Technology-Based Approaches versus Market-Based Approaches

Technology-Based Approaches versus Market-Based Approaches

Description

The United States has experience with the two major kinds of tools available for environmental policy: technology-based, command-and-control (CAC) approaches that select a technology for industry to install; and market-based approaches that create economic incentives for industry to reduce harm to the environment, while leaving the choice and innovation of specific technologies and techniques to private actors. In the US, federal and state governments increasingly are employing the market-based approach, with both environmental and economic benefits. Archetypal CAC regulations rely on uniform, inflexible, technology-based standards issued by the central government. This approach results in high compliance costs, restricts innovation, and discourages efficient use of resources. These rules also require detailed central planning of economic activity. Because the cost of controlling pollution varies among those subject to regulation, a CAC policy requiring them all to meet the same target or to install the same technology, means that some regulated entities could achieve the same environmental protection through less costly means, or more protections for the same cost. Consequently, a CAC approach forces society to pay for relatively expensive environmental protection. This wastes resources and potentially arouses resistance to further environmental protection measures. In the longer run, CAC, technology-based regulation deters innovation by locking in a chosen technology and eliminating the market’s reward for superior techniques; the resulting dearth of better technologies weakens the ability of CAC regulation to prevent environmental degradation. With a market-based incentive approach, the government still sets firm environmental goals, but defines them in terms of environmental performance, not technology, leaving the choice of specific response and compliance strategies to each individual enterprise. The flexible, market-based approach harnesses the economic self-interest of each business in the service of environmental protection. Unfettered by uniform and technology-based standard, firms creatively meet these goals in the most cost-effective manner, and responses are devised to meet the needs of diverse local circumstances. Economic incentives encourage innovation of new technology and process designs, and efficiency in the use of raw materials and other inputs. Whereas improvements occur under CAC policy only when rules are reviewed and strengthened by government agencies, market-based incentives invite continuous environmental entrepreneurship in the private sector. The lower cost of compliance under market-based incentive approaches enables society to purchase more environmental protections or other desired benefits. In the US, market-based approaches have been employed with great success in several real-world applications. They have effectively achieved environmental goals while generally cutting the costs of achieving those goals by 25 to 50 per cent or more. Yet the US CAC-dominated environmental policy of the last two decades has taken its toll, both economically and environmentally. The rediscovery of market-based incentive tools in the last five to ten years has opened the door to better policy here, which we believe should be the model for policy in Eastern Europe. Support for this proposition begins in the section entitled ‘Approaches to Environmental Policy’ with a comparison of the attributes of technology-based and market-based environmental policies: their structure and incentive effects, and their impacts on cost, performance, innovation, and government agencies. This sections assembles the conceptual case for market incentives. In the following section, ‘The Need for Comprehensive Policy’, we emphasize the importance of viewing environmental issues comprehensively rather than dividing problems and treating them in narrow, piecemeal fashion. We then build the practical case for market incentive and finally, based on this experience, we suggest consideration as to how best to design environmental policy.

Source Publication

Greening International Law

Source Editors/Authors

Philippe Sands

Publication Date

1993

Technology-Based Approaches versus Market-Based Approaches

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