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Environmental Law and Economics pp 405–435Cite as

Behavioural and Evolutionary Approach to the Law and Economics of Cap-and-Trade

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Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 4))

Abstract

Initially a science issue, climate change gradually enlarged its frontiers to become a political and normative question, forcing an interdisciplinary approach to apprehend its veracity, sources, impacts and possible and adequate solutions to an intergenerational and uncertainty problem that raises assessment and management questions on risk and abatement costs and benefits. Economics (with the precious help of neo-classical constructions, environmental Economics and cost-benefit analysis) has been serving as a bridge between science and the design of a sound climate policy and regulation. With the Kyoto Protocol and its flexible mechanisms, mainly its article 17, Annex-I Parties, beginning with the European Union, tended to open their policies to the implementation of economic instruments, with a preference for cap-and-trade systems, to comply with their obligations at the lowest cost. In the debate involving the best policy instrument several criteria have been accounted for such as efficiency, environmental effectiveness , equity, political feasibility and social acceptability. However, in a context of risk and uncertainty prone to bounded rationality, an evolutionary and behavioural note must be added in order:

  • to help understand how cap-and-trade became a mainstream solution;

  • to give a more accurate insight on the feasibility of climate policies and on the aptness of the major environmental instruments, especially emissions trading; and

  • to envision the future of cap-and-trade .

Therefore the text is divided in a first part to explain the added-value of evolutionary and behavioural insights, a second part on the reasons behind the rise of cap-and-trade as an environmental tool (especially in the context of climate change) and a third part on the importance of the behavioural traits of the environmental instruments. Finally we conclude on the (un)predictable future of cap-and-trade.

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Notes

  1. 1.

    For all, see references in Saraiva 2012 and 2013.

  2. 2.

    For example, Korobkin 2001; Jones 1997a, b,1999, 2000a, b, 2001a, b, c, d, e, 2004; Jones and Goldsmith 2005, referring to an “evolutionary analysis in law” in a Darwinian sense (respectively pp. 1120 et seq.; pp. 173 et seq.; pp. 833–834; pp. 160–164; p. 1143; p. 834; pp. 1416–1420; pp. 296–301; p. 207 et seq.; p. 1699; pp. 438 et seq.). About the role of genes and the connexion to decision-making and Law, for all, see Jones 2006, even exploring the differences between genders in 2005, p. 11.

  3. 3.

    For all, reviewing the economics literature through an evolutionary lens, van den Bergh 2007.

  4. 4.

    Angelo 2007, p. 151.

  5. 5.

    Leiter and Weisberg 2007, pp. 14–15, argue, contrarily, that these evolutionary accidents help the objections against the evolutionary theory. After all, what was valid in the past isn’t valid nowadays.

  6. 6.

    Roe 1996.

  7. 7.

    Berg and Gigerenzer 2010; Gigerenzer and Todd 1999. Similarly, looking at institutions, Smith 2003.

  8. 8.

    Reference to Ariely 2010.

  9. 9.

    Thaler and Sunstein 2009, p. 20.

  10. 10.

    Preferring the expression evolution for profit, Angelo 2007, p. 94.

  11. 11.

    Richardson 2011, p. 4.

  12. 12.

    Richardson 2011, p. 5.

  13. 13.

    Elliott 2001, p. 21.

  14. 14.

    Reference to Lomborg 2001.

  15. 15.

    Ostrom 1990, 2000, 2009, Ostrom, National Research Council (U.S.) & Committee on the Human Dimensions of Global Change 2002; Ostrom, Schroeder and Wynne 1993; Ostrom, Walker and Gardner 1994.

  16. 16.

    Concurring, Richardson 2011, p. 8.

  17. 17.

    Richardson 2011, p. 6.

  18. 18.

    Slovic 2007; Slovic [et al.] 2007; Friedrich [et al.] 1999; Fetherstonhaugh [et al.] 1997; Dickert [et al.] 2016.

  19. 19.

    Västfjäll, Slovic and Mayorga 2014.

  20. 20.

    Dickert [et al.] 2016; Slovic [et al.] 2002.

  21. 21.

    For all, see Mansbridge (ed.) 1999; Mullainathan and Thaler 2000; Oppenheimer and Olivola (eds.) 2011.

  22. 22.

    Bergh 2007, p. 27.

  23. 23.

    For this part see, Saraiva 2009, pp. 720–724.

  24. 24.

    Coase 1960.

  25. 25.

    Dales 1968a and 1968b. The allocation of authorship of tradable polluting rights to Dales, although generally accepted, is not unanimous, with some scholars pointing Thomas D. Crocker, Alfred Marshall, Henry George or E. J. Mishan. About this topic, Shields 2007, pp. 14–15; Pillet 1997, p. 55, for example, considers C. R. Nixon responsible for the proposal of a market solution in his article “Crazy Energy Proposal”. Not taking sides between Dales and Crocker, Tietenberg 2006 pp. 3–4 and (n.d.). 3; Hanley, Shogren and White 1997 p. 130. Defending Dales, Driesen 2009, p. 6; Barde, Environmental Policy and Policy Instruments, in Folmer, Gabel and Opschoor 1997, p. 218.

  26. 26.

    Dales 1968b, p. 803.

  27. 27.

    Dales 1968a, p. 105.

  28. 28.

    Dales 1968a, p. 104.

  29. 29.

    Dales 1968b.

  30. 30.

    Shields 2007, pp. 27–28.

  31. 31.

    Sousa 2002, p. 68; Faucheux and Noël 1997, p. 223.

  32. 32.

    Baumol and Oates 1971, pp. 42–54.

  33. 33.

    Montgomery 1972, pp. 395–418.

  34. 34.

    Tietenberg 2003, p. 401; Atkinson, Tradable Discharge Permits: Restrictions on Least-Cost Solutions, in Klaassen and Førsund (eds.) 1994, pp. 17–18.

  35. 35.

    For this part see, Saraiva 2009, pp. 936–946.

  36. 36.

    On the definition of political feasibility, Skodvin 2007 - it comes down to a limited function of three aspects: (1) the distribution of costs and benefits of environmental solution among target groups; (2) the distribution of power within and between target groups and policy makers; and (3) the institutional framework in which the decision-making process unfolds.

  37. 37.

    Gunningham and Sinclair 2005, p. 74.

  38. 38.

    Stavins, Experience with Market-Based Environmental Policy Instruments, in Mäler and Vincent (eds.) 2003, p. 421.

  39. 39.

    Leidy and Hoekman, Pollution Abatement, Interest Groups, and Contingent Trade Policies, in Congleton (ed.) 1996, p. 66.

  40. 40.

    Dales 1968a, p. 105.

  41. 41.

    Using the Theory of Public Choice, in particular to explain the choice of the instrument to deal with environmental issues in general and climate in particular, Skodvin 2007; Svendsen 2005 and 1999; Kirchgaessner and Schneider 2002, all based on the lessons of Buchanan and Tullock 1975, who argue that the existing firms in the market prefer the system of command-and-control for being more permeable to pressures and because it allows the creation of barriers to enter the market to potential competitors.

  42. 42.

    Keohane, Revesz and Stavins, The Positive Political Economy of Instrument Choice in Environmental Policy, in Panagariya, Portney and Schwab (eds.) 1999, pp. 91–103.

  43. 43.

    Oates and Portney, in Mäler and Vincent (eds.) 2003, p. 334, p. 337 and 2001, p. 13; Keohane, Revesz and Stavins 1998, p. 328.

  44. 44.

    Once their purpose (public policy) is a public good, it is easily understood that the lobbying by individual agents is costly, forcing them to create or join organizations like NGO or trade associations. The free ride effect can therefore chase away lobbying.

  45. 45.

    Keohane, Revesz and Stavins 1998, pp. 332–332.

  46. 46.

    Tallon and Vergnaud 2006, pp. 82–83.

  47. 47.

    It’s curious to notice that despite the Pigouvian proposal in the 20s of the last century or the Coasean hypothesis in the 60s, all over the world, there is still a preference for a more conventional approach in regulating and establishing uniform standards, which reveals an inertia difficult to break despite the slow development of economic instruments.

  48. 48.

    Lane and Montgomery 2008, pp. 21–22.

  49. 49.

    Jolls, Sunstein and Thaler, in Sunstein (ed.) 2000, p. 38.

  50. 50.

    Keohane, Revesz and Stavins 1998, pp. 344–345.

  51. 51.

    Oates and Portney, in Mäler and Vincent (eds.) 2003, p. 330 and 2001, p. 5.

  52. 52.

    Markussen, Svendsen and Vesterdal (n.d.), p. 18.

  53. 53.

    Svendsen 2005, p. 10; Brandt and Svendsen 2002, pp. 24–25.

  54. 54.

    Daugbjerg and Svendsen 2001, p. 5; Kasa 1999. Otherwise, Parry 2003, p. 397; Nordhaus 2001; Helm and Pearce 1990, p. 5, minimize the possibility of corruption in a carbon tax vis-à-vis cap-and-trade. Oates and Portney, in Mäler and Vincent (eds.) 2003, p. 339 and 2001, p. 15; Bye and Nyborg 2000, p. 3, note that almost all European environmental taxes have exemptions and/or benefits.

  55. 55.

    Lane and Montgomery 2008, p. 18.

  56. 56.

    Brandt and Svendsen 2003, p. 29.

  57. 57.

    Keohane 2009, p. 34; Stavins 2008, p. 17; Tietenberg, in Freeman and Kolstad (eds.) 2007, p. 81; Sterner and Hammar, in Hansjürgens 2005, p. 31; Evans [et al.] 2002, p. 1; Svendsen 2005, pp. 150–160 and 1999.

  58. 58.

    Shapiro 2007, pp. 8–9.

  59. 59.

    Casalta Nabais 2008, p. 120.

  60. 60.

    Dias Soares 2001, pp. 571–572.

  61. 61.

    Less optimistic, Schneider and Weck-Hannemann 2004.

  62. 62.

    Stavins 2003, pp. 15–16.

  63. 63.

    Stoft 2008, p. 131.

  64. 64.

    Driesen 2009, p. 5.

  65. 65.

    Hahn 2008, p. 22; Kirchler 2007, pp. 40–42.

  66. 66.

    Hovi and Holtsmark 2005, p. 8; Cooper 2000, p. 162; Kellow 1998, p. 5; Cuervo and Gandhi 1998, p. 31; Against Waggoner 2009, p. 1259.

  67. 67.

    Pratlong 2005, observes distortions when a State chooses cap-and-trade and another a carbon tax.

  68. 68.

    Whalley and Wigle, The International Incidence of Carbon Taxes, in Dornbusch and Poterba (eds.) 1992, p. 259.

  69. 69.

    Stavins 2007a, p. 49, 2007b, p. 53.

  70. 70.

    Hahn and Stavins 1999, p. 20.

  71. 71.

    van Kooten 2002, p. 29.

  72. 72.

    Sunstein 1999, p. 124. About the relation between taxes and loss aversion, showing studies with very different results, Guthrie 2002, pp. 48–51.

  73. 73.

    Dias Soares 2001, p. 240. Daugbjerg and Svendsen 2001, p. 12, defend that the main obstacle to the success of a green tax is political due to capture problems, parties’ politics and political networks.

  74. 74.

    Stavins 2003, p. 15; Kasa 1999, p. 25. Not concurring, Schneider and Weck-Hannemann 2004, p. 5.

  75. 75.

    Tietenberg 2003, p. 410; Svendsen 1999, p. 143.

  76. 76.

    Bye and Nyborg 2000, pp. 2–3; Pezzey and Park 1998, p. 547.

  77. 77.

    Parry and Pizer 2007, p. 81.

  78. 78.

    See Getner 2009.

  79. 79.

    Metcalfe 2008, p. 7, in his proposal carbon tax, he minimizes these behavioural effects for two reasons: first, because institutional actors such as firms, especially large firms of the energy sector, will not suffer from this aversion to tax; secondly, because the companies will tend to inform consumers that the price increase is due to the tax.

  80. 80.

    Cohen and Vandenbergh 2008, p. 5.

  81. 81.

    Helm 2003, p. 353.

  82. 82.

    On normative internalization, Scott 2000, pp. 19–35.

  83. 83.

    See, for example, the Environmental Defense Fund, Boom and Svendsen 2000, p. 17.

  84. 84.

    Hahn and Passell 2007, p. 2; Oates and Portney, in Mäler and Vincent (eds.) 2003, pp. 338–339 and 2001, p. 15.

  85. 85.

    Richardson 2011, p. 18.

  86. 86.

    OECD 2006, p. 21.

  87. 87.

    Dias Soares 2001, p. 540.

  88. 88.

    Buchanan and Tullock 1975, p. 147.

  89. 89.

    Daugbjerg and Svendsen (n.d.), p. 6 et seq.

  90. 90.

    See, for example, the American war against terrorism since 9/11, Sunstein 2006, p. 11. Nevertheless, Tallon and Vergnaud 2006, pp. 26–27, alert to a gambler’s fallacy.

  91. 91.

    Coglianese and D’Ambrosio 2008, pp. 7–15.

  92. 92.

    For this part see, Saraiva 2009, pp. 949–958.

  93. 93.

    Pi, Parisi and Luppi 2013.

  94. 94.

    Richardson 2011, pp. 16–18.

  95. 95.

    About the relation between the agency theory and the management of the commons, Bromley and Cochrane, A Bargaining Framework for the Global Commons, in Bromley (ed.) 1995, pp. 300–315; Folmer and De Zeeut, in van den Bergh (ed.) 1999, pp. 1093–1094. The agency problem can also be looked at as interests misalignment between the regulator (agent) and the legislature (principal). Lyon and Maxwell 2004, pp. 37–38. A more complex approach asks for the possible collusion between the regulator (agent) and the regulated in order to omit or distort the information given to the political decision-maker (principal) concerned with the collective well-being. Vaz Freire 2008, p. 78.

  96. 96.

    In this sense, but preferring the expression of quasi-behavioural arguments, Hsu, Some Quasi-Behavioural Arguments for Environmental Taxation, in Chalifour [et al.] (eds.) 2008, pp. 29–52. According to McKinsey & Co. 2006, pp. 7–10 and 2005, p. 5 et seq., the European Emissions Trading System reveals a concrete impact on the behaviour of the involved firms, even at the technological innovation level and of long-term decisions. Partially against, Alberton 2003, p. 16.

  97. 97.

    Green 2005, p. 29.

  98. 98.

    Frey and Stutzer 2006.

  99. 99.

    Gertner 2009.

  100. 100.

    Gertner 2009.

  101. 101.

    Thaler and Sunstein 2009, pp. 102–104, pp. 254–259.

  102. 102.

    Ester and Mandemaker, in Dutch Committee for Long-Term Environmental Policy (ed.) 1994, p. 61.

  103. 103.

    Sunstein 1999, p. 141.

  104. 104.

    Thaler and Sunstein 2009, pp. 60–61; Sunstein (ed.) 2000, p. 2 and 1997, p. 4.

  105. 105.

    Thaler and Sunstein 2009, p. 263.

  106. 106.

    Sunstein 1999, pp. 123–124 and 1997, pp. 15–16.

  107. 107.

    Viscusi and Zeckhauser 2005.

  108. 108.

    Brekke and Johansson-Stenman 2008, p. 19.

  109. 109.

    Baron, Schulkin and Kunreuther 1990.

  110. 110.

    Ho 2008.

  111. 111.

    Thaler and Sunstein 2009, pp. 26–31; Jolls 2007, p. 16.

  112. 112.

    Wätzold 2006, pp. 6–7.

  113. 113.

    This does not mean, however, that there is no resistance, because previously the sectors involved were not subject to any environmental burden and could externalize some of their costs.

  114. 114.

    Woerdman and de Vries 2006, pp. 10–11.

  115. 115.

    Invoking the need for more alternatives, Bergh 2007, p. 23. With a different perspective, Woerdman and de Vries 2006, pp. 8–10.

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    Rute Saraiva

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    Bruce R. Huber

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Saraiva, R. (2017). Behavioural and Evolutionary Approach to the Law and Economics of Cap-and-Trade. In: Mathis, K., Huber, B. (eds) Environmental Law and Economics. Economic Analysis of Law in European Legal Scholarship, vol 4. Springer, Cham. https://doi.org/10.1007/978-3-319-50932-7_16

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