Derterminants and consequences of the stringency of environmental policies: an empirical test

Public choice models of environmental policies suggest that governments arbitrage between the conflicting interests of consumers/voters and of producers organized in lobbies. Governments minimize the political costs of environmental policies by approving those that voters demand without pushing for their implementation, to save cost increases to producers. Environmental policies thus become far reaching but not “stringent”. This paper empirically examines four testable hypotheses stemming from the literature on the arbitrage hypothesis on a sample of 20 OECD countries for the period 1995-2012, using a new set of proxies of the stringency of market and non-market based policies that overcome the shortcomings of proxying the stringency of policy instruments by looking at policy results. The estimates obtained through a system of simultaneous equations show that greater stringency, regardless of the policy type, appears to reduce energy intensity, confirming that governments’ political interest to arbitrage depends on the industry’s value added, the level of public sector’s corruption, the quality of governance and on the urbanization rate.