The political choice between a financial instrument and direct regulation in environmental policy is analyzed as a rent seeking game. There are two interest groups, both of whom prefer direct regulation if they did not receive any of the revenue R of the financial instrument. However, R is large enough to make both agents prefer the financial instrument.

There are two designs for the game:

-IR: first an instrument is chosen and then, if the financial instrument is chosen, the revenues are divided;

-RI: first revenue division is decided upon, in case the financial instrument will be chosen, and then an instrument is chosen.

The financial instrument has a higher success probability in RI. This is because firstly, when instrument choice is at stake, the rent seeking costs to obtain part of R are sunk in RI, but not in IR. Secondly, the interest group most interested in the financial instrument can reduce his effort to obtain part of R in RI.

However, the higher success probability for the welfare-maximizing financial instrument does not imply that RI yields a higher aggregate payoff than IR. Wasteful rent-seeking expenditures may be so much higher in RI, that IR is welfare-maximizing. Thus, designing a game that favours the welfare-maximizing instrument can reduce welfare.

The model is applied to the discussion about the regulatory energy charge in the Netherlands in the early 90s. The model can explain why the environmental movement was, and industry was not, willing to discuss the distribution of the revenues from the charge prior to a decision about the implementation of the charge.