Photo by KM L, Pexels
Photo by KM L, Pexels

Using market-based incentives to help improve environmental management

Urbanisation often comes at the cost of the natural environment. Traditional regulations have limited effects, highlighting the need for market-based policy approaches for better environmental management. A recent study published by Asia Development Bank, with the participation of over a dozen EfD researchers, highlights such approaches in Asia.

In Asia air, water and land pollution has been significant over the last 60 years as a result of rapid urbanisation and industrialization. Local governments are challenged with effectively implementing policy that will improve environmental quality while still supporting development within a region.

Typically this has resulted in “command and control” (CAC) regulations which use pre-set standards, bans and penalties for polluters. However, so far, this approach has not proved effective in reducing the impact on the environment or improving current poor environmental quality.

Addresses environmental problems

Market-based incentives (MBIs), on the other hand, encourage producers and consumers to change their behavior through policy interventions such as taxes and subsidies which cultivates innovative solutions to improve resource use and environmental quality.

A report published by Asia Development Bank, with contributions from EfD researcher Reza Daniels, titled Greening Markets: Market-based Approaches for Environmental Management in Asia, highlights the role of MBIs in Asia and how scaling up the use of MBIs can adequately address issues with air pollution, poor water quality and urban waste.

Reza Daniels

Combine with development

The report highlights eight types of MBIs, and while it was noted that this is not a comprehensive list of MBIs used, these types were identified as having the most potential for implementation and upscaling. MBIs included: pollution taxes, water pricing, waste pricing, tradable permits, environmental subsidies, removal of harmful subsides, payments for ecosystem services, information provision and hybrid instruments, where several MBIs are combined to accomplish multiple goals.

“One of the key messages coming out of the report is that improved air, water and waste environmental management policies need not undermine broader economic development imperatives, but can be integrated with them to improve societal welfare,” says Reza Daniels.

Success or failure of MBIs

There is no one MBI or combination of MBIs that will provide a silver bullet for improved environmental quality. MBI success or failure is context dependent and dependent on political acceptance, public understanding and buy-in from both consumers and producers. Asian economies, such as The People’s Republic of China, where MBIs have been used successfully can serve as examples to improve broader application and upscaling.

Provides a blueprint

The report highlights that ultimately the context of a specific sector and country, as well as the specific environmental problem, are key in informing the political and economic capacity to utilize specific MBIs.

 “This report is important because it provides a blueprint for countries in Africa and Latin America to learn from Asia’s experience and potentially leapfrog Asian countries when it comes to implementing a wide range of market-friendly and growth enhancing environmental management policies,” Reza Daniels explains.

Recommendations for environmental management

By implementing MBIs in national environmental plans and programs, Asian policy makers can improve environmental management through a mix of CAC regulations and MBIs suited for a particular context.

However the report highlights the need for improved data and monitoring of environmental impact, especially with regards to urban waste, as the lack of real-time data gathering will hinder the effectiveness of a policy action. Furthermore, the report shows that coupling MBIs with aspirational goals (such as zero-waste policies) can help motivate both public and private sectors to implement both MBIs and CAC regulations.

While MBIs may not be a one size fits all solution to environmental management, there is potential for these policy instruments to support and enhance existing regulations and provide examples of areas where upscaling of MBI would be appropriate and effective.


By: Michelle Blanckenberg


Read the full report:

Greening Markets: Market-based Approaches for Environmental Management in Asia

Read the summary by Development Asia:

Creating Market Incentives to Reduce Urban Waste

News | 22 October 2021