Accounting and Society - Essay Example

? Accounting and Society Assignment Introduction Free markets can be a solution to environmental challenges, and can be more successful compared to no-market based approaches in solving majority of diverse environmental problems. The emphasis on free-market to solve environmental challenges can be seen as somehow ironic since environmental problems have frequently been seen as a form of market failure. In contrast, conventional approaches to regulating the environment characteristically force entities to implement the same pollution control strategies, irrespective of the relative costs to the entities. This can be expensive and equally counterproductive since, although, the approach succeeds in limiting emissions, the attainment of the results is in an unjustifiably pricey way (Oates, Paul and Albert 1989, p.1233). Non-market-based approaches offer minimal or no incentive whatsoever to do better than what the law demands, or no room to develop and experiment with new technology and equipment that might yield enhanced improvement in pollution control (Hahn and Stavins 1991, p.2). The net result in this case is a drag on productivity and criticisms regarding regulatory inefficiency, all of which undermine commitment to attainment of environmental gains. This observation shapes the call for regulation based on free-market and pro-regulatory approach as it delivers more gains to the society as a whole. Economists criticize non-market-based approaches approach to regulation by citing its costliness and rigidity (Driesen 2003, p.137). From late 1980s, market based instruments for environmental regulation gained prominence such as emissions trading programs. Australia Government’s response has been no different as espoused by its creation of pricing mechanism for carbon and fresh regulatory reporting requirements centring on greenhouse gas emissions, energy consumption, and production. The Australian government announced plans to replace the $15 per tonne carbon price floor with the introduction of the new carbon price in July 2012, in which the biggest polluters pay $23 per tonne for the carbon emitted (CO2-e). Australia plans to link its carbon pricing system with the European Union Emissions Trading Systems (EU) from July 2015. The National Greenhouse and Energy Reporting Scheme (NGERS) that commenced on July 2008 seeks to herald a solitary national reporting framework for constitutional corporations that bear significant greenhouse gas emissions right from energy consumption to energy production. Non Market-based Approaches: Traditional Command-and-Control A prescriptive regulation infers a policy that stipulates how much pollution an entity can emit, and/or what forms of control equipment it must utilize to satisfy those requirements. Such a standard is defined in terms of a source-level emissions rate. The main idea behind command-and-control rests in the fact that regulated entities are awarded minimal discretion in their pollution control efforts. Command-and-control approach covers a broad range of regulations manifesting varying degrees of flexibility and cost savings (Stewart 1992, p.547). In such circumstances, aggregate emissions will hinge on the number of polluters plus the output of each polluter. The prescriptive standard does not allow for reallocation of abatement activities as each entity may be still expected to attain a certain emissions standard (Stewart 1992, p.548). Hence, whereas pollution may be minimized to the desired level, it is often attained at a higher cost under a prescriptive approach. Performance-based standards A technology standard infers one that stipulates certain actions with minimal or no flexibility to adopt other actions that might yield the same environmental outcome. The focus on process or technology instead of the environmental outcome is what predominantly characterizes a technology standard. Conversely, performance standards highlight pollution or environmental quality and hence enable regulated sources some scale of flexibility in satisfying those goals such as energy efficiency standards (Stavins 1995, p.133). These standards manifest within-firm flexibility since the source is open to select the most appropriate method for attaining the rate or cap. In each case, the regulation mainly highlights the outcome instead of a set of actions. The flexibility of performance-based standards encourages entities to innovate to the degree that they allow firms to explore cheaper ways to satisfy the standard; however, the approach fails to avail incentives for firms to minimize pollution beyond the set requirements (Driesen 2003, p.138). Market-Oriented approaches Market-based approaches create an incentive for the private sector to integrate pollution abatement into production or consumption decisions, and to innovate in ways that continually highlight the least costly method of abatement. Market-oriented approaches can diverge from more conventional regulatory methods with regard to economic efficiency (or cost-effectiveness) and the distribution of benefits and costs. Majority of market-based approaches pursues to minimize polluters’ abatement costs, a goal that may not be attained under command-and-control based approaches (Montgomery 1972, p.395). Since market-based approaches do not mandate that every polluter satisfy a set emissions standard, they characteristically allow firms more flexibility relative to conventional regulations and capitalize on the heterogeneity of abatement costs across polluters to minimize aggregate costs efficiently (Oates, Paul and Albert 1989, p1234). Market-based approaches can be categorized into four approaches; marketable permit systems, emissions taxes, environmental subsidies, and tax-subsidy combinations. Marketable Permit Systems Several forms of emissions trading exist, inclusive of cap-and-trade systems, project-based trading systems and emissions rate trading systems. The overriding element in this approach is that sources are able to trade credits or allowances, which herald opportunities to minimize emissions at lower costs, possess an incentive to do so. Cap-and-trade Systems In this approach, the set emission allowances are then distributed to polluters, and the market is established in which allowances can be bought or sold. The price of emission allowances in this case is allowed to differ. Since diverse polluters incur diverse private abatement costs to control emissions, the polluters are willing to pay diverse amounts for allowances (Stavins 2003, p.355). Hence, a cap-and-trade system enables polluters who face high marginal abatement costs to purchase allowances from polluters with low/marginal abatement costs, rather than installing expensive pollution control devices or employing costly inputs (Oates 1996, p.197). Cap-and-trade systems are distinct from command-and-control regulations in that they pursue to limit the collective emission level over a certain compliance period, instead of establishing an emissions rate. The equilibrium price of allowances implies that any externality linked to emissions remains entirely internalized by the firm. The collection of revenue via this method of allowance allocation avails the government with an opportunity to minimize pre-existing market inefficiencies, minimize distributional consequences of the policy, and invest in other social priorities (Oates 1996, p.198). Project-based trading systems Project-based trading systems allow restricted forms of emissions trading across or within sources, and enable enhanced flexibility in complying with command-and-control regulations such as emission limits or facility-level permits. A bubble enables a facility to consider all sources of emissions of a certain pollutant within the facility to attain an overall target level of emissions, or environmental enhancement (Tietenberg 1995, p.95). Rate-based trading systems Instead of establishing an emissions cap, the regulator authority under the rate-based trading program develops a performance standard or emissions rate. Sources with emission rates below the performance can receive credits and sell the credits to sources with emission rates that are above the standard. In the same way as other trading systems, sources are able to enhance their emissions rate at low cost and bear an incentive to do so as they can sell the resulting credits to those sources facing increased costs of abatement (Montgomery 1972, p.396). Nevertheless, emissions may amplify under these programs when the sources increase their utilization. Emissions Tax Emissions taxes are exacted according to unit of pollution whereby the polluter will abate emissions to the point that the additional cost of abating one or more unit of pollution matches the tax and the tax will yield in an efficient outcome if it is set equivalent to the extra external damage inflicted by the previous unit of pollution emitted. To evade emissions tax, polluters mainly pursue the cheapest means of reducing pollution. This may incorporate a reduction in output, a change in inputs to production, and installation of pollution control equipment (Downing and Lawrence 1986, p.18). However, taxing emissions may not be viable when emissions are complicated to measure or accurately estimate. Other Market-like Mechanisms: Subsidies Since a subsidy is a form of a “negative tax,” the subsidy may in some instances lead to the same efficient result as a pollution tax. Emission subsidies could be in theory settled per unit of pollution reduction comparative to some baseline amount of pollution. Subsidies paid by governments to entities or consumers for per unit reductions in pollution fashion the same abatement incentives as emission taxes or charges. An environmental subsidy seeks to correct an externality that is not already taken into account by entities when making production decisions (Tietenberg 1995, p.96). Emission taxes and environmental subsidies can also be connected to attain the same level of abatement, in the same way when tax and subsidy instruments are employed differently. Other regulatory mechanisms include market friction reductions and government subsidy reductions. Market friction reductions encompass actions that produce or enhance markets for inputs and outputs related to environmental quality such as laws, which pursue to enhance competition within the electricity markets. They also include liability rules, which encourage entities to consider the costs of the environmental damages they produce, and information programs that help market decision making. Other regulatory approaches, in the context of economic incentives, (and beyond taxes and cap-and-trade) include liability, deposit-refund schemes, information disclosure, and voluntary programs (Stavins 1995, p.134). Discussion An economic dynamic approach to environment law avails a promising platform for regulatory reform compared to static-efficiency-based approach. An economic dynamic approach mainly seeks to emulate the creativity and innovation demonstrated and produced by free markets. Environmental law must reflect and cope with a conventional set of economic dynamics. This indicates a need for a reform agenda that spotlights regulatory design that encourages innovations that are sufficient to cope with significant environmental changes overtime. Such an agenda is likely to propel changes within the regulatory process to guarantee that the regulations facilitate innovation and creativity to avoid challenges associated with unenergetic and sometimes ineffectual governmental decision-making process (Gayer and Horowitz 2006, p.3). Within the environmental law and policy, market-based instruments represent policy instruments that employ markets, price, plus other economic variables to avail incentives for polluters to minimize or eliminate accompanying environmental externalities. Market-based instruments respond to market failure centring on externalities such as pollution by facilitating the establishment of proxy market for the utilization of environmental services (Petts 2009, p.197). Examples of market-based instruments include environmentally-related taxes, emissions trading, charges and subsidies. The Cost-Savings Argument for Taxes and Cap-and-trade For close to a century, economists have maintained that policymakers should value and take advantage of market principles during the design of environmental regulations. Such market-based approaches are likely to utilize economic incentives in delivering environmental goals at lower costs. This stems from the fact that taxes on production activities that generate environmental externalities are likely to deliver the same desirable impacts in the same way that the free market does for ordinary goods. The tax on pollution avails an incentive for a pollution source to minimize its pollution and hence economize on its utilization of the environment. For every unit of pollution, the polluter is expected to decide either to pay the tax or minimize that pollution via any means at the entities disposal (Gayer and Horowitz 2006, p.6). Similar advantages could be derived if polluters were assigned transferrable rights to their pollution, with the overall rights set matching the emissions goals. Market-based approaches have now gained prominence, owing to, in a large part, the long-standing and undisputed support of such approaches by economists. Market-based approaches have overtime proved to be reasonable ways of tackling environmental concerns. In a market system, prices are employed to direct the activities of buyers and sellers. Since trade is intentional, buyers and sellers only make trades when both parties benefit; hence, government intervention within such economy is unnecessary to enhance the parties’ welfare (Stavins 2003, p.356). The superiority of market-based environmental legislation flows from the flexibility they impart on sources centring on the manner in which the sources should control pollution, or other environmentally damaging actions (Petts 2009, p.198). Market mechanisms avail within-firm and across-firm flexibility. These flexibilities guarantee that the lowest-cost pollution control actions remain undertaken and are absent in non-market regulations. The first role of within-firm flexibility emanates from the fact that since the costs of controlling pollution would be borne fully by the polluter, the polluter possesses every incentive to undertake actions whose cost is less than the tax or the permit tax. Across-firm flexibility enables diverse levels of pollution among the diverse regulated sources. Costs are mainly lower than under within-firm flexibility alone as entities will look for the lowest cost actions across the whole regulated sector. Market instruments manifest a strong form of across-firm flexibility. With a solitary “price” for environmental damage, as availed by approaches such as taxes or cap-and –trade, the marginal expense for the last unit of pollution will match across sources, thus reducing the total costs of regulation. Market regulations avail full across-firm flexibility as any pollution control chance anywhere will most likely be utilized via taxes or cap-and-trade (Hockenstein, Stavins and Whitehead 1997, p.31). Under a well functioning market mechanism, other restrictions such as on pollution control technology, energy efficiency, and emission rates, or any other restriction that have been proposed or ratified can be regarded as both redundant and unwarranted. Restrictions will be unnecessary since, under a market mechanism, the incentive discouraging incurring of tax or not to buy extra permits will readily have motivated polluters to spotlight and embrace all appropriate actions. In addition, the restriction will be unwarranted because such restrictions may not possess the lowest cost energy for the source to cut its emissions (Hockenstein, Stavins and Whitehead 1997, p.30). If those restrictions were to be part of the lowest cost strategy, then it would be needless to impose the restrictions; market forces would motivate polluters to find and implement them. A considerable body of literature has attempted to establish cost savings derived from employing market instrument for the regulation of certain pollutants. The overall findings of such studies indicate dramatic cost savings heralded by the market instruments (close to four times under the corresponding non-market alternative compared to under cap-and-trade). In most cases, the ratio can be even higher (Ma?ler 2003, p.355). Market mechanisms frequently yield low aggregate control costs compared to a non-market one. Taxes and cap-and-trade have additional advantages, beyond the cost savings since they can be enforced with less technical knowledge compared to the requirement standards of technology and performance standards (Downing and Lawrence 1986, p.19). Criticisms The superiority of market mechanisms is often put to doubt while some authors accommodate the cost-effectiveness premise. They asset that market power, localized concentrations of pollution (hot spots), or other conditions are highly likely to make market mechanisms fail to yield to their full potential (Johnson 1999, p.111). The second critique diverges from the economic paradigm to assert that cap-and-trade or taxes bear other undesirable attributes isolated from market conditions. These moral stigma claims question the morality of allowing the purchasing of the right to pollute and that trading may weaken the sense of shared responsibility in responding to environmental problems (Johnson 1999, p.112). Potential Effects of Pro-regulatory Approach to Regulation Under the “voluntary approach” to pollution abatement, entities make commitments enhance their environmental performance above and beyond the level dictated by law. Voluntary programs can be categorized into unilateral commitments, public voluntary schemes, and negotiated agreements. Pro-regulatory initiatives can aid in the attainment of emissions reductions and enhance management of environmental hazards. Pro-regulatory approach to regulation is essential in encouraging polluting entities to go beyond what is mandated by the existing regulation. Pro-regulatory approaches employ diverse methods to encourage and attain environmental improvements. They require entities or facilitating firms to set specific environmental goals; promote firm environmental awareness and encouraging process change; publicly recognize firm participation, and utilize labelling to identify environmentally responsible products (Field and Field 2005, p.4). Pro-regulation is a critical component of regulation and derives significant advantages over statutory or direct regulation. Pro-regulation has heralded increased knowledge and expertise of all parties to be used more effectively. Similarly, pro-regulation has led to lower regulatory burden on business and lowered costs to the state. Furthermore, pro-regulation can be regarded as flexible and adaptable. This derives more commitment, pride, and loyalty amid the profession or industry. Pro-regulation has been critical in overcoming market or conduct failures and preventing harms to the environment (Field and Field 2005, p.5). Market based incentives and hybrid approaches avail the regulated community a chance to meet the standards with enhanced flexibility and lower costs compared to the majority of command-and-control regulations while pro-regulation initiatives (voluntary initiatives) may accommodate environmental improvements in areas that are not traditional regulated by Australian government regulations (Hahn and Stavins 1991, p.3). The policy options under consideration are expected to balance cost considerations with other significant goals such as benefits, economic efficiency, and cost-effectiveness. The introduction of environmental legislation based on the free-market would be a win for all stakeholders’ right from business owners, the government, and the community. Market-based orientation presents the best chance of addressing market failures. It is essential to appreciate the value of flexibility availed by market instruments and, equally, the costs, frequently hidden-emanating from the constraints heralded by non-market regulations. Although, not a panacea, market-based instruments-regulations that promote appropriate environmental behaviour via price signals rather than through explicit instructions, and avail incentives to both corporations and individuals, alike, act in ways that further both financial goals and environmental aims (Downing and Lawrence 1986, p.18). Conclusion Since market-based instrument align the financial incentives of companies with those of the environmental objectives, I fully support the adoption of this approach to environmental regulations in Australia. The market-based instruments can be cost-effective and can avail a powerful impetus for entities to innovate and adopt cheaper and better pollution control mechanisms. This leaves more room to propel economic growth or for the adoption of more stringent environmental standards, which is a win-win situation to all stakeholders right from corporations, environmental activists, the government, and the community. Australia should embrace market-based polices since they are inclined to be least costly, and place lower information burden on the regulator, and avail incentives for technological advances. The flexibility heralded by free market environmental regulations can be helpful over time as it allows sources to explore not only among the present options, but to discover other pollution control options (undertaking research and development to highlight new technologies). References List Downing, P. B. & Lawrence J. W. (1986). Innovation in Pollution Control.” Journal of Environmental Economics and Management 13. pp.18-27. Driesen, D. M. (2003). The economic dynamics of environmental law, Cambridge, MIT Press. pp.137. Field, B. & Field, M. (2005). Environmental Economics, New York, McGraw-Hill. pp.4-6. Gayer, T. & Horowitz, J. (2006). Market-based approaches to environmental regulation, Foundations and Trends in Microeconomics 1 (4). pp.1-129. Hahn, R. & Stavins, R. (1991). Incentive-based environmental regulation: A new era from an old idea? Ecology Law Quarterly 18 (1). pp.1-42. Hockenstein, J. B., Stavins, R. & Whitehead, B. (1997). Creating the Next Generation of Market-Based Environmental Tools, Environment 39 (4). pp. 12-33. Johnson, S. (1999). Economics v. equity: do market-based environmental reforms exacerbate environmental injustice? Washington Law Review 56 (1). pp.111-166. Montgomery, D. (1972). Markets in Licenses and Efficient Pollution Control Programs,” Journal of Economic Theory 5. pp.395-418 Oates, W. E. (1996). The economics of environmental regulation, Cheltenham, Edward Elgar. pp.197-200. Oates, W. E., Paul R. P., & Albert, M. (1989). The Net Benefits of Incentive-Based Regulation: A Case Study of Environmental Standard Setting, American Economic Review 79, pp.1233-1243. Petts, J. (2009). Handbook of Environmental Impact Assessment: Impact and Limitations. Chichester, John Wiley & Sons. pp.197-198. Stavins, R. N. (1995). Transaction Costs and Tradeable Permits.” Journal of Environmental Economics and Management, 29, pp.133-147. Stavins, R. N. (2003). Experince with market-based environmental policy instruments, In Ma?ler, K. G. (2003). Handbook of environmental economics 1 Environmental degradation and institutional responses, Amsterdam, North-Holland. pp.355-435. Stewart, R. (1992). Models for environmental regulation: Central planning versus market-based approaches, Boston College Environmental Affairs Law Review 19 (3). pp.547-562. Tietenberg, T. H. (1995). Tradeable Permits for Pollution Control When Emission Location Matters: What Have We Learned? Environmental and Resource Economics 5. pp.95-113. Read More