Thursday, February 13, 2014

Tabarrok on Environmental Policy

Over at Marginal Revolution, my old friend Alex Tabarrok has posted about the sorry state of environmental policy debates in the US. He mainly, and rightly, blames the Republicans, noting that the Reagan and Bush Administrations both supported social welfare-enhancing environmental policies that employed market-based approaches, such as cap-and-trade. Today, by contrast, "Republicans are no longer willing to accept the environmental goals regardless of the means."

But Alex also chides the Democrats for no longer being willing to accept market-based approaches to environmental protection. No evidence supports that statement. Certainly, Democrats were prepared to enact climate legislation in 2010 that relied predominantly on cap-and-trade mechanisms. Such legislation passed the Democratic-controlled House but failed in the Republican-controlled Senate.

Moreover, Alex's presumption that market-based approaches, including both cap-and-trade and effluent taxes, are always economically superior to command-and-control is unwarranted. The chief virtue of those market-based approaches is that they reduce the compliance costs of environmental protection for regulated industries. But compliance costs are not the only category of costs with which policy makers should be concerned. They must attend to the total costs of environmental protection, including monitoring and enforcement costs, which can in some cases be much, much higher for market-based approaches.

Back in 1998, Peter Grossman and I made that point in an article published in the Wisconsin Law Review, entitled, "When is Command-and-Control Efficient?" The article can be viewed here. We subsequently published a more concise version of the main argument from that article in volume 20 of Research in Law and Economics. And we currently are working on a more highly formalized (that is to say, mathematized) version of the argument, in a last-ditch effort to convince environmental economists (among other economists) that their blanket attachment to market-based instruments is mistaken.

Cap-and-trade and effluent taxes are, indeed, excellent and often preferable instruments for pollution control in many circumstances, but not always and everywhere. At least sometimes, because of technological constraints or the absence of well-functioning market institutions, such market-based instruments cannot be expected to function as well or as efficiently as direct regulations, e.g., technology-based standards (or non-tradable quotas based on available technologies).

2 comments:

  1. I could have been clearer. Democrats would clearly go for cap and trade if that were an offer. Since it isn't on offer, however, they aren't likely to push market based approaches.

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  2. I think that's a colorable argument, though I still suspect most Democrats today appreciate that any environmental legislation is most likely to pass Congress (if at all) if it includes market-based approaches to minimize compliance costs. The Waxman-Markey climate change bill, which passed in the House in 2010, was drafted by two Democrats, and relied heavily on cap-and-trade, with the strong support of some environmental groups, such as Environmental Defense Fund.

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