Transaction costs of alternative greenhouse gas policies in the Australian transport energy sector

This study employs a comparative analysis of the transaction costs of alternative policy instruments. The institutional approach to the allocation of resources is emerging to supplement traditional analyses of market and government failures. The causes of these failures are many, but often point to high transaction costs that result largely from institutional impediments. Effective institutions can help reduce transaction costs through more effective signals and incentives, including information generation, to help markets function more efficiently and policies to be delivered more successfully. The study, which contributes to transaction costs measurement, finds that the magnitudes and types of transaction costs associated with setting up and implementing three greenhouse gas reduction policy programs in Australia are substantial and different. The estimated transaction costs of the Tradable Permit and Fee System are relatively high compared to those of the mandatory Fuel Label Program and the voluntary Fuel Efficiency Program, which supports the view that market-based policies can also be costly to deliver. Notwithstanding, transaction costs have frequently been ignored in cost-benefit analyses. It is concluded that transaction costs need to be considered alongside other costs and benefits in the assessment of policies.

► The paper contributes to transaction costs measurement. ► Transaction costs of the three greenhouse policy programs studied are different. ► The findings suggest that market-based policies can also be costly to deliver. ► Transaction costs should be incorporated in cost-benefit analyses of proposed policies.