It is rare that only one instrument is being used to address a particular environmental issue. The publication Instrument Mixes for Environmental Policy analysed a number of cases and drew out lessons that can be learned. While there are several situations where different policy instruments underpin each other (for example, a tax and a labelling scheme), there are number of situations where one or more instruments in the mix adds little to the benefits; only causing additional costs.
The findings of the book were summarised in the following recommendations:
- Regarding how to assess instrument mixes, it is recommended to…
- Carefully assess the benefits and costs of meeting current environmental targets.
- Make in-depth ex ante assessments of any new instruments.
- Regularly make ex post assessments of all instruments impacting on an environmental area.
- Determine at the outset whether the issue at hand represents a “single-aspect” or “multi-aspect” problem.
- Focus the assessments on “outcomes” rather than “outputs”.
- Focus on impacts for the economy as a whole – rather than on impacts for individual firms or sectors.
- Assess carefully the environmental impacts of subsidies given to “other”, non-environmental, sectors.
- Assess regularly whether the design of other non-environmental policy instruments have unintended negative environmental impacts.
- In order to develop instrument mixes that are environmentally effective and economically efficient, it is recommended to…
- Apply instruments that address the environmental problem as broadly as possible.
- Provide similar incentives at the margin to all polluters.
- Have a comprehensive view on which instruments are required to create an environmentally effective and economically efficient instrument mix.
- Supplement instruments that address total pollution level with instruments that address other aspects of “multi-aspect” problems: Where, when, how, etc.
- Enhance possibilities for instruments to mutually reinforce each other by applying instruments that provide flexibility.
- Use information instruments to enhance the environmental effectiveness of any taxes, fees or charges.
- Pay attention to the incentive impacts of various instrument-design options.
- Avoid overlapping instruments, except when they can mutually reinforce each other, or address different aspects of the environmental problem.
- Avoid a confusing multitude of labelling schemes within a specific environmental area.
- Avoid annual targets for environmental problems that can be adequately addressed even if emissions vary somewhat from year to year.
- Put in place appropriate monitoring and enforcement mechanisms – to safeguard the environmental effectiveness of the instrument mix.
- Consider carefully whether voluntary opt-in possibilities in emission trading systems could jeopardise the environmental effectiveness of the trading system – and/or enhance the economic efficiency.
- Be careful when defining the baselines in any such opt-in options – in order to preserve environmental integrity of the whole scheme.
- Address any social concerns related to environmental policy instruments primarily through non-environmental instruments.
- Make sure to provide a positive incentive to abate at the margin if measures to limit sectoral competitiveness impacts are introduced.
- Address any non-environmental market failures primarily through non-environmental instruments.
One case where overlap between policy instruments can be of concern is when a ‘cap’-based trading system, or some other type of upper limit on emissions, is combined with other policy instruments – for example various subsidy schemes. There is a danger that the additional instruments only cause extra costs, without providing any additional benefits. Such issues are discussed in detail in the report Interactions between Emission Trading Systems and Other Overlapping Policy Instruments.
Working papers and similar documents