Economic Instruments

AuthorJamie Benidickson
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).
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
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].

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