Six Themes in Environmental and Resource Economics

This summer, the Association of Environmental and Resource Economists—an international professional organization dedicated to ideas, research, and training in environmental and resource economics—awarded a fellowship to RFF Senior Fellow Dallas Burtraw. The fellowship recognizes Burtraw as having made significant contributions to advancing this field of economics. He joins nine other RFF-affiliated scholars who have received this distinction since 2005: Board of Directors Co–Vice Chair Robert N. Stavins; Board Member Catherine L. Kling; Senior Fellows Maureen L. Cropper, Alan Krupnick, and Karen Palmer; and University Fellows Lawrence H. Goulder, Charles Kolstad, William Schulze, and V. Kerry Smith.

To acknowledge the new recognition, Burtraw shares some broad insights on the field as he’s observed it, the evolution of related research over the years, and how scholars might build on this research moving forward.

1. Encouraging Incentives

Investigating the potential efficiency of incentive-based approaches to environmental regulation—such as cap and trade, emissions prices, or tradable performance standards—and understanding that the benefits of these approaches could be enormous.

2. The Importance of Engaging with Other Disciplines

The early application of integrated assessment, working across disciplines. One perspective articulated by Lester Lave has been very influential for me: Scientific integrity means not only internal integrity within one’s discipline, with all the associated standards of rigor that apply—but also external integrity, to those outside one’s profession, such that one has the responsibility to say what can be concluded from the available data, even if the science is not yet settled, and even if it feels risky to do so.

3. Reducing Pollution Effectively

Integrated assessment provided economic support for the virtual elimination of sulfur dioxide emissions, which was the number one environmental public health threat of my generation. Economics played a big role in solving this problem through the adoption of cap and trade (what Rob Stavins called “the great experiment”), which accelerated progress on sulfur dioxide reductions. Nonetheless, further consideration of this big success leads to my next theme.

4. Bringing Economic Ideas to the Regulator

Our success in eradicating sulfur dioxide emissions wasn’t all due to cap and trade. Fully half of sulfur dioxide emissions reductions were driven by other regulatory authorities under the Clean Air Act.

Reductions in other air pollutants depended little on the formal pricing of pollution; instead, these other reductions relied primarily on various types of regulation. We can draw a lesson from our experience of the last century and apply that lesson to the most pressing environmental challenge of the next generation: climate change.

I would argue that, rather than thinking we can solve the climate crisis by giving shape to something like emissions pricing fully formed at birth, economics can have its biggest influence if we apply good economic ideas in diverse regulatory settings. By aiming for a sequence of policy successes through incremental improvements to regulations, we can achieve greater efficiency and stepwise environmental gains. We may expect these successes to enable the emergence of new technological options and new constituencies that, in turn, enable and support a broader application of economic ideas.

5. The Rise of Auctions

Acknowledging that economic value stems from scarcity, we have come to appreciate that the formation of emissions markets creates substantial value. Economists of my generation inherited a conventional assumption: that the created value would accrue to incumbent firms, through the free allocation of tradable emissions allowances among entities that historically have been able to deposit pollution into the environment for free. We recognized striking implications for both efficiency and equity that made the conventional assumption obsolete, and we shattered the old idea. This change in thinking led to auctions playing a role in initially distributing emissions allowances.

6. Reforming Environmental Markets

The advent of auctions for initially distributing tradable allowances in emissions markets—as opposed to the free allocation of allowances—allows for features such as price floors and price steps that automatically adjust allowance supply in response to changes in allowance prices. These features enable both demand and supply of emissions allowances to respond to changes in prices, just like any other commodity market. Hence, environmental markets begin to embody a hybrid of emissions taxes and caps—which gets us closer to resolving the endless parlor room debate about which approach works better.

In a policy context, we recognize now that either the tax or cap-and-trade approach must be flexible in the face of fluctuations in technologies and costs; thus, the two approaches become quite similar. Further, either approach must enable and amplify the efficiency and achievements of direct regulations, rather than imagining their replacement. This incremental infusion of economic ideas into the regulatory framework enables a sequence of policy successes that can improve efficiency and lead to the environmental improvement that we aim for.