Climate Change 2001:
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6 Policies, Measures, and Instruments

6.1 Policy Instruments and Possible Criteria for their Assessment

The purpose of this section is to examine the major types of policies and measures that can be used to implement options to mitigate net concentrations of GHGs in the atmosphere. In keeping within the defined scope of this Report, policies and measures that can be used to implement or reduce the costs of adaptation to climate change are not examined. Alternative policy instruments are discussed and assessed in terms of specific criteria, all on the basis of the most recent literature. There is naturally some emphasis on the instruments mentioned in the Kyoto Protocol (the Kyoto mechanisms), because they are new and focus on achieving GHG emissions limits, and the extent of their envisaged international application is unprecedented. In addition to economic dimensions, political economy, legal, and institutional elements are discussed insofar as they are relevant to these policies and measures.

Any individual country can choose from a large set of possible policies, measures, and instruments, including (in arbitrary order): emissions, carbon, or energy taxes, tradable permits, subsidies, deposit-refund systems, voluntary agreements, non-tradable permits, technology and performance standards, product bans, and direct government spending, including R&D investment. Likewise, a group of countries that wants to limit its collective GHG emissions could agree to implement one, or a mix, of the following instruments (in arbitrary order): tradable quotas, joint implementation, clean development mechanism, harmonized emissions or carbon or energy taxes, an international emissions, carbon, or energy tax, non-tradable quotas, international technology and product standards, voluntary agreements, and direct international transfers of financial resources and technology.

Possible criteria for the assessment of policy instruments include: environmental effectiveness; cost effectiveness; distributional considerations including competitiveness concerns; administrative and political feasibility; government revenues; wider economic effects including implications for international trade rules; wider environmental effects including carbon leakage; and effects on changes in attitudes, awareness, learning, innovation, technical progress, and dissemination of technology. Each government may apply different weights to various criteria when evaluating GHG mitigation policy options depending on national and sector level circumstances. Moreover, a government may apply different sets of weights to the criteria when evaluating national (domestic) versus international policy instruments. Co-ordinated actions could help address competitiveness concerns, potential conflicts with international trade rules, and carbon leakage.

The economics literature on the choice of policies adopted has emphasized the importance of interest group pressures, focusing on the demand for regulation. But it has tended to neglect the "supply side" of the political equation, emphasized in the political science literature: the legislators and government and party officials who design and implement regulatory policy, and who ultimately decide which instruments or mix of instruments will be used. However, the point of compliance of alternative policy instruments, whether they are applied to fossil fuel users or manufacturers, for example, is likely to be politically crucial to the choice of policy instrument. And a key insight is that some forms of regulation actually can benefit the regulated industry, for example, by limiting entry into the industry or imposing higher costs on new entrants. A policy that imposes costs on industry as a whole might still be supported by firms who would fare better than their competitors. Regulated firms, of course, are not the only group with a stake in regulation: opposing interest groups will fight for their own interests.

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