Open Access

Ekkehard von Knorring, Peter Welzel

• The inefficiency of standards is a well-known result from environmental economics. In this paper we focus on the static inefficiency of an environmental standard as opposed to an environmental tax and discuss suggestions in the literature that adding flexibility to a standard can be used to overcome its efficiency disadvantage. We point out that monitoring and optimally fining high-cost polluters who prefer to secretly emit more than they are allowed to under the standard is not sufficient to replicate the first-best implementation of an emission target achievable under a tax. It has to be supplemented by subsidization of polluters with low marginal abatement costs to induce them to emit less than they are allowed to under the standard. However, we have considerable doubts whether this theoretical possibility of making standards efficient provides good guidance for policy in the real world. Suggesting that polluters optimally violate standards runs the risk of destroying theThe inefficiency of standards is a well-known result from environmental economics. In this paper we focus on the static inefficiency of an environmental standard as opposed to an environmental tax and discuss suggestions in the literature that adding flexibility to a standard can be used to overcome its efficiency disadvantage. We point out that monitoring and optimally fining high-cost polluters who prefer to secretly emit more than they are allowed to under the standard is not sufficient to replicate the first-best implementation of an emission target achievable under a tax. It has to be supplemented by subsidization of polluters with low marginal abatement costs to induce them to emit less than they are allowed to under the standard. However, we have considerable doubts whether this theoretical possibility of making standards efficient provides good guidance for policy in the real world. Suggesting that polluters optimally violate standards runs the risk of destroying the effectiveness of standards as instruments for unconditional achievement of environmental targets.…