Market-Based Approaches to Environmental Law

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Table of Contents

Introduction
Market-Based Approaches
Case for Command-and-Controls
Conclusion
Reference List
Footnotes

Introduction

Today, every country, government, business, and consumer on the planet has all incentives to participate in environmental conservation. These incentives emanate from the visible environmental damages and the detrimental consequences, including climate change. Governments are often at the forefront of the efforts and initiatives for climate control. For example, the United States (US), the United Kingdom (UK), and the European Union (EU) have all developed laws that govern business and other activities that have environmental implications. Recently the UK developed the UK Environment Act, which became law in 2021 and which is intended to promote environmental protection and bridge the gap created by Brexit as the UK left the EU¹. In the US, air pollution has been a major challenge, which has forced the country to develop regulations under emission trading programs². Market-based approaches to environmental regulation are rapidly emerging as the more preferable alternatives to command controls. Therefore, this paper argues that the market-based strategies offer greater incentives and that the command-and-control may still have a role to play.

Market-Based Approaches

The legal frameworks for environmental protections do not seem to achieve the desired results. The market-based approaches to environmental conservation in such countries as the US and the UK are designed to facilitate the mitigation of environmental damage³. This means developing laws and regulatory policies that allow all actors to take responsibility for the environment. In this case, it has been argued that the quantification tools used are the main challenge for the implementation of these policies. For example, it might not be easy to quantify the amount of greenhouse gas emitted by consuming a certain product. In this case, it would be challenging to allocate costs to a consumer since these costs cannot be estimated. The essence of market-based policies is that the resources can be consumed sustainably, a goal that can be achieved by making pollution and other forms of environmental damage costly. Businesses often pass the costs of production to consumers in the form of prices. Therefore, market-based incentives can be seen as sustainable consumption tools, facilitating sustainable development.

There is a need to clarify what market-based approaches are, considering that this term may be misunderstood. From an economic perspective, economic incentives can be mistaken for letting competition between unregulated firms determine environmental outcomes. On the contrary, market-based approaches can be considered a clever government regulation premised on the recognition that free markets always fail on environmental matters⁴. Therefore, the government used its legal power to confront businesses, individuals, and even government agencies with the same incentives faced in the markets – that is, prices that create the need for economization. Tackling environmental issues is a costly affair due to huge expenditures by the governments. However, if these costs were to be diverted to businesses and their consumers, then their activities could be redesigned to reduce the costs. Such a law uses the core market mechanisms to force firms to comply. Economically, all companies have an incentive to reduce costs since the costs reflect in the prices of the end products. Higher prices mean losing out to competitors with better prices, which implies that competition by private firms can be used as a tool for environmental compliance.

There are few examples of successful market-based approaches to environmental regulation in the US, UK, or the EU. Arguably, not many governments have managed to make these approaches work. However, the UK and the EU have developed a new net-zero program intended to reduce the net emissions by each business to zero. Other terminologies used in this initiative include decarbonization, especially since carbon dioxide is the most commonly emitted greenhouse gas⁵. In this case, net-zero is an initiative intended to ensure that the largest polluters pay the highest environmental protection costs. It is not clear that the net-zero program, either in the UK or the EU, was intended to be a market-based approach. However, it can be argued that several traces of economic incentives would force a producer of goods and services to reduce pollution.

Firstly, the implementation in the UK means that the government will financially support the business through investments in innovations and technology aimed at greener alternatives. Secondly, companies will be expected to reduce emissions as much as possible and remove those emissions it makes to achieve net-zero⁶. The companies pay for the removal of greenhouse gases, which means that there are costs to be incurred. Therefore, businesses will be reducing operational costs by reducing their emission. As mentioned earlier, the ultimate objective of the market-based approaches is to create economic incentives that a free market creates. The net-zero project transfers the cost to the individual businesses, which will ultimately reflect in the prices. Consumers are then expected to prefer the more affordable options, which means going for lower prices. Ultimately, the companies that pollute the environment less become more competitive. In this case, it can be inferred that if the net-zero strategy works successfully in the UK, the world will have seen one of the most practical market-based government regulations for the environment.

Across the UC, the environmental laws are also aimed at reducing emissions and decarbonizing the planet. However, the net-zero project is seemingly not received with the same commitment as it has in the UK. The rationale is that while the UK seeks to emit less and remove the gases, the EU’s goals are to reduce emissions by 55% by 2030. However, the European Commission (EC) states that these objectives are extended to 2050, when the EU bloc can achieve net zero. Similar to the UK, the EU hopes to make financial investments that help in innovation and job creation in those sectors that deal with energy. Additionally, the businesses will be expected to take advantage of the economic opportunities provided by the initiative and drive their own emission reductions. The EU acknowledges that five industries emit the bulk of the greenhouse gases: transport, industry, power, building, and agriculture, with 28%, 26%, 23%, 13%, and 13%, respectively, of the overall emissions⁷. Net-zero across the EU could also become a successful market-based approach to environmental laws.

The challenges of the market-based approaches can be illustrated using the case of the United States. As mentioned earlier, problems with quantification have been experienced, which makes it difficult to allocate the costs of environmental protection. Some observers notice that the damages from pollution vary significantly with the location of the source⁸. Additionally, different substances are addressed by different legal frameworks, which raises a problem with compliance. The current laws in the US fail to reflect the variations in the distribution of damages. Experts have argued that it is possible to design the market-based approaches such that they accommodate nonuniformly mixed pollution. The pathway recommended is making sure that penalties vary with damages. The emission trading programs in the US have come under scrutiny for various reasons. For instance, estimates show that the benefits of pollution reduction are experienced more by some communities than others (Grainer and Ruangmas 2018). In this case, the market-based approaches in the country could be deemed ineffective in creating the necessary environmental protection economic incentives.

Overall, there is evidence of countries across the world making progress with the market-based approaches. Due to the economic incentives, businesses have already started exploring the opportunities and prospects that can help them create a competitive edge through legal compliance. In the UK, a transition towards low-energy buildings is already taking place despite the challenges encountered in the process⁹. Policy initiatives in the country have made it possible for this niche to establish itself. For example, regulating energy consumption means consumers will be looking for alternatives and the solutions offered by low-energy buildings. The state-affiliated intermediaries have been created in the UK as part of a policy targeting energy efficiency. Even without the intermediaries, firms and homeowners actively seek low-energy homes in response to the energy efficiency policy, which indicates that market-based approaches could work. In the US, emission trading regulations comprise a set of laws targeting specific areas of environmental damage. However, the implementation of these laws maintains several features of command-and-control, which means that the economic incentives are hardly the priority.

Case for Command-and-Controls

A case has been made for the market-based approaches where the relevant legal frameworks could yield the desired results. If the economic incentives are the way to go, then the question that emerges is whether the command-and-control mechanisms should be consigned to the part. To address this question, there is a need to explore any gaps left by the market-based approaches. In many cases, compliance with environmental laws will pose a major challenge. There is a possibility that businesses find mechanisms of avoiding responsibility for damages and potentially passing them on to others. Additionally, efforts to reduce environmental costs do not always mean polluting less. Therefore, the command-and-control environmental regulation will still have a place in the new legal frameworks. The current implementation of command-and-control laws focuses on coercive policies that force businesses to comply with the environmental standards¹⁰. In the era of market-based approaches, the command-and-control policies could be designed to enforce compliance and ensure that all costs of environmental damage are paid by the firms.

Currently, the literature indicates that the available environmental laws have failed to provide an adequate legal paradigm for navigating the current environmental challenges. Specifically, the laws seem to be overly concerned with mitigation and, at times, facilitating the harmful effects¹¹. The emission trading laws in the US could be used as an example where the regulations set thresholds and limits for pollution as opposed to seeking means of prevention. This is indeed the nature of command-and-control, where no law seeks absolute results in the elimination of emissions. However, it is important to acknowledge that those laws have had tangible success in the protection of certain ecosystems and controlling damages caused by such practices as shaling. The market-based incentives cannot be expected to completely prevent emissions of removal. The rationale is that capitalist nations and consumers will pollute the environment as long as they can afford to pay the costs. Nevertheless, such a scenario may not be witnessed for countries pursuing net-zero since businesses are responsible for removal.

Therefore, it can be argued that command-and-control legislation will remain necessary, especially for economies where the costs are in the form of penalties as opposed to the removal of emissions. Across the EU and the UK, businesses can be expected to implement emission removal infrastructure, assuming the commitment to net-zero. In the US, penalties will be inadequate since businesses and individuals who can afford to pay the penalties will have an incentive to pollute. As such, the command-and-control laws will be needed to set the limits and thresholds.

Conclusion

Market-based approaches are the most effective replacement for the command-and-control environmental laws. However, there lacks adequate examples of successful implementation across the developed world, including the US, UK, and the EU. Some of the initiatives in Europe, including net-zero, have been described as potentially successful if the countries remain committed and the objectives are achieved. In the US, emission trading programs have several drawbacks that prevent the achievement of zero pollution or emissions. Even so, it has been expressed that the market-based approaches may not succeed on their own without the relevant command-and-controls. The rationale is that people who can afford penalties will not have the incentives to protect the environment. Therefore, command-and-controls could help ensure that even the rich have an incentive to reduce emission levels.

Reference List

Allas T and others, ‘Opportunities for UK businesses in the net-zero transition.’McKinsey (2021).

Chiavacci S and Pindilli E, ‘Trends in Biodiversity and Habitat Quantification Tools Used for Market-based Conservation in the United States’ (2019) 34(1) Conservation Biology 125.

ClientEarch Communications, ‘The UK Environment Act – what’s happening now?’ClientEarth (2022).

Fowlie M and Muller N, ‘Market-Based Emissions Regulation When Damages Vary across Sources: What Are the Gains from Differentiation? (2019) 6(3) Journal of the Association of Environmental and Resource Economists 593.

Grainer C and Ruangmas T, Who Wins from Emissions Trading? Evidence from California’ (2018) 71(1) Environmental and Resource Economics 703.

Guo X, Fu Land Sun X, “Can Environmental Regulations Promote Greenhouse Gas Abatement in OECD Countries? Command-and-Control vs. Market-Based Policies’ (2018) 13(12) Sustainability 1.

Kivimaa P and Martiskainen M, ‘Dynamics of policy change and intermediation: The arduous transition towards low-energy homes in the United Kingdom’ (2018) 44 Energy Research & Social Science 83.

Mai L and Boulot E, ‘Harnessing the transformative potential of Earth System Law: From theory to practice’ (2021) 7(1) Earth System Governance 1.

McKinsey & Co, ‘How the European Union could achieve net-zero emissions at net-zero cost. McKinsey Sustainability (2020).

Portney P, ‘Market-Based Approaches to Environmental Policy: A “Refresher” Course.”Resources (2020).

Footnotes

ClientEarch Communications, ‘The UK Environment Act – what’s happening now?’ClientEarth (2022).
Meredith Fowlie and Nicholas Muller, ‘Market-Based Emissions Regulation When Damages Vary across Sources: What Are the Gains from Differentiation? (2019) 6(3) Journal of the Association of Environmental and Resource Economists 593.
Scott Chiavacci and Emily Pindilli, ‘Trends in Biodiversity and Habitat Quantification Tools Used for Market-based Conservation in the United States’ (2019): 34(1) Conservation Biology 125.
Paul Portney, ‘Market-Based Approaches to Environmental Policy: A “Refresher” Course.”Resources (2020).
Tera Allas, Harry Bowcott, Alastair Hamilton, and Virginia Simmons, ‘Opportunities for UK businesses in the net-zero transition.’McKinsey (2021).
Ibid.
McKinsey & Co, ‘How the European Union could achieve net-zero emissions at net-zero cost. McKinsey Sustainability (2020).
Meredith Fowlie and Nicholas Muller, ‘Market-Based Emissions Regulation When Damages Vary across Sources: What Are the Gains from Differentiation? (2019) 6(3) Journal of the Association of Environmental and Resource Economists 594.
Paula Kivimaa and Mari Martiskainen’ Dynamics of policy change and intermediation: The arduous transition towards low-energy homes in the United Kingdom’ (2018) 44 Energy Research & Social Science 84.
Xu Guo Lin Fu, and Xiaohua Sun, “Can Environmental Regulations Promote Greenhouse Gas Abatement in OECD Countries? Command-and-Control vs. Market-Based Policies’ (2018) 13(12) Sustainability 2.
Laura Mai and Emille Boulot, ‘Harnessing the transformative potential of Earth System Law: From theory to practice (2021) 7(1) Earth System Governance 1.

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