Policy objectives & targets

1. Policy objectives & targets • Pollutants - (negative) externalities: “exist when some of the consequences of production (pollution’s imposing costs on others) are not considered when production decisions are made.” resource misallocation • Pollution control policy goals: • Ideal – maximise expected net economic benefits to society (economically efficient or first-best outcome) • Second-best / cost-efficient – achieve specific environmental objectives at least cost given circumstances (i.e. available policy instruments, transaction costs, political, legal or informational costs) • Alternative policy targets: • Performance-based measures • Design-based measures

2. Evaluation criteria • Economic performance: ability to achieve objectives at minimal cost • Administration and enforcement costs • Flexibility: effectiveness of control in the context of changing environmental and economic conditions • Incentives for innovation • Political feasibility (interest groups, path dependency, etc.)

3. Economic incentives • Realign private & social costs • Performance-based (i.e. taxes on water quality) • Monitoring runoff prohibitively costly • High levels of information needed by both parties • Uncertainty makes compliance unattractive to risk-averse producers • Design-based (i.e. taxes/subsidies on inputs/technology) • Expected runoff-based instruments more costly than those based on input and technology use directly • Market-based (i.e. emissions trading) • Requires that activities can be regulated effectively: binding constraints, enforceable system, etc.

4. Standards • Legally require producers to behave in a specified manner • Performance (not feasible) • Runoff - cannot observe if compliant • Ambient - predicting how actions will affect pollution levels difficult • Need homogeneity of producer expectations • Natural variability of effects – must set limits • Design • Inputs / technologies - only moderate welfare loss from uniform application • Expected runoff - higher administration costs

5. Liability • While imposed ex-post, serve as ex-ante incentive to account for externalities • Strict liability vs. negligence (based on performance or actions) • Unilateral vs. bilateral care • Feasibility of efficient control limited: • Inability to trace pollution back to source • Require knowledge of how choices affect performance measures to be effective • Negligence rules also require site-specific information • Litigation process expensive

6. The Nitrates Directive • Standards approach • Performance-based definition of vulnerable zones – appropriate? • Voluntary code of good practice • Binding action plans for vulnerable areas • Design-based: must ensure fixed limit on amount of manure spread per unit of area not exceeded