A Critical Overview
Chapter 2: Emissions trading and alternative instruments
In this chapter we compare regulatory approaches to climate change and outline their advantages and disadvantages. Subsequently, we analyse in which situations an emissions trading system can be employed to ensure efficient and effective environmental protection. We pay particular attention to insights to be derived from this analysis that are important for emissions trading designers. We will not dive into the important question of how to determine the desired level of environmental protection, but a few general remarks on climate change provide a useful background to the analyses. Clearly, industrial production (as a proxy for economic activity) is associated with greenhouse gas emissions. Since it also gives rise to benefits, the level of emissions that maximizes social welfare is positive and not zero. Setting a greenhouse gas emissions target is subject to (scientific) uncertainty and to collective action problems that obstruct the setting of international targets, which would ultimately need to be translated into rule-making for various economic sectors at national level. With regard to (international) target setting it bears mentioning that there are multiple potential goals. The Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (2007), for example, states that if industrialized countries (Kyoto Protocol Annex I parties) want to attain a low stabilization goal of 450 ppm, they should aim at CO2-equivalent emission reductions of 25-40 per cent in 2020 compared to 1990 levels.
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