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Environmental policy analysis

Dealing with economic distortions

image of Environmental policy analysis

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.

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Analytical example 1 – removing the PSO-charge

The price of electricity (and the tax contributions) used in the calculation is based on a simple average of detailed price data published by the Danish Energy Regulators Authority (DERA) for households and large and small firms, cf. Table A.1.

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