The polluter pays principle requires that market prices reflect the full costs of environmental damage arising from pollution which results in a strong incentive for pollution control.
Emissions released in one country may cause damage in another country and therefore the problems of adequate compensation for such damage are also of an international nature.
The polluter-pays principle (PPP), was adopted by Organization for Economic Cooperation and Development (OECD) members, and states that "the polluter should bear the cost of measures to reduce pollution decided upon by public authorities to ensure that the environment is in an acceptable state". The principle can be interpreted as standard PPP (polluters only pay pollution control and cleanup), and extended PPP (polluters pay pollution control and cleanup, and compensate parties for damages suffered from pollution).
This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities. Agenda 21 recommends application of the "polluter pays" principle, where appropriate, to all kinds of water pollution source, including on-site and off-site sanitation.
Much environmental pollution and resource depletion occurs because the people responsible are not those who bear the consequences. If the polluter, or the consumer, is made to pay, then the costs of pollution, waste and the consumption of natural resources are brought into the calculations of the enterprise. This requires that, when production processes threaten or cause damage to the environment, the cost of necessary environmental measures should be borne by the producer, and not by society at large, giving incentives to reduce the pollution. To the extent that those costs are passed on the consumer, it can be said that the user pays and this may in turn reduce demand for the polluting activity.
The principle has been widely accepted as a guide for environmental policymaking by governments and aid agencies.
A UK Government White Paper A New Deal for Transport: Better for Everyone (1998), sets out how, as part of the package of measures tackling congestion and pollution, the Government will introduce legislation to enable local authorities to introduce road user charges in their area and to levy a charge on workplace car parking where they feel that charges can help to meet their local transport objectives. The White Paper also committed the Government to consult on the detailed implementation of these schemes. The key benefits of a fair charging system include: cutting congestion on the roads so it is easier and quicker to make essential journeys; fighting pollution by improving the environment and attacking the rise in respiratory illnesses made worse by vehicle fumes; pumping money into improved local transport; ring fencing money raised by transport so it is spent on transport; and cutting the costs to business when goods and people get stuck in traffic.
Article 5(b) of the Draft Protocol on Water and Health (1999) to the Convention on the Protection and Use of Transboundary Watercourses and International Lakes (1992), states: The polluter-pays principle, by virtue of which costs of pollution prevention, control and reduction shall be borne by the polluter.
Studies performed in connection with the licensing of environmental releases of potentially polluting substances should be designed and performed by independent bodies, and the costs should be budgeted for as part of development costs and be met by the developer.
The Convention on Civil Liability for Damage Resulting from Activities Dangerous to the Environment (Lugano 1993), aims at ensuring adequate compensation for damage resulting from activities dangerous to the environment and also provides for means of prevention and reinstatement.
The "polluter pays" principle, including the internalization of externalities, by virtue of which the costs of pollution prevention, control and reduction should be borne by the polluter. The full health and environmental costs of transport should be borne by the polluters as far as possible.
Principle 13 of the Rio Declaration on Environment and Development (1992), requires that: States shall develop national law regarding liability and compensation for the victims of pollution and other environmental damage; they shall also co-operate in an expeditious and more determined manner to develop further international law regarding liability and compensation for adverse effects of environmental damage caused by activities within their jurisdiction or control to areas beyond their jurisdiction.
Every country has a mounting bill of "externalised" costs: consumers having to pay for removing pesticide residues from drinking water, costs of hospitalisation, rising food poisoning, and so on. Some health analysts believe that a cost crunch looms, with rising environmental and health costs on the one hand, political and economic pressure to lower costs and compete in international markets, on the other.