Environmental policy analysis

Dealing with economic distortions

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This report discusses how policymakers should deal with economic distortions on the cost-side of cost-benefit analysis in the area of environmental policies, and assesses the existing Nordic guideline recommendations. The two types of economic distortions are distortions to product markets, which are almost by definition tied to environmental policy interventions, and distortions to labour supply decisions. Drawing on best practices from the literature, we formulate a number of key principles useful for assessing the impact on labour supply decisions and welfare on product markets from policy interventions. Four analytical examples are included to illustrate the importance of these principles for the correct quantification of distortionary impacts, especially the importance of taking into account pre-existing policy induced distortions.




Economic analysis in general and cost-benefit analysis in particular support the development of cost-efficient environmental policies in all Nordic countries. There exist available tools and guidelines for the different steps in such analysis. In this project The Working Group on Environment and Economy under the Nordic Council of Ministers (MEG) focus on possible distortions that policy instruments may cause on product and labour market respectively, and argue that these effects are important and should be included more frequently in ex-ante cost-benefit analysis. Furthermore this is particularly true when several interventions already exist in the market, which is commonly the case when creating new policy instruments. The report explains, theoretically as well as by using practical examples, why and how including product and labour market distortions lead to better informed decision making.


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