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Economic Incentives: Reasons for Economic Incentives
Table of Contents
Background and Overview
Reasons for Economic Incentives
Types of Economic Incentives
Developing and Implementing Economic Incentives
P2 Opportunities
Where To Go for P2 Help
Complete List of Links

Essential Links:

Economic Instruments for Pollution Control and Prevention: a brief overview
Article goes into more detail about the benefits and theory behind economic incentives.

United States Experience with Economic Incentives for Pollution Control
Comprehensive report on EPA's experience with economic incentives.

The main advantages associated with economic incentives are flexibility, encouragement of technological innovation, improved relationships between the private and public sector, substantial cost savings, and better management of non-point emission sources. Economic incentives are premised on the notion that traditional command-and-control regulatory approaches to pollution control are not only expensive but do not provide an incentive to go beyond compliance. Economic incentives provide a more flexible way to reach environmental goals or limits.

While still requiring strict adherence to environmental standards, economic incentives tend to be more goal-oriented and are more flexible regarding the methods used to achieve those goals. Businesses can choose to meet a goal or limit any way they believe is appropriate rather than being required to install a specific technology. For example, a business can choose to reduce its pollution through energy conservation, product or process reformulation, end-of-pipe pollution control, or any other means.

Many agree that holding all firms to the same uniform standard, as most "command-and-control" regulations do, is not only expensive but can be counterproductive. Costs of controlling emissions can vary greatly among businesses, and even among the different sources within these businesses, rendering technology-specific regulations inappropriate (and costly) for many situations.

Instead of requiring sources to use a specific technology for a specific problem, economic incentives allow and encourage a business to use the most efficient means possible to achieve a goal. By granting businesses more flexibility in reaching targets, economic incentives provide an ongoing motivation to search out technological advances that make compliance even cheaper. Thus, use of economic incentives results not only in improved environmental performance but in substantial cost savings as well.

A 1999 study for the EPA titled "United States Experience With Economic Incentives" estimated that the potential savings from widespread use of economic incentives at the federal, state, and local level could be almost $50 billion, one-quarter of the approximately $200 billion per year currently spent on environmental pollution management in the United States. In addition to cost savings, innovative environmental strategies also stand to make businesses more competitive.

Market-based approaches to environmental regulation can also ease tensions between the government and industry by removing the confrontational nature of traditional regulations. A report from the Global Environmental Management Initiative (GEMI) in 1996, "An Assessment of Environmental Incentive Programs in the United States and Europe," found that almost all businesses participating in an economic incentive program spoke appreciatively of the spirit of trust and cooperation between government officials and the private sector. The implication is that this new spirit leads to more efficient problemsolving and consequently, better environmental performance.

Another advantage to economic incentives is that they may be more effective in dealing with smaller and diffuse (non-point) emissions sources, which collectively contribute large amounts of pollution. These sources tend to be largely ignored in favor of controlling the pollution from more major sources. The traditional regulatory system, dependent on reporting, inspections, and fines for non-compliance, can be very expensive and burdensome to manage when applied to thousands or even millions of sources. Deposits on lead-acid batteries and variable charges for solid waste disposal are two good examples of how economic incentives can more effectively manage the large quantity of non-point emissions sources.


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Hub Last Updated: 6/4/2013