Environmental standards revisited: Benchmarking as a means to more efficient regulation

Abstract

The conventional economic argument favors the use of market-based instruments over ‘command-andcontrol’ regulation. This viewpoint, however, is often limited in the description and characteristics of the latter; namely, environmental standards are often portrayed as lacking structured abatement incentives. Yet many contemporary forms of command-and-control regulation, such as standards stipulated via benchmarking, have the potential to be efficient. We provide a first formal analysis of environmental standards based on performance benchmarks. We show, in a variety of contexts, that standards can provide efficient incentives to improve environmental performance. Under realistic market conditions, performance benchmarks may be preferable to an emissions tax and - just like market-based instruments - lead to convergence of marginal abatement costs.