Which works better–regulation or market-based initiatives? We ask Jody Freeman.

In refusing to join the Kyoto Protocol, which requires signatory nations to meet targeted reductions in emissions of greenhouse gases, President George W. Bush has argued that the long-term solution to the problem will involve new technologies and initiatives by industries, not “command-and-control” regulations or emissions caps which, he says, would ruin the U.S. economy. The Bulletin asks Professor Jody Freeman LL.M. ’91 S.J.D. ’95, who joined the HLS faculty this year: How much do we know about which works better?

There is a big debate about which approach is better. But in fact we’re at a stage of environmental regulation where we now draw on a broad range of tools. Whether we are talking about global warming, air pollution, water pollution, habitat protection or ocean regulation, it’s not a question of “either/or” but of how to use market strategies and prescriptive regulations for maximum environmental benefit at minimum cost.

Most regulatory contexts involve hybrid approaches in which both kinds of instruments work together. For example, an emissions trading program typically operates against the background of an otherwise highly prescriptive air pollution regime, as with the Clean Air Act’s sulfur dioxide trading program, which has been successful in reducing acid rain. Moreover, these policy instruments can evolve dynamically. It appears common, for example, for prescriptive approaches to develop features of market instruments over time. Indeed, many instruments are hybrids.

Some of the biggest success stories of market-based initiatives involve, upon closer examination, a mix of prescriptive and market instruments, as with the phasing out of leaded gasoline in the U.S.

Some research suggests that market instruments can be both more efficient and more effective than prescriptive regulation. In particular, trading schemes appear to have worked relatively well in the context of air pollution regulation. But we’re also learning that at least some of the criticisms of command-and-control appear to be overstated or to miss the mark. Prescriptive regulation is not as uniform and inflexible as critics often suggest. It is no exaggeration to say that the command-and-control system is infused with negotiation and accommodation.

Whether market-based instruments will stimulate technological innovation, as is often claimed, remains still mostly a matter of speculation. And, in some instances, prescriptive regulation may still be necessary because market mechanisms are too risky or unworkable.

One lesson we’ve already learned, however, is that both market-based instruments and prescriptive regulation suffer from many of the same weaknesses, including a pervasive lack of monitoring and enforcement. So, regardless of the regulatory approach we choose, solving environmental problems requires close attention to the implementation process.
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