Citation: Sharon Beder, Charging the Earth: The Promotion of Price-Based Measures for Pollution Control, Ecological Economics 16, 1996, pp. 51-63.

This is a final version submitted for publication. Minor editorial changes may have subsequently been made.

Sharon Beder's Other Publications

    1. Abstract
    2. Introduction
    3. The Rationale
    4. Ideology and Enrolment
    5. Conclusion
    6. References


This paper seeks to consider the ways in which the theory and application of economic instruments, in particular price-based instruments, is shaped by the interests, values and ideologies of those who are promoting and implementing them. Although economists have been advocating the use of economic instruments for pollution control for decades it is only in recent years that they have been embraced by business groups and governments looking for a way to avoid stricter and more costly regulations that might inhibit economic growth and as a way of correcting and therefore preserving the free-market system. This paper examines the rationale for price-based instruments and explains how economists have managed to enrol the support of other interest groups, even those that have different interests.


There are two main types of economic instruments used for pollution control:

While legislation is aimed at directly changing the behaviour of polluters by outlawing or limiting certain practices, economic instruments aim to make environmentally damaging behaviour cost more. Under these market-based policies, polluters are not told what to do; rather, they find it expensive to continue in their old practices and they have a choice about how and whether they change those practices.

The theory behind the use of price-based instruments for pollution control has been present in economic texts for decades but it is only in recent years that governments of Western nations have come to embrace them and promote them. Governments have traditionally favoured legislative instruments (sometimes referred to pejoratively by economists as `command and control' measures) over economic instruments for achieving environmental policy. This has been the case because price-based instruments were thought to be too indirect and uncertain (aimed at altering conditions in which decisions are made rather than directly prescribing decisions), and because economists were not prominent in government administration. Governments have been concerned that additional charges would fuel inflation and might have the undesirable distributional effect of most severely hitting low-income groups. They have been concerned that the public might see charges as giving companies a `right to pollute' which they had paid for. Similarly, businesses have preferred direct regulation because of concerns that charges would increase their costs, and also because of perceptions that they would be able to have more influence on legislation through negotiation and delay.

For several reasons, various governments have begun to reassess the use of economic instruments. The heightening awareness of global and local environmental problems during the late 1980s in many countries drew attention to the inadequacies of existing political, economic and regulatory structures. There were increasing demands from environmental and citizens groups for tightened environmental standards and increased government control of private firms and corporations. Green political groups challenged traditional political parties in elections with varying degrees of success. It appeared as if the free market economic system (like the socialist system) was unable to provide economic growth and environmental protection.

Under threat, business groups and governments looked to economic instruments as a way of avoiding stricter and more costly regulations. In 1991 the OECD issued guidelines for applying economic instruments (OECD, 1991) and an Economic Incentives Task force was established by the US EPA "to identify new areas in which to apply market-based approaches" (Stavins and Whitehead, 1992, p. 29). Similar units have been established in regulatory agencies in other countries. At the Earth Summit in Rio in 1992 business groups pushed for the wider use of economic instruments in conjunction with self-regulation (Schmidheiny, 1992, chapter 2).

The most common form of price-based measure is a charge. A charge can be considered as a `price' that the polluter pays for polluting the environment (OECD, 1989). There are various types of charges, including effluent charges, user charges and product charges. Effluent charges are used mainly in the area of water pollution control and are based on the content and quantity of a firm's waste stream. They are usually kept low because of political pressures from industries not wanting to pay higher charges, and concerns that higher charges might encourage illegal dumping and evasion of the charges. User charges are fees charged for using a resource or for being provided with a service. Product charges are charges added to the price of products: they are used to discourage disposal or encourage recycling. Charges raise revenue which may be used for environmental purposes but are often merely added to a government's general revenue.

This paper concentrates on price-based measures for pollution control. In this first part I will outline the major arguments for price-based instruments used by environmental economists. In the second part I will deconstruct these arguments and show the assumptions and more particularly the ideologies upon which they rest. In the final part of the paper I will show how environmental economists have managed to enrol other groups in society into supporting economic instruments.

The Rationale

The standard view taken by environmental economists[1] is outlined in texts such as Lenihan and Fletcher (1979), Schelling (1983), Seneca and Taussig (1984), Baumol and Oates (1988), Pearce et al. (1989), Thampapillai (1991) and in key articles such as Tietenberg (1990) and Stavins and Whitehead (1992). They argue that environmental degradation has resulted from the failure of the market system to put any value on the environment, even though the environment does serve economic functions and does provide economic and other benefits. Savage and Hart (1993, p. 3) point out that the dominant way of thinking in economics is that the "most effective means of dealing with environmental problems is to subject them to the discipline of the market mechanism":

A `proper' price places environmental resources beyond the reach of those who wish to exploit them, or, at the very least, ensures that the social benefits of exploitation exceed the social costs, however these benefits and costs are measured. Accordingly the solution to environmental problems becomes one of `marketising' the environment through the creation of markets in pollution rights, imposing taxes or subsidies so that prices reflect social costs and awarding quotas of right to pollute. (1993, p. 3)

Price-based measures are market-based measures because, in economists' terms, a price is set and demand determines the quantity of emissions that are released (Schelling, 1983, p. 19).

The economists' preference for market solutions is an ideologically based one:

Its first pillar comes squarely out of a philosophical tradition that grew from Adam Smith's notion that individual pursuit of self-interest would, in a regime of competitive markets, maximise the social good. That tradition is so firmly embedded in economics by now that most economists probably do not realize, unless they venture out into the world of noneconomists, that it is a proposition of moral philosophy...(Kelman, 1983, p. 297)

Not all economists are of this persuasion but the neoclassical approach which embodies this philosophy dominates research and teaching in environmental economics (Rosewarne, 1993, pp. 61-2). Given the workings of the market in reality, and the well-elaborated imperfections and problems associated with it (Moran and Wright, 1991), what is surprising is that neoclassical economics has not only dominated environmental economics but has also increasingly dominated the whole public discussion of sustainable development.

(i) Internalising Environmental Costs

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.

Environmental economists have argued that external costs and benefits (externalities) that are not taken account of in market transactions should be `internalised' by adjusting prices so that the firm producing the goods or services causing the external cost (and eventually the person buying those goods or services) is obliged to pay for it. This can be done by means of a tax or charge--for example, the firm discharging the waste into the river might be charged a fee to cover the cost of lost recreational amenity and fish life. Price-based instruments, such as taxes and charges, are supposed to make external costs part of the polluter's decision.

Laws can also force the polluter to take notice of these external costs by prescribing limits to what can be discharged or emitted but economists tend to be ideologically opposed to the use of laws for this purpose, preferring the market to perform this function. Economic instruments advocate Thomas Schelling (1983, p. xiii) admits in his book Incentives for Environmental Protection that the "benefits from using well-designed pricing mechanisms can be obtained with sensible, well-designed regulatory standards." This is a rare admission. And whilst all parties agree that economic instruments cannot completely replace legislative instruments and that any environmental policy will have a mix of laws, standards and market-based instruments, most economics texts are quite savage about the abilities of legislative instruments to achieve environmental goals.

Figure 1: Typical environmental economist's graph showing costs and benefits of pollution control

Most economists argue that the market is better able to find the optimal level of damage, the one that is most economically efficient. This optimal level of pollution or damage is usually not zero[2]. The idea of an optimal level of pollution is strange, and even repugnant, to many people. But it is a central assumption in the economic theory behind internalisation of costs using price-based instruments.

The optimal level of pollution is supposed to be the level at which the costs to the company of cleaning up the pollution equal the cost of environmental damage caused by that pollution. If the pollution charge is equivalent to the cost of environmental damage then the theory says that the company will clean up its pollution until any further incremental reduction in pollution would cost more than the remaining charge, that is until it is cheaper to pay the charge than reduce the pollution. This is said to be economically efficient because if the polluter spends any more than this the costs (to the firm) of extra pollution control will outweigh the benefits (to those suffering the adverse affects of the pollution).

This might seem to be a less than optimal solution to the community but economists argue that the polluter is better off than if it had paid to eliminate the pollution altogether and the community is no worse off because it is being compensated by the firm for the damage through the payments to the government. In theory the payments made by firms in the form of charges can be used to correct the environmental damage they cause.

This is where theory and reality diverge because there is considerable doubt about whether money payments can correct environmental damage in many circumstances; and more importantly, money collected from pollution charges 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.[3] 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 (Goodin, 1992) and that natural and human-made capital are not perfect substitues for one another (Costanza and Folke, 1994). In fact, 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.

A further assumption behind the theory that there is a point of optimal damage is that increasing pollution reduction are increasingly expensive (see the upward swing of the curve on the above graph) for smaller and smaller environmental gain (see the levelling off of the curve on the graph above). This premise is based on the idea that pollution reduction is achieved by pollution control equipment being added to production processes, whereas the aim of clean production processes is to change production processes so that the pollution is not generated. These changes in production processes may in fact end up saving a firm money over the long term.

All this supposes that the charges are in some way equivalent to the damage done but this cannot be so easily assumed. As Daly and Cobb (1989, p. 141) point out, "even when the physical consequences are not in dispute the evaluation of the economic loss is subject to wide disagreement and uncertainty." In practice governments and regulatory agencies do not attempt to relate charges or taxes to `external costs'. Charges may be levied to raise revenue to cover the costs of programs to combat pollution effects but more usually the charges are aimed at providing an incentive for polluters to reduce their emissions. (This incentive effect will be discussed in the next section of this paper.)

This means that polluters are not paying the actual costs of the damage they cause. Accordingly, a major objective of the economic instrument--to internalise environmental costs so as to obtain the optimal level of pollution--is not achieved. Internalisation of costs is a rhetorical argument. The presence of externalities challenges the claim of economists that the market provides the best means of allocating resources. Externalities are a much cited example of a way in which the market fails to protect the environment. Economists respond by calling for the adjustment of prices to internalise these externalities. Daly and Cobb (1989, p. 37) argue that such adjustments to the market system are done to save face for economists and to avoid restructuring basic economic theory. The rhetoric of internalisation also reinforces the premise that the central environmental problem is the failure to value the environment and that markets can adequately deal with this problem by incorporating environmental costs into market prices.

(ii) Incentives and Environmental Effectiveness

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, p. 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 price-based 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, p. 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, that is, 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 firm's 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, p. 7) Most studies have found that in nearly all cases charges are too low to provide an incentive (OECD, 1989, pp. 114-5; Postel 1991, p. 32; ESD Working Groups, 1991; Stavins and Whitehead, 1992, p. 31, Bard and Opschoor, 1994, p. 25). (Occasional exceptions to this occur such as in the Netherlands.)

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 price-based instruments 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 (Ashford, Ayers and Stone, 1985; Caldart and Ryan, 1985; Cramer and Zegveld, 1991). For example Caldart and Ryan (1985, p. 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." In practice, regulators rarely take this approach, for the same reason that they rarely levy high enough charges, because they are overly concerned about industry reaction. They would prefer to regulate within the existing economic and technological framework.

Environmental legislation can stipulate the type of technology that should be used (Best Available Technology (BAT) and Best Practicable Technology (BPT) approaches are examples of this) or the level of emissions that should be achieved. In the US it has traditionally been expected that regulators should stipulate the technologies that should be used and this has tended to inhibit innovation. In Australia, although regulators have not usually told firms what technology to use, emissions standards have been set on the basis of existing technologies and what could reasonably have been achieved rather than on the basis of environmental goals which could have provided an incentive for technological change over time (Beder, 1989).

The failure of legislative instruments to provide incentives has at its source the same cause as the failure of price-based 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, p. 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, pp. 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, p. 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 willing to pay 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. Legislation does not give them the choice.

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, p. 184). Many of them do not have sufficient knowledge of alternative methods and costs to make optimal decisions in their own interest.

(iii) Economic Efficiency and Cost Effectiveness

Since price-based measures do not internalise environmental costs and generally do not provide more incentive for technological change than legislative measures, economists are left with the argument that such instruments are more economically efficient or cost-effective than legislative measures.[4] They claim that regulation places a high cost on industry and impedes economic growth. Stavins and Whitehead (1992, p. 8) have characterised legislation during the 1970s and 1980s as being implemented regardless of the costs. They promote "market-based incentives for environmental protection" as the alternative:

there is heightened concern over the impact of these regulations on the strength of the economy and its ability to compete in international markets... By dictating behaviour and removing profit opportunities, past environmental regulation has placed unnecessary burdens on the economy and stifled the development of new, more effective environmental technologies.

Regulations are not cost-effective, according to the advocates of economic instruments, 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, p. 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.

But often cost savings arising from economic instruments result directly from firms not having to make pollution reductions that they otherwise would have. Efficiency is often a theoretical argument rather than an empirical one. The efficiency argument assumes markets are perfectly competitive and firms have perfect information. Jacobs (1993, p. 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--that is, cost less overall--than the huge price hike which would have been required to get the same changes made.

Savage and Hart (1993, p. 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 pollution charges since the need for monitoring and enforcement remains--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, 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, p. 7).

(iv) Assimilative Capacity

An inherent assumption behind economic instruments is that the environment can take a certain amount of pollution and that charges 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 is also true of most current legislative instruments.) 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, p. 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. 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.

The alternative approach is to adopt the precautionary principle. Instead of purposely making economic use of what is thought to be the assimilative capacity of the environment, a precautionary approach would be to continually seek to reduce emissions that may harm the environment, by constantly reducing allowable discharges over time. A system of charges does not preclued this, of course, but only if such a system has legal maximum limits that cannot be exceeded by paying to do so.

Ideology and Enrolment

None of the arguments for price-based instruments described in this paper are new amongst economists. What is new is the way economists have been able to gain the support of other professionals and interest groups. Neoclassical economists have always had allies amongst the politically conservative who share their world view. The renewed push for the use of economic and market instruments has been due in part to the influence of the ideology of economic fundamentalism in many Western governments during the 1980s and fits into a trend over the last two decades of increasing deregulation and privatisation in Western capitalist economies (Steiner, 1991).

Industry and Business

For many industrial firms and businesses the environmental problem has been not one of environmental degradation but rather one of increasing governmental constraints on their activities. Price-based instruments, in particular, were viewed as placing additional costs on their operations that they would prefer to avoid. Charges can indeed incur a more hefty financial burden on firms than legislative instruments (Tietenberg, 1985) and is a primary reason why carbon taxes have been opposed by business groups in various parts of the world.

Economists who promote economic instruments have sought to enrol industry by emphasising the flexibility of economic instruments--the fact that they give firms a choice and allow them to make their own decisions. Economists juxtapose economic instruments against legislative instruments which dictate how firms should behave--hence the term applied to legislative instruments "command-and-control". Stavins and Whitehead (1992, p. 7) characterise economic instruments as approaches "that require less bureaucracy and governmental intrusion into business and household decisions" whilst "market-based incentives provide freedom of choice for businesses and consumers to determine the best way to reduce pollution" (p. 10). Grabosky (1993) argues that market-based instruments are more likely to be perceived to be legitimate by industry, and therefore less likely to encounter resistance, than "command-and-control" methods because market-based instruments accord "industry greater decision-making autonomy in the resolution of its problems."

Schelling (1983, p. 7) maintains that "the essence of a pricing system is that it leaves the decision to pay or not to pay to whoever confronts the price." Although a government agency may set a pollution charge, the decision about whether to pay it or not is a decentralised one, that is made in the market place. This contrasts with a fine that must be paid and is a way of enforcing legal measures. He argues that under a charge system individual firms are the ones that make the decisions rather than the regulator.

As public pressure has mounted to tighten up and increase regulation this argument has been more compelling. Industry would prefer to retain the choice of discharging wastes into the environment, even if it has to pay for the privilege. Charges make the costs explicit and place a ceiling on them (Repetto et. al., 1992, p. 7) whereas legislation has the potential to impose clean-up costs of unknown magnitudes. Additionally, environmental taxes and charges are being promoted by economists and others as a way of replacing other charges and taxes that firms would normally have to pay anyway (Jacobs, 1993, p. 9; Postel, 1991, p. 31; Repetto et al, 1992)

Businesses have also come to prefer economic instruments to legislative instruments as more environmentally-conscious citizens look for someone to blame. Economic instruments remove their polluting activity from the `criminal sphere' and legitimises it. Unlike a fine that is imposed for doing something wrong, a charge or a tax indicates that the activity is official and done with approval. Schelling (1983, pp. 6-7) is quite adamant that this is how price-based instruments should be viewed.

It is typical of fees and charges... that no moral or legal prejudice attaches to the fee itself of the action on which or for which it is paid. The behaviour is discretionary. The fee offers an option... a fee entitles one to what one has paid for...It is not levied in anger, it does not tarnish one's record...

The permission granted to go on doing that activity on a continuing basis also reinforces the perception that the activity cannot be wrong.

The environmental crisis of the 1980s brought with it calls for a new environmental ethic and changes in moral values that governed the human-nature relationship. At risk was the possibility that the environmental benevolence of the profit-motive itself could be questioned and the corporations responsible for much pollution labelled as villains. Schultz (quoted in Kelman 1983, p. 297) identified this possibility early on when he said that what was needed for social welfare was "the identification, not of villains and heroes but of the defects in the incentive system that drive ordinary decent citizens into doing things contrary to the common good." Economic instruments make a virtue out of the profit motive and the pursuit of self-interest whereas those arguing for a new environmental ethic took the traditional approach of trying to combat self-interest through morality.

Economic instruments provide this constituency with an alternative to restrictive legislation and economists provide the rhetoric to make the argument for them in terms that are not obviously self-interested. Sara Diamond (1991, p. 54) claims `Some farsighted corporations are finding that the best "bulwark" against "anti-corporate" environmentalism is the creation and promotion of an alternative model called "free market environmentalism"'.

Bureaucrats and Politicians

Many bureaucrats and politicians have been attracted to the idea of economic instruments by the economists' promise that they will remove decision-making from the public arena thereby depoliticising environmental debates. Environmental controversy can be politically damaging and can interfere with the bureaucratic decision-making process.

The outcomes of environmental conflicts have been traditionally determined by the political process. Many economists don't like this system, however, preferring such decisions to be made by the market. Chant et al. (1990, p. 20) argue that market-based instruments transform environmental conflicts from political problems to economic transactions:

A major advantage of the market as an allocational device is that it provides a non-political solution to the social conflict raised by resource scarcity. Individuals obtain title to scarce resources through voluntary exchange and such exchange represents a solution to what would otherwise be a political issue.

In contrast legislative policies are characterised by Chant and his colleagues as engendering "an adversarial relationship among regulators, environmentalists, and private industry. As a result, excessive economic resources often have been used for litigation and other forms of conflict among concerned parties"(p. 8). Jeff Bennet (1991) has also argued that the political process of allocation of scarce environmental resources is "highly divisive, confrontationist and largely inefficient", because resources are misallocated and a great deal of time and money is spent on "the largely unproductive activities of lobbying and protesting." If, instead, he argues, the market could be used to allocate environmental resources on the basis of supply and demand, just as other choices are made (for example, between growing wool or wheat on a farm), they could be removed from the political arena.

Anderson and Leal (1991, p. 23) juxtapose the market with the political process as a means of allocating environmental resources and argue that the political process is inefficient, that is it doesn't reach the optimal level of pollution where costs are minimised:

If markets produce "too little" clean water because dischargers do not have to pay for its use, then political solutions are equally likely to produce "too much" clean water because those who enjoy the benefits do not pay the cost... Just as pollution externalities can generate too much dirty air, political externalities can generate too much water storage, clear-cutting, wilderness, or water quality. Free market environmentalism emphasises the importance of market processes in determining optimal amounts of resource use.

Gary Sturgess (1991), former director-general of the New South Wales Cabinet office, is one of many who has been convinced by such arguments and has argued for market-based solutions to environmental problems as they have the potential to remove the politics from policy-making and to prevent politics from distorting decisions.

Politicians have seen the "environmental problem" as being one of potential politically damaging conflict. In making policy decisions in this area they are forced to make choices that inevitably put some sectors of the electorate off-side. Bureaucrats tend to see the "environmental problem" as more of a technical/managerial problem that can be solved more efficiently without political interference. Both politicians and bureaucrats have reason to prefer a solution that is technocratic and non-political and this is the way economists have sold economic instruments.


Environmentalists are perhaps the most surprising converts to a market-based approach to environmental problems. 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.

Kelman (1983, p. 330), one of the authors of the aforementioned survey on attitudes to economic instruments, suggested to economists in 1983 that the "strategy for making environmentalists into supporters of charges must be to impress them strongly with the efficiency advantages of charges over standards." And this is generally the basis on which environmentalists today accept them. Environmentalists who accept an increasing role for economic instruments take a pragmatic view that these are tools which should be used if they work and that any associated ideology is irrelevant.

Economists encourage this view. For example Jacobs (1993) emphasises the need to differentiate between `objectives' and `tools'. He outlines two stages in environmental policy formulation, the first being the determination of environmental outcomes to be achieved and the second stage being the choice of tools or instruments to be used to achieve those outcomes: "First, it is necessary to throw out the ideological baggage which has accompanied this debate. Because the instruments used in the environmental economist's approach can be called `market mechanisms', it is sometimes assumed that they are right wing..." (p. 5).

Environmentalists have willingly accepted that "all the possible instruments at our disposal should be considered on their merits in achieving our policy objectives, without either ideological or neoclassically-inspired theoretical judgement" (Jacobs, 1993, p. 7). In fact the ideological and political shaping of these instruments has been hidden behind a mask of neutrality. Stavins and Whitehead (1992, p. 8) have argued that "Market-based environmental policies that focus on the means of achieving policy goals are largely neutral with respect to the selected goals and provide cost-effective methods for reaching those goals."

In part the enrolment of environmentalists has also come about because environmental groups have found it necessity to employ their own economists in order to be heard in an increasingly economics dominated environmental policy arena (Rosewarne, 1993, p. 63) and they have taken advice from those economists. Ironically environmentalists who are enrolled in this way are also disempowering themselves. The portrayal of economic instruments as neutral tools removes them from public scrutiny and gives them into the hands of economists and regulators. In fact the decision about levels of pollution, far from being decided in a separate stage of policy making, remains with the polluters since they are given the choice of discharging their pollution or paying the charge. The polluters decide what trade-offs should be made between economics and environmental quality.

Market-based measures grant the highest decision-making power over environmental quality to those who currently make production decisions now. A market system gives power to those most able to pay. Corporations and firms rather than citizens or environmentalists will have the choice about whether to pollute (and pay the charges) or clean up.[5] Very polluting or dirty industries can stay in business if they can afford the pollution charges. In this way, companies can choose whether or not to change production processes or introduce innovations to reduce their emissions.

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. As White (1992, p. 150) argues:

Within this framework of general acceptance of the `market', the issues of `capitalist development' and `ecological sustainability' have tended to congeal around the theme of environmental costs and how best to reduce these. The social relations of the market itself are not brought into question; the solution is not seen as involving a major social transformation or radical economic restructuring.

White argues, as many others have, that the market, far from being free or operating efficiently to allocate resources in the interests of society, is dominated by a small group of large multinational corporations which aim to maximise their private profit by exploiting nature and people. By focusing on policy measures that leave the existing market unchanged, environmental issues will continue to play second fiddle to economic interests; the logic of the system, which is based on unlimited growth, will be left unchallenged.


The benefits of price-based instruments are far more theoretical than real. The use of charges have, in most cases, not been shown to provide incentives for innovation and pollution reduction measures. The recent popularity of economic instruments in all spheres of public life has resulted from a combination of factors: most particularly the success of economists in persuading others that economic instruments will suit their goals and a realisation by those who have market-based power that ways must be found to counteract the possibility of social and political change arising from environmental concerns that may erode their power.

If environmental degradation is indeed a result of a failure to price environmental goods and therefore harness self-interest to the common good then economic instruments could well provide a much needed solution. However, if environmental degradation has resulted from making environmental concerns secondary to economic concerns, and having decisions made by people who see environmental resources merely as an adjunct to production, then economic instruments will merely perpetuate the problem and subvert any potential for political or value-based change.

Such choices are not clear whilst environmentalists and others insist on viewing economic instruments as neutral tools.


1 Environmental economists here are distinguished from ecological economists.

2 An exception might be in the case of plutonium.

3 The distributional or equity dimensions of economic instruments is the basis of many critiques of economic instruments but these will not be canvassed in this paper.

4 Economic efficiency means merely that aggregate benefits outweigh aggregate costs. It does not mean that goods are allocated justly or fairly distributed and it does not imply that allocation will be ecologically sustainable. Rational decisions are not necessarily moral ones. One major problem with economic instruments is their equity dimension. Increased charges are often borne disproportionately by the poor and disadvantaged. For example, a petrol tax has most impact on people who have to travel long distances to get to work and don't have access to public transport. In Sydney this tends to be the poorer working class people living in the outer suburbs where housing is cheapest.

5 There is of course some governmental control associated with economic instruments just as there is usually significant control over legislative instruments by powerful industry groups whose interests are embedded in the regulatory apparatus.


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