Alternatives to Traditional Regulation Building capacity for RIA in South Africa Presentation to Officials 27 May 2009 Michael Goldblatt Director Palmer Development Group
Session 6. Regulatory Alternatives The purpose of this section is to introduce commonly used alternatives to traditional command-and-control regulation, and to present how criteria and considerations on the use of regulatory alternatives can be integrated into the RIA process Issues and questions to be addressed is this session include: What kinds of alternatives exist? How to choose the right solution? Focus on practical assessment of alternatives to traditional command-and-control regulation in SA Follows the general overview presented 2
Approach: Case Study of Environmental Fiscal Reform Process and Carbon Taxation National Treasury policy on economic instruments for environmental protection in SA. Policy framework Treasury s evaluation criteria Relationship to RIA Carbon tax and landfill tax examples Practicalities of assessing regulatory alternatives in the SA context 3
Market Based Instruments Market-based instruments are a package of policy instruments that seek to correct [environmentally]-related market failures through the price mechanism. By seeking to alter the relative prices that individuals and firms face, market-based instruments could be a more efficient way of addressing certain [environmental] concerns. In some instances, such instruments could be used to replace command-and control measures, but in most cases they have a complementary role. National Treasury, 2006: A Framework For Considering Market-based Instruments To Support Environmental Fiscal Reform In South Africa One could replace [environmental] with: Social Health. Already significant instruments South Africa has a number of environmentally-related taxes already in place which together account for approximately 2 per cent of GDP and just under 10 per cent of total tax revenue (mainly fuel levy) Significant sin taxes as well 4
Policy Overview 5
Assessment Criteria 6
Assessment Criteria Environmental effectiveness Is there a clear environmental objective and is the tax well targeted to that objective? Tax Revenue Revenue raised is potentially significant and is a consideration not typically found in command-and-control regulation. Support for the tax Stakeholder engagement and identification of winners and losers. Technical and administrative issues Very important considerations of instrument design. Typically much more complex than command and control. Is the bad measurable? Is the tax base close to the environmental objective? Is there a suitable proxy? Is the tax level appropriate? Can tax collection, be assured? Legislative aspects As with command-and-control, is it in compliance with constraining legislation. Competitiveness effects Impact on domestic industries and can these be mitigated? Distributional impacts An understanding of the way in which environmentally-related taxes impact on different income groups. Can the tax be made progressive or can the impacts be mitigated? Adjoining policy areas Extent to which can assist in meeting other government policy objectives 7
Relationship to RIA approach Essentially the same Can easily incorporate refined RIA approaches Risk assessment Specific criteria 8
RIA in Practice Arguably harder to predict impact of alternative regulatory options Changed incentives effect a system in unpredictable ways This is one of the rationales for alternative regulatory approaches Example: landfill tax Possible impacts of taxing solid waste to reduce waste going to landfill More recycling Reduced waste generation More waste incineration No change (price insensitive) 9
Economic Considerations Market responses Demand or supply elasticities Often unknown Market Structure Monopoly or competitive Open or closed Point of intervention in the value stream Upstream or downstream Consumer electricity tax vs. tax on carbon content of coal vs. tax on GHG emissions Nature of the instrument Ad valorem tax vs. weight based tax for solid waste Ad valorem tax incentives for movement of waste to cheaper and less well maintained sites Weight based tax measurement difficulties and costs These will all affect Effectiveness Efficiency Distribution 10
Carbon Taxation Objective: Reduction of Greenhouse Gas emissions Mechanism: Pricing carbon (precursor to CO 2 ) in the economy Impacts: Alteration of prices and market signals in the energy economy Alternatives: direct emission limits, technology specifications, capand-trade schemes Key Evaluation Criteria (against other instruments) Effectiveness Efficiency International implications / links Distributional impacts 11
Example: Distributional Impacts Distributional are distinct from cost:benefit analysis Massive differences in resource allocation are possible with the same CBA results Options Tax vs cap-and-trade Within cap-and-trade auctions versus grandfathering Special interest considerations the Minerals Council of Australia, Mitch Hooke, who reckoned that the carbon emissions trading scheme would cost 30,000 jobs in the mining sector alone. Similar concerns were echoed by other big business lobby groups Impact on low income energy users Revenue considerations Closely linked to distributional impacts 12
Some Practicalities Alternative approaches will typically require a greater degree of system analysis or modelling Challenges Data Inadequate historical experience Economic modeling limitations Especially in comparison to those available in some developed countries Reliance on special interest groups Can be addressed in part by Cross country transfer of experience Analytical rather than modelling approaches (lead in petrol price increase example) Sensitivity analysis Implementation approaches monitoring 13