Incentives

Incentives are a motivational approach to fix the issues related to the environment, they are the
best method to increase awareness in the environmental area, if incentives are not well-
positioned in the culture’ issues could escalate that governments will try to fix.

Governments suggested two main approaches to reduce the impact of pollution and related
issues; the first approach is to impose the taxes or penalties on those who pollute. In the domain
of climate change, a tax on greenhouse gas emissions is a simple example. The second approach
is called a cap-and-trade system. In such systems those who pollute are given (or sold) “rights”
to pollute in certain amounts and these rights are then traded in a market.

Companies much prefer cap-and-trade systems to rigid government commands, because such
systems allow more freedom and impose lower costs. If a polluter wants to increase its level of
activity, and hence its level of pollution, it isn’t entirely blocked.

The best approach to pollution problems is to impose a tax on the harmful behavior and to let
market forces determine the response to the increased cost.

The alternative cap-and-trade system is similar in spirit and approach. In the pollution context,
people who reduce their pollution below a specified level are allowed to trade their “emissions
rights” for cash.

The Kyoto Protocol, designed to control greenhouse gases, contains a trading mechanism
specifically designed to decrease the costs of emissions reductions.

In the United States, the most dramatic program of economic incentives can be found in the 1990
amendments to the Clean Air Act. The act relies on an emissions trading system for the control
of acid deposition. Much of corporate America was willing to accept the system on the ground
that the ability to trade emissions rights would drive down the cost. With this program, Polluters
are explicitly permitted to trade their allowances. Because pollution reduction can be turned into
cash, strong incentives are created for environmentally beneficial behavior.
As compared with a command-and-control system, the trading mechanism is estimated to have
saved $357 million annually in its first five years. For its first twenty years, the mechanism was
projected to save $2.28 billion annually, for an overall savings in excess of $20 billion.

Feedback and Information

An important step would be an improvement in the process of feedback to consumers through

better information and disclosure. Such strategies can improve the operation of markets and
government alike, and are also far less expensive, than the command-and-control approaches that
national legislatures have so often favored. To be sure, many environmentalists fear that
disclosure by itself will accomplish too little. They might be right. But sometimes information is
a surprisingly strong motivator.

The National Environmental Policy Act, enacted in 1972. The principal goal of the act is to
require government to disclose environmentally related information before it goes forward with
any projects having a major effect on the environment. The purpose of disclosure is to activate
political safeguards, coming from the government’s own judgments once the environmental
effects are made clear, or from external pressure on the part of citizens who have learned about
those effects.

The Emergency Planning and Community Right to Know Act, a law enacted by Congress in
1986 in the aftermath of the Chernobyl nuclear reactor disaster in Ukraine. It was essentially a
bookkeeping measure, intended to give the Environmental Protection Agency a sense of what
was out there. The statute turned out to do a lot more. In fact, the requirement of disclosure,
captured in the Toxic Release Inventory, may be the most unambiguous success story in all of
environmental law.
Ambitious Environmental Nudges

Clive Thompson (2007) has explored the efforts of Southern California Edison to encourage its
consumers to conserve energy. The idea was to give people an Ambient Orb, a little ball that
glows red when a customer is using lots of energy but green when energy use is modest.

The EPA adopted its Green Lights program, which was designed to increase energy efficiency, a
goal that was profitable and good for the environment. The EPA entered into voluntary
agreements with both for-profit and nonprofit firms. Through these agreements, firms pledged to
implement energy-saving lighting improvements.