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Using Regulations and Incentives to Reduce Eutrophication

A government can use various tools to reduce nutrient loadings to appropriate levels. It is not sufficient to simply decide that nutrient inputs into a certain lake should be cut in half. It is necessary to develop techniques for translating this objective into actions that specific polluters undertake. An agency may rely on direct regulation of polluters or institute economic incentives, such as a tax reduction for investment in pollution control. We will use the term "instrument" to describe a specific approach an agency chooses to control the polluter so that discharges are brought under control. For example, the agency may choose a tax instrument or a direct regulatory instrument. We discuss these below.

Classification of Instruments

There are three main categories of environmental management instruments:

• Direct regulatory instruments:

Direct regulatory instruments, also called"command and control" instruments, correspond to institutional measures oriented to influence directly the environmental behavior of economic agents (polluters) in order to regulate production processes or product characteristics, and/or limit the discharges of certain pollutants to the environment, and/or restrict activities in certain periods of time or areas. These actions require a previous definition of environmental standards incorporating government environmental objectives with reference to human health, natural resource conservation, ecological considerations and other issues. For instance, pollutant quantities that can be discharged are specified, technologies that can be implemented by particular industries are prescribed, or criteria or quotas are authorized when exploiting natural resources. Direct regulatory instruments include emission standards, permits and licenses, land use and water control, and urban planning, among others.

An instrument that sets an upper limit on the nutrient level in water discharges from coffee processing facilities would be an example of a direct regulatory instrument.

• Persuasive instruments:

Persuasive instruments consist of non-economic programs, activities and actions oriented to make agents internalize environmental responsibilities in their decision-making processes. Information, education, training and volunteer agreements among government and entrepreneurs are valid examples of this group of instruments. The perception that a company is a good company or a green company can provide an incentive for them to reduce emission levels. Governments may have a role in making consumers aware of the deleterious effects of eutrophication and encourage consumers to place pressure on those from whom they buy their goods. This type of incentive process corresponds to the persuasive group of instruments; however, is difficult to manage and will usually only occur over the long run. It is not suitable where the problem is immediate. There may also be opportunities for direct bilateral negotiation between the government and the polluter, in order to reach agreement on steps to control emissions.

• Economic instruments:

Economic instruments are a specific form of persuasive instrument whereby generating less pollution can save the polluter money. In the context of eutrophication, there are two basic classes of economic instruments: fiscal and financial instruments and market instruments, including property rights instruments.

Fiscal and Financial Instruments.

This is the most significant class of economic instruments and includes emission charges, product charges, subsidies, preferential tax treatment, and financial incentives.

Emission fees. Emission fees (also called effluent fees) involve charging polluters a fee per unit of pollutants generated. Thus if food-processing waste is being discharged into a lake, the generator would pay a fee per unit of pollution emitted. Such a fee should not be confused with a fine for emitting more than allowed. The idea behind this measure is that there is no correct amount of pollution but, all other things equal, less pollution is better. It is always appropriate to send a signal to polluters to try to reduce pollution (though not at any cost). The emission fee makes discharging pollution a little less attractive to the polluter. No matter what amount of pollution is generated, the polluter must pay a fee to the regulatory body covering those emissions. Such fees are probably less effective for controlling pollution that comes from government agencies or other institutions that may be less concerned about costs or budget balancing. The fee will be lower when the assimilative capacity of the water body has not been exceeded, compared to the case where it has been exceeded.

User fees. In the context of a municipal wastewater collection and treatment system, the users of the system can be charged according to the load they place on the system. Clearly, a sewer use charge that is unrelated to the amount of waste generated (for instance, a fixed monthly charge) provides little incentive to reduce wastewater discharges to the system. When proper financing of wastewater treatment is difficult, as it is in many developing countries, it is particularly important to relate the charges paid by users to the cost of providing services to those users. If metering wastewater generation is too costly, charges can be based on closely related variables, such as water use or size of facility.

Product charges. A product charge is a charge on a good or service that is closely related to pollutant emissions. For instance, a charge per unit of fertilizer purchased by farmers would be a product charge whereas a charge per unit of fertilizer runoff into a lake would be an emission charge. It is easier to monitor fertilizer use than runoff and thus easier to tax fertilizer than the pollutant emissions directly.

Subsidies. Although a fee placed on emitting sends a signal that emissions should be avoided, such fees are often politically difficult to institute. Those subject to the fees may protest that they cannot afford them. This may be a particular concern in developing countries that are trying to encourage industry. An alternative is to subsidize pollution reduction. For instance, a food processing facility which has been emitting a certain level of nutrients can be paid for every unit of emissions reduced below the baseline. The problem with subsidies is that they require a source of funds, which may not be readily available.

Market Instruments. Markets can be very effective for helping to efficiently manage resources. It is sometimes possible to harness market forces to solve water and pollution management problems. For instance, markets can be established for the rights to use water for industrial and agricultural use. Such a market assures that scarce water is used in the highest value activities.

For managing the eutrophication of lakes, markets can be established in the form of permits to discharge nutrients into the environment. Under a tradeable permits system, the regulatory authority determines the total amount of emissions of nutrients into a given lake and its tributaries during a year or other period. The agency allocates the total allowed nutrient load among the various emitters in the region. Thus, if emitters are only emitting what is allowed, the pre-chosen overall level of emissions of nutrients will not be exceeded. The problem is that some polluters may have a very difficult time complying with their ceiling on emissions. Others may have no trouble at all. If trading among emitters is allowed, those which have a difficult time with control will be able to acquire (buy) permits from those who find control easy. The one thing we can be sure of is that the total amount of permitted emissions stays the same before and after trade. What is different is that the system is much more flexible with trading, giving polluters more options. The advantage of allowing trading is that the cost of pollution control is as low as possible.

Issues in Implementing Economic Instruments

The use of economic instruments is at the top of the agenda of the environmental management sector in an increasing number of developing countries and emerging economies all over the world. They are widely regarded as being economically efficient and environmentally effective alternatives to direct regulatory instruments. In theory, by providing incentives to control water pollution or other environmental damage, economic instruments are believed to have lower compliance costs and can provide much needed revenue for local government coffers (though not all economic instruments generate revenue).

Administrative costs associated with economic instruments, however, may be high. Monitoring requirements and other enforcement activities remain as for traditional instruments, and additional administration efforts may be required to cope with the design and institutional changes arising from the implementation of economic instruments, at least initially.

The following are some key findings of a study¹ on the application of economic instruments in eleven countries of Latin America and the Caribbean:

• Economic instruments are widely used.
• The primary historical role of economic instruments is to raise revenue. Other potential objectives, such as reduction of environmental impacts or improving cost-effectiveness of regulations, have been under-emphasised or not attained.
• Public awareness is low and uncertainty is high. There is a weak participation among stakeholders, which poses a real constraint to the rapid implementation of complex mechanisms for the implementation of economic instruments.
• Economic instruments can be an important, if not the only, means for introducing some added efficiency to existing control mechanisms. The proposed scope must, however, match the institutional capacity to implement them. To this extent, approaches that introduce gradual and flexible reforms are more likely to be consistent with ongoing institutional changes.
• While the revenue collection task of economic instruments has been highlighted, there still exists a strong need to channel revenues to local authorities to assist in building institutional capacity.
• International donor agencies are prone to recommend solutions from the Organization of Economic Cooperation and Development with little regard to institutional issues;
  to date most of the information flow regarding economic instruments has been of a "North-South" variety. An important opportunity has been missed to share environmental management experiences among developing countries; increased information sharing in a "South-South" dialogue will benefit all parties.

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¹Motta, S., Ruitenbeek, J. and Huber, R., 1997. Applying economic instruments for environmental management in the context of institutional fragility: The case of Latin America and the Caribbean, in Finance for Sustainable Development: The Road Ahead, Proceedings of the Fourth Group Meeting on Financial Issues of Agenda 21 held in Santiago, Chile, 1997, New York, U.S.A.

A common assumption regarding economic instruments is that they constitute a ready substitute for out-dated or inefficient direct regulatory procedures. However, and certainly initially, economic instruments should be considered complements to existing regulatory approaches, not substitutes.

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