Market based instruments and fiscal mechanisms

General information and applications for using this environmental tool.


Market based instruments and fiscal mechanisms provide financial incentives and disincentives to guide behaviour towards environmentally responsible activity, and mitigate undesirable activities, in an effort to reduce damage to the environment. If properly designed, these tools can effectively integrate environmental management into economic decision-making. Fiscal instruments depend on regulators setting clear direction and rules, and then allowing markets to achieve desired environmental outcomes through price signals.

Tool list

Fact SheetsDescription
Emissions/Effluent TradingAllows regulated parties to trade emission responsibilities.
Resource Allocation TradingAllows regulated parties to trade resource allocations.
Product Fees and TaxesSets levies on potentially harmful products to influence purchasing habits and can provide funds for recycling programs.
Pollution Fees and TaxesRequires regulated parties to pay for each unit of pollution emitted, discharged or disposed.
Resource Use Fees and ChargesRequire resource users to pay for each unit of resources used.
Ecological Fiscal ReformA government strategy that shifts fiscal policy from supporting undesired environmental outcomes to supporting positive environmental outcomes.
Deposit-Refund SystemsRequires deposits on a product or packaging at time of sale, which are refunded on return.
Purchase of Development RightsProvides a mechanism to financially compensate willing landowners to protect the natural heritage of their land versus undertaking a development project.
Transfer of Development RightsEncourages high-density clusters of development on less sensitive lands within a defined region, while minimizing development on ecologically sensitive lands.
Environmental SubsidiesProvides grants, low interest loans, loan guarantees or favorable tax treatment to promote specific activities and behaviour.
Legal LiabilityRequires parties causing environmental damage to compensate those harmed.
Financial SecurityRequires regulated parties to place financial assurance with a regulator to ensure performance.
Qualifying Environmental TrustsOne of several mechanisms to demonstrate, secure and assure appropriate finances are available for the reclamation of a site when operations cease.

Tool strengths

  • Potential for greater innovative responses to environmental issues - market based instruments and fiscal mechanisms provide ongoing motivation to reduce emissions, conserve resources and develop more effective and less costly technologies.
  • Effective in controlling non-point/dispersed sources - can influence the behaviour of individual consumers, farmers, and small businesses through market signals.
  • Can result in costs savings - fiscal incentives can result in large reductions of pollution at lower costs to facilities.
  • Can optimize natural resource use - market based instruments and fiscal mechanisms can drive natural resource use to the individual or business that provides the highest social and economic value.
  • Raise revenue by targeting instruments at specific environmental problems, which can be used to reduce taxes (and/or provide subsidies) on environmentally desirable activities - commonly referred to ask -tax shifting-.

Tool limitations

  • Localized adverse effects - market based instruments and fiscal mechanisms are not always appropriate as stand-alone tools where the substances under control can result in localized adverse effects (i.e., toxic substances that accumulate in the environment).
  • Restricts access to resources - applying market based instruments and fiscal mechanisms to conserve natural resources, such as water pricing, could drive the market price to levels that prevent equal access to the resource by all citizens.
  • Can be unfair - green taxes can be regressive. Emissions allocations can be given away to polluters.
  • The market has no interest in the public's well being and is not democratic.
  • The market heavily discounts the future, which does not support sustainable resource use.