How effective are different policy instruments at reducing emissions?

Natural Capital Ireland welcomes a guest blog post by our volunteer Aparna Nair, Final Year at BSc Business & Economics, Queen's University Belfast. The post does not necessarily reflect the views of NCI's Board of Directors or Steering Committee.

There are multiple ways to ensure private sector involvement in the protection of the environment. Popularly known methods include market-based instruments (MBIs) that incentivise firms to control their emissions through market mechanisms such as cap-and-trade policies and carbon taxation. These are typically used in alignment with regulations that mandate aspects of firms’ operations like the use/non-use of certain technology and standards that limit firms’ emissions. Such regulations are classified as ‘command-and-control’ (CAC) and are imposed by regulators to specify certain activities firms must undertake relating to environmental protection (Kolstad, 2011).  

Both instruments are widely used and each propose different sets of advantages and disadvantages. Where CAC instruments are comparatively more effective in situations of urgency and where outcomes must be achieved with certainty, these can be less cost-efficient as they impose restrictions on the use of technology, thereby limiting space for innovation and also can fail to achieve the equi-marginal principle which states that marginal abatement costs across firms must be equal. On the other hand, MBIs, by incentivising firms to reduce emissions by affecting their profits, are cost-efficient and ensure that their distributional effects are efficient so that firms with lower abatement costs contribute more to pollution reduction. However, designing the right policies can be complex and time-consuming and their relative effectiveness is  largely dependent on the political landscape (Kolstad, 2011). 

An article by Söderholm and Sundström (2025) takes a fresh approach to this topic. It poses institutional context as an important, but often disregarded factor in this comparison between MBIs and CACs. For instance, in the cases of carbon taxes, a type of MBI, when abatement costs are high and the social consequences of imposing the wrong tax rate exceed the economic benefits of such taxes, CAC instruments are favoured due to lower risk. Hence, establishing performance standards for firms to meet, rather than strict regulations on how to achieve targets, can, at times, even be superior to emissions taxation (Söderholm and Sundstörm, 2025, p.3).

However, it is important, Söderholm and Sundström (2025) argue, that CAC policies are designed and implemented with care. They recommend an approach involving consultation and cooperation. The importance of gaining knowledge and insights from experts in the field on the information extended by the industry is emphasised, as firms tend to possess more information on their abatement costs and hence, in implementing standards-based CACs, these firms have an incentive to distort their true costs. Additionally, opting for a cooperative means of regulation, involving the widespread distribution of knowledge and consensus-based decision making, can also help ensure greater effectiveness of CAC policies. Furthermore, it is vital to consider both the design and implementation of such policies in light of the existing social, environmental and economic context of the relevant region. 

It is also important to note that the quick and effective control of emissions in the present can yield great value in the future in terms of both the economy and the environment. Hence, the idea that only MBIs can achieve economic benefits is potentially the result of a short-sighted 

view of the future that may not consider the benefits of environmental sustainability to the future generations. 

Another means of assessing the effectiveness of CAC instruments and MBIs is through the consideration of natural capital - the world’s stock of natural resources. Natural capital acts as an important metric in comparing the effectiveness of CACs and MBIs. While MBIs are popularly known to stimulate technological innovation while simultaneously achieving fairness and efficiency, they can have unintended spillover effects. For instance, would imposing a carbon tax make producers shift production to what is now a relatively cheaper option but which would, regardless, harm the atmosphere? Or would this lead to an issue of carbon leakage? Such externalities and spillover effects must be accounted for. To accurately identify and address these concerns, the formulation and implementation of a standardised method of natural capital valuation is necessary. As it stands presently, externalities resulting from the implementation of MBIs continue to be unaccounted for and the true value of nature remains undervalued. 

In such a context, regulatory institutions act as the first step forward in truly assessing the value of nature using a natural capital lens. Such institutions, with their research efforts, can play a key role in developing natural capital instruments, and can then initiate the economy-wide implementation of mandating firms to include natural capital accounts alongside their financial ones. Through CAC instruments, it becomes easier to take a step forward in creating a newer, green economy. The structuring of a circular economy with minimum waste generation, can also become a reality when it is accompanied by efforts to identify, quantify and value nature in monetary terms, as this compensates firms for their sustainability efforts and hence, incentivises them to undertake more eco-friendly actions. 

Many advocate for the creation of efficient nature markets. This is undoubtedly important. However, natural capital assessments become an important first step in establishing these markets and accurately valuing them. It is the regulatory institutions and government bodies, then, that allow for such a valuation to occur by providing necessary funds via subsidies or grants and mandate natural capital valuation to be integrated in all firms’ activities, including in their decision-making mechanisms. Enforcement of natural capital regulations whereby firms are required to assess their ecological impacts accurately, can also benefit the overall economy by creating a green economy and providing greater employment to people. Hence, natural capital acts as the link between the present and the future and the bridge between CAC and MBIs, where regulatory bodies initiate the transition to a sustainable economy and MBIs ensure its continuity. 

To add to my case, I also put forward the urgency of the existing climate crisis. 2024 saw the warmest temperatures since 1850, with ten of the warmest temperatures thus far occurring within the time period 2015-2024 (National Centres for Environmental Information, 2024). Northern Ireland’s statutory target for 2030 is an emissions reduction by 48% from 1990. However, as of 2022, only around 26% of this target was achieved (Climate Change Committee, 2024). 

It is evident, here, that a sense of urgency is vital. Existing statistics on the impacts of climate change are alarming. What could seem as a distant consequence to those not bearing the costs of climate change, is significant to others in different regions of the world and in their own community. Where the Global North is responsible for 92% of the world’s ‘climate breakdown’, with the US and EU having contributions of 40% and 29% respectively, the Global South bears the brunt of the climate crisis (Vigliotti, 2025). This poses several ethical questions relating to climate change and climate justice. Given the targets to be achieved, along with the overall gravity of the situation, I believe that the issue of climate change can be better addressed with CAC policies as compared to market-based mechanisms — at least in the short run.

In this article, I briefly compared CAC and MBIs to further environmental protection and mitigate the effects of the climate crisis. My perspective on the effectiveness of CAC instruments (relative to market-based ones) is driven by theoretical and institutional reasonings and a sense of urgency in the context of climate justice, as well as targets to be achieved. This is not to say that MBIs are unhelpful. In fact, in order to achieve considerable levels of emissions reduction efficiently, MBIs are essential. However, given the current state of the environment and atmosphere, the use of CAC instruments, by implementing and enforcing appropriate regulations, is likely to be the appropriate first step for environmental context which then allows for the efficient functioning of MBIs. 

References 

1. Burnett, N., Edwards, T. and Watson, N. (2024). The UK’s Plans and Progress to Reach Net Zero by 2050. [online] Available at: https://researchbriefings.files.parliament.uk/documents/CBP-9888/CBP-9888. pdf 

2. Climate Change Committee (2024). Progress in Reducing Emissions 2024 Report to Parliament. [online] Climate Change Committee. Available at: https://www.theccc.org.uk/publication/progress-in-reducing-emissions-2024-re port-to-parliament/ 

3. Flavia Vigliotti (2025). The Unequal Costs of Climate Change and Destruction of the Global South: What are the solutions? [online] Global Social Challenges. Available at: https://sites.manchester.ac.uk/global-social-challenges/2025/01/15/the-unequal -costs-of-climate-change-and-destruction-of-the-global-south-what-are-the-sol utions/. 

4. Kolstad, C.D. (2011). Intermediate environmental economics (2nd ed.). Oxford University Press 

5. National Centers for Environmental Information (2024). Annual 2024 Global Climate Report | National Centers for Environmental Information (NCEI). [online] Noaa.gov. Available at:https://www.ncei.noaa.gov/access/monitoring/monthly-report/global/202413 

6. ONS (2023). Measuring UK greenhouse gas emissions - Office for National Statistics. [online] www.ons.gov.uk. Available at: https://www.ons.gov.uk/economy/environmentalaccounts/methodologies/meas uringukgreenhousegasemissions 

7. Söderholm, P. and Sundström, K., 2025. The Institutional Blind-Spot in the Green Transition: Market Incentives versus Command-and-Control. Journal of Economic Issues, 59(2), pp.438-444.