En134-11-2002E (EFR First Steps Report)

© National Round Table on the Environment and theEconomy, 2002

All rights reserved. No part of this work covered by thecopyright herein may be reproduced or used in any formor by any means – graphic, electronic or mechanical,including photocopying, recording, taping or informationretrieval systems – without the prior written permissionof the publisher.

National Library of Canada Cataloguing inPublication Data

Main entry under title: Toward a Canadian agenda forecological fiscal reform : first steps

Issued also in French under title: Vers un programmecanadien d’écologisation de la fiscalité.

Includes bibliographical references.

ISBN 1-894737-04-0

1. Environmental impact charges—Canada. 2.Environmental impact charges—Canada—Case studies.3. Fiscal policy—Canada. 4. Sustainable development—Governmental policy—Canada. I. Stratos Inc. II.National Round Table on the Environment and theEconomy (Canada)

HJ5375.Z73T68 2002 336.1’6 C2002-901263-5

This book is printed on Environmental Choice papercontaining 20 percent post-consumer fibre, using veg-etable inks.

National Round Table on the Environment and the Economy344 Slater Street, Suite 200Ottawa, OntarioCanada K1R 7Y3Tel.: (613) 992-7189Fax: (613) 992-7385E-mail: [email protected]: http://www.nrtee-trnee.ca

To order:

Renouf Publishing Co. Ltd.5369 Canotek Road, Unit 1Ottawa, ON K1J 9J3Tel.: (613) 745-2665Fax: (613) 745-7660Internet: http://www.renoufbooks.comE-mail: [email protected]

UUnniitteedd SSttaatteess::812 Proctor AvenueOgdensburg, NY 13669-2205Toll-free USATel.: (888) 551-7470 Fax: (888) 568-8546

Price: C$14.95 plus postage and tax

The views expressed herein are those of the authors and editors, and do not necessarily represent those ofthe National Round Table or its members.

Toward A CanadianAgenda for EcologicalFiscal Reform:First Steps

Mandate

Toward A Canadian Agenda for Ecological Fiscal Reform i

NRTEE

The National Round Table on the Environment and the Economy

(NRTEE) was created to “play the role of catalyst in identifying, explaining and pro-

moting, in all sectors of Canadian society and in all regions of Canada, principles

and practices of sustainable development.” Specifically, the agency identifies issues

that have both environmental and economic implications, explores these implica-

tions, and attempts to identify actions that will balance economic prosperity with

environmental preservation.

At the heart of the NRTEE’s work is a commit-ment to improve the quality of economic andenvironmental policy development by providingdecision makers with the information they need tomake reasoned choices on a sustainable future forCanada. The agency seeks to carry out its mandateby:

� advising decision makers and opinion leaders onthe best way to integrate environmental and eco-nomic considerations into decision making;

� actively seeking input from stakeholders with avested interest in any particular issue and provid-ing a neutral meeting ground where they canwork to resolve issues and overcome barriers tosustainable development;

� analysing environmental and economic facts toidentify changes that will enhance sustainabilityin Canada; and

� using the products of research, analysis andnational consultation to come to a conclusion onthe state of the debate on the environment andthe economy.

The NRTEE’s state of the debate reports synthe-size the results of stakeholder consultations onpotential opportunities for sustainable development.They summarize the extent of consensus and reasonsfor disagreement, review the consequences of actionor inaction, and recommend steps specific stakehold-ers can take to promote sustainability.

Membership

Toward A Canadian Agenda for Ecological Fiscal Reform iii

NRTEE

ChairStuart L. SmithChairmanENSYN Technologies Inc.

Vice-ChairPatricia McCunn-MillerManaging DirectorEnvironment and Regulatory AffairsPanCanadian Energy Limited

Vice-ChairKen OgilvieExecutive DirectorPollution Probe FoundationToronto, Ontario

Harinder P. S. AhluwaliaPresident and CEOInfo-Electronics Systems Inc.

Paul G. AntlePresident & CEOIsland Waste Management Inc.

Jean BélangerOttawa, Ontario

Lise BrousseauLa Prairie, Québec

Patrick CarsonNobleton, Ontario

Douglas B. DeaconOwner, Trailside Café and Adventures

Terry DuguidChairmanManitoba Clean Environment Commission

Sam Hamad, P.Eng.Vice-President, IndustryRoche Ltd., Consulting Group

Michael HarcourtSenior AssociateSustainable Development Research InstituteUniversity of British Columbia

Raymond E. IvanyPresidentNova Scotia Community College

William H. JohnstoneMoose Jaw, Saskatchewan

Cindy Kenny-GildaySenior AdvisorCommunity AffairsDiavik Diamond Mines

Cristina MarquesCo-Owner and Developer of Dreamcoast Homes

Joseph O’NeillHanwell, New Brunswick

Angus RossChairmanL & A ConceptsScarborough, Ontario

John WiebePresident & CEOGLOBE Foundation of Canadaand President & CEOAsia Pacific Foundation of Canada

Judy G. WilliamsPartnerMacKenzie Fujisawa

President & CEODavid J. McGuinty

Economic Instruments Committee

Toward A Canadian Agenda for Ecological Fiscal Reform iv

NRTEE

Jean BelangerChair

Patricia McCunn-MillerManaging Director, Environment and RegulatoryAffairsPanCanadian Energy

Ken OgilvieExecutive DirectorPollution Probe

Angus RossChairmanL & A Concepts

John DillonVice-President, Policy and Legal CounselCanadian Council of Chief Executives

Staff ContactAlexander WoodPolicy Advisor

Table of Contents

Toward A Canadian Agenda for Ecological Fiscal Reform v

Table of Contents

Executive Summary ..............................................................................................................................vii

1 Introduction ....................................................................................................................................1

2 Background......................................................................................................................................3

2.1 Rethinking the toolbox needed for sustainable development ..............................................................3

2.2 What is ecological fiscal reform?....................................................................................................5

2.3 Ecological fiscal reform: International experience .............................................................................6

2.4 Ecological fiscal reform: The Canadian experience.............................................................................8

3 Why and When to Use EFR ..............................................................................................................11

3.1 The bottom line.........................................................................................................................11

3.2 Establishing the context .............................................................................................................113.2.1 What is the environmental objective or goal? .......................................................................123.2.2 What role is the policy instrument to play, and which instrument best suits this role?.................12

3.3 To what types of issues can EFR be applied? ..................................................................................12

3.4 What EFR instruments can be used? ..............................................................................................13

4 The Case Studies ............................................................................................................................15

4.1 Lessons from the case studies ......................................................................................................154.1.1 There is a role for EFR in Canada, and EFR is uniquely appropriate for the challenge

of implementing sustainable development ...........................................................................164.1.2 EFR can offer many benefits and opens up new opportunities .................................................164.1.3 EFR is a new approach; using it successfully will require leadership, openness,

new actors, and new knowledge .........................................................................................164.1.4 EFR will require broad integration between disciplines and across government

departments, industry, and diverse stakeholders....................................................................174.1.5 Clear policy objectives should come first, but EFR options are best considered

at an early stage in the definition of management options ....................................................174.1.6 EFR options should be evaluated using the same process as for other policy tools.......................184.1.7 Canada’s unique challenges need to be incorporated into the design of

EFR from the outset.........................................................................................................184.1.8 Funding and revenue aspects must be considered and communicated .......................................194.1.9 Good data are needed to provide the basis for analysis, modelling, monitoring,

evaluation, assessment, and continuous improvement ...........................................................194.1.10 Components critical to good EFR design ..............................................................................20

4.2 Agricultural landscapes summary ..................................................................................................204.2.1 Issue definition ..............................................................................................................20

Toward A Canadian Agenda for Ecological Fiscal Reform vi

Table of Contents

4.2.2 Working group objective ...................................................................................................214.2.3 Working group methodology ..............................................................................................214.2.4 Research summary ...........................................................................................................21

4.3 Cleaner transportation summary ...................................................................................................284.3.1 Objective .......................................................................................................................284.3.2 Methodology...................................................................................................................294.3.3 Issue context..................................................................................................................294.3.4 Research and discussion summary ......................................................................................294.3.5 Areas of agreement and disagreement.................................................................................344.3.6 Key observations .............................................................................................................34

4.4 Substances of concern summary ...................................................................................................364.4.1 Issue statement ..............................................................................................................364.4.2 Objective .......................................................................................................................364.4.3 Proposed approach ..........................................................................................................364.4.4 Considerations ................................................................................................................37

5 Future Directions for Ecological Fiscal Reform ..................................................................................39

5.1 General directions for EFR in Canada .............................................................................................39

5.2 Recommendations for future EFR work by the NRTEE........................................................................40

Appendix A: The NRTEE’s EFR Program: Goal and Process .........................................................................43

Appendix B: Membership of the Expert advisory and working groups .......................................................45

Expert Advisory Group ......................................................................................................................45

Agricultural Landscapes Working Group ...............................................................................................47

Cleaner Transportation Working Group.................................................................................................48

Substances of Concern Working Group.................................................................................................49

Appendix C: EFR Program Meetings........................................................................................................51

Bibliography ........................................................................................................................................53

Executive Summary

Toward A Canadian Agenda for Ecological Fiscal Reform vii

� command-and-control approaches to define min-imum standards;

� government spending on research and on publicinfrastructure and services, such as transit, wastemanagement, and water and wastewater treat-ment; and

� public/peer pressure to enlist responsible envi-ronmental behaviour on a voluntary basis.

These approaches have dealt with many of themost tractable environmental problems. The onesthat remain are more complex, characterized by,among other things, diffuse sources of pollution,materials and processes that are integral to currentsystems of industrial production, activities driven bya consumer culture, and interconnected problemsentailing difficult trade-offs. There is a new aware-ness that the policy tools of the past are inadequateto addressing these more complex problems.Command-and-control measures are too rigid, gov-ernment capacity is too thin, and there is a desire forefficient and effective policies that will stimulateinnovation. A new mix of policy instruments isneeded.

Ecological fiscal reform (EFR) as a new policyinstrument is uniquely appropriate for addressingsustainable development. It is a strategy that redirectsa government’s taxation and expenditure programs tocreate an integrated set of incentives to support theshift to sustainable development. The EFR initiatives

The decade since the 1992 Rio Summit on Environment and

Development has established environmental protection as a mainstream issue and core

value for Canadians—for the public, for businesses, and for governments at all levels.

Less progress has been made, however, in developing public policy to drive the shift

toward more sustainable forms of development. In the past, society has relied mainly on

three approaches to solving environmental problems:

and formal policies of other countries are oftenpointed to as models of innovative environmentalaction, as well as of progress in harmonizing environ-mental and economic goals. But to what extent hasEFR delivered on its theoretical promise of being anenvironmentally effective, flexible, and cost-effectivepolicy tool? Does the EFR approach apply inCanada? Does it transfer to our nation’s economy,jurisdictional frameworks, stakeholder dynamics, andfiscal and environmental policy context? Does it havepotential and, if so, with what modifications and inwhat manner? Is there the public and political willfor EFR?

The National Round Table on the Environmentand the Economy (NRTEE)’s EFR Program wasestablished to gain insight into the key challengesand opportunities related to EFR, and to explore thepotential for EFR in Canada. Phase 1 of the programhas reviewed international experience with EFR andinitiated three case studies on the potential applica-tion of EFR in the Canadian context. This approachis intended to expand the base of knowledge andunderstanding regarding how an EFR strategy can beuseful. It also moves beyond theoretical discussionsto assess the practical policy aspects of EFR applica-tion, such as instrument design, integration withother policy tools to create a suite of measures, ana-lytical needs, and options for measures design.

Three case studies were undertaken, with thetopics chosen to illustrate and explore specific chal-

Toward A Canadian Agenda for Ecological Fiscal Reform viii

Executive Summary

lenges for the application of EFR. These case studiesare listed below:

� Agricultural Landscapes, illustrating redirectionof taxation and expenditure programs. The studyobjective was to determine the feasibility of redi-recting governmental (federal, provincial andmunicipal) taxation and expenditure programsaffecting farmers across Canada to meet conser-vation needs and reduce pollution fromfarmlands. Three types of programs wereresearched: environmental farm plans, municipaltax credits for on-farm conservation areas, andconservation cover programs.

� Cleaner Transportation, illustrating how tocomplement regulations. The objective studiedwas to facilitate the adoption of cleaner fuels andengines to promote the transition to cleanertransportation in the diesel-based freight andmass transit sectors.

� Substances of Concern, illustrating how to sup-port voluntary programs. The direction of thiscase study is still in the development stage. Itaims to assess the potential for using suites of fis-cal instruments to achieve more efficiently anappropriate level of environmental managementof chemicals through a global approach.

Lessons learned during these case studies wereused to construct a framework for EFR, includingguiding principles that can apply to a broader rangeof sustainable development issues. The research con-cluded that EFR is a worthy tool—one to beconsidered each time policy options to achieve a newenvironmental objective or goal are being assessed.EFR is particularly appealing when seeking to gobeyond an environmental improvement objective toa sustainable development objective and achieve pos-itive changes in eco-efficiency, trade competitiveness,innovation, and employment. EFR differs from themore traditional approach to economic instrumentsin that it is a strategy (it employs several complemen-tary instruments) and works over a long timehorizon. EFR options should be evaluated as part ofa suite of measures to address an issue, includingcommand-and-control and voluntary measures. The

optimal mix of policy tools will be case specific; EFRmay have a role to play, either on its own or in com-bination with other policy instruments.

The case studies led to broad conclusions on thekey opportunities and challenges in using EFR inCanada. These lessons can be highlighted as follows:

There is a role for EFR in Canada, and EFR isuniquely appropriate to the challenge of implement-ing sustainable development.

� EFR can offer many benefits over traditionalpolicy instruments, as well as open new opportu-nities.

� EFR is a new approach, so using it successfullywill require leadership, openness, new actors, andnew knowledge.

� EFR will require broad integration between dis-ciplines and across government departments,industry, and diverse stakeholders.

� Clear policy objectives should come first, butEFR options are best considered at an early stagein the definition of management options.

� EFR options should be evaluated using the sameprocess as is used for other policy tools.

� Canada’s unique challenges need to be incorpo-rated into the design of EFR from the outset.

� Funding and revenue aspects must be consideredand communicated.

� Good data are needed to provide the basis foranalysis, modelling, monitoring, evaluation,assessment, and continuous improvement.

� Good EFR design depends on a number of criti-cal components.

In considering future directions, the NRTEEprogram has concluded that a multi-prongedapproach will be needed to realize the full potentialof EFR in Canada. A three- to five-year strategy isrequired to develop awareness of, comfort with, andincreased understanding of the EFR approach amonggovernment, industry, environmental non-govern-mental organizations, technical experts, and broadercivil society.

Toward A Canadian Agenda for Ecological Fiscal Reform ix

Executive Summary

A strong leadership signal from senior policymakers will be necessary to assure stakeholders andgovernment policy advisors that EFR is of emerginginterest to the government, and that energies invest-ed in exploring innovative, measured, thoughtfulapproaches to EFR will have a likelihood of imple-mentation. This leadership signal could be providedthrough a formal mandate, framework, and budgetsimilar to that used for the launch of theEnvironment and Sustainable DevelopmentIndicators initiative in 2000.

There is a need to expand the cadre of peoplewho have experience with EFR approaches andanalysis at the applied level. The NRTEE’s EFRProgram has begun this important process, buildingawareness, knowledge, and trust among key actorsand decision makers. It can continue this workthrough advancing the recommendations of the casestudies completed so far, where appropriate; facilitat-ing further case studies; and providing opportunitiesfor those working on EFR to share their work andhave it peer-reviewed. Specifically, the NRTEEshould:

� present case study conclusions on agriculturallandscapes to the senior policy level inAgriculture and Agri-Food Canada,Environment Canada and Finance Canada;

� develop the case study on substances of concernunder the Canadian Environmental ProtectionAct;

� explore the potential to further experiment inareas connected to the cleaner transportationfocus;

� raise awareness of the use of EFR concepts intwo major NRTEE programs: UrbanSustainability and Conservation of NaturalHeritage;

� explore collaboration between the EFR programand the Environment and SustainableDevelopment Indicators initiative;

� engage broader stakeholder support and commit-ment, and build capacity for EFR through anannual forum on EFR.

Toward A Canadian Agenda for Ecological Fiscal Reform 1

Introduction1

Many of these proposals have been successful:energy efficiency, renewable energy, donations ofecologically sensitive lands, and sustainable develop-ment indicators, to name a few.

In 2000, the NRTEE divided its economicinstruments work into two streams. One stream,now titled “Greening the Budget,” focuses on dis-crete budget initiatives that derive fromrecommendations of other NRTEE programs, suchas those on non-renewable resource development inthe North, brownfield sites, and environmentalhealth. The second stream is exploring the potentialof a broader and more integrated approach, ecologi-cal fiscal reform. This program’s more complex andambitious agenda is being investigated over a two- tothree-year period, and outside the urgency of theannual federal budget development cycle.

The EFR initiatives and formal policies of othercountries are often pointed to as models of innova-tive environmental action, as well as of progress inharmonizing environmental and economic goals. Butto what extent has EFR delivered on its theoreticalpromise of being an environmentally effective, flexi-ble, and cost-effective policy tool? Does the EFRapproach apply in Canada? Does it transfer to ournation’s economy, jurisdictional frameworks, stake-holder dynamics, and fiscal and environmental

The National Round Table on the Environment and the Economy

(NRTEE)’s Ecological Fiscal Reform (EFR) Program has arisen from

many years of work on individual budget measures. With the release

of the report of the Task Force on Economic Instruments and

Disincentives to Sound Environmental Practices in 1994, the NRTEE

formed an Economic Instruments Committee, which has since made

annual budget submissions on sustainable development.


Introduction

policy context? Does it have potential and, if so,with what modifications and in what manner? Isthere the public and political will for EFR?

The goal of the NRTEE’s EFR program is togain insight into the key challenges and opportuni-ties related to EFR and to explore the potential forEFR in Canada. The program has included a reviewof international experience with EFR and three casestudies: on agricultural landscapes, cleaner dieseltransportation, and substances of concern. Thisapproach is intended to:

� explore EFR’s application specifically in theCanadian context;

� expand the base of knowledge and understand-ing regarding how an EFR strategy can beuseful;

� move beyond theoretical discussions and assessthe practical policy aspects of EFR application,such as instrument design, integration withother policy tools to create a suite of measures,analytical needs, and options for measuresdesign;

� identify lessons (arising from the case studies)that can be used in constructing a framework forEFR, including guiding principles that canapply to a broader range of sustainable develop-ment issues; and

� identify specific recommendations (arising fromthe case studies) for governments to consider fortheir 2002 budgets. (This last item was a wel-come, but not essential, secondary objective.)

This report summarizes the lessons and recom-mendations of Phase 1 of the NRTEE’s EcologicalFiscal Reform Program, from June 2000 to October2001.


While environmental successes can be celebratedon many fronts—such as the phase-out of ozone-depleting chemicals, the expansion of protectedareas, the growth in renewable energy, and the wide-spread adoption of environmental managementsystems—these successes are matched by continuingenvironmental failures. Every summer, air pollutionleads to thousands of early deaths and many moreillnesses. Chemical-by-chemical approaches to pollu-tion control are unable to catch up with newscientific findings on increasingly subtle humanhealth impacts, such as endocrine disrupters.Ecologically valuable habitat is fragmented and lost,and the species-at-risk list continues to grow. Entirefisheries have been lost. Greenhouse gas emissionsare rising, and the global warming trend is alreadyaffecting Arctic ecosystems and communities. Andthe modest gains that have been made—for example,in energy efficiency—are too often outstripped bythe pace of economic expansion.

These failures point to a larger breakdown ofpublic policy. Simply put, sustainable developmentcontinues to be an uphill struggle because of disso-nance between the goal and the context withinwhich we make everyday decisions. The dissonance isexpressed every day—in, for example, an individual’sdecision to buy a sport utility vehicle instead of a

Background22.1 Rethinking the toolbox needed for sustainable development

The decade since the 1992 Rio Summit on Environment and

Development has established environmental protection as a main-

stream issue and core value for Canadians—for the public, for

businesses, and for governments at all levels. Less progress has

been made, however, in developing public policy to drive the shift

toward more sustainable forms of development.


Background

hybrid electric one, in a utility’s decision to use coalto fuel new power supply, or in a government’s deci-sion to allow incremental urbanization of high-valueagricultural lands. Clearly, if choices that favour sus-tainable development are to be the logical ones, newapproaches are necessary.

In the past, society has relied mainly on threeapproaches to solving environmental problems:

� command-and-control approaches to define min-imum standards;

� government spending on research and on publicinfrastructure and services, such as transit, wastemanagement, and water and wastewater treat-ment; and

� public/peer pressure to enlist responsible envi-ronmental behaviour on a voluntary basis.

These approaches have dealt with many of themost tractable environmental problems. The onesthat remain are more complex, characterized by,among other things, diffuse sources of pollution,materials and processes that are integral to currentsystems of industrial production, activities driven bya consumer culture, and interconnected problemsentailing difficult trade-offs. In agriculture, behav-iour that maximizes private net benefits may conflictwith behaviour that maximizes net social (public)benefits. There is a new awareness that the policytools of the past are inadequate to address these morecomplex problems. Command-and-control measuresare too rigid, government capacity is too thin, andthere is a desire for efficient and effective policiesthat will stimulate innovation. A new mix of policyinstruments is needed. As the Organization forEconomic Co-operation and Development (OECD)concluded in Environmental Outlook, its recentlyreleased agenda for addressing environmental chal-lenges over the next 20 years:

It is often difficult to design a single policy instru-ment that will successfully provide the right incentives fora total reduction in resource use or in pollution and wastegeneration. Instead, it will generally be necessary toemploy a mix of policy instruments. The policy mix sug-gested here involves the combination of a robustregulatory framework with a variety of other instru-

ments, such as stronger pricing mechanisms to influencethe behaviour of consumers and producers, voluntaryagreements, tradable permits, eco-labels and informa-tion-based incentives, land use regulation andinfrastructure provision. In particular, the Outlook rec-ommends the removal of environmentally harmfulsubsidies and a more systematic use of environmentaltaxes, charges and other economic instruments to get theprices right.1

Canada’s Minister of the Environment hasaccepted this need to widen the range of tools usedto manage environmentally sustainable development:

…perhaps the most important element (of the newenvironmental architecture) is an expanded and moresophisticated use of market-based and incentive mecha-nisms to promote sustainable development. It is time toget serious about aligning economic signals and financialrewards with environmental goals. For starters, govern-ments have to end regulations and subsidies that harmthe environment…. Next, we can link taxation to envi-ronmental performance. Many other countries are doingthis now. New green taxes could be designed to be revenueneutral, complemented by cuts in other kinds of taxation,and would not target on particular regions or industriesunfairly. But we can and must get on with the business ofredesigning our tax base to reflect environmental costsearly.2

This alignment of economic signals and financialrewards with environmental goals has come to beknown in Canada as ecological fiscal reform, or EFR.

The elevated interest in EFR comes at a timewhen Canada’s overall fiscal system is also beingreformed. The political and policy climate is over-whelmingly in favour of tax reductions, and taxlevels and social security contributions are beingreduced in most Canadian jurisdictions. This is forc-ing every government to examine thecost-effectiveness and administrative efficiencies of itspolicies and programs. At the same time, the federalgovernment has shown a readiness to use the tax sys-

1 Organization for Economic Co-operation and Development,“OECD Environmental Outlook,” (Paris: 2001), p.24

2 David Anderson, Minister of the Environment, "The EnvironmentalChallenge in the 21st Century," Address to Globe 2000 OpeningPlenary," Vancouver, March 2000.


Background

tem as a primary tool to support certain policyobjectives, particularly those in the social policyarena, such as poverty alleviation and lifelong learn-ing. The theory suggests that EFR, if properlydesigned, can help every taxpayer emerge a winner.

2.2 What is ecological fiscal reform?The NRTEE has defined ecological fiscal reform as:

A strategy that redirects a government’s taxation andexpenditure programs to create an integrated set of incen-tives to support the shift to sustainable development.

The NRTEE has chosen to examine ecologicalfiscal reform, rather than the ecological tax reform(ETR) or tax-shifting approach that is being imple-mented in many European countries.3 EFR is abroader approach, using suites of instruments in areinforcing package, and engaging multiple fiscalpolicy tools in addition to taxes and tax breaks. EFRinvolves:

� redirection or introduction of new taxes or taxbreaks;

� redirection or introduction of targeted directexpenditures, such as targeted government pro-gram expenditures, government procurement,cash subsidies, and grants; and

� other economic instruments, such as tradablepermits, permitting charges, and user fees.

By drawing on this broader array of tools, EFRoffers greater opportunities to design “win-win” poli-cy packages. The common purpose of these tools isto provide incentives for producers and consumers toalter their decisions and behaviour—either to inter-nalize environmental costs or to reward moresustainable practices.

Taxation and expenditures have been used inCanada in the past to support environmentally sus-tainable development measures. Examples of thisapproach include Green Plan funding, the use of dif-ferentiated excise taxes on leaded and unleadedgasoline, tax incentives for donations of ecologicallysensitive lands, and the Sustainable Development

Technology Fund. EFR is differentiated from thesediscrete measures in a number of ways:

� EFR is a deliberate part of the mix of policytools used to address environmentally sustainabledevelopment issues, reinforcing and comple-menting regulatory and voluntary/informationaltools.

� Unlike past budget measures, which have oftenbeen isolated initiatives, EFR entails a deliberatestrategy to use taxation, expenditure, and othereconomic instruments in a package or suite ofmeasures to provide a comprehensive set of rein-forcing incentives for taking environmentalaction.

� EFR includes not only the introduction of newfiscal measures, but also an examination of theinfluence of the present fiscal framework on sus-tainable development policy objectives. Thisrequires a coherent, systemic approach to fiscalpolicy design, and the injection of sustainabledevelopment concerns into mainstream fiscalpolicy.

� At the same time, by employing fiscal ratherthan regulatory or voluntary tools, EFR inserts agreater consideration of economic and socialissues into environmental policy making. Ineffect, it requires a shift of thinking from envi-ronmental protection to sustainable developmentand greater policy integration.

� EFR often—but not necessarily—involves a“recycling” of revenues. The intention is thatEFR constitute not a source of new and incre-mental revenue for governments but, rather, ashifting of the sources of revenue. Where newtaxes or charges are introduced, the revenue isused in one of two ways: to reduce the overalltax burden on the economy through reductionsin other taxes (e.g., on labour, income, or invest-ment) or to provide tax incentives or fundprograms to induce behavioural changes thatsupport the same objective as the tax or charge.

In tackling EFR, the NRTEE is responding to anidentified need for new approaches and more inte-

3 Ecological tax reform is the shifting of taxes onto pollution or energysources, accompanied by a corresponding reduction of distortionarytaxes on labour or capital.


Background

grated policies for sustainable development. Thisneed was established in April 2000, when 26 deputyministers and assistant deputy ministers met with 40leaders and executives from a broad spectrum of pri-vate and not-for-profit sectors at the NRTEE’sLeaders’ Forum on Sustainable Development. Aprincipal conclusion of this meeting was that thelack of integration between sectors and governmentdepartments is a primary constraint on the imple-mentation of sustainable development in Canada.The group proposed that more integrated decisionmaking could be realized through the developmentand use of new tools that incorporate the considera-tion of longer-term implications into decisionmaking. In particular, participants pointed to policygaps specifically around instruments to internalizeenvironmental costs and around incentives toencourage sustainable development. They also sup-ported the pursuit of eco-efficiency gains, an integraloutcome of many EFR measures.4

EFR is meant to be used within a policy packagethat also includes regulatory, informational, and vol-untary tools. The optimal policy mix will be specificto the issue being addressed. The criteria for deter-mining the mix include effectiveness, efficiency,distributional effects, flexibility, and political buy-in.In some cases, command-and-control approachescannot tackle an environmental issue, and EFRoffers a cost-effective and flexible alternative. In theseinstances, EFR is used on a stand-alone basis.Examples include a “cap and trade” on greenhousegas emissions, government green power procurementcombined with tax incentives for renewable energydevelopment, and the redirection of subsidies foragriculture. In these cases, EFR works best whenaccompanied by voluntary initiatives and informa-tion programs that explain the rationale for it andprovide information on sustainable behaviour torespond to the incentive. EFR itself also oftenrequires legislation to provide the legal mandate foroperation.

EFR, command-and-control, and voluntary pro-grams can also be designed to reinforce one another,with EFR measures targeting niches missed by otherpolicy tools. For example, EFR can be used toencourage participation in voluntary programs, asillustrated in the environmental farm plan details inChapter 4. Or, it can be used as a support to regula-tory initiatives, as in the early 1990s when adifferentiated fuel excise tax was used to encourage ashift to unleaded gasoline use in advance of regula-tions.

EFR, regulatory, and voluntary tools all need tobe supported by an institutional framework thatensures that government agencies, departments, andpersonnel are informed about sustainable develop-ment and empowered to take actions to support thisobjective. This institutional support and capacity cantake the form of internal training, legislation requir-ing the consideration of environmental impacts indecision making, and accountability mechanismssuch as the Commissioner of Environment andSustainable Development (see Figure 1).

Figure 1: EFR Within the Policy Toolbox

4 National Round Table on the Environment and the Economy,“Leaders’ Forum on Sustainable Development: DiscussionDocument,” Ottawa, April 4, 2000.

2.3 Ecological fiscal reform:International experience European countries have been much more active inthe implementation of EFR than either Canada orthe United States. “Green tax reform” now enjoys

Voluntary/Informational

Command andControl

Ecological FiscalReform

InstitutionalSupport &Capacity


Background

significant momentum across Europe. The Nordiccountries were first, with Finland, Norway, Sweden,Denmark, and the Netherlands all introducing greentax reforms in the 1988–1992 period. New taxes onpollution (mainly but not exclusively carbon, fuel, orenergy taxes) were introduced, while distortionarytaxes on income and social security contributionswere reduced. A second wave of green tax reformsbegan after 1996, with Austria, the UnitedKingdom, Italy, Germany, France and Belgiumlaunching major initiatives. The magnitude of totaltax revenues collected through EFR generallyremains modest, ranging in 1999 from 0.1% forItaly, 0.5% for the Netherlands, and 1.0% forGermany to 2.4% for Sweden. The leader isDenmark, which now collects over 6% of its totaltax revenue from green taxes.5

The primary objective of ecological tax reform inEurope has been to protect the environment, butgovernments have also been interested in secondaryobjectives. These include reducing unemploymentthrough lower labour taxation and improving thecompetitiveness of the economy through eco-effi-ciency improvements. Recent theoretical research hasconcluded that the employment dividend can berealized, but only if a number of restrictive condi-tions are met. To this point, few ex post evaluationsof these tax shifts have been done.6

The introduction of ETR, like that of manypublic policy measures, has not been without contro-versy. In 2000, facing fierce opposition from hauliersand a hike in fuel prices, the U.K. government aban-doned its proposed “road fuel duty escalator,” whichwould have raised the fuel excise duty by 6% annual-ly. Under pressure from increasing world oil pricessince 1999, the Italian government has postponedecological tax reforms. A major restructuring of envi-ronmentally related taxes and charges approved bythe French parliament in 1999 was subsequently

ruled unconstitutional.7 And in a referendum inSeptember 2000, the Swiss electorate rejected twoproposals for green tax reforms.8 The multi-func-tionality approach used to fund agriculture inEurope has led to challenges at the World TradeOrganization. These experiences highlight the politi-cal challenges of EFR.

The United States has had an active history ofusing market-based approaches to environmentalprotection. However, rather than adopt the broad taxreform approach of the Europeans, the U.S. has used

5 Environment Policy Committee, “Environmentally Related Taxationin OECD Countries: Issues and Strategies,” Paris: EnvironmentDirectorate, OECD, March 2001, p. 34.

6 A. Majocchi, “Greening Tax Mixes in OECD Countries: APreliminary Assessment,” Paris: Environment Directorate, OECD,2000.

International Experience with EFR:Design and Implementation Issues

� Design IssuesJurisdictionHarmonization with other policy initiativesAcceptability to stakeholdersDistributional effectsCareful targetingEnvironmental effectivenessIncentive effectsEfficiencyAdministrative simplicityBudgetary considerations

� Implementation IssuesTransition strategyPace of implementation

� Other EffectsEmploymentInnovationCompetitiveness-- Barg, Brown, Guertin and Troutt, "Issues Relating toEcological Fiscal Reform," International Institute forSustainable Development, Winnipeg: May 2001.

International Experience

7 Note that the fall 2001 French budget nonetheless includes manyEFR measures.

8 Environment Policy Committee, “Environmentally Related Taxationin OECD Countries: Issues and Strategies,” Paris: EnvironmentDirectorate, OECD, March 2001, p. 34.


Background

financial instruments to motivate polluters to reducethe health and environmental risks posed by theirfacilities, processes, or products. The U.S. uses pollu-tion charges, fees, and taxes; deposit-refund systems;marketable permits; subsidies for pollution control,such as grants, low-interest loans, favourable taxtreatment, and preferential procurement policies forproducts; liability legislation; and information disclo-sure and voluntary programs. A recent EPA reportconcluded that:

...there is little doubt that such incentives are provid-ing a new and unique element to environmentalmanagement in the United States. In many cases, incen-tives are generating health and environmental benefitsbeyond what is possible with traditional regulations, andsometimes they can be applied in situations where regu-lations might not be possible at all…. Many economicincentives give an impetus to technological change andinnovative pollution control because sources can generateprofits by finding better, cheaper ways of reducing emis-sions…. In general, it is clear that economic incentives doprovide the opportunity to achieve any given level of pol-lution control with substantial cost savings.9

The European and American experiences demon-strate that EFR has real potential as an effectivesustainable development policy tool. However, theexperiences of other countries cannot be assumed totranslate directly to Canada, and it is necessary toexplore the practical application of EFR specificallywithin our context. Both the successful and less suc-cessful international experiences offer usefulopportunities to learn whether and how to undertakeEFR. What was the political experience of introduc-ing and phasing in EFR? What implementationissues were identified? What design options havebeen used to address these implementation issues? Towhat extent has EFR delivered on its theoreticalpromise of being an environmentally effective, flexi-ble, and cost-effective policy tool?

2.4 Ecological fiscal reform: TheCanadian experienceCanada’s limited use of economic instruments hasgenerally followed the U.S. model of market-basedapproaches targeted to environmental protection,rather than the revenue-neutral, double-dividend tax-shifting approach dominant in Europe. The federalgovernment has used a tradable allowance system toeliminate methyl bromide (an ozone-depleting sub-stance) and has experimented with a project-basedgreenhouse gas emissions trading project (GERT)and Pilot Emission Reduction Trading Project(PERT). There have also been a number of environ-mentally inspired tax incentives, includingdifferentiated excise taxes on leaded and unleadedgasoline, excise tax exemptions for alternative fuelssuch as ethanol, measures to level the playing fieldbetween conventional energy and renewable energysources, and tax benefits for gifts of ecologically sig-nificant land. Environmentally focused programexpenditures and subsidies have been more common,beginning with the $3 billion Green Plan in 1990,green procurement policies, grants and loans forresearch and development of various sustainabletechnologies, and a range of funds to support educa-tion and action programs. The Program Reviewexercise in the mid-1990s led to the removal of

9 National Centre for Environmental Economics, “The United StatesExperience with Economic Incentives for Protecting theEnvironment,” EPA-240-R-01-001, Washington, DC: Office ofPolicy, Economics, and Innovation, U.S. EPA, January 2001.

More Reading on Ecological FiscalReformThese NRTEE background papers are available:

� Analysis of Ecological Fiscal ReformActivity in Canada

� Analysis of U.S. Ecological Fiscal ReformActivity

� Background Paper on Ecological FiscalReform Activities in Europe

� Issues Relating to Ecological Fiscal Reform

Background Papers


Background

many agricultural and energy mega-project subsidieswith “perverse” environmental effects, although thisexercise was driven by deficit reduction, rather thanenvironmental, objectives.

Examples of EFR can also be found at theprovincial and municipal levels in Canada, althoughonly rarely are they explicitly presented under thistitle.10 In 1999, the then government of BritishColumbia launched a Green Economy Initiative,including environmental tax shifting. A first pilotproject aimed to help phase out the sawmill indus-try’s remaining beehive burners and unmodified siloburners in advance of a regulatory phase-out sched-uled for the end of 2004. Permit fees have beenincreased, and the revenue is recycled to companiesthrough rebates for investments in value-added alter-natives to burning wood residue or in research onsuch alternatives.11 The Ontario government islaunching an emissions credit trading system forsmog precursors. Some municipalities provide taxbreaks to help conservation objectives, for example,the City of Burlington’s tax break for woodlot main-tenance. Many provincial governments use economicinstruments for product stewardship. Examples

include deposit-refund schemes for beverage contain-ers and advance disposal fees for tires and used oil.However, the revenue from some of these instru-ments, such as the Ontario tire tax, has not beenrecycled for environmental purposes, contributing topublic scepticism and resistance to the use of eco-nomic instruments for environmental protection.

Notwithstanding the above examples, Canadianexperience with EFR has been limited. A recentOECD Economic Survey of Canada evaluatedCanadian policies for sustainable development andnoted:

No-cost opportunities for curbing pollution are rare,and a strategy based on voluntary agreements alone can-not be expected to correct completely for the external costsof pollution. Hence there is a need to increase the use ofeconomic instruments (for instance, charges on toxicemissions and waste, and disposal fees for products con-taining toxic substances) to reinforce the polluter-paysprinciple.12

This gap was the motivation for the NRTEE’sEFR program, which examines the potential for EFRin Canada.

12 Organization for Economic Co-operation and Development,“Economic Survey of Canada,” Paris, 2000, p. 7.

10 For a partial listing and description of these, see S. Barg, A.Boame, L. Brown, L. DeRiviere, E. Troutt, D. Wranik-Lohrenz, andM. Roy, “Analysis of Ecological Fiscal Reform Activity in Canada,”International Institute for Sustainable Development, Preparatorypaper for NRTEE Ecological Fiscal Program, June 26–27, 2000Meeting, Ottawa.

11 K. Baker, B.C. Green Economy Secretariat, “Tax Shifting inB.C.,” Presentation to the NRTEE Ecological Fiscal Reform ProgramExpert Advisory Group, February 12, 2001. Note the GreenEconomy Secretariat was disbanded in September 2001, and thestatus of further tax-shifting initiatives is not clear.


3.1 The bottom lineEFR is a tool worthy of consideration each time pol-icy options to achieve a new environmental objectiveor goal are being assessed. EFR is particularly appeal-ing when striving to go beyond an environmentalimprovement objective to achieve a sustainabledevelopment objective and to achieve positivechanges in eco-efficiency, trade competitiveness,innovation, and employment.

EFR differs from the more traditional approachto economic instruments in that it is a strategy(entails use of several complementary instruments)and works over a long time horizon. EFR optionsshould be evaluated as part of a suite of measures toaddress an issue, including command and controland voluntary measures. The optimal mix of policytools will be case specific. EFR may have a role toplay, either on its own or in combination with otherpolicy instruments. Many of the criteria and princi-ples for applying EFR are common to theapplication of any policy instrument, and EFRoptions should be assessed and developed using aprocess of equivalent rigour.

3.2 Establishing the context The choice of which policy instrument, or combina-tion of instruments, to use should only beconsidered once the fundamental contextual deci-sions have been made. That is, it must first beestablished what the environmental objective or goalis, and what role the policy instrument is to play.

Why and When to Use EFR3Following is guidance for decision makers on how to choose

issues suitable for EFR, how to analyse EFR measures, and how to

implement EFR.


Why and When to use EFR

3.2.1 What is the environmental objectiveor goal?The first step in the use of any new policy instru-ment is the identification, through sound science, ofan environmental threat that needs to be addressed.An environmental objective or goal would then beestablished, taking into consideration factors such asscientific certainty, effect thresholds, scale of impact,type of hazard, and social consensus. These factorswill determine whether to establish:

� a directional objective (for instance, increasingthe use of recycled materials or enhancing con-servation cover on agricultural lands); or

� an absolute, target-based goal (for instance, lim-iting the concentration of PM 2.5 to 30 mg/m3,24-hour averaging time, by 2010, based on the98th percentile ambient measurement annually,averaged over three consecutive years, as in theCanada Wide Standard); or

� a dual approach that establishes a minimum tar-get but encourages movement beyond the targetover time.

3.2.2 What role is the policy instrumentto play, and which instrument best suitsthis role?Once the objective or goal is established, a decision isneeded about the role(s) the policy instrument(s) areto play. Is it to support relative progress toward adirectional objective? If so, voluntary instruments orsome fiscal instruments may be most appropriate. Is itto achieve an absolute target? Then a command-and-control approach or a cap-and-trade fiscal instrumentmight be more appropriate. A dual approach mightuse command and control to achieve the minimumtarget, and fiscal or voluntary instruments to encour-age performance beyond compliance.

More than one policy instrument for the desiredrole(s) may be identified. In this case, other con-straints should enter the decision. For example,competitiveness and distributional effects are oftenconcerns. If so, EFR instruments may be able tomeet the environmental objective or goal with more

flexibility and economic efficiency than a command-and-control instrument. Factors such as these willinfluence the final choice of instrument or suite ofinstruments.

3.3 To what types of issues can EFR beapplied? EFR can be applied to a range of environmentalissues and can play a variety of roles within a suite ofpolicy instruments. With creative design, EFR canbe part of the policy response to almost any issue.However, EFR seems well suited to environmentalissues where:

� flexibility of response from individual actors isacceptable, since each party will determine theirown response to the market signal. This meansthat EFR, used on its own, is not suited to issuesfor which a minimum threshold performance isrequired from all actors;

� an end point is difficult to assess or define (aswith eco-efficiency), but the direction of progressis known and highly desirable, and EFR can pro-vide incentives for continuous improvement;

How to select a policy instrument tomeet the environmental objective orgoal?

� What is the suite of instruments thatcould be used directly to meet any giventarget?

� What issues are raised by the choice ofpolicy instrument? Does the choice ofinstruments address barriers toward mak-ing progress on the environmental targetschosen?

� Are there any mitigating instruments/actions that would overcome problemspotentially arising from the choice ofinstrument?

Discussion Questions



13 For example, a regulation requiring consumers to return popcans would likely be unenforceable and, hence, ineffective. When thesource of the environmental threat is so pervasive and cross-cuttingthat it is impossible to design a command-and-control approach, asin carbon dioxide emissions from fossil fuel combustion, regulation isineffective. Regulation may also be impractical for political and socialreasons, for example, if the economic burden of compliance must beborne by a lower income or politically powerful group such as theagricultural sector.

� a command-and-control structure is already inplace, but there is a desire to support perform-ance beyond compliance, in advance ofcompliance deadlines, or to support the transi-tion stage of meeting compliance;

� a command-and-control approach is known tobe ineffective or impractical,13 and EFR or vol-untary instruments are the only options;

� a voluntary instrument is in place, but there is aneed to increase the incentive for participation;

� the intention is to support a transitional stage ofperformance and behaviour, and it is expectedthat once this transition has been achieved, apolicy instrument will no longer be needed andcould be dismantled; and/or

� fundamental, longer-term behavioural change isthe objective, and this can be supported by usingmarket signals to change the information onwhich behavioural decisions are made.

3.4 What EFR instruments can be used? The list of potential EFR instruments is a long one.They are logically grouped into three general cate-gories: Market-based or economic instruments directlyaffect the price that a producer or consumer pays fora product or service, behaviour, or activity. Includedin this group are:

� cost-internalizing and revenue-generating instru-ments—taxes, charges, user fees, anddeposit-refund schemes;

� subsidies—cash subsidies, tax incentives andcredits, and grants;

� subsidy removal or redirection;

� insurance programs and requirements;

� tax reductions—reduction or elimination of taxessuch as capital gains tax and municipal propertytaxes;

� market creation—creation of a tradable good orservice and a market in which it can be traded;and/or

� ecological branding or certification.

Direct program expenditures influence mitigationor prevention options, awareness, and markets. Theyinclude:

� research, development, and commercializationprograms;

� transfer payments designed for specific environ-mental needs;

� green procurement; and/or

� information, education, and awareness programs.

Institutional support and capacity involve:

� data collection and analysis;

� tools for assessing and monitoring environmentalimpacts; and/or

� information, education, and awareness programsinternal to government.

The choice among these instruments, or of asuite of instruments from this list, will be case specif-ic. The options should be assessed using the sameprocess and criteria as for any other policy instru-ment, including consideration of:

� technical feasibility;

� likely environmental effectiveness;

� availability of data for analysis;

� acceptability to stakeholders;

� jurisdiction;

� harmonization with other policy initiatives;

� distributional effects;

� competitiveness effects;

� efficiency and cost-effectiveness;



� administrative simplicity and political feasibility;

� comprehensiveness of coverage across sectors, forexample, across for-profit as well as MUSH(municipal, university, schools, hospitals) sectors;

� precision of signal targeting;

� market setting (structure, size, industry leadtime, actors); and

� fiscal impacts, including balance between rev-enue and expenditure components.

These criteria are similar to the ones used toassess traditional command-and-control or voluntaryinstruments. Fiscal impacts may receive slightlystronger consideration when EFR instruments areevaluated, since the nature of the instrument is suchthat revenue and expenditure components may belarger than for other policy tools.

If problems are identified through the evaluationprocess, it may be possible to mitigate them. Pastexperience with EFR instruments has demonstratedthat many potential concerns (e.g., over competitive-ness, distributional effects, or transitional impacts)can be mitigated through the specific design of theEFR instrument.


� Agricultural Landscapes, illustrative of redirec-tion of taxation and expenditure programs. Thestudy objective was to determine the feasibilityof redirecting governmental (federal, provincialand municipal) taxation and expenditure pro-grams affecting farmers across Canada to meetconservation needs and reduce pollution fromfarmlands.

� Cleaner Transportation, illustrative of comple-menting regulations. The objective studied wasto facilitate the adoption of cleaner fuels andengines to promote the transition to cleanertransportation in the diesel-based freight andmass transit sectors.

� Substances of Concern, illustrative of supportingvoluntary programs. This case study aims toassess the potential for using suites of fiscalinstruments to achieve more efficiently an appro-priate level of environmental management ofchemicals through a global approach.

In addition to these summaries, full reports fromeach working group and the economic analysis con-ducted by independent experts, are available.

4.1 Lessons from the case studiesAt the start of this first phase of the NRTEE’s EFRprogram, participants set out to gain insight into thekey challenges and opportunities related to EFR, andto explore the potential for EFR in Canada. The les-

The Case Studies4Included here is a description of the broad, cross-cutting les-

sons learned through work at the Expert Advisory Group and work-

ing group case study levels, along with a summary of each case

study. The three case studies, selected to illustrate specific appli-

cation challenges, are listed below:


The Case Studies

sons learned can be grouped into the following broadconclusions:

4.4.1 There is a role for EFR in Canada,and EFR is uniquely appropriate for thechallenge of implementing sustainabledevelopment There is a role for EFR in Canada. This role willvary according to the specific issue being addressedand the other tools also being applied to the issue.EFR is much broader than economic instrumentsand tax reform, and this very scope is what makes itnew. The range of instruments available providesmany options and opportunities to assemble suites ofinstruments that are mutually supportive, provideenvironmental benefit, and expand the opportunityfor voluntary action or to complement regulatoryapproaches.

EFR can be a uniquely appropriate tool foraddressing sustainable development. This policy fieldaffects many agents in society in complex ways. EFRis an integrative tool, more easily adaptable to thecomplexity of sustainable development than areother policy tools. It also supports continuousimprovement, which underlies the path toward sus-tainable development.

4.1.2 EFR can offer many benefits andopens up new opportunitiesEFR offers certain benefits over command-and-control approaches. It is more amenable to a contin-uous improvement approach. The market signalsbeing sent can be readily adapted—if monitoringidentifies a need to alter the signal to reach thedesired objective or if the objective itself changeswith time. EFR also allows for more flexibility andmore equity, because parties can determine theirresponse. It need not be designed around the “lowestcommon denominator” as regulations must.

EFR also opens up new opportunities, because itcan address niches unfilled by other policy tools. Forinstance, EFR can facilitate reaching targets thathave been established under command and control.EFR can also expand the effectiveness of voluntary

programs, by offering incentives for participation orby sending new “information” to decision-makers inthe form of a price signal. Industry participants inthe Expert Advisory Group felt that the emphasis onthe use of suites of measures in EFR—whether com-plementary suites of regulatory, voluntary, and fiscalmeasures, or suites of fiscal measures alone—wouldenable businesses to better meet environmentalresponsibilities alongside fiscal ones.

4.1.3 EFR is a new approach; using it suc-cessfully will require leadership, open-ness, new actors, and new knowledgeWhile people have been discussing and applying eco-nomic instruments for many years, EFR is a newapproach. Using it successfully will require opennessto change, the involvement of new actors with newknowledge, and the building of new knowledgeamong existing actors. Implementation of EFR willrequire the involvement of, and championing by,senior individuals—from government and the privateand non-government sectors—who have sufficientauthority to take risks, break down barriers, andmandate the adoption of innovative approaches.

EFR challenges us to think “outside the box”—beyond the current regulatory backdrop, compliancemindset, and fiscal instruments that are familiar andcomfortable. Any change is likely to be challengedand resisted by some parties. The introduction ofEFR must, therefore, be undertaken as a consciouschange-management process. To gain acceptance forEFR, time must be taken to build trust and expandthe base of understanding. Forums such as theNRTEE, where people can discuss EFR within a“safe space” and identify shared interests and oppor-tunities, will help to achieve this.

Understanding of the potential for EFR is newto Canada. There is a lack of detailed knowledgeamong decision makers, stakeholders, and the publicabout the range of EFR instruments and their opera-tion. There are concerns about feasibility,government revenue implications, additional costsfor producers/manufacturers, administrative burdens,and other associated factors. This means there will bea need for change among all actors at the policy


The Case Studies

development table—a new mix of issue experts, tra-ditional policy experts, and economists andeconomic instruments experts, who can join togetherto explore creative new solutions and approaches.

There will be difficulties in simply communicat-ing between new groups of experts and in defining acommon vocabulary. One example is the difficultyencountered when discussing the use of any new fis-cal instruments in an era when “no new taxes” hasbecome a widespread mantra. Communication andawareness raising are essential, and the timing is ripefor expanded understanding and implementation ofEFR incentives.

4.1.4 EFR will require broad integrationbetween disciplines and across govern-ment departments, industry, and diversestakeholdersAn expanded use of EFR will be transformative. It willpresent a challenge for everyone, because it requires theintegration of science, economics, and policy design.This demands new forms of horizontal cooperationacross government departments, within industry divi-sions, and among diverse stakeholders. It will alsodemand the evolution of new skill sets and job profilesamong all stakeholders.

Government will face a special challenge. For tax-based EFR instruments, policy responsibility and toolcontrol are split between line departments and theDepartment of Finance. Consequently, there is a needfor cross-departmental cooperation, and confidenceamong all actors that this co-operation will be given.This is in contrast to traditional tools, such as regula-tion or voluntary programs, where authority typicallyresides within the line department. Line departmentsusually have authority over instruments, such as permitfees, fines, and expenditure programs, with fewer chal-lenges to their use. Using them in an integrated EFRframework may require coordination between two orthree levels of government and among departmentswithin one government. Successful use of EFR dependson unprecedented levels of collaboration. This, in turn,highlights the vital importance of institutional supportand capacity that inform and empower action on sus-tainable development across all departments.

4.1.5 Clear policy objectives should comefirst, but EFR options are best consideredat an early stage in the definition of man-agement optionsEFR should not be the driver for establishing envi-ronmental objectives and targets—it must not be a“solution in search of a problem.” The scientificneed to act should be established, and clear policyobjectives should be set prior to the considerationof any specific management option or suite ofinstruments, EFR included. Of course, many issuesface competing policy objectives both between fed-eral departments and levels of government. TheAgricultural Landscapes and Cleaner Transportationcase studies both encountered such competingobjectives.

EFR should be among the mix of policy toolsconsidered from the very start of discussions onmanagement options. The focus should be how tomake the overall policy package most cost-efficientand environmentally effective. EFR may have a roleto play, either on its own or in combination withother policy instruments, and the final policy pack-age may or may not include EFR instruments.

The more the policy framework has beendefined, the narrower the potential role for EFR. Forinstance, the Substances of Concern issue, for whichthe policy framework is in the early stages of defini-tion by government and other stakeholders, offersthe greatest potential for examining the use of EFRstrategies without encumbrance from existing policyframeworks or positions. At the other extreme, theCleaner Transportation issue has a clearly definedpolicy framework, with the regulatory regime alreadydelineated. Fewer opportunities for EFR were identi-fied in this case study, suggesting that EFR shouldnot be done as an add-on to established policies.

The case studies identified two issues related tothe role defined for EFR. The first was the need toidentify whether EFR intends to target leaders, orlaggards, or both. A leadership strategy would focusEFR on early actors, with the goal of pulling the per-formance curve forward. By design, the incentives inthis strategy would not be available to everyone. Alaggard strategy would provide extra incentive for


The Case Studies

low performers to move up the performance curve,but would not be of much benefit to early actors. Astrategy could also be designed to target both leadersand laggards. The choice among these approacheswill depend on the role identified for EFR withinthe larger policy package.

The second issue was the trade-off betweenfocusing an EFR instrument on a targeted, specifical-ly defined environmental issue and maintaining thebreadth in application that is one of EFR’s potentialstrengths. For example, the Cleaner TransportationWorking Group looked specifically at how to reduceemissions from heavy-duty diesel truck and bustransportation (the sector and issue chosen paralleledthe forthcoming regulatory framework). But some ofthe tools—for example, differentiated fuel taxes—could be applied more widely across the petroleumproducts sector to all fuels. Other tools appeared towork best between sectors (e.g., vehicle scrappagefunded by private industry seeking emissions reduc-tion credits). Many issues are extremely interrelated,and it is often difficult to judge where to set bound-aries. It may be easier to deal with one element orone sector on its own, but this narrower approachleads to one-off fiscal instruments rather than anintegrated EFR approach. Casting more broadlyenables key interactions to be considered, but intro-duces complexity and may be unmanageable.

4.1.6 EFR options should be evaluatedusing the same process as for other policytoolsThe development of well-designed, effective EFRinstruments depends on the same conditions as thedevelopment of any other policy instrument: broadsocietal support for action, clarity of objective, suffi-cient time and adequate analytical resources, and openconsultations with stakeholders. The process foranalysing and developing EFR should be similar tothat used for regulation or for voluntary programs.The hurdle should be no higher and no lower.

In working on policy measures that will beimplemented through the federal budget, there is astrong temptation to work toward a submission forthe immediate budget. This was evident in the

efforts of the Expert Advisory Group, which startedwith a mandate to work on a longer timeline, buteventually focused on shorter timelines in order toidentify possible submissions for Budget 2002. Thispull to work within the budget cycle leads to 12-month timelines at the most. Such a lead timecontrasts sharply with the lead times used in the devel-opment of regulatory options (a 36-month periodunder the Canadian Environmental Protection Act[CEPA]) and most voluntary programs. In order todevelop EFR instruments with similar levels of consid-eration, consultation, and effectiveness to those usedin the development of regulatory or voluntary man-agement tools—and in order to go through a similarprocess of purpose definition, measures analysis, andrefinement of design—lead times longer than a tradi-tional budget cycle may be needed.

Because EFR is new and unfamiliar, it may face ahigher hurdle than do other policy instruments. Theremay be a requirement for more analysis and a need todemonstrate stakeholder consensus, effectiveness, andcost-effectiveness at a more stringent level than thatdemanded of other policy tools. But we already fre-quently accept the need to take regulatory action in theabsence of perfect information or complete consensus.In these circumstances, EFR can be implemented on acontinuous improvement model, through the use ofpilot projects with clear mechanisms for periodic moni-toring, evaluation, and amendment. This “learning bydoing” approach can serve to overcome the barriersfaced by a new instrument.

4.1.7 Canada’s unique challenges need tobe incorporated into the design of EFRfrom the outsetCanadian circumstances may pose barriers to EFR orcreate unique opportunities. The case studies uncov-ered factors that may make the use of EFR in Canadaa challenge for some issues and in some sectors.

One challenge, revealed in the AgriculturalLandscapes case study, is the need for coordinationand agreement between levels of government, partic-ularly for issues of shared jurisdiction.Responsibilities for issue management may be frag-mented from revenue power, creating a barrier to the


The Case Studies

use of EFR. Federal–provincial differences of opinionabout program design and funding requirementsmay make agreement on EFR packages difficult.

Canada’s diversity also makes it challenging todesign “one size fits all” EFR approaches. Canada iscomposed of many regions and provinces/territorieswith substantial differences in ecosystems, policycontexts, regulatory and fiscal philosophies andapproaches, and political cultures. These differencespose a unique challenge to any national EFR initia-tive. It may be necessary to offer EFR programswithin a general framework with a specific objectiveand to negotiate delivery on a tailored, region-by-region basis.

Another challenge, revealed in the CleanerTransportation case study, is the size and structure ofsome Canadian markets. For some commodities,Canada is a small portion of a continental marketand, hence, becomes a policy taker, not a policymaker. Where there are only a few actors in theCanadian market and/or a few regional sources ofenvironmental impacts, instruments that have beenused widely in the United States, such as trading, aremore difficult to use.

Finally, the federal government is very concernedabout the precedent set by any new fiscal measure,be it ecological or otherwise. This may become a bar-rier to innovation on the EFR front.

4.1.8 Funding and revenue aspects mustbe considered and communicatedThe EFR agenda in other jurisdictions has often beenimplemented along a revenue-neutral model. Thisapproach has been necessary, since reaction to a taxinstrument is often hostile, particularly in the NorthAmerican climate of “no new taxes” and even a wish fortax reductions. This was reflected in the EFR program,which met with difficulties in achieving agreement onnew charges and taxes. Expenditure-based programs aremore appealing to the public and to stakeholders, butthey are harder to sell to governments.

What does this entail for revenue-neutrality inCanadian EFR initiatives? Is it feasible? Revenue-neu-trality can be implemented through several approaches,either alone or in combination. It can be done:

� through tax reforms, where any new tax revenueis recycled in such a way that the individualparty can be no worse off after taking the desiredenvironmental action;

� through subsidy reforms, where existing subsidyenvelopes are redirected in order to fund moreecologically focused initiatives; and

� through expenditure reforms, where new expen-ditures undertaken in one area lead to a reducedneed for expenditures in another.

The EFR Expert Advisory Group felt that rev-enue-neutrality exclusively along a tax-shifting modelrisks being a red herring. There is a role for newtaxes within EFR where these are warranted forbehavioural purposes; any new tax revenue should berecycled, and the new tax should be clearly linked tothe desired environmental objective. However, EFRis broader than tax reform, and expenditure-basedprograms do have a role, particularly where they canhave no impacts on, or reduce, government revenuerequirements. What is essential is that the fundingand revenue aspects of an EFR initiative be consid-ered and communicated to the public and tostakeholders.

4.1.9 Good data are needed to provide thebasis for analysis, modelling, monitoring,evaluation, assessment, and continuousimprovementThe European failure to conduct many ex post stud-ies of EFR programs should not be repeated inCanada. Strategic investment in science, economics,and program assessment is required to support EFRinitiatives.

At present, there is little baseline data for mostenvironmental issues, insufficient economic informa-tion, and little monitoring of results and outcomes.The ability to do economic analysis was constrainedin both case studies due to a lack of necessary dataand a lack of access to the information that doesexist. However, lack of data must not be blindly usedas an excuse for inaction. Research is needed intowhat kind of and how much information is necessaryfor good analysis. It may be useful to study what data


The Case Studies

Incentives may be required, since private ownerscannot be expected to pay the full cost of creatingand maintaining social goods such as ecological serv-ices. However, farming practices must also be carriedout in a sustainable fashion, requiring private invest-ments and changes in operating procedures that areworked into the costs of production. Designing theright package of incentives is the challenge. Actualexperience is quite varied, as demonstrated by casesin the United States, Europe, New Zealand, and invarious farming regions of Canada. And the realitiesare complex. Political and administrative philoso-phies can dictate choices of instruments. There aremany types of agricultural landscapes, many differentaspirations on the part of farmers, and a wide varietyof ecological needs. And, importantly, many optionsare available.

are used in the U.S. It is important that both the sci-ence and economic aspects be integrated intoanalysis and assessment of an EFR initiative.

Monitoring, evaluation, and assessment will beessential components in introducing EFR on a con-tinuous-improvement basis, whereby programs areimplemented with the clear intent from the outset ofevaluating their effectiveness. Monitoring must focuson actual environmental outcomes, as well as eco-nomic aspects. These investigations could then beused to adjust or fine-tune programs, so that they aremore effective and efficient in achieving their intend-ed targets (e.g., water quality). Unanticipatedeconomic and ecological impacts, positive and other-wise, would also be captured. This may be difficultto do where EFR is only one tool within a suite ofmeasures, including command and control and/orvoluntary. In these cases, the analysis should be onthe full suite of instruments.

4.1.10 Components critical to good EFRdesign Good EFR design depends on a number of criticalcomponents. The case study research suggests thatthese include (but are not limited to) a thoroughknowledge of 1) the state of technology and the gen-uine opportunities available to mitigate or preventecological impacts, 2) the market setting, and 3) thepolicy context within which EFR instruments wouldbe introduced. Other components include attentionto transition strategies, delivery capacity, partnershipbuilding, and the use of communication and publicawareness programs. Attention must be paid to sim-plicity of design and administration. Programs mayneed to be tailored to regional policy contexts andphilosophies, which vary greatly across the country.

The Agricultural Landscapes case studies suggest-ed that success depends on engaging affectedstakeholders and addressing their practical concerns.Constituencies can be built by demonstrating howpeople can be better off under EFR approaches thanunder traditional command-and-control methods.

4.2 Agricultural landscapes summary

4.2.1 Issue definitionWithin agricultural landscapes, EFR might beapplied to provide better incentives for ecologicallysound land management and pollution control. Thedesired long-term outcome is to enhance the ecologi-cal integrity of agricultural landscapes—wherehealthy water, healthy soil, and biodiversity aremaintained. This outcome requires the cooperationof private landowners.

More Reading on the AgriculturalLandscapes Case Study

These NRTEE background papers are available:

� Ecological Fiscal Reform and AgriculturalLandscapes

� Environmental Farm Plans and EcologicalFiscal Reform

� Property Tax Credits for Conservation

� Conservation Cover Incentive Program CaseStudies

Background Papers


The Case Studies

4.2.2 Working group objectiveThe objective of the Agricultural LandscapesWorking Group’s activities was to:

Determine the feasibility of redirecting governmental(federal, provincial, and municipal) taxation and expen-diture programs affecting farmers across Canada to meetconservation needs and pollution reduction from farm-lands.

4.2.3 Working group methodologyThe case study followed three lines of inquiry:

� examination of existing efforts within NorthAmerica, Europe, and other areas such as NewZealand, with some points summarized in thepresent report;

� identification of analytical needs, including eco-nomic analysis and modelling reviews and otherstudies required to make the case for EFR interms that are relevant to decision makers at thefederal and other levels of government; and

� examination of three approaches in detail, draw-ing on Canadian initiatives and data. These threecases are summarized here, with the full studiesavailable as annexes.

These three approaches for applying elements ofEFR for conservation within agricultural regionsshow that a suite of instruments will most likely bedrawn upon to achieve the desired outcomes. Thefirst two examples, development of environmentalfarm plans (EFP) and municipal property tax credits(MPTC) for conservation lands, draw upon existinginitiatives that were started recently as regional pilotprograms but have potential for national application.The third is an economic analysis that could be usedfor the design of a variety of conservation cover pro-grams (CCP). This example, for the first time inCanada, rigorously investigates the net social benefitsof expanding the extent of conservation cover basedon watershed-level information.

The EFP case is an example of an expenditure pro-gram designed for awareness raising and education atthe level of individual farmers and groups of producers.It aims for behavioural change with respect to ecological

health and protection at the farm level. The MPTCexample is a tax credit for on-farm conservation activi-ties. The CCP example could serve as the analyticalbasis for designing support/subsidies for conservationand environmental inputs and conservation cover pro-grams. Conservation cover programs can includeprotection of riparian areas, wetland protection/restora-tion, and the transfer of cultivated lands with highecological value to vegetative cover that is not used foragriculture (also called “set-asides”), as well as moregeneric initiatives for reducing annual cropping.

4.2.4 Research summary4.2.4.1 Environmental farm plans (EFP) Starting in the early 1990s, farm organizations andgovernments began devising new methods of helpingfarmers become more aware of their impact on theenvironment. The most comprehensively developedEFP programs are in Ontario and Quebec. Eachmodel is quite distinctive, revolving around environ-mental farm plan workbooks and peer reviewprocesses in Ontario, and agri-environmental adviso-ry clubs in Quebec. Currently, there are sevenversions of EFPs in Canada, along with several newones in the making. EFPs build on voluntary actionand link education and action of value to health,safety, and environmental concerns both on and offthe farm. Environmental farm planning helps identi-fy the environmental risks, liabilities, strengths, andassets affecting a farmer’s operations, as well as on-and off-farm environmental conditions. From thisanalysis, farmers can flag areas of concern and identi-fy opportunities for improvement. Environmentalfarm planning also makes farmers more aware aboutregulations that may apply to their farm.

The Quebec and Ontario programs use incen-tives quite differently. The private benefits ofprogram content of both are delivered through par-ticipation, and a cash transfer or fee. In Ontario,there is a cash transfer of $1,500 to participants. Thetransfer is paid out to farmers, after initiation oftheir farm plans, to help cover costs of implementa-tion. Quebec’s farm “clubs” charge members a $500annual fee in exchange for information and individ-


The Case Studies

ual assistance (25 hours) that has a market value farin excess of $500. The difference in cash incentives(a $1,500 payment versus a $500 fee) may reflect thedifference in the valuation of the private benefitsprovided by the program. Ontario producers face noregulatory requirement to produce an EFP or com-ply with specific environmental managementrequirements. As a result, the private benefits of theprogram accrue from the value of the informationprovided in reducing costs of production and incommunity relations. In Quebec, as noted, farmersreceive technical assistance. This may be of particularbenefit to cattle growers, who face regulations formanure management.

A number of factors influence program uptake.The most important include:

� that it is a producer-driven, voluntary initiative;

� confidentiality to ensure farmers feel that theywill not be put at a competitive disadvantagewith other farmers or exposed to governmentfines or other regulatory action;

� incentives sufficient to secure farmer interest;

� recognition of due diligence that might aid infuture loan acquisitions;

� recognition that profitability may be enhancedthrough actual on-farm environmental improve-ments;

� recognition of potential for improved marketaccess/branding through adoption of environ-mentally safe practices; and

� educational benefits through access to informationregarding new and innovative farm technologiesand practices.

An EFP is a way to address environmental aware-ness raising and capacity building within the farmcommunity. But it has potential to go beyond theseimportant needs. Unfortunately, a key gap in theseprograms is the lack of systematic monitoring ofenvironmental impacts. For example, is water qualityactually improved? A University of Guelph farmersurvey found risks to the health of the farm family,risks to soil health, and risks to water health as the

main environmental issues addressed by farmers (inthat order). The $1,500 incentive produced a verysubstantial private investment.

Environmental farm plans can be unique to eachtype of farm operation and the distinct geography offarms across Canada. There is considerable latitudein design. They can be tied to other incentiveapproaches such as awards and peer interaction. Andthey may backstop other incentive-based or regulato-ry programs. Support seems to be strongest forvoluntary programs that are driven by farmer organi-zations and provincial considerations. While thegreatest interest has been in central and easternCanada, there is potential for a national programthat takes into account these points. In June 2001,Canada’s agriculture ministers agreed to work towarda comprehensive plan for accelerated environmentalaction, fully covering all Canadian farms. This deci-sion provides a significant opportunity for EFPsnationally.

4.2.4.2 Municipal property tax credit (MPTC) foron-farm conservation areasA municipal property tax credit can encourage vari-ous conservation land uses. A variety of examplesexist, especially in the U.S. For this case study, apilot project in Manitoba was examined. The incen-tive effects of property taxes depend on whether millrates vary by land use characteristics, on whetherproperty owners know how the rates vary, and onany other specific features of the property tax system.If the assessed value assumes the land is being usedfor production and the tax rate is uniform across alltypes of land use, there is a clear incentive to use theland for agricultural products (i.e., crops and live-stock production). Any unused land—that set asidefor conservation assuming a strict conservation inter-pretation of no agricultural use—will generate norevenue for the farmer but will incur the propertytax. A profit-maximizing/cost-minimizing farmer willthen set aside land for conservation only if develop-ment for agriculture generates net private losses.

If a rural municipality (RM) offers a tax credit,resulting in a reduction in property taxes for eachacre/hectare of land set aside for conservation, the


The Case Studies

incentive is now much stronger to set aside land oflow market value. The tax credit is a negative tax andas such provides a reward to the landowner for con-servation. The incentive will be strongest for landsthat have the lowest opportunity cost—those withthe lowest value in production.

A three-year pilot study covering two ruralmunicipalities in Manitoba provided a $1 per acremunicipal tax credit for landowners who adopt spec-ified environmentally sustainable land use practices.Funding for the project comes from DucksUnlimited Canada, the Prairie Farm RehabilitationAdministration, and the Northwest SoilManagement Association. The two municipalitiesprovide support in-kind. Participation is voluntary.Land is eligible for the tax credit if it is used for con-servation initiatives that include tame forage, nativegrassland, wetlands, riparian buffer zones (trees orgrass within 100 metres of a waterway), and annualcropland with a minimum of 40% straw cover.

The size of the tax credit was based on two fac-tors: $1 per acre represented the average property taxpaid in Manitoba for wetlands and bush, and it wasfelt that any smaller amount would not provide astrong enough incentive for farmers to sign up forthe program. The tax credit is clearly not sufficientto compensate owners for the total ecological servicesprovided by their land, but it provides a smallamount of compensation for allowing society to ben-efit from conservation. The sponsors of the programalso emphasize its educational value—illustrating tofarmers the need for conservation practices on theirlands and that society does value them.

Landowners must apply for the tax credit eachspring, specifying the lands that they consider eligi-ble. RM staff help landowners prepare theirapplications. Satellite imaging confirms land uses inthe appropriate conservation category for each appli-cant. Ground inspection for a small percentage ofeach RM’s area helps to ensure compliance. Tax cred-its to those in compliance are paid at the time taxescome due in the fall. In 2000, the program protectedsome 31% of the land base, including 6,538 acres ofwetlands, 15,116 acres of land under conservationtillage, and 39,334 acres of tame forage, native

prairie, and riparian zones. The average tax creditpayout was $261, with individual farmers receivingbetween $1 and $1,628. An evaluation of the pro-gram via mail survey indicated that 86% ofparticipants felt the program was worthwhile and88% agreed that the property tax system was effec-tive compensation. The total cost of the program in1999 was $75,787, of which approximately $61,000represented the tax credits. The balance was foradministrative costs, including satellite analysis,advertising and communications, labour, travel, pro-cessing, and program evaluation.

To assess the “value” of the program, the focusshould be on the present value of the social benefitsand costs—that is, those incurred by society as aresult of the program. The social benefits of using anMPTC are believed to include improvements in envi-ronmental quality such as:

� preservation of soil quality/reduction in erosion;

� improvements in water quality for drinking andfor recreation;

� reduced flooding;

� increase in and maintenance of wetlands;

� protection of air quality (carbon sequestration);

� preservation of riparian ecosystems, with associ-ated benefits;

� biodiversity conservation;

� wildlife habitat enhancement for aquatic and ter-restrial species; and

� energy conservation.

Social benefits also include reduced public expen-ditures on environmental infrastructure such as:

� less silt removal needed from waterways;

� lower water treatment costs;

� reduced flood control expenditures;

� lower erosion, culvert, and crossing repairs; and

� less drain clogging.

These benefits have not been quantified, but it isnot unrealistic to assume that the savings in publicexpenditures could amount to at least $1 per acre.


The Case Studies

The program, therefore, pays for itself in cost savingsto municipalities. Over time, improvements in envi-ronmental quality may also lead to higher landproductivity due to less soil erosion, for example.This could raise land values, and, in turn, generatemore property tax revenue, which could be allocatedfor public goods and services. The MPTC couldeven lead to a more diversified local economythrough more recreational opportunities on con-served lands, more tourism, different crop mixes, andso on. The well-being of residents may rise.

Social costs (to the municipalities) could include:

� forgone revenues;

� incremental administrative costs (above those fornormal property tax collection); and

� costs of assessing the program’s effectiveness inmeeting environmental targets.

Another issue is the jurisdictional level at whichthe social benefits and costs of the program are meas-ured—municipal, provincial, or national? Normally,one would focus on the jurisdiction doing the deci-sion making, in this case, the municipality. But thisis problematic for the MPTC, because the environ-mental benefits may extend far beyond municipalboundaries. Thus, some costs of the program maylogically be borne by governments at the two higherjurisdictional levels.

Lessons from the Manitoba initiative show that avariety of factors contribute to a program’s success.For example, a program benefits from:

� support from a broad spectrum of affected parties,including local government;

� being voluntary;

� tax credits that can reduce a landowner’s propertytaxes to less than zero;

� annual review, permitting reversible land use andreturn of cash to the farmer in each year of par-ticipation;

� a relatively small minimum acreage required forparticipation;

� administrative simplicity, including fewer and lesscomplex eligibility requirements;

� public awareness and a favourable political climate,with no sense that the program is an unwarrant-ed subsidy, but simply a payment that recognizesthe social benefits from conservation occurringon private lands;

� a design that is not likely to initiate any interna-tional trade actions;

� a structure adapted to local conditions and moreflexible than a “one size fits all” program; and

� being a stand-alone program that does not requirelandowners to participate in other programs, butcan be readily integrated with other conservationinitiatives.

Based on a review of several MPTCs in NorthAmerica, the challenges include:

� sustainable program funding, since the tax creditaffects municipal revenues;

� low participation rates/lack of awareness of the pro-gram, arising from factors such as size of acreagecovered, insufficient advertising/communication,eligibility requirements that are too costly andcomplex for the landowner to comply with, andprogram design not well targeted at clear envi-ronmental objectives;

� difficulty in measuring the environmental benefits;

� determining whether the tax credit is even neces-sary (i.e., whether landowners would have takenaction without the incentive);

� setting the tax credit at an appropriate rate—toolow and it will fail to get participation, too highand the landowner gets unnecessary rents; and

� integration with other programs to avoid doubledipping.

On this last point, if more than one programoperates in a region simultaneously, the challenge is toensure that the landowner is not collecting two pay-ments for the same activities, unless this is the goal(perhaps resulting from different funding sources).

In summary, the MPTC is an incentive-basedpolicy that merits continuation—and extensionbeyond the pilot programs—as one of a potential


The Case Studies

suite of EFRs designed to improve environmentalquality. A MPTC creates a market-like value for con-servation activities valued by society but not tradedin traditional markets. The landowner looks at the“price” (tax credit) per unit of land if specified con-servation activities are undertaken and compares thisprice with the land’s marginal returns in any otheruse. While typically a modest incentive, it conveysthe idea to landowners of valuing non-market envi-ronmental benefits. Programs with clear eligibilityrequirements, low compliance costs, and flexibility inland allocated (through small minimum acreage lev-els) are more likely to draw participants and deliverenvironmental benefits. Key challenges are fundingthe tax credit and measuring net benefits of the pro-grams to ensure that they are successful in improvingenvironmental quality.

4.2.4.3 Conservation cover program (CCP)In the past year, Ducks Unlimited Canada has pro-posed a national conservation cover program.Targeted lands would have a number of conservationvalues, such as those exhibited in riparian zones orwetland areas. A CCP provides for the removal ofthese lands from agricultural use either permanentlyor for a period of years. Economic incentives toencourage this land conversion provide a policyinstrument that facilitates a public investment intoprivate land use decisions, ensuring that the agricul-tural landscape provides a range of goods andservices valued by society.

These external environmental benefits mayinvolve a number of factors associated with improvedwater quality, including

� decreased treatment costs;

� lower dredging costs to remove sediment fromwater conveyance and storage infrastructure; and

� increased recreational opportunities (includingfishing and swimming).

Other external benefits may include:

� greater wildlife use;

� biodiversity;

� stewardship for species at risk;

� aesthetic values;

� increased carbon sequestration and decreased netgreenhouse gas emissions; and

� mitigation of flooding.

External costs of the conservation cover programmay include the extra costs associated with deliveringland conversion incentives and compensationrequired for incremental crop depredation bywildlife.

It is assumed that if the landowner decides toconvert a parcel of land to conservation cover, theprivate benefits (including the economic incentiveprovided by the institution responsible for deliveringthe program) are greater than the private costs associ-ated with the conversion. Therefore, quantifyingonly the external benefits and costs associated withthe land conversion will facilitate calculation of thenet external benefits (or costs) of the program. Thethree river basins/watersheds selected for the studyare the Upper Assiniboine River Basin ofSaskatchewan and Manitoba; the Grand RiverWatershed located near Guelph, Ontario; and theMill River Watershed in western P.E.I. These unitswere selected because they represent agriculturallandscapes within different regions, and because rea-sonable data exist for each one.

While some data problems remain, there is aconsistent pattern demonstrating a substantial netexternal benefit from a conservation cover program.In the case of the Grand River, the best estimate wasnet external benefits of $195/ha/year (with a range of$79 to $342). The Upper Assiniboine River demon-strated net external benefits in the range of $29 to$106, with a best estimate of $65/ha/year.Information on the Mill River falls in between theother two (range $69 to $236, with a best estimateof $142/ha/year). In the case of the UpperAssiniboine River, it has been possible to determineoptimal program impacts using a supply responsebased on known lease rates. Table 1 shows both thecalculated values for the external benefits and the cal-culated optimal program impacts. Information onthe other two watersheds is provided in the mainreport.


The Case Studies

The external benefits in this and the Grand Rivercase show a similar pattern. The largest external bene-fits arise from a combination of carbon sequestrationand greenhouse gas emissions reduction. But the nextlargest benefit is saved government payments, becauseland is taken out of agricultural production. In theGrand River case, the figure is even higher ($46.00compared with $12.00). Also in the Grand River,there are additional benefits such as phosphorusreduction ($23.50), recreational fishing ($26.00) andhigh non-consumptive wildlife use value. These fac-tors all contribute to the higher net external benefit

for a CCP in this river, which flows through areas ofrelatively high human population density.

The major contribution of this study is the sub-stantial level and quality of information compiled.An economic analysis like this has not been donebefore. Moreover, the analysis is not based on “backof the envelope” guesses. The figures are rigorouslydeveloped from the best available economic and eco-logical information. They make a compelling casethat a conservation cover program would provide avery good return to society in a variety of watershedsettings representing different environmental and

Table 1

Estimates of external benefits of a conservation cover program in the UpperAssiniboine River Basin in eastern Saskatchewan and western Manitoba

High Best estimate Low

External benefits (costs) $/ha/yrSaved government payments 19.25 12.83 6.42Saved crop insurance premiums 5.27 3.51 1.76 Water quality—sediment 9.34 4.62 1.34Water-based recreation 1.37 0.91 0.46 Wind erosion 4.01 2.67 1.34Change in GHG emissions 14.07 9.38 4.69Carbon sequestration 29.40 19.60 9.80 Wildlife—consumptive use 19.11 10.71 5.36 Wildlife—non-consumptive use 6.45 4.16 2.08

Gross benefits 108.25 68.39 33.23

Program administration costs (1.04) (2.08) (3.12)Depredation compensation (0.32) (0.64) (0.96)

Net external benefits 106.89 65.67 29.15

Supply responseHa per $35/ha payment 25,000 12,000 6,000

Optimal program impactsArea in program (ha) 76,350 22,515 4,996Gross external benefits $8,264,888 $1,539,830 $166,002Program costs $8,240,465 $1,525,420 $161,205Administration costs $79,404 $46,832 $15,588Payments to producers $8,161,052 $1,478,588 $145,617Cost to producers $4,080,526 $739,294 $72,808Gain to producers $4,080,526 $739,294 $72,808

Overall gain $4,080,526 $739,294 $72,808


The Case Studies

regional conditions across Canada. The figures com-piled for each case represent an “average” watershedsituation—a baseline condition. With more fine-tun-ing, it would be possible to examine the benefits ofparticular kinds of conservation cover programs, forexample, for riparian zones. This fine-tuning wouldrequire more information on the specific impacts ofvarious types of riverside and watershed cover on fac-tors such as sediment trapping by riparianvegetation, nutrient removal, and enhanced fish pro-duction. In each instance, such information wouldhave to be translated into economic impacts.

The three watersheds were chosen to representdifferent agricultural regions and, thus, different cli-mates, farming operations, and farming practices.The information could be refined over time, and theanalysis to date has revealed a variety of data gaps. Inits own right, this “shortcoming” can add value,because it highlights research needs. There would behigh returns to our knowledge by compiling addi-tional and better information around these threerivers, rather than repeating the exercise at a superfi-cial level in other basins.

4.2.4.4 Challenges and opportunities—The wayforwardThere is little doubt that EFR initiatives can be suc-cessfully implemented and help society to safeguardand provide ecological services in agricultural land-scapes. Success will come by engaging a substantialportion of the farmers within a region. To do this, itwill be necessary to adjust incentives, consider theimpact of issues such as cross-compliance, and build alevel of understanding about what exactly is to beachieved. The compelling strengths of the examplesstudied are that they are voluntary and have the poten-tial to save society and governments money. Theydemonstrate that each level of government can play arole in EFR for agricultural landscapes, yet not everylevel of government needs to be involved in each case.

The range of instruments available providesmany options and opportunities to assemble suites ofinstruments that are mutually supportive, expand theopportunity for voluntary stewardship action, andlend substance to the notion of the eventual “green

branding” of Canadian agriculture. There must be aprogression from building awareness and knowledge,to implementation, to adequate assessment of out-comes (especially improved environmentalconditions in agricultural watersheds and land-scapes). Environmental farm plans can act as aprecursor for action—providing the baseline knowl-edge and “kick-start” for small initiatives at theindividual farm level. The municipal property taxcredit shows that even a modest incentive can helpencourage and reinforce conservation behaviour. TheEFP and MPTC are complementary, since the for-mer would help landowners identify which land isbest to set aside, and municipalities might wish toextend a MPTC to those with an EFP. Economicanalysis of net external benefits can be used not onlyfor CCP design, but also for a range of other purpos-es, including the monitoring of which lands are mostvaluable for conservation easements or for determin-ing the most appropriate lands to qualify forincentives such as the MPTC.

The study identified key factors influencing pro-gram uptake. One very important matter is toremember that one size will not fit all. Provincialinputs and philosophies, flexibility of designs basedon inputs of specific agricultural sectors and regionalgroups, simplicity in operation and administrativerules (even if this means less capacity for targeting atthe initial stage), and modest administrative costs areall hallmarks of a successful program. There is a needto examine how best to tailor EFR to specificregions, especially when several initiatives are layeredon current (command and control) regulatoryapproaches such as zoning. A “one window”approach may be helpful for farm producers facedwith a variety of programs and regulatory concerns.It is not clear what level of uptake constitutes suc-cess. The notion of continuous improvement will behelped as the participant base expands.

Strategic investment in science and programassessment is required to support the various EFRinitiatives. It is difficult to sort out the value of indi-vidual programs when several are contributing tochanges, so science must be linked in many instancesto economic analysis. This is most clearly demon-


The Case Studies

strated in the watershed net external benefit analysis.There are years of work ahead, especially for targetedactivities such as riparian zone conservation initiatives.But this should not prevent the development andimplementation of incentive programs, if, from the out-set, a commitment is made to evaluate them throughrigorous scientific monitoring. It will be an inexpensiveway for society to obtain information about the envi-ronmental conditions and ecological dynamics ofagricultural landscapes.

The goals of EFR in agricultural landscapes need tobe focused on the positive net benefits/externalities forsociety in terms of enhancing and maintaining ecologi-cal integrity. Private benefits may also accrue, but it isnot necessary for society to pay for them. In the designof programs, revenue-neutrality may be a goal, keepingin mind that programs may be effectively revenue-neu-tral if the conservation activities result in lower costs togovernment for mitigation of environmental degrada-tion. The important point is to be able to demonstrateas clearly as possible that the results truly reflect a cost-effective, positive level of social benefit. The expressionof benefits must be easily understood by a range of peo-ple and organizations, including producers, stakeholdersand decision makers. Failure to communicate benefitseffectively will threaten otherwise well-planned initia-tives. Often this will mean partnerships that cangenerate and use knowledge in an adaptive fashion—learning by doing, as outlined above.

EFR for agricultural landscapes will be implement-ed only to the extent that demand exists to driveprograms forward, sometimes in the face of barriers thatfavour the status quo. At least some of the demand willbe generated through global accords such as climatechange, where there is interest in carbon sequestration,and through voluntary initiatives such as greener pro-duction certification at national or international levels.Unless net societal benefits are clearly articulated andcan be verified by monitoring of outcomes, the fullvalue of EFR approaches (which provide farmers withflexible options) is not likely to be achieved.

The following recommendations are proposed forfollow-up action to this report:

� The NRTEE should continue to explore EFR,focusing on increasing understanding of the poten-tial applications to the agricultural sector, and

providing specific recommendations to federal andprovincial governments that would assist in thedesign and implementation of such initiatives.

� Federal departments, led by Agriculture andAgri-Food Canada, should develop a plan for“green branding” of Canadian agriculture nation-ally and internationally that fully incorporatesEFR, including voluntary initiatives that can beimplemented through farmer stewardship.

� The June 2001 ministerial commitment to accel-erate the pace of improving environmentalpractices on-farm should be met by expandingprograms based on, among other things, thethree EFR examples provided here.

� High-priority conservation cover and environ-mental initiatives should be developed, based onthe watershed ecological–economic analysis pre-sented here, for example, by designing a programfor improving water quality associated with farmrunoff.

� There should be an increased federal and provin-cial commitment to the gathering and sharing ofinformation on the effectiveness of EFR initia-tives and indicators of success, and to thedevelopment of mechanisms for using this infor-mation in the design of complementary EFRinitiatives employing suites of instruments.

� Farmer organizations should become moreinvolved in the design, promotion, and imple-mentation of EFR initiatives, with a view tobecoming active partners in the development ofregionally and sectorally focused approaches.

4.3 Cleaner transportation summary

4.3.1 ObjectiveThe Cleaner Transportation Working Group(CTWG)’s mandate was to:

design fiscal instruments to facilitate the adoptionof cleaner fuels and engines to promote the transition tocleaner transportation in the diesel-based freight andmass transit sectors.


The Case Studies

14 Environment Canada, “Taking Action on Vehicles, Engines and Fuelsto Clean the Air and Protect Human Health,”www.ec.gc.ca/air/taking-action_e.shtmlhttp://www.ec.gc.ca/air/taking-action_e.shtml

15 For the full research report, see Dewees Consulting Limited,“Fiscal Instruments for Diesel Emission Reduction: A PreliminaryAnalysis,” Report to the Cleaner Transportation Working Group,NRTEE, Toronto, October 1, 2001.

During the project, the mandate was broadenedslightly to also consider off-road trucks and diesel.The CTWG specifically investigated EFR measuresto complement the large trucks and buses and dieselcomponents of the February 2001 CanadianEnvironmental Protection Act’s Notice of Intent forVehicles, Engines and Fuels.14

4.3.2 MethodologyThe CTWG identified technical opportunities toreduce emissions from diesel-based trucking andtransit, barriers to the take-up of these opportunities,and “straw dog” fiscal measures for further research.Four objectives, and fiscal options for addressingthem, were identified for further design and research.The research involved:

� a literature survey on the experience with theinstrument in other developed economies;

� gathering data bearing on the effectiveness andcost of the instrument in Canada;

� examination of alternative designs for the instru-ment;

� consideration of implementation problems thatmight arise in Canada; and

� consideration of the distributional effects of theinstrument among those directly affected, includingtrucking firms, shippers, customers, engine manu-facturers, and the petroleum industry.

Limited time, budget, and readily available dataprecluded quantitative analysis. Instead, the analysiswas descriptive, focusing on design issues, implemen-tation problems, lessons to be learned from similarmeasures applied elsewhere, and a more subjectiveassessment of relative costs and effects.

The CTWG reviewed the consultant’s report andreached conclusions about the measures, as well asabout the lessons the case study offered for the gen-eral applicability of EFR in Canada. These are notedin the final part of this section.

4.3.3 Issue contextThe United States has proposed regulations for on-road heavy-duty diesel (HDD) vehicles that willsubstantially reduce emissions of particulate matter(PM) in the 2007 model year and will phase in sub-stantial reductions of nitrogen oxides (NOX) andnon-methane hydrocarbons (NMHC) between 2007and 2009. During that time, half of the engines soldmust meet the 2007 standard for NOX and NMHC(full Phase II), while the other half may meet previ-ous standards plus the 2007 standard for PM (PhaseII PM). The engines that will meet these “Phase II”standards will require fuel with less than 15 ppm sul-phur (i.e., ultra-low sulphur diesel fuel—ULSD), soa limit of 15 ppm will be imposed on on-road dieselfuel sulphur content in 2006. Canada hasannounced its intention to match these standards,although it is not clear that Canada will apply the50% market share rule in 2007–2009.

4.3.4 Research and discussion summary15

The set of instruments selected for investigation fellinto two groups: those affecting engines and thoseaffecting fuels. Emissions from vehicles and enginesdepend upon vehicle/engine technology and theproperties of the fuels. In some cases, vehicle emis-sions control systems cannot operate properlywithout the right fuels. Fuels and engine emissionswere therefore approached as an integrated system,

More Reading, Cleaner TransportationCase Study

These NRTEE background papers are available:

� Cleaner Transportation and EcologicalFiscal Reform: Working Group Report

� Fiscal Instruments for Diesel EmissionReduction: A Preliminary Analysis

Background Papers


The Case Studies

consistent with the approach being taken underCEPA. For engines, the intent was to accelerate take-up of new generation clean engines and retrofittechnologies, and to encourage scrappage of morepolluting engines. The measures analysed were:

� accelerated capital cost allowance (ACCA) forcleaner engines and retrofit technologies,fee/rebate for new vehicles, or tax credit forcleaner engines and retrofit technologies; and

� fiscal instruments to accelerate the scrappage ofolder vehicles.

For fuels, the intent was to accelerate penetrationof ULSD. The two approaches studied were:

� a tax on the sulphur content of diesel fuels; and

� ACCA for refinery and infrastructure upgradesto supply cleaner diesel.

These fiscal instruments operate by changing theafter-tax prices of engines, retrofit devices, and fuelsfor the buyer, thereby creating incentives to changebehaviour. The effectiveness of the instrumentdepends on the responsiveness of buyers (truckingcompanies) and sellers (vehicle manufacturers andfuel refiners) to price changes, which depends on thestructure of the market. Since the Canadian market

for trucks and truck engines is only 10% of theNorth American market, the markets are integratedand the industry is reasonably competitive. Pricesshould, therefore, be similar in both countries andshould reflect production costs in the absence of reg-ulations. However, the emissions control regulationsconsidered here will substantially alter some prices.

4.3.4.1 Encouraging the purchase of Phase II PMprior to 2007To induce production and sales of Phase II PMengines prior to 2007, Canada would require a fiscalincentive at least as large as the extra cost of produc-ing these engines. Current estimates of these costsrange from about $1,100 for a light HD truck toover $1,700 for an urban bus. If the ULSD fuelrequired by these Phase II PM engines is more costlythan regular diesel fuel, the fiscal incentive to inducetruckers to buy these engines would increase tobetween $1,350 and $3,660. If there is a seriousintention to encourage the early sale of these enginesin Canada, a substantial fiscal incentive will berequired, and it will be very helpful if another fiscalincentive is used to eliminate any price penalty forusing ULSD fuel.

Table 2

Summary Evaluation of Instruments

Goal Preferred Instruments - RankedAccelerate Phase II PM before 2007 1. Fee/rebate—effective, revenue neutral

2. Tax credit—costly, omits non-profit sector3. ACCA—costly, omits non-profit sector, imprecise

Increase full Phase II during 2007-2009 1. Fee/rebate—effective, revenue neutral2. Tax credit—very costly, omits non-profit sector3. ACCA—very costly, omits non-profit sector, imprecise

Accelerate cleaner off-road 1. Fee/rebate—effective, revenue neutral2. Tax credit—effective but costly3. ACCA—costly, imprecise

Encourage retrofit 1. Subsidy or rebate—effective, costly

Encourage scrapping 1. Subsidy—effective, costly2. Registration fee—problematic

Early ULSD fuel 1. Tax differential


The Case Studies

Whether or not Phase II PM engine productioncould be advanced prior to existing regulatory time-lines was not known. Sufficient time would beneeded to test for roadworthiness in addition toactual production. This is a key consideration.Unless there is the ability to supply market-readyengines, no fiscal instrument will work.

Use of the full Phase II vehicles and enginesrequires access to ultra-low sulphur diesel. Someoperations, such as municipal transit or off-roadoperations, function in a limited geographic area andcould use cleaner vehicles and engines as long asULSD were available regionally or locally. Otheroperations, such as long-haul trucking, wouldrequire access to ULSD across large territories andsometimes into the U.S. Since the supply of ULSDwill not be required under regulation until 2006, thismay present a significant barrier.

4.3.4.2 Increasing sales of full Phase II above the50% requirement, 2007–2009 periodWhen manufacturers are required to meet the fullPhase II standards in half of the engines they sell,they will have to price them no higher than Phase IIPM engines or they will not sell. This means thatmanufacturers will make high profits on Phase IIPM engines and low profits or losses on full Phase IIengines during 2007–2009. If Canada does notadopt a market share requirement to match the U.S.requirement, we should expect to see few full PhaseII engines offered for sale here and more higher-emission Phase II PM engines. It is, therefore,assumed that Canada will adopt a 50% market sharerequirement to match the U.S. situation.

Increasing sales of full Phase II engines during2007–2009 will be more difficult because the manu-facturers will already be constrained by the 50%market share requirement. If manufacturers cannotsupply half of the market with full Phase II enginesin 2007, no fiscal instrument will increase their salesin Canada. If there is excess full Phase II capacity, afiscal incentive applied to the price of a vehicle willstill not induce manufacturers to increase their pro-duction of full Phase II engines unless it fullycompensates for the increased costs associated with

this engine compared with a Phase II PM engine.The incentive would have to be worth between$2,000 for a light HD truck and $3,200 for a heavyHD truck based on recent cost estimates. Thisassumes that ULSD fuel is the only on-road fuelavailable or that ULSD is priced no higher thanhigher sulphur diesel fuel if the latter is also avail-able. However, with ample manufacturer capacity, afiscal instrument that more than offsets these costscould greatly increase the proportion of full Phase IIengines sold in the Canadian market.

The cost to the federal treasury of a fiscal instru-ment for the pre-2007 period will be proportional tothe number of vehicles sold with Phase II PM engines,so it will be modest unless the program is very success-ful. In the 2007–2009 period, the instrument willapply to all full Phase II engines sold, and half of allengines must be of this type. Thus, the fiscal cost ofthe policy for 2007–2009 may be as high as $100 mil-lion per year even if the program fails to increasemarket share beyond 50%, unless the instrument isrevenue-neutral.

In looking at the specific fiscal instruments toachieve the above goals, there does not appear to be afederal excise tax that could be reduced to have thiseffect. The GST is not appropriate, since truckingfirms reclaim their GST through an input tax creditand the non-profit MUSH (municipal, university,schools, hospitals) sector pays only a fraction of theGST. A new tax on high-emission vehicles would beadministratively feasible but perhaps politically diffi-cult. A fee/rebate would require a new tax, but at leastthe taxes on high-emission vehicles would be balancedby rebates on low-emission vehicles, so it could bedesigned to be revenue-neutral. The fee/rebate couldbe tailored precisely to give the desired incentive forany number of vehicle classes. An income tax creditcould work well for new vehicle purchases and couldbe tailored to match the incentive needed for differentvehicle classes; however, it would not affect theMUSH sector. An accelerated capital cost allowancewould be feasible, but it would be hard to tailor to theincentive needed for different vehicle classes andwould not affect the MUSH sector. The rigidity of theACCA makes it appear inferior to the tax credit. Both


The Case Studies

the income tax credit and the ACCA involve pure taxexpenditures; they are not revenue-neutral. Subsidiesare also feasible. They could affect both the for-profitand MUSH sectors and could be tailored as preciselyas a tax credit. Emission-reduction credits can be tai-lored precisely and are feasible in jurisdictions wherethere is an active market, which does not includemost of Canada. The fee/rebate, therefore, seems thedominant instrument, with subsidies ranking next,the tax credit third, and ACCA and emission-reduc-tion credits last.

Discussion within the working group centred onthe design challenge for a fiscal instrument toencourage the sale of full Phase II engines above the50% threshold mandated by regulation. The chal-lenge was how to avoid a “windfall” situation, wherebuyers of the first, mandated, 50% would qualify foran incentive intended to motivate buyers beyondthat threshold. One option discussed was for a taxcredit whose size would be estimated retroactively,based on the increment of sales above 50% achievedin the overall market. This approach was criticizedbecause it could not provide consumers with certain-ty about the size of the incentive they would obtainand would, therefore, lose much of its motivatingvalue. Another option was to move the incentive upthe supply chain, from the purchaser to the point ofmanufacture or point of sale. A manufacturer or sell-er’s incentive could be designed to apply inproportion to the amount by which manufacturer’ssales exceeded the 50% mandated threshold.Unfortunately, the CTWG did not have enoughtime to explore this idea in more detail.

The majority of operators in the trucking sectorare small companies and family businesses, whichoften run at a very small margin of profitability. Itwould be critical, therefore, to ensure that any EFRinstrument be both effective and equitable in itsapplication to small businesses.

4.3.4.3 Encouraging retrofits and acceleratingscrappageToday’s heavy-duty diesel engines emit far less pollu-tion than engines built a decade ago, and the enginesof 2007 will be far cleaner still. The emissions of old,

dirty engines, therefore, represent an increasing pro-portion of total vehicle emissions. This problem canbe attacked through the retrofit of pollution controldevices on old engines and by encouraging scrapping.

Some of the fiscal instruments that can influencethe purchase of new vehicles are less effective forretrofit. There is no federal excise tax to reduce, andeven if there were it could not make retrofit economi-cal. A fee/rebate seems inapplicable to retrofit costs. Anew excise tax cannot induce the purchase of retrofitdevices. Income tax credits could be effective for for-profit owners, but not for the MUSH sector. Anannual registration fee or tax could be used to helpinduce retrofit, but the amount of the tax would haveto be large and a federal registration tax would beproblematic in Canada. Subsidies and rebates havebeen effective elsewhere in encouraging retrofit andcould work here, but they are not revenue-neutral. Ofthese alternatives, a subsidy program seems best, as itwould appeal to all types of vehicle owners and itcould be designed to provide just the right amount ofincentive for different vehicle classes and ages.

Scrapping the oldest or dirtiest vehicles can be acost-effective means of reducing emissions. The prin-cipal instrument used to encourage scrapping of oldvehicles is the “buy back” program. Automobile buy-back programs have retired tens of thousands ofvehicles in the U.S., while smaller numbers wereretired in British Columbia under its Scrap-It pro-gram. Firms that wanted to create emissionsreduction credits for their stationary sources devel-oped many of the U.S. programs, but some havebeen publicly funded. A buy-back program for truckscould be effective, but it might be useful to conductfurther study and perhaps run a pilot program beforelaunching such an initiative. Age-based registrationfees could also be used to encourage scrapping of theoldest vehicles, but there is little experience with thisinstrument and it would be problematic at the federallevel in Canada.

The working group concluded that the instru-ments for encouraging retrofits and acceleratingscrappage seem to hold the most potential for reduc-ing emissions from HDD trucks and engines. Fromthe purchaser’s perspective, the equal increase in the


The Case Studies

price of all new vehicles forecast for the 2007–2009period (as the economic analysis concludes, above)may lead the purchaser to decide not to purchase anew truck at all. Accordingly, an EFR instrument toencourage scrappage is an essential component of anoverall cleaner HDD package. Vehicles qualifying forpilot scrappage programs have usually been thosefailing to meet provincial emissions tests. A federalprogram might want to allow more vehicles to quali-fy, in order to accelerate the shift toward adoption ofthe cleaner HDD trucks and engines. Any cost-bene-fit analyses of the retrofit and accelerated scrappageprograms should include evaluation of the healthbenefits and greenhouse gas emissions impacts inaddition to clean-air benefits.

While the analysis of the working group wasconducted from a national perspective, looking atclean air issues from a regional health perspectivemight lead to greater emphasis on specific EFRinstruments. Where there exist regional and local airpollution “hot spots,” more costly subsidy or expen-diture programs, such as scrappage and retrofits,could be considered for targeted implementation.These could be part of a regional package that wouldalso include transit system improvements. There arealso regional variations in the provincial policiesbeing used to address clean air issues. For example,emissions reduction credits (ERCs) are in place insome parts of the country, notably in southernOntario. ERCs enable private firms to participate infinancing retrofit and scrappage programs. Anotherexample is the pilot scrappage programs in B.C. Anational retrofit or scrappage program would need toinclude some sort of equivalency clause to allowexisting provincial or municipal programs to substi-tute for the national program.

4.3.4.4 Accelerating demand and supply of ULSDIt was assumed that Canada would adopt regulationsrequiring that all on-road diesel fuel sold beginningin September 2006 contain no more than 15 ppmsulphur, with no exception for small refiners. In thiscase, the role of a fiscal instrument could be toencourage the introduction of this ULSD fuel priorto 2006 or to encourage the reduction of sulphur in

fuels other than on-road diesel fuel. A number ofcountries have found differential fuel taxes thatincrease the cost of high-sulphur fuel relative to low-sulphur fuel to be effective. The pace at which theindustry responded in Europe and Asia, however, isnot very relevant to Canada, because the differentrefining and shipping situation there allowed themto cross-ship available low-sulphur fuel from onecountry to another more readily than can be done inNorth America. It was determined that an increasein the tax on on-road diesel fuel that has more than15 ppm sulphur might accelerate the date of intro-duction of that fuel. This increase could be coupledwith a temporary reduction in the tax on ULSDfuel, to maintain revenue-neutrality. With respect tooff-road diesel fuel, its sulphur content is likely tofall when ULSD becomes mandatory, because somecompanies may find it uneconomical to supply twodifferent fuels to all locations. Further reductionscould be achieved by applying a tax to off-road dieselfuel that had more than a specified sulphur content,perhaps 50 or 100 or even 500 ppm. There is someadvantage to maintaining a higher sulphur level inoff-road fuel than in on-road fuel, as significant costsmay be saved with little loss in benefits. Further U.S.regulations of off-road diesel fuel are expected to beproposed toward the end of 2001, which may influ-ence plans here in Canada.

The application of an accelerated capital costallowance as a way to accelerate or broaden thereduction of sulphur in fuels would be unlikely tohave much effect and may be complex to administer.The discussion on accelerating demand for ULSDcentred on the logistical issues associated withadvancing its supply. As noted above, certainty ofULSD supply is a determinant for the successfulintroduction of cleaner engines.

The early supply of ULSD may run up againsttwo barriers. First, the majority of fuel in Canada isdistributed through common-carrier pipelines. Thesepipelines cannot distribute ULSD through the sys-tem at the same time as higher sulphur dieselwithout contamination. However, in some parts ofthe country, notably Atlantic Canada, fuel is also dis-tributed through proprietary pipelines or by truck.


The Case Studies

This means that ULSD can be distributed inadvance of the 2006 timeline, but in limited quanti-ties and only in limited geographic areas. Second, the2006 deadline for ULSD supply will be implement-ed in Canada at the same time as in the UnitedStates, requiring the upgrading of 194 refineries onthe continent—18 in Canada, and 176 in the U.S.These upgrades draw on the same labour supply asthe expansions of the oil sands and offshore sites. Acontinental labour shortage is already being felt inthis sector. The 2006 deadline will put Canadianrefineries in competition with U.S. refineries, the oilsands, and offshore oil developments. Members ofthe CTWG had different views as to whetherCanadian refineries would be able to advance theirconstruction dates to provide an early supply ofULSD in response to a market signal. Some felt itwas not possible, while others thought that aninstrument to encourage the staggering of refineryupgrading would be beneficial.

Those against a tax differentiation felt that sucha measure would be in conflict with the one-step reg-ulatory approach, which the industry has supportedin Canada. This system requires all refiners to meetthe same standard on the same date, unlike the U.S.system. Concerns about distribution and aboutcapacity to implement the refinery upgrades are rea-sons why the Canadian refinery industry hassupported this one-step approach. Another argumentwas that it would not be possible to precisely tailor atax to the exact sulphur levels found in diesel. Thetax could differentiate fuels with concentrations ofsulphur above 15 ppm from those with concentra-tions below this level, but there exists a widevariation in the sulphur content of diesel fuels abovethe 15 ppm level. It varies by refinery, by season, andby batch. It would be administratively complex for atax to reflect these actual levels.

Members of the CTWG who supported a taxdifferentiation focused on reasons for providingincentives for an advance ULSD supply. These are asfollows: earlier health benefits from reductions in thesulphate contribution to PM; providing market sig-nals that reward firms making an early transition toULSD production; early availability makes possible

more aggressive retrofits of existing HDD trucks andbuses, and enables lower-emission vehicles to beoperated sooner; and providing incentives for earlierconstruction of ULSD production facilities encour-ages staggered construction prior to the 2006deadline.

Unless it is well designed, it is possible that a taxdifferential could simply lead fuel suppliers to passon price differentials to consumers, negating anyafter-tax price differential at the pump. This scenariois plausible since the drivers of Phase II vehicles are“captive” to their need for ULSD and must buy itwhatever the price. The intensely competitive fuelmarket will determine the price at retail, based onmany factors of which taxes are only one. Thus, itcannot be predicted with certainty how a tax differ-ential would affect final price at the pump.

4.3.5 Areas of agreement and disagreementThe working group agreed that the following EFRinstruments should undergo further analysis:

� either a tax credit or a fee/rebate instrument, toencourage sales of the full Phase II engines abovemandated thresholds in the period prior to 2009.For fiscal and policy reasons, the instrumentwould need to be designed to avoid a “windfall”for the Phase II engines required by law in the2007–2009 period;

� a subsidy program for vehicle retrofits; and

� a buy-back program to accelerate the scrappageof more polluting HDD trucks and buses.

All of these instruments should be designed to beeffective and equitable for the large number of smalloperators in the trucking industry.

The CTWG was not able to reach agreement ona recommendation regarding the use of a differenti-ated tax to accelerate demand and supply of ULSDprior to 2006.

4.3.6 Key observationsThree key context factors were found to have

intense influence on the “real life” applicability of theinstruments that were explored:


The Case Studies

� For some issues and in some sectors, it may bemore difficult to use EFR in Canada than in theU.S. The continental nature of the truck andengine manufacturing industry, combined withthe comparatively modest size of the Canadianmarket, leaves little room for autonomousCanadian policy. We are effectively policy takersin this field. But having fewer actors in theCanadian market and/or fewer regional sourcesof environmental impacts makes some of theeconomic instruments being used in the U.S.clean air agenda (such as averaging, banking, andtrading) less relevant here.

� In the context of a highly competitive marketand a regulatory requirement for 50% of enginessold to meet the full Phase II standard duringthe 2007–2009 period, the market will move toeliminate any price differential between tradi-tional engines and the full Phase II engine, andmaintain their production at the 50% balance.In order to be effective, an economic instrumentwould have to send a signal larger than theincreased cost of manufacturing full Phase IIengines. In order to be equitable, the economicinstrument would likely have to apply to all pur-chases of full Phase II engines, not only thoseabove the 50% quota, since these would not bereadily identifiable. This begins to look like avery costly program.

� Even if this issue is addressed, technological rigidi-ties—such as the state of technologies, or the leadtimes required to road test and produce the newengine lines or to bring ULSD on-line—may pre-clude a rapid market response. In the CTWG’scase study, the vehicle technology depends on par-allel action on the fuels side. There is no point inspeeding up production of cleaner vehicles if thecleaner fuels are unavailable. The U.S. EPA esti-mates that ULSD must have an 80% marketavailability in order to ensure that misfuelling ofnew engines does not occur.

These “real life” factors have a strong influenceon the effectiveness of EFR tools.

While the sector focus of the CTWG’s mandateencouraged it to delve in some depth into market

and technology characteristics, it excluded considera-tion of some broader measures. For example, theCTWG looked specifically at how to reduce emissionsfrom HDD truck and bus transportation. But sometools, such as differentiated fuel taxes, could beapplied more widely within the petroleum productssector to all fuels. Other tools, such as vehicle scrap-page funded by private industry seekingemission-reduction credits, may work best betweensectors. The case study also revealed the importance ofthinking through where in the supply chain it is mosteffective to target the EFR instrument. In the case of amarket with few, large actors, engine manufacturersand fuel refiners are in a position to determine whatproduct is supplied. Demand from individual pur-chasers is much less able to effect changes. Thechallenge for EFR analysis and design is to maintainbreadth in the application of possible instruments.

Market characteristics matter, and attention mustbe given to the availability of close substitutes, espe-cially where fiscal measures are contemplated thatwould encourage or discourage purchase of a givenclass of goods. Due attention must be given to sup-ply-and-demand conditions. An example is the caseof differential taxes on low- versus high-sulphurfuels. If relatively few people are operating vehiclesthat require the low-sulphur sort, the representativeuser will be indifferent between types. This meansthat, whatever the tax regime, consumers will notpermit price differences between the two to persist.And presuming different cost structures, this meansthat two fuels will not coexist on the market.

The economic analysis revealed that the back-drop of the existing and planned regulations has asignificant influence on the effectiveness of EFRmeasures. They should, therefore, be designed totake into account known features of pending regula-tions and be consistent with them. Some of the EFRoptions proved difficult to introduce in advance ofthe regulations coming into effect in 2006 and 2007.This suggests a long lead time is needed if EFR isbeing used to accelerate incrementality—to movebeyond compliance. This means that EFR must beconsidered at the inception of the policy maker’s dis-cussions of management options.


The Case Studies

The experience in exploring the potential use ofEFR as a complement to regulation might have beendifferent had the regulatory framework not alreadybeen largely determined and, in fact, set by U.S. ini-tiatives. If Canada were able to exert more policyindependence, and if the management options werestill in development, more opportunities for EFR asa substitute for certain aspects of the regulationsmight have been found. For instance, could EFRsubstitute for the mandated 50% sales of full PhaseII engines in the 2007–2009 period? Could it do soin a way that would avoid the apparent rigidity ofthis 50% target and create an incentive for continu-ous improvement beyond 50%?

Another useful role for EFR measures would beto ensure that they continue to deliver on the incre-mentality front even if the regulatory backdrop fadesaway. “Error-tolerant design” would allow for thefact that regulatory targets might be postponed orcancelled (indeed, successful EFR could trigger justsuch a thing by obviating the regulatory target).

4.4 Substances of concern summaryNote: The direction of this case study is still in thedevelopment stage.

Unlike the two EFR case studies documentedabove—both of which were quite advanced in theareas of issue definition, potential actions (such asregulatory procedures), and available instruments—the issue of substances of concern relating to CEPAlegislation is at a much earlier stage of development.

This has made it more difficult to define objec-tives for this case study, but it also allows more roomto explore a comprehensive suite of fiscal instru-ments. In fact, incorporating EFR tools at this earlystage of discussion on implementing CEPA may pro-vide the ideal circumstances in which to fully explorethe practical applications of the EFR approach.

4.4.1 Issue statement From an environmental standpoint, certain sub-stances may raise concerns because of the inadequacyof environmental management at various stages oftheir life cycle. Concerns may arise, for example,

about emissions from the manufacturing processes(either for the substances themselves or the unintend-ed by-products), about the use of the substances insubsequent industrial processes or their eventual con-sumption, or about their disposal. While CEPAregulatory approaches may achieve reductions in envi-ronmental impacts through definition of managementplans, these processes are expected to be time-consum-ing and resource-intensive, because of the need toreach decisions on a chemical-by-chemical basis.

4.4.2 Objective The Substances of Concern Working Group identi-fied its objective as being to:

assess the potential for using suites of fiscal instru-ments more efficiently to achieve an appropriate level ofenvironmental management of chemicals through a glob-al approach.

4.4.3 Proposed approach The substances of concern issue represents both anopportunity and a problem in the context of an EFRcase study approach. The opportunity resides in thefact that, being in the early stages of definition bygovernment and other stakeholders, the issue offersthe greatest potential for examining the use of EFRstrategies without encumbrance from existing policyframeworks or positions. On the other hand, itappears that not all the stakeholders in this issue areequally seized with the magnitude and scope of theproblem to be addressed.

The approach chosen for this case study allowsfor the broadest review of the potential EFR instru-ments that could be applied. The proposal is to use amatrix framework to develop a comprehensive pic-ture of the challenges and opportunities for usingEFR instruments to address management problemsassociated with substances of concern. This matrix isdesigned with the stages of life-cycle management onone axis and the economic instruments that could beapplied to address management problems on theother. While the emphasis in this study will beplaced on fiscal instruments such as emissions trad-ing, incentive programs, or tax treatment, it will also


The Case Studies

contemplate the role of other instruments such asvoluntary programs and covenants. Overall, thefocus will be on identifying novel and innovativeapproaches to solving the management problemsidentified in the matrix.

In order to gain early experience about the prac-tical application of economic instruments, a secondand concurrent study focus will be on the final dis-posal component in the life cycle. Specifically, thisstudy will consider the question of how economicinstruments could help to manage the disposal ofhazardous waste. This research would be conductedin a similar fashion to the matrix approach describedabove, but with the emphasis on identifying in moredetail how potential fiscal and other instrumentsapply to this specific issue. The narrower focus willallow testing of the broader matrix conclusions. Itwill also allow the group to reach some conclusionsabout the practical applications of EFR in this areaat an early stage. Both the broad matrix approach,described above, and this more specific focus on haz-ardous waste are intended to complement each otherand to mutually reinforce the content and substanceof the case study.

4.4.4 ConsiderationsThe working group identified the following consid-erations in contemplating the use of EFR for themanagement of substances of concern:

� Economic instruments should be considered ontheir own or as complementary to other instru-ments, including voluntary measures. Whereinstruments are designed to provide support forand enhance the voluntary efforts of industry,particular attention will be needed to ensure thatearly voluntary actions are not adversely affectedby incentives granted for subsequent actions bycompetitors.

� Particular attention will have to be given to thefact that not all substances have equal environ-mental impacts. Consideration will be requiredof the need to create differentials in incentivesand constraints to reflect this range of impacts.In exploring this, there will be a need to assess

the extent to which any required degree of riskassessment would defeat the concept of having astreamlined process.

� The range of instruments considered shouldinclude both incentives to accelerate responsesand constraints to prevent negative impacts. All-incentive approaches may also be evaluated.Included should be an analysis of the potentialfor emissions trading.

� Some industrial projects are undertaken strictlywith an environmental objective, while others arebroader in nature and incorporate both environ-mental and economic objectives (such as theconstruction of a totally new plant, which incor-porates environmental improvements in its basicdesign). There will be a need to analyse howinstruments could be applied to such broad projects.

� Instruments should focus on global approachesrather than individual chemicals. However, tofacilitate analysis, smaller groupings of chemicals,and even single chemicals such as mercury, couldbe selected for analysis providing that results canbe extrapolated to a global approach.

� Sub-groups could be formed for each element tobe analysed in the manner set up for theAgricultural Landscapes Group. This wouldenable the appropriate network of interestedstakeholders to be structured for each elementwith support from policy and economics experts.The combined group could then draw generalconclusions.


A three- to five-year strategy is required to developawareness of, comfort with, and increased understand-ing of the EFR approach among government,industry, environmental non-governmental organiza-tions, technical experts, and broader civil society.

A strong leadership signal from senior policy mak-ers will be necessary to assure the community ofstakeholders and government policy advisors that EFRis of emerging interest to the government, and thatenergies invested in exploring innovative, measured,thoughtful approaches to EFR will be well receivedand likely to be implemented.

In Budget 2000, the federal government sent astrong leadership signal when it funded theNRTEE’s Environment and SustainableDevelopment Indicators initiative. It did this with astatement of interest and commitment from respon-sible ministers, a three-year timeline for research anddevelopment of proposals, a budget to engage inoriginal research, and a commitment of direct partic-ipation in the project of several governmentdepartments. A similar mandate, framework, andbudget are needed to move the EFR agenda forward.

There is a need to expand the cadre of people whohave experience with EFR approaches and analysis atthe applied level. The NRTEE’s EFR Program hasbegun this important process, building awareness,knowledge, and trust among key actors and decisionmakers. More such capacity building will be needed.

Future Directions for EcologicalFiscal Reform

55.1 General directions for EFR in Canada

There is a role for EFR in Canada, and EFR can offer many ben-

efits and opportunities. To realize its full potential a multi-

pronged approach is needed.


Future Directions for EFR

5.2 Recommendations for future EFRwork by the NRTEEThe NRTEE should continue its important work onexploring the potential for using EFR in Canada. Itcan do so by advancing the recommendations of thecase studies completed so far (where appropriate),facilitating further case studies, and providing oppor-tunities for those working on EFR to share theirwork and have it peer-reviewed. Specifically:

The NRTEE should present case study conclu-sions on Agricultural Landscapes to the seniorpolicy level in Agriculture and Agri-Food Canada,Environment Canada, and Finance Canada.

The purpose of this would be to solicit supportin government to pursue the case in a coordinatedmanner. Other elements could be added to the workalready done, but the work is sufficiently advancedto proceed to the specific design of instruments anddefining of costs. This work could be pursued by thedepartments concerned. The NRTEE could ask thatFinance Canada declare, in the Budget Statement, itsinterest in considering a final proposal on this work.

The NRTEE should explore the potential to fur-ther experiment in areas connected to the CleanerTransportation focus.

The case study dealing with sulphur in diesel wasseriously constrained by the fact that EnvironmentCanada had already decided to adopt a regulatoryapproach to the problem by 2006–2009. As a result,there would not have been sufficient time left to putin place other fiscal measures to alter timing ordepth of actions. However, two other issues surfacedthat attracted interest because the analysis andoptions were at a much earlier stage of developmentand offered greater scope for exploration. Theseissues are:

� reduction or elimination of sulphur and othercontaminants in heavy fuel oils. Being at thebottom of the barrel, this refinery cut absorbsmuch of the sulphur and will eventually be tar-geted, because it is used in heavy industrialfacilities and also contributes to deterioration ofclean air.

� implementation of new engine technologies,including hybrid-electric and fuel cells. Muchresearch is going on in this field, but the prob-lem of market penetration is ongoing.

It is recommended that this case study be pur-sued in partnership with federal departmentsinvolved in these two issues.

The NRTEE should develop the case study onSubstances of Concern under CEPA.

This case offers an opportunity to truly integrateEFR thinking when an issue is initially consideredand it allows comparison with a more regulatoryapproach. It will enable a fundamental examinationof a broader array of potential instruments. The caseoffers specific potential for actions in an issue area, aswell as providing further experiences to test the con-cept of EFR and build on the specific lessons learnedfrom the Agricultural Landscapes and CleanerTransportation cases.

The NRTEE should raise awareness of the use ofEFR concepts in two major NRTEE programs.

The Urban Sustainability and Conservation ofNatural Heritage programs are planning to explorethe potential for an EFR approach to a coordinatedsolution of issues they will identify.

The NRTEE should explore collaborationbetween the EFR Program and the Environmentand Sustainable Development Indicators initiative(ESDI).

The EFR program and the ESDI initiative areboth cross-cutting, integrative programs addressinginnovative approaches to sustainable development.There is a unique opportunity for the NRTEE toexplore the opportunity for shared research and com-bined initiatives between these programs.

The NRTEE should engage broader stakeholdersupport and commitment and build capacity forEFR through an annual forum on the subject.

There is a need to build a critical mass of ana-lysts and policy makers in the area of EFR. A keyinitiative in this regard could be to organize and con-vene a series of NRTEE conferences on EFR. These


Future Directions for EFR

conferences would be conducted in partnership withother organizations active in EFR research andimplementation. They could be held on an annualbasis for a period of three to five years, serving as aforum where people can compare notes and experi-ments to advance knowledge of EFR. A forum ofthis kind would also establish the NRTEE in a cen-tral (and visible) position in this new subject area.


� explore EFR application specifically in theCanadian context;

� expand the base of knowledge and understand-ing regarding how an EFR strategy can be useful;

� move beyond theoretical discussions on EFR andassess the practical policy aspects of EFR applica-tion, such as instrument design, integration withother policy tools to create a suite of measures,analytical needs, and options for measuresdesign;

� draw lessons from the case studies to construct aframework for EFR, including guiding principlesthat can apply to a broader range of sustainabledevelopment issues; and

� identify specific recommendations arising fromthe case studies for governments to consider fortheir 2002 budgets. This was a welcome, but notessential, secondary objective.

To accomplish this, a 40-member ExpertAdvisory Group was created. It was composed ofhigh-level representatives from industry, non-govern-mental organizations (NGOs), and provincial andfederal governments. Their mandate was to guide theframework for selecting policies and measures, definethe key issues and objectives to be used for the casestudies, and provide intermittent feedback to the

Appendix A: The NRTEE’s EFRProgram: Goal and Process

The goal of the NRTEE’s EFR program is to gain insight into thekey challenges and opportunities related to EFR, and to explore thepotential for EFR in Canada. The program has included a review of theinternational experience with EFR, along with the use of three casestudies: on agricultural landscapes, cleaner diesel transportation, andsubstances of concern. This approach is intended to:


Appendix A

working groups struck to conduct these case studies.Members of the three working groups, who had spe-cific subject issue expertise, were also drawn fromindustry, NGOs, and federal and provincial govern-ments. Their task was to select the family of fiscalinstruments to be used to meet the objective estab-lished by the Expert Advisory Group, to analyse theissues raised by the choice of these instruments, andto consider mitigating instruments and actions toovercome the problems potentially arising from thischoice of instrument. Technical advisors assisted theExpert Advisory and working groups, and NRTEEstaff provided program direction and secretariat assis-tance.

The exploration of EFR was conducted in sixsteps:

� establishing the scope of EFR to be pursued;

� identifying potential issues for EFR;

� identifying candidate fiscal instruments;

� independent economic/policy analysis of candi-date fiscal instruments;

� expert/stakeholder recommendations on a pack-age of fiscal instruments; and

� drawing lessons and guiding principles for gener-al application.

Because a major purpose of the program is tolearn about the application of EFR in Canada, con-sensus was not a necessary objective. Where differentviews existed, these were described and recorded.


Appendix B: Membership of theExpert advisory and working groups

Expert Advisory Group

� Mark Anielski, Director, Pembina Institute forAppropriate Development

� Elizabeth Atkinson, Senior Consultant, MarbekResource Consultants Ltd.

� Ken Baker, Assistant Deputy Minister, B.C. GreenEconomy Secretariat

� Stephan Barg, Associate and Senior ProgramAdvisor, International Institute for SustainableDevelopment

� Gilles Beaudet, Fondation québecoise de l’environ-nement

� Jerry Beausoleil, Director General, Strategic PolicyBranch, Industry Canada

� Jean Bélanger, NRTEE Member and Chair,Economic Instruments Committee

� Jack Belletrutti, Vice-President, CanadianPetroleum Products Institute

� Steve Blight, Project Leader, EnvironmentalEconomics Branch, Environment Canada

� Mark Bowlby, Economist, Resources, Energy andEnvironment, Finance Canada

� Lise Brousseau, NRTEE Member

Note: These lists contain the names of people who attended one or more meetings ofa given group within the Ecological Fiscal Reform (EFR) Program as group “mem-bers” or “alternate” representatives of their organizations. As this first phase of theEFR program has been conducted over the period of June 2000–December 2001,some participants’ titles/organizations may have changed.

The conclusions reached in this report reflect the collective input of the partici-pants in the Ecological Fiscal Reform Program. They do not necessarily reflect thepersonal opinions of individuals listed here or the views of an individual’s respectiveorganization.


Appendix B

� Stephanie Cairns, Environmental Strategies andManagement Consultant, Stratos Inc.

� Jim Campbell, Director, Economic and FiscalAnalysis, Energy Sector, Natural Resources Canada

� Krista Campbell, Resources, Energy andEnvironment, Finance Canada

� Daniel Cayen, Director, EnvironmentalPartnerships, Ministry of Environment and Energy,Government of Ontario

� Nathalie Chalifour, Senior Advisor, Trade,Investment and Policy, World Wildlife Fund

� Mike Cleland, Senior Vice-President, CanadianElectricity Association

� Fiona Cook, Vice-President, Government Relationsand International Trade, Forest ProductsAssociation of Canada

� John Dillon, Vice-President, Environment andLegal Counsel, Business Council on National Issues

� Richard Dixon, Policy Secretariat, AlbertaEnvironment

� Stephen Dobson, Economic Analyst, AlbertaEnvironment

� David Goffin, Secretary Treasurer and Vice-President, Business and Economics, CanadianChemical Producers’ Association

� Dan Goldberger, Senior Financial Advisor,Canadian Electricity Association

� Peter Globensky, Director General, CanadianCouncil of Ministers of the Environment

� Martin Green, Director, Economic FrameworkPolicies, Industry Canada

� Frédéric Guay, Analyses économique, Ministère del’Environnement du Québec

� Chantal Guertin, Energy Economist, InternationalInstitute for Sustainable Development

� Brian Guthrie, Director, Innovation andKnowledge Management Practice, ConferenceBoard of Canada

� Arlin Hackman, Vice-President, Conservation,World Wildlife Fund Canada

� Arthur Hanson, Distinguished Fellow and SeniorScientist, International Institute for SustainableDevelopment; Strategic Advisor, EFR Program

� Michael Harcourt, NRTEE Member, SeniorAssociate, Sustainable Development ResearchInstitute

� Doug Horswill, Vice-President, Environment andPublic Affairs, Cominco Limited

� Allan Howatson, Principal Research Associate,Business and Environment Research Program,Conference Board of Canada

� Rick Hyndman, Senior Policy Advisor, ClimateChange, Canadian Association of PetroleumProducers

� Colin Isaacs, President, Contemporary InformationAnalysis Ltd.

� Michael Kelly, Director of SustainableDevelopment, TransAlta Corporation

� Sue Kirby, Associate Assistant Deputy Minister,Natural Resources Canada

� Luis Leigh, A/Director, Environmental EconomicsBranch, Environment Canada

� Eric Leviten, Senior Researcher, Caledon Instituteof Social Policy

� Ingrid Liepa, Senior Environmental Legal Advisor,TransAlta Corporation

� Gordon Lloyd, Vice-President, Technical Affairs,Canadian Chemical Producers’ Association

� Kerry Mattila, Vice-President, CanadianPetroleum Products Institute

� Elizabeth May, Executive Director, Sierra Club ofCanada

� Stephen McClellan, Director General, Economicand Regulatory Affairs, Environment Canada

� Margaret McCuaig-Johnston, General Director,Economic Development and Corporate Finance,Finance Canada


Appendix B

� Patricia McCunn-Miller, NRTEE Member,Managing Director, Environment and RegulatoryAffairs, PanCanadian Energy Limited

� Barry McFarlane, Economic Consultant,Government of Ontario

� David J. McGuinty, President and CEO, NRTEE

� Robert McLean, Director, Wildlife ConservationBranch, Canadian Wildlife Service, EnvironmentCanada

� Jack Mintz, President and CEO, C.D. HoweInstitute

� Bob Mitchell, Vice-President, Climate ChangeCentral

� Ronald Nielsen, Manager, Environmental Affairsand Sustainability, Alcan Inc.

� Gene Nyberg, Corporate Secretary and Director ofOperations, NRTEE

� Kenneth B. Ogilvie, NRTEE Member, ExecutiveDirector, Pollution Probe Foundation

� Nancy Olewiler, Department of Economics, SimonFraser University

� David Parker, Manager, Regulatory and PublicAffairs, Cominco Limited

� Dan Paszkowski, Vice-President, MiningAssociation of Canada

� David Pollock, Executive Director, PembinaInstitute for Appropriate Development

� Hugh Porteous, Director, Research and CorporateRelations, Alcan Inc.

� Arthur R. Price, Chairman and CEO, Axia NetMedia Corporation

� Gilles Rheaume, Vice-President, Conference Boardof Canada

� Chris Rolfe, Staff Counsel, West CoastEnvironmental Law

� Sara Rose-Carswell, Policy Advisor, NRTEE

� Angus Ross, NRTEE Member, Chairman, L&AConcepts

� Jack H. Ruitenbeek, H.J. Ruitenbeek ResourceConsulting Limited

� Kai Schlegelmilch, Consultant, NatureConservation and Nuclear Safety, Federal Ministryfor the Environment, Germany

� Stuart L. Smith, Chair, NRTEE

� Amy Taylor, Senior Researcher, Pembina Institutefor Appropriate Development

� Lee Thiessen, Manager, Planning and EvaluationSection, British Columbia Ministry ofEnvironment, Land and Parks

� Joe Thwaites, President, Taylor Munro EnergySystems Inc.

� Glen Toner, Facilitator for EFR Program,Professor, Department of Environment, CarletonUniversity

� Sherri Torjman, Vice-President, Caledon Instituteof Social Policy

� Alexandre Turgeon, Premier vice président, Vivreen Ville

� Barry Turner, Director of Government Relations,Ducks Unlimited Canada

� Thomas Van Camp, Senior Policy Analyst,Strategic Policy Branch, Industry Canada

� Peter Victor, Dean, Faculty of EnvironmentalStudies, York University

� Hassan Yussef, Executive Vice-President, CanadianLabour Congress

Agricultural Landscapes Working Group

� Gilles Beaudet, Fondation québecoise de l’environ-nement


� Kenneth Belcher, Assistant Professor, Centre forStudies in Agriculture, Law and the Environment,Department of Agricultural Economics, Universityof Saskatchewan


Appendix B

� Steve Blight, Project Leader for CEA, Environmentand Regulatory Affairs, Environment Canada

� Richard Dixon, Policy Secretariat, AlbertaEnvironment

� Bob Dobson, Conservation Farmer, Cobden,Ontario

� Jan Dyer, Associate Director General, Agricultureand Agri-Food Canada (AAFC)(AAFC Alternates: Jackie Holden, Cross SectoralPolicy DevelopmentAsim Maqbool, Research EconomistRoger Martini, Economist, Special Projects)

� Brian Gray, Director of Conservation Programs,Ducks Unlimited Canada

� Frédéric Guay, Analyses économique, Ministère del’Environnement du Québec

� Arthur Hanson, Distinguished Fellow and SeniorScientist, International Institute for SustainableDevelopment; Strategic Advisor, EFR Program

� Jennifer Higginson, Policy Analyst, CanadianFederation of Agriculture (CFA)(CFA Alternate: Nicole Howe, Policy Analyst)

� William Johnstone, NRTEE Member, Moose Jaw,Saskatchewan

� Robert McLean, Director, Wildlife ConservationBranch, Canadian Wildlife Service, EnvironmentCanada

� Nancy Olewiler, Department of Economics, SimonFraser University


� Thomas Shenstone, Chief, Agriculture andFisheries, Department of Finance(Finance Alternates: Shamika Sirimanne, SeniorEconomist, Economic Development Policy DivisionKrista Campbell, Resources, Energy andEnvironment)

Expert Presenters:

� David Armitage, Senior Researcher, OntarioFederation of Agriculture

� Geri Kamenz, Chair, Environment, CanadianFederation of Agriculture

� Alexandra Leroux, Agente de développement,Clubs-conseils en agro-environnement

� Robert Stephenson, Director, Conservation andEnvironmental Programs, United StatesDepartment of Agriculture

Cleaner Transportation Working Group


� Steve Blight, Project Leader for CEA, Economicand Regulatory Affairs, Environment Canada

� Eric Boudreault, Fuels Policy/Oil Division,Natural Resources Canada

� David Bradley, CEO, Canadian Trucking Alliance

� Stephanie Cairns, Environmental PolicyConsultant, Stratos Inc.

� Donald Dewees, Department of Economics,University of Toronto

� Richard Gilbert, Research Director, Centre forSustainable Transportation

� Michael Hanrahan, Legal Department, Irving Oil Inc.

� Sue Kirby, Associate Assistant Deputy Minister,Natural Resources Canada

� Ron Lennox, Vice-President, Regulatory Affairs,Canadian Trucking Alliance

� Bob Lyman, Senior Director, Oil Division,Natural Resources Canada

� Kerry Mattila, Vice-President, CanadianPetroleum Products Institute

� Steve McCauley, Director, Oil, Gas and EnergyBranch, Environment Canada


Appendix B

� Mark Nantais, President, Canadian VehicleManufacturers’ Association

� Kenneth Ogilvie, NRTEE Member, ExecutiveDirector, Pollution Probe Foundation

� Beatrice Olivastri, Executive Director, Friends ofthe Earth

� Finn Poschmann, Senior Policy Analyst, C.D.Howe Institute

� Peter Reilly-Roe, Assistant Director, TransportationEnergy Use Division, Natural Resources Canada


� Angus Ross, NRTEE Member, Chairman, L&AConcepts

� Helen Ryan, Senior Advisor, EcologicalInstruments, Environment Canada

� Amelia Shaw, Manager of Public Affairs,Canadian Urban Transit Association

� Mark Tushingham, Acting Head, RefineryProcesses, Oil, Gas and Energy, EnvironmentCanada

Substances of Concern Working Group

� John Arseneau, Director General, Toxics PollutionPrevention, Environmental Protection,Environment Canada


� David Bennett, National Director, EnvironmentCommittee, Canadian Labour Congress

� Ed Berry, Vice-President, Canadian Manufacturersof Chemical Specialties Association

� Mark Bowlby, Economist, Resources, Energy andEnvironment, Finance Canada

� Kevin Brady, Consultant, Five WindsInternational

� Daniel Cayen, Director, EnvironmentalPartnerships, Ministry of Environment and Energy,Government of Ontario

� Michael Cloghesy, Président, Centre patronal del’environnement du Québec

� Rick Findlay, Director, Ottawa Office, PollutionProbe Foundation

� Barry Lacombe, President, Canadian SteelProducers Association

� Justyna Laurie-Lean, Vice-President, MiningAssociation of Canada

� Gordon Lloyd, Vice-President, Technical Affairs,Canadian Chemical Producers’ Association

� Stephen McClellan, Director General, Economicand Regulatory Affairs, Environment Canada

� Patrick O’Neill, Senior Policy Advisor, ExecutiveDirector’s Office, Natural Resources Canada


� Jackie Scott, Environment and Health ProjectManager, International and Domestic MarketPolicy, Natural Resources Canada

� Mimi Singh, General Counsel and Director,Environment, Health and Safety, Canadian PlasticsIndustry Association

� Dean Stinson O’Gorman, Senior Economist,Environmental Economics Branch, EnvironmentCanada

� Val Traversy, Director General and Manager,Industrial Analysis and Strategies, Industry Canada


Appendix C: EFR ProgramMeetings

1. Expert Group, Ottawa, June 2000

� Building a common base of knowledge: interna-tional experience and EFR in theory

� Preliminary identification of key challenges andopportunities for EFR in Canada

� Approval of a program agenda and process

2. Expert Group, Vancouver, December 2000

� Development of a selection process to chooseissues suitable for EFR

� Preliminary scoping of candidate case studies

� Identification of suite of fiscal instruments to beused in EFR

3. Expert Group, Ottawa, February 2001

� Briefings on ecological, technological, and policyaspects of candidate case studies

� Application of December selection process, tochoose three case studies, and respective policyobjectives and terms of reference

4. Case Study Working Groups, March-June 2001

� Refinement of policy objective

� Identification of approaches, opportunities, andbarriers to meeting policy objective

� Identification of the package of fiscal instru-ments for economic analysis

5. Expert Group, Ottawa, June 2001

� Feedback to working groups on progress to date

� Preliminary discussion on observations and les-sons regarding application of EFR in Canada


Appendix C

6. Case Study Working Groups, June-November 2001

� Independent economic analysis of suite of fiscalinstruments

� Identification of case study observations and les-sons learned

� Approval of working group report, including rec-ommendations on suite of fiscal instruments forspecific issue being studied

7. Expert Group, Ottawa, October 2001

� Approval of Guiding Principles and Frameworkarising from the case studies

� Conclusions on observations and lessons regard-ing application of EFR in Canada

� Approval of Phase 1 Report


Anielski, M., D. Herbert, D. Pollock, and A. Taylor.Analysis of U.S. Ecological Fiscal ReformActivity. The Pembina Institute. (Ottawa:National Round Table on the Environmentand the Economy, 2000.)

Barg, S., A.K. Boame, L.K. Brown, L. DeRiviere,E.S. Troutt, and D. Wranik-Lohrenz with M.Roy. Analysis of Ecological Fiscal ReformActivity in Canada. International Institute forSustainable Development. (Ottawa: NationalRound Table on the Environment and theEconomy, June 2000.)

Barg, S., C. Guertin, E.S. Troutt, and L.K. Brown.Ecological Fiscal Reform. Context Paper.International Institute for SustainableDevelopment. (Ottawa: National RoundTable on the Environment and theEconomy, December 2000.)

Bosquet, B. “Survey: Environmental Tax Reform:Does It Work? A Survey of the EmpiricalEvidence.” Ecological Economics, vol. 34, no.1 (July 2000).

Bregha, F., et al. Ecological Fiscal Reform. A Review ofthe Issues. (Ottawa: National Round Table onthe Environment and the Economy,November, 1995.)

Canadian Council of Ministers of the Environment.A Fresh Look at Economic Instruments.(Winnipeg: CCME, 1996.)

Dower, R., and R. Repetto. “Green Fees and theNeed for Fiscal Restructuring: Opportunitiesand Challenges.” Pave Environmental LawReview, vol. 12, no. 1 (Fall 1994).

Ekins, P. ”European Environmental Taxes andCharges: Recent Experience, Issues andTrends.” Ecological Economics, vol. 3. (1999),pp. 39–62.

European Union. A Database of Environmental Taxes

Bibliography


Bibliography

and Charges. (London: The EuropeanCommission, June 2000.)

European Environmental Agency. EnvironmentalTaxes Implementation and EnvironmentalEffectiveness. (Copenhagen, Denmark: EEA,issues series No.1, 1996.)

Government of France. Livre blanc sur les modalitésde l’extension de la taxe général sur les activitéspolluantes aux consommations intermédiairedd’énergie des entreprises.http://www.finances.gouv.fr/impots_et_taxes

Gale, R., S. Barg, and A. Gillies. Green BudgetReform. An International Casebook of LeadingPractices. (London: Earthscan, 1995.)

Hammond, J., G. Wolff, C. Cobb, and M. Frame.Greening the Golden State: A Tax Reform forCalifornia’s Future. (San Francisco:Redefining Progress, 1999).

Hoerner, J.A., Harnessing the Tax Code forEnvironmental Protection. (Washington, DC:Centre for Sustainable Economy, 1998.)

Howatson, A. Ecological Fiscal Reform. (Ottawa: TheConference Board of Canada, 1996.)

Majocchi, A. ”Green Fiscal Reform andEmployment: A Survey,” EnvironmentalResource Economics, vol. 8.

Marshall, Lord C. Economic Instruments and theBusiness Use of Energy. (London: TreasuryDepartment, November 1998.)

Morris, D., A. Schiller, and J. Bailey. The MinnesotaEcological Tax Shift Impact on IndividualBusiness. (Institute for Local Self-Reliance,February 1997.)

Myers, N., and J. Kent. Perverse Subsidies: How TaxDollars Can Undercut the Environment and theEconomy. (Washington: Island Press, 2001.)

Noble, M. Environmental Tax Reform in the States:Can Major Change Happen? Minnesota CaseStudy. (Minnesotans for an Energy-EfficientEconomy, 1999.)

Organisation for Economic Co-operation andDevelopment. Economic Instruments forPollution Control and Natural ResourcesManagement in OECD Countries: A Survey.(Paris: OECD, 1999.)

Organisation for Economic Co-operation andDevelopment. Environmental Taxes in OECDCountries. (Paris: OECD, 1995.)

Organisation for Economic Co-operation andDevelopment. Environmental Taxes andGreen Tax Reform. (Paris: OECD, 1997.)

Organisation for Economic Co-operation andDevelopment. Evaluating EconomicInstruments for Environmental Policy. (Paris:OECD, 1997.)

Organisation for Economic Co-operation andDevelopment. Greening Tax Mixes in OECDCountries: A Preliminary Assessment. (Paris:OECD, 1999.)

Organisation for Economic Co-operation andDevelopment. Implementation Strategies forEnvironmental Taxes. (Paris: OECD, 1996.)

Organisation for Economic Co-operation andDevelopment. The Polluter Pays Principle:Definition, Analysis and Implementation.(Paris: OECD, 1975.)

Repetto, Robert. “Environmental Taxes and U.S.Competitiveness.” The Columbia Journal ofWork Business, vol. 27 (Fall and Winter,1992).

Schlegelmilch, K. Background Paper on EcologicalFiscal Reform Activities in Europe. (Ottawa:National Round Table on the Environmentand the Economy, May 2000.)

Schlegelmilch, K. Green Budget Reform in Europe.(Berlin: Springer, 1999.)

Task Force on Economic Instruments andDisincentives to Sound EnvironmentalPractice. Final Report. (Ottawa: EnvironmentCanada, 1994.)

Taylor, A., M. Jaccard, and N. Olewiler,Environmental Tax Shift: A Discussion Paperfor British Columbians. (Vancouver: BritishColumbia Ministry of Finance andCorporate Relations, 1999.)

Tellus Institute. Carbon Taxes with Tax Reductions inMinnesota. (Tellus Institute, February 1997.)

Von Weizsacker, E., and J. Jesinghaus. Ecological TaxReform. (New Jersey: Zed Books, 1992).

Documents

En134-11-2002E (EFR First Steps Report)