Non-monetary instruments: regulation and standards
As with both permits and quotas, regulation and standard, often referred to as command and control, are of interest in economics because of the effect they have on consumer price and production costs and therefore markets. They have also been widely applied in many countries with respect to air emissions, effluent discharges and noise, so that it is possible to assess the effectiveness of regulation in achieving environmental goals. In economic term the monetary assessment of the cost of standard and targets in comparison with the benefits of achieving a reduction in pollution and/or an environment improvement can be considered at two levels. The attainment of maximum economic efficiency requires that regulation should be judged by whether net social benefits are maximized. At a lower level it can be appraised on a cost-effective basis, the criterion being that benefits should exceed costs for given environmental objective. Hartwic and Olewiler (1998) have published an accessible review of regulatory instruments and Perman et al. (2003) provide a comprehensive and quantitative exposition.
The appeal of regulation is that it may obviate the need to estimate the required level of, for example, pollution or resource use, its certainty in attaining specified targets, its transparency, its acceptance by the main sectors of society, especially industry, its relative simplicity in monitoring and enforcing compliance and the placing of responsibility for meeting identified standards on those causing problems. On the other hand, in most countries there is no coherent regulatory strategy. Most policies have been introduced to deal with particular problems. Promotion of national, let alone international, standards and regulation is still in its infancy. For example, the environmental mediums of air, water and land have been considered individually and it is only recently that a more integrated approach has been advocated to reach an agreed standard, for example parts per million of pollutants. These standards tend to be technologically based, with the cost of the investment required to meet them taken into account. For instance, the EU has adopted what is termed the best practicable environmental option (BPEO). Other suggested approaches are best practical means (BPM), best available technology (BTA) and best available technology not involving excessive cost (BATNIEC). Nevertheless, with increasingly rigorous standards and consumer pressure to effect environmental improvements, the burden on producers is likely to increase, with cost consequences which may be passed on in the form of higher product prices. Moreover, greater inflexibility may be introduced the more aggregative the regulation, so that variations in local and industry level conditions are not reflected. It is possible that the effectiveness of regulation may diminish over time because those subject to it will influence the body responsible for administering it. This occurs because both parties need to confer to implement regulations. An analogous example is the procurement of planning permission by property developers, which has been termed ‘rent seeking’ (Evans, 1982),Particularly when there are opportunities for mutual benefits to both parties, for example ‘planning gain’, whereby the community secures, say, leisure facilities within an allowed development.
These observations point up the necessity of there being an effective institutional structure institutional structure involving central and local government and NGOs to administer, monitor (as in the operation of non-transferable licences on pollution levels) and enforce the regulation instruments. This is underlined by the fact that in practice there are multiple environmental objectives, embracing economic efficiency, health and safety, equity, technical feasibility, sustainability and political objective to meet national and international policies. The benchmark for institutional action is the existence of uncertainty, very often arising from a lack of information on the source, level and impact of environmental problem. Regulation practice proceeds by the adoption of such principles as the polluter pays (if identified), safe minimum standard (SMS), embodying approaches like BPEO and BATNIEC given in the previous paragraph, and the precautionary principle that endeavours to satisfy the multiple objective identified above.
Basically, the institutional role can be effective by working towards the internalization of the externalities of inequity, use of open access resources (public goods cases), pollution and environmental degradation, by facilitating the defining of property right so that the legal system can determine responsibility for mitigation of environmental problems. The role can also be performed by simply banning the use of inputs or production of output that give rise to hazardous wastes, land-use zoning through the planning system to separate more industrial activity and transport system generating pollution from residential locations, and the dissemination of information and education. Moreover, regulation can work in conjunction with priced instrument; for example through non-compliance charge for exceeding landfill quotas or failing to recycle waste. Financial redistributions can be made to environmental schemes, such as revenues from mineral extraction regulation and compensation to those who suffer from preventable action. For example, the pollution of potable water supplies by the utility company responsible for its delivery in a state fit for human consumption can be legally forced to make compensation payments to those adversely affected by for instance, suspension of supply to deal with the problem.