Market-Based Incentive Instruments For Pollution Control

The use of market-based incentives (MBIs) as mechanism for influencing pollution abatement has increased greatly in recent years. This trend reflects the realization that the integration of economic and environmental decision-making will induce the private sector to take steps to reduce their pollution emissions levels. Market-based incentive instruments may be broadly classified to include environmental taxes, investment tax incentives, tradeable permits, user charges and deposit refund systems. Until now, policy- makers world wide have continued to place greater emphasis on the use of investment tax incentives since they seem to more effectively balance environmental considerations with concerns about industrial competitiveness. It is becoming increasingly apparent, however, that other MBIs may be more effective mechanisms for influencing pollution abatement in certain circumstances. This report reviews the theoretical foundations for idealized pollution control MBIs. It then focuses in particular on the way in which environmental taxes, deposit refund system and tadeable pollution permits may be more suitable instruments for inducing pollution abatement behaviour. A number of international examples of the implementation of such policies are reviewed.