Fiscal Policies To Control Pollution: International Experience

Over the past few decades, the environmental policy debate has evolved to recognize the utility of influencing pollution abatement by using market forces that integrate economic and environmental decision-making. Market-based incentive (MBI) instruments may be broadly classified to include environmental taxes, investment tax incentives, tradable permits, user charges and deposit refund systems. Investment tax credits have been the preferred fiscal instruments for pollution control because they seem to balance environmental considerations with concerns about industrial competitiveness. Their use, however, may not have the desired effect of reducing pollution and may, in certain circumstances, increase emissions levels. The taxes are also sometimes seen as subsidies in disguise. This report is a comparative analysis of the fiscal instruments used by countries in Asia, Europe and North America, whose design philosophy explicitly incorporates an environmental agenda. In particular, it discusses the intent and design of investment tax incentives, presenting a review of the basic theoretical framework necessary for understanding how they function. In addition, it outlines a set of criteria that may be used to evaluate their economic and environmental impact and describes possible legislative and structural revisions that may enhance their effectiveness and promote their efficiency.