Special Feature: CDM for Renewable Energy

Market-based instruments for environment protection Lessons from the European experience and possibilities of application in Non-Annex I countries Subir Bhattacharya

Governments of various countries intervene in four ways to control pollution and achieve the goal of clean environment: using markets, creating markets, implementing environmental regulations and engaging civil society. Market-based instruments (MBIs) fall in the category of using and creating markets, of which Clean Development Mechanism (CDM) is a key component. MBIs encourage pollution control through market signals instead of explicit directives on pollution levels. This paper deals with the theoretical foundation of MBIs, the policy context that led to the emergence of MBIs, a policy framework for government interventions, the European experience of use of MBIs, a SWOT analysis on MBIs, possibilities of application in countries like India (with special emphasis on renewable energy), and the scope of application of CDM in Non-Annex I countries.

Introduction

Dr. Subir Bhattacharya Senior Manager Management Advisory Services Division MECON Limited Ranchi 834002, India E-mails: [email protected] [email protected]

P

ollution control has always been a matter of concern across the globe. To achieve the goal of clean environment, national governments intervened in a number of ways to control pollution. In the initial stage, governments relied heavily on regulatory mechanisms. While such regulations were effective in some cases, they were, to some extent, inflexible and imposed high costs on the community. There is substantial evidence

to prove that command-and-control system can be extremely costly if it is poorly designed and administered (Hufschmidt and others, 1983; Tietenberg, 1985). It was later realized that market-based instruments (MBIs) offer more cost-effective ways to achieve environmental objectives (James, 1997). Much of the environmental pollution takes place due to incorrect pricing of goods and services produced and consumed. MBIs help to realize simultaneously environmental, economic and social objectives by taking

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z z z z z z

Theoretical foundation of MBIs; The policy context that led to the emergence of MBIs; A policy framework for government interventions; The European experience; SWOT analysis of MBIs; and Scope for application of CDM in Non-Annex I countries.1

Theoretical foundation of MBIs MBIs are those that provide the opportunity to incorporate into market signals some or all of the costs that actions of producers or consumers impose on others in the community through environmental damage and use of natural resources (ABARE, 2001). To put it more simply, MBIs are instruments that “encourage behaviour through market signals rather than through explicit directives regarding pollution control levels or methods” (Stavins, 2000). This is very similar 1

UNFCCC divides countries into three main groups based on differing commitments: Annex I, Annex II and Non-Annex I. Annex I Parties include the industrialized countries that were members of OECD in 1992, plus countries with economies in transition, including the Russian Federation, the Baltic States, and several Eastern and Central European States. Annex II Parties consist of OECD members of Annex I, but not the countries with economies in transition. Non-Annex I Parties comprise mostly developing countries.

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I

ETP

MAC = MDC The equilibrium

R

E Drinking water

V

R Effluent

into account the hidden costs to peoples’ health and environment in a costeffective manner. Broadly speaking, there are four major ways by which a government can intervene: using markets, creating markets, via environmental regulations and by engaging civil society. MBIs fall in the categories of using and creating markets. They encourage pollution control through market signals instead of explicit directives on pollution levels. They are relatively new mechanisms for environmental management, and were tried after the failure of regulatory approaches alone to control pollution satisfactorily. The extent to which MBIs succeded in providing clean environment is still a matter of debate. In this context, the current paper deals with the following issues:

Cost

Special Feature: CDM for Renewable Energy

WTP

C T o wnship

0

P

Pollution

0

Figure 1: Efficient solution to environmental problem to the economic instruments that affect relative prices of alternative actions open to firms. Although by this, they aim to influence decision-making in such a way that the chose alternatives result in environmentally more desirable situation than in the absence of these instruments. MBIs are designed to achieve the conditions for efficient solution of the environmental problem: marginal environmental damage cost should equal marginal cost of environmental protection (abatement cost) or the sum of these two costs should be minimized (Figure 1). MBIs give polluters more flexibility than command-and-control policies. First, in MBI, the method for pollution reduction is not specified. Polluters who face the same regulation may reduce pollution by recycling, installing new equipment, switching fuels, etc. Second, when abatement is costly, polluters have the flexibility to not abate pollution and instead pay higher for polluting. When abatement cost is low, reverse actions could be thought of. As MBIs induce polluters to pay taxes, buy permits or forgo subsidies when they pollute, they provide an alwayspresent incentive to abate pollution. Therefore, such incentives promote innovation in pollution control technologies (Jaffe and Stavins, 1995).

approach either failed to achieve the desired goals or became very expensive, prompting many governments to initiate more effective and cheaper ways of achieving the goals of environmental protection. Attempts were made to develop systems that met the government and community expectations for higher environmental standards but were flexible and amenable enough to run the business activities. Environmental economists argued that in cases where the market fails to price environmental goods and services, a creation of ‘price’ that reflects the value of these goods and services would efficiently regulate their use. This is the genesis of MBIs. Pigou (1932) advocated the use of ‘green taxes’ to adjust market failure. He argued that optimum level of pollution abatement would occur where the marginal abatement cost equalled marginal benefit yield. Here, a tax per rate for pollution that induces abatement up to this point would be socially optimum. These theories got practical expression in the use of MBIs.

Policy context that led to the emergence of MBIs

Pollution charges

In regard to environment protection, ‘market failure’ is a common phenomenon across the globe. Regulatory

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There are four broad categories of MBIs: pollution charges, tradable permits, market barrier reductions, and government subsidies and incentives. Stavins (2001) provides a detailed discussion on the subject.

Pollution charges are levied on a firm, based on the quantum of pollution for which that firm is responsible. The objective of this MBI is to control pol-

Special Feature: CDM for Renewable Energy lution and strengthen incentives to reduce pollution. For the polluters, it is worthwhile to reduce pollution to the point where marginal abatement cost equals tax rate. This MBI remains effective when taxes are sufficiently high to stimulate measures to abate pollution. However, it is very difficult to define and value the marginal damage cost of a unit of pollution. In addition, attempts to measure the tax on pollution may lead to illegal dumping. This is a price-based MBI.

Tradable permits Nobel Laureate Ronald Coase pointed out (1960) that if the assumption of zero transaction cost is maintained, the set of markets could be expanded beyond private goods to include nonmarket assets. The disputed parties will work out an agreement that is efficient regardless of the party to whom unilateral property rights are assigned initially. As long as these legal entitlements can be freely exchanged, government intervention is relegated to designate and enforce well-defined property rights. Coase (1991) had carried out complicated research on this crucial issue and a few fundamental problems associated with it, such as the measurement of monetary damages associated with emissions and fate-and-transport system that moves emissions through alternative media. Crocker (1966) and Dales (1968) introduced the idea of tradable pollution permits as an alternative to Pigouvian tax for the management of environmental quality. This MBI aims to control pollution by way of creating markets for pollutants where pollutants like sulphur dioxide are traded. The system can achieve similar costminimizing allocation of control burden as the charge system. Under this system, a ‘cap’ or an allowable level of pollution is allotted to the firms in the form of permits.2 Firms that keep pollution below the allotted level can sell the surplus to others. Many countries created pollution trading frameworks. Tradable permits form a rightbased MBI.

2

Bhattacharya and others (2007) provide a comprehensive work on the subject.

Market barrier reductions This is a relatively new MBI, and involves removal of legal, regulatory and other barriers to market activities in regard to environment and internalization of externalities to achieve gains from environment protection. There are several types of barrier reductions, such as creating markets with measures that facilitate voluntary exchange of rights, liability rule, and information programmes. This MBI is increasingly used in the industrialized nations as a method that puts a mandatory requirement on the firms to provide government and people with the information on pollution and abatement activities. It attempts to minimize inefficiencies in regulation associated with asymmetric information where a firm would have better information than the government on what and how much it pollutes (Tietenberg and Wheeler, 2001). This is market friction MBI.

Government subsidies and incentives This is a very effective system because environmental damages can be substantially controlled by removing/reforming subsidies. A subsidy per unit establishes incentives for emission reductions identical to tax per unit for pollution. Unlike pollution taxes, however, subsidies can be employed as rewards for reduction of pollution (Austin, 1999). Reducing/removing subsidies may induce people to invest more on energy/resource-saving technology. For example, full cost pricing of irrigation water supply would remove subsidies and is likely to induce farmers to invest more in watersaving technology, which would result in a reduction in water wastage and salinity (Hamilton and others, 2002). In many cases, subsidies encourage activities that involve significant environmental benefits, such as waste recycling. This MBI is widely used and effective in supporting more rapid diffusion of clean technologies such as catalytic converter, low-emission vehicles, etc. Nevertheless, there is a catch. This MBI distorts a firm’s longterm economic incentives, as subsidy adds to the firm’s revenue. Hence, in

many a case, firms may enter the industry or appear polluting enough to qualify for subsidy. This may result in a situation where individual firms decrease pollution but the overall level of pollution actually increases (Baumol and Oates, 1988). This is market reform-based MBI.

A policy framework for government interventions Having established the necessity of using MBIs for environment protection, a framework for government intervention needs to be developed, as government is the key facilitator of environment protection. As given in Figure 2, possible options are explored with special emphasis on costs and benefits; otherwise, policy implementation is likely to be affected or slowed down. To ensure maximum adoption, options are to be devised on the basis of optimization of costs. The framework provides for stakeholder consultation, as extensive consultations with the stakeholders are required in the process. It indicates a dynamic process where performance of each policy option is to be reviewed. In case some policy options are found unsuitable in meeting the desired goals, the whole process should be repeated.

Case study: the European experience on application of MBIs Cross-country experiences in the application of MBIs demonstrate that the objectives of using MBIs are more or less similar. European countries have extensively used this instrument. In Europe, the use of MBIs gained ground since the mid-1990s, mainly in the areas of taxes and tradable permits. Comprehensive systems of air and water pollution taxes are in place in many countries, though the rates are kept low taking into account peoples’ ability and willingness to pay. Within EU-15,3 the Scandinavian countries and the Netherlands, which were the initiator of environmental tax reforms, 3

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.

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Special Feature: CDM for Renewable Energy

Identification of environmental problems/objectives

Stakeholders consultation

Government intervention required?

Wait & watch

Discussions/reviews on policy issues

Appropriate government’s area of intervention

Alignment with other policies

Impact on competitiveness

Thorough analysis of options (tradable permits, taxes, regulations, etc.) with emphasis on cost-benefit

Choice of the appropriate instrument

Policy design & administrative considerations

International experience

Distribution impacts

After implementation: Impact analysis at government level: If found not suitable Figure 2: A framework for government intervention for environment protection as well as Germany and the United Kingdom have made substantial progress since the late 1990s. The use of environmental taxes and charges have widened since 1996 with more taxes on carbon dioxide (CO2), sulphur dioxide (SO2), raw materials, and waste disposal. Emission trading has also become a very important instrument with the adoption of the European Union (EU) Emissions Trading Directive for reducing CO2 emissions, its incorporation into national laws and formulation of the National Emissions Allocation Plan. The trading system started operating since January 2005. Several other instruments are in the planning stage. The use of MBIs is likely to increase further as part of wider initiative on environmental policy reforms.

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Pollution tax In Europe, the definition of ‘environmental taxes’4 is jointly developed by the European Commission (EC) and Organization of Economic Cooperation and Development (OECD). Many environmental taxes are imposed in Europe, such as the CO2 tax prevalent in many member countries. It was first levied in Finland in 1990 followed by Denmark, Germany, the Netherlands, Norway, Poland, Sweden, 4

Environmental tax is defined as a compulsory, unrequited payment to the general government levied on tax base. The tax base is derived from a statistical framework. The taxes are unrequited in the sense that benefits provided by the government to the tax payers are generally not in proportion to their payments (OEDC, 2001).

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Slovenia and the United Kingdom. Estonia introduced a charge on CO2 in 2000. A levy on nitrogen oxides (NOx) is in place in Denmark, France, Norway, Sweden and Switzerland. A multi-pollution tax system for air pollution is imposed in many member countries such as the Czech Republic, Estonia, Latvia, Poland, Bulgaria and Romania. Switzerland has a tax on volatile organic compounds. There are taxes on a wide range of polluting products such as: batteries in Belgium, Bulgaria, Denmark, Italy and Sweden; plastic bags in Denmark, Italy and Ireland; disposable baggage containers in Belgium, Denmark, Estonia, Finland, Latvia, Poland and Sweden; tyres in Bulgaria, Denmark, Finland, Latvia and Sweden; lubricant oil in Finland, Italy, Latvia and Sweden; and chlorofluorocarbons (CFCs) in Latvia and Denmark. There are waste taxes (such as landfill tax) in many EU countries. Hazardous waste taxes are levied in Belgium, Denmark, Finland, France, Germany and Poland. Besides these, there are taxes in place for water pollution, fisheries, agricultural inputs, etc. Table 1 presents environmental taxes in selected European countries. Tax rates in some East European countries are given in Table 2. It is observed that the rates have significant inter-country variations. The reasons may be different industrial structure, different climatic conditions, etc. Table 3 compares the minimum fuel tax rates under EC Energy Tax Directive 2003 with the 1997 proposal. It is interesting to note that in all the cases, the rates under the 2003 Directive, valid from 01.01.2004 and 01.01.2010, are less than the 1997 proposal. This indicates that governments were cautious about the ability and willingness of the polluters to pay. This excise tax is meant to discourage excessive use of the fuels that will generate pollutants.

Emission trading The first comprehensive review of potential for emission trading in Europe is provided by Klaassen (1997). Emission trading became available on a large scale to European policy makers after 1997, when the Kyoto Protocol came into effect.

Special Feature: CDM for Renewable Energy Table 1: Environmental taxes in selected European countries Country

Tax/Tax shift

Remarks

Finland 1990-97

Energy tax, CO 2 tax and landfill tax

This tax was not revenue neutral, as the increase in revenue was not directly linked to income tax cuts.

Sweden 1991, tax shifting programme (2001-10)

Environmental and energy tax including CO 2 and SO2 taxes

A total €3.3 billion was to be shifted by the end of 2010.

Denmark 1993, 1995 and 1998

1993: Increase in existing tax on electricity, fossil fuels and waste. New taxes on piped water, wastewater and carrier bags

The revenue loss was partly offset by the increase in energy taxes.

Increase in energy taxes (industry is reimbursed when entering into voluntary agreements). A new tax on SO 2 and natural gas

Major part of the revenue generated for energy taxes were used for investment in energysaving measures.

Increase in energy tax by 15-25 per cent

1998: Loss from income tax of DKK10 billion (US$1.90 billion) was offset by revenue gain of DKK6 billion (US$1.14 billion).

The Netherlands 1996, 2001

Energy and CO 2 tax. Tax on water and waste disposal

The revenue was used to provide social benefits to people through budget.

United Kingdom 1996

Landfill

1996: Revenue was used for a reduction of 0.2 per cent of employers NIC from 10.2 per cent to 10 per cent.

2001

Energy/CO2 emissions under Climate Change Levy (CCL)

Revenues were used for reduction of 0.3 per cent of employers NIC.

Norway 1999

CO 2 and SO 2 taxes and energy tax

–

Germany 1999-2003

Energy (mineral oils, natural gas and electricity)

Revenues used for reduction in 1.7 per cent of employers’ and employees’ pension contribution.

Russia 2001

Energy tax

Revenue used to offset reduction in income taxes.

Austria 2004

Energy tax

The tax was not revenue neutral. Source: EAA, 2005

In the early period, some countries like the Netherlands, Sweden and the United Kingdom created tradable renewable energy certificates or ‘green certificates’ by which the utilities were allowed to meet the obligations (permissible pollution limit) by purchasing certificates from other producers of electricity from renewable sources. European experience indicated that the system was much more costly than other instruments, such as the carbon tax, which led to demands for a re-examination of the mechanisms. Finally, the compact emission trading framework came into shape under EU’s Emissions Trading System (EUETS). EU-ETS is a milestone in EU’s efforts to meet its obligation under the Kyoto Protocol. The system, which covers 11,500 energy-intensive facilities across the member countries, does not cover non-CO2 greenhouse gases (GHG) that account for about 20 per cent of EU’s total GHG emis-

Table 2: Tax rates in some selected East European countries (€/t) Country (Year)

Air pollution

Water effluent

SO2

NOx

Nitrates

Russia (2001)

1.2

1.6

0.9

39.9

2.7

Romania (2002)

–

–

6.9

27.8

6.9

Estonia (2003)

6.1

13.9

236

377

250 a

Latvia (2003)

20.3

20.3

47

47

47b

Ukraine (2001)

11.1

11.1

0.7

5.8

2.9

8.8 c

7.0 c

3.5 c

0.1

7.8

0.6

Molodova (2001)

34.3

35.1

Phosphates

BOD

a = BOD7 value; b = COD; c = for 2003

Sources: BEF, 2003 and OECD, 2003

sions.5 The first trading period began in January 2005, the second started in 2008 and is currently under way, and the third period is scheduled to commence in 2013. EU does not have much experience in emissions trading

and started with a ‘learning-by-doing’ approach. Implementation of EU-ETS centred on National Allocation Plans (NAP). Each member country must submit a NAP with allocation scheme, including individual allocations for each affected unit. The European Commission assesses NAP using 11 criteria (12 for the second period) given in the emissions trading direc-

5

Six gases included under Kyoto Protocol are carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride.

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Special Feature: CDM for Renewable Energy Table 3: Comparison of minimum tax rates on fuel under EC directive 2003 and the 1997 proposal Item

Minimum rates proposal 1997 Valid from 1.1.2002

Minimum rates (Directive) 2003 Valid from Valid from 1.1.2004 1.1.2010

Transport fuels Petrol (€/1000 l)

500

421

421

HSD (€/1000 l)

393

302

330

LPG (€/1000 kg)

224

125

125

Natural gas (€/Gj)

4.5

2.6

2.6

Heating fuels LDO (€/100 l)

26

21

21

Kerosine (€/100 l)

25

0

0

LPG (€/100 kg)

34

0

0

Natural gas (€/Gj)

0.7

0.15* 0.3**

Coal & coke (€/Gj)

0.7

0.5* 1.0**

Nil Nil

21 0.3

Fuels used for industrial & commercial purposes Diesel (€/1000 l) Natural gas (€/Gj)

21 0.3

* = Business; ** = Non-business such as household Sources: Kwon (2003) and Ernst & Young (2004)

tive to determine compliance.6,7 For the period 2005-07, EU-ETS got some experience in emissions trading with some emissions target. The emission allocations for 2005-07 are depicted in Table 4. In the first period, 21 countries were allocated an annual average of 2.0 billion allowances. This was enhanced to 4.4 billion allowances for 2008-12. The national level of GHG emissions in 2005, as shown in the table, is a clear indication. EU has traded huge quantities of CO2 in recent years.8 It is important to note that the “allowance price” has 6

Criteria include emissions caps and other measures considered by the state as adequate to achieve Kyoto target, protection against discrimination between companies and sectors, early reduction credits, etc. 7

Commission of the European Communities, Directive 2003/87/EC. Please see www.ec.europa.eu

8

According to Point Carbon (2006), EUETS traded around 360 million tonnes of CO2 worth €7.218 billion in 2005. Brokers were responsible for 57 per cent of the volume, exchange markets did 15 per cent

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always remained volatile. Fuel price is the major causal variable in the ETS. A Point Carbon study (2006) says that 79 per cent of the variation in allowance prices is explained by the variation in fuel prices (for electric power) while 23 per cent variation is explained by the weather. This linkage between allowance prices and power market is obvious; the power sector carried out maximum trade in 2005 and had significant influence in the allowance price movements.

Market barrier reductions In this area, nothing much is evident except for the application of the liability rules. Environmental liabilities are different from environmental compliance. While liability is caused by and the remaining 28 per cent came from bilateral trade. Of the exchange market volume, the European Climate Exchange (ECE) had the largest share (63 per cent), followed by Nord Pool (24 per cent) and Powernext (7.9 per cent). While the average price for an allowance was €19.9, it was €20.6 for brokered and exchanged units and €18.2 for bilateral exchange.

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the ‘past action’ of somebody else, compliance is for ‘future actions’ controlled by environmental legislation. Cost of decontamination of soil done by a ‘past’ party amounts to environmental liability of the new land buyer: hence, insurance and extensive survey. Liability for environmental damage could be on the basis of ‘polluter pays’ principle. The most notable development, in regard to environmental liability in Europe, occurred in March 2004: EC approved the long-awaited directive on liability for environment damage. The directive entered into force on 30 March 2004 with formal compliance requirement by 30 April 2007. Within this period, all EU member countries were required to adopt legislation specifying liability for environmental damages. It may be noted that many countries had adopted some measures on environmental damage liability during the 1990s. In Finland, environmental liability is covered by three main acts: (1) the Act on Compensation for Environmental Damage (1993), which covers pollution of air, water, noise, vibration, radiation, etc. and the cost of compensation is measured as the cost of prevention of the damage caused by the polluter; (2) the Environmental Damage Insurance Act (1998) for setting up a compensation fund that guarantees full compensation for the damage in cases where the liable party is insolvent or not identified; and (3) Environmental Protection Act (2000) that seeks mandatory insurance for contaminated soil and ground water. In Spain, the oil tanker ‘Prestige’, laden with 77,000 tonnes of heavy fuel oil, broke into two off the Galicia coast spilling a substantial quantity of oil. The ship owner’s insurer paid a hefty compensation of €22 million. In 2004, in France, there were 6,908 recorded claims related to the 1999 incident of oil tanker ‘Erika’. The compensation claimed totalled €207 million. A law in Belgium safeguards the marine environment based on several liability concepts: monetary compensation or restoration is required for damage. Germany has a law, implemented in

Special Feature: CDM for Renewable Energy Table 4: Emissions allocations in 2005-07 and target 2008-12 (in Mt of CO2 equivalent) Member state

Emissions 2005

Annual average allocation 2005-07

Annual average allocation 2008-12

Austria

33.4

33.0

68.3

Belgium

55.4

62.9

135.8

Chezch Republic

82.4

97.6

176.8

Denmark

26.5

33.5

55.0

Estonia

12.6

19.0

40.0

Finland

33.1

45.5

70.4

France

131.3

156.5

568.0

Germany

474.6

499.0

986.1

Greece

71.3

74.4

139.6

Hungary

26.0

31.3

114.3

Ireland

22.4

22.3

61.0

Italy

225.9

232.5

477.2

Latvia

2.9

4.6

23.3

Lithuania

6.6

12.3

46.9

Netherlands

80.4

95.3

200.3

Portugal

34.4

38.2

75.4

Slovak Republic

25.2

30.5

66.0

Slovania

8.7

8.8

18.8

Spain

183.6

174.4

329.0

Sweden

19.4

22.9

75.2

United Kingdom Total

242.4 1798.5

245.3 1939.7

657.4 4384.8

SWOT analysis of MBIs Based on the European experience of use of MBIs, a SWOT analysis has been carried out. The analysis is on page 18 (Table 5).

Source: Commission of the European Communities, Brussels

2005, based on liability for protection of ecosystem and landscapes. Efforts are going on at various levels in Europe to come out with several liability measures for environment protection.

the hour is to devise at least two approaches: one, on subsidies that can be used in the short-run to address market failure and the other, reform of environmentally harmful subsidies.

Government subsidies and incentives

In France, subsidies are available to encourage technology diffusion or new techniques, open and develop the market for cleaner vehicles, etc. For example, light vehicles carry subsidies, with a maximum of €1,500 per vehicle. Support for electric vehicles is available, with a maximum of €225 per vehicle. The Netherlands has a provision for subsidies on cars that are energy-efficient. In 2002, cars with the lowest-emissions (level ‘A’) carried a subsidy of €1,000 while cars of level ‘B’ received a subsidy of €500 (subsequently abolished, in 2003). The Municipal Transport Authority of Amsterdam (GVB) is taking part in a programme (€18.5 million EU grant)

In this area too, only a little progress has been made in Europe. The reform of environmental subsidies is a hot subject among the European decision makers. OECD has been developing a framework on environmental subsidies. As per EU Environmental Technologies Action Plan, EC will work with the member countries, using the OECD methodology as far as possible, to identify the most significant subsidies that have negative effects on environment. Environmental subsidies are available in many countries of Europe. However, the need of

for development of fuel-cell vehicles. GVB is testing fuel-cell buses in the northern part of the city with the support of a local environment agency Shell Hydrogen and at a cost of €6 million. Luxembourg has similar programmes to stimulate purchase of low-CO2 emitting cars (OECD, 2002). The Swedish government subsidized the installation of NOx abatement technologies as a part of a scheme on ‘differentiated fairway dues’. The scheme had a new design in 2005 with greater environmental differentiation for NOx and sulphur content. Norway also has schemes on NOx abatement. The Energy Saving Trust of the United Kingdom launched the ‘Power Shift Programme’ in 1996. The programme offers grants for purchasing clean-fuel vehicles, which include vehicles running on compressed natural gas (CNG), liquefied natural gas (LNG), liquefied petroleum gas (LPG) and electricity.

The possibility of application of MBIs in developing countries MBI are definitely useful instruments for environment protection. Each MBI has its distinct advantages and disadvantages. In some cases, it is seen that the objectives of one MBI are in conflict with the objectives of another (as evident in the SWOT analysis on page 18). Therefore, it seems that a combination of MBIs is more effective in achieving the overall goal of environment protection. In the developing world, only CDM is available among the MBIs and the other MBIs do not look suitable. However, a system that parallels Joint Implementation, which allows trade within the Non-Annex I countries, can be introduced. In the current situation, when the developing countries are coming up in a big way, specifically the BRIC,9 the major 9

BRIC refers to Brazil, Russia, India and China. (Wilson, D. and Purushothaman, R., 2003).

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Special Feature: CDM for Renewable Energy Table 5: A SWOT analysis of MBIs based on European experience STRENGTH z Taxes offer dynamic incentives

for pollution reduction z Trading puts a definite cap on

total emissions z Trading provides more flexibility to the polluters z Trading is a politically lucrative instrument as most people are not affected z Liability obligation leads to adoption of clean technologies z Subsidies provides direct benefits for adoption of new technologies

WEAKNESS z Limited data for carrying out

evaluation studies on the effectiveness of taxes z Tax system can not guarantee the limit of pollution z Tax system is politically less lucrative z Trading system is complex which hinders its market effectiveness z Liability rule is cost-inefficient

OPPORTUNITY z Large number of pollution

sources and hence, a large market z Trading induces polluters to reduce pollution and participation is substantial z Trading has political advantage (without recourse to shift legislation) z People’s motivation towards adoption of energy-efficient technology provides a good base for trading system z Subsidies are direct incentives for pollution control work that needs to be done can be summarized as follows: z

z

z z

z

Formulation of a comprehensive framework for trading among the Non-Annex I countries under a specific United Nations convention such as UNFCCC; Rigorous data generation required by the specialized statistical agencies – a prerequisite for allocation of certified emission reductions; Development of allocation system; Independent regulation systems in participating countries and their acceptability by participants; and Safeguarding the system for the benefit of developing countries.

Area of future research Areas that require research include the development of hybrid system on MBIs – that is, combinations of MBIs

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THREAT z Conflicting target in case of

environmental tax z Risk of loss of

competitiveness of the producers due to taxes z Design and implementation of trading protocol z Possibility of market manipulation by the polluters, e.g. collusion between few players z Legal process in liability system is very much time consuming

on the basis of empirical evaluation of individual MBIs – and the possibility and development of an analytical framework for emissions trading between the Non-Annex I countries.

Acknowledgement The author wishes to thank Dr. S.K. Singh, Assistant General Manager (Environment) of Environmental Engineering Division, MECON Limited, and Member of the UNFCCC Afforestation/ Re-forestation Working Group, for his thoughtful suggestions, which helped enrich this study.

References 1. Austin, D. (1999). Economic Instruments for Pollution Control and Prevention: A Brief Overview. World Resource Institute, Washington D.C., United States of America.

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2. ABARE (Australian Bureau of Agricultural and Resource Economics) (2001). Alternative Policy Approaches to Natural Resource Management. Background Report to the Natural Resource Management Task Force, Canberra, Australia. 3. Baumol, W. and Oates, W. The Theory of Environmental Policy. Cambridge University Press, Cambridge, United Kingdom. 4. BEF (Baltic Environmental Forum) (2003). Use of Economic Instruments in Environmental Policy in Baltic States. BEF, Riga, Latvia. 5. Bhattacharya, S., Khowala, R.C. and Choudhury, K.D. (2007). Techno-economics of CDM: the mechanism and a case study on steel industry. ICFAI Journal of Environmental Economics, 5(3), pp. 37-53. 6. Coase, R.H. (1960). The problem of social cost. Journal of Law and Economics, Vol. 3, October 1960. 7. Coase, R.H. (1991). The institutional structure of production. Economics Nobel Prize Lecture, 9 December 1991, Stockholm. Sweden. www.nobelprize.org/nobel_ prizes/economics/laureates/ 1991/coase-lecture.html. 8. Crocker, T. (1966). Structuring of atmospheric pollution control system. In The Economics of Air Pollution, Woolzin, H. ed., W.W. Norton, New York, United States of America. 9. Dales, J.H. (1968). Pollution, Property and Prices. University of Toronto Press, Toronto, Canada. 10. EEA (European Environment Agency) (2005). Market-based Instruments for Environmental Policy in Europe. Technical Report No. 8, EEA, Copenhagen, Denmark. 11. Ernst & Young (2004). Oil & Gas Tax Guide to Russia. Ernst & Young, Moscow, Russia. 13. Hamilton, C., Dennis, R. and Turton, H. (2002). Taxes and Charges for Environmental Protection. Discussion Paper No. 46. The Australia Institute, Canberra, Australia. 14. Hufschmidt, M.M., James, D.E., Meister, A.D., Bower, B.T. and Dixon, J.A. (1983). Environment, Natural Systems and Development: An Economic Valuation

Special Feature: CDM for Renewable Energy Guide, Johns Hopkins University Press, Baltimore, United States of America. 15. Jaffe, A.B. and Stavins, R.N. (1995). Dynamic incentives of environmental regulations: the effects of alternative policy instruments on technology diffusion. Journal of Environmental Economics and Management, 29(3), pp. 127-40. 16. James, D. (1997). Environmental incentives: Australian experience with economic instruments for environmental management. Environmental Research Paper No. 5, Environment Australia, p. 12. 17. Kwon, G. (2003). Budgetary Impact of Oil prices in Russia. Note, International Monetary Fund, 1 August 2003. 18. OECD (Organization of Economic Cooperation and Development) (2001). Environmentally related taxes in OECD countries: issues & strategies. OECD, Paris, France.

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22. Stavins, R.N. (2001). Experience with market-based environmental policy instruments. Discussion Paper 01-58, Resource for Future, Washingtin D.C., United States of America. 23. Tietenberg, T.H. (1980), Transferable discharge permits and the control of stationary source air pollution: a survey and synthesis, Land Economics, 56, pp. 391-416. 24. Tietenberg, T.H. and Wheeler, D. (2001). Empowering the community: information strategies for pollution control. In Frontiers of Environmental Economics, Folmer, H., Gabel, S., Gerking, S. and Rose, A. eds., Edward Elgar, Cheltanham, United Kingdom. 25. Wilson, D. and Purushothaman, R. (2003). Dreaming with BRICs: The Path to 2050. Global Economics Paper No. 99, Goldman Sachs, New York, United States of America.ˆ

Asia-Pacific Partnership on Clean Development and Climate The Asia-Pacific Partnership on Clean Development and Climate is an innovative new effort to accelerate the development and deployment of clean energy technologies. APP partners Australia, Canada, China, India, Japan, the Republic of Korea, and the United States have agreed to work together and with private sector partners to meet goals for energy security, national air pollution reduction and climate change in ways that promote sustainable economic growth and poverty reduction. The seven partner countries collectively account for more than half of the world's economy, population and energy use, and they produce about 65 per cent of the world's coal, 62 per cent of the world's cement, 52 per cent of world's aluminium and more than 60 per cent of the world's steel. The Partners will collaborate to promote and create an enabling environment for the development, diffusion, deployment and transfer of existing and emerging cost-effective, cleaner technologies and practices, through concrete and substantial cooperation so as to achieve practical results. The Partners will also cooperate on the development, diffusion, deployment and transfer of longer-term transformational energy technologies that will promote economic growth while enabling significant reductions in greenhouse gas intensities. In addition, the Partners will share experiences in developing and implementing our national sustainable development and energy strategies, and explore opportunities to reduce the greenhouse gas intensities of our economies. The Partnership will focus on expanding investment and trade in cleaner energy technologies, goods and services in key market sectors. The Partners have approved eight public-private sector task forces covering: aluminium, buildings and appliances, cement, cleaner fossil energy, coal mining, power generation and transmission, renewable energy and distributed generation, and steel. The purposes of the Partnership are to: z

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Create a voluntary, non-legally binding framework for international cooperation to facilitate the development, diffusion, deployment, and transfer of existing, emerging and longer term cost-effective, cleaner, more efficient technologies and practices among the Partners through concrete and substantial cooperation so as to achieve practical results; Promote and create enabling environments to assist in such efforts; Facilitate attainment of our respective national pollution reduction, energy security and climate change objectives; and Provide a forum for exploring the Partners’ respective policy approaches relevant to addressing interlinked development, energy, environment and climate change issues within the context of clean development goals, and for sharing experiences in developing and implementing respective national development and energy strategies. For more information, contact: Administrative Support Group Asia-Pacific Partnership on Clean Development and Climate Tel: +1 (202) 647 4875; Fax: +1 (202) 647 0191 E-mail: [email protected] Web: http://www.asiapacificpartnership.org

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