LEGAL AND ECONOMIC INSTRUMENTS

IN ENVIRONMENTAL MANAGEMENT

OBJECTIVE

 To gain a fair idea about the various legal and economic instruments available for
environmental management

 To compare and contrast the usage of economic and legal instruments and
identify the best instrument for environmental management

 To understand the feasibility of application of these instruments to our

environmental management problems

SYNOPSIS

1. Introduction
2. Legal Instruments
2.1 Standards
2.2 Permits and Licenses
2.3 Land and Water Use Controls
2.4 Suasive Instruments
3. Economic Instruments
3.1 Pollution Charges
3.2 Market Creation
3.3 Subsidies
3.4 Deposit Refund Systems
3.5 Enforcement Incentives
4. CAC Vs MBI – A Comparison
5. Conclusion

1 INTRODUCTION developing stage, economic instruments

When the Governments first took
upon to environmental management in
the late 1950s, they were convinced that
the management could be done only
through legislative and policy framing
techniques. In the early 1970s, when
environmental policies were still in their
were used in only a few instances and
were subject to much controversy. Since
then a slow, but continuous evolution
has taken place, with the role of
economic instruments increasing on
several grounds.
 Today, the Governments have
understood that they cam employ two
different instruments for environmental
management; the legal instrument and
the economic instrument. The legal
instrument tends to protect the
management by controlling pollution
through law and authority. The economic
instruments encourage the use of
money to control pollution in an indirect,
yet effective manner. The legal
instruments are also known as
regulatory instruments or COMMAND
AND CONTROL (CAC) instruments. On
the other hand, the economic
instruments are also known as MARKET
BASED INSTRUMENTS (MBI).
The two principal approaches to
pollution control and waste management
are the command-and-control and
market based strategies. The various
CAC and MBI instruments are listed in
the following flow chart.
2 LEGAL INSTRUMENTS

2.1 STANDARDS
Standards are the predominant means for direct regulation of environmental
quality. They define environmental targets and establish the permissible amount of
concentration of a particular substance that discharges into air, water and land. In short,
it is a legally defined regulatory instrument for remitting pollution.

Ambient Environmental Quality Standard: This establishes the highest allowable

concentration of specified pollutants in the ambient air or water. For example, an
ambient standard for a specific river may require that dissolved oxygen, averaged over a
24-hour period at a selected river mile point, must not fall below 4 parts per million on
more than one day per year.

Effluent or Emission Standard: This standard establishes the legal ceiling on the
total quantity or concentration of a pollutant discharged from a pollution source (for
example, mg/liter, grams/24 hours, kg/ton)). Effluent standards may include maximum
effluent limitations for specified time periods (for example, maximum for any one day,
maximum averages of daily values for 30 consecutive days, or for one year) and
monitoring requirements.

Technology-Based Standard: It is a type of standard that is set on the basis of

specific technology the firm employs and its’ relative compliance.

Performance Standard: This is a type of standard that is derived based on the

performance measure of the company and thereby allowing pertaining discharge.

Product and Process Standard-The product and process standards establish the
legal ceiling of pollutants based on the process involved and the final product.

2.2 PERMITS AND LICENCES

The granting or withholding of permits, licenses, or other authorizations is
another important tool for controlling pollution. The permits or licenses are generally tied
to an air or water quality standard and may be subject to the fulfillment of specific
conditions such as compliance with a code of practice, installation of a treatment plant or
pollution control equipment within a certain time period, or adoption of other
environmentally protective measures

2.3 LAND AND WATER USE CONTROLS

Land and Water Use controls like Zoning are principally local governmental tools
that can be obtained for environmental protection. The objective of this instrument is to
facilitate the relocation of industries from a critical zone to a less sensitive zone. Control
of uses of water may be used to limit or ban energy development, exploitation of natural
resources in water and other potentially polluting uses of water.

2.4 SUASIVE INSTURMENTS

The use of environmental consciousness to regulate environmental pollution and
thereby protect the environment is called suasive instruments. In this tool, public
discharge of information of polluting activities is enables. As s result public pressure is
created on the firm to abate pollution. The eco labeling scheme ECOMARK is also
grouped under this category.

3 ECONOMIC INSTRUMENTS

3.1 POLLUTION CHARGES

Pollution charges establish the expenditure that will be made to control
incremental units of pollution, but leave uncertain the resulting level of environmental
quality. Their application is particularly appropriate when the damage from incremental
units of pollution can be estimated reliably. They encompass several types of
instruments namely
(1) Effluent/Emission Charges
(2) User Charges
(3) Product Charges
(4) Administrative Charges
(5) Tax Differentiation

Effluent or emission charges are fees levied by a government authority based on

the quantity and/or quality of pollutants discharged into the environment by an industrial
facility. Under an effluent or emission charge system, a discharger is required to pay a
certain amount for every unit of pollution discharged into surface water or emitted into
the atmosphere.

User charges are direct payments for the costs of collective or public treatment of
pollution. It reflects the fees paid to water authorities to allow discharges of industrial
waste into public sewers. It aims at providing a fee/compensation for the pollution.

Product charges are fees added to the price of products or product inputs that
cause pollution in either the manufacturing or consumption phase or for which a special
disposal system has been established. They function like effluent and emission charges
in that they allow users to determine their own cost-effective means for reducing
pollution.

Administrative charges are fees paid to authorities for services like the
implementation and enforcement of environmental regulations. They usually are a
component of direct regulation and are intended primarily to finance the licensing and
control activities of concerned pollution authorities.

Tax differentiation is used to promote consumption of products that are

environmentally safe. This instrument involves a combination of two surcharges added
to other product charges: a positive charge levied on a polluting product and a negative
charge on a cleaner alternative.

3.2 MARKET CREATION

Under this approach, markets can be created in which actors can buy "rights" for
actual or potential pollution or where they can sell these "rights" to other actors. Market
creation generally takes one of two forms: marketable permits or liability insurance.

Marketable Permits: Under a marketable or tradeable permit system, the

responsible authority determines a target level of environmental quality defined as an
allowable level of emissions or an ambient environmental quality standard. This level of
environmental quality is then translated into a total number of allowable emission that
can be discharged and then allots discharge rights to firms in the form of permits.2
Permits are then distributed to firms with each permit allowing the owner to discharge a
specified amount of pollution. These permits are transferable and also known as
tradeable permits. There are two basic approaches to implementing a marketable
discharge permit system: government auction of permits or free distribution of permits to
dischargers followed by trading among dischargers to establish a market price. The most
important advantages of marketable discharge permit programs are that they tend to be
cost-effective and that they generate revenues. Marketable permit systems also have an
advantage over pollution charge systems in that they ensure a given level of
environmental quality.

Liability insurance is another market creation mechanism in which risks for

damage penalties are transferred from individual companies or public agencies to
insurance companies. Insurance premiums reflect the probable magnitude of the
damage and the likelihood it will occur. When the industrial processes are more secure,
the insurance premium is less and when they are vulnerable, the premium tends to be
high.

3.3 SUBSIDIES
Subsidies include grants, low interest loans, and tax incentives. The basic
principle underlying this category is to provide incentives to the polluters to change their
behaviour or reduce the costs of pollution control to be borne by the polluters. Grants are
financial assistance provided in full by a government (or) government related agency to
obtain a particular equipment or technology. Grants are non-repayable forms of financial
assistance provided if certain measures are taken by polluters to reduce their level of
pollution. Low interest loans refer to the act of reducing the prevailing bank interest rates
(interest rates below market rate) for the benefit of polluters to enable him/her purchase
the equipment or technology. Tax incentives involve tax credits for industrial investments
to abate pollution.

3.4 DEPOSIT REFUND SYSTEMS

Under this approach, consumers must pay a surcharge when purchasing
potentially polluting products. When the consumers or users of the product return it to an
approved center for recycling or proper disposal, their deposit will be refunded. The
basis of this system is to enable proper recycling or disposal.

3.5 ENFORCEMENT INCENTIVES

Enforcement incentives are economic instruments with a fundamentally
regulative nature designed to encourage compliance with environmental standards. It
includes Non Compliance Fees, Performance Bonds and Liability Assignment.

Non Compliance Fees Noncompliance fees are charged to polluters when they
emit or discharge pollution that exceeds levels imposed by regulations. To avoid time-
consuming law problems, it is better to use noncompliance fees rather than criminal
prosecution.

Performance bonds are payments to regulatory authorities before a potentially

polluting activity is undertaken. The payments are returned when the environmental
performance of the activity is acceptable. Like deposit-refund systems, performance
bonds are charges for potential pollution; they are refunded when adequate measures
are taken to prevent pollution. The difference is that in the former user bears the charge
whereas in the latter the polluter bears the charge.

Assignment of liability provides incentives to actual or potential polluters to

protect the environment by making them liable for the damage they cause. This ensures
that victims of environmental damage are compensated by the polluter him/herself.

4 CAC Vs MBI – A COMPARISION

Both the legal and economic instruments have their own pros and cons. On
drawing a comparison between both these instruments, it is found that they both have
their highs and should be used in conjunction, as per the situation.

For the academics, the economic approach offers several advantages when
properly implemented,
* promotes cost-effective means for achieving acceptable levels of pollution;
* stimulates development of pollution control technology and expertise in the private
sector;
* provides government with a source of revenue to support pollution control programs;
* provides flexibility in pollution control technologies; and
* eliminates a government's requirement for large amounts of detailed information
needed to determine the feasible and appropriate level of control for each plant or
product

Despite these strengths, economic instruments have certain disadvantages.

(1)One significant problem is that the effects of economic instruments on environmental
quality are not as predictable as those under the traditional regulatory approach, since
polluters may choose their own solutions. (2) Another problem is that the expertise on
economic instruments is also scarce and the working out of charges to be fixed can turn
to be very controversial. (3) The monitoring of application of economic instruments has
also proved to be a troublesome one.

5 CONCLUSION

Thus we had discussed the various legal and economic instruments employed
for environmental management. The legal instruments were the natural choice for
environmental management. However the OECD (Organization for Economic
Cooperation and Development) has pioneered the role of economic instruments in
environmental management. The wise manner would be to apply any or both of these
techniques ethically and fruitfully as the situation demands. The best instrument for
environmental management would be a correct combination of these two systems, a
meticulously planned mixed system.

In our country, environmental management has been fully based on legal

instruments. The pollution abatement authorities in India are very reserved on the use of
economic instruments, as they fear they may lose control over the polluters, whom they
term unethical in practice. Nevertheless, it’s high time a change in the strategy of our
environmental management takes place and its time that we thought about the
application of these instruments. Subsidies are slowly finding their way into pollution
abatement. But academics want the usage of enforcement incentives to be brought into
fore.

It would be apt to conclude on a positive note, as we observe the use of

economic instruments included in our Draft National Environmental Policy 2004. Let us
hope for, better strive for the usage of effective instruments for environmental
management in our regions.