What levers do governments have to achieve their environmental objectives…

The evolution of environmental policy

• Little attention prior to 1960/70’s

• Post 1960s/70s• regulation primarily command and control (C&C) (prescriptive about what can and can’t

be done) with some considerable success• policy focussed on direct provision (e.g. management of parks) though limited in its

effectiveness

• Policy has evolved:• shifting to more incentive based regulation• design strategies capable of achieving results even in the absence of a credible

enforcement

The evolution of environmental policy• Challenges:

• shrinking resources - “biggest bang” from a much diminished “environmental buck”

• using markets and incentives to provide environmental benefits cost effectively

• political landscape• gaps in information/science (demand side information)

• What policy levers are available to government to achieve environmental outcomes in the interests of the community?

Environmental policy levers options..

Regulation Investment Indirect levers

Command and control Direct provision Moral suasion

Grants and subsidies

Voluntary regulation

EducationIncentives

Regulation• What is it:

– rule or directive, usually given by an authority– some kind of action can usually be undertaken if not complied with– variety of forms – from prescribing conduct (C&C) to calibrating incentives between

players (incentive based)

Command and control (rules based)

Incentive based

Flexibility to respond at least cost

Command and control• Imposes prescriptive rules on how people or business

should/shouldn’t act

• ‘Command’ sets the standards/targets by Government that need to be complied with

• Backed up by legal sanctions, or ‘control’, if standards are not met

• Rules can be set either through legislation or by regulators empowered by legislation to define rules

C&C: Strengths and weaknesses• Strengths

– transparent and unambiguous limits– defined paths of recourse– sends a signal that the issue is of importance

• Weaknesses– complex, inflexible and sometime over-intrusive – can be hard to choose the ‘right’ rules– enforcement costly

Incentive regulation• What is it?

– aim is to induce people or businesses to change behaviour by imposing an incentive (e.g. taxes or granting a subsidy)

– rewards (or penalises less) desirable behaviour

– there is a path of recourse for non-compliance (e.g. tax not payed)

– more flexible and less prescriptive than ‘command and control’.

Examples• Taxes –set on production or consumption - encourage consumers and producers to

adjust their consumption and production patterns

• Can raise revenues• Australian Petroleum resource rent tax - raised over $28 billion since introduction in 1986

• Can be revenue neutral• British Columbia’s Carbon Tax - $1 billion revenue in the 2013 was redirected into personal

and business income tax cuts.

• Trading schemes - impose quantitative limits on resource use with credits developed tradable between businesses.

• Carbon emissions trading scheme (cap and trade)• Native vegetation offsets (cap and trade – no net loss)• Fishing licences (cap total quantity of fish)

Price versus quantity based incentive regulation

• Price based• set a price that will have to be paid if undesirable actions are undertaken (tax)• can estimate upper bound on cost to regulated parties ex-anti - E.g. if actions don’t

change• harder to predict how this will translate into a reduction in undesirable activity/outcome

• Act the same and pay the tax?• Change behaviour?

• Quantity based• set quantity, assign property rights (cap and trade)• price is revealed through trade• easier to predict reduction in activity/outcome• harder to predict cost to regulated parties• flexibility – market can allocate changes in actions to those who can do so at least cost.

Strengths and weaknesses• Strengths

– allows choice - conform to the rule, or pay not to?– encourages technological innovation – not prescriptive

• Weaknesses

– difficult to predict impacts on both environment and costs to individuals/businesses upfront.

– may reward polluters (e.g. reduction against a business as usual baseline)

Voluntary regulation• What is it…?

– voluntary version of regulation– examples:

• business monitoring and publically reporting on its own performance• trade association setting rules of conduct/standards• independent certification

– varying consequences of non-compliance.• often revoking association membership/certification

– can include some government oversight of the regulation, but often seen as a way of business taking pre-emptive action

Voluntary regulation• Strengths

– can be well-informed with a high level of commitment from firms – low cost to government– easy to change to fit circumstances – no need to go through legislative

change procedures– “realistic” standards created as led by industry

• Weaknesses– could be self-serving /undemocratic – may not adequately factor in

the public interest– weak enforcement

• self regulation – incentives withhold/misrepresent information• certification/industry association – revenue comes from fees from

businesses – incentives to stay on their good side!

Direct Provision• What is it…?

– government provides goods or services on behalf of the community…– response to public goods market failure

• Strengths– useful when there are issues with private provision

• concerns around safety• private parties may face incentives not to act in interest of environment

(moral hazard)• when government holds required resources/knowledge (e.g. expensive

technologies)

• Weaknesses– no competition – may lead to inefficient provision

Grants and subsidies Government pays individuals/businesses (in full or in

part) to act in a way that benefits the environment

Acts to align objectives of businesses/individuals (e.g. profit maximising) with environmental objectives

Moral suasion• What is it?

– attempt to coerce individuals or businesses to change behaviour.• no use of regulation or incentives

– two broad types:• can be an appeal to ‘do the right thing’ (moral)• can be threat of repercussions in the future

– can be effective during short-term crises situations, such as wars, water shortages, or financial instability

– Examples• anti-litter campaigns• recycling

Moral suasion• Strengths

– non restrictive => low stakeholder opposition– can be easily updated – no legislative change processes

• Weaknesses– compliers face the cost of taking action– non compliers free ride of actions of compliers– fuels speculation/creates uncertainty about direction of future regulation

• can undermine or delay the implementation of legislation– no immediate path of recourse for non compliance

Education and extension• Information and education can motivate people or businesses to change

their behaviour

• Might show that behaviour change is in interests of individual/business

• May demonstrate the impacts on behaviour on others/environment• overlaps with moral-suasion

• Might show how to do something that is already being done more effectively

Strengths and weaknesses• Strengths

• usually non-controversial• low cost and quick to implement – particularly electronically• non-restrictive

• Weaknesses:• no path of recourse if behaviour doesn’t change

• Information provision is likely to be effective when:• the desired action is in the person’s/businesses best interests – they just don’t

know it yet!• using a broad definition of ‘interest’ this could include where information

reveals that an activity is causing harm to another..

Summary and conclusion…• Market failures invite Government intervention to foster more efficient markets and socially desirable

outcomes

• Policy makers have a broad suite of policy levers• Regulation• Direct provision• Voluntary MBIs• Moral suasion• Information/education

• These all have strengths and weaknesses

• Need to tailor solutions to specific characteristics of the environmental problem

• Selection of the appropriate policy lever is an important first step in best delivering environmental outcomes for the community!