Non-environmental instruments to tackle environmental issues

Prudence Dato (IREGE/ University Savoie Mont Blanc)

There was a debate at the third conference of the Green Growth Knowledge Platform (GGKP) on "Policies and the Green Economy" in Venice two weeks ago on whether environmental policies are enough to escape the climate change trap. The discussion mainly focused on environmental fiscal policies, but also other important issues such as uncertainty, trust and beliefs, non-environmental instruments, etc. In fact, Greenhouse gas emissions, which cause planetary climate change, represent both an environmental externality and the overuse of a common property resource (atmosphere)¹. Green fiscal instruments, such as environmental taxes, tax incentives and subsidies for green technologies are crucial solutions to reduce those gas emissions and can also help to provide additional revenue for public expenditure.

However, there exist other measures that could be taken to improve the performance of those environmental policies. For instance, it is important to account for non-environmental market-failures (information problem, incomplete property rights, split incentives, etc.), which have environmental implications, by using non-environmental instruments such as signals (Ecolabels), incentives mechanisms and regulation of the housing markets, etc. Generally, labels provide information on the quantity of pollution that a product can generate (green car) or its energy consumption (energy efficiency). They are signals and can be misreported. Then, one needs to additionally use incentives mechanisms to control for this information problem. On top of that, decision-makers also need to trust the information that is revealed through the label. Otherwise, the label will be a useless gadget…In residential sector for instance, split incentives² can hinder energy efficiency. One solution could be a regulation of the housing markets (OCDE, 2007)³ by introducing minimum standards (Gillingham, 2012⁴ and Charlier, 2014⁵).

Another issue is uncertainty or volatility that can limit pro-environmental actions. Sometimes, an environmental instrument can be inefficient due to underestimation of the associated environmental externalities because of lack of awareness and understanding of risk and uncertainty (Hasset and Metcalf, 1995)⁶, There exist many other non-environmental policies (in agriculture, transport, infrastructures, etc.) that could be mixed with environmental instruments to achieve both environmental effectiveness and economic efficiency. Does it mean that environmental economics needs to broaden its scope or that any economist should tackle environmental issues?

1 Harris, J., Codur, A., Institute, G. (2012). Economics of climate change. Retrieved from http://www.eoearth.org/view/article/151943.}

2 For example, when a landlord would bear costs related to investments in energy efficiency improvements, while the benefits of that investment would accrue to the tenant (OECD, 2007).

3 OECD (2007). Instrument Mixes for Environmental Policy, OECD Publishing, Paris.

4 Gillingham, K., M. Harding, and D. Rapson (2012). Split Incentives in Household. Energy Consumption, Energy Journal, 33(2): 37-62.

5 Charlier, D. (2014). Split Incentives and Energy Efficiency: Empirical Analysis and Policy Options. Working papers, ART-Dev 2014-07.

6 Gilbert E. Metcalf. "Energy Tax Credits and Residential Conservation Investment: Evidence from Panel Data (with Kevin Hassett)" Journal of Public Economics 57 (1995): 201-217. Available at: http://works.bepress.com/gilbert_metcalf/19