The Institutional Blind Spot in Environmental Economics

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.

Economic approaches to environmental issues typically strive for the most cost-effective means to achieving a given policy goal. However, these approaches are not widely applied to environmental policies.

According to RFF Darius Gaskins Senior Fellow Dallas Burtraw, this occurs because economic approaches often fail to reflect the complexity and role of governing institutions. In a new RFF discussion paper, “The Institutional Blind Spot in Environmental Economics,” he notes:

“A virtue of economic approaches is that they are typically simple and in principle cost-effective. However, for economic advice to reach its full influence requires consideration of the role of institutions and their complexity that determines how economic policies ultimately will function. The success of economic prescriptions for environmental policy depends on a new round of sophisticated thinking about institutions and how they interact with the policy tools at our disposal.”

In the paper, Burtraw considers three institutional relationships that strongly influence how economic tools can be used in environmental policy. First, he investigates the federalist nature of governmental authority. Second, he looks at how this federalist structure interacts with the economic alternatives of cap and trade versus emissions fees. Third, he considers the Clean Air Act and compares the effectiveness of economic instruments versus regulation under the act in the context of mitigating emissions of sulfur dioxide and greenhouse gases.