Environmental policy, government and the market
Oxford Review of Economic Policy, 26:2, 117-136, 2010.
Keywords: cap and trade / Climate Change / coordination / environmental markets / environmental policy / government intervention / prices
Environmental policy is made in a context of both market failure and government failure. On the one hand, leaving environmental protection to the free market, relying on notions of corporate social responsibility and altruistic consumer and shareholder preferences, will not deliver optimal results. On the other hand, nationalizing the delivery of environmental protection is likely to fail because nation states rarely have the depth and quality of information required to instruct all the relevant agents to make appropriate decisions. Thus, as for many areas of policy, appropriate models of environmental intervention will lie between these two extremes. While it is impossible to specify general rules concerning the precise form of intervention, in part because the type of intervention depends upon value judgements, this paper sets out some of the considerations that are particular to environmental policy, and explores several principles for policy design, including information, coordination, and principal–agent problems, with a particular focus on the international context.