Instrument Choice: Regulation and Economic Instruments

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Command and control regulations have been criticized as inefficient – because the regulator is unlikely to know the optimal emissions level or technology for a particular firm – and environmental regulatory policy has shifted toward economic instruments in recent years.

One trend that has emerged from a first round of experimentation with market-based instruments in less developed countries, such as Kazakhstan, Poland, the Czech Republic, the Slovak Republic, and China, is that difficulties exist to using market-based instruments in countries that lack certain levels of institutional, legal, and financial infrastructure (Report: OECD Global Forum on Sustainable Development: Emissions Trading, Bell, 2003). In these countries, it may be more appropriate to begin with modest regulation efforts and build up to more sophisticated instruments over time.

The trade-offs between command and control regulation and economic instruments are studied in the literature that follows in this section.