Positive Political Economy of Instrument Choice in Environmental Regulation

In the realm of environmental policy instrument choice, there is great divergence between the recommendations of normative economic theory and positive political reality. Four gaps stand out. First, despite the advantages of market-based policy instruments, they have been used to a minor degree, compared with conventional, command-and-control instruments. Second, pollution-control standards have typically been much more stringent for new than for existing sources, despite the inefficiency of this approach. Third, in the few instances in which market-based instruments have been adopted, they have nearly always taken the form of grandfathered tradeable permits, rather than auctioned permits or pollution taxes, despite the advantages in some situations of these other instruments. Fourth, the political attention given to market-based environmental policy instruments has increased dramatically in recent years. We search for explanations for these four apparent anomalies by drawing upon intellectual traditions from economics, political science, and law. We find that all fit quite well within an equilibrium framework, based upon the metaphor of a political market. In general, explanations from economics tend to refer to the demand for environmental policy instruments, while explanations from political science refer to the supply side. Overall, we find that there are compelling theoretical explanations for the four apparent anomalies, although these theories have yet to be empirically verified.