Tinkering with the market to save the planet
Markets, the state and the environment — towards integration
Edited by Robyn Eckersley
MacMillan Education Australia, 1995. $32.95
Reviewed by Chow-Wei Cheng
This book contains papers that were presented to a one-day workshop on "Bureaucracy, Markets and the Environment" held at Monash University in October 1992. The participants include Australian and international academics from economic, political and legal disciplines, as well as government representatives and an Australian Conservation Foundation member.
The book argues for a more market-based approach to environmental policy, as an alternative to the "traditional approach" of setting environmental standards by direct legislation.
The market-based approach is interpreted to include "not only new economic instruments such as environmental taxes, charges, subsidies, and tradeable emission permits but also other policy tools that directly or indirectly structure the market place in ways that make commercial decisions more compatible with environmental public policy objectives".
The "traditional approach" of setting environmental standards by direct regulation sees economic policy as largely in tension with environmental policy. Thus the task of government is to "balance" or "trade off" environmental protection and economic growth.
An explicit theme throughout the contributions is that environmental regulation impedes both environmental performance and industry. Further, it's claimed "that regulatory capture is not only bad for economic innovation but also bad for democracy".
Traditional regulation is said to lack both efficiency and legitimacy. Market-based solutions are supposedly more efficient if they provide the same outcome at a lower cost and provide incentive for technological innovation. Traditional regulation is seen as lacking credibility due to lax monitoring and enforcement by the state.
The book surveys the literature of conventional economics in relation to the interaction of the environment and the market. These theories are essentially the environmental (welfare) economics approach, free market environmentalism and constrained market environmentalism.
The environmental economics approach argues that markets fail to take into account full environmental cost because the environment is a public good or a "free resource". As such, it does not enter into the pricing and production decisions of firms.
The solution is therefore to find a means to incorporate the environmental cost into production. This is usually achieved through taxation, though the problem of actually measuring the environmental effects is the main flaw in this theory. Furthermore, if properly measured, the taxes would be massive and likely to send the companies out of business, which is contrary to the government's objectives.
The free market approach argues that government intervention is ineffective and that environmental problems are caused by a lack of markets and property rights for the environment. If property rights over the environment are defined, then the problem can be addressed through voluntary transactions among those causing and suffering environmental degradation. Thus the solution is to privatise the environment and allow market participants to trade these rights. This argument backs the use of tradeable emission permits.
Constrained market environmentalism argues that there is merit in both of the above techniques but that the task of environmental economists is not just to seek the optimal allocation of resources but also to seek an optimal ecological scale of resource usage. Economy-environment integration exists when the economy operates within the carrying capacity of the parent ecosystem.
This argument supports the use of environmentally sustainable planning by the state, which introduces ceilings, bottom lines, minimum standards and general limits to contain and channel market transactions.
The book finds that environmentalists have tended to be hostile to privatisation of the environment because it removes the assets from public control and because private property holders cannot be relied upon to act according to environmentally sustainable objectives. For example, tradeable emission permits amount to the right to pollute. Instead environmental charges and taxes have been at the centre of fiscal policy for green parties and the environmental movement.
The book also looks at the view of industry which has supported free market incentives and tradeable emission permits and other instruments that offer incentives rather than monetary coercion. Business has been hostile to taxes, which result in the relocation of production to countries and areas that are legally "pollution havens".
One problem discussed is the regressive nature of environmental taxes. Where taxes are imposed on goods which consumers need, it is the average consumer (and the poorer consumer is disproportionately worse off) who pays, not the companies that pollute.
Governments have been keen to use such regressive taxes because they raise more revenue; one example is the British government's decision to introduce a VAT tax on fuel in 1993. The editor argues that this is not necessarily a bad thing, because the revenue that the government raises can be used to finance business to find alternatives.
The book also touches on the issue of democracy. Some theories state that the bureaucratic nature of the state means that politicians are ineffectual in enforcing an environmental agenda. One contributor argues that more avenues for accessibility are needed, such as public hearings, impact assessments, policy dialogue and regulatory negotiation.
The book concludes that a variety of approaches and policies are needed to provide an "optimal outcome". On the whole the book places an enormous faith in the market and business to solve environmental problems. On the whole it suggests tinkering with the profit system with a bias towards "free market" mechanisms.
Nowhere do any of the contributors acknowledge that it is the very nature of the profit system that breeds environmental vandalism through the lack of accountability of businesses to people. Furthermore the capitalist state which serves the interests of business cannot be relied upon to change business on behalf of the rest of society.
Blinded by neoclassical economics, the book's contributors do not grapple with the realities of the market and the private profit system, and so do not contribute to any real discussion about the path to environmental sustainability.