Choice Of Environmental Instruments Research Articles

Environmental instrument choice in a non-linear world

ABSTRACTThe substantial literature on environmental instrument choice under uncertainty has provided valuable insights using simplifying assumptions of linear marginal cost and benefit curves and additive error terms to determine when and why a price or quantity instrument should be preferred. But empirical analysis has shown that linearity and additivity are not the norm. This paper explores the formal properties of instrument choice when the marginal benefit and marginal cost curves are non-linear; the error term is multiplicative and assumed to be exponential; and the choice is expanded to include comparisons among different price and different quantity regimes, as well as choices between these types. In this more realistic environment, we show that small changes in variance and parameter values can have a significant impact on optimal instrument choices.

Putting a Price on Carbon: A Comment

This Essay analyzes the characterization of both pollution taxes and so-called cap-and-trade programs addressing greenhouse gas emissions as policies that “put a price on carbon,” a characterization that has come to dominate both policy discussion and much modern scholarship on environmental instrument choice. It shows that the rationale for characterizing cap-and-trade — a quantitative rather than a pricing mechanism — as putting a price on carbon suggests that analysts should likewise treat traditional regulation as a mechanism putting a price on carbon. Treating “market-based mechanisms” as uniquely putting a price on carbon reflects and perpetuates a tendency to see markets and government as antonyms, with markets operating through price and governments operating through coercion, even though markets and governments are intimately intertwined and use a variety of tools. This Essay shows that an informed third generation debate about instrument design and instrument choice should focus on understanding prices’ limits as a coordinating tool, including appreciation of potential conflicts among the values price is thought to serve.

Transitional politics: emerging incentive-based instruments in environmental regulation

This paper proposes a positive theory of environmental instrument choice. We study a democratic society that seeks to lower the level of pollution from industrial sources to a pre-specified target. The target can be implemented by one of three instruments: [ S]: uniform emission standards; [ P]: tradeable permits; and [ T]: emission taxes. The conflict of interest between special-interests, representing polluters, and the electorate is resolved by an elected politician. We characterize when each of the three policy instruments is chosen in political equilibrium and show that the transition, observed in many countries, from [ S] to either [ P] or [ T] can be understood as a natural consequence of increasingly ambitious environmental targets.

Toward a Total-Cost Approach to Environmental Instrument Choice

Much of the theoretical literature on environmental instrument reflects a normative presumption that only instruments, such as effluent taxes or tradable quotas, can produce an efficient outcome. Other potential alternatives, such as non-tradable quotas or more general Pigovian taxes are ruled out as inherently inefficient. Moreover, most of the literature relies on an important but unwarranted presumption: that cost and benefit functions, although they may be subject to uncertainty, are identical regardless of the regime that is chosen; that is price and quota systems are assumed to face the same cost and benefit curves with the same expected values. More crucially, the models assume that no regime will be subject to greater or lesser uncertainty than another. Under these assumptions, environmental instrument choice is determined simply by the relative elasticities of the curves. The real world is far more complicated than existing models of environmental instrument choice suggest. For one thing, monitoring and enforcement costs may be quite different for one regime than another. These cost differentials may affect not only comparisons between effluent tax and tradable permit schemes, but comparisons between instruments generally and more traditional regulatory instruments, such as technology-based standards or general Pigovian taxes. In some cases, for technological or institutional reasons, economic instruments will not efficiently or effectively attain exogenously set pollution-reduction goals. This paper offers a broader framework for comparing environmental instruments. Whereas most theoretical models focus exclusively on the comparative compliance/abatement costs of alternative regulatory instruments, this paper incorporates administrative costs and residual pollution costs into what we term a total-cost approach. The implications of this approach for environmental policy are then discussed in the context of efforts to reduce greenhouse-gas emissions under the 1997 Kyoto Protocol. The paper concludes that the incorporation of administrative (monitoring and enforcement) costs and residual pollution costs into theoretical models can greatly enhance the utility of those models for environmental policy making.

Transitional Politics: Emerging Incentive-based Instruments in Environmental Regulation

In the past 15 years, incentive-based environmental policy instruments, such as pollution taxes and tradeable pollution permits, have become an important supplement to tradition command-and-control instruments in Europe and the U.S. This paper proposes a positive theory of environmental instrument choice that can be used to explain this trend. We imagine a democratic society that seeks to lower the level of pollution from industrial production to a pre-specified target. The target can be implemented by one of three instruments: [Q]: quantity controls; [P]: tradeable permits; and [T]: pollution taxes. We characterize political equilibrium as an evolving policy compromise between special-interests, representing polluters, and the electorate. We identify three factors that play a key role in explaining the recent trend in instrument choice: increasingly ambitious environmental targets, learning-by-doing driven reductions in transaction costs associated with permit trading, and (abatement) cost-reducing technological progress.