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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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