Making Markets Work for Environmental Policies3 Market-based instruments3.1 Economic instruments3.2 The market for cleaner products 3.3 Technological development and innovation Three forms of market-based instruments are examined below: economic instruments such as taxes, subsidies and tradable quotas, voluntary instruments in the market for cleaner products, such as eco-labelling and product declarations, and technological innovation. The three types of instrument are described below, including their areas of application, current experience, and perspectives on their future use. 3.1 Economic instrumentsPrices do not always reflect the scope of the environmental impact associated with production and consumption. The goal of employing economic instruments is to include pollution in the calculation of prices. This is consistent with the ’polluter pays’ principle. Taxes encourage producers, investors, and consumers to act in a more sustainable manner, as they decide which goods or services to produce, invest in, or purchase. Under the right conditions the market can contribute to a certain flexibility for enterprises to reduce environmental impacts cost-effectively. Economic instruments provide an incentive for enterprises to demand cleaner and improved technologies, and can therefore provide an important driving force for the development of new technologies. A cost-effective environmental policy should be based on a mixture of economic instruments, including taxes, tradable quotas, joint implementation, subsidies, voluntary agreements, user charges and environmental liability, cf. box 3.1.
Privatisation and outsourcing are not economic instruments that in themselves affect price and quantity but they can be measures that contribute to cost-effectiveness. Privatising or outsourcing services can lead to more efficient organisation and can reduce the public sector’s monopoly-like position in the market, thus creating a more economically efficient, active market. Compared to other countries, economic instruments are being used quite extensively in Denmark. The majority of economic instruments are based on taxes and subsidies. Tradable quotas are being used to some extent. There is a generally increasing trend for economic instruments such as taxes and tradable quotas to be used in industrialised countries, as they are considered to have a number of advantages over other forms of regulation, not least that they are cost-effective. The EU cooperation is also moving in the direction of using market-based instruments. The government supports the international expansion and coordination of the use of market-based instruments, especially within the EU. This is consistent with the government’s desire to see common minimum rates introduced for environmental taxes in the EU. The tax freeze, together with international regulation considerations, distribution effects, etc., places some constraints on the economic instruments that can be used in Danish environmental policy. It is important to be aware that the structuring of economic instruments will often be subject to other considerations, such as enterprise competitiveness, ease of administration, and the desire to achieve a certain level of revenue. Furthermore, the cooperation within the EU and other international agreements define the frameworks for the use of economic instruments in Denmark. These include, for example, regulations on government subsidies and agreements on minimum tax rates. Not all environmental problems can be solved by economic instruments. One example is highly dangerous substances, where it is crucial that certain threshold limits are not exceeded. The basic idea of the government’s tax freeze is that no taxes or charges are to be increased. However, environmental considerations can justify the introduction of a new environmental tax or increases to existing taxes. Any increase in revenue must be used to reduce another tax or charge. Changes to environmental taxes will only be considered in situations where it is clear that taxes are the most appropriate instrument. Some experience already exists to be further built upon. Previously conducted evaluations and less comprehensive studies and estimates have shown that, in general, the effects of the Danish environmental taxes have been positive. In some cases, the environmental effect has been great, even for modest taxes. For example, the tax differentiation between diesel containing sulphur and diesel low in sulphur content. In other cases, it can be difficult to ascertain whether the tax has had an environmental effect, for example, the tax on PVC. If environmental taxes have to be changed or new ones introduced in future, a solid decision base will first be established, including well-supported analyses of goals and instruments. The difference in the effects on the environment from various taxes depends, for example, on the size of the taxes, administrative considerations, opportunities for isolating the effects of the tax, and the ability of the players to react. A number of these factors can change over time, creating a basis for structuring more environmentally effective taxes. In general, environmental taxes leading to positive environmental effects will yield diminishing revenue over time as consumers and enterprises change their behaviour to consume less of the resource subject to the tax. In Denmark, there are 24 environment-oriented taxes, that is, pollution, energy, and transport and resource taxes. These environment-oriented taxes yielded revenue of DKK 63 billion in 2001. Only about 1.5 per cent of the total tax revenue derives from pollution and resource taxes. Pollution taxes are the taxes which have been introduced on the basis of purely env ironmental considerations. Other taxes have primarily been grounded in fiscal considerations, that is, they have been aimed at achieving a certain level of tax revenue. The taxes designed with a clear environmental objective in mind have generally led to significant environmental improvements. But for a number of taxes, there is potential to achieve greater environmental effects by changing the design of the taxes. The options for making these taxes more environmentally and cost-effective, without conflicting with other important considerations, will be subject to ongoing review, while bearing in mind the premises of the tax freeze. The government is continually working to reduce the extent of subsidies. The subsidies that remain must have the objective of creating better framework conditions for the market to make production and consumption choices leading to reduced environmental impact, and must be aimed at environmentally-friendly agriculture, reductions in the environmental impact from energy production and consumption, and, to a lesser extent, the development of cleaner products. Tradable quotas have many advantages in relation to achieving environment goals in a cost-effective manner. A system of tradable quotas provides for healthy, internal price-setting by determining the scope of pollution reduction and letting the market decide the price for this. Tradable quotas are an interesting mechanism that can be considered when the administrative consequences reasonable. Denmark was the first country in the world to establish a system of tradable emissions quotas for CO2 emissions from electricity production. The electricity supply companies have been allocated an annual CO2 quota, up until 2004. If an emissions quota is exceeded, a fine of DKK 40/tonne CO2 must be paid to the government. The Danish climate strategy is now giving crucial focus to the use of tradable quotas via the EU’s Emissions Trading Directive and the flexible mechanisms of the Kyoto Protocol. As an example of the latter Denmark entered into a contract with Romania in March 2003 regarding the first Danish joint implementation project. Experience with the use of voluntary agreements has shown that they are suitable for achieving nature and environmental goals in a number of cases. In order to work appropriately, these agreements must be precisely formulated and be mutually binding for the parties involved. Their use must depend on a specific assessment for each area. It is important that new applications or extensions to existing applications for economic instruments are based on solid scientific evidence and cost-benefit analyses. Cost-benefit analyses are not a new discipline. However, a number of methodological approaches particularly linked to the environment, such as the valuation of the social costs of pollution, are still under development. Focus will be given to ensuring that research and investigation activities support the development of well-founded decision bases. It is also important that the necessary data exist for evaluating the advantages and disadvantages of the instruments. Initiatives and objectives Based on previous experience with the use of economic instruments to regulate environmental and natural resources, the following initiatives and objectives have been identified within a number of focus areas: More environmentally and cost-effective taxes
Subsidy schemes should be designed to take environmental considerations into account
Increased international use of economic instruments
Increased domestic use of economic instruments
There needs to be a solid knowledge and decision base for economic instruments
3.2 The market for cleaner productsProduct development, production, transport, and marketing are increasingly transcending national borders. Many products are based on subcomponents supplied from other countries. The environmental impacts of each product will therefore often take place in many countries. Given the free movement of goods within the single European market and on the world market, it is difficult to regulate products directly via administrative regulations – beyond certain minimum requirements. In many cases, it will not be sufficient to use domestic economic instruments (taxes etc.) either, because subcomponents from many different countries are involved, and because customers are also spread across a similar number of countries. The use of a number of voluntary instruments can be an appropriate supplement, with the aim of ensuring the continued development and marketing of products undergoing gradual environmental improvements throughout their entire life cycle. Danish enterprises must have access to relevant knowledge and good framework conditions in order to establish adequate competence. The instruments involved here are primarily voluntary, and are best developed in cooperation between the government and the private sector. The instruments relate to the promotion of innovation and the spread of environmentally friendly products and technologies. Market transparency can be increased via trustworthy information to consumers, for example, the “Swan” and “Flower” eco-labels. At the Johannesburg summit business and industry reconfirmed their interest in achieving sustainable development. It is necessary to enter into partnerships and establish new forms of dialogue between the market players and authorities. Greater involvement by enterprises and consumers creates a good framework for knowledge sharing in all stages of the supply, marketing, and demand for cleaner products. In the product area, positive experience has been gained with new forms of dialogue and cooperation which involve all the relevant players on the market, give joint ownership to the initiatives and achieve tangible results. International initiatives will gain increasing significance in a global economy. Efforts must focus on initiatives that promote the EU‘s development of integrated product policy and follow up on the Johannesburg goal of sustainable production and consumption patterns. The increased use of producer responsibility in specific productsgroups with particular environmental or resource problems is an option that is increasingly being employed in the EU. Initiatives and objectives Better documentation and information about cleaner products on a European basis
Better cooperation in the market for cleaner products
3.3 Technological development and innovationGlobalisation and rapid technological development have lead to increased competition between enterprises. In many sectors, the average lifetime for products, services, and technologies is much shorter than it was just 10 years ago. For example, in 1950, 90 per cent of the market-leading enterprises were able to survive for 10 years4. Today, only 20 per cent are able to remain in the market over a ten-year period. These figures illustrate the more extensive and rapid changes taking place in the market and the need to remain on the technological leading edge. Distinction is made between three types of environmental technology: end-of-pipe technologies, cleaner technologies, and environmentally effective technological systems. It is expected that in future, all three types of environmental technology will come to play a significant role in the area of the environment. Cleaner technologies are forging ahead, replacing end-of-pipe technologies to a certain extent. But there continues to be a need for end-of-pipe and waste management technologies in the short and medium term. In the long term, the goal is to minimise the consumption and production of chemicals that are harmful to health and the environment. The development of end-of-pipe technologies is often closely linked to the development of cleaner technology. It is therefore important that Danish enterprises have access to end-of-pipe and waste management technology competencies, in order for them to be able to develop cleaner technology. There is increasing international interest in the development of environmentally-effective technological systems, due to, for example, the growing significance of climate change and increasing transport-related environmental problems. The majority of the technology used in Denmark will be developed in other countries. International cooperation is therefore important. The global market for environmental technology is estimated to be at least Euro 550 billion5 and is seen as a growth area. The value of Danish exports to this market has grown to over DKK 15 million annually, and is also characterised by high growth6. The European Commission’s report on sustainable development for environmental technology7 from March 2002 concluded that the market for environmental technology represents between 2.3 and 3 per cent of the EU’s total GDP. Of this amount, capital expenses constitute 30 per cent, while the remainder is operating expenses. The European Union is the largest export market for Danish environmental technology. The future market for environmental technology will depend particularly on the developments in business and innovation policy and environmental policy. The EU has set itself the goal of becoming the most knowledge-intensive and dynamic economy in the world by 2010. In pursuit of this goal, funds have been set aside in the EU’s Sixth Framework Programme for Research, Technological Development and Demonstration, for research into sustainable energy and transport technologies, including technologies to exploit renewable energy sources, hydrogen cars and fuel cells. The government’s strategy – “The Danish Growth Strategy” concludes that Denmark is not quite able to keep up with the leading countries in terms of innovation and technological renewal. The challenge is to increase both public and private research and development efforts and ensure that research and new knowledge is better exploited commercially. The OECD’s comparative analyses also point out that Denmark could become better at converting new research results into commercial applications. In a number of areas, the existing Danish domestic market for environmental technology solutions is not large enough to develop competitive enterprises on the global market. Municipalities and utility companies are often small, and lack the necessary competencies and tradition for a development-oriented approach to solving environmental problems. The government has historically made large investments in end-of-pipe and resource management technologies, for example, in relation to wastewater and waste. More than DKK 9 billion has been invested in wastewater treatment plants under the Action Plan for the Aquatic Environment I. Compliance with environmental legislation will also require that private enterprises and government institutions invest in end-of-pipe technologies and in the use of cleaner technology. The requirement to use the Best Available Technology (BAT) is also an important component of the EU directive “Integrated Pollution Prevention and Control” that regulates industrial enterprises. Based on long-term environmental policy goals, the EU has determined emissions standards in specific areas, to come into effect over a set number of years. These emissions standards are based on the employment of expected future technology developments. Thus the development of environmental regulation and the development of technological innovation contribute to each other. Environmental legislation rarely stipulates detailed requirements for the use of specific technologies. Rather the market selects the most suitable environmental technologies, and enterprises play a key role in innovation. Experience has shown that sector policies have great significance for the development of environmentally effective technological systems. A restructuring of technological systems is dependent on the framework conditions for the sector’s development (for example, in the form of investments in infrastructure) supporting the introduction of new and more environmentally friendly technological systems. Initiatives and objectives
___________________________________________________________ 3 This means, for example, in the climate area that the interplay between taxes/tax concessions and quota regulations must be evaluated. Some of the enterprises that presently receive a reduction in their CO2 tax will be covered by the quota scheme, and others will not. |
