Using Market-Based Instruments and Issues in Identifying, Designing and Implementing PES

Editor's Notes

• #4: Taxes, fees and charges discourage environmentally harmful activities by increasing their costs compared to other more environmentally friendly alternatives. Subsidies, where duly targeted, reduce the costs related to sustainable activities or products, thereby increasing their marketcompetitiveness. In theory, environmental taxes are more efficient than regulation because they make agents with lower abatement costs pollute (and pay) less than those with higher costs.Quantity-based instruments, such as tradable permit schemes, set a limit on the use of a resource, allocate the use right certificates to the users by auctions or free of charge, and create an artificial market for trading the rights. Water banks are innovative instruments that are generally used to deal with droughts in order to use in urban areas part of the water normally employed in agriculture and to compensate the farmers for the economic loss that results.Liability-based instruments assign responsibility or preventing and remediating environmental impacts to those who cause them. An example is the liability regime established in the European Union, which specifically includes damage both to water objectives and biodiversity objectives within the scope of the regime. The law requires, for example, that if a company discharges pollutants causing damage which threatens the legalobjectives of EU water policy, it is required to pay for the restoration. This provides a strong incentive to avoid such damage.Voluntary offsetting schemes also exist that encourage private, companies and public bodies to offset their impacts by financing restoration or conservation projects. Currently, the most used offsetting schemes are voluntary carbon credits programmes, which in recent years have shown a promising growth rate. Carbon offsetting schemes represent an interesting option to find additional financing for wetland mangrove conservation or enhancement, because wetlands including mangroves provide an important carbon sequestration function.
• #5: The use of MBIs should be seen as a complement to environmental regulation, which is only adequate in some specific contexts. For example, water rights trading can only work where illegal water abstraction is prevented by effective regulation.MBIs typically allow more flexibility to private actors, who can choose between polluting and paying a tax or buy a tradable right or be subject to liability. Therefore, it may not be advisable to use them to protect high-value water and wetland ecosystems or to achieve site-specific protection goals.Incentive-based approaches are often designed using a trial-and-error procedure, which allows the tax or the amount of tradable permits to be gradually adjusted to reach the desired objective. For this reason, MBIs should not be used where failures can lead to severe and irreversibleenvironmental impacts.Introducing environmental taxes or charges often generates political opposition and is generally less accepted than setting technical requirements through environmental standards (hence a reward scheme tends to be more acceptable than a punitive charging or taxation scheme). Furthermore, MBIs can be questioned under an ethical point of view, as in some way they may be perceived as giving the “right to pollute” to those who can afford to pay.In some cases, monetary valuation and MBIs can even undermine the use of other kinds of languages and values (e.g. those related to ethics, culture, human rights), and evidence has been found on the fact that under some circumstances a monetary incentive can “crowd-out”moral, intrinsic motivations for environmental protection.
• #11: price depends on negotiation: buyers won’t pay more than an alternative (eg filtration plant); sellers won’t accept less than opportunity cost or cost incurred. Price depends on negotiation between them. If sellers costs are higher than willingness to pay or higher than cost of buyer’s alternative infrastructure, then there is no deal and PWS won’t work