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Substitutability
of Money for Nature
Money collected from economic instruments is seldom used
to correct environmental damage. Economists argue that if
the money is spent on something equally worthwhile then the
community is still no worse off; a view that those who suffer
from the pollution might find hard to accept. This also assumes
that the benefits that arise from the environment can be substituted
for other benefits that can be bought on the market. However,
environmentalists and others would counter that environmental
quality is not something that can be swapped for other goods
without a loss of welfare. The assumption in internalising
the costs is that environmental damage can be paid for and
that this is as good as, or even preferable, to avoiding the
damage in the first place.
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Assimilative Capacity
of the Environment
Some economists argue that environmental degradation occurs
because of incomplete ownership of rights to use valuable
environmental resources. These resources have traditionally
been commonly owned by everyone (or, alternatively, owned
by no-one) and open to use by anyone. These economists say
there is a strong tendency for people to overexploit and degrade
common property resources because of the 'tragedy of the commons'
principle (Hardin 1968).
In situations where the environment cannot be privately owned,
access rights or user rights can be owned. The idea of rights-based
measures is to create artificial property rights and with
them a market in those rights. It is argued that if people
own the right to use natural resources, they will consider
the longer term and manage those resources sustainably. Tradeable
pollution rights are a way of allocating ownership to the
assimilative capacity of the air or water through rights to
pollute it.
An inherent assumption behind tradeable pollution rights
and other economic instruments is that the environment can
take a certain amount of pollution and that trading can ensure
efficient allocation of that capacity to firms that need to
utilise it. In other words, they assume that the environment
has an assimilative capacity. This idea is based on the fact
that some wastes, such as organic wastes that occur naturally,
will decompose and break down in the environment if there
are not too many of them in the one place at the one time.
Other materials, such as some metals, may exist naturally
in the environment at very low concentrations.
The unspoken assumption behind all such models is that the
capacity of the environment to tolerate a certain number of
renegades is something that we ought, collectively, take advantage
of. We ought to make sure that all those slots are taken,
we ought allow just as many renegades as nature itself will
tolerate. (Goodin 1992, 16)
This approach is highly dependent on the ability of scientists
to assess the impact of pollutants on the environment and
to determine a safe level that will not irreversibly or severely
damage the environment. Greenpeace campaigner Lisa Bunin argues
that emissions trading puts 'blind faith' in both science
and the regulatory authority's ability to set an 'acceptable'
baseline air quality standard, as well as to monitor and prevent
deviations at each source (Memorandum to Roger Wilson, Greenpeace,
1 July 1991).
Similarly Fowler argues that traditional approaches to regulation
which set 'allowable' discharges or emissions have failed
to reduce global pollution and are rapidly losing credibility.
He points out that plants and animals and ecosystems interact
with chemicals in such complex ways that assumptions about
assimilative capacity and 'safe levels' of pollution or exposure
bear little relation to reality.
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Environmental Damage
is Caused by Failure to Price Environment
Some environmental resources; such as timber, fish and minerals;
are bought and sold in the market although their price usually
does not reflect the true cost of obtaining them because the
damage to the environment has not been included. Other environmental
resources such as clean air are not given a price at all and
are therefore viewed by economists as free. Economists argue
that environmental assets tend to be overused or abused because
they are too cheap. Many also claim there is little incentive
to protect environmental resources that are not privately
owned.
Economic instruments are being advocated as a technocratic
solution to environmental problems which is premised on the
economist's view of the problem, that environmental degradation
is caused by a failure to "value" the environment and a lack
of properly defined property rights. By allowing this redefinition
of the environmental problem, environmentalists and others
not only forestall criticism of the market system but in fact
implicitly agree that an extension of markets is the only
way to solve the problem.
On the face of it the economists argument that environmental
degradation is caused by a failure to value the environment
is an attractive one to environmentalists. However economists
take a very specific view of the term 'value' which relates
it to the exchange value of a commodity whereas environmentalists
have a broader concept of the word that goes far beyond economic
value to incorporate aesthetic, spiritual and ethical dimensions.
When economists speak of valuing the environment they mean
giving it a market price based on supply and demand.
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Markets are More Efficient
than Laws
Regulations are said to be inefficient because they require
discharges from all firms to meet uniform standards regardless
of their ability to meet them or alternatively require all
firms to install particular pollution control technologies
regardless of their ability to pay for them. Whilst this might
improve environmental quality it is said to be at a high cost.
Economic instruments, on the other hand, are said to permit
"the burden of pollution control to be shared more efficiently
among businesses" (Stavins and Whitehead 1992, 9).
The idea is that some firms can reduce their pollution more
cheaply than others and that it is more efficient to expect
them to reduce their pollution more than those firms for whom
it would be expensive. In this way the marginal costs of pollution
control, that is the additional cost of achieving an extra
unit of pollution reduction, would be equalised between the
businesses. For example, with an effluent charge, each firm
would pay an equal rate per unit of pollution increase and
those that found it cheaper to reduce their pollution than
pay the charge would do so whilst those for whom pollution
reduction cost more than the charge would pay the charge.
Similarly with tradeable emission permits. Those firms that
could most afford to reduce their emissions could sell their
excess credits to those companies least able to reduce their
emissions. In both cases economists argue that a given level
of air or water quality could be achieved more efficiently
because the firms that could afford most to reduce their pollution
levels would do so, rather than each firm reducing their pollution
by the same amount. The chemical company Du Pont has estimated
that its fifty-two plants achieved cost savings of over 86
per cent from the use of regional bubbles (Senecca and Taussig
1984, 232).
But often cost savings arising from economic instruments
result directly from firms not having to make pollution reductions
that they otherwise would have. A study by economic instrument
advocates Hahn and Hester (1989, 129) found that emissions
trading, although it saved money for industry by enabling
firms to "avoid making emissions reductions that they otherwise
would have been required to make" did not improve environmental
quality.
The conflict between economic efficiency and environmental
goals can be seen in the setting of baseline levels for tradeable
emissions. Even proponents of trading admit that there will
inevitably be a conflict and an implicit trade-off between
the goals of reducing costs and improving environmental quality.
They argue that the US EPA's concern with improving environmental
quality has in fact hampered the effectiveness of trading
and limited markets (Hahn and Hester 198, 147; Atkinson and
Tietenberg 1991, 20-26).
Efficiency is often a theoretical argument rather than an
empirical one. The efficiency argument assumes markets are
perfectly competitive and firms have perfect information.
This is not so. Jacobs (1993, 7) gives the following example;
In Britain a rise of 400% in sewerage charges failed to change
firms' behaviour, even though it was shown that small investments
in pollution control would pay back in under a year. The charging
system was not understood by the firms affected; it was dealt
with by the finance department, not the engineers; and the
firms did not know the technological options available. A
regulation requiring them to install the better technology
would almost certainly have been more efficient&emdash;that
is, cost less overall&emdash;than the huge price hike which
would have been required to et the same changes made.
Savage and Hart (1993, 2) point out that; "A blinkered concern
for efficiency, uses as its intellectual foundation, the fantasy
world of the intermediate economics textbook: a world that
is not constrained by simultaneous imperfections in the market
mechanism, such as monopolies or imperfect competition, uncertainty,
taxes, externalities, asymmetric information, moral hazards
or incomplete markets."
It is often argued by economists that markets are more efficient
than centralised government decision making because they automatically
gather information and ensure that supply and demand are balanced
and resources allocated efficiently. However, this sort of
argument cannot be applied to artificial markets such as those
created for pollution rights since the need for monitoring
and enforcement remains&emdash;the regulator still needs to
know what volumes and concentrations of wastes are being discharged,
and needs to ensure that the firm is paying the correct amount
or deserves emission credits, even when that firm is being
charged for its wastes. "Any system of environmental control
needs inspectors to check whether claimed emissions, discharges
or resource extractions are correct: they are not less 'bureaucratic'
because they are tax inspectors rather than regulatory ones"
(Jacobs 1993, 7).
Emission reduction credit trades now frequently involve a
broker. Brokers' fees are typically calculated as a percentage
of the value of the transaction. Add to this the costs of
accomplishing the air quality modelling that is frequently
required for trades involving noncontiguous sources of nonuniformly
mixed pollutants and the transactions costs can become very
large. These costs serve to further reduce the cost savings
from trades and therefore the incentive to trade, particularly
when the potential savings are small. (Atkinson and Tietenberg
1991, 28)
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Economic Incentives
Will Protect the Environment
Economists can argue that the imposed costs, even if they
don't internalise the real environmental costs of polluting
activity, nevertheless provide an incentive for companies
to reduce their pollution and thereby save money (Jacobs 1993,
3). The contention is that legal standards might ensure firms
meet particular targets but that having met them there is
no incentive to go beyond them whereas with the financial
incentives provided by economic instruments "businesses are
constantly motivated to improve their financial performance
by developing technologies that allow them to reduce their
output of pollutants."(Stavins and Whitehead 1992, 30) "Properly
structured economic instruments encourage industry to go beyond
compliance and engage in continuous innovation and improvement."
(Grabosky 1993).
The assumption here is one that rests on economic determinism;
given the right economic conditions the desirable technological
change will automatically occur. This view of technological
development ignores the social and political factors that
shape technology and which have been the basis for so much
scholarship in the academic discipline of science and technology
studies (MacKenzie and Wajcman 1985; Bijker, Hughes and Pinch
1987). Adding costs to a firms operations may impose pressure
on it to reduce its costs but there is no guarantee that it
will do so in the area where the cost is imposed (Rosenberg
1976, chapter 23). It may find it easier, cheaper, or even
more profitable to apply new technology and methods in other
parts of its operation or just to pass the increased cost
on to the consumer, especially in oligopolistic sectors.
The degree of incentive provided will also obviously depend
on how large the charge or tax or subsidy is: "if it is low,
and environmental improvement is primarily achieved through
major investments in plant and equipment which occur rarely,
there may be little effect."(Jacobs 1993, 7) Most studies
have found that in nearly all cases charges are too low to
provide an incentive (OECD 1989, 114-5; Bard and Opschoor
1994, 25; Postel 1991, 32; ESD Working Groups, 1991; Stavins
and Whitehead 1992, 31).
Because of the general ineffectiveness of price-based measures
as incentives in practice, those promoting them tend to concentrate
on their theoretical, and generally idealised, potential and
compare this to the poor record of legislative instruments
in practice. David James (1993) in research paper prepared
for the Australian Government cites the above OECD study as
evidence of the increasing use of economic instruments without
mentioning the major finding of the study that they are generally
ineffective as an incentive for environmentally beneficial
behaviour.
In theory there is no reason why legislative instruments
could not provide an incentive for ongoing improvement in
performance through innovation (Cramer and Zegveld 1991; Ashford,
Ayers and Stone 1985; Caldart and Ryan 1985). For example
Caldart and Ryan (1985, 310) argue for regulatory approaches
not to be bound by existing technologies and economic conditions
so as "to encourage the type of innovation that can spur technological
breakthroughs and alter economic circumstances."
The failure of legislative instruments to provide incentives
has at its source the same cause as the failure of economic
instruments to provide that same incentive. The power of government
institutions, the will of the politicians, and the scope for
public participation and scrutiny are determining factors
in both cases. J. Rees (1988, 175) says of various policy
instruments:
They inevitably have to operate within an institutional setting
where policy goals are confused, shifting and frequently conflicting,
where the implementation process does not, and cannot, operate
along clear, consistent ends-means lines, and where they are
prey to manipulation by interest groups within both the regulated
community and the regulating authorities themselves.
Brian Wynne (1987, 4-5) makes a similar point when he points
out that
implementation of standards requires an on-going
interaction between competing interests such as the regulatory
authority and the regulated, the nearby community and the
government as well as interested parties. It generally involves
adaption, compromise and negotiation.
Rees (1988, 172) says that advocates of economic mechanisms
tend to assume that 'the pollution control system is populated
by economically rational entrepreneurs and regulators, operating
without technical, perceptual, organisational and capital
availability constraints'. This is not the case. For example,
a firm may not be able to afford the initial capital cost
of changing production processes or putting in pre-treatment
equipment, even if this would be cheaper than paying the charges
in the long term.
Rees claims that a number of studies have shown that 25 to
30 per cent of dischargers who are subject to effluent charges
do not understand the pricing system and that 'significantly
different levels of payment could arise if they altered the
strength/volume composition of the effluent'(1988, 184). Many
of them do not have sufficient knowledge of alternative methods
and costs to make optimal decisions in their own interest.
Tradeable pollution rights have also failed to provide the
incentives hoped for. Tradeable pollution rights are supposed
to provide an incentive to innovation because companies that
can reduce their pollution to below baseline levels can then
sell their emission credits and profit from their reduced
pollution.
One of the major problems with emissions trading is setting
that baseline level&emdash;the level of emissions that individual
firms should have a right to attain before trading can occur.
If the baseline level is too low, there will be few pollution
rights for sale, because few firms will be able to reduce
their pollution levels below the standards set. However, if
the baseline level is too high, there will be few buyers of
pollution rights because most firms will be able to meet the
standards, even without innovation. In either case, there
will be too little trading. In fact, although the emissions
trading program was introduced in the USA in 1979, by 1989
far fewer firms than expected were banking credits or trading
them with other firms.
The on-going incentive provided by tradeable pollution rights
for companies to reduce their pollution only works if there
are other companies wanting to increase their emissions or
new companies wanting to buy credits in order to begin operations
in non-attainment areas. But this means that the gains made
by some firms are negated by others buying up those gains
so they can put out more pollution.
Source: Sharon Beder. Charging the earth: The promotion of price-based
measures for pollution control. Ecological Economics
16(1996): 51-63.
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