Establishing the Environment Protection Authority in a Property Rights Environment John Niland (Chair of NSW EPA) Charges Charging industry a price for disposing of waste products in air and water bodies entails the use of an economic instrument (Dates 1984:11). The terms charges or taxes are often used interchangeably although the two are sometimes differentiated on the basis of revenue destination. Tax revenues are added to the public budget, while charge revenues are used for directly financing environmental measures. Charges can be imposed at a number of points on the production cycle. When properly designed, charges should represent the shadow cost of pollution. Such charges act as incentives by encouraging polluters to reduce discharges to the extent that it is cheaper to treat them than to incur the charge (wlth the unit rate of charge equalling the marginal abatement cost). Various types of environment charge can be identified. Input charges are levied on inputs to polluting activities, for example taxing of chemicals used to manufacture toxic products. Output charges are levied on output of a polluting activity rather than the pollutant itself, for example taxing electricity rather than CO2 or S02 or SO3 or SOx production. User charqes are payments for the costs of collective treatment of effluents or wastes. They include charges paid for services rendered by authorities, for instance for collection and treatment of municipal waste water and solid waste. Effluent or emission charges are payments on the emission of pollutants into air or water or onto soil and on the generation of noise. They are calculated on the basis of the quantity and/or quality of pollutant discharged. Product charges is a term frequently used to cover charges levied on products that are considered to be harmful to the environment when used in production processes, consumed or discarded. Product charges may be applied to raw materials, intermediate goods or final products. The term covers both input and output charges. A survey of OECD countries in 1987 (OECD, 1989) found that charges are by far the most frequently used economic instruments: of a reported 153 economic instruments in use, 81 were categorised as charges. Effluent charges have been used widely in Europe, notably in France, Germany and the Netherlands in water pollution control, solid waste management and in the abatement of noise from aircraft. User charges are commonly applied by local authorities for the collection and treatment of solid waste and sewage. Water effluent charges became operational in Germany in 1981 with increasing charge rates per unit of pollution to 1986. The charge applies to households as well as firms that discharge into the river and is caolculated on a number of parameters including chemical oxygen demand, organic halogen compounds,heavy metals and toxicity to fish. The incentive character of this charge is reflected by a system of corrections on the charge bill in the case of good performance by the polluters. The most important corrections are discounts on the charge bill if actual discharges are lower than those laid down in the permit or licence (Commission of the European Communities, 1990 Annex 2). In Australia, charges frequently are made for the use of environmental resources, for example entrance fees to national parks, garbage disposal charges and water use charges. But the levels set are generally too low either to take account of the full value of the environmental resource or to influence polluters' behaviour towards environmental protection. The trend, however, appears to be towards increasing charges to levels where they might be considered legitimate economic instruments, and the Water Board, the Waste Management Authority and the SPCC are all looking in this direction, as will the new EPA. The Water Board's Trade Waste Policy was revised in early 1990 to provide for a progressive increase in charges, in essence as a pollution tax on the creation of trade waste. The increased charge provides an incentive for firms discharging trade waste to the sewer to examine their processes and find more cost effective ways to reduce, reuse or recover materials from their trade waste. The pricing strategy incorporates mass and concentration and differentiates between industrial waste of domestic strength, and the discharge of nondomestic substances such as heavy metals, and provides an incentive for dischargers to bring effluent concentrations down to set standards. The extra revenue generated by increased trade waste charges is allocated to the Environmental Trusts which will support environmental restoration, research and education programs. The Waste Management Authority in January 1991 introduced the innovative Council Recycling Rebate Scheme which rewards Councils with a rebate of $17.50 for every tonne recycled, which is funded by a levy on waste generators. Structured this way, the scheme recognises both environmental externalities and intergenerational equity. For example, the replacement cost of Sydney's landfill systems with waste-to-energy technology would be about $500 million for council waste alone, and this is being recognised in the levy and rebate system. To better reflect the cost of replacement technology once the landfill capacity or the "commons" is depleted, consideration may need to be given to increasing this type of levy. The fees for pollution control licences issued by SPCC are based on the volume of discharge only. Fees are pitched at a level which approximately recover administrative costs. Although licence fees were increased by 20 per cent in 1990/91, and will be increased a further 20 per cent in 1991/92, they are directed toward administrative cost recovery rather than being a mechanism for pollution prevention, which means there is scope still to bring the economic instnument effect into greater play in this area. Deposit-refund Systems In deposit-refund systems a deposit is paid on potentially polluting or recyclable products. The deposit is refunded when the product is returned and pollution thereby avoided, and additional opportunities are provided for recycling and reuse. The inherent rationality of the system is that it establishes the full cost of products by clarifying and incorporating disposal costs into the production function. Deposit-refund systems have been used most extensively to encourage collection systems for beverage containers. In the United States, states with these have reported an 80-90 per cent return rate of containers using a deposit of 5-10 per cent per container (Moore et al 1990). A deposit-refund system for beverage containers has been established by legislation in South Australia, but reports on its success have been mixed. Other applications which have been suggested for the deposit-refund system include pesticide containers, tyres, batteries and small quantity hazardous wastes such as solvents. Subsidies The majority of OECD countries appear to provide financial assistance for some pollution control activities. Revenues raised from charges schemes may help to finance investment in pollution control equipment. Subsidies may be concealed in below cost charges for environmental services or take the form of grants, soft loans or special tax allowances. They tend to be used sparingly and with due consideration because they are theoretically inconsistent with the polluter pays principle (OECD 1990). Source: John Niland (Chair of NSW EPA), Establishing the Environment Protection Authority in a Property Rights Environment, paper prepared for the Conference on "The New Environmentalism: Applying Economic Solutions in the Real World" sponsored by the New South Wales Cabinet Office, Sydney 18-19 March 1991, pp15-17.