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The p olluter pays concept is a principle of international environmental law that argues that those who cause damage to the environment (i.e., polluters) should be liable for the costs of the damage. Although the Rio Declaration on the Environment and Development supports this principle, its roots can be traced back to the early 1960s when some of the first instruments were drafted to address civil liability for damage resulting from hazardous activities, such as nuclear energy and oil pollution. The principle is an example of attempting to tackle pollution through economic instruments, internalizing the environmental costs of production. The Rio Declaration contains the polluter pays principle only for nations and does not deal with transboundary pollution; the European Union’s (EU) polluter pays principle does deal with transboundary problems.
The first express definition of the principle was given by an Organisation for Economic Co-operation and Development (OECD) recommendation in the context of economic policy. In 1972, the OECD Council Recommendation on Guiding Principles Concerning International Economic Aspects of Environmental Policies stated:
This [polluter pays] principle means that the polluter should bear the expenses of carrying out the [pollution control] measures decided by public authorities to ensure that the environment is in an acceptable state. In other words, the cost of these measures should not be accompanied by subsidies that would create significant distortions in international trade and investment.
This principle does not have a liability on any party, but is more of an economic instrument for allocation of pollution control costs on the party responsible for causing the pollution. The main objective of this fundamentally economic policy is to encourage the free market internationalization of environmental costs in preference to trade distortions effected by governmental subsidies.
An economic system is considered to be efficient when scarce resources are allocated to meet the needs and wants of consumers, though there are different types of efficiencies. If the consumer is willing to pay the price, which equals the cost of resources (price is equal to marginal cost), it means allocated efficiency has been achieved and economic welfare is maximized. Productive efficiency is achieved, however, when the production costs of the firm are applicable both for the short and long-run-in other words, when producers minimize the waste of resources in their production process.
In this system, there has been no consideration of the cost of pollution, or of pastures that are overgrazed or oceans that are overfished, because they are not owned. Pollution in any form is considered to be an externality-the price of polluting the air or water is not considered or built into producing the goods. The cost to society of polluting the air and water increased in the form of ill effects on human health and well being.
It was a British economist, Ronald Coase, who came up with an elegant idea of creating markets for such goods in 1959-60. If property rights are defined, then the polluters and exploiters could bargain with the victims of pollution or over exploitation until a mutually acceptable solution was found. Depending on who held the property rights, the victims would have to bribe the polluters or the polluters would have to compensate the victims.
As an example, consider two neighbors-one of them likes to have a nicely-cut lawn and cuts it with a lawnmower, which disturbs the other neighbor in the evenings and Sunday afternoons. They negotiate and strike a bargain in which the neighbor who likes to sit on the deck and enjoy the evenings offers monetary compensation to the neighbor who likes shorter grass. In this case, as the property right is vested in the gardener-she has the right to cut grass when she likes-the sufferer has to pay the polluter (although this would not be true if a strict noise nuisance act was in place). Even though it is the body owning the property rights who has to be paid in the example above, according to the principle of polluter pays, the industries causing pollution or contamination are obliged to pay for their damage to the environment.
The European Union
In 1973 the EU included the polluter pays principle in its first program of action on the environment. The polluter pay principle in “Principles of a Community Environmental Policy” stated: “The cost of preventing and eliminating nuisances must in principle be borne by the polluter.” A subsequent recommendation in 1975 provided guidance for member state implementation, and later endorsements in treaty amendments established a legal basis backed by the OECD instruments.
According to a strict reading of the polluter pays principle, funds collected by a national program from pollution charges, fees, or taxes should not be used as financial assistance to a polluter, as such activities would constitute a government subsidy. Each EU country, however, has developed unique re-interpretations of the polluter pays principle to justify its subsidy schemes as being compatible with the principle.
Differences in national environmental protection policies from country to country may have an impact on international trade. Countries that adopt strict environmental protection measures may increase the costs of production relative to their trading partners, thereby reducing the competitiveness of their manufacturing industries. As a result, cooperative efforts have been made by industrialized countries to equalize production costs by reducing governmental subsidies for private pollution control.
The polluter pays principle has been incorporated in some transboundary instruments such as the Climate Change Convention; the 1990 International Convention on Oil Pollution Preparedness, Response, and Cooperation; and the 1990 Amendments to the Montreal Protocol. Most of the time, the polluter pays principle is considered part of international environmental law.
- Organisation for Economic CoOperation and Development, Polluter Pays Principle (Organisation for Economic Co-Operation and Development, 1975);
- Philippe Sands, Principles of International Environmental Law, 2nd ed. (Cambridge University Press, 2003);
- United Nations, Rio Declaration on Environment and Development, www.unesco.org.