REC - Sofia Initiatives: Economic Instruments: Report on the Use of EI: Introduction

1. Introduction

The use of economic instruments in as environmental policy measureshas long been promoted by economists. The major advantage of economic instruments is, in theory, that they incorporate environmental concerns directly into the market price mechanism. of the market economy. Therefore, these instruments have all the efficiency properties of the competitive market pricing. They trigger actions both among producers and consumers that allow the achievement of given environmental objectives at the lowest costs. Theis cost saving potential of economic instruments over uniform emission standards or emission reduction has been demonstrated through empirical empirical studies.

The efficiency property of the economic instruments, however, crucially depends on (i) the flexibility of the relevant other environmental policy instruments (ii) marginal cost differentials for different abatement options. If strict emission limits are established for each pollution source - as for e.g. each stack of a plant - there is often only one abatement technology resulting in emission which is in compliance with the standard. There is little legal possibility then for devising abatement strategy according to the cost effectiveness criteria. Therefore, the particular environmental policy context largely determines the efficiency of the economic instrument.

Environmental charges are direct payments of polluters. Therefore, they represent a clear application of the Polluter Pays Principle (PPP). Subsidies may conflict with the PPP, since the principle was originally introduced for curbing the use of environmental subsidies. State aid since those can distort competition and it is regulated at EU level. The concept of PPP evolved and several refinements and definitions appeared. The key element is the polluter's 's ownfinancial responsibility. It is generally accepted that the scope of such financial responsibility is defined through complying with environmental legislation. Possible Eexceptions to the required PPP approach are defined both in OECD and EU documents. The common scheme, however, in these exceptions, is that subsidies must be temporary and targeted to specific environmental problems.

From the beginning of the transition to market economy, there have been high expectations for more extended use of economic instruments asin environmental policy tools in Central Eastern European countries (CEECs). Related initiatives have been largely supported by environmental economists from OECD countries. Their who's suggestions for the use of economic instruments to correct pollution problems have sometimes been blocked by existing regulatory institutions in their own countries. They argue that transition brings about institutional changes providing unique opportunities for extended and integrated application of economic instruments.

Surveying CEE countries' application of economic instruments, one may conclude that this advice has been were well taken. The list of economic incentives in use is rather long but a closer look reveals several several dubious specific sub-optimal features of that list. The aim of this report is to take a real in depth look at actual applications and draw both positive and negative lessons relevant for designing and introducing economic instruments in the CEE as well as in other regions.

REC * PROGRAMS * SOFIA INITIATIVES * ECONOMIC INSTRUMENTS * REPORT ON THE USE OF ECONOMIC INSTRUMENTS * INTRODUCTION