Transaction costs of alternative greenhouse gas policies in the Australian transport energy sector Albert Ofei-Mensah a, ⁎, Jeff Bennett b a Department of Industry Innovation Science Research and Tertiary Education, GPO Box 9839, Canberra ACT 2601, Australia b Crawford School of Public Policy, Australian National University, Canberra, Australia abstract article info Article history: Received 21 May 2012 Received in revised form 15 October 2012 Accepted 6 December 2012 Available online 9 February 2013 Keywords: Transaction costs Greenhouse policies Transport energy This study employs a comparative analysis of the transaction costs of alternative policy instruments. The institu- tional approach to the allocation of resources is emerging to supplement traditional analyses of market and gov- ernment 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 analy- ses. It is concluded that transaction costs need to be considered alongside other costs and benefits in the assess- ment of policies. © 2013 Elsevier B.V. All rights reserved. 1. Introduction Concern for the impacts of climate change poses a global challenge for governments, requiring a range of alternative policy instruments. In this context, greenhouse gas emissions associated with environmen- tal and natural resource use, such as the production and use of energy, can be regarded as a type of market failure (Tietenberg, 2007). The greenhouse gases that are emitted into the atmosphere are a ‘public bad’, which exhibits the characteristic of non-excludability. Ill-defined property rights to the atmosphere will promote inefficient allocation of resources (Anderson, 2004). Good governance and strong property rights institutions can help reduce the transaction costs associated with the formulation and imple- mentation process of policies designed to overcome market failure in the use of the atmosphere as a greenhouse gas sink (Williamson, 2000; Wills, 2006). In this context, the extent of transaction costs that are induced by policy change or new policies is important for assessing the relative efficiency of alternative policies. Despite the importance of transaction costs in the resource decision making process, the empirical assessment of transaction costs under alternative institutional settings has been a relatively neglected area for various reasons. In general, rigorous practical inclusion or estimation of transaction costs has been hindered by a lack of methods or formal techniques that can be used to measure transaction costs (McCann et al., 2005), and there are inconsistent definitions and frameworks (McCann et al., 2005; Williamson, 1996). This paper makes a contribution to the literature on transaction costs measurement, given the scarcity of empirical estimates of transac- tion costs, which can have a significant influence on the cost of implementing environmental policies. The results support the case for a more realistic comparison of alternative types of policies (Garrick et al., 2013-this issue). Marketable permits are touted as a panacea but the results show that when transaction costs are included, they can be more expensive than other policies. The paper also contributes to the literature by showing that transaction costs are not negligible. The analysis presents a shift from current practice, particularly in cost-benefit analyses of policies in the Australian transport energy sec- tor where transaction costs have generally been ignored. Transport (35%) and manufacturing (31%) are the largest consumers of final ener- gy in Australia; within the transport sector, road transport is the largest consumer of final energy, around 75% (ABARES, 2011). This makes the transport sector a dominant source of greenhouse gas emissions in Australia. The transport sector is also a large consumer of energy and source of emissions in many other countries in the Organisation for Eco- nomic Cooperation and Development (OECD). Transport energy poli- cies that are designed to reduce emissions are similar in many OECD countries (IEA, 2006) and, in that context, the findings of the study can be generalised beyond Australia. Ecological Economics 88 (2013) 214–221 ⁎ Corresponding author. Tel.: +61 2 6102 8391; fax: +61 2 6102 3168. E-mail address: albert.ofei-mensah@innovation.gov.au (A. Ofei-Mensah). 0921-8009/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.ecolecon.2012.12.009 Contents lists available at SciVerse ScienceDirect Ecological Economics journal homepage: www.elsevier.com/locate/ecolecon