Europe’s regulations at risk

This repository item contains a report from the Boston University Global Economic Governance Initiative. The Global Economic Governance Initiative (GEGI) is a research program of the Center for Finance, Law & Policy, the Frederick S. Pardee Center for the Study of the Longer-Range Future, and the Frederick S. Pardee School of Global Studies. It was founded in 2008 to advance policy-relevant knowledge about governance for financial stability, human development, and the environment

The Unbearable Lightness of Regulatory Costs

The Article counters the presumption that increased environmental regulation necessarily decreases economic prosperity. It analyzes the European chemical regulatory structure and deduces that any costs imposed on the consumer are minimal, and more cost effective than watered-down American regulations covering the same subject matter with approximately the same cost imposed on the consumer-taxpayer. It argues the Office of Management and Budget and regulated industries have consistently overestimated the costs of environmental regulation and promoted the theory that environmental regulation causes factories and jobs to move offshore. It concludes that deregulation may not spur growth

Carbon Markets and Beyond: The Limited Role of Prices and Taxes in Climate and Development Policy

The climate policy debate has advanced from science to economics, with a growing focus on creating carbon markets and getting the prices right. This is necessary but far from sufficient for an effective and equitable response to the climate challenge. While market-oriented forces such as the IMF and the World Bank have focused almost exclusively on carbon markets, others, such as the Human Development Report and the Stern Review, have emphasized the need for complementary, non-market climate initiatives to promote energy conservation and above all, to create and adopt new low-carbon technologies. The equity implications of market-based policies depend on the price elasticity of demand. When demand is elastic (i.e. the elasticity is large in absolute value), as in the case of industrial energy use, price incentives are quite effective and distributional impacts are minimized. On the other hand, when demand is inelastic (i.e. the price elasticity is close to zero), as in the case of transportation fuel use, price incentives are less effective, worsening income inequality but doing little to change in energy use and carbon emissions. Thus non-market policy instruments are particularly important in sectors with inelastic demand for energy, such as transportation. Price incentives alone cannot be relied on to spark the creation of new low-carbon technologies. Many technologies display “learning curve” effects, starting out with high unit costs and becoming cheaper as they are used more widely. Wind power, which is now commercially viable, only became affordable as a result of decades of government subsidies and research support. The same will be true of other low-carbon energy technologies, which will be needed for a sustainable solution to the climate problem. Policy debate has focused on the need for a globally harmonized price for carbon. This is not required by economic theory; in an unequal world, the logic of market economics implies that richer countries should, in effect, have a higher price for carbon. It appears likely, nonetheless, that a consistent global price will eventually be adopted. This will make the benefit of reducing carbon emissions loom larger in lower-income countries. As a result, a wider range of carbon-reducing technologies will be profitable in developing countries, creating opportunities for “leapfrogging” beyond the technologies in use in high-income countries – thereby helping to launch a new, green path to development.

05-01 "The Shrinking Gains from Trade: A Critical Assessment of Doha Round Projections"

Computable general equilibrium (CGE) models of world trade, often presented as demonstrating the benefits of trade liberalization, now make much more modest forecasts than they did just a few years ago. The estimated benefits are not only small in the aggregate, but also skewed toward developed countries; the expected contribution of trade liberalization to economic development and poverty alleviation is extremely limited. Related calculations, for the expected benefits of services liberalization, trade facilitation measures, and long-term productivity gains from trade liberalization, remain problematical and/or speculative. The empirical limitations of CGE forecasts rest on broader theoretical weaknesses: the models are largely locked within a static framework, and remarkably assume that trade policy causes no changes in total employment, up or down. Models built on more adequate theories, which have only begun to appear, would paint a very different picture of the effects of trade liberalization.

06-02 "The Unbearable Lightness of Regulatory Costs"

Will unbearable regulatory costs ruin the US economy? This specter haunts official Washington, just as fears of communism once did. Once again, the prevailing rhetoric suggests, an implacable enemy of free enterprise puts our prosperity at risk. Like anti-communism in its heyday, anti-command-and-control-ism serves to narrow debate,promoting the unregulated laissez-faire economy as the sole acceptable goal and standard for public policy. Fears of the purported costs of regulation have been used to justify a sweeping reorganization of regulatory practice, in which the Office of Management and Budget (OMB) is empowered to, and often enough does, reject regulations from other agencies on the basis of intricate, conjectural, economic calculations. This article argues for a different perspective: what is remarkable about regulatory costs is not their heavy economic burden, but rather their lightness. Section 1 identifies two general reasons to doubt that there is a significant trade-off between prosperity and regulation: first, regulatory costs are frequently too small to matter; and second, even when the costs are larger, reducing them would not always improve economic outcomes. The next three sections examine evidence on the size and impact of regulatory costs. Section 2 presents cost estimates for a particularly ambitious and demanding environmental regulation, REACH -- the European Union's new chemicals policy. Section 3 discusses academic research on the "pollution haven" hypothesis, i.e. the assertion that firms move to developing countries in search of looser environmental regulations. Section 4 reviews the literature on ex ante overestimation of regulatory costs, including the recent claims by OMB that costs are more often underestimated (and/or benefits overestimated) in advance. Turning to the economic context, Section 5 explains why macroeconomic constraints may eliminate any anticipated economic gains from deregulation. Section 6 introduces a further economic argument against welfare gains from deregulation, based on the surprising evidence that unemployment decreases mortality. Section 7 briefly concludes.

Financing the Climate Mitigation and Adaptation Measures in Developing Countries

The threat of climate change requires a rapid transition to a new, low-carbon style of economic development. How will the transition be financed? Most of the global potential for emission reduction is located in developing countries. Achieving this potential, plus adaptation to climate damages, will cost hundreds of billions of dollars per year. Existing climate funding amounts to less than $15 billion annually, mostly through CDM – far less than is needed. A new climate funding agreement could build on the lessons of the Montreal Protocol for reduction of ozone-depleting substances, a successful case of international environmental cooperation.

00-03 "Trade Liberalization and Pollution Intensive Industries in Developing Countries: A Partial Equilibrium Approach."

Economic theory suggests that liberalization of trade between countries with differing levels of environmental protection could lead pollution-intensive industry to concentrate in the nations where regulations are lax. This effect, often referred to as the "pollution haven" hypothesis, is much discussed in theory, but finds only ambiguous support in empirical research to date. Methodologies used for research on trade and environment differ widely; many are difficult to apply to practical policy questions. We develop a simple, partial equilibrium model explicitly designed to analyze the effects of a change in trade policy. Our model analyzes the relative concentrations of "clean" and "dirty" industries in two nations or regions, before and after the policy change. While lacking the theoretical rigor and mathematical intricacy of other modeling methods, our approach has the advantages of transparency and accessibility to a broad range of analysts and policy makers.

05-03 "Securing Social Security: Sensitivity to Economic Assumptions and Analysis of Policy Options"

Revamping the Social Security program has become a domestic policy priority of the Bush administration. The President has stated that the system is facing a “crisis” and will be “bankrupt” in 2041. His proposal to change Social Security is centered on the introduction of private accounts that would allow workers to direct a share of their Social Security taxes into investments such as stocks and bonds. In this paper we consider whether Social Security is really facing a crisis and whether any potential future shortfalls could be remedied without changing the basic structure of the existing program.