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

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INTRODUCTION

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

developing stage, economic instruments 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 timeconsuming 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.

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