A Tale of Ten Countries

Cataloging information: Copyright © World Bank, Washington, D.C. 1997 All rights reserved. Market Based Instruments for Environmental Policymaking in Latin America and the Caribbean: Lessons from Eleven Countries by Richard Huber, Jack Ruitenbeek and Ronaldo Serôa da Motta p. 79 Includes bibliographical references Translation to Spanish by Raul Tolmos The text is based on analyses of the following background and related papers that formed key components of this study: Belausteguigoitia, J.C., Contreras, H., and Guadarrama, L. 1995. “Mexico: La Gestión Ambiental y el Uso de Instrumentos Económi- cos”, November. Escobar, J. and Muñoz, J.A. 1996.* “Marco Regulatorio e Instrumentos de Mercado de la Política Ambiental en Bolivia”, September. Huber, R.M. 1995. “Ecuador: Economic Instruments for Environmental Management in the Sectors of Water, Air, and Industrial Pollu- tion and Solid Waste Disposal”, August. Orlando, M.B. 1995. “Economic Instruments for Environmental Management Country Background Study: Venezuela”, November. Persaud, B., Wright, M. and Benfield, W. 1995. “Market Based Instruments for Urban Environmental Management: A Case Study of Jamaica”, University of the West Indies Centre for Environment and Development: Kingston, Jamaica, December. Ramirez, J. and Cubillos, R. 1995. “Economic Instruments for Environmental Management in Latin America and the Caribbean: Colom- bia Country Background Paper”, November. Ríos, M. 1995. “Economic Instruments for Environmental Management in Latin America and the Caribbean: Chile Country Background Paper”, November. Ruitenbeek, H.J. and Sawyer, D. 1995. “Special Study Project on Institutional Structure and Economic Instruments for Urban Environ- mental Management in Latin America and the Caribbean: Barbados with Selected Comparisons to Jamaica, Trinidad & Tobago and LAC”, November. Ruitenbeek, H.J., Serôa da Motta, R., and Huber, R.M. 1995. “Special Study Project on Institutional Structure and Economic Instru- ments for Urban Environmental Management in Latin America and the Caribbean: Phase I Background Paper”, September. Serôa da Motta, R. 1996. “Applying Economic Incentives in a Context of Institutional Fragility: The Case of Latin America and Carib- bean Environmental Management”, February. Serôa da Motta, R. 1996. “Economic Instruments for Environmental Management in Latin America and the Caribbean: Brazil Back- ground Paper”, January. Tolmos, R. 1995. “Economic Instruments Country Background Study: Peru”, November. i ii Contents Contents Foreword...................................................................................................................................................................... v Acknowledgments ...................................................................................................................................................... vi Abstract...................................................................................................................................................................... vii Abbreviations and Acronyms.................................................................................................................................. viii Summary...................................................................................................................................................................... 1 Resumen....................................................................................................................................................................... 4 1. Introduction............................................................................................................................................................ 7 Background 7 The Urban Challenge 8 Outline 9 2. Regulations, Market-Based Instruments, and Macropolicies...........................................................................11 Regulations and Market-Based Instruments—A Framework 11 Goals of Market-Based Instruments 11 Examples of Market-Based Instruments 14 Lessons and Implications 17 Macroeconomic Policy Linkages 17 3. Institutional Frameworks in Latin America and the Caribbean..................................................................... 21 Institutional Sustainability in Theory 21 Institutional Development in Latin America and the Caribbean 22 Competence and Uncertainty 24 Summary 26 4. Market-Based Instruments in Latin America and the Caribbean................................................................... 27 Credit and Tax Incentives 27 Cost-Recovery Tariffs 27 Deposit-Refund Systems 28 Resource Use Charges 29 Water Charges 29 Conventional Taxation 31 Final Demand Instruments 32 Summary 33 5. Additional Issues in Design of Market-Based Instruments.............................................................................. 34 Distribution, Poverty, and Tax Implications 34 Perverse Incentives 35 Role of Tradable Permits 35 Earmarking 36 Legal Redress and Advocacy 37 6. Concluding Remarks ........................................................................................................................................... 38 Appendix A. Background Paper Summaries......................................................................................................... 41 Bolivia 41 Brazil 44 Caribbean 47 Chile 51 Colombia 54 Ecuador 57 Jamaica 59 Mexico 62 Peru 65 Venezuela 68 Appendix B. Buenos Aires Seminar Participants.................................................................................................. 71 Bibliography.............................................................................................................................................................. 73 iii iv Contents Bibliographic Note 73 Background and Related Papers 73 Selected Bibliography 73 Text Boxes 1.1 The Road from Rio 7 2.1 OECD Environmental Taxation in the 1980s 12 2.2 Firms’ Compliance Costs: MBIs versus CAC 12 2.3 Revenues versus Incentives: An Example of the Tradeoffs 14 2.4 Air and Water Quality Regulations in Mexico 15 2.5 Macropolicy Linkages and Environmental Quality in Mexico 19 2.6 Subsidies, Emission Charges, and Institutions: Lessons from Russia 19 3.1 Institutional Sustainability 22 3.2 Conflicting Market-Based Instruments and Political Priorities in Argentina 25 4.1 Colombia’s Proposed Environmental Tax: Practical Difficulties of Implementation 30 4.2 Brazil’s Green Value-Added Tax 32 5.1 Progressive Environmental Taxation In Bolivia 34 5.2 Air Pollution Permit Trading in Chile 36 Tables 1.1 Cost of Health Impacts Associated with Urban Pollution in Latin America 9 2.1 Classification of Policy Instruments Based on Decentralization and Flexibility in Individual Decisionmaking 13 2.2 Main Environmental Linkages of the Major Current Economywide Policies in Latin America and the Caribbean 18 3.1 Environmental Management Sectors in Selected Latin American and Caribbean Countries 23 3.2 Roles and Responsibilities of Selected Environmental Institutions in Latin America and the Caribbean 24 4.1 Credit and Tax Incentives 27 4.2 MBIs and Solid Waste Management 28 4.3 User Charges in Latin America and the Caribbean 29 A1 Environmental Policy Instruments in Bolivia 43 A2 Charging for Natural Resource Use in Brazil 46 A3 Main Instruments Used for Environmental Improvement in Mexico 62 Foreword One of the greatest challenges facing developing coun- building and information-sharing were identified as are tries is to enhance growth while finding the most cost- key factors that promote intra- and intergovernmental effective way to reduce negative environmental impacts. integration and public participation, thereby helping to remove legal and political barriers and merge institu- The traditional and most direct approach to environmental tional strengths. management is to impose restrictions, guidelines, penal- ties, and fees. But this “command-and-control” (CAC) Future work will look more closely at valuing the quan- method can be difficult and expensive to implement, titative costs and benefits of various types of MBIs in monitor, and enforce, especially in countries with weak different economic, administrative, and political con- institutional capacity. texts. This will provide clearer guidance on which MBIs are most appropriate for specific conditions and policy Experience has shown that market-based instruments objectives. (MBIs), which broadly speaking provide economic incentives to modify behavior, may be a more effective With support from the Economic Development Institute way to achieve many environmental goals. Though not (EDI), the World Bank has held three regional work- necessarily less expensive than CAC instruments, MBIs shops (in 1995, 1997, and 1998) as part of its broader often yield better results by harnessing the powerful initiative on MBIs in Latin America and the Caribbean, cost-benefit motivations of businesses and individuals. and will continue to sponsor in-country workshops in the future. In addition, an internet seminar was organ- This study of MBIs, focusing on 11 countries in Latin ized that focused on fostering greater regional coopera- America and the Caribbean, is a work in progress. It is tion and coordination on environmental issues and part of a wider effort to disseminate knowledge, share MBIs, and providing further knowledge on institutional experience, and facilitate the development and use of structure, MBIs, and efficient resource management. MBIs throughout the region. The purpose of this multifaceted dissemination strategy The investigation’s

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