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Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
© Commonwealth of Australia, 1997
ISBN 0 642 26850 9
Emission charges, when used as an economic instrument, should be applied according to the level of emissions. Such charges may consist of a charge per unit of mass, volume or concentration of pollutant emitted. Depending on the levels at which they are set, they can provide strong incentives for dischargers to reduce their discharges to the environment. Dischargers face the option of paying the charge or of reducing the quantities emitted, thus responding to an economic incentive to carry out abatement.
Generally, charges are applied to point sources, which are relatively easy to monitor. Charges may also be applied to non-point sources such as farms and urban areas, although they have yet to be applied in this context in Australia.
Variations of charging systems include the use of zoned charges, variable rate charges (increasing as the levels of discharge increase) and charges applying above a threshold level of discharge.
Charges can provide a powerful ongoing stimulus for firms to undertake research and development for environmental control and to adopt better abatement technology and practices. These incentives stem from the cost savings that are potentially achievable from improved pollution abatement measures. Materials, energy and product recovery and recycling often result from these processes.
Charges can in some circumstances be used as a means of raising government revenue, rather than acting as an economic incentive for pollution abatement. However, by allocating these funds to environmental improvement projects or to other environmental functions such as monitoring and enforcement, governments may achieve environmental objectives.
The cost functions of dischargers may not be known, thus it may be difficult initially to set the correct scale of charges and obtain the desired environmental improvement. However, it may be possible to experiment with the level of charges, and observe the effect on the environment. By announcing a progressive scale of charges, increasing over time, some of these problems may be avoided. It is important, however, not to disrupt long-term investment plans within industry (especially in environmental control measures) and create opposition to a charging system.
Examples of emission charges are rare in Australia. The predominant form of environmental management consists of command-and-control systems, under which licences are issued to dischargers, with permits to emit specified volumes or loads of pollutants up to a maximum limit. These permits are usually tied to the licensee and are non-tradeable. Licence fees are charged primarily for revenue reasons rather than acting as economic incentives for the abatement of emissions.
The environmental protection and revenue effects of emission charges may move in opposite directions. Any system of charges that totally eliminated emissions would yield no revenue to the enforcement agency, but this is unlikely since a certain level of emissions is usually acceptable.
From an industry viewpoint, international competitiveness may be affected by the imposition of pollution charges. Emission charges could also create problems of commercial competitiveness if different systems were developed and applied in different States and Territories. Nevertheless, individual States and regions may wish to define their own levels of charges, taking into account possible differences in assimilative capacities of local environments and differences in community preferences for their beneficial uses.
Queensland has a licensing system for airborne emissions, administered by the Department of Environment and Heritage. The system is currently under review as part of the preparation of new environment protection legislation.
In South Australia, a licence is required for discharges to air. The fee is based on the annual production rate of the product, not on the quality or quantity of pollutant.
New South Wales uses a licensing system for air, water and noise, administered by the Environment Protection Authority (EPA).
Effluent charges operate in a similar way to emission charges. As in the case of air pollution management, the usual instrument in Australia has been a licensing system, with fees designed to cover administrative costs.
In most cases, noise is controlled largely through direct regulations. Penalties are imposed for non-compliance, but these cannot be described as an economic instrument in the accepted sense.
In South Australia, penalties were previously applied for breaches of the Noise Control Act 1977, but the Act was repealed following the introduction of the Environment Protection Act 1993. The new Act covers noise as well as other forms of pollution.
Similar regulations are used in other States. In Queensland, licences to create noise are issued without any charge, but the system is under review.
An example of the application of economic charges to noise is the noise tax imposed on aircraft using airports under the control of the Federal Airports Corporation (see section 4.4). The charge is levied via airlines and added to the price of a ticket.
An important objective of environmental management in South Australia has been to ensure that the quality of marine waters is suitable to protect the beneficial uses sought for those waters. Criteria have been developed to define appropriate water quality parameters for marine waters. All discharges to the environment in South Australia must be licensed. One of the relevant regulatory tasks has been determination of an appropriate system of charges to be applied in the context of the licensing system.
A pioneering application of an effluent charge in Australia is the system of fees introduced in South Australia to support the Marine Environment Protection Act 1990. Regulations were gazetted in 1992 and came into effect in 1993. The Act has subsequently been repealed and superseded by the Environment Protection Act 1993 (proclaimed in May 1995).
The system of charges operates under the Environment Protection (Fees and Levy) Regulations 1994, within the new legislative framework established by the Environment Protection Act 1993, and will be administered by the South Australian EPA. The fee structure is currently under review.
Description of Instrument
The fee structure discussed here is the schedule of charges introduced under the Marine Environment Protection Act 1991 and further dealt with in the Guidelines for Licensing Discharges to the Marine Environment (South Australian EPA 1993) specified by the Marine Environment Protection Committee. The guidelines discuss the required conditions for transitional licences to meet the following objectives and priorities:
In the schedule of fees, discharges are described as 'emissions' rather than 'effluents'. They are measured for every point source discharge to any South Australian tidal waters. The charge is levied according to the impact level which is computed by means of the formula:
impact level = flow x salinity factor x pollutant class factor x impact area factor where
Table 4.1 shows the existing schedule of charges.
|Impact level (range)||Fee ($)|
|less than 0.1||no fee|
|20,001 or more||240,000|
Source: South Australian EPA 1993
Assessment Against Criteria for Evaluation
The scheme has been operating for the last three years and has been considered sufficiently successful to be embraced by the Environment Protection Act 1993. Environmental objectives are met through compliance conditions and monitoring requirements that regulate discharges to the environment. The Act also provides for security bonds to cover potential rehabilitation/ restoration costs.
The Marine Environment Protection Committee established general principles for setting fees in their Guidelines for Licensing Discharges to the Marine Environment (South Australian EPA 1993). It is instructive to note the committee's comments on the general objectives of the system of fees:
'In recommending these principles for setting fees, the Marine Environment Protection Committee acknowledges that it is not attempting to set a fee which reflects the actual impact and costs to the community of any activity or category of activity, only that it is recovering some of those costs to the community in approximate proportion to the overall impacts and costs.'
The scheme clearly has the potential to reflect potential environmental damage costs to the community, and could provide positive economic incentives for improved technologies and management practices for effluent management.
A general review of the licence fee system is under way. It is designed to achieve greater application of the polluter pays principle in South Australia, and will include a revision of the fees for discharges to the marine environment. The Objects of the Environment Protection Act include:
'to allocate the costs of environmental protection and restoration equitably and in a manner that encourages responsible use of, and reduced harm to, the environment, with dischargers bearing an appropriate share of the costs that arise from their activities, products, substances and services.'
It is anticipated that the licence fee reform program approved by the State Government will increase the average annual licence fee from about $486 in 1993-94 to about $780 in 1999. The charging system can thus be expected to evolve in the direction of an incentive-based effluent management system rather than one designed to cover administrative costs. The reforms will also increase average annual licence revenue from its current level of about $850,000 to about $1.6 million in 1999, expressed in current dollar values.
The fee system introduced by South Australia is a pioneering example of an effluent charge in the accepted economic sense. One of its most innovative features has been the use of index values as a proxy for environmental damage costs. The strategy of increasing fees over time will provide anticipatory economic incentives, allowing dischargers to adjust to the changing regulatory environment and to implement cost-effective effluent management plans in the future. Sufficient revenue will also be generated to cover administrative and enforcement costs. Some other States in Australia have since adopted a similar approach in establishing fee structures to support their discharge licensing systems.
When the New South Wales EPA took over the functions of the State Pollution Control Commission, it inherited a licensing system for discharges to the environment that can be described as 'command-and-control'. The authority has been investigating various proposals to achieve the advantages of economic incentives as part of its regulatory functions. The options have included effluent or emission charges, 'bubbles' and tradeable discharge permits.
The instrument discussed in this case study is a system of load-based licence fees for discharges to the environment. At present, the system is only at the proposal stage, but considerable progress has been made in consulting with relevant stakeholders, establishing principles on which the scheme may be based, and drawing up a schedule for implementation.
Description of Instrument
The Load-based Licensing Scheme under development by the New South Wales EPA is an excellent practical example of an effluent or emission fee. The system incorporates targets and the level of the fee depends on the discharge load and its potential impacts on the environment.
A Steering Committee, with representatives from Sydney Water, the New South Wales Chamber of Manufactures, New South Wales Treasury and the Total Environment Centre, has overseen the development of the proposed scheme. A model has been developed to assess alternative designs for the scheme.
The general principles of the scheme are noted in a background paper (New South Wales EPA 1996a) presented to a special workshop on load-based licence fees held in January 1996. They are as follows.
Table 4.2 shows the pollutants to be covered by the scheme.
|Air pollutants||Water pollutants|
|coarse particulates||suspended solids|
|sulphur oxides||Biological Oxygen Demand|
|fine particulates||oils and greases|
|hydrogen sulphides||organic toxics (some)|
|metals (some)||metals (some)|
|organic toxics (some)|
The basis for calculating fees is similar to the system introduced by the South Australian EPA for its marine waters protection. The fees are determined in conjunction with a set of index values reflecting initial loads and subsequent environmental impacts. The index values therefore act as a proxy for environmental damage costs.
The proposed scheme has two levels of fees and two emission targets. The short-term targets are achievable by Australian industries in the short to medium term. The long-term targets reflect desired environmental outcomes that may be achievable over time through changes in technology and management practices.
The emission targets are calculated for each licensee using a 'target calculation factor'. Each factor is specific to a particular industry and is linked to the activity level of the discharger, measured in terms of tonnes of output, stocking rates (for example, for grazing), equivalent persons for sewage treatment plants, and square metres of land for diffuse sources such as factory storage areas or farm land.
The 'unit fees' for each pollutant are calculated as the product of a 'base fee' and the 'pollutant weighting'. The pollutant weighting indicates the relative harm to the environment of the particular pollutant. The fees also incorporate 'pollutant critical zone weightings' which reflect the state of the receiving environment.
The fee to be imposed on emissions above the short-term target will be set at a higher level than the fee for emissions between the two targets. The aim is to encourage firms to act promptly and to complete any existing pollution reduction programs. No fee will be charged on emissions below the targets.
The base fees can be varied to control the general level of economic incentive. It is proposed that the base fee will increase to full value over five years.
Loads will be determined through monitoring data where available, and otherwise through the application of 'emission factors'. Emission factors indicate the loads of various pollutants per unit of activity level for each discharger. The pollutant load is estimated by multiplying the activity level by the emission factor.
Options for implementation of the scheme, including the timing and integration with existing regulatory arrangements, are still under consideration. It is proposed that the industries initially falling within the scheme will be:
|cement works||electricity generation||petroleum works|
|ceramic or glass works||extractive industries||sewage treatment|
|chemical works (some)||livestock processing||incinerators|
|coal and other mines||mineral/metallurgical||bulk shipping facilities|
|coal works||paper production|
The industries to be covered next by the scheme comprise:
|agricultural industries||Chemical storage||livestock intensive|
|aquaculture||contaminated soil||marinas, boat/ship works|
|bitumen pre-mix||crushing, grinding industries||wood/timber milling|
|breweries||drum/container reconditioning||wood preservation|
Industry, environment groups and the community have been asked for their comments on the structure of the proposed scheme, including targets, pollutant weightings and pollutant critical zone weightings.
There will be provision for a formal review of the scheme every five years in consultation with stakeholders. There will be ongoing review of methods for determining loads.
Assessment Against Criteria for Evaluation
As the scheme is still in the planning stages, it is not possible to conduct a full assessment of its features and likely operation. However, it should be acknowledged that the scheme has many desirable properties, including the potential for encouraging more effective and economically efficient management of discharges, allowance for environmental impacts, cost coverage for administrative purposes and opportunities for stakeholders to participate in formulating the scheme. An important advantage of the proposal is that it builds on the existing system of discharge licences. Transition to the scheme should thus involve only modest legislative and administrative costs.
The New South Wales EPA's load-based licence fee system is a positive innovation in pollution management in Australia. While it is similar to the system of fees introduced in South Australia for marine waters protection, it will apply to a much wider range of industries and affected environments.
In some countries, charges are imposed on levels of noise nuisance. Charges are levied on aircraft, for example, on a per aircraft or per passenger basis, according to the type of aircraft and the noise level that is reached during take-off and landing.
The Aircraft Noise Levy Act 1996 was passed in August 1995, establishing a regime for the imposition and collection of an aircraft noise levy. The levy applies at designated airports as a means of recovering costs of Commonwealth noise amelioration programs involving the acquisition and insulation of homes and certain public buildings in high noise areas near those airports.
The levy has been applied to landings of jet aircraft at Sydney Airport since 1 October 1995. It applies to aircraft on both domestic and international routes, regardless of whether they are carrying passengers.
The amount of levy payable for each landing is calculated using a formula specified in subsection 6(1) of the Act which takes into account a 'levy unit' and the 'assessed noise' of the jet aircraft. The levy unit (currently $162.12) is the minimum amount payable by a jet aircraft required to pay the levy. Assessed noise is a combination of three certification levels for aircraft measured at three points (the lateral reference noise measurement point; the flyover noise measurement point; and the approach noise measurement point) specified under the provisions of Volume 1, Annex 16 to the Chicago Convention. The three certification levels vary for each model of aircraft and type of engine. The formula is designed so that the amount of levy payable doubles for each additional 5 EPNdB (Effective Perceived Noise Level in decibels) of noise generated by the aircraft. A typical levy would be $228 per landing for a particular Boeing 737-300 aircraft.
The rate of levy is adjusted with increases in the consumer price index. Revenue estimated for 1996-97 is $37 million, which is expected to recover the costs of the Sydney noise abatement program over 12 years.