And The Environment:
Selected Legal Issues And The Environment:
Selected Legal Issues1993
West Coast Environmental Law Research Foundation
West Coast Environmental Law Research Foundation 1001 - 207 West Hastings Street, Vancouver, B.C., Canada V6B 1H7 phone: (604) 684-7378 fax: (604) 684-1312
The West Coast Environmental Law Research Foundation is a non-profit charitable society which supports and conducts legal research to develop standards and objectives that will ensure the maintenance of environmental quality.
The Law Foundation of British Columbia provides major funding for the West Coast Environmental Law Research Foundation.
Environment Canada funded the research for this publication in order to catalyze discussion on the use of economic instruments to improve environmental protection in British Columbia. Environment Canada does not necessarily endorse all or any of the opinions expressed in the publication.
This report is for educational purposes only. Individuals with specific legal problems are urged to seek legal advice from a lawyer.
Contents may not be reproduced commercially, but any other production in encouraged.
Canadian Cataloguing in Publication Data
Rolfe, Christopher, 1961-
Economic instruments and the environment
Includes bibliographical references.
ISBN 0-919365-12-4
1. Pollution -- Law and legislation -- Canada.
2. Environmental permits -- Canada. 3.
Environmental law -- Canada. I. Nowlan, Linda,
1958- II. Hillyer, Ann. III. West
Coast Environmental Law Research Foundation.
IV. Title.
KE3619.R64 1993 344.71'04632 C93-091815-0
KF3775.R64 1993
The authors are indebted to the staff at the West Coast Environmental Law Research Foundation, particularly: Wendy Grandan for her extensive research and diligent assistance in locating sources of information; Ann Hillyer and Carol Reardon for their cogent comments and editing; Morgan Ashbridge, Denice Regnier and Nancy Chocol for copy editing and assistance in the production of this report; and Catherine Ludgate for acquiring research materials and administrative support.
The study was funded by Environment Canada. Special thanks are owed to Roger McNeill, Economist, Conservation and Protection Branch, Environment Canada for his assistance in guiding the project. We are also pleased to acknowledge that the Law Foundation of the British Columbia provides core funding for the West Coast Environmental Law Research Foundation.
Many individuals helped in the preparation of the this report. We would like to thank the following people who reviewed drafts of the report and provided invaluable comments: Ellen Baar, York University; Dermot Foley, Research Director, Society for Promoting Environmental Conservation; Alastair R. Lucus, Professor of Law, University of Calgary; Doug MacDonald, Consultant, Environmental Policy Research and Consulting; Rick McDougall and his staff at the Program Evaluation and Economic Analysis, Ministry of Environment, Lands and Parks; and Murray Rankin, Barrister & Solicitor, Arvay Finlay.
Barbara Rutherford, Barrister & Solicitor, Canadian Environmental Law Association both provided extensive comments on early drafts of the report and provided us with information in the course of researching this project. We would also like to thank the following people who also provided us with information in the course of research for this project. Bill Fressa, Information Officer, California Air Resources Board; Dan Duceck, Senior Economist, Environmental Defence Fund; Jim Ricketts and Felicia Lopez, Environmental Defense Fund; Helen Spiegelman, Recycling Council of British Columbia; Ralf Wissman, Coopers and Lybrand; Jenny O'Grady, Environment Canada; Gerald Coffey, Canadian Environmental Network; Zen Makuch, Canadian Environmental Law Association; and Adam R. Saslow, Regulatory Impact Analyst, United States Environmental Protection Agency.
The views expressed are those of the authors and the West Coast Environmental Law Research Foundation. Any errors or omissions are, of course, solely the responsibility of the authors.
This report examines several legal issues that should be addressed before establishing economic instruments for environmental protection. Economic instruments are tools created by law which either encourage improved environmental behavior or discourage environmentally damaging activities such as pollution. Many environmental organizations advocate improving Canada's existing environmental laws by using economic instruments such as deposit refund systems, subsidies and discharge fees in combination with traditional regulatory approaches.
Canadian environmental law currently consists largely of regulations and permits or licenses which prohibit industries from exceeding permissible levels of discharges. Breaches of these regulations are punished through fines and criminal law sanctions. This "command and control" approach to regulation has successfully reduced pollution from many sources, but cannot overcome obstacles to effective regulation in areas where enforcement is difficult.
This report looks at three economic instruments which are intended to improve environmental protection:
Also, administrative penalties and ticketing are examined.
The legal issues examined include: which level of government has the constitutional ability to adopt these instruments; what provisions must be included in statutes that establish these instruments; potential administrative and constitutional law challenges to economic instruments laws and implementation and how to prevent them; and challenges to economic instruments based on international trade law.
Both federal and provincial governments have broad powers to establish economic instruments although neither level of government has an unlimited power to establish any form of instrument. Any law must be based on one of the subjects or "heads of power" listed in the Constitution Act, 1867. Municipalities and regional districts have whatever powers are delegated to them by provincial or federal law.
The provinces have a very wide power to establish economic instruments subject to only a few restrictions. Provinces can: establish discharge permit trading systems for any discharges within the province; establish revenue generating discharge fee systems; place charges on products that lead to emissions; impose a system of discharge fees or tradeable emission permits for vehicles; and establish a system of deposits and refunds for products or substances that are sold or produced within the province.
Although the federal government has a more limited power to establish economic instruments for environmental protection, its power is still significant. Economic instruments can be used by the federal government to help solve global, national or regional problems which need a coordinated national approach. A federal system of tradeable permits for pollutants that cause acid rain or global warming would likely be justified if the provinces show an inability to cooperate effectively in dealing with these issues. Deposit refund systems for persistent toxics, carbon taxes, tradeable permit systems for discharges into fish bearing waters, discharge taxes, and tradeable permit systems for the phase out of health threatening substances may also be justified under federal heads of power; however, these systems must be carefully designed if they are to be constitutionally valid.
Regulations can be challenged on the basis that they go beyond what a Legislature or Parliament intended when they delegated a regulation making power. Enabling legislation for discharge fees, tradeable permit systems, administrative penalties and deposit refund systems should be sufficiently comprehensive to allow all necessary aspects of a working system to be established. Legislation should also establish basic principles that ensure environmental protection is the foremost goal of economic instruments. Enabling legislation for all instruments should ensure regulation making and administration of the systems is informed by an open discussion of public concerns.
The decisions of administrators in exercising discretion given to them by statute or regulation can be challenged in Court if the discretion is exercised for an improper purpose or in an unfair manner. The degree to which any system of economic instruments can be challenged on either basis depends on the amount of discretion granted to administrative officials. For instance, discharge fees based on permitted discharges rather than actual discharges are difficult to challenge because there is little discretion left to individual administrators. There is more potential to challenge fees based on estimates of actual discharges. Appeals of discretionary administrative penalties and discretionary approvals of permit trades are also very likely. Appeals to the courts can, however, be limited by statutorily structuring the exercise of discretion, by creating a fair process for appealing decisions, and by following these processes.
Under a discharge fee system government sets a price on each unit of pollutant discharged, and the polluter pays to government an amount equal to the quantity of the pollutant discharged times the unit price. The unit price varies according to the toxicity or environmental effect of the pollutant. Comprehensive enabling legislation for discharge fees should provide:
While discharge fee systems could potentially be challenged in the Courts on the basis of the Canadian Charter of Rights and Freedoms (the "Charter") the chances of successful appeals are limited. The Charter generally does not protect economic rights or liberty to carry on business. Nor are equality provisions of the Charter infringed by discharge fees that apply unequally to different regions or businesses. Discharge fees will generally not be contrary to trade law.
Two reforms of the existing system of command and control regulations are examined along with discharge fees: monetary administrative penalties and ticketing. While discharge fees are intended to encourage reduction of discharges below permitted levels, administrative penalties and ticketing are intended to ensure that there are meaningful incentives to reduce discharges below permitted levels. Ticketing streamlines the criminal process for minor offences so that prosecution of large numbers of minor offences is possible. Administrative penalties provide regulators with an enforcement option which may in some cases be more practical than criminal prosecution.
Enabling legislation for administrative penalties should provide that:
Enabling legislation for ticketing already exists for both the federal government and many provinces.
Automatic administrative penalties payable whenever a permit violation occurs are valid under the Charter and could probably be used in combination with criminal sanctions. The constitutionality of using discretionary administrative penalties and criminal prosecutions for the same offence is less clear; however, if legislation distinguishes between the role of administrative penalties and criminal sanctions, combined use of both should be permissible. Legislation should specify that the purpose of the fines is to encourage compliance with environmental regulations and permits, to compensate for environmental damage or potential damage, and to recover administrative costs related to the imposition and investigation of regulatory breaches.
Deposit refund systems include relatively simple product deposits and refunds payable on the sale and return of beverage containers, car bodies, batteries, and pesticide containers. Product deposit refund systems such as these have been applied in Canada, the United States and some European countries. Product deposit refund systems for hazardous materials such as solvents and oils have also been proposed. Substance deposit refund systems -- where a deposit is paid when a substance is produced or imported and refunded when the substance is exported or properly disposed of -- have been proposed in Europe. In a substance deposit refund system the refund is paid despite substantial changes in the form of the substance.
Enabling legislation for product deposit refund systems should:
Some additional provisions necessary for substance deposit refund systems include:
Deposit refund laws will likely withstand any attacks based on the Charter. Even in the United States, where economic interests receive some constitutional protection, attacks by industry on deposit refund systems have failed. Such attacks are less likely to succeed in Canada where there is even less constitutional protection of business interests.
Challenges to deposit refund systems based on trade law are unlikely to succeed although there is some potential for challenges to measures related to deposit refund systems. For instance, labeling requirements, product charges and products bans may have more of an impact on foreign manufacturers than domestic manufacturers and could be challenged as non-tariff barriers. While governments should be wary of such challenges, successful challenges can probably be avoided by basing measures on a clear environmental rationale.
Under a tradeable permit system the government establishes a cap for total allowable emissions and distributes permits for this amount amongst polluters. Polluters that keep their emissions below allowed levels may sell their surplus permits to other firms. The number of permits which are distributed to polluters -- and the cumulative emissions allowed under all the permits -- are reduced pursuant to a schedule set out in legislation or regulations.
According to some economic theory, tradeable permit systems can place a limit on the total discharges of a particular substance and reduce this limit over time at the lowest possible economic cost. However, there are significant practical problems in actually implementing a system of tradeable permits. This is especially true for sources which do not have accurate discharge data and for discharges that may have localized effects. Any proposal for tradeable permit systems will have to be carefully examined to ensure that it will actually reduce pollution, at a lower cost than command and control strategies. Both draft legislation and draft regulations must be carefully analyzed with public input before any system is adopted.
The following are some of the salient concerns which should be addressed in any generally applicable enabling legislation. Some recommendations may not be necessary for enabling legislation aimed at a specific problem. Enabling legislation should:
Finally, challenges or claims for compensation based on property rights in tradeable permits can be avoided by specifically stating that permits are revocable licenses.
In short, the validity of economic instruments for environmental protection under the Charter, the potential for administrative law challenges to administrators' discretion, and the potential for challenges under international trade law must be considered in designing legislation and regulations for economic instruments. However, these concerns can be largely dealt with through well planned legislation and regulations. Both federal and provincial governments have wide powers to establish economic instruments, which may prove to be useful regulating tools for environmental protection.
The search for improved environmental protection -- and the urgency of the task -- challenges us to be ever alert to new or improved ways to accomplish our goal. Increasingly we recognize that our approach must encourage prevention rather than remediation of environmental degradation and that a variety of tools need to be used together to achieve this end.
This report examines the use of economic instruments: tools that attempt to take advantage of market forces to prevent pollution and influence behaviour. These tools are not viewed as a single solution to environmental ills. However, an appropriate mix of environmental regulations and economic instruments may accelerate our progress to better environmental protection.
Canadian environmental law consists largely of regulations or permits and licences which prohibit industries from exceeding prescribed levels of emissions, require industries to install certain abatement equipment or prohibit the use of substances for specific purposes. If a business exceeds permitted levels or breaches regulations it can be charged with an offence and, if convicted, it can be punished by a fine or jail sentence. This "command and control" system of regulation has been successful in some areas of pollution. Atmospheric lead concentrations in Vancouver have dropped dramatically in the last fifteen years; the frequency of carbon monoxide concentrations in the Lower Fraser Valley exceeding air quality objectives has declined in the same period; and the discharge of organochlorines in pulp mill effluent has been reduced substantially in only a few years. [(1) -- 1. See British Columbia, Ministry of Environment Lands and Parks, State of the Environment Report for British Columbia (Victoria: Ministry of Environment, Lands and Parks, 1993) at 14 to 24.]
However, there is a growing recognition that command and control strategies have limitations in terms of their ability to modify destructive conduct through enforcement alone.
To help address these issues, some environmental organizations and economists have advocated the use of economic instruments in conjunction with environmental regulations, to create incentives for compliance. Economic instruments include discharge fees, product levies, taxes, deposit-refund systems, subsidies and tradeable permit systems. This report examines three economic instruments that can be used to improve environmental protection: discharge fees, deposit-refund systems and tradeable permit systems. The report addresses some of the legal issues related to the use of these instruments. It examines which government bodies have the constitutional power to adopt these instruments and what potential legal challenges governments might face if economic instruments are implemented. The emphasis in this report is on the legal issues related to the implementation of economic instrument rather than a comprehensive analysis of their overall effectiveness.
The first crucial legal issue is to determine which level of government has the power to implement an economic instrument. Chapter 1 deals with the constitutional powers of the Canadian federal and provincial governments to implement economic instruments.
Chapter 2 discusses general legal principles that must be taken into account in developing and implementing legislation for economic instruments. It reviews various rules of statutory interpretation that will affect which issues should be addressed in legislation and which issues should be addressed in regulations. It also discusses some of the basic principles of administrative law that will affect how statutes are drafted and how economic instruments should be implemented to avoid successful court challenges.
Chapter 3 reviews discharge fees, administrative penalties and ticketing systems, all of which are intended to provide increased economic incentives for polluters to reduce discharges. Under a discharge fee system, a price is set on each unit of pollutant discharged, and the polluter pays to the government an amount equal to the quantity of pollutant times the unit price. Discharge fees should be used in conjunction with maximum limits on permitted emissions. If sufficiently high, discharge fees are an effective incentive to reduce emissions below permitted levels. [(2) -- 2. J. Opschoor & H. Vos. Economic Instruments for Environmental Protection (Paris: Organization for Economic Cooperation and Development, 1989).] Product charges are considered to the extent they may be the most effective means of placing charges on emissions. For instance, if fees are to be placed on carbon dioxide releases this will be most effectively and efficiently done by placing a tax on the carbon content of fossil fuels.
While emission charges also have the potential to improve the efficiency of the tax system by discouraging undesirable side effects of economic activity, they may, in some cases, have greater impacts on low income earners. These adverse distributive effects must be addressed.
Chapter 3 examines the necessary components of enabling
legislation and the potential Charter of Rights, administrative law and
trade law challenges to discharge fees.
Chapter 4 discusses deposit refund systems. These systems can range in complexity from the simple bottle deposit system used for beer bottles in Canada to deposit systems used for particular substances such as lead, cadmium or chlorine. For bottle deposits, the charge is levied at the time of sale and refunded when the bottle is returned to a designated collection point. A substance deposit is levied when the substance is manufactured or imported and refunded when it can be proven that the substance has been exported or disposed of suitably. Deposit-refund systems are appropriate where the policy objective is not only to discourage the use of the product but also to encourage its proper disposal.
Chapter 4 also examines specific legal issues relating to deposit-refund systems, including necessary implementing legislation, Charter challenges, trade law challenges and administrative law challenges. It raises issues that legislative drafters and administrators should consider before implementing deposit-refund systems rather than comprehensively analyzing whether or not they are an appropriate tool in any particular circumstance.
Chapter 5 discusses one of the most complex economic instruments, a tradeable permit system. Under this type of system, the government establishes a cap for total allowable emissions and issues permits for a specified level of emissions. Firms that keep their emissions below their allowed level may sell their surplus allotments to other firms. The number of permits which are allocated to polluters -- and the cumulative emissions allowed under all the permits -- are reduced pursuant to a schedule set out in legislation or regulations. Tradeable permit systems thus have the theoretical potential to achieve specific overall emissions reductions.
However, the potential and the reality may be quite different. Problems relating to
monitoring and ensuring that traded permits represent actual reductions in emissions may
negate the potential advantages of tradeable permit systems.
Many of the safeguards suggested in Chapter 5 may affect the ability of tradeable permits systems to reduce emissions at the least possible cost. For example each of the safeguards necessary to ensure that a tradeable permit system for nitrous oxides and volatile organics actually reduces pollution may have an economic cost. The added administrative burden of a tradeable permit system and the reduced potential for savings on abatement costs may indeed make tradeable permit systems inappropriate for dealing with some environmental problems. This should be studied further before any tradeable permit system is adopted. Our purpose here is to explain rather than advocate the use of tradeable permit systems. Any proposed tradeable permit system must be carefully scrutinized to ensure that it will result in a cleaner environment. Further, the success of a tradeable permit system is entirely dependent on the adequacy of enabling legislation and implementing regulations.
We hope this report will be a useful addition to the growing body of literature considering the application of economic instruments for environmental protection in Canada.
West Coast Environmental Law web site
-- Last modified on 11/12/03.