Environmental Policy Instruments

The problem of the choice of environmental policy instruments has been an issue since Pigou [2] analyzed the need for state intervention when private costs diverge from social costs and suggested that the solution would be to internalize the externalities through taxation.1 Coase [4] criticized the proposed state intervention and affirmed that there is no reason to suppose that governmental regulation is called for simply because the problem is not very well handled by the market or the firm. 

A tradable permit system is defined as quantity-based environmental policy instrument. The regulatory authority stipulates the allowable total amount of emissions (cap) and the right to emit becomes a tradable commodity. Under a cap-and-trade system, prices are allowed to fluctuate according to market forces. Thus, the price of emissions is established indirectly. Permits could be allocated to firms through auction or free allocation. 

Similarly to other environmental taxes, carbon taxes are defined as priced-based policy instruments for the correlated effects to increase the price of certain goods and services, thereby decreasing the quantity demanded. On the other side, tradable permits are defined as quantity-based environmental policy instrument. Although both policy instruments are MB, their implementation is different carbon taxes fix the marginal cost for carbon emissions and allow quantities emitted to adjust, whereas tradable permits fix the total amount of carbon emitted and allow price levels to change according to market forces. 

Figure 1 shows the different roles that can be played by insurance sector as a form of environmental policy instruments. 

Behrens A (2004) Environmental policy instruments for dematerialisation of the European Union. SERI Background Papers, No 7. Sustainable Europe Research Institute, Vienna EUROSTAT (2001) Economy-wide material flow accounts and derived indicators. A methodological guide. Statistical Office of the European Union, Luxembourg Giljum S (2006) Material flow-based indicators for evaluation of eco-efficiency and dematerialisation policies. In Lawn P (ed) Sustainability indicators in Ecological Economics. Edward Elgar, Cheltenham... 

Baldursson, F.M., von der Fehr, N.-H.M, 2004. Price volatility and risk exposure on market-based environmental policy instruments. Journal of Environmental Economics and Management 48(1), 682-704. 

The challenges discussed so far are predominantly of a technical nature. The EU greenhouse gas emission trading scheme is the first application of this environmental policy instrument at EU level and few Member States had previously implemented or considered the use of the instrument at national level.10 Therefore neither authorities charged with the task to develop the allocation plan nor stakeholders involved had much experience with an allocation process.11 This relative inexperience made the process design (see next point) even more challenging. In many cases know-how gaps had to be addressed as a first step towards... 

Stavins, R. N. (2003). Experience with market-based environmental policy instruments. In Handbook of Environmental Economics, Volume I, Karl-Goran Maler and Jeffrey Vincent, (Eds.), Elsevier Science Amsterdam, pp. 355- 35. 

On the one hand, social and environmental labels provide consumers with the information they want, so they increase market efficiency acting as information policy instrument. On the other hand, they help enterprises to mitigate the environmental and social impacts of their business, thus acting as an environmental policy instrument (see Figure 15.3). 

THE INTERNATIONAL LEAD TRADE Table 20.1 Environmental policy instruments... 

In the first part of the chapter, we intend to revise the traditional analysis of the choice of environmental policies. The following part deals with the comparison between tax and tradable permit systems. Then the role that can be played by the insurance sector is considered. The different policy instruments are considered in the framework of climate as an economic global public good. And, finally, some conclusive remarks are presented in relation to the COP 21 conference in Paris in terms of the future policies against GHG effects. 

This chapter aims to describe the traditional theory on the choice of environmental policies following an economic analysis of law (EAL) approach (Section 2) to analyze the comparison between tax and tradable permit systems (Section 3), to outline the role of the insurance sector (Section 4), and to consider the different policy instruments in a context of economic global public goods. The final objective is to take into account the future COP 21 conference in Paris in terms of the choice of policy instruments against GHG effects. 

Organisation for Economic Co-operation and Development (OECD) (2002). Policy Instruments for Achieving Environmentally Sustainable Transport. Paris OECD. 

If the economist s question is asked, it is often assumed that it is unlikely that organic farming as a fixed system coincides in respect to environmental performance with the aspiration level of society for each indicator (Alvensleben 1998). This point of view follows the Tinbergen rule of economic theory that tells us that the number of policy instruments chosen should at least equal to the number of targets set (Ahrens and Lippert 1994, Henrichsmeyer and Witzke 1994). This is theoretically sound if the following prerequisites are given ... 

Helm, D., 2005. Economic instruments and environmental policy. Economic and Social Review 36(3), 205-228. 

OECD (2009e) OECD/EEA database on instruments used for environmental policy and natural resources management, http //www2.oecd.org/ecoinst/queries/index.htm. Cited 5 March 2009. 

Sterner, T. (2002) Policy Instruments for Environmental and Natural Resource Management. Resources for the Future Press, Co-published with World Bank and Swedish International Development Cooperation Agency, Washington. 

There has also been a shift in governmental use of policy tools from input to output centred instruments (Pierre and Peters 2000), with evaluations and inspections being examples of two policy instruments that have grown in importance (Johansson 2006). It has also been suggested that these changes have been fostered by the expansion of the European Union, mainly because regulations are the EU s most common policy instrument (Majone 1996). Regulations dominate within the area of environmental policy in Europe, even if economic and communicative policy instruments also are used (Mac Neil et al. 2002). 

Objectives, Instruments, and Institutions, Objectives, Instruments and Implementation, Environmental Policy Objectives, Instruments, and Implementation, Ed., D. Helm, Oxford University Press Inc., New York, NY, USA, 2000,... 

Target-setting and subsequent reporting should reflect national differences in production, use, and environmental conditions, as well as alternative regulatory measures and policy instruments that can be implemented to achieve risk reduction. 

Ultimately, it is the policy instruments that provide different actors with incentives for change. Some examples of policy instruments are given in Table 10.1. A carefully planned environmental policy should provide for a positive interaction of different policy instruments, which may happen in several ways (Bemelmans-Videc et al., 1997 Gunningham and Grabosky, 1998 Dalhammar, 2007a). 

The result of the NAP development process was a scenario of likely abundance rather than scarcity of allowance. The Italian authorities carefully evaluated this outcome and endorsed it based on a number of considerations. The two main driving factors were on the one hand the expected impact of scarcity on Italian company s competitiveness while on the other the preference for a gradual transition from the traditional more rigid command and control to the new flexible market instrument approach to environmental policy-making. 

Frank Convery, B.Agr.Sc., M.Agr.Sc., M.S., Ph.D., is Heritage Trust Professor of Environmental Policy at University College Dublin. He is active on a number of EU-wide investigations and bodies. He has written extensively on resource and environmental economics issues with particular reference to agriculture, forestry, energy, minerals, land use, urbanisation, environment and development in developing countries. At present, his research relates to EU environmental policy with particular reference to the use, potential and effectiveness of market-based instruments. 

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