The Institutional Blind-Spot in the Green Transition: Market Incentives versus Command-and-Control
Patrik Söderholm, and Kristoffer Sundström
Journal of Economic Issues, 2025
This article questions the neoclassical claim that compared to command-and-control instruments such as performance standards, economic policy instruments (e.g., taxes or emission allowance schemes) represent a superior policy approach to mitigate industrial pollution. Based on recent research, we argue that the ongoing transition towards zero-carbon production processes involves specific challenges, which tend to strengthen the case for using standards-based regulations, not least quantitative performance standards. Empirical research suggests that this regulatory approach is not necessarily adopted as crudely as some economic models (and textbooks) suggest. Efforts can be undertaken to reduce the cost of compliance and incentivize technological change. These, in turn, must address the entire set-up of the regulatory systems, including knowledge generation and transfer, social trust, and the forms of relationships between regulators and industry. All in all, it is essential to abstain from simplified normative arguments about instrument choices in environmental policy regardless of the institutional context.