World Resource Institute

Fiscal & Economic Incentives

Types of economic and fiscal incentives that can be used to incentivise reductions in nutrient pollution include ecotaxes, incentive payments/subsidies, ecolabeling, and environmental markets (adapted from Sands 2003. These mechanisms are meant to complement or avoid regulatory approaches. These policies are described in more detail below.

Ecotaxes

Ecotaxes, also known as green fees and taxes, are meant to create “full cost accounting” of economic activities by using fiscal policies to internalize negative externalities. Some examples of green fees and taxes that can be used in the context of mitigating eutrophication include:

  • Polluter-pays tax. A polluter-pays tax provides economic incentives for ecologically sustainable activities—or, conversely, disincentives for activities that are not ecologically sustainable. For example, Denmark’s wastewater tax, imposed on point sources (industry and wastewater treatment plants), levies a tax on every unit of nitrogen, phosphorus, and biological oxygen demand (BOD) discharged in wastewater (EcoTech 2001). Similarly, the Netherlands employs a fee system for agriculture that levies fines on farms with nitrogen and phosphorus in excess of their approved nutrient budget (Hoffmann and Boyd 2006).
  • Dedicated environmental tax. Governments can impose taxes and fees directly on a sector or population, and then use the revenue to fund nutrient reducing activities or technologies. For example, in Maryland (U.S.) an annual fee commonly called the “flush tax” is levied on every household and business in the state via their water and sewer bill. The revenues from this tax are used to upgrade wastewater treatment plants with nutrient removal technologies and add nitrogen-removing capability to septic systems.
  • Taxes on technologies/products/inputs with negative environmental impacts. Placing a tax on technologies, products or inputs that are associated with negative externalities creates a price signal aimed to reduce demand for the taxed good. A fertilizer tax is an example of an input tax. The effectiveness of this kind of tax is dependent on the elasticity of demand and availability of substitutes.

Incentives and subsidies

Incentive payments, subsidies, tax credits, and low-interest loan programs are economic instruments used to encourage adoption of desirable practices. Agricultural conservation subsidies in the United States are used to encourage farmers to implement best management practices that will reduce nutrient and soil loss on farms. In Pennsylvania, the Resource Enhancement and Protection Program provides a tax credit for farmers who implement best management practices that improve water quality. Pennsylvania estimated that over a two-year period (2007-2008) the program reduced nitrogen pollution by 162,176 pounds and phosphorus runoff by 14,939 pounds (Pennsylvania Department of Agriculture 2009). The U.S. Clean Water State Revolving Fund (CWSRF) loan program currently offers $5 billion annually in low-interest loans to municipalities and wastewater treatment plants to help fund water quality protection projects for wastewater treatment and watershed management (EPA 2009a). Since inception, the CWSRF program has spent more than $2.9 billion to control pollution from nonpoint sources and for estuary protection (EPA 2009a).

The effectiveness of incentive payments improves when performance-based approaches are used [(Guiling et al. 2006)]/publication/paying-environmental-performance-investing-farmers-and-environment). Performance-based approaches use incentive payments based on actual environmental outcomes rather than paying for actions and implementation of practices. Performance-based approaches can include incentive payments based on quantitative estimates of environmental benefits as well as mechanisms such as reverse auctions. Reverse auctions have been used in the United States and Australia to cost-effectively allocate money to landowners who reduce nutrient losses (Eigenraam 2005; Selman et al. 2007; Selman et al. 2008). In reverse auctions, multiple sellers (e.g., landowners) compete to supply a single buyer (e.g., the government) with a specified good or service, enabling the buyer to locate the most competitive sellers. In an environmental context, reverse auctions can be used to maximize environmental benefits given a limited funding budget.

Ecolabeling

Ecolabeling is a voluntary method of certifying products that are produced in a way that is environmentally preferable to other products in the same product/service category based on life cycle considerations. Ecolabeling is meant to create consumer preference for “green” products and thus generate a financial return to the supplier of the certified product in the form of increased revenues. Ecolabeling of agricultural products can provide incentives for farmers who wish to certify their products and adopt sustainable agricultural practices.

Environmental Markets

Environmental markets, including regulatory and voluntary markets, use a market to provide price signals for environmental goods and are meant to align behavior with environmental goals.

Regulatory markets are meant to provide flexibility to regulated sources, thereby reducing the financial burden of regulatory compliance with limits or caps on nutrient emissions. For example, regulatory water quality trading markets for nutrients exist in the United States, Canada, and New Zealand (Selman et al. 2009) and are designed to both minimize the costs of complying with effluent nutrient caps and offset new nutrient discharges from new and expanding sources. One example of an active water quality trading program is the Long Island Sound Nitrogen Credit Exchange in Connecticut. Connecticut allows wastewater treatment plants capped under the Long Island Sound TMDL to meet their nitrogen discharge limits by upgrading their facility or by purchasing nitrogen offsets from another facility that is operating below its discharge limit. Another example is in New Zealand. Farmers in Lake Taupo are able to purchase additional nitrogen discharge allowances from other farms or implement management practices to meet their regulatory obligations or expand their production.

Conversely, voluntary markets are not driven by regulation, but by the value placed on the environmental good or service by the buyer. Voluntary markets generally follow the “payment for ecosystem services” model, where buyers (motivated by altruism or self-interest) are willing to pay landowners to maintain or enhance ecosystem services (e.g., water purification, flood control, carbon sequestration). For example, in the Chesapeake Bay, a consortium of NGOs has established a voluntary nutrient market called the Chesapeake Fund. Individuals and companies that wish to offset their “nutrient footprint” can purchase nutrient offsets from the Fund. In turn, the Chesapeake Fund uses these revenues to pay farmers in the watershed to implement nutrient-reducing best management practices.

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