Instrument Development Phase

Monetary Evaluation

An EI has to reflect price values for natural resource uses. To calculate them, regulators must follow the conventional procedures according to the kind of instrument choices. If the aim is to correct an externality, then it is necessary to estimate externality values. In the case of behavior prices, marginal control or user opportunity costs are the relevant ones, whereas financing prices require estimates of demand elasticity. Simulations and modeling exercises need to be undertaken to come up with suggested values for the chosen EIs.

Legal Evaluation

In parallel with the economic evaluation of the instrument choices, regulators should also pay attention to the legal aspects of these choices. The use of EI may affect conventional property rights and consequently may require a new legal framework, which can be difficult to be set up. Therefore, the final choices have to be in accordance with these legal aspects to avoid either a long process of legalization or future judicial disputes.

Simulation of Revenue Generation and Distribution

Since most of the EI applications are expected to generate revenues, it is important to simulate the magnitudes of these outcomes. Note that, apart from the microeconomic factors affecting revenues, such as demand and control cost functions, revenue amounts are also dependent on macroeconomic parameters, such as growth rate, exchange rate, and so on. Therefore, on the basis of the monetary and legal evaluation exercises, regulators should simulate revenue estimates combining micro and macroeconomic parameters. Moreover, if revenue will be distributed, as for example in terms of sectoral transfer, subsidies, or loans, the scenario should also reflect these dimensions.

Economic and Social Impact Assessment

Environmental policy is often designed to deal with a scarcity of natural resources and therefore imposes use constraints on economic agents. Very often the discussion of a proposed EI is paralyzed by differing perceptions of its economic and social impacts. Although political compromise is inevitable on policy issues, regulators who are not reasonably aware of these main impacts will be trapped by articulate interest groups that seek to magnify the impacts in order to adjust the EI design or implementation for their own benefit. Consequently, opportunities for efficiency and social gains can be missed. Therefore, jointly with the revenue analysis, regulators must also assess economic and social impacts and translate them, whenever possible, into monetary values affecting the main social and economic groups related to the policy.

Compensatory Measures

Apart from this strategic behavior, there will be some groups that lack the resources to evaluate their losses and will only become aware of them when the policy is implemented. Therefore, along with economic and social impact assessments, regulators must work out compensatory policies on distributive grounds and growth restrictions. As was said above, although any policy instrument will create losers and beneficiaries, the use of pricing systems is more difficult to leave to the discretion of politicians and environmental agencies once it is implemented. The relation between charge costs and use levels is less sensitive to individual agreements and exemptions that are not already stated in the charging rules.

Institutional Arrangements

Defining the institutional arrangements for EI choices means identifying each organization’s role and commitment and the incentives for cooperation. Note that EI revenue is often a good incentive for cooperation, but secondary benefits from the successful EI application, such as public expenditure reduction and sectoral growth, may also be attractive. Regulators must find ways to confirm the capacity of each institution involved and create the necessary formal links.

Implementation Planning

The El must be planned for gradual introduction so that simulation and modeling results and institutional arrangements can be tested. National or regional policies can be implemented by pilot projects or experimental programs.

Public Awareness and Debate

Debate with the major losers and beneficiaries of the policy and the proposed instruments should be attempted throughout the development phase to adjust decision-makers and experts’ estimates and perceptions. Fiscal devices are not well perceived by economic agents, particularly if they also restrict currently free use of natural resources. Objections on the ground of property rights often arise against any use charge; therefore, public awareness of the actual costs and benefits of the policy and its proposed economic instruments has to be carefully created.

Performance Indicators

Together with the implementation planning, performance indicators have to be designed to allow adjustments during the implementation process and corrections when environment and economic scenarios change. Additionally, such indicators further public awareness and acceptance.

The itemization above is merely guidelines for EI formulation, and the arrangement, importance, and detailing of each item depend on each case. Of course, the guidelines make demands on current institutional capacity and their full application is not always possible. Regulators can, however, use them in approaching international agencies and organizations, emphasizing the steps for which they believe technical and financial assistance is most necessary. Equally, these international institutions should orient their assistance on the same basis in order to help countries to make the most of the efficiency and social gains of economic instruments on environmental management.