Conclusions

Institutional capacity is a key parameter for the implementation of economic instruments for environmental management in Latin America. The analysis here has focused mainly on water charges, with which there has been the most experience in the region. An attempt has been made to show that institutional fragility is responsible both for inadequate adoption of the pricing-criterion instrument and for lack of enforcement of the instrument.

Pricing criteria are not always clear and/or congruent with the stated goals of the water charges. The supposed ecological aims of water charges are often confused with financing needs. The lack of monitoring and other institutional requirements impede regulators from applying the charges consistently. Such policy failures not only discredit the charge system but also increase political barriers.

The relatively successful experiences with royalties on minerals and electricity confirm that clear financing aims with low administrative costs are key to successful revenue generation. Although in practice they raise the relative prices of resources, and thereby lower their use levels, their purpose is not environmental.

When administrative costs are high and demand more institutional capacity than is available, a pricing instrument can probably face the same institutional constraints as those identified for control-oriented instruments. Not only are environmental goals frustrated: in some cases, the application of the pricing instrument results in additional budget needs rather than generating extra revenue as expected.

Therefore, much of the institutional effort on the application of the EI should be concentrated on its design in order to select “viable” instruments, not the “best” or “desirable” ones. In doing so, regulators may adjust their institutional capacity to the required enforcement needs.