8. Economic instruments for environmental protection.

How societies can advance environmental protection or - more generally - sustainable development when benefits are distributed unevenly. A wide spectrum of policy options is reviewed in the chapter. Effective implementation of environmental policies.

The analysis of environmental policy starts with four notions crucial to: ef­fectiveness, efficiency, cost-effec­tiveness and equity (see folia 6). The first one judges policies from the point of view of whether they reach social objectives. The next two apply economic criteria: whether costs of implementing a policy are commensurate with its benefits, or whether the policy achieves its goal at least cost. The last one re­iterates the question the eq­uity of policies can be assessed, not only in terms of inter-generational distribution of costs and benefits, but also in terms of distribution across social strata, regions, etc.

Special emphasis is put on eco­nomic instruments such as taxes and marketable permits. Under certain conditions they are capa­ble of achieving cost-effectiveness by appropriately allocating abate­ment/conservation efforts. At the same time, actual implementa­tion of economic instruments in environmental policies have not become routine world-wide. Countries tend to rely on direct regulations, such as, standards, non-transferable pollution per­mits and the like. To many, their effects seem to be more reliable and predictable. Nevertheless, they typically entail higher costs as they leave little flexibility to economic agents.

It often comes as a surprise to many analysts that European economies in transition have been quite advanced in applying economic instruments, mainly pollution charges. Exam­ples from Lithuania and Poland show that pollution charge-rates are rather high even though not as high as in some (rather exceptional) cases in Sweden. In transition econo­mies, the revenues from such charges are typically earmarked for environmental protection and recirculated by so-called environ­mental funds. In Poland, environ­mental funds finance around 40 per cent of environmental invest­ment expenditures and they have been crucial in triggering the re­covery process. In mature market economies, pollution charges are applied rather rarely and, when they are, the rates are low. Sweden is the exception, but the unu­sually high rate for sulphur di­oxide emissions does not raise high revenues there, since the volume of emissions went down to a very low level (even before the charge was introduced in 1991).

One common characteristic of both western and eastern Euro­pean economies is that there are virtually no instruments con­sciously applied in order to em­bark on a sustainable develop­ment path. What countries do by, for example, provision of safe po­table water or reducing exposure to the most harmful air pollut­ants, is their response to immedi­ate and most pressing needs. For the time being, the long-term ef­fects - such as climate change -bearing on the sustainability of current welfare are not addressed by policy-makers in a consistent way. So while there exist in­struments which can be applied in order to make policies more equi­table and cost-effective, actual na­tional records suggest that their implementation is driven by short term considerations rather than long-term criteria.

"Ecological tax reform - reducing unemployment and improving environment" offers an example of how long-term eco­nomic and environmental issues can be addressed jointly. (see folia 6). The concept proposes to shift the tax burden from labour to environmentally harm­ful activities. It illustrates one of the key features of environmen­tal taxes, i.e. their potential for reducing the tax base. It demon­strates that even an extensive tax reform program results in mod­est shifts of the tax burden. This reinforces earlier findings about the need to apply a whole array of instruments in order to embark on a sustainable path of development.