Greening Markets: Market-Based Approaches for Environmental Management in Asia

By Asian Development Bank

Asia has experienced massive economic growth, characterized by rapid urbanization and industrialization, changing demographics, and increasing consumption and demand for resources. This has contributed to significant environmental degradation. The challenge faced by governments in the region is in identifying and implementing innovative and dynamic policy approaches that are effective at improving environmental quality while sustaining development gains. This report reviews past and ongoing applications of market-based instruments to address air quality, water, and waste management in Asia. It provides recommendations for the use of market-based instruments for more efficient and effective environmental management.

• Language: English
• Publisher: Asian Development Bank
• Release date: Jul 1, 2021
• ISBN: 9789292629359

Book preview

1 Introduction

KEY MESSAGES

•   The report assesses the suitability of selected market-based instruments (MBIs) to address environmental problems and offers recommendations for promoting their use, opportunities for scaling up application, and where new MBIs offer the greatest promise.

•   Policies to protect and improve environmental quality are needed in much of developing Asia.

•   Heightened levels of air pollution threaten urban and rural populations, water resources are increasingly stressed, water pollution threatens the drinking water of millions, and the waste stream created by increases in consumption is causing tremendous challenges.

•   Command and control regulations have traditionally been employed to set specific standards for users, which do not typically create incentives to change behavior or developing innovative solutions to reduce pollution.

•   MBIs are policies that use prices and incentives to achieve environmental goals at a lower cost than traditional regulations.

•   MBIs can be cost-effective and flexible approaches to environmental protection. MBIs are also dynamic and create incentives to innovate to achieve the least cost for abatement.

•   MBIs covered in this report include (i) taxes, fees, and charges; (ii) water pricing; (iii) tradable permits; (iv) environmental subsidies and removal of harmful subsidies; (v) payments for ecosystem services; (vi) disclosures, labels, and voluntary agreements; and (vii) hybrid policies.

•   The success of an MBI hinges on its design, implementation, monitoring, and enforcement. It also depends on public perception and understanding, and distribution of costs and benefits (especially on vulnerable groups).

Background

Market-based instruments provide incentives and flexibility to achieve environmental goals at a lower cost.

The need for innovative and aggressive environmental policies in much of Asia is clear. Amid rapid urbanization, a changing population structure, and increased demand for resources, goods, and services, environmental quality has been significantly degraded. Furthermore, the energy and water intensity of manufacturing production in developing Asia—the amounts of water and energy used for a given amount of production—are double the world average (BP 2019). The accelerating environmental degradation in Asia indicates the need for more interventions and the utilization of better policies (Gunatilake and De Guzman 2008). Although there has been increasing policy intervention in Asia, the implementation of environmental policies has often been ineffective and lacking a scientific basis (United Nations Environment Programme [UNEP] 2016).

Given the dynamic setting and changing economic conditions, there is a need for environmental policies that allow for flexibility, creating incentives for individuals and firms to make decisions that would be better for the environment and society as a whole. Previous experience suggests that relying too heavily on direct regulations is not optimal in some sectors, as firms cannot make use of technological and management opportunities to reduce pollution at a lower cost. Market-based approaches can provide producers with more flexibility to find least-cost methods to reduce pollution and use resources more efficiently, which can promote technological innovation. This flexibility also implies that the largest pollution reductions can be achieved by firms with the lowest costs (Gunatilake and De Guzman 2008).

Ideally, market-based policies would create incentives for more efficient use of natural resources, induce innovation, and internalize the costs of using natural resources. Compared to regulations controlling emissions, technologies, or production decisions directly, market-based instruments (MBIs) rely on markets and prices to steer decisions toward more efficient outcomes. Past experience indicates that successful application of MBIs is affected by (i) the characteristics of the policy instrument, (ii) the characteristics of the environmental problem, and (iii) local context, including technical requirements, and the economic, social, and political environment. As such, the suitability of MBIs is likely to vary with a country’s