Trends in the development and use of economic instruments

The evolution of the use of government policy for environmental protection has moved through similar phases to environmental summits and agreements and, to some extent, corresponds with recommendations which have come out of these meetings. For instance: in response to the Stockholm conference, the OECD countries adopted the Polluter Pays Principle as an underlying economic principle for environmental policy (Pearce, 1988 p1; & OECD, 1994 p41).

Over the past five years interest in the subject of economic instruments for environmental protection has grown and intensified. This has partly been in response to the World Commission on Environment and Development (WCED) in 1987 and the United Nations Conference on Environment and Development (UNCED) in 1992. Tracing the evolution of government policy for environmental protection shows that it has gone through similar phases to these meetings. WCED recommended that environmental regulations be applied across boundaries. While it was recognized that economic instruments could be used to protect the environment, regulations were deemed to be more desirable and efficient (WCED, 1987 pp198-200 & 319). Economists have debated this vociferously for some time and a swing towards economic incentives as opposed to command and control methods has taken place (Pearce, Markandya, and Barbier, 1989 p155). This is also reflected in the official report of the United Nations Conference on Environment and Development, Agenda 21. Agenda 21 acknowledges that environmental laws and regulations are important but that on their own they cannot be expected to solve all the problems of environment and development. UNCED recognizes that attitudes and behaviour towards the environment will be shaped by the economic and legal contexts and that market-oriented approaches can enhance a country's capacity to deal with the issues of environment and development. Recommendations are now for the use of economic incentives. The new call is for international co-operation in the use of these instruments (Agenda 21, 1993 pp252-254). Governments are now using a combination of the two approaches since it is clear that they both have merit.

With the recognition of the value of economic instruments the number of economic instruments and innovation in their application has burgeoned. This can particularly be seen in the adoption of feebate and distributive credit systems. The focus in the application of economic instruments has also shifted to one of prevention rather than cure. They are no longer used to generate revenue to cover clean-up costs but rather to act as incentives for individuals to change their behaviour. These findings are increasingly being backed-up by empirical evidence (which is still very sparce at this stage). Examples of empirical work in this area can be found in Pearson and Smith (1991) which assesses a European carbon tax; Lotker (1991), related to the development of solar energy by Luz International Limited; and Ministry of Agriculture and Fisheries of New Zealand (1993) which looks at a case study on agricultural subsidy reform in New Zealand.

An emerging development in this field is the transition from instruments for environmental protection to instruments for sustainable development. This is best seen in the series by David Pearce: Blueprint for a Green Economy; Blueprint 2: Greening the World Economy; Blueprint 3: Measuring Sustainable Development; and Blueprint 4: Sustaining the Earth - Capturing Global Value. These titles also show that economic instruments are now being discussed on a global level. While little effort (apart from the European Carbon Tax - which has still not been approved) has been made to implement any instruments on a higher than national level yet, there is currently much talk about it. Recognition that many environmental problems (like pollution) do not heed national borders has drawn attention to the need for some harmonisation of policy. Furthermore, harmonisation of policy would also mean that policies in one country will not undermine policies in the country next door. Protagonists of free trade argue that international trade can only be fair trade if all parties are using the same incentives and disincentives. It is a call for harmonisation in response to the allegation that non-harmonisation is protectionism cloaked in environmental piousness. The World Trade Organisation and the General Agreement on Trade and Tariffs are investigating these allegations (see General Agreement on trade and Tariffs, 1994).