C7.2 Pollution and environmental charges

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Characteristics

Charges can be levied both to reflect the cost of the use of water as a natural resource (for example through demand management charges (C3) such as abstraction levies, or environmental charges (C7)) and to cover costs of service provision. This tool focuses onpollution and environmental charges. Environmental charges are designed to reflect cost of damage to the environment resulting from use of resources, whether surface water or groundwater. Pollution charges, a particular type of environmental charge, are designed to reflect the financial and economic costs of discharging wastes into the environment. By levying a charge, polluters are encouraged to reduce their polluting discharges, and in effect are paying for the reduction of the ambient water quality (in the same way as charges are levied for consumption of water by users).

A charging system has the advantage over pure regulation in that it permits some flexibility in the way firms or other polluters respond. A system combining charges and standards may be best of all since standards provide a greater certainty of outcome than prices alone. Other types of environmental charge include levies on abstractions, or charges reflecting the value of the environmental resources used, and provide an incentive for users to change their behaviour, in response to a price change.

Pollution charges can be levied on specified pollutant discharges on the basis of load and/or concentration, and can reflect environmental damage imposed by pollutants. (Note that pollution charges are distinct from sewerage or wastewater treatment charges, which are tariffs or cost recovery charges, see C7.1).

A desirable pollution charge should:

Reflect the environmental costs of wastewater pollution;
Bear some relation to marginal abatement costs faced by the polluter (e.g. industrial enterprise or municipality) and be high enough to induce some investment in pollution reduction;
Generate useful amounts of revenue for clean-up actions;
Credit polluters for the release of clean effluent for dilution and mixing.

Levying charges on diffuse (non-point) pollution, e.g. from farms, is difficult to carry out directly, and tends to be done by proxy (acreage, number of cattle, etc) or product (e.g. tax on fertiliser).

Although pollution charges offer a useful incentive to polluters to reduce their polluting discharges, most of the established schemes have as their main aim the collection of revenue to finance pollution abatement programmes. This can effectively raise public support for the charges. The charge in itself offers an incentive to reduce discharge. Revenues from environmental charges are sometimes accumulated to special funds earmarked for environment/conservation activities. As with regulations, pollution and environmental charges need effective regulatory and management capacity (see B2.3). It is important to ensure the acceptability of charges if they are to be effective. Pollution charges can be effective where there is transparency and a clear regulatory framework.

Lessons learned

Few pollution charges are set at levels high enough to encourage to firms to spend sufficient on pollution abatement to meet pollution standards, but the existence of a charge, even at a low level, provides some incentive and may be helpful in raising awareness of the costs of pollution.
Pollution charges need to be administered as part of an overall system of regulation.
A precondition for successful pollution charges is the presence of a well-developed monitoring and measuring system (see also C1).
Pollution charges have a stronger incentive effect on the polluting party if it has to bear the cost of the charge itself and cannot pass the costs on to consumers.
Planned progressive increases in charges are useful in allowing dischargers to adjust their processes over a given time period.

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