1 Introduction

Managing resources so as to support sustainable development ... requires internalizing negative production and consumption externalities, for example, through reforms of subsidies that are harmful to the environment, the use of economic instruments such as taxes and charges, the creation of markets, and better appraisal of external effects.

OECD Secretary General, Donald Johnston (2000)

The general principle of smart taxation is that you should tax what you don't want, not what you do.

Canadian Council of Chief Executives (2003)

A decade ago, the Government of Canada published a discussion paper on Economic Instruments For Environmental Protection (1992). That paper described economic instruments then in use internationally or under serious discussion. Since that publication, Canada has made limited progress relative to many OECD countries towards incorporating these measures into its environmental conservation and protection toolbox. Although Canada has some experience with certain types of economic instruments, it does not utilise these measures as systematically, as creatively or as effectively as many other countries. Economic instruments can offer significant advantages over other risk management measures. Canada's slower progress in using economic instruments relative to other countries may mean it is not addressing its environmental problems as cost-effectively as they are. A more effective use of economic instruments may be necessary to enable Canada to manage many of the complex environmental problems that are closely related to current systems of industrial production and consumption while continuing to stimulate innovation and competitiveness.

This paper is intended to enhance understanding of the opportunities and issues regarding the use of economic instruments in Canada. It draws on the lessons learned in other countries and in Canada regarding when to use these measures, how to introduce them and how to design them.