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Manual on the Development of Cleaner Production Policies ... - Unido

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DEVELOPMENT OF CP POLICY<br />

MODULE 4: POLICY TOOLS AND INSTRUMENTS<br />

SLIDE: Market-based instruments<br />

• Emissi<strong>on</strong> fees and n<strong>on</strong>-compliance fines (Mexico: waste water fees<br />

depending <strong>on</strong> <strong>the</strong> locati<strong>on</strong> and polluti<strong>on</strong> load, similar regulati<strong>on</strong>s in<br />

Uruguay and Colombia);<br />

• Grants, subsidies and financial assistance for CP (Nati<strong>on</strong>al<br />

Envir<strong>on</strong>mental Fund in Colombia, Subsidy for Technological<br />

C<strong>on</strong>versi<strong>on</strong> to avoid <strong>the</strong> use <strong>of</strong> CFCs in Chile).<br />

<br />

Market-based instruments (also known as ec<strong>on</strong>omic instruments) are<br />

increasingly used in envir<strong>on</strong>mental protecti<strong>on</strong>. You may want to note that<br />

market-based instruments tend to support <strong>Cleaner</strong> Producti<strong>on</strong>, as <strong>the</strong>y are<br />

based <strong>on</strong> <strong>the</strong> “polluter-pays” principle, and provide str<strong>on</strong>g financial incentives<br />

to implement CP.<br />

Background<br />

The term “market-based instruments”, also called “ec<strong>on</strong>omic instruments”, is used to describe a<br />

mechanism that changes <strong>the</strong> financial and ec<strong>on</strong>omic c<strong>on</strong>diti<strong>on</strong>s faced by enterprises when dealing with<br />

envir<strong>on</strong>mental polluti<strong>on</strong>. Ec<strong>on</strong>omic instruments are based <strong>on</strong> <strong>the</strong> “polluter-pays” principle, which<br />

states that polluters must bear full financial resp<strong>on</strong>sibility for polluti<strong>on</strong> reducti<strong>on</strong> or clean-up. The<br />

polluti<strong>on</strong> preventi<strong>on</strong> principle allows <strong>the</strong> internalizati<strong>on</strong> <strong>of</strong> costs that would not normally be incurred<br />

by <strong>the</strong> producer or <strong>the</strong> user (externalities).<br />

Market-based instruments can be divided into three main categories based <strong>on</strong> how <strong>the</strong>y affect a<br />

government’s budget:<br />

1. Public expenditure instruments take <strong>the</strong> form <strong>of</strong> subsidies, grants and tax allowances and are <strong>the</strong><br />

most familiar tool <strong>of</strong> interventi<strong>on</strong>. Their functi<strong>on</strong> is to provide a financial incentive for<br />

individuals or companies to undertake an activity <strong>the</strong>y would not o<strong>the</strong>rwise engage in. Examples<br />

include grants for developing envir<strong>on</strong>mentally friendly technology, price supports for recycling<br />

industries and tax allowances for energy c<strong>on</strong>servati<strong>on</strong>;<br />

2. Revenue-generating instruments include taxes, charges and fees. These, to some extent, can be<br />

viewed as <strong>the</strong> price to be paid for polluting, and have both an incentive impact and a revenue<br />

impact. However, taxes, charges and fees are generally too low to have any effect <strong>on</strong><br />

envir<strong>on</strong>mentally damaging behaviour and so <strong>the</strong>y serve mainly as a revenue generator. Effluent<br />

charges, tax differentiati<strong>on</strong> between leaded and unleaded petrol, user charges for public waste<br />

disposal and depleti<strong>on</strong> taxes <strong>on</strong> mineral exploitati<strong>on</strong> serve to dem<strong>on</strong>strate how <strong>the</strong>se instruments<br />

are used;<br />

3. Budget neutral instruments represent a relatively new class <strong>of</strong> instruments within <strong>the</strong> policy<br />

arena, <strong>the</strong> most comm<strong>on</strong> <strong>of</strong> which is <strong>the</strong> deposit/refund system. They are designed to collect a<br />

surcharge <strong>on</strong> a potentially harmful substances or activities, and <strong>the</strong>n refund that surcharge if <strong>the</strong><br />

substance is recycled or restored, or use is avoided.<br />

Envir<strong>on</strong>mental ec<strong>on</strong>omists <strong>of</strong>ten list literally hundreds <strong>of</strong> individual instruments. At <strong>on</strong>e extreme, <strong>the</strong>y<br />

comprise fines or sancti<strong>on</strong>s that are linked to traditi<strong>on</strong>al command-and-c<strong>on</strong>trol regulati<strong>on</strong>s. At <strong>the</strong><br />

o<strong>the</strong>r extreme, <strong>the</strong>y include approaches that depend <strong>on</strong> c<strong>on</strong>sumer advocacy or private litigati<strong>on</strong> to<br />

provide incentives for improving envir<strong>on</strong>mental management. Between <strong>the</strong>se extremes are <strong>the</strong> more<br />

familiar tax-and-subsidy approaches as well as less comm<strong>on</strong>ly used mechanisms that rely <strong>on</strong> traded<br />

property rights.<br />

PAGE 93

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