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Section 6.2.1 sets the general policy context in which any environmental policy will operate. This section focuses on specific policies to address climate change. The various policy instruments are assessed generically. In other words, there is not a sector-specific focus, because it is beyond the scope of this chapter. This may create some bias insofar as most sector-specific policies are technology oriented and of the command-and-control type.
Regulatory environmental standards set either technology standards or performance standards, enforceable through fines and other penalties24 (voluntary standards are discussed in Section 6.2.2.4). They may attach to a product, a line of products (e.g., US Corporate Average Fuel Economy (CAFE) standards), or the provision of a service (e.g., Japan requires that firms employ an energy manager).25 In this chapter regulatory standards are distinguished from economic or market-based instruments (taxes and fees, permits, subsidies). Although all regulatory standards have consequences upon economic decision making, they differ from market-based instruments, which operate by directly changing relative prices rather than by specifying technology or performance outcomes.
Regulatory standards can be effective policies to address market failures and barriers associated with information, organization, and other transactions costs. They also are widely used to require actors to account for environmental externalities and, if continually modified to account for technical progress, they can provide dynamic innovation incentives (see Section 6.5.3). The principal sources of inefficiency associated with some regulatory standards derive from too narrow specifications of uniform behaviour in heterogeneous situations, weakness in controlling aggregate levels of pollution, and relatively more difficult application to products other than component or turnkey technologies. By requiring a certain level of performance without specifying how it should be achieved, performance standards generally reduce losses through inflexibility when compared to technology standards.
On the whole, energy efficiency standards have proved to be an effective energy conservation policy tool. Energy efficiency standards are widely used in over 50 nations and the number of standards is still growing.26 ,27 ,28 For appliance standards enacted in the USA, cumulative energy savings in 1990 to 2010 are estimated at 24 etajoules (EJ), consumer life-cycle costs savings at US$46 billion, and emission reductions at about 400MtCO2. For an early estimate, see McMahon (1992). The introduction of refrigerator and freezer standards in the EU is estimated to generate 300 TeraWatt hours (TWh) of cumulative electricity savings during 1995 to 2010 (Lebo and Szabo, 1996). Similar measures in Central and Eastern Europe are expected to save 60 TWh energy and to reduce emissions by 25 MtCO2 (Bashmakov and Sorokina, 1996). In Japan, the law concerning the rational use of energy was strengthened on 1 April 1999 and is expected to reduce, in combination with the industries’ voluntary actions plan, a maximum of 140 MtCO2 in industry, transportation, and other sectors in total (Yamaguchi, 2000). Energy efficiency standards are especially effective in countries with high and growing appliance ownership and in countries in which consumers’ energy awareness is low because of historically low energy prices.
The development of an effective regulatory standard requires national and, potentially, international, leadership to balance the interests of manufacturers, consumers, environmental non-government organizations (NGOs), and other interest groups, while creating sufficient societal support and incentives for successful implementation. While decisions to introduce regulatory standards are commonly made by legislatures, the development and implementation of standards over time is often left to a less transparent public administration. Although the enforcement and monitoring of all policy instruments is costly and subject to failures, including discriminatory treatment and corruption, social science literature that examines the implementation of regulatory standards is more extensive.
Recent literature indicates that regulatory standards often precede market-based instruments and build institutional capacity in policy evaluation, monitoring, and enforcement (Legro et al., 1999). This is especially true in developing countries that lack both trained personnel and the financial resources to implement market-based instruments.29 Technology standards have provided the initial training ground for public officials unfamiliar with any approach to environmental regulation. Russell and Powell (1996) found that developing countries with a better institutional capacity developed through experience with regulatory standards generally are more successful in implementing market-based environmental policies than less well-equipped countries. Cole and Grossman (1998) suggest that when historical, technological, and institutional contexts are taken into account, technology standards are efficient in the initial stages of environmental policy development.
The use of regulatory standards to force the internalization of environmental costs has initial distributional consequences different from those of environmental taxes or subsidies.30 Regulatory standards reduce economic benefits previously shared by consumers, capital, and labour only to the extent of compliance costs and/or output foregone. Unlike environmental taxes or auctioned permits, regulatory standards do not extract the value of environmental costs on inframarginal production that continues after the policy is mandated.
Regulatory standards may also be used to correct barriers that arise from information failures and can yield net benefits to society if the costs associated with the regulation are less than the losses due to informational barriers.
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