13.2.1.1 Regulations and standards

Regulatory standards are the most common form of environmental regulation, and they cover a wide variety of approaches. A regulatory standard specifies with a certain degree of precision the action(s) that a firm or individual must undertake to achieve environmental objectives and can consist of such actions as specifying technologies or products to use or not use and/or more general standards of performance as well as proclaiming dictates on acceptable and unacceptable behaviour. Two broad classes of regulatory standards are technology and performance standards. Technology standards mandate specific pollution abatement technologies or production methods, while performance standards mandate specific environmental outcomes per unit of product. In this context, where a technology standard might mandate specific CO₂ capture and storage methods on a power plant, a performance standard would limit emissions to a certain number of grams of CO₂ per kilowatt-hour of electricity generated. A product standard would, for example, be the requirement that refrigerators operate minimally at a specified level of efficiency, while a technology-forcing standard would involve setting the refrigerator efficiency requirement slightly beyond present-day technological feasibility but announcing that the efficiency requirement will not go into effect until a number of years following the announcement.

The primary advantage of a regulatory standard is that it may be tailored to an industry or firm, taking into account the specific circumstances of that industry or firm. There is also a more direct connection between the regulatory requirement and the environmental outcome, which can provide some degree of certainty.

Technology standards involve the regulator stipulating the specific technology or equipment that the polluter must use. Technology standards are best used when there are few options open to the polluter for controlling emissions; in this case, the regulator is able to specify the technological steps that a firm should take to control pollution. The information requirements for technology standards are high: the regulator must have good and reliable information on the abatement costs and options open to each firm. Losses in cost effectiveness arise when regulators are less well informed; technology standards may then be applied uniformly to a variety of firms, rather than tailoring the standard to the actual circumstance of the firm. This raises costs without improving environmental effectiveness and is one of the main drawbacks to regulatory standards.

Performance standards can reduce these potential problems with technology standards by providing more flexibility (IPCC, 2001). Costs can generally be lower whenever a firm is given some discretion in how it meets an environmental target. Performance standards expand compliance options beyond a single mandated technology and may include process changes, reduction in output, changes in fuels or other inputs and alternative technologies. Despite this increased flexibility, performance standards also require well-informed and responsive regulators.

One problem with regulatory standards is that they do not provide polluters with the incentive(s) to search for better approaches to reducing pollution. Thus, they may not perform well in inducing innovation and technological change (Jaffe et al., 2003; Sterner, 2003). If a government mandates a certain technology, there is no economic incentive for firms to develop more effective technologies. Moreover, there may be a ‘regulatory ratchet’ whereby firms are discouraged from developing more effective technologies out of fear that standards will be tightened yet again (Harrington et al., 2004). Finally, although it may be possible to force some technological change through technology mandates, it is difficult for regulators to determine the amount of change that is possible at a reasonable economic cost. This raises the possibility of implementing either costly, overly stringent requirements or, alternatively, weak, unambitious requirements (Jaffe et al., 2003). Nevertheless, there are examples in the literature of technology innovations spurred by regulatory standards. For example, Wätzold (2004) reported innovative responses from pollution control vendors in Germany in response to standards for SO₂ control.

Although relatively few regulatory standards have been adopted with the sole aim of reducing GHG emissions, standards have been adopted that reduce these gases as a co-benefit. For example, there has been extensive use of standards to increase energy efficiency in over 50 nations (IPCC, 2001). Energy efficiency applications include fuel economy standards for automobiles, appliance standards, and building codes.^[5] These types of policies are discussed in more detail in Chapters 5 and 6 of this report. Standards to reduce methane and other emissions from solid waste landfills have been adopted in Europe, the USA and other countries (see Chapter 10) and are often driven by multiple factors, including the reduction of volatile organic compound (VOC) emissions, improved safety by reducing the potential for explosions and reduced odours for local communities (Hershkowitz, 1998).

There are a number of documented situations in which regulatory standards have worked well (see Freeman and Kolstad, 2006; Sterner, 2003). Sterner (2003) reports several cases of such situations, including those in which firms are not responsive to price signals (e.g. in non-competitive settings or with state enterprises) and where monitoring emissions is difficult but tracking the installation of technology is easy. In situations where there is imperfect monitoring and homogeneous abatement costs between firms, Montero (2005) finds that standards may lead to lower emissions and may be economically more efficient than market-based instruments. Based on an analysis of the German SO₂ abatement programme, Wätzold (2004) concludes that a technology standard may be acceptable when only one technology exists to achieve an environmental result and, therefore, firms do not face differential abatement costs. Finally, standards may be desirable where there are informational barriers that prevent firms or individuals from responding solely to price signals. This may be particularly relevant for energy efficiency standards for household appliances and other similar applications (OECD, 2003d). Chapter 6 provides additional information on this subject.

A growing body of literature is focusing on whether regulatory standards or market-based instruments are preferable for developing countries. One common view is that technology standards may be more appropriate for building the initial capacity for emissions reduction because economic incentive programmes require more specific and greater institutional capacity, have more stringent monitoring requirements and may require fully developed market economies to be effective (IPCC, 2001; Bell and Russell, 2002). Willems and Baumert (2003) support this approach but also note that technology approaches, policies and measures may have greater applicability to the general capacity needs of developing countries interested in pursuing sustainable development strategies (See Box 13.3). Russell and Vaughan (2003) suggest that a transitional strategy is the appropriate approach for developing countries, whereby technology standards are introduced first, followed by performance standards and finally by experimentation with market-based instruments. An alternative view is that, in some cases, a performance standard at the facility level and an overall emissions cap could provide a more a more effective structure (Ellerman, 2002; Kruger et al., 2003). This type of approach could also facilitate a transition to a tradable permits programme as the institutions and economies develop over time.