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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 they 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.

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. 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.

European Economic Recovery Plan

The European Economic Recovery Plan, announced at the end of 2008, identified an important number of green initiatives with a focus on energy-saving and climate-change related measures. Read more here.

Lisbon and Sustainable Development Strategies

The Lisbon Strategy for Growth and Jobs also includes an explicit environmental dimension. Integrated Guidelines provide guidance to Member States to establish reform programmes. Guideline 11 includes recommendations on important environmental policy issues. Member States report each year on the implementation of their national reform programmes. Read more here.

The EU Sustainable Development Strategy (EU SDS) provides a long-term vision that involves combining a dynamic economy with social cohesion and high environmental standards. In July 2009 the Commission adopted the 2009 Review of EU SDS. It underlines that in recent years the EU has mainstreamed sustainable development into a broad range of its policies. At the same time, unsustainable trends persist in many areas. The review also launches a reflection on the future of the EU SDS and its relation to the Lisbon strategy. More on the environmental aspects of Sustainable Development

Useful links