Economic Instruments

• Author: Jamie Benidickson
• Profession: Faculty of Law University of Ottawa
• Pages: 302-319

302

CHAPTER 17

ECONOMIC

INSTRUMENTS

1 OECD, Improving the Environment through Reducing Subsidies (1998).

A. SOME BASIC PROS AND CONS

Economic instruments, another of the more recently prominent

approaches to environmental protection, take a variety of forms. Not

all of the economic incentives currently in place or under considera-

tion are particularly innovative, even though efforts to appreciate the

environmental implications of their operation have intensified in the

past few years. Nor is the focus entirely on initiatives that are explic-

itly directed at improving environmental conditions, for the environ-

mentally-adverse impacts of other policy measures is of equal

significance. A simple example is subsidies to the agriculture, energy,

transportation and industrial sectors which have encouraged waste,

pollution and excessive natural resource consumption.1Although this

is an important matter, it will not receive much attention here.

After discussing the general attractions of economic instruments

and market mechanisms from an environmental perspective, as well as

noting some of the reservations that are expressed about them, this

chapter describes non-tax instruments, tax incentives, and public

funds dedicated to the environment. The chapter concludes with ref-

erence to insurance and financial institutions in light of their potential

Economic Instruments 303

2Environment Act, S.N. 1995, c. E-13.1, s. 21.

to use economic incentives in the interests of environmental protec-

tion.

Proponents of economic incentives anticipate that environmentally

appropriate behaviour can be encouraged if environmental costs are

properly priced and appropriately allocated. Certain elements of the

legal regime can be seen as consistent with an economic approach to

regulation. For example, statutory arrangements assigning financial

liability for clean-up costs and other expenses to “persons responsible”

for the damages express the general intention that the burden of com-

pensation for environmental losses should be borne by those who

stand to benefit from the activity that resulted in the damage. Profit-

stripping provisions are expected to eliminate the financial attraction

of disregarding environmental protection requirements. Legal imple-

mentation of the “polluter pays” principle is also often assumed to cre-

ate incentives for preventive measures and alternative approaches that

serve to avoid environmental harm in the first place. Such an observa-

tion might be made in connection with the following provision from

Newfoundland legislation:

Where pollution occurs and the person or municipal authority that

the minister considers responsible for the occurrence of the pollution

fails to do the things that the minister considers are appropriate to

prevent, control, eliminate or ameliorate the pollution, the minister

may take appropriate action to prevent, control, eliminate or amelio-

rate the pollution and the costs incurred by the minister in taking

that action are a debt due the Crown and are recoverable from the

person or municipal authority that the minister considers responsible

for the occurrence of the pollution.2

Although there are certain satisfactions in requiring those who pol-

lute to assume the costs of the damage they have caused, prevention is

more attractive. In general, advocates of economic instruments expect

not only that harm to the environment will be less likely when those

benefiting from the harmful activity must assume the costs, but that

society’s overall costs of achieving a given level of environmental pro-

tection will be lower because of a more efficient distribution among

polluters of the costs of meeting that standard. It is also anticipated

that appropriately designed economic incentives will promote the

development of innovative means to safeguard and improve environ-

mental quality on an ongoing basis.