Market-based instruments should have significant
advantages over command and control mechanisms in terms
of stimulating technical change and innovation in
pollution control. The reason is that each and every unit
of pollution is costly to the firm. In contrast, under a
command and control approach, once a source has satisfied
the emission limits, all pollution within those limits is
costless. Why spend valuable resources instituting
further controls when there is no reward? In fact, the
incentives may be negative, for a firm that controls to
less than permitted amounts may be inviting reduc-tions
in what is permitted. In many parts of the nation
pollution control agencies are con-stantly struggling to
find ways of meeting ambient environmental quality goals.
Firms that demonstrate the possibility of making emission
reductions below permitted amounts offer an easy target
for obtaining some of the necessary emission reductions.
These same innovative firms may supply the catalyst for
regulations that require other firms in the same industry
to undertake what has been demonstrated as possible.
It should not be surprising that the theoretical and
empirical literature concludes that emission taxes
provide the greatest stimulus for technical change and
innovation, with marketable permits offering a lesser
stimulus and command and control the least. Among command
and control approaches, it is safe to say that
performance-based standards should provide a greater
incentive to innovate than would pure technology
requirements.
Long-run changes in behavior and technology are among
the most difficult economic effects to document. For that
reason, relatively little is known of the effects that
take place as a consequence of different pollution
control policies. Yet these effects are thought to be
very important. One author said the rate of technological
change in pollution control is "the single most important
criterion on which to judge environmental policies."
Another analyst termed innovation "the key to an
effective solution" of environmental problems.
The available evidence suggests that existing
environmental policies give only a mild stimulus for
technical change and innovation, though there are
important exceptions such as the U.S. acid rain control
program where control costs have fallen dramatically due
to major technical and behavioral changes. Outlays for
research and development in pollution control are between
two and three percent of total pollution control
expendi-tures. This is about the same as the average
R&D expenditure in all of U.S. manufactur-ing, but
far lower than one might expect in a new and rapidly
changing industry. A more apt comparison might be
provided by drugs, electronics and information processing
where R&D runs between 6 and 10 percent of
expenditures. Research and development in pollution
control appears to lag behind largely because of the
command and control framework that has been chosen, not
because of any other inherent limitation. Pollution
control based more heavily on economic instruments would
be expected to stimulate greater R&D and in turn
reduce over the long run the costs of improving the
environment.
Source: Robert Anderson et al., 'The United States
Experience with Economic Incentives in Environmental
Pollution Control Policy', Environmental Law Institute
and EPA, 1997.
