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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 4: Traditional environmental instruments, Kyoto mechanisms and the role of technical change

Marzio Galeotti and Carlo Carraro


Marzio Galeotti and Carlo Carraro 1. INTRODUCTION The previous chapters explored the role of different policy mixes in providing the right incentives for industries and firms to reduce their GHG emissions. However, most of the analysis focused on short-term actions taken by a single industry or firm. In this chapter, we would like to broaden the analysis of the incentive mechanisms that may lead to effective emission reductions, by stressing the role of climate-related technical change and by analysing which incentive mechanisms can be designed to foster its adoption and diffusion. In particular, we would like to identify which policy mixes are most suitable to induce firms to adopt long-term innovation policies aimed at reducing GHG emissions. The perspective chosen in this chapter is both a microeconomic and a macroeconomic one, because we would like to take into account also the systemic effects of growth and innovation, including their links with environmental degradation. Hence impacts on growth of different climate policies will be considered jointly with impacts on innovation and emissions. As already stressed in previous chapters, one important aspect of the Kyoto Protocol, retained in the recent agreement struck in Marrakesh, is the introduction of the so-called flexibility mechanisms, that is, instruments designed to facilitate the achievement of the emission reduction targets agreed upon by the signatory countries. Emissions trading (ET) by permits, joint implementation (JI) and clean development mechanisms (CDM) serve the purpose of reducing the costs of complying with the agreement, thus lessening the feedback of improved...

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