The student of environmental policy is exposed to a myriad of policy instruments the government can employ: emissions taxes, abatement subsidies, marketable allowances, regulation based on performance standards or technology, property rights, deposit-refund schemes, information programs, liability rules, and a number of related policy tools. When Congress crafts environmental legislation or administrative agencies promulgate rules to implement environmental policy goals, they must choose from among these policy tools. In an ideal world, they would employ those instruments that will allow the government to meet its goals at the lowest possible cost subject to external constraints.
One consistent message from the environmental economics literature is that incentive-based instruments are a more cost-effective means to achieve environmental goals than alternative policy instruments such as technology-based standards.(1) In practice, however, this counsel has only rarely been heeded.(2) In the United States, environmental protection schemes have evinced more diversity than uniformity with respect to key characteristics. Perhaps this diversity should not be surprising. Consider the wide variety of activities that policy instruments are designed to promote: nonpoint source water pollution control, protection of wetlands, reduction of sulfur dioxide emissions, clean-up of hazardous waste sites, and protection of endangered species. Given this tremendous variation among environmental goals and the means of achieving those goals, is there any reason to expect that when it comes to implementation we can exercise a one-size-fits-all approach to instrument choice?
In fact, what we observe is a plurality of instruments and combinations thereof that have steadfastly defied economists' and policy analysts' prescriptions.(3) Part of this deviation between normative prescription and actual practice can be attributed to political considerations,(4) and part to legal constraints. However, there may also be normative justifications for choosing instruments outside the increasingly standard incentive-based dyad of taxes and marketable allowances. While those instruments may minimize the direct cost of producing environmental services, such as emissions abatement, they do not necessarily minimize the total social costs. To see this, however, requires a reformulation of the standard evaluation criteria that are applied in most policy instrument studies and a broadening of the range of instruments under consideration.
The purpose of this article is to provide a conceptual framework for understanding the policy instruments that the government uses when it implements environmental policy goals. Unlike other surveys that focus on the contrasts among instruments, the emphasis here is on exploring the continua of instruments that are available for a variety of applications. In the process of developing the framework, the article will advance key ideas related to the choice and structure of evaluation criteria, the design and role of a taxonomy of instruments, and the application of lessons from a variety of distinct literatures.
Many studies of policy instruments have identified evaluation criteria by which the performance of policy tools may be judged.(5) This article expands the insights from those analyses by recognizing that two key criteria can be added to their lists: (1) the differential effects of policy instruments on the system of public finance and (2) legal constraints that may render optimal solutions (from a cost-minimization perspective) infeasible. Reformulating the evaluation criteria as a cost-minimization problem provides additional insight into the nature of the tradeoffs that the policymaker faces in choosing among the various instruments.(6)
This article also demonstrates that the taxonomies of policy instruments can be re-framed to bring out several factors. …