Thursday, September 20, 2012

The Institutional Blind Spot in Environmental Economics

Abstract: Economic approaches are expected to achieve environmental goals at less cost than traditional regulations, but they have yet to find widespread application. One reason is the way these tools interact with existing institutions. The federalist nature of governmental authority assigns to subnational governments much of the implementation of environmental policy and primary authority for planning the infrastructure that affects environmental outcomes. The federalist structure also interacts with the choice of economic instruments; a national emissions cap erodes the additionality of actions by subnational governments. Even the flagship application of sulfur dioxide emissions trading has been outperformed by the venerable Clean Air Act, and greenhouse gas emissions in the United States are on course to be less than they would have been if Congress had frozen emissions with a cap in 2009. The widespread application of economic tools requires a stronger political theory of how they interact with governing institutions.
The trading program was statutorily created in the Clean Air Act Amendments of 1990 and led to cost reductions of roughly 40 percent compared to traditional approaches under the Clean Air Act.8 However, the program had what literally became a fatal flaw: namely, an inability to adjust to new scientific or economic information. Though information current in 1990 suggested that benefits of the program would be nearly equal to costs, by 1995 there was strong evidence that benefits were an order of magnitude greater than costs. Today the Environmental Protection Agency would argue that benefits are more than thirty times the costs.Unfortunately, to change the stringency of the program requires an act of Congress, at least according to the D.C. Circuit Court.12 The Act locked in the emissions cap, and despite several legislative initiatives to change the stringency of the trading program, none have been successful.
by Dallas Burtraw
Resources For the Future (RFF)
RFF Discussion Paper 12-41; August, 2012
Research Topics: Air Quality, Climate Change, Environmental Regulation, Policy Instruments

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