Policy instrument choice in the area of chemicals is surrounded by uncertainties in terms of the damage costs from chemical production and consumption as well as the abatement or substitution costs of replacing chemicals of concern. In a seminal paper, Weitzman shows that the assumptions made under uncertainty about the marginal damage costs and marginal abatement costs are fundamental to the choice of policy instrument [1
]. When there are reasons to assume that the marginal damage cost rises sharply with use, for example due to threshold effects, and the marginal cost of abatement is comparatively low, then a quantitative restriction is generally more efficient than a price-type instrument. When there are reasons to assume that the marginal damage cost is not rising sharply with use but the marginal abatement cost is high, a tax or other price-type instrument is usually more efficient than a quantitative instrument.
Chemicals policy has traditionally focused on reducing the risk from chemicals where damage costs are known to be high, such as lead and PCB (polychlorinated biphenyls). Hence, quantitative restrictions through bans and permits have been the most common policy instruments in chemicals management. There is growing concern about the combined effect on health and ecosystems from low-dose exposure to multiple chemicals, as the production of synthetic chemicals have grown very rapidly during last decades [2
]. Only a fraction of the more than 140,000 industrial chemicals that have been synthesized since 1950 have undergone rigorous testing for safety or toxicity [3
]. Recent studies indicate that chemical pollution carries larger health and environmental costs than previously documented [3
] . Indicative examples include substantial health and environmental costs associated with the diffuse and widespread pollution from PFAS (per- and polyfluoroalkyl substances) [5
] and large costs linked to the effects of endocrine disrupting substances on male reproductive health and other health endpoints [6
A focus on reducing the pressure from not only substances of very high concern but also from broader groups of chemicals and chemical products could motivate a larger use of market-based instruments in chemicals management [9
]. Developments in this direction include taxation of pesticides in several European countries [10
] and taxation of flame retardants in electronic products, chlorinated solvents and products containing phthalates and PVC (Polyvinyl chloride) in Scandinavia [11
]. The Swedish government has also announced that a tax on hazardous chemicals in clothes and shoes will be implemented.
The two main arguments in favor of market-based instruments is that they can be more cost-effective in reducing use, and better at promoting innovation than bans, use restrictions and technology standards [13
]. These command and control policies typically allow for very little flexibility in the means of achieving specific targets. As a result, all firms need to meet the same target, irrespective of how costly the change is. However, the cost for complying with a ban or use restriction often differs between companies, due to, for example, differences in production processes and sunk costs from technology investments. Ignoring these differences in costs for substituting hazardous chemicals between firms reduces cost-effectiveness.
By making the use of a certain chemical more costly, market-based instruments—in contrast with standards and permits—provide a continuous incentive for substitution with less hazardous alternatives. Companies have an incentive to substitute the targeted chemical as long as their marginal cost of substitution is lower than the cost of using the targeted chemical. By allowing firms with different substitution costs to reduce use at different scales, market-based instruments can incentivize a cost-effective reduction in the use of the targeted chemical. Moreover, by increasing the cost of using a specific chemical, taxes and charges can also spur innovation and search for new alternatives to the relatively more expensive input. Ideally, market-based instruments should target groups of substances with similar chemical structure in order to avoid regretful substitution where companies shift to using a close substitute with similar properties as the targeted chemical.
While market-based instruments have some merits, there are many situations where their use is less appropriate. For example when the health or environmental damages increase steeply due to increased exposure to a hazardous chemical, where effects are location-specific, and where threshold effects, i.e., an abrupt spike in the damage function after a given threshold, are likely. In such situations, bans and use restrictions are more appropriate [1
The design of policy instruments has different levels of technical complications at different stages of the life cycle of chemicals—i.e. the design of chemicals and chemical products, their use as input into the production of goods and services, as part of a finished good or service, and as waste. From an economic efficiency point-of-view, it is desirable to target policy instruments towards specific environment or health damages as closely as possible. Formally, an optimal (green) tax should be set such that the marginal damage is equal to the marginal benefit of using the chemical. However, information on the relation between the given chemical and its damage function in the different stages of the chemical life-cycle is costly to obtain. Besides uncertainties regarding the hazard profiles of chemicals there are often also large uncertainties regarding the damage costs from different use and exposure scenarios. In some cases, the main damage stems from point sources, such as industrial plants for production or recycling. In other cases, the damage costs arise from diffuse sources when millions of consumers use products containing chemicals. There may also be large spatial variations in damage costs from for example the use of fertilizers and pesticides [12
]. It can therefore be complicated to develop differentiated taxes based on specific damage estimates for different uses. Alternatively an input tax can lower the overall use of a specific chemical and can be easier to administrate as the number and diversity of producers is far more limited than at later stages. However, an input tax may risk unduly restricting less harmful applications of the targeted chemical [16
]. In practice there are many context-specific factors—such as information constraints, administrative costs, distributional effects, and political economy pressures—that determine which policy instruments are most effective and feasible to implement.
In this paper we take stock of the extent and lessons-learned from using market-based instruments for chemicals management, we outline key considerations policy makers face when designing policy instruments for chemicals management and identify an agenda for further research. We discuss the effectiveness, benefits and challenges of market-based instruments within the broader array of possible policy instruments in the particular context of chemical management. While there are several reviews of the use of market-based instruments for environmental management in general, e.g., references [13
], there are relatively few studies reviewing the use of market-based instruments for chemicals management [10
The next section describes the methodology used in our review of the use of market-based instruments for chemicals management. Section 3
presents the results of the review. In the concluding section, we discuss our results and outline some opportunities for further research.
Based on a review of published and gray literature and an analysis of the OECD database on Policy Instruments for the Environment [23
] we analyze experiences and lessons-learned from using market-based instruments for managing hazardous chemicals. In comparison with other environmental policy areas, we find a relatively limited use of market-based instruments for chemicals management. As chemical policy has targeted the prevention of health and environmental damage from a limited number of highly hazardous chemicals, bans and use restrictions have been the most frequently used policy instruments. Price-type instruments give the regulator less certainty about effects on the quantity used of a specific substance, and are therefore less appropriate for addressing chemicals of very high concern. Nevertheless, in some cases, taxes and other market-based instruments have provided important complements to bans and use restrictions, also in relation to very hazardous substances such as lead. A growing interest in using market-based instruments in chemicals management is indicated by increasing use of taxes on pesticides in several European countries and on hazardous chemicals in consumer products as well as the use of taxes and charges in hazardous waste management. A focus on reducing the pressure from not only substances of very high concern but also from broader groups of hazardous chemicals and chemical products is likely to generate increased interest in the use of market-based instruments. The repeated calls to speed up innovation in order create chemicals that are ‘safe by design’ may also generate an interest in an increased use of market-based instruments. By changing the relative prices in favor of less hazardous chemicals, chemical taxation or other market-based instruments can change the rate of return of investments in favor of alternative technology. In addition, governments can generate additional incentives for research and innovation for example by providing tax credits for expenses related to research and development or by providing favorable treatment of capital or labor expenses. This would also address the market failure related to imperfect information and knowledge spill-overs, which tend to result in a sub-optimal level of innovation [65
The review provides some evidence that risk-based taxation—which links taxation more closely to external effects—can be effective in reducing the environmental and health effects from pesticides. In contrast, non-differentiated taxation, e.g., ad-valorem or per unit taxes, of pesticides can have unintended consequences as quantity reductions can be achieved through substitution with more toxic products [66
]. Closer proportionality of taxes in relation to environmental and health risks may also increase the likelihood that a tax will be perceived as fair. Thus, risk-based taxation may not only enhance the economic desirability of taxes but may also increase their political legitimacy [24
]. However, risk-based taxation is administratively more burdensome than per unit taxation for both regulators and industry. Hence, balancing the benefits of a targeted approach against its transaction costs is a key dilemma in policy instrument design [67
]. While taxing actors early in the chemical life cycle in some cases can be reasonably cost-effective second-best measures [12
], regulatory design needs to carefully consider the technical and political complications associated to the distribution of regulatory costs and benefits resulting from targeting actors at different stages of the chemical life cycle [68
The introduction of market-based instruments for managing hazardous chemicals is often met with resistance by interest groups that will face higher taxes or no longer benefit from a subsidy as a result of the instrument in question. For example, the Swedish tax on fertilizers was removed following protests from farmers that the tax would hurt their ability to compete with other European farmers. However, protests from interest groups are also common when other policy instruments to regulate chemicals are introduced.
If taxes on pesticides and chemical fertilizer lead to large differences in prices between countries, they can provide incentives for illegal trade. However, countries like Sweden and Denmark who have applied this type of taxes, are assessed to have the lowest levels of illegal pesticides in the European Union [69
]. This indicates that tax induced price differences on agrochemicals do not necessarily lead to illegal trade if adequate control measures are in place.
Certain amounts of policy consensus and institutional enforcement capacity are required to implement policy instruments that increase social welfare. This is a generally valid assertion, regardless of the choice of quantitative or price based policy instruments. Instruments should preferably be designed together with relevant stakeholders and then be gradually implemented. Consultation and monitoring of the reactions of stakeholders to a new incentive is important in order to avoid undesired side effects and to ensure that the incentives operate at the right level. How information about a policy change is communicated and how revenues are used is often critical to successful implementation.
It is important to have an adaptive capacity to re-design an instrument during the initial stages. Several schemes, mostly regarding fertilizers, have failed due to strong lobbying against them by the respective sector. It is key that, for example, farmers understand the relationship between their actions, the state of the environment and the policy goals to which the introduction of a tax or other market-based instruments should contribute. This implies a need to work together with relevant stakeholders to build agreements and share information during instrument design and implementation.
The review indicates a relatively limited use of market-based instruments for chemicals management in low- and middle-income countries. A pertinent question is whether this is due to a lack of specific institutional capacities that are only available in high-income countries? In general, the capacity to generate fiscal revenue is restrained in low-income countries, which tend to have a large informal economy and a relatively large share of agriculture in total output. This makes income taxes play a relatively less important role for revenue generation. Instead indirect taxes, such as foreign trade taxes, excise taxes on e.g., alcohol, tobacco and fuel and value-added taxes, play a relatively more important role, compared with in high-income countries [70
]. In principle, taxation of chemicals should therefore not be more difficult than taxing income in many low-income countries. However, a limited general capacity to assess when and how to use market-based instruments and to implement such instruments in practice may contribute to the low use of them.
Our review further indicates that the effectiveness of market-based instruments is linked to other institutional factors. In the area of hazardous waste management, effectiveness is associated with the level of awareness among citizens about the importance of correct disposal and the accessibility of collection and recycling stations [49
]. For example, the hazardous waste management system in Canada is assessed to be more efficient than in many states in the US, due to a well-developed system for waste collection along with a long tradition of the public separating different waste streams [48
]. Similarly, the Nordic countries have more efficient systems for hazardous waste management than some other European countries due to higher levels of consumer awareness and extensive waste management systems already being in place [18
Our review also points to important knowledge gaps regarding the use of market-based instruments for chemicals management. We identify the following opportunities for further research:
Evaluate the effectiveness of policy instruments for chemical management in different sectors and contexts. There is a lack of good evaluations of the effectiveness of different instrument uses. This is unfortunate since the performance of different policy instruments for chemical management is dependent on context specific factors such as price elasticities, national and international market structures, availability of substitutes and the exposure characteristics for the targeted chemicals. There is also a need for enhanced knowledge about what type of institutional and political economy factors that are critical during instrument design and implementation.
Evaluate the effects of agricultural policies and other policies generating perverse incentives for increased use of hazardous chemicals. Reducing subsidies for fossil fuels has been identified as a cost effective instrument to reduce green-house gas emissions. Similarly, addressing subsidies which incentivize an increased use of agrochemicals and other hazardous chemicals, is relevant for improved chemicals management. However, more research about the extent of such subsidies as well as their effects on environmental resources, health and income distribution is needed.
Study the use of risk-based taxation of hazardous chemicals. Our review indicates that risk-based taxation—which links taxation more closely to specific environment and health risks—can be effective in reducing the environmental and health effects from pesticides. It is likely that instruments that require actual emission measurements will become more popular in the future, thanks to information technology that reduce monitoring costs. However, more knowledge about exposure-damage relationships is needed in order to properly design such instruments. Experimentation and learning about the effectiveness of such taxation schemes is warranted.
Evaluate experiences from taxation of chemicals in groups. Denmark and Sweden have implemented taxation of phthalates in PVC and flame retardants in electronic products. While there are some indications of a lack of precision and high administrative costs associated with these taxes, there is a lack of formal evaluations. These initiatives may provide important lessons for future policy instrument design and should be studied further.
Study institutional reforms which can incentivize sound chemicals management by making producers bear the full environmental and health costs during the product life cycle. The establishment of systems with Extended Producer Responsibility seem to have succeeded in shifting the cost of waste management from authorities to producers in many countries. Requirements on information disclosure or legal obligations about liability for firms to prevent and remedy environmental damages—for example obligations to be insured or to build up funds for clean-up or waste management—are other examples of institutional reforms, which can generate incentives in line with the polluter pays principle. These types of institutional reforms merit further attention by researchers as they may provide important compliments to both price- and quantity-type policy instruments in generating incentives for sound chemicals management.