Developing Environmental Markets: Are Governments Doing their Bit?

The utilisation of private funding through the creation of market based environmental policy has emerged globally as a preferred method to tackle environmental and climate change issues. However the leadership role of policy makers and governments within these systems still remains poorly defined and often, poorly executed.

Conceptually, the premise of these constructed markets is simple; prevent the market failure of externalities (i.e. pollution) by incorporating a monetised reflection of these costs into processes or products (for further explanation see here). Taxes, quotas, subsidies and emissions trading are all examples of market based environmental policy.

The lure of this policy tool for government is that by involving the private market, policy makers are able to align the goals of private market with their own and mobilise a far greater pool of funding than they likely have on hand themselves. Furthermore, their costs are limited purely to the regulation of the scheme itself. The Renewable Energy Target, European Emissions Trading Scheme, NSW Energy Savings Scheme and the now dismantled Clean Energy Futures Package proposed by the Gillard Government are all examples.

Being reliant on private investment, the greatest asset to market based policy is its ability to incentivise participation of private investment. Sadly, political events regularly undermine this, the experience of the following schemes all being pertinent examples of how political volatility can increase ‘regulatory risk’ and dissuade future investment:

  • The Clean Development Mechanism, which was hugely successful in attracting renewable energy investment to least developed countries, has been brought to it’s knees in part by economic recession but also cumbersome decision making processes that failed to arrive at achievable solutions in time.
  • The coalition review of the Renewable Energy Target, has also placed in doubt the future of the Australian solar market and contributed to dwindling investment.
  • Similarly, the Coalition’s dismantling of the Clean Energy Futures Package (CEFP) in favour of their Emissions Reduction Fund, has rendered the private investment made into the CEFP largely worthless.

With each successive failure of market based environmental policy, the regulatory risk of any future scheme increases in parallel with the reluctance of the private market to be involved. As a policy tool that promises so much, and has achieved so much, care must be taken to reassure and win back the trust of its greatest asset – private enterprise.

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