- The Rationale
- Internalising Environmental Costs
- Incentives and Environmental Effectiveness
- Economic Efficiency and Cost Effectiveness
- Assimilative Capacity
- Ideology and Enrolment
- Industry and Business
- Bureaucrats and Politicians
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:
- Price-based measures use charges, taxes and subsidies to
persuade polluters to reduce their discharges.
- Rights-based measures `create rights to use environmental
resources, or to pollute the environment, up to a pre-determined limit, and
allowing these rights to be traded' (Commonwealth Government of Australia,
1990, p. 14).
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
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,
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
The standard view taken by environmental economists
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
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.
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
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
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. 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.
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.
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."
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
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
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
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.
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.
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,
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).
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.
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,
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
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
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"'.
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
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
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
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
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. 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
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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