The GEC Insights series is a new curated collection of online articles at the intersection of environment and economics, each written by leading thinkers from the worlds of business, government and civil society. Part of our Economics for Nature project, they bring together diverse perspectives to answer the question: how can we re-design our economies to protect and restore nature?
To address the biodiversity and climate crises, "market mechanisms" are often promoted while “command and control" measures are disfavoured. Below, we outline why the labels are misleading and how the two categories overlap. In some contexts, directives, standards, quotas and bans are easier to enact or implement, and can more effectively achieve environmental goals. Alongside taxes and trading schemes, they are important tools in the regulatory toolkit for tackling the urgent crises we face.
It’s fair to say that neoclassical economists have had an immense influence over the policy options promoted to tackle environmental challenges. A staple of neoclassical environmental policy is that governments should use so-called “market mechanisms”, such as taxes on environmentally destructive activities, cap-and-trade schemes that limit the aggregate quantity of environmental pollution and enable trading in emission rights, or payments for the production of environmental goods such as ecosystem services. At the same time, neoclassical economists and their adherents in public policy tend to frown upon so-called “command and control” measures, such as regulated standards, non-tradeable individual quotas, administrative directives and bans.
We don’t doubt that market mechanisms have positive attributes, at least in theory and if they are well designed and implemented in practice. Nor do we doubt that they rightfully belong in the policymakers’ toolkit, ready to be wielded in the appropriate context. What we want to do here, rather, is make a positive case for measures falling in the command and control category.
Market mechanisms and command and control—an illusory distinction
But first, let’s be clear that the distinction between market mechanisms and command and control is illusory. "Market mechanism" conjures the image of a decentralised process that can reduce pollution and protect nature with minimal government intervention in private decision-making. Meanwhile "command and control" evokes the bloated bureaucrat—or worse, the Soviet menace—crushing the spirit of entrepreneurship.
This mythologising obscures the reality that, in an advanced economy, no market is free. Markets are deeply shaped by property and contract rights, which are governed and enforced (or, in other words, commanded and controlled) by the state, with brute force if necessary. (That is why laws, of whatever kind, should be enacted by democratically accountable representatives according to fair and inclusive procedures, and subject to other checks and balances.)
Government-created markets in pollution entitlements or ecosystem services go well beyond such generalised shaping of background entitlements. They require a new, and typically immense regulatory and bureaucratic infrastructure all of their own. Entitlements must be created, as must rules and institutions for monitoring, reporting, verification, permit trading (where applicable), and enforcement. Typically this will require hundreds of pages of legislation and secondary regulation, as well as considerable administrative resources and staff for the governing agencies. The resulting administration and transaction costs, often excluded from economists’ efficiency calculations, can be substantial.
Moreover, the key decisions that go into the design of market mechanisms, like determining which objects (sectors, pollution sources, ecosystem services etc.) are covered by the scheme, setting the aggregate quantity limit (for a cap-and-trade scheme), or setting the tax rate, call for political decisions by public officials that are not so different from prototypical command and control decisions. Neoclassical economists will tell you there is an optimal price/quantity. But calculating this is impossible, and so economists usually disagree about what this is, leaving an unaccountable degree of political discretion. More importantly, what the neoclassical economist considers optimal rests on a normative criterion, namely, efficiency maximisation which, philosophically and democratically, is hard to defend as the ultimate—let alone exclusive—goal of public policy.
“ In certain political–institutional contexts, caps, bans and standards can achieve similar environmental outcomes to market mechanisms while being easier to enact or implement.”
These political decisions are always open for debate. The final outcome is inevitably the product of lobbying and public relations campaigns by interest groups, of which the industries being regulated are usually the most vociferous. The regulatory outcome is also affected by political institutions like electoral rules that give certain constituencies more influence than others (e.g. the US Senate gives rural voters in small states disproportionate representation).
When the political and institutional context is adequately taken into account, proposals for market mechanisms will make little sense in many jurisdictions. For instance, market mechanisms make the costs of the measure salient to voters, and are therefore easily portrayed by opponents as harmful taxes on consumption. This makes them difficult to enact anywhere, but especially so in jurisdictions in which the electoral rules give legislators greater incentive to respond to consumer interests.
Institutions, vested interests and cultural norms also influence the implementation of policy, and sometimes in ways that disfavour market mechanisms. For instance, in many countries the rule of law is weak, regulatory bodies are poorly resourced, administrative officials are easily corrupted, and firms have limited capacity or inclination to comply with regulations. In such contexts, it makes little sense to introduce mechanisms that depend on the complex monitoring, reporting and verification of invisible pollutants at source for their successful operation. Yet advocates of market mechanisms rarely take such factors into account when they recommend carbon cap-and-trade schemes everywhere from China to Kazakhstan.
The key point is this: in certain political–institutional contexts, caps, bans and standards can achieve similar environmental outcomes to market mechanisms while being easier to enact or implement (and considerable
suggests this will often be the case). This provides a reason to favour them over market mechanisms, all else equal.
Command and control measures typically have a further, crucial advantage: clarity. Investments by both producers and consumers are made on the basis of expectations about the future. Where there is competition between a polluting incumbent technology and a cleaner (but currently inferior or more expensive) substitute, uncertainty about the likely technological trajectory can stymie investment. Measures that direct businesses to use particular technologies, meet certain performance standards, or phase-out certain activities, leave no-one in any doubt about the preferred trajectory. The resulting convergence of expectations can unleash investment in the clean substitute, improving its performance and reducing its cost. This convergence effect can also take on a normative dimension, creating a shared understanding about acceptable standards of behaviour that shift commercial and social norms over the longer term, making regulatory backsliding more difficult (think of bans on CFCs, asbestos, lead in petrol, and smoking, for example).
This contrasts with the much vaunted flexibility of market mechanisms, which allow businesses to meet their obligations in the least-cost way. The resulting cost-containment can certainly be a virtue, but under real-world market mechanisms, firms use this flexibility to engage in incremental tinkering at best, and gaming the system at worst. This kind of experimentation might be appropriate when the stakes are low and where there is space to recover from failures. But given the scale and urgency of the environmental crises we face, clarity of direction seems like a more important virtue.
Let’s focus on “better laws”
Once we affirm the rightful place of standards, directives, quotas and bans in the policy toolkit, and drop the misleading command and control branding, a rich portfolio of possibilities for tackling environmental challenges presents itself.
In the UK, for example, a model Green Recovery Act (which we were involved in writing) contains a wide range of novel suggestions, often involving small tweaks to existing laws that would have a strongly beneficial environmental impact. A few examples (which just scratch the surface) include:
- Amending the laws governing electricity, communication, transport, and petroleum to direct the regulators (in the UK case, that’s Ofgem, Ofcom, the Office of Rail and Road, and the Oil and Gas Authority) to use their powers to limit and phase out the use of coal, oil and gas in the industries they regulate.
- Clarifying corporate governance rules to ensure that all company directors invest in green energy and energy efficiency measures when it makes their company money (as they often do, at least over a medium-term payback period).
- Changing tax deduction rules to ensure all new business vehicles, taxis, buses and delivery vans have zero emissions (a measure that nicely illustrates the illusory distinction between a market mechanism and command and control, and one that will save vehicle users, the NHS and the economy billions in fuel costs and dramatically reduce harm to health from air pollution).
When it comes to evaluating these and other proposals for governing nature, the question we should be asking is not “which market mechanism is most efficient?” But rather, “which laws will work best?” to tackle our critical challenges at the scale and pace they demand.
Dr Fergus Green is a Postdoctoral Researcher in the Department of Philosophy at Utrecht University. He researches the ethics, politics and governance of climate change and energy transitions. As a lawyer in Australia (2009–12) he advised government bodies, companies and NGOs on Australia’s carbon pricing schemes and other climate and environmental laws.
Dr Ewan McGaughey is a senior lecturer at the School of Law, King’s College, London and a research associate at the Centre for Business Research, University of Cambridge.
The Green Economy Coalition believes that dialogue and discussion are cornerstones of effective policy-making. Therefore we publish articles from a broad range of contributors, covering a wide range of views. The views expressed by our guest authors do not necessarily
reflect the policy or positions of the GEC; furthermore, since our coalition and our contributors are reflective human beings navigating a complex world, our views are subject to change over time.
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