Environmental and Resource Economics - Essay Example

?I. al Approach The Coasian theorem applies to situations where the social costs and benefits of an undertaking is equal to the personal costs and benefits and will be borne or enjoyed by the concerned parties. In such ideal situations, a most effective way to implement pollution control is automatically put in place. Under the assumption that there are perfect markets, perfect information dissemination and very minimal transaction costs, Coasian bargaining can seamlessly happen and can be used to secure environmental protection. (Cole 2002:3-4) Theoretically, Coasian bargaining leads the general public to get together and, as general beneficiaries, to be willing to jointly contribute resources for environmental protection. II. Command-and-Control Approach The Command-and-Control Approach to environmental protection has given rise to regulations that set limits on emissions and discharges from machineries, and on specific properties and makeup of equipment that may be manufactured, imported or utilized in the country. Under the same Approach, rules on audits and disclosure of information are also imposed. With the government giving due recognition to companies that abide by environmental protection laws, companies are driven to be compliant. Furthermore, companies are spared from the mandatory costs of non-compliance with the set standards and laws. For these reasons, the Command-and-Control Approach can work. (Khanna & Damon 1999) However, it has been pointed out that plain declaration of environmental laws is not enough. Non-compliance should be subject to strictly applied sanctions and penalties for such laws to be effective and for the Command-and-Control Approach to work. (Tietenberg & Lewis 2012) In the United States, the purpose for setting rules and regulations designed to protect the environment were initially declared by former President Richard Nixon on 1 January 1970 through the National Environment Policy Act (NEPA). As stated in the NEPA, the firm policy of the US Federal Government is to establish and maintain conditions that would allow man and nature to co-exist in harmony through the use of powers and resources that the Government has at hand. NEPA further states that this policy delivers the social, economic and other requirements of the American people, both present and future generations. (Wilson 2004) In the years that followed, more environmental standards and laws have been set and legislated. Thus, the Command-and Control Approach of the US Government has spawned the environmental protection system that stands to this day. Subsequently, the Congress instituted the Clean Air Act (CAA), the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA), and the Comprehensive environmental Response, Compensation, and Liability Act (CERCLA). (Wilson 2004) In spite of the many laws that have been made for environmental protection, critics have continually hounded the effectiveness and efficiency of such laws with endless questions. These laws contain the goals for which they have been set and critics have zeroed in on how the same goals have not been achieved through the implementation of the same laws. (Wilson 2004) Hence, the limitation of the Command-and-Control Approach is highlighted. Nationally promulgated and applied laws, no matter how good, can never successfully secure environmental protection. After all, the efforts of one specific country cannot combat the harm inflicted by the other countries across the globe. While we all attempt to save our planet, the Command-and-Control Approach used by governments can mostly cover only their specific territories. The bid of the United States to totally eliminate all production and use of chlorofluorocarbons (CFCs) and other chemicals harmful to the ozone layer can be cited as an example. Even with US exercising political will, the ozone layer will continually thin out for as long as there are other countries that get on with their generation and use of CFCs. Due to the extreme damage that CFCs can cause the earth’s ozone layer, then the perilous harm brought on by CFCs will indiscriminately hurt people of across the planet; and it will not matter at all if the United States happened to have done their share of good for the environment. (Esty 1996) Experts have cited that the application of laws for environmental protection must go beyond state or country borders, if they are to be effective. Since the environment is not scaled and limited by boundaries, then the implementation of laws for environmental protection by a relatively insignificant number of nations will all just come to naught. This fact reveals one weakness of the Command-and-Control Approach and this same weakness can be addressed through the creation of cooperation agreements amongst countries. (Samaan 2011) Through the Command-and-Control Approach of various governments, nations can forge partnerships for the undertaking of mutually beneficial activities. Examples of these can be the conduct of studies on pollution and its dire effects on the environment, the exchange of scientific and technical information and data, and participation in multilateral conferences and conventions aimed towards furthering the environmental cause. (Samaan 2011) Indeed, the past decades have given rise to major environmental treaties and conventions involving countries that have acknowledged that they have to do their part in saving the planet and protecting the environment. A tabulation of these treaties and conventions together with other relevant details is found in the following page. Major Environmental Treaties and Conventions: From Global Challenges: An Approach to Environmental, Political, and Economic Problems by Todd Sandler Across the globe, the world’s nations have given varying levels of support for the Command-and Control Approach that their governments have applied. In some nations, companies have welcomed the advent of the environmental laws and have even done more than what is required. In contrast, companies in some other nations have protested against and resisted being subject to environmental regulations; these companies lobbied for the removal of strict standards that were getting in the way of their detrimental business practices (e.g., unhealthy disposal of industrial wastes) and were eating up their bottom figures. (Prakash & Kollman 2004) The Command-and-Control Approach sticks to the traditional style of imposing performance and product standards. It covers requirements to use best available technology or other specific technology mandates, which the government must have access to. It is also the Command-and-Control Approach that is in place when the government sets maximum volumes allowed for emissions and limits the choice of technologies that companies can install and utilize for their operations to the best available and environmentally sound ones. (Prakash & Kollman 2004) For this reason, the Command-and-Control Approach has also been criticized for restricting the advantages and breakthroughs that could have been enjoyed by companies through technology. The Approach, likewise, provides no incentives to encourage companies to innovate. III. Incentive- (or Quasi-market) Based Approach With Command-and-Control Approach as the initial means by which countries have variously set forth to achieve and maintain environmental protection, economic incentives for companies that managed to contribute to the cause hardly existed in the 1970s. In the late 1980s, policy-makers began to consider the establishment of economic incentive instruments to encourage companies to re-design their environmentally unsustainable operations so as to inflict no more harm on the environment. (Harrington & Morgenstern 2004) Given that the government’s attempt to secure environmental protection through the restrictive Command-and-Control Approach has not been totally successful, there came the resolve to make the rules and regulations more flexible and, more importantly, to create market-based solutions. (Husted 2004) On top of the cost-effectiveness of the Incentive-Based Approach, it is seen to bring in the necessary changes much more efficiently than rigid standards and laws ever could. (Tietenberg & Lewis 2012:504) After all, incentives tantamount to diminished costs and increased profits; companies continually seek to achieve both. Furthermore, a lot of things have changed since the time when environmental protection was set aside as a less urgent concern and when companies gave little thought to their contribution to the universal efforts towards saving the planet. Businesses have mostly ceased to fight environmental law and have begun to do as they should. Even the annual reports that companies prepare each year for their stakeholders now include sustainability reports, which provide details of the programmes and activities that the companies support and implement to do their part in reversing the damage that has been inflicted by the Industrial Age to our environment. Companies now know that running clean and waste-free production centers actually is advantageous for their business. Companies now acknowledge that green business is good business. (Croston 2008:69) While the Command-and-Control Approach steered companies toward the right direction, the Incentive-Based Approach allows sustainable development to be achieved as a benefit of supporting the environmental protection programme in place. Through economic incentives, companies can appreciate better their role in protecting the environment and become more keen to abide by the environmental laws, standards and rules. Based on the results of applying the Incentive-Based Approach in the United States, Europe, and Asia, it has become clear that giving companies some latitude and allowing them a degree of flexibility in dealing with the imposed laws and regulations positively generate good. (Tietenberg & Lewis 2012:596) While the Command-and-Control Approach inefficiently causes companies to bear the costs of environmental protection through the required compliance to standards and the imposed penalties for those who fail, the Incentive-Based Approach rewards compliant companies and transforms them into willing partners of the government in environmental protection. (Prakash & Kollman 2004) IV. Application of Approaches A good number of surveys have confirmed that corporate stakeholders have become more conscious of the importance of environmental protection and that they have learned to weigh the overall value of the company and its products based on how they respond to the urgent challenge to save earth. Stakeholders now make companies accountable for their unhealthy business practices and the damage that their operations inflict on the environment. (Senge, etc. 2008:104-105) The principles of Coasian bargaining can seem to apply to the circumstances between companies and the stakeholders, with the companies in the role of the “polluters” and with the stakeholders as the “victims”. (Prakash & Kollman 2004) It has been said that one potent key to solving the climate crisis involves tapping the powerful force of market capitalism as an ally (Gore 2006). Indeed, if stakeholders including the consumers, the suppliers, the banks and lenders, and the government would all be granted access to timely and accurate information on the environmental programmes that companies implement, then the same stakeholders will be able to determine which companies are running green businesses and which ones are doing more and more environmental harm in the course of their operations. Information, in this case, is accessed and disseminated at very low costs; the companies are taking the lead in providing them and making them known to all concerned. (Prakash & Kollman 2004) In the light of the foregoing circumstances, stakeholders or the “victims” can then send the companies or the “polluters” a clear message about the latter’s role in environmental protection. To send the same message, banks and lenders can charge lower interest rates for companies with superior environmental performance; suppliers can give additional discounts to the same green companies; the government can secure more economic incentives for them; and, consumers can buy only “green products”. As a result, companies can then respond accordingly to the demands of their respective stakeholders. They can become green companies producing green products and then come to benefit from their healthy and mutually beneficial relationships with the stakeholders. (Prakash & Kollman 2004) In the process of disclosing information on their environmental performance, companies are often morally pressured to deliver better performance and to do more for environmental protection. After all, bad data can make a company look bad and this can gradually lead to its demise, with all its stakeholders giving preferential treatments only to green companies. The Coasian principle is, then, in place; the companies or the “polluters” and the stakeholders or the “victims” will be led to work together to deliver optimal pollution levels. (Prakash & Kollman 2004) Understandably, Coasian bargaining is criticized for overlooking equity and power as relevant factors. It also assumes too much: (i) that the cost for generating and disseminating data is not significant; and, (ii) that the stakeholders can readily appreciate and analyze the data made available. (Prakash & Kollman 2004) Meanwhile, the Command-and-Control Approach has been widely used in both the United States and the European Union. But while USA under the Bush Administration was initially hesitant to face the climate change issue that leaders like Al Gore was tirelessly bringing to the attention of more and more Americans, UK did not take long to resolve to tackle climate change. The year 2007 specifically ushered in plenty of new legislation in UK regarding climate change. Amongst them was the Climate Change Bill, which was introduced into Parliament on 14 November 2007. This bill targets that the net carbon emissions of UK be 60% lower by 2050 as compared with the equivalent figure in 1990. (Jolly 2008:45) The USA has mostly applied the Command-and-Control Approach to monitor pollutants through the implementation of specific rules and regulations, such as Corporate Average Fuel Efficiency (CAFE) standards. Originally enacted in 1978, the CAFE standards set the minimum fleet mileage standards for motor vehicles sold in the USA. (Metcalf 2009) The Command-and-Control Approach has likewise been implemented by the US Environmental Protection Agency ( US EPA). The Agency has established pre-treatment standards regulating the quality of the wastewater that flows into plant facilities. This move sought to solve the problem caused by untreatable hazardous wastes that enter wastewater treatment plants located in the communities. This application of the Command-and-Control Approach by setting standards has turned out to be not cost-effective, just like other waste-related standards that the US Government has imposed. Truly, the Incentive-Based Approach would have costed the government less and would have yielded better results. (Tietenberg & Lewis 2012:494) The US EPA has also used various market-based solutions for the development of markets for waste. The Agency has plans to invest in a computer exchange that obtains and keeps relevant information on potential buyers and sellers of waste. (Buchholz 1998) Thanks to the advances of technology in this Information Age, the identified issues and problems in running an efficient environmental protection system will be properly dealt with. New strategies will be formulated given that remote sensing technologies, modern telecommunication systems and easy access to and dissemination of information through the internet will all make it simpler and easier to detect harm, track pollution flows, record patterns of resource utilization and consumption, and measure impact. These developments will pave the way to improved systems for institutional actions in response to environmental problems. Thus, in the near future, there will be a healthier market for environmental property rights, a significantly improved economic incentive system, a market-based framework for making new environmental standards and regulations, a more effective command-and-control mechanism, and refined social norms of environmental stewardship. (Esty 2004) Addressing the global warming through significant cuts in greenhouse gas emissions is contentious because of economic activities in the different countries that will all be grossly affected in the process. In spite of the projected difficulties of the endeavor, the Kyoto Protocol of 1997 was signed by the participating countries to achieve the targeted reductions and to limit the effects of global warming. Through the Kyoto Protocol, industrialized nations have committed to reduce by 5.2 percent the emission levels by 2008-2012 as compared with the equivalent figure in 1990. (Dallas 2009:29) Among the countries that did not take part in the Kyoto Protocol were USA and Australia. However, it is worth noting that a number of US cities have ‘ratified’ the Kyoto Treaty in their own respective capacities and are establishing policies that are meant to reduce global warming pollution despite the complete lack of support from the US Federal Government for such undertakings. (Gore 2006:288) On the other hand, it is believed that the Incentive-Based Approach, as allowed by prevailing circumstances, is the best Approach for reducing pollution and resource degradation. The Approach has yielded two major policy tools: (i) pollution taxes; and, (2) cap-and-trade systems. To effectively lower the US carbon dioxide emissions, a tax levied on the carbon content of fuels would be one of the most effective policies we could use. By increasing the price of carbon-intensive fossil fuels, the marketplace would promote lower-carbon fuels, such as the renewable electric power. The alternative approach, cap-and-trade, places a cap on total US carbon dioxide emissions. The government next enters the picture to auction off just enough permits to emit a ton of carbon dioxide; the auctioned permits then added up to the cap’s total. Like a carbon dioxide tax, cap-and-trade also places a price on pollution; this, in turn, raises the price of dirty fuel. (Goodstein 2011:15) The US EPA has detailed six major applications of the Incentive-Based Approach, as follows: (i) US EPA’s Emission Trading Program, (ii) the leaded gasoline phasedown, (iii) water quality permit trading, (iv) chloroflourocarbon (CFC) trading, (v) the SO2 allowance for acid rain control, and (vi) the RECLAIM program in the Los Angeles metropolitan region. The implementation of the sulfur dioxide (SO2) marketable permit market, provided for under the Clean Air Act Amendments, is yet another prominent example of the application of the Incentive-Based Approach. (Lewis 1996) The same is true in UK – Incentive-Based Approach is recognized as the one that will bring in the most benefits. While the reduction of carbon emissions is currently at the priority list, the Confederation of British Industry (CBI) verbally announced that it supports the government’s pledge to reduce carbon emissions. Companies have, thus, already been required to run environmentally friendly operations and, produce only green products and services. Those that will not comply with this requirement will be penalized, either through green taxes or the increased cost of producing carbon emissions. (Jolly 2008:51-52) In addition, companies can avail of the benefits of the Enhanced Capital Allowances (ECAs) that are offered for energy-saving investments. ECAs can be claimed on certain purchases or investments. A fraction of the total purchases or investments can be dedicted from the company’s taxable income, thereby decreasing its tax payment due. ECAs were promoted by the government to encourage businesses to invest in energy-saving equipment, as specified in the UK Energy Technology List (ETL). (Jolly 2008:51-52) List of References Buchholz, R.A. (1998) Principles of Environmental Management: The Greening of Business. New Jersey: Prentice Hall. Cole, D. (2002) Pollution and Property: Comparing Ownership Institutions for Environmental Protection. Cambridge, UK: Cambridge University Press. Croston, G. (2008) 75 Green Businesses You Can Start To Make Money and Make A Difference. Canada: Entrepreneur Media Inc. Dallas, N. (2009) Green Business Basics: 24 Lessons for Meeting the Challenges of Global Warming. New York: The McGraw-Hill Companies, Inc. Esty, D. (1996) Stepping Up to the Global Environmental Challenge. Yale Law School Legal Scholarship Repository 1-1-1996. Esty, D. (2004) Environmental Protection in the Information Age. 79 N.Y.U. Law Review 115. Goodstein, E. (2011) Economics and the Environment 6th Edition. New Jersey, USA: John Wiley & Sons, Inc. Gore, A. (2006) An Inconvenient Truth. New York: Rodale Books. Harrington, W. and Morgenstern, R. (2004) Economic Incentives versus Command and Control. Resources Magazine, Fall/Winter 2004 Issue. Husted, B.W. (2004) A Comparative Institutional Approach to Environmental Regulation: The Case of Environmental Degradation Along the U.S.-Mexico Border. Human Ecology Review, Vol. 11 No. 3. Jolly, A. (2008) Managing Climate Risk. London, UK: Thorogood Publishing Ltd. Khanna, M. & Damon, L. (1999) EPA’s Voluntary 33/50 Program: Impact on Toxic Releases and Economic Performance of Firms. Journal of Environmental Economics and Management, Vol. 37 Issue 1, January 1999. Lewis, T. (1996) Protecting the Environment when Costs and Benefits are Privately Known. The RAND Journal of Economics, Vol. 27 No. 4, Winter, 1996. Metcalf, G. (2009) Market-Based Policy Options to Control U.S. Greenhouse Gas Emissions. Journal of Economic Perspectives, Vol. 23, No. 2, Spring 2009 Prakash, A. and Kollman, K. (2004) Policy Modes, Firms and the Natural Environment. Washington, USA: John Wiley & Sons, Ltd and ERP Environment. Sandler, T. (1997) Global Challenges: An Approach to Environmental, Political and Economic Problems. Cambridge, UK: Cambridge University Press. Senge, P., Smith, B., Kruschwitz, N., Laur, J. & Schley, S. (2008) The Necessary Revolution: How Individuals and Organizations are Working Together to Create a Sustainable World. London, UK: Nicholas Brealey Publishing. Tietenberg, T. and Lewis, L. (2012) Environmental & Natural Resource Economics 9th Edition. New Jersey, USA: Pearson Education, Inc. Watson-Samaan, A. (2011) Enforcement of International Environmental Treaties: An Analysis. Fordham Environmental Law Review, Vol. 5, Issue 1 2011. Wilson, M. (2004) A Behavioral Critique of Command-and-Control Environment Regulation. 16 Fordham Environmental Law Review 223 (224-225). Read More