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Tuesday, April 14, 2009

Stavins: The Making of a Conventional Wisdom

Robert Stavins wonders why people have become more receptive to market based solutions to environmental problems:

The Making of a Conventional Wisdom, by Robert Stavins: Despite the potential cost-effectiveness of market-based policy instruments, such as pollution taxes and tradable permits, conventional approaches ... have been the mainstay of U.S. environmental policy since before the first Earth Day in 1970.  Gradually, however, the political process has become more receptive to innovative, market-based strategies.  ...[gives examples]...

Why has there been a relatively recent rise in the use of market-based approaches?  For academics like me, it would be gratifying to believe that increased understanding of market-based instruments had played a large part..., but how important has this really been?  In 1981, my Harvard colleague, political scientist Steven Kelman surveyed Congressional staff members, and found that support and opposition to market-based environmental policy instruments was based largely on ideological grounds: Republicans, who supported the concept of economic-incentive approaches, offered as a reason the assertion that “the free market works,” or “less government intervention” is desirable, without any real awareness or understanding of the economic arguments for market-based programs.  Likewise, Democratic opposition was based largely upon ideological factors, with little or no apparent understanding of the real advantages or disadvantages of the various instruments.  What would happen if we were to replicate Kelman’s survey today?  My refutable hypothesis is that we would find increased support from Republicans, greatly increased support from Democrats, but insufficient improvements in understanding to explain these changes.  So what else has mattered?

First, one factor has surely been increased pollution control costs, which have led to greater demand for cost-effective instruments.  ...

Second, a factor that became important in the late 1980’s was strong and vocal support from some segments of the environmental community.  By supporting tradable permits for acid rain control, the Environmental Defense Fund seized a market niche in the environmental movement...  Related to this, a third factor was that the SO2 allowance trading program, the leaded gasoline phasedown, and the CFC phaseout were all designed to reduce emissions, not simply to reallocate them cost-effectively... Market-based instruments are most likely to be politically acceptable when proposed to achieve environmental improvements that would not otherwise be achieved.

Fourth, deliberations ... differed ... in an important way:  the separation of ends from means, that is, the separation of consideration of goals and targets from the policy instruments used to achieve those targets.  By accepting ... the politically identified (and potentially inefficient) goal, the ten-million ton reduction of SO2 emissions, for example, economists were able to focus successfully on the importance of adopting a cost-effective means of achieving that goal.

Fifth, acid rain was an unregulated problem until the SO2 allowance trading program of 1990; and the same can be said for leaded gasoline and CFC’s.  Hence, there were no existing constituencies ... for the status quo approach, because there was no status quo approach.  We should be more optimistic about introducing market-based instruments for “new” problems, such as global climate change, than for existing, highly regulated problems, such as abandoned hazardous waste sites.

Sixth, by the late 1980’s, there had already been a perceptible shift of the political center toward a more favorable view of using markets to solve social problems. ...  as was evidenced by deliberations on deregulation of the airline, telecommunications, trucking, railroad, and banking industries. Indeed, by the mid-1990s, the concept (or at least the phrase), “market-based environmental policy,” had evolved from being politically problematic to politically attractive.

Seventh and finally, the adoption of the SO2 allowance trading program for acid rain control - like any major innovation in public policy - can partly be attributed to a healthy dose of chance that placed specific persons in key positions, in this case at the White House, EPA, the Congress, and environmental organizations.  The result was what remains the golden era in the United States for market-based environmental strategies. [...list of refereneces...]

    Posted by on Tuesday, April 14, 2009 at 12:33 AM in Economics, Environment, Politics, Regulation | Permalink  TrackBack (0)  Comments (24)

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