Instrument Choice in Environmental Policy

Instrument Choice in Environmental Policy

Lawrence H. Goulder and Ian W.H. Parry,
Resources for the Futures(RFF) Discussion Paper, April 2008.

Abstract:

We examine the extent to which various environmental policy instruments meet major evaluationcriteria, including cost-effectiveness, distributional equity, minimization of risk in the presence ofuncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissionsallowances, subsidies for emissions reductions, performance standards, technology mandates, andresearch and development subsidies. Several themes emerge. First, no single instrument is clearly superioralong 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 ofvarious instruments in their “pure” form. Fourth, for many pollution problems, more than one marketfailure may be involved, which may justify (on efficiency grounds, at least) employing more than oneinstrument. Finally, potential overlaps and undesirable interactions among environmental policyinstruments are sometimes a matter of concern.Key Words: emissions control instruments, cost-effectiveness, distributional burden, inducedinnovation