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Firms, Governments and Climate Policy

Incentive-based Policies for Long-term Climate Change

Edited by Carlo Carraro and Christian Egenhofer

This book analyses the policy mixes that provide the best possible incentives for firms and governments to act on climate change and sign up to international climate agreements. In doing so, the authors address a multitude of related issues including the linkages between flexible mechanisms and voluntary agreements; regulation and taxation; the opportunities and barriers of the Kyoto Protocol for industry; and the incentives for firms to undertake climate-related R & D and investments. As well as illustrating the environmental benefits and cost-effectiveness of alternative policy mixes in reducing GHG emissions, the authors also offer sensible policy prescriptions for increasing the numbers of countries that ratify and implement climate agreements.
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Chapter 1: The compatability of the Kyoto mechanisms with traditional environmental instruments

Christian Egenhofer


1. The compatibility of the Kyoto mechanisms with traditional environmental instruments Christian Egenhofer 1. INTRODUCTION Environmental policy has for long been relying on direct regulation, also referred to as command-and-control instruments. In the last decade or so this approach has been giving way to a new balance of environmental instruments. Not only have incentive-based instruments started to play a bigger role; at the same time, as a result of an enlarged toolbox of instruments, governments have started to combine instruments and develop policy mixes. Climate change policy is a good illustration of both trends. The Kyoto flexible mechanisms have introduced incentive-based instruments to be applied at a global level. Climate change policy will demand a mixture of domestic and global action, hence reinforcing the trend towards the combination of instruments. This raises issues of compatibility of instruments as well as ‘optimizing’ policy mixes to enhance incentives to abate pollution. The starting-point of our analysis is that in the European Union (EU) there is a long-trend shift from regulation to incentive-based instruments as well as to a combination of instruments. This trend is likely to be accelerated through the Kyoto Protocol, as is argued below. Little academic work has been done, however, on the practical compatibility of emissions trading (ET) with traditional environmental instruments, both command-and-control (that is, regulation) and incentive-based instruments such as voluntary agreements and taxation. This is in stark contrast with what is happening ‘on the ground’. As Appendix 1 shows, existing approaches to address climate change have...

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