Theoretical Cautions and Practical Considerations
Choosing environmental policy tools

18 March 2004

par Web Team

Interest in the environmental problems of developing countries has led to a growing literature on the choice of policy instruments. The message of that literature tends to be that developing countries should embrace and put in place management systems based on economic incentives (sometimes called market-based incentives) such as marketable permits (to pollute or otherwise stress the environment) or, better yet, charges per unit of the stress. This message is supported primarily by arguments, first, that economic incentives produce least-cost solutions to environmental problems and, second, that they involve a "double dividend" of revenue for hardpressed governments that are often saddled with poorly designed and administered tax systems.

This report probes the wisdom of this blanket prescription from several points of view. First, it clears up the debate’s background about instruments, and the terminology of instrument classification. In particular, the phrase "command and control" is rejected as a label for all instruments other than economic incentives, the argument being that it should apply only to a small subset of those alternatives-the ones that specify both what is to be achieved and how.

Next, the static efficiency basis for recommending economic incentives is challenged on the basis that attaining static efficiency in the general case in which location matters implies a very heavy information and calculation load, either for the responsible agency (with charges) or the sources themselves (marketable ambient quality permits). A second problem is the other side of the "double dividend" coin-the transfer payments they imply can be very large; indeed, of the same order of magnitude as the resource costs of controlling the activity being charged. Finally, the awkwardness of the lack of a second best result, justifying some form of charges as better than other forms of regulation, is noted.

The requirements for centralized information implied by the static efficiency goal may be linked to government capability more generally. This notion is pursued by a discussion of the evolution of government capability as part of the development process, using a typology of traditional, transitional, and modern. The institutional discussion notes how the commercial/industrial and rural sectors of Latin American economies may be expected to evolve-at least under current fashions in economic prescriptions. Taken together, the cautionary materials about the economic properties of economic incentive instruments, and government capabilities relative to the demands imposed by those instruments lead to a set of recommendations that:
-  are tuned to the level of institutional development of the nation in question;
-  look very different, especially for the "traditional" phase of development, from the recommendations of the rest of the instruments literature; and
-  look more favorably on economic instruments as the level of institutional capability approaches "modern."

The report closes with a preliminary catalog of what is actually being attempted in Latin America. In the institutionally better developed nations several efforts to use economic instruments are observed. But many other experiments with other instruments seem also to be underway. The less institutionally developed nations seem to be doing less across the board, not just in the application of economic incentives. Possible reasons for this general lack of action are suggested but no definitive answer is available without substantial field investigations.

Web Team

P.S. Source : Inter-American Development Bank