Environmental Policy And Economic Analysis

Introduction

In recent times, the issue of sustainable development has gained importance in international law on environment. The issue has implications for both environment as well as development and trade, due to which academic discussion on sustainability has also involved economic analysis, and consequently environmental policy itself has come to be subject to economic analysis. There is a close nexus between environmental policy and economic analysis, which is premised on the concept of externality. The concept of externality relates to the harmful consequences of economic activities on the environment. The effect of such economic activities can be quantified and the economic activity can be made subject to economic instruments and market incentives that are aimed at shifting the negative consequences of the economic activity upon the party that is involved in the economic activity.

The environmental policy can be created to include such economic instruments and market incentives for the firms and actors causing such externalities so as to reduce the harmful activity or at the very least minimise its effects on the environment. Such economic instruments and market incentives are aimed at internalising the environmental costs for the polluters, by making the polluters pay for the harms caused to the environment. Economic instruments can also be made for the purpose of imposing some limits on the level of environmental pollution. Such economic instruments can lead to the protection of the environment by providing limits or sanctions on human economic activities detrimental to the environment. The premise on which environmental taxation is based is that the market is not always alert to or concerned with the damage that can be caused by its economic activities and that the levying of the tax can lead to increase in the cost of the activities, which may serve as detriments to the increase in the activity; conversely, market incentives can be used to decrease the cost of beneficial activities, thus leading to the increase in such activities.

This essay considers the ways in which economic instruments and market incentives can be implemented within environmental policy for the purpose of reducing the harmful impacts of economic activities on the environment and for the purpose of ensuring sustainable production and consumption. The essay also discusses how these measures can be implemented through international law by using the case study of European economic instruments and market incentives to provide examples of effective measures that can created at the international level.

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Economic Instruments within Environmental Policy

Environmental policy can be driven by one of the two approaches, command and control approach and market based approach. The command and control approach is older in origin and it has been the principal approach for environmental policy, whereas the market based approach is newer approach to environmental policy. The command and control approach sees the state giving directives for control of pollution, whereas the market based approach devises instruments for modulating behaviour of actors causing externalities through market signals. A market based approach is also based on incentive and directly or indirectly motivates actors to reduce externalities by either impose costs for externalities or providing rewards for lower externalities. Taxation and market incentives come within these approaches to environmental policy making.

Economic instruments within environmental policy can include a range of instruments that are designed to provide limits on economic activities, tax polluters, or provide rewards or incentives to those who behave responsibly towards the environment. These can include taxes, charges, pricing of natural resources, government procurement, and permit trading schemes, to name a few measures. These measures respond to environmental harm, which is caused by rapid economic development and industrial growth, leading to climate change and pollution, among other environmental harms; such harms are also related to the increased ecological fragility.

Environmental taxes are instruments that increase the cost of the products with negative impact on the environment that are aimed at creating incentives for more responsible behaviour towards the environment. Environmental taxes can include cost-covering charges that are designed to cover the costs for mitigating the negative effects of the taxed economic activities, for instance, taxes for water treatment. Another kind of environment tax can be an incentive tax,which is aimed at changing consumer or producer behaviour. Yet another kind of tax can be fiscal environmental taxes, that lead to raising of revenues. Environmental taxes and environmental charges are economic or fiscal instruments of environmental policy that are focused on giving financial incentives for more responsible behaviour towards the environment.

The term green tax is also used to illustrate environmental taxes. For the sake of brevity, this is the term that will be employed in this essay. The Organisation for Economic Co-operation and Development (OECD) has defined green tax as “A tax falls into the category environmental if the tax base is a physical unit (or a proxy for it) of something that has a proven, specific negative impact on the environment, when used or released." Therefore, green taxes are the taxes that are charged when the activity undertaken by the actor charged is environmentally harmful. Green taxes are also called as ecological taxes and Pigouvian taxes. In any case, green tax consists of two kinds of taxes in general, these being pollution tax and resource tax. In the general sense, it is considered that all kinds of taxes that are related to the environment and natural resources and are a part of a tax policy with an impact on economic activity and environment, are green taxes.

The first green taxes to be implemented in the national environmental policy anywhere, were in Sweden, where they were implemented in the form of carbon dioxide tax. At the time, the carbon dioxide tax was based on the premise that levying the tax may be useful in more efficient markets with less waste and harm. The underlying idea behind the carbon dioxide tax in Sweden and the other green taxes that developed eventually in different national legal systems, was that the finite resources of the environment must not be allowed to be squandered in wasteful and harmful manner and that the tax will bring more efficiency in the market in this context.

Today, the term green tax can include a combination of measures, and there has been significant development of such measures within the domestic jurisdictions as well as in the European context. These include measures of reduction of environmentally harmful subsidies, eliminations of tax exemptions on activities that are potentially harmful for the environment, restructuring of tax policy by taking environment into consideration, and creating new taxes that are aimed at environmental protection from harmful economic activities. Therefore, green taxes can be aimed at correcting or reducing negative externalities and also at raising revenues. In other words, green taxes may be related to specific environmental goals, that may include finite resource utilisation, reduction of pollution, and sustainable development of economic activities.

At this point in the essay, a distinction may be drawn between environmental or green taxes and environmental charges as this difference can also be crucial to understanding the economic instruments that are included in environmental policy and the objectives of such inclusions. Environmental taxes are unrequited payments that are made by the actor and in return of which the government provides some benefits or advantages to the taxpayers, these benefits not necessarily being in proportion to the payments made. Environmental charges the charges that are paid specifically for the services received, and as such these are always proportionate to the services payments made. Environmental charges can include administrative charges, that further include control fees, or licence fees, while user charges relate to the costs of collective or public expenses. The point to remember here is that the environmental taxes are implemented regardless of the service or benefit provided; whereas charges are always levied in lieu of service provided. Taxes can therefore be used to raise the revenues.

Economic Instruments and Sustainable Consumption

This part of the essay discusses the link between economic instruments as part of environmental policy and sustainable production or consumption of finite resources as well as environmental protection in general. At the outset, it may be mentioned that there are specific ramifications of environmental policy, as reflected in the green tax system, on trade and economic activities. In other words, trade and environment are interlinked here in two ways: first, trade impacts environment through harmful economic activities; and second, environmental policy as reflected in economic instruments and market incentives impacts trade. In the same context, it may be mentioned that the environmental discourse may at times see trade and environment as opposed to each other, where trade is seen as detrimental to the environment. Environmentalists also use economic argument to show how trade can be detrimental to the environment and also have steep economic costs, because environmental degradation has impacts on the environment as well as public health, which leads to increased economic costs. Thus, an argument is made for countering the negative impacts of trade and economic activities on environment, by providing economic instruments and market incentives.

Pigou, an economist, is generally given credit for the development of the concept of environmental taxation because it was his concept of using taxation as a measure for correcting negative externalities that is involved in the development of environmental taxes. Negative externalities caused by economic activities, can include externalities like environmental pollution and are defined as a harm from production or consumption of some good where that harm affects someone other than the actual producer or consumer. Correction to such harm can be made by imposing taxes on the good that is leading to the harm by providing an equalizer with the marginal external damage, wherein the taxation amount is added to the external cost so that the buyer pays the marginal social cost of the good that he has bought. The premise on which such taxation is based is that the externality or the harm represents a failure on the part of the buyer or seller to take into account the potential environmental cost of the good and by taxing the buyer, the market can be regulated so as to bring such costs down.

Pigouvian taxation therefore, seeks to provide a method by which the harmful externalities of the economic activities can be brought down. However, it may be noted that this is not the only justification for environmental taxes and such taxes can also be used for the purpose of raising revenues for the government. These revenues can then be put to some public use. Therefore, the link between green taxes and the sustainable consumption can be explained as a ‘double dividend’ wherein the tax can control the negative externalities that impact the environment, and also lead to the revenues for the government. Raised revenues can be used for public safety, education and even research as goods of collective consumption, while also responding to the negative externality, which can be internalised for the actor through taxation.

International Economic Instruments

International community has responded to environmental harm and externalities of economic activities by devising methods for the protection of environment, some of which are based on economic analysis. European Union has been at the forefront of environmental policy and regulation using international instruments, and there are many steps taken by it to achieve ‘green economy’. EU has combined command and control and market based approaches to achieve the ends of green economy and the European experience has been hailed in literature as one that provides a good example of effective international environmental law. Gradually over the years, the EU has shifted towards a market based approach and has started involving green taxes at European level, which are to be implemented through member states at the domestic level as part of the environmental tax reform (ETR) under the Europe 2020 strategy. It may be noted that the wider principles of international environmental law were actually developed under the United Nations, and gradually adopted within the EU system. The Polluter Pays Principle (PPP) is one of these wider principles, which was first developed by the Organisation for Economic Co-operation and Development (OECD) Council; and this principle has gone on to become one of the mainstays in international environmental law. The PPP is based on the premise that the damage to the environment should be paid for by the polluter, and the principle was also invoked by the 1992 Rio Declaration. The European Communities Treaty incorporates polluter pays principle. Apart from the PPP, another international law principle incorporated in the European system is the precautionary principle. This principle demands that the policy makers should exercise their discretion to prevent the possibility of harm from decisions that can potentially impact the environment in a negative way.

In context of economic instruments, it is the PPP that is the more important theoretical framework for developing the measures for environmental taxes, environmental charges and market incentives that are related to actors who cause externalities. In the EU, the environmental policy is made by the EU and then it is followed by the Member states in the national legislations that are rooted in the EU directives. An example of a directive can be found in the 2005 EU emission Trading Directive which was aimed at providing measures for emission reduction. Other directives include the Urban Waste Water Treatment Directive (91/271/EEC), which aims at providing measures for implementation of water treatment.

It may be noted that in international discourse, economic justification for environmental protection has become a strong argument and one that has received significant attention and as environmental economics grew, the international law attention has grown to develop economic measures. The EU has also developed measures that are aimed at providing market based approach to environmental protection, where earlier it has focused more on the command and control approach to environmental protection.

A point to be noted is that the European system works on the consent of the Member states which provides the basis for the market based measured for the environmental policy. Outside of Europe, such consensus has been hard to achieve in international environmental law, which has been constrained by challenges in implementation since the first important international declaration on environment was adopted in Stockholm, this being the Stockholm Declaration. The biggest impediment for the effective implementation of international law in this respect is the opposing and conflicting interests of development and environmental protection, which to some extent have been balanced through the evolution of the sustainable development principle which was first proposed in the Brundtland Report. Another exacerbating factor is the impasse between the Global North and Global South on the implementation of such economic measures.

International environmental law is contained in treaties and customary practices that seek to create a framework for limiting environmental degradation through the enforcement of international standards. Mechanisms like the World Trade Organisation are also structured to allow free trade and the rising free trade puts pressure on local environments which are at risk unless environmental policy is created at the global level for minimising such risks to environment everywhere. Such global policy needs to be implemented through domestic laws which requires conformation to the international law by states. Ederington and Minier explain the crux of the matter as follows:

“Two main arguments have been advanced for requiring countries' domestic policies to conform to international standards. The first is the `level playing field' argument: the idea that it is unfair for countries to gain a comparative advantage in trade through lax environmental or labour standards. The second argument for expanding international trade agreements to cover domestic policies is that, as countries ratify agreements constraining their ability to pursue trade goals through trade policy, there will be unilateral incentives for governments to distort domestic policies as a secondary means of protection. Assuming that countries have incentives to erect barriers to trade, one means of decreasing imports within an industry is to relax environmental standards (or other domestic regulation) in that industry. However, while lax regulatory standards may be unilaterally optimal, they are inefficient for the world economy (since they lead to a global loss of trade). Therefore, international cooperation over environmental policies that deters countries from relaxing their environmental standards as a trade barrier can lead to increased global welfare.”

Again, the above statement relied on an economic argument for environmental protection which seeks to justify the making of global norms, including market based and economic instruments, which will aid in mitigating the negative externalities that result from economic activities. What is also important is that in the absence of such global norms, national governments provide lax environmental norms in order to aid trade, with bad impacts for the environment.

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Conclusion

Economic activities may have severe negative impacts for the environment. Economic analysis of environment has led to the development of economic instruments like environmental or green taxes and charges and market incentives. The justification for these instruments is that market forces can be used to mitigate the negative externalities of economic activities by providing detriments to harmful activity or reward for environmentally beneficial activities. Such measures are already in place in European system where a combination of command and control and market based instruments are being used to control such externalities. International law needs to adopt such measures at a global level to counteract the externalities that impact local environments as well as global environment.

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