What Has Kyoto Wrought? The Real Architecture of International Tradable Permit Markets

This paper investigates a central issue in the climate change debate associated with the Kyoto Protocol: the likely performance of international greenhouse gas trading mechanisms. Virtually all design studies and many projections of the costs of meeting the Kyoto targets have assumed that an international trading program can be established that minimizes the costs of meeting overall goals. This conclusion rests on several simplifying assumptions. In this paper, the authors focus on one important issue that has received little, if any, attention: the interaction between an international trading regime and a heterogeneous set of domestic greenhouse policy instruments. This is an important issue because the Protocol explicitly provides for domestic sovereignty regarding instrument choice, and because it is unlikely that most countries will choose tradable permits as their primary domestic vehicle. It is true that costs can be minimized if all countries use domestic tradable permit systems to meet their national targets (allocate permits to private parties) and allow for international trades. But when some countries use non-trading approaches such as greenhouse-gas taxes or fixed quantity standards � which seems likely in the light of previous experience � cost minimization is hardly assured. In these cases, achieving the potential cost savings of international trading will require some form of project-by-project credit program, such as joint implementation. But theory and experience with such credit programs suggest that they are much less likely to facilitate major cost savings, because of large transactions costs, likely government participation, and absence of a well functioning market. Thus, individual nations' choices of domestic policy instruments to meet the Kyoto targets can limit substantially the cost-saving potential of an international trading program. There is an important trade-off between the degree of domestic sovereignty and the degree of cost effectiveness. Moreover, there is a need to analyze the likely cost-savings from feasible, as opposed to idealized, international policy approaches to reducing emissions of greenhouse gases.

The Impact of Economics on Environmental Policy

Environmental economists have seen their ideas translated into the rough-and-tumble policy world for over two decades. They have witnessed the application of economic instruments to several environmental issues, including preserving wetlands, lowering lead levels, and curbing acid rain. This essay examines the impact of the rise of economics in the policy world on the making of environmental policy. I focus on two related, but distinct phenomena-the increasing interest in the use of incentive-based mechanisms, such as tradable permits, to achieve environmental goals; and the increasing interest in the use of analytical tools in regulatory decision making, such as benefit-cost analysis. I argue that economists and economic instruments have had a modest impact on shaping environmental, health and safety regulation, but that economists will play an increasingly important role in the future. Although the role of economics is becoming more prominent, it does not follow that environmental policy will become more efficient. This apparent inconsistency can be explained by the political economy of environmental policy.

The FCC Cross-Ownership Rules Should Be Repealed

The Federal Communications Commission prohibits a business from owning a small newspaper and a small radio station or television station in the same town. I argue that the FCC's cross-ownership rules containing these prohibitions should be repealed because they do not have a useful economic justification.

The False Promise of "Full Disclosure"

In this essay, I address the problem of conflicts of interest in the context of funded research and opinions that are disseminated to the public by academics, think tanks, and individuals affiliated with think tanks. I argue that "full disclosure" may be a laudable goal, but is likely to be a disaster in practice. In addition, I argue that some disclosure norms imposed by the media are not likely to be very helpful in promoting useful information for their audiences, and will likely have unintended adverse consequences. There are no simple solutions to the problem of identifying conflicts of interest and potential biases associated with research and opinions reported in the media. I believe the problem could constructively be addressed by honing the thinking skills of the media and the public, not something that is likely to happen immediately because the demand isn't there.

Government Analysis of the Benefits and Costs of Regulation

Recently, Congress has shown a greater interest in assessing the economic impact of regulation. The interest is driven in part by estimates that federal regulation cost several hundred billion dollars annually. In 1996, Congress required the director of the Office of Management and Budget to provide estimates of the total annual benefits and costs of all federal regulatory programs and estimates of the benefits and costs of individual regulations. This essay reviews the increasing use of economic analysis in regulatory decision making, critically assesses the first OMB report, and considers how the use of economic analysis can help inform regulatory decision making. It argues that policy makers need to address a growing body of evidence that casts doubt on the effectiveness and efficiency of much regulation.Regulatory Reform

Regulatory Reform: Assessing the Government's Numbers

This paper provides the most comprehensive assessment to date of the costs and benefits of federal regulatory activities. The assessment, based on the government's own numbers, shows that the net benefits for final regulations promulgated from 1981 to mid-1996 approach a net present value of $1.6 trillion. The analysis also shows that the government can significantly increase the net benefits of regulation. Less than half of final regulations pass a neutral economist's benefit-cost test. Net benefits could increase by approximately$280 billion if agencies rejected such regulations. Net benefits could also increase if agencies replace existing regulations with more efficient alternatives, or if agencies substantially improve regulatory programs. The efficiency of individual regulations varies by agency and by the type of risk the regulation is designed to reduce. Regulations from the Department of Transportation comprise over half of the total net benefits of final regulations, although they account for less than 10% of all regulations. The net benefits of regulations from the Environmental Protection Agency account for only about a third of total net benefits, primarily because of 19 Clean Air Act regulations with high net benefits, although two-thirds of all regulations are EPA regulations. On average, regulations that reduce cancer risk are less efficient than other social regulations, and EPA cancer regulations appear less efficient than other cancer regulations. Regulations that reduce the risk of car, fire, or work-related accidents are generally more efficient than regulations that reduce the risk of cancer and heart disease. The study also shows that the efficiency of regulations has not declined over time, as some scholars suggest. Furthermore, the introduction of formal regulatory oversight by the OMB does not appear to influence the cost-effectiveness of regulations. The paper shows that agency compliance with regulatory impact analysis requirements in Reagan's Executive Order 12291 and Clinton's Executive Order 12866, the basis for agency estimates of the costs and benefits of regulation, is usually superficial. As a result, the quality of such analyses is generally poor. Partly because of the poor quality of analyses, it appears that agencies do not often use the analyses to improve regulatory outcomes. If Congress and the White House are serious about regulatory reform, they must cooperate to enforce the regulatory impact analysis requirement. Successful enforcement requires high-level political support, statutory language requiring all agencies to adhere to established principles of economic analysis, and rigorous review of agency analyses by an independent entity. At this time, it is unclear whether law makers are willing to exert the political muscle necessary to achieve real reform.