Some general observations on policy instruments
Although it has not been exhaustive, this review of policy instruments and their respective advantages and disadvantages has highlighted some of more important issue arising from the means for achieving environmental goals. Some common economic evaluation threads are discernible in the examination of the instruments, whether priced or regulatory.
First, a key factor from an economic viewpoint is whether the measures are cost-effective and/or efficient. These criteria will not be rehearsed at this point except to state that although conceptual it is possible to appraise the effect of the instruments, in practice it is extremely difficult, especially with those which are regulatory. In general, economists conclude that price instruments are more cost-effective and efficient.
A second and equally crucial issue is that for nearly all the instruments considered, assumption of an identifiable limit to the marginal social cost (or benefit where grants and subsidies are being offered), which the instrument will prevent being exceeded. Two observation are apposite. The first is the practical difficulty of ascertaining the allowable environmental damage, which is the foundation of the concept of limits to acceptable changes as an environmental target. The second is that the economic optimum, towards which the instrument are meant to guide activity, does not necessarily accord with optimal position propounded by other disciplines, such as ecology; see the relative position regarding the level of activity of the private sector (OP), the economic optimum (OS) and the ecological optimum (OE) in figure 9.4 for example, the European Union Bathing Waters Directive identified standards (environmental indices) which are relevant to human health and consumer satisfaction but which are not relevant to the marine environment and its biodiversity. Regulation may be more arbitrary if it is decided that a reduction in environmental damage is desirable per se without any reference to an economic or any other optimum or assimilative capacity of the environment, as shown in figure 9.4.
Another aspect which emerges is the equity issue; in particular whether the polluter pays principle is actually effective. A further dimension of this issue is the degree of regressiveness (i.e. lower income groups pay proportionately more than higher income groups) of the instruments, irrespective of whether the burden falls on consumers rather than producers. The basis economic concept of elasticity of demand and supply gives insights as to the possible burden, while knowledge of variations in demand elasticity over different incomes offers evidence on the degree of regressiveness of specific instruments. Clearly, the more inelastic demand is for products in relation to supply, the more the burden of an environmental charge or tax fall on the consumer. Priced instruments, especially if they are specific rather than ad valorem, i.e. levied at a flat rate rather than on a percentage basis, in essence being in their effect like indirect taxes, are usually regressive. Their impact can be offset by governments compensating lower-income group, but using revenue from charge and tax from this way may reduce the funds available for environmental improvements where the public sector is responsible for implementing them. Much the same arguments apply to the differential effect on specific firm or industries where the instruments distort the allocation of resources.
Passing reference has been made to the implementation of the instrument but this aspect needs to be spelt out more fully. There are a number of evaluation factors for judging whether instruments are both effective and workable. Effectiveness concerns the achievement of the particular aim or objectives, whereas the extent to which instrument are workable is more a function of cost and feasibility. Costs arise when there is a requirement to administer an instrument. It becomes necessary to ask whether such administration can be undertaken through existing structures-such as the fiscal authorities for the collection of charges, taxes and payment of subsidies or tax relief, the land-use planning system for regulation, and specialist environmental bodies for licence or permit or quotas-as opposed to setting up specific organization and structures.
There may also be a requirement for monitoring activities and enforcing compliance. In addition there are the operating costs incurred by those subject to instrument, especially the ones more firmly set in a market context, for example the transaction cost of securing a tradable permit or quotas. Other factors determining whether particular instruments are feasible or not are the ease or difficulty with which the natural, sources and possible sufferers of environmental problems can be identified, the possibilities of ascertaining and measuring the extent to which their impact has unintended and detrimental effects and how far they are considered acceptable by society in general and the business sector in particular.