The objective of the document is to help the European Union’s Eastern Partnership (EaP) countries (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine) to design or reform economic instruments related to environmentally harmful products in order to provide incentives for both reducing pollution and introducing greener products. It has been developed within the framework of the initiative “Greening Economies in the Eastern Neighbourhood” (EaP GREEN) funded by the European Commission and implemented by the OECD in partnership with the UNEP, UNIDO and UNECE. The target audience of this policy manual includes key government stakeholders (ministries of environment, economy and finance) as well as the business community, nongovernmental and academic institutions in EaP countries.

Promoting green growth requires well-designed institutions and environmental policy instruments that are effective in achieving their environmental objectives without imposing excessive burdens on the economy. There is growing recognition in OECD countries that economic instruments such as environmentally related taxes can be effective in stimulating a shift to less-damaging forms of production and consumption while providing producers and consumers with flexibility in making these adjustments. Behavioural changes stimulated by economic instruments may lead to the creation of new jobs and employment opportunities. Investments in new “cleaner” technology can be an important source of employment and business development. Where economic instruments generate revenues, the appropriate deployment of these revenues can also make a significant contribution to enhancing incomes and growth.

This policy manual considers the potential use and implementation of four categories of product-related economic instruments: product taxes, tax differentiation based on environmental factors, deposit-refund systems and extended producer responsibility (EPR). Each of these instruments has particular strengths and weaknesses that make them appropriate with respect to certain policies and products, but may reduce their applicability elsewhere. This section proposes an approach to identify instruments which are appropriate for the particular environmental problem under consideration.

This section provides an overview of the existing practices in OECD and EaP countries in the implementation of the four categories of product-related economic instruments. It considers the application of each instrument to various product types, its design and impact on public revenue.

New environmentally related product taxes or the differentiation of existing taxes such as VAT or excise taxes can both be used to create incentives for environmental improvement. Successful introduction of well-functioning environmentally related product taxes will generally require close coordination between different branches of government, in particular between the environment ministry and the ministry of finance. There are several possible ways to implement environmentally related product taxes. This section addresses such implementation issues as revenue raising, competitiveness and income distribution concerns.

Deposit-refund systems (DRS) can be employed to ensure high rates of recovery of certain tightly defined and specific products, where the mechanism of charging deposits and paying refunds can be operated at an acceptable cost relative to the gains from achieving high rates of return of the products concerned. However, despite the relative simplicity of the concept, implementation of a DRS may involve considerable complexity and high costs of operation which may act as a burden on producers, distributors or retailers. This section discusses key decisions and practical steps to be taken in introducing a DRS, such as commodity coverage, the choice between a singleproducer and a common industry-wide scheme, treatment of smaller producers and importers, setting the level of the deposit, and the need for government intervention in a DRS.

A frequent objective of Extended Producer Responsibility (EPR) schemes is to ensure secure and safe collection and disposal of substances or products that would otherwise be hazardous or harmful within the general waste stream. Another frequent motivation is to reduce public waste management costs by shifting the burden of collecting and managing significant parts of the waste stream away from tax-financed municipal operations. This section discusses commodity coverage of EPR schemes as well as issues of design, constitution and financing of Producer Responsibility Organisations (PROs). It also addresses the establishment and enforcement of EPR performance targets as well as costs borne by industry and consumers.