What are Policy Instruments?

"Policy instruments" is the term used to describe some methods used by governments to achieve a desired effect. The two basic types of policy instruments are regulatory and economic instruments.

Regulatory instruments, specifically laws and regulations, are the most commonly used policy instruments in Canada. For example, to achieve the desired effect of fewer traffic accidents, governments pass laws which regulate driving.

Economic instruments, such as tax credits for certain types of investment or subsidies for certain products, are also used as a way of influencing the actions of individuals and corporations.

Alberta uses both kinds of policy instruments. With respect to air quality, there has been greater emphasis on regulatory instruments. There is a growing consensus, however, that on an issue as important as clean air, both regulatory and economic instruments have major roles to play.

Regulatory Instruments

Alberta's ambient air quality objectives identify allowable concentrations of certain contaminants over specified periods of time. Other provinces establish air quality objectives in a similar manner. Alberta has set a variety of standards to be met by companies doing business here. These take into account several factors including the amount and type of industry activity, the population, the amount of traffic, the quality of the air coming into Alberta and many other factors. Companies must agree to meet these standards before they can build or expand their operations. The combined effect of all these standards ensures that emissions are minimized and the provincial ambient air quality objectives are met. The chart shown below illustrates the types of standards.

Alberta's standards continue to evolve as industry and population grow and as understanding of the effects of each pollutant increases. Regulatory measures have already led to widespread adoption of pollution control technologies. They have also resulted in more stringent emission standards for new projects. Generally, however, current regulations do not require retrofitting existing facilities unless there is a major expansion.

Regulations and standards achieve a uniform level of control but they can be an inflexible way to achieve ambient air quality targets. For example, regulatory controls such as emission standards may be too restrictive for remote areas of the province and at the same time insufficient for heavily populated areas.

As well, regulations tend to focus on specific sources of emissions, rather than addressing regional, provincial or international concerns, such as cumulative air quality impacts, including acid deposition and global warming.

Economic Incentives

Economic incentives are another type of policy instrument to encourage the reduction of gaseous emissions. Some are in use now; others are being considered and their pros and cons discussed. Examples include:

(1) taxes and fees

(2) sudsidies

(3) incentives

(4) tradeable permits

Taxes and Fees

Taxes on energy production or consumption and fees for emissions are potential sources of funds for environmental protection or reclamation programs. A tax or a fee can be a powerful incentive to producers and manufacturers to upgrade their plants. A tax or a fee passed on to the consumer increase the price of goods and may reduce demand. An increase in the price of fuel can influence fuel choice and encourage energy efficiency.

An energy tax can be effective to encourage energy efficiency, but may not be an effective way to reduce emissions. It can penalize equally an environmentally acceptable plant which has effective pollution control equipment and one without such equipment if both consume the same amount of energy. Such a tax might stimulate research into energy efficiency measures and equipment, but not into emission control technologies.

There is a concern about the potential impact both provincial economy. This is due to the economic hardship they could cause companies which cannot afford to install more efficient equipment or switch to cleaner-burning fuel. The behaviour changes caused by such taxes and fees even could be environmentally detrimental rather than beneficial. For example, a tax or a fee that results in switching from natural gas to electricity, which has been generated from coal or nuclear power, could trade one form of environmental concern for another.


Environmental subsidies, usually in the form of tax credits or subsidized prices, can encourage the development and use of pollution control technologies, the development and use of renewable energy, and the promotion of energy conservation and efficiency. In Alberta, the rural home heating program is an example of such a subsidy. Under this program, rural residents who do not have access to natural gas can claim a provincial rebate based on the difference between the cost of their propane and that of natural gas.

Subsidies are usually financed by government. The costs to government can vary over time because the subsidies are often based on actual cost. A drawback to subsidies is that people and companies may come to rely on a subsidy program and, consequently, its cancellation can cause economic hardship.


Incentive programs often take the form of an up-front grant to defray the initial cost of a desired action. Grants can be used to encourage renewable energy sources or new pollution control technologies. For example, the province wants to increase the use of natural gas as a fuel for wehicles. To encourage people to change to the preferred fuel, grants are available in Alberta to cover part of the cost of installing the necessary conversion equipment.

Another grant program partially compensates companies for the cost of installing improved sulphur emission controls at small gas plants.

The costs of grant programs, which are designed to reqard the performance of one specific action, tend to be more contrallable than subsidies which are ongoing. Grant programs are often available for a fixed time period and can be designed with a sunset clause so they are phased out at the appropriate time.

Grant programs do not provide the long-range control a subsidy program does because there is often no way of ensuring a recipient continues the practice that the grant was designed to compensate.

Tradeable Permits

A tradeable permit system is one that relies on market forces to allocate emission permits among all companies in an area subject to an overall maximum emission limit established by government. To establish a tradeable permit system, the government sets, as it does for regulations, a maximum level for a particular type of emission for a geographic area. Each company in that area is then issued permits allowing it to emit limited quantities of that substance. Under such a system, companies may buy and sell their emission permits providing they do not emit more than allowed under the permits they own.

A company wanting to increase production either has to buy more emission permits on the open market or install cleaner-burning or more efficient equipment to stay within the limit of the credits it owns. If a company decides to install more efficient or cleaner-burning equipment, it can sell its excess emission credits to defray the cost.

This allows industry the flexibility to direct its financial resources to the most cost-effective opportunities for reducing emissions.

Tradeable permits may be an effective means to encourage reducing gaseous emissions in an area but they may also cause localized problems. For example, a firm could purchase a number of sulphur dioxide emission permits and not be concerned with reducing or controlling its emission levels. The result could be an unacceptable concentration of acid deposition downwind of that one plant.

Other concerns include: the challenge of establishing maximum emission levels; the allocation of permits; and the fact that the system is largely untested. The United States has some tradeable emission permit programs; its experience indicates such a system is workable.

What Has Been Done So Far?

With respect to air quality, Alberta has regulations concerning emission levels of sulphur and nitrogen oxides, but has none governing the release of carbon dioxide, methane or volatile organic compounds.

A report about various incentive methods - focusing on air pollution - and the implications concerning their use in Canada was prepared for the Canadian Electrical Association in June 1990.

The Government of Alberta and the Canadian Petroleum Association are jointly funding a study on the feasibility of using various economic instruments such as taxes, subsidies and tradeable permits to reduce emissions in Alberta. The study was to be completed in late 1990.

Three federal government departments, finance, environment, and energy, mines and resources are also evaluating economic instruments. A report, due in February 1991, is to assist in implementing the federal Green Plan.

Others, such as the Conference Board of Canada and the Canadian Energy Research Institute, are doing work to identify the strengths and weaknesses of economic instruments.

The Future

A mix of regulatory measures and economic incentives is being considers as a means to achieve and maintain air quality objectives in Alberta.

Further Information

Air quality issues - greenhouse gases, acid deposition (acid rain) and smog - cannot be addressed in isolation. Their complex inter-relationships make achieving the goal of clean air for the future a challenge for individuals, industry and governments alike. The Clean Air Strategy for Alberta is providing an opportunity for Albertans to participate in meeting that challenge.

To assist Albertans in participating in the Clean Air Strategy for Alberta, the Alberta government has prepared a series of fact sheets and a glossary. Their purpose is to help Albertans understand the magnitude of the environmental and economic considerations, the complexity of the science, the potential requirements for changes in lifestyle, and the challenges facing individuals, industry and government.

List of Fact Sheets

An Overview, Greenhouse Effect, Acid Deposition (Acid Rain), Ozone - Stratospheric and Ground-Level, Carbon Dioxide, Sulphur Oxides, Methane, Nitrogen Oxides, Volatile Organic Compounds, Chlorofluorocarbons and Halons, Energy Efficiency, Policy Instruments, Glossary, Renewable Energy

Clean Air Strategic Alliance, 9th Floor, Sterling Place, 9940 - 106 Street, Edmonton, Alberta, Canada, T5K 2N2, ph. 403/427-9793, fx. 403/422-3127, em: casa@incentre.net

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