User Charges in the Environmental Economics

In fact, in the environmental economics literature, both tax and charge are being used interchangeably indicating that a negative price is levied in proportion to the amount of' dzmage imposed on society due to pollution. It is also known as the price to be paid to internalize the social cost emerging out of environmental problems. While tax has a straightforward single connotation, however, user charge has many. The four broad types of user charges being practiced are:

a) Emission charge - charge levied on the pollutant to internalize the social damage emerging out of pollution activities.

b) User charge - fee levied for using the environmental resources.

c) Product charge -taxes are levied on the goods produced with polluting inputs. Carbon tax is the best example.

d) Administrative charge - fee levied by the government for implementation or monitoring various environment associated legislations.

In comparison with fiscal instruments, incentive mechanism performs better in controlling pollution. It has been theoretically proved that paying pollution tax is always costlier than adopting pollution control measures. Thus, it is cheaper for the firm to adopt pollution abatement measures (installation of clean technology, effluent treatment plants and more efficient utilization of exhaustible resource) than paying the taxes. Financial instruments or subsidies are the incentives given to the polluting agents to abate pollution. As described, it may be in various forms such as financial subsidy, soft loan and grants, sectoral/revolving funds, financial aid in installing new technology, subsidies for environmental research and development expenditure. It is an important instrument of environmental protection in developing countries.

Surprisingly, subsidy is being promoted in the developed world too but in different forms. In developed countries, the environmental taxes imposed and collected on various environmental items are being exclusively used for environmental protection activities in the form of soft loans or grants (or the development of improved technologies and resources, and related infrastructure development. In a way, such an encouragement has been very effective in environmental management in developed countries.