Choosing an Economic Instrument

Economic instruments can be divided into three main categories based on how they affect a government's budget: public expenditure instruments, revenue generating instruments, and budget neutral instruments. Within these categories, policy makers have a variety of options to choose from. It is important to realize, however, that these instruments can have positive or negative effects on the environment depending on how they are implemented. Furthermore, the effects of these instruments may be neutralized by other policies which have not taken environmental consequences into account. Policy makers need to be cognizant of these factors and other criteria (discussed below) when choosing an instrument to achieve a certain environmental goal. It has also been found that economic instruments are most effective when used in conjunction with regulation (Barbier, 1992 p7; Gale and Barg, 1995 p3; OECD, 1994 p18).

Public Expenditure Instruments

Public expenditure instruments (PEIs) take the form of subsidies, grants and tax allowances and are the most familiar tool of intervention. This is generally because it is more politically acceptable for governments to hand out benefits than impose costs on individuals (Barthold, 1994 p143). The function of PEIs is to provide a financial incentive for individuals to undertake an activity they would not otherwise. Examples include grants for developing environmentally friendly technology, price supports for recycling-industries, and tax allowances for energy conservation (Barbier, 1992 p2; Gale and Barg, 1995 p9).

Revenue Generating Instruments

Revenue generating instruments (RGIs) include taxes, charges, and fees. These, to some extent, can be thought of as the "price" to be paid for polluting. RGIs have both an incentive impact and a revenue impact. However, taxes, charges and fees are generally too low to have any effect on environmentally damaging behaviour and so serve mainly as a revenue generator. Usually this income is earmarked and used for clean-up operations, new abatement technologies or subsidizing new investment. Effluent charges on sulphur dioxide emissions, tax differentiation between leaded and unleaded petrol, user charges for public waste disposal, depletion taxes on mineral exploitation and stumpage fees for timber demonstrate how RGIs are used (Barbier, 1992 p2; Gale and Barg, 1995 p12; OECD, 1994 p18; Owens, 1993 p708).

Budget Neutral Instruments

Budget neutral instruments (BNI) represent a relatively new class of instruments within the policy arena, the most common of which is the deposit/refund system. They are designed to lay a surcharge on a potentially harmful substance or activities and then refund that surcharge if that substance is recycled, restored or use is avoided. In such cases the government acts as the intermediary transferring funds from one group to another. To date there are three types of BNIs in use, viz., deposit/refund systems, feebates, and distributive credits. Common deposit/refund schemes are for the recycling of glass bottles, aluminum cans and other containers. Feebates refer to a system where producers or consumers of certain substances are required to pay a certain rate for that action regardless of the legal limits permitted. Those who consume or produce less of the substance than the legal limits are then compensated for restraint. Those consuming or producing more than the legal limit receive little or no compensation depending on how the system is set up. Examples of feebate systems would be reforestation rebates on timber stumpage fees, or the Swedish nitrogen oxide charge. Distributive credits are most often used in the area of waste management where a credit against the waste collection fees is offered to households who recycle their waste. The credit should theoretically be equal to the savings incurred by not having to collect and process this waste (Barbier, 1992 p2; Gale and Barg, 1995 pp18-20; OECD, 1994 p20).