Shaping Climate Change Policy
ESRI Studies Series on the Environment
Lisa Ryan and Hal Turton
Market-based instruments have become popular in recent times among economists and subsequently policymakers because they address some of the failings of command-and-control policies such as static and dynamic ineﬃciency. Two important demand-side measures include emissions trading, which can provide ﬂexibility to reduce aggregate greenhouse emissions at lower cost, while taxes and charges, in addition to emissions trading, advance the polluter pays principle, requiring polluters either to pay for their emissions or to carry out abatement actions. Both instruments provide an incentive for ﬁrms to invest in innovation in order to abate at lower cost than the price of an emissions permit or the tax. When the costs of abatement are passed through to consumers, these instruments act as demand-side charges to consumers and encourage the demand for less polluting goods. From the demand side, transport has relatively low fuel price elasticities: Ϫ0.12–Ϫ0.31 (short run) and Ϫ0.5–Ϫ1.39 (long run) and so charges will likely need to be high to have an impact on the passenger car sector. Price sensitivity or elasticity tends to increase if alternative destinations and transport modes are available and of good quality. For example, the extent to which travel demand is reduced as a response to an increase in vehicle or fuel price will be inﬂuenced by the alternatives available (VTPI, 2006). In theory, under perfect conditions,1 as shown in Section 7.1, taxes and emissions permits should have the same eﬀect. However, Weitzman (1974) pointed out in his seminal paper that...
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