Why is Environmental Policy not Market-Based?

Abstract

This study is aimed at examining the application of market-based environmental policy instruments (e.g., environmental tax and emission trading) through actual cases. It is made clear that environmental taxes tend to create new regulations (non-market-based policies) and that emission trading depends on the most difficult type of regulations. Reasons for the difficulties are identified as the considerations of distributive problems. Another reason for the preference of direct regulation to market-based approaches is identified as the increasing return to scale or non-convexity. That is demonstrated through a recycling and waste management policy based on the principle of the extended producer’s responsibility (EPR). Application of the efficiency criterion to environmental regulations is examined through the attempts to use cost-benefit analysis (CBA) for assessing hazardous pollutant control policies. It is made clear that the application of CBA would result in denying most of the actually introduced regulations and there is no consensus over its use. The proposed approach frees us from the understanding of environmental problems as external diseconomies or as phenomena of market failure.