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Chapter Three: Policy Responses - Asia and the Pacific

Economic instruments

Many countries are beginning to make more use of economic instruments although often still in combination with command-and-control regulations. China is a typical example. Economic instruments such as pollution charges, pricing policy, favourable terms of investment for environmental technology, market creation, as well as ecological compensation fees, are being introduced and, in the coming decade, China aims to incorporate natural resource and environment values into the accounting system for its national economy and to establish a pricing system that reflects environmental cost (SEPA 1997b). Mongolia, in trying to move from a top-down, command-and-control approach to one with increased public participation, is relying on traditional patterns of resource use enhanced by economic incentives and user-pay principles (JEA 1994). Thailand has subsidized capital investment of the treatment of hazardous waste and toxic chemicals, implemented a service charge on community wastewater treatment, introduced a price differentiation between leaded and unleaded gasoline, and is considering granting community rights to conserve forest.

Economic incentives and disincentives are being employed to promote environmental conservation and efficient resource use. Incentives include preferential tax credits and accelerated depreciation allowances on pollution abatement and control equipment. For example, tax deductions stimulated the installation of industrial anti-pollution equipment in the Philippines and the Republic of Korea, while in India an investment allowance of 35 per cent, compared with the general rate of 25 per cent, is provided towards the cost of new machinery and plant for pollution control or environment protection (Government of India 1992). Another success story is the Demand-side Management Programme in the power sector of Thailand (see box below), partly funded by the GEF.

 Demand-side management in the power sector of Thailand

Recognizing the severe impacts of accelerated energy demand, the Thai government has adopted a comprehensive Demand-side Management (DSM) Plan for the power sector. A five-year (1993-97) DSM Master Plan was formulated and implemented with a total budget of US$189 million. By the end of October 1997, the DSM programmes were saving 295 MW of peak demand and 1 564 GWh a year of electrical energy. The reduction in carbon dioxide emissions through implementing the DSM programmes was estimated at more than 1 million tonnes a year while investment requirement in power generation was reduced by US$295 million. The programmes also resulted in consumer savings of US$100 million a year in terms of electricity bills. The DSM programmes include:

*  switching lamp production from fat tubes (40 W and 20 W) to slim tubes (36 W and 18 W) and promotion, by the Electricity Generating Authority of Thailand (EGAT), of compact fluorescent lamps instead of incandescent lamps through price differentials;
*  the Green Building Program, through which commercial buildings can obtain CFLs at a subsidized price. For existing buildings, EGAT carries out an energy audit, design and retrofitting of electrical systems to comply with the energy efficiency requirements set by the government. EGAT also provides interest-free loans to building owners for energy-saving modifications;
*  a programme to replace fluorescent lamps for rural street lighting with subsidized high-pressure sodium vapour lamps;
*  a campaign to test refrigerators and air-conditioners for efficiency, and interest-free loans to purchase efficient air-conditioners;
*  a programme under which EGAT encourages manufacturers and importers of electric motors to produce or import high-efficiency motors, and industrial entrepreneurs to utilize high-efficiency motors by providing interest-free loans to meet the additional cost.

Source: EGAT 1997


In a different sector, Malaysia has implemented tax exemptions for investment in timber plantations to complement efforts in sustainable timber production (Government of Malaysia 1994). For the most part, however, forest-related policies, which include the use of economic instruments, have failed to curb the degradation of Asia's forests (see box).

 Degradation of Asia's forest cover - an example of market, policy and institutional failures

The degradation of Asia's forests clearly demonstrates market, policy and institutional failures. Explicit and implicit subsidies and volume-based taxes on timber removal encourage destructive logging, especially of marginal and fragile forest lands. When concessions are awarded, the goods and services a forest provides in addition to timber are rarely priced. This results in excessive deforestation and in conflicts between logging companies and local communities. Also, forest concessions are typically too short to provide incentives for conservation and replanting. The situation is further aggravated by the lack of secure property rights, both of agricultural land and often of forest resources. Without secure land tenure, farmers do not invest in soil conservation practices and, as it becomes impossible to maintain agricultural yields on existing land, people clear new land from the edges of forests.

Source: ADB 1997


A number of deposit-refund schemes have been promoted to encourage recycling and re-use of products, especially packaging materials. For instance, manufacturers and importers of various goods in the Republic of Korea are required to deposit funds with the government to cover the costs of waste recovery and treatment (Government of Republic of Korea 1991).

Economic disincentives are often based on the polluter pays principle (PPP). Pollution fines are common; for example, in the Philippines fines are used to complement the enforcement of emission standards, and are based on the duration of the violation, and environmental conditions prevailing at the time, the quantity of effluent discharged, and the average deviation from the effluent or emission standards (Government of the Philippines 1992). Among the East Asian countries, Japan and the Republic of Korea have both adopted the PPP although, in Japan, it is yet to be applied comprehensively to pollution control because of existing systems of financial subsidies and tax credits (IDE 1995). In Malaysia, discharge fees have been in use since 1978 to complement a regulatory approach towards solving water pollution from palm oil mills (Panayotou 1994). With the gradual imposition of more stringent standards and higher discharge fees, biological oxygen demand in public water bodies dropped steadily from 222 tonnes per day in 1978 to 58 in 1980 and 5 in 1984 (Government of Malaysia 1994).

Singapore introduced road pricing in the early 1970s to reduce road congestion. Highly effective area licensing schemes were adopted which, by charging drivers to use the roads in the city centre during peak hours, reduced congestion significantly during these times. This system will be further improved by an automated Electronic Road Pricing System (Panayotou 1994). In 1990, to control the growth of private vehicles even further, Singapore introduced a vehicle quota system in which anybody wishing to own a car had to bid for a Certificate of Entitlement (O'Conner 1996).

South Asia and most of the Mekong Basin countries still rely more on regulatory mechanisms for achieving environment policy objectives than on market forces or economic instruments. However, there is a growing awareness of the importance of pricing resources, such as water, to reflect their real economic value and social cost, and there are some successful examples of price mechanisms influencing the more efficient use of water by the industrial sector, for example in India (World Bank/UNDP 1995). Property rights, specially in water and forests, remain ill-defined and insecure despite efforts to decentralize decision making to local levels and the need to consider the interests of the poor and take measures to prevent commercial interests from taking over.

In the Pacific Islands, almost no economic instruments are yet used as tools for environmental management. A lack of experience with such mechanisms, the important role of the informal economy and the traditional role of 'custom' in resource management at the local level, all weigh against market-based instruments. Nevertheless, the possibility of increased impacts stemming from globalization will make it essential for countries to consider the role that such mechanisms may need to play in future.

While economic and fiscal instruments are being promoted for many environmental uses in Australia, the opposite seems to be occurring in New Zealand, where the only fully-developed example of an economic instrument at present is a transferable quota system used to manage the major fisheries. The best-known economic instruments were the deposit-refund schemes that once operated for soft drink, beer and milk bottles. These disappeared in the 1980s as the growth of supermarkets and centralized distribution centres favoured plastic containers over glass ones (New Zealand Ministry for the Environment 1997).

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