In this chapter you will:

• Find out what needs to be considered for implementing environmental policy;

• Learn about the instruments available to attain environmental goals;

• See by which mechanisms these instruments operate;

• Consider their respective merits and limitations;

• Learn why uncertainty complicates the implementation of environmental policy immensely.

The previous chapter dealt with the evolution of environmental policy over the last few decades and how environmental targets are set. In this chapter we study the instruments that have been used to pursue the agreed environmental targets. Over time economists and political scientists have developed many different instruments for implementing environmental policy goals.

Before going into details of the different policy instruments and how to choose between them, let us take a step back and think about why we need policy instruments. Well obviously, we want to avoid or reduce environmental damage. But why is it that we cannot leave this task to markets? As we saw in Chapter 9, in neoclassical economics excessive anthropogenic environmental damage stems from the failure of the institutions of which markets consist, and in which they are embedded, to incorporate the full cost and benefits of economic activities. When do markets fail? They fail if the institutions are missing which require producers and consumers to take responsibility for the consequences of their actions. This leads to a divergence of private and social costs and as a consequence private profit-maximising decisions are not socially, that is allocatively, efficient.