THE CASE AGAINST COMMAND AND CONTROL ENVIRONMENTAL REGULATION

THE CASE AGAINST ‘COMMAND AND CONTROL’ ENVIRONMENTAL REGULATION

This type of 'command and control' environmental regulation has long been the default approach to environmental issues by governments, coercing polluters into installing pollution-abatement technology, limiting the volume and concentration of firms' emissions, etc.

Although almost always well-intentioned, there are many severe flaws in such an approach, with the first being the difficulty of enforcement pollution abatement technology. While it is easy for inspectors to check whether individual firms have the required equipment in place, confirming whether it is even switched on or working on par with regulations can be troublesome to verify cheaply and quickly. This leads to a drawn-out whack-a-mole game, due to it being highly costly to run such mandated technology, it is temptingly profitable to simply switch it off, limiting its practicality. However, authorities are able to counter such actions with limited success through more frequent and unannounced inspections of polluting firms. Nonetheless, the capital and labour resources used for such activities, just like the resources used by the government in regulations, incur a significant opportunity cost, the cost and value of sacrificing the second-best option, which could arguably be put into much more beneficial programs than engaging in this whack-a-mole game.

Secondly, such regulations solidifies the oligopoly status of the energy sector. One example of this is the EU acid rain legislation which mandated the installation of flue-gas desulfurization (FGD) scrubbers in all power stations in the EU. While reasonable on the surface, the flaws reveal themselves once you skim past the surface. It cements the oligopoly of the energy sector, with itself already being a sector with huge barriers to entry, such as its massive set-up cost and lack of access to the distribution channels. FGD scrubbers are already hugely expensive, with the FGD system at Longannet power station costing over £400 million, a sum many smaller firms are simply unable to afford. Furthermore, large corporations, with their massive capital reserves, are able to exploit their size and economies of scale through the purchase of larger FGD systems, in which the processing cost per ton is cut by half, while smaller firms with smaller FGD systems suffer much higher unit costs, dealing a massive hit towards their profitability and thus undermining their competitiveness. This squeezes smaller firms out of the market, cementing the oligopoly’s market position. Such a market environment does no good to society, it limits consumer choice, discourages further innovation thanks to the lack of competition, and can even lead to price setting/gouging by the dominant firms due to the lack of substitutes in the market.

The superior solution to solving environmental problems are subsidies for smaller firms when entering the market. Not only is this useful in lowering prices for consumers, from P to P1 by shifting the supply curve from S to S1, but it also ensures that market shares remain liquid, constantly applying pressure on firms to innovate and improve, resulting in lower prices for consumers as firms must compete.