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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 3: Kyoto flexible mechanisms: opportunities and barriers for industry and financial institutions

Josef Janssen


3. Kyoto flexible mechanisms: opportunities and barriers for industry and financial institutions Josef Janssen 1. INTRODUCTION While the previous chapter analysed the incentives to negotiate and adopt agreements to reduce GHG emissions at the industry level, this chapter analyses the incentives to reduce emissions provided by the so-called ‘flexible mechanisms’. The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), adopted in December 1997 by more than 150 countries, established global markets for GHG emissions reductions.1 By means of the market-based Kyoto mechanisms of joint implementation (JI), clean development mechanism (CDM) and international emissions trading (IET), it will be possible to trade emission permits globally. Demand will be driven by the emissions reduction commitments of industrialized and transitional countries (the group of Annex B countries).2 JI and IET enable international transactions of emission permits among Annex B countries. The CDM allows developing countries, that is, non-Annex B countries, to deliver emission permits to Annex B countries. This emerging global market, the net value of which is estimated to amount to probably several US$10 billion annually,3 will offer challenging opportunities to a wide variety of different players in industry and business. Will the reluctance of the US administration to ratify the Kyoto Protocol threaten the emergence of such GHG markets? Yes, but only to some extent. First, the Intergovernmental Panel on Climate Change (IPCC), in its recent third assessment report, reinforces the need for climate change mitigation. Hence the issue will not go away. Moreover,...

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