Environmental and Natural Resource Economics - Essay Example

Introduction Prevention of environmental pollution from industries has been a challenge to various countries. This is because most of large emissions are attributed to the industries. As a result, it calls for the reduction of emissions from the industries in an efficient and cost-effective way. This article assesses the strengths and weaknesses of conventional command and control regulations and economic instruments (emissions trading) in regulation of industrial pollution. Conventional command and control regulation According to McManus (2009), conventional command and control regulation involves direct regulation of an industry by legislation which states what is illegal and what is permitted. The command represents the quality of targets or standards by that the company has to comply as directed by the government authority. Control represents the negative sanctions which may lead to non-compliance such as prosecution (Baldwin, Cave, & Lodge, 2011). The conventional command and control enforcement involves application of uniform sanctions. The deliverance of its objectives requires the highest possible level of compliance which can be achieved through appropriate enforcement and implementation. It is worth noting that due to its application of uniform sanctions, the small companies feel its burden more severely as compared to large size companies (Abbot, 2009). Strengths According to Gruber (2005), conventional command and control regulation are usually preferred in cases where there is highly toxic pollutant such as the concern of the impact of toxicity outweighs any concern on economic efficiency. It is also effective where marginal costs curves abatements are uniform in all the companies where that the industry is regulated. As a result of this, it will be easier for the government to easily know abatement curve. It is also preferred when the initial reduction in regard to the amount of pollutant will lead to significant benefits to the society, while the continued reduction will not be in a condition of providing much benefit. In this case, the marginal benefit of reduction is said to be highly inelastic. Conventional command and control has high dependability as well as predictability and it is seen as imposing fixed standards which are usually enforced by the law. This makes it to respond quickly to various issues that do not abide to the set standards or regulations. The system also has political benefits because the regulator which is the government acts decisively and swiftly (Baldwin, Cave, & Lodge, 2011). Weaknesses Due to the advancement in technology, the regulatory agency finds it difficult to stay current with the methods that are most effective. All the standards which include performance, design and input are aimed at reducing pollution, but integration of the standards leads to drastically reduction in the flexibility of the choice for the industries. This means that the firm is limited to its capability of getting the most cost-effective way in continuing with production while at the same time, reducing pollution. This is because every individual has different cost structures and the one-that-fits-all from the government denies the firms the flexibility of addressing certain external problems. This results to economic inefficiency (Gruber, 2005). As a traditional method, it can also lead to inefficient solution where the method draws unfairness accusations from polluting firms. This is because efficiency and fairness requires the regulators to split the responsibilities for pollution reduction in an equal manner among the polluting firms. It is difficult or impossible for the government to understand each polluting firm’s cost structures. This knowledge is essential and is required if regulation must be efficient (Ogus, 2004). Sometime, the markets conditions may be just right the regulation on command and control to work by itself. But in most times, it doesn’t work well due to weak enforcement, low compliance, and the goal of reducing pollution is not achieved. Thus, high information and administrative costs affect the government while on the other hand, high costs of compliance for the firms lead to creation of more economic inefficiency. Due to these failures, most of policy makers and economists push for other regulatory tools which include taxes and tradable pollution permits (Gruber, 2005). Economic instruments: Emissions trading Emission trading is one of the powerful economic instruments that manage emissions from industrial greenhouse gases. The emissions trading system encourages excellence in operation and provides path and incentive for use of existing and new technology. As a policy instrument, it has been preferable to conventional command and control regulation, taxes and tax payer funded support programs. There are three reasons behind this; first, it is one of the most economically efficient way of reaching a given reduction cap or target emissions; secondly, it is designed to specifically deliver environmental objective; and finally, the system provides a clear price signal against which the abatement investments are measured (NSW Government, 2012). Emissions trading allow the parties to buy as well as sell credits for emissions reductions or permits for emissions of certain pollutants. It allow meeting of established emission goals in a way that is most cost-effective by allowing the market to make a determination of lowest cost abatement opportunities of pollution. The environmental protection authority (EPA) initially determines the total emissions that can be accepted and then this total is divided into tradable units which are usually referred to as permits or credits. Such units are allocated to scheme participants or companies. These participants (polluters) who are responsible for emission of pollutants must obtain sufficient tradable units in order to compensate for their emissions. The companies that reduce emission will have surplus units which mean that they can sell them to other companies who have difficulties in reduction of emissions such as finding it more expensive to reduce emissions. The permits or credits from tradable emissions can be also banked or saved for use in future instead of selling as long as total limits on emissions are not exceeded (U.S. General Accounting Office, 1997). Companies have an incentive that allows them to their emissions beyond the provided allowances in order to generate revenues from sales of the allowances. As time goes by, a decrease in the number of allowances distributed to sources of pollution will lead to further reduction of total emissions (NSW Government, 2012). Strengths Emissions trading have been an essential and useful innovation for regulations in the environment in many countries. As an economic instrument, emissions trading can lead to reduction in compliance costs of regulated industries as well as giving the industries more flexibility to meet goals on emissions. In addition, emission trading leads to generation of political support for more regulatory programs (Brown & Jacobson, 1998). The programs on emission trading have shown a reduction in compliance costs in regulated industries. This can be depicted by acid rain which has shown a significant reduction in the costs related to control of pollution. In United States, the compliance costs for initial projections for meeting the goals in acid rain program were estimated to be $4.9 billion by 2010. Later, according to general accounting office, the cost estimates for 2010 became less than $2 billion (U.S. General Accounting Office, 1997). Emissions trading programs has also been effective tools for preservation of natural resources and improvement of the quality of environment. This is accomplished given that there is availability of sufficient information to the designers of the policy in order to ensure that the targets on emissions will lead to accomplishment of environmental goals. Thus, effective monitoring, enforcing of emission trading programs and setting of sound targets will lead to achievement of environmental goals (Golub, 1998). The programs on emissions trading are also cost-effective ways of accomplishment of goals of environmental policies. However, the goals themselves may not be sufficient in reduction of the problems aimed by these policies. A careful design of regulatory programs will ensure that the minimum quality standards at all areas are met thus, enhancing the trading systems to produce economical, environmental and health benefits that are expected (Bovenberg & Goulder, 2002). Emissions trading have led to more interests in the achievement of environmental goals. More debates on achievement of these goals using the emissions trading system have attracted the interest of the public. This has led to support of the programs by the government where the debates and conflicts have been softened by reducing the cost of achievement of environmental goals. As a result, new regulatory programs have been put into place. For instance, a program on acid rain is an example of how emission trading resulted to new programs for regulation with more aggressive environmental goals. Thus, emission trading has generated political support (Golub, 1998). Emissions trading systems have served as a transition to a system of taxes or emission fees to other defined efforts in for reflecting true costs in prices as well as creation of incentives that are more powerful in reduction and prevention of pollution and encouragement of economic activities. Thus, emissions trading system has served as an ultimate test to a fundamental shift in practices that are aimed at improving efficiency, reducing pollution and conservation of resources. It has led to other more powerful innovations that advocate for sustainable activities (Bovenberg & Goulder, 2002). The trading system has also encouraged the development of technologies that are cleaner and less polluting. This is enhanced by making the available emission credits for the companies at higher prices in order to encourage investing in cleaner and newer technologies. Emission trading provides the sources more flexibility in attainment of the standards thus, allowing for more use of technologies that are cheaper. For instance, trading will encourage washing of coal in order to reduce the sulphur content present in coal. Such a technology does not lead to attainment of emission standard if used alone, thus it can be combined with various actions for instance, purchasing credit as a portion of the cost involved in other technologies (Barry, 1998). Weaknesses Emission trading at every case may not lead to reduction of compliance costs. Some of the programs are complicated such as EPA bubble program that requires the agency for review of every transaction. It is worth noting that the costs of transactions are relative high and this may be counterproductive especially for small trades. Thus, it may require an expensive and extensive emissions modelling, compliance schedules as well as assessments of alternatives technological controls (Golub, 1998). Trading programs may be seen as effective but they may be moving pollution from one region or location to the other instead of providing clear incentives for reduction of levels of emissions. Credits that have been earned by plant shutdowns may lead to creation of incentives for unregulated company to close its facilities, the relocate to areas that are less regulated. It may be difficult to obtain accurate emissions of the past for these sources. Emission trading systems may not lead to rewarding of the sources that has voluntarily reduced emissions. If the distribution of allowances is based o the levels of past emissions, the high polluter will be rewarded for their uprising while on the other hand, the innovators that have already invested in emission reductions will end up having fewer allowances for working with (Brown & Jacobson, 1998). In summary, trading emissions have some weaknesses. It may result in hot spots where emissions will be concentrated where companies will buy permits or credits from other rather than reducing emissions. It may be more expensive due to requirements for aggressive enforcement of reporting and monitoring as well as reviewing of every transaction which relatively high. It may fail to promote dissemination and development of new processes and technologies for elimination and reduction of emissions if a company makes a decision of buying credits instead of investing in control of pollution. It may also be opposed by companies that fear the risks and uncertainties of failure and the possibility of lack of achievement of environmental goals through trading (Barry, 1998). Conclusion From the assessment of the strengths and weaknesses of various approaches environmental policy in economic perspective, the flexibility of economic instruments has the capability of achieving higher levels of the protection of environment as compared with conventional regulatory policies. However, the results show that command and control regulation is highly dependable and predictable but it is inflexible and economically inefficient. It is also worth noting that not all problems in the environment that can be solved by economic instruments meaning that conventional command and control may be preferable in particular cases. Economic instruments tend to show efficiency as well as flexibility but they also show low dependability. However, such methods were brought up by failures from the traditional methods where the policy makers and economists pushed for such policies as economic instruments. References Abbot, C. (2009). The Regulatory Enforcement and Sanctions ACT 2008. Environmental Law Review 38 Baldwin, R., Cave, M., & Lodge, M. (2011). Understanding Regulation: Theory, Strategy and Practice (2nd ed). Oxford: Oxford University Press Barry, K. (1998). U.S. experience with economic incentives for emissions trading, Applying market-based instruments to environmental policies in china and OECD countries, 99-105. Bovenberg, A. L & Goulder, L. H. (2002). Environmental taxation and regulation, in A. J. Auerbach, & M. Feldstein (eds), Handbook of public economics, Vol.3, Amsterdam: north Holland Elsevier. Brown, W & Jacobson, H. K. (1998). Engaging countries: strengthening compliance with international environmental accords, Cambridge, MA: MIT Press. Golub, J. (1998). New instruments for environmental policy in the EU, London and new York: Routledge. Gruber, J. (2005). Public Finance and Public Policy, Worth Publishers: NYC. McManus, P. (2009). Environmental Regulation. Australia: Elsevier Ltd. NSW Government (2012). What is emissions trading? Accessed on 29 August, 2012, http://www.environment.nsw.gov.au/licensing/emissionstrading.htm Ogus, A. (2004). Comparing Regulatory Systems: Institutions, processes and legal forms in industrialised countries. In: Cook, P., Kirkpatrick, C. Minogue, M., Parker, D. (Eds.) UK: Edward Elgar Publishing Ltd. U.S. general Accounting Office, (1997). Overview and issues on emissions Allowance trading programs, GAO/T-RCED, 97-103. Read More