Market Based Instruments of Environmental Policy in Developi

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402/95 - 12 e PVI Division 402Environmental Protection, Conservationof Natural Resources, Dissemination ofAppropriate Technologies (GATE)

Market-Based Instrumentsin Environmental Policy inDeveloping Countries

Framework for Policy Planning and Institutional

Development in the Environment


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Division 402Environmental Protection, Conservationof Natural Resources, Dissemination ofAppropriate Technologies (GATE)

402/95 - 12 e PVI

Market-Based Instrumentsin Environmental Policy inDeveloping Countries

Framework for Policy Planning and InstitutionalDevelopment in the Environment

Eschborn 1995


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Published by:Deutsche Gesellschaft frTechnische Zusammenarbeit (GTZ) GmbHP.O. Box 5180, D-65726 Eschborn

Division 402, Environmental Protection, Conservationof Natural Resources, Dissemination ofAppropriate Technologies (GATE)

Pilot Project Institutional Development in EnvironmentWachsbleiche 1, D-53111 BonnTel.: (+49) 0228 98533-0 / Fax: (+49) 0228 98570-18E-Mail: [email protected]

Author: Stephan Paulus

Responsible: W. Hamacher, S. Paulus, B. Winkler

Layout: I. Borucki

Printed by: Universum Verlaganstalt, D-65175 Wiesbaden


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Foreword

Since the beginning of the Eighties, the Federal Republic of Germany has provided assistance un-der development cooperation to counterpart institutions in developing countries so as to help solveenvironmental problems. To date, however, broader-based approaches in institutional developmentand advice in environmental policy planning which aim at developing institutional structures and aneffective range of policy instruments have been the exception rather than the rule. Meanwhile, ex-perience has shown that the complexity of environmental problems, their multisectoral nature andthe large number of relevant actors all mean that greater consideration has to be given to the insti-tutional setting. The UN Conference on Environment and Development (UNCED) also stressed theimportance of the environmental policy framework and called for assistance to developing countriesin establishing institutional structures and local capacity to solve the serious problems facing theeconomy.

The present paper is a review of types and examples of market-based instruments of envi-ronmental policy. A common feature of these is that they aim more at the economic self-interest of

those causing environmental problems rather than following regulatory command and control ap-proaches. Experience to date justifies the assumption that, in principle, market-based instrumentsalso represent an attractive option for developing countries. However, it is important to counter at-tempts to attach a certain mystique to individual instruments or types of instruments: instead, thegoal must be to develop a mix of instruments, institutional structures and regulations which is ap-propriate to the situation and takes into account as far as possible ecological effectiveness, econo-mic efficiency, political and administrative feasibility and social acceptance. The concepts and ideasexpounded in this paper all derive from the possible role of development cooperation in institutionaldevelopment and advice in policy planning in the environment. As a result, the paper is aimed pri-marily at specialists planning or implementing environmentally related projects in development co-operation, and is intended to encourage corresponding projects to integrate the development of arange of effective environmental policy instruments into their activities to an even greater extent. Atthe same time, the particular sensitivity of this sector is explicitly recognised by assigning a role todevelopment cooperation which is more catalytic than formative. The emphasis is on technical co-operation (TC), without losing sight of contact points and openings for cooperation with other in-struments of development cooperation. This paper should accordingly also be of interest to expertsand decision-makers from developing countries who are seeking to review the potential of coope-ration in this sector and who wish to acquaint themselves with the relevant debate status amongGerman development cooperation institutions.

The ideas expressed here constitute one of the key areas being developed under the supraregionalpilot project Institutional Development in Environment which is being implemented by the GTZunder a commission from the German Federal Government, with the aim of increasing the integra-tion of participative and process-oriented elements into the promotion of environmental institutions.Besides a review of the relevant literature and case studies on Benin, Chile, Mexico and Thailand,the paper draws on the results of an international workshop organised jointly by the GTZ and DSEin June 1994. We wish to express our gratitude to all those involved, and particularly to the mem-bers of the Working Party on Economic Instruments of Environmental Policy (AG-UI), which hassupported the GTZ in this learning process over a period of years.

Bonn/Eschborn, March 1995

Dr. H.P. Schipulle Dr. W. MorbachFederal Ministry for Economic Deutsche Gesellschaft fr technischeCooperation and Development Zusammenarbeit (GTZ) GmbHDivision 224 (Environmental Protection, Division 402 (Environmental Protection,Natural Resources Management Natural Resources Management

and Forestry) Dissemination of Appropriate Technologies)


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Contents

Foreword IContents II

List of abbreviations IIISummary IV

1. Introduction 1

2. Market-based instruments in environmental policy :types and experience 3

2.1. Arguments for using market-based instruments in environmental policy 32.2. Types and examples of market-based instruments in environmental policy 32.2.1 Overview 32.2.2 Fees and prices 32.2.3 Charges and taxes 4

2.2.4 Subsidies and environmental funds 62.2.5 Tradable permits and market creation 82.2.6 Deposit systems and performance bonds 92.2.7 Law of liability 102.2.8 Property rights 11

3. Market-based instruments of environmental policy :policy planning and development cooperation 14

3.1. The context 143.2. Institutional requirements 153.3. Criteria for analysis and evaluation 163.4. Operational planning 17

3.5. Acceptance and feasibility 183.6. Approaches and phases 19

4. Environmental policy planning and development cooperation 21

4.1. Policy planning and capacity development in the environment 214.2. Target groups and stakeholders 214.3. Ownership and process orientation 234.4. Levels of advisory services 244.5. Political sensitivity and conflict management 244.6. Programme approach and entry points 24

5. Contributions of development cooperation in environmental

policy planning 26

5.1. The focus of advisory services in technical cooperation 265.2. Advisory role and presence 265.3. The range of services under technical cooperation 285.4. Cooperation between development cooperation agencies 28

6. Conclusion 31

Selected references 32Members of the Working Party on Economic Instruments of Environmental Policy 35Publications of GTZ Division 402 36


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List of abbreviations

BMZ German Federal Ministry for Economic Cooperation and Develoment

CDG Carl Duisberg Society

CIM Centrum fr internationale Migration und Entwicklung

DAC OECD Development Assistance Committee

DSE German Foundation for International Development

FC Financial Cooperation

GTZ Deutsche Gesellschaft fr Technische Zusammenarbeit GmbH

IDE Institutional Development in Environment

KfW Kreditanstalt fr Wiederaufbau

MBI Market-based Instruments of Environmental Policy

NGO Non-Governmental Organisation

OECD Organisation for Economic Cooperation and Development

PPR Project progress review

SAP Structural adjustment programme

TC Technical Cooperation

ZV DSE Public Administration Promotion Centre


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IV

Summary

Although command-and-control conceptsform the core of environmental policy in-

struments worldwide, market-based in-struments have been incorporated in envi-ronmental policy in an growing number ofcountries. Where as in most developingcountries there are serious shortfalls inimplementing environmental policy and, atthe same time, the populations living con-ditions are linked particularly closely to thestate of natural resources, the use of mar-ket-based instruments may be a attractiveoption.

Market-based instruments comprise allprice-related and/or regulatory orderswhich mobilise the economic self-interestof resource users and polluters for envi-ronmental policy purposes. The term cov-ers a wide range of individual instrumentswhich can be used for specific problems.Market-based instruments include envi-ronment-related fees, pricing policy forprimary commodities and inputs, environ-mental charges and taxes, tradable rightsand licences, market creation, deposit

systems, rights of exploitation and disposaland the law of liability. Compared with pureregulations there are borderline caseswhere (depending on the exact constella-tion) regulatory or market elements pre-dominate. Overall, market-based instru-ments are distinguished by the fact thatthey provide economic incentives to pollut-ers to implement efficient measures toprevent environmental pollution or pursuea course of sustainable utilisation of natu-ral resources.

The use of market-based instruments isaccordingly supported not only by envi-ronmental policy considerations, but also(and above all) by economic considera-tions based on the high costs of imple-menting command-and-control conceptsand their environmentally questionable,long-term structural effects. This does notmean simply replacing regulations by eco-nomic incentives, but rather reorienting thepolicy mix to take account of specificenvironmental problems and the economic,legal and institutional framework. The ef-fectiveness of market-based instrumentsdoes, however, depend on certain condi-

tions. For example, environmental chargesneed a basis for assessment which can be

checked as simply as possible, and whichis clearly connected with the environmentalproblems to be curbed with the help of thecharge. In addition, the effect depends,inter alia, on the intensity of competition,the potential for technological innovationand the price elasticity of demand.

There is nothing accidental in the way thatregulatory approaches have dominatedenvironmental policy worldwide. The rea-sons can be traced back to the sectoral

organisation and fragmentation of govern-mental structures, the relative lack of politi-cal clout of state environmental institutionsand (not least) in the fact that environ-mental policy as a government responsibil-ity has so far received little support in pub-lic debate. Chances for using market-based instruments improve with growingawareness of the pressure the problemsare creating and the more evident the pos-sibility of so-called win-win effects be-comes. Favourable constellations for mar-

ket-based instruments to create benefits inboth economic and environmental termsarise e.g. in the context of privatisationefforts, decentralisation programmes,structural adjustment programmes orsituations where implementation of retro-spective environmental policy is hittingfinancial constraints.

Market-based instruments do, however,involve significant administrative and/ormonitoring inputs. It is therefore importantto review the institutional conditions care-fully and to integrate the instruments intoexisting structures as far as possible. Crite-ria for selecting instruments are ecologicaleffectiveness, economic efficiency, ad-ministrative feasibility, public costs andrevenue, distributional effects and imple-mentation. In operational planning, exten-sive planning and consultation efforts arerequired, which in turn call for technical,legal and administrative know-how. Interms of implementation and communica-tions strategies, special attention must bepaid to possible acceptance problems onthe part of those liable for payments(charges etc) and the general public.


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Development cooperation (bilateral andmultilateral) has previously only consideredissues of market-based instruments inenvironmental policy in isolated cases (ex-cept for conditionality, e.g. with regard to

pricing policy) or in the context of trainingand upgrading programmes and researchcooperation. Policy planning concepts inthe environmental sector with a longer-term orientation have been the exceptionrather than the rule. However, there is rea-son to expect that a need for professionaladvisory services will emerge in this field inthe future.

With regard to possible advisory mea-sures, it is useful to distinguish between

the preparatory phase, the phase of plan-ning and selecting instruments, and theimplementation phase. In each of thesephases there is a different need for advi-sory services and hence different openingsfor cooperation.

Advice in environmental policy planningmust move beyond the narrow focus ontechnical assistance to governments. As aprofessional service, environmental policyadvice aims to advise decision-makers and

actors involved in the political process inthe governmental and non-governmentalsectors. Actors can be separated into pol-luters or resource users, those affected byenvironmental problems, governmentaland non-governmental environmental in-stitutions as channels for environmentalpolicy regulations, and other organisationsand actors with influence over environ-mentally relevant decisions or the be-haviour of polluters and resource users. Anexact analysis of the structure of those

involved and the organisational landscapeis thus always required. In a long-termperspective, polluters and resource userswill be target groups for policy advice.However, the question of target groups onthe one hand and partners of cooperationon the other can only be answered on acase-by-case basis when directly imple-menting corresponding programmes. Gen-erally speaking, though, diversification ofpartners will be an important element.

Policy planning and institutional develop-ment in environment can only have sus-tainable success, if the partners in the de-veloping countries have a sense of own-

ership. When planning and implementingcorresponding programmes this impliesthat participative and dialogue-orientedinstruments and processes should be usedas far as possible. Certain aspects - im-ponderables - simply cannot be foreseen

due to the fact that decision-making proc-esses in environmental policy are not usu-ally linear, but rather erratic, repetitive anddependent on political and economic con-stellations. This means that policy planningprogrammes in the environment must beprocess oriented and allow for flexible,iterative procedures. In addition, such pro-grammes must be firmly anchored in thegiven political context and located at anappropriate level in the hierarchy.

Market-based instruments are not gener-ally an autonomous field for cooperation,but rather an option in projects which areconcerned partly or exclusively with policyplanning or institutional development in theenvironment. In principle, there may be awhole range of project types for a givencontext and partner structures into whichenvironmental policy advice measurescould conceivably be integrated. Opportu-nities to initiate a dialogue on this withpartners arise inter alia in the framework of

project planning and assessment, policydialogue and project progress reviews andevaluation. Pilot measures can provide anopening for raising the issue.

Besides technical and institutional ques-tions, advisory services may also focus onorganisational development as well asinterorganisational cooperation and com-munication. The specific mix of focal areasand the distribution of roles between part-ners and the German contribution must be

adapted for each individual case throughproject and operations planning. Thequestion of the advisers role must also besettled in this context. Forms of process-oriented advisory services and facilitatingwill become increasingly important com-pared with classic adviser profiles, as inmany cases of development cooperationthe function will be predominantly catalytic.The GTZ, as a TC institution, can offerservices for initiating and identifying policyadvice and institution-building programmes

in the environmental sector; it can alsoadvise partners in developing countries onplanning corresponding programmes andassessing feasibility and (as part of the


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German contribution) it can assist with theimplementation of corresponding pro-grammes.A decisive factor is the integration of vari-ous development cooperation instruments.Financial cooperation projects also offer

opportunities to promote the use of market-based instruments. Recently, the KfW, forexample, made financing for power proj-ects conditional on electricity tariffs cover-ing at least 65% of costs. Besides suchrequirements whose fulfilment is uncer-tain there is the possibility of integratingcomponents into suitable projects (includ-ing power, water supply, sanitation andsolid-waste disposal) which ensure longer-term, back-up advisory services in thisarea. Training programmes also offer an

opportunity for cooperation with institutionssuch as the DSE and CDG, which havebeen offering programmes for various tar-get groups in the environmental sector forsome time now. The first modules dealingwith issues of market-based instrumentshave now been incorporated into some ofthese programmes. In the next stage it willbe a matter of elaborating on these com-ponents and giving them a greater practi-cal orientation. Political foundations arealso suitable cooperation partners where

the social dimension of environmental pol-icy is concerned, or when creating plural-istic fora for discussion or for researchcooperation. The pluralistic institutionalstructure of German development coop-

eration offers opportunities in the field ofpolicy advice (not limited to the environ-mental sector) which could be utilisedmore extensively than in the past, e.g. un-der country programmes.

Policy planning and institutional develop-ment programmes in the environment particularly where they involve market-based instruments make very heavy de-mands on both, partners in the developingcountries as well as German cooperationagencies and require staying power. Therisks from political uncertainties and proc-ess orientation can, however, be limited bycareful initiation, preparation and planning,substantial orientation towards participa-tion and possibly also break points. In ad-

dition, policy advice in the environmentshould also have other elements besidesthe focus on market-based instruments,giving them the nature of a programme. Inthe short term there is no reason to expectthat developing countries will come forwardwith full-flegded applications to the Ger-man Federal Government which deal spe-cifically with advisory services on market-based instruments. It is, however, realisticto assume that it will be possible in thecourse of identifying, planning and as-

sessing development cooperation projectsto identify a corresponding need and spe-cific opportunities for cooperation in neigh-bouring areas. Such opportunities shouldbe actively pursued.


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1. Introduction

Although the principles of polluter pays

and prevention have long been establishedin environmental policy, in practice theemphasis has largely been on repair-oriented and curative measures. This isalso reflected in the worldwide predomi-nance of command-and-control conceptsin environmental policy. Experience has,however, shown that such concepts havelimited reach, and this is increasinglyforcing a reorientation in policy instrumentsand hence not least (in both institutionaland instrumental terms) to greater integra-

tion of environmental policy and economicpolicy. In a market economy context, oneof the most important requirements for thisis the integration of the environmental di-mension into the market mechanism insuch a way that the market responds ef-fectively to them instead of working againstthem.

In a broad sense, the term market-basedinstruments of environmental policy (MBI)is used to cover all price-related and/or

regulatory instruments which harness thecommercial self-interest of actors (i.e. in-dustry, farmers, transport users or the po-pulation at large) for environmental goals.

Although overshadowed by political andscientific debate, a wide range of market-based instruments (MBI) have found theirway into environmental policy in a growingnumber of countries. In Germany thisapplies to the effluent charge at Federallevel and, above all, to the "Lnder" (sta-tes) and local authorities. Other OECDcountries are acquiring experience withMBI in environmental policy, starting withso-called "emission trading" in the USA,and going on to liability laws in Japan andthe deposit on car bodies in Norway. Se-veral developing countries are also deve-loping approaches of this kind, e.g. diffe-rent rates of duty on leaded and unleadedpetrol in Thailand, pollution licences inChile and the environmental fund in Tuni-sia.

In developing countries in particular, there

is a particularly close relationship betweenpeoples living standards and the state ofnatural resources. In times when marketeconomy principles are gaining ground indeveloping countries as well, environmen-tal policy must get to grips with the potenti-al and limits of market-based instruments ifit wishes to remain effective and containthe scale of environmental problems. Thisis particularly important in view of the se-rious shortcomings in implementing com-mand-and-control instruments that have

become evident throughout most develo-ping countries. Having said this, however,it is important not to lose sight of the corre-sponding problems which the use of mar-ket-based instruments can involve undercertain circumstances.

In developing and strengthening appro-priate environmental institutions in deve-loping countries, development cooperation(DC) to date has limited itself to rather nar-row aproaches. Although technical coope-

ration (TC) has devoted increasing attenti-on over the past 10-15 years to institutionbuilding for government and non-governmental environmental institutionsand organisations, projects have beenpredominantly technical and at operationallevels. Financial cooperation (FC) has re-cently incorporated elements designed toaddress issues of long-term viability inenvironmental terms as well (e.g. by impo-sing requirements for covering costs inelectricity generation projects). We can ex-pect greater demand for assistance in en-vironmental policy planning, not least be-cause awareness of ecological issues isbeing steadily enhanced in developingcountries within the framework of trainingand upgrading programmes and throughresearch cooperation programmes (e.g.SIDA, IDRC, World Bank, DSE). This pa-per is an attempt to define this area of co-operation more closely, specifically in thefield of market-based instruments, and toconsider the role of DC in the light of theparticular complexity and sensitivity of the

issue.


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2. Market-based instruments in environmental policy: typesand experience

2.1. Arguments for using market-based instruments in environmental policy

In both industrialised and developingcountries, the application of individualmarket-based instruments has always be-en the result of specific constellations.These generally involved a mixture of envi-ronmental and economic considerations.The difficulties in implementing "command-and-control" approaches, the high costs (toboth private and public-sector budgets)

and the static nature of curative environ-mental policy have always been an im-portant motivation for considering ways tointroduce economic mechanisms into envi-ronmental policy. There are a number offactors at work here, such as:

the enormous cost of monitoring (whichbecomes virtually unmanageable in theSMI sector);

the disproportionate growth in wasteand effluent disposal costs as the level

of purification required by "end-of-pipe"technologies rises;

free residual pollution, which leaves noincentive to reduce emissions beyondstandards (and results in substantialexternal costs, particularly in developingcountries);

the obstacle to innovation caused byrigid technical regulations which leavelittle scope for integrated and possiblymore cost-effective solutions and fre-quently go beyond the expertise of envi-

ronmental agencies; the economic inefficiency of standards,

which require each individual source ofemissions to meet the same norms irre-spective of the costs of compliance(which can vary very widely dependingon the type of plant) and which do notpermit compensatory approaches.

Other issues arise when the peculiari-ties of public goods and long-term de-velopments are considered, for example

arising out of distortions to price me-chanisms. This type of problem is parti-cularly frequent in developing countries:

Free access to a resource where thereis no possibility of excluding potentialusers tends to lead to overexploitation(e.g. fish stocks, water).

Where property rights are vaguely de-fined or uncertain (e.g. for forests,arable or grazing land), users will tendto omit or neglect maintenance mea-sures, contributing to overexploitation.

Internationally widespread subsidies forprimary fuels, fertilisers and pesticidesare tending to undermine the effect ofecological regulations and hence theirgoals.

Besides burdening public-sector bud-gets, undesirable ecological effects ari-se where fees for public services (e.g.water supply, sewerage, waste dispo-sal) are too low to cover costs.

"Command-and-control" approachesgenerally have little impact on the (eco-

nomic policy) framework for economicgrowth and structural change, creatingthe risk that their initial successes willbe eroded by higher emission and re-source consumption levels.

Against this background, determining theright set of instruments is a question thatcan only be answered on a case-by-casebasis, i.e. depending on the nature of theenvironmental problems (type of pollutantor resources), their sources (e.g. number,

type, geographical distribution), the impacton people, environment and economy, andwith due allowance for the existing institu-tional structure and setting. It is, however,important to avoid giving market-basedinstruments an air of mystery through ter-minological differentiation from other in-struments of environmental policy.

The controversy over the fundamental su-periority of regulatory instruments or mar-ket-based instruments has given way to a

pragmatic consensus that it is normally amatter of developing an effective policy mixof different and complementary regulatoryand market-based instruments which will


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also have a preventive effect. In conside-ring the advantages and disadvantages ofa given instrument, it is accordingly im-

portant to look at these in the context of theentire range of (regulatory and market)instruments.

2.2. Types and examples of market-based instruments in environmental policy

2.2.1. Overview

In the broad sense, market-based instru-ments involve all price or non-price measu-res which make use of the economic self-

interest of the polluter to create incentivesto lower costs by preventing pollution orthrough sustainable use of natural resour-ces.

Overview of market-based instruments in environmental policy

Instruments Examples

Fees, prices

Charges and taxes

Subsidies and funds

Compensation and tradable permits

Deposit systems and performance bonds

Law of liability

Property rights

Prices or subsidies for energy, water, fertilisers andpesticides, water and effluent treatment fees, refusefees, toxic waste fees, road use feesEmission charges, product charges, exploitationcharges, differential taxationGrants, tax concessions, special depreciation allo-wances, customs concessions, concessionary inte-rest rates, location incentives, environmental funds,revolving funds, sectoral fundsFlexible standards, pollution permits and certificates,tradable quotas and exploitation permitsDeposits, e.g. on bottles, packaging, vehicle bodies,reafforestation bonds, rehabilitation bonds, risk

bondsLiability for damage and injury, environmental liabili-ty, liability insuranceLand titles, water rights, concession auctions, deve-lopment rights, joint commercial exploitation

environmental fees and pricing policiesfor primary commodities and inputs;

environmental charges and taxes whichare likely to have an environmental ef-fect as well as a revenue effect;

subsidies and environmental funds; tradable permits and rightes, including

flexible standards and regulatory orderswhich result in reduction of abatementcost by taking into account the differingcosts for different emission sources(compensation);

deposit systems and performancebonds;

law of liability, where it applies to riskswith environmental relevance;

tradable property rights, where theseinclude incentives for sustainable ex-ploitation.

The notion of market-based instruments inenvironment is not amenable to precisedefinition. Besides standards and otherclearly regulatory instructions, there areobvious borderline areas where regulatory

or market elements predominate, depend-ing on operational details.

2.2.2. Fees and prices

Environmental fees are levied for services(e.g. effluent or refuse disposal). To avoidlosses on the part of the suppliers (usuallythe state) and to ensure adequate capaci-ty, fees should cover full costs. In practice,this principle (which requires coverage of

operating, maintenance and capital costs)is all too frequently ignored for sectoral orsocial policy reasons. This is a major pro-blem in environmental terms, as subsidies


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remove any incentive to reduce demandfor the services through preventive measu-res (e.g. reducing refuse).

Particularly important although mostlyoutside the direct competence of envi-

ronmental ministries and agencies aresubsidies and price controls on industrialor agricultural inputs, and specificallyenergy, water, fertilisers and pesticides. Inmany developing countries subsidies onelectricity have been a significant factor notonly in the deficits of state-owned powergeneration companies, but also in the lackof finance for modernising power stationsand failure to exploit potential for energyconservation in industry, agriculture andtransport. Vast areas of arable land are still

becoming salinated or waterlogged becau-se farmers are using free irrigation sy-stems and (often in combination with defi-cient drainage) overwatering their fields.Like subsidies for fertilisers or pesticides,

subsidised water rates distort prices anddiscriminate against other measures formaintaining and increasing agriculturalproductivity, such as soil cultivation andconservation. In the long term, this canlead to declining agricultural productivity,

erosion, groundwater pollution, resistanceetc.

On the other hand, it is particularly difficultto increase fees and input prices in deve-loping countries, as this may involve ex-tensive distributive effects. Effective com-pensation is difficult because the relevanttax or social policy instruments are gene-rally not sufficiently developed, so thatadjustments in this area can only be ef-fected in stages if at all. On the other

hand, economic logic favours im-plementing the first stage (achieving fullcost cover) before the second (e.g. im-posing charges).

Example of input prices that cover costs

Indonesiaspent just under USD 130 million a year up to 1985 on subsidies for pesticides; i.e. up to 82% ofthe consumer price. The resulting massive use of pesticides and subsequent development of resistancesled to disastrous plagues of locusts in the 70s and 80s which destroyed large portions of the rice harvest.Between 1986 and 1988 the pesticide subsidies were abolished in stages, partly for ecological reasons but

partly also for financial reasons. In addition, the use of a large number of pesticides was banned in 1986,including some of those that had formerly been subsidised. By 1989 the use of pesticides had dropped by90%, the yield per hectare had, however, increased by 20%. In the meantime, integrated pest control me-thods are now being promoted.

In Chinairrigation farming has been promoted since 1949, and today around 75% of arable land is irrigated.In 1985 the Chinese government started decentralising its irrigation policy and gave provinces greater eco-nomic autonomy. In the course of these reforms, water rates were raised to the level of operating, mainte-nance and capital costs, with the result that overirrigation and inefficient distribution decreased. Since 1980the government has been financing new irrigation systems with loans instead of state grants as a way ofmotivating agencies to raise water tariffs.

2.2.3 Charges and taxes

A characteristic common to both envi-ronmental charges and taxes is that theyare imposed on the exploitation of the envi-ronment as a commodity and have both anenvironmental and a revenue effect (whichin practice can be more important). UnderGerman tax law, revenue from chargesmust be used for specific purposes, whiletaxes can be absorbed in the general bud-

get. Environmental charges and taxes canbe imposed on certain types of emissions,inputs, exploitation and products, or inclu-

de differentiated rates of taxation based onenvironmental policy considerations.Compared with standards and norms,charges have (besides the revenue effect)the advantage that they create an incentivefor the originator of emissions to reduceresidual pollution below existing limits,where this is cheaper than paying thecharge.The environmental effectiveness of leviesis, however, dependent on a series of fac-tors. The basis for assessment must,

for example, be as simple as possible(quantity of pollutant, energy consumption,units of output, possible indirect indicatorssuch as energy consumption) and there


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must be a clear relationship to the envi-ronmental problems to be contained withthe help of the charge. Much depends onthe amount of the charge, which needs tobe based on an estimate of the costs ofpreventing pollution which is as accurate

as possible (in some cases, this may alsobe extremely difficult). There are also pro-blems with political decision-making ifchanging production output, emissionquantities or environmental quality objecti-ves require increases in levies.

The burdens of adjustment are dividedbetween suppliers and consumers, de-pending on the intensity of competition,potential for technological innovation, pos-sibilities of substitution and the elasticity of

demand. This makes it difficult to determi-ne in advance how far the adjustment willcome from changes in the manufacturingprocess and/or constraints on demand (theproblem of accuracy). In practice, chargesare accordingly usually combined withnorms or standards.

Factors favouring the use of emissioncharges are:

clear differences in abatement costs fordifferent sources of emissions;

easily identifiable emission sources;

low-cost methods of monitoring emis-sions;

technological potential for reducingemissions.

Product charges are preferable where

products are manufactured in largenumbers and are easily identifiable;

existing administrative structures can beused (e.g. to collect VAT);

product manufacture, resource exploi-tation or waste disposal involve emis-sions whose sources are diffuse and

difficult to document; consumers can switch to other pro-

ducts, so that there is a high price ela-sticity of demand.

The basic advantage of charges and taxesis that the polluter has the choice of usingthe lowest-cost technology and achievingthe optimal degree of pollution abatement(below the standards).

Examples of environmental charges and taxes

In Germanythe discharge of effluents into bodies of water is subject to a levy under the Effluent ChargeAct. The basis for assessment is the quantity of pollutants, calculated from an assessment index com-prising suspended particulate matter, oxidants, mercury, cadmium, chromium, nickel, lead, copper,phosphorus, nitrogen, certain halogen compounds and toxicity to fish. The charge affects direct dischar-gers, mostly local authorities as operators of public sewage treatment installations and major industrialplants with their own treatment plants. Since 1993 the charge has stood at DM 60 per pollution unit.Revenue from the charge (c. DM 500 million a year) has been used as dedicated funding for measuresto protect waters. The effluent charge is combined with minimum requirements pursuant to the WaterResources Act.

In Taiwanthe government passed a law in 1991 on controlling air pollution which involved a system ofemission taxes on industrial emissions and fuels. The revenue from the tax is to be used for envi-ronmental protection measures. It is planned to lower or eliminate the taxes as soon as certain emissionstandards are met.

Besides its control function, the draft effluent charge legislation in the Brazilian Federal State of Rio deJaneirogives priority to funding aspects by using revenue to finance monitoring operations by the envi-ronmental agency and programmes to conserve water resources. There is a similar situation in Colom-bia, where the revenue from the charge is to be tied directly to the financing needs of the administration.

As in Germany, leaded petrol has, since 1991, been subject to a higher rate of tax in Thailand thanunleaded petrol. As a result of this tax differential, unleaded petrol currently has a market share inBangkok of c. 25 %.


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Examples of environmental charges and taxes (contd.)

Since 1979 Chinahas been testing a system of charges on a wide range of emissions. However, thepollution charges (extended to cover the whole nation in 1982) only apply if the legal limit is exceeded.Even so, the system has resulted in a significant decline in pollution, for example a reduction of 80% inSO2

In the Scandinavian countriescharges are raised on batteries, pesticides and fertilisers. The aim of theNorwegiancharge on fertilisers and pesticides is to provide extra funding for environmental programmesin agriculture. Almost all OECD countries raise product charges on lubrication oils and disposablepackaging.

The German city of Kassel introduced a tax in 1992 on disposable cutlery, dishes and packaging. Thebasis for the tax is the use of non-reusable dishes and packaging if used to contain food and drink soldfor consumption at the point of sale. The rates lie between DM 0,10 and DM 0.50. The new tax waschallenged before the courts, but upheld by the Hesse administrative court in August 1994.

2.2.4. Subsidies and environmentalfunds

Subsidies have direct relevance to envi-ronmental policy where they are granted tomeasures for environmental protectionand resource conservation. This applies

e.g. to concessionary loans, grants, taxand depreciation allowances for the use ofenvironmental technologies, correspondingcustoms concessions or subsidies for ap-propriate technologies such as biogasplants and wood-saving stoves.

Examples of environment-related subsidies

In Japanthere are concessions on depreciation for investments in environmental technology and low

waste production processes. In addition, investments in plants using environmental technologies do notform part of the basis for assessing taxes on capital assets.

In Thailand there are reduced customs tariffs on imported environmental protection plants, provided itinvolves "end-of-pipe" technologies. Similar regulations for eco-friendly process technologies are beingplanned. In Indonesia imports of equipment for effluent treatment plants are subject to a concessionaryrate of customs duty.

Under the EU LIFE programmegrants are available for 30-100 % of the costs of measures (inter alia) toprotect biotopes and nature, of administrative facilities and services in the environmental sector, forenvironment-related educational and information material. The EU THERMIE programme promotesinnovative energy technologies, provided that they involve particular commercial risk, e.g. rational ener-gy use, new energy sources, and even prospecting and development of petroleum and gas fields).

One example of the combination of charges and subsidies is the Dumoka Bone National Park in Su-lavesi, Indonesia. As part of the extensive irrigation project, farmers were charged for water: these char-ges were used not only to maintain and operate the irrigation systems, but also to fund nature conserva-tion and biodiversity conservation measures, which indirectly contributed to improved management ofthe water catchment area.

Seen in purely economic terms, subsidieslike these are a second-best solution, asthey involve a risk of free riders and arebased on general sharing of burdens rat-her than the polluter pays principle. Evenso, such subsidies are a widespread in-strument for achieving environmental pro-tection goals. Generally, however, the in-

strument should be designed for a limitedperiod and constructed so that there is nodiscrimination against environmental pro-tection measures which do not involveinvestment (an example of such discrimi-nation is special depreciation allowances).Practical experience has shown, however,that it is easier to distinguish between envi-


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ronmental protection investment and re-placement or rationalisation investment inthe case of end-of-pipe technologies thanwith integrated approaches.

Environmental funds are programmes

which make available loans to finance en-vironmental protection and resource con-servation measures through public or pri-vate-sector banks. Environmental funds ofthis type are refinanced partly from thenational budget and partly from environ-mental charges, taxes or fines for viola-tions of environmental legislation. Thefunds mostly include an element of subsi-dy, as they offer loans at interest ratesand/or for periods which are more favou-rable than normal market conditions. Other

variants avoid concessionary elements andmerely assure firms (and particularly SMIs)access to credit. Retrofitting and non-productive investment in end-of-pipe tech-nologies are often particularly difficult to

finance through commercial banks. Envi-ronmental funds are a relative newcomerin DCs, but 21 developing countries havealready implemented them. There are twobasic types of environmental funds:

The standalone model, where the goalof the fund is limited to a narrowly de-fined project (e.g. a nature conservationarea).

The multipurpose model, which is in-tended to finance environmental protec-tion and resource conservation measu-res within a predefined framework.

The main problems currently facing thefunds are management and governanceproblems, undercapitalisation, problems of

delimiting recipient groups, definition ofpromotional criteria and financing mo-dalities.

Examples of environmental funds

The Industrial Finance Corporation of Thailand (IFCT) funds private investment in plants for pollutioncontrol through the "Environment Portfolio. Since 1991 this has been accompanied by an EnvironmentFund", which originally had a capital stock of c. USD 20 million and also derived revenue from a special

charge on petroleum consumption. The introduction of an environment tax to provide further refinancingfor the Environment Fund is currently under discussion.

The "Fonds de Dpollution" in Tunisiaalso helps finance industrial investment in environmental protec-tion. It is funded by public money and loans and grants from international donors. Revenue from feesand fines goes to the general budget of the ANPE environmental protection agency.

Besides public funding, the "Environmental Pollution Prevention Fund" in Korea is financed by finesimposed on industrial establishments which have exceeded statutory limits. However, the low level ofthese fines means that they have little deterrent effect, particularly since no effort is made to collect thefines in around 30 % of cases for reasons of economic feasibility.

In the Federal Republic of Germany the KfW provides loans at concessionary interest rates for longperiods, inter alia for private sector investment in environmental protection, energy saving, and de-velopment and production of eco-friendly products. The Federal Environment Ministry (BMU) pro-gramme "Demonstration Projects in Environmental Protection" offers interest subsidies for model pilotprojects in the environmental sector. The Land Lower Saxonyhas created an Eco-fund to co-financeprivate projects such as low energy housing, the development of edible packaging for fast-food pro-ducts, vocational advanced training and consultancy.


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2.2.5 Tradable permits and marketcreation

Tradable permits and market creation arerights defined in quantitative terms which

are transferable and can accordingly betraded in the market. The best known formof this instrument is the so-called "emissi-on trading", which is practised in the USAin connection with air pollution control.Other models involve trading quotas, sha-res and rights of exploitation e.g. in fishe-ries and soil use.

The appeal for environmental policy ofpollution permits is that they enable controlof the total volume of pollution. It is up to

the economic self-interest of the pollutersto decide whether to reduce their emissi-ons or buy the appropriate licences on themarket. The price mechanism minimisesmacroeconomic costs by ensuring that thepolluters who make the greatest efforts to

prevent pollution are those who face thelowest costs in doing so.

To avoid a situation where trading in pollu-tion permits leads to concentration of pol-

lution in specific regions (the so-called hotspot problem), the tradable pollution musthave equivalent impact throughout theregion concerned. Conceivable modelsrange from those where, for example,emissions are only tradable within a factoryor industrial zone to those involving tradingpollution rights within conurbations or enti-re states. In this sector, combinations oftradable rights and regulations are thenorm. The more narrowly defined the area("bubble") within which compensation is

permitted and the more exchange is ef-fected through approval procedures (ratherthan free trading), the more the instru-ments involved approach a system of (fle-xible) regulation.

Examples of tradable pollution rights and compensation approaches

In the course of implementing the Clean Air Act, tradable pollution permits are used in the USA, varyingin form from state to state (so-called "marketable pollution permits", e.g. for CO, SO2 , SPM, NOx). Forspecific geographical areas ("bubbles") quality standards can be set for individual pollutants. The 1993

amended Clean Air Act introduced an annual 1.5% reduction in the standards. Within the "bubbles",once the ambient air quality limits have been reached, additional emissions are only permitted if theincrease is at least compensated for at some other point ("offset" or "netting"). This is done by purcha-sing (subject to approval) so-called "emission reduction credits" (ERC), which result in a reduction atsome other point of emissions below the minimum requirements. Besides minimising pollution preventi-on costs (estimates put annual savings at USD 5-12 billion) the system has the further advantage thatthe environmental protection agencies need only set quality standards and monitor emissions, withouthaving to worry about technical details. The US system does, however, involve substantial administrati-ve work because of the mandatory approval process. The most extensive form of "emission trading" inpractice to date is found in southern California.

Several US statesare also using permit approaches in water conservation and refuse disposal. Otherexamples of tradable rights (although only on a limited scale) can be found in the USA and Canada inthe production and use of CFCs and acid rain control.

In Chilethe Santiago de Chile region has been using a combination of emission standards and pollutionpermits since 1992. The emission standards relate to concentrations of atmospheric pollutants, whilethe permits relate to total output for each source of emissions. Permits were granted on the basis ofexisting emissions ("grandfathering") and initially are valid until 1998. New emission sources will only beapproved then if they are offset elsewhere by purchasing corresponding permits, although only partialcompensation is required for a transitional period (100% compensation from 1997 onwards). The sy-stem does not cover small emission sources, although these are still subject to the same emissionstandards. Based on the experience to date, the system has proved efficient and administratively mana-geable, although several issues remain to be resolved (tax treatment of licences, extension to smallemission sources).


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The following requirements must be metfor using pollution permits:

ability to measure total emissions forclearly defined pollutants;

adequate competition in the permitmarket to sustain a functioning pricemechanism;

ability to set geographical limits on themarket;

monitoring and control capability whichenables fully comprehensive measure-ment of actual emission levels.

Conditions favouring the use of permitapproaches are:

relatively large differences in pollutionprevention costs;

quality levels are set and/or achievedand can be converted into emissionquantities;

additional growth is expected in emis-sions and the number of polluters;

the number of polluters is large enoughto ensure a functioning market;

the environmental impacts within thedesignated market are independent ofthe location of sources;

the problem of measuring emissionquantities has been solved.

Examples of tradable user rights

To contain traffic problems in Santiago de Chile, tradable user rights for buses were auctioned for cer-tain major traffic routes. The basic idea of the system is to cut overcapacity and speed up local publictransport by reducing the number of buses. The system was introduced after legislation in 1991 took theoldest buses out of service to reduce exhaust emissions. This led to problems in practice because licen-ces were only needed for certain streets, so that bus operators could get round the system relativelyeasily by changing their routes. The transport ministry accordingly intends to extend the system to alarger number of roads or routes in the next round of auctions.

In practice, the main problems in intro-ducing permits arise in connection with theinitial allocation. This can be done eitheron the basis of emission approvals alrea-dy issued, or existing use ("grandfathe-ring"), although this creates the risk ofhoarding and thus entry barriers for new-comers. Allocation based on fixed pricesinvolves the problem of finding the correctbasis for charging in environmental terms.Auctions involve high information costs toensure that all polluters have the opportu-nity to participate, and to establish a func-tioning market. Legal problems arise inconnection with auctions because theyinvolve de facto dispossession of existingpermit holders. Determining the duration oflicences also involves weighing the claims

of legal security against the need for envi-ronmental policy control capability.

2.2.6 Deposit systems and perfor-mance bonds

Deposit systems have long been in use ina large number of countries for economicreasons: More recently, they have beenreceiving increasing attention for envi-ronmental motives, particularly in dealingwith products or materials which can berecycled or involve special disposal prob-lems. In principle, deposit systems involvea refundable charge which gives the useror consumer an incentive to return articlesor materials.


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Examples of deposit systems

In Denmarkthere has been a deposit system for beverage bottles for many years. Many retailers, howe-ver, complain that this results in costs because consumers return a large number of bottles which werebought elsewhere ("handling costs"). In 1991 deposits between manufacturers and retailers were raisedsignificantly above the level of deposits between retailers and consumers. This arrangement was, howe-

ver, partly neutralised by the fact that retailers with a "bottle deficit" charged the consumers the higherrate, so as to motivate their customers to return the bottle to the same place at which it was bought.

In Indiathe largest bottler of mineral water bowed to pressure from the environmental ministry and intro-duced a deposit on plastic bottles. These were causing significant waste disposal problems, above all intourist centres, because refuse is mostly burned at public waste deposits. The result was the emergenceof informal markets in many areas, where the poor population performed the function of bottle collectorsand transporters.

Deposits systems on packaging and beverage bottles are very widespread (almost all OECD countriesand developing countries like Syria, Lebanon, Egypt.

In Norwayand Swedena deposit system for vehicle bodies was introduced in 1978 which has resultedin the return and at least partial recycling of 90-95 % of all cars.

Practical problems in implementing a de-posit system arise in publicising the systemand also in organising payments (pay-ments or refunds between retailers, ma-nufacturers, recyclers, and refuse disposaloperators), which require in part a mul-tistage procedure in which the level of de-

posit can vary. One variant on the depositsystem is the "performance bond". Here,companies have to pay a deposit which isrefunded (plus some interest) if they com-ply with certain conditions. If the amount ofthe bond exceeds the cost of compliance,this creates an incentive to comply.

Examples of performance bonds

In Australiaperformance bonds are used to give strip mining operators an incentive to rehabilitate sites.

Swedenimposes performance bonds on oil tankers to reduce the risk of oil pollution.

In Indonesiaa variant on the performance bond was introduced in 1980, under which grants for fellingrights were combined with payment of a deposit which was refundable in the event of reafforestation.As, however, the value of the deposit pro hectare was well below the reafforestation costs, the chargewas simply passed on without having any effect.

2.2.7 Law of liability

Legally speaking, the law of liability servesprimarily to compensate parties who havesuffered injury or damage. Traditionally,this has covered loss of income or assetsand hazard to health or life. For environ-mental damage which does not come un-der these categories, liability exists onlywhere environmental liability has beencreated. Another factor of great importanceis whether proof of concrete fault is requi-red for liability, or whether the hazard alone

is sufficient (liability through fault versusstrict liability). In many developing coun-tries, however, the law of liability is relati-vely underdeveloped and there are majorproblems in enforcement, for example thelack of legal assistance for victims, over-loaded court systems and insolvency ofparties found liable.

Economically, the law of liability can alsohave a deterrent effect by creating an in-centive to limit the risk of environmental


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damage or accidents owing to possibleclaims for damages and the resultant hig-her cost of insurance or risk premiums.The requirements to be met if the law ofliability is to have a deterrent effect include:

damage or injury must be attributable tothe acts of individuals or one or morecorporate bodies;

damages must be calculable, and inaddition to damage to property and lossof income it must be possible to sue forenvironmental damage (environmentalliability).

To ensure that polluters can be held liablein every event, the law of liability is gene-rally considered in combination with man-datory insurance. This does, however,weaken the individual incentive effect, as

the risks are distributed among all the insu-rance policy holders. Another importantfactor for risk prevention is whether theinsurance premiums are calculated on thebasis of actual risk or based on indirectcriteria, such as tonnage in the case of oiltankers.

Examples of liability laws

Japan introduced what is regarded as a pioneering series of legal principles in the 80s. These includethe principle of strict liability, the admissibility of the so-called epidemiological proof of causality insteadof strict scientific proof of the cause of damage or injury, the principle of joint and several liability, andthe principle of the reversal of the burden of proof in favour of the victim. This legal foundation, whichwas introduced in the context of the "Minamata" and "Itai-Itai" cases, motivated companies to reachagreements at local level on environmental protection measures which went far beyond the statutoryminimum requirements.

Based on experience after the Bophal desaster, Indiaintroduced a limited form of environmental liabilityin 1991 in the "public liability insurance act". Under this, all companies using hazardous substances arerequired to take out liability insurance which will pay provisional compensation to victims of accidentswithout the need for a court hearing or proof of individual fault on the part of the company or its em-ployees. Although designed to avoid situations like Bophal, where the victims received no payment at allfor years, the amount of the provisional compensation is relatively modest (the final amount is decidedby the courts).

The Environmental Liability Act of 10.12.1990 in the Federal Republic of Germany introduced elementsof environmental liability which should enhance the self-interest of companies in taking environmentalprotection measures. The law establishes liability, regardless of fault, for damage or injury caused byaccidents. A liability insurance policy must ensure that possible claims are covered.

2.2.8 Property Rights

Property rights over natural resources havemajor importance in environmental policy.A very wide range of combinations of ow-nership and exploitation rights are concei-vable, e.g.:

public ownership and exclusively na-tionalised or collective exploitation;

public ownership, with rights of disposaland exploitation transferred (throughconcessions, permits, licences, leases)to local communities, groups or private

companies and individuals ("public do-main system");

local community, group or private ow-nership where the state reserves theright to monitor the nature of ex-

ploitation through to unrestricted private ownership.

From the environmental policy standpoint,ownership and rights of exploitation in wa-ter (including ground water), air, soil, forestareas, fish and game stocks are particu-larly important. Generally speaking, envi-ronmental policy instruments (with eitherregulatory or market orientation) requireprior clarification and assertion of rights ofownership and exploitation. For example,

state institutions can only impose require-ments or levies for waste water if the statehas the property right. From an economic


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standpoint, the question of the tradability of such rights is particularly interesting.

Examples of property rights

37 % of agricultural land in Thailand is not documented in land registers or titles. A further 47 % is subject to exploitation rights for a limited period only. In many areas, the risk of eviction leads farmers toneglect investment in soil improvement and erosion protection. Their uncertain legal status also meansthat farmers have difficulty obtaining credit, and are frequently forced to resort to the expensive informalcredit market. Often it is more profitable to clear public land than intensify agricultural activities on exi-sting arable land. The Thai government is implementing a programme with World Bank support whichguarantees farmers inter alia nontransferrable exploitation rights for terms of 5-25 years.

In Papua New Guinea the policy of liberalisation gave rise to the question of introducing private landownership. Previously, traditional exploitation rights at village level had existed which functioned well,including in ecological terms. Instead of introducing land registers and private ownership, the govern-ment decided to secure the traditional exploitation rights in the "Land Ordinance Act". Mediation proce-dures and special courts are available to settle disputes. In this system, for example, companies haveto negotiate felling concessions directly with the clans or village councils. Individual families have theright to cultivate arable land, while ownership is vested in the relevant clan.

In the Indian State of Maharashtra the "Phani Panchayat" model has proved very successful in mana-ging water catchment areas. In a framework of village self-help organisations, minidams are constructedand erosion protection measures implemented. Exploitation rights were also agreed among small-scalefarmers for irrigation which set upper limits on the cultivation of water-intensive sugar cane and quanti-ties of water per hectare. Hectare yields were increased for all farmers under this arrangement. At thesame time, the water shortage has been decisively reduced.

In Benin, uncertain legal relationships and conflicts between traditional and state land codes, reinforcedby the current breakup of state farms, are leading to destructive behaviour towards resources. Faced bythe unresolved issue of restoration and delays in negotiations with the state, former landowners whowere dispossessed in the course of creating state farms have destroyed trees, harvests and equipment("We will not allow the state to benefit from things that belong to us but are not being returned to us").The reprivatisation of forest areas under the structural adjustment programme has led to massive pro-

tests in Honduras. In some cases, users set forest fires ("Protest matches").

Problems frequently arise in connectionwith sustainable use of natural resources:

Where there is free access to a re-source and existing users have no wayof blocking out other users (free riders):this tends to lead to over-exploitation ofthe resource, as existing users cannotrely on other users to share in or evennot disrupt maintenance measures.

Where property rights are inadequatelydefined: (legal) security regarding thenature, extent, exclusivity and durationof property rights play a particular rolehere. Insecure property rights frequentlylead to neglect of investment in resour-ce conservation. Often formal rightscompete with informal or traditionalrights, which may lead to conflict overexploitation.

In the case of common property sys-tems, where specified groups (e.g.village population) use resources jointly:

here, enforceable intragroup arrange-ments and incentives together with ex-clusivity of exploitation by the group areessential for sustainable managementof the resources.

Where a given exploitation code ischanged (from above) without takingaccount of all user groups.

There are many different solutions, andthese cannot be generalised. Dependingon the situation and the resource, one ofthe following might prove helpful: privateownership, the transfer of user rights subject to conditions (e.g. approval pro-cedures, quotas, concessions, licences),increasing legal security (e.g. through landregisters, property rights, tenancy andagricultural tenancy law etc.), intragrouparrangements within self-help or-ganisations or at village level, or strengt-

hening of traditional exploitation rights. Inthe interest of sustainable resource use,however, the property rights must be cle-


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arly defined, exclusive, enforceable andsecure. In many developing countries partly because of competition between

traditional and "modern" systems this isnot the case.


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goals (and particularly environmental qualityobjectives) is an important indicator of thepolitical will that is crucial for effective de-ployment of any environmental policy in-strument. The existence (or emergence) ofenvironmental framework legislation or a

national environmental strategy can providesome hints in this area. The more the goalsare stated in operational terms, the greaterthe possibility of useful evaluation of exist-ing instruments, assessment of reform pro-posals and concrete structuring of regula-tory and market-based instruments. Inmany cases, the debate over objectives particularly in public is limited, as it in-

volves the risk of publicising latent conflictsof interest and ultimately weakening envi-ronmental policy (although this process canperfectly well be fertile and conducive toconsensus). Where, however, politiciansseek to avoid any public debate at all, it can

be assumed that nothing beyond symbolicgestures is intended, with environmentalpolicy merely a loose mesh full of loopholes.In such cases, advisory services on policyplanning have very limited scope, particu-larly in the area of market-based instru-ments. This also applies to cooperation atthe implementation level, which will also belimited in scope under these conditions.

3.2. Institutional requirements

The introduction and implementation ofmarket-based instruments involve sub-stantial inputs in administration and/ormonitoring they are by no means self-perpetuating elements of environmentalpolicy. The additional inputs required (orsavings) compared with regulatory in-struments depends on the type of in-strument, its specific design, and how farthe package of instruments fits into existingprocedures and institutional structures.Before making any decision on introducingmarket-based instruments, the existinginstitutional structures and their capacitieshave to be reviewed.

The basic condition for the use of market-based instruments is adequate know-how inthe fields of environmental law, economics,administration and planning in both the gov-ernment environmental institutions them-selves and in their surroundings, particularlyin research and consulting organisations.Another important issue is whether the envi-

ronmental ministry has the primary functionof planning and coordination (nodal

agency model) but relies on other insti-tutions for monitoring and implementation(laboratories, police, state and district-levelauthorities, forestry agencies, factory in-spectorates), or whether it has its own re-sponsibilities and corresponding decentral-ised structure for implementation (en-forcement agency model). Another aspectthat needs to be checked is the allocation ofauthority between local, regional and na-tional authorities at various levels, e.g.whether federal states, provinces or localauthorities can issue regulations, raisecharges, impose levies etc. The vertical andhorizontal distribution of authority is impor-tant e.g. for introducing tradable pollutionrights, if trading is confined to geographi-cally limited regions (bubbles), whichshould coincide with the regional authorityof the relevant institutions. Finally, it is alsonecessary to review which disposal andmonitoring systems are available, e.g.whether water meters or measuring stationsfor effluent and exhaust gases are installed

in industrial establishments.


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Criteria for evaluating environmental policy instruments

Environmental effectiveness,i.e. the measurable attainment of the environmental policy goals, depending on the environmentalproblems involved (e.g. reducing pollution or consumption of a resource). Another point to be con-sidered is whether there are incentives to reduce emissions below the minimum requirements.

Economic efficiency,i.e. a comparison between the microeconomic and macroeconomic costs of the various instruments fora given environmental impact. The review should cover both short-term and long-term considerations(e.g. cost savings through innovation) and also the question of whether the instrument will focus effortsat prevention on the points where they are most cost effective.

Administrative feasibilityThis is concerned with the modalities of introduction or implementation, their adaptation to existing (gov-ernment and non-government) institutional structures and the statutory permissibility of the instruments,e.g. cost of measurement, need for information, demand for trained staff, responsibilities of institutions,possibilities for decentralisation and self-help potential.

Public-sector costs and revenue,

arising out of the introduction and implementation of the instruments (e.g. costs of supervision, generaladministration, services and infrastructure). Directly imputable revenue e.g. from charges, levies ortaxes, should be offset.

Effects on distribution,i.e. the ability to implement the instruments vis--vis the polluters and the population generally, wheredifferent burdens or benefits accrue to individual groups.

3.4. Operational planning

A (preliminary) decision can be reached onthe choice of instruments based on context

analysis and comparative evaluation ofvarious instruments. To give these instru-ments operational form, further questionsmust be settled, a process illustrated herefor environmental charges:

reviewing existing property rights, stan-dards, etc;

determining the type of charge (emis-sion, product etc);

determining the basis for assessment(quantity of pollutant, concentration ofpollutant, use of raw materials, quantity

of output, etc); determining the level of charges (based

on average marginal prevention costs orcost of damage);

identifying additional needs in terms oftechnical infrastructure required for im-plementation;

estimating costs of introduction and im-plementation and revenue;

determining the group of payers (all pol-luters, certain groups of polluters, keyregions, manufacturers, dealers etc);

determining the uses of revenue (ear-marked or general budget);

identifying the need for change in exist-ing laws, regulations or codes;

determining monitoring, administrativeand collection procedures;

determining sanctions for violations;

determining organisational and ad-ministrative requirements for introductionand implementation;

determining transitional periods andstages in introduction;

consulting with all involved on the indi-vidual drafts;

determining announcement and infor-mation policy;

determining indicators for monitoring andevaluation.

It is not possible to describe the individualsteps in detail here. It is, however, clear thata substantial amount of planning and con-sultation is required. In many cases it willalso be necessary to invest in the technicalinfrastructure.


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3.5. Acceptance and feasibility

Anyone intending to implement market-based instruments of environmental policymust tackle the problems of acceptance

rooted in the political process and the inter-ests of individual actors. The introduction ofmarket-based instruments inevitably in-volves a substantial amount of communica-tion and consultation.

The following aspects are important in in-creasing the acceptance of market-basedinstruments among target groups and thegeneral public:

Market-based instruments act in ad-

vance of regulations, bans and possibleclosures; they accordingly help avoidbreaches and their economic and socialconsequences (loss of jobs and produc-tive capital).

Several price-related, market-basedinstruments (charges and taxes) tend toact degressively. On the other hand, en-vironmental problems involve substantialcosts which hit the poor populationgroups first and foremost.

All experience shows that technicalregulations do not lead to the most cost-

effective solution, as they inherently aimat unproductive end-of-pipe technologiesand neglect the potential for innovationor savings in integrated preventive tech-nologies. Wherever possible, proofshould be cited to show that market-based instruments tend to induce morecost-effective solutions in relation tocommand and control approaches.

Market-based instruments are frequentlyseen as additional costs and rejectedaccordingly. This can be eased throughgrandfathering and a stepwise (al-

though reliable) introduction. The adaptability of those affected must

be taken into account and promoted inintroducing market-based instruments.Besides gradual introduction, this can be

done e.g. through technological advice,information on existing methods of pre-vention (e.g. water conservation possi-

bilities for households, integrated envi-ronmental technologies in industry),promoting relevant technological devel-opments and possibly focused use ofsubsidies (limited durations as far aspossible).

Market-based instruments should beintroduced on the principle of first thingsfirst, i.e. in areas where the pressure ofproblems is greatest and most evidentdespite other environmental policymeasures.

Environmental reporting should be stra-

tegically expanded so that structural ef-fects of market-based instruments canbe demonstrated (technologicalchanges, structural changes etc).

Acceptance considerations may alsomake it advisable to use revenue frommarket-based instruments in dedicatedways, e.g. in environmental funds.

Wherever possible, strategic alliancesshould be sought and exploited, e.g. withsuppliers of environmental technology,exporters, trade unions, NGOs, scien-tists etc.

The actors affected should be involvedin all phases of planning and imple-mentation.

Acceptance problems affecting the use ofmarket-based instruments can be solvedmore easily where government environ-mental policy credibly implements the pol-luter pays principle and principle of pro-phylaxis. Empowerment of state and NGOenvironmental institutions is to some extenta requirement for solving acceptance prob-lems.


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3.6. Approaches and phases

It is of course important to take into accountthe specific status of environmental policy

debate in the developing country con-cerned. It can be helpful here to distinguishbetween the following phases:

preparation;

planning and selection of instruments;

implementation.The preparation phase is distinguished bythe fact that debate on the use of market-

based instruments is just beginning. Thereis vague interest on the part of individual

decision-makers in using market-basedinstruments, without however any concreteplanning. In this phase the following meas-ures can be useful in order to smooth thepath for a process leading to a revision ofthe environmental policy instruments andpossible increased use of market-basedinstruments.

Preparatory phase: possible activities

Commissioning of environmental economic studies by local research institutions and dissemination

of the results (possible topics: expenditure on environmental protection by industry and the publicsector; degrees of cost coverage in public services, evaluation of environmental damage, imple-mentation problems in environmental policy, environmental impact of growth and structural change,potential for energy or water conservation, economic evaluation of preventive environmental tech-nologies, environmental impact land codes, state of funding of state environmental institutions etc);

Channelling contacts with relevant research institutes in other countries, possibly twinning, i.e.concrete cooperation agreements;

Information visits to give multipliers the opportunity to acquaint themselves with experience in devel-oping and industrialised nations with the use of market-based instruments (target groups: decision-makers and middle management in government environmental institutions, scientists, NGOs, repre-sentatives of industry, journalists);

Creating forums for debate and working parties on environmental policy, with the involvement of themost important actors;

Organising national and international expert discussions, workshops and seminars in order to pres-ent models of and experience with market-based instruments;

Possible advisory services to the planning department in the environmental ministry and linking it toscientific institutes, NGOs, etc;

Assisting local champions; Analysing the environmental impact of economic and sectoral policies; Sending multipliers on relevant training and upgrading courses; Assisting with establishing relevant curricula and courses at universities in developing countries.

In the planning phase and when selectinginstruments, there are declarations of intentby the government or important non-governmental actors to integrate market-

based instruments into the range of envi-ronmental policy instruments. Measures

geared to preparation, communication andnetworking should be continued in thisphase. In addition, there are further techni-cal issues and responsibilities, the most

important of which are shown below:


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Phase of planning and selecting instruments: possible areas for advisory services

identifying priority environmental problems;

detailed formulation of environmental policy goals;

reviewing the institutional and legislative framework;

evaluating the current range of instruments; reviewing the requirements for the use of market-based instruments;

comparing instruments, selecting appropriate instruments;

operational planning for individual instruments;

possibly trials under pilot measures;

identifying the requirements (administrative, statutory, staffing, institutional, technological) for imple-mentation;

revising proposals after trials;

reviewing the impact on distribution and possible compensation measures;

clarifying feasibility and possible communications strategies.

In the implementation phase there are con-

crete plans for using market-based instru-ments. The emphasis in advisory servicesis on organising the decision-making proc-

ess and generating the framework condi-

tions needed for implementation. Particu-larly noteworthy are:

Implementation phase: possible areas for advisory services

organising expert discussions;

hearing the views of stakeholders;

inter-ministerial, cross-sectoral dialogues;

revising drafts;

creating the framework conditions for implementation (administrative, institutional, legislative, staff-ing, technical infrastructure);

creating the conditions for monitoring; designing and implementating communication strategies;

evaluating results.

All the measures and focal points listedhere are intended to illustrate possibilities.They must be given detailed form andadapted to local features on the basis of thespecific situation. One element of this in

individual cases must be to decide what theGerman contribution will be. As far as pos-sible, existing local expertise should beused and enhanced.


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4. Environmental policy planning and developmentcooperation

4.1. Policy planning and capacity development in the environment

In development cooperation practice, assi-stance in policy planning has always playeda special role. This role has been all themore important where assistance in policyplanning has moved away from the narro-wer sense of government-oriented advice toinvolving all relevant actors and so increa-singly taking on a political dimension. Envi-

ronmental policy planning should be seenas an element in what has recently becomeknown in international discussion as capa-city building, or (to get away from the phy-sical associations of the term) capacity de-velopment in the environment.

Capacity development in the environment

Generally, capacity in the environment is understood as the capability of a country to solve envi-ronmental problems at national or local level on its own for the purposes of sustainable development. Asan area of development cooperation capacity development in the environment (CDE) is concerned withtechnical improvements (e.g. resource-conserving land use, preventive environmental technology,environmental information systems) and also supports cross-cutting approaches such as the develop-ment of institutional structures institutional development in the environment (IDE). This covers bothorganisations with relevance for the environment (e.g. ministries, agencies, associations, self-help orga-nisations) and institutionalised regulation (e.g. legislation, environmental policy instruments and proce-dures).

The main goals of CDE approaches lie in the following interconnected areas:

availability of corresponding know-how and trained staff at all levels;

efficiency, functionality and collective capability of the organisations involved;

networks and cooperation between the various organisations;

effectiveness of environmental policy, regulatory mechanisms and integration of environmental con-siderations into the framework of economic and sectoral policy.

Technical cooperation agencies are pos-sible partners under development coop-eration for assistance in environmental po-

licy planning, where need has been statedfor the development of local capacity in thisarea. As a professional service, this form ofcooperation aims at providing advice topolitical decision-makers and actors in the

government and non-government sectorsinvolved in the political process (direct po-licy advice) or at helping build up planning

and implementation capacity (indirect policyadvice). The two variants are not mutuallyexclusive.

4.2. Target groups and stakeholders

Even more than other areas of cooperation,assistance in environmental policy planning

face a relatively large number of frequentlyopposed actors involved. This means that athorough study of the organisations andstakeholders involved, their positions and

interests, views and attitudes is a basicrequirement for achieving the goals of envi-

ronmental policy planning.


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InstitutionalStructures

Actors and Institutional Structures in the Environment

EnvironmentalOrganisations

AffectedPeople

Other Actors

Polluters,Resource

Users

Within a given (economic, social, political,ecological, international) environment, it isuseful to distinguish at least four types ofactors:

Polluters (e.g. industrial establishments,road-users, urban households) and re-source users (e.g. farmers, pastoralists,rural households).

People affected by environmental pro-blems, who may overlap with the pollu-ters or resource users (e.g. farmers, pa-storalists, village populations) but gene-rally constitute other groups (e.g. urbanand rural population relying on surfacewater for drinking-water supplies).

Environmental organisations acting as

implementing agencies or intermediariesfor environment-related legislation,procedures, standards etc. Dependingon the specific situation, there may be avery large number of these organisationsbecause of the frequent high degree offragmentation of responsibilities (e.g.environment ministries, subordinateagencies, other government and non-government bodies).

Other organisations and actors with in-fluence because e.g. they determine theframework for economic decision-

making (economic policy institutions) ordetermine the state of information andpublic opinion (media) etc.

Even this highly simplified overview of thestakeholders shows that changes in envi-ronment policy instruments can only hope tosucceed if the most important parties areinvolved from the start. The implication ofthis for planning and implementing pro-grammes under technical cooperation isthat detailed information on the structure of

the stakeholders and the organisationallandscape is required in every phase. Thisincludes analysis of the internal features ofindividual organisations and also covers

communication links between individualorganisations and actors.

The analysis of the parties involved is clo-sely related to the analysis of institutional

structures. This term is used here to coverall formal or informal structures which influ-ence environmentally relevant decisions byindividual actors (e.g. environmental legisla-tion, procedures, norms, standards, incenti-ves, but also including for example religiousvalues and economic policy regulations).Knowledge of these relationships and theirinteractions is essential for identifying therelevant actors and organisa-tions.

The question of which target groups andpartners are most suitable for cooperationwith regard to market-based instruments inenvironmental policy cannot be answered ingeneral terms. Whereas the long-term de-velopment objective should normally aim atthe polluters/resource users in terms ofseeking to change behaviour patterns (ex-ample: small-scale farmers use resource-conserving

Documents

Market Based Instruments of Environmental Policy in Developi