Question

Ways in which the tax laws encourages pro-environmental behavior.

Answer 1

Economic instruments describe a broad set of interventions including taxes and charges: subsidies and incentives; tradable permits and quotas; awards, licences and franchises; and loans, guarantees and insurances. They can be used to encourage pro-environmental behaviour (e.g. subsidies and tax credits) or to discourage behaviour that is environmentally harmful (e.g. quotas and taxes). Generally speaking economic instruments are used to introduce price signals to consumers and producers and to act as a reminder of the external costs and benefits of goods and/or activities (OECD, 2002). Table 1 describes the main types of economic instrument that are generally available to Government. Some of these instruments are however more appropriate to pro-environmental behaviour change than others and the following sections discuss this specific angle in more detail.

Table 1: Variants of economic instruments
Variant	Description	Examples
Taxes	The Government raises the price paid by the consumer or costs faced by industry	Fuel duty
Charges	Government charges for services that are consumed	Policing at football matches
Subsidies, tax credits and vouchers	The Government reduces the price paid by the consumer or the costs faced by industry	Pre-school education voucher R&D tax credits
Benefits and grants	Similar to subsidies but often used when the emphasis is on who receives the subsidy rather than the goods/services that are being promoted (grants and benefits can be ring-fenced or can be use for any expenditure)	Education maintenance allowances Incapacity benefit Warm Front Scheme (Home Energy Efficiency Grant)
Tradable permits and quotas	Systems under which a right to produce a good/service (or by-product) is created and a market is created to allow companied to buy or sell these rights	Carbon emissions trading scheme
Award and auctioning of franchises and licenses	System under which the right to produce a good/service is sold	Radio spectrum of mobile phones Airport landing slots
Government loans, loan guarantees and insurance	Government directly provides loans and/or provides a subsidy for the loan (e.g. through guarantees or insurance)	Student loans Export credit guarantee