Marketbased Approaches for Environmental Protection

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Market-based Approaches for Environmental
Protection

• Prof Tollefson
• Law 329
• November 27, 2007

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Topics covered

• Why the rise of market approaches?
• Concepts terminology (market failure, public
  goods, externalities, social and private costs)
• Supply-side methods of counteracting market
  failure (regulation/fines taxes/subsidies
  tradeable permits)
• Demand-side approaches (market campaigns,
  boycotts procurement policies certification and
  eco-labelling)

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Fathoming the rise of market approaches to env
protection

• What do we mean by market-based approaches and
  why have they achieved such popularity?
• Factors in their rise
• Ascendancy of Economics as a discipline/lens
• Declining faith in command and
  control/regulatory state
• Business lobby
• Government cutbacks
• US experience under Clean Air Act...

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Key concepts I

• Market failure where the market, left alone,
  fails to produce socially optimal outcomes
• A prime example are public goods (goods that
  can only be produced, if at all, collective
  action)
• Examples include parks, species protection,
  various environmental amenities

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Key Concepts II

• Externalities (negative and positive)
• Also are a form of market failure
• Negative externalities imposition of
  un-bargained for harms on third parties via the
  market (failure of cost internalization)
• Positive externalities benefits for which
  generator is not compensated by the market
• (failure of benefit capture)

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An illustration from BC forestry

• 2 main sources of market failure in BC forestry
• The private cost of timber harvesting is less
  than the social cost (resulting in negative
  externality of associated impacts on non-timber
  values)
• The private benefit of sustainable forest
  practices is less than the social benefit
  (resulting from inability of firms to capture
  benefits associated with such practices)
• See B. Scarfe, in Wealth of Forests (at 198)

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Supply-side approaches to combat market failure

• Prohibition i.e. Fisheries Act
• Pollution permitting i.e. BCs EMA
• Taxation grants subsidies (depreciation
  allowances favourable tax treatment for land
  under conservation covenants/organic farms)
  output taxes (emission or carbon-based)
• Tradeable property rights-based approaches (US
  Clean Air Act)

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Tradeable Permits I

• How does cap and trade work?
• T-1 recognize and allocate a right to pollute
  normally by enshrining in law existing permit
  allocations
• T-2 cap total quantum of allowable emissions to
  decline over time
• T-3 create permit trading system
• NOx and SO2 markets in US also in the EU and a
  major feature of the Kyoto Protocol

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Tradeable Permits II

• Critiques?
• Practical concerns existing entitlements
  newcomers monopolistic outcomes policing
  enforcement
• Role of the state abdication of control over
  outcomes?
• Values marketization of public domain means-end
  issues

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Demand-side responses to market failure

• Illustrations market campaigns boycotts
  procurement policies eco labelling
  certification
• Why go this route? Cost efficiency (lower
  monitoring costs promotion of competition
  subsidiarity principle)
• Problems imperfect information transaction
  costs greenwashing
• Illustrations consider the Forest Stewardship
  Council

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Concluding thoughts questions

• What should be given priority demand or
  supply-side solutions to market failure?
• Does our earlier discussion about smart
  regulation suggest any insights into this
  question?
• To what extent are inadequately defined and
  protected property rights the cause of our most
  pressing environmental problems?
• How helpful is market failure as a way of
  thinking about environmental law reform?