Pollution Charges: Lessons from Implementation

Pollution charges exist in various forms, as described in Box 1. They can be imposed on emissions or products; they can be levied as a fee for service or as a fine for noncompliance; and they can be collected as separate payment or as part of a broader levy, such as a locally defined water use tariff or national energy tax. Pollution charges can be levied on actual source emissions (direct emissions charge), estimated emissions (presumptive emissions charge), or products whose use or disposal is linked to pollution (product charge or tax). While the direct charge is most straightforward, the difficulty of systematically measuring discharges limits its possible application and may give a comparative advantage to indirect instruments, such as fuel taxes or water charges. Indirect pollution charges assume a certain connection between the tax base and the amount of pollution. The problem with these charges is that if the connection is not straight or strong enough, the incentive signals may be distorted or insufficient. The design of pollution charge programs entails many compromises between the advantages and shortcomings of direct and indirect instruments. For example, indirect charges based on fuel use or water consumption can very closely approximate the direct pollution charge when supplemented with rebates according to actual source emissions. Pollution Charges: Lessons from Implementation