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Economic Incentives: Types of Economic Incentives
Table of Contents
Background and Overview
Reasons for Economic Incentives
Developing and Implementing Economic Incentives
Types of Economic Incentives
(NEW!) Focus on Renewable Energy Incentives
P2 Opportunities
Where To Go for P2 Help
Complete List of Links

Essential Links:

Database of State Incentives for Renewable Energy
Comprehensive source of information on state, local, utility, and selected federal incentives that p...

Energy and Water Rebates Available to Puget Sound (WA) Businesses
LIsting and maps for Puget Sound businesses to identify incentives in energy and water conservation ...

EPA's Environmental Quality Incentives Program
Provides information on the economic incentive programs, with summaries of more than 70 programs. M...

Priority Green (Green Permitting at the City of Seattle)
The City of Seattle offers expedited and facilitated permitting for certain types of green projects,...

State P2 Environmental Awards Program List
Comprehensive list of available environmental and P2 awards by state.

Pollution Charges and Taxes

Charges, fees or taxes are prices paid for discharges of pollutants to the environment, based on the quantity and/or quality of the pollutant(s). To be most effective, the charge is levied directly on the quantity of pollution in the form of an emissions tax or charge. Product charges can occur at different usage points, either as they are manufactured, consumed, or disposed of.

An excellent example of unit-based pricing is the pay-as-you-throw (PAYT) initiative, quickly gaining momentum in the United States as an innovative method of managing solid waste. These types of programs are at work in 3,000 communities nationwide. Rather than paying one flat fee for solid waste disposal, residents and businesses in PAYT communities pay per pound or gallon of garbage disposed. This offers residents an incentive to recycle and reduce waste and helps communities cover solid waste costs through accurately charging residents for solid waste services. It also gives waste generators more control over their garbage bill and lets them pay only for the amount of waste generated. PAYT may affect household purchasing decisions by favoring products that come with less and/or recyclable packaging.

Just as PAYT programs have stimulated better solid waste management in communities, a similar "pay-as-you-pollute" program could be implemented in managing hazardous waste in pollution prevention (P2) efforts. The same principles and advantages that make PAYT such a success in stimulating recycling efforts and reducing solid waste can be used just as effectively to promote use of P2 technologies and practices.

Input or Output Taxes and Charges

This market-based environmental tool is a form of environmental taxes. Environmental taxes are premised on the idea that whatever is taxed is discouraged. Therefore instead of taxing activities deemed good for society, such as income or savings, taxes should be levied on what is undesirable, like pollution or waste. Unfortunately, our current tax system rarely taxes businesses and consumers that seriously degrade our natural resources. Because there is no cost associated with these activities, businesses and consumers get the market signal that it is acceptable. An environmental tax shift would change that by providing incentives for better environmental management, while continuing to raise revenue at the same (or higher) levels and reduce other taxes, on income and labor for example, that may in turn stimulate our economy.

Preliminary experience with market-oriented environmental taxes abroad offers much hope. Countries from Canada to China have levied thousands of environmental taxes, on everything from gasoline and pesticides to sulfur and carbon emissions to grocery bags. Only a few dozen standouts have been implemented with tax rates high enough to do much environmental good, but these few have provided evidence of the effectiveness of the approach when properly pursued. In Britain, for example, excise duties have been adjusted so that the price of leaded gas has risen increasingly, relative to the price of unleaded. Partly as a result, lead emissions from the exhausts of British cars fell by 70% in the decade to 1990. When Sweden introduced a charge of $6000 per ton on nitrous oxide emissions from power stations in 1992, average emissions fell 35% within two years. A Swedish tax on the sulfur content of diesel fuel resulted within 18 months to a ten-fold increase in the share of "clean" diesel in total diesel consumption.

Designed to curb their rampant consumption of 1.2 billion plastic grocery bags a year, the Republic of Ireland levied the innovative plastic bag tax or "PlasTax" in 2002. The PlasTax resulted in a 90% drop in consumption and approximately 1 billion fewer bags consumed annually. Further, approximately $9.6 million was raised from the tax in the first year and is earmarked for a "green fund" established to benefit the environment. The overwhelming success of the tax has inspired various countries and cities around the world, including the United Kingdom, Australia and New York City, to consider a similar tax.

Marketable Permits

Another market-oriented environmental policy is marketable or tradable permits also referred to as a "cap-and-trade" system. The rationale is based on setting an absolute quantity of pollution to be allowed, and then giving or selling polluters rights or "permits", to pollute up to that given cap.

Polluters can trade these permits with other permitees, treating them like any other commodity in the marketplace. Those who can clean up effectively and cheaply can then make money by selling spare permission to pollute to those for whom cleaning up would be more expensive. The key point is that tradable permits allow governments to set the precise amount of pollution that they are prepared to handle. This is something they could do with regulation, but could not do with a tax. Environmental organizations could also, in theory, buy up permits and thus reduce the amount of pollution allowed.

The most successful example of tradable permits has been the Clean Air Act amendments in 1990. An ambitious tradable permit system was created under which more than 100 large coal-fired power plants were given initial emissions reductions. The goal was to reduce emissions of sulfur dioxide by 50% in the eastern half of the United States. These facilities were given the ability to purchase excess emissions reductions generated by other plants that found it easy to reduce their sulfur dioxide, along with the choice of meeting their emissions reductions targets themselves. This cap-and-trade approach resulted in sulfur dioxide reductions that have been both larger and faster than required by law. Furthermore, annual savings to electricity ratepayers nationally (compared to the previous traditional approach) range from 50-80%, amounting to savings of $1-6 billion annually. Similar cap-and-trade permits are being used in state and local governments nationwide to reduce other types of pollution. One such project in the Pacific Northwest is the pollutant trading system in Idaho, which uses cap-and-trade to lower pollution emissions into the Boise River.

Deposit-Refund Systems

Deposit-refund systems require a monetary deposit at the point of sale of a product, with the deposit given back when the item is returned at the end of its useful life. In the U.S., deposit-refund schemes have been applied most commonly to help manage the disposal of lead-acid batteries, but are also being successfully applied in some states to beverage containers, pesticide containers, and tires. A deposit-refund system could also be used to divert some of the massive amounts of electronic waste that goes into the solid waste stream every year.


Subsidies are a commonly used tool in environmental management. Some examples used at all levels of government are grants, low-interest loans, favorable tax treatment, and environmentally preferable procurement policies. Subsidies are used to promote pollution prevention, the cleanup of contaminated industrial sites, farming and land preservation, sustainable/green energy, environmentally friendly fuels and vehicles, and municipal wastewater treatment. These subsidies are sometimes criticized because the government is helping to bear the costs that should be the responsibility of the polluter. Some examples of subsidies include tax benefits for the purchase of a hybrid vehicle and the $500 voucher incentive for hazardous waste management offered by King County Local Hazardous Waste in Seattle.

Voluntary and Recognition Programs

Use of voluntary and recognition programs of economic incentive has been growing tremendously in the past 10 years. Currently, the US Environmental Protection Agency and state and local governments have various programs that encourage sources like private businesses, schools, hospitals and universities to reduce specific kinds of pollution. According to a 2001 Environmental Protection Agency (EPA) report, more than 7,000 organizations participate in EPA's voluntary programs, and in 1998 those participants conserved 1.8 billion gallons of clean water, 7.8 million tons of solid waste, and prevented the release of air pollution in an amount equivalent to taking 13 million cars off the road. Not only were these actions a great boon for the environment, but EPA also estimates these organizations saved roughly $3.3 billion. Hundreds of similar programs are in operation at state and local levels.

A successful case that illustrates the benefits of a voluntary recognition program is the 33/50 Program. Introduced in 1991, it challenged industry to reduce toxic emissions by 33% by 1992 and 50% by 1995, relative to a 1988 baseline for each facility. Actual emissions reduced by participating businesses exceeded EPA's expectations and occurred a year ahead of schedule. One of the main factors driving participation in this and other recognition programs is the desire of the firm to achieve favorable publicity, in the hopes of taking away market share from competitors thought to be less environmentally friendly. Numerous polls in recent years have shown evidence that consumers are willing to pay a premium for products that have environmental advantages. Another reason companies choose to participate in a voluntary recognition program is the benefits of free technical assistance from the sponsoring regulatory agency.

Permit and Regulatory Incentives

Although technically not falling under the definition of market-based incentives, it is useful to discuss permit and other regulatory incentives. Permit incentives come in the form of expedited permitting, increased permit flexibility, multimedia permitting, and self-certification permit programs, among many different options. Also, experimental regulatory incentives in the form of "grace period" laws were being explored in the mid-1990s. Grace period laws are designed to more clearly focus limited public resources on serious violations. When a "minor" violation is discovered, the relevant environmental agency must provide the violator with a "notice to comply" or a "notice of violation." The notice identifies the violation and provides a time period in which the violator must come into compliance.

Yet another form of regulatory incentive is the environmental "amnesty" law. These laws are designed to encourage businesses to request technical assistance, and/or to voluntarily engage in pollution prevention activities. Regulatory agencies will ignore a committed offense if the violator requests technical assistance or participates in an officially sponsored voluntary pollution prevention program. Amnesty laws are targeted toward small businesses, which may not have adequate resources or expertise to conduct an environmental self-audit. By not levying fines during these "amnesty" periods, businesses attain a very real financial benefit.

An example of a permit incentive program is the Florida?s Department of Environmental Protection "team permitting" approach. Applicants who need to receive permits from multiple agencies can agree to have team permits known as "ecosystem management agreements." In exchange, applicants must have exemplary compliance records and must demonstrate that this approach will result in a "net ecosystem benefit" to the affected ecosystem and a reduction in overall risks to human health and the environment. This program has resulted in increased permit flexibility, expedited permit processing, alternative monitoring and reporting requirements, cooperative inspections and hundreds of thousands of dollars in savings for private sector participants.

The following table lists the types of incentives described above, along with examples and pros and cons of each.

Incentive Examples Pros and Cons
Pollution Charges and Taxes
  • Emission charges
  • Effluent charges
  • Solid waste charges
  • Sewage charges
  • Pros: stimulates new technology; useful when damage per unit of pollution varies little with the quantity of pollution
    Cons: potentially large distributional effects; uncertain environmental effects; generally requires monitoring data
    Input or Output Taxes and Charges
  • Leaded gasoline tax
  • Carbon tax
  • Fertilizer tax
  • Pesticide tax
  • Virgin material tax
  • Water user charges
  • CFC taxes
  • Pros: administratively simple; does not require monitoring data; raises revenue; effective when sources are numerous and damage per unit of pollution varies little with the quantity of pollution
    Cons: often weak link to pollution; uncertain environmental effects
    Marketable Permits
  • Emissions
  • Effluents
  • Fisheries access
  • Pros: provides limits to pollution; effective when damage per unit of pollution varies with the amount of pollution; provides stimulus to technological change
    Cons: potentially high transaction costs; requires variation in marginal control costs
    Deposit-Refund Systems
  • Lead-acid batteries
  • Beverage containers
  • Automobile bodies
  • Pros: deters littering; stimulates recycling
    Cons: potentially high transaction costs; product must be reusable or recyclable
  • Municipal sewage plants
  • Land use by farmers
  • Industrial pollution
  • Equipment purchases
  • Pros: politically popular, targets specific activities
    Cons: financial impact on government budgets; may stimulate too much activity; uncertain effects
    Voluntary and Recognition Programs
  • Project XL
  • 33/50
  • Energy Star
  • Performance Partnerships
  • EnviroStars (King County, WA)
  • IdahoGemStars
  • Pros: low cost; flexible; many possible applications; way to test new approaches
    Cons: uncertain participation
    Permit and Regulatory Incentives
  • Increased permit flexibility
  • Multimedia permits
  • ?Grace period? regulations
  • Amnesty regulations
  • Pros: may reduce permit overlap and redundancies, reduce permit process time, encourage small businesses to comply
    Cons: uncertain participation

    Source: National Center for Environmental Economics, U.S. Environmental Protection Agency, The United States Experience with Economic Incentives in Environmental Pollution Control Policy. Washington, DC: GPO, 2001.


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    Hub Last Updated: 10/17/2014