5.2.3  Command-and-control vs the market in pollution control

MBI approaches overall avoid unnecessary costs that would arise from mandating use of certain technologies, or requiring that all polluters reduce emissions by the same proportion or amount, or other prescriptive approaches.

Such CAC approaches may, however, be sensible as an initial approach when faced with a major problem and limited information, when the information required to support an MBI approach cannot be obtained; eg, the first years of the Clean Air Act in the United States (Cole, 1999). Also the costs of an MBI approach “are assumed to exceed the operating costs of a system of fixed standards” so for there to be cost savings “there must exist some heterogeneity among firms” ie, if options for reducing pollution are limited or potential trading pools are small the gains from a more market-oriented approach may not justify the costs (Romstad, 1999, p52).

The United States did later move to models such as netting off emission changes within a plant, offsetting changes between plants, allowing bubbles of grouped plants, or banking credits for future use or sale. A later move to full emissions allowances trading for sulphur dioxide emissions appears to have been successful in reducing emissions by more than projected at a lower cost despite costly monitoring and registry requirements. In all these cases, the benefits may have been constrained by the lack of security of the underlying property right but this is difficult to evaluate. Absolute security is not possible unless environmental goals are to be permanently fixed (Cole, 1999).

Trading or taxation approaches may also not be appropriate when faced with emissions that have a local impact (so that trading beyond a region will not achieve the goals), or that have a global rather than regional impact (so trading required international co-operation), or where available alternatives make a complete ban on a pollutant viable. Other key issues include whether pollutants are assimilative or accumulative, and whether the ambient concentration is uniformly or non-uniformly mixed spatially (Pennings, Heuman and Meulenberg, 1996).

It can also be argued that there is greater environmental risk with an MBI approach; eg, because it relies on monitoring that quotas are not exceeded, or on miscalculations of the cost of abatement under a tax system. Conversely, if an MBI approach is less costly for firms, then a more stringent environmental standard could be adopted. An MBI approach is also likely to create better incentives over time for improving technology (Romstad, 1999). It can be argued that incumbent firms support CAC approaches to reduce competition while environmentalists do so due to a lack of trust in firms, opposition to creating explicit rights to pollute and a preference for limiting industrial activity (Yandle, 1999).

Overall, an MBI tax approach sets a maximum cost for control measures, giving polluters an incentive to undertake any expenditure that reduces pollution at a lower cost than the tax rate. An MBI permit approach sets a minimum level of pollution, but is likely to achieve that level at a lower cost than otherwise and may reduce below that level due to innovation in pollution control measures. A CAC approach may achieve its targets, but at an unnecessarily high cost and with the risk of foregoing attainable pollution reductions.