Economics and the Environment, 8th Edition

CHAPTER 17Promoting Clean Technology: Theory

17.0 Introduction

Since the 1960s, environmental economists have made the case for a switch away from command-and-control (CAC) regulation toward incentive-based (IB) approaches. Their response to the question “How can we do better?”: “We can achieve the same pollution-reduction goals at much lower cost.” The previous chapter illustrated how, slowly, through a series of increasingly complex policy experiments, the cap-and-trade idea in particular has taken hold. Today, this concept has achieved broad acceptance, and IB approaches dominate new regulatory initiatives across the planet. To attack global warming, global carbon trading—under a shrinking cap—has become a fact of life in Europe, has been implemented on the east and west coasts of the United States, and is on the table in China and Korea.

While IB advocates prescribed better regulatory design for our environmental problems, a more fundamental criticism has been leveled at any regulatory approach to pollution control, including both CAC and IB. As discussed at the end of Chapter 14, regulation faces three generic problems: (1) rapid economic growth, (2) rising marginal costs of control (the “easy” point and stationary sources are already controlled), and (3) leakage (pollution regulated in one medium squeezing out elsewhere). As a result, regulation alone, even when incentive-based, may not be sufficient to achieve environmental goals.

Moreover, we have seen that regulation ...