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Making Markets Work for Environmental Policies

1 Introduction

The government intends to make better use of market forces in environmental policy to achieve environmental policy goals. The price mechanism and governance via the creation of flexible framework conditions can stimulate the responsibility of enterprises and the population to solve or help solve more environmental tasks.

The government platform 2001 “Growth, welfare – renewal” highlights the need to make the market work for environmental policies: With the aim of achieving cost-effective solutions, the government will prepare a report on “making the market work for environmental policies”, analysing the practical options for using market-oriented tools to promote a better environment.

“Making the market work for environmental policies” means using market forces to solve environmental problems. There are various ways market players can be influenced to consider the environment: economic instruments (taxes, tradable quotas, subsidies, environmental liability, etc.), which influence market prices directly, or by creating framework conditions (general regulations, voluntary instruments such as agreements, information, eco-labelling, product declarations and technological innovation) for the players, to give them the opportunity to choose their own specific solutions.

This report on making the market work for environmental policies needs to be seen in the specific context of the government’s goal of achieving cost-effective solutions. The aim is to improve environmental measures, either by achieving more with the same resources, or by achieving the same result for less.

1.1 Change of direction in environmental policy

The government intends to breathe new life into environmental policies. In future, the aim of achieving cost-effective solutions and increased use of market-based instruments will be the guiding principles. This will be achieved via a review of a number of environmental policy issues. At the same time, however, the government has a number of commitments resulting from activities currently under way, EU regulations, and other international obligations. In some areas, therefore, in practice, the change in environmental policy will take place over a number of years.

A clean and healthy environment is an essential part of any modern society. A green market economy has to be founded in respect for our natural resources. The challenge is to unify human activity with good environmental protection. The government wants Denmark to be one of the leading countries in reducing pollution, and wants to achieve its ambitious environmental goals in the most cost-effective manner. Denmark must also fulfil its international obligations and participate in international cooperation based on realistic goals. The national strategy for sustainable development from June 2002 contains a number of environmental goals for Denmark which derive largely from international goals.

The OECD report: “Environmental Performance Review – Denmark” from 1999, recommends that Denmark increase its use of economic analyses and instruments in environmental policy, and points out that there is potential in Denmark for improving the environmental effects and cost-effectiveness of environmental taxes.

To date, environmental policy has been largely organised using administrative rules – typically competent authority approvals and monitoring. The traditional methods of regulation in the form of requirements and standards for emissions and technologies are not necessarily the most effective, and are not suited to solving all types of environmental problems. Furthermore, there is a risk of inappropriate bureaucracy developing around the administration of the regulations.

The difference from the way environmental policy was previously conducted will lie in the choice of instruments. The government will critically review traditional instruments and increase the use of market-based instruments in the organisation of environmental policy.

An important step towards making the market work for environmental policies will therefore be to extend the practical use of market-based instruments. Economic instruments such as taxes, tradable quotas, etc., provide consumers and enterprises with a financial incentive to reduce their environmental impact. Flexibility is achieved that makes it possible to limit the environmental impact where it can be done most effectively.

Initiatives and objectives for the use of economic instruments need to be evaluated in the light of the government’s tax freeze. The government‘s platform 2001 “Growth, welfare – renewal” states that, “The tax freeze does not prevent the essential restructuring of taxes. If there are compelling reasons for introducing or increasing a tax or charge, this will be done in such a way that the increased revenue is used, in full, to reduce another tax or charge. The same principle will be employed if, for environmental reasons, it is desirable to introduce or increase an environmental tax.” Restructuring of taxes will only be considered when it is a cost-effective instrument for improving environmental initiatives.

The responsibility demonstrated by enterprises and the population must be given room to operate freely. Solving environmental problems in the most socio-economically appropriate way will require initiative, motivation, and innovation from citizens and enterprises.

Regarding environmental monitoring, greater rewards should be given in future to enterprises which conduct themselves in an environmentally responsible manner. There needs to be greater correspondence between the service enterprises receive in the form of supervision, and what they pay for this service, so that the fee seems more just and transparent.

Private individuals also have a responsibility to take care of the environment. That this responsibility is being taken seriously is evident, for example, in local activities to improve the environment and protect nature, and in the consumers’ demands for environmentally-friendly products.

1.2 Making the market work for environmental policies

Making the market work for environmental policies is about how the market can solve environmental problems. This is a better approach to solving environmental problems than the more traditional regulation of individual players, which is administratively more burdensome. “Making the market work for environmental policies” is about enterprises and consumers giving consideration to the environment in their daily decisions about consumption, production, and investment. The guiding principle has to be free initiative. The government will lay down the framework conditions for these measures, so that the market can work out the best solutions for itself – from both an economic and environmental perspective.

The challenge is to increase the use of market-based instruments in general, and to combine them so they influence market players to consider the environment in a way that ensures the most effective and cheapest environmental initiatives for society. The OECD points out that many environmental problems can best be handled using a broad range of instruments, with the exact combination of instruments being critical for their combined effectiveness. It is therefore important to view these instruments in context and across sectors. At the same time, each sector is responsible for integrating environmental considerations into their own policies¹.

To date, adequate use has not been made of price setting for environmental goods and natural resources. Therefore, in the future, prices must reflect the costs to society as far as possible, including the value of the environmental effects from production and consumption. The principle that the ’polluter pays’ is important and applies equally in Denmark and the EU. A number of other considerations, including enterprise competitiveness, are also important.

As part of the process of making the market work for environmental policies, it will therefore be necessary to base initiatives on socio-economic analyses weighing up the advantages and disadvantages of the various instruments and between different focus areas.

Box 1.1.
Primary principles for making the market work for environmental policies

Environmental goals must be achieved as cost-effectively as possible. The initiatives must be considered as a whole, across sectors and instrument s. The overall economic growth of all sectors in society must occur without a corresponding growth in environmental impacts. The right framework conditions and incentives must be in place to ensure that the market contributes to solving environmental problems on its own initiative. The environment can be used as a competition parameter for enterprises, and be a driving force for innovation and technological development. The ’polluter pays’ principle is central. A number of other considerations, including enterprise competitiveness, are also important. There is a need for carefully documented analyses of goals and the socioeconomic advantages and disadvantages of potential measures. International efforts to make the market work for environmental policies need to be increased. Forward-looking initiatives in the areas of education, research, and innovation can contribute to improving environmental competencies in Danish enterprises and research and knowledge institutions. The responsibility of enterprises and the population must be furthered.

The market for environmentally-friendly products and production processes represents a significant potential growth area for Danish enterprises, both on the domestic and global markets. As already mentioned, an increasing number of enterprises are integrating environmental considerations into their commercial foundations as a competition parameter. This is contributing to increased innovation and renewal of products and production processes in an environmentally-friendly direction.

Consumers, investors, and employees are increasingly focusing their attention on how each enterprise’s products affect the environment during production, use, and later disposal. This trend is expected to continue and will encourage enterprises to be ready to adapt in response to consumers’ environmental demands, and enable them to document their efforts in relation to the environmental properties of their products.

As a consequence of globalisation, markets, communication, and the development and introduction of new technologies are increasingly transcending national boundaries. Globalisation is also leading to greater competition. Enterprises are constantly competing to be the first to introduce new ideas and to reduce the time between the appearance of new technological knowledge and the development and production of new products. This increased competition improves the potential for using the market to create cheaper and better solutions to environmental problems.

At the same time, globalisation of the markets leads to an increasing proportion of environmental impact being linked to the consumption and disposal of products which cross national borders. This increases the importance of voluntary environmental initiatives as a supplement to regulation, and makes it necessary to direct a larger proportion of environmental efforts towards forums such as the EU and WTO, where the frameworks for the global market are determined.

Globalisation also carries with it new economic and social challenges. In order to tackle these, in the Lisbon Strategy, the EU has set itself the goal of becoming the most dynamic knowledge-based economy by 2010. Initiatives to make the market work for environmental policies should, overall, be structured so that they contribute to this goal. The EU has highlighted environmental technology development as a good foundation for unifying efforts to promote a better environment with efforts to take the EU strongly into the future global knowledge society.

Box 1.2,
Factors that affect the development of a green market economy

Income development and relative prices. Consumer preferences. Direct and indirect regulation, including orders, bans, permitted emissions levels, ownership, environmental taxes, tradable quotas, subsidies, etc. International frameworks for the regulation of environmental factors. Expectations for future environmental regulation and long-term environment goals. Knowledge, skills, and information. Technological development and infrastructure. Globalisation of production and trade.

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¹ cf. article 6 of the EU Treaty

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