•
I*
VS.
nternational Experiences
with Economic Incentives
for Protecting the Environment
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EPA-236-R-04-001
November 2004
INTERNATIONAL EXPERIENCES WITH
ECONOMIC INCENTIVES FOR
PROTECTING THE ENVIRONMENT
NCEE*
NATIONAL CENTER FOR
ENVIRONMENTAL ECONOMICS
Office of Policy, Economics, and Innovation
Office of the Administrator
U.S. Environmental Protection Agency
Washington, q>C 20460
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International Experiences with Economic Incentives for Protecting the Environment
U.S EPA Headquarters Library
Mail code 3404T
1200 Pennsylvania Avenue NW
Washington, DC 20460
202-566-0556
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Executive Summary
EXECUTIVE SUMMARY
This report reviews experiences outside the United States with economic instruments for
managing the environment, including air and watej1 quality, water quantity, solid and hazardous
wastes. It represents an update and extension of one chapter in the 1997 report by Anderson and
Lohof to the US Environmental Protection Agency. That report found widespread use of
economic instruments for managing the environment, including some applications not observed
in the United States. Seven years later, this report identifies new instruments, more widespread
application of older instruments, and greater acceptance of incentive-based mechanisms in
environmental management. This report can also be regarded as an addition of international
experience to a 2001 EPA report on the US experience with using economic incentives and
follows the same basic organization.
Market Based Instruments (MBIs), and Economic Incentives (Els) more broadly, have a number
of advantages over traditional command and control (CAC) methods for controlling pollution.
One, these tools give those responsible for sources pf pollution (hereafter referred to as "sources"
or "polluters") an incentive to reduce pollution below permitted amounts when it is relatively
inexpensive to do so. That feature, in turn, provides a motivation for sources to become smarter
regarding pollution control options and costs. Technological improvement and innovation will be
stimulated, resulting in greater opportunities to reduce pollution at low cost. Finally, Els are
uniquely well suited to many of the pollution problems the world now faces. The more widely
dispersed and smaller the sources, the more difficult it is to rely on traditional CAC methods of
source-specific limits, inspections and enforcement. Els harness forces of the market to give all
sources, large and small, the motivation to find the least cost means of limiting their polluting
activities. In principle, environmental inspections and enforcement become less necessary as
sources pursue their own self-interest and control pollution. These features are especially
important in developing nations where resources to deal with pollution are severely limited.
Els also are widely used for allocating natural resources to competing users. Long ago, fanners
in England recognized the problem of communal grazing lands. Without charges to control use,
or fences to delineate private property, the common grazing lands were over grazed and
unproductive. Similarly, groundwater tables in muiy parts of the world are declining rapidly
because the water is free except for the cost of operating one's pump.
The guiding definition of Els for this paper is quite broad: any instrument that provides
continuous inducements, financial or otherwise, to encourage responsible parties to reduce their
releases of pollutants or make their products less polluting. This definition includes fees, charges
and taxes, charges on polluting inputs and outputs, tradable permits, subsidies, deposit-refund
systems, as well as reporting requirements, and liability for harms. Seme voluntary mechanisms
also are included.
Worldwide experience with these instruments is extensive, and a number of survey reports cover
portions of this topic. However, some instruments are discussed in detail for the first time in this
report. The intention is to offer some depth of treatment for a relatively few examples to provide
the reader with an understanding of how the instrument is designed and how it performs,
particularly in the context of developing nations. This report draws on other survey literature
that covers a portion of this topic, but seeks to avoid redoing their analyses.
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International Experiences with Economic Incentives for Protecting the Environment
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Conclusions
There is substantial evidence of growing use of economic instruments for managing the
environment. The 1997 report to EPA provides a useful benchmark against which to assess
changes. Not only are more countries applying economic instruments but also they are doing so
in a more sophisticated manner. Many problems from older applications have been corrected.
For example, charge rates have risen to more nearly cover the cost of water deliveries in several
nations.
Direct fees and taxes are the most used market mechanisms internationally, as was the case in
1997. These can affect environmental quality in two ways: first, they can directly affect polluting
behavior and the choice of inputs to firms and product purchases by households. Second they can
provide a source of revenue to pay for governmental oversight of environmental management or
to subsidize pollution control activities. Noteworthy trends for this category of instrument
include more applications and higher rates, as well as some acceptance in parts of the world
where charges heretofore have been difficult to implement. In several nations where it is socially
and politically unacceptable to use prices to allocate water, fees to pay for delivery costs are
slowly gaining acceptance.
Deposit-refund systems are little changed over the past seven years, both in terms of
applications and in deposit amounts.
Trading regimes are shifting to capped allowance systems from more open-ended mechanisms.
Marketable permits systems have gained greater acceptance worldwide, particularly for the
control of greenhouse gas emissions. New applications of marketable permits for conventional
pollutants in nations such as Chile, China and Slovakia are also noteworthy.
Greenhouse gas emission control is an important and rapidly growing application of economic
instruments. In 1997 just a handful of nations imposed carbon taxes. Now many more nations
rely on carbon taxes and greenhouse gas trading regimes are in place. One can now place buy or
sell orders in organized markets for the right to emit these gases.
Reductions in environmentally harmful subsidies are a noteworthy trend that has been
encouraged by international lending institutions. The World Bank and other leading lenders often
make the elimination of environmentally harmful subsidies a condition for lending. A related
phenomenon is an agreement by a group of large international banks active in lending to
developing nations. The banks agree not to lend for environmentally damaging projects.
Liability for harms caused to the environment is increasingly being used as a tool to limit
polluting and environmentally damaging activities. While cases of this type go back to the 19th
Century in England, only relatively recently have cases of environmental damage in developing
nations found a sympathetic hearing in the courtroom.
Information is used in many new applications, including product labeling, categorizing firms
according to their environmental performance, and disclosure of pollution releases.
Voluntary programs now exist in a host of programs to encourage firms to improve their
environmental performance. Much greater attention is also being paid to rewards that can be
offered in such programs. The one new category is liability, where a number of recent cases are
cited in which firms were ordered to pay compensation for damage to the environment.
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Executive Summary
Comparisons with the United States Experience
Among the incentives more widely used in forejign countries than in the United States are
environmental product labeling, differential taxation of motor fuels, effluent discharge fees,
charges on noise pollution and carbon taxes. Most industrialized countries have user fees for
municipal waste and water/sewage and deposit-refund systems for beverage containers. Water
user fees tend to be higher in Western Europe and lower elsewhere, with the notable exception of
Israel. Even in countries where water historically has been free, charges for water delivery are
now finding acceptance.
Market-based permit systems were found to be more common in the United States than
elsewhere in the 1997 EPA report. This situation, however, is evolving—for example, there are
many tradable permit systems now in use internationally.
User and pollution charges are more frequent than in the United States, and several such
charges appear to have incentive effects. Examples include Sweden's NOX emission charge,
water effluent charges in Germany and the Netherlands, product charges in Norway, waste
charges in Denmark and Korea, and water user or extraction charges in Australia and several
Asian countries. Water charges vary widely throughout the world. Higher charges go hand in
hand with lower demand. Per capita consumption in Alexandria Egypt, where water is heavily
subsidized, is about 550 liters per day, whereas in Germany, where water is now relatively
expensive, per capita consumption is less than 140 liters per day.
While many user and pollution charges are primarily revenue raising mechanisms, some
countries, including Denmark, Finland, the Netherlands, Norway, and Sweden, have attempted to
incorporate environmental considerations into the design of their taxation systems in an effort to
shift the tax burden from labor and capital to the use of natural resources.
Cash subsidies for pollution control investments appear to be more generous in Europe than in
the United States and many developing nations ajlso offer such incentives. An important new
development concerns lending assistance for industrial projects. Signatories to the Equator
Principles agree to lend to only to industrial developments that employ cleaner technologies and
for public projects that are not damaging to the environment.
Product charges are found to be principally revenue-raising instruments with little incentive
effect, attributable primarily to the low level of the charges. Moreover, some charges are not
closely linked to waste generation or product consumption. However, some of the product
charges described in mis section, such as fertilize]] taxes and the preferential taxation of cleaner
motor fuels, do appear to have significant incentive! effects.
With the trends already firmly in place and acceptance growing, the future looks bright indeed
for additional use of economic incentives for managing the environment.
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International Experiences with Economic Incentives for Protecting the Environment
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IV
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Table of Contents
Table of Contents
1. Introduction .....1
1.1 Purpose and Relation to Earlier Reports j 1
1.2 Definition of Economic Incentives 2
1.3 Types of Economic Incentives Discussed 3
1.3.1 Fees, Charges and Taxes 3
1.3.2 Deposit-Refund Systems 3
1.3.3 Pollution Trading Systems 4
1.3.4 Subsidy Systems 1 4
1.3.5 Information Disclosure 5
1.3.6 Liability 5
1.3.7 Voluntary Mechanisms 6
1.4 Organization of the Report 6
2. Charges, Fees and Taxes , 7
2.1 Pricing Mechanisms for Water ', 7
2.2 Industrial Effluent Fees 9
2.2.7 France 9
2.2.2 Germany 10
2.2.3 The Netherlands 10
2.2.4 Malaysia //
2.2.5 Philippines 12
2.2.6 China 13
2.2.7 Other Developing Countries 15
2.3 Air Emission Fees 16
2.3.1 Japan 16
2.3.2 France 16
2.3.3 Sweden 16
2.3.4 China 18
2.4 Municipal and Other Waste Charges 18
2.5 Product Charges 20
2.6 Preferential Taxation of Environmentally Friendly Products and Activities 21
3. Deposit Refund Systems and Performance Bond|s 23
3.1 Deposit-Refund Systems 23
3.1.1 South Korea 23
3.1.2 Yukon Territory, Canada 24
3.1.3 Germany 25
3.1.4 Automobile Body Deposits 25
3.2 Performance Bonds i 25
4. Trading Mechanisms 27
4.1 Trading of Air Emission Rights 27
4.1.1 Particutate Tradingin Santiago Chile 28
4.1.2 SO<2 Trading in Slovakia 29
4.1.3 Emissions Trading in China 29
4.1.4 Ontario Canada Pilot Emissions Reduction Trading 30
4.1.5 NOx Trading in the Netherlands 30
4.1.6 EU Greenhouse Gas Emissions Trading 30
4.2 Tradable Salinity Credits in Australia 30
4.3 Tradable Water Rights 31
4.3.1 Australia 31
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5.
4.3.2New Zealand 31
4.3.3 Chile 31
Subsidies. 33
5.1 Subsidies for Improving the Environment 33
5.2 Subsidies for Environmentally Friendly Agriculture and Land Management 33
5.3 Subsidies for Resource Conservation 35
5.4 Environmentally Harmful Subsidies 35
5.4.1 Developing Countries 35
5.4.2 OECD Review 36
5.4.3 International Lending: The Equator Principles 36
6. Liability 39
6.1. Ok Tedi Mine, Papua New Guinea 40
6.2. Yanacocha Mine, Peru 42
6.3 Coral Reef Damage Assessments 43
6.3.1 Egypt 43
6.3.2 Puerto Rico 43
6.3.2 Australia 44
7. Information Provision 45
7.1. Performance Rating of Firms 45
7.1.1. Indonesia 45
7.1.2. Philippines 45
7.2. Pollutant Release and Transfer Registers (PRTR) 46
7.3 Product Labeling 46
8. Voluntary Agreements 50
8.1 Covenants and Agreements 50
8.2 Industrial Estates and Eco-Industrial Parks 50
8.2.1 Kalundborg, Denmark 50
8.2.2 Nanhai, GuandongProvince, China 51
8.3 Waste Exchanges 52
9. Conclusions ....53
Bibliography 57
About the Report 61
Endnotes 63
List of Tables
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Table 2.1. Incremental Water Use Charges 8
Table 3.1. South Korea 24
Table 3.2. Yukon Deposit and Refund Rates 24
Table 5.1. Environmental Subsidies in Asia 34
Table 7.1. Summary of Environmental Product Labeling Programs 47
Table 7.2. Korean Ecomark Criteria 48
Table 9.1. Economic Instruments for Managing the Environment 54
M
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List of Acronyms
List of Acronyms
ADF Advance Disposal Fee
BAPEDAL Indonesian Environmental It ipact Management Agency
BOD Biochemical Oxygen Demar d
C$ Canadian Dollar (currency unit)
CAC Command and Control
CAO Compliance Advisor Ombudsman
CERCLA Comprehensive Environmental Response Compensation and Liability Act
CFC Chlorofluorocarbon
CO Carbon Monoxide
COa Carbon Dioxide
CRAES Chinese Research Academy for Environmental Science
DENR Department of Environment and Natural Resources
Dfl Dutch Florin or guilder (currency unit prior to the Euro]
DKr Danish Krona (currency unit)
ECU European Currency Unit (a precursor of the Euro)
El Economic Incentive
EIP Eco-industrial Park
EPA Environmental Protection Agency
EPB Environmental Protection Bureau
EU European Union
EUR Euro (currency of the European Union)
F French Franc (currency unit)
GWH GigawattHour
GOE Government of Egypt
HIID Harvard Institute for International Development
IFC International Finance Corporation
Kc Ceska Koruna or Czech crown (currency unit)
LLDA Laguna Lake Development Authority
MBI Market Based Instruments
MJ Megajoules
Mk Finnish Markka (currency unit)(
MW Megawatt
MWH Megawatt Hour
NGO Nongovernmental Organization
NK Norwegian Krone (currency unit)
NOAA National Oceanic and Atmospheric Administration
NOX Nitrogen Oxides
NPDES National Pollution Discharge Elimination System
OECD Organization for Economic Cooperation and Development
OTML Ok Tedi Mining Limited
PER Perchloroethylene
PLC Pollution Levy System
PNG Papua New Guinea
PROPER Program for Pollution Control, Evaluation, and Rating
PROKASIH Indonesia's Clean Rivers Program
PRN Package Recovery Note
PRTR Pollutant and Transfer Registers
PSR Performance Standard Rates
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International Experiences with Economic Incentives for Protecting the Environment
RES A Restated Supplemental Agreement Act
RM Malaysian Ringgit (currency unit)
SEK Swedish Krona (currency unit)
SEPA Swedish Environmental Protection Agency
S Austrian Schilling (currency unit)
S02 Sulfur Dioxide
SOE State-Owned Enterprises
TCE Trichioroethylene
TL Turkish Lira (currency unit)
TSS Total Suspended Solids
TVE Township and Village Enterprises
US United States
US$ United States dollar
UNCED United Nations Conference on Environment and Development
UNEP United Nations Environment Programme
USEPA United States Environmental Protection Agency
VOC Volatile Organic Compound
WHO World Health Organization
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Introduction
1. Introduction
1.1 Purpose and Relation to Earlier Reports
This report reviews worldwide experiences witi economic instruments for managing the
environment, including air and water quality, wate • quantity, and solid and hazardous wastes. It
represents an update and extension of one chapter in a 1997 report to the US Environmental
Protection Agency.1 That report found widespread ijise of economic instruments for managing the
environment, including some applications not observed in the United States. Seven years later,
this report identifies new instruments, more widespread application of older instruments, and
greater acceptance of incentive-based mechanisms in environmental management. This report
can also be regarded as an addition of international experience to a 2001 EPA report on the US
experience with using economic incentives2 and follows the same basic organization.
Because the definition of economic incentives used here is quite broad, a great many instruments
and programs potentially could have been included in this review. Worldwide experience with
these instruments is extensive, and a number of survey reports cover portions of this topic.
However, several instruments are discussed in detail for the first time in this report and the
coverage of developing country experiences is more! extensive than found elsewhere.
Worldwide experience with these instruments is ex ;ensive, and a number of survey reports cover
portions of this topic. The intention here is to offer some depth of treatment for a relatively few
examples of particular interest. The examples cover a broad range of instruments and a broad
range of countries, discussing several of these instruments for the first time. The intent is to
provide the reader with an understanding of how the instrument is designed and how it performs,
particularly in the context of developing nations. This report also draws on other survey literature
to provide a breadth of treatment, but seeks to avoid redoing their analyses:
• OECD reports on economic instruments and environmental funds,3
• Regional Economic Center (for nations of Central and Eastern Europe),4
* Harvard Institute for International Development review of Chinese experiences,5
• World Bank survey of experiences in Latin America,6
• A 2002 survey by the Nordic Council,7
• Asian Development Bank reports on the use off economic instruments in the Philippines and
Indonesia,
• A survey of experiences with economic instruments for managing the environment in
Australia,9
• A book on Policy Instruments for Environmental and Natural Resource Management,!0 and
• A book comparing approximately twelve economic incentives used in environmental
management in the US and in Europe."
* Articles by Pearce and Stavins that explore the advantages and limitations of economic
incentives for managing the environment.
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International Experiences with Economic Incentives for Protecting the Environment
1.2 Definition of Economic Incentives
The guiding definition of economic incentives (Els) for this paper is quite broad: any instrument
that provides continuous inducements, financial or otherwise, to encourage responsible parties to
reduce their releases of pollutants or make their products less polluting.12 In essence, with
incentives sources view each unit of pollution as having a cost, whereas under more traditional
regulatory approaches pollution may be free or nearly so once regulations have been satisfied.
These incentives provide monetary and near-monetary rewards for polluting less and impose
costs of various types for polluting more, thus supplying the necessary motivation to polluters.
Such an approach can influence the polluting behavior of small firms, farms, and consumers, all
of whom are difficult to address through traditional command and control measures. Incentives
also can be used to motivate polluters to improve upon existing regulatory requirements.
Included within the definition of economic incentives for managing the environment are
• pricing mechanisms, including fees, charges and taxes, for application to air pollution,
water pollution and solid waste
• deposit-refund systems to encourage recycling or the proper disposal of the product as
well as performance bonds, which also may be viewed as deposits with subsequent
refunds
• pollution trading systems
• subsidy systems, including grants, low-interest loans, favorable tax treatment, lending
practices of international banks, and preferential procurement policies for products
believed to be environmentally friendly
• liability as a mechanism for compensating victims when sources release pollution that
causes harm to human health and the environment and also as a mechanism for
encouraging sources to comply with existing environmental regulations
• information disclosure that can affect the polluting behavior of firms and product
purchase decisions by consumers
• voluntary measures and non-monetary rewards through which governments encourage
firms and individuals to improve their environmental performance
Market based instruments (MBIs), which include the first four of the above approaches, and Els
more broadly, have a number of advantages over traditional command and control (CAC)
methods for controlling pollution. One, these tools give those responsible for sources of pollution
(hereafter referred to as "sources" or "polluters") an incentive to reduce pollution below
permitted amounts when it is relatively inexpensive to do so. That feature, in turn, provides a
motivation for sources to become smarter regarding pollution control options and costs.
Technological improvement and innovation will be stimulated, resulting in greater opportunities
to reduce pollution at low cost. Finally, some Els such as fees and information disclosure are
uniquely well suited to many of the pollution problems the world now faces. The more widely
dispersed and smaller the sources, the more difficult it is to rely on traditional CAC methods of
source-specific limits, inspections and enforcement. Els harness forces of the market to give all
sources, large and small, the motivation to find the least cost means of limiting their polluting
activities. In principle, environmental inspections and enforcement become less necessary as
November
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Introduction
sources pursue their own self-interest and control pollution. These features are especially
important in developing nations where resources to deal with pollution are severely limited.
Els also are widely used for allocating natural resources to competing users. Long ago, farmers
in England recognized the problem of communal grazing lands. Without charges to control use,
or fences to delineate private property, the common grazing lands were over grazed and
unproductive. Similarly, groundwater tables in many parts of the world are declining rapidly
because the water is free except for the cost of operating one's pump.
1.3 Types of Economic Incentives Discussed
Each of the types of Els listed above has particular characteristics, which are described in this
section.13
1.3.1 Fees, Charges and Taxes
From the perspective of sources that are subject to environmental fees, charges, and taxes, these
three terms are largely interchangeable in terms i of their effects. They all require that the
generator of a designated type of pollution pay a fee (or charge or tax) for each unit of pollution.
These fees make attractive tools for managing the environment because they attach an explicit
cost to polluting activities and because sources can easily quantify their savings if they reduce
the amount of pollution they emit. One disadvantage is that fees do not guarantee the amount by
which a source would reduce pollution.
Pollution-related fees, charges, and taxes are widely collected at all levels of government, and
they are one of the most prevalent economic incentives in use today. Although fees can generate
substantial revenues for the government agency that imposes them, they tend to be set at rates
too low to have a significant impact on pollution. Some important exceptions are noted in this
report, notably effluent fees in Germany, the Netherlands and into Laguna Lake in the
Philippines; chlorofluorocarbon (CFC) emission fees in Norway; and nitrogen oxide (NOX) and
sulfur dioxide (862) emission fees in Sweden.
Environmental fees may not be able to target pollution directly. For example, there are no taxes
on automobile emissions. Taxes on gasoline and taxes on cars can be used to address automobile
emissions indirectly (Fullerton) and consequently are a second-best solution. The use of fee
revenues also can affect environmental quality as demonstrated in the earmarking of pollution
levy receipts in France and China for use in pollution control.
1.3.2 Deposit-Refund Systems
Deposit-refund systems require a monetary deposit at the time of sale of a product. The deposit is
returned when the item is returned at the end of its useful life. Unlike the other instruments
reviewed in this report, deposit-refund systems sometimes originate within the private sector and
do not always require government mandates. Worldwide, deposit systems are applied to help
control the disposal of lead-acid batteries, to products such as beverage containers, pesticide
containers, tires, and automobile bodies, and to other consumer products. When used products
are valuable, as is currently the case for lead-acid Batteries, the private sector often creates and
manages a disposal system. Regardless of who manages the disposal of such products, the fees
charged by this system help subsidize the return of recyclable products.
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International Experiences with Economic Incentives for Protecting the Environment
Deposit-refund systems appear to be most appropriate for discrete, solid commodities such as
beverage containers, batteries, and car bodies that would cause environmental harm through their
improper disposal. Government-mandated deposit systems for less discrete substances, like air
and water pollutants, have not been attempted. One factor that limits the widespread use of
deposit-refund systems is their high transaction cost. Collecting and refunding deposits on the
sale of individual products such as beverage containers tends to be expensive, and additional
costs are involved in collecting and returning used products for disposal.
1.3.3 Pollution Trading Systems
There are two distinct types of trading systems in rights to pollute: cap-and-trade systems and
credit systems. Cap-and-trade systems have a limit on the total amount of allowed releases of
pollution. They seek a specific environmental result; trading allowances to release pollution is
simply an option to minimize the cost of achieving the emission reductions specified in the
regulatory cap on emissions. In the cap-and-trade approach, allowances for future emissions are
sold or granted to existing sources.
Credit systems, on the other hand, do not establish any fixed ceiling on total emissions. Total
emissions can increase if new sources of pollution enter the market of if existing sources increase
production. In uncapped systems, tradable credits are earned for controlling pollution beyond
what is specified in one's permit.
Trading programs have certain features that have made them increasingly popular in such diverse
locations outside the United States as Australia, Chile, China, and Slovakia. In a trading
program, innovative, entrepreneurial companies can profit from low-cost reductions in
emissions. Slower, less innovative firms can benefit as well by having the opportunity to
purchase needed emission allowances for less than it would cost them to comply internally.
Finally, cap-and-trade programs can provide great certainty about the magnitude of
environmental improvement that will be achieved.
At the same time, trading programs may have several drawbacks, including the potential for high
transaction costs and inactive markets, especially in credit or open-market systems. High costs
can be attributed to the need to verify each reduction before authorizing the credit. Clearly,
trading programs should not be applied to all environmental problems. The long-term effects of
trading programs on technical innovation vary from program to program. Some have spurred
considerable innovation, such as the U.S. acid rain program, while others have not due to high
transaction costs.
1.3.4 Subsidy Systems
Subsidies to support reductions in pollution take many forms. Among the many subsidies that are
used at all levels of government to help manage environmental pollution are grants, low-interest
loans, favorable tax treatment, and preferential procurement policies for products believed to
pose relatively low environmental risks. Subsidies are used to support private-sector pollution
prevention and control activities, the cleanup of contaminated industrial sites, farming and land
preservation, consumer product waste management, alternative automobile fuels, clean-running
cars, and municipal wastewater treatment. Subsidies also can result in harmful environmental
effects. In this regard, subsidized water and energy and assistance to farmers are often cited as
examples.
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Introduction
Subsidies for environmental management are sometimes criticized because the government
entity providing the subsidy—and the taxpayer ultimately—is helping to bear the costs that
should be the responsibility of the polluter. Moreover, when products or activities are subsidized,
consumers act on price signals that do not reflect the full costs of production, in the end
consuming more than they otherwise would and causing harm to the environment. For example,
water subsidies in Egypt encourage the cultivation of rice and sugarcane and discourage
individuals from repairing leaking plumbing. By the time it reaches the Mediterranean the Nile is
heavily polluted and its flow is reduced to a trickle.
!
1.3.5 Information Disclosure
The collection and public availability of information on environmental performance has proven
to be a strong incentive for sources to reduce their emissions of pollution. The incentive derives
from a number of factors. For example, when companies collect emissions information, they
learn about the nature and magnitude of their emissions. When such information is made easily
accessible to the public, workers and local corpmunities have a much better idea of the
environmental risks they face, so they are more prone to support or demand actions to reduce
emissions. When a source's emissions are shown to decline over time, the source often reaps the
benefits of better relationships with its employees and with the local community. Finally, in
some cases a proven, long-term record of environmental stewardship makes a company's
products more desirable to consumers.
The disclosure of environmental performance information is much more common today than a
decade ago. The rating of firms' environmental performance is gaining in popularity, with
ongoing programs in Indonesia and the Philippines and pilot programs in a number of other
countries. Public reporting of the storage, release atid disposal of toxic chemicals is required in
nearly a dozen nations. Product labeling regarding recycling and other environmental attributes
also is gaining acceptance worldwide.
1.3.6 Liability
The possibility of being held legally responsible for health or environmental damages can a
powerful incentive for sources to reduce or avoid pollution. Some cases in U.S. jurisdiction have
cost those responsible hundreds of millions of dollars or even billions in one case. With potential
costs of this magnitude, sources have a powerful incentive to minimize their legal exposure.
Consequently, expensive technologies that control pollution or aggressive environmental
management systems can seem very reasonable to sources.
Liability mechanisms are a part of both civil and common-law systems, and can include both
criminal and civil (non-criminal) sanctions. Many (environmental statutes worldwide have civil
liability provisions, though environmental liability actions in developing countries are relatively
rare. Weak implementation of the law in developing countries is one problem. Another problem
is jurisdiction: whether a case should be brought iri the developing country where the damage
occurred or in the home country of the firm responsible for the damage. As the examples here
suggest, there is no universal rule regarding jurisdiction. Generally, plaintiffs attempt to have
cases heard in the home country of the responsible firm where awards are likely to be higher.
While the norm in developing countries is that individuals harmed by spills are not compensated
due to unclear liability rules or inadequate financial guarantees prior to the start of operations,
some large awards in recent years are certainly garnering worldwide attention.
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International Experiences with Economic Incentives for Protecting the Environment
1.3.7 Voluntary Mechanisms
Although government programs that encourage sources to reduce pollution on a voluntary basis
were virtually unheard of 20 years ago, they have become one of the fastest growing
environmental management tools. Noteworthy examples include the use of negotiated
agreements between industry and government in the Netherlands and Japan, eco-industrial parks
in many nations, and waste exchanges.
There are a number of reasons why voluntary reductions in pollution are proving more and more
popular with sources, and they are related to the incentives associated with information
disclosure. When sources voluntarily reduce pollution and their employees, neighboring
communities, and customers learn about it, sources gain several benefits. Voluntary actions taken
by sources often reduce employees' exposure to harmful pollutants, thus lessening sources'
liability and improving their relationship with labor. Sources enjoy better relations with
neighboring communities, and a reputation for good environmental stewardship may attract more
customers for their products. In some cases, sources also save money by taking these actions.
Moreover, sources that join voluntary partnership programs can be eligible for various kinds of
technical assistance from sponsoring government agencies.
1.4 Orga nization of the Report
The remainder of this report is organized into eight chapters corresponding to the general types
of economic incentives discussed above and in the same order as used in USEPA (2001):
Chapter 2 examines pricing mechanisms, including fees, charges and taxes, for application to air
pollution, water pollution and solid waste.
Chapter 3 considers deposit-refund systems to encourage recycling or the proper disposal of the
product as well as performance bonds, which also may be viewed as deposits with subsequent
refunds.
Chapter 4 covers pollution trading systems.
Chapter 5 discusses subsidy systems, including grants, low-interest loans, favorable tax
treatment, lending practices of international banks, and preferential procurement policies for
products believed to be environmentally friendly. The chapter also considers the adverse impacts
of subsidies that harm the environment.
Chapter 6 addresses the use of liability as a mechanism for compensating victims when sources
release pollution that causes harm to human health and the environment and also as a mechanism
for encouraging sources to comply with existing environmental regulations.
Chapter 7 reviews the impact that information disclosure may have on the polluting behavior of
firms and product purchase decisions by consumers.
Chapter 8 looks at a variety of voluntary measures through which governments encourage firms
and individuals to improve their environmental performance.
Chapter 9 offers several observations and conclusions.
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2. Charges, Fees and Taxes
Charges, Fees and Taxes
*
Fees, charges and taxes are the most commonly used economic instrument for environmental
management in the international context. Generally such fees are set at relatively modest levels
and used to raise revenues to cover the costs of prpgram administration (or other purposes) and
incentive effects are limited. A few noteworthy exceptions exist in which the primary purpose of
environmental fees is to control emissions or effluerit.
i
2.1 Pricing Mechanisms for Water
According to a 1999 report from the Organization for Economic Cooperation and Development,
there is a clear trend toward market pricing for water in OECD nations, with many reporting
increases in the real price of water during the 1990s. In the case of industrial users, water fees are
usually based on quantities of water consumed. W|ater charges for residential consumers are set
at flat rates in some areas and based on amounts consumed in others. Agricultural users often pay
according to the land area under irrigation, however there are some efforts to impose volume-
based charges. In other parts of the world, howjever, water is supplied free of charge. Not
surprisingly, higher charges go hand in hand with lower demand. Per capita consumption in
Alexandria Egypt, where water is heavily subsidized, is about 550 liters per day, whereas in
Germany, where water is now relatively expensive, per capita consumption is less than 140 liters
per day.
Consumption-based rates are more likely to influence water use than flat rates, but relatively
large price increases might be needed to induce changes in consumer behavior. A number of
studies have found water consumption to be negatively related to unit-based prices. In 1982, for
example, the Hunter and District Water Board in Australia replaced its fixed-rate pricing system
with a pay-for-use system.14 Water consumption subsequently declined by 20-30%, a decline that
allowed the deferral of some water supply construction projects. Xenos et al. conclude that
increases in water prices in Athens before and after 1990 led to significant decreases in water
use. Although some of the decreases have been attributed to public education campaigns, the
price increases have also been credited with significant incentive effect. The Regional
Environmental Center reported that in the Czech and Slovak Republics, increases in water
charges since 1991 have led to significant declines in water consumption. In Bogor, Indonesia,
water rates were increased by 200-300% in 1988 and a conservation campaign was implemented
in 1989.15 Domestic and commercial water use fell by 30% within nine months. This implies a
price elasticity of demand of -0.10 to -0.15. An esbalating block rate tariff in Hermanus, South
Africa imposed in 1996-1997 succeeded in balancing limited supplies with rising demands.16
Water charges are imposed for the cost of treating ^nd delivering water to agricultural, industrial
and household users. Dinar and Subramanian recently completed a survey of water charges in 22
nations some of which were developed and others are still developing. The results of that survey
are summarized in Table 1, supplemented by data for additional countries from the World Bank
web site. Industry generally pays the highest fees, followed by households, and agricultural users
typically pay the lowest rates. A tremendous variation in rates charged is observed, however
neither the state of development nor the availability of water appears to explain observed
patterns.
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Table 2.1. Incremental Water Use Charges
(1996, in US$s per cubic meter)
Country
Algeria
Australia
Botswana
Brazil
Canada
Egypt
France
India
Israel
Italy
Jordan
Lebanon
Madagascar
Morocco
Namibia
New Zealand
Pakistan
Portugal
Spain
Sudan
Taiwan
Tanzania
Tunisia
Uganda
United States
United
Kingdom
Agriculture
0.019-0.22
0.0195
0.0042-0.032
0.0017-0.0019
0.11-0.39
0.16-0.26
0.0038-0.028
0.0095-0.0193
0.0001-0.028
0.020-0.078
0.0124-0.0438
Domestic
0.057-0.27
0.23-0.54
0.28-1.48
0.040
0.34-1.36
0.03-0.07
0.36
0.0095-0.082
0.36
0.14-0.82
0.23
0.32
0.325-1.75
0.53
0.22-1.38
0.31-0.69
0.06-0.10
0.1526-0.5293
0.0004-0.0046
0.08-0.10
0.25-0.42
0.062-0.241
0.096-0.529
0.38-0.59
0.40-1.50
0.0095-0.0248
Industry
4.67
7.82
0.17-1.52
0.40-0.90
0.136-0.290
0.26
0.38-0.97
1.19
0.0004-0.0046
0.08-0.10
0.261-0.398
0.583
0.72-1.35
Source: Dinar and Subramanian and other sources.
Charges on surface and groundwater abstraction (withdrawal) differ from the water supply
charges described above in that they can be regarded as taxes on the use of a natural resource
rather than payments for services provided. Charges on surface and groundwater use have been
imposed in several countries, including France, Spain, the Netherlands, and Denmark.17 The
Netherlands imposes a ground water tax of 0.15 EUR ($0.14) per cubic meter, while Denmark
imposes a tax on household and some service sector water users of 0.84 EUR ($0.72) per cubic
meter. Both of these charge levels are thought to be high enough to influence behavior.
Wastewater discharges are not directly metered in most jurisdictions; rather they are assumed to
be equal in volume to water consumption, which is measured. Some discharge fees for larger
businesses are based not only on water use but also on discharge toxicity, which provides them
with a separate incentive to reduce the toxicity of their discharges.
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Whether a water user fee has a greater effect in terms of raising revenue or reducing a potentially
polluting activity depends largely on the elasticity of the demand for water, that is whether
demand is responsive to changes in price. If the demand is inelastic, an increase in user fees will
principally raise revenue, but will not affect cot sumption behavior in a significant way. If
demand is elastic, however, consumption behavior is likely to be changed by a water fee, but the
revenue-raising prospects are limited. Although w^ter demand is often assumed to be inelastic,
studies that separate water demand by season have found that household water demand is
inelastic in winter but elastic in summer. Others have found that water demand by industrial and
agricultural users is sensitive to price changes. To promote water conservation, some
jurisdictions have rate schedules that impose higher rates as use increases.
2.2 Industrial Effluent Fees .
This section describes effluent discharge fees systems found in France, Germany and the
Netherlands, as well as in several developing nations. The intent here is to describe systems
where fees are set high enough to have a positive impact on environmental quality. Many
effluent fee systems in Europe and the former Soviet Union impose very modest fees with the
primary objective to raise revenue to recover administrative costs, not to improve environmental
quality.
2.2.1 France
France's six river basin authorities have been levying effluent charges since 1968. Each river
basin has a committee and an agency, with the committee functioning tike a parliament and the
agency as an executive body. Each river basin boarq sets its own charge rates annually, subject to
approval by the basin committee. Levies now total about 1.1 billion Euros annually.
The original basis for France's effluent charge was weight of suspended matter and weight of
organic matter, since these two pollutants were relatively easy to detect and control. Charge
parameters were later expanded to include salinity (1973), toxicity (1974), nitrogen and
phosphorus (1982), and halogenated hydrocarbons, toxics, and other metals (1992). Discharges
are estimated based on the emissions class and activity level of the discharger or, in the case of
municipalities, on the basis of population and daily discharge per inhabitant. The basin
authorities and dischargers may request actual measurement, the costs of which are borne by
whoever makes the request.
The charge applies to all municipalities with more than 400 inhabitants and to all non-municipal
facilities discharging at least 200 population equivalents a year. For facilities connected to a
public sewage system, the charge applies only if discharges exceed 6,000 m3 per year.
It is not clear to what extent the charges have discouraged pollution since the charges are
designed primarily as revenue-raising instruments.18 Charge levels are based not on perceived
environmental costs of discharges but rather on thle revenue needs of the river basin authority.
The effluent charges, as well as fees for extracting
that are used mainly to finance water pollution c
ground and surface water, generate revenues
jntrol investments by farmers, industry, and
t
municipalities. Some of the assistance takes the ftorm of low-interest loans, but most of it is
grants that usually cover 30%-50% of the total cost of a given investment.
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2.2.2 Germany
Based on the 1976 Federal Effluent Charge Law, effluent charges have been collected by
German states (Lander) since 1981. Although collection is left to the states, the charge
calculation rules, charge amounts, and damage unit parameters are determined at the federal
level.19 German states do not have the autonomy to set effluent charges that U.S. states have in
setting the NPDES permit fees.
Effluent charges for point sources are based on "damage units" dependent on quantities and types
of pollutants and set to reflect actual costs of treatment. One damage unit is defined as 50kg
organic matter, 3kg phosphorus, 25kg inorganic nitrogen, 2kg halogenated hydrocarbons, 20g
mercury (and compounds), lOOg cadmium (and compounds), 500g chromium, nickel or lead
(and compounds), 1kg copper (and compounds), or 3,000m3 of wastewater divided by the
dilution factor by which the waste water must be diluted in order to lose its acute toxic effect on
fish.20 Separate assessment methods are used for stormwater and for discharges from inhabitants
not connected to the sewage system.
Charge assessment is based on discharges allowed in state-issued permits. Dischargers without
permits or with permits lacking discharge limits pay charges based on their declared discharges.
Charges are raised if permitted discharge limits are exceeded. Most monitoring is left to polluters
with random spot checks by the authorities. However, if a polluter declares in advance that its
discharge levels will be at least 20% below levels allowed in its permit over a period of at least
three months, the charge is assessed on the basis of the projected reduced discharge level.
The charge amounts can be reduced in several ways. If a discharger uses Best Available
Technology for hazardous pollutants and Generally Agreed Technology Standards for non-
hazardous pollutants, its charge per damage unit is reduced by 75%. In addition, investments in
treatment facilities are rewarded by reduced charges for a period of three years prior to
completion of the new facility, provided that the facility will reduce pollution by at least 20%. In
2002, the average fee for wastewater discharge was 2.24 Euros per cubic meter, which equates to
an average annual cost of 117 Euros per person. Significant increases in inflation-adjusted
wastewater fees over the past 15 years have led to considerable technical innovation in water-
saving dishwashers, washing machines and toilets.21
2.2.3 The Netherlands
Bressers shows that effluent charges in the Netherlands, which were introduced in the 1970
Pollution of Surface Waters Act, likely had a significant incentive effect on polluters, despite the
fact that the fees were designed principally to finance effluent treatment rather than an effort to
influence the magnitude of discharge. For discharges into federal waters, charges are imposed
and collected by the federal government. For discharges into regional waters and into sewerage,
charges are imposed and collected by regional water boards, which are also responsible for
building and operating wastewater treatment plants. Regional charges are the same for indirect as
for direct discharges and vary by region according to the costs of treating wastewater.
Monitoring is the responsibility of polluters with occasional verification by government
authorities.
Charge revenues have risen significantly since they were first introduced, and are sufficient to
cover nearly all wastewater treatment plant construction and operation costs. The cost of
administering the program has been estimated at 3.5% of revenues. Charges are based on
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pollution units. For oxygen-consuming substances, a pollution unit is defined as the average
amount of oxygen-consuming material produced by one person in one day, which is further
defined as 136g of oxygen-producing material. For heavy metals discharged into federal waters,
one pollution unit is defined as lOOg of the sum of mercury, cadmium and arsenic, and l,000g of
the sum of copper, zinc, lead, nickel and chromium.!
For charge assessment purposes, there are three groups of dischargers:
1. For households and businesses generating fewer than 5 pollution units per day, charges are
usually fixed at 3 pollution units. This group accounts for about 65% of charge revenues.
2. For dischargers of 5 to 1,000 pollution units (in some industries, the maximum is 100
pollution units) of organic pollutants per day, charges are determined by combining an industry
coefficient with easily obtainable data such as water use and amounts of raw materials. Facilities
that believe they are being overcharged can, at their own expense, conduct sampling and
measurement and be charged according to the findings. This group contributes approximately
15% of charge revenues.
3. Industrial facilities and municipal sewage treatment plants generating more than 1,000
pollution units per day of organic pollutants or mo^e than 10 pollution units of heavy metals are
charged according to actual discharge, which they are expected to measure. Municipal treatment
plants are not charged for discharges into regional waters and pay a reduced rate for discharges
into federal waters. This group accounted for approximately 20% of charge revenues.
The first two groups face a pollution charge that is not directly linked to pollution. The third
group, however, faces pollution charges directll linked to the quantity of pollution they
discharge. For this group, the effluent fees are believed to have a significant effect on the
quantity of pollution discharged.
2.2.4 Malaysia
Palm oil and rubber factories in Malaysia have been subject to a variable fee for BOD
discharge.22 For land discharges, the fee is purely] volumetric; for water discharges, the fee is
based on quantity of BOD discharged and varies with BOD concentrations. The fee is two-
tiered: a low level up to the concentration standard, and a higher level above the standard. There
is a minimum fee of Malaysian Ringit (RM) 150; charges are RM 0.05/ton of wastewater for
land discharges; RM 10/ton of BOD for water discharges up to the standard; and RM 100/ton of
BOD for water discharges above the standard. Starting in the second year of the regulations, the
standard became mandatory. The two-tiered charge system continued, but mills that violated the
standard faced a real threat of being shut down (beiween 1991 and 1994, 27 crude palm oil mills
had their licenses temporarily suspended for violations; in 1996 licenses of another 4 crude palm
oil mills and 4 raw natural rubber factories were suspended). In 1995. effluent charges on crude
palm oil and raw rubber generated RM 1,031,439, equal to 6% of the Department of
Environment's annual budget.
The regulations produced a dramatic drop in BOEJ emissions: a 2/3 reduction in the first year,
and a 99% reduction after 7 years. Vincent and AM (1997) argue that relatively little of this can
be attributed to the effluent charges, however, as it was the threat of shutdown that appears to
have motivated most action. Some mills might have reduced their concentrations below the
standards due to the charges, but because of the miiiumum payment, this was probably negligible.
There were several problems with the use of the BOD charges as an incentive to reduce
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emissions. First, due to the minimum charge, mills had no incentive to reduce water discharges
below 15 tons. Second, when the standard became mandatory, the main instrument became the
standard and threat of shutdown, not the charge. Third, charge levels were not linked to any
estimate of marginal benefits and marginal costs of pollution abatement, but were instead based
on agency estimates of the level that would reduce discharges without imposing a major burden
on industry.
2.2.5 Philippines
Laguna de Bay, also known as Laguna Lake, covers 90,000 hectares making it the second largest
freshwater lake in Southeast Asia Located partially within the confines of Metro Manila, the
lake is an important fishing area for the local people, provides water for commercial, industrial
and household use, and also serves as a disposal area for liquid wastes. Over time, the lake was
overwhelmed with wastes, resulting in polluted water and large-scale fish kills. A Republic Act
created the Laguna Lake Development Authority (LLDA) in 1966 as a quasi-governmental
agency to manage development activities within the lake basin.23A 1975 executive order
expanded the role of LLDA to include environmental protection and sustainable development of
the water, fisheries and shore lands.
LLDA's jurisdiction includes 21 river tributaries of Laguna de Bay, five provinces (referred to as
CALABARZON), sixty-six municipalities, and nine cities (including the capital, Manila). Within
this area, LLDA identified fifteen industrial estates with approximately 3,200 facilities, as well
as about 10,000 stand-alone manufacturing facilities. Although the Philippine Department of
Environment and Natural Resources supervises LLDA, it remains an independent body through a
special charter. The government owns 94 percent of it and private investors own the rest. LLDA
receives no funds from the national budget. As such, it retains, invests, and uses collected fees
without turning them over to the national treasury.
Hagler Bailly Consulting conducted a study for the World Bank reviewing effluent charge
systems used in France, Germany, Malaysia, the Netherlands, and the United States as possible
mechanisms for improving water quality in Laguna Lake. The study suggested that a charge
system could be a very effective tool in stimulating effluent reductions. The bank recommended
that LLDA be allowed collect fees at Laguna Lake because it is a government-operated and -
controlled corporation with its own budget and board of directors. It is an attached agency of the
Department of Environment and Natural Resources (DENR), but unlike DENR, LLDA can
directly use revenues from the fee to pay for the administration of the program and finance
wastewater treatment programs.
Officially launched on January 29,1997, the user fee program focused on reducing the biological
oxygen demand (BOD) of wastewater flowing into the lake by charging industries and
commercial operations a pollution fee. Initially, the program targeted industries in sectors
responsible for 90 percent of the industrial wastewater flowing into the lake and its major
tributaries. These include food processing, beverage firms, hog raisers, slaughterhouses, and
textile mills. Later, the program will also include major municipal and household sources of
wastewater.
LLDA requires that firms pay their estimated user fees for the year before a discharge permit is
issued. LLDA established its fee schedule using a numerical model of discharge activities and
the objective of achieving a 50 percent reduction in the BOD load of the lake water within the
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Charges, Fees and Taxes
first year of implementation. To achieve this re
incremental costs of pollution prevention or treatrne'nt
luction, the fees had to be higher than the
for many sources.
LLDA assesses two concurrent fees at the plant level on pollution discharges based on both
volume and pollution load, providing incentives for water conservation and pollution abatement.
LLDA levies a fixed fee based on the volume of wastewater discharged by the facility and a
variable fee based on the amount of BOD discharged. The fixed fee is P5,000 for daily discharge
up to 30 m3, PI0,000 for discharges between 30 a^id 150 m3 per day: and P15,000 per year for
more than 150 m3 per day (P35 ~ $1 at the time the program was implemented). For wastewater
that meets the government Class C standard of less than 50 milligrams per liter BOD
concentration, the variable fee is P5 for every kilogram of BOD released. Wastewater that does
not meet the standard is charged P30 per kilogram. For existing industries, the P30/kg rate is
higher than the cost of installing wastewater treatment facilities, giving firms a financial
incentive to invest in treatment or pollution prevention.
LLDA maintains an environmental fund to help administer the system. Fee revenues are placed
here to (1) subsidize owners' clean technology investments through grants or loans, (2) recover
the costs of administering the system (data management, monitoring, and so on), and (3) obtain
loans in the capital market to build domestic wastewater treatment plants. As fees are collected,
LLDA has hired more staff and added more firms to the system. By the end of 2002, the
discharge fee system covered 914 of the 4,000 firmi in the basin.
Relative to a 1997 baseline, the program had achieved a reduction in BOD of 96% by 2003 for
those firms brought under the permitting system in 1997 and a 95% reduction for firms brought
under the permit system in 1998. The lake has maintained its Class C status — indicating it was
suitable for fish culture and industrial use.
The effort to improve environmental conditions in the Laguna Lake watershed also involves a
number of voluntary efforts. LLDA enlists the support of local industries, communities, media,
and NGOs to help improve the water quality of tjhe lake and its twenty-one major tributaries.
LLDA recruited industries along the tributaries to work with local governments, local fishing
organizations, and environmental and church groups to devise and implement a rehabilitation
plan for their adopted tributary. Activities include collecting baseline data, cleaning solid waste
from the tributary and its banks, planting vegetation along the banks, installing low-cost garbage
traps at the mourn, and dredging where necessary.
2.2.6 China
The People's Republic of China initiated the pollution levy system (PLS) in 1978, based on the
"polluters pay principle". First stipulated in the Environmental Protection Law of the People's
Republic of China (Tentative) in 1979, the system is referred to in subsequent legislation on air
pollution, water pollution and waste. In the Tentative Regulation on Levying Discharge Fee (1982)
and the Tentative Regulation on the Repayable Usage of Specific Fund for Pollution Sources
Control (1988), the State Council describes the targets, scope, standards, fee calculation methods
and procedure of a system for levying fees, as well as fee management and use. The system now is
operational in all the provinces, cities, and counties in the country. The pollution charge system may
be characterized as a comparatively mature and effective environmental management system,
though Chinese authorities regularly implement reforms of the system.
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From the outset, the PLS was viewed as a means of implementing the polluter-pays principle and
providing a source of funding for provincial and local Environmental Protection Bureaus (EPB).
Another important feature of the PLS is that a large portion of the funds that are collected are
returned to the enterprises for pollution control investments. China's PLS covers air, water and
waste.
The water law establishes a system of concentration-based standards for effluents from point
sources. Pollution levies are imposed on all releases for the substance that exceeds the standard.
In 1993 the effective levy rate on wastewater discharges not meeting the standard was 0.13 yuan
per cubic meter.
Many of the important polluters in the nation are state-owned enterprises (SOE) and many
Township and Village Enterprises (TVE) operate in a financial collaboration with local
government authorities. While China has freed most internal prices, the profit motive of an SOE
or a TVE that is run in cooperation with a local government cannot be as strong as in a private
company. Consequently, the response of firms in China to a pollution levy also may not be as
strong as it would be in other economies. While the PLS seems to have been reasonably effective
in reducing pollution, other factors such as responsibility contracts signed by enterprise
managers and local government officials as part of the five-year planning process may be more
important in determining the pollution intensity of industrial activity.
As originally implemented, the PLS had the following features:
• It applied to 113 items that belonged to one of five groups of pollutants: air emissions,
effluents, solid waste, noise and radioactive substances.
• The amount of levy was based on pollutant concentrations at the point of release, rather than
mass or volume. In 1993 volume became a determinant of the levy on wastewater and in
1998 mass emissions of SOz were subject to the levy.
• Generally the levy applies only to the portion of discharges whose concentrations exceed
national or local emission standards. This changed for effluents in 1993 and for SQj in 1998,
and now applies to all releases of these substances.
• For sources releasing several pollutants into the same medium, only the most highly taxed
pollutant was levied.
• The magnitude of the levy is much lower than incremental pollution control costs, suggesting
that the levy itself cannot have a major influence on polluting behavior.
• The pollution levy was assessed only on industrial sources. Sources such as municipalities,
hospitals and schools are exempt.
• Discharge concentration standards apply nationally, however provincial and local
governments may adopt more stringent standards
• Other charges (known as the "four small pieces") provide further incentives for sources to
comply with the PLS.
Environmental supervision and management divisions of local Environmental Protection
Bureaus collect the levy. Generally about 80% of the amount collected is returned to sources to
help finance pollution control investments. The remainder is the principal source of income for
local and provincial EPBs. The partial recycling of PLS revenue to polluting enterprises finances
between 20% and 25% of total Chinese investment in pollution abatement. The PLS revenue
retained by local and provincial EPBs contributes importantly to environmental management
capacity in China.
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Charges, Fees and Taxes
Since the early 1990s, the PLS has been the subject of several evaluations by the Chinese
Research Academy for Environmental Science (CfRAES), HOD and the World Bank. While
recognizing its important positive role, these rev
design of the pollution levy, especially the tax basi s and charge rate, (2) the extent to which the
pollution levy applies to polluters and pollutants
ews have identified deficiencies in (1) the
and (3) mechanisms for distributing levy
revenues.
While many reviewers have criticized the Pollution Levy System, analysis of plant cost functions
suggests that it should achieve positive results. A World Bank study by Dasgupta et. al. estimates
that effluent charges as low as $1 per ton should induce an 80% abatement of suspended solids.
If charges were $3, $15 and $30 per ton respectively for TSS, chemical oxygen demand, and
BOD, firms would have an incentive to reduce effluent by 90%. This suggests that the current
pollution levy should have a significant effect on cost-minimizing firms, an effect that could be
strengthened by increasing charge levels and, especially, applying charges to all effluents, not
just effluent in excess of the standard. Wang and Chen note that recycling of about one-half of
charge revenues for pollution control at the paying facilities should further increase pollution
control efforts.
By 1996, China had imposed pollution levies on 496,000 polluting units with charge collections
that year of 4.1 billion yuan and accumulated charges of 29.06 billion yuan. About 25% of the
country's industrial enterprises currently are levied. Levy collections have not kept pace with the
value of industrial output because the charge rates have been fixed while price changes have
been significant. Also, some enterprises have complied with emission standards because of
enforcement and as a result are not subject to levies for air pollution. Many Township and
Village Enterprises (TVE) are not levied at all becjause local Environmental Protection Bureaus
(EPB) do not have the resources to pursue all sources within their jurisdiction or find that the
potential revenues from levying smaller sources dods not justify the effort.
During the ten years from 1986 to 1995, charge revenue increased about four-fold in nominal
terms, or 2.13 times in real terms. In the whole country, the proportion of total charge revenue to
the value of industrial output decreased from 0.106% in 1986 to 0.040% in 1995. For TVEs, the
proportion of charge to TVE industrial output value decreased from 0.025% in 1986 to 0.009%
in 1995. Since TVEs generally use less advanced technologies, one would expect them to be
paying relatively more in pollution levies, not less than average. This suggests the desirability of
increasing efforts to impose the pollution levy on a larger proportion of the TVEs.
2.2.7 Other Developing Countries
Egypt imposes effluent fees on industrial discharge equal to one piastre (about one-sixth of one
U.S. cent) per cubic meter. Several Eastern European countries have imposed effluent fees on
industrial discharge. These countries, as well as China and most of the former Soviet Union, also
impose non-compliance charges for discharge in excess of certain specified amounts. Revenues
from most of these charges are used to fund environmental protection activities, but Slovenia's
charge generates revenues for the general federal budget.
Like other environmental charges in Eastern Europe and the former Soviet Union, many of the
effluent charges are limited in their effectivenesjs by problems such as weak enforcement,
polluters' inability or unwillingness to pay, anq inflation. Lack of widespread interest in
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environmental issues, limited experience with incentive mechanisms, and complicated charge
mechanisms have also been cited as problems with charges in Eastern Europe.
Several states in Brazil have introduced (or begun to introduce) charges for water and industrial
sewage discharge based on pollution content,2 While the charge rates differ across states, water
charges are based on consumptive use and discharge of BOD plus a public unit price on all
withdrawals. Eventually the states plan to add other discharge parameters. Sewage charges in
Sao Paulo State, which are based on pollution content, have been found to have a significant
impact on pollution. Reductions have been achieved through changes in production methods, use
of cleaner inputs, and recycling. Having significantly underestimated the responsiveness of
polluters to increased charges, the state sewage treatment company now suffers from excess
capacity at a treatment plant.
Since 1991 India has imposed a combined fee for industrial use of water and discharge. The
Water Cess Fee on discharge varies according to use, with cooling water charged the least,
process wastewater an intermediate amount, and polluted wastewater charged the most. Seventy
percent of the Water Cess Fee can be rebated if users treat their wastewater.
2.3 Air Emission Fees
2.3.1 Japan
Japan has levied sulfur emissions charges to generate revenues to compensate victims of
pollution-related diseases. Since SCh was believed to cause the greatest harm, it was chosen for
the tax. Both stationary and mobile sources are subject to the charge, the latter in the form of
differential taxation dependent on vehicle weight. Since mobile sources are thought to generate
about 20% of NOX and SCh emissions, the tax ratio between stationary and mobile sources is 4:1.
For stationary sources, tax rates vary from $0.625 to $56.25 per cubic meter, depending on
whether the source is located in a designated area. Since many diseases date back to the 1980s,
there is also a levy of $0.82 per cubic meter based on 862 emissions between 1982 and 1986.
Ambient SOz concentration levels have fallen significantly in Japan, but it is unclear to what
extent this decrease is due to the tax.
2.3.2 France
France imposes a charge on emissions of hydrochloric acid, sulfur-containing compounds,
nitrogen oxide-containing compounds, non-methane hydrocarbons, solvents, and other volatile
organic compounds. The tax rates and base were expanded in 1990. The fee, 150 F ($30) per
metric ton, has been imposed on combustion facilities with a maximum thermal power of at least
20 MW, waste incineration facilities with a capacity of three metric tons per hour, and facilities
emitting more than 150 metric tons per year of taxable pollutants.
2.3.3 Sweden
In 1992 Sweden imposed a nitrogen oxide emission charge of 40 SEK ($5.9) per kg ($5,400 per
short ton) on energy producers with a capacity in excess of 10 MW and production exceeding 50
GwH.25 Approximately 120 heating plants and industrial facilities with about 180 boilers are
subject to the tax. One interesting aspect of this tax is that revenues are rebated to the sources
subject to the tax based on their energy generation. At the beginning of every year, facilities
16 November
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Charges, Fees and Taxes
report their NOX emissions and energy production for the previous year to the Swedish
Environmental Protection Agency (SEPA). On the
revenues and refunds per generated MwH. Those
October, and those entitled to rebates receive then in December. The charge system in effect
transfers income from high-emitting to low-emittin:
basis of these reports, SEP A calculates total
facilities facing a. net charge must pay by
plants. In 1992, for example, approximately
15,300 metric tons on NOX emissions were subject to the charge, generating about 610 million
SEK ($90 million). As a result of the revenue and rebate calculations, over 100 million SEK ($15
million) was transferred from high-emitting to low-emitting facilities. Most facilities subject to
the taxes have installed measuring equipment so that the tax can be properly assessed. For
facilities that either have no measuring equipment or whose equipment is temporarily out of
order, a standard of approximately 1.5 times the average emission level applies. This standard
rate, 600 mg NOX/MJ for gas turbines and 250 mg NOX/MJ for other installations, gives polluters
a strong incentive to install measuring equipment.
An accredited laboratory must inspect measuring equipment once a year. Measuring and
reporting are monitored by SEP A. Since other factors, such as the introduction of tighter
emissions standards can influence NOX emissions in Sweden, it is difficult to determine the effect
of the NOX charge. However, emission reductions appear to have been greater than they would
have been without the charge. Incentive effects were evident as early as 1990 when many plants
took measures to reduce emissions in anticipation of the charge. Millock and Sterner note that
with the NOX charge and the installation of NOX tnonitoring equipment sources have both the
ability and an incentive to fine-tune combustion processes to reduce emissions. In 1992, the first
year in which the charge was in effect, emissions from taxed plants were 15,300 metric tons,
down 36% from their 1990 level of 24,000 metric tons. This decrease was not due to a decrease
in energy consumption: emissions per mega-joule fell from 150 mg NO IMS in 1990 to 99 mg
NO /MJ in 1992. Some plants have even linked staff compensation with emissions reductions.
The charge for NOX emissions was set at 40 SEK ($5.9) per kg because studies by the Swedish
Environmental Protection Agency (SEPA) had indicated that control costs varied from 20 to 80
SEK ($2.9-11.8) per kg. SEP A has stated that the value of NO emission reductions is at least as
high as the amount of the charge. The taxed plants; were able to reduce emissions at an average
cost per kg of approximately 10 SEK ($1.5) in 1991 Costs have ranged from 5 to 20 SEK ($0.7-
2.9) per kg. Since these costs are significantly louver than the 40 SEK per kg charge, rational
facilities will probably implement more abatement! options in future years. Abatement measures
used since the introduction of the charge include not only investments in new equipment but also
measures to limit emissions by optimizing combustion.
Annual administrative costs of the charge are approximately 2 million SEK ($290,000) for SEPA
and 300,000 SEK ($44,000) for each firm using measurement equipment. (SEPA appears not to
have included its 2 million SEK administrative cost in its cost-benefit table, but this exclusion
does not have a significant effect on the conclusions of its analysis.) Assuming 2 million SEK in
administrative costs for SEPA and 18 million SEK ($2.6 million) in measurement costs for those
taxed facilities that have installed measuring! equipment, the annual monitoring and
administrative costs amount to 20 million SEK ($3 million), or roughly 3% of charge revenue.
One limitation of the charge is that it reportedly covers only about 6.5% of total NO* emissions,
partly due to some energy producers' tendency to supply just under 50 GwH to avoid the tax.
(Because of the 50 GwH threshold, the marginal taxation of quantities of energy just over 50
GwH is high.) Subsequently the threshold was lowered to 25 GwH. Another potential problem is
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that the charge on NOX may cause some plants to increase emissions of other substances, but
other control standards are in place to limit such emissions.
2.3.4 China
The Pollution Levy System was described previously. The air law regulates emissions. Charges
are applied to all emissions of SOi, not just emissions in excess of the standard. For other
emissions, pollution levies are applied to the emissions in excess of the standard. For example, a
fee of 0.04 yuan/kg (or $5/mT) applies to chlorine, carbon disulfide, CO, hydrochloric acid,
fluoride, and NOX emissions in excess of the standards. For coal dust and cement dust, the fee is
0.02 yuan/kg. Coal is charged a fee of 3.0 yuan/kg if emissions exceed standards by no more
than four times.
The first formal indication of interest in limiting 862 emissions in the China is the State
Council's 1990 "Suggestions on the Development of Acid Rain Control." The document
recommends the creation of two control areas or zones, one for acid rain in the south of the
country where the pH of precipitation is below 4.5 and one for SC>2 in several industrial cities in
the north where ambient concentrations exceed Class II standards. Together the two control
zones cover approximately 11.2% of the national territory and include over three-fourths of the
population. A total of 47 of the 275 municipalities within the two control zones were declared
"key" and they are targeted for the most ambitious control efforts.
National minimum rates were increased once in 1991; however, many provinces impose higher
rates. In the recently designated SC>2 and acid rain control zones, excess 862 emissions have
incurred a fee of 0.20 yuan/kg since 1998. Several large cities in the 862 and acid rain control
zones also have raised their rates above 0.20 yuan/kg. Beijing's is the highest at 1.2 yuan/kg
(equivalent to $150 per metric ton and approximately the same price as SC>2 allowances in the
US Acid Rain trading program).
2.4 Municipal and Other Waste Charges
Bresser's 1994 survey of economic instruments reports that municipal waste user charges are
levied in 18 of the 21 industrialized countries (all but New Zealand, Portugal, and the United
Kingdom) that it surveyed. The charges are usually (but not always) flat rates for households and
unit rates for commercial generators. Note that unit rates are likely to have a greater incentive
effect than flat rates that are independent of quantities of waste generated. The charges usually
fund waste collection and/or disposal, but in many countries are also set high enough to exert an
incentive effect to reduce waste.
Denmark, for example, levies the highest fee on waste delivered to landfills and a somewhat
lower fee on waste delivered to incineration facilities.26 Recycled wastes are not charged. Since
the charges were introduced in 1987, the quantity of waste registered at disposal facilities has
dropped and the reuse of building waste as filling material for road construction and other
purposes has increased.
In the Netherlands, a charge equivalent to approcimatelySl 8 per ton on landfill disposal of waste
came into effect January 1,1995 as part of a broader environmental tax law.27 The main purpose
of the charge is to raise revenue for the national budget, but a secondary purpose is to discourage
waste generation. To promote incineration as a disposal method, incineration is exempt from the
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Charges, Fees and Taxes
tax. The size of the charge relative to the average
metric ton suggests that the tax could have significant
waste treatment costs of 82 Dfl ($50) per
incentive impact
The United Kingdom landfill tax, which dates from October 1, 1996. is managed by Entrust.28
The tax rate was 2 £ ($3) per metric ton for inactive waste such as bricks and 7 £ ($10.7) per
metric ton for other waste. Landfill operators pay the tax and can raise disposal fees to recover
their tax payments. The British Customs and Excise office said that the tax is "designed lo use
market forces to protect the environment by makir g the disposal of waste in landfill sites more
expensive." Businesses' national insurance contributions were cut to compensate for the effect of
the tax on business. A tax credit scheme allows lahdfill operators to donate up to 6.5% of their
landfill tax liability to environmental projects in return for a 90% tax credit.29
Outside the OECD, South Korea introduced a system in 1995 under which household waste can
be disposed of only in standardized bags sold in officially designated places. Bag prices in the
metropolitan areas of the capital city of Seoul range from 60-80 won ($0.08-0.10) for five-liter
bags to 1,090-1,450 won ($1.41-$1.88) for 10oT
governments and vary slightly from area to area.
•liter bags. Prices are determined by local
The amount of waste sent to landfills was
approximately 40% lower for the six months after implementation of the system. Unfortunately,
a large quantity of the decrease was attributable not to waste reduction or recycling, but rather to
uncontrolled incineration or private disposal. The plastic bags themselves are not biodegradable
and thus pose disposal problems; moreover the bag fees are too low to cover waste disposal
costs.
In 1994, Turkey introduced an Environmental Clianup Tax on waste to raise revenue and to
discourage waste generation.30 The monthly rate wis set at 25,000-100,000 TL ($0.37-$1.47) for
households and 25,000-5,000,000 TL ($0.37-$295) for other generators. The Cleanup Tax was
also imposed on wastewater.
Australia, Austria, Belgium, Finland, France, and several German states impose charges on
hazardous waste disposal. Austria's tax of 200 S ($19) per metric ton is used to fund the cleanup
of contaminated land. France has imposed a tax on the disposal of "special industrial wastes," a
category including asbestos, chrome, lead, solventSj, and other specified substances. The tax rose
from 20 F ($4) per metric ton in 1994 to 40 F ($8) per metric ton in 1998.
The Netherlands and the Flanders region of Belgium impose charges on animal manure disposal
to limit soil pollution. In the Netherlands, individuals are permitted to dump the manure
equivalent of 125 kg of phosphate per hectare per year free of charge. Quantities between 125
and 200 kg are subject to a charge of 0.25 Dfl ($0|.15) for every kg over 125 kg, and quantities
over 200 kg to a charge of 0.5 Dfl ($0.3) per kg. '
Waste charges have also been levied in a number of less industrialized countries, including the
Czech Republic, China, Estonia, Hungary, Poland, Russia, and the Slovak Republic. Municipal
waste charges for households and businesses in the Czech Republic, which have been in place
since before World War II, were significantly increased in 1992. Municipalities determine prices.
One problem with the increased charges is that they appear to have led to an increase in illegal
dumping.
Since 1992, the Czech Republic has also levied two types of charges on landfill operators. The
first charge, imposed on all landfill operators, generates revenue for the municipality where the
landfill is located to finance environmental protection activities. The second charge is imposed
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only on those landfills that do not adhere to specified waste disposal standards. One report
indicates that the charge "very positively motivated the establishment of new dumps in
accordance with the strict required criteria concerning the safe storing of waste." The amounts of
both charges vary significantly according to the type of waste, the highest being 5,000 Kc ($184)
per metric ton for dangerous waste. The Slovak Republic has similar charges.
In much of Eastern Europe and the former Soviet Union, charges on waste as well as air and
water pollution are higher for quantities in excess of permitted levels or for improperly handled
quantities. These higher incremental rates for levels in excess of standards could be looked upon
as non-compliance fees.
2.5 Product Charges
Levied in numerous industrialized countries, product charges are imposed either on a product or
some characteristic of that product. Although some of these charges may discourage
consumption, many of them are advance disposal fees intended to finance the proper disposal of
the products after their use. Products on which charges have been imposed include automotive
air conditioners (Canada), batteries (Canada, Denmark, Portugal, and Sweden), beverage
containers (Belgium, Finland, Norway, and Sweden), building materials (Denmark), CFCs
(Australia and Denmark), dry cleaning solvents (Denmark), fertilizers (Austria, Finland,
Norway, and Sweden), light bulbs (Denmark and Korea), lubricating oil (Finland, France, Italy,
Norway, and Spain), packaging (Belgium and Germany), pesticides (Belgium, Denmark,
Norway, and Sweden), plastic and paper bags (Italy, Iceland, and Denmark), sulfur in oil
(Finland, Norway, and Sweden), and tires (Taiwan and Canada). South Korea in 1993 imposed
advance disposal fees on several products that are difficult to treat or recycle, but the rates are
rather low.
Several countries have imposed product charges on pesticides and fertilizers. Estimates of price
elasticity of demand for these products vary widely, depending perhaps on the time period
studied, crops, geographic area, and other factors. However, some of these charges are likely to
have an incentive effect. Norway has levied charges on fertilizers and pesticides since 1988. The
fertilizer taxes are NKr 1.17 ($0.18) per kg of nitrogen and Nkr 2.23 ($0.35) per kg of
phosphorous, resulting in average taxation of approximately 7% of the wholesale price. The
pesticide tax is 13% of the purchase price. In Finland, charges of Mk. 1.5 ($0.32) per kg were
imposed on phosphate fertilizers in 1990. Relatively low charges on fertilizers in Austria, which
are no longer in effect, are reported to have had a significant impact on fertilizer use.
In Denmark, retail sales of pesticides are subject to a 20% tax. Hansen estimated the price
elasticity of demand for pesticides in Denmark at -0.45. This estimate suggests that the 20% tax
reduced pesticide use by 9%. Sweden imposed two different charges on fertilizers in the 1980s.
At their highest level, in 1991, the charges equaled 30-35% of the sales price of phosphate and
nitrogen. Subsequently, charges were reduced. The charges have had a significant impact on
fertilizer use. The amount of land under cultivation has also decreased but not in the same
proportion as fertilizer use. The reduction in use appears to be most significant during the period
when the tax was at its highest. The Swedish Board of Agriculture administers the charge. Its
annual administrative costs associated with the charge have been estimated at 500,000 SEK
($74,000), roughly 0.4% of the total annual charge.
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Charges, Fees and Taxes
Effective in 2000 Norway imposed a product charge of 50 Norwegian kroner ($7.50) per kilo on
purchases of trichloroethylene (TCE) and perchloroethelyne (PER). Firms have the right to
reclaim half of the tax upon delivery of TCE sludge to authorized recyclers and treatment plants.
The product charge is noteworthy because it is mere than three times the market price of TCE
(which is between 10 and 15 crowns per kilo). Suclp a product charge would be expected to have
strong incentive effects. Sterner (2004) notes preliminary data show that consumption of TCE
fell from more than 500 tons in 1999 to 139 tons in 2001, while PER use fell from 270 tons in
1999 to 32 tons in 2001. Some care should be taken in interpreting these data because 1999
purchases were inflated about 25% by hoarding in anticipation of the tax.
Energy taxes can be considered product charges. One type of energy tax that has become a
frequent topic of discussion in environmental prote< tion is a carbon tax. Levied on fuels based on
their carbon content and intended to limit emissioi s of carbon dioxide, carbon taxes have been
adopted in several European nations, including Belgium, Denmark, Finland, France, Italy,
Luxembourg, the Netherlands, Norway, and Swedein. Poland has a small tax on COa emissions.
Carbon taxes are generally small relative to other fuel taxes, although the relative size of the
carbon tax varies according to the type of fuel. Rates often vary depending on the sector or use of
the fuel. In Finland and the Netherlands, the taxes are assessed partly on carbon content and
partly on energy content. OECD (2004) provides a useful review of these and other energy taxes
in OECD countries.
Many developed and developing countries have imposed higher taxes on leaded gasoline to
encourage motorists to switch to unleaded fuel, with Austria, Denmark, Bulgaria, Denmark,
Finland, France, Germany, Greece, Netherlands, Pldlippines, Poland, Portugal, Sweden, and the
United Kingdom providing some examples. Hammir and Lofgren note that the price differentials
generally ranged from the equivalent of one to ten US cents per liter.
2.6 Preferential Taxation of Environmentally Friendly Products and Activities
This is a very broad topic that can be covered only in a cursory fashion. Preferential taxation of
environmentally friendly products is found in many nations. Tax breaks may take the form of
reduced excise taxes (e.g., for unleaded gasoline), reduced custom duties for equipment
embodying certain advanced technologies, low interest loans, income tax concessions, etc. The
section on subsidies later in this report offers a numper of specific examples.
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22
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Deposit Refund Systems and Performance Bonds
3. Deposit Refund Systems and Performance Bonds
3.1 Deposit-Refund Systems
Deposit-refund systems or "deposit systems" corjibine a product charge (the deposit) and a
subsidy for recycling or proper disposal (the refund). Manufacturers or vendors of products that
are subject to deposits incur additional costs in handling returned products, but these costs are
often partially offset by the interest earned on deposits, unclaimed deposits, and sales of
collected, used products. Performance bonds, discussed later in this section, are closely related to
deposit systems.
One of the objectives of a deposit system is to discourage illegal or improper disposal. Waste
products that are discarded improperly have higher social costs than those disposed of properly,
since such discards can become an eyesore or even an environmental or health threat. Improperly
discarded waste is also quite expensive to redirect to the legal waste stream. Deposit systems are
commonly applied to beverage containers, in part because these containers make up a large
proportion of roadside litter, Another important objective of a deposit system is to divert
recyclable items from the waste stream.
In addition to being used for beverage containers, deposit systems have also been used for other
products such as pesticide containers, lead-acid batteries, and tires. Firms voluntarily implement
some of these systems while state and local authorities develop others.
Several studies conclude that deposit systems are more cost-effective than other methods of
reducing waste disposal, such as traditional forms of regulations, recycling subsidies, or advance
disposal fees (ADF) alone. However, the relatively high administrative costs of a deposit system
could outweigh these cost savings, particularly for low-valued items.
Administrative costs are an important consideration when determining the efficiency of deposit
systems. Ackerman et al. estimate that administrative costs in the U.S. average about 2.30 per
container, equivalent to more than $300 per ton for steel containers and $1,300 per ton for
aluminum cans, in states with traditional beverage container deposit systems. Palmer et al.
estimated that waste disposal in a deposit system jcosts about one-half as much as an advance
disposal fee or recycling subsidies. A full accepting of the desirability of deposit-refund
systems would compare administrative costs and the costs imposed on consumers with the
benefits of reduced disposal costs, energy savings, reduced litter, avoidance of the environmental
costs of extracting raw materials, and other environmental benefits. Deposit-rerund systems
appear best suited for products with high value, or whose disposal is difficult to monitor and
potentially harmful to the environment When the used product has economic value, the private
sector may initiate the program.
3.1.1 South Korea
The OECD (200 Ib) notes that among middle-income countries, South Korea has one of the most
extensive deposit systems in terms of items covered. Under a 1991 amendment to its Solid Waste
Management Act, South Korea introduced a comprehensive deposit program in 1992. The
products affected by the system and the deposit j amounts are shown in the following table.
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Producers and importers of the listed products pay the deposits into a "Special Account for
Environmental Improvement" and receive refunds as they collect and treat the resulting post-
consumer waste. The products covered and the magnitude of the deposit were modified in 1993
and again in 1996. The largest deposit applies to large tires and amounts to about $0.40. The
deposit on paper, metal, glass and plastic packaging is a fraction of a US cent per container.
Table 3.1. South Korea
Material
Paper pack
Metal can
Glass bottle
PET bottle
Batteries
Tires
Lubricating oil
Televisions
Air conditioners
Washing machines
Size
Less than 250 ml
Greater than 250 ml
Lid attached
Lid separated
Less than 1 00 ml
100 to 350 ml
over 350 ml
Less than 500 ml
500 to 1500 ml
Over 15 00 ml
Mercury
Silver oxide
Large
Medium
Motorcycle
Deposit
0.3 won
0.4 won
2 won
5 won
1.5 won
2 won
3 won
4 won
5.5 won
7 won
120 won
75 won
450 won
130 won
50 won
25 won/liter
38 won/kg
38 won/kg
38 won/kg
Exchange rate (2003): 1 won = $0.00084
3.1.2 Yukon Territory, Canada
Canada's Yukon Territory implemented a deposit-refund system in 1992. Consumers pay a
deposit when they purchase beverage containers and receive a refund when they return the empty
container to one of about 25 registered recycling depots in the territory. Beverage wholesalers
send the deposit to the Recycling Fund, which then reimburses recycling centers for refunds
made, collection, processing and shipping costs. During the period 2000-2001 the return rate for
containers was nearly 85%.
Table 3.2. Yukon Deposit and Refund Rates
Container Type
Aluminum can
Large (glass, plastic, tin and tetrapack >1 liter
Small (glass, plastic, tin and tetrapack < 1 liter
Large liquor container (>500 ml)
Small liquor container (<500 ml)
Refillable beer and cider bottles
Deposit
$.10
0.35
0.10
0.35
0.15
0.10
Refund
$.05
0.25
0.05
0.25
0.10
0.10
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Deposit Refund Systems and Performance Bonds
Source: government of Yukon Territory31
3.1.3 Germany
Germany has been a leader in promoting recycling. Its Green Dot or Duales system is now
operating in several countries such as Austria, France and Spain where the Green Dot on
packaging indicates that the manufacturer has paid a fee to Duales, which is responsible for
recycling. A new German package recycling law went into effect January 1, 2003. Single use
containers incur a fee of 0.25 euros (or 0.50 for containers 1.5 liter or larger). Beer cans are
included but liquor, wine, fruit juice, milk, and noik-carbonated beverage containers are exempt.
Until October 1, consumers must return the empty
a receipt or other proof of purchase. After that date
system for accepting returns. According to a recenl
;ontainers to the point of purchase along with
, retailers and beverage suppliers must have a
press release from the German Environment
Ministry, sales of non-refillable cans and bottles have dropped by 60% since the start of 2003.
3.1.4 Automobile Body Deposits
Norway, Sweden, the Aland Islands (a self-governing territory of Finland) and Greece have
mandatory deposit-refund systems for automobile bodies. These systems are reviewed in a recent
report from the Nordic Council of ministers. Under the Swedish system created in 1975,
mandatory deposits on new cars finance payments to individuals who return old cars to
authorized scrap dealers. Originally, the deposit wa$ 250 SEK ($37) and the refund was 300 SEK
($44), but in 1988, the deposit was raised to 300 SEK ($44) and the refund to 500 SEK ($74). In
1992, the deposit was increased to 500 SEK and the refund was set at 1,500 SEK ($221) for cars
returned within nine months of an inspection and 500 SEK ($74) for other cars. The purpose of
the differentiation was to encourage the scrapping of older cars emitting more pollutants.
Although the scrap car refunds have lowered the number of abandoned cars, the incentive effect
has been reduced by deductions of some motorists' unpaid taxes and fines from their refund
payments and by their desire to keep old cars for spare parts. Administrative costs of this system
are relatively low at approximately 2% of revenues). The deposit-refund system in Greece, under
which motorists must purchase a new vehicle with a catalytic converter to qualify for a refund,
has significantly increased the prevalence of catalytic converters.
3.2 Performance Bonds
Performance bonds are fees levied upon companies that extract certain natural resources, such as
timber, coal, oil and gas, and may also be imposed on a variety of construction activities.
Amounts deposited as the performance bond can be refunded when the payer fulfills certain
obligations. In that sense, a performance bond acts like a deposit-refund system.
While performance bonds give companies a direct economic incentive to reclaim mining sites,
follow timber-harvesting regulations, and perform construction activities in compliance with
applicable rules, there is also a second and perhaps stronger incentive A firm's ability to obtain
future mineral leases, timber harvesting contracts, or construction permits is dependent in large
part on satisfying today's regulatory requirements.
China uses a performance bond to ensure
management, and in particular to ensure compli
policy seeks to have projects (1) designed, (2)
sufficient financial resources for environmental
iance with its "three simultaneous" policy. That
constructed, and (3) operated in compliance with
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International Experiences with Economic Incentives for Protecting the Environment
all environmental regulations. The use of performance bonds to ensure financial responsibility is
administered by Provincial and local EPBs, and overseen by the Ministry of Finance or by the
relevant economic sector institution.
Beginning in 1997, Indonesia's Director General of Mining required mine operators to post a
reclamation guarantee reflecting the value of the potential environmental damage the mining
operation could cause.32 The amount of the guarantee is set at the estimated reclamation cost
should the damage be caused. The Indonesian government refunds the guarantee upon
satisfactory performance by the operator.
Beginning in 1991, the Philippines required a Forest Guarantee Bond (a returnable performance
bond) to encourage responsible long-term management by timber leaseholders, to provide a
means for promptly penalizing lessees if there is a violation of the agreement, and to provide a
market-based measure of profitability of a forest lease with harvesting rights by having would-be
leaseholders bid against one another for the right.33 The government set a floor price for leases of
P6,000/ha (US$217). This amount approximated 10% of the value of the standing timber. The
government suspended the scheme in 1995 after it was clear that it encouraged clear-cutting and
did not produce the desired investments in planting and protecting forests.
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Trading Mechanisms
4. Trading Mechanisms
4.1 Trading of Air Emission Rights !
At least three different forms of emission trading exist: emission cap and allowance trading
programs (e.g., the U.S. Acid Rain Program), emissions averaging or rate-based trading (e.g.,
fuel efficiency standards for vehicles), and credit trading programs such as emission offsets.34
The general principle of emissions trading systems
by one of two means. First they may limit their
is that sources may satisfy their obligations
releases of pollution to no more than the
permitted amount. Second they may release moife (or less) than the permitted amount and
exchange credits representing any deficiency (or surplus) either internally or externally. Sources
with marginal costs of pollution control that are about average are likely to meet their obligations
without trading. Sources with relatively high marginal control costs are likely buyers of pollution
reduction credits and sources with relatively low marginal costs of control are likely sellers of
excess credits. The broad objective of emissions trading is to lower the total costs of achieving a
given environmental goal.
Cap and trade programs have a number of technical and regulatory requirements that have
limited its use (particularly in developing countries):
• A clear legal and regulatory framework, including a delineation of the roles and
responsibilities of the different parties (regulators, emission sources, and others);
• Definition of the overall emissions cap, and whi:h sources to include;
• A process for allocation of emission quotas to the sources that are included;
• Timing and spatial issues, such as how long the program will run, whether banking will be
allowed, whether there will be trading zones or other mechanisms to account for differences
in the environmental impact of emissions from different sources;
• Accurate methods for measuring emissions (oftejn a sophisticated and costly continuous
emission monitoring device);
• Accurate allowance tracking system; and
• Effective enforcement and penalty requirements.
While the U.S. has considerable experience with emission trading, there are relatively few other
examples elsewhere in the world. Germany has an joffset program that allows new sources to be
located in areas with poor air quality without pausing further deterioration in air quality.
Santiago, Chile established a program in tradable paniculate credits in 1992. A 1993 revision of
Taipei, China's Air Pollution Control Act included provisions under which individual sources
may be exempted from emission standards if they can control sufficient amounts of the same
types of emissions elsewhere in the same air pollution control region. Several emission trading
programs are under development in the People's Republic of China: nationwide trading of SOa
emissions from electric utilities, patterned after 4e U.S. Acid Rain program; trading of SOa
emission reduction requirements in the city of Taiiyuan (Shanxi Province) and in other cities.
Several years ago, the Asian Development Bank also insisted on a number of one-off trades in
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International Experiences with Economic Incentives for Protecting the Environment
China as conditions for loan approval, Slovakia has established the foundation for trading in SOi
emissions, with actual trading not slated for another couple of years. Ontario, Canada has a pilot
emission reduction trading (PERT) program dating from 1997 that includes VOC, SO2, CCh, and
NOX. Many countries have started to design programs in tradable greenhouse gas emission
credits. This section reviews several of these experiences,
4.1.1 Particulate Trading in Santiago Chile
This example concerns total suspended particulate matter (TSP) in Santiago, Chile and a novel
emissions trading program designed to help the city solve a serious air pollution problem.
Santiago is located in a broad valley that is prone to temperature inversions. Rapid industrial
growth brought with it severe air pollution problems, notably TSP, inhalable particulate matter
(PM 10), carbon monoxide and ozone. Epidemiological studies linked the high concentrations of
PM 10 to daily mortality in adults and respiratory disease in children.
In 1987, stationary sources produced an estimated 21,780 kg and mobile sources 13,570 kg of
TSP per day. Through an aggressive program to control industrial emissions of particulate
matter, a decade later the industrial source contribution had been reduced from 61.6% to just
34% of total TSP.
Santiago's Emission-Offsets Trading Program was designed to address cost-effectively the
inherent conflicts between industrial growth and ambient air quality goals.35 As described by
Montero et al., industrial sources of TSP registered at the time the program was promulgated
receive daily emission capacity rights in perpetuity. New sources and expanding sources receive
no emission capacity rights, so they must buy emission capacity rights from existing sources.
This means there is an emissions cap equal in magnitude to the sum of the individual emission
capacity rights at the time the program was created.
At the time the program was established in March 1992 there were 563 existing sources,
primarily industrial boilers that exceed an emissions threshold of 1,000 m3 per hour. By July
1993 another 117 new sources were registered and included in the program. Sources of process
emissions can be included in the program, but in practice the difficulty of estimating process
emissions has resulted in these sources being left out.
The maximum emissions level from each source is calculated from a uniform permissible
emission concentration that was applied to all sources and two source characteristics that are
verified during annual inspections: the type of fuel used and size. Sources can trade any excess
between their rights as computed above and their computed maximum emissions. Because what
is measured is not actual emissions but rather the potential to create emissions, what is traded are
capacity rights not actual emissions. In no case may a source exceed the national concentration
standard of 112 mg/m3.
DS4 empowers the Metropolitan Health Service of the Metropolitan Region through its Office
for the Control of Stationary Sources to enforce the program through inspections. DS 32, a
Supreme Court order from 1990, provides additional enforcement power through the authority to
order temporary shut downs of the top 50% of important sources of TSP whenever there is a
forecast or actual emergency situation with respect to air quality. From the onset of the program,
industry switched to cleaner fuels to lower their emissions capacity so that they no longer are
counted among the largest 50% of TSP emitters. Completion of a natural gas pipeline from
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Trading Mechanisms
Argentina in 1997 has led to rapid conversion of industry, power generators, commercial sources
and households to a clean alternative fuel.
The amount of trading of emission rights has been lower than would be expected and the prices
for rights higher than expected, A number of factors may explain these results. By 1998,
ownership of emission rights had become quite: concentrated. Five firms (as distinct from
sources) owned 31% of the rights and 21 firms ovjned 50% of the rights. Transaction costs are
high due to a time-consuming approval process and because there is no organized market in the
rights.
In terms of environmental results, Santiago's efforts to control TSP have been remarkably
successful. In 1993 when the program started, 4,604 kg/day of rights were outstanding,
compared to an emission capacity 7,442 kg/day. By 1999, outstanding rights were modestly
lower at 4,087 kg/day, but capacity to produce emissions had been lowered to 1,637 kg/day.
However, the market in emission rights is less well developed than might be desired, with few
transactions and prices that have fluctuated wildly from one transaction to the next. In the first
six months of 1998, inter-firm transaction prices for the right to emit one kg/day in perpetuity
ranged from a low of about $ 1,100 to a high of about $ 11,500.
4.1.2 SO2 Trading in Slovakia
A 1998 law authorizes the Ministry of Environment
for large and medium scale sources of several polh
to establish a national cap and trade program
itants. The Ministry established an emissions
quota for each of 79 administrative districts, whicji in turn set quotas for individual sources in
2002. Sources may trade all or part of these quotas]. Currently only sources greater than 50 MW
thermal input are included in the program.
4.1.3 Emissions Trading in China
In the early 1990s China began to require that emissions be offset at selected new facilities. With
assistance from Environmental Defense (a U.S. non-governmental organization), the first real
emissions trading projects in China began in 2000 in the cities of Nantong (Jiangsu Province)
and Benxi (Liaoning Province). These pilot tests revealed that emission trading was feasible, at
least in a primitive form.36
Following on those initial pilot projects and with the blessings of China's State Environmental
Protection Administration, in 2002 Environmental Defense expanded its emissions trading pilot
programs to include four provinces, three metropolitan areas and one enterprise. The project
includes Jiangsu, Shanxi, Shandong and Henan
Municipalities, and the Huaneng Company (China
Provinces; Tianjin, Shanghai, and Liuzhou
Resources). In addition efforts are underway
to develop a national SO2 emissions trading prograrii.
As described by Morgenstern et al., in 2001 the city of Taiyuan, Shanxi Province agreed with the
Asian Development Bank to participate in a demonstration of SOa emissions cap and allowance
trading system trading patterned after the highly successful U.S. Acid Rain program. Sources are
granted emission allowances for each year of the program. Allowances may be used to meet
source emission limits, traded with other firms in the program, or banked for future use. Initially
26 sources will participate in the program, which has as a goal a 60% reduction in emissions
during the Tenth Five-year Plan (2000-2005). Yang and Schreifels report the first demonstration
trades took place in December 2002.
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4.1.4 Ontario Canada Pilot Emissions Reduction Trading
Established in 1996, Pilot Emissions Reduction Trading (PERT)'is an experimental program in
the Windsor-Quebec corridor designed to develop practical experience in emission trading as a
means to control smog and other air pollutants.3 Sources have generated over 150,000 tons of
NOX credits since the program's inception but there have been no official trades (and hence uses)
of the credits.
4.1.5 NOX Trading in the Netherlands
In 2001 the government of the Netherlands and industry agreed to a rate-based emission trading
program for NOX emissions that allocates credits to sources based on performance standard rates
(PSR) multiplied by the sources consumption of fossil fuels. As described by Zijistra, sources
with a capacity equal to or greater than 20 MW must meet this PSR through own abatement
actions or the purchase of credits from other sources. The environmental goal of the program is
an industrial emission target of 55,000 tons of NOX in 2010, a 55% reduction from 1995 base
year emissions of 122,000 tons. Because a rate-based program does not control total emissions,
the government set an interim goal of 75,000 tons for 2005 to indicate whether tightening of the
performance standard of 50 grams of NOX per GigaJoule will be necessary. To add additional
flexibility, the program allows pollution sources to bank credits for future use as well as borrow
credits from their allocation for next year.
4.1.6 EU Greenhouse Gas Emissions Trading
On July 2, 2003 the European Parliament approved a directive on emissions trading that will
create a market in carbon dioxide emissions across the EU beginning January 2005.38 As
described in the EU Green Paper, emissions trading will establish limits on carbon dioxide
emissions from energy intensive sectors. Sources that reduce emissions to a level below their
limit can sell this surplus or bank it for future use. The EU mechanism will be the first multi-
national emissions trading scheme in the world. One key feature is the right of member states to
auction a portion of the allowances. The rest of the allowances will be granted to existing sources
without charge.
4.2 Tradable Salinity Credits in Australia
Two examples of salinity credit trading systems are found in Australia. As described by Newman
and Gross, one is in the Murray-Darling Basin Commission, which manages water resources in a
three-state area that produces over half of Australia's agricultural output. The basin system is
naturally saline, with some stream inflows saltier than the sea. Extensive irrigation activities in
the upstream states of New South Wales and Victoria, encouraged by the sale of irrigation water
to farmers at low prices, increased the flow of salt into the river system, reducing water quantity
and quality to the downstream state of South Australia Irrigation activity in South Australia
further added to salinity levels of the water before it reached downstream urban users. Under the
Commission's salinity and drainage strategy, each state is responsible for its actions affecting
river salinity and no actions are permitted that increase overall river salinity. Credits can be
earned for investments that limit the entry of salt into the river system. The tradable credits are
used to offset debits for drainage into the system.
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Trading Mechanisms
The second concerns the Hunter River, which experiences naturally saline conditions that
adversely affect agricultural productivity and drinking water quality. To protect river water
quality from further deterioration due to saline discharge, coal mines and other sources along the
river are subject to salinity discharge limits. When the river is at low flow, no discharges are
permitted. At high flow limited discharge of saline water is allowed. In flood state, unlimited
discharge is allowed provided salinity levels (measured by electrical conductivity) in the river do
not exceed a stated threshold. Beginning in 1995, mines were allowed to trade allowances for
discharge during high flow conditions. The progranji is considered highly successful.39 Salinity in
the river is much lower now than before the schem:
mines have opened.
4.3 Tradable Water Rights
was implemented and at the same time new
Trading in water rights is a relatively new phenomenon, with most examples dating from the
1980s or 1990s. Three cases are discussed briefly: the Murray-Darling Basin in Australia, New
Zealand and Chile. Until about ten years ago, tradable water rights were an important feature of
water management at some of the oases in the Western Desert of Egypt.
4.3.1 Australia
To protect water quality, the Murray-Darling Basin Commission imposed a cap on water use and
water transfers out of the basin. Under the cap, individual sources received tradable water rights.
The Commission also holds periodic water allocation auctions. Volumes traded, although small
compared to total water allocations, have increased steadily.40
4.3.2 New Zealand
New Zealand's Resource Management Act encourages local authorities with responsibility for
managing natural resources to consider alternative mechanisms. The Manawatu-Wanganui
Regional Council's Oroua Catchment Plan is the fiist regional plan developed under the RMA to
include a transferable water permit system.41
4.3.3 Chile
Under Chile's 1981 Water Code, water use rights are completely separate from land use rights
and can be purchased, transferred, or sold.42 New water rights are awarded by competitive bid.
Partly because most water rights (perhaps 50%-65%) are traditional but not legally recognized,
water leases are far more common than sales. In one area north of Santiago, the price of a three-
month lease was estimated at $90-120 per liter per second (equivalent to about 1.5 cents per
cubic meter). Transaction costs are said to be relatively high because of the need for
infrastructure investments to transfer water, the need for approval from government authorities,
and the lack of legally recognized water rights. In general, however, the system appears to
promote efficient water allocation.
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32 November
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Subsidies
5. Subsidies
5.1 Subsidies for Improving the Environment
Subsidies are the mirror image of emission fees or
for their emissions, the subsidy approach offers ca
taxes. Rather than imposing charges on firms
;h payments to firms for reducing emissions.
Polluters who release emissions forgo the cash pa> ment Subsidy systems provide incentives to
polluters to control all units of pollution whose marginal control cost is less than the subsidy.
Subsidy systems for pollution control are especially popular in two sectors: farming and
municipal government. However, economists point out a major drawback of subsidy systems.
While subsidies provide incentives to existing firms and other sources to reduce their pollution,
new entrants may be attracted by the higher profits earned as a result of subsidies. In some
extreme situations this could have the perverse effect of increasing total pollution.
Several examples of subsidy instruments in Asian nations are summarized in Table 5.1.
5.2 Subsidies for Environmentally Friendly Agriculture and Land Management
Numerous countries use subsidies to promote environmentally friendly agriculture. Canada's
Land Management Assistance Program offers many land management subsidies and provinces
subsidize farmers' efforts to comply with codes of acceptable environmental practices. In the
Province of New Brunswick, for example, the Ministry of Agriculture offers payments for
practices that increase the organic content of soil aftd reduce soil erosion, including payments of
C$15 ($11) per acre for winter crops and of C$50 ($30.5) per acre for green manure crops.43
Faced with serious manure waste problems, Hong Kong introduced a program in the late 1980s
to pay allowances to farmers if they stopped maintaining livestock.
The European Union's Common Agricultural Policy requires member countries to offer financial
assistance to farmers for recommended practices in environmentally sensitive areas such as water
protection zones. Germany, Finland, Norway, and Sweden offer grants to farmers who convert
from traditional to organic farming. The United Kingdom is one of several European countries
that reward farmers for not spraying around the edge of crops. The crop-edge program in the
U.K. has enhanced bird and butterfly populations yvhile having minimal impact on crop yields.
Farmers in nitrate-sensitive areas of the United Kingdom can receive annual per hectare
payments for limiting their use of nitrogenous fertilizers and animal manure, establishing crop
cover to avoid bare land in the fall, and keeping hedges and woodland. Under Germany's Nature
Conservation Act, farmers are rewarded for adopting environmental management practices such
as reducing fertilizer use, refraining from converting grasslands into cropland, and refraining
from using meadows while insects are hatching,44 Also, several alpine countries subsidize
sustainable agriculture and animal husbandry activities in mountainous areas to prevent
environmental degradation.
*
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Table 5.1. Environmental Subsidies in Asia
Country, instrument, and
source of data
Indonesia—tariff
reductions for wastewater
treatment equipment
.45
Korea—low interest loans
and income tax deductions
for purchase of energy-
• • 46
saving equipment.
PR China - reduced tariffs
for pollution control
equipment and advanced
technology goods
Philippines—tax
exemptions for pollution
control equipment47
Thailand —import and
income tax exemptions for
pollution control activities
Taiwan —corporate
income tax deduction on
pollution control
equipment
Indonesia, Korea, Taiwan
and Thailand — soft loans
for pollution control
Description of instrument
Tariffs are reduced on imported wastewater treatment
equipment.
Under the Energy Utilization Act of 1979, low interest loans are
provided for a variety of energy-efficiency investments. Firms
that produce energy-saving equipment receive a corporate
income tax deduction of 10%; firms that import this equipment
receive a deduction of 3%.
The PR China has made great efforts to encourage the use of
imported high-technology goods, including pollution control
equipment, through reductions and exemptions from tariffs and
customs duties.
Exemptions of up to 100% of import duties and local taxes are
given on anti-pollution devices for industries covered by the
Investment Priorities Plan. (Before 1984, the exemption was for
up to 50% of tariffs on imported pollution control equipment.)
A tax exemption for pollution control devices of up to 5% of
income is being considered. Because operating costs of
pollution-control devices is typically greater than the expected
value of existing fines for violating pollution standards, it is
unlikely that the policy has reduced pollution.
Pollution control equipment not produced in Thailand is exempt
from import duties, and foreign specialists working on pollution
control activities are exempt from income taxes.
In 1981, the Taiwan government approved income tax
deductions for corporations purchasing pollution control
equipment or clean technology.
With assistance from international donor organizations, firms in
Indonesia, South Korea, Taiwan and Thailand can borrow for
pollution control equipment and clean technology at favorable
interest rates and other loan terms.
A number of countries subsidize reforestation activities. In the Belgian region of Flanders,
private forest owners can obtain subsidies for reforestation, granting access to the public, and
forest grouping. In 1994, Finland announced revisions in its tax structure for forests. Under the
revised system, forest reserved for noncommercial purposes and designated in officially
approved management plans will not be taxed based on its prospective yield as before, but rather
will remain tax-free for a 13-year transition period. The United Kingdom provides grants for the
planting of trees and hedges on agricultural land. In Portugal, farmers can obtain subsidies and
concessional loans for reforestation and creation of permanent pastures, and Spain and Turkey
offer grants for afforestation and other land restoration activities. In Japan, forest owners can
34
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Subsidies
receive grants, low-interest loans, and favorable tajx treatment in return for observing specified
land management practices (OECD, 1994).
5.3 Subsidies for Resource Conservation
Another area where subsidies have been used extensively is the promotion of resource
conservation. Denmark has offered grants for activities such as renewable energy source power
generation, energy-saving measures, and used oil collection and exempted energy-efficient light
bulbs from the aforementioned product charge on bulbs. The Netherlands has exempted
recycling wastes from its recently imposed waste tax, and exempted water used to wash
recyclable beverage containers from its new groundwater tax. Both of these taxes were described
above.
In the western Australian mining community of Kalgoorlie-Boulder, where water is supplied by
a 550-km pipeline, a $2.6 million (US$2.0 million) campaign in 1995 sought to reduce water use
from 7,000 million liters per year to 6,300 mil
businesses, institutions and households, and included water consumption audits of businesses
provided at 50% of cost, a $300,000 (US$232,<
ion liters per year. The campaign targeted
)00) revolving loan fund to finance water-
efficient technologies, free installation of water-saving toilets and shower heads, and subsidies
for a host of similar water-saving devices. The campaign achieved a reduction in demand of
about 13%, an improvement over the 10% reduction that was originally sought.48
In Switzerland, individuals may deduct energy-saving improvements from their taxable income,
and businesses' expenditures on energy-efficient equipment, solar power, and other similar
investments are subject to accelerated depreciation. Australia exempts certain recycled paper
products, solar power equipment, and alternative fu ;1 technology from its Wholesale Tax.
5.4 Environmentally Harmful Subsidies
5.4.1 Developing Countries
In much of the world, forest resources, waste co
below their long-run marginal cost. It has been
contributed to 5% of the total area deforested in the
lection, water, and electricity are priced far
estimated that tax benefits for businesses
Brazilian Amazon Fertilizers and pesticides,
which are taxed in several European countries, arc subsidized in pans of Asia. In much of the
world, forest resources, waste collection, water, and electricity are priced far below their long-
run marginal cost. Electricity is far cheaper in developing countries than in OECD countries. The
World Bank (1992) has estimated that developing countries use about 20% more electricity than
they would if consumers paid the true marginal cost of supply.
The government of Egypt, for example, subsidizes many activities, a number of which could be
termed environmentally unfriendly. Some of these Subsidies are being reduced or eliminated. For
example, as a condition for project lending, the Wtorld Bank succeeded in having Egypt reduce
substantially its subsidies for agricultural fertilizers and pesticides (American Chamber of
Commerce in Egypt). Historically, Egypt has subsidized the market price of diesel fuel and fuel
oil, setting domestic prices at approximately one-half of world market levels. Recently,
petroleum exploration companies have discovered large quantities of natural gas in the Western
Desert and in coastal areas of the Red Sea Contract terms for these exploration and production
concessions give the GOE a 50% share in any production but also compel the government to buy
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International Experiences with Economic Incentives for Protecting the Environment
the other 50% at world market prices. Finding markets for all of the natural gas has been a
problem, especially with the subsidies already offered to diesel fuel and fuel oil. The Egyptian
government has decided to subsidize further the use of natural gas through the construction of
pipelines and below-cost sales to certain large consumers. Although not the primary motivation
of these policy decisions, urban air quality is improved through these measures.
5.4.2 OECD Review
Based on an analysis and review of the literature on environmentally harmful subsidies, a 1998
OECD report concluded:
• A subsidy can be defined as environmentally harmful if it encourages more
environmental damage to take place than that which would occur without the subsidy.
• The largest percentage of support has been implemented through minimum price
regulations, which increase the marginal revenues of the producer at the expense of
consumers and taxpayers.
• Support in the OECD countries is mainly given to inefficient firms in mature industries in
order to protect them from foreign competition.
• The tax jurisdiction under which the support measures are applied has a significant effect
on the economic and environmental aspects.
• Support measures consist of a combination of direct financial mechanisms and
regulations. Removing only one element from such combination will often have only
limited influence.
• Support measures may also represent a rather weak beneficial effect on income, growth
and employment, while having adverse effects on the environment.
• It is difficult to calculate the exact environmental effect of support policies across the
sectors. A rough estimate can be based on the elasticity of demand and supply in a given
sector, the point of impact of the support measure in the market exchange, and direct and
indirect links between the point of impact of the support and resulting pollution or other
adverse impact.
* The positive effects of the support removal will often become apparent only after
relatively long time span. Any estimates of the environmental benefits of support removal
will necessarily depend on assumed technical development and the time horizon
examined.
• Because of the increasing benefits that accrue over a longer time period the total
environmental benefits of support removal will be larger than estimates based on
empirical evidence.
5.4.3 International Lending: The Equator Principles
In response to pressure from environmental activists that international banks too often financed
projects that were environmentally damaging, the International Finance Corporation in
collaboration with ABN Amro, Barclays, Citigroup and WestLB AG developed a banking
industry initiative for addressing environmental and social issues in project financing. The
initiative applies to projects in excess of $50 million, placing projects in one of three risk
categories. Borrowers developing projects in the two higher-risk groups will be required to carry
out an environmental assessment covering issues such as the project's impacts on indigenous
36 November
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populations and biodiversity, pollution prevention
2004 twenty international banks had adopted the
rnd the efficient use of energy. As of March
Equator Principles.
The Equator Principles seek to achieve three main
in categorizing projects into high, medium and low
IFC categorization process. They apply this to proj sets
should be helpful in encouraging lending for environmentally
Subsidies
esults. First, banks use common terminology
environmental and social risk, based on the
globally and to all industry sectors. This
sound projects.
in their environmental and social
plans, the extent to which they have
ic pollution abatement guidelines and IFC
them. This should give banks much better
Second, banks require that their customers demonstrate
reviews, and in their environmental and social management
met the applicable World Bank and IFC sector-specific pollute
safeguard policies, or.to justify exceptions to
information on which to make judgments.
Third, banks must insert covenants into the loaii documentation for high and medium risk
projects covenants to ensure that borrowers comply with required environmental and social
management plans. If those plans are not followed], and if deficiencies are not corrected, banks
have the ability to declare the project loan in default).
The IFC uses two sets of guidelines for its projects
Handbook was adopted in 1998 and compiled by
IFC. That document covers 40 industrial sectors.
health and safety 'safeguard' guidelines that cover cither sectors
The safeguard policies generally represent methods for dealing with issues that cross industry
The Pollution Prevention and Abatement
environmental staff from the World Bank and
' Tie IFC also uses a series of environmental,
sectors, such as nature protection or population
consistent environmental and social principles. The
on the other hand, mostly are sector-specific envi ronmental standards that apply to processes,
technology, and issues in specific industries, and lepresent good practice within that sector. In
these respects the policies and guidelines support es ch other. It is instructive to provide examples
of these guidelines and safeguard policies to characterize their scope and content.
esettiement, where it is important to apply
World Bank pollution prevention guidelines,
Coke manufacturing guidelines from the Pollutioi
quite detailed and discuss many aspects of manufaci uring
* Typical manufacturing processes
• Typical waste characteristics
Prevention and Abatement Handbook are
and environmental performance:
• Pollution prevention and control methods
• Target pollution loads for air and water per unit |of coke produced
• Concentration guidelines for wastewater discharge
• Noise limit guidelines
• Monitoring and reporting guidelines
A few of the IFC guidelines are similar to the
Systems, which specifies discharge and emission
World Bank guidelines, e.g., Gas Terminal
imits in terms of concentration (but not per
unit of output), workplace noise and air quality limits and general environmental considerations.
Most of the IFC guidelines are much more general,
and conduct of activities but without any numerical
offering broad recommendations for planning
recommendations.
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International Experiences with Economic Incentives for Protecting the Environment
The World Bank and IFC guidelines have been used routinely for project appraisal and as criteria
for lending. With the recent adoption of the Equator Principles by several important international
banks, the World Bank and IFC guidelines surely will have broader visibility, potentially leading
to their greater use and impact.
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Liability
6. Liability
The imposition of liability for damage to human hjealth and the environment can be a powerful
incentive to encourage good environmental behavior by corporations, as well as a means to
compensate those who are injured. If polluters are liable (and must pay) for the damage they
cause, they will have an incentive to limit pollution. The profit-maximizing firm will control
pollution to the point where the marginal pollution I damage equals the marginal costs of control.
At this point, their total payments for controlling pollution and compensating victims are
minimized.
Liability mechanisms are a part of both civil and I common-law systems, and can include both
criminal and civil (non-criminal) sanctions. Many environmental statutes worldwide have civil
liability provisions, though environmental liability actions in developing countries are relatively
rare. Weak implementation of the law in developing countries is one problem. Another problem
is jurisdiction: whether a case should be brought jn the developing country where the damage
occurred or in the home country of the firm responsible for the damage. As the examples here
suggest, there is no universal rule regarding jurisdiction. Moreover, in some cases individuals
harmed by spills are not compensated due to unclear liability rules or inadequate financial
guarantees prior to the start of operations.
More than a decade ago, the United States passed the Oil Pollution Act and CERCLA, both of
which have provisions for natural resource damage assessment and restoration. More recently,
the European Union responded to the difficulty of pursuing environmental liability claims under
traditional legal remedies. In 2002 the European Commission of the European Union adopted a
proposed directive on environmental liability that seeks to prevent and restore environmental
damage. That directive, approved by the EU Parliament in 2003, should be approved by EU
member states over the next three years. The directive holds operator;; of environmentally risky
or potentially risky activities responsible for damage and for restoration in the event of a
situation that causes damage. Operators also are responsible for costs of necessary preventative
measures to counter the risks of environmental damage (e.g., when the dike of a holding pond
weakens or there is the threat of an explosion because of excessive pressure). Under the
directive, public interest groups and other non-governmental organizations can require public
authorities to respond to environmental threats and can challenge in court the decisions of public
authorities when the decisions appear to contravenejthe directive.
Examples are given below of instances when liability was imposed on firms for causing
environmental damage. The first example concerns the Ok Tedi mine in Papua New Guinea. The
second example is of a mercury spill in Peru. ,A third set of examples concerns damage
assessments for coral reefs, including one case in Egypt.
Several implications may be drawn from this review. First, pursuing liability claims is very
costly and the outcome is highly uncertain, arguing that liability is most appropriate only for
large incidents and not routine polluting activities. (Second, smaller and more poorly capitalized
enterprises may find bankruptcy an attractive option in the event of a large pollution incident.
Consequently, performance bonding or some other type of guaramee may be desirable for
enterprises that have the potential of causing significant environmental harm.
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International Experiences with Economic Incentives for Protecting the Environment
6.1. Ok Tedi Mine, Papua New Guinea
The Ok Tedi mine is located on Mt. Fubilan at the headwaters of the Ok Tedi River in the Star
Mountains in western Papua New Guinea, not far from the Indonesian border.49 The Ok Tedi
River flows 200 km to the south where it joins the Fly River. The Fly River meanders over 450
km of floodplain until it joins the Strickland River and empties into the Gulf of Papua. The mine
is at an elevation of 1,800 m, in a geologically unstable region marked by frequent landslides and
earthquakes due to very high rainfall (10 meters annually). Mining is conducted by the Ok Tedi
Mining Limited (OTML).
Originally the PNG government required in the Environmental Impact Statement that the mine
have a tailings pond as a condition of operation. After foundations for the tailings dam were
destroyed by major landslides in December 1983 and January 1984, OTML received permission
from the government to dump some 65 million tons of tailings and waste rock annually into the
Ok Tedi and Ok Mani rivers. The tailings are sand-sized and smaller, while the waste rock is
gravel to boulder size. The waste material contains copper, cadmium, lead and other heavy
metals.
The tailings and waste rock dumped into the Ok Tedi river system have caused much greater
adverse impacts downstream than originally envisioned. The riverbed at Tabubil where most
mine employees live, has risen by approximately 4 meters. Downstream where the Ok Tedi
flattens out and loses some of its velocity, sand has accumulated to the extent that the riverbed is
six meters higher. Elevation of the riverbed has increased the frequency and severity of flooding,
as well as contaminating the floodplain of the Fly River with heavy metals and sand. Several
hundred square kilometers of formerly productive lands have experienced forest dieback and
areas near the river are no longer suitable for cultivation. In the Ok Tedi, fish catches have
declined by 90% from baseline (pre-mine) levels, while on the middle stretches of the Fly River,
catches have declined by about 70%. It is important to note that fish and water quality both meet
WHO standards, meaning that human health impacts have not been an issue.
There have been at least six different compensation agreements designed to address these
environmental impacts. The first agreement covered land loss during construction of the mine,
and also provided compensation in the event of unanticipated adverse environmental impacts
within the area covered by the mining leases. The subsequent compensation agreements were the
result of litigation by affected parties living outside the area covered by the mineral lease.
Courts in Papua New Guinea would not accept cases brought by those outside the original
compensation agreement. As a result, plaintiffs filed suit in the Australian courts. BHP Billiton
(a large Australian natural resources company) worked with the PNG legislature to draft
legislation that would bar such suits and protect BHP and the other owners of Ok Tedi from
liability for harm to people or the environment. Adverse publicity effectively stymied these
efforts and eventually the Australian courts found that several groups of plaintiffs had been
injured. The PNG legislature enacted the Restated Supplemental Agreement Act (RESA) also
known as the Mining Act of 1995 to codify these settlements from the Australian courts.
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Liability
Source: http://www.oktedi.com/okTediDociuTients/'?ktMimap.pdf
Victories in the Australian courts enhanced the bargaining position of the affected landowners by
providing them with resources necessary to hire
outside legal representation and seek greater
compensation. The 1995 act is noteworthy because it provides compensation without proof of
loss to communities deemed affected by changes to the river system.
A 1996 settlement agreement between BHP and 30,000 landowners has three elements: creation
of a tailings pond to receive wastes from continued mining; rehabilitation of the Ok Tedi and Fly
Rivers; and compensation of A 110 million ($ 70 million US) to the affected landowners, and an
agreement to pipe tailings to unused land at the bpttom of the mountain at a cost of between A
300 million and A 450 million. In addition, OTML agreed to dredge about 20 million tons of
rock annually in parts of the Ok Tedi River to reduce siltation, erosion of the riverbanks and
flooding of adjacent farmland, and BHP agreed Ito pay the plaintiffs' legal costs. While the
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International Experiences with Economic Incentives for Protecting the Environment
compensation was paid, the mine continued operations while it conducted a risk assessment of
the planned tailings pond and the ongoing dredging activities.
In August 1999, the PNG government asked the World Bank to review OTML's risk assessment
for its waste disposal operations and to consider broader issues of environmental and social
stewardship and responsibilities between the government and the peoples of the Western
Province. The World Bank concluded that the best option from an environmental viewpoint was
to close the mine immediately. However, there had been no preparations for closure in the
affected communities and, as the World Bank (2000) pointed out, the social costs of closure
needed to be considered.
The PNG Government interpreted the risk assessment as supportive of continued mining until
2010, the date originally planned for mine closure. BMP recognized that the mine was an
increasing liability and announced in May 2000 that it wanted to end its involvement in Ok Tedi
Mining Limited by June 2001. Atlas Mining, a Philippine company, emerged as the most likely
buyer. The Papua New Guinea government has expressed concern regarding the sale, citing
recent litigation by landowners in the Western Province where the mine is located and possible
compensation that may be ordered by the Victoria (Australia) Supreme Court.
Certainly not all impacts have been adverse. The OTML has been the principal agent of
economic development in the Western Province. It employs 1900 people and at least four times
that many jobs are created indirectly as a result of the mine. During its first 15 years of operation,
infant mortality has fallen from 300 to 15 per 1000 live births, life expectancy has increased
from 30 years to 50 years, and the incidence of malaria has fallen by at least two-thirds. In
addition, substantial sums have been paid in taxes and royalties to the PNG government,
governments of the Western Provinces, and local landowners.
An important aspect of the litigation and settlement concerns what precedent it might have for
mining operations of foreign companies and whether injured parties could seek redress in the
home nation of the company. The fact that a mining company could be sued in its home country
for damage caused in another country where it had operations is an important precedent.
Moreover, that it could be found liable for environmental damage even when it complied with all
environmental regulations and permit conditions of the host country also is remarkable.
Compensation paid to adversely impacted parties in the host country has been substantial; the
consequences of environmental damage were a major drain on corporate resources, enough so
that BHP is trying to sell or otherwise dispose of its interest in the project.
6.2. Yanacocha Mine, Peru
Yanacocha is a large gold mine in the Peruvian Andes. On June 2, 2000 a truck traveling from
the Yanacocha gold mine spilled 151 kg of mercury between the villages of Choropampa and
Magdalena. The truck driver allegedly went on to Lima without informing residents of the
hazards posed by mercury (Langdon). Local residents collected as much mercury as possible,
believing it was valuable. According to Yanacocha sources, symptoms of mercury poisoning
affected more than 900 individuals and several individuals were hospitalized (IFC, 2000).
Interestingly, a risk assessment of the spill conducted for the mine owners did not address
exposure resulting from the collection activity.
Newmont Mining is a 51% owner of the mine, along with Minas Buenaventura with 44% and the
International Finance Corporation, a private sector branch of the World Bank, with 5%. The
42
November
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Liability
Compliance Advisor Ombudsman (CAO), an evaluation unit of the EFC, investigated the
accident and reported:
• The mine had no emergency response plan for mercury spills outside its property
Newmont did not apply global standards for the
transport of hazardous wastes
J L .< W ____j_._
The mine did not follow safety procedures for loading and transporting mercury, and
* The mine owners and the Peruvian government were not forthcoming about the dangers
posed by mercury exposure.
Under protest Newmont paid a fine of 1.74 million soles (approximately $500,000) to the
Peruvian government. The company also agreed to provide health insurance for five years for
individuals with symptoms of mercury poisoning, to construct a number of public works projects
in the affected area, and to respond to the recommendations of the CAO. Newmont took a charge
of $10 million in its financial statements for 2000 to reflect these costs. In September 2004,
lawyers representing individuals claiming injury fiom the spill were successful in petitioning a
U.S. court to hear their case. Newmont acknowled >ed that it could not predict the magnitude of
its future liabilities from the spill.
6.3 Coral Reef Damage Assessments
These are several instances where liability has been imposed for damage to coral reefs, and
compensation paid for restoration and cleanup, as well as lost tourism revenues, etc.
6.3.1 Egypt
On April 4, 1996 Cunard Lines' Royal Viking Sun strayed from course and ran into a coral reef
off Tiran Island near Ras Mohammed in the Red [Sea. Before the vessel was freed, it damaged
approximately 2,000 square meters of reef. Egyptian authorities impounded the vessel and
demanded $23.5 million (equivalent to over $10,OpO per square meter of reef) in compensation
for lost tourism revenues and damage to the environment. Cunard Lines settled the case and paid
that amount.
6.3.2 Puerto Rico
On July 24, 1997 the 326-foot For tuna Reefer went aground near a Nature Reserve off the west
coast of Mona Island in Puerto Rico (Anderson). The vessel damaged a barrier reef that extends
about 10 miles from the eastern end of the island around the south coast and to the northwest.
The reef contains large, branching elkhom corals 1(hat were damaged by the grounding. Because
of the remoteness of the site, salvage efforts were lindered and the vessel remained aground for
ten days. While no fuel oil was spilled, the grounding and later salvage activities caused physical
damage to an area approximately 8,000 square meters.
Restoration experts advised reattaching the largest pieces of coral to reestablish the physical
structure of the reef (Elkhom coral often survive reattachment). In a September 11 settlement
agreement with the Commonwealth of Puerto Rico and the National Oceanic and Atmospheric
Administration, the ship owner, Rama Shipping Company of Thailand, agreed to pay $1,250,000
for natural resource damage (equivalent to about $190 per square meter of damaged reef). The
settlement provides $650,000 for emergency reattachment of 400 large pieces of coral, to be
2004
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International Experiences with Economic Incentives for Protecting the Environment
conducted under NOAA leadership, and $400,000 for compensatory restoration to the
Commonwealth. By September 20, NOAA had initiated emergency restoration efforts.
6.3.2 Australia
On November 2, 2000 the container vessel MVBunga Teratai Satu ran aground on the northwest
side of Sudbury Reef, a part of the Great Barrier Reef of Australia.50 The 22,000 ton, 184 meter
long cargo vessel was registered to Malaysia International Shipping Corporation and carrying
1200 tons of fuel oil. After two days of effort, the ship was freed without loss of fuel or cargo,
however the reef sustained considerable damage. The Australian government conducted a
cleanup in two phases. The first phase involved a relatively small 50-meter by 30-meter scar
from the ship in the coral. This area was heavily contaminated with a tin-based anti-fouling
substance that had been applied to the vessel. At the end of the first phase of cleanup, several
large blocks of reef were replaced to facilitate regeneration of the coral. The second phase of
cleanup involved a larger debris field 100 meters by 300 meters. The shipping company has
agreed to pay the Australian government at least $2 million to compensate for the cleanup and
restoration efforts and long-term monitoring. One of the other outcomes of the incident will be a
thorough review of shipping practices near the Great Barrier Reef.
44 November
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Information Provision
7. Information Provision
The provision of information can be a powerful tool to encourage firms to pursue
environmentally responsible behavior. This chapter discussed three such mechanisms:
performance rating of firms; pollutant release and transfer registers; and product labeling.
7.1. Performance Rating of Firms
7.1.1. Indonesia
In Indonesia, the Environmental Impact Management Agency (BAPEDAL) created the Program
for Pollution Control, Evaluation, and Rating (PROPER) to rate factories on their compliance
with national wastewater discharge standards; the ratings are then disclosed to the public through
the media. The program operated for three years frbm 1995 until the financial crisis of 1998 but
is now being revived.51 The first of these surveys) in June 1995 rated 187 factories. Five color
categories were used to rate environmental performance: gold for firms that use best technology
and reduce pollution to 5% of the national standard, green for firms that reduce pollution to 50%
of national standards, blue for compliance with national standards, red for firms that fail to meet
national standards, and black for those without pollution controls.
Formal as well as informal sanctions applied, depending upon the color class. For example, the
Indonesian stock exchange would not list securities of firms that fall short of the blue
classification. Cultural factors such as shame avoidance and citizen lawsuits also play a role in
motivating polluters. Evidence suggests that this system influenced behavior. In the first survey
in June 1995, 35.3 percent of the 187 factories were in compliance with the government's water
pollution regulations. Two years later, 49.2 percent |of the factories were in compliance.
7.1.2. Philippines
The Philippine Department of Environment and Natural Resources introduced the Industrial
Ecowatch Project in 1995 as a voluntary compliance monitoring system, and formally
implemented it by regulation in 2003.52 The idea isj to use public disclosure to pressure firms that
value their reputation to manage their pollution. A "gold" rating means that the firm is practicing
resource conservation and pollution prevention, using clean technology and implementing self-
regulation beyond the requirements of environmental regulations. A "green" rating indicates very
good performance. A "blue" rating refers to minimum compliance with all applicable
environmental regulations for at least one year. A "red" rating refers to compliance that falls
short of the standards. Lastly, a "black" rating pertains to the absence of any effort to comply
with regulations and a pollution level that is damaging to the environment.
Ecowatch is being implemented in the jurisdictions of the Laguna Lake Development Authority
and the DENR-National Capital Region. The ratings of seventy-two firms were calculated in the
DENR-NCR area. Based on initial confidential disclosure to the firms, only 4 industries made it
to the blue rating, Before disclosure to the public was made, 22 firms improved their
performance to a blue rating. Former President Ramos honored firms with blue ratings in April
1998. These firms have benefited from the recognition as full-page advertisements were
launched to announce their environmental achievement. It appears that resources invested in the
Industrial Ecowatch Project will pay dividends in the future. The payback is not only to the
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International Experiences with Economic Incentives for Protecting the Environment
environment but also to the firms that get good media exposure for their products. Sooner or
later, this will translate to more demand for their goods. With color-coding, firms have an
economic incentive to manage their pollution.
The success in the adoption of Ecowatch is partly attributed to the-assistance of two World Bank
divisions: the Agriculture and Environment Division - East Asia I and the Policy Research
Department, Environment, Infrastructure & Agriculture Division. Furthermore, the industries'
reception of Ecowatch was not adversarial due to the participatory framework used in planning
the project's mechanics. The industries themselves were partly responsible for the design of the
Ecowatch system, which includes area coverage and criteria for rating & timing. Also, the
country's larger industry associations came together and supported the launching of the project.
The database of Ecowatch will be merged with the databases of the Pasig River Rehabilitation
Program and the Management and Information System Office of the Environmental
Management Bureau. This integration of data gathered from monitoring activities will
strengthen the regulatory network as inspection and reporting will become easier. Also, other
users will be given the opportunity to tap into this information resource.
Similar programs are being developed in Mexico, Columbia and the People's Republic of China.
7.2. Pollutant Release and Transfer Registers (PRTR)
For certain kinds of environmental problems and in certain social and institutional situations, the
best regulatory solution may be to encourage the generation and dissemination of information
about a problem. This approach recognizes that disclosing information can put pressure on
businesses indirectly (rather than directly through administrative penalties such as fines or
closures), and encourages them to engage in low cost measures to address the environmental
problem rather than seeing business always as "the problem" to be regulated.
The US Toxics Release Inventory reporting system dates from 1987. Since then several other
nations have developed similar systems. Known internationally as Pollutant Release and Transfer
Registers (PRTR), these programs have their origin in the 1992 Earth Summit, officially called
the United Nations Conference on Environment and Development (UNCED). Chapter 19 of
Agenda 21, the Summit's action plan, calls on nations to develop such programs. The OECD, the
World Bank, and UNEP have developed PRTR guidelines and offer assistance in developing
such programs.
The early PRTR programs include Canada's National Pollutant Release Inventory (1993), the
United Kingdom's Chemical Release Inventory, and Australia's National Pollutant Inventory.
The Czech Republic, Denmark, Finland, France, Ireland, Japan, Mexico, the Netherlands, the
Republic of South Africa, Sweden, Switzerland, and Trinidad and Tobago presently are in
various stages of implementing PRTR programs.53 Currently, pollutant release data by facility
and for geographic regions are available on the Internet for the United States, Canada, Australia,
and the United Kingdom.
7.3 Product Labeling
Product labeling programs normally are voluntary in nature, relying on third-party verification of
positive or environmentally neutral attributes of products. Labeling programs that focus on
positive or environmentally neutral attributes of products may be classified as Seal of Approval
46 November
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Information Provision
Programs or Single Attribute Programs. A number of international seal of approval programs are
summarized in Table 7.1 and the Korean program is described in somewhat more detail in Table
7.2.54 Single attribute programs that focus on whether a product can be recycled or is
biodegradable also should be noted.
Table 7.1. Summary of Environmental Product Labeling Programs
Country
Austria
Canada
China
Croatia
Czech Rep.
Denmark
EU
Finland
France
Germany
Germany
Iceland
India
Japan
Korea
Luxem-
bourg
Malaysia
Netherlands
New
Zealand
Norway
Singapore
Seal
Austrian Eco-label
Environmental
Choice
Croatia's Env.
Label
Environmental
Label
Nordic Swan
EU Ecolabei
Nordic Swan
NF-Environment
Blue Angel
Green Dot
Nordic Swan
Eco-Mark
Eco-Mark
Eco-Mark
EU Ecolabei
Product
Certification
Stichting Miliekeur
Environmental
Choice
Nordic Swan
Green Label
Type of Label
Seal of Appr
Seal of Appr
Seal of Appr
Seal of Appr
>val
>val
wal
aval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Single Attribute
Seal of Approval
Seal of Appr
Seal of Appr
Seal of Appr
aval
aval
aval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Year
started
1991
1988
1994
?
1994
1989
1992
1989
1992
1977
1990
1989
1991
1989
1992
1992
1996
1992
1990
1989
1992
Number of Products
(as of 1998)
35
49
12
33
17
42
11
42
6
88
7
42
16
69
36
11
1
32
17
42
21
2004
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International Experiences with Economic Incentives for Protecting the Environment
Country
Spain
Sweden
Sweden
Taiwan
Thailand
UK
Seal
ANEOR
SIS-Nordic Swan
Environmental
Choice
Green Mark
Green Label
EU Ecolabel
Type of Label
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Seal of Approval
Year
started
1993
1989
1990
1992
1993
1992
Number of Products
(as of 1998)
3
42
17
35
6
11
Source: Abt Associates
Most product labeling programs describe positive features of products, but the EU has a few
labeling programs that describe negative environmental attributes of products, such as drinking
water contaminant reports, pesticide warning labels, and workplace material safety data sheets.
Table 7.2. Korean Ecomark Criteria
Product category
Products made with reused paper
Tissues made with reused paper
Reused plastics
CFC free aerosol sprays
Reusable diapers
Non-asbestos brake lining
Aluminum cans with stoppers
Filter for kitchen sinks
Non-bleached and non-dyed towels
Water valves
Packaging materials using wastes
Soap made with waste edible oils
Criterion
> 50% reused paper
> 50% reused paper
> 60% reused plastic
0% CFC content
100% cotton
0% asbestos
Should use aluminum
Holes no larger than 1.5 mm diameter
Made without dyes or bleach
Water should not run with closed valve
Made with 100% waste
Contain > 50% waste edible oil
Korea initiated its Eco-Mark Labeling program in June 1992, under supervision of the Korean
Ministry of Environment.55 A committee within the Korean Environmental Labeling Association
determines if applicants for eco-certification meet its criteria Unlike other labeling schemes,
Korea's program has focused on one important criterion in each product category. Labeling
criteria for the first 12 product categories approved under the program are far simpler than the
life cycle assessment criteria employed in some other countries. The program appears to have
48
November
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Information Provision
had incentive effects. Sales of recycled paper increased by 30% after the introduction of the
program.
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International Experiences with Economic Incentives for Protecting the Environment
8. Voluntary Agreements
Voluntary pollution control programs and agreements are increasingly common in both develop
and developed countries as regulatory seek ways to motivate firms to go beyond compliance with
existing environmental regulations.
8.1 Covenants and Agreements
The Netherlands' use of covenants, agreements between industry and government, to address
environmental problems has attracted considerable attention in recent years. Covenants generally
have the legal status of private law agreements, allowing the authorities to seek legal recourse for
enforcement. Covenants have been signed between industry and the government concerning
products, packaging, waste, and other matters. In the field of air pollution, covenants have been
concluded on the reduction of SOX and NOX from power plants, the reduction of VOC emissions
from industry, small businesses, and households, and the phaseout of CFCs.
In Japan, voluntary pollution control agreements date back to the 1950s. Tens of thousands of
these agreements are now in force.
Under Indonesia's PROKASIH (or Clean Rivers Program), the largest polluters are encouraged
to sign agreements to reduce pollution by specific amounts over a specific time period. In the
first 2 1/2 years after the start of the program, about 1,000 polluters signed agreements, the
majority of which took measures to reduce pollution. The government has released information
on which signatories have complied and which have not and encouraged press coverage of
signatories' performance under the program.
8.2 Industrial Estates and Eco-lndustrial Parks
Several thousand industrial parks have been established around the world, many with the specific
objective of using waste materials from one industrial operation as raw material input to another.
A number of factors may be cited as stimulating the formation of eco-industrial parks (EIPs) and
industrial estates, notably preferential tax policy, direct subsidies, and increasingly strict
government regulation. Because many industrial estates and EIPs were established without any
special economic incentives, they are classified with voluntary actions. The Kalundborg EIP is a
case in point.
8.2.1 Kalundborg, Denmark
Kalundborg's voluntary industrial networks to re-use wastes have been described extensively
(Gertler & Ehrenfeld, 1997; Erkman, 1997). The discussion here will review the factors leading
to the development of the network. Six industrial plants are included in a network based on reuse
of waste products:
• Novo Nordisk/Novozymes A/S (insulin and enzymes)
• Asnaesvaerket A/S (electricity)
• Statoil raffinaderiet A/S (petroleum products)
• Gyproc Nordic East A/S (gypsum wallboard)
50
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Voluntary Agreements
• Soilrem A/S (microbiological cleaning of polluted soils)
• Asnass fiskeindustri A/S (trout fish farm)
Among the six industries there are at least 19 different exchange activities: seven water exchange
projects; six energy exchange 6 projects; and six so
number of ancillary projects to share laboratory
id waste projects. In addition, there are also a
capacity, common contracts with external
entrepreneurs, and personnel recruiting. The network evolved spontaneously in response to ever-
stricter environmental regulations. The Asnaes plant and the refinery were started around 1960,
but it was not until in the 1970s that the first exchange linkages were established. Gas was piped
from the refinery to the Gyproc plant from its start in 1972. In 1976 Novo Nordisk began
shipping sludge to farmers. The Asnass plant began in 1979 to sell fly ash to cement producers
and in 1981 to supply heat to the municipality. The number of exchange activities has doubled
since the early 1990s with the identification of more opportunities for profitable exchange.
The annual economic savings from the exchange .activities amount to about 100 million DKr
($10 million US). With a total investment or abchrt 500 million DKr, the payback times for
individual projects average approximately five yea's. These economic profits arise primarily as
an effect of resource savings. For example, recirci lating water between companies saves about
two million cubic meters groundwater and one million cubic meters of surface water every year.
About 200,000 tons of raw gypsum is saved through the use of gypsum produced from scrubbing
operations and approximately 20.000 tons of oil is saved through steam exchange.
Environmental legislation has been the major driver for the evolution of the Kalundborg EIP.
Most exchange activities have been a response to pollution legislation or initiatives to save
energy and water. Initiatives to use water more efficiently stem from relative water scarcity in
the region. Danish environmental legislation rests on negotiations between government and the
regulated community and not on rigid technological demands or emission standards. This
flexibility allows for local problem resolution, whi :h is manifest in the exchange activities. The
commune of Kalundborg, which together with the regional government is responsible for the
implementation of environmental legislation affecting the EIP, has been well informed and
supportive but not directly involved in negotiations between the companies.
8.2.2 Nanhai, Guandong Province, China
The Nanhai EIP is a new site focusing on the environmental protection industry. The park, which
is currently under development, seeks to co-locate new businesses that implement ecological-
industrial principles and conduct business with networks outside the park.
Four types of environmental businesses are sought most:
• Environmental equipment manufacturing, such as sewage and waste treatment
equipment; !
• Manufacture of environment friendly products;
• Environmental protection research and service; and
• Wastes recycle, reuse and regeneration, solvent recycle, etc.
A number of economic incentives are being offered to entice firms to locate within Nanhai,
including discounted land costs and favorable land financing terms. The city maintenance fee is
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International Experiences with Economic Incentives for Protecting the Environment
reduced. Firms locating within the park are offered many tax breaks (such as reduced property
taxes, reduced business fees, reduced taxes on equipment purchases, etc.). Preferential policies
also are offered regarding the introduction of experts and other human resources.
8.3 Waste Exchanges
The London Environment Exchange promotes trading in materials such as metals, plastic, paper
and glass.56 It is a response to new European Union regulations that require member states to
achieve 50-65 percent recovery of waste packaging materials by 2001 and recycle at least half of
that amount. The exchange was set up with assistance from the OM Group, which manages the
Stockholm Exchange and trades financial and pulp wood futures and options in London. The
OM Group hopes the Environment Exchange will help UK companies meet their EU obligations.
Waste exchanges may be viewed as a voluntary response to command and control regulations.
The UK is the first country to adopt the EU Environmental Directive in national law. Businesses
with annual sales of more than five million pounds and handling more than 50 tons of packaging
must hold Package Recovery Notes (PRNs) to prove they are fulfilling their packaging recovery
and recycling obligations. Those that recover or recycle more than required can sell their excess
PRNs to others. There are six types of PRN: glass, aluminum, paper, plastic and steel, and a
general note is issued for recovery of non-specific materials.
52 November
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Conclusions
9. Conclusions
This report provides an introduction to international use of economic instruments for managing
the environment. Because of the literally thousands of such instruments in use, the report can
only highlight some of the more interesting applies tions. In the case of fees, charges and taxes,
the report can only cover a small fraction of the miny applications, particularly those in Europe.
For other types of instruments, such as tradable permits, it is possible to summarize most
applications.
The 2001 USEPA report The United States Experience with Economic Incentives for Managing
the Environment provides a useful table, reproduced here as Table 9.1, of the general
applicability of different types of instruments, reflecting international as well as US experience.
It goes without saying, however, that the success of many instruments depends critically on
details of both design and implementation.
There is substantial evidence of growing use of economic instalments for managing the
environment. The 1997 EPA report provides a useful benchmark against which to assess
changes. Not only are more countries applying economic instruments but also they are doing so
in a more sophisticated manner. Many problems from older applications have been corrected.
For example, charge rates have risen to more nearly cover the cost of water deliveries in several
nations. Trading regimes are shifting to capped allowance systems from more open-ended
mechanisms.
Among the incentives more widely used in foreign countries than in the United States are
environmental product labeling, differential taxation of motor fuels, effluent discharge fees,
charges on noise pollution and carbon taxes. Mo$t industrialized countries have user fees for
municipal waste and water/sewage and deposit-refund systems for beverage containers. Water
user fees tend to be higher in Western Europe and lower elsewhere, with the notable exception of
Israel. Even in countries where water historically Jhas been free, charges for water delivery are
now finding acceptance.
The 1997 EPA report found that market-based permit systems are more common in the United
States than elsewhere, however this situation is evolving- for example, there are many tradable
permit systems now in use internationally.
The application of user and pollution charges elsewhere is more frequent than in the United
States, and several such charges appear to have incentive effects. Examples include Sweden's
NOX emission charge, water effluent charges in Germany and the Netherlands, product charges
in Norway, waste charges in Denmark and Korea, and water user or extraction charges in
Australia and several Asian countries. However, many user and pollution charges are primarily
revenue raising mechanisms. Several countries, including Denmark, Finland, the Netherlands,
Norway, and Sweden, have attempted to incorporate environmental considerations into the
design of their taxation systems in an effort to shift the tax burden from labor and capital to the
use of natural resources.
The use of economic instruments to limit green house gas emissions is an important and rapidly
growing application. In 1997 just a handful of nations imposed carbon taxes. Now many more
nations rely on carbon taxes and greenhouse gas trading regimes are in place. One can now place
buy or sell orders in organized markets for the right to emit these gases.
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International Experiences with Economic Incentives for Protecting the Environment
Table 9.1. Economic Instruments for Managing the Environment
Instru-
ment
Pollu-
tion
charges.
taxes
and fees
Input or
output
charges,
taxes
and fees
Subsi-
dies for
environ
mentally
friendly
activi-
ties
Remov-
al of
environ-
mentally
harmful
subsi-
dies
Deposit-
refund
Situation Where
Instrument Works
Best
• Damage function
relatively flat
* Monitoring data
available
• Numerous sources
•No monitoring
data
• Damage function
relatively flat
• Linkages between
input or output
and environment
• Monitoring data
available
• Subsidy is not
likely to stimulate
new entrants
• Environmental
harms from the
subsidies can be
documented
• Political will
exists to remove
subsidies
• No monitoring
data
• Recyclable
product
Examples
• Emis son/ef-
fluent charge
• Emission
charge
• Sewage
charge
• Solid waste
charge
• Carbon tax
• Leaded gas
tax
• Fertilizer tax
• Water user fee
• Sewer fee
• CFC tax
• Industrial
pollution
control
• Agricultural
activity
• Municipal
sewage plant
• Fuel subsidies
• Agricultural
subsidies
• Beverage
container
• Lead-acid
batteries
• Automobile
bodies
Pros and Cons
Pros:
• Stimulates new technology
• Useful if damage per unit of pollution
varies little
Cons:
• Limited control over the quantity of
pollution
• Potentially large distributional effects
Pros:
• Simple to administer
• Raises revenue
Cons:
•Weak incentive effects for pollution
control
• Potentially limited environmental
impacts
Pros:
• Politically popular
Cons:
• Potentially large budgetary cost
• Uncertain effects
• May stimulate too much of the activity
Pros:
• Should improve efficiency and welfare
Cons:
• Unpopular with those receiving
subsidies
Pros:
• Deters littering
• Stimulates recycling
Cons:
• High administrative costs
54
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Conclusions
Instru-
ment
Perfor-
mance
bonds
Trada-
ble
permits
Liabil-
ity
Infor-
mation
provi-
sion
Volun-
tary me-
chan-
isms
Situation Where
Instrument Works
Best
• Specific actions
desired
• Damage function
steeply sloped
• Precise control
over amount of
pollution
important
•Marginal control
costs vary across
sources
• Large impacts
•Recipients
understand
information
• Firms willing to
exceed applicable
standards
Examples
• Mining
•Timber
harvesting
• Emission
• Effluent
• Water rights ;
• Fisheries
access
Natural
resource
damage
assessment
•Toxic releases
• Product
character-
istics
• Energy
conservation
•Water
conservation
•Pollution
prevention
Pros and Cons
Pros:
• Can stimulate desired actions
Cons:
• High administrative costs
Pros:
• Good control over amount of pollution
• Stimulates technological change
Cons:
• Little control over amount spent on
pollution control
• Potentially large transactions costs
Pros:
• Strong incentive
Cons:
• High transaction costs
• Difficult burden of proof
Pros:
* Low cost
Cons:
• Uncertain results
Pros:
• Low cost
Cons:
• Uncertain results
The use of incentives such as cash subsidies for pollution control investments appear to be more
generous in Europe than in the United States arid many developing nations also offer such
incentives. An important new development concerns lending assistance for industrial projects.
Signatories to the Equator Principles agree to lend to only to industrial developments that employ
cleaner technologies and for public projects that are not damaging to the environment.
The use product charges were found to be principally revenue-raising instruments with little
incentive effect, attributable primarily to the low level of the charges. Moreover, some charges
are not closely linked to waste generation or product consumption. However, some of the
product charges described in this section, such as fertilizer taxes and the preferential taxation of
cleaner motor fuels, do appear to have significant incentive effects.
2004
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International Experiences with Economic Incentives for Protecting the Environment
Finally, liability for harms caused to the environment is increasingly being used as a tool to limit
polluting and environmentally damaging activities. While cases of this type go back to the 19*
Century in England, only relatively recently have cases of environmental damage in developing
nations found a sympathetic hearing in the courtroom.
With the trends already firmly in place and acceptance growing, the future looks bright indeed
for additional use of economic incentives for managing the environment.
56 November
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Bibliography
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60 November
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About the Report
About the Report
This report has been prepared by the National Center for Environmental Economics (NCEE) in
the EPA Office of Policy, Economics, and Innovation, which is a part of the Office of the
Administrator. It builds on three previous reports
and USEPA, 2001) with similar titles. This report
States portions of these earlier reports and was auti
(USEPA, 2002, Anderson and Lohof, 1997,
both updates and expands on the non-United
ored by Robert C. Anderson. The report has
been revised as a result of reviews by a number o|f EPA staff both inside and outside of EPA.
Helpful comments were received inside from tijie staff of NCEE and the EPA Office of
International Activities, as well as Richard Morgeustem of Resources for the Future and Byron
Swift of the Environmental Law Institute.
Because of the desirability of making possible future reports in this series as comprehensive as
possible, readers who are aware of interesting applications of incentive mechanisms that they
believe should be included in subsequent reports are encouraged to send that information to Alan
Carlin (Carlin.alan@epa.gov) at EPA Mailcode 18I09T, Washington, DC 20460, who served as
the EPA coordinator for this report.
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International Experiences with Economic Incentives for Protecting the Environment
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62 November
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Endnotes
End notes
Chapter 1
1 Chapter 11 of Anderson and Lohof. 1997. In this update the sections on product labeling and information
disclosure have been combined, and the section on debt for nature swaps has been replaced with a new
one about liability mechanisms.
2 USEPA. 2001.
3 OECD. 2002 and OECD. 200la.
4 Regional Environment Center. 2001.
5 Harvard Institute for International Development. 2001.
"Huberefa/. 1998.
7 Nordic Council of Ministers. 2002.
8 Asian Development Bank. 1997 and 1997a.
9 James. 1997.
10 Sterner. 2002.
11 Harrington, Morgenstem, and Sterner. 2004
12 For a more comprehensive discussion, see USEPA (2001).
13 A much more detailed discussion can be found in USEPA (J001).
Chapter 2
14
See: http://\\-w-vv.records.nsw.gov.aa'fceuide/hi.''hd'\\ib.htm
15 World Bank.2003.
14 ibid.
17 OECD. 1999.
18 Glachant, Michael. 2001.
19 Rodi, Michael. 2002.
20
Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. 2001.
Center for Innovation Research in the Utility Sector. 2003.
22 World Bank. 2002.
23 The web site of LLDA is hltp:/Vv»wv. ilda.gov. ph/
24 Lanna, 2003
25 International Institute for Sustainable Development. 2003.
26 Op.cit.
"Op.cit.
28 hUp://ww\v.entrust.ore.uk/
29
: itcs.org.uk/
30 OECD, 1 994 and Waste Management World, January 2002i
Chapter 3
31
32
33
Asian Development Bank, 1997.
Asian Development Bank. 1997.
Chapter 4
34 See generally, USEPA, 2002.
35 The legal foundation for the program is Supreme Decree No. 4 (DS4) of 1 992.
36 Fernando, P.N. et al. 1999.
37
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International Experiences with Economic Incentives for Protecting the Environment
niroto^
39 htip://www.erivuotimeiit. iisw.gov aii/it3teinei/liceTisina/i:trsls/irL(lex.httn
40hltp-//www.ncc.gov.aii/pdtVAS'l'5WtDP-OQ2a.ptif
pgnnits.'tradwat3 .htm
42 See Brehm and Quiroz for more details.
Chapter 5
43 New Brunswick, Agricultural Operation Practices Act.
45 O'Conner, D. 1994.
46 Op. cit.
47 Asian Development Bank. 1997.
Chapter 6
4SBoticia, 1996.
49 World Bank. 2000 is a major source for this section.
50 htip://w\vw.gbnnr!a.gov.au/ctgp___sjte/mariaaement/eiin/sudburv/
Chapter 7
" Garcia Lopez, et.al.
52 http://www.denr.gov.ph/article/view/! 101/1/284
53 http://www.ecn.cz/prtr-tfydiscussion.htm
54 For more information on the programs discussed in this section, see Abt Associates, 1 998.
55 The program home page is: http://wvvw.gcc.eo.kr/ehome/ccomark.html.
Chapter 8
64 November
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