Document Type

Working Paper


Available under a Creative Commons Attribution Non-Commercial Share Alike 4.0 International Licence


Environmental and geological engineering


Progress has been made from the "either-or-scenario", whereby environmentalists regarded the market as an implacable enemy. The market is instead proving to be a potentially powerful ally. The rigidity of the traditional regulatory system with its mandatory approach is far from the ideal. An economic incentives approach has special merit in that it allows polluters a certain freedom of choice in the matter of compliance with pollution thresholds. This has important implications in the area of information. One of the barriers to perfect information is the private nature of information. Freedom of choice of policy in regard to achieving environmental goals means that individual firms can, by basing their options on the inherently superior information available to them, reach common objectives at minimum cost. Technical innovations, spurred on by economic incentives and superior information, should make attainment of standards easier.

The US programme issues emissions reduction credits calculated on the surplus reductions in excess of predetermined standards on a baseline date. As only existing polluters receive credits, this approach is known as "grand fathering". Various rules cover the subsequent accumulation and use of credits.

Europe and Japan favour emissions charges. The general principle underlying such taxes is to make the polluter pay. Helm and Pearce enumerate the problems associated with such taxes in their income and their substitution effects.