Environmental policy performance and its determinants: Application of a three-level random intercept model

Abstract

This paper contributes to the study of environmental and energy policy by using a three-level random intercept (TLRI) model to rank the performance of different countries. Inspired by the literature on Item Response Theory and multilevel latent models, the TLRI model treats policy commitment as a latent variable which is estimated conditional on the difficulty of the policy portfolio implemented by each country. This approach is characterized by three novel aspects. First, the model results in a ranking of countries which is conditional on the complexity of their chosen policy portfolio. Second, it provides a unified framework in which to construct a policy indicator and to study its determinants through a latent regression approach. The resulting country ranking can thus be cleaned from the effect of economic and institutional observables which affect policy design and implementation. Third, the model estimates parameters which can be used to describe and compare policy portfolios across countries. We apply this methodology to the case of energy efficiency policies in the industrial sectors of 29 EU countries between 2004 and 2011. In the conclusions we highlight the future possible applications of this approach, which are not confined to the realm of environmental and energy policy.