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RECOMMENDATIONENVIRONMENT
Recommendation of the Council on the Use of Economic Instruments in Environmental Policy
31 January 1991 - C(90)177/FINAL

THE COUNCIL,

HAVING REGARD to Article 5 b) of the Convention on the Organisation for Economic Co-operation and Development of 14 December 1960;

HAVING REGARD to the Recommendation of the Council of 26 May 1972 on Guiding Principles Concerning International Economic Aspects of Environmental Policies [C(72)128];

HAVING REGARD to the Recommendation of the Council of 14 November 1974 on the Implementation of the Polluter-Pays Principle [C(74)223];

HAVING REGARD to the Recommendation of the Council of 7 July 1989 on the Application of the Polluter-Pays Principle to Accidental Pollution [C(89)88(Final)];

HAVING REGARD to the Council's Acts which recommend the use of economic instruments in various policy fields, namely: the Recommendation of the Council of 28 September 1976 on a Comprehensive Waste Management Policy [C(76)155(Final); the Recommendation of the Council of 5 April 1978 on Water Management Policies and Instruments [C(78)4(Final)]; the Recommendation of the Council of 3 February 1978 on the Re-Use and Recycling of Beverage Containers [C(78)8(Final)]; the Recommendation of the Council of 3 July 1978 on Noise Abatement Policies [C(78)73(Final)]; the Recommendation of the Council of 20 June 1985 on Strengthening Noise Abatement Policies [C(85)103]; the Recommendation of the Council of 31 March 1989 on Water Resource Management Policies: Integration, Demand Management, and Groundwater Protection [C(89)12(Final)];

HAVING REGARD to the Declaration on Environment: Resources for the Future adopted by Member Governments during the meeting of the Environment Committee at Ministerial level on 20 June 1985 which states that Member countries will "Seek to introduce more flexibility, efficiency and cost-effectiveness in the design and enforcement of pollution control measures in particular through a consistent application of the Polluter-Pays Principle and a more effective use of economic instruments in conjunction with regulations";

HAVING REGARD to the OECD Council Ministerial Communiqué of 31 May 1990, which states that the OECD should design "Guidelines for the use of economic instruments and of market mechanisms to achieve environmental goals";

HAVING REGARD to the Ministerial Declaration of the Second World Climate Conference of 7 November 1990, which states: "the adoption of any form of economic or regulatory measures should require careful and substantive analyses. We recommend that relevant policies make use of economic instruments appropriate to each country's socio-economic conditions in conjunction with a balanced mix of regulatory approaches";

CONSIDERING that a sustainable and economically efficient management of environmental resources requires, inter alia, the internalisation of pollution prevention, control and damage costs;

CONSIDERING that such internalisation can be enhanced by a consistent use of market mechanisms, in particular those economic instruments defined in the Annex to this Recommendation;

I.   RECOMMENDS that Member countries:

i)   Make a greater and more consistent use of economic instruments as a complement or a substitute to other policy instruments such as regulations, taking into account national socio-economic conditions;

ii)   Work towards improving the allocation and efficient use of natural and environmental resources by means of economic instruments so as to better reflect the social cost of using these resources;

iii)   Make effort to reach further agreement at international level on the use of environmental policy instruments with respect to solving regional or global environmental problems as well as ensuring sustainable development;

iv)   Develop better modelling, forecasting and monitoring techniques to provide information on environmental consequences of alternative policy actions and their economic effects;

v)   Integrate environmental and economic decision-making in sectoral policies in order to avoid adverse effects on environmental resources, e.g. As could be the case for price-support mechanisms in sectors such as energy, agriculture and transport.

II.   RECOMMENDS that, when using economic instruments, Member countries take into account the Guidelines and considerations set out in the Annex hereto, which is an integral part of this Recommendation.

III.   INSTRUCTS the Environment Committee and other relevant bodies of the Organisation (in particular, the Economic Policy Committee):

i)   To support Member countries' efforts in applying economic instruments through an exchange of information concerning, in particular design or choice of economic instruments, taxation reforms, modelling, forecasting and monitoring techniques, institutional arrangements, regulatory reform and deregulation, removal of environmentally damaging sectoral subsidies in order to:

• Enhance international co-ordination of environmental policies with respect to global and regional environmental problems;

• Develop its work on economic instruments in order to assist Member States in the choice of the most cost effective policy instruments and to provide information regarding their effectiveness in achieving specific environmental objectives;

ii)   To review the actions taken by Member countries pursuant to this Recommendation within the three years following the adoption of this Recommendation.


ANNEX    

GUIDELINES AND CONSIDERATIONS FOR THE USE OF ECONOMIC INSTRUMENTS IN ENVIRONMENTAL POLICY[1]

I.   Types of Economic Instruments to which the Guidelines Apply

1.   Economic instruments have the potential to be applied to a wide range of environmental and natural resources issues. The present guidelines deal with the use of economic instruments defined hereunder. In addition, there are other types of economic instruments such as enforcement incentives, fines, non-compliance fees, administrative charges, performance bonds, damage compensation, etc. which may have a role in environmental policy but are not considered here. Furthermore, the guidelines focus primarily on pollution issues although economic instruments also have considerable potential for application in the form of resource pricing.

Charges and Taxes

2.   Emission charges or taxes are payments on the emission of pollutants into air or water or onto or into soil and on the generation of noise. Emission charges or taxes are calculated on the basis of the quantity and type of pollutant discharged.

3.   User charges or taxes are payments for the costs of collective treatment of effluent or waste.

4.   Product charges or taxes are levied on products that are harmful to the environment when used in production processes, consumed or disposed of. Product charges or taxes can act as a substitute for emission charges or taxes when charging directly for emissions is not feasible. They may be applied to raw materials, intermediate or final (consumer) products. Product tax differentiation may be designed for the same purpose.

Marketable Permits

5.   Marketable permits are quotas, allowances or ceilings on pollution emission levels of specified polluters that, once allocated by the appropriate authority, can be traded subject to a set of prescribed rules. Hence, marketable permits provide an incentive for dischargers releasing less pollution than their limits allow, to trade the differences between actual discharges and allowable discharges to other dischargers which then have the right to release more than allowed by initial limits. Under different approaches, these trades can take place within a plant, within a firm, among different firms, or possibly between countries. The objective is to reach the overall pollution ceiling with maximum efficiency. Equally, marketable permits can be used as a device to encourage efficient use of natural resources such as scarce water supplies.

Deposit-Refund Systems

6.    With deposit-refund systems, a deposit is paid on the acquisition of potentially polluting products. When pollution is avoided by returning the products or their residuals, a refund follows.

Financial Assistance

7.   Various forms of financial assistance can be granted to polluters as help and/or as an inducement to abate their polluting emissions. As a general rule, financial assistance is incompatible with the Polluter-Pays Principle, except in a few specific cases, for example, when in compliance with the exceptions to the Polluter-Pays Principle as defined in the two Council Recommendations [C(72)128 and C(74)223] or when applied in the framework of appropriately designed redistributive charging systems.

There may also be circumstances where payments can be made to reinforce other measures designed to achieve appropriate natural resource use.

II.   Criteria for Choice of Instruments

8.   Economic instruments constitute one category amongst others of instruments designed to achieve environmental goals. They can be used as a substitute or as a complement to other policy instruments such as regulations and co-operative agreements with industry. In some instances, for economic and administrative reasons, direct regulation and control are appropriate when, for example, it is imperative that the emission of certain toxic pollutants or the use of hazardous products or substances be wholly prohibited. In other instances, economic instruments can supplement regulations in order to strengthen the enforcement of standards designed to protect public health.

9.   The choice of environmental policy instruments can be made against five sets of criteria:

i)   Environmental effectiveness: The environmental effectiveness of economic instruments is mainly determined by the ability of polluters to react. The primary objective of economic instruments is to provide a permanent incentive to pollution abatement, technical innovation, and product substitution.

ii)   Economic efficiency: In a broad sense, economic efficiency is achieved by an optimal allocation of resources; in a limited but more operational sense, it implies that the economic cost of complying with environmental requirements is minimised.

iii)   Equity: Distributive consequences vary according to the types of policy instruments applied. For example, pollution charges or taxes entail additional payment on the discharge of "residual" pollution; additionally their distributive impact would depend upon how the revenue is used. Similarly, with marketable permits, the distributional effects will differ according to their initial allocation.

iv)   Administrative feasibility and cost: All types of policy instruments involve implementation and enforcement structures. This relates in particular to the ease and cost of monitoring discharges and the number of target groups involved and also upon the nature of existing legal and institutional settings.

v)   Acceptability: It is of crucial importance that target groups be informed and consulted on the economic instruments imposed on them. In general, the success of any (economic) instrument requires certainty and stability over time with respect to their basic elements.

10.   Regarding the choice of specific economic instruments, the following elements should be taken into consideration:

Emission charges or taxes can be given particular consideration for stationary pollution sources and where marginal abatement costs vary across polluters (the wider the variation, the greater the cost-saving potential). Other criteria are: the feasibility of monitoring emission (through direct monitoring or proxy variables); the ability of polluters to react to the charge; the ability of public authorities to develop a consistent framework for charges; the potential for technical innovation.

User charges are relevant when collective disposal and treatment facilities can be operated, e.g. for waste water, industrial and household waste.

Product charges or taxes can be particularly effective when applied to products that are consumed or used in large quantities and in diffuse patterns. Products subject to charges should be readily identifiable.

Deposit-refund systems can be considered for products or substances which can be reused, recycled or which should be returned for destruction. Because deposit refund schemes can be expensive and complicated to operate, it is important that products be easy to identify and to handle and that users and consumers should also be willing to take part in the scheme.

Marketable permit systems offer particular advantages in situations in which: the marginal costs of compliance with a uniform standard vary significantly across the regulated target group; when there is a fixed objective which one wants to achieve at minimum economic cost; the number of sources involved is large enough to establish a well-functioning, competitive market for permits, within a designated geographical area.

III.   Guidelines for Implementing Economic Instruments

11.   When considering the adoption of economic instruments, it is important to assess the cost and benefits of all policy alternatives. In particular, the development, implementation and enforcement of economic instruments should take due consideration of the issues defined hereunder.

Clear Framework and Objectives

12.   First and foremost, the framework and objectives of the economic instrument must be clear. In particular, the following points should be specified: whether the economic instrument operates in combination with or as an alternative to direct regulation; whether it precedes regulations in order to speed up compliance; whether the revenues are used for general purposes or earmarked for specific environmental or other measures. In the case of charges or taxes, the objective of providing incentives should not be confused with the revenue-raising purpose.

Well-Defined Field of Operation

13.   The field of operation must be clearly defined. This includes pollutants, processes or products to which economic instruments are applied. Furthermore, information should be available on the target groups in terms of their number, their size, their contribution to the pertinent problem and the way they pollute (point/non-point sources, mobile/stationary sources), their financial abilities, the way they are organised and likely to react (structure of industry, behaviour of firms, technological characteristics, etc.). However, information requirements should not be excessive.

Simple Mode of Operation

14.   Simplicity and clarity of the mode of operation are of paramount importance and determine to a large extent the administrative efficiency of the economic instrument. This is related to the technicalities of the economic instrument: formulae and calculation of the charge, calculation of emission reduction credits (in case of marketable permits), etc. This also concerns, in terms of new bodies (or in association with existing tax offices), administrative requirements, the way monitoring will take place and the details of invoicing and control. Regarding the "structure" of any economic instrument there should be a fine balance between undue complexity, which makes the instrument hard to apply, and excessive simplicity, which may mean that it is not very efficient. The amount of information required for the proper operation of any instrument is of decisive importance for its success. Economic instruments aiming at inducing polluters to reduce their emissions are likely to be more complex than those designed purely for revenue-raising purpose. The simplicity or complexity of the mode of operation is mainly related to calculation and invoicing procedures (see below). Further, implementing an excessive number of different economic instruments can lead to confusing price signals and prove to be counterproductive in the long term.

15.   For emission charges or taxes, three ways of calculation exist: 1) monitoring actual discharges; 2) table-based; 3) flat rate. Monitoring might be done either by the responsible administrative body on an annual or more frequent basis, or by the polluter through yearly (or more frequent) returns. Self-monitoring is less costly, but requires a periodic control. Monitoring is advisable for large polluters. Calculation of table-based charge or tax is a single operation, taking into account general indicators such as the process characteristics of the firm.

16.   For product charges or taxes, rates are fixed. Collection of the revenue can easily fit within existing fiscal channels. Appropriate taxing systems (excise duties, value-added tax) can be efficient structures. Invoicing numerous product charges or taxes at the retailers' level should be avoided. Producers and importers are less numerous, and therefore may be more efficiently administered and more easily controlled.

17.   For marketable permits, complex issues such as the initial allocation of emission quotas (in such a way as to minimise barriers to free entry into the industry), monitoring and the determination of constant or decreasing emission ceilings must be clearly specified. Furthermore, when a net reduction in aggregate discharges is the target, provisions must be made with respect to new entrants in the market.

Acceptability

18.   Acceptability increases by taking into account the following elements:

• Adequate information disseminated to target groups concerning aspects of the new instrument which may affect them. Important features are the purpose and technicalities of the instrument, financial consequences, time of introduction, possible future adjustments, etc. Timely announcement of new elements is important. Target groups should also be aware of the inter-relations between different policy fields.

• Consultation with target groups should, as far as possible, be conducted concerning application of the instruments. In particular, in order to reduce uncertainty and to ensure a stable policy context, major modifications or plans should be discussed with organisations' representatives or other diffuse target groups (industry, farmers, consumers etc.). Instruments on the interface of different policy fields should be presented to all relevant parties.

• Implementation of new economic instruments should be preceded by an appropriate anticipation period and timely announcements. Where appropriate, the implementation should also be progressive, especially for emission charges or taxes and marketable permits in order to enable polluters to adapt and avoid excessively rapid increases in financial burdens (e.g. the rates of pollution charges could be raised progressively to the desired level).

Integration with Sectoral Policies

19.   Economic instruments should be designed to facilitate the integration of environmental policy with other policies, in particular through an appropriate adaptation of various economic sectors' pricing and fiscal structures to conform with environmental goals. Removal and correction of governmental intervention failures such as distorting subsidies in the agricultural field or improper pricing of transport infrastructures, fuels and services, are of utmost importance for a proper integration of environmental policies with sectoral policies. One fundamental objective of economic instruments is to ensure that the prices of goods and services truly reflect the associated environmental costs. This can be achieved only if intervention failures are first removed.

Manpower and Cost of Implementation

20.   Excessive transaction costs should be avoided for enforcement agencies, industry and individuals. The cost effectiveness of implementation and enforcement mechanisms should be carefully assessed. Using existing enforcement channels and invoicing systems could generate substantial cost savings.

Assessment of Economic and Distributive Consequences

21.   Several aspects should be distinguished. Firstly, at the micro level, specific (groups of) enterprises may have to face considerable expenditures in a short period of time, which may threaten their continuity. On the other hand, at a more macro level, the instrument concerned will establish efficient solutions in the longer term, if correctly defined. In comparing general long-term efficiency and specific short-term problems, temporary financial assistance measures for easing transition problems might be adopted, provided that the firms concerned are basically economically sound, even when bearing environmental costs. Applying temporary measures is economically more desirable than granting exemptions to the instrument. The positive economic consequences of economic instruments should be taken into account: for instance, emission tradings allow for ongoing economic growth which would be hampered under strict direct regulation. Incentive charges or taxes (but also direct regulation) may trigger technological innovations, which can create new markets and generate new products.

22.   In practice, there are two approaches to the implementation of economic instruments through the fiscal system. One approach is to introduce new product taxes or charges e.g., to impose specific environmental taxes ("eco taxes") on polluting products and substances, such as fuels, pesticides, motor-vehicles, beverage containers. Another approach is to adapt existing tax systems to environmental purposes. This requires, first and foremost, restructuring existing taxes which induce detrimental effects on the environment (e.g., when existing taxes encourage the use of polluting, rather than "clean", products). Economic instruments might generate significant revenue. One possible solution is, when appropriate, given the situation prevailing in each country, to balance the introduction of a new tax with a reduction of existing ones to avoid an additional fiscal burden on the economy. Alternatively, the revenue derived from economic instruments could contribute to reinforcing the budget.

Conformity with General Principles of National and International Trade, Fiscal and Environmental Policy

23.   In implementing economic instruments, it is necessary to comply with existing general agreements and principles of environmental policy both at the national and at the international level. One of the most important of these is the "Polluter-Pays" Principle. Economic instruments, with the exception of financial assistance, are clearly in line with this principle. Principles stemming from trade agreements (e.g., GATT) should also be respected. When introducing economic instruments, unfair competition and international trade distortion must be avoided. Charges or taxes on final products should not discriminate between domestic and imported products.

24.   Economic instruments should be in line with existing political, administrative, judicial and fiscal structures. If the introduction of economic instruments does not fit into existing frameworks or requires their modification, the actual implementation will be more complex and difficult. Since, in many instances, economic instruments are of a fiscal character, their compatibility with existing fiscal systems is particularly important. When major tax reforms or deregulation are considered, the possible role of economic instruments within these new frameworks should be examined.

25.   When international harmonisation of economic instruments is considered, the different environmental conditions, economic situations and fiscal structures in the countries involved should be given due consideration.

IV.   Fields of Possible Application of Economic Instruments[2]

Water Pollution

26.   Water pollution is particularly amenable to emission (effluent) and user charges or taxes as effluent discharge from stationary sources are relatively easy to monitor.

27.   Product charges or taxes may be applied in the case of products that will pollute surface or ground water before, during or after consumption. Examples of possible applications relate to detergents, fertilizers and pesticides. If the objective of the product charge or tax is to discourage consumption, the quantity of the products consumed should be highly sensitive to prices. The availability of cleaner substitutes could considerably increase the success of product charges or differentiated taxes (such as detergents with and without phosphates). Product charges or taxes can also be used as a proxy for emission charges or taxes (e.g. charge on the use of polluting products in production processes).

28.   Marketable permits could be applied to point sources as well as to combinations of point sources and non-point sources. In the case of point source/non-point source situations, point sources could obtain additional rights by reducing the pollution burden from non-point sources.

29.   Deposit-refund systems can play an indirect role in water management. Many potentially polluting substances (for example pesticides) are packed in non-returnable containers. During disposal of the containers the remnants of these substances are released into the environment and might pollute surface and ground water. Such remnants can be properly processed when containers are returned to the producer.

30.   Pollutants which are discharged in large quantities by many dischargers, and which are easy to calculate or monitor or for which a common denominator exists (BOD, COD), can more easily be subjected to emission charges or taxes than pollutants that occur in great variety and small amounts (heavy metals, toxic substances). For the latter, product charges or taxes could be considered. Because of the complexity of the matter a multi-phase approach is necessary, starting with those pollutants that are easiest to handle and lead to substantial improvements.

31.   The main target groups for economic instruments in the field of water quality policy are industry (chemical, metal, food, pulp and paper, mining, etc), agriculture, and households.

32.   With regard to industry, emission (effluent) charges or taxes could be applied where: 1) industry can effectively reduce emissions in response to the charge or tax; 2) technical innovation is likely to be encouraged; and 3) when the level of emissions can reasonably be monitored.

33.   Agricultural pollution from point sources (such as intensive animal husbandry units) can often be controlled by regulatory means, complemented, where effective, by economic instruments in the form of effluent charges or taxes. Many agricultural problems arise from diffuse application of pesticides, fertilizers, etc. Charges based on an evaluation of emissions or product charges or taxes on certain inputs could be applied. The effectiveness of these instruments needs careful evaluation in the overall context of agricultural policy.

Air Pollution

34.   In the field of air pollution control, emission charges or taxes may be considered as a complement or a substitute to regulation. For administrative reasons (in particular, monitoring of emissions), emission charges or taxes are more easily applicable to large volume pollutants and large stationary sources.

35.   As energy production and use is a major cause of air pollution, energy pricing should take environmental factors into account; this can be done by applying product charges or taxes, in particular charges on fuels in the form of a surcharge on or a variation of the excise duties on fossil fuels. Product charges or taxes can be used as a proxy for emission charges or taxes, for instance when pollution is diffuse, when there are many, small (mobile) sources. There is a strong tradition, especially in the transport sector, for taxation of mobile sources, and these should be adapted in line with environmental objectives.

36.   Creating price differentiation between traditional products and cleaner substitutes can be done by a combination of surcharges and discounts on the price of such products in a broadly revenue-neutral way.

37.   Marketable permits can be considered in order to create market conditions for new and modified installations and regarding air pollution characteristics of some products (e.g. cars). Producers could be allowed to trade credits by exceeding standards or meeting them earlier than required, providing that equal or better environmental conditions are achieved.

38.   Deposit-refund systems can be applied to products that contain potentially polluting substances in closed circuits (e.g. refrigerators and air conditioners containing CFC's). After return, such products can be properly scrapped, or recycled.

39.   In the case of air pollution, the main target groups for applying economic instruments are industry, energy and transport. For industry, the same constraints applicable to water pollution (paragraph 31) should be taken into account. For the energy sector, particular attention should be paid to proper integration of energy and environmental policies through appropriate pricing of energy resources.

40.   Integration of transport and environmental policies is also of particular relevance. Not only should transport pricing and taxation take into account environmental factors, but also specific economic instruments could be introduced, such as pricing/taxation of fuels reflecting, as far as possible, the ultimate environmental damage caused. Motor-vehicles could also be subjected to environmental charges or taxes. Congestion charges or taxes, primarily designed to alleviate traffic problems, could contribute to reducing air pollution. Finally, charging for the use of transport infrastructures (road pricing and other tolls) should also integrate environmental concerns, when appropriate.

Waste Management

41.   Financing (user) charges should aim at a proper collection, processing and storage of waste or at the clean up of old hazardous waste sites. Incentive charges or taxes can have multiple purposes which should be recognized when designed. A first purpose might be to minimize (voluminous and/or toxic) waste generation in production and consumption processes. A second purpose might be to discourage production and consumption of (voluminous and/or toxic) waste-intensive products and to promote more "friendly" substitutes. Thirdly, economic instruments can be introduced to promote recycling which saves depletable resources, including space for waste dumping.

42.   Emission (disposal) charges or taxes should be based either on the volume and/or on the toxicity (or other harmful characteristics) of waste elements. In the latter case, waste containing many substances will cause calculation and monitoring problems. Because of possible evasion, emission charges or taxes can only be applied if it is easy to control dischargers. In most cases, user charges, i.e. payment for waste collection and the use of waste disposal facilities, can be applied.

43.   Product charges or taxes can be considered in the case of products that will generate waste in the production or consumption phases (e.g. plastic bags). They act as proxies in those cases where a direct charging for waste is not effective or efficient. Materials which cannot be recycled or re-used could be subjected to charges or taxes.

44.   In the cases where a return of used products to collection or storage sites is important, a deposit-refund system can be considered. This is desirable when such products can be re-used or recycled (bottles, crates) or when such products contain potentially polluting substances (batteries, cars). A product subject to a deposit-refund system should exist in large quantity and the necessary collection system should be manageable.

45.   Main target groups for economic instruments in waste management are industry, agriculture, households and the waste handling sector, be it public or private. Industry may be subject to economic instruments, either because they produce products that will create waste problems when used or disposed of, or generate voluminous or toxic wastes. Agricultural waste such as animal manure could also be charged for.

Noise

46.   Economic instruments can be used to reinforce direct regulation, improve enforcement of existing measures and speed up compliance with more stringent noise standards. Economic instruments can also improve the integration between different policy fields, in particular between transport policy and noise abatement policy. Economic instruments (charges) are also able to raise revenues for financing specific noise abatement measures, such as the insulation of houses, or the construction of noise barriers.

47.   Charges or taxes on noise sources can be considered regarding aircraft noise, road traffic noise and industrial noise sources. Aircraft noise charges or taxes can be applied on landing fees according to noise characteristics of the aircraft and associated with physical regulations (ICAO noise approval certificates). Charges or taxes could also be applied to passenger cars and lorries, based on their acoustic characteristics as measured under internationally agreed procedures (e.g. ISO). Emission charges or taxes are also applicable to (stationary) industrial noise sources.

48.   Product charges or taxes could be used with respect to appliances. Differentiation of taxes is conceivable with regard to noisy products and low-noise-alternatives

49.   Other economic instruments which are considered with respect to other traffic problems, such as road pricing and charging according to the costs of car use, could also work in relation to noise. Noise charges or taxes could also be part of an integrated charging system on motor-vehicles, comprising pollution and other possible characteristics of vehicles.

50.   The main target groups for the application of economic instruments to noise are transport, owners of domestic appliances and industry. Regarding transport, manufacturers and users of passenger cars and lorries, airports and railways should be considered. Regarding industry, a variety of sectors are involved; among these are the construction sector and many large manufacturers.

Applying Economic Instruments to International and Global Environmental Problems

51.   Economic instruments can be considered for tackling international and global environmental problems, such as acid rain, global warming and stratospheric ozone depletion, in the most cost-effective manner.

52.   Carbon dioxide is the main factor causing global warming, but emissions cannot be removed by any end-of-pipe treatment currently available. However, since emissions are proportional to the carbon content of the fuels being burned, a charge or tax on carbon would be identical to an emission charge or tax on carbon dioxide. The charge or tax on carbon could be translated into a product charge or tax on fossil fuels given information about the carbon content of these fuels. Likewise, the tax system may be adapted, for example through a taxation of the sulphur content of fuels. General measures such as energy taxes or charges should, in conformity with other policy objectives, encourage increased energy efficiency, thereby lowering related environmental impacts.

53.   Marketable permits can also be considered. If the goal is to hold emissions constant, some existing emission sources could be allowed to increase emissions, and new sources could be allowed to emit, provided that they can get some other source to reduce emissions by at least an equivalent amount. Alternatively, increases in emissions could be offset by investments which increase the environment's ability to absorb the emissions (in the case of carbon dioxide).

54.   Target groups vary from problem to problem. For instance, a limited number of firms produce CFCs and these could be subjected to charges or marketable permits. For practical reasons, marketable permits would have to apply to producers and importers only. Large emission sources of carbon dioxide like electricity producers could be allocated marketable permits or be made subject to carbon charges or taxes. Small sources like households could also be subject to a carbon charge or tax (for example, on gasoline and home heating fuels).

Relevant body:
Environment Committee now called Environment Policy Committee

[1] The Guidelines set out in this Annex are based on the review of Member countries' experience in using economic instruments [see OECD, Economic Instruments for Environmental Protection, Paris 1989] and on detailed Guidelines prepared by an OECD "Task Force on Economic Instruments" and by the OECD Group of Economic Experts [OECD, Guidelines for the Application of Economic Instruments in Environmental Policy, Paris 1991].
[2] For detailed Guidelines, see OECD, Guidelines for the Application of Economic Instruments in Environmental Policy, Paris, 1991.
 
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