13.1.2.4 Institutional feasibility
Institutional realities inevitably constrain environmental policy decisions. Environmental policies that are well adapted to existing institutional constraints have a high degree of institutional feasibility. Economists traditionally evaluate instruments for environmental policy under ideal theoretical conditions; however, those conditions are rarely met in practice, and instrument design and implementation must take political realities into account. In reality, policy choices must be both acceptable to a wide range of stakeholders and supported by institutions, notably the legal system. Other important considerations include human capital and infrastructure as well as the dominant culture and traditions. The decision-making style of each nation is therefore a function of its unique political heritage. Box 13.2 provides an example for one country, taken largely from OECD (2005c).
Certain policies may also be popular due to institutional familiarity. Although market-based instruments are becoming more common, they have often met with resistance from environmental groups. Market-based instruments continue to face strong political opposition, even in the developed world, as demonstrated by environmental taxes in the USA or Europe. Regulatory policies that are outside of the norm of society will always be more difficult to put into effect (e.g. speed limits in Germany, or private sector participation in water services in Bolivia).
Another important dimension of institutional feasibility deals with implementing policies once they have been designed and adopted. Even if a policy receives political support, it may be difficult to implement under certain bureaucratic structures.
Box 13.2 The UK climate change levy: a study in political economy
The UK has a tradition of action on climate change that dates from the early acceptance of the problem by the Conservative Prime Minister Margaret Thatcher in 1988. The Labour government in 1997 reaffirmed the commitment to act and to use market-based instruments wherever possible; however, it voiced concerns on two aspects of this commitment: Firstly, that such measures might have a disproportionate effect on the poor which, in turn, might affect the coal mining communities (an important constituency) and, secondly, that this commitment might perpetuate a perception that the Labour government was committed to high taxes.
A key element of the UK’s climate policy is a climate levy. The levy is paid by energy users – not extractors or generators – is levied on industry only and aims to encourage renewable energy. An 80% discount can be secured if the industry in question participates in a negotiated ‘climate change agreement’ to reduce emissions relative to an established baseline. Any one company over-complying with its agreement can trade the resulting credits in the UK emissions trading scheme, along with renewable energy certificates under a separate renewable energy constraint on generators. However, a number of industrial emitters wanted a heavier discount and, through lobbying, they managed to have a voluntary emissions trading scheme established that enables companies with annual emissions above 10,000 tCO2-eq to bid for allocation of subsidies. The “auction” offered payments of 360 million € and yielded a de-facto payment of 27 € per tonne of CO2. Thus, the trading part of the scheme has design elements that strongly reflect the interest groups involved (Michaelowa, 2004). The levy itself has limited coverage and, consequently, households, and energy extractors and generators have no incentive to switch to low carbon fuels. However, its design does take household vulnerability, competitiveness concerns and the sensitivity of some sectoral interests into account. Thus, while the levy has contributed to emission reduction, it has not been as effective as a pure tax; a pure tax may not have been institutionally feasible.