United Nations Environment Programme (UNEP)
Environment Outlook-1 - The Web version

Chapter 3: Policy Responses and Directions

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Current Changes in Approaches to Environmental Policy

Changing Environmental Policy Perceptions and Concepts

Many parts of the industrial world achieved economic growth and wealth in the past by having unlimited access to environmental resources (air, water, land, soils, and so on), and little thought was given to the impacts of growth on the environment. They then sought to improve and protect their quality of life from the environmental impacts of their development-initially from the effects of pollution on air and water, and more recently from hazardous waste, biodiversity loss, ozone layer destruction, and global climate change. This protection was largely achieved through Government-regulated command-and-control policies and end-of-pipe solutions that relied on legislation and measures such as emission standards and limits and on maximum permitted rates of resource use.

Significant improvements in environmental protection have been made in many parts of the world through such strategies and action (see below). Yet the state of the ecosphere as a whole continues to deteriorate. Developments in the different regions (Chapter 2) and explorations of the future (Chapter 4) show that an increasing number of environmental constraints will be encountered in the next few decades. Although command-and-control standards are effective in many cases in terms of short-term environmental improvements, the costs of implementation, enforcement, and compliance are high and may hinder long-term economic development. Furthermore, although such policies have proved to be efficient for pollution control, they are less effective for problems associated with the management, protection, and conservation of natural resources, particularly when a large number of different groups and people use these resources. Environmental issues have developed from simple (local, attributable, quantifiable, easy-to-solve, low-risk, and with short time horizons) to complex (global, non-attributable, non-quantifiable, difficult-to-solve, high-risk, and with long time frames). Complex environmental problems demand a combination of policy instruments to achieve environmental goals without constraining economic growth, development, and human well-being. Effective policy setting in support of sustainable development indeed requires a more diverse mix of policies that address the social fabric of life, ensure effective institutional arrangements, improve the economy in all its sectors, protect the environment, and so on. Consequently, countries are complementing command-and-control policies with, among other things, market-based economic instruments, methods to achieve cleaner and more resource-efficient production systems, and efforts to change consumer attitudes.

Economic instruments are increasingly applied world-wide. They aim at changing behaviour by offering incentives rather than by imposing standards or regulating specific technical improvements. Many of them seek to internalize external costs (both resource depletion and pollution costs), so that the producers, transporters, and consumers of various commodities face the full social costs of their activities (the "polluter pays" principle-PPP). A simple example is a carbon tax applied to motor fuel: this makes the producer pay the full social costs of depletion of the resource and makes the consumer absorb the full social costs of environmental damage, thus creating incentives to use fuel and vehicles more efficiently.

Few, if any, economic incentives have actually replaced regulations because most have been introduced with the primary objective of increasing Government revenues rather than altering behaviour towards more environmentally friendly activities. Also, some examples are available whereby economic instruments have been used "for short-term economic gains," which resulted in degradation of the environment. The issue at hand is how to get the best out of market forces, while at the same time moving towards environmental protection and equitable opportunity, and how to determine the appropriate level and type of regulation by Government to achieve this. In countries with strong institutional frameworks, it appears to be mostly a question of fine-tuning existing policies. For countries with weak and transforming institutions, it will entail an extensive and lengthy process of capacity building at all levels.

As detailed in the following sections, the trend is definitely toward using economic instruments to modify behaviour in a positive way. A summary of different groups of economic instruments is given in Box 3.2.. In Box 3.3, positive experiences with economic instruments are described briefly.

Box 3.2.

Economic Instruments for Environmental Protection and Natural Resources Management

Property Rights

Ownership rights
  • land titles
  • water rights
  • mining rights
Use rights
  • stewardship
  • licensing
  • concession/bidding
  • turfs
  • Development rights

Market Creation

Tradeable emission permits
Tradeable catch quotas
Tradeable development quotas
Tradeable water shares
Tradeable resource shares
Tradeable land permits
Tradeable offsets/credits

Fiscal Instruments

Pollution taxes
  • effluent taxes
  • emission taxes
Input taxes
Product taxes
Export taxes
Import tariffs
Tax differentiation
Royalties and resource taxes
Land use taxes
Investment tax credits
Accelerated depreciation

Financial Instruments

Financial subsidies
Soft loans
Location/relocation incentives
Subsidized interest
Hard currency at below
equilibrium exchange rate
Revolving funds
Sectoral funds
Ecofunds/Environmental funds
Green funds

Charge Systems

Pollution charges
User charges
Betterment charges
Impact fees
Access fees
Road tolls
Administrative charges

Bonds & Deposit
Refund Systems

Environmental performance bonds
(e.g., forest management)
Land reclamation bonds
(e.g., mining)
Waste delivery bonds
Environmental accident bonds
(e.g., oil spills)
Deposit refund systems
Deposit refund shares

Liability Systems

Legal liability
  • non-compliance charges
  • joint and several liabilities
Natural resource damage liability
Liability insurance
Enforcment incentives

UNEP. 1995. Economic Instruments for Environmental Management and Sustainable Development. Consultant report prepared by Panyoutu for UNEP Environment and Economics Unit, Environmental Economics Series Paper No 16. UNEP Environment and Economics Unit, Nairobi

In this context, clear interest in environmental impact assessments (EIA) has also developed. An EIA is the analysis of the likely environmental consequences of a proposed human activity. Although generally project-specific, EIAs have increasingly been applied to policies, plans, and programmes as well (UNEP, 1996d). The principle objective is to ensure that environmental considerations are incorporated into the planning for, decisions on, and implementation of development activities. EIAs increasingly assist in preventing or minimizing an activity's adverse impacts, while maximizing its beneficial effects.

Experience demonstrates that an effective EIA depends on three fundamental mechanisms: public participation (effectiveness is determined largely by how successfully the community has been involved), inter-sectoral co-ordination, and a consideration of alternatives. Through these mechanisms, EIAs serve an increasingly integrative and preventive role in development policy and planning.

A perceptional change is also manifested in structural adjustment programmes that are being implemented in developing countries. A combination of long-standing domestic policy distortion and the adverse external conditions of the 1970s (such as oil shocks, debt crisis, and world recession) created severe macro-economic and structural problems for developing countries. In response, stabilization and structural adjustment programmes were implemented. Structural adjustment policies predated the concept of sustainable development and focused on the objective of development assistance and economy-wide policies. They have now evolved to realign with the concept of sustainable development through integration with social and environmental policies.

A 1996 UNEP study explored the question of the environmental effects of stabilization and structural adjustment programmes (UNEP, 1996a). Understandably, the answer depended on a large number of interrelated factors, implying that economic policy-makers cannot apply a simple, standardized set of reforms to any given economy and expect predictable, consistent, or even beneficial results. Macro-economic reforms may even have unpredictable and mixed effects, depending on the situation in a country, or threaten economic growth and environmental integrity for the future in certain cases.

Box 3.3.

Experience with Economic Instruments

A recent survey showed that 14 members of the Organisation for Economic Co-operation and Development used between 1 and 20 economic instruments for environmental protection. Germany, Sweden, and the Netherlands were the most progressive in this respect. Of the 151 instruments in use, approximately half were charges and one third were subsidies. Others were such instruments as deposit-refund systems, market creation, and enforcement incentives.

In the developing world, there is considerable emphasis on communal management systems. Property rights can play a particularly important role in conservation and biodiversity protection. It all relates to the conversion of non-domesticated land to other uses, such as agriculture or industry, as detailed in Chapter 4. Transferring the responsibility of resource management to local communities and allowing them a fair share of the benefits arising from economic activities associated with non-cultivated biological resources helps reduce the pressure to convert such areas.

An example of retention of customary rights over land is found in Papua New Guinea, where more than 90 per cent of the land remains communal. In contrast with other developing countries, only 13 per cent of the forestland in Papua New Guinea has been converted to other uses.

Other economic instruments are also widely used. Private water rights in India provide incentives for the efficient management of an increasingly scarce resource. Concession bidding, forest fees, timber taxes, and environment bonds are used throughout West and Central Africa to promote sustainable management. China has introduced industrial discharge permits and emission charges that double or even triple if the allowable discharge standard is exceeded. Turkey has found relocation incentives to be effective for urban-based industry, while Chile has introduced both tradeable emission permits and tradeable water rights. Puerto Rico uses transferable development rights to promote coastal conservation. Costa Rica introduced biodiversity prospecting rights and tradeable reforestation tax credits, and is currently experimenting with internationally tradeable development rights and carbon offsets. Kenya has introduced differential pricing for entry into National Parks to combat congestion in the most popular eco-tourism destinations.

Removal of timber from forests is being controlled in several countries by tradeable extraction permits, as, for example, in Côte d'Ivoire.

In offshore fisheries, for example, several countries are using tradeable quotas when conventional property rights cannot be assigned but an aggregate catch quota can be set, monitored, and enforced. Similar approaches are being used to optimize the numbers of visitors to national parks in Africa (through tradeable visitor permits), the numbers of hotels built in tourist development areas (through tradeable development permits), and the use of irrigation water (through tradeable water shares). Some economies in transition are experimenting with tradeable emission permits.

Urban pollution and congestion are being controlled by restricting the number of certain vehicles with access to urban areas. In New York City, for example, the number of taxis is controlled with tradeable licenses. In Santiago, Chile, the right of access to certain key city roads for buses and taxis has been auctioned.

Charge systems have typically been applied to the protection of resources from waste discharges and emissions. In Malaysia, for instance, effluent charges have been in operation for 20 years to protect water quality from effluents arising from the palm oil and rubber industries. In Singapore, a scheme that charged drivers for using roads in the city centre during peak hours resulted in a 73-per-cent reduction in traffic in the restricted zone (and less carbon monoxide). Virtually all the economies in transition have introduced pollution charges.

Throughout the developing world, traditional societies maintain a wealth of customary use rights and communal management systems that provide incentives for the efficient use and conservation of natural resources. Although many have come under intense pressure from population growth, from new markets, and from technology, these systems contain valuable lessons and experiences for the design of effective, modern resource management systems that are attuned to local customs.


UNEP. 1995. Economic Instruments for Environmental Manage-ment and Sustainable Development. Consultant report prepared by Th. Panayotou for UNEP Environment and Economics Unit. Environmental Economics Series Paper No. 16. UNEP Environment and Economics Unit. Nairobi.

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