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Economic instruments

Parallel to the application of legal and administrative instruments in environmental policy implementation, application of economic instruments is increasing. In many cases they are more efficient, since they have an immediate effect on a polluter’s budget. The importance of economic instruments is increased by the growth of production and consumption, as well as the increase of pollution abatement costs.

The goal of economic instruments is to reduce pollution by ensuring that polluters and consumers make the best choices for the environment voluntarily. In fact, they establish financial feedback links between polluters and the public. Without economic instruments, it would be necessary to provide additional funding for the implementation of environmental projects.

The main principles for choosing economic instruments should be the following:

• the polluter pays;
• they should promote activities to abate pollution;
• they should be simple and flexible;
• they should be fair towards different polluters;
• amounts collected for pollution should be used for environmental investment in regions that suffer due to a specific polluter;
• amount of financial compensation to be paid by the polluter should be determined on the basis of measurements, not theoretical calculations.

The natural resources tax was introduced in 1990 to conserve natural resources and limit environmental pollution, as well as to accrue funds for financing environmental activities. The tax consists of two parts: a base rate for the use of natural resources and for permission to pollution within specified limits; and penalty rates for excessive pollution and use of resources.

To date, the tax has not promoted pollution abatement and resource conservation because the rates have devalued, even though revised several times. The tax revenues are also inadequate to compensate damage to the environment. It is cheaper for a polluter to pay a fine for excess pollution than to invest funds to avoid it.

At present, due to inadequate pollution monitoring technology, taxes and fines are based on calculations instead of measurements. These calculations often don’t reflect the actual situation.

A new law on the natural resources tax has been drafted. In the new law, taxes will be paid for abstraction (use) of natural resources, emission of pollutants into the environment, environmental or resource degradation, and the sale or import of goods and products harmful to the environment.

The draft also provides for the application of several new economic instruments.

• An expansion of the notion of use of natural resources, introducing the expression goods or products harmful to environment; use of such products and services is subject to excise tax. Such goods include fuels (coal, liquid fuel, gas, peat), gasoline, batteries and accumulators, ozone-depleting substances, fluorescent lamps, different types of packaging, etc.
• The increase and better preparation of tax rates for the use of natural resources and environment pollution
• The introduction of emission licences, investment tax credits and a CO2 tax to be collected as excise on fuel.

Apart from the natural resources tax, the following economic instruments are available and often used in Latvia:

• Subsidies, e.g. budget subsidies, subsidies by the Environmental Fund or different foreign donors, soft loans.
• State loan guarantees - the State extends guarantees for loans necessary to implement such projects that solve State priority environmental problems, provided the respective local government is capable of implementing the project (this is also supported by the environmental policy principles regarding projects that are nationally acceptable and locally practicable).
• Tax relief for environmental investments not provided for by the present taxation system.
• Administrative charges for issuing permits and licences.
• The State Environmental Fund to make payments for environmental damage.
• Compensation for environmental damage.

Besides the natural resources tax, compensation for environmental damage is one of the most widely applied economic instruments. It is also one of the forms of liability for environmental violations. Compensation for damage is usually set in accordance with specific calculation rates for losses that are determined taking into account the notional value of natural resources, costs for their renewal or clean-up, including a fine as a penalty for the element of violation. Rates for loss calculation are set by Cabinet decisions or decisions or orders of specific ministries. Compensation of losses is usually applied together with other forms of liability for environmental violations, but in the case of damage to the environment, losses have to be compensated irrespective of whether the person has been held liable in any other form. The guilty party may compensate losses voluntarily, otherwise they are collected by enforcement measures following a court order.

In the future, prices of goods and services should include environmental costs, which is not the case at present. Methods for determination (calculation) of environmental protection and remediation should be developed and elaborated. In general, the importance of economic instruments will continue to grow.

The main goal for Latvian environmental investment policy should be to promote environmentally-friendly investment, including public and private, domestic and foreign. The main focus should be on solving local problems, while keeping in mind regional and international problems.

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Last updated: November 8, 1996. The information prepared by Valts Vilnitis: fuxis@varam.gov.lv