JOSEPHINE V. YAM

LAWYER + SOCIAL ENTREPRENEUR

  • Environment & Sustainability
  • Josephine V. Yam
  • Josephine V. Yam

The Negative Impacts of a Regulatory Command-and-Control Approach to Greenhouse Gas Reduction in the United States

Josephine V. Yam, February 2012

This article will discuss three detrimental impacts on private industry resulting from the U.S. government’s shift to a command‐and‐control approach from a market-based approach in reducing greenhouse gas (GHG) emissions as the U.S. inescapably enters a carbon-constrained world.

At the beginning of his presidency in 2008, President Barack Obama strongly supported market-based emissions trading or “cap-and-trade” through federal legislation as the best tool to combat climate change (Perdan, 2011). However, after the 2010 mid-term congressional elections which saw the balance of power shift to Republicans who opposed cap-and-trade, Obama announced that the U.S. would not pursue a cap-and-trade scheme any longer and that other means to address climate change would be considered (Chipman and Lomax, 2010). The only other means it had within its power was regulation through the U.S. Environmental Protection Agency (EPA). Pursuant to the EPA’s endangerment finding that formally declared that GHG emissions pose significant harm to human health and welfare, the EPA would control GHG under the existing Clean Air Act. However, given its financial and regulatory limitations under the Act, the EPA would be using mandatory command-and-control policies to regulate GHG emissions accordingly (Agricultural Carbon Market Working Group, 2010).

A command-and-control policy is a regulation that mandates the control of emissions to achieve a specified level of environmental quality or a given emissions standard (U.S. Environmental Protection Agency, 2011). Because it dictates the method of reaching a given goal, its choice of a specific solution often excludes other low-cost solutions and creates counterproductive side effects (Shrum, 2007). While it may seek to correct the problems associated with market failures, it bypasses reliance on the market by simply choosing the solution to a perceived problem. Examples of such policy include mandates for renewable portfolio standards, vehicle standards, appliance standards and building standards (Shrum, 2007). Regulators need to be extremely careful not to put forward an efficiency target that faces huge technological hurdles. They must set standards cognizant of the likelihood of developing necessary technological solutions in order to control compliance costs (Tuladhar, 2009).

There are three negative impacts of the command‐and‐control approach in reducing GHG emissions that will adversely affect major emitters, such as those in the electricity, oil and gas and transportation industries, and non-major emitters that were intending to voluntarily participate in the cap-and-trade scheme, such as those in the agriculture and forestry industries.

The first negative impact is the lack of flexibility on the part of emitters to determine how to reduce their emissions. It is the government that determines the method for reducing GHG emissions, not the emitter (U.S. Environmental Protection Agency, 2011). This means that EPA will tell emitters how to comply with reducing their emissions, rather than empowering them to find the most cost-efficient means themselves (Agricultural Carbon Market Working Group, 2010). Flexibility measures inherent in a cap-and-trade scheme, such as banking, borrowing and trading emissions reductions or offsets, are extremely important for reducing the cost of compliance to regulated entities and energy consumers alike (Agricultural Carbon Market Working Group, 2010). Flexibility measures such as these are non-existent in a command-and-control approach to GHG emissions reduction.

The second negative impact is the inevitably higher costs for emitters and consumers. Given the lack of flexibility in a regulatory approach, emitters will have no incentive to find the least cost way of achieving the regulatory requirement (U.S. Environmental Protection Agency, 2011). Regulatory mandates raise the demand for a certain product, which allows the producer to sell the product at higher prices. The result is a subsidy for the producer and higher costs for the consumer. In fact, climate change economists agree that command-and-control strategies are more expensive and thus less efficient than market-based strategies because they can raise emission reduction costs by a factor of ten (Shrum, 2007). When command-and-control policies raise costs for certain products, they leave no room for emitters to generate income to offset any costs of regulation (Agricultural Carbon Market Working Group, 2010).

For example, unlike a command‐and‐control approach, a market‐based cap‐and‐trade scheme can create market opportunities for the agricultural community. Under such a program, emissions from major emitters such as electric utilities, oil companies and large industrial sources would be curbed by setting caps on their emissions. This would allow a flexible market to flourish so that major emitters can choose the most effective means of meeting their GHG reduction requirements. In this case, the agricultural sector can generate additional revenue by selling emission offset credits to major emitters required to reduce their emission levels even though, as an uncapped sector, the agricultural industry would not be regulated (Agricultural Carbon Market Working Group, 2010).

The third negative impact is the diminished incentive for continuous innovation. Under command-and-control regulations, there is no incentive for private industry to go beyond the regulatory standard for emissions reduction. In fact, there may actually be a disincentive to do so because demonstrating the feasibility of additional effort may result in more stringent future regulation (Pew Centre on Global Climate Change, 2011). Because regulatory command-and-control standards specify the abatement technology required to reduce emissions, emitters do not have an incentive to explore new and innovative abatement strategies or production processes that are not permitted by regulation (U.S. Environmental Protection Agency, 2011).

In contrast to the command‐and‐control approach, in a cap‐and‐trade scheme, an emitter that can reduce emissions at a cost lower than the allowance price either reduces its compliance cost because it needs to purchase fewer allowances or frees up allowances that can be sold to others (Pew Centre on Global Climate Change, 2011). This financial incentive drives private industry to continually innovate and seek new emission-reducing technologies that regulators might not have anticipated under more prescriptive command-and-control regulations (Pew Centre on Global Climate Change, 2011). In a market-based system, such emission-reducing innovation can set the stage for deeper emission cuts over time. This is significant because meeting the challenge of global warming will require new innovative technology to achieve the very deep emission cuts that are imperative in a low-carbon economy (Pew Centre on Global Climate Change, 2011).

In conclusion, the U.S. government’s shift to a command‐and‐control approach from a market-based approach in reducing greenhouse gas (GHG) emissions will likely result in deleterious impacts to private industry of inflexibility, higher costs to emitters and consumers, and a lack of needed innovation as the U.S. inescapably enters a carbon-constrained world.

References

Agricultural Carbon Market Working Group. (2010) Cap-and-Trade vs. Command-and-Control: An Economic Assessment. Available at http://www.agcarbonmarkets.com/documents/TCG%20White%20Paper_CCA%20vs%20CAT_Final.pdf (accessed October 5, 2011).

Chipman, L. & Lomax, S. (November 4, 2010). Obama Moves Away From `Cap and Trade,' Seeks New Tools. Bloomberg. Available at http://www.bloomberg.com/news/2010-11-04/obama-calls-cap-and-trade-just-one-way-northeast-carbon-market-falls.html (accessed October 4, 2011).

Perdan, S. & Azapagic, A. (2011) Carbon trading: Current schemes and future developments. Energy Policy, 39, 6040–6054.

Pew Centre on Global Climate Change. (January 2011). Climate Change 101: Understanding and Responding to Global Climate Change. Pew Centre. Available at http://www.pewclimate.org/docUploads/climate101-fullbook_0.pdf (accessed October 4, 2011).

Shrum, T. (2007) Greenhouse Gas Emissions: Policy and Economics. Kansas Energy Council. Available at http://kec.kansas.gov/reports/GHG_Review_FINAL.pdf (accessed October 5, 2011).

Tuladhar, S., Yuan, M., Bernstein, P., Montgomery, D. & Smith, A. (2009). A top–down bottom–up modelling approach to climate change policy analysis. Energy Economics, 31, S223–S234.

U.S. Environmental Protection Agency. (October 5, 2011). Economics of Climate Change. National Center for Environmental Economics. Available at http://yosemite.epa.gov/ee/epa/eed.nsf/pages/ClimateEconomics.html (accessed October 4, 2011).

Yeoh,P. (2008). Is carbon finance the answer to climate control? International Journal of Law and Management, 50(4), 189-206.

JOSEPHINE V. YAM

LAWYER + SOCIAL ENTREPRENEUR

CEO & CO-FOUNDER, B3 CANADA

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