Pollution charges (C7.04)


Water pollution is harmful to all water-dependent life. Depending on its scale, it can have catastrophic effects; it causes diseases, disrupts food chains, and destroys ecosystems. Pollution charges are an instrument for controlling pollution, designed to reflect the financial and economic costs imposed on society and the environment from discharging wastes and pollutants into water bodies. This has been enshrined in the widely accepted Polluter Pays Principle

A pollution charge should be differentiated from a wastewater or effluent treatment charge (see Tool C7.01), which is a payment for services rendered in restoring the wastewater to a quality acceptable for releasing it into the environment (confusion can be caused by the fact that, in European countries, pollution taxes tend to be referred to as effluent charges). 

Pollution charges aim to impact the economic behaviour of polluters. Faced with paying for the social cost of their discharges, they have three broad choices: to cease operations; to change their technologies and practices in order to reduce their pollution; or to carry on polluting and pay the charge. Though pollution charges give an incentive for the reduction of polluting discharges, most of the established schemes have the collection of revenue to finance pollution abatement programmes as their main aim. 

In theory, if the level of the charge is at the economic level that equals the cost to society of this pollution, society should be indifferent whether the pollution continues (with charges fully compensating for the damage to the environment) or ceases. The assumption here is that the costs of pollution can be fully assessed, and that restitution of the original environmental quality can be and will be done. 

In practice, governments do not know what the abatement cost for particular pollution is. Thus, pollution charges tend to be below this economic level, which is difficult to estimate. It should be noted that if pollution taxes are too high, polluters are being excessively penalised. The aim of zero pollution is likely to be uneconomic and unaffordable, if the cost of pollution abatement exceeds the cost of the pollution itself. However, even sub-optimal charges will have some impact on the behaviour of polluters. 

Pollution charges can be levied on specified pollutant discharges on the basis of load and/or concentration and can reflect environmental damage imposed by pollutants. However, levying charges on diffuse (non-point) water pollution, e.g. from farms, is difficult to carry out directly, and tends to be done by proxy (according to acreage, number of cattle, etc.) or by taxing products responsible for the pollution (e.g. tax on fertiliser and other agricultural chemicals). 

A desirable pollution charge should: 

  • Reflect the environmental costs of wastewater pollution; 
  • Bear some relation to marginal abatement costs faced by the polluter (e.g. industrial enterprise or municipality) and be high enough to motivate investment in pollution reduction; 
  • Generate significant revenue for clean-up actions; 
  • Credit polluters (e.g. offsetting the pollution charge) for the release of clean effluent for dilution and mixing. 

The main alternative to pollution charges outside of trading schemes (see C7.02) are so-called command and control (C&C) regulations, which stipulate the kind and amount of water pollution that can or cannot be discharged. A charging system has the advantage over C&C regulation in that it permits some flexibility in the way firms or other polluters respond. A system combining charges and standards may be best of all since standards provide a greater certainty of outcome than prices alone. Such a system might include a discharge prohibition of particularly noxious substances, and set maximum limits on others while imposing charges on pollutants up to those limits. 

Success factors for the implementation of a charge system also include a competent authority to legislate, monitor, and enforce the charge. Therefore, a functioning administrative or communal system to collect and enforce the charges is necessary. This is especially true regarding systems with high price levels and/or volumetric measurement. 

Lessons learned 

  • Few pollution charges are set at levels high enough to encourage firms to spend sufficient money on pollution abatement to meet pollution standards, but the existence of a charge, even at a low level, provides some incentive and may be helpful in raising awareness of the costs of pollution. 
  • Pollution charges need to be administered as part of an overall system of regulation that includes maximum permitted releases and concentrations of noxious elements in discharges. 
  • A precondition for successful pollution charges is the presence of a well-developed measurement, inspection, and enforcement system (see also Tools B1). 
  • Planned progressive increases in charges are useful in allowing dischargers to adjust their technological processes over a given time period. 
  • Public enterprises and municipalities are often major water polluters. Where they have “soft budget constraints” they may be able to pass the cost of pollution charges back to their government sponsors. This defeats their objective.  
  • Revenues from environmental charges are often earmarked for environment/conservation, which can bolster public support for the charges.