Globe

The Political Transaction Costs and Uncertainties of Establishing Environmental Rights

September 24, 2014

By Kerry Krutilla
A key issue in the design of environmental polices is how environmental rights are distributed. Among the options, rights can be grandfathered to polluters or taxed or auctioned to generate public revenue. These alternatives have different political consequences, which impose different economic costs and political uncertainties. This research models political behavior around the rights establishment, and formally determines the associated welfare costs. The model includes parameters for the degree to which environmental rights are distributed between polluters and the government; the benefits of the environmental policy; the compliance costs of the policy; and the relative political power of polluters and environmentalists. The model shows that the economic costs of political behavior can significantly erode the expected value of environmental policymaking when the environmental rights are taxed or auctioned. These costs are not considered in the policy evaluations that recommend structuring environmental policy to raise revenue.