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Written by Tafadzwa Magejo
University of Zimbabwe
September, 2007

Taking a World Class View on Economic Instruments for Good Environmental Practices

A Discussion of Economic Instruments Available to Zimbabwe to Encourage Compliance with Environmental Regulations
Executive Summary

This discussion covers economic instruments that can be used to enforce compliance to environmental regulations in Zimbabwe. The author discusses both instruments/tools that are already adopted in Zimbabwe and other tools that can be adopted by Zimbabwe to enlist good environmental practices. The impact on compliance of both adopted instruments and instruments available for adoption are discussed. The views of various authorities in the field of environmental management are integrated into this discussion. The focus is on ensuring that Zimbabwe takes a world class view on economic instruments to ensure compliance with world class environmental standards.

Introduction

There has been a rapid evolution of policy tools employed in various countries to achieve their environmental goals. Historically and even today the preferred tool has been "command and control" regulation. By prescribing through law the environmental standards and targets that industry must meet, regulatory approaches clearly can force technology changes in favorable directions.

Over the last two decades however there has been growing pressure on African governments to look to the markets to try to solve environmental problems more effectively, and at al lower cost. Theoretically, market based policy tools.taxes, charges and marketable permits for example should provide a dynamic function with respect to good environmental practices by exerting a constant pressure for change. In this regard, regulatory approaches have often been criticized for being static vis a vis technology... requiring industry to change up to a point of meeting the established standards.

However the real world experience since the early 1990s in developing countries indicates that their potential for stimulating continual technological improvement has not been realized. This is due largely to the fact that it has not been possible politically to raise taxes or charges to levels high enough to significant technology modification.

The situation is now changing. Countries such as Sweden, France and the Netherlands have been introducing higher charge rates for water and waste management, coupled with imaginative ways to utilize the increased revenues from the charges, in a manner that is gaining public support and also promoting technological change.1 What is emerging in most countries is a hybrid approach, based funding and applying a mix of government regulation, market-based economic instruments and voluntary agreements-tailored for specific environmental problems. Zimbabwe is no exception in the "rush" to minimize environmental impacts of industries and individuals. In this rush Zimbabwe is faced with the dilemma of balancing economic growth and environmental management. This discussion seeks to address the issue economic instruments as a means for encouraging good environmental practices.

Focus on Economic Instruments

From the discussion above it has been observed that Economic instruments are vital and dynamic tools that can be effective in inducing compliance to environmental regulations. They have a relative advantage over regulatory tools though a mix of these two and other tools to form a hybrid ensures maximum results. The cases sited in the introduction have shown that economic instruments have the following advantages:
  1. Economic instruments are dynamic. They do not prescribe specific technologies, but leave target groups to decide whether they prefer to control the output of emissions, change the input or do a mixture of both.
  2. Economic instruments generate revenue. They generate substantial amounts of revenue which can be used for other environmental projects.
Economic instruments can either be incentives or penalties. Incentives will pull organizations into adopting good environmental practices whilst penalties will push organization into adopting environmentally sound technologies.2 Grants and subsidies are common in most of the EU nations.3 Some nations have implemented taxes, charges or similar instruments, especially in the area of water consumption, water discharge and water disposal. The effect on compliance to regulations and good environmental practices is dependant on the rate of tax.

Zimbabwe has adopted a number of economic instruments both incentive based and penalty based. It also still has a plethora of options to choose from, these tools are beneficial to better environmental management in Zimbabwe.

The next sections discuss these economic instruments available in and to Zimbabwe to encourage compliance to environmental regulations.

A Discussion of Economic Instruments Adopted by Zimbabwe

Economic "Push" Tools in Zimbabwe

Economic push tools are those that will push companies into adopting good environmental practices thereby complying with the countries environmental regulations. The effectiveness of most pull tools is determined by the tax rate.4

Pollution Taxes

These are taxes used by a government or a regulatory body (the ministry of environment and tourism in Zimbabwe's case through the Natural Resources Board (NRB)) to dissuade companies and individuals from releasing pollutants into the atmosphere. These pollutants may include emissions, toxins, and other harmful by products of various manufacturing systems. Many pollutant specific taxes are available in Zimbabwe one of the most common ones is discussed below.

Carbon Taxes

"It will be wiser to impose a tax on oil than to await for the market to drive up the oil prices."5

According to Dr Michael Witter,6 a carbon tax is a tax on energy sources which emit carbon dioxide into the atmosphere. It is an example of a pollution tax. A carbon tax addresses a negative externality hence the classification as a pigovian tax.7
The government of Zimbabwe introduced a carbon tax payable by every motorist to the Zimbabwe Revenue authority (ZIMRA). The tax was adopted through an amendment of the Income tax Act and Finance Act. The Act was effective from 1 January 2001. The tax was first collected from the motorist each time they were paying their annual vehicle taxes. This approach didn't make sense as the tax did not consider frequency of pollution and the level of pollution. The current method is such that a motorist is charged a certain amount per litre of fuel purchased, the more fuel one consumes (the more carbon dioxide released in the atmosphere) the more one pays for that consumption.

The main aim of the carbon tax was to reduce the amount of carbon dioxide and other greenhouse gases emitted into the atmosphere in Zimbabwe and thereby reduce global warming. The trend so far has shown that most firms and individuals have not adopted any new technologies or alternative fuel sources that result in low carbon emissions in the atmosphere.

The main contributor to this situation is the tax rate which is highly distorted by the government subsidies on fuel. Most companies and individuals find it cheaper to pollute than to invest in environmentally sound technologies that reduce carbon emissions. The full potential of this pollution in pushing firms into complying with environmental regulations is yet to be achieved.

Fees

The facility is charged basing on the characteristics of the pollutants e.g. amount, rate and toxicity. An example in the Zimbabwean scenario is effluent charges. A lot of work regarding effluent and waste standards and management has already been done following the amendments to the Water Act in 1998 and the subsequent passing of the Effluent and Waste Standards Statutory Instrument 274/2000.8 Effluent standards are classified by colour coding into: blue, for that which is environmentally safe; green, low environmental hazard, yellow, medium environmental hazard; and red, high environmental hazard. All the categories attract some disposal fees ranging from US$130 to US$400 (blue to red) as of Government exchange rate for December 2002 (Figure 1).

Effluent Monitoring Charge
Figure 1: Effluent Monitoring Charges9

In addition to monitoring charges, different environmental fees are charged per mega litre of effluent for the green (US 50 cents) yellow (US$ 1.20 and for the red category (US$ 2.10). The red colour code also attracts a penalty charge of US 50 cents per mega litre of effluent. Monitoring charges for disposing solid wastes on land are double those of effluent with a 25% penalty fee set for wastes falling in the red category. Due to the hyperinflationary climate these penalties have ceased to make sense and hence minimal or no compliance from industry.

Deposit -Refund

Deposit refunds encourage reuse of raw materials in Zimbabwe. The recycling of beer and soft drinks bottles is the best example so far. Consumers return these empty bottles because of the money they would want to retain. The system reduces production costs and hence the cost of the product as recycling bottles is much easier than manufacturing new bottles. Other areas where this system has been used include pallet deposits, empty metal drum deposits and wooden drum deposits. The deposit system works well, as the deposit fee is competitive.

Metering of Critical Resources (Energy & Water)

ZINWA and ZESA use this tool in trying to give resource consumers the ability to control their consumption levels. The consumers are charged per unit of the resource consumed. Failure to pay for consumption, results in the specific consumer being cut off from the main grid. This tool reduces (theoretically) reduces wastefulness of these critical resources. Households and companies are supposed to pay bills at the end of every month. Due to lack of manpower, most ZESA and ZINWA bills are based on estimates and these are usually underestimates of real consumption. The other problem with the metering system at the moment is lack of enforcement; consumers may not pay for the resources for months before being cut off from the grid. The Zimbabwean government has also highly subsidized these resources such that the rates are so low to dissuade wastefulness.
Economic "Pull" Instruments in Zimbabwe

Environmental Competitions

Environmental competitions are some of the key economic instruments that is used by the National Resources Board to pull corporations into complying with environmental regulations. Environmental competitions are voluntary and this gives a loophole for offenders to abscond these competitions. An example of such competitions is discussed below: In 1980, the MRC, with participation from the Mine Managers Association, initiated an annual mine dump competition to promote environmental awareness and responsibility. Under this competition, dumps are judged on the basis of proper siting and construction, effective plant cover (revegetation) and any secondary hazardous effects. It must be noted that the competitions are voluntary and this has not led to any significant reduction in the number of unvegetated mine dumps.10
Economic Instruments Available for Adoption by Zimbabwe

Adopting a New Thinking Towards Environmental Taxes and Levies

The government of Zimbabwe can adopt an approach where companies are not taxed according to the income that a company makes per year but rather tax companies according to resource use and pollution. The taxes will ensure that companies adopt eco-efficient methods of production.11 It is not in line with the principles of sustainable development to gain lots of money today through income taxes whilst destroying the environment to the detriment of future generations. These taxes will prevent the extractors (mostly multinational/Transnational companies) from exhausting our resources. The push by these taxes will ensure compliance to environmental regulations.

Subsidy Removal on Natural Resources

Subsidy removal promotes minimal resource consumption, but it results high costs for the final products.12 The peasants and people below the poverty dictum line will not welcome such a move. It is still politically incorrect to adopt this strategy due to the economic situation in Zimbabwe.

Environmental Bonds

Zimbabwe can adopt the concept of including environmental bonds and clean up costs in project proposals. Taking an example of a mining company, they will post bonds before the issue of a permit to mine. The release of that bond is contingent upon the completion of all required reclamation, restoration, and abatement work on the permit area. The company is forced to work for the release of their bond and hence comply with environmental regulations.
Conclusion

Economic instruments (EIs), in theory, have all the efficiency properties of competitive market pricing: they trigger actions both among producers and consumers that allow the achievement of given environmental objectives at the lowest costs. The efficient nature of economic instruments is due to the flexibility given to the polluters for devising a cost effective compliance strategy. Environmental charges and taxes are direct payments from polluters and therefore, they represent a clear application of the Polluter Pays Principle (PPP). PPP states that polluters must bear full financial responsibilities for pollution reduction. It is generally accepted that the scope of such financial responsibility is determined by environmental legislation. Additional advantages of economic instruments are their capacity to integrate environmental concerns with sectoral policy goals and to promote a gradual shift in the allocation of a society's resources required for sustainable development.13

To enjoy the aforesaid benefits Zimbabwe needs to improve in the following areas:
  1. Monitoring of pollutants to ensure efficient enforcement of the various policies.
  2. Optimize pollution charges so that the social effects of the activities are redressed at the same time promoting business investments in Zimbabwe.
Zimbabwe has many economic tools that it can adopt which can be tied up to already available legislation. In the mining sector, for example the following Acts and statutory instruments can be tied up with their respective economic instruments:
  • Mines & Minerals Act
  • Natural Resources Act
  • Hazardous Substances and particles Act



Sources

1 Bill long 1994: Cleaner Production in OECD countries, industry and environment Volume 17 No 4 October- December 1994, Bill Long was the director of environment for OECD.

2 Allen H Aspengren, Industrial Environmental Initiatives in the 1990s, UNEPIE 1994, Allen was the Manager Environment, Health and safety for 3M Europe.

3 Birgitte Nielsen et al 1993: Waste Management: Clean Technologies-Update on the situation in EU Member States, industry and environment Volume 17 No 4 October.

4 Sermphol Buengsung , Cleaner production Initiatives in Thailand, UNEPIE 1994.

5 Paul Volker, Former Federal Reserve Chairman, February 6 2007.

6 Dr Michael Witter, Economic Incentives for Implementing Environmental Management Systems in Jamaica.

7 A pigovian tax is a targeted tax to correct externalities. It was named after Arthur Pigou who first proposed these targeted taxes.

8 ZINWA (2000)., ZINWA safeguards the polluter pays principle for effluent and solid waste

9 Figure Adapted from GodWell Nhamo's paper: GodWell Nhamo (2003), INSTITUTIONAL AND LEGAL PROVISIONS FOR ENVIRONMENTAL MANAGEMENT IN ZIMBABWE.

10 Claude Fussler: The development of eco-efficiency in the industry, UNEPIE 1994.

11 Thompson, and Strickland. Concepts and Cases; Starbucks Case Study.

12 Stephen McClellan (2004), Economic Instruments for water management in Canada.

13 Jurg Klarer et al (1999), Source book on Economic instruments for environmental policy in Eastern Asia.


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