Financial Means to Change Environmental Behaviours

Introduction

One of the key ways in which environmental policies are implemented, in addition to law, is through financial mechanisms. Financial instruments are those that work on the principle of making some kind of action either more or less economically palatable to organisations. They don’t tell organisations that they can or cannot carry out some kind of action, as law often does; instead, they make that action either more or less financially onerous.

Polluter Pays

Many financial instruments implement a policy principle known as ‘polluter pays’. The person who is responsible for causing pollution is the one that pays for the environmental damage that it causes (internalisation of cost), rather than the cost of environmental harm being picked up by another party such as a government (externalisation of cost). There is an element of moral fairness in this approach in addition to making it significantly economically disadvantageous to pollute.

Example of Financial Instruments

The landfill taxes in each UK country, originally introduced by the Finance Act 1996, place a charge on each tonne of waste that ends up in a landfill site. Currently, this charge is £126.15 per tonne for active waste (waste that is biodegradable in a landfill, such as wood, cardboard and garden waste) and £4.05 per tonne for inert waste (waste that does not readily decompose in a landfill, such as glass, concrete or ceramic items). This pushes waste towards being recycled or dealt with through other measures.

Similarly, the Climate Change Levy is a tax on the use of energy that has been produced from the combustion of fossil fuels or fossil fuels used for energy generation directly. Taxes such as these often form part of what is known as the ‘green tax shift’, where deleterious actions are taxed rather than those that have some benefit to society.

Emissions trading works on the principle that organisations must buy allowances for their emissions and can trade surplus allowances on an open market. It works on the principle that at the end of every year the organisation must surrender sufficient allowances to cover their emissions. As time proceeds, the total number of purchasable allowances is reduced. It therefore provides a significant incentive for organisations to reduce emissions. This approach is often known as ‘cap and trade’ and has been used extensively to reduce greenhouse gas emissions, with the EU Emissions Trading Scheme being a significant example.

An interesting one is feed-in tariffs (FIT). These were introduced as a relatively short-term measure to kick-start the uptake of low-carbon and renewable electricity generation in 2010, closing for new applicants in 2019. These work on the principle that the UK government would pay participants who installed small-scale solar photovoltaic, wind, combined heat and power (CHP), hydro electricity and anaerobic digestion for the energy that they produce. Successful applicants receive support for between 10 and 25 years depending on factors such as technology type, capacity and when the installation was commissioned. The number of new installations that could be paid FITs was capped every three months. FITs basically acted as an economic incentive to change behaviour, making the installation of small-scale low-carbon and renewable energy generation very advantageous and expanding a market that provides a much lower environmental impact alternative.

Final Note

There are many financial ways to change environmental behaviour. Often these work on the polluter pays approach, making sure that those who cause pollution pay for the harm it causes. There are many examples of financial ways to improve behaviour such as the landfill tax, Climate Change Levy, emissions trading and feed-in tariffs.

John Binns BSc (Hons), MSc, MISEP (formerly IEMA)

John Binns BSc (Hons) MSc MISEP (formerly IEMA) is an experienced environmental tutor and consultant