Economic Instruments for Env Mgmt

8/10/2019 Economic Instruments for Env Mgmt

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ECONOMIC INSTRUMENTSINENVIRONMENT MANAGEMENT

Group 2


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Environmental resource management is the management of the interactionand impact of human societies on the environment. It is not, as the phrase mightsuggest, the management of the environment itself. Environmental resourcesmanagement aims to ensure that ecosystem services are protected and maintained

for future human generations, and also maintain ecosystem integrity throughconsidering ethical, economic, and scientific (ecological) variables. Environmentalresource management tries to identify factors affected by conflicts that risebetween meeting needs and protecting resources.

Environment

Management

Environment Resource

Management

Environment Resource Management Approaches :

Control and Command Approach

Management through effective Economic Instruments or Market Based Instruments


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Economic Instruments Introduction

Economic Instruments encompass a range of policy tools, from pollution taxes andmarketable permits to deposit-refund systems and performance bonds.

The common element of all economic instruments is that they effect change orinfluence behaviour through their impact on market signals.

Economic instruments are a means of considering "external costs," i.e. costs to thepublic incurred during production, exchange or transport of various goods andservices, so as to convey more accurate market signals. Those "external costs" mayinclude natural resource depletion, environmental degradation, health impacts, socialimpacts, etc.

Economic instruments facilitate the implementation of Principle 16 of the RioDeclaration, commonly known as the "Polluter Pays Principle." The article states:"National Authorities should endeavour to promote the internalisation ofenvironmental costs and the use of economic instruments, taking into account theapproach that the polluter, should in principle, bear the cost of pollution with due

regard to the public interest and without distorting international trade andinvestment."


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Economic Instruments Vs Control & Command Policies

Economic instruments are often contrasted to "command and control" policyapproaches that determine pollution reduction targets and define allowable controltechnologies via laws or regulations.

In reality, however, command and control policy and economic instrumentsfrequently operate in tandem.

A government may set limits on permitted pollution levels for a region or a countryin order to meet a certain health or environment objective.

Market-oriented approaches such as tradable permits might then be used toallocate the allowable emissions in an efficient manner. Tax breaks or other financial

incentives might be offered to groups, individuals or industries investing in cleanertechnologies.


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MethodsEconomic Instruments can be designed in a variety of ways, and for a variety ofapplications, including the following:

Increasing prices of goods and services that damage health and environment, aswell as increasing financial returns in the case of more sustainable approaches thatfoster more environmentally- friendly production and consumption patterns.

Reduction of compliance costs by providing flexibility to polluters or users ofnatural resources to chose the most cost-efficient and environmentally-effectivemeasures.

Incentives for investments in innovation and improved environmentaltechnology so that both environmental and financial benefits are generated.

Allocation of property rights and responsibilities of firms, groups or individualsin a manner so that they have both the incentive and the power to act in a moreenvironmentally- responsible manner.

The raising of revenues to achieve environment and health objectives via tax

policies.


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CARBON TAX - One of the most importantexamples of economic instrument

A carbon tax is an indirect tax a tax on a transactionas opposed to a direct taxwhich taxes income. A carbon tax sets a price for carbon dioxide emissions.

In economic theory, pollution is considered a negative externality, a negative effecton 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 accuratelyreflect the cost of the goods' production to society, thereby internalizing the costsassociated with the goods' production. A tax on a negative externality is called aPigovian tax and should equal the marginal damage costs.


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Carbon Tax in IndiaOn 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 powermore 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 theirvoluntary target to reduce the amount of carbon dioxide released per unit of gross domesticproduct by 25% from 2005 levels by 2020.

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


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HOW IS A CARBON TAX DIFFERENT FROM ANEMISSIONS TRADING SYSTEM?

In an emissions trading system, a central authority sets a cap on how much apollutant such as CO2 may be emitted. The cap is allocated to companies in the form ofemissions 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 arebeing rewarded for reducing emissions.


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HOW CARBON CREDIT TRADING WORKSNow letslook 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 byone metric ton, and earns praises and a Carbon Credit certificate from thegovernment.

On the other hand, Company Paint-Your-Home canthelp but carry on pollutingthe soil, river, and air to make the best paints in the market. Now, to show the worldthat it actually cares for the environment by ruining the environment and then tocompensate the damage caused to the eco-system, Company Paint-Your-Homebuys the credit certificate from Project Plant-A-Tree. This credit acts as the permitto emit one more metric ton of gases.

This way, Project Plant-A-Tree could pay off its bills, employees/volunteers, andfuture projects to carry on helping the environment. And Company Paint-Your-Home is able to focus on churning profits.

A win-win situation for both!


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HOW CARBON PRICING CURRENTLY WORK INAUSTRALIA?

Carbon pricing, implemented in Australia on July 1, 2012, roughly applies to Australia'slargest 500 emitters, which are companies that emit more than 25,000 tonnes of carbondioxide 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 inthe 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 cappedby regulators. Most carbon units will be auctioned by the Clean Energy Regulator and theprice 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 creditscan be sold to people and businesses wishing to offset their emissions.

This scheme includes credits earned from activities such as reforestation, savannah firemanagement and reductions in emissions from livestock and fertiliser use.

Australia has a legislated renewable energy target designed to ensure that 20 per cent ofelectricity comes from renewable sources by 2020.


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Public-Private Partnerships. Through economic incentives, both the central andstate governments are promoting public-private partnerships (PPPs) for thedevelopment of infrastructure for environmental services. For example, in Gujarat, 10percent of the total investment of USD 1,644 million for controlling pollution hascome through a public-private partnership.

Other Incentive Initiatives. Some states are introducing initiatives to encouragegood environmental behavior through packages of economic and regulatory

incentives. For example, the Gujarat PCB provides incentives to industriesimplementing environmental management systems (EMS) by issuing them consentson a priority basis and of longer validity (six years), providing 25 percent rebates inwater cess and 50 percent discounts on fees for environmental audits .

Key ChallengesThe positive experiences are disseminated very slowly across the states in the absenceof national leadership and guidance.

Despite a number of promising initiatives, financial incentive packages for small-scale 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 loansystem, these industries will continue to violate environmental requirements.


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Role of the Judiciary in Management ofEnvironment 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-ledpublic interest litigation (PIL) that has its legal basis in the constitutional right to ahealthy environment. Through this judicial activism, the courts have issued orders withspecific implementation requirements that not only remedy the case at hand, but also setnew policies and practices with widespread implications for the regulated community aswell 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 thefamous Godavarman Case.

2) Implementation of the PolluterPaysprinciple as an offshoot of the MC Mehta Case


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Indias Attempt with Trading as EconomicInstrument

NAPCC2008

PAT

REC

Pilot ETS


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NMEEE mandates following objectives:

A market based mechanism to enhance cost effectiveness of improvements inenergy efficiency in energy-intensive large industries and facilities, throughcertification of energy savings that could be traded. (Perform Achieve and Trade)Accelerating the shift to energy efficient appliances in designated sectors throughinnovative measures to make the products more affordable. (Market Transformationfor Energy Efficiency)

Creation of mechanisms that would help finance demand side managementprogrammes in all sectors by capturing future energy savings. (Energy EfficiencyFinancing Platform)Developing fiscal instruments to promote energy efficiency (Framework for EnergyEfficient Economic Development) Market-based approaches to unlock energyefficiency opportunities, estimated to be about Rs. 74,000 crores.


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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 theenergy-intensive and large scale industries are known as DesignatedConsumers. The listof these consumers has been published by BEE. PAT scheme creates energy efficiencytargets to be met and incentivizes businesses achieving higher energy efficiency withtradable energy saving certificates (ESCerts) The market for these ESCerts will be theentities that will not meet their energy efficiency targets and will need to buy these ESCertsto meet the energy efficiency norms.

Energy Savings Certificates (Escerts) How it works?Designated consumers will be given Specific Energy Consumption (SEC) targets to meetover a period of three years.

If they succeed in meeting the threshold for the energy saving, they will have noobligation to buy ESCerts from others through the PAT mechanism.

Those who have surpassed the target (i.e. achieved additional savings above thebenchmark) will qualify for earning Energy Saving Certificates (ESCerts), which could be

traded with DCs falling short of their targets.


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PAT Legal FrameworkThe Energy Conservation Act 2001, provides the framework for efficient use of energy andits conservation. PAT framework to be implemented are embedded in the various sectionsof the Act as under

Furnish report of energy consumption to the Designated Authority of the State as well asto BEE (section 14(k))Designate or appoint an Energy Manager who will be in-charge of submission of annualenergy 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 theevent of default. The Act has been amended with the addition of new sub-section 14A toenable this and section 14A(2) allows such trading. EScerts are defined by adding a newsub-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 ActExcess 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-compliancemeasured in terms of the market value of tones of oil equivalent by inserting a new section26(1A)BEE to be the overall regulator and dispute resolution agency and Energy EfficiencyService Ltd. (EESL) to be the process manager


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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 ofenergy efficiency measures in these high energy intensive sectors.


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How the market based mechanism works?


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Benefits expected from PAT

PAT is a unique mechanism for institutionalizing energy efficiency. PAT has been rolledout 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 yetprovided guidelines for the exact boundary setting for the units Experts are divided overkeeping the Energy efficiency improvement targets as unitspecific or at entity level. Clear

methodologies are needed for the same.

There is a great heterogeneity within each sector. Target Setting Energy ConsumptionNorms under the PAT mechanism may not be feasible with a single standard at sector level.


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RENEWABLE ENERGY CREDIT TRADINGSYSTEM (REC)

IndiasREC trading system was launched in November 2010, and the systemsprimary purpose is topromote renewable energy even in regions that have low

potential for renewable power generation. The Indian government plans for thismechanism to contribute significantly to renewable energy generation goalsoutlined by the NAPCC and the Energy Act of 2003 (EA-2003).

The Ministry of Power regulates the REC mechanism. Under EA-2003, thecountrysState Regulatory Commissions(SERCs) set targets for power companies topurchase a certain percentage of their total power from renewable sources. Thesetargets 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 majorPower Exchanges, IEX and PXIL.


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PILOT ETSIndias 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 aredetrimental to human health, these state pilot programs could function as a foundation fora 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 ofemissions mitigation, and (2) it spurs innovation


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UNs Attempt at an International LevelEconomic Instrument


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ThankYou !!!

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Economic Instruments for Env Mgmt