Topic 10: Implementing Environmental Policies

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6/20/2012. Econ 2400 - Ed Barbier. Sustainable development revisited. Our Common Future (1987): ?Sustainable development is development that meets the needs of the present without compromising the ability of the future generations to meet their own needs. Implies intergenerational equity.Implies

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Topic 10: Implementing Environmental Policies

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1. 6/21/2012 Econ 2400 - Ed Barbier Topic 10: Implementing Environmental Policies Towards sustainable development

2. 6/21/2012 Econ 2400 - Ed Barbier Sustainable development revisited Our Common Future (1987): “Sustainable development is development that meets the needs of the present without compromising the ability of the future generations to meet their own needs. Implies intergenerational equity. Implies non-declining economic welfare as a minimum criterion. Implies that the environment be treated as a form of natural capital Implies some role for environmental policy in breaking the vicious cycle between environmental degradation and economic development.

3. 6/21/2012 Econ 2400 - Ed Barbier Reversing “unsustainable” development Environmental policies are needed to convert the vicious cycle whereby the failure of environmental values to be reflected in markets and government decisions leads to economic development with excessive environmental degradation and increasing ecological scarcity.

4. 6/21/2012 Econ 2400 - Ed Barbier Environmental policy innovations: market-based instruments Using existing markets Removal of persistent market distortions/failures and imposing additional taxes and subsidies to internalize harmful environmental externalities E.g. Subsidy reduction, environmental taxes, user fees, deposit-refund systems and targeted subsidies. Creating new markets Establishing property rights, privatizing and decentralizing, tradable permits and rights, carbon offsets, etc.

5. 6/21/2012 Econ 2400 - Ed Barbier Environmental policy innovations: regulations and public choice/participation Implementing environmental regulations Increase effective use of standards, bans, permits and quotas. Engaging the public Eco-labeling and other forms of information disclosure that assist consumers in making informed choices Encouraging greater public participation in policy decisions that influence environmental management.

6. 6/21/2012 Econ 2400 - Ed Barbier Property rights and biodiversity conservation

7. 6/21/2012 Econ 2400 - Ed Barbier Market-based instruments Charges (taxes) Tradable/marketable permits Subsidies Development and adoption of clean technologies, tax allowances for energy conservation, soft loans for erosion control, price supports for recycling. Deposit/refund or fee/rebate schemes Recycling and reforestation rebates on timber stumpage fees. Compensatory incentives Clean tech transfers to developing countries, debt-for-nature swaps, heating allowances for poor. Enforcement incentives Performance bonds, noncompliance fines, assigning legal liability.

8. 6/21/2012 Econ 2400 - Ed Barbier Market-based instruments: advantages Cost-effective alternatives to regulatory controls. E.g. studies of air pollution suggest that direct controls are 2 to 20 times more costly than MBIs. Decentralize much of the decision making to the firm or household, which typically has better information for determining the appropriate individual response. Provide cost incentives to adopt cleaner technologies and alternative resource inputs and processes, or to develop such improvements with time.

9. 6/21/2012 Econ 2400 - Ed Barbier Some limitations to market-based instruments Important criteria other than cost-effectiveness may be used to evaluate and select environment policy instruments E.g., raising revenues rather than reducing pollution or resource exploitation Under certain conditions, the cost-savings from MBIs may be negligible or even negative. E.g. the presence of uncertainty, ecological thresholds, pollution “mixes”. MBIs are often used in conjunction with regulatory controls, and in some instances, a mix of instruments may be the most cost-effective approach.

10. 6/21/2012 Econ 2400 - Ed Barbier Why do policymakers often prefer regulation? A regulative tradition exists such that authorities are more familiar with the direct control approach. Switching to MBIs implies additional information requirements, higher initial admin costs, bureaucratic opposition and coping with more complex processes. The effects of regulation are more certain, whereas the revenue and incentive effects of charges and other MBIs are often seen as uncertain. Charges and other MBIs are perceived as having undesirable impacts on inflation, income distribution and international competitiveness.

11. 6/21/2012 Econ 2400 - Ed Barbier Why do firms and households often prefer regulation? Fear that charges and MBIs might result in additional compliance costs. Fear that MBIs may be misused for financial rather than incentive purposes. Regulatory controls are much more familiar, and the political process can be influenced through negotiation and lobbying. Risk-aversion: outcome of MBIs are considered more variable and difficult to predict, whereas although regulatory controls may be stricter, to the extent that the outcomes are more predictable, they may be preferred.

12. 6/21/2012 Econ 2400 - Ed Barbier Removal of harmful subsidies: a key but neglected MBI? The definition of MBIs has been extended further to comprise the removal of subsidies and other public policy interventions that distort the private costs of resource use and pollution discharge. Before additional charges and MBIs are imposed, harmful subsidies and policy distortions should be removed first. Often the result is a “win-win” situation: economic efficiency improves and environmental damage is reduced. Major problem: Any subsidy, regulation or policy distortion is likely to benefit one or more economic agents, and such agents will lobby hard to justify the retention of such policies.

13. 6/21/2012 Econ 2400 - Ed Barbier Energy taxes and subsidies Although in the energy sector there is widespread concern that reductions in subsidies and the introduction of taxes will affect the economy badly, such claims are not substantiated. Many of the fears over the widespread use of MBIs are often misplaced. Although there is concern that, for example, in the energy sector the use of taxes and reductions in subsidies will negatively affect the performance of the overall economy, such claims are not substantiated by the evidence. Like all OECD countries, Germany and Japan have been taxing energy for many years. This is reflected in the high rates of taxation on regular unleaded petrol in these countries. In contrast, China and Japan still subsidize energy consumption, yet their energy productivity (measured by GDP per kilogram of energy used) is around ten times lower than that of Japan and Germany. Also carbon dioxide intensity (emissions per dollar of GDP) is much lower in Japan and Germany. Finally, over 1990-4 in Germany the economy grew annually by 1.1%, but energy consumption fell by 1.5% In fact, since the mid-1980s China has been gradually reducing its energy subsidies, especially in the coal sector which supplies more than 70% of the country's energy (World Bank 1997). For example, subsidy rates for coal have fallen from 61% in 1984 to 11% in 1995. As a consequence, energy intensity has fallen almost 30% since 1985. Energy consumption is 0.3 billion metric tonnes (in oil equivalents) less and carbon dioxide emissions 1.1 billion metric tonnes lower than they would be without the reforms. These reforms have contributed not only to energy conservation and environmental protection but also to reducing government spending significantly. As Table 7.4 shows, they may have also started to break the link between economic growth and energy consumption growth. From 1990 to 1994 China's GDP increased annually by 12.9%, but its rate of growth in energy consumption was only 4% per year.Many of the fears over the widespread use of MBIs are often misplaced. Although there is concern that, for example, in the energy sector the use of taxes and reductions in subsidies will negatively affect the performance of the overall economy, such claims are not substantiated by the evidence. Like all OECD countries, Germany and Japan have been taxing energy for many years. This is reflected in the high rates of taxation on regular unleaded petrol in these countries. In contrast, China and Japan still subsidize energy consumption, yet their energy productivity (measured by GDP per kilogram of energy used) is around ten times lower than that of Japan and Germany. Also carbon dioxide intensity (emissions per dollar of GDP) is much lower in Japan and Germany. Finally, over 1990-4 in Germany the economy grew annually by 1.1%, but energy consumption fell by 1.5% In fact, since the mid-1980s China has been gradually reducing its energy subsidies, especially in the coal sector which supplies more than 70% of the country's energy (World Bank 1997). For example, subsidy rates for coal have fallen from 61% in 1984 to 11% in 1995. As a consequence, energy intensity has fallen almost 30% since 1985. Energy consumption is 0.3 billion metric tonnes (in oil equivalents) less and carbon dioxide emissions 1.1 billion metric tonnes lower than they would be without the reforms. These reforms have contributed not only to energy conservation and environmental protection but also to reducing government spending significantly. As Table 7.4 shows, they may have also started to break the link between economic growth and energy consumption growth. From 1990 to 1994 China's GDP increased annually by 12.9%, but its rate of growth in energy consumption was only 4% per year.

14. 6/21/2012 Econ 2400 - Ed Barbier MBIs in the developing world In Latin America, since the late 1980s many countries in the region have not only instigated major macroeconomic and sectoral reforms but also adopted a number of MBIs for environmental management purposes. The charges shown in the above table have met with varying degrees of success in achieving their environmental objectives. For example, forestry taxes have been set at very low levels, and suffer from weak enforcement particularly in frontier regions where monitoring is extremely difficult. In the case of charges in the energy and mineral sector, the taxation levels are generally too low to affect exploitation and use of the resource. However, the charges in Brazil, Colombia and Ecuador have been an important source of revenue for compensation local authorities in the affected regions and for environmental agencies. The most ambitious use of MBIs appears to be in the water sector of Brazil, Colombia, Mexico, and hopefully soon Jamaica. The proposed charge systems have the opportunity to improve water management while generating substantial revenue to overcome budgetary constraints. Unfortunately, the actual effectiveness of these systems has been severely limited in the countries attempting to implement them, due to problems of lack of domestic capacity to administer these MBIs, enforcement difficulties, poor information, and lack of participation by stakeholders. In general, the overall experience of Latin American and Caribbean countries with MBIs is that they are more of a complementary instrument rather than a substitute for more conventional environmental controls and regulation. The primary function of MBIs is still mainly to raise revenue, and the main limitation on their effectiveness appears to be weak legislation, enforcement and institutions. In addition, some recent macroeconomic reforms in Latin America appear to be inconsistent with the implementation of MBIs. This is particularly the case of public sector reforms that adversely affect or limit environmental legislation, regulations and institutions that are necessary for operating MBIs. The charges shown in the above table have met with varying degrees of success in achieving their environmental objectives. For example, forestry taxes have been set at very low levels, and suffer from weak enforcement particularly in frontier regions where monitoring is extremely difficult. In the case of charges in the energy and mineral sector, the taxation levels are generally too low to affect exploitation and use of the resource. However, the charges in Brazil, Colombia and Ecuador have been an important source of revenue for compensation local authorities in the affected regions and for environmental agencies. The most ambitious use of MBIs appears to be in the water sector of Brazil, Colombia, Mexico, and hopefully soon Jamaica. The proposed charge systems have the opportunity to improve water management while generating substantial revenue to overcome budgetary constraints. Unfortunately, the actual effectiveness of these systems has been severely limited in the countries attempting to implement them, due to problems of lack of domestic capacity to administer these MBIs, enforcement difficulties, poor information, and lack of participation by stakeholders. In general, the overall experience of Latin American and Caribbean countries with MBIs is that they are more of a complementary instrument rather than a substitute for more conventional environmental controls and regulation. The primary function of MBIs is still mainly to raise revenue, and the main limitation on their effectiveness appears to be weak legislation, enforcement and institutions. In addition, some recent macroeconomic reforms in Latin America appear to be inconsistent with the implementation of MBIs. This is particularly the case of public sector reforms that adversely affect or limit environmental legislation, regulations and institutions that are necessary for operating MBIs.

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