The report is structured in three parts. Part I - 'General Aspects' - includes an overview of the main issues in EU regulation affecting national competence in enacting economic instruments and provides also a presentation of the EU general policy on the use of economic instruments in environmental regulation. Part II focuses on the legal framework which includes identification of the goals and different instruments of EU environmental law and relevant principles of the Treaty. Attention is also paid to the identification of possible legal conflicts connected with the use of economic instruments on national and EU level. Finally, in view of EU principles and legislation, part III discusses options for the use of individual types of economic instruments on a national level.

The report concludes that, in principle, the EU is favorable to the use of economic instruments, preferably on a EU harmonized level. However, taxation issues require unamnity to pass the Council of Ministers, which makes the introduction of new harmonized environmental taxes a difficult process. On this basis, action from individual Member States is attractive if the instruments helps to increase cost effectiveness of specific environmental policies.

The report discusses economic instruments listed in the EU Fifth Environmental Programme 'Towards Sustainable Development' that include: emission charges, environmental taxes and tax differentiation, state subsidies, environmental audit and liability. Member states can introduce these economic instruments if they respect:

• Environmental legislation of the EU;
• The abolition of border control;
• The competition provisions of the Treaty and Directives, and, related practices of the European Court of Justice (ECJ).

According to the report, EU legislation, particularly regarding free trade, may constitute problems for national actions, especially in the case of compensation taxation, refund systems and subsidy schemes. The problems relate to potential trade and competitiveness distortions. Each potential conflict is individually investigated and each case must be approved by ECJ. The study described several examples of successful solutions of controversial cases from EU Member States, especially Denmark. In case of the Danish CFC input tax, for example, CFC is taxed according to the content in the product and/or to the consumption of CFC during the production process. Since the amount of CFC involved in manufacturing and the environmental aim of the tax is clearly defined, and, the environmental problem to be resolved by the tax was accepted, this import tax was approved by EU. The experience from such cases is useful also for CEECs in the accession process.

Another sensitive area are subsidy schemes. The Commission principally allows investment oriented subsidies that must not exceed 15% of total investment (25% for small and medium sized enterprises). If higher than prescribed environmental protection standards are reached, up to 40% of total investment costs is allowed. Subsidies for operational costs can be granted exceptionally. There was concern that Denmark's solid waste refund system and renewable energy subsidy system may distort the conditions for export and import within the EU. The Commission's approval for these instruments was given, however, on the ground of environmental interests of the Community that are addressed with the instruments. Another example is the Danish deposit refund system for beer and soft drink bottles. A mandatory requirement was tried for the ECJ on grounds that the system discriminated against import. The decision favorable towards Denmark was based on well functioning of the system and environmental aspects.

The conclusion is that legal aspects involved with introducing new economic instruments should be considered with great care. However, they should not hamper well reasoned and justified attempts by Member States to implement economic instruments in environmental policy on national levels. There is room for negotiations and agreements and the ECJ may put emphasis on environmental objectives of the instruments.

Henrik Duer, COWIconsult: EU and Economic Instruments in Environmental Regulation. Report prepared for the Nordic Working Group of Environmental Economics under the Nordic Council of the Ministers. Copenhagen 1994, 48 pp. The report will be send free of charge on written request to: Nordic Council of Ministers, Store Strandstraede 18, DK-1255 Copenhagen K, Denmark.