Tuesday, December 18, 2007

Economics in environmental policy

Every now and then someone has the nerve to produce a paper with a disciplinary heading. Needless to say, such a person needs to be an absolute authority in his or her field. Robert Stavins, mentioned as the top environmental economist in the US, has done so this time with a NBER working paper on "Environmental Economics".

After reviewing this subject field his main conclusions are that (i) the underlying normative stance of (Hicks-Kaldor) welfare evaluation as operationalised in cost-benefit analysis will continue to be debated, (ii) market-based instruments to environmental policy have already moved centre stage.

What does this mean? First, the evaluation of policies, programmes, plans and projects for their impact on social welfare is not an exact science. Cost-benefit analysis does provide (often vital) information in a broader decision making process, but need to include a sensitivity analysis on key assumptions to be really acceptable. Second, with increasing scarcity of natural and environmental resources, markets will continue to play an increasing role in the allocation of these resources. Examples are carbon trading schemes and payment for ecoystems services (PES).

As economists increasingly move into the field of environmental policy making this begs a sensitivity in the use of our evaluation tools and a good grasp on the power and limitations of market based solutions.

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