An investment contest to influence environmental policy

In an investment contest for environmental policy, polluters and victims of pollution invest in an increase of their marginal benefits of pollution and environmental quality, respectively. These investments influence time-consistent environmental policy. Investments will exceed their optimal level. The more victims there are, the lower aggregate investment, the lower payoffs for the victims and the higher payoffs for the polluters. The more polluters there are, the higher aggregate investment and the lower payoffs for polluters and victims. Asymmetries between polluter and victim result in less overinvestment and bias environmental policy in favour of the less productive side.     

Europe '92. Decentralizing environmental policy in the single market

The creation of the EC's internal market by the end of 1992 appears to necessitate a harmonization of environmental policies in the European Community. Against this background, the paper analyzes the options for decentralizing environmental policy in Europe and indicates some limitations of this approach.It is shown that, in the case of stationary sources, a harmonization is not required whereas, in the case of international spillovers and global environmental systems, a decentralization of policies is possible if countries can agree on international diffusion norms or national emission quantities, respectively. A harmonization seems to be unavoidable if product norms have to be applied, e.g. in the case of pollutants in consumption goods. Generally, however, price instruments should be used wherever possible, since they allow for a regional differentiation of environmental qualities without segmenting European markets.     

Channels of transmission of environmental policy to economic growth: A survey of the theory

Economists generally hold that environmental regulations impose constraints on the production possibilities set and are therefore potentially harmful to economic growth. In recent years, however, it has been recognized that environmental regulation can enhance the prospects for growth if improved environmental quality increases the productivity of inputs or the efficiency of the education system. It is also held that environmental regulation promotes pollution abatement activity and can lead to the exploitation of increasing returns to scale in abatement. Furthermore, expectations of a better environment may encourage households to save. Finally, it has been conjectured that environmental regulations can stimulate innovation because R&D is a relatively clean activity and because the market share of clean innovations increases. Future empirical research should shed light on the relative importance of these different channels of transmission of environmental policy to the growth rate of the economy.     

Global environment and dynamic games of environmental policy in an international duopoly

This paper examines a differential game model of international pollution control in which polluting oligopolists compete in a third country market. Two alternative policy instruments (emission taxes and command-and-control regulations) are considered. A tougher emission policy in the home country enhances the foreign firm’s competitiveness because of the static “rent-shifting” effect. The foreign country also enjoys a future improvement of the global environmental quality by “free riding” on the home country’s emission reduction effort. Because of these strategic effects, the levels of environmental policy determined in the noncooperative policy game are distorted away from the socially optimal level. Moreover, the emission tax game produces a more distortionary outcome than that in the command-and-control game; it generates more pollution and lower welfare.      

Macroeconomic conditions in the U.S. and congressional voting on environmental policy: 1970-2008

Using the Environmental Scorecard ratings of Congressmen and Senators published annually by the League of Conservation Voters, we explore empirically whether political support for pro-environment legislation, aggregated across each legislative body, is sensitive over time to changing economic conditions — that is, whether there is a political trade-off between economic conditions and the environment. Using LCV scorecard ratings from 1970 to 2008, we find evidence, consistent across both the House and Senate, that political support for the environment is related to per capita income, but this general tendency can be decomposed into sharp differences by party.     

The role of location choice in strategic export promotion policy: capital liberalization incentives of exporting countries

We study an international capital liberalization game where exporting countries choose either to open the domestic market for capital inflow or not. We clarify that if the cost difference is large enough, the less productive country is indifferent between closing or opening for inward direct investment, and the more productive country never has an incentive to open. International coordination to open markets is not always necessary in our capital liberalization game since it may deteriorate the welfare of the more productive country and will make world welfare worse off. The earlier version of this paper is Kiyono and Wei (2002).     

New Labour, energy policy and 'competitive markets'

By the end of New Labour's first term four central objectivesof energy policy had become established: ‘cheap’energy, the relief of fuel poverty, a major reduction of carbondioxide emissions, and energy security through maintaining awide diversity of primary fuel supplies, all to be achievedthrough ‘competition’. After surveying New Labourenergy policy documents, the paper argues that New Labour failedto appreciate (i) the extent to which, under such a laissezfaire policy regime, these objectives were mutually inconsistent;(ii) that the apparent successes of energy market liberalisationduring the preceding Conservative Governments had little todo with ‘competition’; and (iii) that the transactioncosts of injecting increasing ‘competition’ intoboth British and European energy systems are likely to exacerbatethe growing threat to energy security. The paper concludes witha brief examination of the implications of transaction costeconomics for the organisational structure of the UK energysupply industry.     

Harnessing the political economy of environmental policy: David Pearce’s contribution to OECD

During 34 years, David Pearce made major contribution to OECD work on environmental economic issues, with a particular focus on cost–benefit analysis, economic instruments, biodiversity and distributive issues. This article provides a brief review of David Pearce’s contributions. This work was particularly useful in enhancing the political economy of environmental policy which is at the core of OECD work. The opinions expressed in this paper reflect the author’s perception of this long history of the development of environmental economics at OECD; it does not necessarily reflect the views of the OECD and its member countries. Many thanks to Jonathan Fisher, Nick Johnstone and Michel Potier for their comments on an earlier draft.     

K. William Kapp's theory of social costs and environmental policy: Towards political ecological economics

The paper analyzes the contribution of K. William Kapp, widely considered one of the founders of Ecological Economics. This paper will demonstrate how K. William Kapp developed his theory of social costs into a framework for environmental policy development, i.e. the basis for Political Ecological Economics. The latter provides the most comprehensive and non-utilitarian alternative to the main neoclassical approaches provided by Arthur Pigou and Ronald Coase. Kapp determined basic human needs to be necessary values operational for policymaking via politically derived and scientifically determined social minima (criteria) and socio-ecological indicators. This “rational humanism” was inspired by Weber's concept of substantive rationality and informed by John Dewey's pragmatic instrumentalism. The paper concludes that Kapp's contribution is important enough to cement its place in the broader school of Ecological Economics.     

Models in evolutionary economics and environmental policy: Towards an evolutionary environmental economics

In this paper we review evolutionary economic modelling in relation to environmental policy. We discuss three areas in which evolutionary economic models have a particularly high added value for environmental policy-making: the double externality problem, technological transitions and consumer demand. We explore the possibilities to apply evolutionary economic models in environmental policy assessment, including the opportunities for making policy-making endogenous to environmental innovation. We end with a critical discussion of the challenges that remain.     

On the strategic potential of technological aid in international environmental relations

Prior to noncooperative choices of abatement of a transboundary pollutant, a technologically advanced country considers making an unconditional transfer of abatement technology to its less-advanced rival. Even though technological aid is given unconditionally and abatement strategies are chosen noncooperatively, in a number of plausible circumstances, a transfer of a superior control technology will induce Pareto-superior pollution abatement.     

Competition policy and market leaders

We study the potential loss in social welfare and changes in incentives to invest in R&D that result when the market leading firm is deprived of its position. We show that under plausible assumptions like free entry or repeated market interactions there is a social value of market leadership and its mechanical removal by means of competition policy is likely to be harmful for society.     

Environmental policy and growth when inputs are differentiated in pollution intensity

Environmental policy affects the distribution of market shares if intermediate goods are differentiated in their pollution intensity. When innovations are environment-friendly, a tax on emissions skews demand towards new goods which are the most productive. In this case, the tax has to increase along a balanced growth path to keep the market shares of goods of different vintages constant. Comparing balanced growth paths, we find that tightening the policy stance spurs innovation, because it increases the market share of recent vintages, and promotes environment-friendly technological progress. As a result the cost of environmental policy in terms of slower growth is weaker.     

Environmental policy and long-term welfare in a tourism economy

A dynamic general equilibrium model of a small open economy specialized in producing tourism services is presented. The tourism package is a bundle of attributes provided by firms, the government and the natural environment. Investment in accommodation increases the number of visitors but also congests public goods and reduces environmental quality. The model is used to determine the conditions for the existence of a long-term double dividend. These conditions depend on both the initial level of environmental quality and the responsiveness of the tourism price to marginal changes in environmental and accommodation quality and congestion of public goods. Support from the Balearic Islands Government (PRIB-2004-10142) and helpful comments from anonymous referees are gratefully thanked.     

Designing environmental policy: lessons from the regulation of mercury emissions

In its waning days, the Clinton administration decided that it was appropriate to regulate mercury emissions from power plants. The incoming Bush administration had to decide how best to regulate these emissions. The Bush administration offered two approaches for regulating mercury emissions from power plants. The first was to establish uniform emission rates across utilities, as mandated by the 1990 Amendments. The second was to establish a cap on mercury emissions while allowing emissions trading in order to reduce the cost of achieving the goal. This paper presents the first cost-benefit analysis of this issue that takes account of IQ benefits. We find that the benefits of the mercury regulation are likely to fall short of the cost. This assessment is based on a number of assumptions that are highly uncertain. The finding of negative net benefits is robust to many, though not all, reasonable variations in the model assumptions. We also find that the emissions trading proposal is roughly $15 billion less expensive than the command-and-control proposal. Mr. Gayer is associate professor of public policy at Georgetown University and a visiting scholar at the American Enterprise Institute. Mr. Hahn is co-founder and executive director of the American Enterprise Institute-Brookings Joint Center for Regulatory Studies and a scholar at AEI. We would like to thank Mary Jo Krolewski, Leonard Levin, Joel Schwartz, Anne Smith, Nik Wada, and Chris Whipple for helpful comments and Jordan Connors, Laura Goodman and Molly Wells for valuable research assistance. The views expressed in this paper represent those of the authors and do not necessarily represent the views of the institutions with which they are affiliated.     

Is Environmental Dumping Greater when Plants are Footloose?

We address concerns that globalisation gives national governments incentives to set weak environmental policies and that these incentives are particularly strong in industries where plants are footloose. Using a simple model of imperfect competition, we compare the environmental policies that would be set by non-cooperative governments for two different move structures—where governments set environmental policies after firms decide where to locate (market share game) and where governments set environmental policies before firms decide where to locate (location game). We show that the extent of environmental dumping in the market share game can be greater than in the location game.
JEL classification F 1; H 4; L 5; Q 2     

On the design of incentive mechanisms in environmental policy

The objective of this paper is to present environmental policy as a simple game in two stages within a principal-agent framework. At the outset the authority adopts a transfer payment rule. Then the firms react by carrying out abatement activities, based on their chosen levels of emission and output. Next the authority measures the emissions (and residual profit of the industry) and revises the level of its instrument. Then the game starts again. Our purpose is to narrow the scope of ad hoc incentive schemes by characterizing families of optimal linear schemes.We thank two anonymous referees for their valuable suggestions. We have also benefited from comments from I.-M. Andréasson, J. B. Opschoor, H. Verbruggen and the other members of the Task Force II: Environmental Policy instruments of the European Science Foundation Programme: Environment, Science and Society. Wang acknowledges support from the Deutsche Forschungsgemeinschaft (DFG).     

Environmental policy, fuel prices and the switching to natural gas in Santiago, Chile

In this study I analyzed the role of environmental policies and energy cost savings on the pattern of switching to natural gas by stationary sources in Chile. According to the data most of the switching was induced by the lower cost of natural gas, although environmental policies played a small role and showed that sources were more sensitive to the cost of energy than to the environmental regulation.