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Sharpening the Blunt Knife How Interest Groups Shape Environmental Policy Instrument Choice An Exercise in Advanced Cross-Country Political Economy. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de. Title. Outline The Blunt Knife: MBI in Theory and Practice

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  1. Sharpening the Blunt Knife How Interest Groups ShapeEnvironmental Policy Instrument Choice An Exercise in Advanced Cross-Country Political Economy Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Title • Outline • The Blunt Knife: MBI in Theory and Practice • The Explanatory Approach • Cross-Country Results • Sharpening the Knife: Conclusions Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  2. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de The Cutting Knife … “If it is feasibleto establish a market to implement a policy,no policy-maker can afford to do without one.” John H. Dales 1990: 21 MBI in Theory and Practice • ecologically effective • economically efficient • US AT: -50% SO2, -50% costs • EU ETS: -21% GHG (2020), -30-50% costs • German ETR: -2-3% CO2, 250.00 jobs Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  3. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de … and its (Partial) Bluntness “[T]he use of economic instruments has somewhat increased, but … for the wrong reasons …[and] their impact is still rather low” G. Kirchgässner and F. Schneider 2003: 369, 388 Shortcomings of MBI in Practice • US AT: weak target, competitive distortions • EU ETS: over-allocation, competitive distortions • German ETR: low tax rates, exemptions • Japan ETS: voluntary, bottom-up intensity targets Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  4. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Question “[T]he output of environmental policy emerge from a struggle between key interest groups.” Robert W. Hahn 1990: 21 “[W]here did all the markets go?” Robert W. Hahn andGordon L. Hester 1989: 109 Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  5. Determinants of EnvironmentalPolicy Instrument Choice Based on: Jänicke, Martin/Kunig, Philip/Stitzel, Michael (2003): Umweltpolitik – Politik, Recht und Management des Umweltschutzes in Staat und Unternehmen. Bonn: Dietz Input socio- cultural cognitive-informational institutional-political Systemic Situational Actor Actor Constraints Constraints economic- technical Output Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Conceptual Framework Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  6. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Research Steps of a Political Economy Analysis Analytical Steps • description of effects of the policy instrument • identification of relevant political actors • analysis of political actors’ preferences (towards policy’s effects) • study of political actors’ influence • external constraints Effects of the Policy Instrument • company-level and society-level efficiency • attribution of costs • administrative costs • competitive distortions • property rights • ecological accuracy • incentives to innovate • adaptation to structural changes Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  7. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Research Steps of a Political Economy Analysis Political Actors and Preferences • voters maximize utility from private and public goods • interest groups maximize political rents • bureaucrats maximize budgets • politicians maximize votes and support Determinants of Political Power • number of members • homogeneity of interests • market power • financial and personnel resources • informational advantages • power of individual group members • will-and-skill of individuals • access to discussion and decision-making arenas • utilizable networks Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  8. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Similarities in IG Action in USA, Germany, Japan Most Important Effects of ETS on IG’s interests are • society-level cost efficiency and maximization principle • the cap • attribution of costs • property rights’ issues • competition issues Political Influence Most Heavily Depends on • support of the public • homogeneity of interests • financial and personnel resources • access to the political process • utilizable networks • market power Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  9. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Similarities in IG Action in USA, Germany, Japan Situational/Systemic Conditions Shape Interests, Influence • visibility of the problem • failure of alternative instruments • political pressure by earlier commitments • overall economic situation • availability of information • routines of policy making • belief in government’s/civil society’s role Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  10. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Differences in IG’s Influence USA, Germany, Japan USA Germany Japan support of the public + + – homogeneity of interests + + – financial, personnel resources – – – access to the political process 0 0 – utilizable networks 0 0 – market power – – – visibility of the problem + + – failure of alternative instruments + + + pressure by earlier commitments + + + overall economic situation + + – availability of information + + – routines of policy making + + – government’s/civil society’s role + + – Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  11. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Similarities in IG Action in USA, Germany, Japan Additional Observations • profit maximization leads to distinguished special interests • industry utilize instrument hopping and voluntary action • economic knowledge determines environmentalists’ interests • political flexibility of emissions trading can be used to gain support • free allocations can be used for pay for approval • cap can be protected despite of free allocations Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  12. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Sharpening the Knife: Conclusions Recommendations for Governing Interest Groups’ Action • increase public support for climate protection and MBI • increase NGOs economic knowledge • communicate emission trading’s merits to companies • use free allocation for buying support • protect the cap • split opponents alliances by collaborating with winners • create homogenous support amongst environmentalists • organize cross-actor networks of supporters • increase NGOs resources • open the political process to NGO participation Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

  13. Dr. Sven Rudolph Faculty of Economics s.rudolph@wirtschaft.uni-kassel.de Quote “[P]roposals for reform that ignore these constraints ...run the risk of being irrelevant for policy makers” Robert W. Hahn and Gordon L. Hester 1989: 144 Interest Groups and Instrument Choice GCET 11 Bangkok, November 5, 2010

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