Sez report

1.3.3.1. Government and the market framework 
It is the role of government to set the market framework – fiscal signals, incentives, regulations – 
within which businesses, individuals and communities operate. Such adjustments of the market play an 
important role in solving or preventing market failures which lead to social and environmental 
problems. 
The term ‘market failure’ describes a situation in which markets do not efficiently allocate goods and 
where market forces do not serve the perceived public interest. Externalising the costs of business onto 
the environment, or not accounting for the true all-round value of natural resources, are key examples. 
Adjusting markets to respond to such failures will allow the market to respond in a positive way, and 
encourage the most progressive and responsible companies to survive and flourish. This means: 
x
sending the right signals to business
through market-based instruments, trading, fiscal 
incentives and disincentives (taxation, subsidies etc), product standards, voluntary initiatives 
and regulatory changes; 
x
empowering individuals, communities and businesses
though provision of information, 
labeling and easier access to sustainable products and services; and 
x
public procurement shifts
to help steer markets in the right direction by leveraging public 
procurement budgets.
 
Market instruments cannot always deliver, and some things are not easily amenable to operation within 
the market. That’s why we have chosen a different route to protect our National Parks, our ancient 
monuments, much of our countryside and our historic buildings. Likewise, some things will need to be 
regulated where fiscal signals cannot function fast enough to alter the trajectory of past mistakes.
In this situation, government’s role should be welcomed as a supportive influence. Complaints that 
environmental taxes or regulation will damage UK competitiveness or force companies to relocate in 
countries with less stringent pollution laws should be seen in this context. Senior economists have 
found little truth in either concept. Indeed the World Economic Forum’s 
Global Competitiveness 
Review 2003-2004
shows that highly competitive countries such as Denmark, Sweden and Finland are 
also those with the highest social and environmental regulations. In Scandinavian countries, ‘smart 

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regulation’ is seen as the mother of innovation. The same could be true in the UK, given far-sighted 
government.
Indeed, a July 2007 survey of 151 British firms conducted by consultants PricewaterhouseCoopers, 
found that taxes are often effective at delivering green improvements and half (49%) of the companies 
did not think current policy instruments actually encourage significant changes in behaviour. In the 
report Glyn Barker, managing partner, PricewaterhouseCoopers LLP states “We believe that there is 
an urgent requirement for a much clearer policy framework to help business respond to the challenge 
of climate change. While it may be surprising to find businesses appearing to welcome further 
regulation, corporate leaders recognise that customer and investor pressure is not enough to change 
their environmental behaviour fast enough, given the urgency and scale of action required. 
Competitive businesses want a level playing field, and they want it to be green.”