Polluter pays principle

Figure 1. A coal-fired power plant in China.

The idea behind the Polluter-Pays Principle is, the entity that pollutes or creates environmental degradation is the one that should directly pay the cost of the polluting action (as opposed to letting society as a whole pay the cost). The costs that have to be paid are mandated by the government of a country or region and can come in variety of forms. Costs can be both preventative such as a tax or restorative such as clean-up costs after an accident.

This principle outlines the basic precepts that the cost of using certain resources should better reflect the effects on the planet and environment as a result if using that resource. It does not dictate the level or type of cost that should be applied and does not layout an acceptable level of pollution. The Polluter-Pays Principle is a framework for the governments of the OECD to work within in order to develop their own pollution prevention and environmental restoration laws.

This principle leads to a higher price for goods and service is the idea behind creating a carbon emissions tax, and also is why nuclear power plants must pay for nuclear waste disposal as part of their operational cost.

Originally the PPP was established to force firms that harmed the environment with accidents to clean the accident up. While this was a good policy because it forced firms to be more responsible and accountable it was not a proactive policy.

The PPP has evolved to be a proactive measure that can be used to address the problem of climate change, pollution and others.

Effects of the PPP

Figure 2. The flow chart shows how the cost of a PPP system can affect consumers and producers. Without a PPP system, the household buys electricity from a firm who is supplied by a generation firm (often the firm that generates electricity also sells it). Under the PPP system, the cost of generation is higher because the generation method has to take into account the effects of it generation in terms of pollution. Because the firms have to keep costs low, they pass the cost of the PPP system onto the consumer. In the bottom half, the household pays more to the generation firm which remits the money to the government to account for the environmental impact they have.

The polluter-pays policy means that a polluting firm should have to pay for both their production costs and any costs that are associated with the pollution created. This could be cost of a better air scrubber or a tax on a certain amount of emissions. Under a PPP system the firm has to pay both its cost of production and the cost that the pollution could impose on society. The implementation of a Polluter-Pays scheme is done in order to internalize or fix a negative externality such as pollution.

Under a Polluter-Pays system, a firm that produces pollution as a byproduct of their production will have to pay a tax to offset the cost to society that is not accounted for. The PPP does not stipulate that the cost should be entirely paid by the producer. The producer can pass the cost of the tax onto the consumer meaning that the bill to the consumer rises.

When the electricity bill of a consumer rises, it is because they have to pay for their choice to use electricity produced by polluting methods. The higher cost of switching to another electrical source such as photovoltaic cells also reflects the environmentally choice. The trade-off is that the PV cell alternative does not incur an ongoing social cost.

A carbon tax or a emissions trading system are two possible solutions to the problem of pollution. See those pages for more information.

Problems with the Polluter-Pays Principle

There are a number of reasons why it is difficult to implement an efficient Polluter-Pays system:

• Some methods of correction are less effective as others. Under the payment method, a government pays firms to produce less overall to limit pollution but does not create any incentive to make their process less harmful.
• It is sometimes difficult to precisely measure emissions as firm will try to hide the real amount. It is difficult to both decide the appropriate level of acceptable pollution and the method to correct it.
• Across countries policies may differ in terms of how much pollution is allowed or how high the tax is, this can lead to a country gaining an advantage over another. If one country has a tax on a ton of CO₂ emitted that is lower than another country, a firm could simply move its operations to the country that has the lower tax which reduces their ocsts.
• Compliance,it is difficult to get a large number of countries to agree on levels of allowable pollution because each country has different industries and economic circumstances. It is also a challenge to ensure compliance within a country as there is a cost to the administration and regulation of the Polluter-Pays system.

• Different industries produce different levels of emissions.
• An industrial nation with a large amount of manufacturing, metal smelting and high emission electrical generation plants will produce a large amount of carbon emissions.
• Nations that are less industrial such as agrarian societies or highly developed nations where commerce is the main economic activity will procure a (comparatively) lower amount of carbon emissions.
• When making international agreements on the limiting of carbon emissions, the heavy industry nations feel more restricted or penalized. Because industry id the main economic driver, a limit or tax will reduce the efficiency of their economy, this is never a popular result for governments. As a result, governments are more reluctant to adopt measures such as carbon taxes or limits on emissions.

See Also

• Externality
• Pareto Efficiency
• Pareto Improvement
• Emissions trading
• Carbon tax