES) in the marine environment by 2020. The directive also embraces and strengthens the principles and requirements of the EU Water Framework Directive (2000), by setting a coherent framework for environmental protection for all European regional seas. An interesting comparison between the two main concepts, and potential conflicts between the Water Framework Directive (WFD) and the Marine Strategy Framework Directive (MSFD), can be found in Borja et al. (2010).

EU’s Marine Strategy Framework Directive states under article 1.3 that “Marine strategies shall apply an ecosystem-based approach to the manage-ment of human activities. This ensures that the collective pressure of such activities is kept within levels compatible with the achievement of good GES, and that the capacity of marine ecosystems to respond to human-induced changes is not compromised, while enabling the sustainable use of marine goods and services by present and future generations”. This call for an eco-system approach requires a deep understanding of the marine ecosystems

9 http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm


and the impact they have on human well-being. Furthermore, the directive emphasises the need for working across borders, including linking activities to regional sea conventions (Article 5, 6), such as the Helsinki Convention. The Baltic Sea is one of the marine regions that are specified in the directive (Article 4).

In order to carry out the cost-benefit analysis required by the MSFD, it is necessary to identify the benefits obtained from different marine ecosystem services, such as is done in the BalticStern studies BalticSurvey and BalticSUN surveys (see BG Paper Benefits of mitigating eutrophication for a description of these studies and their results). According to the MSFD all measures of the Programmes of Measures, which shall be reported before 2015, to reach the environmental targets, shall be cost-effective. Regarding the policy instru-ments to be used in getting the necessary measures implemented, the MSFD calls for the establishment of economic incentives in reaching good environ-mental status.

EU Strategy for the Baltic Sea Region (EUSBSR)This strategy was launched in 2009, following a request from the EU Parliament and is the tool that will deliver the regional implementation of the Integrated Maritime Policy (IMP). The actual implementation is, however, made on a national level, implying that its success might vary between Baltic Sea countries.

Four key challenges have been identified as requiring urgent attention. They are:1. To enable a sustainable environment.2. To enhance the region’s prosperity.3. To increase accessibility and attractiveness. 4. To ensure safety and security in the region.

The EU Strategy for the Baltic Sea Region aims to contribute to more inten-sive cooperation between the Baltic countries and to shape the region into a regional cooperation model for the whole EU. The implementation of the strategy is financed from different EU funds in the area, including the Baltic Sea Region Program.

2.3. other international policies and targetsApart from national and EU legislations and directives, there also exist a number of international policies and agreements that are of relevance for the environmental state of Baltic Sea.

International Convention for the Prevention of Pollution from Ships (MARPOL 73/78)The MARPOL Convention was adopted in 1973 at IMO, and has been updated with different amendments over the years. MARPOL is the central conven-tion addressing safe and clean shipping, and was designed to minimize pollu-tion of the seas, including dumping, oil and exhaust pollution. Its stated ob-jective is: to preserve the marine environment through the complete elimination of pollution by oil and other harmful substances and the minimi-zation of accidental discharge of such substances. The Convention includes


regulations aimed at preventing and minimizing pollution from ships – both accidental pollution and that from routine operations – and currently in-cludes six technical Annexes that deal with prevention of different forms of marine pollution from ships: oil, noxious liquid substances carried in bulk, harmful substances carried in packaged form, sewage, garbage, and air pollution.10

In accordance with MARPOL 73/78 the Baltic Sea area has been designated as a special area. Far-reaching prohibition and restrictions on any discharge into the sea of oil or oily mixtures, noxious liquid substances and garbage have been introduced by the Baltic Sea states (HELCOM, 2004).

Convention on Long-range Transboundary Air Pollution (CLRTAP) CLRTAP was established in 1979 and states that signing parties should en-deavour to limit and, as far as possible, gradually reduce and prevent air pol-lution including long-range transboundary air pollution.11 By means of ex-changes of information, consultation, research and monitoring, the Parties undertake, to develop policies and strategies to combat the discharge of air pollutants. Parties should also adopt air quality management systems and control measures, compatible with balanced development and use the best available technology, which is economically feasible.12

Convention on Environmental Impact Assessment in a Transboundary Context (Espoo, 1991) The Espoo Convention was adopted in 1991 and entered into force in 1997, and sets out the obligations of Parties to assess the environmental impact of certain activities at an early stage of planning. Furthermore, it lays down the general obligation of States to, at an early stage of planning, notify and con-sult each other on all major projects under consideration that are likely to have a significant adverse environmental impact across boundaries.13

The United Nations Economic Commission for Europe (UNECE) adopted the Protocol on POPs as part of the CLRTAP on the 24 June 1998 in Aarhus, Denmark.

Convention of Biological Diversity (CBD) The CBD, which was opened for signing on 5 June 1992 at the United Nations Conference on Environment and Development (the Rio “Earth Summit”), is an international legally binding treaty with the following three main goals:• conservationofbiologicaldiversity,• sustainableuseofitscomponents,and• fairandequitablesharingofbenefitsarisingfromgeneticresources.Its objective is to develop national strategies for the conservation and sustain-able use of biological diversity.Marine and coastal biodiversity that relates also to the conservation of bio-logical diversity and sustainable use of the Baltic Sea is addressed in particu-

10 http://www.imo.org/about/conventions/listofconventions/pages/international-convention-for-the-prevention-of-pollution-from-ships-(marpol).aspx11 http://www.unece.org/env/lrtap/12 http://rod.eionet.europa.eu/instruments/57813 http://www.unece.org/env/eia/


lar in one of the CBD programs. Elements of this program include: integrated marine and coastal management, marine and coastal living resources, marine and coastal protected areas, mariculture and invasive alien species.14

Stockholm Convention on Persistent Organic Pollutants PoPs15

The Stockholm Convention on Persistent Organic Pollutants was signed in 2001 and became effective as of May 2004. It aims to eliminate or restrict the production and use of persistent organic pollutants (POPs).

The treaty calls for international action on 12 pollutants grouped into three categories:• Pesticides:aldrin,chlordane,DDT,dieldrin,endrin,heptachlor,mirexand

toxaphene. • Industrialchemicals:hexachlorobenzene(HCB)andpolychlorinated

biphenyls (PCBs).• Unintendedby-products:dioxinsandfurans.

The Convention has a range of control measures to reduce and, where feasible, eliminate the release of POPs, including emissions of unintentionally pro-duced POPs such as dioxins. The Convention also aims to ensure the sound management of stockpiles and wastes that contain POPs.

United Nations Framework Convention on Climate Change (UNFCCC) The UNFCCC sets an overall framework for intergovernmental efforts to tackle the climate change challenge. Under this framework, the member governments gather and share information on greenhouse gas emissions, national policies and best practices. In addition, national strategies for a ddressing greenhouse gas emissions and adapting to expected impacts are developed, including a provision of financial and technological support to developing countries and cooperation in preparation for adapting to the im-pacts of climate change.

As shown in several scenario studies done for the Baltic Sea, the increase in temperature caused by climate changes might have a significant effect on the Baltic Sea’s ability to produce ecosystem services. Furthermore, climate changes also have indirect effects on the Baltic Sea due to, for example, changes in land-use, precipitation, evaporation, and floods.

14 http://www.bonusportal.org/policy_and_other_links/international_conventions_and_the_baltic_sea/15 http://www.uspopswatch.org/


3. Policy instrumentsIn order to achieve the targeted nutrient load reduction of the BSAP, some kind of policy instrument has to be implemented forcing the sources of these nutrients to take into consideration their impact on the Baltic Sea. This section will focus on a general discussion regarding the appropriate policy instruments taking into consideration the characteristics of the Baltic Sea and the drivers behind its environmental state.

In this paper there is a clear distinction between a measure and a policy instrument, the former being a physical measure having a direct impact on the environment (e.g. reduced fertilization), whereas the latter describes the policy instrument used to generate the desired measure (e.g. a tax on fertilizers). A measure may be carried out by the stakeholder in question (e.g. agriculture, households), whereas a policy instrument is usually decided and enforced by the government. The design, implementation and enforcement of a given policy instrument is the final step towards reaching the environmental im-provement, after identifying an environmental problem, setting a target and selecting appropriate measures to reach that target.

Policy instruments are in this paper defined as those tools that create the incentives for the implementation of measures to reach the objective. That is, the incentive that the actor supposed to implementing the measure is con-fronted with (e.g. price signal, legislation or information). Directives setting targets and/or describing the actions needed to be taken (e.g. MSFD, Nitrate directive), or funding of research is therefore not considered to be policy instruments in this paper since they do not create a direct incentive to implement measures, even though they set up important frameworks and sometimes legal force. In order to meet the requirements of the Marine Strategy Framework Directive necessary measures need to be identified and some kind of policy instrument need to be implemented on a national level. Type of measures and policy instruments are up to the Member State to decide.

3.1. Categories of policy instrumentsThere are several kinds of policy instruments that can be chosen in order to get a measure implemented. Policy instruments can be categorized with regard to what the actor supposed to take measures or change behaviour is confronted with. That is, whether they are subject to an economic incentive to take action (e.g. taxes, subsidies), some kind of demand on what action they have to achieve (e.g. discharge limits, technological requirements) or infor-mation on how they could do things. Policy instruments are often divided into the three main categories: • Command-and-control,suchasperformancestandards,emissionlimits,

classifications, best available technology (BAT).• Market-basedinstruments,suchastaxes,subsidies,fees/charges,tradable

permits.• Information,suchaseducation,counselling,informationcampaignsetc.

Whether it is optimal to choose market based instruments (e.g. taxes/subsidies, tradable emission/ambient permits) or command-and-control instruments


(e.g. emission standards, technological requirements) depends to a large degree on the shapes of the marginal cost and marginal damage curves, the presence of uncertainties concerning these curves and whether there are any thresholds with regard to the damage (see e.g. Weitzman, 1974; Kolstad, 1987; Gren, 2004; Goulder & Parry, 2008).

Market-based instruments A characteristic feature of market-based instruments is that they affect the costs and benefits of choices made by those concerned. When some kind of price signal is linked directly to an environmental problem, people are encouraged to use resources in an environmentally less burdensome way.

A tax or charge can be imposed on the emissions causing environmental damage. By setting the tax equal to the damage caused by the pollution the cost of the damage is internalized into the polluting generating activity. However, in the case of diffuse sources, a common approach may be to tax the resource causing the environmental problem (e.g. petrol tax, tax on fertili-zers).

Subsidies should primarily be used for activities characterized by having positive external effects. For example, subsidies for wetlands could be desig-ned so that the cost of creating and managing them internalizes the positive effects in the form of nitrogen removal, biodiversity and recreation that a wetland can generate. Subsidising treatment of a negative external effect (e.g. subsiding the investment of abatement technology) should be avoided as far as possible, since in the long term the subsidy will send the wrong signals to the market. This is because average costs are lowered, which generates a profit and hence an incentive for expansion and increased production in the subsidized sector, which is contrary to the objective (Brännlund & Kriström, 1998; Goulder & Perry, 2008). Besides, subsidies must be funded out of other state revenues, which in turn may lead to distortive effects in the areas that are taxed, which may in turn impact adversely on welfare. On the other hand, welfare may increase if the subsidies are funded via taxes on negative external effects.

Tradable emission permits restrict total emissions to a certain quantity of pollutants (e.g. phosphorous, nitrogen oxide or the right to use groundwater). The quantity is set so that the objective is achieved, that is, the target emission level is set by society. The right to emit a substance is regulated in the form of a “guideline value” at system level, and transferable emissions rights are issued at the same time.

There are two ways of allocating emission permits:1) Issue them free of charge, in which case an allocation principle has to be

chosen. One example is “grandfathering”, where rights are allocated on the basis of current and/or historic emissions.

2) Auction: bids are submitted by prospective buyers.

However, emission permits can be transferred between the various actors, which means that they can be traded. Emission reductions occur when meas-ures with a lower marginal abatement cost than the cost of the emission per-mit are carried out. Therefore, transferable emission permits can be seen as a


combination of a command-and-control and a market-based instrument.Command-and-controlCommand-and-control may be quantitative (emission conditions, perfor-mance standards etc.) or technical (e.g. best available technology). The most common way is to regulate emission levels by setting a guideline value for emissions that must not be exceeded, or quite simply prohibiting the emis-sions. It is also possible to regulate treatment technology by requiring the owner of the production facility causing the emissions to use a specific treat-ment technology. Production inputs causing the environmental problem can also be regulated (e.g. ban the use of PCB’s, CFC’s).

InformationInformation can change attitudes and behaviour by informing people about environmental impacts. Information can take many different forms and some examples are labelling, public disclosure, or rating and certification. Informa-tion differs from command-and-control and market-based instruments in that the recipient of the information is not obliged to do anything and is not subjected to economic incentives; the desired action is voluntary. Information may nonetheless be an important tool of creating a more positive attitude t owards the desired change in behaviour. Another form of information is to describe the measures available. Information is also often an important complement to other policy instrument (Sterner & Coria, 2012). For example, information, often prior to their implementation, can lead to a greater under-standing of the need to use taxes, charges and command-and-control.

3.2. Criteria for evaluating the effectiveness of instrumentsPolicy instruments can be evaluated over a set of criteria (see e.g. Sterner & Coria, 2012; Goulder & Parry, 2008). Whether the policy instruments lead to reaching the target or not is an obvious criteria, referred to as target-fulfil-ment. Whether the policy instrument reaches the target to the lowest possible cost, that is its cost-effectiveness, is another often used criterion for evalua-tion. Sometimes, but not always, the cost-effectiveness term also considers the instruments potential for encouraging the development of new cheaper measures, so called dynamic cost-effectiveness. The way the instrument performs with regard to these criteria indicates how well an instrument has worked, and also gives guidance on the choice of an instrument for a new purpose. These criteria should not be ranked; their relative importance depends on the specific environmental problem as well as the nature of the measures for which the instrument is to be used. However, in general it may be said that instruments that performs well with regard to target fulfilment and are cost-effective are attractive from a socio-economic viewpoint. But whether priority should be given to target fulfilment or to cost-effectiveness depends on the environmental problem in question. There may also be other factors to take into account when choosing between instruments. Some of these are described below after a more thorough description of target fulfil-ment, cost-effectiveness and dynamic efficiency.


Target fulfilmentWhat is the instrument’s potential to achieve the objective?

The environmental objective can be expressed generally for the environ-mental problem, for example to protect the biodiversity of the Sea, or gene-rally for the pollutant, for example to reduce the nutrient load to the Baltic Sea by 50 per cent. It can also be expressed for a given sector or emission, for example to reduce nitrogen leaching from agriculture by 50 per cent, or reduce accidental oil spills by 95 per cent. If no specific target is formulated, the direct effects of the instrument might be assessed, as for example the numbers of kilograms of reduced phosphorus load to the Baltic Sea.

Command-and-control of pollutants and emissions performs well with regard to target fulfilment, assuming complete compliance. If it is difficult to achieve 100 per cent compliance due to, for example, monitoring problems, it may be advisable to use market-based instruments as a complement to command-and-control. Emission permits also generate a high target fulfil-ment, since the amount of emission permits are set in order to reach the objective. In that sense, this instrument is no different from command-and-control.

It is uncertain whether taxes are able to achieve the objective, since fluctua-tions in the economic cycle affect production levels, which may mean that a given industry emits more (less) than is desirable during economic growth (recession). Moreover, a lack of information about the cost of measures may mean that a tax is set too low, or too high, when introduced. Therefore, a tax or charge cannot absolutely guarantee that a certain objective is reached, which may have devastating effects in the presence of threshold effects. However, raising or lowering the tax until the objective is achieved can easily remedy this.

Where there are threshold effects for damage caused by the emissions, or where the environmental problem otherwise causes very serious damage even where there are no threshold effects, target fulfilment may be the most important criteria in assessing the effectiveness of the instrument. It is then desirable to use an instrument offering great precision in terms of target fulfilment – an instrument that ensures that a given limit value is not exceeded. For example, quantitative command-and-control or emissions rights under which the environmental objective is specified.

Cost-effectivenessWill the instrument achieve the environmental objective at the lowest possible cost?

Cost-effectiveness means that the stated objective is achieved at the lowest possible socio-economic cost. In practice, this means that the cheapest measures at the margin are carried out first. The cost of reducing an additional unit of pollutant is called the “marginal cost”. The more the marginal cost of treatment varies between the sources of the environmental problem, the greater the efficiency gains are by using a policy instrument that are capable of generating a cost-effective allocation of measures.


In Figure 3.1 below, the vertical axis shows the cost, while the horizontal axis represents the total load reduction. The marginal cost (MC) curve shows the cost to reduce the load by one more unit. This cost increases as it is initially possible to implement very cheap measures to bring about a reduc-tion in load, while increasingly expensive measures have to be taken when the volume of reduction increases. It is necessary to establish a target to make it possible at all to decide whether a measure is cost-effective or not. Such a target is illustrated in Figure 3.1 by the dotted vertical line.

On the basis of the marginal cost curve and the target it is possible to see that the measures to the left of the target are cost-effective, while those to the right are not. In order to reach the target at lowest possible cost only the former measures should be implemented.

The area under the marginal cost curve gives the total economic cost of a particular reduction.

Figure 3.1 Marginal cost curve and cost-effectiveness.

Market-based instruments are generally considered to have greatest potential with regard to cost-effectiveness (see Box 3.1), since they set a price on the be-haviour and it is optimal for everyone who has a marginal abatement cost less than this price to reduce its pollution until the point where this marginal cost equals the price, thereby generating a cost-effective allocation of measures.


Box 3.1 Tietenberg (2006) summarises the results of 14 different studies that show that the cost of attaining a particular target is 40 to 95 per cent lower with taxes/fees and transferable emission permits than in the use of technological requirements or requirements for uniform reductions. The greater the differences in abatement cost that prevail between different measures, the higher the cost gains to be obtained from market-based instruments. The reason is that market-based instruments give a price signal that means that each sources opts for the cheapest alternative in choosing between fee/tax and taking its own measures.

Since tradable permits use the market mechanism to determine the allocation of measures it usually performs well with regard to cost-effectiveness. But emissions trading may entail high administrative costs for those involved, which is to some extent due to the need for good information to operate in the market. Furthermore, the prospects of achieving cost-effectiveness using tradable emission permits may be limited by strategic behaviour, and also by transaction costs generated by the effort the buyer and the seller have to take in finding each other (see Baumol & Oates, 1988). If the emissions trading market is to work properly, it must include a sufficient number of players of approximately the same size. If there are not enough players, there is a risk of existing players refusing to sell their rights to new players wishing to enter the market. There is also a risk that some players will gain an advantage in a monopoly (only one seller) or monopsony (only one buyer). From a cost- effectiveness viewpoint, it makes no difference theoretically speaking how the emission permits are allocated; both methods, mentioned above, generate cost-effectiveness.

However, the prospect of achieving a cost-effective solution at an early stage is higher when using auction to allocate the permits. In addition, an auction is the only method that satisfies the polluter pays principle, since a free allocation of rights means that society gives away the benefit of being allowed to pollute to the recipient of the right, although it is true that they will have to pay for any emissions exceeding their entitlement. An auction also solves the problems involved in allocation as regards the resources needed to decide on an allocation considered “fair” by all those involved.

When the marginal cost of treating emissions differs greatly between measures it is of particular importance in terms of cost-effectiveness to use market-based instruments for environmental problems. Where the location of the emission source plays a part in the environmental damage, geographical differentiation of the instrument is needed to achieve cost-effectiveness. The use of a uniform policy instrument such as uniform tax, uniform required percentage reduction, or uniform quantity of reduction, would under these circumstances not reach the targeted reduction at the least cost (transaction costs excluded), since it is based on the assumption that the damage generated by a unit of emissions is the same for all sources. However, if the additional administrative cost of a differentiated instrument is high, then uniform


instruments may nonetheless be a better alternative. It should also be noted that if the environmental problem is regional or global, this might influence the analysis of the effectiveness of the instrument. In the case of global environmental problems (e.g. greenhouse gases), differing tax rates between different sources may be desirable when companies operate in a competitive global market and there is a risk of production being relocated to countries where environmental command-and-controls are less stringent. At worst, a market-based instrument designed to combat specific emissions may cause more environmental harm if domestic production declines and is replaced by production abroad that generates higher overall emissions than before the instrument was introduced.

As emphasized by Goulder and Perry (2008) it is not easy judging alterna-tive policy instruments in terms of cost-effectiveness, since a comprehensive assessment of costs should not only focus on the direct abatement costs of the measures the instrument targets, but also include monitoring and enforce-ment costs, as well as general equilibrium impacts (i.e. spill over effects) outside the sectors implementing the measures. Furthermore, any positive or negative synergy effects of the measure targeted by the policy instrument should ideally be included into the cost estimate as well.

Dynamic cost-effectivenessThe assessment of the effectiveness of a policy instrument should also cover the incentives the policy instrument provides for the development of new and cheaper measures over time, known as dynamic cost efficiency. In particular, the dynamic perspective includes the incentives for technological develop-ment created by the chosen instrument. If the emission source pays for all emissions (as is the case with e.g. a tax), there is a constant economic incen-tive to reduce emission quantities, which in turn stimulates research and implementation of treatment technology in the area.

Market-based instruments generally mean high dynamic cost-effectiveness as they generally lead to there being financial incentives at all times to bring down discharges. This in turn leads to efforts to develop, for example, new water treatment technologies producing a higher level of abatement than is the case with other types of policy instruments. As a result, the marginal cost of achieving the target can be reduced over time as cheaper measures are developed. Like taxes, emission permits create an incentive for technological development, although taxes differ in one sense from permits, because the price of these permits tends to fall in the long term if new and cheaper treatment technology is implemented, thereby also reducing the economic incentive to develop new technology (see Tietenberg, 1992). But with a tax level that remains unchanged, the incentive (marginal cost of treatment less tax) of new and cheaper treatment technology remains constant.

If taxes and targets are set so to reach an optimal level of abatement, technical progress in abatement technology under constant taxes leads to more-than-optimal abatement, whereas constant regulation leads to less-than-optimal abatement (Sterner & Coria, 2012).


Command-and-control creates no economic incentive for reducing emissions by more than is required, which in turn limits the incentives for technological development in the field.

Other aspectsIn addition to the above criteria, there are other factors of importance when introducing an instrument. For example, there are political aspects such as redistribution of wealth and regional policy considerations. These are often important because they may affect the political scope for implementing an instrument, and it is necessary to consider who will ultimately be paying for implementing the required measures. How well the policy instrument can handle the different kinds of uncertainties present might also be a factor to consider. The specific characteristics of the environmental problem, as well as the measures targeted are also important to be aware of.

Distributional and equity concernsWho ultimately bears the costs of fulfilling the objective has a great impact on the political prospects of gaining acceptance for a policy instrument. It is usually considered desirable from a socio-economic point of view for those who pollute to pay for measures to be taken. The extent to which ownership rights are defined in society and who possesses them are of great importance when designing instruments. The polluter pays principle (PPP) implicitly allocates title to those affected. In other words, individuals are entitled to clean air, clean water and a preserved environment. If, on the other hand, the polluter is considered to have the right to impact negatively on the environ-ment, the aim will be to find an instrument whereby those affected pay the polluter to reduce his emissions. So, if the owner of the emission source does not need to compensate society for the damage caused by its operations, the polluter pays principle does not hold. If the polluter pays principle does pre-vail, and compensation is paid to those negatively affected by the emissions, it is essential that it be paid with no strings attached, so that it does not engender behavioural changes potentially affecting the effectiveness of the instrument. Account should also be taken of whether an instrument sharpens income differences, thus counteracting the redistributive effects that the pro-gressive income tax system is designed to achieve (Brännlund & Kriström, 1998). If that is the case, other policy instruments can be used in order to correct for such effects.

Unclear or non-existent rights of ownership may also be the cause of many environmental problems. The threat to fish stocks has largely arisen because historically no legal entity owned the fish stock, and even if they did (which is what fishing quotas of the CFP in a sense attempts to do), it is usually impos-sible in practice to completely prevent people from fishing for cod. In other words, a degree of non-excludability prevails. That is, even if ownerships rights are established and clear, they might be difficult to enforce due to the non-excludability character of the fishing problem, That is, it is hard to exclude fishing vessels to catch stocks they do not have the right to catch.


However, it can be difficult to implement PPP politically depending on which sectors the policy instrument targets. Too heavy a financial burden on sectors that compete on an international world market can lead to the relocation of production to countries where these sectors are not subject to similar requirements despite creating the same environmental problems (often referred to as leakage). This suggests the use of policy instruments that are less financially burdensome for the polluting sector in such cases.

The characteristic features of the market in which various companies and industries operate very much influences the extent to which those companies and industries will be financially affected by some kind of environmental policy instrument. A company may lose market share if the instrument leads to sizeable cost increases. Companies producing a fairly homogenous product and competing in the global market (e.g. pulp and paper companies and farms) are more vulnerable to production cost increases of this kind than are companies producing a heterogeneous product in the absence of competition from the outside world (e.g. district heating plants, wastewater treatment plants). It is important to emphasise that exposure to competition depends not only on whether one operates in a global market; it is also a question of how homogenous the product is perceived to be by consumers. Although steel, for example, may appear to be a homogenous product, there is evidence that steel quality, and not only price, is a key factor driving demand. As regards the ability of a business operation to bear its costs, it is also of interest to look at treatment costs as a percentage of sales, which indicates whether a given company would be rendered insolvent by the financial burden placed on it by the instrument. However, according to the Porter hypothesis, environ-mental legislation can draw the attention of companies to potential efficiency improvements that not only benefit the environment, but also make compa-nies more competitive and profitable (Porter & van der Linde, 1995). But it should be mentioned that there is disagreement in this field of research as to whether the Porter hypothesis actually exists (Brännlund & Marklund, 2009).

How the cost of, for example reaching the BSAP target, is distributed between different groups/sector of the society, is to a large extent determined by the type of policy instruments used in order to get the measures imple-mented, which is illustrated in Table 3.1 below. Whether, for example, it is the sector implementing the measures that are burdened with the abatement cost differ between subsidy and tax. Under a subsidy, it will be the taxpayers that are burdened with the cost, while a tax will put the burden on the polluter, paying both for the abatement as well as any remaining discharges. Taxes also generate revenues to the government. A tax on nutrients and auctioned tradable permits will, therefore, imply a larger burden on the polluting sectors. Just how large this burden is depends on how much of the cost that can be transferred to the consumers. However, the revenue to the public sector generated by these instruments could be used to compensate either those individuals who are suffering from the pollution or those economic sectors that are worse off due to the policy. If command-and-control is used, under which the polluters are required to take certain measures, for example manure storage, abatement standards for wastewater treatment plants and


single household, the cost of abatement will be taken by the sectors/groups implementing the measures, this also holds for fees/charges and tradable permits that are handed out free of charge, that isnot auctioned. If, on the other hand, subsidies and grants are used to a large degree for getting agricul-tural measures implemented, the taxpayers and not the farmers will carry the burden of the abatement cost.

Taxes and auctioned tradable permits are the only two policy instruments that under all circumstances fulfil the polluter-pays-principle (assuming that the tax level and price of permit corresponds to the damage generated). Command-and-control only fulfils the polluters-pay-principle if they lead to no environmental damage caused by the actors subject to the policy.

Table 3.1 Distributional effects of different policy instruments

Policy instrument Abatement cost burden on source

Discharge/emission cost burden on source

Governmental cost

Tax Yes Yes Revenue

Subsidy No No Expense

Legislation Yes No None

Tradable permit auctioned Yes Yes Revenue

Tradable permit

Allocated free

Yes No None

Information Yes No Minor expense

Administrative feasibilityAll policy instruments generate some type of transaction costs, which is addi-tional to the abatement cost, and therefore not taken into account in this study. Transaction costs include all costs associated with the introduction and maintenance of a policy instrument not directly attributable to the cost of a measure. Administrative costs as well as costs of monitoring and enforcement are examples of transaction costs related to the policy instrument chosen. The authorities in charge of the policy instrument as well as the sectors/ individuals subject to the instrument carry these transaction costs. The size of these costs, as well as how they are distributed, can differ significantly be-tween different types of policy instruments, but is also dependent on the de-sign of the policy instrument in question. For example, general subsidies of-ten implies lower administrative costs than those based on that the applicant and measure meeting some specific requirements, but the former are more likely to be less cost-effective than the latter in the case where location is rele-vant for the effect of the measure. The transaction costs are not reflected in the table above, since these usually occurs at the regulating as well as the regulat-ed part. Furthermore, they are usually relatively low compared to the actual abatement cost and hard to estimate in advance of the implementation of a certain policy instrument, since they are specific to the design of a policy instrument. If there are many actors involved which are characterized by large differences regarding the activities, as is the case with sources of eutrophication, the larger the transaction costs tend to be for a given policy instrument (Vatn et al., 2002).


In the end, the choice of policy instrument, and thereby the distributional effects, is often based on distributional consideration by the decision makers.

Uncertainty, risk and information asymmetryAs pointed out by Sterner and Cornia (2012) the criteria of cost-effectiveness and dynamic cost-effectiveness is not always enough or even appropriate. Other criteria, like producing feasible, verifiable and robust results, in a world of uncertainty and risk might be more important to consider in the evalua-tion of a policy instrument.

Therefore, it is also important to take account of how policy instruments can deal with different types of uncertainty and information problems in the choice of policy instruments. Uncertainties are unavoidable and exist in a number of areas in the field of eutrophication and can be divided into three categories:• Scientific(biological,chemical,physical)uncertainty:forexample,on

actual (as opposed to estimated) retention, the correlation between activity and load and between load and effect on eutrophication.

• Economicuncertainty:forexample,regardingthedifferencebetween estimated and actual costs of measures and the benefit of a reduced nutrient load.

• Technologicaluncertaintyonthetreatmentcapacityofthevariousmea-sures.

Since abatement cost, expressed in effect on recipient, is a function of economic as well as natural factors this uncertainty of costs is also related to natural scientific uncertainty.

In summary, these uncertainties imply that a decision maker will not have perfect information about the true marginal cost of an abatement measure. The challenge, therefore, lies in the difficulty to fully know what level on a tax or subsidy that is required to get a specific measure implemented, and also to what level such policy instruments need to be geographically differentiated. However, in the presence of uncertainties regarding abatement costs, a tax, for example, is to be preferred to a more administrative policy instrument demanding more information of the regulating agency. A price policy, such as a tax, is preferred if uncertainties about abatement costs are dominating, while a “quantity” policy, such as commandand-control or cap-and-trade instrument, is preferredf it, on the other hand, is the uncertainties regarding the damage that dominates(Goulder & Parry, 2008; Sterner & Coria, 2012).

However, the capability of policy instruments to adjust to new information must also be considered.

It will be difficult to attain cost-effectiveness with command-and-control if the marginal cost of treatment differs from one source to another. True, quantitative command-and-control of emissions is possible on an individual basis in order to achieve cost-effective command-and-control, but this also presupposes that the regulatory authority has full information about treat-ment costs in that industry. This may not only be impossible in practice, it will also require extensive resources. An instrument of this kind is unlikely to


be cost-effective unless there are only a few emission sources and low infor-mation costs. Where there is doubt about the marginal cost of measures, market based incentives are preferable compared to an administrative instrument such as command-and-control.


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