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The parsimony of economic theory provides general insights into an otherwise complex world. However, the most straightforward organizing principles from theory have not often taken hold in environmental policy or in the decentralized climate policy regime that is unfolding. One reason is inadequate recognition of a variety of institutions. This paper addresses three ways the standard model may inadequately anticipate the role of institutions in the actual implementation of climate policy, with a US focus: multilayered authority across jurisdictions, the impressionistic rather than deterministic influence of prices through subsidiary jurisdictions, and the complementary role of prices and regulation in this context. The economic approach is built on the premise that incentives affect behavior. We suggest an important pathway of influence for economic theory is to infuse incentive-based thinking into the conventional regulatory framework. In a complex policy regime, incentives can be shaped by shadow prices as well as market prices.

Price-based policies are often prescribed by economists over more traditional regulatory approaches because they tend to be more cost-effective tools for achieving specific economic and political goals. While this principle seems simple in theory, market-based approaches have not often been incorporated in environmental or climate policy decisions.

Following earlier research highlighting the importance of considering institutional complexity when crafting environmental policy, Darius Gaskins Senior Fellow Dallas Burtraw and Matthew Woerman examine how failure to anticipate institutional context is impacting the implementation of climate policy in particular.

In a new RFF discussion paper, “Economic Ideas for a Complex Climate Policy Regime,” they address three specific issues related to US state and national policies, including actions under the Clean Air Act, as well as global efforts: the challenges of coordinating multilayered authority across jurisdictions, the differing influences on decisionmaking of market-based prices and shadow prices or other regulatory reforms, and the idea that prices and regulation in this context should be considered as complements rather than substitutes.

Burtraw and Woerman write “that market prices are necessary for an efficient outcome, indeed imperative, but they are not sufficient. The bigger idea is to recognize the economic importance of shaping the incentives of decisionmakers in all forms of social institutions. This recognition constitutes thinking like an economist within the complex climate policy regime.”