Economic Instruments

• Author: Jamie Benidickson
• Pages: 375-395

375

CH A PTE R 17

ECONOMIC

INSTRUMEN TS

Economic inst ruments, another prominent approach to environmental

protection, take a variety of forms. Not all of the economic incentives

currently in place or under consideration are particularly innovative,

even though efforts to appreciate the environment al implications of their

operation have intensif‌ied. Nor is the focus entirely on initiatives that

are explicitly directed at improving environmental conditions, for the

environmentally adverse i mpacts of other policy measures is of equal sig-

nif‌icance. A simple example is subsidies to the agriculture, energy, trans-

portation, and industr ial sectors that have been critici zed for encouraging

waste, pollution, and excessive natural re source consumption.1 Although

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

After discus sing the general attractions of economic instruments

and market mechanism s from an environmental perspective, as well

as noting some of the reservations that are expressed about them, thi s

chapter describes non-tax instr uments, tax incentives, and public

funds dedicated to the env ironment. The chapter concludes with refer-

ence to insurance and f‌in ancial institutions in light of their potentia l to

use economic incentives in the interest s of environmental protection.

1 Organisat ion for Economic Co-operation and Development [OECD], Improv-

ing the Environment Through Reducing Subsid ies (Paris: OECD, 1998); Envir on-

mentally Harmf ul Subsidies: Challenges for Reform (Pari s: OECD, 2005); OECD,

Subsidy Reform an d Sustainable Development: Eco nomic, Environmental and Social

Aspects (Paris: OECD, 2006).

ENVIRONMENTAL L AW376

A. SOME BASIC PROS AND CONS

Proponents of economic incentives anticipate that environmentally

appropriate behaviour can be encouraged if the environmental costs

of various activities are recognized and then appropriately valued and

allocated. Certain elements of the legal regime can already be seen

as consistent with an economic approach to regulation. For example,

statutory arrangements assigning f‌inancial liability for cleanup costs

and other expenses to “persons responsible” for the damages suggest

that the burden of compensation for environmental losses should be

borne by those who stand to benef‌it from the activity that resulted in

the damage. As the Supreme Court of Canada remarked in Imperial Oil,

the polluter-pays principle “assigns polluters the responsibility for rem-

edying contamination for which they are responsible and imposes on

them the direct and immediate costs of pollution.”2 In this regard, prof-

it-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.

Principles that di rect the court to consider both use values and non-

use values as aspect s of environmental damage that ser ve as “aggra-

vating factors” in the context of sentencing also underscore economic

consequences.3

Although there are certain satisfactions in requiring those who pol-

lute or degrade the environment to assume the cost s of the damage

they have caused, prevention is more attractive. In general, advocates

of economic instruments ex pect not only that harm to the environment

will be less l ikely when those benef‌iting from the harmf ul activity must

assume the costs, but that society’s overall costs of achieving a given

level of environmental protection will be lower bec ause of a more eff‌i-

cient distribution among polluters of the costs of meeti ng that standard.

It is also anticipated that appropriately designed economic incentives

will promote the development of innovative means to safeguard and

improve environmental quality on an ongoing basis.

A number of potential advantages have been claimed for economic

instruments over traditional command and control regulation in

2 Imperial Oil v Qu ebec, [2003] 2 SCR 624 at 642.

3 Canadian Environmen tal Protection Act, 1999, SC 1999, c 33, s 287.1 [CEPA 1999].