26 December 2004

Polluter Pays Principle

The Polluter Pays Principle (PPP) says simply that those who pollute the environment must pay for the damage they have caused. The idea originated in the 1970s when members of OECD countries sought a means by which pollution control costs would be financed by the polluters rather than the public in general. Its principal defect is that it does not guarantee efficiency of pollution control and environmental protection.

The PPP assigns environmental rights to those who benefit from environmental improvement, so polluters pay. The Beneficiary Pays Principle (BPP), on the other hand, says that whoever benefits from a cleaner environment should bear the costs of pollution control.

Social Policy Bonds are not concerned with who pays for solutions but with efficiency in achieving them. But some have asked me whether Social Policy Bonds targeted at environmental goals (Environmental Policy Bonds) would be compatible with the PPP. The answer is yes.

Where polluters can be clearly identified, and where society believes that the PPP should apply, then the polluters could be taxed and their proceeds used to redeem the bonds.

Take, for example, a lake is polluted by activities of farms surrounding it. Assume that the local authority thinks a bond regime would be the most cost-effective way of improving the lake's health. It could issue 'Lake Health Bonds', which would be redeemable for a fixed sum only when the lake's water quality had reached a target level for a sustained period.

Who would contribute to the redemption funds used to redeem the Bonds? Where the lake is grossly polluted and the farmers are wealthy, the political process would probably demand that the farmers pay. But where the lake is already healthy, though not quite healthy enough to attract fee-paying fishers, then the beneficiaries of a clean-up - would-be tourist operators around the lake, perhaps - could reasonably be asked to contribute. They might, on their own initiative, decide to issue their own Lake Health Bonds.

The crucial points are that the Social Policy Bond principle:
  1. maximises efficiency, expressed as maximum reduction in pollution per dollar spent; and
  2. is versatile enough to encompass the PPP and the BPP, or any combination.


zylstra said...

"the political process would probably demand that the farmers pay"? That's what we're trying to determine aren't we: the political process to reduce pollution. You're just saying let's use a political process to have polluters pay.

Ronnie Horesh said...

Hi zylstra and thank you for your comment. Actually I was trying to say that once the political process has decided that there shall be a reduction in pollution, and (yes) that polluters or beneficiaries shall pay for that reduction THEN Environmental Policy Bonds would ensure that the targeted reduction per dollar spent would be maximised. Regards, RH