Prices, Quotas & Payments

Principle of an environmental tax

• Reduce use of something

• Reduce an undesirable impact

• Influence a behaviour

• Examples: tax a resource to preserve it or tax to correct externalities

At what level should you set such a tax?

Ideally, optimize tax so that it maximizes welfare – reducing negative environmental impacts without causing too much economic loss.

Problem with an environmental tax?

Necessitates continuous measurement of impact, and precise knowledge of its consequences.

Practice of an environmental tax

• Tax an activity or good related to the impact of interest

• Tax the impact at an established rate, and adapt the rates to get a result

India’s coal tax

• Taxing coal

• Tax money goes to National Clean Energy Fund (NCEF) to subsidize renewable energy

• In practice only a fraction of the coal tax has gone to the NCEF (24%)

• Much of it has been used for projects not directly related to renewable energy

India’s current coal tax

• Replaced by a GST that’s no longer tied to the NCEF

Fuel taxes - advantages

• Can be a large source of tax income

• Reduction in local pollutants (SOx, particulate matter)

• Reduction in greenhouse gases

Fuel taxes - disadvantages

• They affect the poor more

• It’s often difficult to raise them

• Many countries start from subsidizing, not taxing, fuels

Carbon taxes

• Put a price on the ton of emitted carbon dioxide (CO2)

• Measure the emissions rates of different activities (aviation, automobiles, energy sector, etc.)

• Make people pay proportionally to their emission

Canadian carbon taxes

• Introduced in 2019

• Provinces were to design their own pricing schemes (or federally-imposed)

• Eliminated consumer carbon tax in April 2025

Colombia’s effluent tax

• An agreement to reduce pollutants within a given watershed by a given amount

• Actors within watershed declare quantity of different pollutants

• Calculation of tax on pollutants at national level, adjusted to local level

• Efficiency of the program is disputed (seems only partially effective)

Forest extraction on concessions

• Companies get a concession (right to use) on public land to extract timber

• In exchange, they pay a tax to the government (per amount of wood or per hectare)

• But taxes like these don’t ensure concessions are managed sustainably

• Unless they are high, they also don’t necessarily influence the amount of extraction significantly

Cameroon’s forest extraction on concessions

• Generated good revenue

• Management has mostly been sustainably

Potential issues with environmental taxes

• If you set them too low, they will have no effect

• If you set them too high, companies may evade them or leave

Think of the pollution haven hypothesis.

Principle of a quota

• You have a clear numerical objective that you want to reach

• You set a cap corresponding to that objective

• That amount is distributed among actors

• Actors may trade the amount

Tradable permits/quotas

• Set a desired total quantity (limiting extraction of a renewable resource or an undesirable environmental impact)

• Allocate between people/companies

• Let people trade the permits

• Prices will adjust to demand

Total Allowable Cash (TAC) - fisheries

• The TAC is set by authorities to match what is considered a sustainable extraction rate for any species

• Usually set in live weight equivalents

• This amount is usually revised yearly based on biological monitoring

• In reality, setting the right TAC can be very complex

Individual Transferable Quotas (ITQs)

• Defined for specific species (or groups of species)

• Allocated to individual actors gratis or by auction

• ITQs can be defined as a % of the TAC or they can be defined as absolute quantities and be redefined each year

• ITQs can then be traded on the market

Wildlife Trade Quotas

• Under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), countries set maximum quotas of wildlife species for export

• Entered into force in 1975

• CITES proposes a framework

• Parties (countries) set up their own legal frameworks and set targets to implement the framework

Wildlife Trade Quotas - Issues

• Trading any amount of some endangered or charismatic species is seen as controversial by some

• BUT this is an attempt to manage what we know exists rather than drive it underground

• Some suggest that legal quotas support illegal trade

• BUT there is little evidence of that

• CITES only deals with species, not ecosystems → not enough on its own

Hunting Quotas

• Most countries determine hunting quotas

• Quotas for scarce/endangered species are low or zero, with expensive permits

• Hunting permits are sometimes used to raise money for conservation

Quebec’s Cap and Trade Program

• Covers emissions in the power, buildings, transport, and industrial sectors, as well as industrial process emissions.

• ~80% of QC emissions covered (multiple GHG)

• ~35% emissions given for free, ~65% auctioned

• Currently about 32 USD/T Carbon

• ~1.5 billion $ revenue /year

Issues with tradeable quotas

• Often hard to know what’s the right amount

• It can be hard to measure levels (e.g. for pollution)

• Can be costly to implement and enforce

• Little incentives to go below the cap

• Risk of entrenching inequalities, e.g. if rich actors buy permits from poorer actors

“Right to Pollute/Damage”

People have a right to a certain amount of environmental damage (all our actions have impacts)

Environmental Payments/Subsidies - Principle

• An activity that is profitable to a firm/individual causes a negative externality to society

• Society (the government) pays the firm/individual to change behavior (e.g., adopt other activity)

• Government incentivizes an activity (e.g., solar) by putting a subsidy on its production

• Subsidy makes the production of a good cheaper, decreasing its price

• Lower price means higher demand, so quantity increases

• Payments can be by governments, directly by stakeholders, or by stakeholders but mediated by government

Clean Cooking Fuel Subsidies

• ”Clean” cooking fuels such as LPG are usually more expensive than solid-fuel alternatives

• Many governments have tried to incentivize a shift by providing subsidies to families

• Blanket subsidies often inefficient:

  • Reach users that don’t need them as well as poorer users

  • If high, can lead to smuggling into neighbouring countries

Payment for Ecosystem Services (PES)

• A voluntary transaction where

• A well-defined environmental service (ES) or a land use likely to secure that service

• Is being ‘bought’ by an ES buyer

• From an ES seller,

• If the ES seller secures ES provision (conditionality)

PES Diagram

Make it more profitable to keep the forest → minimum payment difference between conservation and ranching/maximum payment how much the ranching is costing society → in the end it’s best to pay somewhere in the middle.

PES - Issues

• Joint production: One action (e.g. forest conservation) produces several ecosystem services at the same time (e.g. hydrological, biodiversity, carbon).

• Practice: Payment for one “umbrella” service (often hydrological services),

• Usually tied to land cover or land use.

• Public goods: Many ecosystem services are public goods, hard to exclude users, free-riding is possible.

• Practice: Collective entities (e.g. municipalities, governments) or NGOs are the financers of PES (notably hydrological services and biodiversity).

• Crowding out: Does offering incentives undermine intrinsic motivation?

PES vs. Direct Regulation

PES can be more feasible/politically desirable than “command and control regulations”:

• if there is no overarching authority (e.g. if beneficiaries and providers belong to two independent countries or provinces)

• if the overarching authority is weak, e.g. rule-of-law is weak or costly to implement (esp. in marginal areas of many developing countries)

• if landowners are poor, marginalized and/or highly dependent on the natural resources in question

• if land use rights are already private

PES - Impacts

• Government-financed PES have resulted in modest or no reversal of deforestation.

• Case studies of user-financed, smaller scale PES schemes claim more substantial impacts, but these schemes have not been widely evaluated using rigorous empirical frameworks