Evaluation criteria

OECD

Environmental effectiveness

The main goal of environmental policies is a better quality of the environment. Better quality can be achieved in two ways, namely by a better performance of the target groups themselves (cleaner process-integrated or end-of-pipe technological changes in product characteristics, and so on) or by collective and public action (basically collection and treatment of discharges). The final goal is restoration and preservation of environmental quality. A derived goal in case of instruments with an incentive purpose is to reach the objective by inducing positive changes in the target group's performance. This is called incentive impact. The environmental effectiveness of economic instruments determined by their impact on environmental quality, either through pollution abatement by target groups or collective or public actions facilitated by those instruments. In many cases economic instruments are complementary to regulations. Assessing the impact of economic instruments then presupposes knowledge about reductions in environmental degradation due to regulation alone; this is difficult to assess.

Economic efficiency

Environmental policies result in costs to be borne by target groups and governments. Firms are always opposed to "non-productive" business cost increases; and within the public budget, environmental expenditures have to compete with programmes in other policy fields. Consequently, economic efficiency, i.e. reaching given policy objectives with minimum costs, is an important criterion, particularly in times of economic recession and public budget deficits.

Both environmentally effective end economically-efficient solutions can be achieved by technological innovation. Therefore innovation is not an independant criterion but points to favourable directions, when effectiveness and efficiency cannot be assessed directly.

Administrative efficiency and practability

Implementation and enforcement of economic instruments imply a number of practical and administrative efforts in terms of money and manpower on the part of authorities as well as target groups. Particularly with respect to revenue-raising instruments, high levels of administrative costs are a direct threat to achievement of efficiency goals Complex charge base systems might cause strong opposition, since firms often have to pay for charge calculation. On the other hand, simplified charge bases, e.g. lists with categories of target groups, might be considered unjust. Opposition invokes negotiations and sometimes adaptations.

In short, practical aspects of implementation and enforcement of economic instruments include:

• The amount of information required;
• The level of administrative costs;
• The likelihood of opposition.

Concordance with institutional framework

Economic instruments cannot be regarded in an organisational and political vacuum. The existing political principles and the bureaucratic framework will influence the choice, implementation and termination of specific instruments. A leading principle which OECD Member countries have agreed on, is the "Polluter Pays Principle", although there are exceptions and differences in interpretation (see Chapter 2). This might influence the acceptability of subsidy schemes which are only partly PPP-compatible.

An important phenomenon is the "regulative tradition". Some countries have always emphasised regulatory instruments as the main tools of environmental policy(e.g. the United States, the United Kingdom, Italy). Economic instruments then playa minor role and new instruments are not easily introduced. The process of "deregulation" occurring-in a number of countries and aimed at a lower level of government intervention in society might, however, alter the attitude towards economic instruments. Deregulation may be defined as the simplifying and streamlining of regulatory processes. Deregulation can have serious influences on the use or appraisal of economic instruments. Transferring specific policies and related financial tasks to lower government levels or other authorities (e.g. water boards) might induce new charge systems (e.g. France). On the other hand, streamlining might cause a cut in the number of different charges applied in the same policy field (e.g. the Netherlands). Furthermore, in a context of deregulation, moral suasion (i.e. industry agreements) is sometimes considered more appropriate than economic instruments(i.e. product charges) (e.g. Germany, the Netherlands).

Another important characteristic of the institutional framework is the striving for policy integration, not only within the environmental policy field, but also with other fields of government intervention. Since many environmental problems are multi-media (e.g. acidification, dispersion of nutrients and toxic substances), the need for multi-media policies has been recognised in a number of countries. Subsequently, solutions require involvement of different societal sectors which are already target groups in other policy fields (industry, traffic, agriculture). Mutual tuning is expected to gain more effective and efficient results.

A final aspect related to the institutional framework concerns the partial transition from curative to preventive policies. Some environmental problems now are reaching the stage of solution in terms of an acceptable balance of discharges and abatement (e.g. water pollution with BOD). The emphasis in policy measures then is on enforcement and prevention. This transition might induce a shift in the application of policy instruments, since every single instrument has its own mode of operation. An example is the Swedish practice, showing a shift from combinations of regulations and financial assistance schemes in the former decade to combinations of regulations and charges in the present.

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The criteria for the evaluation of economic instruments are effectiveness in environmental terms, efficiency in an economic and in an administrative sense and concordance with the institutional framework, mainly implying compatibility with the "Polluter-Pays Principle". Below, the fields of operation of the instruments discerned are summarised and their functioning is evaluated against these criteria.

Charges

Effluent charges

Effluent charges do not play an important role in the fields of air pollution control and waste management. As to noise abatement, in a number of countries effluent charges are applied in relation to aircraft noise. The economic significance of these charges is very small. Effluent charges might be rated successful in the the field of water pollution control policy. The overall economic significance of effluent charges varies widely among countries.

As to environmental effectiveness, only charges aiming at affecting polluting behaviour may be judged by this criterion. Charges with a mere financial function can only contribute indirectly towards better environmental quality by raising the funds necessary for environmental programmes. The water effluent charge system in Germany with intended incentive impacts operates accordingly, because of a long anticipation period, initially increasing charge levels and charge reductions on better-than-required 'performance.- The Dutch water effluent charge, with a revenue raising function only, has in fact had incentive impacts as well, as a result of high charge rates necessary to fulfil the revenue raising function. Other effluent charges. with the new Danish waste charge as a possible exception, have too low a charge rate to provide any incentive impact. These include the French air pollution charge and the aircraft noise charges.

It appears that, in terms of their incentive impact, effluent charges will have an opportunity to be successful only if the charge rates are higher than they are at present. In terms of their revenue-raising function, effluent charges are successful to the degree that their financial goals are fulfilled.

The experience of most of the countries applying water effluent charges (France Germany, Italy) indicates that the level of financial charges is far below the desired level from an economic efficiency point of view. In the Dutch case. with considerably higher charge levels, many polluters have decided to abate in order to avoid high charge payments, which might indicate that this charge has brought about efficient solutions. However, the Dutch charge has led to unexpected (and unintended) incentive effects on polluters, thus straining the capacities of public treatment facilities and so implying a decreasing social economic efficiency.

Both effectiveness and efficiency require higher charge rates. However, the information available does not indicate that charges are likely to be increased. In France, firms are reluctant to accept higher environmental taxes, in general. The effluent charge level in Germany, affected by inflation, will probably be increased, but still remains low, though additional incentives will be created by the modification of the charge discount system in 1989. The Italian water pollution charge be ended when direct regulations are fully implemented. On the other hand, a consideration of an air pollution charge is to be expected, if the current technical guidelines do not trigger sufficient results in due time. Aircraft noise charges, though minor significance, are heavily fought by the airline companies; higher charge levels unlikely here as well.

A main objection to higher charge rates follows from the requirement of administrative efficiency. As a general rule, water pollution charge bills are based on monitoring in the case of large polluters only. Otherwise, table-based or flat-rate rge levels are used. Higher charge levels will induce many polluters, levied on the basis of a table or a flat rate, to ask for actual monitoring in order to attempt avoiding charge payments. Furthermore, high charge levels are acceptable only when the rge base is detailed and, consequently, complex. This will considerably decrease administrative efficiency and, consequently, the economic efficiency of charges.

This dilemma is well illustrated with the following statement: "The idea of a simple and at the same time effective pollution charge is dubious; if the tax is simple it ,to be effective and if fair, it will be complicated, so unacceptable in either case."

Another dilemma is illustrated by waste effluent charges. Here, authorities felt low charges would not be effective but that high charges would encourage evasive behaviour and illegal dumping. Often, administrative efficiency appears to be the dominant concern. For example, the new Dutch fuel charge replaces five existing charges, two of which were calculated on an effluent basis.

In principle, effluent charges are compatible with the "Polluter-Pays Principle". charges are levied on the basis of the amount and quality of polluting materials marged into the environment. In practice, the "degree of compatibility" depends totally on the charge base, the charge rate and the affected portion of the target groups. Compatibility can be taken to be higher if: (i) the charge base contains more pollutants, (ii) the rates are higher and (iii) fewer arrangements exist that allow for exemption. According to these criteria, water effluent charges would be more compatible in Germany and the Netherlands than in France and Italy. The aircraft noise charges do take into account noise characteristics, but their level is too low.

User charges

User charges are common with respect to the collection and treatment of municipal solid waste and waste water discharged into sewers. User charges operate where societies consider a collective action more desirable than diffuse private actions. This suggests that user charges have been introduced for reasons of environmental activeness and economic efficiency. Since they are considered normal payments for public services, they quite rarely act as economic incentives. In the few examples with effluent charge base, practical problems have occurred, such as high costs of nitoring, disagreement over the charge base, and invoicing difficulties.

As a consequence of their solely financial function, the economic and administrative efficiency of user charges is more important than their effectiveness with respect to polluting behaviour. Systems in which the charges are calculated on a flat-rate basis and are invoiced alongside an existing tax system e.g. property tax) are felt to be administratively efficient. The advantages of a diversification of the charge base, in terms of a closer linkage between pollution and charge, are apparently felt to be less important than the disadvantages of such a system in terms of reduced efficiency. In fact, there is a tendency to move towards more administratively efficient structures, i.e. separate monitoring for large sources only or replacing the separate charge system by already existing tax systems which are easier to implement and enforce.

Compatibility with the "Polluter-Pays Principle" of user charges is secured, if the revenues raised are sufficient to cover the money needs for carrying out the intended environmental programmes. A closer relationship between charge rates and the actual pollution would be in line with this principle, but is quite generally turned down for the sake of efficiency.

Product charges

The majority of product charges are applied to cover environmental expenditures relating to the potentially harmful products involved. Their environmental effectiveness depends on the extent to which. the necessary expenditures are covered. It is ironical to notice, that the higher the sales of such products are, the higher are the revenues from the charges and the better they serve their goal. Some product charges have a regulatory purpose. A common feature of those charges is their lack of incentive impact. The reason is that the charge rates are too low to affect purchasing behaviour significantly. In terms of their effectiveness, most product charges lack power. Exceptions are the Finnish charge on beverage containers and the Norwegian charge on food containers.

The economic efficiency of product charges is closely related to their effectiveness. It is efficient to charge consumers for harmful products which cannot be recovered from the environment (fertilisers, pesticides, batteries in household waste) only if the charge affects consumption of such products. As to financial charges on products for which an obligation of safe processing exists (e.g. Lubricants), economic efficiency depends on the cost advantages of collective treatment over private (diffuse) treatment. If no possibility of private treatment exists (as with respect to batteries),then a product charge must provide an incentive or should support other preventive measures, such as a deposit-refund system. The justification of such product charges is derived less from reasons of economic efficiency than from conformity with the Polluter-Pays Principle".

For reasons of administrative efficiency, product charges with a revenue raising function only should be restricted in number. Compatibility with the "Polluter-Pays Principle", then, might become weaker. This is no major problem, however, since the majority of product charges have low charge rates, which can hardly be considered to cover the environmental damage or prevention costs in full. Administrative efficiency is further improved when product charges are practically linked to already existing tax or excise systems. Examples are the new Dutch fuel charge and the United States' feedstock charge. The consumption of fuels is widespread and causes major environmental problems.

The compatibility of product charges with the "Polluter-Pays Principle" is considered quite good on the whole, insofar as those who use products on which pay for the damage or for preventive measures. If the condition that polluter pays is not satisfied, then the statement polluters pay" still holds true. Simplification of product charge systems, however, does not enhance the role of economic instruments as a vehicle for incentives. In general, charge rates are low, implying that only part of costs are covered by the charge revenues.

Administrative charges

Administrative charges are mainly intended to finance direct regulatory measures, such as licensing and control activities of authorities, and thus have a redistributive effect. The fact that part of the financial burdens is laid on polluters instead of the general public is clearly in line with the "Polluter-Pays Principle". Financial charges may be environmentally effective, if the revenues facilitate a better performance of the tasks of authorities. In practice, they rarely operate accordingly, since the revenues not added to the budget of the authorities involved, but to the general budget only. In a few cases administrative charges for registration of harmful products (chemicals, pesticides) are intended as incentives purposes as well. In those cases the environmental effectiveness depends on the burden for producers to enter the registration procedure. The reported charges hardly work accordingly.

Tax differentiation

Tax differentiation as an instrument of environmental policy has found limited application so far. In a number of countries, tax differentiation on car fuels is applied encourage the consumption of unleaded petrol. Some of these countries also differentiate car price taxes in order to favour the sales of clean cars. These tax diferentiations are implemented for a transitional period only, since the countries concerned regulate air pollution from cars by direct regulations. Lower prices for added petrol probably have little effect on fuel consumption. In some countries, the normal gasoline has disappeared from the market since the introduction of the tax differentiation system. These systems can be said to have been fully effective in an environmental sense, although the disappearance of leaded gasoline has also been a result of negotiations. In some countries, the sales of clean cars have exceeded expectations. This might very well be attributed to the tax differentiation system, and indicates its effectiveness.

Tax differentiation systems are relatively easy to implement, since, by definition, they are imbedded in existing tax systems. Consequently, they have high administrative efficiency. They clearly are in line with the 'Polluter-Pays Principle".

On the whole, tax differentiation seems to be one of the more successful economic instruments and its application, therefore, is recommendable.

Subsidies

Many countries have a substantial practice of applying subsidies as instruments in listing their environmental policy objectives. In general, the acceptability of financial assistance is greater, when the related environmental problem is felt to be re severe. Examples are water pollution treatment, restoration of hazardous waste environmental programmes- In the majority of these cases however, financial assistance appears to serve a mainly economic goal, namely financially supporting firms that are severely affected by imposed direct regulations. Thus, in-a number of cases financial assistance is a necessary component of direct regulations for economic and not necessarily for environmental reasons, and accordingly, environmental effectiveness is less relevant. It is not clear whether the availability of financial support plays a positive role in negotiating and imposing stricter direct regulations. The effectiveness of subsidies seems to be important mainly with respect to restoration of old plant sites.

The contributions of subsidies to economic efficiency are hard to assess. Granting subsidies, as compensations in case of economic hardship, might be more socially desirable in the long run than forcing standards upon firms which lead to shutdowns. On the other hand, "windfall profits" have been reported to occur. Numerous subsidy schemes operate separately, each aimed at specific target groups, with specific conditions and limited budgets. No optimal (macro)economic efficiency, therefore can be expected.

High subsidy shares in investment costs of pollution control facilities, such as reported in the United States' waste water treatment plant construction programme, induce plant operators to design capital-intensive facilities with too much reserve capacity as a consequence. This leads to inefficient solutions. Lower shares, as has been reported for the United States at least, can be considered positive, from this point of view.

Subsidy systems are generally considered to have a low compatibility with the "Polluter-Pays Principle", but are widely applied, nonetheless, as an important tool of environmental policy. Subsidies speed up old plant renewal, solve economic problems encountered in the process of policy implementation and contribute to development and introduction of clean technologies. Therefore, with a few exceptions, subsidy systems are considered as a vital counterpart to direct regulations.

This has led to a range of interpretations of the "Polluter-Pays Principle". In some cases subsidies are regarded as compatible with this principle or as an accepted exception. In other cases this principle is reinterpreted at much more abstract levels, or presented as a long term objective. On the whole, the "Polluter-Pays Principle" seems not to be a crucial factor in decision making on environmental policy instruments.

Deposit-refund systems

Deposit-refund systems were originally introduced voluntarily for merely economic reasons. These systems are widely applied with respect to beverage bottles. For environmental reasons, new systems have been introduced for aluminium cans (Sweden) and car hulks (Norway, Sweden). The environmental effectiveness of deposit-refund systems depends on the percentages of return. These appear to be quite good, on the whole. Obviously, a ban on certain products or containers is more effective, but less acceptable to the parties concerned. In practice, deposit-refunds appear to be more effective than voluntary return systems.

Due to their nature, deposit-refund systems are relatively attractive. Whereas charges are seen as "penalties on bad behaviour", deposit-refunds have an element of rewarding good behaviour". Deposit-refunds might be considered valuable, though generally not effective enough in case of major environmental problems, as a consequence of their voluntary character and the low level of the deposits.

Since deposit-refund systems have a rather "liberal" character, full collaboration of the industries and firms concerned is necessary. Implementation of new systems is difficult, when these actors object to them. From a private point of view, deposit-refund systems for containers have now lost much of their economic efficiency, because production costs are low, while transportation and storage costs are high. Therefore, new deposit-refund systems are less acceptable, because firms and distributors expect administrative and logistic problems. Whether deposit-refund systems are an efficient solution to environmental problems depends on a comparison between the costs of those systems and the costs of alternatives with equal environmental results. Costs of alternatives consist of the expenditures for household waste collection, incineration or dumping and the expenditures for picking up litter. In some cases, environmental damage remains. Although no assessments exist, it is not unreasonable to assume that, in certain cases, such costs exceed the costs of a deposit-refund system, which, moreover, are completely laid on the (potentially) polluting parties.

Therefore, deposit-refund systems are generally considered compatible with the 'Polluter-Pays Principle. Consumers are charged a certain amount of money as an ex ante payment for the pollution they might bring about.

Enforcement incentives

Two types of enforcement incentives have been discerned: non-compliance fees and performance bonds. Only non-compliance fees are applied in the field of environmental pollution policy, in a limited number of countries.

Performance bonds resemble deposit-refund systems as to their "rewarding" nature. Only one application has been reported (Australia), though, in principle, performance bonds could be a valuable complement to direct regulations, as they might ease enforcement.

Non-compliance fees have similar advantages. The new United States non-compliance fee with respect to hazardous waste management is expected to provide strong incentives&emdash;since, in case of non-compliance, considerable fines can be imposed&emdash;and, therefore, to be environmentally effective. The operation of the Swedish environmental protection charge shows that the application of non-compliance fees should not be too complicated. Simple procedures can considerably increase their impact.

As to its economic efficiency, the level of non-compliance fees, in principle, equals the profit surplus gained by violation of environmental regulations. The polluter is left with a private cost-benefit decision only, namely the balance between the profits gained by violation and the fee to be expected. Total environmental damage costs do not play a part in this decision (Norway, Sweden). In the United States, polluters might expect to be charged for all the social costs caused by non-complying activities.

The administrative efficiency of non-compliance fees is low. These fees normally are enforced through court cases, although settlements are possible. Enforcement incentives, however, are "instruments by exception" and become active when enforcement of direct regulations has failed. Consequently, such enforcement procedures, in general, should not be expected to be smooth.

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