The polluter pay principle is a method for remedying any damage, especially to the environment and public health, that results from any activity by requiring the business or person performing such activity to pay for the full cost of the damage from it rather than having the environment, individuals, government or other victims of the damage bear the costs. That is, it is a policy that aims to internalize the external costs (i.e., externalities) of activities that harm the environment, public health, etc.
A well-crafted polluter pay policy can provide a strong incentive for polluters to reduce the harmful effects of their externalities (1) by using less harmful processes for their activities, (2) by replacing such activities with less harmful activities, and (3) by encouraging the development of less harmful technologies and practices. It simultaneously provides funds to governments and other organizations that can be used to undo or mitigate damage from such activities.
An example of the application of the polluter pay principle is a coal-burning electric power generation plant. The burning of coal produces carbon dioxide, which contributes to climate change. It also emits a variety of other toxic substances, such as sulfur dioxide, nitrogen oxides and particulate matter, including fly ash (which contains mercury and other toxic metals). These substances contribute to air and water pollution and thus harm human health as well as crops and terrestrial and aquatic ecosystems.
Requiring the owners of the coal-burning electric power generation plant to pay a penalty based on the estimated harm from burning coal would provide an incentive for them to invest in equipment to reduce the emissions (e.g., scrubbers) and could also provide an incentive to conduct research on more effective and less costly ways to cut the emissions. Such a penalty might also give the owners an incentive to cut the emissions by reducing the amount of power generated and/or by raising the prices for its electricity. Reducing the output and raising the prices could, in turn, cause consumers of the electricity to make greater efforts to conserve it.
Meanwhile, the funds received by the government from the polluting power plant could be used to attempt to remediate the effects of the pollution. For example, they could be used to plant more forests to absorb carbon dioxide emissions. They could also be used to compensate farmers for damage to their crops from the air pollution, to provide air filtration equipment for nearby homes, and to provide medical services for people suffering from air pollution.
The polluter pay principle can be applied to all types of negative externalities, not just toxic emissions. For example, it can be applied to noise pollution, such as that from aircraft, automobiles, loud music venues and gasoline-powered leaf blowers and even from ships and other water-based activities whose sounds disturb sea mammals and other species in aquatic ecosystems. It is also being increasingly applied to congested urban roads in the form of congestion pricing.
One of the biggest difficulties of implementing a polluter pay policy is determining monetary values for the damage caused by polluters. Another is accurately determining who is responsible for the damage, particularly in situations involving multiple parties or diffuse sources. Fortunately, however, these are not insurmountable barriers, and even approximations can be useful in reducing pollution, congestion and other harmful externalities of human activities.