Regulatory Instruments

Regulatory instruments impose legally enforceable restrictions on economic agents to realize environmental protection objectives. They are sometimes referred to as 'command-and-control' mechanisms because they prohibit or mandate certain actions (i.e., the command), while using various forms of punishment to motivate compliance (i.e., the control mechanism). Environmental regulations can take many different forms, including

• prohibitions on specified activities (e.g., discharging pollutants into a water body or the atmosphere, or taking a threatened species);

• requirements to obtain a governmental approval (or permit) before undertaking a specified activity (e.g., pollution permits, operating licenses, and development approvals);

• requirements to follow certain procedures when carrying out specified activities (e.g., to use certain equipment, abide by operating standards, or to monitor pollution emissions); and

• requirements to undertake specified actions that are deemed to be environmentally beneficial (e.g., weed control in agricultural areas).

The use of regulatory instruments can be justified on the basis of deterrence or similar choice theories of criminology. According to this approach, people are assumed to make choices by rationally weighing the costs and benefits associated with alternative courses of action and selecting the action that is most likely to maximize their utility. Regulations can affect this process by altering the costs and benefits associated with environment-related activities. For example, by outlawing the emission of pollutants into a river and incarcerating or imposing fines on people who violate the law, the government is able to increase the costs of emitting pollutants. In doing so, it makes alternative nonpolluting options more attractive. In countries where the rule of law prevails, provided the penalties and probability of enforcement are high enough, and punishment is swift, the desired pattern of behavior should emerge.

The difficulty with this theory is that humans are not always rational utility maximizers, meaning that environment regulations may not always result in the desired outcomes. Regulatory approaches can also fail to achieve their objects because of poor design (e.g., ambiguous regulations and unworkable administrative arrangements), strategic avoidance by polluters, and an absence of monitoring and enforcement due to a lack ofresources or political will. There are even cases where regulatory instruments have aggravated the environmental problems they were designed to solve.

Regulatory instruments are criticized not only for being ineffective, but also for their inefficiency. This is because they can impose inflexible restrictions on producers, thereby limiting the choices that are available as to how producers meet the desired environment target. Regulatory mechanisms can also have large administration and compliance costs. Government agencies are required to constantly monitor compliance and undertake costly litigation when breaches are discovered, while producers incur legal and other costs while attempting to abide by the environmental regulations. In addition, regulatory mechanisms do not provide incentives to encourage the reallocation of resources toward producers with the lowest marginal costs of environmental protection. As a result, it is difficult for regulatory mechanisms to satisfy the equimarginal principle, which requires that the marginal cost of environmental protection be equalized across polluters to achieve the desired environment target at the lowest possible cost.

The other main criticism of environment regulation is that it can be inequitable. Disputes about whether regulatory mechanisms are unfair are usually framed in terms of the alteration of preexisting property rights. Some people may believe they have a right to pollute or use the environment in a particular way. When environment regulations are introduced, these property rights may be taken away, prompting calls for compensation. In the absence of compensation, the people who are affected by the regulations may feel they are being forced to shoulder a disproportionate amount of the financial burden associated with the provision ofpublic good environmental outcomes. This problem is often confronted with laws that prohibit the removal of native vegetation or the taking of native species, or that restrict the development of real property for commercial purposes.

In several countries disputes about the impact ofenviron-ment regulations on property rights have been a central part of environmental policy debates. For example, in the United States, the Fifth Amendment to the Constitution provides that private property shall not be 'taken for public use without just compensation'. This has led to numerous Supreme Court cases and an extensive literature on so-called 'regulatory takings'. The Australian Constitution contains a similar provision, which provides the Federal Government with the power to make laws with respect to the 'acquisition of property on just terms'. In both jurisdictions, courts have found that these constitutional provisions limit the extent to which the government can abolish property rights for environmental purposes.

While issues surrounding the abrogation of property rights have been influential in framing equity issues associated with environmental regulations, it is often forgotten that most regulations alter property rights. The elevated status of property right issues in the context of environmental debates is arguably due to the reverence accorded to real property and preferential treatment given to certain primary industries in western countries.

Despite the criticisms of regulatory measures, they remain the most widely used instrument for environmental protection. There is an ongoing debate about why states tend to prefer regulatory instruments, with supporters of economic instruments often attributing it to ignorance of alternatives, simplicity, and pressure by special interest groups. Yet, regulatory instruments have a number of attributes. The most important of these is the certainty they can provide when faced with imperfect information about environmental risks and the irreversibility of certain forms of environmental harm (e.g., species extinction). In these circumstances, relying on economic, voluntary, or information instruments can lead to suboptimal outcomes by permitting excessive exploitation of the environment. Regulatory instruments are well suited to these situations as they allow distinct boundaries to be placed on the use of environmental resources. This has led to the advocacy of decision-making tools like the precautionary principle and collective choice processes like the safe minimum standards approach.

Another benefit of regulatory instruments is they can be more cost-effective than other measures in dealing with certain types of environmental issues. As discussed, regulatory instruments are often criticized for having large administrative and compliance costs. Yet, in some cases, alternative economic and voluntary approaches may have higher administrative and compliance costs because of the nature of the environmental problem and the complexity in the required program. For example, addressing land clearing with voluntary measures can require agreements to be negotiated with large numbers of landholders, leading to high transaction costs and a plethora of different standards. In contrast, regulations can provide a uniform standard that does not require case-by-case negotiations and is easier to monitor and enforce. Regulatory instruments can also overcome free-rider problems by forcing recalcitrant polluters to abide by the necessary standards.

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