The Use of Economic Incentives in Developing Countries: Lessons from International Experience with Industrial Air Pollution

Abstract

To what extent should developing countries eschew conventional command and control regulation that is increasingly seen as inefficient and rely instead on economic incentives to control industrial air pollution? The article discusses the advantages and disadvantages of various economic incentive instruments; presents in-depth case studies of their application in Sweden, the United States, China, and Poland; and proposes policy guidelines. The authors argue that both design deficiencies and pervasive constraints on monitoring and enforcement impede the effectiveness of economic instruments in developing countries. The latter are difficult to rectify, at least in the medium term. Therefore, tradable permits are generally not practical. Suitably modified, however, emissions fee policies probably are appropriate. They can provide a foundation for a transition to an effective economic incentive system and can raise revenue for environmental projects and programs. If political opposition can be overcome, taxes on goods associated with pollution constitute a second-best regulatory instrument.