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Environment and Economics

Why do we use economics in environment policy?

The main reason is that in our society the environment has become a scarce resource. Since economics is about how to deal with scarce resources, it can often be useful when tackling environmental problems.

One way of using economics is to ensure that the costs and the benefits of environmental measures are well balanced. Although it is difficult to estimate costs and benefits, there is an increasing demand that this is done before environmental policy is decided on a European level. With the use of market-based instruments, environmental goals can sometimes be reached more efficiently than with traditional command and control regulations. 

Economic and environmental objectives are often perceived as being contradictory. It is believed that a choice must be made between one and the other and that both cannot be achieved concurrently. The facts and figures in this brochure (pdf ~1,5Mb) shows that this perception is wrong, and that economy and environment can go together.

Environment and Economics in the European Commission:

Published studies on environmental economics

A broad range of studies have been undertaken examining the different links between environment and the economy. See further details and most recent studies here.

REFIT, Evaluation and Impact assessments

Reaching our objectives in an efficient and effective way is good for everyone. Smarter and simpler regulation makes it cheaper and easier for people, businesses and organisations to comply. In turn, this leads to a better environment.

Under the Regulatory Fitness and Performance programme (REFIT), EU law is actively reviewed within a rolling programme of evaluation and modernisation. See further details on the Commission's REFIT programme here.

The Commission is committed to improving the quality of policy and law making and has therefore strengthened its efforts to assess and evaluate its policies under the umbrella of the initiative "Better Regulation". You can find out more about Better Regulation here .

Evaluation involves looking back to see how policy has performed. Evaluation is a process that critically examines a policy or legislation. It involves collecting and analysing information about the activities, characteristics and outcomes. Its purpose is to make judgments on the policy or legislation in order assess how well it has worked in the past. See further details on DG Environment's evaluations here.

The Commission introduced in 2002 integrated assessment of all new policies in forms of Impact Assessments. These assessments involve the identification of the problem, objectives, options to address the problem and an analysis of the economic, social and environmental impacts of the different options. For comparing the options, relevant methods used are usually a cost-benefit framework (recognising that not all impacts are monetised of course) or cost-effectiveness analysis. As such, Impact Assessment should lead to better and more cost-effective policies that are clearly justified. See further details on the Commission's impact assessments here. All final impact assessments - including on environment policy initiatives - are available here.

Use of market-based Instruments

Market-based instruments (MBI), such as environmental taxes, tradable permit systems or targeted subsidies, are a cost-effective way to protect and improve the environment. They provide incentives to firms and consumers to opt for greener production or products. Governments can also opt for an Environmental Tax or Fiscal Reform or the reform of Environmentally Harmful Subsidies. See further details.

Beyond GDP

Gross Domestic Product (GDP) is the best known measure of macro-economic activity. It has also come to be regarded as a proxy indicator for overall societal development and progress in general. However, GDP does not measure environmental sustainability or social inclusion and these limitations need to be taken into account when using it in policy analysis and debates. The need to strengthen data and indicators which would complement GDP has been increasingly recognised and a number of international initiatives have been launched to advance on these issues. In August 2009, the European Commission adopted a Communication on this issue. For concise information, please look at the press release and its annex. See further details here or via the Beyond GDP home page.

Commission Staff Working Document issued on 2/08/2013: Progress on 'GDP and beyond' actions and annexes.

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