Traditional studies in economics assume that decision makers are homogeneous. Although this assumption simplifies analysis, modeling decision maker heterogeneity yields insights about consumer or producer behavior that provide policy makers with efficient policy designs. In my dissertation, I analyze how decision maker heterogeneity influences the efficiency of instrument choice in environmental and energy policies. In my first chapter, I consider the efficacy of different policies for increasing fuel economy when households are heterogeneous in how they value gasoline costs when buying a new vehicle. I find that designing policies to target households that undervalue fuel costs can reduce compliance costs of energy efficiency programs in the transportation sector. In my second and third chapters, I evaluate the efficacy of alternative instruments for alleviating adverse selection in markets for carbon offsets when potential projects have heterogeneous characteristics. In these essays, I find that the most efficient policies directly attack the adverse selection problem by lowering baselines to all projects. This is because conservative baselines lead to fewer projects being over-credited and to more projects being under-credited. Taken together, my essays push forward the literature on instrument choice in the face of decision maker heterogeneity and yield general insights for designing sound environmental and energy policy.