Market-based Environmental Policy Instruments Research Articles

The Impact of Market and Non-Market-Based Environmental Policy Instruments on Firms’ Sustainable Technological Innovation: Evidence from Chinese Firms

A firm’s sustainable technological innovation (STI) is an important strategy to cope with the global challenges of the climate emergency and resource constraints. To encourage firms to pursue sustainable innovation, the government put its efforts into designing a proper environmental policy (EP). According to Porter’s hypothesis, a well-designed and flexible EP will advance the pace of a firm’s innovation. This paper argues that a flexible EP portfolio combining market and non-market-based EP instruments may affect a firm’s STI. Market-based EP instruments are cost-effective and consistent from a long-term view, whereas non-market-based EP instruments are more forceful and effective in the short term. Hence, these two kinds of EP instruments could complement each other. Furthermore, technical executives in top management teams will moderate the relationships between EP instruments and firms’ STI. Data analysis results of 618 Chinese public firms, who constantly participated in R&D activities during 2015–2019, supported these hypotheses. Contributions to EP and firm innovation theory, as well as suggestions for policymakers and firms’ top management teams, are discussed.

Market-based Environmental Policy Instrument Mixes and Firms’ Environmental Innovation: A Fuzzy-set Qualitative Comparative Analysis

ABSTRACT This study analyzed the antecedents of firms’ environmental innovation considering policy instrument mixes. Selecting 209 firms as the research sample and employing the fuzzy-set qualitative comparative analysis method, we examined the effect of five types of market-based environmental policy instruments on firms’ environmental innovation. We found that environmental innovation was not contingent on any individual condition, but resulted from the mix of the five market-based environmental policy instruments, which formed four paths and three models, namely, incentives-punishment, financial support, and subsidies-demand. The study has implications in improving the applicability of policies and formulating an effective environmental policy framework.

Diplomasi Lingkungan Norwegia kepada Indonesia: Analisis Skema REDD+ tahun 2015-2020

Environmental issues have become a fairly important topic of discussion in the last few decades. These environmental issues have attracted a lot of attention from local to global levels. REDD + contains measures designed to reduce greenhouse gas emissions due to deforestation and forest degradation in the presence of financial incentives. In environmental diplomacy between Indonesia and Norway, the REDD + scheme aims to reduce pollution levels according to targets and within a certain time period. In analyzing Norway's environmental policy and its involvement in global environmental cooperation, market-based environmental policy instruments can be used. In market-based environmental policy instruments there is a carbon trading mechanism to evaluate the REDD + mechanism in 2015-2020. REDD + implementation in Indonesia is carried out with the existence of a carbon market that uses a cap and trade mechanism, which results in the form of carbon credits that can be disbursed into financial incentives. The funds can be used to reduce deforestation and forest degradation, as well as for the conversion of peatlands in Indonesia.

Clean up your own mess: An experimental study of moral responsibility and efficiency

Although market-based environmental policy instruments feature prominently in economic theory and are widely employed, they often face public resistance. We argue that such resistance may be driven by moral responsibility, where citizens prefer to tackle the environmental problems that they have caused by themselves, rather than delegating the task to others by means of a market mechanism. Using a laboratory experiment that isolates moral responsibility from alternative explanations, we show that moral responsibility induces participants to take inefficient actions that reduce the earnings of the whole group of participants. We discuss the implications of this finding for the design and implementation of environmental policies.

The indecisive role of the market in China’s SO2 and COD emissions trading

ABSTRACTGovernmental intervention is essential to combat environmental pollution, a phenomenon classically explained as market failure, while market-based environmental policy instruments have provided cost-effective alternatives. By examining five pilot air pollution (sulfur dioxide) and water pollution (chemical oxygen demand) trading schemes in China through a market-based theoretical framework and extensive empirical analysis, this research analyzes where a state-market boundary is defined, whether the market is performing effectively, and, critically, what leads to underperformance. Constrained by policy design, policy conflicts, and excessive state intervention, the market has not played an effective and ‘decisive’ role, resulting in low market thickness for participants and transactions, market congestion on prices, and inadequate market safety for genuine emissions trading. Better emissions trading for conventional pollutants and CO2 requires better market-oriented rules, improved policy coordination, and stronger implementation while minimizing state intervention.

The Research on the Economic Effect of Market-Based Environmental Policy Instruments

Market-based environmental policy has many forms, including carbon trade and carbon taxes. The choice of market-based environmental policy instruments needs careful consideration of the effect on economy growth and structure. In the analytical framework of Ramsey model, carbon emissions are added into the instantaneous utility function and the problem of maximization of enterprise profits. Based on this hypothesis, the balance growth path and dynamitic changes of consumption and investment could be compared under different market-based environmental policy instruments. The conclusion shows that market-based environmental policy instruments have a negative effect on economic growth in the short run. However, in the long run, these instruments can promote economic growth and optimize economic structure by giving enterprises motivation to improve emission reduction technology. The distinction of these two environmental policy instruments lies in the difference between the price of carbon emission permit and the rate of carbon taxes. Moreover, by derivation, it is obvious that saving rate is inversely linked to carbon tax rate (or the price of carbon emission permit). Therefore, according to the current situation in China’s economic development, in order to improve consumption’s contribution on economic growth, we can choose the instrument which has higher price to reduce saving rate. In this way, consumption can be promoted and the structure of economics can be optimized.

Cap-and-trade, taxes, and distributional conflict

Enacting market-based environmental regulation, such as emissions taxes and cap-and-trade programs, often create rents that are contested by agents. In this paper, we create a framework that compares social welfare from alternative market-based environmental policy instruments under the presence of rent seeking. We show that, contrary to the commonly held view, non-revenue-raising instruments (NRRIs) are in many cases preferable over revenue-raising instruments (RRIs). We find that the choice of instrument depends on the size of a potential revenue-recycling effect and the level of preassigned rents.

Environmental Policy Design and the Fragmentation of International Markets for Innovation

It has long been argued that the implementation of market-based environmental policy instruments such as environmentally-related taxes and tradable permits is likely to lead to greater technological innovation than more direct forms of regulation such as technology-based standards. One of the principle reasons for such an assertion is that they they give firms greater 'flexibility' to identify the optimal means of innovating to meet the given environmental objective. Thus, it can be argued that the benefits of (some) market-based instruments can also be true of well-designed performance standards. While the theoretical case for the use of flexible policy instruments is well-developed, empirical evidence remains limited. Drawing upon a database of patent applications from a cross-section of countries evidence is provided for the positive effect of 'flexibility' of the domestic environmental policy regime on the propensity for the inventions induced to be diffused widely in the world economy. For a given level of policy stringency, countries with more flexible environmental policies are more likely to generate innovations which are diffused widely and are more likely to benefit from innovations generated elsewhere. And while the focus of this paper is on the specific case of environmental policy, the discussion is equally applicable to aspects of product and labour market regulation which have implications for technological innovation, such as product and workplace safety.

Environmental Policy Design and the Fragmentation of International Markets for Innovation

It has long been argued that the implementation of market-based environmental policy instruments such as environmentally-related taxes and tradable permits is likely to lead to greater technological innovation than more direct forms of regulation such as technology-based standards. One of the principle reasons for such an assertion is that they give firms greater „flexibility‟ to identify the optimal means of innovating to meet the given environmental objective. Thus, it can be argued that the benefits of (some) market-based instruments can also be true of well-designed performance standards. While the theoretical case for the use of flexible policy instruments is well-developed, empirical evidence remains limited. Drawing upon a database of patent applications from a cross-section of countries evidence is provided for the positive effect of „flexibility‟ of the domestic environmental policy regime on the propensity for the inventions induced to be diffused widely in the world economy. For a given level of policy stringency, countries with more flexible environmental policies are more likely to generate innovations which are diffused widely and are more likely to benefit from innovations generated elsewhere. And while the focus of this paper is on the specific case of environmental policy, the discussion is equally applicable to aspects of product and labour market regulation which have implications for technological innovation, such as product and workplace safety.

The relative efficiency of market-based environmental policy instruments with imperfect compliance

We study how the relative cost efficiency of three market-based instruments—emission taxes, tradable permits and output taxes—is influenced by the combination of accounting for incomplete compliance and pre-existing labor taxes. First, accounting for violations makes the policy instruments less effective so that environmental damages have to be larger to justify a policy. Secondly, including fines in a second-best setting provides a new means of collecting government revenues and of lessening existing tax distortions. We show that the relative position of grandfathered tradable permits vis-a-vis emission taxes improves considerably when incomplete compliance is incorporated in a second-best setting. A simple AGE model illustrates the results.

Experience with Market-Based Environmental Policy Instruments

Environmental policies typically combine the identification of a goal with some means to achieve that goal. This paper, prepared as a chapter draft for the forthcoming Handbook of Environmental Economics, focuses exclusively on the second component, the means--the instruments--of environmental policy, and considers, in particular, experience around the world with the relatively new breed of economic-incentive or market-based policy instruments. I define these instruments broadly, and consider them within four categories: pollution charges; tradable permits; market barrier reductions; and government subsidy reductions. By defining market-based instruments broadly, I cast a large net for this review of applications. As a consequence, the review is extensive. But this should not leave the impression that market-based instruments have replaced, or have come anywhere close to replacing, the conventional, command-and-control approach to environmental protection. Further, even when and where these approaches have been used in their purest form and with some success, such as in the case of tradeable-permit systems in the United States, they have not always performed as anticipated. In the final part of the paper, I ask what lessons can be learned from our experiences. In particular, I consider normative lessons for: design and implementation; analysis of prospective and adopted systems; and identification of new applications.

Why is Environmental Policy not Market-Based?

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.

Price volatility and risk exposure: on market-based environmental policy instruments

We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance efficiency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market.

The Chinese Government's Role in Implementing Multilateral Environmental Agreements: The Case of the Montreal Protocol

The Multilateral Fund created by amendments to the Montreal Protocol played a key role in motivating the Chinese government to ratify and comply with the Protocol. Two other factors have affected China's actions in meeting the Protocol's requirements: the nation's desire to appear as a responsible and co-operative actor in solving global environmental problems, and the interest of China's principal implementing agency in expanding its responsibilities and authorities. Three factors have had significant roles in enhancing the national government's ability to implement the Protocol: expanded administrative capacity, participation of local government units with capability to enforce regulations, and the employment of market-based environmental policy instruments.