Originally, law did not have much regard for the environment. However, as time has progressed we have become increasingly aware of the importance of ensuring the health of our environment. Nowadays, law is largely tailored to accommodate economic concerns whilst holding conservative regard to environmental factors and vice versa. Governments achieve this through dynamic policy approaches. Although global agreements on climate change cannot currently be met, the issue of climate change is at the forefront and it is the responsibility of our government to implement a policy in order to achieve a reduction in Australia's greenhouse gas (GHG) contribution whilst holding regard to the economy.
A policy is designed in a particular and systematic manner in order to influence behavior in a certain way. However with so many elements to consider, it is difficult to find a single policy approach to satisfy every aspect of the issue and the desired outcome is often shadowed by the need to satisfy other areas. Although there is much debate about the benefits of different policy approaches, on the 1st July 2012 Julia Gillard's Carbon Tax was implemented as an economic instrument against GHG emissions. This paper explores the merits of economic instruments, such as the carbon tax (CT) and emissions trading schemes (ETS) in contrast with a carbon cap, direct regulatory policy approach and compares which is the most suitable policy approach in regulating GHG emissions.
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Direct regulation, commonly referred to as command and control "prohibits activities with undesirable consequences" (Fisher, p 200). This is achieved through the government imposing a duty upon a resource developer to apply for approval to operate. Accompanied with this approval is a duty to comply with the set standards which may be enforced by a criminal, civil or administrative sanction (FISCHER, p 200). In other words, a resource developer must have approval to emit GHG and are only able to do so up to an imposed standard. Failure to do so may result in fines or imprisonment.
Alternatively the issue of carbon pollution may be approached using economic incentives which is evident in the carbon tax. These incentives are designed to stimulate a particular market by imposing levies. In this instance the government would ideally target sustainable development, in particular stimulate the renewable energy market. The idea of the carbon tax is to increase to cost of our resources for developers, forcing them to seek more cost effective energy or pay the price. Economic incentives may present themselves as instruments such as commercial or financial incentives. In the case of the CT a financial disincentive is used and imposes an obligation or duty on the resource developer to pay a tax on GHG emissions (Fisher, p 206). Failure to pay this tax sees the resource developer subject to a remedy. Another market based option proposed to combat GHG emissions is the ETS. This revolves around emissions trading permits available to sell or trade depending on an individual developer's needs.
Traditionally, the exercise of power to enforce prohibition was the dominating approach to environmental regulation. Directly regulating environmental issues in this manner has therefore been the policy approach for centuries and it is very well understood. It is for this reason that policy developers are reluctant to move away from this design (Helm, pp205-228). The notion of command and control appears extremely effective at achieving an environmental outcome as it requires compliance and is usually accompanied by strict remedies. This method however is becoming increasingly replaced or complimented by other policy approaches such as economic incentives due to the broad effect of the latter on encouraging a sustainable market.
The many merits of economic incentives are being realized over time and are becoming increasingly popular as a modern approach to policy development. Although they still impose a degree of enforceability, they allow for more flexibility and utilise the economy as a powerful ally (Tietenberg, p 17). Even though there are many benefits of such flexibility (as will be mentioned in this paper), this market based approach only encourages a GHG reduction rather than demanding results. As noted in (Fischer, p 208) "The imposition of a charge does not prevent pollution or harm to the environment". A resource developer may continue to emit large amounts of carbon whilst adhering to guidelines of the carbon reduction policy is they are still producing notable profit. It is for this reason that the effectiveness of these instruments in achieving a reduction in GHG is questionable.
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In times of such great scientific uncertainty it is difficult to put a time frame on how promptly Australia needs to achieve a reduction in GHG emissions. According to CSIRO, global temperatures are rising faster than expected. In cases such as these, we should not gamble the future of our climate and should enforce a policy which is going to achieve the desired environmental outcome with the greatest assurance. Direct regulation is the policy approach that would most likely achieve a reduction in GHG emissions fastest and more definitely than a market based approach. Although there is much certainty accompanied with direct regulation, problems may arise if the remedy for failing to comply is too weak when compared with the cost of compliance. For example if the penalty for exceeding emission standards is a fine of insignificant cost, a developer may choose to emit beyond the set standard and be subject to the remedy if it proves more cost effective for them. In order for this approach to be effective, penalties would need to be harsh to successfully enforce compliance.
With that said, when introducing a policy to an issue without a short deadline, the merits of a market based approach can be profound. It is evident that "the real advantages of economic instruments are only realized over time, because they provide a continual incentive to reduce emissions" (Harrington & Morgenstern, p 15). There are countless benefits accompanied with a market based approach and these provide greater incentives over time for continuing innovation such as technology development. Although a market based policy approach may initially be costly for the resource developer, it is designed to encourage them to seek a "greener" technology alternative and hence over time a more cost effective means of operation. This interest in sustainable development via renewable energy in turn would stimulate engineers of the technological market to produce cleaner and more affordable energy sources. Furthermore, by allowing the developer to choose the most suitable technology for them personally, the technology market is stimulated and different models of renewable energy could potentially be produced. Having many renewable energy options would provide a choice and financial flexibility to resource developers as they would be able to select the most appropriate model for their practice.
Economic incentives may be favored in terms of financial efficiency as they encourage an overall reduction in costs. By altering the way in which power is enforced over the resource developer, the private sector is given more freedom and flexibility to approach the situation. Through changing the incentives, the best private choice can be made on how to partake in reducing GHG emissions (Tietenberg, p. 17). An example of this is the ETS where companies who emit less GHG's are able to sell their permits to developers who require more allowance. This approach differs from direct regulation where an authority ie. the Government calls the shots and strict standards are set. These standards accompanied with direct regulation are often difficult to determine and costly to enforce as they require constant monitoring to ensure compliance. On the contrary with the CT, a tax is simply imposed per unit of emissions. Administrative cost's accompanied with direct regulation far outweigh those of economic instruments.
Furthermore, the introduction of a carbon tax would result in an increase in the price of fossil fuels which would be both directly and indirectly carried onto consumer goods (Cornwell & Creedy, p 21). Although this may appear as a negative to consumers, economic incentives are continually generating revenue for the government due to the tax imposed per unit of carbon emitted. This revenue may be redirected into other areas of governance where it is needed, for example households or employment. On the other hand direct regulation may not generate any profit if the resource developer complies with the standards set. This factor accompanied with the costly administration of a carbon cap may see the government at a loss, financially.
With the diverse complexity of choosing a suitable policy approach, it is evident that no single design can cater to all aspects of the environmental issue at hand. When considering both direct regulation and economic incentives it is often portrayed that the two are mutually exclusive. This dichotomous view is not correct, rather in order to preserve our beautiful environment whilst considering the social and economic impacts, it is more fitting to apply indices from a combination of policy approaches.
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Although direct regulation is more reliable at achieving a desired outcome, there are more likely to be beneficial effects on the economy over time when selecting a market based approach. In the case of GHG emissions and global warming, there is little room for implementing a policy that is not going to provide results, thus command and control is a pragmatic approach. Having said that, through using command and control to solve one problem we may be creating many more in regards to social and economic implications. On the other hand, "Economic instruments do not discriminateâ€¦.and are dynamic in effect" (Helm, p 207), suggesting that they are a much more versatile approach in regards to satisfying different tiers of the issue with the assumption that time is not an issue.
In addition, a command and control approach highlights bad performers or parties violating standards (Ehrlich, p 97). This reflects badly on the company and portrays a negative reputation. It is for this reason that a market for "going beyond compliance" may establish in order to enhance ones competitive standing (Ehrlich, p 97). Introducing a program that recognises and rewards companies going beyond compliance could encourage a more successful policy when applying command and control. A positive aspect of economic incentives is that the resource developer is reducing their tax cost's for every unit of carbon that they do not emit, given that the tax is significant.
It is evident that both direct regulation and economic incentives are coupled with positives and negatives. In conclusion, "Environmental problems are far too heterogeneous to expect any single set of criteria to be universally effective" (Swaney, J., 623). In the case of reducing Australia's GHG emissions, the certainty of direct regulation is highly favourable yet the many economic drivers associated with a market based approach are invaluable to the environment. A suitable policy approach would be neither one nor the other, rather it would be tailored to fit a particular problem. A method to combat the flaws of each policy approach would be to selectively encompass positive elements of each approach. For example, in order for an economic incentive approach to have a greater chance at success, it would "integrate an underlying command and control approach" (Ehrlich, p 97). Such a policy could combine the certainty of direct regulation with the cost effectiveness, technological innovation and flexibility of an economic incentives approach. The ETS employs a degree of "control" in the sense that there is a total amount of emission allowed nationally and these can be flexibly traded to provide efficiency. In contrast the carbon tax whilst encouraging technological development and financial efficiency does not ensure a reduction in emissions.