Carbon Emissions, Market vs. Regulatory Approaches
Do market approaches have greater potential to reduce carbon emission than regulatory approaches?
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Market mechanisms are open ended and provide and an ongoing profit motive for companies, state agenc...
Market mechanisms are open ended and provide and an ongoing profit motive for companies, state agencies, and individuals to reduce emissions, as doing so either creates additional profits (cap and trade) or yields up additional tax reductions (carbon tax). Either is better than a regulatory approach, which only requires cuts to a certain level and provides no longer-term incentive for companies to drive down emissions by investing in new technology – meaning companies will take the minimum action necessary to meet the regulatory standard.
Regulation already exists and has proved effective, so it is unnecessary to try to construct market-based solutions. Pollution and climate change is essentially a result of market failure, and governments need to intervene to resolve this. Regulations are flexible as they can be strengthened and extended over time, building on initially moderate measures. Regulations can also be introduced in such a way that companies are given an incentive to reduce their carbon emissions as much as possible, for example through progressive fines for CAFE vehicle emissions standards in the USA
Market mechanisms provide a better means of tackling climate change at a global level. With the exc...
Market mechanisms provide a better means of tackling climate change at a global level. With the exception of the European Union, regulations are set by individual countries so there is a great risk that each state will come up with its own set of regulations in an attempt to limit carbon emissions. Not only will this be unnecessarily complicated and raise the costs of compliance considerably, there is also a risk that states will have an incentive to introduce only lax regulations in an attempt to attract more business investment than other, more demanding jurisdictions.\
By contrast, market mechanisms can provide a more coordinated and effective international response. A cap and trade system will sit alongside existing international financial and commodities markets. Cap and trade also provides incentives for developing countries to participate by offering them a chance to profit by adopting green technologies and preserving their forests. And although an identical global tax level for carbon emissions seems as unlikely as coordinated regulation, agreement on the principle of carbon taxation would be much easier to achieve. Individual countries could set their own carbon tax rates if they wished, but as they will all be taxing the same damaging emissions the overall impact in the market will be to provide a powerful push to reduce emissions.\
Because it is not possible to achieve a perfect market in carbon emissions, regulations are to be preferred. Firstly, some types of emissions are more damaging to the environment than others, but this is hard to recognise in a carbon tax or trading system. Regulations can be more targeted in order to deal with the biggest problems first. For example, government policy has required vehicle exhausts to become much less damaging to the environment over the past few years, and can also demand that companies (e.g. power generators) update their equipment and working methods. The deadlines and potential sanctions accompanying such government demands can also focus investment into research and development which the market alone would not provide. \
Secondly, the existing global marketplace is quite imperfect. Many countries (e.g. China, India) lack the kind of open economies needed for market mechanism to operate effectively. Unless efforts to curb carbon emissions are to be put on hold until their economies are sufficiently reformed for market incentives to have a chance of working, regulations will have to be the main method of emissions reductions in such places. And on a global scale market incentives are hugely distorted by such oddities as the exemption of aircraft fuel from taxation.
Using market mechanisms is likely to have a greater impact on people’s behaviour than regulation alo...
Using market mechanisms is likely to have a greater impact on people’s behaviour than regulation alone. Both a carbon tax and a trading system that prices emissions would raise the cost of fuel and electricity for ordinary people, providing an incentive to reduce their personal carbon footprint. This would have an immediate impact, and would affect all kinds of consumers, whereas regulations mandating efficiency standards for vehicles or homes would apply only to new purchases and not to the huge number of existing automobiles and houses, making any overall progress in reducing emissions extremely slow. Regulations can also have perverse effects – for example, requiring higher fuel efficiency standards may reduce the cost per mile to the motorist and so actually encourage more driving and so more pollution. By contrast, raising the cost of the fuel itself (as either cap and trade or a carbon tax would) will provide incentives for both greater engine efficiency and reducing mileage.
Market-based proposals can sound great in theory but economists fail to recognize the way in which people actually live their lives. Because people value the personal freedom their motor vehicle gives them, and feel that they have no choice but to use it to get to work, take the kids to school, etc., they will swallow very high increases in fuel taxes without changing their behaviour. Similarly, making your home energy efficient can involve a lot of initial expense, and even if this investment would pay for itself in lower bills or taxes over a number of years, many people will not feel the investment is worthwhile. Only by regulation requiring people to change their behaviour can this inertia be addressed.
Market mechanisms such as carbon trading allow the greatest reduction in emissions at the least cost...
Market mechanisms such as carbon trading allow the greatest reduction in emissions at the least cost – this damages the world economy less and will ultimately allow more rapid decreases in emissions than costly regulations would achieve. Power generating plants and motor vehicles in the developing world and the former Soviet Union are often hugely more polluting than those in the most developed nations, and it would be relatively cheap to equip them with more modern technology in order to bring emissions down. By contrast, achieving even a tiny additional reduction in more efficient developed world plants and vehicles would be hugely costly, as it would require completely new technologies to be developed. Carbon trading (or an international carbon tax) would encourage firms to direct investment into whatever would reduce their emissions most cost-effectively, either by direct investment in their developing world operations, or by buying carbon credits from such countries. If this means emissions in the rich world stay level while carbon reduction efforts are concentrated elsewhere, then fine – the world as a whole gains from this. And if it transfers money and directs investment into developing nations, then that is an additional benefit of the scheme.
Market mechanisms like carbon trading can act as a way for the rich countries historically responsible for causing climate change to avoid their responsibilities. By allowing developed countries and their businesses to purchase carbon offsetting credits in the developing world, they can effectively export their obligation to reduce carbon emissions. This is not morally justifiable as the problem was largely created by developed nations, so they should be required (by regulations) to make sacrifices to deal with it. Furthermore, as such market systems often trade virtual carbon reductions, whereby schemes in the developing world are meant to prevent increases in emissions which might otherwise have taken place, they do not reduce the actual amount of carbon emitted into the earth’s atmosphere. Questions have also been raised about the potential for fraud and corruption in many carbon offset schemes in the developing world.
Badly designed market mechanisms will not promote effective emissions reduction, but that is also tr...
Badly designed market mechanisms will not promote effective emissions reduction, but that is also true of badly designed regulations (which are often highly politicised, e.g. US vehicle exhaust emissions standards). The European Union’s system has had problems, but the EU Commission has been much stricter with the second round of permit allocations and there is every prospect that the carbon market will prove successful in the next few years. Already EU companies have been incentivised to invest in carbon-reduction schemes in developing countries, so cap and trade is having a positive global impact. Extending cap and trade to other countries would allow us to learn from the EU’s experience, perhaps by making companies pay for permits to pollute rather than giving permits to them for free. On the other hand, many economists argue that a carbon tax is preferable to both regulations or cap and trade, as it is much more transparent in the way it creates incentives to reduce emissions.
Regulations are more stable and effective than carbon markets. The European Union’s recent experience of running a cap and trade system for carbon emissions does not inspire confidence. Allocations of permits to pollute have been politicised amid competition between member states, so too many permits have been handed out, often to the wrong industries. As a result the carbon price was initially extremely volatile before settling at a very low level – neither of which is likely to inspire any company to make big investments in green technology. Given that the level of any carbon tax is also likely to be highly politicised, the predictability of clear emissions standards is much the best way to promote emissions reductions.
Consumers are not unfairly punished by carbon taxes or by higher energy prices as a result of cap an...
Consumers are not unfairly punished by carbon taxes or by higher energy prices as a result of cap and trade schemes. Ultimately climate change is caused by all of us, and ordinary people will have to change their behaviour in order to tackle global climate change. But there is no reason to think that market mechanisms will create victims – carbon taxes can be offset by reductions in the level of other taxes, so that their overall impact is neutral. And regulations do not just affect big businesses – they create costs which industry passes on to consumers in the form of more expensive electricity, vehicles, gasoline, etc. In fact, regulations often favour particular industries over others for political reasons, which is far more unfair than using market mechanisms to send green price signals to consumers.
Carbon taxes unfairly punish consumers of energy by raising the cost of heating their homes, travelling to work, etc. Hard-working families already face a very high tax burden and so-called “green” taxes are just another excuse for politicians to dip into their wallets. Cap and trade is little better as it puts energy consumers at the mercy of volatile markets, making ordinary families prone to the same unpredictable price spikes and supply failures which affected California a few years ago. Regulations force those really responsible for carbon emissions – power generators, the auto industry, fuel companies – to face up to their responsibilities and to invest some of their vast profits in green technology.
Regulations to reduce carbon emissions will suffer all the problems of government bureaucracy. Whil...
Regulations to reduce carbon emissions will suffer all the problems of government bureaucracy. While market mechanisms will appeal to companies’ and consumers’ self-interest in a transparent way, regulations are always complex and burdensome. A massive and expensive administrative system will be needed to frame and introduce meaningful regulations, and this will impose unnecessary costs upon our economy (and probably raise taxes). Worse, because government is always so bad at regulation, companies will calculate that they need not obey the rules anyway – because poor monitoring means they are unlikely to get caught, and weak penalties mean that even if they are caught the fines will still be less than the cost of complying with the regulations.
Regulations such as efficiency standards will be easier to introduce than market mechanisms. In a democracy the public need to be convinced of any major new policy initiative, and polls suggest the public would prefer more stringent emissions standards. By contrast market mechanisms find little favour with the public, meaning that any attempt to introduce them may be doomed to failure, along with the politicians associated with them. Carbon taxes are unpopular because the public very reasonably sees them as another way for the state to take money off them; politicians’ promises to offset the impact with reductions in other taxes are not believed. Cap and trade systems are so complicated to explain that it is unlikely the public would ever learn to understand and trust them. What the public will see is that cap and trade schemes would require a large and costly bureaucracy of their own, but at international level, so that our sovereign independence would be threatened by some global body.
What do you think?