This document discusses using economic instruments to promote greener products in Eastern Partnership countries. It outlines options like product taxes, tax differentiation, deposit-refund systems, and extended producer responsibility. These can incentivize reducing pollution and introducing greener products. The document analyzes objectives, effects, and areas of potential application for each instrument. Key areas discussed include motor vehicles, fuels, packaging, and hazardous waste products.

1. Economic instruments for greener products in Eastern Partnership
countries.
Creating Market Incentives for
Greener Products
Stephen Smith (University College London)
OECD expert meeting: Paris, 6-7 March 2014

2. Introduction
• Draft Policy Manual “Creating market incentives for
greener products”
• Strategic approach to using product related economic
instruments
– key policy options
– implementation issues and priorities
• Aim is to help EaP countries design or reform economic
instruments relating to environmentally-harmful products
– Product taxes and tax differentiation
– Deposit-refund systems and Extended Producer
Responsibility (EPR)
• Incentives to reduce pollution and to introduce greener
products

3. A strategic approach:
• Selecting the right instruments:
– appropriate to the relevant environmental problems and policy
objectives
– capable of achieving the required environmental improvements
• This introduction
– describes the range of instruments available
– sets out key issues to consider:
• the objectives of policy
• effects and side-effects
– highlights where product-related instruments could contribute to
more effective environmental policy

4. Product-related economic instruments
• Product taxes
• Tax differentiation
• Deposit-refund systems (DRS)
• Extended producer responsibility (EPR)
Different objectives
• Some instruments are used primarily to change consumer
purchasing behaviour (taxes and tax differentiation).
• Others aim to achieve changes in waste generation and
waste management (DRS and EPR).

5. Product taxes
• Levied on sale of products which affect the environment when
produced or consumed
• In OECD countries, some product taxes have been introduced for
environmental reasons
– To stimulate changes in producer or consumer behaviour
• Some major revenue-raising product taxes have important
environmental effects
– E.g. taxes on motor fuels and other energy products
• Sometimes revenues are earmarked for environmental purposes
– E.g. to contribute revenues to an environmental clean-up fund

6. Tax differentiation based on environmental
factors
• Existing taxes can be adapted to give incentives for greener
production and consumption.
– Increase the tax on “dirty” goods
– Reduce the tax on “green” goods
• Aim is to induce behavioural change
– Tax differential can make green production more profitable
– A higher price for dirty products will encourage consumers to switch
• Tax differentiation rarely increases revenues

7. Deposit-refund systems
• Used to encourage high rates of recovery
– items that can be re-used or recycled (bottles, cans, etc.)
– products that would be harmful in general waste (e.g. batteries)
• DRS can be mandatory, or voluntary if the collected items
are sufficiently valuable (e.g. reusable printer cartridges)
• Can be operated by firms themselves or by special-
purpose agency

8. Extended Producer Responsibility (EPR)
• Producers are made liable for the social costs of disposal (including
the environmental impact) at the end of the product life
• EPR legislation places obligations on producers
– either to recover and recycle end-of-life products themselves
– or to pay for industry-run collection and recycling
• EPR can take a variety of forms:
– Collection by each individual firm or an industry-level organisation
– Deposit-refund systems might be one way of ensuring that items are
recovered
– EPR can offer cost-reducing flexibility to firms, but needs to be enforced

9. Clarifying policy objectives
What do we want these instruments to achieve?
• Environmental effectiveness
– Behavioural change – greener production and consumption
– Enforcement / compliance issues may be crucial
• Impact on public revenues
– High revenue potential of some product taxes, especially on energy
– Could permit tax cuts elsewhere
• Impact on public budgets
– Costs of tax administration, etc.
– EPR may reduce costs of public waste management
• …. and we need to bear in mind the wider implications of using these
instruments, which may be important

10. Wider implications of instrument choices
• Effects on business
– Costs borne by firms – “compliance costs”
– Impact on competitiveness – if foreign competitors don’t face similar
requirements
– Business opportunities – cleaner products, waste management,
etc.
• Effects on consumers
– Additional tax burden
– Costs and inconvenience (e.g. separation and return of wastes)
– Equity impact: some costs may bear heavily on poorer households
• Overall functioning of the market economy
– Effects on competition and innovation
– Market instruments may be better than bureaucratic regulation, but
still need to be carefully designed and implemented

11. In OECD countries, most product-based economic
instruments are in a few areas:
Motor vehicles
Motor fuels and household energy
Pesticides and fertilisers
Packaging products and materials
Products that generate hazardous waste
tax, DRS, EPR
tax
tax
tax, DRS, EPR
tax, DRS, EPR

12. Areas of potential application (see Table 1)
Motor vehicles
•Taxes on initial sale can encourage purchase of smaller,
more fuel-efficient vehicles.
•Annual vehicle use taxes have less effect on vehicle
purchases.
•Existing vehicle taxes can be differentiated
– E.g. based on engine size, CO2 emissions rate, etc.
•Deposit-refund systems to discourage dumping of end-of-
life vehicles. (Is this a big problem?)
•EPR is used in some OECD countries to encourage vehicle
recycling.

13. Motor fuels
•Existing fuel excises can be increased/differentiated
•Reduce tax on low-sulphur diesel and other “green” fuels
•Balance by tax increase on existing fuels, so no loss of
revenue?
Motor engine oil
•DRS/EPR can be used to encourage recovery of used oil, to
reduce discharge of waste oils
Motor tyres, vehicle batteries
•Use DRS or EPR to encourage separate recovery
Consumer batteries
•Tax differential may discourage sale of most damaging types
•DRS or EPR could encourage separate recovery

14. Bottles, cans and other drinks packaging
•Tax per new can or bottle can encourage re-use by making
single use more costly
•DRS can be costly
•EPR could give firms an incentive to find less-costly ways of
ensuring high rates of return or recovery
Plastic shopping bags
•Tax on the use of plastic carrier bags by retailers (Ireland)
Other packaging materials and products
•Taxes on supply of packaging materials to firms could
discourage excessive use and encourage innovation
•Tax rates on different materials should reflect waste
management costs