Environmental policy analysis – Dealing with economic distortions

The Nordic countries have ambitious goals to encourage environmental
policy objectives in a broad range of areas. To ensure cost‐effective policies, all Nordic countries are using cost benefit analysis. The goal is to support a policy making pro-cess where any given objective is achieved at the lowest costs.

However, practice shows that identical policies are assessed in different ways leading to different optimal policies throughout the Nordic countries. Especially, the complex issues related to quantifying product market distortions and labour market distor-tions give rise to inconsistencies. Furthermore, even within the same country might present guidelines not be sufficiently easy to understand and apply for practitioners outside central economic ministries.

As the results of cost benefit analyses can have substantial impact on how different policy proposals come out in terms of net value and internal ranking, it is important to have a consistent, practically intuitive guide to create a better understanding of how policy instruments could and should be used.

In this report we propose a set of guidelines underpinned by practical examples which show how applied cost benefit analysis can be used to gauge the net impact of especially environmental policies on labour supply and consumer/producer surplus. We pay special attention to product and labour market distortions and give specific guidance on how to deal with these.

The study is commissioned by The Nordic Council of Ministers