Instrument Choice in Environmental Policy

34 Pages Posted: 8 Apr 2008 Last revised: 15 Oct 2008

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Ian W. H. Parry

Resources for the Future

Date Written: April 1, 2008

Abstract

We examine the extent to which various environmental policy instruments meet major evaluation criteria, including cost-effectiveness, distributional equity, minimization of risk in the presence of uncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissions allowances, subsidies for emissions reductions, performance standards, technology mandates, and research and development subsidies. Several themes emerge. First, no single instrument is clearly superior along all the criteria. Second, significant trade-offs arise in the choice of instrument; for example, assuring a reasonable degree of distributional equity often will require a sacrifice of cost-effectiveness. Third, it is possible and sometimes desirable to design hybrid instruments that combine features of various instruments in their pure form. Fourth, for many pollution problems, more than one market failure may be involved, which may justify (on efficiency grounds, at least) employing more than one instrument. Finally, potential overlaps and undesirable interactions among environmental policy instruments are sometimes a matter of concern.

Keywords: emissions control instruments, cost-effectiveness, distributional burden, induced innovation

JEL Classification: Q58, H23, Q54

Suggested Citation

Goulder, Lawrence H. and Parry, Ian W. H., Instrument Choice in Environmental Policy (April 1, 2008). RFF Discussion Paper No. 08-07, Available at SSRN: https://ssrn.com/abstract=1117566 or http://dx.doi.org/10.2139/ssrn.1117566

Lawrence H. Goulder

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Resources for the Future

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Ian W. H. Parry (Contact Author)

Resources for the Future ( email )

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HOME PAGE: http://www.rff.org/~parry

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