A Yellow Light for Green Policies

I used to be a forest, you know?

Representative democracies rank amongst the best forms of government we know, but when it comes to designing and implementing environmental policies, they seem to deliver less than optimum results. Why this should be so, considering that environmental awareness has increased dramatically among the citizenry over the past few decades, is the subject of Friedrich Schneider’s latest CESifo Working Paper.

Mr Schneider, a CESifo Researcher from the Johannes Kepler University of Linz, together with his colleague Andrea Kollman, uses public choice theory to analyse the motives or interests concerning environmental policy of the five most important economic agents in developed countries, namely voters, politicians, producers, interest groups, and bureaucracies, to find out why market-based instruments have not been implemented satisfactorily.

It turns out that the incentives for implementing such instruments in environmental policy are weak, as compared to command-and-control measures. Voters, for instance, while vocally aware of environmental concerns, tend to grant higher priority to issues of more immediate urgency, such as unemployment or crime, over less tangible ones such as environmental protection. In addition, the immediate costs but delayed benefits typical of environmental policies, in particular those aimed at reducing carbon dioxide emissions, conspire against such policies, as does the fact that the provision of this kind of public good allows free-rider behaviour.

Politicians, in turn, always with an eye on re-election, tend to prefer policies that lead to immediate and noticeable utility gains for the median voter, with costs as invisible as possible. This leads to a preference for command-and-control measures, which meet these criteria, over market-based ones, which are more difficult to manage and, while over time more effective, less obviously beneficial in the short run.

Producers also prefer the command-and-control measures, since they leave some leeway for negotiations between the regulating authority and individual firms. In addition, while the economic efficiency of market-based instruments for the whole economy can be reasonably assumed, it is debatable whether every single firm can realize minimum costs.

Digging a bit deeper, the authors also point out that research has shown that if a tax design involves no refunding scheme, all polluters will favour a command-and-control regime over taxes. Conversely, if a refund system is in place, refunding will depend on the individual polluting level of each facility. Uniform refunding would thus lead to a redistribution from large to small polluters. As a consequence, the latter will prefer taxes, while the former will go for command-and-control. And the larger firms have more lobbying clout, which is the next point the authors analyse.

The fact that there are about 20,000 lobbyists to the 15,000 Commission and European Parliament officials speaks for itself. As it happens, it is not only producers which prefer command-and-control measures over market-based instruments: green interest groups do as well. They interpret permits and environmental taxes as “rights to pollute,” and consequently rank them as immoral.

The influence of industry lobbyists can be seen in the fact that, when for once a market-based approach was decided upon by the EU in the form of a cap-and-trade system for carbon dioxide emissions, lobbyists managed to have it watered down in its efficiency by grandfathering the polluting permits, i.e. allocating them at no cost according to past emission levels. Auctioning them off would have been a far better option. 

Finally, the public bureaucracy. Amongst many other factors, the bureaucracy is well aware that it is needed for command-and-control mechanisms, but may be superfluous if such a mechanism is replaced by something like a n environmental tax. Furthermore, when it comes to commanding and controlling, the bureaucracy knows what to do, which may not be the case with a new instrument.

From the above, the authors conclude that the affected producers and the public authorities are the two groups with the strongest reasons to favour command-and-control policies, and both have the political power and resources to influence the design of environmental policy.

What to do, then?

The authors suggest to scale back the “representative” bit in “representative democracy” and give more oomph to the “democracy” part, by giving voters more rights, in the form of a referendum on environmental matters. A further boost could come from improving the quality of information voters receive, for instance by introducing such things as green labels for products. This would help voters to internalise environmental behaviour and increase pressure on producers and, well, on their representatives as well.

Friedrich Schneider, Andrea Kollmann: Why does Environmental Policy in Representative Democracies Tend to be Inadequate? A Preliminary Public Choice Analysis, CESifo Working Paper No. 3223

• Other CESifo Working Papers by Friedrich Schneider
• Other CESifo Working Papers dealing with environmental policy
• Other CESifo Working Papers dealing with public choice
• Other CESifo Working Papers dealing with green taxes
• Other CESifo Working Papers dealing with tradeable permits
• CESifo Working Papers published in the past three months