Many industrial and extractive activities cause pollution or other resource damage. A set of economic instruments aims to accomplish three objectives: force the environmental costs into current prices; set up financial mechanisms that protect the public from cleanup costs should the original firm/government fail to do so; and to provide a legal mechanism to sue firms or governments retroactively for the damage their activities have caused. Informational regimes (e.g., mandatory emissions reporting) leverage market forces by exposing below-par performance to customers and neighbours, and by establishing a record of past performance that can support legal action should there be violations.
a) Variations:
i) Time: some EIs spur reductions in the environmental risks associated with current activities; others attempt to recover costs of past damages; and still others help mitigate future environmental risks.
ii) Phase-in. As with most EIs, instruments can be phased in over time to reduce the transitional dislocations.
iii) Polluter pays principle. There are degrees to how closely the entity paying is the one who polluted. It can be the firm, the industry, the region, or all taxpayers. The closer the payments are to the ones causing the problem, the better the price signals will be. iv) Degree of risk control. Protection against future risks is often done through insurance. Governments can make this tool more effective by allowing only financially strong insurers into the market, and by instituting reinsurance requirements where appropriate. Reinsurers absorb a portion of the potential risks associated with a policy, establishing increased diversification for the insurance market. However, they too must be monitored for financial solvency.
v) Border adjustments. Surcharges can be added to competing products coming into the country to offset any competitive disadvantage due to environmental regulation. b) Examples:
i) Addressing risks of current activities: (1) Pollution taxes/permits
ii) Recovering damages associated with past activities:
(1) Civil and criminal penalties for natural resource damages. iii) Addressing risks of future activities:
(1) Required liability or environmental insurance
(2) Performance bonds for proper site remediation/closure. Bonds can be issued for environmental performance, land reclamation bonds, waste delivery bonds, environmental accident bonds, forest management bonds.
(3) Deposit/refund systems for proper product returns
5) Subsidizing transition to cleaner alternatives.
New technologies or alternative resource management practices may have demonstrated environmental benefits relative to current practice. EIs that subsidize these alternatives can benefit environmental quality by accelerating a market shift to these preferable approaches. Once subsidies are available, however, many groups will seek to obtain them; not all will be justified. Care and attention are needed to ensure that the subsidies flow narrowly to the desired recipients if the original objectives of the policies are to be achieved.
a) Variations:
i) Point of support. Subsidies can support activities linked to desired practices (research into wind power), or they can be paid only when the desired practices are actually applied in the market place (tax credit for each delivered kWh of wind power). Rewarding only successful innovation is generally much more cost efficient and productive, and much of the development and marketing risk remains in the private sector.
ii) Magnitude of support. Subsidy levels can range from 100 per cent (grants) to much smaller levels associated with EIs such as revolving funds (small interest rate subsidies). Efficiently providing only what is needed to make a technology economic, but no more, allows limited public funds to have a much greater impact. Renewable Energy Portfolio standards, for example, force clean energy providers to compete against each other for the minimum level of subsidy at which they can provide clean energy. This type of an approach helps make subsidies both more efficient and more dynamic over time.
b) Examples:
i) Grant-based subsidies: soft loans, direct funding, provision of hard currency at below market rates.
ii) Financing-based subsidies: Soft loans, revolving funds, sectoral funds, green funds, public interest rate subsidies or loan guarantees.
iii) Tax-based subsidies: tax credits, tax breaks, tax exemptions, tax differentiation, accelerated write-offs.
iv) Risk-based subsidies: subsidized insurance or reinsurance, liability caps, public sector indemnification.
Local policy makers face a sensitive political situation when trying to judge and assess -- even qualitatively -- the capabilities and levels of corruption in the institutions of which they are a part, or with whom they must work. A number of efforts are currently underway to develop indices and cross-country rankings for these sensitive measures. These indices do entail judgments and approximations, and none are perfect, nevertheless they do provide an important outside source both to help assess domestic conditions and to justify evaluations that civil servants make. This Annex presents a number of the more promising metrics, but is not an exhaustive listing.
Environmental Sustainability Index
The Environmental Sustainability Index (ESI) is an initiative of the Global Leaders of Tomorrow Task Force of the World Economic Forum. The index measures overall progress towards environmental sustainability for 142 countries. There are five core components evaluated: environmental systems, reducing stresses, reducing human vulnerability, social and institutional capacity, and global stewardship. There are 68 underlying variables which combine measures "of current conditions, pressures on those conditions, human impacts, and social responses”. Source: Global Leaders of Tomorrow Environment Task Force, 2002 Environmental Sustainability Index, 2002. Available at:
http://www.ciesin.columbia.edu/indicators/ESI.
Corruption Perceptions Index
The Corruption Perceptions Index (CPI) is compiled by Transparency International. It is a "poll of polls", drawing on 14 surveys from seven institutions regarding perceptions about corruption levels in the government. Polled individuals include business people, academics, and country analysts. Only countries with at least three surveys are included, which means some high-corruption nations are left off the listing.
Source: Transparency International Press Release, "Corrupt political elites and
unscrupulous investors kill sustainable growth in its tracks, highlights new index," Berlin, 28 August 2002. Data available at:
http://www.transparency.org/pressreleases_archive/2002/2002.08.28.cpi.en.html
World Bank Efforts
The World Bank has been working on aggregate governance indices since 1997. Using 194 data measures from 17 data sources compiled by 15 separate organizations, the Bank integrates them into six aggregate index areas. Rule of Law is used as a proxy for the baseline legal institutions within a country. Voice and Accountability can serve as a proxy for the strength of the political institutions. The Bank also tracks the work of others and maintains a fairly extensive listing of these ongoing efforts.
Resources: World Bank data sets are available at:
http://www.worldbank.org/wbi/governance/wp-governance.htm.
Additional resource: Daniel Kaufman, Aart Kraay, and Pablo Zoido-Lobaton, Governance Matters II: Updated Indicators for 2000/2001, World Bank Policy Research Working Paper 2772, February 2002.