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Review of European Union Market-Based Instruments Over the summer of 2007 the European Union consulted on their use of market-based instruments (MBIs), which are policies able to adjust the prices of problematic products or activities. If prices can reflect 'externalities' or damage then people will tend to choose the less damaging options. Adjustments to prices can also create flows of funds to invest in making more sustainable options cheaper. MBIs have a massive potential for creating rapid sustainable development and healthy economies. However it is clear that the European Commission had a weak grasp of the possibilities of MBIs, leading them to dwell primarily on tax reforms and to ignore the opportunities for MBIs which work across issues and sectors without market distortions. See the EU press release for the consultation and the EU Green Paper on market-based instruments for environment and energy-related policy purposes, http://ec.europa.eu/taxation_customs/resources/documents/common/whats_new/COM(2007)140_en.pdf . The EU's questions are given in red and my responses in grey. Dear Commission I was very pleased to see your ideas quoted below from page 9 of the green paper. Also the reference to a "new industrial revolution" on page 15. As a general comment on the green paper it was not apparent that a basic conceptual structure is in place which would allow Europe to achieve anything like that revolution, or similar goals such as decoupling economic growth from waste and stabilising the climate. The green paper is necessarily a compacted view of much broader thinking within the Commission but it does give the impression of being lost in the details. The situation with MBIs and sustainable development is like having an important patient on a hospital table surrounded by hundreds of doctors. The doctors concur that the patient is so ill that there isn't much time for diagnosis. Lots of medicines and surgery have already been tried without any overall improvement in the patient's condition; in fact it's worsening fast. The doctors agree to work in national teams, each telling the others what they are doing. The teams are handed more of the same medicines and more scalpels and asked to treat pieces of the patient. They hope to correct the defects of previous work with deeper incisions and stronger medicine. Everyone wishes them good luck. The questions that appear to be neglected are:
If these questions can be explored I believe there is an opportunity for MBIs to be vastly simplified, making them easier to discuss, faster to implement in policy, more efficient in operation and effective enough to match the scale of global problems. Key quotes from the MBI Green Paper See full text at http://ec.europa.eu/taxation_customs/resources/documents/common/whats_new/COM(2007)140_en.pdf Page 9. "Whichever the solution, it needs to be seen in a global perspective. There is an increasing global recognition that environmental protection needs to be integrated into economic decisions in order to ensure long term sustainable development. This will lead to an extended application of MBI by national authorities and their use should be promoted at the global level. The EU should actively engage in dialogue with other countries, to promote the use of market-based instruments that allow policy objectives to be met in a cost-effective way." Page 15. "The new energy and climate policy agreed in Europe implies nothing less than a new industrial revolution over the next 10 to 15 years." Questions from the Green Paper in red and responses in grey What are the areas and options for the further use of market-based instruments at EU or national level? Areas: all energy and sustainable development (SD) issues, all sectors, all countries. Can consider use of generalised MBIs. Options: would consider a generalised use of the 'recycling insurance' provided by the EU WEEE Directive. See section 4 of the NATO paper. Could market-based instruments be used in a way that promotes competitiveness, and does not impose an undue burden on consumers, in particular citizens with a low-income, but at the same time ensures revenue for public budgets? Yes. A broad sustainable development agenda will help with some of the difficulties of low-incomes. Efficient policy instruments can minimise prices. A sustainable growth model can preserve public revenues. However inequalities of wealth will persist and remain in need of other action by governments. Should the EU more actively pursue taxation to further Community policy purposes (in addition to fiscal objectives)? Is this the right response to current global challenges and the fiscal needs of national budgets? No. Environmental taxes have disadvantages that appear to rule out their use when scaled up from current levels to cover SD issues at the scale of the problems. Taxes may be suitable for a gradual improvement in some areas but cannot support the "new industrial revolution" you describe on p15. Disadvantages of taxes:
Should the EU more actively promote environmental tax reforms at national level? How could the Commission best facilitate such reforms? Can it for example offer some kind of co-ordination process or procedure? An MBI forum should take care not to become an ETR forum, thus omitting valuable non-tax options. MBI reforms are a vital strategic approach to SD and they have a lot to say about why SD has proved to be elusive over the decades. Since the public and business will be needed to support MBI reform and will be affected by it there should be a range of formal and informal forums able to reduce the barriers to participation and bring in fresh perspectives. If any MBI forum is loaded by government it is likely to become an ETR forum and be ineffective. If any MBI forum is loaded by technical experts it is likely to become lost in detail and be ineffective. See 2.5 in the NATO paper. Would the establishment of the abovementioned MBI Forum be useful to stimulate exchanges of experience/best practice on Environmental Tax Reform between Member States? Limiting the remit to previous experience would ensure the loss of innovative proposals. A "new industrial revolution" cannot be forged from the dogmas of the old one. How could it be organised in an optimal way? How should it be composed to avoid potential overlap with existing structures? Suggest first consider a conceptual structure, perhaps using systems thinking and leverage points to frame the discussion. See references 7, 11, 17 in the NATO paper. Then draw in people with creative abilities (hopefully including some economists). How does the need to reduce the tax burden on labour in many Member States fit with the objective to promote innovation and to support research and development in order to shift towards a "greener" economy? Tax burdens can be cut by reducing the burden of governments who implement policies with centralised control. A well-designed non-prescriptive MBI, as opposed to a centralised instrument could:
See section 4 of the NATO paper. How can this be achieved while at the same time respecting the budgetary neutrality? The 'precycling insurance' instrument proposed in section 4 would reduce regulatory and intervention costs to government. Neutrality could be maintained by taxing (perhaps labour) less and/or spending more as needed on likely mounting costs of climate change etc. Would a more significant tax shift towards environmentally damaging activities be the right answer? No. Not taxes as described above. Needs thought on the relevant costs to internalise; damage or preventive costs? What is, in the light of national experiences, the best way to advance the process of reforming environmentally-harmful subsidies? National experiences seem to shed more light on what to avoid and do not seem a particularly productive way forward. "New industrial revolutions" are probably not found by following the old one. Counter-productive subsidies are a product of an obsolete mind-set. This cannot be negotiated directly but requires a new economic paradigm, which can be achieved with a sinlge new MBI (section 4 of the NATO paper). Should the Energy Taxation Directive be reviewed to make a clearer link to the policy objectives the Directive integrates, in particular in the field of environment and energy? Would this make energy taxation a more effective instrument by better combining the incentive effects of taxation with the ability to generate revenue? Yes the Directive should be reviewed. Can consider replacing it with a generalised preventive MBI. Worth going back to first principles and assessing options for MBIs at stages of fuels, energy or emissions. Current arrangements mix instruments at different stages, creating market distortions. Also seems to be a problem with energy policy trying to influence resource issues (such as 2G biofuels). Worth reassessing options for MBIs for energy or resources. Bear in mind the physics: Earth is open to energy but closed to matter. This suggests a preference for MBIs on resources (products) which can take care of energy issues. See 4.10 of the NATO paper. Is splitting the minimum levels of taxation between energy and environmental counterparts the best way for doing so? What would be the pros and cons and the main practical aspects of such an approach? Would the environmental incentive created by energy taxation be a sufficient and adequate response to reflect the objectives of the energy policy in the field of biofuels, including the creation of a market-based incentive for second generation biofuels? Now we're really lost in the detail. Is there a need for additional taxation addressing the remaining environmental aspects of electricity production (if any)? Is the proposed approach sufficient to favour uptake of electricity of renewable origin? What is the impact of such a Community framework for electricity of nuclear origin (bearing in mind the differing approaches at national level towards the use of nuclear energy)? Nuclear is seen by governments as a quick fix for climate. Nuclear can be managed by the same MBI as other fuels (see 4.10 of the NATO paper). Would the suggested changes to the Energy Taxation Directive and the proposed approach to its scope be the best solution for ensuring coherence between the Directive and EU ETS? Are there other options to achieve this objective? Yes, please consider precycling insurance as described in section 4 of the NATO paper, which can handle this issue. What are the potential options that should be explored in order to provide the necessary incentives to encourage the EU's trading partners to undertake effective measures to abate greenhouse gas emissions? Please see 4.11 of the NATO paper, which describes this issue. Also see 2.3 - emissions reductions are not a leverage point for addressing climate change. What would be the best MBI to tackle emissions from shipping, taking into account the specific nature of maritime transport? How could it be best designed? Please consider precycling insurance as described in section 4 of the NATO paper, which can handle this issue. How can infrastructure charging, including considerations related to environmental costs, best be applied to transport modes? Should this model apply to all transport modes, or take into account specificities of each transport mode? To what extent should the Eurovignette directive be used in this respect? Using infrastructure charging to account for fuel-derived problems such as CO2 seems to invite resistance and evasion. Would consider using an MBI that works on fuels for fuel-derived problems and infrastructure for infrastructure-derived problems. Infrastructure has its own environmental costs, both from products (natural resources) used to make it and from the end-of-life costs to regenerate it into new resources. Both fuels and infrastructure (and vehicles) can be handled with the same sustainability MBI, as outlined in section 4 of the NATO paper. How can the Commission most effectively ensure implementation of the water pricing policies set out in the Water Framework Directive? What options could be explored to reinforce the links between investments in national water projects and the introduction of corresponding water pricing to provide incentives for users and avoid distorting competition? Water is a bit of a minefield, with pollution prevention, water cleaning, water supply, national water projects, sewage treatment and flood drainage all needing to be tackled and paid for. Would suggest reconsidering who best to pay for each aspect in order to avoid ending up with water customers paying for the failures elsewhere to prevent pollution and climate change. Precycling insurance could handle pollution and climate change prevention, whilst subsidising local and national water/sewage systems involving ecosystem expansion (eg reed beds) or making new resources from waste (eg anaerobic digestion). Other aspects can be covered by customers and public funds. If there is insufficient progress to divert waste away from landfill, should the Commission consider proposing a harmonised landfill tax with EU-wide minimum rates? Landfill tax is a good example of policy gone wrong, being founded on a goal to move away from the bad (landfill) rather than to the good (RRR). The landfill Directive is a missed opportunity to decouple economic growth from waste by tackling disposability. Instead we see a bonanza of incineration-based contracts locking in unsustainable consumption and production plus the huge health costs of PM2.5s for the next 30 years. The public are expected to pay for this, despite no meaningful involvement in the decision-making. See http://www.frontofpipe.net Does the Community legal framework provide sufficient scope for Member States to use MBI to address waste management issues? Should the Commission facilitate the application of MBI in this area, e.g. through supporting exchanges of information? The legal framework of the Landfill Directive is a disaster. Local government has little interest in the hard work and thinking needed for waste prevention and local resource cycles. National governments make token efforts at prevention policy and apply the waste hierarchy backwards (perpetuating disposal rather than prioritising prevention etc). If exchanges of information mean the usual suspects swapping the same old stories there would be no point. Suggest a role for new approaches, such as in the attached paper. Without new thinking, the destruction of resources by disposal to air will continue to expand and economic growth cannot be decoupled from waste. Should the Member States make a more intensive use of MBI to protect biodiversity? Should, in particular, "payments for environmental services" be used more intensively to achieve environmental objectives? MBI are unavoidable for biodiversity since it can't pay for itself to be protected and expanded. Would support use of reverse auctioning for subsidies, though must take care that sites which don't win don't then get bulldozed. Habitats also need regulatory protection against loss. Risk of big landowners growing wealthier by getting paid for doing nothing. PES should not become a protection 'racket' "pay up or we torch it". Worth remembering the other ways to get ecosystems besides preserving existing habitat:
And should the scope for introducing systems of biodiversity offsets at Community level, e.g. wetland banking, be further examined? I'm worried by your use of language. Habitat banking does not make a marketable asset, it makes a marketable liability. Assets have positive market values; environmental liabilities do not, whether traded or not. Assigning property values is a separate concept, which I understand to be about transferring public ecosystems to private owners in the whimsical hope that they will look after them better than we can. I guess the owners could then collect PES in perpetuity? I do hope this is not being proposed as an alternative to something potentially sustainable. Do you see scope for using cross border emissions trading schemes between groups of Member States to combat conventional air pollution through SO2 and NOx? How should such a system be designed to fit with national taxes and charges that are applied in several Member States? This is an example of overcomplicated MBIs based on evolutionary layering of whatever seems to make sense at the time. There is of course no guarantee that different MBIs covering different problems in different places can ever be aligned, no matter how complicated you let it all become. Seems to be a need for basic thinking about what could be done if we were starting from scratch? Return to: top of page, home page, BlindSpot reviews, BlindSpot tools. | |
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