Command and Control

Command and Control (CC or CAC) is one of the three main ways (alongside Carbon Taxes and ETS) through which a government can regulate the carbon emissions of an economy. Unlike Carbon Taxes and ETS, however, it is not a market-based solution and relies on the government laying out a set of rules or standards for companies to follow. One can distinguish two types of Command and Control regulation:

Emission standards set an upper limit on the pollution that can be caused by any individual company. Generally, this limit is determined by the size of the company and its industry sector. If a company fails to comply with the standard, it has to pay a substantial fine. As for ETSs, Emission standards are used primarily but not exclusively for greenhouse gas emissions. (For examples, the successful 1987 Montreal protocol used CC to limit the release of Chlorofluorocarbons into the atmosphere)

Technology standards rule out the use of certain technologies (e.g., to ban the use of coal for electricity generation) and thus make companies opt for more environmentally friendly alternatives.

CC is a popular choice among governments as paradoxically both polluting companies and environmental NGOs favor it. NGOs hope to encourage the legislative powers to set strict limits for polluting companies and high fees in case the limits are not respected. Simultaneously, companies hope to use their lobbying power to relax the stringent regulations to much lower levels such that the company either already complies with the regulation or faces a minimal mitigation cost. This process is called regulatory capture and often pointed out as one of the main weaknesses of CC regulation.

Unlike in ETSs and Carbon Tax Systems, once companies comply with the set standard, they have no incentive to further lower emissions meaning that governments face the challenge to determine a desirable level of pollution such that CC regulation is effective.

For this very reason, from a theoretical point of view, CC is the most inefficient solution. However, it does not necessarily create a larger welfare loss than carbon taxes, especially when the desired emissions are close to zero. Further, compared to both ETSs and Carbon Taxes, Emission standards likely entail lower monitoring costs as it is enough to monitor sporadically instead of continuously. In the case of technology standards, sometimes monitoring is not required at all.

Sources and further reading:

Long-term assessment of the effectiveness of CC by the GermanInstitute for Economic Research

(Definitions and content draw heavily on ECON204 thaught by Prof. Neumeyer at the London School of Economics and the corresponding textbook Environmental Economics: An Introduction by Field and Field)