Michael Hoel was the winner of the 2000 Erik Kempe Award for his article:
“Coordination of Environmental Policy for Transboundary Environmental Problems”
published in Journal of Public Economics, 66 (1997), 199-224.
The Nomination Committee, composed by Thomas Aronsson, Scott Barrett, and Michael Rauscher, has awarded this paper for the following motivation:
In order to reach a pareto efficient outcome under transboundary environmental problems, it is well known that some kind of international agreement will normally be required. Such agreements may concern emissions, environmental policy instruments or a mixture of these two. In many cases, the agreements focus directly on emissions. An important question is then whether it is necessary supplement such agreements with some kind of policy coordination in order to reach a pareto efficient outcome, or if the choice of environmental policies can be left to the individual countries. In other words, will the individual countries, when they are implementing the agreement, have incentives to choose policy instruments, which cause a suboptimal resource allocation from society’s point of view? This is the main issue of Michael Hoel’s paper.
Michael Hoel receives the Erik Kempe award for his systematic study of how the need for policy coordination (as a supplement to international agreements on emissions) depends on the functioning of the economic system.
Hoel focuses primarily on the labor market and explains why the system for wage formation influences the individual countries’ choices of environmental policy instruments. Under perfect competition, there is no need for policy coordination. If, on the other hand, the wage rate is determined by bargaining between firms and employees (or their representatives), the picture becomes more complicated, and there are situations in which policy coordination is desirable.
The paper provides an important contribution to the literature on environmental economics by connecting the study of environmental policy coordination to the functioning of the labor market. It highlights the incentive structure underlying the individual countries’ choices of policy instruments, when they are required to meet an international agreement on emissions. Finally, since unemployment is sometimes used as an argument against strict environmental standards, the paper contributes to the understanding and solution of a practical decision problem.