Positive feedback, lock-in, and environmental policy

Abstract

During the last several decades, modern economic methods have been brought to bear on problems of environmental policy, with powerful and influential results. However, this policy- making paradigm often relies on some of the most restrictive sets of assumptions of microeconom- ics: the convexity conditions required for competitive markets to be Pareto-efficient. When positive feedback or lock-in occurs, these assumptions do not hold, and standard economic analysis of environmental policy may lead to technologically inferior outcomes, e.g., pollution control costs that are higher than necessary. This paper considers positive feedback in several different forms, and argues that it commonly occurs in markets that affect environmental policies, such as markets for energy technologies. The discussion examines how the standard paradigm for environmental economics breaks down in the presence of positive feedback or lock-in, and considers some policy responses to this problem. The case of SO2 trading helps illustrate how the standard paradigm can miss important technological opportunities for lower-cost pollution mitigation. The argument also suggests how the standard paradigm encourages end-of-pipe solutions and tends to overlook options like pollution prevention strategies, which can sometimes provide more economical environmental improvements.