Question

Question 1: Economists often argue that market-based (incentive-based) environmental policy is preferred to so-called Command and Control standards setting.

---- b. Explain the role of emissions taxes and tradable pollution permits in creating socially efficient incentives for production and consumption of environmentally unfriendly economic growth.

---- c. Now, consider the issue of politics. What are the realities of incentive-based environmental policy that make them difficult sells to the voting public? In what ways to incentive-based policy avoid politics? How?

Answer 1

Environmental policy makers have two types of instruments to control over the consumption and production habits in society. One is command and control approaches and another is economic incentive or market-based policies. This policy helps to reduce and eliminate negative environmental externalities. Economists often argue with these above mentioned policies, however command and control approaches is considered as traditional way and incentive or market-based policies is the new environmental policy. Command and control regulatory approach include emissions standards, process/equipment specifications, requirements to disclose information, and audits, limits on input/output/discharges. Inspections are then used to ensure the company is meeting the set standard or not, If not meeting then a sanction would result, such as a fine or prosecution. Incentive-based regulatory approaches are also referred as market-based approaches because the market, the private-sector companies, is driving the change. In this approach, companies are rewarded with some financial gain and incentives are given for incorporating pollution reduction into their business decisions. In command and control approach companies are motivated to reduce pollutants to a regulated level. In incentive-based approach rewards are given to companies for reaching even lower pollution levels. The benefit of the incentive-based approach encourages the creation of innovative and cost-effective methods of pollution control.
Pollution emission tax is designed to reduce pollution and its negative effect on the environment. Company causing pollution pays for the cost of removing it or gives compensation to those who have been affected by it. The tax rate is reduced if emission rate is too little, and vice versa. In tradable pollution permits the companies have legal rights to pollute a certain amount in a time span. Companies sell their left over pollution permits to the firms that pollute more. In this way emissions taxes and tradable pollution permits creates a socially efficient incentives for production and consumption of environmentally unfriendly economic growth.
Public choice method used to explain the discrepancy between economic theory and political reality in environmental politics. In order to analyze the environmental policy it is important to identify the various factors involved and their interests and impact in the political decision-making process, respectively. Professionals, decision makers more carefully assess the impact of payments for ecosystem services, funded by national governments, on social and environmental outcomes. In this way incentive-based policy avoid politics.