ENVIRONMENTAL POLICY
reduce pollution further to cut the tax bill (Pearce et al. 1989 ;Pearceand
Turner 1990 ).
Whereas an eco-tax is a price-based mechanism, atradeable permitis a
rights-based mechanism that combines regulation with a financial incentive.
The government calculates the overall level of allowable emissions for an
area and sets a target that either corresponds to that total, or is lower. The
overall target level is divided into individual emission permits, each giving
theowner the right to release a specific volume of emissions. These permits
are then sold or auctioned to polluters.^4 The government sanctions a market
in the permits, which gives firms an incentive to reduce pollution and sell
any surplus permits for a profit, while firms that do nothing to reduce
pollution will at least pay something towards the cost of environmental
damage. Permits offer firms the flexibility to reduce pollution in the most
cost-effective way, whilst also giving the government the opportunity to cut
the overall level of emissions by withdrawing permits, buying them back or
cutting their entitlement.
Beyond their greater efficiency, proponents claim that MBIs have further
advantages. They raise revenues which can be reinvested in environmentally
beneficial ways: for example, money from water pollution taxes in France,
Germany and the Netherlands is reinvested in water quality improvement
(Andersen 1994 ). Taxes have a potential educative and communicative role by
providing a signal to producers and consumers that they should change their
behaviour. Many experts also claim that eco-taxation offers a potential ‘dou-
ble dividend’, by delivering both environmental protection and additional
jobs (see Box12.3). Among several administrative benefits, it is claimed that
compliance will be cheaper and more effective because the tax is gathered
bytheexisting revenue collection framework instead of being policed by
infrequent on-site inspection.
Yetenvironmental MBIs remain the exception rather than the rule. Until
recently, tradeable permits hardly existed outside the textbook. The USA has
led the way with several small-scale experiments arising from various Clean
Air Acts. One big scheme, underpinning a major drive to prevent acid rain,
saw the introduction in 1995 of a permit system to control SO 2 emissions.
Each source (usually a coal-burning power-station) was issued with permits
equal to a percentage of its historic emissions level, with permits reduced
totheoverall emissions target level from 2000. The Dutch have set up an
NOxtrading scheme, Denmark and the UK have introduced national carbon
trading systems and in January 2005 the EU established a trading scheme
forgreenhouse gas emissions – the first EU-wide MBI. Individual transfer-
able quotas have been used for several years to control fishing in Iceland,
Australia andNew Zealand, and in several EU states such as Portugal and
Denmark.
Eco-taxes have been around longer: water charges were introduced in
France in 1969 and the Netherlands in 1972 (Braadbaart 1998 ). Yet they
are still used sparingly. There are very few in the USA beyond the local