Environmental Management: Principles and practice

Shadow prices
The difficulty of establishing the value of ‘externalities’, including environmental
factors, in monetary units has been addressed in several ways: one is to use shadow
prices. A shadow price is a value that reflects the true opportunity cost of a resource
or service. The real value of something reflects the most desirable alternative for it,
e.g. (in production) the opportunity cost of producing an extra unit of manufactured
goods is the lost output of childcare, food production, etc., forgone as a result of
transferring resources to manufacturing activities. In consumption, opportunity cost
is the amount of one commodity that must be forgone in order to consume more of
another (Todaro, 1994).
Green taxes
The use of taxation is an important tool for seeking environmental management
goals. Pearce (1995) urged environmental management to seek a balance between
using economic command and control (largely through taxes) and incentives. Capra
(1997: 292) suggested that one of the most effective ways of countering environmental
damage and supporting sustainable development would be to shift the tax burden
from income to ‘eco-taxes’. These could be added to products, energy, services and
materials, to reflect true costs. This means the consumer pays. While there have been
national measures for some time, interest in green taxation on an international scale

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is recent (and still mainly theoretical), triggered by increasing transboundary pollution,
competition for internationally shared resources, and the threat of global
environmental change.
The function of green taxes is not to raise revenue for government but rather to
provide participants in the marketplace with accurate information about true costs.
For example, a tax on CFCs reflects their impact on ozone (Farber et al., 1995).
Green taxes counter the pursuit of lower prices by externalizing the true costs, ensuring
that the purchaser is aware of the costs of environmental impacts. It is important that
attempts to integrate external costs of production into prices does not burden the
poor or ‘punish’ the middle classes. The aim is to give people and companies
incentives to invent, innovate and respond to environmental challenges (Repetto et
al., 1992). Green taxation should encourage manufacturers to seek to reduce waste
and other environmental damage to keep down their costs and thus prices to the
purchaser—i.e. there is incentive to improve environmental practice. Taxation is also
becoming an important tool in the quest for sustainable development (Von Weisäcker
and Jesinghaus, 1992).
One problem associated with attempts to agree international green taxation is
that it may come into conflict with sovereignty (Nellor, 1987). There are a number
of taxation approaches that have potential for controlling global climate change:
tradeable emission quotas; carbon (emissions) tax; energy use tax; taxation associated
with technology transfers; reduced taxation for providing carbon sinks.
Pigouvian taxes
The idea of 1920s’ UK economist Arthur Pigou, these are intended to be levied on
(externalities) pollution, or activities it is desirable to discourage to achieve sound
environmental management (see chapter 4).