New environmental policy instruments

New environmental policy instruments

New Instruments of Environmental Policy (NEPIs) have in begun to be adopted by advanced societies in recent years with increasing vigour. Although forms of environmental policy have been around for many decades, the idea of placing more market-orientated mechanisms in situ is a newer concept. The dictionary definition of "new" is: 'novel’ and ‘appearing for the first time’ [1] though some instruments have been around for many years in one form or another and instead are evolved. Therefore, while the prefix ‘new’ is ambiguous, it instead denotes a shift away from command-and-control policies to more incentive-based instruments.

NEPIS are said to have largely replaced the dependence on, and requirement for, environmental regulation. Instruments of environmental policy include eco-taxes, tradable permits, voluntary agreements and additional market-based instruments (MBIs) such as quotas and schemes for environmental labelling[2]. The way in which environmental policy and management is implemented has changed as a result of the growth in ‘new’ instruments in the sector. One high profile example of a ‘new’ instrument that has emerged in recent decades is the EU emissions trading scheme, in which implementation required substantial joined-up multilateral and multi-layered agreement within existing governance networks[3].

Growing scepticism about the effectiveness of environmental regulation is supposed to have given NEPIs a fertile ground in which to flourish. Policy-making by the use of market-based instruments was seen to be more useful in tackling big environmental issues than State-led rules administering the environment as though it was an arm of government. By introducing new market-based instruments, the market would take ownership of the environment, with sectors being coerced into internalising their environmental externalities, i.e., the polluter pays principle. NEPIs are also believed to place MBIs in a more authentic setting, potentially spurring on a myriad of technological innovations that would naturally be absent if the State was left to simply regulate activities[4].

The concept of NEPIs has been cited as an important contribution to the environmental governance debate, accentuating the divergence of opinion that surrounds governance: should the state play a key role in tackling environmental degradation or should it respect its own limits and allow other actors to take on such responsibilities. Some writers have asserted that “in an era of governance, the state is smaller, more networked and much less heavily reliant on binding legislation” [5].


What are New Environmental Policy Instruments?

NEPIs come from the realm of economic theory about how to regulate the natural world without imposing top-down laws and legislation, often using newer methods such as market-based instruments and voluntary agreements. NEPIs are said to be a new approach from traditional ‘command and control’ styles of regulation[6]. British Prime Minister Lloyd George is believed to have introduced the world’s first market-based instrument (MBI) when he levied a tax on petrol in 1909[7].

However, the driving force behind contemporary environmental policy, which really began to take on in the 1970s, was top-down legislative edicts that attempted to govern the environment, in the form of taxation and direct laws instigating pollution controls, quality standards, among others[8]. Major changes in environmental policy began to take place by the mid-to-late 1980s. By 1995 the number of market-based instruments in operation had risen by 50%[9], illustrating how this new approach to environmental governance became a universally successful game-changer. This growth in the use of NEPIs, which includes the arrival and proliferation of environmental management systems, is said to be the result of several key factors:

1. Widespread acceptance of the need to adopt a new approach to environmental management. Acknowledgement by policy-makers that government diktats can deliver only limited change in industry and individual behaviours.
2. An increasing acceptance of the principles of market economics. The effectiveness of the market in business could be conferred to the need to address environmental problems.
3. The irrevocable consequences of state deregulation, liberalisation and privatisation, together with the onset of globalisation, all call for a new political framework in which to handle environmental problems. Further, a growing realisation that citizens often perceive the State to be the problem not the solution, notably among environmental economists, cements this idea.[10].

Current NEPIs

The Organisation for Economic Cooperation and Development (OECD) holds a database of all recognised NEPIs in operation and include instruments within the following sectors: Water Pollution, Air pollution, Climate Change, Land contamination, Waste Management, Natural Resource Management, Noise, Ozone Layer Protection, Energy Efficiency,Transport and Land Management[11].

Eco-taxes and environmental charges

The use of economic instruments like taxes are recognised by the OECD and being “effective” and “efficient” policy instruments[12]. Ecotaxes are essentially predicated on the idea of shifting tax policy away from labour and instead onto the utilisation of natural resources. This shift was symbolically marked by a heavy emphasis on economic instruments in the World Commission for Environment and Development in 1987. A legislative emphasis on environmental taxes can actually produce multiplie benefits, dubbed the “double dividend hypothesis”[13], as tax rates can slacken in clean industries using revenues generated from polluting industries. Ecotaxes are currently deployed with the sole aim of abatement, but this could be extended to make it a reliable revenue stream.

Taxes can focus on CO2 emissions to combat global warming, landfill to promote sustainable waste management, and fuel tax to improve air quality. The rise of environmental taxes has been in response to the economic principle of ‘environmental externalities’, whereby polluters inflict lasting damage to the environment as part of their activities. In response, the ‘polluter pays’ principle has become a means of evaluating and quantifying the damage in monetary units, and making firms pay these costs for that damage. By enforcing a levy, or tax, on units of environmental damage, the liability becomes a financially burdensome on a firm's business plan, thereby spurring on pollution reduction/abatement strategies. Alternatively, the price increases are passed on to the consumer. Consequently, consumers become incentivised to switch to cheaper, more eco-friendly products[14]. The logic is explained as being:

1. The costs of environmental damage is incorporated into the prices of goods or services from which their production caused.
2. This increases the burden on consumers and producers encouraging them to use the power of choice.
3. Each producer is in the same situation, by equalising the marginal abatement costs of reduction, all producers are on a level playing, so normal competition laws can resume but with reduced environmental damage.
4. This gives producers the incentive to advance their production behaviour to reduce liabilities, with the aim of spurring on an ‘ecological modernisation’ chain effect[15].

Tradable permits

Emissions trading is one of the more eminent initiatives to have come to the fore in modern environmental economics. The most well-known being the EU Emissions Trading Scheme.

Voluntary Environmental Agreements

Voluntary Environmental Agreements (VEA) are mutual agreements between government and business and are considered to be a ‘new’ instrument of environmental policy[16]. They are a form of industrial self-regulation. The manifold difficulties of enforcing environmental policy has given rise to this new concept. Between policy-makers and industry, a set criteria is agreed upon: efficacy (it must work efficiently to be of minimal cost), coherence and consistency (they must operate similarly across member states and organisations), and consumer confidence (consumers must have trust in the system)[17]. The idea is similar to the self-regulatory and transparency principles espoused by the Global Reporting Initiative.

Feed-in tariffs

The concept of consumer-led feed-in tariffs (FITs) is increasingly arresting the attentions of global energy ministers in an expanding number of developed countries. They are adopted by these countries to promote the generation of renewable energy electricity, as well as help them meet their challenging legally-bound renewable targets. The concept is based on a consumer-led ‘overhaul’ in the market. The mechanism, a quasi-market environmental policy that centres on price-setting and price differentiation, allows the generators of renewable electricity to sell their excess electricity to energy companies via the national grid for a pre-determined price[18]. International organisations now exist that aim to promote the policy within a number of countries. The International Feed-In Cooperation, a project set up between Germany, Spain and Slovenia, exists to exchange ideas, experiences, best practice and policy successes in operating the feed-in tariff system[19]. The EU determines FITs to be the most “effective” policy mechanism that promotes the exploitation of renewable energy sources[20].

FITs are associated with improving market-driven ‘efficiencies’, something for which the energy sector is rarely praised. There is a compelling academic debate about nature of feed-in tariffs within the context of environmental governance and ‘new’ instruments of governance. They are believed to be the subject of both ‘command and control’ and neoliberal ‘market-driven’ forces (i.e. the government sets the tariffs, but the consumer choice element determines which technology will prosper and which shall perish)[21].

Free-market environmentalism

The debate surrounding NEPI’s often invokes the rising concept of free-market environmentalism (FME). Proponents of FME argue that the majority of our environmental problems can be fixed by the enforcement of ‘tradable property rights’ in environmental assets. The idea is anathema to ‘state environmentalism’, i.e. governments' supervision of the environment. The concept seeks to take a new approach to the infamous tragedy of the commons dilemma. Since the market’s externalities are largely responsible for most environmental problems (e.g. pollution, degradation, etc), the idea that the market may ironically be a saviour has come to prominence in recent years. FME economists argue that by making environmental assets private property, a sense of ownership of all natural assets will promote environmental protection[22]. Dividing up assets into units of private property is an example of governments utilising free-market to implement environmental policy instruments.

The theory behind instrument choice

There is a large body of work dedicated to the theory behind ‘choice’ of environmental instruments that states adopt. There are often many factors at play that complicate the instrument choice process from legitimacy and costs to social acceptance and knowledge base[23]. Scholars outline two main approaches that inform their decision: ‘naïve instrumentalism’ and the ‘public choice theory’ approach[24].

1. Naïve instrumentalism surrounds the idea that if politicians are presented with a particular problem, they have a range of instruments at their disposal to employ in order to overcome the problem. In their deliberations, politicians are likely to be pragmatic, adopting an evidenced-based instrument to use over less substantiated ideas. This behaviour is criticised for its rationale. Policymakers may ignore important aspects of such as actors’ interests and long-term constraints. Overestimating the veracity and reliability of science-based arguments may also obscure political rationale.
2. The Public Choice theory has been developed by environmental economists as a means of emphasising the self-centric preferences of instrumental choice by actors. Politicians are likely to be voter conscious and seek to minimise electoral disadvantage or similarly bolster support. Implementing an effective environmental policy with little material impact on individual finances is likely to be the overriding aim[25].

NEPIs in the European Union

The expansion and adoption of NEPIs by a growing number of EU Member States has been much remarked upon. Aside from the evolutionary forces that came to make command-and-control measures increasingly seen as obsolete, the ‘Europeanisation’ of environmental policy-making within the region since the 1970s brings previously sovereign states much more closely intertwined with each other as part of a wider unifying political union. The establishment of a shared policy-making system (i.e. the EU) has further entrenched this harmonisation. Within the EU, regulatory instruments have often been the mainstay of environmental policy and include emissions controls, laws and other policy diktats.


German environmental policy has a tradition of being largely regulatory (Ordnungsrecht). The growth of NEPIs is Germany is attributed to the increasingly expensive tools used to maintain pollution. Economists became aware that there was a rising marginal cost of pollution abatement that meant that units extra of pollution eliminated became more expensive using existing regulatory tools. It is also believed that the changing role of governance in Germany has enabled NEPIs to grow. The traditional top-down hierarchical structure of environmental policy has largely been replaced with a “mutual dependencies” between public and private actors. Germany is also an export-driven economy, the use of market-instruments enabled domestic policy-makers to change the way environmental policy is handled. The development of European tradable permits to reduce greenhouse gases is also well entrenched within the country[26].

United Kingdom

Like Germany, the growing prominence of NEPI’s in the UK is against a backdrop of widespread dissatisfaction with existing regulatory frameworks. Environmental policy in Britain is regarded as being notably evolutionary and pragmatic, e.g. new agencies established or laws enacted to deal with problems as they arise, thus more ‘reactive’ than ‘anticipatory’. The shift towards NEPIs in the UK has been influenced by many factors. The EU has forced the UK to adopt and share environmental practises from across the continent. The politicisation of environmental issues has given credence to NEPIs as pressure groups become more open minded to market-based initiatives. In particular, the 18-year Conservative government along with the New Labour Third Way concept comprehensively embraced the ideas of liberal market-based mechanisms as a means of facing environmental issues[27].

The Netherlands

The Netherlands is often considered a ‘leader’ of environmental policy throughout the EU. Like most countries, environmental policy in the Netherlands began with a series of public health acts and a number of environmental regulations designed to safeguard human health in urban areas. Today a significant example of a Dutch NEPI is from the Surface Water Pollution Act enacted in the 1970s, with the explicit aim of using ‘market incentives’ to alter behaviour. The act introduced a levy that was collected to generate revenue that would be used to construct and maintain public sewer systems[28].


The late 1980s and early 1990s saw an impressive expansion, and success of, environmental protection measures in Austria. The dominant theme of environmental policy in the country has, however, been a heavy use of command and control regulation, extensive use of ‘end of pipe’ permits and the requirement to meet stringent technological standards. Licensing is also often bureaucratic and costly for industries[29].

Ecological taxes have featured prominently in Austrian environmental policy. Historically used within the transport sector, a proliferation of eco-taxes has occurred. Action at the Kyoto summit has propelled the idea of tradable permits within Austrian ministries. However, to date no tradable permit systems are in place and the concept has been roundly criticised by climate policymakers. Austria takes very much a “pick and choose” approach to its employment of NEPIs[30].


Critics of NEPIS, often targeting market-based instruments specifically, conclude that whilst economic policy and environmental policy are often two sides of the same coin, they should rarely be treated as like for like areas of government policy. Criticism often centres on the theme of promoting environmental instruments as a means of achieving cost-effectiveness and the pursuit of efficiencies:

1. Efficiency is not the aim of social regulation. The market is ruthlessly adept at ironing out inefficiencies, but that does not mean this model should be applied to the governance of environmental systems as the sole aim is the protection of the natural and human worlds.
2. Many other social movements that had a specific goal in mind, from the abolition of slavery, to women’s rights, labour rights, property rights, etc, are not the subject of efficiencies. It is contended that such an abstract concept like the ‘environment’ should also not be the subject of efficiencies as though it was an economic system or business venture[31].

Academic criticism challenging the “double dividend” theory suggests that contrary to optimistic predictions, revenues generated from pollution taxation, for example, are actually negligible and should not be seen as a policy breakthrough. This is because tax elasticity of pollution is likely to be very high, i.e. short-term, because rapid abatement rates will impact on revenue accrual, whereas a carbon tax, for example, has a smaller elasticity due to the heavy reliance on fossil fuel consumption. The latter is therefore likely to be a long-term significant generator or of taxation because abatement will be significantly weaker[32].


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