The polluter pays principle and potential conflicts in society

The conventional implementation of polluter pays principle (PPP) in many countries is based on the use of an environmental tax, which is determined proportionally to the amount of emissions of the polluting substances. In this paper we show that this practice is not adequate because of its real negative impact if the pollutant accumulates to a stock in the environment. Using a specific mathematical model we find, that in many cases there is a danger of an unavoidable conflict between the interests of society as a whole and the interests of private business, generated by these procedures of PPP implementation. This paper also presents a mathematical formula which expresses the time period, when the conflict arises. We call it "the time boundary of investment expediency". Some results of a numerical simulation for the calculation of this quantity for different investment initiatives are also presented in this article. On the basis of the model analysis, we suggest "a corrected" amount of environmental tax which covers the negative effect on social welfare. We find that it should be dependent on the lifetime of the production project, not only on the amount of emitted pollution. The study gives some practical tools for strengthening governance in the environmental sector and for the evaluation of investment initiatives from a "quality of growth" point of view. (c) 2005 Elsevier B.V. All rights reserved.