Economic instruments to incentivise substitution of chemicals of concern – a review

1 March 2023

Daniel Slunge

Executive Summary

Economic instruments such as taxes and fees have been extensively used in other environmental domains but have so far been relatively sparsely applied to chemicals. However, there is an increased interest in the potential of economic instruments to incentivise substitution of chemicals of concern. This interest is motivated by the ambition to speed up the substitution of substances of concern and to reduce the toxic load from broader groups of chemicals as well as the need to strengthen fiscal revenues and cover costs for chemical management.

This study aims to give an overview of economic instruments used in chemicals management and in other environmental domains that governments could consider to incentivise substitution of chemicals of concern. The study reviews lessons learned from the use of five types of economic instruments: taxes, fees, subsidies, tradable permits, and deposit-refund systems, as well as “hybrid instruments” that combine elements of different instrument groups.

The main benefits of economic instruments are their ability to provide continuous incentives for firms to innovate and substitute to safer alternatives. By incorporating information of environmental and social costs into prices that producers and consumers face on the market, economic instruments can incentivise substitution without stipulating in detail what technology or action each actor should take. However, as economic instruments give authorities less control over how, where and at what quantities chemical substances are used, they should be seen as complements rather than substitutes to other instrument types, such as bans, use restrictions and information.

Despite evidence that environmental taxes and other economic instruments can be effective in addressing environmental problems, their actual use is generally far from sufficient to implement the polluter pays principle. New taxes or fees are often challenged by different interest groups leading to sub-optimal design and implementation. Hence, political economy factors need to be considered in the design and implementation of economic instruments.

Building on the lessons learned from the use of economic instruments for environmental and chemicals management, five broad sets of instruments with potential to incentivise substitution of chemicals of concern are discussed:

• Fees on producers and importers of chemicals to incentivise information provision. Fee-based registries contribute indirectly to substitution by providing information to market actors and authorities. A key challenge is that the information submitted to the authorities often is of low quality. This could be counteracted by increasing default costs, through imposing (increasing) penalties and enhancing quality controls.

• Taxes or fees on chemicals of concern with a possibility to use revenues for toxic use reduction programmes. A tax or fee could be introduced on all substances identified as substances of concern. To avoid “regrettable substitution”, a tax or fee system could in principle be extended to also cover chemicals with a similar chemical structure as listed chemicals of concerns. Revenues from fees could finance toxic use reduction programmes, including research, education, technical support as well as grants to small businesses to support transitioning to safer alternatives.

• Risk based taxation on substances of concern in products articles and processes. Evaluations indicate that risk-based taxation – which links taxation more closely to specific environment and health risks – can be effective in reducing the environmental and health effects of chemicals. However, the limited information about substances of concern in articles is a key constraint to broader application.

• Hybrid schemes combining fees and subsidies in collaboration with industry sectors. By returning revenues from fees on chemicals of concern to the regulated sector in the form of a subsidy or technical assistance, strong incentives for substitution can be generated in sectors where substitution is challenging. An important feature of these type of hybrid schemes is their potential to create policy support within the regulated industry.

• Permit systems with trading possibilities. Tradable permit systems have been used in relation to lead, CFCs and fluorinated greenhouse gases. Similar systems could be designed to incentivise the substitution of other groups of substances of concern or specific uses. One could also envision broader permit markets as all chemicals put on the market occupy a piece of a shared pollution space.

In order to enhance the use of economic instruments to incentivise substitution of chemicals of concern, a policy learning process among OECD countries could be established. This could involve systematic monitoring, evaluation and information sharing in relation to the use of existing and new economic instruments in chemicals management. This would be an important way to address the existing knowledge gaps on the effectiveness of economic instruments in chemicals management.

EfD Authors
Publication reference
OECD (2023), Economic instruments to incentivise substitution of chemicals of concern – a review, OECD Series on Risk Management, No. 79, Environment, Health and Safety, Environment Directorate, OECD.
Publication | 9 March 2023