ECONOMIC INSTRUMENTS

IN
ENVIRONMENT MANAGEMENT
Group 2

Environment
Management

Environment Resource
Management

Environmental resource management is the management of the interaction

and impact of human societies on the environment. It is not, as the phrase might
suggest, the management of the environment itself. Environmental resources
management aims to ensure that ecosystem services are protected and maintained
for future human generations, and also maintain ecosystem integrity through
considering ethical, economic, and scientific (ecological) variables. Environmental
resource management tries to identify factors affected by conflicts that rise
between meeting needs and protecting resources.
Environment Resource Management Approaches :
Control and Command Approach
Management through effective Economic Instruments or Market Based Instruments

Economic Instruments Introduction

Economic Instruments encompass a range of policy tools, from pollution taxes and
marketable permits to deposit-refund systems and performance bonds.
The common element of all economic instruments is that they effect change or
influence behaviour through their impact on market signals.
Economic instruments are a means of considering "external costs," i.e. costs to the
public incurred during production, exchange or transport of various goods and
services, so as to convey more accurate market signals. Those "external costs" may
include natural resource depletion, environmental degradation, health impacts, social
impacts, etc.
Economic instruments facilitate the implementation of Principle 16 of the Rio
Declaration, commonly known as the "Polluter Pays Principle." The article states:
"National Authorities should endeavour to promote the internalisation of
environmental costs and the use of economic instruments, taking into account the
approach that the polluter, should in principle, bear the cost of pollution with due
regard to the public interest and without distorting international trade and
investment."

Economic Instruments Vs Control & Command Policies

Economic instruments are often contrasted to "command and control" policy
approaches that determine pollution reduction targets and define allowable control
technologies via laws or regulations.
In reality, however, command and control policy and economic instruments
frequently operate in tandem.
A government may set limits on permitted pollution levels for a region or a country
in order to meet a certain health or environment objective.

Market-oriented approaches such as tradable permits might then be used to

allocate the allowable emissions in an efficient manner. Tax breaks or other financial
incentives might be offered to groups, individuals or industries investing in cleaner
technologies.

Methods
Economic Instruments can be designed in a variety of ways, and for a variety of
applications, including the following:
Increasing prices of goods and services that damage health and environment, as
well as increasing financial returns in the case of more sustainable approaches that
foster more environmentally- friendly production and consumption patterns.
Reduction of compliance costs by providing flexibility to polluters or users of
natural resources to chose the most cost-efficient and environmentally-effective
measures.
Incentives for investments in innovation and improved environmental
technology so that both environmental and financial benefits are generated.

Allocation of property rights and responsibilities of firms, groups or individuals

in a manner so that they have both the incentive and the power to act in a more
environmentally- responsible manner.
The raising of revenues to achieve environment and health objectives via tax
policies.

CARBON TAX - One of the most important

examples of economic instrument
A carbon tax is an indirect tax a tax on a transactionas opposed to a direct tax
which taxes income. A carbon tax sets a price for carbon dioxide emissions.
In economic theory, pollution is considered a negative externality, a negative effect
on a party not directly involved in a transaction, which results in a market failure.

Economist Arthur Pigou proposed taxing the goods (in this case hydrocarbon fuels),
which were the source of the negative externality (carbon dioxide) so as to accurately
reflect the cost of the goods' production to society, thereby internalizing the costs
associated with the goods' production. A tax on a negative externality is called a
Pigovian tax and should equal the marginal damage costs.

Carbon Tax in India

On July 1, 2010 India introduced a nationwide carbon tax of 50 rupees per metric tonne
($1.07/t) of coal both produced and imported into India. In India coal is used to power
more than half of the country's electricity generation.
The carbon tax raises more than 25 billion rupees per annum.
According to then Finance Minister Pranab Mukherjee, this clean energy tax was
supposed to help in financing a National Clean Energy Fund (NCEF).
It was also envisaged that the carbon tax would be a step towards helping India meet their
voluntary target to reduce the amount of carbon dioxide released per unit of gross domestic
product by 25% from 2005 levels by 2020.

Coal production in India in FY2010 was around 540 Million Tonnes and the country had
imported another 100 million tonnes . The corresponding figures for FY2013 stands at 560
million tonnes of production and another 135 million tonnes of import. Is the economic
instrument yielding the desired result ???

HOW IS A CARBON TAX DIFFERENT FROM AN

EMISSIONS TRADING SYSTEM?
In an emissions trading system, a central authority sets a cap on how much a
pollutant such as CO2 may be emitted. The cap is allocated to companies in the form of
emissions permits, which give them the right to emit a certain amount of the pollutant.

Firms are required to hold a number of permits equivalent to their emissions.

The total number of permits issued to all companies cannot exceed the emissions cap.
Firms that need to increase their emission permits must buy them from companies
that require fewer permits.
This means permit buyers are paying a charge for polluting more, while sellers are
being rewarded for reducing emissions.

HOW CARBON CREDIT TRADING WORKS

Now lets look at the following scenario to understand how Carbon Credit Trading
works:
Project Plant-A-Tree plants trees to maintain the flora and fauna of a forest.
Because of its efforts, Project Plant-A-Tree manages to reduce the gas emissions by
one metric ton, and earns praises and a Carbon Credit certificate from the
government.
On the other hand, Company Paint-Your-Home cant help but carry on polluting
the soil, river, and air to make the best paints in the market. Now, to show the world
that it actually cares for the environment by ruining the environment and then to
compensate the damage caused to the eco-system, Company Paint-Your-Home
buys the credit certificate from Project Plant-A-Tree. This credit acts as the permit
to emit one more metric ton of gases.
This way, Project Plant-A-Tree could pay off its bills, employees/volunteers, and
future projects to carry on helping the environment. And Company Paint-YourHome is able to focus on churning profits.
A win-win situation for both!

HOW CARBON PRICING CURRENTLY WORK IN

AUSTRALIA?
Carbon pricing, implemented in Australia on July 1, 2012, roughly applies to Australia's
largest 500 emitters, which are companies that emit more than 25,000 tonnes of carbon
dioxide or supply or use natural gas.
The tax stands at $23 per tonne of CO2. The tax is intended to rise to $A24.15 per tonne in
the following financial year and then to $A25.40 per tonne in 2014-15.

From July 2015, the number of units issued by the government each year will to be capped
by regulators. Most carbon units will be auctioned by the Clean Energy Regulator and the
price will be set by the market, starting from a floor price of $A15 per tonne.
Under the Carbon Farming Initiative (CFI), farmers and land managers can earn carbon
credits by storing carbon or reducing greenhouse gas emissions on the land. These credits
can be sold to people and businesses wishing to offset their emissions.
This scheme includes credits earned from activities such as reforestation, savannah fire
management and reductions in emissions from livestock and fertiliser use.
Australia has a legislated renewable energy target designed to ensure that 20 per cent of
electricity comes from renewable sources by 2020.

Other Economic and Incentives-based

Instruments in India
The NEP 2006 recommends a judicious mix of incentives and regulatory
instruments and emphasizes the use of economic principles in environmental
decision-making.
Rebate on Water Cess - Industries that comply with effluent standards, are
connected to a wastewater treatment plant, and do not consume water in excess of
the prescribed limit are entitled to a 25 percent rebate in the water cess. The rebate
scheme thereby encourages compliance.
Bank Guarantees - For ensuring compliance with SPCB directives. Under this the
SPCB forfeits a portion or all of the bank guarantee for its discretionary use in cases
of Non Compliance.
Subsidies for Pollution Control Installations -The central and state
governments subsidize each 25 percent of total project costs, 30 percent is secured
through loans from financial institutions, and the remaining 20 percent is covered
by the participating small industries themselves.

Public-Private Partnerships. Through economic incentives, both the central and

state governments are promoting public-private partnerships (PPPs) for the
development of infrastructure for environmental services. For example, in Gujarat, 10
percent of the total investment of USD 1,644 million for controlling pollution has
come through a public-private partnership.
Other Incentive Initiatives. Some states are introducing initiatives to encourage
good environmental behavior through packages of economic and regulatory
incentives. For example, the Gujarat PCB provides incentives to industries
implementing environmental management systems (EMS) by issuing them consents
on a priority basis and of longer validity (six years), providing 25 percent rebates in
water cess and 50 percent discounts on fees for environmental audits .

Key Challenges
The positive experiences are disseminated very slowly across the states in the absence
of national leadership and guidance.
Despite a number of promising initiatives, financial incentive packages for smallscale industries that are often unable to bear the cost of cleaner technologies are
underdeveloped. In the absence of a well-structured and needs-based grant or loan
system, these industries will continue to violate environmental requirements.

Role of the Judiciary in Management of

Environment in India
Over the last twenty years, the Supreme Court of India and some High Courts of the
states have led the way in the enforcement of environmental laws through citizen-led
public interest litigation (PIL) that has its legal basis in the constitutional right to a
healthy environment. Through this judicial activism, the courts have issued orders with
specific implementation requirements that not only remedy the case at hand, but also set
new policies and practices with widespread implications for the regulated community as
well as regulatory agencies. :
Economic Instruments implemented as a result of Court Orders :
1) NPV for diversion of Forest Areas for Non Forest Purposes as an offshoot of the
famous Godavarman Case.
2) Implementation of the Polluter Pays principle as an offshoot of the MC Mehta Case

Indias Attempt with Trading as Economic

Instrument

PAT

NAPCC
2008

REC
Pilot ETS

NMEEE mandates following objectives:

A market based mechanism to enhance cost effectiveness of improvements in
energy efficiency in energy-intensive large industries and facilities, through
certification of energy savings that could be traded. (Perform Achieve and Trade)
Accelerating the shift to energy efficient appliances in designated sectors through
innovative measures to make the products more affordable. (Market Transformation
for Energy Efficiency)
Creation of mechanisms that would help finance demand side management
programmes in all sectors by capturing future energy savings. (Energy Efficiency
Financing Platform)
Developing fiscal instruments to promote energy efficiency (Framework for Energy
Efficient Economic Development) Market-based approaches to unlock energy
efficiency opportunities, estimated to be about Rs. 74,000 crores.

Perform Achieve and Trade (PAT)

The Perform Achieve and Trade scheme is a market-based mechanism to enhance energy
efficiency in the large energy-intensive industries. The facilities that come under the
energy-intensive and large scale industries are known as Designated Consumers. The list
of these consumers has been published by BEE. PAT scheme creates energy efficiency
targets to be met and incentivizes businesses achieving higher energy efficiency with
tradable energy saving certificates (ESCerts) The market for these ESCerts will be the
entities that will not meet their energy efficiency targets and will need to buy these ESCerts
to meet the energy efficiency norms.

Energy Savings Certificates (Escerts) How it works?

Designated consumers will be given Specific Energy Consumption (SEC) targets to meet
over a period of three years.
If they succeed in meeting the threshold for the energy saving, they will have no
obligation to buy ESCerts from others through the PAT mechanism.
Those who have surpassed the target (i.e. achieved additional savings above the
benchmark) will qualify for earning Energy Saving Certificates (ESCerts), which could be
traded with DCs falling short of their targets.

PAT Legal Framework

The Energy Conservation Act 2001, provides the framework for efficient use of energy and
its conservation. PAT framework to be implemented are embedded in the various sections
of the Act as under
Furnish report of energy consumption to the Designated Authority of the State as well as
to BEE (section 14(k))
Designate or appoint an Energy Manager who will be in-charge of submission of annual
energy consumption returns of the Designated Agencies and BEE (section 14 (l))
Comply with the energy conservation norms and standards prescribed under section 14
(g) of the Act
Purchase Energy Saving Certificates (ESCerts) for compliance to section 14 (g) in the
event of default. The Act has been amended with the addition of new sub-section 14A to
enable this and section 14A(2) allows such trading. EScerts are defined by adding a new
sub-section 2(ma).
Monitoring and Verification of compliance by Designated Energy Auditors (DENA)
which will be prescribed the Government/ BEE under section 14A/13 (p) of the Act
Excess achievement of the target set would entail issuance of ESCerts under section 14A(1)
Penalty for non-compliance being Rs. 10 lakhs and the value of non-compliance
measured in terms of the market value of tones of oil equivalent by inserting a new section
26(1A)
BEE to be the overall regulator and dispute resolution agency and Energy Efficiency
Service Ltd. (EESL) to be the process manager

Designated Consumers (DCs) account for 25% of the national gross domestic product (GDP)
and about 45% of commercial energy use in India. PAT mechanism will drive incorporation of
energy efficiency measures in these high energy intensive sectors.

How the market based mechanism works?

Benefits expected from PAT

PAT is a unique mechanism for institutionalizing energy efficiency. PAT has been rolled
out from April 2011 and is targeted at savings 9.78 million metric tonnes of oil equivalent
(mMTOE), which amounts to an avoided capacity of 5623 MW over a period of three years.

Challenges
Many operators have more than one unit for the energy consumption. BEE has not yet
provided guidelines for the exact boundary setting for the units Experts are divided over
keeping the Energy efficiency improvement targets as unit specific or at entity level. Clear
methodologies are needed for the same.
There is a great heterogeneity within each sector. Target Setting Energy Consumption
Norms under the PAT mechanism may not be feasible with a single standard at sector level.

RENEWABLE ENERGY CREDIT TRADING

SYSTEM (REC)
Indias REC trading system was launched in November 2010, and the systems
primary purpose is to promote renewable energy even in regions that have low
potential for renewable power generation. The Indian government plans for this
mechanism to contribute significantly to renewable energy generation goals
outlined by the NAPCC and the Energy Act of 2003 (EA-2003).
The Ministry of Power regulates the REC mechanism. Under EA-2003, the
countrys State Regulatory Commissions(SERCs) set targets for power companies to
purchase a certain percentage of their total power from renewable sources. These
targets are called Renewable Purchase Obligations Standards (RPOs).
To comply with their RPOs or profit from a surplus of RECs, covered entities may
trade RECs either within or across states. RECs can be traded at the 2 major
Power Exchanges, IEX and PXIL.

PILOT ETS
Indias pilot ETS mechanism was unveiled February 1, 2011, and three statesGujarat,
Tamil Nadu, Maharashtrareceived government mandates to implement programs.

The pilot ETS mechanism focuses on particulates, such as SO2, NOx, and SPM, which are
detrimental to human health, these state pilot programs could function as a foundation for
a future CO2 trading program that could conceivably link up to a global system.
Rationale for experimenting with ETS is two-fold: (1) it is a cost-effective method of
emissions mitigation, and (2) it spurs innovation

Unique Issues with Indias Economic Instruments

1. PAT is the first of its kinda market system geared towards enhancing energy
efficiencyin the developing world.
2. Few other countries, especially developing countries, have three national market-based
environmental programsPAT, REC, and CDMthat are active with potential to reduce
GHGs.

Challenges
1. India sees climate change as a problem caused by developed countries, so there is
political reluctance to create an ETS due to fears that such a policy could hinder economic
development. In international climate negotiations, India has steadfastly refused to take
on mandatory emissions reductions.
2. India will need to build its capacity, namely improve its data collection and its supply of
trained manpower,t o implement ETS effectively.
3. Non-compliance penalties are relatively weak, so they could fail to incentivize
compliance

UNs Attempt at an International Level

Economic Instrument

Thank
You !!!