Reconsider policy allocation strategies: A review of environmental policy instruments and application of the CGE model

How to choose environmental policy instruments within a clearly defined scope of the market mechanism and government intervention will profoundly affect the policy effectiveness. Through a systematic review of 111 representative literature, this paper traces the theoretical development of environmental policy instruments, empirical analyses based on the CGE (Computable General Equilibrium) model, and globally practical experience. We find that the reflections on environmental policy instruments have shifted from command-based to market-based, from trade-offs between quantity-based and price-based instruments within the scope of market-based instruments to combining both, and finally a reasonable allocation of both command-based and market-based instruments. The CGE model promotes the shift, deepens the theory, and accelerates the transformation from theoretical thinking to practical application. By providing approaches to recognize and measure the overall economic costs of environmental policies, the CGE model plays an important role in validating efficiency theories, identifying efficiency losses, and amending policy instruments. It also promotes the implementation of environmental tools through region-pertinent settings and simulations. Based on reflections and discussions upon existing literature, we propose that the market should play a dominant role in allocating resources to obtain long-term environmental goals with corresponding environmental regulations as supplementary; under the circumstances with market efficiency losses, command-based instruments should be employed to cope with market failures. The results in this paper can facilitate the expansion of the environmental policy theory and also assist governments with better selection and formulation of environmental policy instruments relying on a solid theoretical basis and rational practical approaches. •Theoretical development of environmental policy instruments and empirical analyses based on the CGE model are systematically explored.•The preference for policy tools shifts to market-based instruments and evolves into a combination of quantity- and price-based instruments.•The CGE model promotes theoretical verification, and facilitates policy formulation and implementation.•The market should play a dominant role in allocating resources to obtain long-term environmental goals.•Command-based instruments should be employed to complement market tools when the market efficiency loss is substantial