Final answer:
Financial firms are subject to command-and-control regulation for environmental performance, which faces criticism due to lack of incentives, inflexibility, and politically-driven loopholes. Market-oriented tools offer alternative solutions, but the overall effectiveness and justification of the high compliance costs are debated.
Step-by-step explanation:
Financial firms are regulated for the environmental performance of their portfolio by various mechanisms, including command-and-control regulation, which sets specific limits for pollution emissions and requires certain pollution-control technologies. Despite their role in environmental protection, such regulations have downsides, including a lack of incentive for exceeding set limits, limited flexibility in pollution reduction methods, and the existence of loopholes often driven by political compromise. Consequently, market-oriented environmental tools are being considered or implemented to provide more flexible, incentive-based, and cost-effective approaches to environmental regulation.
There is significant debate over whether the costs for firms to comply with federal environmental laws, which government economists estimate to be over $200 billion per year, are justified. Firms that are already greening their processes may oppose stricter regulations, while environmental groups such as Greenpeace continually advocate for stronger measures. These issues are exacerbated by command-and-control regulations that are subject to political influence, where existing firms lobby against the application of stricter standards to them, leading to legal frameworks riddled with exceptions and loopholes.