The Economic Approach to Environmental Policy

Citation

Read, P. (2000), "The Economic Approach to Environmental Policy", International Journal of Social Economics, Vol. 27 No. 3, pp. 244-255. https://doi.org/10.1108/ijse.2000.27.3.244.2

Freeman has gathered together leading papers from his distinguished career as a pioneer of the sub‐discipline “environmental economics” unheard of prior to his graduate studies in the early 1960s, and still so new as to register in the 1999 Journal of Economic Literature classification only as an apparent afterthought to Q2 “Renewable resources and conservation”. These he has grouped into four parts which broadly follow shifts in his professional interests. These run from an early concern with the distributional effects of environmental policy, through contributions to the economics of environmental policy instruments, and to problems of measuring environmental values, which ran in parallel through his mid‐career in the 1970s and 1980s, to a mostly recent involvement in the economics of risk and uncertainty as it affects environmental issues. A few miscellaneous papers form a fifth part.

These few paragraphs cannot serve to illuminate the work of a lifetime, on which the professional reader and graduate student will want to work from the original. Others would require a substantial article which Freeman himself provides in his Chapter 34 review of “Economics, incentives and environmental regulation”. More useful is it to remark on the shifts in economic theorising that have paralleled the infancy of environmental economics and influenced the development of Freeman’s work.

As so often in economics, progress is driven by the demands of policy, with his early work responding to political hopes of killing two birds with one stone: could water resource development serve also to ameliorate the lot of the rural poor? Application of a social welfare function suggested this could be the case and Freeman argued that, “if the distribution chosen by the political mechanism can be assumed to be most preferred and if enough is known about the conditions under which this choice was made, the shape of this implied social welfare function can be determined”. But work in this direction faltered doubtless reflecting the profession’s preference for sheltering under the impossibility theorem, turning away from political economy in the increasing formalisation of efficiency issues.

So Sen got his Nobel Laureate only at the end of the century, a reflection of the time that was needed for Stiglitz and his collaborators to discover the “almost singular set of assumptions under which Adam Smith’s invisible hand conjecture was correct” (Stiglitz, 1994). With multiple equilibria and path dependency now central in economic theorising it seems that efficiency and equity can no longer be separated. Small events may determine which equilibrium is reached and these small events may be represented by the choices of those to whom power over spending is given or redistributed. Maybe in his maturity Freeman will return to graze again the pastures of his early career.

Meanwhile Baumol and Oates’s work placed environmental policy analysis firmly in the context of general competitive equilibrium theorising. This has led to a generation of confident technicians eager to thrust on an unwilling body politic the prescriptions of cost‐benefit analysis that takes no account of the reality that compensatory payments are rarely made to those disadvantaged by policy, and of externality pricing that takes account neither of the distributive impacts, or of second‐best realities. Thus we had, in relation to the primary environmental issue of the twenty‐first century, the de´baˆcle over the use of cost‐benefit analysis in climate change assessment (Nature, 1995). This sprang from a valuation procedure for which compensation was not only unlikely but unimaginable, and which seems unlikely to engage the enthusiasm of so sensitive a practitioner as Freeman. Nor does it seem sensible to persist with externality pricing of greenhouse gas emissions that is fatally open to leakage in relation to developing countries that cannot be expected to accept an equalised policy burden for several decades.

Throughout his career Freeman’s work has related to leading‐edge environmental policy making implemented by the US Environmental Protection Agency, a reality that has led to a significantly US focus, not only in his work but in the development of the sub‐discipline. To this may be attributed some of the insensitivity to sustainable development issues that mars some economists’ contribution to an environmental problem that is global in scope. More fundamental is the grounding of theorising in a tradition that is static in spirit, failing to encompass the dynamics of technological change which in the long run provides best hopes for effective responses that do not noticeably impact on living standards. Recent work at the Rand Institute suggests that a robust policy solution should focus more on rewarding innovation than on penalising emissions, an approach which is more likely both to stimulate sustainable development and to minimise leakage. Let us hope that young men of talent, like Freeman, will take up the challenge of carrying “environmental economics” into the twenty‐first century world of dynamic increasing returns theorising.

The book is handsomely produced with several articles reset for the occasion. It is a shame that funds did not run to extending this to the few remaining articles that are reproduced by photo‐reduction from double column large page format, a practice that is far from easy on the eye. As the record of the development of one of the leading practitioners of environmental economics, the book is of interest to scholars in the history of economic thought, as well as convenient access to core materials on environmental policy from the economics of the latter part of the twentieth century.